SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________________________________________
FORM 10-QSB
___________________________________________________________
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter Ended March 31, 2006
Commission File Number 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in charter)
Oregon 93-0981021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
___________________________________________________________
8800 Enchanted Way, S.E., Turner, Oregon 97392
(503)-588-9463
(Address, including Zip code, and telephone number,
including area code, of registrant's principal executive offices)
___________________________________________________________
Indicate by check mark whether the registrant (1) has filed, all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
[X] YES [ ] NO
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
[ ] YES [X] NO
Number of shares of common stock outstanding as of March 31, 2006
4,687,202 shares, no par value
Transitional Small Business Disclosure
[ ] YES [X] NO
WILLAMETTE VALLEY VINEYARDS, INC.
INDEX TO FORM 10-QSB
Part I - Financial Information
Item 1--Financial Statements
Balance Sheet
Statement of Operations
Statement of Cash Flows
Notes to Interim Unaudited Financial Statements
Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3--Controls and Procedures
Part II - Other Information
Item 1 - Legal proceedings
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Default Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits
Signatures
PART 1 FINANCIAL INFORMATION
ITEM 1 Financial Statements
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
March 30, December 31,
2006 2005
(unaudited)
ASSETS. __________ __________
Current Assets:
Cash and cash equivalents $ 1,760,216 $ 415,591
Accounts receivable trade, net 1,108,640 1,568,255
Inventories 6,498,258 6,950,993
Prepaid expenses and other
current assets 91,455 22,561
Deferred income taxes 91,000 91,000
__________ __________
Total current assets 9,549,569 9,048,400
Vineyard development cost, net 1,505,863 1,526,073
Property and equipment, net 3,946,470 4,037,160
Debt issuance costs, net 33,622 35,410
Other assets 79,688 80,071
__________ __________
Total assets $15,115,212 $14,727,114
========== ==========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Line of credit $ - $ -
Current portion of long term debt 283,334 283,334
Accounts payable 799,241 811,141
Accrued expenses 291,496 348,169
Income taxes payable 583,183 344,987
Grapes payable 322,456 471,873
__________ __________
Total current liabilities 2,279,710 2,259,504
Long-term debt 1,916,652 1,986,531
Deferred rent liability 166,211 164,771
Deferred gain 434,190 442,214
Deferred income taxes 148,000 148,000
__________ __________
Total liabilities 4,944,763 5,001,020
__________ __________
Shareholders' equity
Common stock, no par value - 10,000,000
shares authorized, 4,687,202 and 4,660,202
shares issued and outstanding at March 31,
2006 and December 31, 2005 7,700,283 7,613,222
Retained earnings 2,470,166 2,112,872
__________ __________
Total shareholders' equity 10,170,449 9,726,094
__________ __________
Total liabilities and shareholders'
equity $15,115,212 $14,727,114
========== ==========
The accompanying notes are an integral part of this financial statement.
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Operations
(unaudited)
Three months ended March 31,
2006 2005
__________ __________
Net Revenues
Case Revenue $ 3,694,176 $ 2,284,638
Facility Lease - Custom Crush 8,793 90,440
__________ __________
Total Revenue 3,702,969 2,375,078
Cost of Sales
Case 1,951,419 1,230,516
Bulk 4,631 55,926
__________ __________
Total Cost of Sales 1,956,050 1,286,442
Gross Margin 1,746,919 1,088,636
Selling, general and
administrative expense 1,129,116 892,422
__________ __________
Net operating income 617,803 196,214
Other income (expense)
Interest income 4,279 165
Interest expense (43,487) (65,783)
Other income 16,895 17,336
__________ __________
Net income before income taxes 595,490 147,932
Income tax (238,196) (59,173)
__________ __________
Net income 357,294 88,759
Retained earnings beginning of
period 2,112,872 955,933
__________ __________
Retained earnings end of period $ 2,470,166 $ 1,044,692
========== ==========
Basic income per common share $ .08 $ .02
Diluted income per common share $ .07 $ .02
Weighted average number of
basic common shares
outstanding 4,674,058 4,486,278
Weighted average number of
diluted common shares
outstanding 4,819,920 4,580,883
The accompanying notes are an integral part of this financial statement.
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Cash Flows
(unaudited)
Three months ended March 31,
2006 2005
__________ __________
Cash flows from operating activities:
Net income $ 357,294 $ 88,759
Reconciliation of net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 132,003 139,197
Stock based compensation expense 8,390 -
Changes in assets and liabilities:
Accounts receivable trade 459,615 55,847
Inventories 452,735 161,134
Prepaid expenses and other
current assets (68,894) (67,081)
Other assets 383 694
Accounts payable (11,900) (11,893)
Accrued expenses (56,673) 41,305
Income taxes payable 238,196 (150,826)
Grape payables (149,417) (125,722)
Deferred rent liability 1,440 8,247
Deferred gain (8,024) (8,024)
__________ __________
Net cash provided by
operating activities 1,355,148 131,637
__________ __________
Cash flows from investing activities;
Additions to property and equipment (19,315) (29,294)
__________ __________
Net cash used in investing activities (19,315) (29,294)
__________ __________
Cash flows from financing activities:
Debt issuance costs - (4,622)
Net (decrease) increase in line of
credit balance - 32,808
Proceeds from stock options exercised 78,671 -
Repayments of long-term debt (69,879) (68,830)
__________ __________
Net cash (used in) provided by
financing activities 8,792 (40,644)
__________ __________
Net increase (decrease) in cash and
cash equivalents 1,344,625 61,699
Cash and cash equivalents:
Beginning of period 415,591 851,492
__________ __________
End of period $ 1,760,216 $ 913,191
========== ==========
The accompanying notes are an integral part of this financial statement.
NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
1) BASIS OF PRESENTATION
The accompanying unaudited financial statements as of and for the three months
ended March 31, 2006 and 2005, have been prepared in conformity with
accounting principles generally accepted in the United States. The financial
information as of December 31, 2005, is derived from the audited financial
statements presented in the Willamette Valley Vineyards, Inc. (the "Company")
Annual Report on Form 10-KSB for the year ended December 31, 2005. Certain
information or footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of
management, the accompanying financial statements include all adjustments
necessary (which are of a normal recurring nature) for the fair statement of
the results of the interim periods presented. The accompanying financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended December 31, 2005, as presented in the Company's
Annual Report on Form 10-KSB.
Operating results for the three months ended March 31, 2006, are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 2006, or any portion thereof.
The Company has a single operating segment consisting of the retail, instate
self-distribution and out-of-state sales departments. These departments have
similar economic characteristics, offer comparable products to customers, and
utilize similar processes for production and distribution.
Basic earnings per share are computed based on the weighted-average number of
common shares outstanding each period. Diluted earnings per share are computed
using the weighted average number of shares of common stock and potentially
dilutive common shares outstanding during the year. Potentially dilutive
shares from stock options and other potentially dilutive shares are excluded
from the computation when their effect is anti-dilutive. Potentially dilutive
shares of 145,862 shares are included in the computation of dilutive earnings
per share for the three months ended March 31, 2006. Total potentially
dilutive shares of 94,605 shares are included in the computation of dilutive
earnings per share for the three months ended March 31, 2005.
2) STOCK BASED COMPENSATION
The Company has two stock option plans, the 1992 Stock Incentive Plan ("1992
Plan") and 2001 Stock Option Plan ("2001 Plan"). No additional grants may be
made under the 1992 Plan. The 2001 Plan, which is shareholder approved,
permits the grant of stock options and restricted stock awards for up to
900,000 shares. All stock options have an exercise price that is equal to
the fair market value of the Company's stock on the date the options were
granted. Administration of the plan, including determination of the number,
term, and type of options to be granted, lies with the Board of Directors or a
duly authorized committee of the Board 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.
The following table presents information on stock options outstanding for the
periods shown:
Quarter to date
March 31, 2006
_______________
Weighted
average
exercise
Shares price
Outstanding at
beginning of period 609,500 $ 3.57
Granted - -
Exercised (12,000) 2.18
Forfeited - -
--------
Outstanding at
end of year 597,500 $ 3.60
________
The following table presents information on stock options outstanding for the
periods shown:
Quarter Ended Quarter Ended
March 31, 2006 March 31, 2005
__________________ __________________
Intrinsic value of options
exercised in the period $ 45,909 $ -
Stock options fully vested and
expected to vest
Number 597,500 426,200
Weighted average exercise
Price $ 3.60 $ 2.35
Aggregate intrinsic value $1,740,257 $ 336,391
Weighted average contractual
term of options 7.05 years 5.00 years
Stock options vested and
Currently exercisable
Number 540,800
Weighted average exercise
Price $ 2.36
Aggregate intrinsic value $1,565,758
Weighted average contractual
term of options 6.86 years
At January 1, 2006, the Company began recognizing compensation expense for
stock options with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 123 (Revised), "Share-Based Payment," ("SFAS 123R"). The fair
value of each stock option granted is estimated on the date of grant using the
Black-Scholes based stock option valuation model. This model uses the
assumptions listed in the table below. Expected volatilities are based on
implied volatilities from the Company's stock, historical volatility of the
Company's stock, and other factors. Expected dividends are based on the
Company's plan not to pay dividends for the foreseeable future. The Company
uses historical data to estimate option exercises and employee terminations
within the valuation model. The risk-free rate for periods within the
contractual life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant.
Black-Scholes assumptions
March 31, 2000
__________
Risk Free interest rates 4.26%
Expected dividend 0%
Expected lives, in years 5-10
Expected volatility 113%
The Company expenses stock options on a straight line basis over the options'
related vesting term. For the quarter ended March 31, 2006, the Company
recognized pretax compensation expense related to stock options of $8,390.
The following table illustrates the effect on net income and earnings per
share if the fair value method established in SFAS 123R had been applied to
all outstanding and unvested awards in the prior period.
March 31,
2005
(unaudited)
__________
Net income, as reported $ 88,759
Add Stock-based employee
compensation expense included in
reported net income, net of
related tax effects -
Deduct total stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (179,670)
__________
Pro forma net income $ (90,911)
Earnings per share:
Basic - as reported $ 0.02
Basic - pro forma $ 0.02
Diluted - as reported $ (0.02)
Diluted - pro forma $ (0.02)
During the three months ended March 31, 2006, the following transactions
related to stock option and warrant exercise occurred:
Exercise
Shares price
Stock Options Exercised 4,000 $ 3.289
1,000 3.00
1,500 1.81
4,000 1.5625
1,500 1.50
Stock Warrants Exercised 15,000 $ 3.42
3) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW:
March 31, December 31,
2006 2005
(unaudited)
__________ __________
Winemaking and packaging materials $ 16,381 $ 223,389
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products) 1,340,118 1,790,472
Finished goods (bottled wines 5,141,759 4,937,132
and related products) __________ __________
Current inventories $ 6,498,258 $ 6,950,993
========== ==========
4) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
March 31, December 31,
2006 2005
(unaudited)
__________ __________
Land and improvements $ 769,644 $ 769,644
Winery building and hospitality center 4,714,465 4,707,802
Equipment 3,988,304 3,975,652
__________ __________
9,472,413 9,453,098
Less accumulated depreciation (5,525,943) (5,415,938)
__________ __________
$ 3,946,470 $ 4,037,160
========== ==========
ITEM 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and Results
of Operation and other sections of this Form 10-QSB contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve risks and uncertainties
that are based on current expectations, estimates and projections about the
Company's business, and beliefs and assumptions made by management. Words
such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates" and variations of such words and similar expressions are intended
to identify such forward-looking statements. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking statements due to numerous factors, including, but not limited
to: availability of financing for growth, availability of adequate supply of
high quality grapes, successful performance of internal operations, impact of
competition, changes in wine broker or distributor relations or performance,
impact of possible adverse weather conditions, impact of reduction in grape
quality or supply due to disease, impact of governmental regulatory decisions,
and other risks detailed below as well as those discussed elsewhere in this
Form 10-QSB and from time to time in the Company's Securities and Exchange
Commission filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and
general domestic economic conditions.
Critical Accounting Policies:
The foregoing discussion and analysis of our financial condition and results
of operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires Management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to revenue recognition, collection of
accounts receivable, valuation of inventories, and amortization of vineyard
development costs. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under
different assumptions or conditions. A description of our critical accounting
policies and related judgments and estimates that affect the preparation of
our financial statements is set forth in our Annual Report on Form 10-KSB for
the year ended December 31, 2005. Except with respect to accounting for
stock-based compensation expenses (see Note 2 of Notes to Financial
Statements, above), such policies were unchanged during the three months ended
March 31, 2006.
Overview
Revenues increased 56% and Net Income before taxes increased 303% for the
three months ended March 31, 2006, as compared to the prior year period.
Sales to out-of-state distributors continued to be the primary reason for the
increases in sales revenue and profitability during the three month period
ending March 31, 2006. Sales to out-of-state distributors increased 153% for
the three months ended March 31, 2006 as compared to the prior year period.
Depletions of the Company's products by its out-of-state distributors to
their retail customers increased 68% in the three months ended March 31, 2006
compared to the prior year period. Specifically, increases in depletions of
the following core products were: 118% Estate Pinot Noir, 127% Vintage Pinot
Noir, 26% Whole Cluster Fermented Pinot Noir, 51% Pinot Gris and 7% Riesling.
The 2005 sales revenues resulted primarily from record demand where 110,000
cases of Company produced wines were sold. Fortunately, the winery had large
inventory balances available beginning in 2005 to meet this demand. As demand
continued into 2006, Management advanced the release dates of some of its
products from prior practice to continue to supply its distributors.
This continued increase in demand for the Company's products has further
constrained the Company's inventory of its core products in national
distribution. Management expects to receive less revenue from the sales of
Vintage Pinot Noir, the Company's flagship in each of the years 2006 and 2007
than it did in 2005. The case sales of Vintage Pinot Noir in 2005 exceed
inventory of this product estimated to be available for sale in each of the
years 2006 and 2007. Inventories of Whole Cluster Pinot Noir, Pinot Gris and
Riesling available for sale in 2006 are approximately the same as sales of
these products in 2005. The Company has placed these varieties on allocation
with its distributors, and has made careful, upward price adjustments as new
vintages were released in order to address these inventory constraints.
The recent, significant increase in demand for Oregon wine has increased
winery start-ups and demand for available fruit supplies. There were 303
licensed wineries in Oregon in 2005, more than double the number in 2001.
While plantings are increasing, fruit yields are lagging behind demand.
Management believes the strong national sales of its wines are in part due to
the significant unmet need of the varieties and the style and quality of the
winery's products in markets outside of Oregon combined with the national
exposure of its wines and the varietal Pinot Noir.
Due to the higher costs of producing current vintages of Vintage Pinot Noir,
primarily due to lower overall production levels, Management does not believe
the price increases will offset the negative impact to net profit resulting
from the lower total gross revenues from fewer case sales of Vintage Pinot
Noir.
The Company presently owns 48 acres of producing vineyard at its Willamette
Valley Vineyards Estate Vineyard and approximately 148 acres at its Tualatin
Estate Vineyard. In addition, it leases the 50 acre Belle Provenance
Vineyard in the Eola Hills, of which 2006 is the last year of the 10 year
lease. The Company has chosen not to renew that lease.
The Company planted an additional 17 acres in 2005 and is in the process of
planting an additional 5 acres in 2006 at the Tualatin site.
Management has contracted on a long term basis (10 years) for 90 acres of
Pinot Gris and Riesling, which was planted in 2005, and is finalizing a
contract for 100 acres of Pinot Noir and 70 acres of Pinot Gris and Riesling,
which were planted in 2006.
The white varietal cases from these long term contracts will be available for
sale beginning mid-year 2008 with substantial volumes of all varietals in
2010.
The total owned and contracted vineyard will total 478 acres, which will
produce approximately 120,000 cases when fully productive. Additionally,
Management will continue to purchase wine grapes as the Company has done
historically from quality growers throughout the Willamette Valley Appellation
on shorter term contracts and purchase high quality wine in bulk when
appropriate.
In 2006, the Company expects to produce nearly 74,000 cases of wine from the
2005 vintage. The Company's current production capacity at both its Estate
Vineyard and Tualatin Estate Vineyard sites should support the production of
the additional case volume provided by the new plantings within its existing
facilities through incremental increases in stainless steel fermentation
vessels and French oak barrels using retained earnings to finance these
capital purchases and build up in inventory.
Record revenues have enabled Management to pay down the credit line to zero,
retire all equipment loans and to build a significant cash balance to
internally fund the Company's growth plan.
During this period of high demand and limited supply, Management is focused on
positioning the Company's Willamette Valley Vineyards brand and flagship
varietal Pinot Noir as the consumer's brand of choice for the varietal at
price points that Management believes significant growth and margin
opportunity exists. The Company is identifying and nurturing Pinot Noir
enthusiasts at all levels of distribution through its "Customers for Life"
program.
To this end, the Company has garnered two national wine list placements with
a well known restaurant chain and is conducting wine dinners in 2006 in over
50 of the chain's restaurants throughout the country, taking the story of
fresh seafood and Northwest cuisine paired with wines produced by Willamette
Valley Vineyards to wine consumers. The restaurant organization and the
Company are jointly promoting these dinners to local food and wine writers.
In conjunction with these wine dinners and through national promotion, the
Company is conducting its second annual, "Why I Love Oregon Pinot Noir" essay
contest, where the winner will receive an all expense paid weekend trip to
Oregon Wine Country. The contest to date has identified a number of
passionate Pinot Noir enthusiasts.
Since the Company's last filing, the Willamette Valley Vineyards Pinot Noir
was named among the most popular Pinot Noirs on restaurant wine lists in Wine
& Spirits Magazine, Pinot Noir expert Gregory Walters in his "Pinot Report"
rated the Hoodview Pinot Noir a "92", national writer Leslie Sbrocco in
Epicurious.com featured the '05 Whole Cluster Pinot Noir, award winning author
Kevin Zraly in his "American Wine Guide" recommended the winery's Pinot
Noir, the '04 Pinot Gris was ranked by the San Francisco Chronicle among its
top 100 wines and the newly released '05 Pinot Gris was named a winner of the
prestigious Oyster Competition and earned a gold medal at the Riverside
International Wine Competition. The '05 Riesling earned the Best of Oregon
designation and gold medal from the Northwest Wine Summit.
The Wine Spectator Magazine, in an article entitled "Would You Like Fries
With That Pinot Noir?" reported the winery's use of biodiesel in all its
tractors and delivery vans as well as its innovative biodiesel program for
employee commuting as did the National Biodiesel Board in its report to
Congress.
Management is working with other Oregon wine industry leaders to strengthen
efforts to grow wine grapes in certified sustainable programs and documenting
vineyard conditions in a unique interactive, web based database for the
purposes of improving collective wine quality industry wide. Management
believes these efforts will benefit all Oregon wine brands as wine consumers
are choosing wines for the producers' values and practices.
All of the Company's vineyards are certified sustainable by LIVE (Low Input
Viticulture and Enology) and Salmon Safe by the Pacific River Council.
Revenues from the Company's Oregon Wholesale Department, Bacchus Fine Wines,
increased 25% in the three months ended March 31, 2006 compared to the prior
year period. Oregon wholesale sales of Company produced wines increased 13%
and direct retail sales made in the tasting room and through the Company's
Key Customer Service Representatives increased 14% in the three months ended
March 31, 2006 compared to the prior year period.
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.
The Company has two stock option plans, the 1992 Stock Incentive Plan
("1992 Plan") and 2001 Stock Option Plan ("2001 Plan"). No additional grants
may be made under the 1992 Plan. The 2001 Plan, which is shareholder
approved, permits the grant of stock options and restricted stock awards for
up to 900,000 shares. All stock options have an exercise price that is equal
to the fair market value of the Company's stock on the date the options were
granted. 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 2001 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. There now remains 33,466
shares available in the pool. Given the new accounting rules, Management
expects the Board to be reluctant to issue options from this pool and does
not expect the Board to seek any additional options from the Shareholders.
There are several employee incentive option grants in force which the
Management expects to expense approximately $8,400 per Quarter in 2006.
RESULTS OF OPERATIONS
Revenue
Winery Operations
The Company's revenues from winery operations are summarized as follows:
Three months ended March 31,
2006 2005
__________ __________
Tasting Room and Retail sales
& Rental Income $ 378,983 $ 333,897
On-site and off-site festivals 36,033 46,001
In-state sales 1,548,736 1,236,792
Out-of-state sales 1,823,766 721,704
Custom crush /bulk wine /misc sales 8,793 90,440
__________ __________
Gross Revenue 3,796,311 2,428,834
Less Excise Taxes 93,342 53,756
__________ __________
Net Revenues $ 3,702,969 $ 2,375,078
========== ==========
Net revenues for the three months ended March 31, 2006 increased $1,327,891,
or 56%, over the corresponding period in the preceding year. This increase
is due almost entirely to the increases in out-of-state sales, in-state sales,
and tasting room sales and rental income.
Tasting room sales and rental income for the three months ended March 31,
2006 increased $45,086, or 14%, compared to the corresponding prior year
period. Tasting room sales increased during the three months ended March 31,
2006 due primarily to increased purchases in the tasting room and increased
key customer phone sales.
Sales in the state of Oregon, through the Company's wholesale department,
Bacchus Fine Wines, increased $311,944, or 25%, in the three months ended
March 31, 2006, compared to the corresponding prior year period. The
Company's direct instate sales to its largest customer increased $129,058, or
100%, in the three months ended March 31, 2006, over the comparable prior year
period. These increases are largely the result of the broader product lines
presented and increased product placements through the development of the
wholesale department's portfolio of brands produced by wineries outside of
Oregon.
Out-of-state sales in the three months ended March 31, 2006 increased
$1,102,062, or 153%, over the comparable prior year period. The higher sales
are primarily a result of strong demand for the Company's varietals,
significant sales efforts undertaken by the Company's out-of-state sales
force and depletion allowances on particular products, resulting in
significant by-the-glass restaurant placements.
Excise taxes
The Company's excise taxes for the three months ended March 31, 2006
increased 74% as compared to the corresponding period in the preceding year.
This was due primarily to the increased sales in the three months ended
March 31, 2006 compared to the prior year period, thereby increasing overall
sales volumes and taxes calculated based on volume.
Gross Profit
Winery Operations
As a percentage of net revenue, gross profit increased to 47% in the three
months ended March 31, 2006, as compared to 46% in the comparable prior year
period. The revenue generated by the sale of the Company's higher margin
products to out of state distributors in the three months ended March 31, 2006
reversed the trend of decreasing margins in prior periods. 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 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.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the three months ended
March 31, 2006 increased 27% compared to the corresponding prior year period.
These increases are 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, selling, general and administrative expenses
decreased to 30% for the three months ended March 31, 2006, as compared to
38% for the comparable prior year period, primarily as a result of increased
revenues.
Interest Income, Other Income and Expense
Interest income increased to $4,279 for the three months ended March 31, 2006,
compared to $165 for the comparable prior year period. Interest expense for
the three months ended March 31, 2006 decreased 34% compared to the
corresponding prior year period. Interest costs were lower primarily due to
less debt outstanding during the period.
Other income for the first quarter of 2006 was an interest rebate from Farm
Credit Services for interest paid on the Company's long-term debt in 2005, in
the amount of $16,895, compared to $17,336 during the first quarter of 2005,
received from Farm Credit Services for interest paid on the Company's long-
term debt in 2004, during the first quarter of 2005.
Income Taxes
Income tax expense was $238,196 for the three months ended March 31, 2006,
compared to $59,173 for the prior year period due to the Company's net profit
for the three months ended March 31, 2006. The Company's estimated tax rate
for the three months ended March 31, 2006 and 2005 was 40 percent.
Net Income and Earnings per Share
As a result of the factors listed above, net income for the three months
ended March 31, 2006 was $357,294, or $0.07 per diluted share, compared to
net income of $88,759, or $0.02 per diluted share, in the comparable prior
year period.
Liquidity and Capital Resources
At March 31, 2006, the Company had a working capital balance of $7.3 million
and a current ratio of 4.19:1. At December 31, 2005, the Company had a
working capital balance of $6.8 million and a current ratio of 4.00:1. The
Company had a cash balance of $1,760,216 at March 31, 2006 compared to a cash
balance of $415,591 at December 31, 2005. The increase in cash was primarily
due to the Company's increased revenue.
Total cash provided by operating activities in the three months ended
March 31, 2006 was $1,355,148, compared to $131,637 for the prior year period,
primarily as an increase in net income, collection of receivables, and
conversion of inventory to cash through sales in the three months ended
March 31, 2006 compared to the prior year period. Cash provided by operating
activities in the three months ended March 31, 2006 consisted of net income
of $357,294, plus depreciation of $132,003, plus changes in assets and
liabilities and other non-cash charges of $865,851.
Total cash used in investing activities in the three months ended
March 31, 2006 was $19,315, compared to $29,294 in the prior year period.
Cash used in investing activities consisted of property and equipment
additions.
Total cash provided by financing activities in the three months ended
March 31, 2006 was $8,792, compared to $40,644 used in financing activities
in the prior year period. Cash provided by financing activities primarily
consisted of stock option proceeds offset by payments on the long term debt.
At March 31, 2006, 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 March 31, 2006, the
Company was in compliance with all of the financial covenants.
As of March 31, 2006, the Company had a total long-term debt balance of
$2,199,986 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.
At March 31, 2006, the Company owed $322,456 on grape contracts. This amount
is primarily owed to a single grape grower, which will be paid as the wine
made from those grapes is sold.
The Company believes that cash flow from operations and funds available under
its existing credit facilities will be sufficient to meet the Company's
foreseeable short and long term needs.
ITEM 3
Controls and Procedures
a) We carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer, Chief Financial Officer and
other management personnel, of the effectiveness of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934 as of March 31, 2006. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of March 31, 2006 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 March 31, 2006 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except as noted above.
PART II. OTHER INFORMATION
Item 1. Legal proceedings. None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None.
Item 3. Default Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security holders. None
Item 5. Other Information
(a) The Audit Committee of the Board Of Directors has approved the
following non-audit services, which are being performed by Moss Adams, our
independent accountants, during the calendar year ending December 31, 2006:
- Income tax advisory services related to: income tax returns
(b) There were no material changes in the procedures by which security
holders may recommend nominees to the board of Directors during the three
months ended March 31, 2006.
Item 6. Exhibits
The exhibits filed herewith are listed in the Exhibit Index following the
signature page of this report.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
Date: May 15, 2006 By /s/ James W. Bernau
James W. Bernau
President
Date: May 15, 2006 By /s/ Sean M. Cary
Sean M. Cary
Controller
EXHIBIT INDEX
Exhibit
3.1 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])
3.2 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])
4 1992 Stock Incentive Plan (incorporated by reference to the Company's
Registration Statement on Form S-8 (333-61181) filed September 10, 2001)
4.1 Amendment dated July 21, 1996 (incorporated by reference to the Company's
Registration Statement on Form S-8 (333-61181) filed September 10, 2001)
4.2 Amendment dated July 25, 1998 (incorporated by reference to the Company's
Registration Statement on Form S-8 (333-61181) filed September 10, 2001)
4.3 Amendment dated April 15, 1999 (incorporated by reference to the Company's
Registration Statement on Form S-8 (333-61181) filed September 10, 2001)
4.4 Amendment dated July 25, 2000 (incorporated by reference to the Company's
Registration Statement on Form S-8 (333-61181) filed September 10, 2001)
4.5 Sample Incentive Stock Option Agreement (incorporated by reference to the
Company's Registration Statement on Form S-8 (333-61181) filed
September 10, 2001)
4.6 Sample Nonqualified Stock Option Agreement (incorporated by reference to
the Company's Registration Statement on Form S-8 (333-61181) filed
September 10, 2001)
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.