**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-QSB**

 

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**x****QUARTERLY REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended September 30, 2007**

 

**o****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE EXCHANGE ACT**

 

**CommissionFile Number 0-21522**

 

**WILLAMETTEVALLEY VINEYARDS, INC.**

 (Exact name of registrant as specified incharter)

 

| **Oregon**                       | ** ** | **93-0981021**          |
|----------------------------------|------------|-------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer        |
| incorporation or  organization)  |       | Identification  Number) |

 

**8800Enchanted 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)

 

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Check whether theissuer (1) filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

|   |   | x  YES | o  NO |   |
|--------|--------|--------|-------|--------|

 

Indicate bycheckmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

 

|   |   |   | o  YES | x  NO |   |
|--------|--------|--------|--------|-------|--------|

 

Number of sharesof common stock outstanding as of September 30, 2007: 4,807,102 shares, no par value

 

Transitional SmallBusiness Disclosure

|   |   |   | o  YES | x  NO |   |
|--------|--------|--------|--------|-------|--------|

 

 

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WILLAMETTE VALLEYVINEYARDS, INC.

INDEX TO FORM10-QSB

 
| Part I -  Financial Information                                                                       |   |
|-------------------------------------------------------------------------------------------------------|--------|
|                                                                                                  |   |
| Item 1 -  Financial Statements                                                                        |   |
|                                                                                                  |   |
| Balance Sheet                                                                                         |   |
|                                                                                                  |   |
| Statement of  Operations                                                                              |   |
|                                                                                                  |   |
| Statement of  Cash Flows                                                                              |   |
|                                                                                                  |   |
| Notes  to Interim Unaudited Financial Statements                                                      |   |
|                                                                                                  |   |
| Item  2 - Management’s Discussion and Analysis of Financial Condition and Results  of Operations |   |
|                                                                                                  |   |
| Item 3 - Controls  and Procedures                                                                     |   |
|                                                                                                  |   |
| Part II - Other  Information                                                                          |   |
|                                                                                                  |   |
| Item 1 - Legal  proceedings                                                                           |   |
|                                                                                                  |   |
| Item 2 -  Unregistered Sales of Equity Securities and Use of Proceeds                                 |   |
|                                                                                                  |   |
| Item 3 -  Default Upon Senior Securities                                                              |   |
|                                                                                                  |   |
| Item 4 -  Submission of Matters to a Vote of Security Holders                                         |   |
|                                                                                                  |   |
| Item 5 - Other  Information                                                                           |   |
|                                                                                                  |   |
| Item  6 - Exhibits                                                                                    |   |
|                                                                                                  |   |
| Signatures                                                                                            |   |

 

2

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Part 1                                                                              FINANCIALINFORMATION

 

Item 1                                                                              FINANCIALSTATEMENTS

 

WILLAMETTE VALLEY VINEYARDS, INC.

Balance Sheet

 
| ** **                                                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                                     | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                         |       |                   |       |                  |       |
| Current assets:                                                                                                                                                |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                      | 2,239,624  |                  | $          | 1,612,470 |   |
| Accounts  receivable trade, net                                                                                                                                |       | 1,036,711              |       | 1,609,697             |       |
| Inventories                                                                                                                                                    |       | 6,968,523              |       | 6,751,927             |       |
| Prepaid expenses  and other current assets                                                                                                                     |       | 426,264                |       | 107,743               |       |
| Deferred income  taxes                                                                                                                                         |       | 100,000                |       | 107,000               |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total current  assets                                                                                                                                          |       | 10,771,122             |       | 10,188,837            |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Vineyard  development cost, net                                                                                                                                |       | 1,474,340              |       | 1,538,002             |       |
| Property and  equipment, net                                                                                                                                   |       | 4,143,959              |       | 3,985,680             |       |
| Note receivable                                                                                                                                                |       | 250,000                |       | —                |       |
| Debt issuance  costs, net                                                                                                                                      |       | 22,894                 |       | 28,258                |       |
| Other assets                                                                                                                                                   |       | 59,531                 |       | 57,667                |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total assets                                                                                                                                                   |       | $                      | 16,721,846 |                  | $          | 15,798,444 |   |
|                                                                                                                                                           |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                     |       |                   |       |                  |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Current  liabilities                                                                                                                                           |       |                   |       |                  |       |
| Current portion  of long term debt                                                                                                                             |       | $                      | 251,437    |                  | $          | 251,437 |   |
| Accounts payable                                                                                                                                               |       | 1,420,115              |       | 945,741               |       |
| Accrued expenses                                                                                                                                               |       | 391,404                |       | 392,952               |       |
| Income taxes  payable                                                                                                                                          |       | —                 |       | 305,608               |       |
| Grapes payable                                                                                                                                                 |       | 94,352                 |       | 481,590               |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                     |       | 2,157,308              |       | 2,377,328             |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Long-term debt,  less current portion                                                                                                                          |       | 1,044,718              |       | 1,237,571             |       |
| Deferred rent  liability                                                                                                                                       |       | 215,690                |       | 190,951               |       |
| Deferred gain                                                                                                                                                  |       | 386,048                |       | 410,119               |       |
| Deferred income  taxes                                                                                                                                         |       | 222,000                |       | 242,000               |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                             |       | 4,025,764              |       | 4,457,969             |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Shareholders’  equity                                                                                                                                     |       |                   |       |                  |       |
| Common stock, no  par value - 10,000,000 shares authorized, 4,807,102 and 4,793,027 shares  issued and outstanding at September 30, 2007 and December 31, 2006 |       | 8,269,258              |       | 7,935,829             |       |
| Retained  earnings                                                                                                                                             |       | 4,426,824              |       | 3,404,646             |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total  shareholders’ equity                                                                                                                               |       | 12,696,082             |       | 11,340,475            |       |
|                                                                                                                                                           |       |                   |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                               |       | $                      | 16,721,846 |                  | $          | 15,798,444 |   |

 

The accompanying notesare an integral part of this financial statement.

 

3

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WILLAMETTE VALLEY VINEYARDS, INC.

Statement of Operations

(unaudited)

 
| ** **                                                      | ** ** | **Three months ended** | ** ** | **Nine Months ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                      | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net revenues                                                    |       |                             |       |                            |       |   |   |   |   |
| Case revenue                                                    |       | $                                | 4,247,388  |                            | $          | 3,293,144 |   | $ | 11,551,376 |   | $ | 10,414,158 |   |
| Facility Lease                                                  |       | 2,981                            |       | 14,899                          |       | 20,567 |   | 32,485 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Total net  revenues                                             |       | 4,250,369                        |       | 3,308,043                       |       | 11,571,943 |   | 10,446,643 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Cost of sales                                                   |       |                             |       |                            |       |   |   |   |   |
| Case                                                            |       | 2,124,364                        |       | 1,745,683                       |       | 6,020,537 |   | 5,476,376 |   |
| Bulk                                                            |       | —                           |       | —                          |       | 986 |   | 4,631 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Total cost of  sales                                            |       | 2,124,364                        |       | 1,745,683                       |       | 6,021,523 |   | 5,481,007 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                    |       | 2,126,005                        |       | 1,562,360                       |       | 5,550,420 |   | 4,965,636 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative expenses                   |       | 1,346,636                        |       | 1,160,318                       |       | 3,923,654 |   | 3,490,063 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Net operating income                                            |       | 779,369                          |       | 402,042                         |       | 1,626,766 |   | 1,475,573 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Other income  (expense)                                         |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                 |       | 18,193                           |       | 19,729                          |       | 46,304 |   | 42,885 |   |
| Interest expense                                                |       | (26,583                          | )          | (41,667                         | )          | (82,343 | ) | (127,750 | ) |
| Other income                                                    |       | —                           |       | —                          |       | 12,667 |   | 16,895 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Net income  before income taxes                                 |       | 770,979                          |       | 380,104                         |       | 1,603,394 |   | 1,407,603 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Income tax                                                      |       | 248,241                          |       | 152,041                         |       | 581,217 |   | 563,040 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Net income                                                      |       | 522,738                          |       | 228,063                         |       | 1,022,177 |   | 844,563 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Retained  earnings beginning of period                          |       | 3,904,086                        |       | 2,729,372                       |       | 3,404,646 |   | 2,112,872 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Retained  earnings end of period                                |       | $                                | 4,426,824  |                            | $          | 2,957,435  |   | $ | 4,426,823 |   | $ | 2,957,435 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Basic earnings  per common share                                |       | $                                | .11        |                            | $          | .05  |   | $ | .21 |   | $ | .18 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted earnings  per common share                              |       | $                                | .10        |                            | $          | .05  |   | $ | .20 |   | $ | .17 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average  number of  basic common shares outstanding    |       | 4,806,112                        |       | 4,781,055                       |       | 4,804,324 |   | 4,722,636 |   |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Weighted average  number of   diluted common shares outstanding |       | 5,003,549                        |       | 4,978,955                       |       | 5,007,660 |   | 4,604,499 |   |

 

The accompanying notesare an integral part of this financial statement.

 

4

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WILLAMETTE VALLEY VINEYARDS, INC.

Statement of Cash Flows

(unaudited)

 
| ** **                                                                              | ** ** | **Nine Months ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                  |       |                                                    |       |   |   |
| Net income                                                                              |       | $                                                       | 1,022,177  |   | $ | 844,563 |   |
| Reconciliation  of net income to net cash provided by (used in)   operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                                          |       | 396,633                                                 |       | 404,748 |   |
| Bad debt expense                                                                        |       | 8,333                                                   |       | — |   |
| Deferred income  taxes                                                                  |       | (13,000                                                 | )          | — |   |
| Stock based  compensation expense                                                       |       | 36,781                                                  |       | 25,170 |   |
|                                                                                    |       |                                                    |       |   |   |
| Changes in  operating assets and liabilities:                                           |       |                                                    |       |   |   |
| Accounts receivable  trade                                                              |       | 564,654                                                 |       | 769,184 |   |
| Inventories                                                                             |       | (216,594                                                | )          | 888,430 |   |
| Prepaid expenses  and other                                                             |       |                                                    |       |   |   |
| current assets                                                                          |       | (318,522                                                | )          | (221,889 | ) |
| Other assets                                                                            |       | (1,864                                                  | )          | 945 |   |
| Accounts payable                                                                        |       | 474,374                                                 |       | 13,954 |   |
| Accrued expenses                                                                        |       | (1,547                                                  | )          | (2,577 | ) |
| Income taxes  payable                                                                   |       | (305,608                                                | )          | (282,460 | ) |
| Grape payables                                                                          |       | (387,238                                                | )          | (190,542 | ) |
| Deferred rent  liability                                                                |       | 24,739                                                  |       | 17,933 |   |
| Deferred gain                                                                           |       | (24,071                                                 | )          | (24,071 | ) |
|                                                                                    |       |                                                    |       |   |   |
| Net cash  provided by operating activities                                              |       | 1,259,247                                               |       | 2,243,388 |   |
|                                                                                    |       |                                                    |       |   |   |
| Cash flows from  investing activities;                                                  |       |                                                    |       |   |   |
| Additions to  property and equipment                                                    |       | (485,886                                                | )          | (270,456 | ) |
| Vineyard  development expenditures                                                      |       | —                                                  |       | (16,927 | ) |
|                                                                                    |       |                                                    |       |   |   |
| Net cash used in  investing activities                                                  |       | (485,886                                                | )          | (287,383 | ) |
|                                                                                    |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                                  |       |                                                    |       |   |   |
| Proceeds from  stock options exercised                                                  |       | 36,240                                                  |       | 254,895 |   |
| Loan to grape  producer                                                                 |       | (250,000                                                | )          | — |   |
| Repayments of  long-term debt                                                           |       | (192,854                                                | )          | (212,349 | ) |
| Excess tax  benefit on stock option exercises                                           |       | 260,407                                                 |       | — |   |
|                                                                                    |       |                                                    |       |   |   |
| Net cash provided  by (used in) financing activities                                    |       | (146,207                                                | )          | 42,546 |   |
|                                                                                    |       |                                                    |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                   |       | 627,154                                                 |       | 1,998,551 |   |
|                                                                                    |       |                                                    |       |   |   |
| Cash and cash  equivalents:                                                             |       |                                                    |       |   |   |
| Beginning of  period                                                                    |       | 1,612,470                                               |       | 415,591 |   |
|                                                                                    |       |                                                    |       |   |   |
| End of period                                                                           |       | $                                                       | 2,239,624  |   | $ | 2,414,142 |   |

 

The accompanying notesare an integral part of this financial statement.

 

5

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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

 

1) BASIS OF PRESENTATION

 

Theaccompanying unaudited financial statements as of September 30, 2007 and forthe three and nine months ended September 30, 2007 and 2006, have been preparedin conformity with accounting principles generally accepted in the UnitedStates (“GAAP”). The financial information as of December 31, 2006 is derivedfrom the audited financial statements presented in the Willamette ValleyVineyards, Inc. (the “Company”) Annual Report on Form 10-KSB for the year endedDecember 31, 2006. Certain information or footnote disclosures normallyincluded in financial statements prepared in accordance with GAAP have beencondensed or omitted pursuant to the rules and regulations of the Securitiesand Exchange Commission. In the opinion of management, the accompanyingfinancial statements include all adjustments necessary (which are of a normalrecurring nature) for the fair statement of the results of the interim periodspresented. The accompanying financial statements should be read in conjunctionwith the Company’s audited financial statements for the year ended December 31,2006, as presented in the Company’s Annual Report on Form 10-KSB.

 

Operatingresults for the three and nine months ended September 30, 2007 are notnecessarily indicative of the results that may be expected for the entire yearending December 31, 2007, or any portion thereof.

 

TheCompany has a single operating segment consisting of the retail, in-stateself-distribution and out-of-state sales departments. These departments havesimilar economic characteristics, offer comparable products to customers, andutilize similar processes for production and distribution.

 

The Company entered intoa lease agreement for approximately 60 acres of vineyards and related equipmentin 2007. The original term of the lease is 11 years through 2017, with foursuccessive 5-year renewal options.

 

The Company loaned$250,000, at an 8.5% per annum interest rate, to a grape grower for the solepurpose of making improvements to vineyards subject to grape contracts with theCompany. The loan will be repaid, including principal and interest, throughdeductions from grape payments owed by the Company to the grape grower through2012. The loan is secured by, along with other instruments, a Deed of Trust onthe subject vineyard.

 

Basic earnings per shareare computed based on the weighted-average number of common shares outstandingeach period. Diluted earnings per share are computed using the weighted averagenumber of shares of common stock and potentially dilutive common sharesoutstanding during the year. Potentially dilutive shares from stock options andother potentially dilutive shares are excluded from the computation when theireffect is anti-dilutive. There were no potentially dilutive shares excludedfrom the computation for the three and nine months ended September 30, 2007.197,437 and 203,336 potentially dilutive shares are included in the computationof dilutive earnings per share for the three months and nine months endedSeptember 30, 2007, respectively. 197,900 potentially dilutive shares are includedin the computation of dilutive earnings per share for the three and nine monthsended September 30, 2006.

 

2) STOCK BASEDCOMPENSATION

 

The Company has two stockoption plans, the 1992 Stock Incentive Plan (“1992 Plan”) and 2001 Stock OptionPlan (“2001 Plan”). No additional grants may be made under the 1992 Plan. The2001 Plan, which was approved by the shareholders, permits the grant of stockoptions and restricted stock awards for up to 900,000 shares. All stock optionshave an exercise price that is equal to the fair market value of the Company’sstock on the date the options were granted. Administration of the plan,including determination of the number, term, and type of options to be granted,lies with the Board of Directors or a duly authorized committee of the Board ofDirectors. Options 

 

6

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are generally grantedbased on employee performance with vesting periods ranging from date of grantto seven years. The maximum term before expiration for all grants is ten years.

 

The following tablepresents information related to the value of outstanding stock options for theperiods shown:

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 30, 2007** | ** ** | **September 30, 2007** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **Weighted**                     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **average**                      | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **exercise**                     | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                          | ** ** | **Shares**                       | ** ** | **price**                        | ** ** | **Shares** | ** ** | **price** | ** ** |
| Outstanding at  beginning of period |       | 483,000                     |       | $                                | 3.96       |   | 495,000 |   | $ | 3.94 |   |
| Granted                             |       | —                           |       | —                           |       | — |   | — |   |
| Exercised                           |       | —                           | ** ** | **—**                       |       | (12,000 | ) | $ | 3.02 |   |
| Forfeited                           |       | —                           |       | —                           |       | — |   | — |   |
|                                |       |                             |       |                             |       |   |   |   |   |
| Outstanding at  end of Period       |       | 483,000                     |       | $                                | 3.96       |   | 483,000  |   | $ | 3.96 |   |

 

AtJanuary 1, 2006, the Company began recognizing compensation expense for stockoptions with the adoption of Statement of Financial Accounting Standards (“SFAS”)No. 123 (Revised), “Share-Based Payment,” (“SFAS 123R”). The fair value of eachstock option granted is estimated on the date of grant using the Black-Scholesstock option valuation model. This model uses the assumptions listed in thetable below. Expected volatilities are based on implied volatilities from theCompany’s stock, historical volatility of the Company’s stock, and otherfactors. Expected dividends are based on the Company’s plan not to paydividends for the foreseeable future. The Company uses historical data toestimate option exercises and employee terminations within the valuation model.The risk-free rate for periods within the contractual life of the option isbased on the U.S. Treasury yield curve in effect at the time of grant.

 

Black-Scholes assumptions

 
| ** **                | ** ** | **September 30, 2007** | ** ** |
|---------------------------|------------|----------------------------------|------------|
|                      |       |                             |       |
| Risk Free  interest rates |       | 4.59                             | %          |
| Expected  dividend        |       | 0                                | %          |
| Expected lives,  in years |       | 5-10                             |       |
| Expected  volatility      |       | 47.9                             | %          |

 

TheCompany expenses stock options on a straight-line basis over the options’ relatedvesting term. For the three months ended September 30, 2007 and 2006, theCompany recognized pretax compensation expense related to stock options andrestricted stock grants of $14,395 and $8,390, respectively; and for the nine months ended September 30, 2007and 2006, the Company recognized pretax compensation expense related to stockoptions and restricted stock grants of $36,781 and $25,170, respectively.

 

There were notransactions related to stock option and warrant exercise during the three monthsended September 30, 2007.

 

While completing the 2006income tax return, the Company became aware of certain incentive stock optionsthat had been exercised and the related stock subsequently sold before arequired tax holding period. The sale of the stock thus became a disqualifyingdisposition, which allows the Company to deduct as 

 

7

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employee compensation thedifference between the exercise price for the stock option and the stock’sselling price. Certain disqualifying dispositions occurred in 2005, and the2005 tax return was amended, which resulted in a tax refund of $149,108. Thosedisqualifying dispositions that impacted the 2006 return led to a reduction of$111,299 in the Company’s tax liability. Since the deduction reported in theincome tax returns exceeds the compensation costs recognized in the financialstatements, the excess tax benefit is recognized as additional paid in capital.Accordingly, $260,407 of the increase in common stock is related to the excesstax benefit realized by the Company. These disqualifying dispositions and theresulting tax benefit do not have any impact on the 2006 or 2005 incomestatements.

 

3) INVENTORIES

 

The Company’sinventories, by major classification, are summarized as follows, as of thedates shown:

 
| ** **                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                    | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                                                                    | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                          |       |                   |       |                  |       |
| Winemaking and  packaging materials                                           |       | $                      | 115,950    |                  | $          | 142,737 |   |
| Work-in-progress  (costs relating   to unprocessed and/or bulk wine products) |       | 1,413,737              |       | 2,697,354             |       |
| Finished goods  (bottled wines and related products)                          |       | 5,438,836              |       | 3,911,836             |       |
|                                                                          |       |                   |       |                  |       |
| Current  inventories                                                          |       | $                      | 6,968,523  |                  | $          | 6,751,927 |   |

 

4) PROPERTY AND EQUIPMENT

 

The Company’s propertyand equipment consists of the following, as of the dates shown:

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2007**               | ** ** | **2006**              | ** ** |
| ** **                              | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| Land and  improvements                  |       | $                      | 773,894    |                  | $          | 769,644 |   |
| Winery building  and hospitality center |       | 4,793,154              |       | 4,782,064             |       |
| Equipment                               |       | 4,479,569              |       | 4,009,023             |       |
|                                    |       | 10,046,617             |       | 9,560,731             |       |
|                                    |       |                   |       |                  |       |
| Less accumulated  depreciation          |       | (5,902,658             | )          | (5,575,051            | )          |
|                                    |       | $                      | 4,143,959  |                  | $          |  3,985,680 |   |

 

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Item 2 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward LookingStatements

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operation andother sections of this Form 10-QSB contain forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995. Theseforward-looking statements involve risks and uncertainties that are based oncurrent 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 suchwords and similar expressions are intended to identify such forward-lookingstatements. Therefore, actual outcomes and results may differ materially fromwhat is expressed or forecasted in such forward-looking statements due tonumerous factors, including, but not limited to:  availability of financing for growth,availability of adequate supply of high quality grapes, successful performanceof internal operations, impact of competition, changes in wine broker ordistributor relations or performance, impact of possible adverse weatherconditions, impact of reduction in grape quality or supply due to disease,impact of governmental regulatory decisions, and other risks detailed below aswell as those discussed elsewhere in this Form 10-QSB and from time to time inthe Company’s Securities and Exchange Commission filings and reports. Inaddition, such statements could be affected by general industry and marketconditions and growth rates, and general domestic economic conditions. TheCompany undertakes no obligation to revise forward-looking statements toreflect events or changes after the date of this discussion or to reflect theoccurrence of unanticipated events.

 

Critical Accounting Policies

 

**The foregoing discussion and analysis of our financialcondition and results of operations are based upon our financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financialstatements requires the Company’s management to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities. On an on-goingbasis, we evaluate our estimates, including those related to revenuerecognition, collection of accounts receivable, valuation of inventories, andamortization of vineyard development costs. We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances. Actual results may differ from these estimates underdifferent assumptions or conditions. A description of our critical accountingpolicies and related judgments and estimates that affect the preparation of ourfinancial statements is set forth in our Annual Report on Form 10-KSB for theyear ended December 31, 2006. Such policies were unchanged during the three andnine months ended September 30, 2007.**

** **

Overview

 

Third Quarter results were aided by some additions towinery production volumes, offsetting on a short term basis, expected salesconstraints due to drawn down inventory from continued strong demand for PinotNoir.

 

The winery sold out of its 2005 Willamette ValleyPinot Noir in September and released the 2006 vintage in October, ahead of thenormal release schedule. Management chose to release early to keep distributorssupplied on an allocated basis to retain key restaurant and bottle shopplacements.

 

The positive net results, compared to the previousyear’s third quarter resulted from both more case sales and higher margin salesto out-of -state 

 

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distributors, Oregon retail and restaurant licensees andthrough the winery’s Retail Department of the winery’s own production.

 

As a result, we generated $0.11 and $0.21 basicearnings per share during the three and nine months ended September 2007,respectively, the highest earnings produced in the first nine months of theCompany’s history.

 

The winery received approximately 393 tons ofwinegrapes this harvest from the grower assisted by a Company loan foradditional plantings. By 2010, the volume from this grower is expected toincrease to approximately 1,150 tons annually.

 

The sixty acre Elton Vineyard, in the first year ofthe long term lease, produced 164 tons for the winery’s production with othervolumes required to be sold to other winemakers under pre-existing contractsthat are due to expire this year. Elton Vineyards was named one of the top tenOregon vineyards by Andy Perdue, editor of Wine Press Northwest on September25, 2007.

 

The winery received 1,746 tons from the 2007 harvestwith the leading amount for Pinot Noir of 815 tons. Generally, the wineryderives approximately 65 cases of finished wine per ton.

 

The grapes that were harvested and purchased inOctober represent a subsequent event from the financial presentation for thethree and nine months ended September 30, 2007 so incremental inventories forthese grapes are not reflected herein.

 

Capital expenditures in prior quarters for additionalwinemaking improvements  allowedde-juicing to concentrate Pinot Noir flavors, additional sort equipment toremove all but the best clusters for the winery’s Pinot Noir bottlings, gentlewinegrape handling using gravity to enhance wine qualities from the sortingtable into the de-stemmer,  smallfermenters, and then into the press.

 

The national sales team has increased placements ofDijon Clone Chardonnay and Riesling to increase sales growth while facing PinotNoir inventory constraints.

 

At the November Board meeting, after due deliberationon value and related issues, the Board approved of the Company purchasing acentrally located downtown Carlton winery building lot from its CEO for afuture expansion site. The Board had previously authorized the CEO to use hisown funds to pursue this opportunity and purchase the property in January 2007.This authorization was provided primarily because the Board did not havesufficient time to conduct appropriate due diligence on the property before itssale. Since that time, successful environmental and geological studies havebeen completed. The CEO sold the property to the Company at a price equal to hiscost of acquisition, independent studies and interest payments. Thistransaction is a subsequent event for the three and nine months ended September30, 2007, and is therefore not reflected in the financial statements herein.

 

The Company’s wines continue to receive high marksfrom national reviewers.  The 2006 Whole Cluster Pinot Noir wasrecommended as a “favorite American Pinot Noir” in the Wall Street Journal onSeptember 7, 2007 and received an 89 point rating from the Wine Advocate inNovember. The 2005 Estate, 2006 Pinot Noir and 2006 Whole Cluster wererecommended by national reviewer and author, David Rosengarten in his onlinenewsletter on October 12, 2007 saying “They caught Pinot’s mystery.” The 2006Pinot Gris received 93 points from Wine & Spirits magazine in their Augustissue and was named by them among the best Pinot Gris in America.

 

The national media continues to take notice of the Company’sstance on environmental stewardship.  Most recently, the Company wasfeatured in an international Associated Press story on August 28, 2007 forbeing the first winery in the world to use certified sustainable natural cork. Thiscertification was granted by the Rain Forest Alliance according to ForestStewardship Council standards. Additionally, the Company was recommended in

 

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the October issue of Martha Stewart’s Body & Soulmagazine because of its sustainable farming certifications (LIVE/Salmon Safe)and biodiesel use and on Wine Spectator Online on September 9, 2007 for theCompany’s pledge to become carbon neutral by 2010.

 

The winery earned organic certification from OregonTilth for its Pinot Noir blocks on the Estate Vineyard on October 3, 2007.

 

RESULTS OF OPERATIONS

 

Revenue

 

Netrevenues for the three and nine months ended September 30, 2007 increased$942,326 or 28.5% and $1,125,300 or 10.8%, respectively, over the correspondingperiods in the preceding year. This also represents an increase in net revenuesover the preceding three month period of 2007 of $524,150 or 14.1%. Theincrease in revenue is primarily due to incremental growth in sales volume anda higher percentage mix of out-of-state sales.

 

Our revenues from wineryoperations are summarized as follows:

 
| ** **                              | ** ** | **Three months ended** | ** ** | **Nine Months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| Tasting Room  Sales and   Rental Income |       | $                                | 517,368    |                            | $          | 467,431  |   | $ | 1,270,090 |   | $ | 1,108,513 |   |
| On-site and  off-site Festivals         |       | 57,235                           |       | 38,600                          |       | 121,974 |   | 88,685 |   |
| In-state sales                          |       | 1,886,224                        |       | 1,675,868                       |       | 5,301,522 |   | 4,570,947 |   |
| Out-of-state  sales                     |       | 1,870,284                        |       | 1,193,665                       |       | 5,138,929 |   | 4,908,386 |   |
| Bulk wine/ Misc.  sales                 |       | 2,981                            |       | 14,899                          |       | 20,567 |   | 32,485 |   |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Total Revenue                           |       | 4,334,092                        |       | 3,390,463                       |       | 11,853,082 |   | 10,709,016 |   |
| Less excise  taxes                      |       | (83,723                          | )          | (82,420                         | )          | (281,139 | ) | (262,373 | ) |
| Net Revenue                             |       | $                                | 4,250,369  |                            | $          | 3,308,043 |   | $ | 11,571,943 |   | $ | 10,446,643 |   |

 

Tastingroom sales and rental income for the three and nine months ended September 30,2007 increased $49,937 or 10.7% and $161,577 or 14.6% compared to thecorresponding prior year periods. The incremental revenue is primarily due to ahigher volume of cases sold in the tasting room and an increased number of on-site room rentals versus prior year.

 

Sales in the state ofOregon, through our wholesale department, Bacchus Fine Wines, increased$210,356 or 12.6% and $730,575 or 16.0%, in the three and nine months endedSeptember 30, 2007, respectively compared to the corresponding prior yearperiods. In the three and nine months ended September 30, 2007, our directin-state sales to our largest customer decreased $3,985 or -1.3%, and increased$51,895 or 6.3%, respectively over the comparable prior year periods. Theincrease in the year is largely the result of the broader product linespresented and increased product placements through the development of thewholesale department’s portfolio of brands produced by wineries outside ofOregon. Bacchus Fine Wines added Pasternak Wine Imports of Harrison, NY to itslist of suppliers in the quarter. Pasternak Wine Imports is owned in part by DomainesBarons de Rothschild and is renowned for its portfolio of exceptional EuropeanBordeaux producers. It is anticipated that the new brands and varietalsintroduced to our Oregon customers via Pasternak Wine Imports will favorablyimpact our market share throughout the region resulting in continued revenuegrowth.

 

Out-of-state sales in thethree and nine months ended September 30, 2007 increased $676,619 or 56.7% andincreased $230,543 or 4.7%, respectively, over

 

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the comparable prior yearperiods. The increases are primarily due to increased sales of the winery’sDijon Clone Chardonnay and Riesling.

 

Gross Profit

 

As a percentage of netrevenue, gross profit from winery operations was 50.0% and 48.0% in the threeand nine months ended September 30, 2007, respectively, as compared to 47.2%and 47.5% in the comparable prior year period. We continue to focus on improveddistribution of higher margin products as well as continuing our efforts toreduce grape and production costs, we anticipate that our increasedrepresentation of brands other than our own through our Oregon sales force andincreases in cost of production may erode future gross margin as a percentageof sales due to the lower margins associated with selling those brands.

 

Selling, General andAdministrative Expense

 

Selling, general andadministrative expenses for the three and nine months ended September 30, 2007increased $186,318 or 16.1% and $433,591 or 12.4% respectively, compared to thecorresponding prior year periods. These increases are due primarily to higheremployee compensation costs as we continue to add much needed staff and toimprovements in our management systems in anticipation of higher, future winevolumes, and non-recurring repair costs related to deferred facilitymaintenance. As a percentage of net revenues from winery operations, selling,general and administrative expenses decreased to 31.7% for the three monthsended September 30, 2007, and increased to 33.9% nine months ended September30, 2007 as compared to 35.1% and 33.4%, respectively, for the comparable prioryear periods.

 

Interest Income, OtherIncome and Expense

 

Interest income decreased$1,535 or 7.8% and increased $3,419 or 8.0% for the three and nine months endedSeptember 30, 2007, respectively, compared to the comparable prior year periods.Interest expense for the three and nine months ended September 30, 2007decreased $15,083 or 36.2% and $45,407 or 35.5%, compared to the correspondingprior year periods. The average interest rate paid for the three and ninemonths ended September 30, 2007 was 9.85% and 9.61% respectively.

 

Other income for thefirst quarter of 2007 was an interest rebate from Farm Credit Services forinterest paid on our long-term debt in 2006, of $12,667, compared to $16,895during the first quarter of 2006 that was received from Farm Credit Servicesfor interest paid on our long-term debt in 2005.

 

Income Taxes

 

Income tax expense was$248,241 and $581,217 for the three and nine months ended September 30, 2007,respectively, compared to $152,041 and $563,040 for the prior yearperiods.  Our estimated tax rate for the three months ended September 30,2007 and 2006 was 32 percent and 40 percent respectively. The decrease in thetax rate is primarily due to a domestic production deduction as well as thedecrease in federal taxable income due to Oregon taxes, both of which wereadjusted for in the quarter. In October, 2007 we filed amended income taxreturns for 2005 and the income tax returns for 2006. As a result of taking atax deduction for exercises of incentive stock options in both years thecurrent tax liabilities were reduced by a cumulative effect of $260,407. Thisbenefit increases additional paid in capital in stockholders equity and isreflected on the statement of cash flows as excess tax benefits on stock optionexercises.

 

Net Income and Earningsper Share

 

As a result of thefactors listed above, net income for the three and nine months ended September30, 2007 was $522,738 or $0.10 per diluted share and

 

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$1,022,177 or $0.20 perdiluted share, respectively, compared to net income of $228,063, or $0.05 perdiluted share and $844,563 or $0.17 per diluted share , in the comparable prioryear period.

 

# **Liquidityand Capital Resources**

# ** **

At September 30, 2007, wehad a working capital balance of $8.6 million and a current ratio of 5.0:1. AtDecember 31, 2006, we had a working capital balance of $7.8 million and acurrent ratio of 4.3:1. We had a cash balance of $2,239,624 at September 30,2007, compared to a cash balance of $1,612,470 at December 31, 2006. Theincrease in cash was primarily due increased sales volumes.

 

Total cash providedoperating activities in the nine months ended September 30, 2007 was $1,259,247compared to cash provided by operating activities of $2,243,388 for the sameperiod in the prior year. The decrease in cash provided operating activitieswas primarily due to our payments for accounts payable and increases in accountreceivable due to higher sales volume in the nine months ended September 30,2007.

 

Total cash used ininvesting activities in the nine months ended September 30, 2007 was $485,886,compared to $287,383 in the prior year period as new equipment was added toimprove winery operations.

 

Total cash used infinancing activities in the nine months ended September 30, 2007 was $146,207compared to $42,546 provided by financing activities in the prior year period. Cashused in financing activities primarily consisted of payments on our long termdebt offset by stock option proceeds and the loan to a grape producer.

 

At September 30, 2007,the line of credit balance was $0, on a maximum borrowing amount of $2,000,000.We have a loan agreement with Umpqua Bank that contains, among other things,certain restrictive financial covenants with respect to total equity,debt-to-equity and debt coverage that must be maintained by us on a quarterlybasis. As of September 30, 2007, we were in compliance with all of thefinancial covenants.

 

As of September 30, 2007,we had a total long-term debt balance of $1,296,154, including the portion duein the next year, owed to Farm Credit Services. There was no new long-term debtincurred in the three months ended September 30, 2007. The debt balanceremaining represents the debt service with Farm Credit Services which was usedto finance our Hospitality Center, invest in new winery equipment to increaseour winemaking capacity and complete a larger storage facility.

 

At September 30, 2007, weowed $94,352 on grape contracts. This amount is primarily owed to a singlegrape grower, which will be paid as the wine made from those grapes is sold.For the 2007 harvest, there are grape purchase contracts in place with local growersthat are accrued when the grapes are received. The majority of the grapes undercontract were received in October 2007, therefore the annual results for 2007will reflect the remaining liability for these grape purchases.

 

We believe that cash flowfrom operations and funds available under our existing credit facilities willbe sufficient to meet our foreseeable short and long term needs.

 

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Item 3 CONTROLSAND PROCEDURES

 

(1)   DisclosureControls and Procedures - We maintain disclosure controls and proceduresthat are designed to ensure that information required to be disclosed in ourreports under the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to management, including our Chief ExecutiveOfficer, as appropriate, to allow timely decisions regarding required disclosure.Our quarterly evaluation of disclosure controls and procedures includes anevaluation of some components of our internal control over financial reporting.In designing and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, as they are designed to do, and management necessarily wasrequired to apply its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.

 

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PART II.                                OTHER INFORMATION

 

Item 1.            Legalproceedings.

 

None.

 

Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.            DefaultUpon Senior Securities.

 

None.

 

Item 4.            Submissionof Matters to a Vote of Security Holders.

 

None.

 

Item 5.            OtherInformation

 

The Audit Committee ofthe Board of Directors has approved the following non-audit services, which arebeing performed by Moss Adams, our independent accountants, during the calendaryear ending December 31, 2007:

 

Incometax advisory services related to: income tax returns

 

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Item 6.            Exhibits

 

Exhibit No.     Description

 

3.1   Articles of Incorporation of WillametteValley Vineyards, Inc. (incorporated by reference from the Company’s RegulationA Offering Statement on Form 1-A (Commission File No. 24S-2996)

 

3.2   Bylaws of Willamette Valley Vineyards, Inc. (incorporatedby reference from the Company’s Regulation A Offering Statement on Form 1-A(Commission File No. 24S-2996)

 

4.1   1992 Stock Incentive Plan (incorporated byreference to the Company’s Registration Statement on Form S-8 (Commission FileNo. 333-61181) filed September 10, 2001)

 

4.2   Amendment dated July 21, 1996 (incorporatedby reference to the Company’s Registration Statement on Form S-8 (CommissionFile No. 333-61181) filed September 10, 2001)

 

4.3   Amendment dated July 25, 1998 (incorporatedby reference to the Company’s Registration Statement on Form S-8 (CommissionFile No. 333-61181) filed September 10, 2001)

 

4.4   Amendment dated April 15, 1999 (incorporatedby reference to the Company’s Registration Statement on Form S-8 (Commission FileNo. 333-61181) filed September 10, 2001)

 

4.5   Amendment dated July 25, 2000 (incorporatedby reference to the Company’s Registration Statement on Form S-8 (CommissionFile No. 333-61181) filed September 10, 2001)

 

4.6   Sample Incentive Stock Option Agreement(incorporated by reference to the Company’s Registration Statement on Form S-8(Commission File No. 333-61181) filed September 10, 2001)

 

4.7   Sample Nonqualified Stock Option Agreement(incorporated by reference to the Company’s Registration Statement on Form S-8(Commission File No. 333-61181) filed September 10, 2001)

 

31.1  Certification by James W. Bernau pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934

 

31.2  Certification by Jeffrey J. Fox pursuant toRule 13a-14(a) of the Securities Exchange Commission Act of 1934

 

32.1  Certification pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2  Certification pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

Pursuant to therequirements of the Security Exchange Act of 1934, as amended, the Registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

WILLAMETTE VALLEYVINEYARDS, INC.

 

 
| Date: November 14, 2007 | By     | /s/ James W. Bernau |   |
|-------------------------|--------|---------------------|--------|
|                    |   | James W. Bernau     |   |
|                    |   | President           |   |
|                    |   |
| Date: November 14, 2007 | By     | /s/ Jeffrey J. Fox  |   |
|                    |   | Jeffrey J. Fox      |   |
|                    |   | Controller          |   |

 

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