SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 1997
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, 1997 4,226,096 shares, no par value
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
September 30, December 31,
1997 1996
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 141,284 * $ 794,885
Accounts receivable trade, net 390,581 288,905
Other receivable - 12,388
Inventories 4,060,682 2,843,053
Prepaid expenses 85,734 94,790
Deferred income taxes 111,438 111,438
----------- -----------
Total current assets 4,789,719 4,145,459
Vineyard development cost, net 1,461,579 386,605
Property and equipment, net 6,736,830 5,421,016
Investments 96,001 115,218
Notes receivable 145,838 138,511
Debt issuance costs,net 173,994 56,896
----------- -----------
Total assets $13,403,961 $10,263,705
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Line of credit $ 1,195,764 $ 479,626
Current portion of long term debt 124,191 97,819
Accounts payable 599,517 117,428
Other accrued liabilities 41,712 51,511
Accrued commissions and payroll 104,466 122,745
Income taxes payable 14,148 29,148
Grapes payable 354,049 551,014
---------- ----------
Total current liabilities 2,433,847 1,449,291
Long-term debt 3,947,620 3,072,181
Deferred income taxes 114,028 114,028
----------- ----------
Total liabilities 6,495,495 4,635,500
Shareholders' equity
Common stock, no par value
- - 10,000,000 shares authorized,
3,785,356 shares at 12/31/96
and 4,226,096 at 9/30/97
issued and outstanding 6,763,652 5,369,868
Retained earnings 144,814 258,337
---------- -----------
Total shareholders' equity 6,908,466 5,628,205
Total liabilities and
shareholders' equity $13,403,961 $10,263,705
=========== ==========
* $106,000 restricted cash see Liquidity and Capital
Resources
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,
1997 1996 1997 1996
Revenues:
Net Revenue $1,309,636 $1,127,965 $3,386,937 $2,756,539
Cost of
Sales 577,289 483,098 1,514,580 1,204,199
--------- -------- --------- ---------
Gross Margin 732,347 644,867 1,872,357 1,552,340
Selling, general,
administrative
expenses 636,134 491,827 1,723,170 1,276,128
Other income (expense)
Interest income 4,808 2,747 24,540 11,798
Interest expense (114,328) (51,262) (298,639) (147,403)
Other income 3,263 20,030 11,389 21,727
---------- -------- --------- ---------
(106,257) (28,485) (262,710) (113,878)
Net income(loss) before
income taxes (10,044) 124,555 (113,523) 162,334
Income tax benefit - (27,712) - (27,712)
Net income(loss) (10,044) 96,843 (113,523) 134,622
======== ======= ======== =======
Retained earnings
beginning of period 154,858 125,686 258,337 87,907
Retained earnings
end of period $144,814 $222,529 $144,814 $222,529
======== ======== ======== ========
Net income(loss)
per common share $ - $ 0.03 $ (0.03) $ 0.04
Weighted average number
of common shares
outstanding 4,226,096 3,785,356 4,056,411 3,785,356
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Cash Flows
(unaudited)
Nine Months Ended September 30,
1997 1996
Cash flows from operating activities:
Net loss $ (113,523) $ 134,622
Reconciliation of net loss
to net cash used
for operating activities:
Depreciation and amortization 368,834 265,856
Changes in assets and liabilities:
Accounts receivable trade (101,676) (185,545)
Other receivable 12,388 (9,395)
Inventories (1,217,626) (95,566)
Prepaid exp 9,056 (24,993)
Grapes payable (196,965) (344,642)
Accounts payable 482,089 160,301
Taxes payable (15,000) 27,712
Accrued liabilities (28,080) (39,370)
--------- ----------
Net cash used by operating
activities (800,503) (111,020)
Cash Flow from investing activities
Construction expenditures
and purchases of equipment (910,217)* (485,656)
Vineyard development expenditures (455,622)* (17,067)
Cash received for investments 19,217 29,720
Change in notes receivable (7,327) (7,118)
----------- ----------
Net cash used by investing
activities (1,353,949) (480,121)
Cash Flows from financing activities:
Line of credit borrowings 716,138 40,741
Debt issuance cost (117,098) 1,547
Mortgage loan funds 901,811 (49,976)
--------- --------
Net cash provided /(used) by
financing activities 1,500,851 (7,688)
Net decrease in cash and
cash equivalents (653,601) (598,829)
Cash and cash equivalents:
Beginning of period 794,885 599,895
End of period $ 141,284 $ 1,066
======== ======
* excludes a non cash purchase of equipment and land in
exchange for stock issued as part of the purchase of
Tualatin Vineyards
The accompanying notes are an integral part of this
financial statement.
WILLAMETTE VALLEY VINEYARDS, INC.
NOTES TO FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The interim financial statements have been prepared by the
Company, without audit and are subject to year-end
adjustment, in accordance with generally accepted accounting
principles, except that certain information and footnote
disclosure made in the latest annual report have been
condensed or omitted for the interim statements. Certain
costs are estimated for the full year and are allocated to
interim periods based on estimates of operating time
expired, benefit received, or activity associated with the
interim period. The financial statements reflect all
adjustments which are, in the opinion of management,
necessary for fair presentation.
2) Inventories by major classifications are summarized as
follows:
September 31, December 31,
1997 1996
Winemaking and packaging material $ 56,688 $ 87,321
Work-in-progress (costs relating 582,573 1,559,612
to unprocessed and/or unbottled
wine products)
Finished goods (bottled wines
and related products) 3,421,421 1,196,120
------------ ----------
$ 4,060,682 $2,843,053
=========== ==========
3) Property and Equipment consist of the following:
September 30, December 31,
1997 1996
Land and improvements $ 1,037,071 $ 563,077
Winery building and Hospitality 4,370,191 3,718,733
Center
Equipment 3,029,808 2,576,748
Construction in progress 106,000 27,913
------------ -----------
$8,543,070 $6,886,471
Less accumulated depreciatio (1,806,240) (1,465,455)
-------------- ------------
$ 6,736,830 $ 5,421,016
=========== ==========
4) Tualatin Acquisition:
On April 15, 1997, the Company acquired 100 percent of the
outstanding stock of Tualatin Vineyards Inc. ("TVI") . The
purchase price paid by the Company to the Tualatin
Vineyards Inc. shareholders in exchange for their shares
was $1,824,000 plus Tualatin Vineyards Inc.'s current
assets minus Tualatin Vineyards Inc.'s current and long
term liabilities as reflected in Tualatin Vineyards Inc.'s
balance sheet dated April 15, 1997. The Company paid 35
percent of the purchase price in the form of cash with the
balance paid through the issuance of unregistered shares of
the Company's Common Stock at an exchange rate based on an
agreed price for the Company's Common Stock of $3.162366
per share. The final purchase price was $1,988,601 paid to
Tualatin Vineyards Inc. shareholders. This calculates to
$696,010 in cash borrowed from Farm Credit Services plus
$1,292,591 in common stock. The company incurred additional
costs in the form of attorney costs of $46,000 and real
estate closing costs and loan fee costs of $25,650 which
will be amortized over the life of the loan.
5) Excise taxes:
For the third quarter and the nine months of 1997, the
Company has reported its excise taxes as a deduction of
sales revenue to equal a net revenue total (as shown on the
Statement of Operations). Prior to 1997, the Company has
reported excise taxes as selling, general and
administrative expense. Since the Company only collects
these excise taxes for the federal and state governments,
it should not consider these expense as legitimate selling,
general and administrative expenses. The amount for the
third quarter of 1997 and the first nine months of 1997 was
$50,824 and $128,685. For the same periods in 1996, the
excise taxes collected were $24,128 for the third quarter
of 1996 and $70,331 for the first nine months of 1996. In
1997, the federal excise tax rate increased significantly
because the Company produced more wine in 1997 over 1996
which placed itself in a higher tax rate category. In this
report, the Company reclassified the third quarter and
first nine months of 1996 financial statements to reflect
the current period presentation.
6) Cash Flow:
In the second quarter of 1997, the Company recorded the
acquisition of Tualatin Vineyards on its balance sheet.
Since 65% of the transaction was paid for with common stock
of the Company, the statement of cash flow does not
reflect this non-cash transaction.
7) Forward Looking Statement:
This Management's Discussion and Analysis of Financial
Condition and Results of Operation and other sections of
this Form 10Q 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,
successful assimilation of Tualatin Vineyards Inc.'s
business with that of the Company and other risks detailed
below as well as those discussed elsewhere in this Form 10Q
and from time to time in the company's Securities and
Exchange Commission filing and reports. In addition, such
statements could be affected by general industry and market
conditions and growth rates, and general domestic economic
conditions.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
For the third quarter of 1997 and for the nine months of
1997, the Company has operated at a level where the sales
revenues and operating expenses have not met the approved
budget. For the first nine months of 1997, the Company's
actual sales revenue is 5% lower than its projections for
this same period. The 1997 sales projections were based only
on a percentage increase from the prior year and did not
provide enough detail for the Company to determine in what
market location the Company is not meeting projections. This
is the first time in the Company's history it has not met
its sales projection. The Company has returned to a strict
policy of developing detailed sales projections in which
each sales manager is directly responsible for his/her
projections. Since the operating budgets were based on
obtaining certain sales revenue goals, the actual operating
expenses have exceeded their approved budgets. For the first
nine months of 1997 the actual operating expenses have
exceeded the budget by 14%. With sales projections not
meeting budget and operating expenses exceeding the
Company's authorized budgets, this creates the unprofitable
condition in which the Company finds itself. Traditionally,
the fourth quarter is the Company's strongest quarter and it
expects to show a nominal profit for the year.
During the third quarter of 1997, the Company's newly formed
Executive Committee, made up of three members of the board
of directors has taken action to solve these conditions.
With the Company's management, the Executive Committee has
developed an expenditure reduction plan which expects to
show positive results in future quarters. The Company has
eliminated six managers and directors of the Company in a
move to reduce overhead expenses in the company. The Company
has also eliminated two outside contractors to further
reduce its operating costs. During the third quarter of
1997, the Company's General Manager resigned. Jim Bernau,
the President and CEO, has returned to the Company full time
to take over the day-to-day operation.
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,
1997 1996 1997 1996,
Tasting room and
hospitality sales $ 244,277 $ 250,706 $596,179 $615,001
On-site and off-site 144,992 127,713 323,005 320,240
In state sales 552,273 415,118 1,331,495 1,125,087
Bulk sales 18,792 56,516
Out of state sales 400,126 358,556 1,208,427 766,542
-------- -------- --------- ---------
Total Revenue $ 1,360,460 $1,152,093$3,515,662$2,826,870
Less Excise taxes 50,824 24,128 128,685 70,331
---------- -------- --------- -------
Net Revenue $ 1,309,636 $1,127,965$3,386,937$2,756,539
========== ========= ======== =========
Tasting Room and Hospitality sales for the three months
ended September 30, 1997 decreased 3% from the same period
in 1996. For the first nine months of 1997, the sales
decreased 3% from the same period in 1996. The management
has scheduled several new events and programs to help
bolster sales in the Tasting Room, in 1997. The management
has instituted internal procedures to track the buying
habits of the customers who visit the tasting room. The
Company will use the information to target individual groups
to encourage the customers to perceive the tasting room and
grounds as a pleasant and rewarding buying experience. In
the past year, the Company allowed the Wholesale Division to
sell wine that had been exclusively designated as wine to be
sold in the tasting room . The Company intends to return to
its policy of carrying exclusive and smaller lot wines in
the tasting room with higher sales margins.
On-site and off-site festival sales for the third quarter of
1997 increased 14% over the third quarter of 1996. For the
nine months of 1997, sales in this category increased 1%
over the same period in 1996. Revenues from on-site and
off-site festivals have increased slightly in 1997 primarily
due to the increased number of events in this year over last
year. One off-site event, "Bite of Salem", had an increase
of revenue of $11,500 over last year's event, but due to a
large sponsor fee of $8,000 the event was not profitable.
The Company has implemented a policy to require a cost
benefit analysis for each event before a decision is made to
participate in the event. The Company hopes to reduce its
overhead cost in the Retail Department by only participating
in events that return a desired profit rate. By eliminating
events that do not meet the desired profit, the Company will
cut its overhead costs in this department.
Sales in the state of Oregon, through the Company's
independent sales force, increased 33% in the third quarter
of 1997 from the third quarter of 1996. For the nine
months of 1997, the sales increased 18% over the same period
in 1996. The Company has made significant efforts to
increase sales by expanding the supply of Edelweiss (a
Muscat and Riesling base wine) to in-state wholesale
accounts. This wine has proven to be a best seller in the
Tasting Room since its introduction in 1995. In the third
quarter, the Company introduced a two pack of White
Riesling, one of its most popular products, which has won
five gold medals during 1997 including a double gold from
the Tasting Guild International Competition. Revenues for
White Riesling in the third quarter increased $48,000 over
the same period in 1996. Also in the quarter, the Company
had a significant increase of $22,000 in revenues for its
96' Pinot Gris which won a gold medal at the Oregon State
Fair.
Out-of-state sales in the third quarter of 1997 have
increased 12% over the third quarter of 1996. In the nine
months of 1997, these sales to distributors increased 58%
over the first nine months of 1996. The growth in out-of-
state sales slowed in the third quarter of 1997 yet the
sales of certain products remained strong. The Pinot Noir
product line showed a strong growth in the third quarter and
the first nine months of 1997. The revenue from sales of
Pinot Noir shipped out-of-state in the third quarter of 1997
increased to $198,643 from $172,952 in the third quarter of
1996. The revenue from sales in Pinot Noir shipped out-of-
state in the first nine months of 1997 increased to $678,593
from $365,226 for the same period in 1996. This represents
an increase of 86%. The overall sales increase is a result
of the efforts of the Company focusing on developing
domestic and international markets. The Company now sells
wine in 39 states and six foreign countries.
Gross Profit
Winery Operations
As a percentage of revenue, gross profit for the winery
operations decreased to 56% of revenue in the third
quarter of 1997 as compared to 57% in the third quarter of
1996. For the first nine months of 1997, the gross profit
decreased from 55% as compared to 56% for the first nine
months of 1996. The Company expects the gross margins to
remain at this level through 1997. During the third
quarter of 1997, the Company sold $68,000 of Tualatin
Vineyard wine at a lower gross margin which impacted the
margin experienced in the quarter as compared to the same
period in 1996.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 29%
to $636,134 in the third quarter of 1997 from $491,827 in
the third quarter of 1996. Selling, general, and
administrative expenses for the first nine months of 1997
increased 35% to $1,723,170 from $1,276,128 over the same
period in 1996. As a percentage of revenue from winery
operations, selling, general and administrative expenses
increased to 49% in the third quarter of 1997 from 44% in
the third quarter of 1996. For the first nine months of
1997, these costs as a percentage of revenue increased to
51% in 1997 from 46% in 1996.
During the third quarter of 1997, the selling, general, and
administrative expenses increased by additional commissions
paid to the independent sales force of $43,000 over the same
period in 1996. Since commissions are based on the same
percentage of revenue, there is no adverse effect in the
expense to revenue ratio. In the third quarter of 1997,
the Company has experienced increased expenses relating to
samples, travel, point-of-sale expenses, and shipping
charges for the development of new markets and the
expansion of sales outside of the state. The out-of-state
sales representatives are given a predefined percentage of
revenue for wine samples and point of sale material. Thus,
as the gross revenues increase, the actual dollar
expenditures for wine samples and point-of-sale material
increases.
The Company is taking steps to reduce its selling, general,
and administrative expenses due to the upward spiral of
expense in the past year. The first step was taken on
October 1, when the Point of Sale design department was laid
off. The Company estimated that it lost $12,000 in the
month of September to operate this department. The Company
will contract with the former employees to do all of its
design and point of sales work. The Company will operate at
a reduced total budget of $4,000 per month. In addition, the
Company has laid off additional personnel in the Retail
Division as expenses were increasing faster than revenue.
The Company has targeted other administrative expenses and
has reduced its spending in several key areas. The Company
has suspended all new contracts on all outside consulting
and placed very strict spending limits on the following
expenditures; legal, office supplies, printing, postage, and
telephone . The Company feels that with these spending
limits and elimination of outside consulting work, it will
be able to reduce its administrative expenses to its 1996
level.
Other Income and Expense
Interest and other income decreased to $8,071 for the third
quarter of 1997 from $22,777 for the third quarter of 1996.
For the first nine months of 1997, interest and other income
increased to $35,929 from $33,525 in 1996.
Interest expense increased to $114,328 in the third
quarter of 1997 from $51,262 in 1996. For the first nine
months of 1997, the interest expense increased to $298,639
from $147,403 in 1996. The Company incurred additional
interest expense from funds borrowed from Farm Credit
Services in the fall of 1996 to finance additional
production capacity and added a storage facility for
growing its business. The 20,000 square foot storage
building was built to store wine which had previously been
stored off-site at a cost of $8,000 per month to the
Company. In April 1997, the Company borrowed an additional
$1.3 million from Farm Credit Services to purchase Tualatin
Vineyards and procure funds to plant an additional 50 acres
of vineyards at Tualatin Vineyards.
Income Taxes
The Company has operated at a net loss for the first nine
months in 1997 but expects to show a nominal profit by the
end of 1997. Accordingly, no income tax benefit has been
recorded for the quarter and nine months ending September
30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had a working capital
balance of $2.4 million and a current ratio of 2.0:1. At
December 31, 1996 , the Company had a working capital
balance of $2.7 million and a current ratio of 2.9:1.
The Company has a cash balance of $141,284 at September 30,
1997. It has committed $106,000 for the final payment on a
20,000 square foot storage building on site, which was
completed in September, 1997.
The Company obtained a line of credit of $1,000,000 from
Farm Credit Services during the last quarter of 1996 and an
additional $1,000,000 was added to the line in the second
quarter of 1997. At September 30, 1997, the line of credit
balance was $1,195,764.
The Company has a total long term debt balance of
$4,071,811, not including its line of credit, owed to Farm
Credit Services. Of this debt, $2,771,811 was used to
finance the Hospitality Center and invest in winery
equipment to increase its capacity to produce 100,000 cases
of wine per year. An additional $1,300,000 was borrowed to
finance the acquisition of Tualatin Vineyards and to plant
additional vineyards there. The total long term debt is
represented by four separate notes with Farm Credit
Services, each of which will be retired in fifteen years.
The interest rates are 8.15%, 9.95%, 8.55%, and 8.1% .
At September 30, 1997, the Company has contracted
$1,200,000 in grape contracts for the harvest in the fall
of 1997. As of that date, the Company has processed about
$350,000 of grapes.
At September 30, 1997, the total inventory of bulk wines and
finished product is valued at cost, $4,060,682. This is up
from $2,843,053 from December 31, 1996. In 1996, the Company
anticipated a growth in business thus it expanded the size
of its 1996 grape harvest. This resulted in an increase in
inventory cost as the Company bottled the additional
product.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None.
(b) No reports were filed on Form 8-K during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
Date: By /s/ James W Bernau
James W Bernau
President
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
Date: By
James W Bernau
President
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 141,284
<SECURITIES> 0
<RECEIVABLES> 400,581
<ALLOWANCES> (10,000)
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0
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<TOTAL-REVENUES> 1,309,636
<CGS> 577,289
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