10QSB 1 wvv033q10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ___________________________________________________________ FORM 10-QSB ___________________________________________________________ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended September 30, 2003 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, 2003 4,474,854 shares, no par value Transitional Small Business Disclosure [ ] YES [X] NO WILLAMETTE VALLEY VINEYARDS, INC. INDEX TO FORM 10-QSB Part I - Financial Information Item 1--Financial Statements Balance Sheet Statement of Operations Statement of Cash Flows Notes to Consolidated Financial Statements Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3--Controls and Procedures Part II - Other Information Item 1--Exhibits and Reports of Form 8-K Item 5--Other Information Signatures Exhibit Index PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS, INC. Balance Sheet September 30, December 31, 2003 2002 (unaudited) ASSETS. __________ __________ Current Assets: Cash and cash equivalents $ 513,917 $ 632,183 Accounts receivable trade, net 729,502 519,861 Inventories 7,603,948 7,550,291 Prepaid expenses and other current assets 45,419 47,908 Deferred income taxes 148,212 148,212 __________ __________ Total current assets 9,040,998 8,898,455 Vineyard development cost, net 1,660,055 1,707,274 Inventories 520,408 520,408 Property and equipment, net 4,714,599 5,046,893 Notes receivable from officer and other 65,079 61,948 Debt issuance costs, net 69,195 73,628 Other assets 219,524 238,647 __________ __________ Total assets $16,289,858 $16,547,253 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Line of credit $ 1,664,135 $ 2,050,171 Current portion of long term debt 237,838 237,838 Accounts payable 640,073 371,253 Accrued commissions and payroll 278,707 214,029 Income taxes payable 187,190 111,837 Grapes payable 538,771 870,058 __________ __________ Total current liabilities 3,546,714 3,855,186 Long-term debt 2,771,787 2,944,511 Distributor obligation 1,500,000 1,500,000 Deferred rent liability 103,297 86,203 Deferred gain 405,989 424,727 Deferred income taxes 209,095 209,095 __________ __________ Total liabilities 8,536,882 9,019,722 __________ __________ Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,474,854 and 4,469,444 shares issued and outstanding at September 30, 2003 and December 31, 2002 7,163,981 7,155,162 Retained earnings 588,995 372,369 __________ __________ Total shareholders' equity 7,752,976 7,527,531 __________ __________ Total liabilities and shareholders' equity $16,289,858 $16,547,253 ========== ========== 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, 2003 2002 2003 2002 __________ __________ __________ __________ Net Revenues Case Revenue $ 1,853,417 $ 1,511,502 $ 4,737,309 $ 4,110,832 Custom Crush- Bulk Revenue 69,906 - 233,721 28,215 __________ __________ __________ __________ Total Revenue 1,923,323 1,511,502 $ 4,971,030 4,139,047 Cost of Sales Case 884,890 697,352 2,230,806 1,873,337 Bulk 57,833 - 179,444 28,405 __________ __________ __________ __________ Total Cost of Sales 942,723 697,352 2,410,250 1,901,742 Gross Margin 980,600 814,150 2,560,780 2,237,305 Selling, general and administrative expense 751,202 651,145 2,058,035 1,970,811 __________ __________ __________ __________ Net operating income 229,398 163,005 502,745 266,494 Other income (expense) Interest income 1,160 1,333 3,787 3,727 Interest expense (83,657) (89,177) (257,189) (267,120) Other income (expense) 101,690 6,246 111,758 18,758 __________ __________ __________ __________ Net income before income taxes 248,591 81,407 361,101 21,859 Income tax 99,437 - 144,475 - __________ __________ __________ __________ Net income 149,154 81,407 216,626 21,859 Retained earnings beginning of period 439,841 176,346 372,369 235,894 __________ __________ __________ __________ Retained earnings end of period $ 588,995 $ 257,753 $ 588,995 $ 257,753 ========== ========== ========== ========== Basic income per common share $ .03 $ .02 $ .05 $ .01 Diluted income per common share $ .03 $ .02 $ .05 $ .01 Weighted average number of basic common shares outstanding 4,474,854 4,469,444 4,474,064 4,468,560 Weighted average number of diluted common shares outstanding 4,483,157 4,469,444 4,474,171 4,473,457 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, 2003 2002 __________ __________ Cash flows from operating activities: Net income $ 216,626 $ 21,859 Reconciliation of net income to net cash provided by (used in) operating activities: Depreciation and amortization 543,303 572,045 Gain on disposal of fixed assets (3,004) - Stock issued for compensation 8,819 3,941 Changes in assets and liabilities: Accounts receivable trade (209,641) 299,534 Inventories (53,657) (461,119) Prepaid expenses and other current assets 2,489 86,061 Note receivable (3,131) 7,975 Other assets 13,013 13,380 Accounts payable 268,820 (222,085) Accrued commissions and payroll costs 64,678 (2,638) Income taxes payable 75,353 - Grape payables (331,287) (583,467) Deferred rent liability 17,094 19,359 Deferred gain (18,738) (18,738) __________ __________ Net cash provided by (used in) operating activities 590,737 (263,893) __________ __________ Cash flows from investing activities; Additions to property and equipment (143,749) (50,517) Vineyard development expenditures (6,057) - Proceeds from the sale of property and equipment 15,128 - Investments 1,000 (50,228) __________ __________ Net cash used in investing activities (133,678) (100,745) __________ __________ Cash flows from financing activities: Debt issuance costs (16,565) - Net (decrease) increase in line of Credit balance (386,036) 147,500 Proceeds from stocks options exercised - 8,575 Repayments of long-term debt (172,724) (183,316) __________ __________ Net cash (used in) financing activities (575,325) (27,241) __________ __________ Net decrease in cash and cash equivalents (118,266) (391,879) Cash and cash equivalents: Beginning of period 632,183 504,510 __________ __________ End of period $ 513,917 $ 112,631 ========== ========== The accompanying notes are an integral part of this financial statement. NOTES TO CONSOLIDATED FINANCIAL STATEMENT 1) BASIS OF PRESENTATION The accompanying unaudited financial statements as of and for the three and nine month periods ended September 30, 2003 and 2002, have been prepared in conformity with generally accepted accounting principles. The financial information as of December 31, 2002, 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, 2002. 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 and recurring nature) for the fair presentation 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, 2002, as presented in the Company's Annual Report on Form 10-KSB. Operating results for the three and nine months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2003, 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 and diluted net income per share and Basic earnings per share are computed based on the weighted-average number of common shares outstanding each year. Diluted earnings per share are computed using the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the year. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive. There were total common stock equivalent shares of 8,303 and 106 shares included in the computation of dilutive earnings per share for the three andnine months ended September 30, 2003, respectively. There were total common stock equivalent shares of zero and 4,897 shares included in the computation of dilutive earnings per share for the three and nine months ended September 30, 2002, 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 quarter and nine months ended September 30: Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 (unaudited) (unaudited) (unaudited) (unaudited) __________ __________ __________ __________ Net income, as reported $ 149,154 $ 81,407 $ 216,626 $ 21,859 Add Stock-based employee compensation expense included in reported net income, net of related tax effects - - - - Deduct total stock based employee compensation expense determined under fair value based method for all awards, Net of related tax effects (5,948) (5,882) (17,844) (17,646) __________ __________ __________ __________ Pro forma net income $ 143,206 $ 75,525 $ 198,782 $ 4,213 Earnings per share: Basic - as reported $ 0.03 $ 0.02 $ 0.05 $ 0.01 Basic - pro forma $ 0.03 $ 0.02 $ 0.04 $ 0.00 Diluted - as reported $ 0.03 $ 0.02 $ 0.05 $ 0.01 Diluted - pro forma $ 0.03 $ 0.02 $ 0.04 $ 0.00 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. 3) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW: September 30, December 31, 2003 2002 (unaudited) __________ __________ Winemaking and packaging materials $ 27,590 $ 96,123 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 1,762,802 2,773,750 Finished goods (bottled wines 6,333,964 5,200,826 and related products) __________ __________ $ 8,124,356 $ 8,070,699 Less: amounts designated for distributor (520,408) (520,408) __________ __________ Current inventories $ 7,603,948 $ 7,550,291 ========== ========== 4) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: September 30, December 31, 2003 2002 (unaudited) __________ __________ Land and improvements $ 976,838 $ 984,954 Winery building and hospitality center 4,577,467 4,567,076 Equipment 4,803,864 4,670,506 __________ __________ 10,358,169 10,222,536 Less accumulated depreciation (5,643,570) (5,175,643) __________ __________ $ 4,714,599 $ 5,046,893 ========== ========== 5) SUBSEQUENT EVENTS: None. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statement: This Management's Discussion and Analysis of Financial Condition and Results of Operation and other sections of this Form 10-QSB contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, and beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease, impact of governmental regulatory decisions, and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Management's Discussion and Analysis of Financial Condition and Results of Operations Wine quality continues to be the focus of management. The number of vineyards where the Company obtains its fruit has been reduced, allowing winemaking and vineyard personnel to give each remaining site more attention. As the new plantings at the Company's Tualatin Estate vineyard continue to mature, fewer wine grapes are needed from contracted vineyards. Careful canopy management and cluster thinning to restrict yield and improve flavors are leading to Company grown, higher quality, higher margin wines. Small fermenters, under 1 ton in size, are used to cold soak the red wine grape berries prior to a natural yeast fermentation and gentle punch downs by hand. The Company is making a higher percentage of its red wines in small open top fermenters than ever before. Recognition of the Company's wines was given a boost this third quarter when bottles of the Company's wines again appeared on the set of NBC's popular sitcom, FRIENDS. Sales in all departments increased in the third quarter compared to the same period in the prior year. This continued a positive trend for both in-state wholesale and out-of-state sales to distributors and reversed the retail sales decline experienced in the first two quarters of 2003. Net operating income for the third quarter of 2003 increased 41%, of which 8% related to custom crush work. This increase is due to an increase of 23% in total case revenue. Gross margins in the third quarter of 2003 declined from 54% to 51% in the same period in the prior year. This was due predominately to an increase in sales allowances of approximately $50,000. These sales allowances were provided to distributors to reduce their selling prices and increase depletions. In-state sales through the Company's sales force, Bacchus Fine Wines, increased 35% in the third quarter of 2003 over the same period in 2002. This increase is a result of higher sales of both the Company's wines and other distributed products this quarter over the prior year. Bacchus Fine Wines now represents 35 wineries and 202 different wines. Riedel, producer of the finest wine glassware in the world selected Bacchus to exclusively represent Riedel in Oregon to restaurant and retail accounts. Bacchus increased the size of its delivery fleet and sales force in this quarter and is expected to increase its staff and number of delivery vans over the next several quarters. This wine distributorship held its first annual show this September attended by 125 retailer and restaurant buyers and staff at the winery where experts presented seminars on wine and food. Sales to out-of-state distributors increased 22% over the prior year. The winery held its first national sales competition by offering qualifying distributor sales representatives a trip to Oregon wine country this September for achieving certain sales goals. Out-of-state distributors' sales of the Company's wines to their retail customers have increased 12% for the nine months. The large inventories previously held by the distributors of the Company's wines have now been drawn down, increasing shipments from the winery during this period. Retail sales increased 9% for the quarter over the prior year. These positive results are due to the increase in Key Customer Service Representative direct sales and hospitality revenue derived from rental of the winery's facilities for meetings and weddings. Selling, general and administrative expenses increased 15% in the third quarter 2003 over the same period in the prior year. This increase was a result of selling expenses increasing 27% to 546,026 from $429,532 during this period. A 7% reduction in general and administrative expenses to 205,176 in the third quarter of 2003 from $221,613 in the same period of 2002, helped alleviate some of the increase in selling expenses. The Company filed an insurance claim due to the significant loss of wine inventory in the control of a now former sales representative reported in the second quarter. The claim was accepted, paid and is recorded in the third quarter results under Other Income. Over the past few years the Company's wine production has outpaced sales and as a result the Company's inventory balance has grown. In the past two years the Company has taken several steps in order to reduce the inventory balance in order to bring it more in line with current sales volumes. Beginning with the 2002 crush, the Company decreased the amount of grapes received from outside contractors. The Company continued to decrease grapes received from contractors in 2003 and plans to again decrease the amount of grapes received in 2004. In order to increase sales, the Company is currently in search of a National Sales Manager who will devote time to working with out of state distributors in order to increase depletions at these distributors. Also, in an effort to increase sales, prices of some older wines may be reduced in the future which would negatively impact margins but the Company expects to continue to receive positive margins on all of the vintages in inventory. 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, 2003 2002 2003 2002 __________ __________ __________ __________ Tasting Room Sales and Rental Income $ 445,993 $ 410,659 $ 1,093,073 $ 1,133,549 On-site and off-site festivals 20,817 46,161 85,814 125,023 In state sales 915,025 667,886 2,235,829 1,819,696 Out of state sales 534,532 439,708 1,489,532 1,163,788 Bulk wine/ Misc. sales 69,906 - 233,721 28,215 __________ __________ __________ __________ Total Revenue $ 1,986,273 $ 1,564,414 $ 5,137,969 $ 4,270,271 Less Excise Taxes 62,950 52,912 166,939 131,224 __________ __________ __________ __________ Net Revenue $ 1,923,323 $ 1,511,502 $ 4,971,030 $ 4,139,047 ========== ========== ========== ========== Tasting room and retail sales, and rental income for the three months ending September 30, increased 9% to $445,993 in 2003 from $410,659 for the same period in 2002. For the first nine months of 2003, sales decreased 4% over the same period in 2002. Retail sales increased during the second quarter of 2003 due in part to higher customer counts and improved telephone sales. On-site and off-site festival sales for the third quarter of 2003 decreased 55% to $20,817 from $46,161 over the third quarter of 2002. During the first nine months of 2003, sales in this category decreased 31% over the same period in 2002. This decrease is due primarily to the continuing focus away from on-site and off-site events, in favor of telephone, mail order and retail sales. In prior periods, direct sales from the winery to independent distributors in the state of Oregon were included in out-of-state sales category. Beginning in the quarter ended June 30, 2003 these sales are accounted for in the in state sales category. In the third quarter of 2003 these sales increased 135% to $122,919 from $52,301 over the same period of 2002. The higher sales are a result of increased sales focus on these distributors by the new Bacchus management. Sales in the state of Oregon, through the Company's independent sales force and through direct sales from the winery, increased 37% to $915,025 in the third quarter of 2003 from $667,886 in the third quarter of 2002, adjusted for the change in reporting of in state distributor sales. Sales through the Company's independent sales force alone for the third quarter of 2003 increased 35% to $712,118 from $527,759 in the third quarter of 2002. The Company's direct instate sales to our largest customer decreased 9% to $79,988 from $87,826 in 2002. These increases are largely the result of the improved sales management and broader product lines presented through the conversion to Bacchus Fine Wines. Out-of-state sales in the third quarter of 2003 increased 22% to $534,532 from $439,708 in the third quarter of 2002, adjusted for the change in reporting of in state distributor sales. During the first nine months of 2003, sales increased 28% over the same period in 2002. 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 pays excise taxes to the Oregon Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the removal of product from the Company's warehouse on a per gallon basis. The Company's excise taxes increased in the third quarter of 2003 to $62,950 from $52,912 for the same period in 2002. For the first nine months of 2003, excise taxes increased to $166,939 from $131,224 for the same period in 2002. This was due in part to the increased sales in the first nine months of 2003, increasing overall sales volumes and taxes paid by volume. Gross Profit Winery Operations As a percentage of revenue, gross profit for the winery operations decreased to 51% in the third quarter of 2003 as compared to 54% in the third quarter of 2002. The Company has sold through many of the white wines from the very successful 2001 crush, and moved on to the slightly higher cost 2002 products reducing the gross margin. The Company is continuing its focus on, and improved distribution of, higher margin products, as well as continuing to reduce grape and production costs. Selling, General and Administrative Expense Selling, general and administrative expenses increased to $751,202 in the third quarter of 2003 from $651,145 in the third quarter of 2002. As a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 39% in the third quarter of 2003 from 43% in the third quarter of 2002. In a continued drive to increase sales, the Company increased spending on visits to out-of-state distributor markets, and on delivery and marketing support instate for Bacchus Fine Wines. Amounts paid by customers to the Company for shipping and handling expenses are included in the net revenue. Expenses incurred for shipping and handling charges are included in selling, general and administrative expense. The Company's gross margins may not be comparable to other companies in the same industry as other companies may include shipping and handling expenses as a cost of goods sold. Interest Income, Other Income and Expense Interest income decreased to $1,160 for the third quarter of 2003 from $1,333 for the third quarter of 2002. Interest expense decreased to $83,657 in the third quarter of 2003 from $89,177 in 2002. Interest costs were lower because the Company paid a lower interest rate on its line of credit. The Company's other income (expense) is summarized as follows: Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 __________ __________ __________ __________ Amortization of deferred gain on 1999 Tualatin sale-lease back $ 6,246 $ 6,246 $ 18,738 $ 18,738 Miscellaneous rebates 75 - 1,453 21 Inventory loss - - (29,423) - Insurance settlement for inventory loss 95,369 - 95,369 - Gain on Tualatin bare land sale - - 3,004 - Farm Credit interest rebate - - 22,617 - __________ __________ __________ __________ Other income (expense) $ 101,690 $ 6,246 $ 111,758 $ 18,759 Other income and expense was income of $101,690 for the third quarter of 2003 compared to income of $6,246 for the third quarter of 2002. This increase is primarily due to insurance proceeds received related to an inventory loss. In the quarter ended September 30, 2003, in accordance with the 1999 sale-lease back at the Tualatin site, the Company recognized a gain of $6,246. The Company also received various rebate checks totaling $75 in the quarter ended June 30, 2003. The Company discovered a significant loss of inventory in the control of a now former independent sales representative with a wholesale value of approximately $100,000, and an inventory cost of $29,423 that the Company expensed as other expense. The Company filed an insurance claim and notified local law enforcement officials. The insurance company paid $95,369 for claim and the Company recorded it as other income in the third quarter. Income Taxes As the Company experienced a net profit for the third quarter and first nine months of 2003 a $99,437 income tax expense was accrued for the quarter ended September 30, 2003, making the total accrued $144,475 for the nine months ended September 30, 2003, based on the expected effective tax rate for 2003. Liquidity and Capital Resources At September 30, 2003, the Company had a working capital balance of $5.5 million and a current ratio of 2.55:1. At December 31, 2002, the Company had a working capital balance of $5.0 million and a current ratio of 2.3:1. The Company had a cash balance of $513,917 at September 30, 2003. At September 30, 2003, the line of credit balance was $1,664,135. The Company has a loan agreement with GE Commercial Distribution Finance Corporation that contains, among other things, 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, 2003, the Company was in compliance with all of the financial covenants. As of September 30, 2003, the Company had a total long-term debt balance of $3,009,625 owed to Farm Credit Services. This debt was used to finance the Hospitality Center, invest in winery equipment to increase the Company's winemaking capacity, complete the storage facility, and purchase Tualatin Vineyards. At December 31, 2002, the Company was in violation of 1 of 5 of its debt coverage covenants. The Company obtained the waiver from Northwest Farm Credit Services related to a violation of the debt/net worth financial covenant on March 17, 2003. The waiver for the referenced covenant extends through December 31, 2003; no consideration was paid to FCS for the waiver. The debt/net worth financial health covenant required a ratio not exceeding 1.10:1. At December 31, 2002 the Company's ratio was 1.20:1 (9,019,722/7,527,531.) The Company must maintain compliance with the debt covenant for the Farm Credit Services debt agreement on an annual basis at December 31. In the event of future non-compliance with the Company's debt covenants, Northwest Farm Credit Services would have the right to declare the Company in default, and at Farm Credit Service's option without notice or demand, the unpaid principal balance of the loan, plus all accrued unpaid interest thereon and all other amounts due shall immediately become due and payable. At September 30, 2003, the Company owed $538,771 on grape contracts. A large portion is owed to a single grape grower, which will be paid as the wine made from those grapes is sold. The Company believes that cash flow from operations and funds available under credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months. Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our financial statements is set forth in our Annual Report on Form 10-K for the year ended December 31, 2002. ITEM 3 Controls and Procedures a) The Registrant carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Registrant's disclosure controls and procedures as of September 30, 2003 were effective to ensure that information required to be disclosed by the Registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in 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 design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected. b) There were no changes in the Registrant's internal control over financial reporting that occurred during the quarter ended September 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. PART II. OTHER INFORMATION Item 1 Exhibits and Reports on Form 8-K. (a) 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 PricewaterhouseCoopers, our independent accountants, during the calendar year ending December 31, 2003: - Income tax advisory services related to: income tax returns; acquisitions; and formation and liquidation of foreign subsidiaries 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 19, 2003 By /s/ James W. Bernau James W. Bernau President Date: November 19, 2003 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.