UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File number 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Name of Small Business Issuer in Its Charter)
OREGON 93-0981021
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8800 Enchanted Way, S.E.
Turner, OR 97392
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (503) 588-9463
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
(Title of class)
Check whether the issuer is not required to file reports pursuant to Section
13 or 15(d) of the Exchange Act. YES [X] NO [ ]
Check whether the issuer (1)filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this Form 10-KSB [X].
Issuer's revenues for its most recent fiscal year: $13,667,869
Aggregate market value of the voting stock held by non-affiliates of the
Issuer based upon the closing bid price of such stock as of March 31, 2006:
$31,689,374
Number of shares of Common Stock outstanding as of March 31, 2006: 4,660,202
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: YES [ ] No [X]
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction
Willamette Valley Vineyards, Inc. (the "Company") was formed in May 1988 to
produce and sell premium, super premium and ultra premium varietal wines
(i.e., wine which sells at retail prices of $7 to $14, $14 to $20 and over $20
per 750 ml bottle, respectively). Willamette Valley Vineyards was originally
established as a sole proprietorship by Oregon winegrower Jim Bernau in 1983.
The Company is headquartered in Turner, Oregon, where the Company's Turner
Vineyard and Winery are located on 75 acres of Company-owned land adjacent to
Interstate 5, approximately two miles south of Salem, Oregon. The Company's
wines are made from grapes grown at its vineyards (the "Vineyards") and from
grapes purchased from other nearby vineyards. The grapes are crushed,
fermented and made into wine at the Company's Turner winery (the "Winery") and
the wines are sold principally under the Company's Willamette Valley Vineyards
label. Willamette Valley Vineyards is the owner of Tualatin Estate Vineyards
and Winery located on approximately 120 acres near Forrest Grove, Oregon, and
leases an additional 105 acres of vineyard land at the Forest Grove location.
Products
Under its Willamette Valley Vineyards label, the Company produces and sells
the following types of wine in 750 ml bottles: Pinot Noir, the brand's
flagship and its largest selling varietal in 2005, $15 to $50 per bottle;
Chardonnay, $14 to $25 per bottle; Pinot Gris, $14 to $18 per bottle; Riesling
and Oregon Blossom (blush blend), $10 per bottle (all bottle prices included
herein are the suggested retail prices). The Company's mission for this brand
is to become the premier producer of Pinot Noir from the Pacific Northwest.
The Company currently produces and sells small quantities of Oregon's Nog
(a seasonal holiday product), $10 per bottle, and Edelweiss, $10 per bottle,
under a "Made in Oregon Cellars" label.
Under its Tualatin Estate Vineyards label, the Company currently produces and
sells the following types of wine in 750 ml bottles: Pinot Noir, the brand's
flagship, $28 per bottle; Chardonnay, $17 per bottle; Semi-Sparkling Muscat,
$16 per bottle. The Company's mission for this brand is to be among the
highest quality estate producers of Burgundy and Alsatian varietals in Oregon.
Under its Griffin Creek label, a joint effort between the Company and Quail
Run Vineyards, the Company produces and sells the following types of wine in
750 ml bottles: Merlot, the brand's flagship, $30 per bottle; Syrah, $35 per
bottle; Cabernet Sauvignon, $35 per bottle; Cabernet Franc, $30 per bottle;
The Griffin (a Bordeaux blend), $60 per bottle; Pinot Gris, $18 per bottle;
Viognier, $25 per bottle; and Pinot Noir, $25 per bottle. This brand's
mission is to be the highest quality producer of Bordeaux and Rhone varietals
in Oregon.
Market Overview
Wine Consumption Trends: Wine consumption in the United States declined from
1987 to 1994 due to increased consumer health concerns and a growing awareness
of alcohol abuse. That decline was led by sharp reductions in the low-cost
non-varietal ("jug") wine and wine cooler segments of the market, which, prior
to 1987, were two of the fastest growing market segments. Beginning in 1994,
per capita wine consumption began to rise. The Company estimates that premium,
super premium and ultra premium wine consumption will experience a moderate
increase over the next few years. Consumers have restricted their drinking of
alcoholic beverages and view premium, super premium and ultra premium wines as
a beverage of moderation. The Company believes this change in consumer
preference from low quality, inexpensive wines to premium, super premium and
ultra premium wines reflects, in part, a growing emphasis on health and
nutrition as a principal element of the contemporary lifestyle as well as an
increased awareness of the risks associated with alcohol abuse.
The Oregon Wine Industry.
Oregon is a relatively new wine-producing region in comparison to California
and France. In 1966, there were only two commercial wineries licensed in
Oregon. By 2005 there were 303 commercial wineries licensed in Oregon and
over 14,100 acres of wine grape vineyards, 11,800 acres of which are currently
producing. Total production of Oregon wines in 2005 is estimated to be
approximately 1.5 million cases. Oregon's entire 2005 production has an
estimated retail value of approximately $295.6 million, assuming a retail
price of $200 per case, and a FOB value of approximately one-half of the
retail value, or $147.8 million.
Because of climate, soil and other growing conditions, the Willamette Valley
in western Oregon is ideally suited to growing superior quality Pinot Noir,
Chardonnay, Pinot Gris and Riesling wine grapes. Some of Oregon's Pinot Noir,
Pinot Gris and Chardonnay wines have developed outstanding reputations,
winning numerous national and international awards.
Oregon does have certain disadvantages as a new wine-producing region.
Oregon's wines are relatively little known to consumers worldwide and the
total wine production of Oregon wineries is small relative to California and
French competitors. Greater worldwide label recognition and larger production
levels give Oregon's competitors certain financial, marketing, distribution
and unit cost advantages.
Furthermore, Oregon's Willamette Valley has an unpredictable rainfall pattern
in early autumn. If significantly above-average rains occur just prior to the
autumn grape harvest, the quality of harvested grapes is often materially
diminished, thereby affecting that year's wine quality.
Finally, phylloxera, an aphid-like insect that feeds on the roots of
grapevines, has been found in several commercial vineyards in Oregon.
Contrary to the California experience, most Oregon phylloxera infestations
have expanded very slowly and done only minimal damage. Nevertheless,
phylloxera does constitute a significant risk to Oregon vineyards. Prior to
the discovery of phylloxera in Oregon, all vine plantings in the Company's
Vineyard were with non-resistant rootstock. As of December 31, 2005, the
Company has not detected any phylloxera at its Turner site. Beginning with
the Company's plantings in May 1992, only phylloxera-resistant rootstock is
used. In 1997, the Company purchased Tualatin Vineyards, which has phylloxera
at its site. All plantings are on and all future planting will be on
phylloxera resistant rootstock. The Company takes all necessary precautions
to prevent the spread of phylloxera to its Turner site. Also phylloxera is
active at the Belle Provenance Vineyard for which the Company has a 10-year
lease. Any planting, training, and care of new plants at the Belle Provenance
Vineyard will be the responsibility of the landowner under the terms of the
lease, not at the expense of the Company.
As a result of these factors, subject to the risks and uncertainties
identified above, the Company believes that long-term prospects for growth in
the Oregon wine industry are excellent. The Company believes that over the
next 20 years the Oregon wine industry will grow at a faster rate than the
overall domestic wine industry, and that much of this growth will favor
producers of premium, super premium and ultra premium wines such as the
Company's.
Company Strategy
The Company, one of the largest wineries in Oregon by volume, believes its
success is dependent upon its ability to: (1) grow and purchase high quality
vinifera wine grapes; (2) vinify the grapes into premium, super premium and
ultra premium wine; (3) achieve significant brand recognition for its wines,
first in Oregon and then nationally and internationally; and (4) effectively
distribute and sell its products nationally. The Company's goal is to
continue as one of Oregon's largest wineries, and establish a reputation for
producing some of Oregon's finest, most sought-after wines.
Based upon several highly regarded surveys of the US wine industry, the
Company believes that successful wineries exhibit the following four key
attributes: (i) focus on production of high-quality premium, super premium
and ultra premium varietal wines; (ii) achieve brand positioning that
supports high bottle prices for its high quality wines; (iii) build brand
recognition by emphasizing restaurant sales; and (iv) develop strong marketing
advantages (such as a highly visible winery location, successful self-
distribution, and life long customer service programs).
To successfully execute this strategy, the Company has assembled a team of
accomplished winemaking professionals and has constructed and equipped a
22,934 square foot state-of-the-art Winery and a 12,500 square foot outdoor
production area for the crushing, pressing and fermentation of wine grapes.
The Company's marketing and selling strategy is to sell its premium, super
premium and ultra premium cork-finished-wine through a combination of
(i) direct sales at the Winery, (ii) self-distribution to local and regional
restaurants and retail outlets, and (iii) sales through independent
distributors and wine brokers who market the Company's wine in specific
targeted areas where self-distribution is not economically feasible.
The Company believes the location of its Winery next to Interstate 5, Oregon's
major north-south freeway, significantly increases direct sales to consumers
and facilitates self-distribution of the Company's products. The Company
believes this location provides high visibility for the Winery to passing
motorists, thus enhancing recognition of the Company's products in retail
outlets and restaurants. The Company's Hospitality Center has further
increased the Company's direct sales and enhanced public recognition of its
wines.
Vineyard
The Company now controls 280 acres of vineyard land. At full production,
these vineyards should enable the Company to grow approximately 50% of the
grapes needed to meet the Winery's ultimate production capacity of 298,000
gallons (124,000 cases).
The Property. The Company's estate vineyard at the Turner site currently has
48 acres planted and producing, with 24 acres of Pinot Noir and 24 acres of
Pinot Gris and Chardonnay. The oldest grapevines were planted in 1985, with
additional grapevines planted in 1992, 1993, and 1999. Vineyards generally
remain productive for 30 to 100 years, depending on weather conditions,
disease and other factors. We estimate these vines will continue to produce
for another 35 years under conditions known today.
The Vineyard uses an elaborate trellis design known as the Geneva Double
Curtain. The Company has incurred the additional expense of constructing this
trellis because it doubles the number of canes upon which grape clusters grow
and spreads these canes for additional solar exposure and air circulation.
Research and practical applications of this trellis design indicate that it
should increase production and improve grape quality over traditional designs.
Beginning in 1997, the Company embarked on a major effort to improve the
quality of its flagship varietal by planting new Pinot Noir clones that
originated directly from the cool climate growing region of Burgundy rather
than the previous source, Napa, California, where winemakers believe the
variety adopted to the warmer climate over the many years it was grown there.
These new French clones are called "Dijon clones" after the University of
Dijon in Burgundy, which assisted in their selection and shipment to a US
government authorized quarantine site, and then seven years later to Oregon
winegrowers. The most desirable of these new Pinot Noir clones are numbered
113, 114, 115, 667 and 777. In addition to certain flavor advantages, these
clones ripen up to two weeks earlier, allowing growers to pick before heavy
autumn rains. Heavy rains can dilute concentrated fruit flavors and promote
bunch rot and spoilage. These new Pinot Noir clones were planted at the
Tualatin Estate on disease resistant rootstock and the 667 and 777 clones have
been grafted onto 7 acres of self rooted, non-disease resistant vines at the
Company's Estate Vineyard near Turner.
New clones of Chardonnay preceded Pinot Noir into Oregon also arranged by the
University of Dijon, and were planted at the Company's Estate Vineyard on
disease resistant rootstock.
The purchase of Tualatin Vineyards, Inc. in April 1997 (including the
subsequent sale-leaseback of a portion of the property in December 1999) added
83 acres of additional producing vineyards and approximately 60 acres of bare
land for future plantings. In 1997, the Company planted 19 acres at the
Tualatin site and planted another 41 acres in 1998, the majority being Pinot
Noir.
Also in 1997, the Company entered into a 10-year lease with O'Connor Vineyards,
now known as Belle Provenance, (53 acres) located near Salem to manage and
obtain the supply of grapes from Belle Provenance Vineyards. In 2005, the
Company informed Belle Provenance Vineyards that the Company will terminate
the current lease at the end of the initial 10-year term.
In 1999, the Company purchased 33 acres of vineyard land adjoining Tualatin
Estate for future plantings and used lot line adjustments to create three
separate land parcels at Tualatin Estate.
Grape Supply. In 2005, the Company's 48 acres of producing estate vineyard
yielded approximately 129 tons of grapes for the Winery's fifteenth crush.
Tualatin Vineyards produced 539 tons of grapes in 2005. Belle Provenance
Vineyards produced 177 tons of grapes in 2005. In 2005, the Company purchased
an additional 277 tons of grapes from other growers. The Winery's 2005 total
wine production was 171,889 gallons (72,297 cases) from its 2004 and 2005
crushes. The Company expects to produce 175,000 gallons in 2006 (73,600 cases)
from its 2005 crush. The Vineyard cannot and will not provide the sole supply
of grapes for the Winery's near-term production requirements. The Company has
also entered into grape purchase contracts with certain directors or their
respective affiliates of the Company.
In 2005, the Company entered into a long-term grape purchase agreement with
one of its Willamette Valley wine grape growers whereby the grower agreed to
plant 40 acres of Pinot Gris and 50 acres of Riesling and the Winery agreed to
purchase the yield at fixed contract prices through 2015. The wine grape
grower must meet strict quality standards for the wine grapes to be accepted
by the Winery at time of harvest and delivery. This new long-term grape
purchase agreement will increase the Company's supply of high quality wine
grapes and provide a long-term grape supply, at fixed prices.
The Company fulfills its remaining grape needs by purchasing grapes from other
nearby vineyards at competitive prices. The Company believes high quality
grapes will be available for purchase in sufficient quantity to meet the
Company's requirements. The grapes grown on the Company's vineyards establish
a foundation of quality, through the Company's farming practices, upon which
the quality of the Company's wines is built. In addition, wine produced from
grapes grown in the Company's own vineyards may be labeled as "Estate Bottled"
wines. These wines traditionally sell at a premium over non-estate bottled
wines.
Viticultural Conditions. Oregon's Willamette Valley is recognized as a
premier location for growing certain varieties of high quality wine grapes,
particularly Pinot Noir, Chardonnay, Riesling and Pinot Gris. The Company
believes that the Vineyard's growing conditions, including its soil, elevation,
slope, rainfall, evening marine breezes and solar orientation are among the
most ideal conditions in the United States for growing certain varieties of
high-quality wine grapes. The Vineyard's grape growing conditions compare
favorably to those found in some of the famous Viticultural regions of France.
Western Oregon's latitude (42o-46o North) and relationship to the eastern edge
of a major ocean is very similar to certain centuries-old wine grape growing
regions of France. These conditions are unduplicated anywhere else in the
world except in the great wine grape regions of Northern Europe.
The Vineyard's soil type is Jory/Nekia, a dark, reddish-brown, silky clay loam
over basalt bedrock, noted for being well drained, acidic, of adequate depth,
retentive of appropriate levels of moisture and particularly suited to growing
high quality wine grapes.
The Vineyard's elevation ranges from 533 feet to 700 feet above sea level with
slopes from 2 percent to 30 percent (predominately 12-20 percent). The
Vineyard's slope is oriented to the south, southwest and west. Average annual
precipitation at the Vineyard is 41.3 inches; average annual air temperature
is 52 to 54 degrees Fahrenheit, and the length of each year's frost-free
season averages from 190 to 210 days. These conditions compare favorably with
conditions found throughout the Willamette Valley viticultural region and
other domestic and foreign viticultural regions, which produce high quality
wine grapes.
In the Willamette Valley, permanent vineyard irrigation generally is not
required. The average annual rainfall provides sufficient moisture to avoid
the need to irrigate the Vineyard. However, if the need should arise, the
Company's property contains one water well which can sustain sufficient volume
to meet the needs of the Winery and to provide auxiliary water to the Vineyard
for new plantings and unusual drought conditions.
Winery
Wine Production Facility. The Company's Winery and production facilities are
capable of producing up to 104,000 cases (247,000 gallons) of wine per year,
depending on the type of wine produced. In 2005, the Winery produced 171,889
gallons (72,297 cases) from its 2003 and 2004 crushes. The Winery is 12,784
square feet in size and contains areas for processing, fermenting, aging and
bottling wine, as well as an underground wine cellar, a tasting room, a retail
sales room and administrative offices. There is a 12,500 square foot outside
production area for crushing, pressing and fermenting wine grapes, and a 4,000
square foot insulated storage facility with a capacity of 30,000 cases of wine.
The Company also has a 20,000 square foot storage building to store its
inventory of bottled product. The production area is equipped with a settling
tank and sprinkler system for disposing of wastewater from the production
process in compliance with environmental regulations.
With the purchase of Tualatin Vineyards, Inc., the Company added 20,000 square
feet of additional production capacity. Although the Tualatin facility was
constructed over twenty years ago, it adds 20,000 cases of wine production
capacity to the Company, which the Company felt at the time of purchase was
needed. To date, production and sales volumes have not expanded enough to
necessitate the utilization of the Tualatin facilities. The Company decided
to move current production to its Turner site to meet short-term production
requirements. The capacity at Tualatin is available to the Company to meet
any anticipated future production needs.
Hospitality Facility. The Company has a large tasting and hospitality facility
of 19,470 square feet (the "Hospitality Center"). The first floor of the
Hospitality Center includes retail sales space and a "great room" designed to
accommodate approximately 400 persons for gatherings, meetings, weddings and
large wine tastings. An observation tower and decking around the Hospitality
Center enable visitors to enjoy the view of the Willamette Valley and the
Company's Vineyard. The Hospitality Center is joined with the present Winery
by an underground cellar tunnel. The facility includes a basement cellar of
10,150 square feet (including the 2,460 square foot underground cellar tunnel)
to expand storage of the Company's wine in a proper environment. The cellar
provides the Winery with ample space for storing up to 1,600 barrels of wine
for aging.
Just outside the Hospitality Center, the Company has a landscaped park setting
consisting of one acre of terraced lawn for outdoor events and five wooded
acres for picnics and social gatherings. The area between the Winery and the
Hospitality Center forms a 20,000 square foot quadrangle. As designed, a
removable fabric top can cover the quadrangle, making it an all-weather outdoor
facility to promote sale of the Company's wines through outdoor festivals and
social events.
The Company believes the Hospitality Center and the park and quadrangle make
the Winery an attractive recreational and social destination for tourists and
local residents, thereby enhancing the Company's ability to sell its wines.
Mortgages on Properties. The Company's winery facilities are subject to two
mortgages with a principal balance of $2,269,865 at December 31, 2005. The
mortgages are payable in monthly aggregate installments, including principal
and interest, of approximately $454,000 annually through 2012. After 2012,
the Company's monthly aggregate mortgage payments including interest will be
approximately $92,000 annually until the year 2014. The mortgage on the
Turner site had a principal balance of $1,723,320 on December 31, 2005. The
mortgage on the Tualatin Valley property, issued in April 1997 to fund the
acquisition of the property and development of its vineyard, had a principal
balance of $546,545 on December 31, 2005.
Wine Production. The Company operates on the principle that winemaking is a
natural but highly technical process requiring the attention and dedication of
the winemaking staff. The Company's Winery is equipped with current technical
innovations and uses modern laboratory equipment and computers to monitor the
progress of each wine through all stages of the winemaking process.
The Company's recent annual grape harvest and wine production is as follows:
Tons of
Grapes Production Cases
Crush Year Crushed Year Produced
2001 1859 2001 85,554
2002 1091 2002 110,063
2003 917 2003 92,208
2004 994 2004 73,212
2005 1132 2005 72,297
Sales and Distribution
Marketing Strategy. The Company markets and sells its wines through a
combination of direct sales at the Winery, sales directly and indirectly
through its shareholders, self-distribution to local restaurants and retail
outlets in Oregon, directly through mailing lists, and through distributors
and wine brokers selling in specific targeted areas outside of the state of
Oregon. As the Company has increased production volumes and achieved greater
brand recognition, sales to other domestic markets have increased, both in
terms of absolute dollars and as a percentage of total Company sales.
Direct Sales. The Company's Winery is located adjacent to the state's major
north-south freeway (Interstate 5), approximately 2 miles south of the state's
third largest metropolitan area (Salem), and 50 miles in either direction from
the state's first and second largest metropolitan areas (Portland and Eugene,
respectively). The Company believes the Winery's unique location along
Interstate 5 has resulted in a greater amount of wines sold at the Winery as
compared to the Oregon industry standard. Direct sales from the Winery are an
important distribution channel and an effective means of product promotion.
To increase brand awareness, the Company offers educational Winery tours and
product presentations by trained personnel.
The Company holds four major festivals and events at the Winery each year. In
addition, open houses are held at the Winery during major holiday weekends
such as Memorial Day, Independence Day, Labor Day and Thanksgiving, where
barrel tastings and cellar tours are given. Numerous private parties, wedding
receptions and political and other events are also held at the Winery.
Direct sales are profitable because the Company is able to sell its wine
directly to consumers at retail prices rather than to distributors or
retailers at wholesale prices. Sales made directly to consumers at retail
prices result in an increased profit margin equal to the difference between
retail prices and distributor or wholesale prices, as the case may be. For
2005, direct sales contributed approximately 17% of the Company's revenue.
Self-Distribution. The Company has established a self-distribution system,
called Bacchus Fine Wines, to sell its wines to restaurant and retail accounts
located in Oregon. Eighteen sales representatives, who take wine orders and
make some deliveries primarily on a commission-only basis, currently carry out
the self-distribution program. Company-provided trucks and delivery drivers
support several of these sales representatives. The Company believes this
program of self-representation and delivery has allowed its wines to gain a
strong presence in the Oregon market with over 1,200 restaurant and retail
accounts established as of December 31, 2005.
The Company has expended significant resources to establish its self-
distribution system. The system initially focused on distribution in the
Willamette Valley, but has expanded to the Oregon coast and southern Oregon.
For 2005, approximately 53% of the Company's net revenues were attributable to
self-distribution.
Distributors and Wine Brokers. The Company uses both independent distributors
and wine brokers primarily to market the Company's wines in specific targeted
areas where self-distribution is not feasible. Only those distributors and
wine brokers who have demonstrated knowledge of and a proven ability to market
premium, super premium, and ultra premium wines are utilized. Outside of
Oregon, the Company's products are distributed in 37 states and the District
of Columbia.
On March 8, 2006 the Company terminated an incentive distribution agreement
with a national wine distributor group (the "distributor") with fourteen
affiliated distributors. Under the agreement, the Company had agreed to pay
the distributor incentive compensation if certain sales goals were met over a
five year period. The Company terminated the agreement because the
distributors did not reach these goals in every year since the agreement's
inception. Following the termination, the Company has continued to do business
with the distributors on terms and conditions generally available to all of
the Company's distributors.
Tourists. Oregon wineries are experiencing an increase in on-site visits by
consumers. In California, visiting wineries is a very popular leisure time
activity. Wineries in Washington are also experiencing strong interest from
tourists. Chateau Ste. Michelle, located near Woodinville, Washington, for
example attracts approximately 200,000 visitors per year.
The Company believes its convenient location, adjacent to Interstate 5, enables
the Winery to attract a significant number of visitors. The Winery is located
less than one mile from The Enchanted Forest, which operates from March 15 to
September 30 each year and attracts approximately 130,000 paying visitors per
year. Adjacent to the Enchanted Forest is the Thrillville Amusement Park and
the Forest Glen Recreational Vehicle Park, which contains approximately 110
overnight recreational vehicle sites. Many of the visitors to the Enchanted
Forest and RV Park visit the Winery.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all alcoholic and nonalcoholic beverages. Within
the wine industry, the Company believes that its principal competitors include
wineries in Oregon, California and Washington, which, like the Company, produce
premium, super premium, and ultra premium wines. Wine production in the
United States is dominated by large California wineries that have significantly
greater financial, production, distribution and marketing resources than the
Company. Currently, no Oregon winery dominates the Oregon wine market.
Several Oregon wineries, however, are older and better established and have
greater label recognition than the Company.
The Company believes that the principal competitive factors in the premium,
super premium, and ultra premium segment of the wine industry are product
quality, price, label recognition, and product supply. The Company believes
it competes favorably with respect to each of these factors. The Company has
received "Excellent" to "Recommended" reviews in tastings of its wines and
believes its prices are competitive with other Oregon wineries. Larger scale
production is necessary to satisfy retailers' and restaurants' demand and the
Company believes that its current level of production is adequate to meet that
demand for the foreseeable future. Furthermore, the Company believes that its
ultimate forecasted production level of 298,000 gallons (124,000 cases) per
year will give it significant competitive advantages over most Oregon wineries
in areas such as marketing, distribution arrangements, grape purchasing, and
access to financing. The current production level of most Oregon wineries is
generally much smaller than the projected production level of the Company's
Winery. With respect to label recognition, the Company believes that its
unique structure as a consumer-owned company will give it a significant
advantage in gaining market share in Oregon as well as penetrating other wine
markets.
Governmental Regulation of the Wine Industry
The production and sale of wine is subject to extensive regulation by the U.S.
Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau and the
Oregon Liquor Control Commission. The Company is licensed by and meets the
bonding requirements of each of these governmental agencies. Sale of the
Company's wine is subject to federal alcohol tax, payable at the time wine is
removed from the bonded area of the Winery for shipment to customers or for
sale in its tasting room. The current federal alcohol tax rate is $1.07 per
gallon; however, wineries that produce not more than 150,000 gallons during
the calendar year are allowed a graduated tax credit of up to $0.90 per gallon
on the first 100,000 gallons of wine (other than sparkling wines) removed from
the bonded area during that year. The Company also pays the state of Oregon
an excise tax of $0.67 per gallon on all wine sold in Oregon. In addition,
all states in which the Company's wines are sold impose varying excise taxes
on the sale of alcoholic beverages. As an agricultural processor, the Company
is also regulated by the Oregon Department of Agriculture and, as a producer of
wastewater, by the Oregon Department of Environmental Quality. The Company
has secured all necessary permits to operate its business.
Prompted by growing government budget shortfalls and public reaction against
alcohol abuse, Congress and many state legislatures are considering various
proposals to impose additional excise taxes on the production and sale of
alcoholic beverages, including table wines. Some of the excise tax rates being
considered are substantial. The ultimate effects of such legislation, if
passed, cannot be assessed accurately since the proposals are still in the
discussion stage. Any increase in the taxes imposed on table wines can be
expected to have a potentially adverse impact on overall sales of such
products. However, the impact may not be proportionate to that experienced by
producers of other alcoholic beverages and may not be the same in every state.
Employees
As of December 31, 2005 the Company had 80 full-time employees and 6 part-time
employees. In addition, the Company hires additional employees for seasonal
work as required. The Company's employees are not represented by any
collective bargaining unit. The Company believes it maintains positive
relations with its employees.
Additional Information
The Company files quarterly and annual reports with the Securities and Exchange
Commission. The public may read and copy any material that the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington D.C. 20549. The public may also obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. As the
Company is an electronic filer, filings may be obtained via the SEC website at
(www.sec.gov.). Also visit the Company's website (www.wvv.com) for links to
stock position and pricing.
ITEM 2. DESCRIPTION OF PROPERTY.
See "DESCRIPTION OF BUSINESS -- Winery" and "-- Vineyard".
The Company carries Property and Liability insurance coverage in amounts deemed
adequate by Management.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending to which the Company is a party
or to which any of its property is subject, and the Company's management does
not know of any such action being contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
Company's Fourth Quarter ended December 31, 2005.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the Capital Market (formerly known as
the NASDAQ Small Cap Market) under the symbol "WVVI." As of December 31, 2005,
there were 3,029 stockholders of record of the Common Stock.
The table below sets forth for the quarters indicated the high and low bids for
the Company's Common Stock as reported on the Capital Market. The Company's
Common Stock began trading publicly on September 13, 1994.
Quarter Ended
3/31/05 6/30/05 9/30/05 12/31/05
High $3.45 $4.53 $5.46 $8.92
Low $2.74 $3.11 $3.49 $4.44
Quarter Ended
3/31/04 6/30/04 9/30/04 12/31/04
High $2.52 $2.54 $2.50 $3.98
Low $2.00 $2.07 $1.87 $2.06
The Company has not paid any dividends on the Common Stock, and the Company
does not anticipate paying any dividends in the foreseeable future. The Company
intends to use its earnings to grow the distribution of its brands, improve
quality and reduce debt.
Equity Compensation Plan Information
Number of
securities
Number of remaining available
Securities to be for future issuance
issued upon Weighted-average under equity
exercise of exercise price of compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected
and rights and rights in common (a))
Plan Category (a) (b) (c)
Equity compensation
plans approved by 609,500 $3.57 107,801
security holders
Equity compensation
plans not approved - $ - -
by security holders
Total 609,500 $3.57 107,801
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward Looking Statement
This Management's Discussion and Analysis of Financial Condition and Results of
Operation and other sections of this Form 10KSB contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. 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. Such
forward-looking statements include, for example, statements regarding general
market trends, predictions regarding growth and other future trends in the
Oregon wine industry, expected availability of adequate grape supplies,
expected positive impact of the Company's Hospitality Center on direct sales
effort, expected increases in future sales. 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. Actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements due to numerous factors, including, but not limited to:
availability of financing for growth, availability of adequate supply of high
quality grapes, successful performance of internal operations, impact of
competition, changes in wine broker or distributor relations or performance,
impact of possible adverse weather conditions, impact of reduction in grape
quality or supply due to disease, impact of governmental regulatory decisions,
and other risks detailed below as well as those discussed elsewhere in this
Form 10KSB 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Willamette Valley Vineyards' consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. As such, management is required to make certain
estimates, judgments and assumptions that are believed to be reasonable based
upon the information available. On an on-going basis, management evaluates its
estimates and judgments, including those related to product returns, bad debts,
inventories, investments, income taxes, financing operations, and contingencies
and litigation. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company's principal sources of revenue are derived from sales and
distribution of wine. Revenue is recognized from wine sales at the time of
shipment and passage of title. Our payment arrangements with customers
provide primarily 30 day terms and, to a limited extent, 45 or 60 day terms.
Shipping and handling costs are included in general and administrative
expenses.
The Company values inventories at the lower of actual cost to produce the
inventory or market value. We regularly review inventory quantities on hand
and adjust our production requirements for the next twelve months based on
estimated forecasts of product demand. A significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand.
In the future, if our inventory cost is determined to be greater than the net
realizable value of the inventory upon sale, we would be required to recognize
such excess costs in our cost of goods sold at the time of such determination.
Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand could have a significant impact on the ultimate selling price and,
therefore, the carrying value of our inventory and our reported operating
results.
We capitalize internal vineyard development costs prior to the vineyard land
becoming fully productive. These costs consist primarily of the costs of the
vines and expenditures related to labor and materials to prepare the land and
construct vine trellises. Amortization of such costs as annual crop costs is
done on a straight-line basis for the estimated economic useful life of the
vineyard, which is estimated to be 30 years. The Company regularly evaluates
the recoverability of capitalized costs. Amortization of vineyard development
costs are included in capitalized crop costs that, in turn are included in
inventory costs and ultimately become a component of cost of goods sold.
The Company pays depletion allowances to the Company's distributors based on
their sales to their customers. The Company sets these allowances on a monthly
basis and the Company's distributors bill them back on a monthly basis. All
depletion expenses associated with a given month are expensed in that month as
a reduction of revenues. The Company also pays a sample allowance to some of
the Company's distributors in the form of a 1.5% discount applied to invoices
for product sold to the Company's distributors. The expenses for samples are
expensed at the time of sale in the selling, general and administrative
expense. The Company's distributors use the allowance to sample product to
prospective customers.
Amounts paid by customers to the Company for shipping and handling expenses
are included in the net revenue. Expenses incurred for shipping and handling
charges are included in selling, general and administrative expense. The
Company's gross margins may not be comparable to other companies in the same
industry as other companies may include shipping and handling expenses as a
cost of goods sold.
OVERVIEW
RESULTS OF OPERATIONS
The winery's flagship varietal, Pinot Noir, led sales with an increase of 98%,
from 24,550 cases in 2004, to 49,677 cases of the total 110,000 cases of
Willamette Valley Vineyards produced wines sold in 2005. Sales revenue
increased 46% and net income increased 149% for the year ended December 31,
2005, as compared to the prior year period. Sales revenue increased primarily
due to strong sales of the core product offerings to our out-of-state
distributors and through the Oregon Wholesale Department, called Bacchus Fine
Wines, to Oregon restaurant and retail outlets.
Out-of-state distributor sales revenue increased 78% for the year ended
December 31, 2005 as compared to the prior year period. A 59% increase in the
distributor's depletions (sales from the distributors to their customers) was
the driving force behind the increase in out-of-state sales revenues. The
continued demand of certain products has prompted the Company to make careful,
upward adjustments in prices as new vintages are released, and place those
products on allocation with its distributors in order to address inventory
constraints.
Sales revenue through the Company's wholesale sales force and through direct
sales from the winery to retail licensees in the state of Oregon increased 38%
for the year ended December 31, 2005 as compared to the prior year period,
primarily due to the growth of distributed wine brands. Revenue from sales of
Company produced products through Bacchus Fine Wines increased 22% for the
year ended December 31, 2005 as compared to the prior year period, also
contributing to the revenue growth.
The Company used $3,052,330 of cash generated from net earnings and the
reduction in wine inventories resulting from record sales to reduce the amount
owed under the bank credit line, the distributor obligation and other financing
in 2005. As a result, interest costs have dropped significantly compared to
comparable prior year periods. The Company plans to continue to use cash
generated from operations to maintain short term financing balances at zero
into the future, to the extent possible.
The Company has instituted a 401(k) Profit Sharing Plan for 2006 as an
incentive to long-term employee retention and development with a portion of
the interest savings as a result of the reduction of debt. The Company will
make a safe harbor contribution of 100% of what employees contribute up to 4%
of their annual pay.
Increased sales of Company produced products have reduced inventory levels and
the Company is reviewing sales projections in order to plan appropriate future
inventory production levels. In the past year, the Company planted an
additional 25 acres of vines at its Forest Grove site, bringing the planted
acreage controlled by the Company to over 250 acres, and contracted on a long
term basis for 90 new acres of wine grapes. The Company expects the shortage
of inventory of certain products is likely to constrain the Company's
operating performance during 2006.
In 1997, the Company entered into a 10-year lease with O'Connor Vineyards, now
known as Belle Provenance, (53 acres) located near Salem to manage and obtain
the supply of grapes from Belle Provenance Vineyards. In 2005, the Company
informed Belle Provenance Vineyards that the Company will terminate the
current lease at the end of the initial 10-year term, after the 2006 harvest.
Wine Quality
The quality of the Company's wines continues to attract national attention.
Winery Founder and President Jim Bernau attributes much of the record sales to
a national interest in the variety Pinot Noir resulting from the movie
"Sideways". The winery staff conducted a national essay contest promoted
through its distributors, retailers and website where contestants submitted
short essays entitled "Why I Love Oregon Pinot Noir" to win their own
"Sideways" trip to Oregon Wine Country. The "$40 a Day" Food Network show
featuring chef Rachael Ray's visit to the winery aired a number of times in
2005, increasing wine consumer awareness of Willamette Valley Vineyards wines
as did the nationally broadcast cellar visit of Public Broadcasting's "Caprial
and John's Kitchen". Results in the fourth quarter of 2005 were influenced by
our Willamette Valley Vineyards Pinot Noir being included in Wine.com's
national holiday promotion as well as East Coast wine retailer Stew Leonard's
holiday catalog. Also in the fourth quarter of 2005, Consumer Reports
magazine listed our Pinot Gris as a "Best Buy" in its holiday catalog and The
San Francisco Chronicle named this wine among its Top 100 for the year.
Sales
Finished wine revenues increased 30% in the year ended December 31, 2005 as
compared to the previous year. Unit sales (6 and 12 bottle cases) increased
30% from the previous year. Case sales from the Winery increased to 110,000
cases in the year ended December 31, 2005 from 84,449 cases in 2004 for
product produced by the Company. The Company continued to experience
increased unit sales for products other than its own through Bacchus Fine
Wines, from 13,782 cases in 2004 to 27,217 cases in 2005. The Company's
distributors experienced a collective increase of 59% in sales of Company
products to their retail customers in 2005.
Wine Inventory
Inventories of wines produced by the Company continued to decrease in 2005
from their peak in 2002. The Company has held wine production below sales
rates for the past several years to bring inventories into balance. The
Company believes the fixed costs per unit of production will reduce when
production volumes increase. Total finished wine inventory decreased to
134,123 cases in 2005 from 137,399 the previous year due to the sale of the
Company's products, and offset by the continued purchasing of other wines for
resale by Bacchus Fine Wines. There are many factors that will affect the
Company's successful marketing of these wines, including whether the wines
maintain their quality through the time they are sold and consumed, whether
consumers will continue to enjoy these varieties and to be willing to pay
higher prices for these wines, whether increased supply of these types of
wines from the Company and other sources will put downward pressure on prices,
as well as other factors, many of which management cannot control. In
addition, factors that affect the Company's ability to operate profitably and
implement the sales and marketing strategy may affect the successful marketing
of these wines. Management believes if these factors are successfully
addressed, the Company can profitably market these wines.
Seasonal and Quarterly Results
The Company has historically experienced and expects to continue experiencing
seasonal fluctuations in its revenues and net income. In the past, the
Company has reported a net loss during its first quarter and expects the first
quarter to be the weakest of the year, including the first quarter of 2006.
Sales volumes increase progressively beginning in the second quarter through
the fourth quarter because of consumer buying habits.
The following table sets forth certain information regarding the Company's
revenues, excluding excise taxes, from Winery operations for each of the last
eight fiscal quarters:
Fiscal 2005 Quarter Ended Fiscal 2004 Quarter Ended
(in thousands) (in thousands)
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
Tasting room and
retail sales $ 334 $ 460 $ 514 $ 535 $ 328 $ 331 $ 458 $ 482
On-site and off-site
festivals 46 2 18 8 50 12 16 10
In-state sales 1,237 1,789 1,751 2,298 902 1,171 1,283 1,783
Bulk/Grape sales 90 12 9 10 9 7 10 21
Out-of-state
sales 722 1,311 1,458 1,446 597 650 635 896
Total winery
revenues $2,429 $3,574 $3,750 $4,297 $1,886 $2,171 $2,402 $3,192
Period-to-Period Comparisons
Revenue. The following table sets forth, for the periods indicated, select
revenue data from Company operations:
Year Ended December 31
(in thousands)
2005 2004
Tasting room and retail sales $ 1,843 $ 1,599
On-site and off-site festivals 74 88
In-state sales 7,075 5,139
Bulk /Grape Sales 121 47
Out-of-state sales 4,937 2,778
Revenues from winery operations $14,050 $ 9,651
Less Excise Taxes 382 264
Net Revenue $13,668 $ 9,387
2005 Compared to 2004
Tasting room and retail sales for the year ended December 31, 2005 increased
$243,403, or 15%, as compared to the corresponding prior year period. Tasting
room sales increased during the year ended December 31, 2005, due primarily to
increased customer traffic flows at the Company's winery tasting room, a 13%
increase in purchases in the tasting room and a 36% increase in key customer
phone sales. The focus on customers for life through telephone, mail order
and retail sales will continue with the goal of expanding the customer base
and continuing the trend of increasing revenue generation by the retail
department. The Company experienced a decrease in revenue during 2005 in
on-site and off-site festivals revenue of 16%, or $13,763 as compared to the
same period in 2004. This decrease is due primarily to the continuing focus
away from on-site and off-site events, and towards telephone, mail order and
retail sales.
Sales in the state of Oregon, through the Company's independent sales force
and through direct sales from the winery increased $1,936,110, or 38%, in the
year ended December 31, 2005, as compared to the corresponding prior year
period. Sales through the Company's independent sales force alone for the year
ended December 31, 2005 increased $1,605,925, or 38%, as compared to the prior
year period. The Company's direct instate sales to its largest customer
increased $311,931, or 42%, in the year ended December 31, 2005, as compared
to the prior year period. These increases are largely the result of the
broader product lines presented and increased product placements through the
development of Bacchus Fine Wines.
Out-of-state sales in the year ended December 31, 2005 increased $2,158,981,
or 78%, as compared to the prior year period. The increased sales are
primarily a result of promotional allowances offered to distributors by the
Company that are resulting in increased depletions by the Company's
distributors. Depletions of wine through the Company's distributors to their
customers increased in the year ended December 31, 2005 by 58%, to 47,783
cases, from 30,227 cases in the prior year period. The Pinot Noir variety led
sales in 2005.
The Company pays alcohol excise taxes to both the Oregon Liquor Control
Commission and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax
and Trade Bureau. These taxes are based on product sales volumes. The
Company is liable for the taxes upon the removal of product from the Company's
warehouse on a per gallon basis. The Company also pays taxes on the grape
harvest on a per ton basis to the Oregon Liquor Control Commission for the
Oregon Wine Board. The Company's excise taxes for the year ended December 31,
2005 increased 45% as compared to the prior year period. This was due
primarily to the increased sales in the year ended December 31, 2005 as
compared to the prior year period, thereby increasing overall sales volumes
and taxes calculated based on volume. Sales data in the discussion above is
quoted before the exclusion of excise taxes.
As a percentage of net revenue, gross profit decreased to 47% in the year
ended December 31, 2005, from 49% in the prior year period. While the Company
is continuing its focus on improved distribution of higher margin products as
well as continuing to reduce grape and production costs, we anticipate that
our increased representation of brands other than our own through our Oregon
sales force will further erode the gross margins due to the lower margins
associated with selling those brands. While the gross margin may erode due to
such representation, the Company does not anticipate that net income will
follow that trend.
Amortization of vineyard development costs is included in capitalized crop
costs that, in turn, are included in inventory costs and ultimately become a
component of cost of goods sold. For the years ending December 31, 2005 and
2004, approximately $79,000 and $77,000, respectively, were amortized into
inventory costs.
Selling, general and administrative expenses for the year ended December 31,
2005 increased 23% compared to the prior year period. This increase is due
primarily to higher fixed Oregon wholesale sales and delivery costs and
increased shipping and fuel costs. As a percentage of net revenue from winery
operations, however, selling, general and administrative expenses decreased to
32% for the year ended December 31, 2005, as compared to 38% for the prior
year period, primarily as a result of increased revenues.
The Company's other income (expense) is summarized as follows:
Year Ended December 31
2005 2004
__________ __________
Miscellaneous rebates $ - $ 44
Gain on Tualatin
land sale - 76,003
Farm Credit interest
rebate 17,336 14,504
Insurance settlement for
Vehicle loss $ - $ 7,296
__________ __________
Other income
(expense) $ 17,336 $ 97,847
Interest expense decreased 23% or $71,105 in the year ended December31, 2005
as compared to the prior year period. Interest costs were lower primarily due
to less debt outstanding during the period.
The provision for income taxes and the Company's effective tax rate were
$628,261 and 35% of pre-tax income in the year ended December 31, 2005 with
$345,476 or 43% of pre-tax income recorded for the prior year period.
As a result of the above factors, net income increased to $1,156,939 in the
year ended December 31, 2005 from $463,682 for the prior year period. Earnings
per share were $0.26 and $0.10, in the years ended December 31, 2005 and 2004,
respectively.
Liquidity and Capital Resources
At December 31, 2005, the Company had a working capital balance of $6.8
million and a current ratio of 4.00:1. At December 31, 2004, the Company had
a working capital balance of $6.4 million and a current ratio of 2.87:1. The
Company had a cash balance of $415,591 at December 31, 2005 compared to a cash
balance of $851,492 at December 31, 2004. The decrease in cash was primarily
due to the reduction in the Company's line of credit and distributor
obligation.
Total cash provided by operating activities in the year ended December 31,
2005 was $2,570,841, compared to $644,569 for the prior year period, primarily
as a result of an increase in net income, which was substantially attributable
to the conversion of inventory to cash through sales in the year ended
December 31, 2005 compared to the prior year period.
Total cash used in investing activities in the year ended December 31, 2005
was $371,073, compared to $244,590 in the prior year period. Cash used in
investing activities consisted of property and equipment additions and
vineyard development costs.
Total cash used in financing activities in the year ended December 31, 2005
was $2,635,669, compared to $251,348 in the prior year period. Cash used in
financing activities primarily consisted of payments on the long term debt,
the line of credit, and the distributor obligation.
At December 31, 2005, the line of credit balance was $0, on a maximum
borrowing amount of $2,000,000. The Company has a loan agreement with Umpqua
Bank that contains, among other things, certain restrictive financial covenants
with respect to total equity, debt-to-equity and debt coverage, that must be
maintained by the Company on a quarterly basis. As of December 31, 2005, the
Company was in compliance with all of the financial covenants.
As of December 31, 2005, the Company had a total long-term debt balance of
$2,269,865 owed to Farm Credit Services. The debt with Farm Credit Services
was used to finance the Hospitality Center, invest in winery equipment to
increase the Company's winemaking capacity, complete the storage facility, and
purchase Tualatin Vineyards. In August of 2005, the Company signed a new
business loan agreement with Umpqua Bank to borrow $1,500,000 to pay-off the
distributor obligation. As of December 31, 2005, the Company had repaid the
entire principle balance of the Umpqua agreement, leaving no outstanding
balance included in the long-term debt balance.
The Company believes that cash flow from operations and funds available under
its existing credit facilities will be sufficient to meet the Company's
foreseeable short and long term needs.
The Company's contractual obligations as of December 31, 2005 including long-
term debt, grape payables and commitments for future payments under non-
cancelable lease arrangements are summarized below:
Payments Due by Period
__________________________________________________________
Total Less than 1-3 years 4-5 years After 5
1 year years
__________ __________ __________ __________ __________
Long-term debt and
capital lease
obligations $ 2,269,865 $ 283,334 $ 637,724 $ 745,752 $ 603,055
Grape Payables 471,873 275,772 128,034 68,067 -
Operating Leases 2,745,404 218,992 336,569 367,785 1,822,058
__________ __________ __________ __________ __________
Total Contractual
Obligations $ 5,487,142 $ 778,098 $ 1,102,327 $ 1,181,604 $ 2,425,113
========== ========== ========== ========== ==========
Risk Factors
The following disclosures should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations.
These disclosures are intended to discuss certain material risks of the
Company's business as they appear to Management at this time. However, this
list is not exhaustive. Other risks may, and likely will, arise from time to
time.
Agricultural Risks Could Adversely Affect Our Business
Winemaking and grape growing are subject to a variety of agricultural risks.
Various diseases, pests, fungi, viruses, drought, frost and certain other
weather conditions can affect the quantity of grapes available to the Company,
decreasing the supply of the Company's products and negatively impacting
profitability. In particular, certain of the Company's vines are not
resistant to phylloxera; accordingly, those vines are particularly at risk to
the effects from an infestation of phylloxera.
We May Not Be Able to Grow or Acquire Enough Quality Fruit for Our Wines
The adequacy of our grape supply is influenced by consumer demand for wine in
relation to industry-wide production levels. While we believe that we can
secure sufficient supplies of grapes from a combination of our own production
and from grape supply contracts with independent growers, we cannot be certain
that grape supply shortages will not occur. A shortage in the supply of wine
grapes could result in an increase in the price of some or all grape varieties
and a corresponding increase in our wine production costs.
Loss of Key Employees Could Harm Our Reputation and Business
Our success depends to some degree upon the continued service of a number of
key employees. The loss of the services of one or more of our key employees,
including the President, Winemaker, Controller and the Bacchus General Manager,
could harm our business and our reputation and negatively impact our
profitability.
Adverse Public Opinion Regarding Our Bacchus Portfolio May Harm Our Business
The Company has invested heavily in products for resale through our Bacchus
Fine Wines department. The Company believes that having these products for
sale will make it easier to sell additional Company product to the same buyers.
If this strategy proves to be unsuccessful, the Company will have substantial
inventory of non-Company products to sell at prices that may not cover our
costs of such inventory and may result in our selling less Company product
than anticipated. Either or both effects could adversely affect our
profitability and shareholder value.
The Company's Ability to Operate Requires Utilization of the Line of Credit
The Company's cash flow from operations historically has not been sufficient
to provide all funds necessary for the Company's Operations. The Company has
entered into a line of credit agreement to provide such funds and entered into
a term loan arrangement, the proceeds of which were used to acquire the
Tualatin operations and to construct the Hospitality Center. There is no
assurance that the Company will be able to comply with all conditions under
its credit facilities in the future or that the amount available under the
line of credit facility will be adequate for the Company's future needs.
Failure to comply with all conditions of the credit facilities or to have
sufficient funds for operations could adversely affect the Company's results
of operations and shareholder value.
Costs of being a publicly-held company may put us at a competitive
disadvantage
As a public company, we incur substantial costs that are not incurred by our
competitors that are privately-held. These compliance costs may result in
our wines being more expensive than those produced by our competitors and/or
may reduce our profitability compared to such competitors.
ITEM 7. FINANCIAL STATEMENTS.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Willamette Valley Vineyards, Inc.
We have audited the accompanying balance sheet of Willamette Valley Vineyards,
Inc., as of December 31, 2005, and the related statements of operations,
shareholders' equity, and cash flows for the two years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Willamette Valley Vineyards,
Inc., as of December 31, 2005, and the results of its operations and cash
flows for the two years then ended, in conformity with accounting principles
generally accepted in the United States of America.
/s/ Moss Adams LLP
Santa Rosa, California
March 29, 2006
Willamette Valley Vineyards, Inc.
Balance Sheet
December 31,
2005
ASSETS
Current assets:
Cash and cash equivalents $ 415,591
Accounts receivable, net (Note 2) 1,568,255
Inventories (Note 3) 6,950,993
Prepaid expenses and other current assets 22,561
Deferred income taxes (Note 9) 91,000
-----------
Total current assets 9,048,400
Vineyard development costs, net 1,526,073
Property and equipment, net (Note 4) 4,037,160
Debt issuance costs 35,410
Other assets 80,071
-----------
$ 14,727,114
___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 5) $ -
Current portion of long-term debt (Note 6) 283,334
Accounts payable 811,141
Accrued expenses 348,169
Income taxes payable 344,987
Grape payables 471,873
-----------
Total current liabilities 2,259,504
Long-term debt (Note 6) 1,986,531
Distributor obligation (Note 12) -
Deferred rent liability 164,771
Deferred gain (Note 11) 442,214
Deferred income taxes (Note 9) 148,000
-----------
Total liabilities 5,001,020
-----------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 7 and 8):
Common stock, no par value - 10,000,000
shares authorized, 4,660,202 issued and
outstanding at December 31, 2005 7,613,222
Retained earnings 2,112,872
-----------
Total shareholders' equity 9,726,094
-----------
$ 14,727,114
___________
The accompanying notes are an integral part of the financial statements.
Willamette Valley Vineyards, Inc.
Statements of Operations
For the Years Ended December 31, 2005 and 2004
2005 2004
Net revenues $13,667,869 $ 9,387,141
Cost of goods sold 7,282,112 4,806,326
------------ ------------
Gross margin 6,385,757 4,580,815
Selling, general and
administrative expenses 4,385,354 3,569,296
------------ ------------
Income from operations 2,000,403 1,011,519
------------ ------------
Other income (expenses):
Interest income 1,197 4,633
Interest expense (233,736) (304,841)
Other income 17,336 97,847
------------ ------------
(215,203) (202,361)
------------ ------------
Income before income taxes 1,785,200 809,158
Income tax provision (Note 9) 628,261 345,476
------------ ------------
Net income $ 1,156,939 $ 463,682
____________ ____________
Basic net income
per common share $ 0.26 $ 0.10
____________ ____________
Diluted net income
per common share $ 0.25 $ 0.10
____________ ____________
The accompanying notes are an integral part of the financial statements.
Willamette Valley Vineyards, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 2005 and 2004
Common stock Retained
Shares Dollars earnings Total
----------- ------------ ----------- -----------
Balances at December 31, 2003 4,479,478 7,167,589 492,251 7,659,840
Stock issuance for compensation 5,300 12,190 - 12,190
Common stock issued and
options exercised 1,500 2,550 - 2,550
Net income - - 463,682 463,682
----------- ------------ ----------- -----------
Balances at December 31, 2004 4,486,278 $ 7,182,329 $ 955,933 $ 8,138,262
Stock issuance for compensation 2,725 9,610 - 9,610
Common stock issued and
options exercised 171,199 421,283 - 421,283
Net income - - 1,156,939 1,156,939
----------- ------------ ----------- -----------
Balances at December 31, 2005 4,660,202 $ 7,613,222 $2,112,872 $ 9,726,094
___________ ____________ ___________ ___________
The accompanying notes are an integral part of the financial statements.
Willamette Valley Vineyards, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2005 and 2004
2005 2004
Cash flows from operating activities:
Net income $1,156,939 $ 463,682
Reconciliation of net income
to net cash (used for) provided by
operating activities:
Depreciation and amortization 556,487 636,889
Gain on disposal of fixed assets - (81,401)
Loss on disposal of vines - 31,063
Deferred income taxes (46,574) (17,388)
Bad debt expense 16,066 -
Stock issued for compensation 9,610 12,190
Changes in assets and liabilities:
Accounts receivable (675,811) (111,674)
Inventories 1,448,344 (511,545)
Prepaid expenses and
other current assets 30,498 (6,494)
Note receivable 5,000 61,134
Other assets 2,244 (28,803)
Accounts payable 300,338 (241,416)
Accrued expenses (178,691) 55,419
Income taxes receivable/payable 66,017 362,881
Grape payables (120,517) (77,324)
Deferred rent liability 32,986 22,790
Deferred gain (32,095) 74,566
------------ ------------
Net cash provided by
operating activities 2,570,841 644,569
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (248,030) (292,510)
Vineyard development expenditures (123,043) (102,532)
Proceeds on sale of fixed assets - 693,632
------------ ------------
Net cash provided by (used for)
investing activities (371,073) 244,590
------------ ------------
Cash flows from financing activities:
Debt issuance costs (4,622) (2,178)
Net increase (decrease) in line of
credit balance (1,232,251) 101,735
Proceeds from and stock
options exercised 421,283 2,550
Repayments of distributor obligation (1,500,000) -
Issuance of long-term debt 1,500,000 28,923
Repayments of long-term debt (1,820,079) (382,378)
------------ ------------
Net cash used for
financing activities (2,635,669) (251,348)
------------ ------------
Net (decrease) increase in cash
and cash equivalents (435,901) 637,811
Cash and cash equivalents:
Beginning of year 851,492 213,681
------------ ------------
End of year $ 415,591 $ 851,492
____________ ____________
The accompanying notes are an integral part of the financial statements.
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
1. Summary of Operations, Basis of Presentation and Significant
Accounting Policies
Organization and Operations
Willamette Valley Vineyards, Inc. (the "Company") owns and operates vineyards
and a winery located in the state of Oregon, and produces and distributes
premium, super premium, and ultra premium wines, primarily Pinot Noir, Pinot
Gris, Chardonnay, and Riesling. In 2005 and 2004 no one customer represented
more than 10% of revenues. Sales in Oregon through the Company's independent
sales force and through direct sales from the winery represented approximately
50% and 53% respectively, of revenues for 2005 and 2004. Out-of-state sales
represented approximately 35% and 29% respectively, of revenues for 2005 and
2004. Foreign sales represent less than 1% of total sales. The Company also
sells its wine through the tasting room at its winery.
Basis of Presentation
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America,
which require management to make certain estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. The Company bases its estimates on historical
experience and on various assumptions that are believed to be reasonable under
the circumstances at the time. Actual results could differ from those
estimates under different assumptions or conditions.
Segment Reporting
The Company has a single operating segment consisting of the retail, instate
self-distribution and out of state sales departments. These departments have
similar economic characteristics, offer the same products to customers,
utilize the same production facilities and processes and have similar customer
types and distribution methods.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value:
Cash and Cash Equivalents, Accounts Receivables, Prepaid Expenses and
Other Current Assets, Accounts Payable, Accrued Expenses and Other Current
Liabilities
The carrying amounts of these items are a reasonable estimate of their fair
values.
Concentration of risk
Cash and cash equivalents are maintained with several financial institutions.
Deposits held with banks may exceed the amount of insurance provided on such
deposits. Generally, these deposits may be redeemed upon demand and are
maintained with financial institutions of reputable credit and therefore bear
minimal credit risk.
Financial instruments that potentially subject the Company to credit risk are
accounts receivable. The Company performs ongoing credit evaluations of its
customers and does not require collateral. A reserve is maintained for
potential credit losses. The allowance for doubtful accounts is based on an
assessment of the collectibility of customer accounts. The Company regularly
reviews the allowance by considering factors such as historical experience,
credit quality, the age of the accounts receivable balances, and current
economic conditions that may affect a customer's ability to pay.
Line of Credit
Borrowings under the line of credit arrangement have variable interest rates
that reflect currently available terms and conditions for similar debt. The
carrying amount of this debt is a reasonable estimate of its fair value.
Long-Term Debt
The fair value of the Company's long-term debt, including the current portion
thereof, is estimated based on the present value method using AA rates
provided by Farm Credit Services for the Northwest Farm Credit Services debt
and estimated current rates for similar borrowing arrangements for all other
long term debt. The carrying value and estimated fair value of long term debt,
including current portion is as follows:
Carrying Fair
Value Value
__________ __________
Northwest Farm
Credit Services $ 2,269,865 $ 2,301,546
Other Comprehensive Income
The nature of the Company's business and related transactions do not give rise
to other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with an
original maturity of less than 90 days.
Inventories
After a portion of the vineyard becomes commercially productive, the annual
crop and production costs relating to such portion are recognized as work-in-
process inventories. Such costs are accumulated with related direct and
indirect harvest, wine processing and production costs, and are transferred to
finished goods inventories when the wine is produced, bottled, and ready for
sale. The cost of finished goods is recognized as cost of sales when the wine
product is sold. Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market by variety. In accordance with general practices in
the wine industry, wine inventories are generally included in current assets
in the accompanying balance sheet, although a portion of such inventories may
be aged for more than one year (Note 3).
Vineyard Development Costs
Vineyard development costs consist primarily of the costs of the vines and
expenditures related to labor and materials to prepare the land and construct
vine trellises. The costs are capitalized until the vineyard becomes
commercially productive, at which time annual amortization is recognized using
the straight-line method over the estimated economic useful life of the
vineyard, which is estimated to be 30 years. Accumulated amortization of
vineyard development costs aggregated $566,591 and $487,273 at December 31,
2005 and 2004, respectively.
Amortization of vineyard development costs are included in capitalized crop
costs that in turn are included in inventory costs and ultimately become a
component of cost of goods sold. For the years ending December 31, 2005 and
2004 approximately $79,000 and $77,000 respectively, were amortized into
inventory costs.
Property and Equipment
Property and equipment are stated at cost or the historical cost basis of the
contributing shareholders, as applicable, and are depreciated on the straight-
line basis over their estimated useful lives as follows:
Land improvements 15 years
Winery building 30 years
Equipment 5-7 years
Expenditures for repairs and maintenance are charged to operating expense as
incurred. Expenditures for additions and betterments are capitalized. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation are removed from the accounts, and any resulting gain or loss is
included in operations. The Company reviews the carrying value of investments
for impairment whenever events or changes in circumstances indicate the
carrying amounts may not be recoverable.
Debt Issuance Costs
Debt issuance costs are amortized on the straight-line basis, which
approximates the effective interest method, over the life of the debt. For
the years ended December 31, 2005 and 2004, amortization of debt issuance
costs was approximately $12,000 and $22,000 respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability approach
whereby deferred income taxes are calculated for the expected future tax
consequences of temporary differences between the book basis and tax basis of
the Company's assets and liabilities.
Deferred Rent Liability
The Company leases land under a sale-leaseback agreement. The long-term
operating lease has minimum lease payments that escalate every year. For
accounting purposes, rent expense is recognized on the straight-line basis by
dividing the total minimum rents due during the lease by the number of months
in the lease. In the early years of a lease with escalation clauses, this
treatment results in rental expense recognition in excess of rents paid, and
the creation of a long-term deferred rent liability. As the lease matures,
the deferred rent liability will decrease and the rental expense recognized
will be less than the rents actually paid. For the period ended December 31,
2005 and 2004, rent costs recognized in excess of amounts paid totaled $32,985
and $22,790, respectively.
Revenue Recognition
The Company recognizes revenue when the product is shipped and title passes to
the customer. The Company's standard terms are 'FOB' shipping point, with no
customer acceptance provisions. The cost of price promotions and rebates are
treated as reductions of revenues. No products are sold on consignment.
Credit sales are recorded as trade accounts receivable and no collateral is
required. Revenue from items sold through the Company's retail locations is
recognized at the time of sale. The Company has established an allowance for
doubtful accounts based upon factors pertaining to the credit risk of specific
customers, historical trends, and other information. Delinquent accounts are
written-off when it is determined that the amounts are uncollectible.
Cost of Goods Sold
Costs of goods sold include costs associated with grape growing, external
grape costs, packaging materials, winemaking and production costs, vineyard
and production administrative support and overhead costs, purchasing and
receiving costs and warehousing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of non-
manufacturing administrative and overhead costs, advertising and other
marketing promotions. Advertising costs are expensed as incurred or the first
time the advertising takes place. For the years ended December 31, 2005 and
2004, advertising costs incurred were approximately $23,000 and $19,500
respectively.
The Company provides an allowance to distributors for providing sample of
products to potential customers. For the years ended December 31, 2005 and
2004, these costs, which are included in selling, general and administrative
expenses, totaled approximately $64,000 and $43,000 respectively.
Shipping and Handling Costs
Amounts paid by customers to the Company for shipping and handling costs are
included in the net revenue. Costs incurred for shipping and handling charges
are included in selling, general and administrative expense. For the years
ended December 31, 2005 and 2004, such costs totaled approximately $416,000
and $269,000 respectively. The Company's gross margins may not be comparable
to other companies in the same industry as other companies may include
shipping and handling costs as a cost of goods sold.
Excise Taxes
The Company pays alcohol excise taxes based on product sales to both the
Oregon Liquor Control Commission and to the U.S. Department of the Treasury,
Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the taxes
upon the removal of product from the Company's warehouse on a per gallon basis.
The federal tax rate is affected by a small winery tax credit provision which
declines based upon the number of gallons of wine production in a year rather
than the quantity sold. The Company also pays taxes on the grape harvest on a
per ton basis to the Oregon Liquor Control Commission for the Oregon Wine
Advisory. For the years ended December 31, 2005 and 2004, excise taxes
incurred were approximately $382,000 and $264,000 respectively.
Stock Based Compensation
The Company accounts for the employee and director stock options in accordance
with provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Pro forma disclosures as required
under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock Based Compensation, and as amended by SFAS No. 148, Accounting for
Stock Based Compensation - Transition and Disclosure, are presented below
(Note 8).
Had compensation cost for the Company's stock option plans been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123, the Company's net earnings would have been reduced
to the pro forma amounts indicated as follows for the year ended December 31
(Note 8 for certain assumptions with respect to this computation):
2005 2004
Net income, as reported $ 1,156,939 $ 463,682
Add: Stock-based compensation expense
included in reported net income,
net of tax 7,314
Deduct: Total stock-based employee
compensation expense under fair value
based method for all awards,
net of tax (675,854) (45,771)
------------ ------------
Pro Forma net income (loss) $ 481,085 $ 425,225
____________ ____________
Earnings per share:
Basic - as reported $ 0.26 $ 0.10
Basic - pro forma 0.11 0.09
Diluted - as reported 0.25 0.10
Diluted - pro forma 0.10 0.09
On December 16, 2005, the FASB finalized FAS 123R "Share-Based Payment," which
will be effective for the first interim or annual reporting periods beginning
after December 15, 2005. The new standard will require the Company to record
compensation expense for stock options using a fair value method. On
March 29, 2005, the SEC issued SAB 107, which provides the Staff's views
regarding interactions between FAS 123R and certain SEC rules and regulations
and provides interpretations of the valuation of share-based payments for
public companies.
The Company is currently evaluating FAS 123R and SAB 107 to determine the fair
value method to measure compensation expense, the appropriate assumptions to
include in the fair value model, the transition method to use upon adoption
and the period in which to adopt the provisions of FAS 123R. The impact of
the adoption of FAS 123R cannot be reasonably estimated at this time due to
the factors discussed above as well as the unknown level of share-based
payments granted in future years. The effect of expensing stock options on
the Company's results of operations using the Black-Scholes model is presented
in the table above.
On December 12, 2005 the Board of Directors of Willamette Valley Vineyards,
Inc. approved the accelerated vesting (the "Acceleration") of unvested stock
options to purchase 130,750 shares of common stock previously granted to
employees and officers under the Company's 1992 Stock Incentive Plan and 2002
Stock Option Plan with exercise prices of $1.46-$4.98 per share. The
Acceleration was effective December 23, 2005, and the exercise prices of all
the options vested were not changed. The Acceleration resulted in an increase
in stock-based compensation expense net of tax of approximately $114,897 in
2005 and a reduction in future stock-based compensation expense and
administrative costs associated with complying with SFAS No. 123R.
Basic and Diluted Net Income per Share
Basic earnings per share are computed based on the weighted-average number of
common shares outstanding each year. Diluted earnings per share are computed
using the weighted average number of shares of common stock and potentially
dilutive securities assumed to be outstanding during the year. Potentially
dilutive shares from stock options and other common stock equivalents are
excluded from the computation when their effect is antidilutive.
Options to purchase 609,500 shares of common stock were outstanding at
December 31, 2005 and diluted weighted-average shares outstanding at
December 31, 2005 include the effect of 116,150 stock options. Options to
purchase 284,200 shares of common stock were outstanding at December 31, 2004
and diluted weighted-average shares outstanding at December 31, 2004 include
the effect of 59,823 stock options. In addition, the warrant outstanding
since 1992 was included in the computation of diluted earnings per share in
2005, but not included in 2004 because the exercise price of $3.42 was greater
than the average market price of the common shares during 2004.
2005 2004
Weighted Weighted
average Earnings average Earnings
shares per shares per
Income outstanding share Income outstanding share
Basic $1,156,939 4,518,827 0.26 $ 463,682 4,485,136 0.10
Options - 116,150 - - 59,823 -
Warrant - 15,000 - - - -
---------- --------- ------ ---------- --------- ------
Diluted $1,156,939 4,649,977 $0.26 $ 463,682 4,544,959 $0.10
========== ========= ====== ========== ========= ======
Statement of cash flows
Supplemental disclosure of cash flow information:
2005 2004
Interest paid $ 234,000 $ 305,000
Supplemental schedule of noncash
investing and financing activities:
Capital leases - 17,327
Issuance of common stock(Note 7) 9,610 12,190
Liquidity
The Company's ability to fund operations requires utilization of amounts
available pursuant to a line of credit agreement as further discussed in
Note 5. There was $0 outstanding on the line of credit with Umpqua Bank as of
December 31, 2005. Management believes existing cash and cash flow from
operations, combined with the amounts available under the line of credit
facility will be sufficient to satisfy all debt service obligations and fund
the Company's operating needs and capital expenditures for the foreseeable
future.
2. Accounts Receivable
Oregon law prohibits the sale of wine in Oregon on credit; therefore, the
Company's accounts receivable balances are the result of sales to out-of-state
and foreign distributors. At December 31, 2005 the Company's accounts
receivable balance is net of an allowance for doubtful accounts of $57,951.
Changes in the allowance for doubtful accounts are as follows:
Balance at Charged to Charged to Write-offs Balance at
Beginning costs and other net of end of
Of period expenses accounts recoveries period
__________ __________ __________ __________ __________
Fiscal year ended December 31, 2004:
Allowance for
Doubtful accounts $ 41,885 $ - $ - $ - $ 41,885
========== ========== ========== ========== ==========
Fiscal year ended December 31, 2005:
Allowance for
Doubtful accounts $ 41,885 $ 16,066 $ - $ - $ 57,951
========== ========== ========== ========== ==========
3. Inventories
Inventories consist of:
Winemaking and packaging materials $ 223,389
Work-in-process (costs relating to unprocessed
and/or unbottled wine products) 1,790,472
Finished goods (bottled wine
and related products) 4,937,132
-----------
Current inventories $ 6,950,993
___________
4. Property and Equipment
Land and improvements $ 769,644
Winery building and hospitality center 4,707,802
Equipment 3,975,652
-----------
9,453,098
Less accumulated depreciation (5,415,938)
-----------
$ 4,037,160
___________
5. Line of Credit Facility
In December of 2005 the Company entered into a revolving line of credit
agreement with Umpqua Bank that allows borrowings of up to $2,000,000 against
eligible accounts receivables and inventories as defined in the agreement.
The revolving line bears interest at prime and is payable monthly. The
interest rate was 7.25% at December 31, 2005. At December 31, 2005 there were
borrowings of $0 on the revolving line of credit.
The weighted-average interest rate on the aforementioned borrowings for the
fiscal years ended December 31, are as follows:
2005 5.75%
2004 5.55%
The line of credit agreement includes various covenants, which among other
things, requires the Company to maintain minimum amounts of tangible net
worth, debt-to-equity, and debt service coverage as defined, and limits the
level of acquisitions of property and equipment. As of December 31, 2005, the
Company was in compliance with these covenants.
Umpqua Bank Capital borrowings are collateralized by the bulk and case goods
inventory and the proceeds from the sales thereof.
6. Long-Term Debt
Long-term debt consists of:
2005
Northwest Farm Credit Services Loan $ 2,269,865
-----------
2,269,865
Less current portion (283,334)
-----------
$ 1,986,531
___________
The Company has an agreement with Northwest Farm Credit Services containing
two separate notes bearing interest at a rate of 7.85%, which are
collateralized by real estate and equipment. These notes require monthly
payments ranging from $7,687 to $30,102 until the notes are fully repaid in
2014. The loan agreement contains covenants, which require the Company to
maintain certain financial ratios and balances. At December 31, 2005, the
Company was in compliance with these covenants. In the event of future
noncompliance with the Company's debt covenants, Northwest Farm Credit
Services ("FCS") would have the right to declare the Company in default, and
at FCS' option without notice or demand, the unpaid principal balance of the
loan, plus all accrued unpaid interest thereon and all other amounts due shall
immediately become due and payable.
Future minimum principal payments of long-term debt mature as follows:
Year ending
December 31,
2006 $ 283,334
2007 306,393
2008 331,331
2009 358,394
2010 387,358
Thereafter 603,055
-----------
$ 2,269,865
___________
7. Shareholders' Equity
The Company is authorized to issue 10,000,000 shares of its common stock.
Each share of common stock is entitled to one vote. At its discretion, the
Board of Directors may declare dividends on shares of common stock, although
the Board does not anticipate paying dividends in the foreseeable future.
On June 1, 1992, the Company granted its president a warrant to purchase
15,000 shares of common stock as consideration for his personal guarantee of
the real estate loans and the line of credit with Northwest Farm Credit
Services (Notes 6 and 8). The warrant is exercisable through June 1, 2012 at
an exercise price of $3.42 per share. As of December 31, 2005, no warrants
had been exercised.
In each of the years ended December 31, 2005 and 2004, the Company granted
2,725 and 5,300 shares of stock valued at $9,610 and $12,190, respectively, as
compensation to employees. The cost of these grants was capitalized as
inventory or included in selling, general and administrative expenses in the
statement of operations. The effects of these noncash transactions have been
excluded from the cash flow statements in each period.
8. Stock Incentive Plan
900,000 Shares of common stock have been reserved for issuance to employees and
directors of the Company under a stock incentive plan. 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 of Directors. Options are generally granted based on employee
performance with vesting periods ranging from date of grant to seven years.
The maximum term before expiration for all grants is ten years. As of
December 31, 2005, there are approximately 107,801 shares available for future
issuance under this plan.
At December 31, 2005 and 2004, the following transactions related to stock
options occurred:
2005 2004
_______________ _________________
Weighted Weighted
average average
exercise exercise
Shares price Shares price
Outstanding at
beginning of year 284,200 $ 1.90 288,600 $ 1.69
Granted 496,500 4.15 84,000 2.31
Exercised (171,199) 2.46 (1,500) 1.70
Forfeited (1) 3.00 (86,900) 1.77
-------- --------
Outstanding at
end of year 609,500 $ 3.57 284,200 $ 1.90
________ ________
Weighted-average options outstanding and exercisable at December 31, 2005
are as follows:
Options outstanding Options exercisable
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Exercise December 31, contractual exercise December 31, exercise
price 2005 life price 2005 price
$ 1.46 8,000 7.09 $ 1.46 8,000 $ 1.46
1.50 9,300 2.03 1.50 9,300 1.50
1.56 42,000 4.58 1.56 42,000 1.56
1.69 6,500 4.66 1.69 6,500 1.69
1.75 38,000 2.17 1.75 38,000 1.75
1.81 3,000 3.24 1.81 3,000 1.81
2.30 60,000 8.58 2.30 26,400 2.30
2.31 20,000 8.40 2.31 20,000 2.31
2.75 1,000 0.48 2.75 1,000 2.75
2.99 24,000 9.12 2.99 24,000 2.99
3.00 200 0.06 3.00 200 3.00
3.29 79,000 4.12 3.29 79,000 3.29
3.76 111,500 9.58 3.76 100,200 3.76
4.14 4,000 4.58 4.14 4,000 4.14
4.98 25,000 9.76 4.98 6,500 4.98
5.00 114,000 9.99 5.00 114,000 5.00
5.50 64,000 4.99 5.50 64,000 5.50
------ --------- ------ ------ -------- ------
$ 1.46-$5.50 609,500 7.01 $ 3.57 546,100 $ 3.60
The Company adopted SFAS No. 123 in 1996 and has elected to account for its
stock-based compensation under Accounting Principles Board Opinion 25. As
required by SFAS No. 123, the Company has computed for pro forma disclosure
purposes (Note 1) the value of options granted during each of the two years
ended December 31 using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for the grants in 2005 and 2004:
2005 2004
Risk-free interest rate 4.26 % 4.83 %
Expected lives 10 years 10 years
Expected volatility 45 % 50 %
Adjustments are made for options forfeited prior to vesting. For the years
ended December 31, 2005 and 2004, the total value of the options granted was
computed to be approximately $1,356,068 and $129,615, respectively, which
would be amortized on the straight-line basis over the vesting period of the
options.
For the years ended December 31, 2005 and 2004, the weighted average fair
value of options granted was computed to be $2.73 and $1.54, respectively.
9. Income Taxes
The provision for income taxes consists of:
2005 2004
Current tax expense:
Federal $591,247 $299,963
State 83,588 68,472
------------ ------------
674,835 368,435
------------ ------------
Deferred tax expense (benefit):
Federal (43,041) (20,349)
State (3,533) (2,610)
------------ ------------
(46,574) (22,959)
------------ ------------
Total $628,261 $345,476
____________ ____________
The effective income tax rate differs from the federal statutory rate as
follows:
Year ended December 31,
2005 2004
Federal statutory rate 34.0 % 34.0 %
State taxes, net of federal benefit 2.6 4.4
Permanent differences (0.5) 3.9
Other, primarily prior year taxes (0.9) 0.6
------------ ------------
35.2 % 42.9 %
____________ ____________
Permanent differences consist primarily of nondeductible meals and
entertainment and life insurance premiums.
Deferred tax assets and (liabilities) at December 31 consist of:
2005
Accounts receivable $ 22,000
Inventories 68,000
Other 1,000
-----------
Net current deferred tax asset 91,000
-----------
Depreciation (372,000)
Deferred gain on sale-leaseback 170,000
Deferred liabilities 54,000
-----------
Net noncurrent deferred tax liability (148,000)
-----------
Net deferred tax liability $ (57,000)
___________
10. Related Parties
During 2004, the Company purchased grapes from certain director/shareholders
for an aggregate price of $3,489. At December 31, 2004 grape payables
included no amounts owed to these shareholders.
The Company provides living accommodations in a manufactured home on the
Company's premises for the president and his family as additional compensation
for security and lock-up services the president provides. During the years
ended December 31, 2005 and 2004, the Company recorded $6,985 and $6,422,
respectively, in expenses related to the housing provided for its president.
11. Commitments and Contingencies
Litigation
From time to time, in the normal course of business, the Company is a party to
legal proceedings. Management believes that these matters will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows, but due to the nature of the litigation, the
ultimate outcome cannot presently be determined.
Operating Leases
The Company entered into a lease agreement for approximately 45 acres of
vineyards and related equipment in 1997. In December 1999, under a sale-
leaseback agreement, the Company sold a portion of the Tualatin Vineyards
property with a net book value of approximately $1,000,000 for approximately
$1,500,000 cash and entered into a 20-year operating lease agreement. The
gain of approximately $500,000 is being amortized over the 20-year term of
the lease. In December 2005, under a new sale-leaseback agreement, the Company
sold another portion of the Tualatin Vineyards property with a net book value
of approximately $551,000 for approximately $727,000 cash and entered into a
14-year operating lease agreement. Approximately $99,000 of the total gain of
$176,000 realized from this sale/leaseback transaction has been deferred and
will be amortized over the life of the lease agreement.
The amortization of the deferred gain totals approximately $25,000 per year for
the 1999 sale-leaseback agreement and $7,000 for the 2005 sale-leaseback
agreement, and is recorded as an offset to the related lease expense in
selling, general and administrative expenses.
As of December 31, 2005, future minimum lease payments are as follows:
Year ending
December 31,
2005 $ 218,992
2006 158,083
2007 178,486
2008 182,061
2009 185,724
Thereafter 1,822,058
-----------
Total $ 2,745,404
===========
The Company is also committed to lease payments for various office equipment.
Total rental expense for all operating leases excluding the vineyards, amounted
to $15,638 and $11,915 in 2005 and 2004, respectively. In addition, payments
for the leased vineyards have been included in inventory or vineyard
developments costs and aggregate approximately $215,436 for the year ended
December 31, 2005.
Susceptibility of Vineyards to Disease
The Tualatin Vineyard and the leased vineyards are known to be infested with
phylloxera, an aphid-like insect, which can destroy vines. The Company has
not detected any phylloxera at its Turner Vineyard.
It is not possible to estimate any range of loss that may be incurred due to
the phylloxera infestation of our vineyards. The phylloxera at Tualatin
Estate Vineyard is believed to have been introduced on the roots of the vines
first planted on the property in the southern most section Gewurztraminer in
1971 that the Company partially removed in 2004. The remaining vines, and all
others infested, remain productive at low crop levels.
12. Distributor Obligation
On March 8, 2006 the Company terminated an incentive distribution agreement
with a national wine distributor group (the "distributor") with fourteen
affiliated distributors. Under the agreement, the Company had agreed to pay
the distributor incentive compensation if certain sales goals were met over a
five year period. The Company terminated the agreement because the
distributors did not reach these goals in every year since the agreement's
inception. Following the termination, the Company has continued to do
business with the distributors on terms and conditions generally available to
all of the Company's distributors.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 8A. CONTROLS AND PROCEDURES.
a) We carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer, Chief Financial Officer and
other management personnel, of the effectiveness of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934 as of December 31, 2005. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of December 31, 2005 were effective to
ensure that information required to be disclosed by the Company in the reports
it files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The Company considered
these limitations during the development of it disclosure controls and
procedures, and will continually reevaluate them to ensure they provide
reasonable assurance that such controls and procedures are effective.
b) There were no changes in the Company's internal control procedures over
financial reporting that occurred during the period ended December 31, 2005
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting, except as noted above.
ITEM 8B. OTHER INFORMATION.
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors, nominees for election as a director, and each such person's age at
March 31, 2006 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,
President and Director 52
James L. Ellis * *** Secretary and Director 61
Sean M. Cary Controller 32
Thomas M. Brian Director 57
Delna L. Jones** Director 65
Lisa M. Matich** Director 43
Betty M. O'Brien* Director 62
Stan G. Turel * ** *** Director 58
_______________________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Member of the Executive Committee
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Executive officers
are appointed by the Board of Directors and serve at the pleasure of the Board
of Directors. Set forth below is additional information as to each director
and executive officer of the Company.
James W. Bernau. Mr. Bernau has been President and Chairperson of the Board
of Directors of the Company since its inception in May 1988. Willamette
Valley Vineyards was originally established as a sole proprietorship by Oregon
winegrower Jim Bernau in 1983, and he co-founded the Company in 1988 with
Salem grape grower, Donald Voorhies. From 1981 to September 1989, Mr. Bernau
was Director of the Oregon Chapter of the National Federation of Independent
Businesses ("NFIB"), an association of 15,000 independent businesses in
Oregon. Mr. Bernau has served as the President of the Oregon Winegrowers
Association and the Treasurer of the association's Political Action Committee
(PAC) and Chair of the Promotions Committee of the Oregon Wine Advisory Board,
the State of Oregon's agency dedicated to the development of the industry. In
March 2005, Mr. Bernau received the industry's Founder's Award for his service.
James L. Ellis. Mr. Ellis has served as a Director since July 1991 and
Secretary since June 1997. Mr. Ellis has served as the Company's Director of
Human Resources from January 1993, and Vice President /Corporate since 1998.
From 1990 to 1992, Mr. Ellis was a partner in Kenneth L. Fisher, Ph.D. &
Associates, a management-consulting firm. From 1980 to 1990, Mr. Ellis was
Vice President and General Manager of R.A. Kevane & Associates, a Pacific
Northwest personnel-consulting firm. From 1962 to 1979, Mr. Ellis was a
member of and administrator for the Christian Brothers of California, owner of
Mont La Salle Vineyards and producer of Christian Brothers wines and brandy.
Thomas M. Brian. Mr. Brian was appointed to the Board of Directors in June
of 2004. Mr. Brian has served as Chairman of the Washington County Board of
Commissioners since 1999. Previously, he served for 10 years in the Oregon
House of Representatives. While in the legislature, Mr. Brian was Chairman of
the Revenue Committee and served on the Judicial and Ways and Means
Committees. He also served 10 years as City Councilor and Mayor of Tigard,
OR. Mr. Brian has successfully owned and operated a commercial/industrial
real estate company for eighteen years.
Delna L. Jones. Ms. Jones has served as a Director since November 1994.
Ms. Jones resigned from the Board in December of 2002 having moved to Southern
California and was reappointed by the Board in March of 2005 having returned
to Oregon. Currently Ms. Jones is President of Delna Jones and Associates,
an independent consulting firm. Ms. Jones was elected in 1998 and served as a
County Commissioner for Washington County, Oregon from 1998 to 2000. Ms. Jones
has served as project director for the CAPITAL Center, an education and
business consortium from 1990 to 1998. From 1985 to 1990, Ms. Jones served as
Director of Economic Development with US West Communications. Beginning in
1982, she was elected six times to the Oregon House as the State
Representative for District 6. During her tenure, she served as the Assistant
Majority Leader; she also chaired the Revenue and School Finance committee,
and served on the Legislative Rules and Reorganization committee and the
Business and Consumer Affairs committee.
Lisa M. Matich. Ms. Matich was appointed to the Board of Directors in April of
2004. She is the Director of Financial Analysis of PacifiCorp, a multi-state
electric utility with over 1.5 million customers. Previously she was a
Financial Consultant with SAIC 1996 to 2002, a Fortune 500 company and the
nation's largest employee-owned research and engineering company. She was
Chief Financial Officer of Egmont Electricity 1991-1996, a New Zealand
electricity provider and public company. Ms. Matich also has a background in
public accounting with both Price Waterhouse and Coopers & Lybrand. She is a
CPA in the state of California and a member of the American Institute of
Certified Public Accountants. Ms. Matich has a degree in Business
Administration from the University of California, Berkeley.
Betty M. O'Brien. Ms. O'Brien has served as a Director since July 1991.
Ms. O'Brien is a partner in Elton Vineyards, a commercial vineyard located in
Eola Hills in Yamhill County, Oregon and established in 1983. Ms. O'Brien
was the Executive Director of the Oregon Wine Board from 2001 to 2004.
Ms. O'Brien was employed by Willamette University as its Director of News and
Publications from 1988 to 2000. She is a member of the Oregon Winegrowers
Association, having previously served as its President and Treasurer and as a
director. Ms. O'Brien is a member of the Vineyard Management/Winemaking
Program Advisory Committee at Chemeketa Community College (CCC). She heads a
wine industry task force developing a new wine marketing program and
curriculum leading to a two-year degree at CCC. She is teaching the first
class in the program, Introduction to Wine Marketing.
Stan G. Turel. Mr. Turel has served as a Director since November of 1994.
Mr. Turel is President of Turel Enterprises, a real estate management company
managing his own properties in Oregon, Washington and Idaho. Prior to his
current activities, Mr. Turel was the Principal and CEO of Columbia Turel,
(formally Columbia Bookkeeping, Inc.) a position which he held from 1974 to
2001. Prior to the sale of the company to Fiducial, one of Europe's largest
accounting firms, Columbia had 26,000 annual tax clients including 4,000 small
business clients. Additionally Mr. Turel successfully operated as majority
owner two cable TV companies during the 80's and 90's which were eventually
sold to several public corporations. Mr. Turel is a pilot, was a former
delegate to the White House Conference on Small Business and held positions
on several state and local Government committees.
Board of Directors Committees. The Board of Directors acts as a nominating
committee for selecting nominees for election as directors. The Board of
Directors has appointed a standing Audit Committee that, during the year ended
December 31, 2005, conducted four meetings. The elected members of the Audit
Committee are Delna L. Jones, Lisa Matich, and Stan G. Turel. Ms. Matich is
designated by the Board of Directors as the "audit committee financial expert"
under SEC rules. The Audit Committee is responsible for engaging the
Company's Independent Registered Public Accounting Firm, and reviews the scope
of the independent annual audit, the independent accountants' letter to the
Board of Directors concerning the effectiveness of the Company's internal
financial and accounting controls and the Board of Directors' response to
that letter, if deemed necessary. The Board of Directors also has appointed a
Compensation Committee, which reviews executive compensation and makes
recommendations to the full Board regarding changes in compensation, and also
administers the Company's 1992 Stock Incentive Plan. During the fiscal year
ended December 31, 2005, the Compensation Committee held two meetings. The
members of the Compensation Committee currently are Betty M. O'Brien, Chair,
Stan Turel, and James Ellis. In 1997 the Board appointed an Executive
Committee, members are: James Bernau, James Ellis, and Stan Turel. The
Executive Committee held two meetings during 2005.
Code of Ethics. The Company adopted a code of ethics applicable to its Chief
Executive Officer, Controller and other finance leaders, which is a "code of
ethics" as defined by applicable rules of the Securities and Exchange
Commission. Amendments to the code of ethics or any grant of a waiver from a
provision of the code of ethics requiring disclosure under applicable SEC
rules, if any, will be disclosed on our website at
www.WillametteValleyVineyards.com. Any person may request a copy of the code
of ethics, at no cost, by writing to us at the following address:
Willamette Valley Vineyards, Inc.
8800 Enchanted Way SE
Turner, OR 97392
Attention: Corporate Secretary
ITEM 10. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company, to or on behalf of the Company's
Chief Executive Officer, James W. Bernau (the "named executive officer") for
the years ending December 31, 2004 and 2005.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Name
Year Salary($) Bonus($) Other Annual Restricted Securities LTIP All
Compensation($) Stock Underlying Payouts($)Other
Compen-
sations
Award(s) Options/
($) SARs (#)
James W. Bernau
2004 157,149 - 6,422 - 38,000 - -
2005 158,658 37,500 6,985 - 147,000 - -
Bernau Employment Agreement
The Company and Mr. Bernau are parties to an employment agreement dated
August 3, 1988 and amended in February 1997 and again amended in January of
1998. Under the amended agreement, Mr. Bernau is paid an annual salary of
$158,658 with annual increases tied to increases in the consumer price index.
Pursuant to the terms of the employment agreement, the Company must use its
best efforts to provide Mr. Bernau with housing on the Company's property.
Mr. Bernau and his family live in the house free of rent and must continue to
reside there for the duration of his employment in order to provide additional
security and lock-up services for late evening events at the Winery and
Vineyard. The employment agreement provides that Mr. Bernau's employment may
be terminated only for cause, which is defined as non-performance of his
duties or conviction of a crime.
Stock Options
In order to reward performance and retain high-quality employees, the Company
often grants stock options to its employees. The Company does not ordinarily
directly issue shares of stock to its employees. Options are typically issued
at a per share exercise price equal to the closing price as reported by the
Capital Market at the time the option is granted. The options vest to the
employee over time. Three months following termination of the employee's
employment with the Company, any and all unexercised options terminate.
Option Exercises and Holdings
The following table provides information, with respect to the named executive
officer, concerning exercised options during the last fiscal year and
unexercised options held as of December 31, 2005.
Options exercised in the last fiscal year
Name Number Value
Of shares Realized(1)
James W. Bernau 113,000 $271,926
Number of Securities Underlying
Unexercised Options at FY-End
Exercisable Unexercisable
James W. Bernau 75,000(3.289)
4,000(4.136)
64,000(5.50)
Value of Unexercised
In-the-Money Options at FY-End(2)
Exercisable Unexercisable
James W. Bernau 120,825
3,056
-
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) Options are "in the money" at the fiscal year-end if the fair market value
of the underlying securities on such date exceeds the exercise price of the
option. The amounts set forth represent the difference between the fair
market value of the securities underlying the options on December 31, 2005
($4.90 per share based on the NASDAQ closing price for the Company's Common
Stock on the NASDAQ Small Cap Market on that date), and the exercise price of
the option, multiplied by the applicable number of options.
Director Compensation
The members of the Company's Board of Directors do not receive cash
compensation for their service on the Board, but are reimbursed for out-of-
pocket and travel expenses incurred in attending Board meetings. Under the
Company's Stock Incentive Plan adopted by the shareholders in 1992 and further
amended by the shareholders in 1996, beginning in 1997 an option to purchase
1,500 shares of Common Stock is granted to each Director for service on the
Board during the year. This option was increased to 4,000 per year when the
50-share grant per Director's meeting was discontinued for the year 2000 and
beyond. In December 2005, each Director was granted 14,000 options for
service during 2005. In the foreseeable future, as a result of the Financial
Accounting Standards Board ("FASB") Statement of Financial Accounting
Standard ("SFAS") No. 123R, Share-Based Payment, requiring all share-based
payments to be recognized as expenses in the statement of operations based on
their fair values and vesting periods, the Company does not intend to issue
stock options to the Directors for their service.
Section 16(a) Beneficial Ownership Reporting Compliance
None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of December 31, 2005, by (i) each
person who beneficially owns more than 5% of the Company's Common Stock
(ii) each Director of the Company (iii) each of the Company's named executive
officers, and (iv) all directors and executive officers as a group.
Percent of Number of
Shares Beneficially Owned Shares Outstanding Stock
James W. Bernau President/CEO, Chair of the Board
2545 Cloverdale Road 982,085.5 (1) 21.1%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 111,800 (2) 2.4%
Milwaukie, OR 97222
Thomas M. Brian Director
7630 SW Fir 22,000 (3) **
Tigard, OR 97223
Delna L. Jones Director
14480 SW Chardonnay Ave 27,800 (4) **
Tigard, OR 97224
Lisa M. Matich Director
7250 Meadows Court 33,700 (5) **
Wilsonville, OR 97070
Betty M. O'Brien Director
22500 Ingram Lane NW 38,150 (6) **
Salem, OR 97304
Stan G. Turel Director
604 SE 121 Street 67,692 (7) 1.4%
Vancouver, WA 98683
All Directors, executive 1,283,228 (8) 27.5%
officers and persons owning
5% or more as a group (6 persons)
______________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an outstanding
warrant and 143,000 shares issuable upon exercise of options exercisable
within 60 days of the date of this report.
(2) Includes 106,500 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(3) Includes 22,000 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(4) Includes 26,000 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(5) Includes 26,000 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(6) Includes 33,000 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(7) Includes 34,000 shares issuable upon the exercise of options exercisable
within 60 days of the date of this report.
(8) Includes 15,000 shares issuable upon the exercise of an outstanding
warrant and 390,500 shares issuable upon exercise of options exercisable
within 60 days of the date of this report.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 2004, the Company purchased grapes from Elton Vineyards for $3,489.
Betty M. O'Brien, a Director of the Company, is a principal owner of Elton
Vineyards.
On November 26, 2002, Mr. Bernau was granted options to acquire 30,000 shares
of the Company's common stock in exchange for his personal guarantee of
$1,000,000 of the Company's Line of Credit from GE Commercial Distribution
Finance. The options were issued pursuant to the stock incentive plan and
are accounted for as non-compensatory employee stock options. The options are
exercisable anytime through November 26, 2007, at an exercise price of $1.6577
per share.
On June 1, 1992, the Company granted Mr. Bernau a warrant to purchase 15,000
shares of the Company's Common Stock as consideration for his personal
guarantee of the Real Estate Loan and the Line of Credit from Farm Credit
Services pursuant to which the Company borrowed $1.2 million. The warrant is
exercisable anytime through June 1, 2012, at an exercise price of $3.42 per
share.
The Company believes that the transactions set forth above were made on terms
no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and
its officers, directors, and principal shareholders will be approved by a
disinterested majority of the members of the Affiliated Transactions Committee
of the Company's Board of Directors, and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation of Willamette Valley Vineyards, Inc.
(incorporated by reference from the Company's Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
(b) Bylaws of Willamette Valley Vineyards, Inc.(incorporated by reference
from the Company's Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(10) Material Contracts
(a) Employment Agreement between Willamette Valley Vineyards, Inc. and James
W. Bernau dated August 3, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(b) Indemnity Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated May 2, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(c) Indemnity Agreement between Willamette Valley Vineyards, Inc. and Donald
E. Voorhies dated May 2, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(d) Shareholders Agreement among Willamette Valley Vineyards, Inc. and its
founders, James Bernau and Donald Voorhies, dated May 2, 1988 (incorporated
by reference from the Company's Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(h) Revolving Note and Loan Agreement dated May 28, 1992 by and between
Northwest Farm Credit Services, Willamette Valley Vineyards, Inc. and James
W. and Cathy Bernau (incorporated by reference from the Company's Regulation
A Offering Statement on Form 1-A [File No. 24S-2996])
(i) Founders' Escrow Agreement among Willamette Valley Vineyards, Inc., James
W. Bernau, Donald Voorhies and First Interstate Bank of Oregon, N.A. dated
September 20, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(j) Amendment to Founders' Escrow Agreement dated September 20, 1988
(incorporated by reference from the Company's Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
(k) Stock Escrow Agreement among Willamette Valley Vineyards, Inc., Betty M.
O'Brien and Charter Investment Group, Inc. dated July 7, 1992 (incorporated
by reference from the Company's Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(l) Stock Escrow Agreement among Willamette Valley Vineyards, Inc., Daniel S.
Smith and Piper Jaffray & Hopwood, Inc. dated July 7, 1992 (incorporated by
reference from the Company's Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(m) Acquisition of Tualatin Vineyards, Inc. dated April 15, 1997.
(File No. 000-21522)
(n) Business Financing Agreement dated July 2, 2002 by and between GE
Commercial Distribution Finance and Willamette Valley Vineyards, Inc.
(File No. 000-21522)
(o) Consent of Moss Adams LLP, Independent Registered Public Accounting Firm
(p) Business Loan Agreement dated December 29, 2004 by and between Umpqua
Bank and Willamette Valley Vineyards, Inc. (File No. 000-21522)
(b) Reports on Form 8-K
a. Form 8-K, filed April 5, 2005, Item 2.02 - Results of Operations and
Financial Condition
b. Form 8-K, filed December 23, 2005, Item 1.02 - Entry into a Material
Definitive Agreement
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information contained under the caption entitled "Audit and Related Fees"
in the Proxy Statement is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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.
(Registrant)
Date: March 31, 2006 By:___/s/ James W. Bernau______________________
James W. Bernau,
Chairperson of the Board,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
_/s/_________________ Chairperson of the Board, March 31, 2006
James W. Bernau President
(Principal Executive Officer)
_/s/_________________ Controller March 31, 2006
Sean M. Cary (Principal Accounting Officer)
_/s/_________________ Director and Vice-President March 31, 2006
James L. Ellis and Secretary
_/s/_________________ Director March 31, 2006
Thomas M. Brian
_/s/_________________ Director March 31, 2006
Delna L. Jones
_/s/_________________ Director March 31, 2006
Lisa M. Matich
_/s/_________________ Director March 31, 2006
Betty M. O'Brien
_/s/_________________ Director March 31, 2006
Stan G. Turel
EXHIBIT INDEX
Exhibit
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification by James W. Bernau pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
31.2 Certification by Sean M. Cary pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.