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, 2005
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, 2005
4,486,278 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
Item 3--Controls and Procedures
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, INC.
Balance Sheet
March 31, December 31,
2005 2004
(unaudited)
ASSETS. __________ __________
Current Assets:
Cash and cash equivalents $ 913,191 $ 851,492
Accounts receivable trade, net 852,663 908,510
Inventories 7,666,848 7,827,982
Prepaid expenses and other
current assets 120,140 53,059
Deferred income taxes 109,401 109,401
__________ __________
Total current assets 9,662,243 9,750,444
Vineyard development cost, net 1,463,149 1,482,348
Inventories 571,355 571,355
Property and equipment, net 4,167,921 4,254,526
Note receivable 5,000 5,000
Debt issuance costs, net 43,084 42,561
Other assets 81,621 82,315
__________ __________
Total assets $15,994,373 $16,188,549
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Line of credit $ 1,265,059 $ 1,232,251
Current portion of long term debt 257,957 257,957
Accounts payable 498,910 510,803
Accrued expenses 568,165 526,860
Income taxes payable 128,144 278,970
Grapes payable 466,668 592,390
__________ __________
Total current liabilities 3,184,903 3,399,231
Long-term debt 2,263,157 2,331,987
Distributor obligation 1,500,000 1,500,000
Deferred rent liability 140,032 131,785
Deferred gain 466,285 474,309
Deferred income taxes 212,975 212,975
__________ __________
Total liabilities 7,767,352 8,050,287
__________ __________
Shareholders' equity
Common stock, no par value - 10,000,000
shares authorized, 4,486,278 and 4,486,278
shares issued and outstanding at March 31,
2005 and December 31, 2004 7,182,329 7,182,329
Retained earnings 1,044,692 955,933
__________ __________
Total shareholders' equity 8,227,021 8,138,262
__________ __________
Total liabilities and shareholders'
equity $15,994,373 $16,188,549
========== ==========
The accompanying notes are an integral part of this financial statement.
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Operations
(unaudited)
Three months ended March 31,
2005 2004
__________ __________
Net Revenues
Case Revenue $ 2,284,638 $ 1,834,611
Facility Lease - Custom Crush 90,440 9,015
__________ __________
Total Revenue 2,375,078 1,843,626
Cost of Sales
Case 1,230,516 884,019
Bulk 55 926 -
__________ __________
Total Cost of Sales 1,286,442 884,019
Gross Margin 1,088,636 959,607
Selling, general and
administrative expense 892,422 689,764
__________ __________
Net operating income 196,214 269,843
Other income (expense)
Interest income 165 1,203
Interest expense (65,783) (76,382)
Other income 17,336 14,538
__________ __________
Net income before income taxes 147,932 209,202
Income tax (59,173) (83,681)
__________ __________
Net income 88,759 125,521
Retained earnings beginning of
period 955,933 492,251
__________ __________
Retained earnings end of period $ 1,044,692 $ 617,772
========== ==========
Basic income per common share $ .02 $ .03
Diluted income per common share $ .02 $ .03
Weighted average number of
basic common shares
outstanding 4,486,278 4,482,280
Weighted average number of
diluted common shares
outstanding 4,580,883 4,662,087
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,
2005 2004
__________ __________
Cash flows from operating activities:
Net income $ 88,759 $ 125,521
Reconciliation of net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 139,197 166,667
Stock issued for compensation - 11,500
Changes in assets and liabilities:
Accounts receivable trade 55,847 64,031
Inventories 161,134 (113,140)
Prepaid expenses and other
current assets (67,081) (993)
Note receivable (1,120)
Other assets 694 778
Accounts payable (11,893) (87,343)
Accrued expenses 41,305 (50,662)
Income taxes payable (150,826) 83,681
Grape payables (125,722) (55,185)
Deferred rent liability 8,247 5,697
Deferred gain (8,024) (6,246)
__________ __________
Net cash provided by
operating activities 131,637 143,186
__________ __________
Cash flows from investing activities;
Additions to property and equipment (29,294) (80,208)
Vineyard development expenditures - (37,999)
__________ __________
Net cash used in investing activities (29,294) (118,207)
__________ __________
Cash flows from financing activities:
Debt issuance costs (4,622) -
Net (decrease) increase in line of
credit balance 32,808 10,820
Repayments of long-term debt (68,830) (68,744)
__________ __________
Net cash (used in) provided by
financing activities (40,644) (57,924)
__________ __________
Net increase (decrease) in cash and
cash equivalents 61,699 (32,945)
Cash and cash equivalents:
Beginning of period 851,492 213,681
__________ __________
End of period $ 913,191 $ 180,736
========== ==========
The accompanying notes are an integral part of this financial statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements as of and for the three month
period ended March 31, 2005 and 2004, have been prepared in conformity with
generally accepted accounting principles. The financial information as of
December 31, 2004, is derived from the audited financial statements presented
in the Willamette Valley Vineyards, Inc. (the "Company") Annual Report on Form
10-KSB for the year ended December 31, 2004. Certain information or footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the accompanying financial
statements include all adjustments necessary (which are of a normal recurring
nature) for the fair statement of the results of the interim periods presented.
The accompanying financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 2004,
as presented in the Company's Annual Report on Form 10-KSB.
Operating results for the three months ended March 31, 2005, are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2005, or any portion thereof.
The Company has a single operating segment consisting of the retail, instate
self-distribution and out of state sales departments. These departments have
similar economic characteristics, offer comparable products to customers, and
utilize similar processes for production and distribution.
Basic earnings per share are computed based on the weighted-average number of
common shares outstanding each period. Diluted earnings per share are computed
using the weighted average number of shares of common stock and potentially
dilutive common shares outstanding during the year. Potentially dilutive
shares from stock options and other potentially dilutive shares are excluded
from the computation when their effect is anti-dilutive. Potentially dilutive
shares of 94,605 shares are included in the computation of dilutive earnings
per share for the three months ended March 31, 2005. Total potentially
dilutive shares of 179,807 shares are included in the computation of dilutive
earnings per share for the three months ended March 31, 2004.
2) STOCK BASED COMPENSATION
The Company accounts for the employee and director stock options in accordance
with provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Pro forma disclosures as required
under SFAS No. 123, Accounting for Stock Based Compensation, and as amended by
SFAS No. 148, Accounting for Stock Based Compensation - Transition and
Disclosure, are presented below.
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net earnings would have been reduced
to the pro forma amounts indicated as follows for the quarter ended March 31:
March 31, March 31,
2005 2004
(unaudited) (unaudited)
__________ __________
Net income, as reported $ 88,759 $ 125,521
Add Stock-based employee
compensation expense included in
reported net income, net of
related tax effects - 11,500
Deduct total stock based employee
compensation expense determined
under fair value based method for
all awards, Net of related tax
effects (179,670) (12,909)
__________ __________
Pro forma net income $ (90,911) $ 124,112
Earnings per share:
Basic - as reported $ 0.02 $ 0.03
Basic - pro forma $ 0.02 $ 0.03
Diluted - as reported $ (0.02) $ 0.03
Diluted - pro forma $ (0.02) $ 0.03
For purposes of disclosure, the Black-Scholes option pricing model was used to
calculate fair values for stock options granted. The estimated fair value of
the options is amortized to expense over the options' vesting period.
4) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW:
March 31, December 31,
2005 2004
(unaudited)
__________ __________
Winemaking and packaging materials $ 51,251 $ 134,059
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products) 1,607,491 1,891,681
Finished goods (bottled wines 6,579,461 6,373,597
and related products) __________ __________
8,238,203 8,399,337
Less: amounts designated for distributor (571,355) (571,355)
__________ __________
Current inventories $ 7,666,848 $ 7,827,982
========== ==========
5) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
March 31, December 31,
2005 2004
(unaudited)
__________ __________
Land and improvements $ 769,644 $ 769,644
Winery building and hospitality center 4,674,765 4,647,272
Equipment 3,806,876 3,805,075
__________ __________
9,251,285 9,221,991
Less accumulated depreciation (5,083,364) (4,967,465)
__________ __________
$ 4,167,921 $ 4,254,526
========== ==========
6) 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
For the first quarter of 2005, the company experienced its third consecutive
profitable first quarter, generally the weakest in the industry, and
historically the weakest for the Company.
The First Quarter 2005 net profit was lower than 2004 principally because of
unusually high margins experienced in the prior year period. Gross margins in
2005 were in line with expectations at 46%, as compared to 52% in the prior
year period.
Total Sales increased 29% over the prior period and Gross Profit increased 13%
($129,029) over the prior year period. This increase was exceeded, however,
by an increase in selling, general and administrative expenses of 29%
($202,658) over the prior year period. As a consequence of the increase in
expenses, operating income declined as compared to the prior year period.
Increases in the expenses of the wholesale department, called Bacchus Fine
Wines' outpaced the increase in gross profit principally in sales labor
expense and shipping costs. These costs are a result of additional delivery
capacity and the shipment of purchases of additional wine inventory for
resale, compared to the prior year period. To a lesser degree, the Retail
Department's expenses increased over the gross profit as compared to the prior
year principally due to increased shipping costs. The management has embarked
on a study of shipping related costs, other than higher fuel costs, which can
be reduced through changes in purchasing and logistics. Management believes a
portion of these higher expenses, those relating to higher fixed wholesale
delivery costs can be spread over higher sales expected in the remainder of
the year.
The most significant development in the first quarter was a 40% increase in
depletions of WVV products by the Company's out-of-state distributors to their
retail customers. This increase in depletions resulted in sales from the
winery to out-of-state distributors increasing 21% over the prior period, and
Management believes this will continue to lead to increased sales throughout
the year. Management believes the focus on its core offerings of Pinot noir
and Pinot gris is the primary reason for this historically high increase
combined with an increased awareness of Pinot noir by the movie, "Sideways"
which began showing in the Fourth Quarter of 2004.
Increased sales of WVV produced products have reduced excess inventories and
Management is reviewing sales projections in order to plan appropriate
inventory production. While there remains some inventory imbalances,
management may increase wine production of Pinot noir in 2005 which may spread
fixed production costs and improve the margins on future sales.
Management is reviewing a possible shortcoming in Oregon wholesale sales and
is taking steps to improve focus on WVV produced products. Management believes
the focus on purchased wines for resale which produced higher than expected
results with an increase in revenues in the first quarter of 2005 of 130%
detracted from monitoring and maximizing sales activities on WVV produced
products. Willamette Valley Vineyards produced wine increased in Oregon
wholesale sales by 5% in the first quarter, or approximately half of the
budgeted increase.
Retail revenues were flat due to lower sales by the Company's Key Customer
Sales Representatives (KCSRs). Tasting Room sales increased 9% in the first
quarter of 2005 as compared to the prior year period. The management has
filled the KCSR vacancies in April and expects improved financial performance.
RESULTS OF OPERATIONS
Revenue
Winery Operations
The Company's revenues from winery operations are summarized as follows:
Three months ended March 31,
2005 2004
__________ __________
Tasting Room and Retail sales
& Rental Income $ 333,897 $ 327,759
On-site and off-site festivals 46,001 49,969
In-state sales 1,236,792 901,827
Out-of-state sales 721,704 597,179
Custom crush /bulk wine /misc sales 90,440 9,015
__________ __________
Gross Revenue 2,428,834 1,885,749
Less Excise Taxes 53,756 42,123
__________ __________
Net Revenues $ 2,375,078 $ 1,843,626
========== ==========
Tasting room and retail sales, and rental income for the three months ending
March 31, 2005 increased 2% compared to the prior year period. Tasting room
and retail sales increased during the first quarter of 2005 due primarily to
increased customer traffic flows and higher customer purchases in the tasting
room.
On-site and off-site festival sales for the first quarter of 2005 decreased 8%
compared to the prior year period. This decrease is due primarily to the
continuing focus away from on-site and off-site events, in favor of 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, increased 37% in the first quarter
of 2005 compared to the prior year period. Sales through the Company's
independent sales force alone for the first quarter of 2005 increased 39% to
$1,076,550 compared to $774,270 for the prior year period. This increase is
largely the result of the broader product lines presented through the
development of Bacchus Fine Wines.
Out-of-state sales in the first quarter of 2005 increased 21% compared to the
prior year period as a result of increased promotional allowances offered to
distributors by the Company and higher depletions through the Company's
distributors during the first quarter of 2005.
Excise taxes
Excise taxes increased 25% in the first quarter of 2005 to $53,756 compared to
$43,123 for the prior year period due primarily to increased sales, thereby
increasing overall sales volumes and taxes calculated based on volume.
Gross Profit
Winery Operations
As a percentage of revenue, gross profit for winery operations decreased to
46% in the first quarter of 2005 as compared to 52% in the prior year period.
While the Company is continuing its focus on and improved distribution of
higher margin products as well as continuing to reduce grape and production
costs, we anticipate the Company's increased representation of brands other
than its own through its Oregon sales force will further erode the gross
margins due to the lower margins associated with selling those brands. While
the gross margin may erode due representation, the Company anticipates that
net incomes will not follow that trend.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 29% to $892,422 in the
first quarter of 2005 from $689,764 in the first quarter of 2004. As a
percentage of revenue from winery operations, selling, general and
administrative expenses increased to 38% in the first quarter of 2005 from
37% in the first quarter of 2004. This increase is primarily due to higher
fixed wholesale delivery costs and increased shipping costs.
Interest Income, Other Income and Expense
Interest income decreased to $165 for the first quarter of 2005 compared to
$1,203 for the prior year period because of the decrease in notes receivable.
Interest expense decreased to $65,783 in the first quarter of 2005 compared
to $76,382 in the prior year period primarily due to less debt outstanding
during the period.
The Company's other income is summarized as follows:
Three months ended March 31,
2005 2004
__________ __________
Farm Credit interest rebate $ 17,336 $ 14,504
Miscellaneous rebates - 302
__________ __________
Other income 17,336 14,538
Income Taxes
Incomes tax expense was $59,173 for the first quarter of 2005 compared to
$83,681 for the prior year period due to the Company's net profit for the
first three months in 2005. The Company's estimated tax rate for the first
quarter of 2005 and 2004 was 40 percent.
Liquidity and Capital Resources
At March 31, 2005, the Company had a working capital balance of $6.5 million
and a current ratio of 3.03:1. At December 31, 2004, the Company had a
working capital balance of $6.4 million and a current ratio of 2.87:1. The
Company had a cash balance of $913,191 at March 31, 2005 compared to a cash
balance of $851,492 at December 31, 2004.
Total cash provided by operating activities in the first quarter of 2005 was
$131,637 compared to $143,186 in the prior year period, primarily as a
decrease in net income and higher depreciation in the first quarter of 2005
compared to the prior year period. Cash provided by operating activities in
the first quarter of 2005 consisted of net income of $88,759 plus depreciation
of $139,197 less changes in assets and liabilities and other non-cash charges
of $96,319. Cash provided by operating activities in the first quarter of
2004 consisted of net income of $125,521 plus depreciation of $166,667 less
changes in assets and liabilities and other non-cash charges of $149,002.
Total cash used in investing activities in the first quarter of 2005 was
$29,294 compared to $118,207 in the prior year period. Cash used in investing
activities consisted of property and equipment additions and vineyard
development costs.
Total cash used in financing activities in the first quarter of 2005 was
$40,644 compared to $57,924 in the prior year period. Cash used in financing
activities primarily consisted of payments on the long term debt and additions
to the line of credit.
At March 31, 2005, the line of credit balance was $1,265,059, on maximum
borrowing of $2,000,000. The Company has a loan agreement with Umpqua Bank
that contains, among other things, certain restrictive financial covenants
with respect to total equity, debt-to-equity and debt coverage, that must be
maintained by the Company on a quarterly basis. As of March 31, 2005, the
Company was in compliance with all of the financial covenants.
As of March 31, 2005, the Company had a total long-term debt balance of
$2,521,114 owed primarily 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 March 31, 2005, the Company owed $466,668 on grape contracts. This amount
is primarily 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
its existing credit facilities will be sufficient to meet the Company's
foreseeable short and long term needs.
Critical Accounting Policies:
The foregoing 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 Management 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-KSB for the
year ended December 31, 2004.
ITEM 3
Controls and Procedures
a) We carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer, Chief Financial Officer and
other management personnel, of the effectiveness of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934 as of March 31, 2005. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer initially concluded that
our disclosure controls and procedures as of March 31, 2005 were effective to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The Company considered
these limitations during the development of it disclosure controls and
procedures, and will continually reevaluate them to ensure they provide
reasonable assurance that such controls and procedures are effective.
b) There were no changes in the Company's internal control procedures over
financial reporting that occurred during the period ended March 31, 2005 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except as noted above.
PART II. OTHER INFORMATION
Item 1
Exhibits
The exhibits filed herewith are listed in the Exhibit Index following the
signature page of this report.
ITEM 5
Other Information
Non-Audit Fees:
The Audit Committee of the Board Of Directors has approved the following
non-audit services, which are being performed by Moss Adams, our independent
accountants, during the calendar year ending December 31, 2005:
- Income tax advisory services related to: income tax returns
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 13, 2005 By /s/ James W. Bernau
James W. Bernau
President
Date: May 13, 2005 By /s/ Sean M. Cary
Sean M. Cary
Controller
EXHIBIT INDEX
Exhibit
31.1 Certification by James W. Bernau pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
31.2 Certification by Sean M. Cary pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.