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, 2004
Commission File Number 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in charter)
Oregon 93-0981021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
___________________________________________________________
8800 Enchanted Way, S.E., Turner, Oregon 97392
(503)-588-9463
(Address, including Zip code, and telephone number,
including area code, of registrant's principal executive offices)
___________________________________________________________
Indicate by check mark whether the registrant (1) has filed, all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
[X] YES [ ] NO
Number of shares of common stock outstanding as of September 30, 2004
4,486,278 shares, no par value
Transitional Small Business Disclosure
[ ] YES [X] NO
Explanatory Note
As previously reported, in February and March 2004 the Alcohol and Tobacco
Tax and Trade Bureau of the U.S. Treasury Department audited the Company's
excise tax liability and payments for 2003, 2002 and 2001. This audit
resulted in additional excise taxes owing for those periods due principally
to the Company's incorrect application of the federal small winery tax credit.
The Company originally recorded a liability as of December 31, 2003 and a
related expense in the year then ended of the estimated excise taxes owing of
$80,000. The Company has restated its financial statements for the years ended
December 31, 2003, 2002, and 2001 and the quarterly periods within each of
those years to reflect the correct excise tax for each of the periods and to
record the estimated interest and penalties with respect to the related
estimated excise tax liability. Additional excise tax of $6,284 and $18,852
and related interest and penalties of $1,854 and $5,562 have been recorded for
the three and nine months ended September 30, 2003, respectively.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a five year period
through 2004. Amortization expense of $7,200 through June 30, 2004 and $3,600
and $10,800 for the three and nine months ended September 30, 2003 was included
in selling, general, and administrative expenses. It has been determined that
such costs should be expensed as incurred. Accordingly, the Company has
restated its financial statements for the first six months of 2004 and for the
three and nine months ended September 30, 2003 to adjust for the previously
capitalized costs and related amortization.
In addition, the Company has restated its financial statements for the three
and nine months ended September 30, 2003 to reflect the reclassification of
amortization of deferred gain arising from a sales-leaseback transaction from
other income to offset the related lease expense included in selling, general
and administrative expenses. The Company has also restated the nine months
ended September 30, 2003 to reflect the reclassification of an expense from
other expense to cost of goods sold.
Additional detail regarding the restatement is included in Note 2 of the Notes
to Financial Statements included in Part I, Item 1 and in Management's
Discussion and Analysis of Financial Condition and Results of Operations under
Restatement of Financial Information in Part I, Item 2, of this Form 10-QSB.
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 5--Other Information
Item 6--Exhibits
Signatures
PART 1 FINANCIAL INFORMATION
ITEM 1
Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
September 30, December 31,
2004 2003
(unaudited) (restated)
ASSETS __________ __________
Current assets
Cash and cash equivalents $ 116,440 $ 213,681
Accounts receivable trade, net 759,945 796,836
Inventories 8,038,109 7,335,378
Prepaid expenses and other
current assets 30,057 46,565
Income taxes receivable - 83,911
Deferred income taxes 174,323 174,323
__________ __________
Total current assets 9,118,874 8,650,694
Vineyard development cost, net 1,681,477 1,698,970
Inventories 552,414 552,414
Property and equipment, net 4,514,302 4,698,915
Notes receivable from officer and other 69,507 66,134
Debt issuance costs, net 54,270 62,805
Other assets 227,584 201,220
__________ __________
Total assets $16,218,428 $15,931,152
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,256,360 $ 1,130,516
Current portion of long-term debt 250,291 250,291
Accounts payable 721,787 752,219
Accrued expenses 564,730 471,441
Income taxes payable 127,559 -
Grapes payable 483,070 669,714
__________ __________
Total current liabilities 3,403,797 3,274,181
Long-term debt 2,519,576 2,693,108
Distributor obligation 1,500,000 1,500,000
Deferred rent liability 126,087 108,995
Deferred gain 381,005 399,743
Deferred income taxes 295,285 295,285
__________ __________
Total liabilities 8,225,750 8,271,312
__________ __________
Shareholders' equity
Common stock, no par value - 10,000,000 shares authorized,
4,486,278 and 4,479,478 shares issued and outstanding at
September 2004 and December 31, 2003 7,228,329 7,167,589
Unearned employee compensation (45,080) -
Retained earnings 809,429 492,251
__________ __________
Total shareholders' equity 7,992,678 7,659,840
__________ __________
Total liabilities and shareholders'
equity $16,218,428 $15,931,152
========== ==========
The accompanying notes are an integral part of these financial statements.
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Operations
(unaudited)
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(restated) (restated)
__________ __________ __________ __________
Net revenues
Case revenue $ 2,302,461 $ 1,847,133 $ 6,233,268 $ 4,718,457
Custom crush-facility lease-
bulk revenue 10,146 69,906 26,203 233,721
__________ __________ __________ __________
Total net revenues 2,312,607 1,917,039 6,259,471 4,952,178
Cost of sales
Case 1,166,551 884,890 3,112,378 2,260,229
Bulk - 57,833 - 179,444
__________ __________ __________ __________
Total cost of sales 1,166,551 942,723 3,112,378 2,439,673
Gross margin 1,146,056 974,316 3,147,093 2,512,505
Selling, general and administrative
expenses 871,511 742,367 2,403,668 2,031,530
__________ __________ __________ __________
Net operating
income 274,545 231,949 743,425 480,975
Other income (expense)
Interest income 1,216 1,160 3,764 3,787
Interest expense (81,285) (84,500) (233,107) (259,718)
Other income 10 95,444 14,548 122,443
__________ __________ __________ __________
Net income before
income taxes 194,486 244,053 528,630 347,487
Income tax 77,794 98,026 211,452 140,242
__________ __________ __________ __________
Net income 116,692 146,027 317,178 207,245
Retained earnings beginning of
period 692,737 379,741 492,251 318,523
__________ __________ __________ __________
Retained earnings
end of period $ 809,429 $ 525,768 $ 809,429 $ 525,768
========== ========== ========== ==========
Basic earnings per
common share $ 0.03 $ 0.03 $ 0.07 $ 0.05
Diluted earnings per
common share $ 0.03 $ 0.03 $ 0.07 $ 0.05
Weighted average number of
basic common shares
outstanding 4,486,180 4,474,854 4,484,752 4,474,064
Weighted average number of
diluted common shares
outstanding 4,560,959 4,483,157 4,563,863 4,474,171
The accompanying notes are an integral part of these financial statements.
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Cash Flows
(unaudited)
Nine months ended September 30,
2004 2003
(restated)
__________ __________
Cash flows from operating activities:
Net income $ 317,178 $ 207,245
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization 484,303 543,303
Loss (gain) on disposal of fixed assets 1,898 (3,004)
Stock issued for compensation 13,110 8,819
Changes in assets and liabilities:
Accounts receivable trade 36,891 (209,641)
Inventories (702,731) (53,657)
Prepaid expenses and other
current assets 16,508 2,489
Note receivable (3,373) (3,131)
Other assets (26,364) 2,213
Accounts payable (30,432) 268,820
Accrued expenses 93,307 89,092
Income taxes payable 211,452 71,120
Grape payables (186,644) (331,287)
Deferred rent liability 17,092 17,094
Deferred gain (18,738) (18,738)
__________ __________
Net cash provided by
operating activities 223,457 590,737
__________ __________
Cash flows from investing activities;
Additions to property and equipment (226,010) (143,749)
Vineyard development expenditures (40,462) (6,057)
Proceeds from the sale of property
and equipment - 15,128
Investments - 1,000
__________ __________
Net cash used in investing activities (266,472) (133,678)
__________ __________
Cash flows from financing activities:
Debt issuance costs (9,088) (16,565)
Net increase (decrease) in line of
credit balance 125,844 (386,036)
Proceeds from stocks options exercised 2,550 -
Issuance of long-term debt 28,923 -
Repayments of long-term debt (202,455) (172,724)
__________ __________
Net cash used in financing activities (54,226) (575,325)
__________ __________
Net decrease in cash and
cash equivalents (97,241) (118,266)
Cash and cash equivalents:
Beginning of period 213,681 632,183
__________ __________
End of period $ 116,440 $ 513,917
========== ==========
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements as of and for the three and
nine months ended September 30, 2004 and 2003, have been prepared in conformity
with accounting principles generally accepted in the United States. The
financial information as of December 31, 2003, is derived from the audited
financial statements presented in the Willamette Valley Vineyards, Inc. (the
"Company") Annual Report on Form 10-KSB/A for the year ended December 31, 2003.
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, 2003, as presented in the Company's Annual Report on Form
10-KSB/A.
Operating results for the three and nine months ended September 30, 2004, are
not necessarily indicative of the results that may be expected for the entire
year ending December 31, 2004, 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 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. Total potentially dilutive shares of 8,303 and 107 shares are
included in the computation of dilutive earnings per share for the three and
nine months ended September 30, 2003, respectively.
2) RESTATEMENT OF FINANCIAL INFORMATION
As previously reported, in February and March 2004 the Alcohol and Tobacco Tax
and Trade Bureau of the U.S. Treasury Department audited the Company's excise
tax liability and payments for 2003, 2002 and 2001. This audit resulted in an
additional amount of excise tax owing for those periods due principally to the
Company's incorrect application of the federal small winery tax credit. The
Company originally recorded a liability as of December 31, 2003 and a related
expense in the year then ended of the estimated excise taxes owing of $80,000.
The Company has restated its financial statements for the three and nine month
periods ended September 30, 2003 to reflect the correct excise tax for the
periods and to record the estimated interest and penalties with respect to the
estimated excise tax owing. Additional excise tax of $6,284 and $18,852 and
related interest and penalties of $1,854 and $5,562 have been recorded for the
three and nine months ended September 30, 2003, respectively.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a five year period
through 2004. Amortization expense of $7,200 through June 30, 2004 and $3,600
and $10,800 for the three and nine months ended September 30, 2003 was included
in selling, general, and administrative expenses. It has been determined that
such costs should be expensed as incurred. Accordingly, the Company has
restated its financial statements for the first six months of 2004 and for the
three and nine months ended September 30, 2003 to adjust for the previously
capitalized costs and related amortization.
The effect of these restatements was to decrease net income by $3,127, or $-
per share, for the three months ended September 30, 2003 and by $9,381, or $-
per share, for the nine months ended September 30, 2003.
In addition, the Company has restated its financial statements for the nine
months ended September 30, 2003 to reflect the reclassification of an expense
of $29,423 from other expense to cost of goods sold and for the three and nine
months ended September 30, 2003 for the reclassification of amortization of
deferred gain arising from a sales-leaseback transaction of $6,246 and $18,738,
respectively, from other income to an offset of the related lease expense
included in selling, general and administrative expenses. There was no change
to previously reported net income as a result of these reclassifications.
There was no change to previously reported cash provided by operating
activities, cash used by investing activities or cash used by financing
activities.
The following sets forth the effects of the aforementioned restatements to the
Company's Balance Sheet at December 31, 2003, and Statements of Operations for
the three and nine months ended September 30, 2003.
December 31, 2003
As Reported Adjustments Restated
Current assets $ 8,648,453 $ 2,241 $ 8,650,694
------------ ------------ ------------
Other assets $ 215,148 $ (13,928) $ 201,220
------------ ------------ ------------
Total assets $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Current liabilities $ 3,261,959 $ 12,222 $ 3,274,181
------------ ------------ ------------
Deferred income taxes $ 300,856 $ (5,571) $ 295,285
------------ ------------ ------------
Total liabilities $ 8,264,661 $ 6,651 $ 8,271,312
Shareholders' equity 7,678,178 (18,338) 7,659,840
------------ ------------ ------------
Total liabilities and
Shareholders' equity $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Three months ended September 30, 2003(unaudited)
As Reported Adjustments Restated
Net revenues $ 1,923,323 $ (6,284) $ 1,917,039
Cost of sales 942,723 - 942,723
------------ ------------ ------------
Gross margin 980,600 (6,284) 974,316
Selling general and administrative
expenses 751,202 (8,835) 742,367
------------ ------------ ------------
Net operating income 229,398 2,551 231,949
Other income (expense),
net 19,193 (7,089) 12,104
------------ ------------ ------------
Income before income taxes 248,591 (4,538) 244,053
Income tax 99,437 (1,411) 98,026
------------ ------------ ------------
Net income $ 149,154 $ (3,127) $ 146,027
============ ============ ============
Nine months ended September 30, 2003(unaudited)
As Reported Adjustments Restated
Net revenues $ 4,971,030 $ (18,852) $ 4,952,178
Cost of sales 2,410,250 29,423 2,439,673
------------ ------------ ------------
Gross margin 2,560,780 (48,275) 2,512,505
Selling general and administrative
expenses 2,058,035 (26,505) 2,031,530
------------ ------------ ------------
Net operating income 502,745 (21,770) 480,975
Other income (expense),
net (141,644) 8,156 (133,488)
------------ ------------ ------------
Income before income taxes 361,101 (13,614) 347,487
Income tax 144,475 (4,233) 140,242
------------ ------------ ------------
Net income $ 216,626 $ (9,381) $ 207,245
============ ============ ============
3) 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 expense 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 income would have been reduced to
the pro forma amounts indicated as follows for the three and nine months ended
September 30(unaudited):
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(restated) (restated)
__________ __________ __________ __________
Net income,
as reported $ 116,692 $ 146,027 $ 317,178 $ 207,245
Add stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects 1,610 - 13,110 8,819
Deduct total stock based
employee compensation
expense determined
under fair value based
method for all awards,
net of related tax
effects (10,946) (5,948) (28,980) (26,663)
__________ __________ __________ __________
Pro forma net
income $ 107,356 $ 140,079 $ 301,308 $ 189,401
Earnings per share:
Basic -
as reported $ 0.03 $ 0.03 $ 0.07 $ 0.05
Basic -
pro forma $ 0.02 $ 0.03 $ 0.07 $ 0.04
Diluted -
as reported $ 0.03 $ 0.03 $ 0.07 $ 0.05
Diluted -
pro forma $ 0.02 $ 0.03 $ 0.07 $ 0.04
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, 2004 the Company reserved 20,000
shares of restricted stock for employee incentive compensation. Restricted
stock awards are recorded as compensation expense over the requisite vesting
period based on the market value at the date of reservation. Unearned
compensation in connection with the restricted stock is presented within the
shareholders' equity.
4) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOWS:
September 30, December 31,
2004 2003
(unaudited)
__________ __________
Winemaking and packaging materials $ 21,681 $ 80,886
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products) 1,441,697 1,982,469
Finished goods (bottled wines 7,127,145 5,824,437
and related products) __________ __________
8,590,523 7,887,792
Less: amounts designated for distributor (552,414) (552,414)
__________ __________
Current inventories $ 8,038,109 $ 7,335,378
========== ==========
5) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
September 30, December 31,
2004 2003
(unaudited)
__________ __________
Land and improvements $ 984,256 $ 976,838
Winery building and hospitality center 4,647,272 4,577,467
Equipment 5,074,786 4,933,329
__________ __________
10,706,314 10,487,634
Less accumulated depreciation (6,192,012) (5,788,719)
__________ __________
$ 4,514,302 $ 4,698,915
========== ==========
6) SUBSEQUENT EVENTS:
During the three months ended September 30, 2004, management initiated the sale
and lease back of the 75.3 acre Meadowview parcel at the Tualatin Estate
Vineyard for $726,675, which closed on October 22, 2004. The net proceeds of
the sale will be recorded in the fourth quarter of 2004 as revenue for the non-
vineyard acres of the parcel not being leased back, and as deferred gain for
the leased back vineyard acres. The deferred gain will then be amortized over
the life of the lease. Pursuant to the sale leaseback agreement, the Company
will continue to farm and develop the vineyard acres of this parcel. This
parcel includes 15.7 acres of established vineyard that the Company has agreed
to lease for up to 14 years. The parcel also includes 7 acres of vineyard
planted in 2004 and trellised with French Dijon clone 777 Pinot noir on disease
resistant rootstock at the purchaser's expense, and 23 additional acres of
vineyard land. The purchaser has agreed to fund the vineyard development of
the 23 acres of vineyard land. The Company will begin paying rent on the 7
acres and any plantings on the 23 acres starting when the vines become
commercially productive in 2008 for up to 24 years. The net cash proceeds of
the sale were principally applied to reduce amounts owing under the Company's
credit line.
On November 24, 2004, the Company received a Staff Determination from The
Nasdaq Stock Market indicating that because the Company's Form 10-QSB for the
period ended September 30, 2004 had not been filed, the Company's securities
were subject to delisting from The Nasdaq Stock Market SmallCap Market at the
opening of Business on December 3, 2004, unless the Company requested a hearing
in accordance with The Nasdaq Stock Market's marketplace rules. Additionally,
as a result of the Company's filing delinquency, at the opening of business on
November 29, 2004, the fifth character "E" was appended to the Company's
trading symbol, changing the trading symbol to WVVIE from WVVI. The Company's
filing delinquency was a result of the outstanding accounting issues relating
to the accounting for label and package design costs, and the filing of
restated financial statements for the years ended December 31, 2003, 2002 and
2001, the quarterly periods within each of those years, the three month period
ended March 31, 2004 and the three and six month periods ended June 30, 2004.
The Company has requested a hearing before a Nasdaq Listing Qualifications
Panel to review the Staff Determination. There can be no assurance the Panel
will grant the Company's request for continued listing. The Company believes
that as a result of the filing of this Form 10QSB, all issues raised by The
Nasdaq Stock Market will be resolved, and its securities will continue to be
listed on The Nasdaq Stock Market and its trading symbol will be changed back
to WVVI, pending the results of the Nasdaq Listing Qualifications Panel review.
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. Actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited to: availability
of financing for growth, availability of adequate supply of high quality grapes,
successful performance of internal operations, impact of competition, changes
in wine broker or distributor relations or performance, impact of possible
adverse weather conditions, impact of reduction in grape quality or supply due
to disease, impact of governmental regulatory decisions, and other risks
detailed below as well as those discussed elsewhere in this Form 10-QSB and
from time to time in the Company's Securities and Exchange Commission filings
and reports. In addition, such statements could be affected by general
industry and market conditions and growth rates, and general domestic economic
conditions.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The Management's Discussion and Analysis of Financial Condition and Results of
Operations presented below reflect the effects of the restatement of our
financial statements for the first six months of 2004, for the three and nine
months ended September 30, 2003, and as of December 31, 2003 as discussed in
Note 2 to the financial statements.
Overview
Operating performance in the three and nine months ended September 30, 2004
increased primarily due to strong sales to out-of-state distributors and Oregon
restaurant and retail outlets. Total net sales revenue grew by 21% in the
three months ended September 30, 2004 and 26% for the nine months ended
September 30, 2004, compared to the respective prior year periods. Operating
income increased 18% for the three months ended September 30, 2004 and 55% for
the nine months ended September 30, 2004, compared to the respective prior year
periods. Reductions in tasting room expenses in the three months ended
September 30, 2004 and additional rent income from the Tualatin winery also
contributed to these positive results.
The increase in out-of-state sales is due to the growth in depletions (sales
from distributors to their customers) of the Company's core product offerings,
Vintage Pinot noir, Whole Cluster Pinot noir, Pinot gris and Riesling. As a
group, the depletions of these products from distributors to their customers
increased 14% and 19%, respectively, for the three and nine months ended
September 30, 2004, compared to the respective prior year periods, driving the
19% and 26% growth in sales from the winery to out-of-state distributors during
the three and nine months ended September 30, 2004, respectively, compared to
the respective prior year periods.
Sales in the state of Oregon through the Company's independent sales force and
through direct sales from the winery to retail licensees increased 40% and 50%,
respectively, for the three and nine months ended September 30, 2004 compared
to the respective prior year periods, primarily due to the growth of distributed
wine brands in the three and nine months ended September 30, 2004. Expenses
increased significantly in the three and nine months ended September 30, 2004
compared to the prior year periods as delivery support was built up in
anticipation of additional brands to be rolled out in the fourth quarter of
2004. Management considers the Wholesale Department called Bacchus Fine Wines
to be in a building stage where an intense focus is being applied to the
placement of purchased wine in restaurant and retail accounts. The Company has
purchased a significant inventory of wines for resale totaling approximately
$800,000, placing an additional demand on cash and the Company's credit line.
Management has taken these steps as it believes they will improve the sales
opportunities for the Company's own wines with retail and restaurant customers
and increase net income in the future.
Retail revenues were relatively flat during the three and nine months ended
September 30, 2004 compared to the prior year periods but retail operating
expenses were reduced over those same comparable periods. Although Tasting
Room sales increased during the three and nine months ended September 30, 2004
compared to the same prior year periods, the winery experienced reductions in
Key Customer sales due to staffing vacancies during the same comparable
periods. In the third and fourth quarter, management added a Customer Service
Coordinator and Key Customer Service personnel to increase direct sales to wine
consumers.
During the three months ended September 30, 2004, management initiated the sale
and lease back of the 75.3 acre Meadowview parcel at the Tualatin Estate
Vineyard for $726,675, which closed on October 22, 2004. The net proceeds of
the sale will be recorded in the fourth quarter of 2004 as revenue for the non-
vineyard acres of the parcel not being leased back, and as deferred gain for
the leased back vineyard acres. The deferred gain will then be amortized over
the life of the lease. Pursuant to the sale leaseback agreement, the Company
will continue to farm and develop the vineyard acres of this parcel. This
parcel includes 15.7 acres of established vineyard that the Company has agreed
to lease for up to 14 years. The parcel also includes 7 acres of vineyard
planted in 2004 and trellised with French Dijon clone 777 Pinot noir on disease
resistant rootstock at the purchaser's expense, and 23 additional acres of
vineyard land. The purchaser has agreed to fund the vineyard development of the
23 acres of vineyard land. The Company will begin paying rent on the 7 acres
and any plantings on the 23 acres starting when the vines become commercially
productive in 2008 for up to 24 years. The net cash proceeds of the sale were
principally applied to reduce amounts owing under the Company's credit line.
Revenue from the remaining owned parcel at Tualatin Estate improved in the
three and nine months ended September 30, 2004 due to the renting of the winery
facility to the Company's former winemaker.
Harvest began at the end of the three months ended September 30, 2004 with
variable results based upon vineyard location. Rain during bloom and the warm
summer reduced yield. Rains in mid-September, just prior to harvest, caused
some small berries to split, reducing yields. This variable vintage breaks a
string of six remarkable vintages beginning in 1998. Early fermentations
indicate some lots of Pinot noir will be lighter in color, less concentrated
yet fragrant. White wines such as Pinot gris and Riesling are showing bright,
powerful fruit flavor.
The Company capitalized $71,528 of label and package design costs in 1998 and
1999, and was amortizing them over a five year period through 2004. It has
been determined that such costs should be expensed when incurred. Accordingly,
the Company has restated its financial statements for the years ended December
31, 2003, 2002, and 2001, and the quarterly periods within each of those years,
and the six month period ended June 30, 2004 to remove the amortization expense.
The impact of this restatement is to reduce earnings in 1999 and increase
earnings in subsequent periods through June 30, 2004. The Company delayed its
filing of this Form 10-QSB pending the determination of the accounting for
these label and package design costs. As a result of this filing delinquency,
on November 24, 2004, the Company received a Staff Determination from The
NASDAQ Stock Market indicating that because the Company's Form 10-QSB for the
period ended September 30, 2004 had not been filed, the Company's securities
were subject to delisting from The NASDAQ Stock Market SmallCap Market at the
opening of Business on December 3, 2004, unless the Company requested a hearing
in accordance with The Nasdaq Stock Market's marketplace rules. Additionally,
as a result of the Company's filing delinquency, at the opening of business on
November 29, 2004, the fifth character "E" was appended to the Company's
trading symbol, changing the trading symbol to WVVIE from WVVI. The Company
has requested a hearing before a Nasdaq Listing Qualifications Panel to review
the Staff Determination. There can be no assurance the Panel will grant the
Company's request for continued listing. The Company believes that as a result
of the filing of this Form 10-QSB, all issues raised by The Nasdaq Stock Market
will be resolved, and its securities will continue to be listed on The Nasdaq
Stock Market and its trading symbol will be changed back to WVVI, pending the
results of the Nasdaq Listing Qualifications Panel review.
RESULTS OF OPERATIONS
Revenue
The Company's revenues are summarized as follows (unaudited):
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(restated) (restated)
__________ __________ __________ __________
Tasting Room Sales and
Rental Income $ 458,208 $ 445,993 $ 1,117,331 $ 1,093,073
On-site and off-site
festivals 15,702 20,817 76,861 85,814
In state sales 1,282,737 915,025 3,355,725 2,235,829
Out of state sales 635,298 534,532 1,881,946 1,489,532
Bulk wine/
Misc. sales 10,146 69,906 26,203 233,721
__________ __________ __________ __________
Total Revenue 2,402,091 1,986,273 6,458,066 5,137,969
Less Excise Taxes 89,484 69,234 198,595 185,791
__________ __________ __________ __________
Net Revenue $ 2,312,607 $ 1,917,039 $ 6,259,471 $ 4,952,178
========== ========== ========== ==========
Tasting room sales and rental income for the three months ended September 30,
2004 increased 3% to $458,208 in 2004 from $445,993 compared to the prior year
period. For the nine months ended September 30, 2004 tasting room sales and
rental income increased 2% over the comparable prior year period. Tasting room
sales and rental income increased during the three months ended September 30,
2004 due in part to higher customer traffic flows and increased tasting room
sales.
On-site and off-site festival sales for the three months ended September 30,
2004 decreased 25% to $15,702 from $20,817 compared to the prior year period,
and decreased 10% for the nine months ended September 30, 2004 compared to the
prior year period. These decreases are 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 40% to $1,282,737 in the three
months ended September 30, 2004 from $915,025 compared to the prior year period.
Sales through the Company's independent sales force for the three months ended
September 30, 2004 increased 46% to $1,039,372 from $712,118 for the comparable
prior year period. The Company's direct instate sales to our largest customer
increased 127% to $181,347 from $79,988 in the three months ended September 30,
2004 compared to the prior year period. These increases are largely the result
of the improved sales management and broader product lines presented through
the development of Bacchus Fine Wines.
Out-of-state sales in the three months ended September 30, 2004 increased 19% to
$635,298 from $534,532 compared to the prior year period. During the nine
months ended September 30, 2004, sales increased 26% compared to the prior year
period. The higher sales are a result of increased 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 increased in the three months ended September 30,
2004 to $89,484 from $69,234 compared to the prior year period, and increased
to $198,595 from $185,791 for the nine months ended September 30, 2004 compared
to the prior year period. This was due largely to the increased sales in the
three and nine months ended September 30, 2004 compared to the prior year
periods, thereby increasing overall sales volumes and taxes calculated based on
volume.
Restatement of Financial Information
As previously reported, in February and March 2004 the Alcohol and Tobacco Tax
and Trade Bureau of the U.S. Treasury Department audited the Company's excise
tax liability and payments for 2003, 2002 and 2001. This audit resulted in an
additional amount of excise tax owing for those periods due principally to the
Company's incorrect application of the federal small winery tax credit. The
Company originally recorded a liability as of December 31, 2003 and a related
expense in the year then ended of the estimated excise taxes owing of $80,000.
The Company has restated its financial statements for the three and nine month
periods ended September 30, 2003 to reflect the correct excise tax for the
periods and to record the estimated interest and penalties with respect to the
estimated excise tax liability. Additional excise tax of $6,284 and $18,852
and related interest and penalties of $1,854 and $5,562 have been recorded for
the three and nine months ended September 30, 2003, respectively.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a five year period
through 2004. Amortization expense of $7,200 through June 30, 2004 and $3,600
and $10,800 for the three and nine months ended September 30, 2003 was included
in selling, general, and administrative expenses. It has been determined that
such costs should be expensed as incurred. Accordingly, the Company has
restated its financial statements for the six months ended June 30, 2004 and
for the three and nine months ended September 30, 2003 to adjust for the
previously capitalized costs and related amortization.
The effect of these restatements was to decrease net income by $3,127, or $-
per share, for the three months ended September 30, 2003 and by $9,381, or $-
per share, for the nine months ended September 30, 2003.
In addition, the Company has restated its financial statements for the nine
months ended September 30, 2003 to reflect the reclassification of an expense
of $29,423 from other expense to cost of goods sold and for the three and nine
months ended September 30, 2003 for the reclassification of amortization of
deferred gain arising from a sales-leaseback transaction of $6,246 and $18,738,
respectively, from other income to an offset of the related lease expense
included in selling, general and administrative expenses. There was no change
to previously reported net income as a result of these reclassifications.
There was no change to previously reported cash provided by operating
activities, cash used by investing activities or cash used by financing
activities.
The following sets forth the effects of the aforementioned restatements to the
Company's Balance Sheet at December 31, 2003, and Statements of Operations for
the three and nine months ended September 30, 2003.
December 31, 2003
As Reported Adjustments Restated
Current assets $ 8,648,453 $ 2,241 $ 8,650,694
------------ ------------ ------------
Other assets $ 215,148 $ (13,928) $ 201,220
------------ ------------ ------------
Total assets $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Current liabilities $ 3,261,959 $ 12,222 $ 3,274,181
------------ ------------ ------------
Deferred income taxes $ 300,856 $ (5,571) $ 295,285
------------ ------------ ------------
Total liabilities $ 8,264,661 $ 6,651 $ 8,271,312
Shareholders' equity 7,678,178 (18,338) 7,659,840
------------ ------------ ------------
Total liabilities and
Shareholders' equity $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Three months ended September 30, 2003(unaudited)
As Reported Adjustments Restated
Net revenues $ 1,923,323 $ (6,284) $ 1,917,039
Cost of sales 942,723 - 942,723
------------ ------------ ------------
Gross margin 980,600 (6,284) 974,316
Selling general and administrative
expenses 751,202 (8,835) 742,367
------------ ------------ ------------
Net operating income 229,398 2,551 231,949
Other income (expense),
net 19,193 (7,089) 12,104
------------ ------------ ------------
Income before income taxes 248,591 (4,538) 244,053
Income tax 99,437 (1,411) 98,026
------------ ------------ ------------
Net income $ 149,154 $ (3,127) $ 146,027
============ ============ ============
Nine months ended September 30, 2003(unaudited)
As Reported Adjustments Restated
Net revenues $ 4,971,030 $ (18,852) $ 4,952,178
Cost of sales 2,410,250 29,423 2,439,673
------------ ------------ ------------
Gross margin 2,560,780 (48,275) 2,512,505
Selling general and administrative
expenses 2,058,035 (26,505) 2,031,530
------------ ------------ ------------
Net operating income 502,745 (21,770) 480,975
Other income (expense),
net (141,644) 8,156 (133,488)
------------ ------------ ------------
Income before income taxes 361,101 (13,614) 347,487
Income tax 144,475 (4,233) 140,242
------------ ------------ ------------
Net income $ 216,626 $ (9,381) $ 207,245
============ ============ ============
Gross Margin
As a percentage of net revenue, gross margin decreased to 50% in the three
months ended September 30, 2004 compared to 51% in the comparable prior year
period. Gross margin for the nine months ended September 30, 2004 decreased to
50% compared to 51% in the comparable 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 gross margins due to the lower margins
associated with selling those brands.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased to $871,511 in the three
months ended September 30, 2004 from $742,367 in the comparable prior year
period. Selling, general and administrative expenses increased to $2,403,668
for the nine months ended September 30, 2004 from $2,031,530 for the comparable
prior year period. As a percentage of net revenue from winery operations,
selling, general and administrative expenses decreased to 38% in the three
months ended September 30, 2004 from 39% in the comparable prior year period,
and to 38% in the nine months ended September 30, 2004 from 41% in the
comparable prior year period, primarily as a result of a higher increase in
revenues as compared to the increase in selling, general and administrative
expenses.
Interest Income, Other Income and Expense
Interest income increased to $1,216 for the three months ended September 30,
2004 from $1,160 for the comparable prior year period. Interest expense
decreased to $81,285 for the three months ended September 30, 2004 compared to
$84,500 in the comparable prior year period. Interest income decreased to
$3,764 the nine months ended September 30, 2004 compared to $3,787 for the
comparable prior year period. Interest expense decreased to $233,107 for the
nine months ended September 30, 2004 compared to $259,718 in the comparable
prior year period. Interest costs were lower primarily due to less debt
outstanding during the period.
The Company's other income(unaudited) is summarized as follows:
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
(restated) (restated)
__________ __________ __________ __________
Gain on Tualatin
bare land sale $ - $ - $ - $ 3,004
Farm Credit interest
rebate - - 14,504 22,617
Miscellaneous rebates 10 75 44 1,453
Insurance settlement for
Inventory loss - 95,369 - 95,369
__________ __________ __________ __________
Other income $ 10 $ 95,444 $ 14,548 $ 122,443
Income Taxes
As the Company experienced a net profit for the three and nine months ended
September 30, 2004, we accrued $77,794 in income tax expense for the three
months ended September 30, 2004, making the total accrued for income taxes
$211,452 for the nine months ended September 30, 2004. The Company's estimated
tax rate for the three and nine months ended September 30, 2004 was 40 percent.
Liquidity and Capital Resources
At September 30, 2004, the Company had a working capital balance of $5.7 million
and a current ratio of 2.68:1. At December 31, 2003, the Company had a working
capital balance of $5.4 million and a current ratio of 2.64:1. The Company had
a cash balance of $116,440 at September 30, 2004.
Total cash provided by operating activities in the nine months ended September
30, 2004 was $223,457 compared to $590,737 in the prior year period. Cash
provided by operating activities in the nine months ended September 30, 2004
was comprised 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. Cash
provided by operating activities in the nine months ended September 30, 2003
was comprised of net income of $207,245 plus depreciation of $543,303 less
changes in assets and liabilities and other non-cash charges of $159,811.
Total cash used in investing activities in the nine months ended September 30,
2004 was $266,472 compared to $133,678 in the prior year period. Cash used in
investing activities comprised of property and equipment additions and vineyard
development costs.
Total cash used in financing activities in the nine months ended September 30,
2004 was $54,226 compared to $575,325 in the prior year period. Cash used in
financing activities was primarily comprised of payments on the long term debt
(2004 $202,455 and 2003 $172,724) and payments and draws on the line of credit
(2004 draws of $125,844 and 2003 payments of $386,036).
At September 30, 2004, the line of credit balance was $1,256,360 compared to
$1,130,516 on December 31, 2003. The Company's loan agreement with GE
Commercial Distribution Finance Corporation contains certain restrictive
financial covenants with respect to total equity, debt-to-equity and debt
coverage, which must be maintained by the Company on a quarterly basis. As of
September 30, 2004, the Company was in compliance with all of the financial
covenants. During the three months ended September 30, 2004, management
initiated the sale and lease back of the 75.3 acre Meadowview parcel at the
Tualatin Estate Vineyard for $726,675, which closed on October 22, 2004. The
net cash proceeds of the sale were principally applied to reduce amounts owing
under the Company's credit line during the fourth quarter of 2004.
The Company's lender, GE Commercial Distribution Finance, announced to its
winery clients that it would be exiting the wine industry. It was noted that
GE Commercial Distribution Finance was unable to build a client base to justify
their costs of servicing the industry.
The Company's ability to fund operations requires utilization of amounts
available pursuant to a line of credit agreement as further discussed above.
There was $1,256,360 outstanding on the line of credit with GE Commercial
Distribution Finance Corporation as of September 30, 2004. The Company has been
notified by GE Commercial Distribution Finance Corporation that they do not
intend to renew the line of credit agreement when it expires on January 3, 2005
and that it was reducing the amount available under the existing line of credit
to $2,000,000. There can be no assurance that the Company will be successful in
obtaining replacement financing on favorable terms, or at all. The Company's
failure to obtain such financing or to obtain such financing on favorable terms
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. The Company is in discussions with a replacement
lender to replace the line of credit facility in amounts that are similar to
the existing credit facility but has not obtained a non-cancelable commitment.
Management believes that it will be able to complete discussions and satisfy
all the required terms and conditions prior to January 3, 2005. In the event
that they are not able to finalize a new line of credit facility prior to
January 3, 2005, management believes that the existing lender will grant an
extension of time on the existing line of credit to enable the Company to
finalize a new line of credit facility. Management believes existing cash and
cash flow from operations, combined with the amounts that it expects to have
available under the new line of credit facility will be sufficient to satisfy
all debt service obligations and fund the Company's operating needs and capital
expenditures through 2005.
As of September 30, 2004, the Company had a total long-term debt balance of
$2,769,867 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 September 30, 2004, the Company owed $483,070 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
current and pending credit facilities will be sufficient to meet the Company's
liquidity requirements for the next 12 months.
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 amended
Annual Report on Form 10-KSB/A for the year ended December 31, 2003.
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, 2004. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures as of September 30, 2004 were not 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.
As described in Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations under Restatement of Financial
Information and in Note 2 of the Notes to Financial Statements included in Part
I, Item 1, subsequent to the issuance of the Company's financial statements for
the year ended December 31, 2003, the Company's management determined it was
necessary to restate the Company's financial statements as of and for the years
ended December 31, 2003, 2002, and 2001 and for each of the quarterly periods
within each of those years for the following: a) the Company's incorrect
application of the federal small winery tax credit, b) capitalization and
subsequent amortization of certain label and package design costs that should
have been expensed in the period incurred, c) revision in classification of the
amortization of deferred gain from a sales-leaseback from other income to
selling, general and administrative expenses, and d) revision in classification
of an expense in other expense to cost of goods sold.
Management and the Company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, identified and communicated to the Audit Committee
certain matters relating to the Company's internal controls and procedures over
its financial reporting for excise taxes during the periods under review that
are considered a material weakness (as defined in Public Company Accounting
Oversight Board Standard No. 2). In response thereto, the Company has performed
a review of its excise tax calculation and reporting procedures and has put
additional controls in place over the calculation and reporting of excise taxes
to ensure that they are accurately measured and reported in the appropriate
reporting period. We believe these changes to our disclosure controls and
procedures will be adequate to provide reasonable assurance that the objectives
of our disclosure controls and procedures will be met. The Company has also
implemented enhanced supervisory review procedures related to the preparation
of our financial statements, including the process used to initially classify
transactions, to ensure that amounts are appropriately classified in accordance
with generally accepted accounting principles and classified consistently
between reporting periods.
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, 2004
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 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 PricewaterhouseCoopers, our
independent accountants, during the calendar year ending December 31, 2004:
- Income tax advisory services related to: income tax returns; acquisitions
ITEM 6
Exhibits
a) The exhibits filed herewith are listed in the Exhibit Index following the
signature page of this report.
b)
a. Form 8-K, filed October 7, 2004, Item 4.02 - Non-Reliance on Previously
Issued Financial Statements or a Related Audit Report or Interim Review
b. Form 8-K, filed November 26, 2004, Item 2.02 - Results of Operations and
Financial Condition
c. Form 8-K, filed December 2, 2004, Item 2.02 - Results of Operations and
Financial Condition and Item 3.01 - Notice of Delisting or Failure to Satisfy
a Continued Listing Rule or Standard: Transfer of Listing
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: December 6, 2004 By /s/ James W. Bernau
James W. Bernau
President
Date: December 6, 2004 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.