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, 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
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
[ ] YES [X] NO
Number of shares of common stock outstanding as of September 30, 2005
4,539,202 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 Interim Unaudited 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
Item 5--Other Information
Signatures
PART 1 FINANCIAL INFORMATION
ITEM 1 Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
September 30, December 31,
2005 2004
(unaudited)
ASSETS. __________ __________
Current Assets:
Cash and cash equivalents $ 500,812 $ 851,492
Accounts receivable trade, net 1,054,236 908,510
Inventories 7,229,781 7,827,982
Prepaid expenses and other
current assets 65,395 53,059
Deferred income taxes 109,401 109,401
__________ __________
Total current assets 8,959,625 9,750,444
Vineyard development cost, net 1,593,132 1,482,348
Inventories - 571,355
Property and equipment, net 4,095,568 4,254,526
Note receivable - 5,000
Debt issuance costs, net 37,198 42,561
Other assets 80,509 82,315
__________ __________
Total assets $14,766,032 $16,188,549
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Line of credit $ - $ 1,232,251
Current portion of long term debt 507,957 257,957
Accounts payable 791,554 510,803
Accrued expenses 275,508 526,860
Income taxes payable 255,170 278,970
Grapes payable 351,824 592,390
__________ __________
Total current liabilities 2,182,013 3,399,231
Long-term debt 2,833,636 2,331,987
Distributor obligation - 1,500,000
Deferred rent liability 156,524 131,785
Deferred gain 450,238 474,309
Deferred income taxes 212,975 212,975
__________ __________
Total liabilities 5,835,386 8,050,287
__________ __________
Shareholders' equity
Common stock, no par value - 10,000,000
shares authorized, 4,539,202 and 4,486,278
shares issued and outstanding at September 30,
2005 and December 31, 2004 7,292,188 7,182,329
Retained earnings 1,638,458 955,933
__________ __________
Total shareholders' equity 8,930,646 8,138,262
__________ __________
Total liabilities and shareholders'
equity $14,766,032 $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 Nine months ended
September 30, September 30,
2005 2004 2005 2004
__________ __________ __________ __________
Net revenues
Case revenue $ 3,609,228 $ 2,302,461 $ 9,394,542 $ 6,233,268
Custom crush-facility lease-
bulk revenue 8,828 10,146 111,090 26,203
__________ __________ __________ __________
Total net revenues 3,618,056 2,312,607 9,505,632 6,259,471
Cost of sales
Case 1,944,787 1,166,551 5,106,703 3,112,378
Bulk - - 55,926 -
__________ __________ __________ __________
Total cost of sales 1,944,787 1,166,551 5,162,629 3,112,378
Gross profit 1,673,269 1,146,056 4,343,003 3,147,093
Selling, general and administrative
expenses 1,085,852 871,511 3,047,836 2,403,668
__________ __________ __________ __________
Net operating
income 587,417 274,545 1,295,167 743,425
Other income (expense)
Interest income 349 1,216 775 3,764
Interest expense (57,355) (81,285) (175,735) (233,107)
Other income
(expense) - 10 17,336 14,548
__________ __________ __________ __________
Net income before
income taxes 530,411 194,486 1,137,543 528,630
Income tax 212,165 77,794 455,018 211,452
__________ __________ __________ __________
Net income 318,246 116,692 682,525 317,178
Retained earnings beginning of
period 1,320,212 692,737 955,933 492,251
__________ __________ __________ __________
Retained earnings
end of period $ 1,638,458 $ 809,429 $ 1,638,458 $ 809,429
========== ========== ========== ==========
Basic earnings per
common share $ .07 $ .03 $ .15 $ .07
Diluted earnings per
common share $ .07 $ .03 $ .15 $ .07
Weighted average number of
basic common shares
outstanding 4,514,635 4,486,180 4,498,019 4,484,752
Weighted average number of
diluted common shares
outstanding 4,621,115 4,560,959 4,604,499 4,563,863
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,
2005 2004
__________ __________
Cash flows from operating activities:
Net income $ 682,525 $ 317,178
Reconciliation of net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 422,355 484,303
Loss on disposal of fixed assets - 1,898
Stock issued for compensation 9,610 13,110
Changes in assets and liabilities:
Accounts receivable trade (145,726) 36,891
Inventories 1,169,556 (702,731)
Prepaid expenses and other
current assets (12,336) 16,508
Note receivable 5,000 (3,373)
Other assets 1,806 (26,364)
Accounts payable 280,751 (30,432)
Accrued expenses (251,352) 93,307
Income taxes payable (23,800) 211,452
Grape payables (240,566) (186,644)
Deferred rent liability 24,739 17,092
Deferred gain (24,071) (18,738)
__________ __________
Net cash provided by
operating activities 1,898,491 223,457
__________ __________
Cash flows from investing activities;
Additions to property and equipment (193,101) (226,010)
Vineyard development expenditures (171,095) (40,462)
__________ __________
Net cash used in investing activities (364,196) (266,472)
__________ __________
Cash flows from financing activities:
Debt issuance costs (4,622) (9,088)
Net (decrease) increase in line of
credit balance (1,232,251) 125,844
Proceeds from stock options exercised 100,249 2,550
Repayments of distributor obligation (1,500,000) -
Issuance of long-term debt 1,500,000 28,923
Repayments of long-term debt (748,351) (202,455)
__________ __________
Net cash used in
financing activities (1,884,975) (54,226)
__________ __________
Net increase (decrease) in cash and
cash equivalents (350,680) (97,241)
Cash and cash equivalents:
Beginning of period 851,492 213,681
__________ __________
End of period $ 500,812 $ 116,440
========== ==========
The accompanying notes are an integral part of this financial statement.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements as of and for the three and
nine months ended September 30, 2005 and 2004, have been prepared in
conformity with accounting principles generally accepted in the United States.
he 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 accounting principles generally
accepted in the United States 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 and nine months ended September 30, 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 106,480 shares are included in the computation of dilutive earnings
per share for the three and nine months ended September 30, 2005. Total
potentially dilutive shares of 74,779 and 79,111 shares are included in the
computation of dilutive earnings per share for the three and nine months ended
September 30, 2004, respectively.
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 three and nine months
ended September 30:
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
(unaudited) (unaudited) (unaudited) (unaudited)
__________ __________ __________ __________
Net income,
as reported $ 318,246 $ 116,692 $ 682,525 $ 317,178
Add stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects - 1,610 - 13,110
Deduct total stock based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax
effects (64,199) (10,946) (192,597) (28,980)
__________ __________ __________ __________
Pro forma net
income $ 254,047 $ 107,356 $ 489,928 $ 301,308
Earnings per share:
Basic -
as reported $ 0.07 $ 0.03 $ 0.15 $ 0.07
Basic -
pro forma $ 0.06 $ 0.02 $ 0.11 $ 0.07
Diluted -
as reported $ 0.07 $ 0.03 $ 0.15 $ 0.07
Diluted -
pro forma $ 0.05 $ 0.02 $ 0.11 $ 0.07
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.
During the three months ended September 30, 2005, the following transactions
related to stock option exercise occurred:
Exercise
Shares price
Stock Options Exercised 6,000 $ 3.62
6,714 3.00
23,485 1.50
3) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW:
September 30, December 31,
2005 2004
(unaudited)
__________ __________
Winemaking and packaging materials $ 31,907 $ 134,059
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products) 1,383,045 1,891,681
Finished goods (bottled wines 5,814,829 6,373,597
and related products) __________ __________
7,229,781 8,399,337
Less: amounts designated for distributor - (571,355)
__________ __________
Current inventories $ 7,229,781 $ 7,827,982
========== ==========
In August 2005, the Company entered into a new business loan agreement with
Umpqua Bank to borrow $1,500,000 to pay-off the distributor obligation. With
the distributor obligation pay-off, the distributor released their lien
against the inventory and the inventory amount designated for distributor
was
reclassified to current inventory.
4) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
September 30, December 31,
2005 2004
(unaudited)
__________ __________
Land and improvements $ 769,644 $ 769,644
Winery building and hospitality center 4,696,058 4,647,272
Equipment 3,949,390 3,805,075
__________ __________
9,415,092 9,221,991
Less accumulated depreciation (5,319,524) (4,967,465)
__________ __________
$ 4,095,568 $ 4,254,526
========== ==========
5) DEBT
In August of 2005, the Company signed a new business loan agreement with
Umpqua Bank to borrow $1,500,000 to pay-off the distributor obligation. The
Umpqua Bank agreement calls for an interest rate of 6.01 percent, and 8
quarterly payments of $200,593 including principal and interest beginning in
November of 2005. The agreement also contains, among other things, certain
restrictive financial covenants with respect to total equity, debt-to-equity
and debt coverage. As of September 30, 2005, the Company was in compliance
with all of the financial covenants. The borrowings are collateralized by the
case goods inventory. As of September 30, 2005, the Company had paid $500,000
towards the principal balance of the Umpqua agreement leaving an outstanding
balance of $1,000,000 included in the long-term debt balance.
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.
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.
Overview
The Company set a record with its Third Quarter earnings achieving its highest
earnings since its inception - besting the Company's Second Quarter of 2005
reported three months ago which was, at that time, the winery's highest
earning Quarter. Sales Revenue increased 56% and Net Income before taxes
increased 173% for the three months ended September 30, 2005, as compared to
the prior year period, and increased 52% and 115%, respectively, for the nine
months ended September 30, 2005, as compared to the prior year period.
Management believes the strong sales are in part due to the Company's wine
quality which Management believes is at its highest since beginning operations
and the national exposure on the Food Network in Rachael Ray's "$40 a Day" and
on PBS Chefs Caprial and John Pence in "Caprial and John's Kitchen". Articles
and wine recommendations in national publications like the Wine Spectator,
Wine Enthusiast, Food and Wine, People Magazine, Your Diet and Sunset magazine
have also contributed. Management also believes the "Sideways" movie has been
a significant factor. There have been follow-on effects. For example, the
winery's '04 Pinot Gris was featured in the Wine Enthusiast Magazine cover
story, "Best Wines for Summer Sippin", with Virginia Madsen, co-star of
"Sideways". The winery ran a very successful consumer essay contest called
"Why I Love Oregon Pinot Noir" where the winning entrant won their own
"Sideways" trip to Oregon wine country.
The Wine Spectator magazine coverage of the Willamette Valley Vineyards
achieving the first federal approval of a wine label listing the antioxidant
resveratrol content may also be a factor contributing to sales growth. The
powerful antioxidant resveratrol is found in high amounts in Pinot Noir grapes
grown in moist, cool climates according to Dr. Leroy Creasy of Cornell
University.
In August 2005, the Company entered into a new business loan agreement with
Umpqua Bank to borrow $1,500,000 to pay-off the Company's distributor
obligation. The distributor obligation was incurred during 2001 when the
Company entered into a distribution agreement with a national wine distributor
group (the "distributor"), whereby the distributor paid the Company $1,500,000
for a base amount of bottled wine. The Umpqua Bank agreement calls for an
interest rate of 6.01 percent, and 8 quarterly payments of $200,593 including
principal and interest beginning in November of 2005. During September 2005,
the Company used excess cash generated through sales to pay $500,000 towards
the principle balance of the Umpqua agreement, leaving an outstanding balance
of $1,000,000.
The Company used $1,942,963 of cash generated from net earnings and the
reduction in wine inventories resulting from record sales to pay down the bank
credit line and other financing in the first nine months of 2005. As a
result, interest costs have dropped significantly compared to comparable prior
year periods. Management plans to continue to use cash generated from
operations to reduce short term financing balances to zero and maintain that
posture into the future, to the extent possible.
Sales to out-of-state distributors continued to be the primary reason for the
increases in sales revenue and profitability during the three and nine months
ended September 30, 2005. Sales to out-of-state distributors increased 130%
and 85%, respectively, for the three and nine months ended September 30, 2005
as compared to the respective prior year periods. The demand for certain
varieties of wine has reduced inventories of those varieties, and the Company
has placed those varieties on allocation with its distributors in order to
address inventory constraints. The winery's flagship, Vintage Pinot Noir, has
experienced the highest increase in orders, but there are no foreseen
limitations on its availability at the present time.
Management is continuing to focus its efforts on making the brand Willamette
Valley Vineyards the brand of choice for Pinot Noir under $20 a bottle retail
or under $50 on a restaurant wine list. Management is strongly committed to
the Pinot Noir grape variety and believes the Willamette Valley is one of the
best places in the world to grow this variety.
Management believes Willamette Valley Vineyards is positioned to develop wine
consumer support for its brand in this market segment. Management has made
and will make some additional price increases to it offerings due in part to
the higher costs of applying more hand labor in caring for the wine grapes
at lower crop levels. Management believes this is necessary to maintain and
continue to improve wine quality but also believes these price increases will
not take its offerings out of its target market.
Revenues from the winery's Oregon Wholesale Department called Bacchus Fine
Wines increased 37% in the three months and 42% in the nine months ended
September 30, 2005 compared to the respective prior year periods.
Sales of Company produced products through Bacchus Fine Wines increased 31%
and sales of products produced by other wineries increased 53% in the three
months ended September 30, 2005 compared to the prior year period. For the
nine months ended September 30, 2005, such sales increased 21% and 85%,
respectively, compared to the prior year period.
Increased sales of Company produced products have reduced excess inventories
and the Company is reviewing sales projections in order to plan appropriate
future inventory production levels. In the past year, the Company has planted
25 acres of vines at its Forest Grove site and contracted on a long term basis
for 90 acres of wine grapes. Management expects the Company's lack of
inventory of certain varieties is likely to negatively impact the Company's
operating performance for the Fourth Quarter of 2005.
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,
2005 2004 2005 2004
__________ __________ __________ __________
Tasting Room Sales and
Rental Income $ 514,424 $ 458,208 $ 1,308,431 $ 1,117,331
On-site and off-site
festivals 17,504 15,702 65,617 76,861
In-state sales 1,751,116 1,282,737 4,777,055 3,355,725
Out-of-state sales 1,458,141 635,298 3,490,478 1,881,946
Bulk wine/
Misc. sales 8,828 10,146 111,090 26,203
__________ __________ __________ __________
Total Revenue 3,750,013 2,402,091 9,752,671 6,458,066
Less Excise Taxes 131,957 89,484 247,039 198,595
__________ __________ __________ __________
Net Revenue $ 3,618,056 $ 2,312,607 $ 9,505,632 $ 6,259,471
========== ========== ========== ==========
Net revenues for the three months ended September 30, 2005 increased
$1,305,449, or 56%, over the corresponding period in the preceding year. This
increase is due almost entirely to the increases in out-of-state sales,
in-state sales, and tasting room sales and rental income.
Net revenues for the nine months ended September 30, 2005 increased $3,246,161,
or 52% over the corresponding period in the preceding year. This increase is
due almost entirely to the increases in out-of-state sales and in-state sales.
Tasting room sales and rental income for the three months ended September 30,
2005 increased $56,216, or 12%, compared to the corresponding prior year
period. For the nine months ended September 30, 2005, tasting room sales
increased $191,100, or 17%, compared to the prior year period. Tasting room
sales increased during the three and nine months ended September 30, 2005 due
primarily to increased customer traffic flows, increased purchases in the
tasting room and increased key customer phone sales.
Sales in the state of Oregon, through the Company's independent sales force
and through direct sales from the winery increased $468,379, or 37%, in the
three months ended September 30, 2005, compared to the corresponding prior
year period. Sales through the Company's independent sales force alone for the
three months ended September 30, 2005 increased $212,914, or 17%, over the
comparable prior year period. The Company's direct instate sales to its
largest customer increased $74,118, or 41%, in the three months ended
September 30, 2005, over the comparable prior year period. These increases
are largely the result of the broader product lines presented and increased
product placements through the development of Bacchus Fine Wines.
Out-of-state sales in the three months ended September 30, 2005 increased
$822,843, or 130%, over the comparable prior year period. During the nine
months ended September 30, 2005, these sales increased $1,608,532, or 85%,
over the comparable prior year period. The higher sales are primarily a
result of promotional allowances offered to distributors by the Company that
are resulting in higher depletions by the Company's distributors.
Excise taxes
The Company's excise taxes for the three and nine months ended September 30,
2005 increased 47% and 24%, respectively, as compared to the corresponding
periods in the preceding year. This was due primarily to the increased sales
in the three and nine months ended September 30, 2005 compared to the prior
year periods, thereby increasing overall sales volumes and taxes calculated
based on volume.
Gross Profit
Winery Operations
As a percentage of net revenue, gross profit decreased to 46% in the three
months ended September 30, 2005, as compared to 50% in the comparable prior
year period. As a percentage of net revenue, gross profit for the nine months
ended September 30, 2005 decreased to 46% as compared to 50% in the comparable
prior year period. While the Company is continuing its focus on improved
distribution of higher margin products as well as continuing to reduce grape
and production costs, we anticipate that our increased representation of
brands other than our own through our 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 to such representation, the
Company does not anticipate that net income will follow that trend.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three and nine months
ended September 30, 2005 increased 25% and 27%, respectively, compared to the
corresponding prior year periods. These increases are due primarily to higher
fixed Oregon wholesale sales and delivery costs and increased shipping and
fuel costs. As a percentage of net revenue from winery operations, selling,
general and administrative expenses decreased to 30% for the three months
ended September 30, 2005, as compared to 38% for the comparable prior year
period, and to 32% for the nine months ended September 30, 2005, as compared
to 38% for the comparable prior year period, primarily as a result of
increased revenues.
Interest Income, Other Income and Expense
Interest income decreased to $349 and $775 for the three and nine months,
respectively, ended September 30, 2005, compared to $1,216 and $3,764,
respectively, for the comparable prior year periods. Interest expense for the
three and nine months ended September 30, 2005 decreased 29% and 25%,
respectively, compared to the corresponding prior year periods. Interest
costs were lower primarily due to less debt outstanding during the period.
The Company's other income is summarized as follows:
Three months ended Nine months ended
September 30, September 30,
2005 2004 2005 2004
__________ __________ __________ __________
Farm Credit interest
rebate - - 17,336 14,504
Miscellaneous rebates - 10 - 44
__________ __________ __________ __________
Other income
(expense) $ - $ 10 $ 17,336 $ 14,548
Income Taxes
Income tax expense was $212,165 and $455,018, respectively, for the three and
nine months ended September 30, 2005, compared to $77,794 and $211,452,
respectively, for the prior year periods due to the Company's net profit for
the first three and nine months in 2005. The Company's estimated tax rate for
the three and nine months ended September 30, 2005 and 2004 was 40 percent.
Net Income and Earnings per Share
As a result of the factors listed above, the Company's reported net income for
the nine months ended September 30, 2005 was $682,525, or $0.15 per diluted
share, compared to net income of $317,178, or $0.07 per diluted share, in the
comparable prior year period.
Liquidity and Capital Resources
At September 30, 2005, the Company had a working capital balance of $6.8
million and a current ratio of 4.11:1. 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 $500,812 at September 30, 2005 compared to a
cash balance of $851,492 at December 31, 2004. The decrease in cash was
primarily due to the pay down in the Company's line of credit and distributor
obligation.
Total cash provided by operating activities in the nine months ended September
30, 2005 was $1,898,491, compared to $223,457 for the prior year period,
primarily as an increase in net income, conversion of inventory to cash
through sales, and lower depreciation in the nine months ended September 30,
2005 compared to the prior year period. Cash provided by operating activities
in the nine months ended September 30, 2005 consisted of net income of
$682,525, plus depreciation of $422,355, plus changes in assets and
liabilities and other non-cash charges of $793,611. Cash provided by
operating activities in the nine months ended September 30, 2004 consisted of
net income of $317,178, plus depreciation of $484,303, less changes in assets
and liabilities and other non-cash charges of $578,024.
Total cash used in investing activities in the nine months ended September 30,
2005 was $364,196, compared to $266,472 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 nine months ended September 30,
2005 was $1,884,975, compared to $54,226 in the prior year period. Cash used
in financing activities primarily consisted of payments on the long term debt,
the line of credit, and the distributor obligation.
At September 30, 2005, the line of credit balance was $0, on a maximum
borrowing amount 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 September 30,
2005, the Company was in compliance with all of the financial covenants.
As of September 30, 2005, the Company had a total long-term debt balance of
$3,341,593 owed primarily to Farm Credit Services and Umpqua Bank. The debt
with Farm Credit Services 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. In August of 2005, the
Company signed a new business loan agreement with Umpqua Bank to borrow
$1,500,000 to pay-off the distributor obligation. The Umpqua Bank agreement
calls for an interest rate of 6.01 percent, and 8 quarterly payments of
$200,593 including principal and interest beginning in November of 2005. The
agreement also contains, among other things, certain restrictive financial
covenants with respect to total equity, debt-to-equity and debt coverage. As
of September 30, 2005, the Company was in compliance with all of the financial
covenants. The borrowings are collateralized by the case goods inventory. As
of September 30, 2005, the Company had paid $500,000 towards the principle
balance of the Umpqua agreement leaving an outstanding balance of $1,000,000
included in the long-term debt balance.
At September 30, 2005, the Company owed $351,824 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.
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 September 30, 2005. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of September 30, 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 September 30, 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: November 14, 2005 By /s/ James W. Bernau
James W. Bernau
President
Date: November 14, 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.