Blueprint
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UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
_____________________
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FORM 10-K
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(Mark One)
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☒
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2016
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or
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the
transition period from _________________ to
_______________________
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Commission file number: 000-21522
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WILLAMETTE
VALLEY VINEYARDS, INC.
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(Exact name of registrant as specified in its charter)
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Oregon
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93-0981021
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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8800 Enchanted Way, S.E.
Turner, OR 97392
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(Address of principal executive offices)
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Registrant’s telephone number, including area code: (503)
588-9463
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Securities registered pursuant to Section 12(b) of the
Act:
Series A Redeemable Preferred Stock
(Title of class)
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock
(Title of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act: ☐ Yes ☒
No
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Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act: ☐ Yes ☒ No
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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: Yes ☒ No ☐
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Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files): Yes
☒ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment
to this Form 10-K: ☐
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Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act:
Large
accelerated filer ☐ Accelerated filer
☐ Non-accelerated filer
☐ Smaller reporting company
☒
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act):
Yes
☐ No ☒
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The
aggregate market value of common stock held by non-affiliates of
the registrant as of June 30, 2016 was approximately
$30,560,166.
The
number of outstanding shares of the registrant’s Common Stock
as of March 23, 2017 was 5,006,255.
The
number of outstanding shares of the registrant’s Preferred
Stock as of March 23, 2017 was 2,396,954.
___________________
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DOCUMENTS INCORPORATED BY REFERENCE
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None
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WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1
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Business
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4
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Item 1A
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Risk Factors
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14
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Item 1B
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Unresolved Staff Comments
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18
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Item 2
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Properties
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18
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Item 3
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Legal Proceedings
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18
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Item 4
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Mine Safety Disclosures
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19
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PART II
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Item 5
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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19
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Item 6
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Selected Financial Data
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20
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Item 7
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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20
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Item 7A
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Quantitative and Qualitative Disclosures about Market
Risk
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30
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Item 8
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Financial Statements and Supplementary Data
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31
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Item 9
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Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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49
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Item 9A
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Controls and Procedures
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49
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Item 9B
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Other Information
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50
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PART III
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Item 10
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Directors, Executive Officers and Corporate Governance
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50
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Item 11
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Executive Compensation
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53
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Item 12
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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55
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Item 13
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Certain Relationships and Related Transactions, and Director
Independence
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56
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Item 14
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Principal Accounting Fees and Services
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57
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Item 15
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Exhibits, Financial Statement Schedules
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58
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WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-K
As used
in this Annual Report on Form 10-K, “we,”
“us,” “our” and “the Company”
refer to Willamette Valley Vineyards, Inc.
PART I
ITEM 1. BUSINESS
Forward Looking Statements
This
Annual Report on Form 10-K, including any information incorporated
by reference, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended,
referred to as the “Securities Act”, and Section 21E of
the Securities Exchange Act of 1934, as amended, referred to as the
“Exchange Act”. In some cases, you can identify
forward-looking statements by terms such as “may,”
“will,” “should,” “expect,”
“plan,” “intend,” “forecast,”
“anticipate,” “believe,”
“estimate,” “predict,”
“potential,” “seeks,”
“estimates” or the negative of these terms or other
comparable terminology, which when used are meant to signify the
statement as forward-looking. However, not all forward-looking
statements contain these words. Forward-looking statements include,
but are not limited to, statements about our plans, objectives,
expectations and intentions and other statements that are not
historical facts. These forward-looking statements are not
guarantees of future performance and involve known and unknown
risks, uncertainties and situations that are difficult to predict
and that may cause our own, or our industry’s actual results,
to be materially different from the future results that are
expressed or implied by these statements. Accordingly, actual
results may differ materially from those anticipated or expressed
in such statements as a result of a variety of factors, including
those set forth under Item 1A “Risk Factors” in this
Annual Report on Form 10-K. We urge you to carefully review the
disclosures we make concerning risks and other factors that may
affect our business and operations. We caution you not to place
undue reliance on forward looking statements, which speak only as
of the date of this report. We do not intend, and we undertake no
obligation, to update any forward information to reflect events or
circumstances after the date of this report or to reflect the
occurrence of unanticipated events, unless required by law to do
so.
Business
Introduction – Willamette Valley Vineyards, Inc.
(“the Company” or “WVV”) was formed in May
1988 to produce and sell premium, super premium and ultra-premium
varietals. The Company was originally established as a sole
proprietorship by Oregon winegrower Jim Bernau in 1983. The Company
is headquartered in Turner, Oregon, which is just south of the
state capitol of Salem, Oregon. The Company’s wines are made
from grapes grown in vineyards owned, leased or contracted by the
Company, and from grapes purchased from other nearby vineyards. The
grapes are harvested, fermented and made into wine at the
Company’s Turner winery (the “Estate Winery” or
“Winery”) and the wines are sold principally under the
Company’s Willamette Valley Vineyards label, but also under
the Griffin Creek and Tualatin Estate labels. The Company also owns
the Tualatin Estate Vineyards and Winery, located near Forest
Grove, Oregon (the “Tualatin Winery”).
Segments - The Company has identified two operating
segments, direct sales and distributor sales, based upon their
different distribution channels, margins and selling strategies.
Direct sales includes retail sales in our tasting room and remote
sites, wine club sales, on-site events, kitchen and catering sales
and other sales made directly to the consumer without the use of an
intermediary. Distributor sales include all sales through a third
party where prices are given at a wholesale rate. See “Note
15 – Segment Reporting” on the Notes to Financial
Statements attached to this report.
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 2016, $22 to $100 per bottle;
Chardonnay, $25 to $45 per bottle; Pinot Gris, $17 per bottle;
Rose, $18 to $24 per bottle; and Riesling, $14 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.
Under
its Tualatin Estate Vineyards label, the Company currently produces
and sells the following type of wine in 750 ml bottles:
Semi-Sparkling Muscat, $19 per bottle.
Under
its Griffin Creek label, the Company produces and sells the
following types of wine in 750 ml bottles: Syrah, the brand’s
flagship, $45 per bottle; Merlot, $40 per bottle; Cabernet
Sauvignon, $45 per bottle; Grenache, $45 per bottle; Cabernet
Franc, $45 per bottle; The Griffin (a Bordeaux style blend), $65
per bottle; and Viognier, $30 per bottle. This brand’s
mission is to be the highest quality producer of Bordeaux and Rhone
varietals in Southern Oregon.
Under
its Made in Oregon Cellars label, the Company produces and sells
the following type of wine in 750 ml bottles: Oregon Blossom (blush
blend), $12 per bottle.
The
Company holds U.S. federal and/or Oregon state trademark
registrations for the trademarks material to the business,
including but not limited to, the WILLAMETTE VALLEY VINEYARDS,
BIO-CASK, DAEDALUS CELLARD, NOG, OREGON’S NOT, OREGON’S
LANDMARK WINERY, GRIFFIN CREEK, GRIFFIN, ELTON, WILLAMETTE, WVV,
SIP.SAVE, WHOLE CLUSTER, MADE IN OREGON CELLARS, OREGON BLOSSOM,
and IT’S WILLAMETTE, DAMMIT marks. Additionally, the Company
has allowed use on PAMBRUN, PIERRE PAMBRUN and PINOT
BLACK.
Market overview – The United States wine industry has
seen a rapid increase in the number of wineries that are being
established throughout the country. From 1995 to 2016, U.S.
wineries grew in number from 1,817 to 8,702. In addition, wineries
are classified as one of the fastest growing segments in
agriculture with an average annual growth of
10–15%.
The
United States is the largest wine market in the world in terms of
revenues and volume. According to Impact Databank, U.S. wine sales
have been growing at a rate of 2-3% per year for the past 21 years.
In 2015 U.S. wine sales reached $38.1 billion, a 3% increase from
2014. The U.S. wine volume consumption reached 357.5 million cases
in 2014, the most recent year this data was available, with France
in second place at 310 million cases. The U.S. also leads the world
as the largest wine-consuming nation with over 101 million people
drinking wine, approximately 44% of all U.S. adults.
U.S.
wineries decreased production in 2015, the most recent year such
data is available, by 8% and produced approximately 323 million
cases. Pinot Noir is one of the highest-priced varietals on the
market, yet its sales have nearly tripled in the U.S. since the
movie Sideways was released in 2004. In 2016, red blends sales
increased 10.1% and wine priced at $11 per bottle, and above, had
sales growth while bottles priced below $8 had a decline in sales
volume. In Oregon, wines price at greater than $20 per bottle are
growing faster than other segments.
In a
2015 American Wine Consumer Preference Survey, by Sonoma State
University and the Wine Business Institute, American wine consumers
from all 50 states were sampled regarding their wine consumption.
Of those sampled, 56% reported they consume wine daily or several
times per week making them “High Frequency Wine
Drinkers” with the remaining 44% being occasional drinkers.
Respondents demonstrated a preference for red wine, with 74%
listing it as one of their favorites, and 78% considered themselves
to have intermediate or advance knowledge of wine. Price and brand
topped the list of decision making reasons when purchasing wine for
home consumption with 32% listing the most common price being $10
to $15, 19% being $15 to $20 and 14% being more than $20.
Additionally, 89% of respondents thought red wine was most
healthy.
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.
In 2015, the most recent year such data is available, there were
702 commercial wineries licensed in Oregon, an increase of 4% from
2014, and 28,034 planted acres of wine grape vineyards, 24,742
acres of which were harvested. Oregon wine grapes produced a 2015
crop with a total value of $171 million, an increase of 1.7% from
2014. Pinot Noir leads all varieties accounting for 62% of
harvested acreage. Oregon case sales in 2015 are estimated at 3.1
million, up from 2.8 million in 2014, a 6.9% increase, with the
largest channel increase in direct to consumer sales at 14%. Case
sales in dollars for 2015 are estimated to be $470 million, a 9%
increase from 2014.
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. Though Oregon
contributed only 1% of domestic wine production, it accounted for
21% of domestic wines that garnered a score of 90 points or higher
by Wine Spectator in 2015.
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
Estate Vineyard, in Turner, Oregon, were with non-resistant
rootstock. As of December 31, 2016, 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 at the Tualatin Winery, which has phylloxera at its site.
All current plantings are with, and all future planting will be
with phylloxera-resistant rootstock at that location. The Company
takes commercially reasonable precautions in an effort to prevent
the spread of phylloxera to its Turner site.
As a
result of these factors, subject to the risks and uncertainties
identified in this Annual Report, the Company believes that
long-term prospects for growth in the Oregon wine industry are
excellent. The Company believes that over the next several 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 Estate and Griffin Creek
brands.
2015 Oregon harvest – The Oregon Vineyard and Winery
Census Report states that the total grapes crushed in Oregon rose
5%, compared to 2014, to a record high of 73,518 tons. Pinot Noir
continued to lead statewide production representing 60% of the
tonnage grown and crushed. Yield increased to an average 3.43 tons
per acre from 24,742 harvested acres.
2016 Oregon harvest – There is no official data
available on the 2016 Oregon harvest as of the date of this
report.
Company Strategy
The
Company, one of the largest wine producers 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; (4) effectively distribute and
sell its products nationally; and (5) continue to build on its base
of direct to consumer sales. The Company’s goal is to
continue to build on a reputation for producing some of
Oregon’s finest, most sought-after wines.
Based
upon several highly regarded surveys of the U.S. 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 support of
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 the Estate Winery into a 12,784 square foot
state-of-the-art winery that includes a 12,500 square foot outdoor
production area for the harvesting, 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 direct sales at the Estate Winery, the McMinnville
Tasting Room in McMinnville, Oregon and Tualatin Estate Winery and
sales through independent distributors and wine brokers who market
the Company’s wine in specific targeted areas.
The
Company believes the location of the Estate Winery next to
Interstate 5, Oregon’s major north-south freeway,
significantly increases direct sales opportunities to consumers.
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. We also
believe the Company’s remodeled Hospitality Center, at the
Estate Winery, has further increased the Company’s direct
sales and enhanced public recognition of its wines.
In
order to remain competitive in the premium, super premium and
ultra-premium market, the Company has embarked on a brand expansion
project and is in the process of developing a brand and winery in
the Walla Walla AVA under the name Pambrun. This winery is expected
to produce small vintages of Cabernet Sauvignon and other
Bordeaux-varietals to compete in the ultra-premium wine market. The
Company intends to release wines under the Pambrun label beginning
with the 2015 vintage year and plans to start facility construction
in 2019. Additionally, the Company is developing a single vineyard
brand near Hopewell, Oregon adjacent to the current site of Elton
Vineyards to produce wine under the Elton label. This brand will
produce primarily Pinot Noir and Chardonnay, also for sale in the
ultra-premium space. The Company intends to release wines under the
Elton label beginning with the 2015 vintage year and plans to
complete facility construction in 2024. In June 2016 the Company
purchased 53 acres in the Ribbon Ridge AVA and is in the process of
planning vineyard development and a small single vineyard brand
offering. In December 2016 the Company purchased approximately 40
acres in the Dundee, Oregon area and is in the process of
developing a plan for the use and development of that
property.
Vineyards
The
Company owns and leases approximately 794 acres of land, of which
625 acres are currently planted as vineyards or is suitable for
future vineyard planting. The vineyards the Company owns and leases
are all certified sustainable by LIVE (Low Input Viticulture and
Enology) and Salmon Safe. At full production, the Company
anticipates these vineyards would enable the Company to grow
approximately 76% of the grapes needed to meet the winery’s
production capacity, of 378,000 gallons (159,000 cases), at its
Estate Winery.
The
following table summarizes the Company’s
acreage:
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Vineyard
Name
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Owned
Vineyards
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WVV
Estate
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107
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60
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4
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1
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42
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197
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269
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Tualatin
Estate Vineyard
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107
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48
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12
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-
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47
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162
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246
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Ingram
Vineyard
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86
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2
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60
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-
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24
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5
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-
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Pambrun
Vineyard
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42
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-
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15
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16
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11
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-
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-
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Loeza
Vineyard
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62
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-
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13
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45
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4
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-
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-
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Ribbon
Ridge Vineyard
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53
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-
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-
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25
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28
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-
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-
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Rocks
Vineyard
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37
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-
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-
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36
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1
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-
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-
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40
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-
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-
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40
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-
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-
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-
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Sub-Total
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534
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110
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104
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163
|
157
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364
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515
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Peter
Michael Vineyard
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79
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69
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-
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-
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10
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231
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330
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Meadowview
Vineyard
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45
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45
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-
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-
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-
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217
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292
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|
Elton
Vineyard
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59
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54
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-
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2
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3
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109
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157
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|
|
110
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-
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70
|
40
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-
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-
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-
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Sub-Total
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293
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168
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70
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42
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13
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557
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779
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|
|
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|
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|
|
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|
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304
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304
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-
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-
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-
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1,052
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1,094
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Total
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1,131
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582
|
174
|
205
|
170
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1,973
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2,388
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*
Contracted acreage is estimated
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WVV Estate –Established in 1983, the Company’s
Estate Vineyard (the “Estate Vineyard”) is located at
the Winery location south of Salem, near Turner, Oregon. The Estate
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 improve grape quality through smaller clusters and berries
over traditional designs. The Company planted one half acre in
2016.
Tualatin Estate Vineyard – Established in 1973 at the
Tualatin Winery location near Forest Grove, Oregon, the
Company’s Tualatin Estate Vineyards is one of the oldest
vineyards in Oregon. It was purchased by the Company in 1997. A
series of sale-leaseback transactions split the property into two
additional vineyards, and the Company continues to lease and manage
the Peter Michael Vineyard and Meadowview Vineyard, located
adjacent to the Tualatin Vineyard.
Ingram Estate and Elton Vineyard – The Company
purchased 86 acres near Hopewell, Oregon, for vineyard plantings.
Adjacent to the purchased land is an additional 110 leased acres,
also for vineyard development. The Company believes the site is
ideally situated to grow premium Pinot Noir and planted 24 acres in
2016. The Ingram site is also adjacent to Elton Vineyards, where
the Company leases 54 acres of established vineyards. The Company
intends to plant 22 leased acres at Ingram in 2017.
Pambrun Vineyards – In 2015, the Company purchased 42
acres in the Walla Walla AVA near the town of Milton-Freewater,
Oregon. Additionally, the Company has exercised an option to buy
another 45 acres in 2017. The Company believes this site is ideal
to grow Cabernet Sauvignon and other Bordeaux-varietals. Wines
produced from this vineyard are expected to be sold under the
Pambrun label. The Company planted 15 acres in 2016 and intends to
plant 4 acres in 2017.
Loeza Vineyard – The Company purchased 62 acres near
Gaston, Oregon in 2014, for vineyard plantings, and believes the
site is ideally situated to grow premium Pinot Gris. The site is
close to Tualatin Vineyards which allows the Company to leverage
existing crews for vineyard development and operations. The Company
planted 13 acres in 2016 and intends to plant 35 acres in
2017.
Ribbon Ridge Vineyard – The Company purchased 53 acres
in the Ribbon Ridge sub-AVA in 2016 for vineyard plantings and
believes the site is suitable for growing ultra-premium Pinot Noir.
The Company plans to plant 15 acres in the fall of
2017.
Rocks Vineyard – The Company purchased approximately
37 acres in the new Rocks District of Milton-Freewater appellation
near Milton-Freewater, Oregon in 2016. No plantings are planned
until 2018.
Dundee Vineyard – The Company purchased 40 acres in
Dundee, Oregon in December 2016. The Company has no plans for
planting this site in 2017.
Grape Vines - 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
adapted 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 U.S. government authorized quarantine site, and
then two years later to Oregon winegrowers. The most desirable of
these new Pinot Noir clones are numbered 113, 114, 115, 667, 777
and 943. 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 Pinot Noir clones
were planted at the Tualatin Vineyards with phylloxera-resistant
rootstock and the 667 and 777 clones have been grafted onto seven
acres of self-rooted, non-phylloxera-resistant vines at the
Company’s Estate Vineyard.
New
clones of Chardonnay preceded Pinot Noir into Oregon and were
planted at the Company’s Estate Vineyard on
phylloxera-resistant rootstock.
Grape supply – In 2016, the Company’s producing
acres in the Estate Vineyard yielded approximately 197 tons of
grapes. Tualatin/Peter Michael/Meadowview Vineyards produced an
aggregate of 585 tons of grapes in 2016. Elton and Ingram Vineyards
produced 88 tons of grapes in 2016.
The
Company fulfills its remaining grape needs by purchasing grapes
from other nearby vineyards at competitive prices. In 2016, the
Company purchased an additional 1,052 tons of grapes from other
growers. The Company cannot grow enough grapes to meet anticipated
production needs, and therefore contracts grape purchases to make
up the difference. Contracted grape purchases are considered an
important component of the Company’s long-term growth and
risk-management plan. The Company believes high quality grapes will
be available for purchase in sufficient quantity to meet the
Company’s requirements. Additionally, the Company will
continue to evaluate opportunities to purchase properties for
future vineyards.
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,
Pinot Gris, Chardonnay and Riesling. The Company believes that the
Estate 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 Estate 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.
The
Estate 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
Estate Vineyard’s elevation ranges from 533 feet to 800 feet
above sea level with slopes from 2% to 30% (predominately 12-20%).
The Estate Vineyard’s slope is oriented to the south,
southwest and west. Average annual precipitation at the Estate
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 Estate Vineyard. However, if the
need should arise, the Company’s Estate property contains one
water well which can sustain sufficient volume to meet the needs of
the Winery and to provide auxiliary water to the Estate Vineyard
for new plantings and unusual drought conditions. At the Tualatin
Vineyard, the Company has water rights to a year round spring that
feeds an irrigation pond. Additionally, the Company has water
rights at the Pambrun and Rocks Vineyards.
Susceptibility of vineyards to disease – The Tualatin
Vineyard and the adjacent 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 Estate Vineyard or
Loeza Vineyard.
It is
not possible to estimate any range of loss that may be incurred due
to the phylloxera infestation of the Company’s vineyards. The
phylloxera at Tualatin 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. The Company is in
the process of gradually replacing infested areas with new,
phylloxera-resistant vines.
Winery
Wine production facility – The Company’s Winery
and production facilities are capable of efficiently producing up
to 159,000 cases (378,000 gallons) of wine per year, depending on
the type of wine produced. In 2016, the Winery produced
approximately 141,416 cases (336,300 gallons) from its 2014 and
2015 harvest. The Company expects to produce approximately 143,000
cases (340,000 gallons) in 2017 from its 2015 and 2016
harvests.
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, and administrative offices. There is a
12,500 square foot outside production area for harvesting, pressing
and fermenting wine grapes, and a 4,500 square foot insulated
storage facility with a capacity of approximately 30,000 cases of
wine. The Company also has a 23,000 square foot storage building to
store its inventory of bottled product with a capacity of
approximately 135,000 cases of wine. 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.
In
addition to the production capacity discussed above, the Tualatin
Winery has 20,000 square feet of production capacity. This adds
approximately 25,000 cases (59,000 gallons) of wine production
capacity to the Company. The capacity at the Tualatin Winery is
available to the Company to meet any anticipated future production
needs. In 2008, the Company replaced the roof and production floor,
insulation and walls, in anticipation of using it for wine storage
and future production.
Hospitality facility – The Company has a renovated tasting
and hospitality facility of 35,642 square feet (the
“Hospitality Center”) at the Estate Winery. The main
floor of the Hospitality Center includes retail sales space with
the Estate Tasting Room, Club Room for Wine Club Members, dining
area and mezzanine, which altogether are designed to accommodate
approximately 300 persons for tastings, wine and food pairing
meals, public and private events and meetings. An iconic
observation tower and tiered decks around the Hospitality Center
enable visitors to enjoy the view of the Willamette Valley and the
Company’s Estate Vineyard. The tiered decks funnel into an
outdoor courtyard that hosts many seasonal gatherings. To the south
side of the tiered decks the Company has two hospitality suites for
overnight accommodations. The Hospitality Center sits above the
underground barrel cellar and tunnel that connects with the Winery.
The facility includes a basement cellar, tunnel and barrel room of
11,090 square feet to store up to 1,800 barrels of wine for aging
in the proper environment.
Just outside the Hospitality Center, the Company has a landscaped
park setting consisting of terraced lawns for outdoor events. The
area between the Winery and Hospitality Center form 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
the sale of the Company’s wines through festivals and social
events. Above the Company’s working Winery houses the Pinot
Room and Founders’ Room, which can accommodate 40 persons and
111 persons for public and private events.
The Company believes the Hospitality Center and surrounding areas
make the Winery an attractive recreational and social destination
for tourists and residents, thereby enhancing the Company’s
ability to sell its wines.
Mortgages on properties – The Company’s winery
facilities at the Estate Winery are subject to four mortgages with
an aggregate principal balance of $4,824,095 at December 31, 2016.
The mortgages are payable in monthly aggregate installments,
including principal and interest, of approximately $53,059. The
maturity dates of the mortgages range from December 1, 2024 through
December 1, 2028.
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:
|
|
|
|
|
|
|
|
|
Harvest
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
1,107
|
25
|
1,132
|
-
|
2005
|
72,297
|
|
2006
|
1,454
|
34
|
1,488
|
-
|
2006
|
81,081
|
|
2007
|
850
|
896
|
1,746
|
-
|
2007
|
115,466
|
|
2008
|
551
|
874
|
1,425
|
57,736
|
2008
|
121,027
|
|
2009
|
1,033
|
1,100
|
2,133
|
74,954
|
2009
|
132,072
|
|
2010
|
674
|
371
|
1,045
|
4,276
|
2010
|
110,224
|
|
2011
|
718
|
609
|
1,327
|
9,620
|
2011
|
81,357
|
|
2012
|
658
|
670
|
1,328
|
7,910
|
2012
|
91,181
|
|
2013
|
755
|
1,020
|
1,775
|
6,257
|
2013
|
95,638
|
|
2014
|
1,211
|
970
|
2,181
|
520
|
2014
|
108,958
|
|
2015
|
1,266
|
1,012
|
2,278
|
-
|
2015
|
120,794
|
|
2016
|
921
|
1,052
|
1,973
|
47,780
|
2016
|
141,416
|
Cases
produced per ton harvested often vary between years mainly due to
the timing of when the cases are produced.
Sales and Distribution
Marketing strategy – The Company markets and sells its
wines through a combination of direct sales at the Winery, directly
through mailing lists, and through distributors and wine brokers.
As the Company has increased production volumes and achieved
greater brand recognition, sales to out of state markets have
increased, both in terms of absolute dollars and as a percentage of
total Company sales.
The Company uses a variety of marketing channels to generate
interest in its wines. The Company has created a new, highly
functional website and maintains social media sites. The Company
controls a database of customers for email and direct promotions.
The Company continues to submit its wines to competitions and
state, regional and national media for editorials and
ratings.
Direct sales – The
Company’s Estate Winery is located on a visible hill adjacent
to Oregon’s major north-south freeway (Interstate 5),
approximately 2 miles south of the state’s second-largest
metropolitan area (Salem), and 50 miles in either direction from
the state’s first and third-largest metropolitan areas
(Portland and Eugene). The unique location along Interstate 5 has
resulted in generally greater amount of wines sold at the Estate
Winery as compared to the Oregon industry standard. Direct sales
from the Winery are a vital and growing sales channel and an
effective means of product promotion. The Estate Winery Tasting
Room is open daily and offers wine tasting and education by trained
personnel. The Company offers a complimentary daily tour along with
by-appointment private tours offering a behind-the-scenes look at
the production process of the wines. The Company has the largest
wine club membership in Oregon and features a Members-only Club
Room at the Estate Winery.
In 2014, the Company launched “Pairings,” a focused
restaurant offering a wine and food pairing lunch. Led by the
Winery chef, the menu highlights Northwest fresh dishes paired
thoughtfully with the Company’s wines. The culinary offering
has now expanded to include “Pairings Food & Wine
Experiences,” community-style wine dinners hosted on the
weekends.
The Winery has developed a strong Winery Ambassador program, which
connects its “Ambassadors” with customers throughout
the United States and offers personalized wine recommendations and
easy ordering by phone or email.
The Company also operates two additional tasting rooms; one in
historic downtown McMinnville, in the heart of Oregon Wine Country,
and at its Tualatin Vineyard (located 30 minutes west of
Portland).
The
Company holds four major festivals at the Winery each year. In
addition, open houses are held at the Winery during major holiday
weekends such as Memorial Day and Thanksgiving. Numerous private
events, charitable and political events are also held at the
Winery.
Direct
sales produce a higher profit margin because the Company is able to
sell its wine directly to consumers at retail prices rather than to
distributors at free-on-board or “FOB” prices. Sales
made directly to consumers at retail prices result in an increased
profit margin equal to the difference between retail prices and
distributor prices. For 2016 and 2015, direct sales contributed
approximately 36% and 39% of the Company’s net sales,
respectively.
Distributors and wine brokers – The Company uses both
independent distributors and wine brokers primarily to market the
Company’s wines in specific targeted areas. 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. The Company’s products are
distributed in 49 states and the District of Columbia, and there
are 5 non-domestic (export) customers. For 2016 and 2015, sales to
distributors and wine brokers contributed approximately 64% and 61%
of the Company’s revenue from operations,
respectively.
Tourists – Oregon wineries are a popular tourist
destination with many bed & breakfasts, motels and fine
restaurants available. The Willamette Valley, Oregon’s
leading wine region has almost 80% of the state’s wineries
and vineyards and is home to approximately 531 wineries. An
additional advantage for Willamette Valley wine tourism is the
proximity of the wineries to Portland (Oregon’s largest city
and most popular destination). From Portland, tourists can visit
the Willamette Valley winery of their choice in anywhere from a 45
minutes to a two hour drive.
The
Company believes its convenient location, adjacent to Interstate 5,
enables the Winery to attract a significant number of visitors. The
Winery is approximately a 45 minute drive from Portland and less
than one mile from The Enchanted Forest, a popular amusement park
which operates from April through September each year.
Dependence on Major Customers
Historically,
the Company’s revenue has been derived from thousands of
customers annually. In 2016, sales to one distributor represented
approximately 19.0% of total Company revenue. In 2015, sales to one
distributor represented approximately 18.2% of total Company
revenue.
Research and Development
The
nature of the Company’s business does not require the Company
to incur a material amount of research and development
expense.
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 that of 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 primarily 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 additional production capacity will be needed
to meet estimated future demand. Furthermore, the Company believes
that its estimated production capacity of 437,000 gallons (184,000
cases) per year at its Estate Vineyards and Tualatin Vineyard
locations 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 estimated production capacity level of the
Company’s Wineries. 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 for wines with alcohol content at or below 14.0% and
$1.57 per gallon for wines with alcohol content above 14.0%;
however, wineries that produce not more than 250,000 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 for wines with alcohol content at or below 14.0% and $0.77
per gallon for wines with alcohol content above 14.0% on all wine
sold in Oregon. In addition, most 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.
Costs and Effects of Compliance with Local, State and Federal
Environmental Laws
The
Company management is strongly focused on environmental stewardship
and maintains a variety of policies and processes designed to
protect the environment, the public and consumers of its wine.
Although much of the Company’s expenses for protecting the
environment are voluntary, the Company is regulated by various
local, state and federal agencies regarding environmental laws.
However, these regulatory costs and processes are effectively
integrated into the Company’s regular operations and
consequently do not generally cause significant alternative
processes or costs.
Employees
As of
December 31, 2016 the Company had approximately 108 full-time
employees and 38 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 Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and proxy statements with
the Securities and Exchange Commission (“SEC”). The
public may read and copy any materials that the Company files with
the SEC at the SEC’s Public Reference Room at 100 F Street,
NE, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an internet site that contains
reports, proxy and information statements, and other information
regarding issuers, including the Company, that file electronically
with the SEC at www.sec.gov. You may learn more about the Company
by visiting the Company’s website at www.wvv.com.
All websites referred to herein are inactive textual references
only, meaning that the information contained in such websites is
not incorporated by reference herein.
ITEM 1A. RISK FACTORS
The
following disclosures should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition
and Results of Operations of this Annual Report on Form 10-K. 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 the Company
Winemaking
and grape growing are subject to a variety of agricultural risks.
Various diseases, pests, fungi, viruses, including Grapevine Red
Blotch Disease (GRBV), 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. Phylloxera is a pest that attacks the
rootstocks of wine grape plants. Vineyards in the United States,
including some in Oregon and some owned by us, have been infested
in recent years with phylloxera. In particular, Tualatin Vineyards
have phylloxera. There can be no assurance that the Company’s
existing vineyards, or the rootstocks the Company is now using in
its planting programs, will not become susceptible to current or
new strains of phylloxera or that the phylloxera present at the
Tualatin Vineyards will not spread to our other vineyards.
Pierce’s Disease is a vine bacterial disease. It kills
grapevines and there is no known cure. Small insects called
Sharpshooters spread this disease. A new strain of the Sharpshooter
was discovered in Southern California and is believed to be
migrating north. The Company is actively supporting the efforts of
the agricultural industry to control this pest and is making every
reasonable effort to prevent an infestation in its own vineyards.
The Company cannot, however, guarantee that it will succeed in
preventing contamination in its vineyards. Future government
restrictions regarding the use of certain materials used in grape
growing may increase vineyard costs and/or reduce production.
Additionally, long-term changes in weather patterns could adversely
affect the Company.
Loss of key employees could harm the Company’s reputation and
business
The
Company’s 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 these key employees, including James W. Bernau, our
President, and Richard F. Goward Jr., our Chief Financial Officer,
could harm the Company and its reputation and negatively impact its
profitability, particularly if one or more of the Company’s
key employees resigns to join a competitor or to form a competing
company.
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 term loan arrangements, the
proceeds of which were used to acquire the Tualatin Winery and the
Tualatin Vineyards, construct and remodel the Hospitality Center
and pay down the Company’s revolving line of credit. 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 its 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.
As of
December 31, 2016, the Company’s outstanding indebtedness was
approximately $4.9 million and the Company had a line of credit
balance of $0 on a maximum borrowing amount of $2
million.
Costs of being a publicly-held company may put the Company at a
competitive disadvantage
As a
public company, the Company incurs substantial costs that are not
incurred by its competitors that are privately-held. These
compliance costs may result in the Company’s wines being more
expensive than those produced by its competitors and/or may reduce
profitability compared to such competitors.
The Company faces significant competition which could adversely
affect profitability
The
wine industry is intensely competitive and highly fragmented. The
Company’s wines compete in several premium wine market
segments with many other premium domestic and foreign wines, with
imported wines coming from the Burgundy and Bordeaux regions of
France, as well as Italy, Chile, Argentina, South Africa, New
Zealand and Australia. The Company’s wines also compete with
popular priced generic wines and with other alcoholic and, to a
lesser degree, non-alcoholic beverages, for shelf space in retail
stores and for marketing focus by the Company’s independent
distributors, many of which carry extensive brand portfolios. A
result of this intense competition has been and may continue to be
upward pressure on the Company’s selling and promotional
expenses. In addition, the wine industry has experienced
significant consolidation. Many of the Company’s competitors
have greater financial, technical, marketing and public relations
resources than the Company does. In particular, wine production in
the United States is dominated by large California wineries that
have significantly greater resources than the Company.
Additionally, greater worldwide label recognition and larger
production levels give many of the Company’s competitors
certain unit cost advantages. Company sales may be harmed to the
extent it is not able to compete successfully against such wine or
alternative beverage producers’ costs. There can be no
assurance that in the future the Company will be able to
successfully compete with its current competitors or that it will
not face greater competition from other wineries and beverage
manufacturers.
The Company competes for shelf space in retail stores and for
marketing focus by its independent distributors, most of whom carry
extensive product portfolios
Nationwide,
the Company sells its products primarily through independent
distributors and brokers for resale to retail outlets, restaurants,
hotels and private clubs across the United States and in some
overseas markets. Sales to distributors are expected to continue to
represent a substantial portion of the Company’s net revenue
in the future. A change in the relationship with any of the
Company’s significant distributors could harm the
Company’s business and reduce Company sales. The laws and
regulations of several states prohibit changes of distributors,
except under certain limited circumstances, making it difficult to
terminate a distributor for poor performance without reasonable
cause, as defined by applicable statutes. Any difficulty or
inability to replace distributors, poor performance of the
Company’s major distributors or the Company’s inability
to collect accounts receivable from its major distributors could
harm the Company’s business. There can be no assurance that
the distributors and retailers the Company uses will continue to
purchase the Company’s products or provide Company products
with adequate levels of promotional support. Consolidation at the
retail tier, among club and chain grocery stores in particular, can
be expected to heighten competitive pressure to increase marketing
and sales spending or constrain or reduce prices.
Fluctuations in quantity and quality of grape supply could
adversely affect the Company
A
shortage in the supply of quality grapes may result from a variety
of factors that determine the quality and quantity of the
Company’s grape supply, including weather conditions, pruning
methods, diseases and pests, the ability to buy grapes on long and
short term contracts and the number of vines producing grapes. Any
shortage in the Company’s grape production could cause a
reduction in the amount of wine the Company is able to produce,
which could reduce sales and adversely impact the Company’s
results from operations. Factors that reduce the quantity of the
Company’s grapes may also reduce their quality, which in turn
could reduce the quality or amount of wine the Company produces.
Deterioration in the quality of the Company’s wines could
harm its brand name and could reduce sales and adversely impact the
Company’s results of operations.
Contamination of the Company’s wines would harm the
Company’s business
The
Company is subject to certain hazards and product liability risks,
such as potential contamination, through tampering or otherwise, of
ingredients or products. Contamination of any of the
Company’s wines could cause it to destroy its wine held in
inventory and could cause the need for a product recall, which
could significantly damage the Company’s reputation for
product quality. The Company maintains insurance against certain of
these kinds of risks, and others, under various insurance policies.
However, the insurance may not be adequate or may not continue to
be available at a price or on terms that are satisfactory to the
Company and this insurance may not be adequate to cover any
resulting liability.
A reduction in consumer demand for premium wines could harm the
Company’s business
There
have been periods in the past in which there were substantial
declines in the overall per capita consumption of beverage alcohol
products in the United States and other markets in which the
Company participates. A limited or general decline in consumption
in one or more of the Company’s product categories could
occur in the future due to a variety of factors, including: a
general decline in economic conditions; increased concern about the
health consequences of consuming alcoholic beverage products and
about drinking and driving; a trend toward a healthier diet
including lighter, lower calorie beverages such as diet soft
drinks, juices and water products; the increased activity of
anti-alcohol consumer groups; and increased federal, state or
foreign excise and other taxes on beverage alcohol products. The
competitive position of the Company’s products could also be
affected adversely by any failure to achieve consistent, reliable
quality in the product or service levels to customers.
Changes in consumer spending could have a negative impact on the
Company’s financial condition and business
results
Wine
sales depend upon a number of factors related to the level of
consumer spending, including the general state of the economy,
federal and state income tax rates, deductibility of business
entertainment expenses under federal and state tax laws, and
consumer confidence in future economic conditions. Changes in
consumer spending in these and other regions can affect both the
quantity and the price of wines that customers are willing to
purchase at restaurants or through retail outlets. Reduced consumer
confidence and spending may result in reduced demand for the
Company’s products, limitations on the Company’s
ability to increase prices and increased levels of selling and
promotional expenses. This, in turn, may have a considerable
negative impact upon the Company’s sales and profit
margins.
Increased regulation could adversely affect the
Company
The
wine industry is subject to extensive regulation by the Federal
Alcohol Tobacco Tax and Trade Bureau (“TTB”) and
various foreign agencies, state liquor authorities, such as the
Oregon Liquor Control Commission (“OLCC”), and local
authorities. These regulations and laws dictate such matters as
licensing requirements, trade and pricing practices, permitted
distribution channels, permitted and required labeling, and
advertising and relations with wholesalers and retailers. Any
expansion of the Company’s existing facilities or development
of new vineyards or wineries may be limited by present and future
zoning ordinances, environmental restrictions and other legal
requirements. In addition, new regulations or requirements or
increases in excise taxes, income taxes, property and sales taxes
or international tariffs, could negatively affect the
Company’s financial condition or results of operations.
Recently, many states have considered proposals to increase, and
some of these states have increased, state alcohol excise taxes.
New or revised regulations, or increased licensing fees,
requirements or taxes could have a material adverse effect on the
Company’s financial condition or results of operations. There
can be no assurance that new or revised regulations or increased
licensing fees and requirements will not have a material adverse
effect on the Company’s business and its results of
operations and its cash flows.
The Company’s common stock is thinly traded, and therefore
not as liquid as other investments.
The
trading volume of the Company’s common stock on NASDAQ is
consistently “thin,” in that there is not a great deal
of trading activity on a daily basis. Because the average active
trading volume is thin, there is less opportunity for shareholders
to sell their shares of the Company’s common stock on the
open market, resulting in the common stock being less liquid than
common stock in other publicly traded companies.
The Company may face liabilities associated with the offer and sale
of our preferred stock.
In August 2015, the Company commenced a public offering of our
Series A Redeemable Preferred Stock pursuant to a registration
statement filed with the Securities and Exchange Commission. The
Company registered this transaction with the securities authorities
of the States of Oregon and Washington and, in November 2015,
achieved listing status on NASDAQ under the trading symbol WVVIP.
The terms of our Series A Redeemable Preferred Stock are unusual
for a company of our size, and we believe the structure of these
securities and of the offering are not commonplace among issuers of
any type. Federal and state securities laws impose significant
liabilities on issuers of securities if the related offering
documents contain material misstatements of fact, or if the
documents omit to state facts necessary, in light of the
circumstances as a whole, to prevent the documents from being
misleading. These liabilities can include rescission liability to
the purchasers of the securities, as well as potential enforcement
liability that could give rise to civil money penalties. Securities
litigation can be extraordinarily expensive and protracted, and if
we are accused of misstatements or omissions in our offering
documents, we may face economic harms and management distractions
regardless of the ultimate outcome of any such litigation. Further,
if we ultimately are adjudged to have actually made a material
misstatement or omission, the Company may be liable for the
repayment of the purchase price of the related securities, plus
interest from the date of purchase. Any one or more of these events
or circumstances would have a material adverse impact upon our
business, financial condition or results of operations, and may
make it more difficult or more expensive to undertake
capital-raising efforts in the future.
The Company may be unable to pay accumulated dividends on its
Series A Redeemable Preferred Stock.
The
Company’s Series A Redeemable Preferred Stock bears a
cumulative 5.3% dividend based upon the original issue price, or
$0.22 per share per annum. However, prior to the declaration and
payment of dividends our board of directors must determine, among
other things, that funds are available out of the surplus of the
Company and that the payment would not render us insolvent or
compromise our ability to pay our obligations as they come due in
the ordinary course of business. Additionally, our existing credit
facility limits, and future debt obligations in the future may
limit, both our legal and our practical ability to declare and pay
dividends. As a result, although the Series A Redeemable Preferred
Stock will continue to earn a right to receive dividends, the
Company’s ability to pay dividends will depend, among other
things, upon our ability to generate excess cash. Further, although
shares of our Series A Redeemable Preferred Stock will earn
cumulative dividends, unpaid dividends will not, themselves,
accumulate (as might compounding interest on a debt security, for
example).
The issuance of additional shares of our preferred stock or common
stock in the future could adversely affect holders of common
stock.
The
market price of our common stock may be influenced by any preferred
stock we may issue. Our board of directors is authorized to issue
additional classes or series of preferred stock without any action
on the part of our stockholders. This includes the power to set the
terms of any such classes or series of preferred stock that may be
issued, including voting rights, dividend rights and preferences
over common stock with respect to the liquidation, dissolution or
winding up of the business and other terms. If we issue preferred
stock in the future that has preference over our common stock with
respect to liquidation, dissolution or winding up, or if we issue
preferred stock with voting rights that dilute the voting power of
our common stock, the rights of holders of the common stock or the
market price of the common stock could be adversely
affected.
The provisions in our articles of incorporation, our by-laws and
Oregon law could delay or deter tender offers or takeover attempts
that may offer a premium for our common stock.
Certain
provisions in our articles of incorporation, our by-laws and Oregon
law could make it more difficult for a third party to acquire
control of us, even if that transaction could be beneficial to
stockholders. These impediments include, but are not limited to;
the classification of our Board of Directors (the
“Board”) into three classes serving staggered
three-year terms, which makes it more difficult to quickly replace
Board members; the ability of our Board, subject to certain
limitations under the rules of the NASDAQ Stock Market, to issue
shares of preferred stock with rights as it deems appropriate
without stockholder approval; a provision that special meetings of
our Board may be called only by our chief executive officer or at
the request of holders of not less than half of all outstanding
shares of our common stock; a provision that any member of the
Board, or the entire Board, may be removed from office only for
cause; and a provision that our stockholders comply with
advance-notice provisions to bring director nominations or other
matters before meetings of our stockholders. The Board may
implement other changes that further limit the potential for tender
offers or takeover attempts.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Vineyards – The Company owns or leases 827 acres of
land, of which 534 acres is owned and 293 acres leased. Of the 827
acres of land owned or leased, 278 acres are productive vineyards,
379 acres are pre-productive vineyards or are suitable for future
vineyard plantings, and 170 acres are not suitable for vineyard
planting or are used for winery or hospitality purposes. See Item 1
Business - Vineyards, of this Annual Report on Form 10-K for the
locations of each of the Company’s vineyards (both owned and
leased) and other information pertaining to the production
capacity, harvest totals and other important characteristics of
each such vineyard.
Wine production facility – We believe the
Company’s Estate Winery and production facilities are capable
of efficiently producing up to 159,000 cases (378,000 gallons) of
wine per year, depending on the type of wine produced. In 2016, the
Winery produced approximately 141,416 cases (336,300 gallons) from
its 2014 and 2015 harvest. 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, meeting rooms, and
administrative offices. There is a 12,500 square foot outside
production area for harvesting, pressing and fermenting wine
grapes, and a 4,500 square foot insulated storage facility with a
capacity of 30,000 cases of wine. The Company also has a 23,000
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. The
Hospitality Center located as the Company’s Estate Winery is
a large 35,642 square foot tasting and hospitality facility.
The
Hospitality Center sits above the underground barrel cellar and
tunnel that connects with the Winery. The facility includes a basement cellar, tunnel
and barrel room of 11,090 square feet used to store up to 1,800
barrels of wine for aging in the proper
environment.
The Company’s Tualatin Winery has 20,000 square feet
of production capacity. This adds approximately 25,000 cases
(59,000 gallons) of wine production capacity to the Company. The
capacity at the Tualatin Winery is not currently used but is
available to the Company to meet any anticipated future production
needs. Additionally, the Company operates a small retail store and
tasting room at the Tualatin Winery.
The
Company carries Property and Liability insurance coverage in
amounts deemed adequate by Management.
See
additional discussion of vineyard and wine production facility
under Item 1. Business.
ITEM 3. LEGAL PROCEEDINGS
Although
the Company from time to time may be involved with disputes, claims
and litigation related to the conduct of its business, 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. MINE SAFETY DISCLOSURES
Not
applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
The
Company’s common stock is traded on the NASDAQ Capital Market
under the symbol “WVVI.”
The
following table below sets forth for the quarters indicated the
high and low sales prices for the Company’s common stock as
reported on the NASDAQ Capital Market:
|
Quarters
ended 2016
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$8.36
|
$8.75
|
$9.00
|
$7.19
|
|
Low
|
$7.80
|
$7.62
|
$6.90
|
$6.55
|
|
Quarters
ended 2015
|
|
|
|
|
|
|
|
|
|
|
|
High
|
$8.20
|
$8.10
|
$7.23
|
$6.24
|
|
Low
|
$6.66
|
$4.50
|
$5.95
|
$5.50
|
The
Company’s Series A Redeemable Preferred Stock (the
“Preferred Stock”) is listed on the NASDAQ Capital
Market under the symbol “WVVIP.” Although it is listed,
as of December 31, 2016 there was limited trading for the recently
issued stock.
Holders
As of
March 14, 2017, the Company had approximately 2,879 common stock
shareholders of record. As some of our shares of common stock are
held in “street name” by brokers on behalf of
shareholders, we are unable to estimate the total number of
beneficial holders of our common stock represented by these record
holders.
Dividends
The
Company has not paid any dividends on its Common Stock, and the
Company does not anticipate paying any dividends in the foreseeable
future. The Company intends to use its earnings to expand its
vineyards, winemaking and customer service facilities.
The
Company has paid a prorated annual dividend on its Preferred Stock.
On December 30, 2016 the Company paid $.22 per share to Preferred
Stock shareholders of record as of December 12, 2016. Shares issued
by the Company after January 1, 2016 received a prorated dividend
based upon their original issue date. The Company offers a program
that allows Preferred Stock shareholders to use their dividends as
credits for wine purchases at additional discounts. Total dividends
paid, in cash and wine credits, were $462,529 and the payment
satisfied all accrued dividend liability through December 31, 2016.
The Company anticipates paying Preferred Stock dividends annually
in December of each year.
Equity Compensation Plans
See
Item 12 – Equity Compensation Plan Information of this Annual
Report on Form 10-K for information concerning securities
authorized for issuance under the Company’s equity
compensation plans.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
Issuer
purchases of equity securities not disclosed in previous
submissions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
October
2016
|
2,350
|
8.11
|
2,350
|
$212,496
|
|
November
2016
|
-
|
-
|
-
|
212,496
|
|
December
2016
|
600
|
8.18
|
600
|
207,586
|
|
|
|
|
|
|
|
Total
|
2,950
|
8.13
|
2,950
|
$207,586
|
In
January 2012 the Company began its first program to repurchase
common stock and has approved two subsequent programs. As of
December 31, 2016 the Company has repurchased 219,792 shares of
common stock since the inception of the original
program.
In
November of 2015 the Board approved its most recent program to
repurchase common stock of the Company. Under the November 2015
Board action, the Company funded a plan to repurchase up to
$250,000 of our common stock through the open market. On April 25,
2016, the Board approved allocating additional funds to increase
the plan balance back to the $250,000 level and additionally
approved the repurchase of up to $100,000 of the Company’s
common stock from private parties. On August 29, 2016 the Board
approved adding an additional $250,000 to the plan. This plan is
intended to remain in place until all funding for the plan is
depleted or the plan is expanded or terminated by the Board. As of
December 31, 2016, $207,586 remained unspent under this
plan.
ITEM 6. SELECTED FINANCIAL DATA
Not
required.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial
Condition and Results of Operations should be read in conjunction
with the Company’s financial statements and related notes.
Some statements and information contained in this
Management’s Discussion and Analysis of Financial Condition
and Results of Operations are not historical facts but are
forward-looking statements. For a discussion of these
forward-looking statements, and of important factors that could
cause results to differ materially from the forward-looking
statements contained in this report, see Item 1 of Part I,
“Business – Forward-Looking
Statements.”
Critical Accounting Policies and Estimates
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations discusses Willamette Valley Vineyards’ 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.
Revenue - The Company’s principal sources of revenue
are derived from sales and distribution of wine. Distributor sales
are recognized from wine sales at the time of shipment and passage
of title. The Company’s payment arrangements with customers
provide primarily 30-day terms and, to a limited extent, 45-day,
60-day or longer terms for some international customers. Direct
sales from items sold through the Company’s retail locations
are recognized at the time of sale.
Inventory - The Company values inventories at the lower of
actual cost to produce the inventory or market value. The Company
regularly reviews inventory quantities on hand and adjusts its
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 the Company’s
inventory cost is determined to be greater than the net realizable
value of the inventory upon sale, the Company would be required to
recognize such excess costs in its cost of goods sold at the time
of such determination. Therefore, although the Company makes every
effort to ensure the accuracy of its forecasts of future product
demand, any significant unanticipated changes in demand could have
a significant impact on the ultimate selling price and cases sold
and, therefore, the carrying value of the Company’s inventory
and its reported operating results.
Additionally,
the Company regularly evaluates inventory for obsolescence and
marketability and if it determines that the inventory is obsolete,
or no longer suitable for use or marketable, the cost of that
inventory is recognized in its cost of sales at the time of such
determination.
Vineyard Development - The Company capitalizes 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.
Depletions - 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 recognized
in that month as a reduction of revenues. The Company also
reimburses for samples used by distributors up to 1.5% of product
sold to the distributors. Sample expenses are recognized at the
time the Company is billed by the distributor as a selling, general
and administrative expense.
Shipping - Amounts paid by customers to the Company for
shipping and handling expenses are included in the net revenue.
Expenses incurred for outbound 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.
Income Taxes – The
Company accounts for income taxes using the asset and liability
approach. This requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the financial statement and the tax basis of
assets and liabilities at the applicable tax rates. The Company
evaluates deferred tax assets, and records a valuation allowance
against those assets, if available evidence suggests that some of
those assets will not be realized.
The effect of uncertain tax positions would be recorded in
the financial statements only after determining a more likely than
not probability that the uncertain tax positions would withstand an
examination by tax authorities based on the technical merits of the
position. The tax benefit to be recognized is measured as the
largest amount of benefit that is greater than fifty percent likely
of being realized upon ultimate settlement. As facts and
circumstances change, management reassesses these probabilities and
would record any changes in the financial statements as
appropriate.
Overview
The
Company generates revenue from the sales of wine to wholesalers and
direct to consumers. Direct to consumer sales primarily include
sales through the Company’s tasting rooms and wine club.
Direct to consumer sales are more profitable to the Company due to
prices received being closer to retail than those prices paid by
wholesalers. The Company continues to emphasize growth in direct to
consumer sales through use of the Hospitality Center and growth in
wine club membership. The Company had 6,714 wine club memberships
for the year ended December 31, 2016, a net increase of 344 when
compared to 2015. Periodically, the Company will also sell grapes
or bulk wine, which primarily consists of inventory that does not
meet Company standards or is in excess to production targets.
However, this activity is not a significant part of the
Company’s activities.
The
Company sold approximately 134,700 and 121,800 cases of produced
wine during the years ended December 31, 2016 and 2015,
respectively, an increase of 12,900 cases, or 10.6% in the current
year over the prior year. The increase in wine sales was the
result of growth in both retail sales and sales through
distributors.
Cost of
Sales includes grape costs, whether purchased or grown at Company
vineyards, crush costs, winemaking and processing costs, bottling,
packaging, warehousing and shipping and handling costs associated
with purchased production materials. For grapes grown at Company
vineyards, costs include farming expenditures and amortization of
vineyard development costs. The Company expects cost of sales to
decrease, as a percentage of net sales, over the next several
years, as higher yield vintages are released.
At
December 31, 2016, wine inventory includes approximately 72,400
cases of bottled wine and 407,600 gallons of bulk wine in various
stages of the aging process. Case wine is expected to be sold over
the next 12 to 24 months and generally before the release date of
the next vintage. The winery bottled approximately 141,416 cases
during the year ended December 31, 2016.
Results of Operations
The
Company had net sales of $19,425,412 and $17,938,872 for the years
December 31, 2016 and 2015, respectively, an increase of $1,486,540
or 8.3%, for the year ended December 31, 2016 over the prior year
period. The reasons for this increase include increased sales in
all categories except bulk wine; retail sales (10.2%), in-state
sales (13.8%), out-of-state sales (12.5%) and sales of bulk
products (-68.5%). The reduction in bulk wine sales is primarily
attributable to high harvest yields in 2015 that did not exist in
2016.
Gross
profit was $12,220,528 and $10,846,761 for the years ended December
31 2016 and 2015, respectively, an increase of $1,373,767, or
12.7%, for the year ended December 31, 2016 over the prior year
period. This increase was generally driven by an increase in sales
and a reduced cost of sales as a percentage of sales.
The
gross margin percentage was 62.9% and 60.5% for the years ended
December 31, 2016 and 2015, respectively, an increase of 4.0%, for
the year ended December 31, 2016 over the prior year period. This
increase in the gross profit percentage is primarily the result of
an overall increase in per case margins.
Selling,
general and administrative expenses were $8,053,127 and $7,573,801
for the years ended December 31, 2016 and 2015, respectively, an
increase of $479,326, or 6.3%, for the year ended December 31, 2016
over the prior year period. This increase was mainly the result of
both increased selling expenses and increased general and
administrative costs associated with efforts to increase sales and
accommodate and develop retail growth.
Income
from operations was $4,167,401 and $3,272,960 for the years ended
December 31, 2016 and 2015, respectively, an increase of $894,441,
or 27.3%, for the year ended December 31, 3016 over the prior year
period. The primary reason for this increase was increased gross
profit, which was partially offset by increased selling expenses
and administrative expense.
Provision
for income taxes was $1,478,310 and $1,275,416 for the years ended
December 31, 2016 and 2015, respectively, an increase of $202,894,
or 15.9%, for the year ended December 31, 2016 over the prior year
period. This increase in income taxes is 2016 compared to 2015 were
primarily the result of higher pretax income in 2016 compared to
the previous year partially offset by a lower effective tax
rate.
Net
income was $2,628,975 and $1,901,832, for the years ended December
31, 2016 and 2015, respectively, an increase of $727,143, or 38.2%,
for the year ended December 31, 2016 over the prior year period.
The primary reason for this increase was an overall increase in
income from operations. Additionally, the Company recorded $110,000
in net proceeds received in 2016 from a legal claim, regarding
damage to grapes that occurred in 2013 from an adjacent farm
overspray, which was included as an offset to selling, general and
administrative expense for 2016.
Net
income applicable to common shareholders was $2,166,446 and
$1,844,221, for the years ended December 31, 2016 and 2015,
respectively, an increase of $322,225, or 17.5%, for the year ended
December 31, 2016 over the prior year period. This increase was
primarily driven by increased income from operations in 2016
compared to 2015.
Diluted
income per common share after preferred dividends was $0.43 and
$0.37 for the years ended December 31, 2016 and 2015, respectively,
an increase of $0.06, or 16.7%, for the year ended December 31,
2016 over the prior year period. The primary reason for this
increase is an increase in net income in 2016 compared to
2015.
The
Company has three primary sales channels: direct-to-consumer sales,
in-state sales to distributors, and out-of-state sales to
distributors. These three sales channels represent 36.0%, 19.1% and
44.9%, of net sales for the year ended December 31, 2016,
respectively. This compares to 38.5%, 18.2% and 43.3% of net sales
for the year ended December 31, 2015, respectively. Miscellaneous
and grape sales are included in direct-to-consumer
sales.
The
Company had cash balances of $5,706,351, at December 31, 2016, and
$4,010,664 at December 31, 2015. The Company had no outstanding
line of credit balance at December 31, 2016 or 2015.
EBITDA
In
2016, the Company’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”) increased
20.2% to 5,724,058 from 4,760,442 in 2015, primarily as a result of
higher net income and depreciation and amortization
expenses.
EBITDA
does not reflect the impact of a number of items that affect our
net income, including financing costs. EBITDA is not a measure of
financial performance under the accounting principles generally
accepted in the United States of America, referred to as
“GAAP”, and should not be considered as an alternative
to net income or income from operations as a measure of
performance, nor as an alternative to net cash from operating
activities as a measure of liquidity. We use EBITDA as a benchmark
measurement of our own operating results and as a benchmark
relative to our competitors. We consider it to be a meaningful
supplement to operating income as a performance measure primarily
because depreciation and amortization expense are not actual cash
costs, and depreciation expense varies widely from company to
company in a manner that we consider largely independent of the
underlying cost efficiency of our operating
facilities.
EBITDA
has significant limitations as an analytical tool, and should not
be considered in isolation, or as a substitute for analysis of our
results as reported. Because of these limitations, EBITDA should
only be considered as a supplemental performance measure and should
not be considered as a measure of liquidity or cash available to us
to invest in the growth of our business. See the Statement of Cash
Flows set out in our consolidated financial statements included
herein.
The
following table provides a reconciliation of net income (the most
comparable GAAP measure) to EBITDA for the periods
indicated:
|
|
|
|
|
|
|
|
Net Income
|
$2,628,975
|
$1,901,832
|
|
Depreciation
and amortization expense
|
1,335,254
|
1,274,243
|
|
Interest
Expense
|
291,370
|
311,188
|
|
Interest
Income
|
(9,851)
|
(2,237)
|
|
Income
tax expense
|
1,478,310
|
1,275,416
|
|
EBITDA
|
$5,724,058
|
$4,760,442
|
Sales
Wine
sales for the years ended December 31, 2016 and 2015 and ending
inventory amounts for the year ended December 31, 2016, are shown
on the following table, as well as planned production quantities
for the year ending December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Varietal/Product
|
|
|
|
|
|
|
|
|
|
|
|
Pinot
Noir/Estate
|
13,900
|
14,000
|
18,100
|
15,200
|
|
Pinot
Noir/Barrel Select
|
10,800
|
10,800
|
200
|
9,000
|
|
Pinot
Noir/Founders Reserve
|
3,400
|
3,500
|
5,100
|
5,000
|
|
Pinot
Noir/Special Designates
|
4,100
|
4,200
|
7,400
|
4,100
|
|
Pinot
Noir/Whole Cluster
|
38,000
|
30,100
|
4,300
|
35,200
|
|
Pinot
Gris
|
24,500
|
22,400
|
11,800
|
26,000
|
|
Riesling
|
22,000
|
20,100
|
7,500
|
19,500
|
|
Chardonnay
|
2,600
|
3,500
|
4,200
|
4,300
|
|
Table
Wine
|
10,300
|
6,100
|
5,300
|
12,500
|
|
Other
|
5,100
|
7,100
|
8,500
|
12,200
|
|
|
|
|
|
|
|
Total
Total
|
134,700
|
121,800
|
72,400
|
143,000
|
Approximately
52% of the Company’s case sales during 2016 were of the
Company’s flagship varietal, Pinot Noir. Case sales of Pinot
Gris and Riesling follow with approximately 18% and 16% of case
sales each, respectively. The Company sold approximately 134,700
and 121,800 cases of Company-produced wine during the years ended
December 31, 2016 and 2015, respectively. This represents an
increase of approximately 12,900 cases, or 10.6% in 2016 compared
to 2015. This increase in case sales in 2016 compared to 2015 was
primarily the result of growth in both retail sales and sales
through distributors.
Wine Inventory
The
Company had approximately 72,400 cases of bottled wine on-hand at
the end of 2016. Management believes sufficient bulk wine inventory
is on-hand to bottle approximately 143,000 cases of wine in 2017
and that sufficient stock is on hand to meet current demand levels
until the 2017 vintage becomes available.
Production Capacity
Current
production volumes are within the current production capacity
constraints of the Winery when including storage capacity at the
Tualatin Winery and utilization of temporary storage when
appropriate. In 2016, approximately 141,416 cases were produced,
and Management anticipates bottling approximately 143,000 cases in
2017. The Winery has capacity to comfortably store and process
about 159,000 cases of wine per year at the Estate Winery but can
expand that capacity by utilizing storage at the Tualatin Winery as
well as temporary storage. Management continues to invest in new
production technologies to increase the efficiency and quality of
wine production. During 2016, the Company did not choose to utilize
the wine production facilities at the Tualatin Winery but did
utilize it for wine storage. The Tualatin Winery has capacity to
produce approximately 25,000 cases of wine. The facility is
maintained in good condition, and is occasionally used by other
local wineries. Management intends to fully utilize the production
capacity at the Estate Winery before expanding into the Tualatin
Winery.
Grape Supply
For the
2016 and 2015 vintages, the Company grew approximately 47% and 54%
of all grapes harvested, respectively. The remaining grapes
harvested were purchased from other growers. In 2016 and 2015, 32%
and 16% of grapes harvested were purchased under short-term
contracts, and 21% and 30% of grapes harvested were purchased under
long-term contracts, respectively. The Company considers short-term
contracts to be for single vintage years and long-term contracts to
cover multiple vintage years.
Grapes
are typically harvested and received in October of the vintage
year. Upon receipt, the grapes are weighed, and a quality analysis
is performed to ensure the grapes meet the standards set forth in
the purchase contract. Based on the amount of qualifying grapes
received, the full amount payable to the grower is recorded to the
grapes payable liability account. Approximately 50% of the grapes
payable amount is due in November of the vintage year. The
remaining amount is due in March of the following year. The grapes
are processed into wine, which is typically bottled and available
for sale between five months and two years from date of
harvest.
The
Company received $525,118 and $959,446 worth of grapes from
long-term contracts during the years ended December 31, 2016 and
2015, respectively. The Company received $1,258,642 and $900,792
worth of grapes from short-term contracts during the years ended
December 31, 2016 and 2015, respectively. Total grapes payable were
$693,666 and $816,879 as of December 31, 2016 and 2015,
respectively. Grapes payable includes $225,118 and $410,575 of
grapes payable from long-term contracts as of December 31, 2016 and
2015, respectively.
The
Company plans to address long-term grape supply needs by developing
new vineyards on properties currently owned or secured by lease.
The Company has approximately 174 acres of vineyards that have been
planted but are in the pre-productive stage. We anticipate that
these vineyards will begin bearing fruit in the next one to three
years. The Company has approximately 173 acres of land that is
suitable for future vineyard development. Management currently has
plans to plant approximately 76 acres and 75 acres in the years
2017 and 2018, which we anticipate will begin bearing fruit in
years 2021 and 2022, respectively. Additionally, the Company
intends to seek out opportunities to acquire land for future grape
plantings in order to continue to increase available quantities,
maintain control over farming practices, more effectively manage
grape costs and mitigate uncertainty associated with long-term
contracts.
In
2016, a major grape supplier substantially under-delivered grape
quantities, anticipated under the contract with us, causing the
Company to purchase grapes from other local growers. The Company is
reevaluating its relationship with this grower and as a result may
purchase fewer grapes under the long-term contract
categorization.
Wine Quality
Continued
awareness of the Willamette Valley Vineyards brand and the quality
of its wines, was enhanced by national and regional media coverage
and partnerships throughout 2016.
The
Company's Founder Jim Bernau was nominated for 'Person of the
Year' in the Wine Star Awards presented by Wine Enthusiast
Magazine. The Willamette Valley was honored by earning
‘Region of the Year.’
The
Company was selected as the Best Vineyard/Tasting Room Experience
by Sunset Magazine in their annual Sunset Travel
Awards. The Sunset Travel Awards honor the
West's top destinations in lodging, dining, cultural tourism,
outdoor adventure and attractions. The Company is the first
Oregon winery to win the award.
The
Company's Founder Jim Bernau was selected as the face of the Oregon
Wine Board's Oregon Wine Month campaign that ran in May 2016. Print
advertisements and in-store point of sale materials were featured
throughout the country promoting Oregon wines.
Wine
Enthusiast Magazine rated the Company's 2015 Whole Cluster Pinot
Noir a 90 point and Editors' Choice, Whole Cluster Rose' a 90 point
and Editors' Choice, Pinot Gris a 90 point and Editors' Choice,
2013 Bernau Block Pinot Noir a 91 point and Cellar Selection, 2013
Signature Cuvée Pinot Noir a 92 point, 2013 Hannah Pinot Noir
a 91 point, 2013 Elton Pinot Noir a 90 point, and 2014 Estate
Chardonnay a 90 point score.
Wine
Spectator rated the Company’s 2013 Tualatin Estate Pinot Noir
a 91 point, 2013 Signature Cuvée Pinot Noir a 91 point, and
2013 Vintage 40 Chardonnay a 89 point score. Wine Spectator rated
the 2014 Riesling with a 90 point and “Best Buy” in the
February 2016 issue.
Vinous, which recently purchased Stephen Tanzer's International
Wine Cellar, reviewed the Company's 2013 Pinot Noirs and awarded 91
points to the Hannah Pinot Noir, Signature Cuvée Pinot Noir
and Bernau Block Pinot Noir. They awarded 90 points to the Elton
Pinot Noir, Whole Cluster Pinot Noir and Vintage 40 Pinot
Noir.
The
2016 Quarter 1 issue of Burghound.com rated the Company’s
2012 Fuller Pinot Noir a 92 point, 2012 O’Brien Pinot Noir a
91 point, 2012 Tualatin Estate Pinot Noir a 91 point, 2012 Hannah
Pinot Noir a 90 point, and 2012 Signnature Cuve’e Pinot Noir
a 90 point.
Wine
Advocate rated the Company’s 2014 Elton Chardonnay a 90 point
score.
The
International Wine Report rated the Company’s 2013 Elton
Pinot Noir with a 93 point score.
Portland
Monthly Magazine included the Company's 2014 Estate Pinot Noir
(#13) and 2014 Estate Chardonnay (#32) on the list of Oregon's 50
Best Wines.
The
Company's 26th annual Grape Stomp Championships & Harvest
Celebration was featured in a USA Today article titled, "Where to
stomp grapes this harvest season." The article was also syndicated
to the Portland Tribune.
SouthCoast
Today shared the Company's winery story and rated the wines as
"outstanding."
The
Company partnered with the Portland Timbers major league soccer
team for the 2016 season. The partnership includes in-stadium
experiences and tastings, premium concession offerings and joint
advertising.
The
Company partnered with Tillamook Diary Co-op on in-store displays
and promotions featuring Tillamook Cheese and the Company's wine in
Safeway and Albertson's stores.
The
Company partnered with Timberline Lodge, one of the northwest's top
destinations, on a sustainable food educational dinner series
called Pasture and Pinot Noir. The program will run through the end
of the year and feature grass-fed beef paired with the Company's
wines in their on-site restaurant.
The
Company participated in Chicago Gourmet and Los Angeles Food and
Wine events.
The
Walla Walla Union Bulletin featured an article titled, “New
vineyard honors Valley’s French-Canadian roots,” prior
to the Company’s Pambrun Vineyard planting that was also
picked up and featured on Bloomberg Online in May.
Wine
Enthusiast Magazine featured an online story on the Company’s
Groundbreaking event titled, “Willamette Moves Into Walla
Walla,” for the new Pambrun Vineyard located in the Walla
Walla Valley.
Eater
included the Company’s culinary program in a piece titled,
“14 Standout Restaurants in the Willamette Valley Wine
Country.”
The
Classic Wine Auction presented their annual ORVI Award to our
Founder Jim Bernau for his achievements in building the Oregon wine
industry and establishing its worldwide reputation. The ORVI Award
is presented to individuals that have not only elevated the status
of Oregon wines, but have also provided generous support to the
Classic Wines Auction.
Portland
Monthly Magazine selected Founder Jim Bernau for their Faces of
Portland campaign featuring him as the face of Oregon
wine.
The
Statesman Journal, published in Salem, Oregon, featured an article
titled, “Oregon Wine Industry Honors the Best,” which
announced the Company’s Vineyard Manager, Efren Loeza earned
the inaugural Oregon Wine Board Vineyard Excellence Award at the
2016 Oregon Wine Symposium.
Kelly
Mitchell of The Huffington Post published an online feature story
about the Company titled “Perfecting Pinot in the Willamette
Valley,” and writing, “Today Willamette Valley
Vineyards is a leader, not only in the production of top Pinot
Noir, but in the employing practices to offset environmental impact
of the business.”
The
Oregonian named the Company as "One of the Most Elegant Wineries in
Oregon" in the January 2016 article.
Seasonal and Quarterly Results
The
Company has historically experienced and expects to continue
experiencing seasonal fluctuations in its revenue and net income.
Typically, first quarter sales are the lowest of any given year,
and sales volumes increase progressively through the fourth quarter
mostly because of consumer buying habits.
The
following table sets forth certain information regarding the
Company’s revenue, excluding excise taxes, from the
Winery’s operations for the three and twelve months ended
December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
sales
|
$1,957,154
|
$1,699,991
|
$6,932,424
|
$6,291,039
|
|
In-state
sales
|
1,345,089
|
1,120,745
|
3,810,841
|
3,350,048
|
|
Out-of-state
sales
|
2,616,886
|
2,225,228
|
8,937,097
|
7,940,977
|
|
Bulk
wine/miscellaneous sales
|
100,565
|
131,148
|
245,097
|
777,538
|
|
|
|
|
|
|
|
Total
revenue
|
6,019,694
|
5,177,112
|
19,925,459
|
18,359,602
|
|
|
|
|
|
|
|
Less
excise taxes
|
(158,790)
|
(116,414)
|
(500,047)
|
(420,730)
|
|
|
|
|
|
|
|
Sales,
net
|
$5,860,904
|
$5,060,698
|
$19,425,412
|
$17,938,872
|
2016 Compared to 2015
Retail
sales for the years ended December 31, 2016 and 2015 were
$6,932,424 and $6,291,039, respectively, an increase of $641,385,
or 10.2%, for the year ended December 31, 2016 over the prior year
period. This increase was primarily driven broad based growth in
each major retail category.
Bulk
Wine/miscellaneous sales for the years ended December 31, 2016 and
2015 were $245,097 and $777,538, respectively, a decrease of
$532,441. This decrease was primarily the result of increased sales
of bulk wine in 2015, mainly due to higher yields in the 2014 and
2015 grape harvests, which resulted in wine quantities that were in
excess of Company needs. These excess bulk wine quantities were not
present in 2016.
In-state
sales for the years ended December 31, 2016 and 2015 were
$3,810,841 and $3,350,048, respectively, an increase of $460,793,
or 13.8%, for the year ended December 31, 3016 over the prior year
period. Management believes this increase is primarily due to
increased visibility of our products in the Oregon
market.
Out-of-state
sales for the years ended December 31, 2016 and 2015 were
$8,937,097 and $7,940,977, respectively, an increase of $996,120,
or 12.5%. Management believes this increase is primarily related to
an increase in sales efforts outside of Oregon in
2016.
The
Company pays alcohol excise taxes to both the OLCC and to the TTB.
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 OLCC for
the Oregon Wine Board. The Company’s excise taxes for the
years ended December 31, 2016 and 2015 were $500,047 and $420,730,
an increase of $79,317, or 18.9%, for the year ended December 31,
2016 over the prior year period. This increase was due primarily to
increased wine sales in 2016.
Cost of
Sales was $7,204,884 and $7,092,111 for the years ended December
31, 2016 and 2015, respectively, an increase of $112,773, or 1.6%,
for the year ended December 31, 2016 over the prior year period.
The increase in cost of sales can be attributed mainly to the
overall increase in product sales partially offset by higher sales
margins.
As a
percentage of net sales revenue, gross profit was 62.9% and 60.5%
in the years ended December 31, 2016 and 2015, respectively, an
increase of 4.0%, for the year ended December 31, 2016 over the
prior year period. This increase in the gross profit percentage is
primarily a result of the release of higher margin vintages in
2016.
The
Company continued its focus in 2016 on improved distribution of
higher margin products through distributors nationwide and through
direct sales and strives to minimize increases in grape and
production costs.
Selling,
general and administrative expenses were $8,053,127 and $7,573,801
for the years ended December 31, 2016 and 2015, respectively, an
increase of $479,326, or 6.3%, for the year ended December 31, 2016
over the prior year period. This increase was the primarily the
result of increased sales efforts and operating costs associated
with retail and administrative operations offset partially by
receipt of a legal settlement of $110,000 in 2016.
Interest
income was $9,851 and $2,237 for the years ended December 31, 2016
and 2015, respectively, an increase of $7,614 or 340.4%. The
increase in interest income is primarily due to increased balances
of cash on hand in the Company’s accounts as a result of the
proceeds received from sale of Preferred Stock in 2016. Interest
expense was $291,370 and $311,188 for the years ended December 31,
2016 and 2015, respectively, a decrease of $19,818, or 6.4%, for
the year ended December 31, 2016 over the prior year period. The
decrease in interest expense was mainly due to the reduced balances
on Company loans.
Other
income, net, was $221,403 and $213,239 for the years ended December
31, 2016 and 2015, respectively, an increase of $8,164, or 3.8%,
for the year ended December 31, 2016 over the prior year period.
The increase in other income is not attributable to a single
factor.
The
provision for income taxes and the Company’s effective tax
rate was $1,478,310 and 36.0%, respectively in the year ended
December 31, 2016. The provision for income taxes and the
Company’s effective tax rate was $1,275,416 and 40.1%,
respectively in the year ended December 31, 2015. This decrease in
tax rate is primarily related to tax adjustments that occurred in
2015 but did not reoccur in 2016 as well as an increased federal
domestic production activities deduction. The Company does not
anticipate significant changes in the tax rate in future
periods.
As a
result of the above factors, net income was $2,628,975 and
$1,901,832 for the years ended December 31, 2016 and 2015,
respectively, an increase of $727,143, or 38.2%, for the year ended
December 31, 2016 over the prior year period. The increase in net
income was primarily the result of increased income from
operations. Diluted income per common share after preferred
dividends was $0.43 and $0.37 for the years ended December 31, 2016
and 2015, respectively, an increase of $0.06 or 16.7% in 2016
compared to 2015. The increase in earnings per share is primarily a
result of increased net income.
Liquidity and Capital Resources
At
December 31, 2016, the Company had a working capital balance of
$16.4 million and a current ratio of 5.59:1. The Company had cash
balances of $5,706,351, at December 31, 2016.
Total
cash provided from operating activities for the years ended
December 31, 2016 was $3,087,913. These results were primarily due
to income from operations, increased by non-cash operating
expenses, such as depreciation, and decreased by an increase in
inventory.
Total
cash used in investing activities for the years ended December 31,
2016 was $5,328,419. These results were primarily due to additions
to property and equipment and general vineyard
development.
Total
cash provided from financing activities for the years ended
December 31, 2016 was $3,936,193. These results were primarily due
to cash received in connection with the issuance of Preferred Stock
partially offset by the repurchase of common stock and payment of a
preferred stock dividend.
At
December 31, 2016, 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, 2016, the Company
was in compliance with all of the financial covenants. The current
line of credit loan agreement with Umpqua Bank is due to expire in
July 2017.
As of
December 31, 2016, the Company had a long-term debt balance of
$4,824,096 owed to NW Farm Credit Services. The debt with NW Farm
Credit Services was used to finance the Hospitality Center and
subsequent remodels, invest in winery equipment to increase the
Company’s winemaking capacity, complete the storage facility,
and acquire new vineyard land for future development. Additionally,
the Company had a long-term debt balance of $45,899 owed to Toyota
Credit Corporation for the purchase of a vehicle.
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 operating
needs.
The
Company’s contractual obligations as of December 31, 2016
including long-term debt, note payable, grape payables and
commitments for future payments under non-cancelable lease
arrangements are summarized below:
|
|
Payments Due by Period
|
|
|
|
Less than 1
|
|
3 - 5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
$4,869,995
|
$380,471
|
$830,912
|
$920,631
|
$2,737,981
|
|
Note
payable
|
245,417
|
245,417
|
-
|
-
|
-
|
|
Grape
payables
|
693,666
|
693,666
|
-
|
-
|
-
|
|
Operating
leases
|
2,455,689
|
415,230
|
758,217
|
345,181
|
937,061
|
|
|
|
|
|
|
|
|
Total
contractual obligations
|
$8,264,767
|
$1,734,784
|
$1,589,129
|
$1,265,812
|
$3,675,042
|
Inflation
The
Company’s management does not believe inflation has had a
material impact on the Company’s revenues or income during
2016 or 2015.
Off Balance Sheet Arrangements
At
December 31, 2016 and 2015, the Company had no off-balance sheet
arrangements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
|
|
|
PAGE
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
|
32
|
|
|
|
|
Financial Statements
|
|
|
|
|
|
|
Balance Sheets
|
33
|
|
|
|
|
|
|
Statements of Income
|
34
|
|
|
|
|
|
|
Statements of Shareholders’ Equity
|
35
|
|
|
|
|
|
|
Statements of Cash Flows
|
36
|
|
|
|
|
|
|
Notes to Financial Statements
|
37-49
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Shareholders
Willamette Valley Vineyards, Inc.
We have audited the accompanying balance sheets of Willamette
Valley Vineyards, Inc. (the “Company”) as of December
31, 2016 and 2015, and the related statements of income,
shareholders’ equity, and cash flows for the 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
also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that 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, 2016 and 2015,
and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ Moss Adams LLP
Portland, Oregon
March 23, 2017
WILLAMETTE VALLEY VINEYARDS,
INC.
BALANCE SHEETS
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
Cash
and cash equivalents
|
$5,706,351
|
$4,010,664
|
|
Restricted
cash
|
-
|
1,476,232
|
|
Accounts
receivable, net
|
1,871,450
|
1,684,502
|
|
Inventories
(Note 3)
|
11,970,656
|
10,632,462
|
|
Prepaid
expenses and other current assets
|
399,740
|
131,173
|
|
Income
tax receivable
|
-
|
204,513
|
|
Total
current assets
|
19,948,197
|
18,139,546
|
|
|
|
|
|
Investment
in Kore Wine Company
|
59,186
|
60,000
|
|
Vineyard
development costs, net
|
4,666,794
|
3,699,947
|
|
Property
and equipment, net (Note 4)
|
20,196,945
|
16,729,162
|
|
|
|
|
|
TOTAL ASSETS
|
$44,871,122
|
$38,628,655
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
Accounts
payable
|
$505,085
|
$386,137
|
|
Accrued
expenses
|
995,405
|
604,580
|
|
Investor
deposits for preferred stock
|
-
|
1,476,232
|
|
Current
portion of note payable
|
245,417
|
245,417
|
|
Current
portion of long-term debt
|
380,471
|
349,003
|
|
Income
taxes payable
|
389,798
|
-
|
|
Current
portion of deferred revenue-distribution agreement
|
142,857
|
142,857
|
|
Unearned
revenue
|
213,612
|
73,200
|
|
Grapes
payable
|
693,666
|
816,879
|
|
Total
current liabilities
|
3,566,311
|
4,094,305
|
|
|
|
|
|
Note
payable, net of current portion
|
-
|
245,417
|
|
Long-term
debt, net of current portion and debt issuance costs
|
4,443,685
|
4,773,794
|
|
Deferred
rent liability
|
113,567
|
140,756
|
|
Deferred
revenue-distribution agreement, net of current portion
|
95,223
|
238,083
|
|
Deferred
gain
|
89,172
|
121,267
|
|
Deferred
income taxes
|
1,931,000
|
1,848,000
|
|
Total
liabilities
|
10,238,958
|
11,461,622
|
|
|
|
|
|
COMMITMENTS AND
CONTINGENCIES (Note
12)
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
Redeemable preferred
stock, no par value, 10,000,000 shares authorized,
|
|
|
2,396,954
shares, liquidation preference $9,947,359, issued and
|
|
|
outstanding at December 31, 2016 and 1,074,338 shares,
liquidation
|
|
preference $4,458,710, issued and outstanding at December 31,
2015,
|
|
|
respectively.
|
9,061,307
|
3,735,437
|
Common stock, no par value, 10,000,000 shares authorized, 5,016,685
and
|
|
|
4,989,216
shares issued and outstanding at December 31, 2016 and
|
|
|
|
December
31, 2015, respectively.
|
8,971,575
|
8,998,760
|
|
Retained
earnings
|
16,599,282
|
14,432,836
|
|
Total
shareholders' equity
|
34,632,164
|
27,167,033
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
$44,871,122
|
$38,628,655
|
The
accompanying notes are an integral part of the financial
statements.
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES, NET
|
$19,425,412
|
$17,938,872
|
|
COST OF SALES
|
7,204,884
|
7,092,111
|
|
|
|
|
|
GROSS PROFIT
|
12,220,528
|
10,846,761
|
|
|
|
|
|
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
|
8,053,127
|
7,573,801
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
4,167,401
|
3,272,960
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
Interest
income
|
9,851
|
2,237
|
|
Interest
expense
|
(291,370)
|
(311,188)
|
|
Other
income, net
|
221,403
|
213,239
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
4,107,285
|
3,177,248
|
|
|
|
|
|
INCOME TAX PROVISION
|
(1,478,310)
|
(1,275,416)
|
|
|
|
|
|
NET INCOME
|
2,628,975
|
1,901,832
|
|
|
|
|
|
Preferred stock dividends
|
(462,529)
|
(57,611)
|
|
|
|
|
|
INCOME APPLICABLE TO COMMON SHAREHOLDERS
|
$2,166,446
|
$1,844,221
|
|
|
|
|
|
Basic income per common share after preferred
dividends
|
$0.43
|
$0.37
|
|
|
|
|
|
Diluted income per common share after preferred
dividends
|
$0.43
|
$0.37
|
|
|
|
|
|
Weighted average number of basic common shares
outstanding
|
4,991,065
|
4,928,712
|
|
|
|
|
|
Weighted average number of diluted common shares
outstanding
|
4,995,343
|
4,963,999
|
The
accompanying notes are an integral part of the financial
statements.
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
-
|
$-
|
4,869,788
|
$8,601,637
|
$12,588,615
|
$21,190,252
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock, net
|
1,074,338
|
3,735,437
|
-
|
-
|
-
|
3,735,437
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends declared
|
-
|
-
|
-
|
-
|
(57,611)
|
(57,611)
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense
|
-
|
-
|
-
|
17,685
|
-
|
17,685
|
|
|
|
|
|
|
|
|
|
Stock
issued and options exercised
|
-
|
-
|
155,971
|
629,938
|
-
|
629,938
|
|
|
|
|
|
|
|
|
|
Stock
repurchased
|
-
|
-
|
(36,543)
|
(250,500)
|
-
|
(250,500)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
1,901,832
|
1,901,832
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
1,074,338
|
3,735,437
|
4,989,216
|
8,998,760
|
14,432,836
|
27,167,033
|
|
|
|
|
|
|
|
|
|
Issuance
of preferred stock, net
|
1,322,616
|
5,325,870
|
-
|
-
|
-
|
5,325,870
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividends declared
|
-
|
-
|
-
|
-
|
(462,529)
|
(462,529)
|
|
|
|
|
|
|
|
|
|
Stock
based compensation expense
|
-
|
-
|
-
|
748
|
-
|
748
|
|
|
|
|
|
|
|
|
|
Stock
issued and options exercised
|
-
|
-
|
97,500
|
498,927
|
-
|
498,927
|
|
|
|
|
|
|
|
|
|
Stock
repurchased
|
-
|
-
|
(70,031)
|
(526,860)
|
-
|
(526,860)
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
2,628,975
|
2,628,975
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
2,396,954
|
$9,061,307
|
5,016,685
|
$8,971,575
|
$16,599,282
|
$34,632,164
|
The
accompanying notes are an integral part of the financial
statements.
WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
income
|
$2,628,975
|
$1,901,832
|
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
Depreciation
and amortization
|
1,335,254
|
1,274,243
|
|
Gain
on disposition of property & equipment
|
(2,500)
|
(1,900)
|
|
Stock
based compensation expense
|
748
|
17,685
|
|
Non-cash
loss from investment in Kore Wine Company
|
814
|
-
|
|
Deferred
rent liability
|
(27,189)
|
(22,940)
|
|
Deferred
income taxes
|
83,000
|
431,000
|
|
Deferred
gain
|
(32,095)
|
(32,095)
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
(186,948)
|
(72,378)
|
|
Inventories
|
(1,338,194)
|
(721,892)
|
|
Prepaid
expenses and other current assets
|
(268,567)
|
18,851
|
|
Income
taxes receivable
|
204,513
|
118,501
|
|
Income
taxes payable
|
389,798
|
-
|
|
Unearned
revenue
|
140,412
|
38,765
|
|
Deferred
revenue-distribution agreement
|
(142,860)
|
(142,860)
|
|
Grapes
payable
|
(123,213)
|
118,028
|
|
Accounts
payable
|
35,140
|
(280,856)
|
|
Accrued
expenses
|
390,825
|
52,993
|
|
Net
cash from operating activities
|
3,087,913
|
2,696,977
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Investment
in Kore Wine Company
|
-
|
(60,000)
|
|
Additions
to vineyard development
|
(1,003,115)
|
(915,091)
|
|
Additions
to property and equipment
|
(4,327,804)
|
(2,451,705)
|
|
Proceeds
from sale of property and equipment
|
2,500
|
1,900
|
|
Net
cash from investing activities
|
(5,328,419)
|
(3,424,896)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from investor deposits held as restricted cash
|
1,476,232
|
(1,476,232)
|
|
Proceeds
from investor deposits held as liability
|
(1,476,232)
|
1,476,232
|
|
Payment
on installment note for property purchase
|
(245,417)
|
490,834
|
|
Payments
on long-term debt
|
(348,923)
|
(329,276)
|
|
Issuance
of preferred stock, net
|
5,325,870
|
3,735,437
|
|
Payment
of preferred stock dividend
|
(462,529)
|
(57,611)
|
|
Proceeds
from stock options exercised
|
194,052
|
629,938
|
|
Repurchase
of common stock
|
(526,860)
|
(250,500)
|
|
Net
cash from financing activities
|
3,936,193
|
4,218,822
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS
|
1,695,687
|
3,490,903
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, beginning of year
|
4,010,664
|
519,761
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
$5,706,351
|
$4,010,664
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
Purchase
of property with common stock
|
304,875
|
-
|
|
Purchase
of equipment with long-term debt
|
45,899
|
-
|
|
Purchases
of property and equipment included in
|
|
|
|
accounts
payable
|
99,896
|
16,088
|
|
|
$450,670
|
$16,088
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash
paid during the year for:
|
|
|
|
Interest
paid (net of capitalized interest)
|
$292,870
|
$308,437
|
|
Income
tax paid
|
$801,250
|
$719,550
|
The
accompanying notes are an integral part of the financial
statements.
NOTE 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.
The
Company has direct-to-consumer sales and national sales to
distributors. These sales channels offer comparable products to
customers and utilize similar processes and share resources for
production, selling and distribution. Direct-to-consumer sales
generate a higher gross profit margin than national sales to
distributors due to differentiated pricing between these
segments.
Direct-to-consumer
sales, including bulk wine, miscellaneous sales, and grape sales,
represented approximately 36.0% and 38.5% of total revenue for 2016
and 2015, respectively.
In
state sales through distributors represented approximately 19.1%
and 18.2% of total revenue for 2016 and 2015,
respectively.
Out-of-state
sales, including foreign sales, represented approximately 44.9% and
43.3% of total revenue for 2016 and 2015, respectively. Foreign
sales represent approximately 0.8% of total revenue.
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 revenue 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.
Financial instruments and concentrations of risk – The Company has the
following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities, grapes
payable and long-term debt.
Cash
and cash equivalents are maintained at four financial institutions.
Deposits held with these financial institutions may exceed the
amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and are maintained with a
financial institution of reputable credit and therefore bear
minimal credit risk.
In
2016, sales to one distributor represented approximately 19.0% of
total Company revenue. In 2015, sales to one distributor
represented approximately 18.2% of total Company
revenue.
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 money market funds.
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 collectability 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. The Company has credit
risk associated with uncollateralized trade accounts receivable
from all operations totaling $1,871,450 and $1,684,502 as of
December 31, 2016 and 2015 exclusive of the allowance for doubtful
accounts. The allowance for doubtful accounts is further discussed
in Note 2.
Inventories – For Company produced wines, 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 costs, 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 sheets, 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 $1,185,823 and $1,109,406 at December 31, 2016 and
2015, 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, 2016 and 2015, approximately $76,417 and $75,669,
respectively, was amortized into inventory costs.
Property and equipment – Property
and equipment are stated at cost and are depreciated on the
straight-line basis over their estimated useful lives. Land
improvements are depreciated over 15 years. Winery buildings are
depreciated over 30 years. Equipment is depreciated over 3 to 10
years, depending on the classification of the asset. Depreciation
is discussed further in Note 4.
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.
Review of long-lived assets for impairment
- The Company evaluates
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. Long-lived assets
consist primarily of property and
equipment. Circumstances that might cause the Company to
evaluate its long-lived assets for impairment could include a
significant decline in the prices the Company or the industry can
charge for its products, which could be caused by general economic
or other factors, changes in laws or regulations that make it
difficult or more costly for the Company to distribute its products
to its markets at prices which generate adequate returns, natural
disasters, significant decrease in demand for the Company’s
products or significant increase in the costs to manufacture the
Company’s products.
Recoverability of assets is measured by a comparison of the
carrying amount of an asset group to future net undiscounted cash
flows expected to be generated by the asset group. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. The
Company groups its long-lived assets with other assets and
liabilities at the lowest level for which identifiable cash flows
are largely independent of the cash flows of other assets and
liabilities (or asset group). This would typically be at
the winery level. The Company did not recognize any impairment
charges associated with long-lived assets during the years ended
December 31, 2016 and 2015.
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, 2016 and 2015, amortization
of debt issuance costs included in interest expense was
approximately $4,383 and $4,383 respectively. Debt issuance
amortization costs are scheduled at $4,383 for each of the next
four years, and $28,307 thereafter. Unamortized debt
issuance costs are recorded as a reduction from the carrying amount
of the related debt liability in the Company’s Balance
Sheets.
Distribution agreement receivable –
Effective September 1, 2011, the Company entered into an agreement
with Young’s Market Company for distribution of
Company-produced wines in Oregon and Washington. The terms of this
contract include exclusive rights to distribute Willamette Valley
Vineyard’s wines in Oregon and Washington for seven years. In
an effort to facilitate the transition, with as little disruption
as possible, Young’s Market Company agreed to compensate
Willamette Valley Vineyards for ongoing Oregon sales and branding
efforts. As a result, the Company was due to receive $250,000 per
year starting on September 2011 for each of the next four years for
a total of $1,000,000. As of December 31, 2016 and 2015, the
Company has no distribution agreement receivable with the final
payment having been made in 2014. The total amount of $1,000,000
received by the Company related to this agreement is being
recognized as revenue on a straight line basis over the seven year
life of the agreement. For the years ended December 31, 2016 and
2015, the Company has recognized revenue related to this agreement
in the amount of $142,860 and $142,860, respectively, recorded to
other income.
Income taxes – Income taxes
are recognized using enacted tax rates, and are composed of taxes
on financial accounting income that is adjusted for requirements of
current tax law, and deferred taxes. Deferred taxes are estimated
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.
The Company had no unrecognized tax benefits as of December 31,
2016 or 2015. The Company recognizes interest assessed by taxing
authorities as a component of tax expense. The Company recognizes
any penalties assessed by taxing authorities as a component of tax
expense. Interest and penalties for the years ended December 31,
2016 and 2015 were not material.
The Company files U.S. federal income tax returns with the Internal
Revenue Service (“IRS”) as well as income tax returns
in Oregon, California and Connecticut. The Company may be subject
to examination by the IRS for tax years 2013 through 2016.
Additionally, the Company may be subject to examinations by state
taxing jurisdictions for tax years 2012 through 2016. The Company
is not aware of any current examinations by the IRS or the state
taxing authorities.
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 years ended December 31, 2016 and 2015, rent costs paid in
excess of amounts recognized totaled $27,189 and $22,940,
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 revenue. 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. Net revenue
reported herein is shown net of sales allowances and excise
taxes.
The
Company has price incentive programs with its distributors to
encourage product placement and depletions. When recording a sale
to the customer, an incentive program liability is recorded to
accrued liabilities and sales are reported net of incentive program
expenses. Incentive program payments are made when completed
incentive program payment requests are received from the customers.
Incentive payments to a customer reduce the incentive program
accrued liability. For the years ended December 31, 2016 and 2015,
the Company recorded incentive program expenses of $503,334 and
$449,930, respectively, as a reduction in sales on the income
statement. As of December 31, 2016 and 2015, the Company has
recorded an incentive program liability in the amount of $46,888
and $42,456, respectively, which is included in accrued expenses on
the balance sheet.
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.
Administrative
support, purchasing, receiving and most other fixed overhead costs
are expensed as selling, general and administrative expenses
without regard to inventory units. Warehouse and winery production
and facilities costs, which make up approximately 12% of total
costs, are allocated to inventory units on a per gallon basis
during the production of wine, prior to bottling the final product.
No further costs are allocated to inventory units after
bottling.
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, 2016 and 2015, advertising costs incurred
were approximately $182,008 and $152,867 respectively.
The
Company provides an allowance to distributors for providing sample
of products to potential customers. For the years ended December
31, 2016 and 2015, these costs, which are included in selling,
general and administrative expenses, totaled approximately $105,421
and $153,299, 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, 2016 and
2015, such costs totaled approximately $412,331 and $421,617,
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, 2016 and 2015, excise taxes incurred were
approximately $500,048 and $420,729 respectively.
Stock based compensation – The Company
expenses stock options on a straight line basis over the
options’ related vesting term. For the years ended December
31, 2016 and 2015, the Company recognized pretax compensation
expense related to stock options of $748 and $17,685,
respectively.
Basic and diluted income per common share after preferred
dividends – Basic income
per share is computed based on the weighted-average number of
common shares outstanding each year. Diluted income per share is
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 anti-dilutive.
Options
to purchase 7,000 shares of common stock were outstanding at
December 31, 2016 and diluted weighted-average shares outstanding
at December 31, 2016 include the effect of 4,278 stock options.
Options to purchase 67,000 shares of common stock were outstanding
at December 31, 2015 and diluted weighted-average shares
outstanding at December 31, 2015 include the effect of 35,287 stock
options.
There
were no potentially dilutive shares from stock options included in
the computation of dilutive income per share for 2016 and 2015 as
their impact would have been anti-dilutive.
Reclassifications – As a result of the
retrospective adoption of ASU 2015-03 (see “Recent accounting
pronouncements” below), the Company made certain
reclassifications to the prior year's long-term debt to conform to
the balance sheet presentation as of December 31, 2016. These
reclassifications had no effect on the Company's financial
position, shareholders' equity or net cash flows for any of the
periods presented.
Recently issued accounting standards – In May 2014, the FASB
issued ASU No. 2014-09, Revenue
from Contracts with Customers (Topic 606) (“ASU
2014-09”), a new standard to achieve a consistent application
of revenue recognition within the U.S., resulting in a single
revenue model to be applied by reporting companies under GAAP. The
original effective date for ASU 2014-09 would have required
adoption by the Company in the first quarter of fiscal 2017 with
early adoption prohibited. In August 2015, the FASB issued ASU No.
2015-14, Revenue
from Contracts with Customers (Topic 606) - Deferral of the
Effective Date (“ASU
2015-14”), which defers the effective date of ASU 2014-09 for
one year and permits early adoption in accordance with the original
effective date of ASU 2014-09. The Company has evaluated the effect
of the standard and does not believe it will be material to the
Company’s financial reporting.
In
January 2016, the Financial Accounting Standards Board
(“FASB”) issued ASU No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities, which is designed to
enhance the reporting model for financial instruments. This
guidance requires equity investments, with exceptions, to be
measured at fair value with changes in fair value recognized in net
income. Additionally, it requires public businesses to use the exit
price notion when measuring the fair value of financial instruments
for disclosure purposes. For public entities, the amendments in
this update are effective for fiscal years beginning after December
15, 2017. The Company has not yet
selected a transition method or determined the effect of the
standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU
2016-02, Leases (“ASU 2016-02”). This update
requires that lessees recognize assets and liabilities on the
balance sheet for the rights and obligations created by all leases
with terms of more than 12 months. ASU 2016-02 also will require
disclosures designed to give financial statement users information
on the amount, timing, and uncertainty of cash flows arising from
leases. These disclosures include both qualitative and quantitative
information. The effective date for ASU 2016-02 is for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2018 with earlier adoption permitted.
The Company is still evaluating the impact of ASU 2016-02 on its
financial position and results of operations.
The accounting standards that have been issued by the FASB or other
standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on our
financial statements upon adoption.
NOTE 2 – ACCOUNTS RECEIVABLE
The
Company’s accounts receivable balance is net of an allowance
for doubtful accounts of $15,921 and $11,944 at December 31, 2016
and 2015, respectively. Changes in the allowance for doubtful
accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of Period
|
$11,944
|
$11,944
|
|
Charged
to costs and expenses
|
3,977
|
-
|
|
Charged
to other accounts
|
-
|
-
|
|
Write-offs,
net of recoveries
|
-
|
-
|
|
|
|
|
|
Balance
at End of Period
|
$15,921
|
$11,944
|
NOTE 3 – INVENTORIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Winemaking
and packaging materials
|
$817,836
|
$690,292
|
|
Work-in-process
(costs relating to
|
|
|
|
unprocessed
and/or unbottled wine products)
|
6,634,014
|
6,058,701
|
|
Finished
goods (bottled wine and related products)
|
4,518,806
|
3,883,469
|
|
|
|
|
|
Current
inventories
|
$11,970,656
|
$10,632,462
|
NOTE 4 – PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
$449,409
|
$482,284
|
|
Land,
improvements and other buildings
|
8,063,716
|
5,089,472
|
|
Winery
buildings and hospitality center
|
14,458,309
|
13,756,320
|
|
Equipment
|
10,122,593
|
9,055,987
|
|
|
|
|
|
|
33,094,027
|
28,384,063
|
|
|
|
|
|
Less
accumulated depreciation
|
(12,897,082)
|
(11,654,901)
|
|
|
|
|
|
|
$20,196,945
|
$16,729,162
|
Depreciation
expense was $1,254,455 and $1,194,191 during the years ended
December 31, 2016 and 2015, respectively.
NOTE 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, is payable monthly, and is subject to renewal. The Company
renewed the credit agreement in June of 2016 for a period of 12
months. The interest rate was 3.75% at December 31, 2016 and 3.5%
at December 31, 2015. At December 31, 2016 and 2015 there were no
borrowings on this revolving line of credit.
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, 2016, the Company was in compliance
with these financial covenants.
NOTE 6 – NOTE PAYABLE
In
April of 2015 the Company purchased approximately 42 acres of
farmland in the Walla Walla AVA under terms that included paying
one third of the price upon closing and one third in each of the
two subsequent years. As of December 31, 2016 the Company had a
balance due of $245,417 on April 1, 2017. No interest accrues under
the terms of this note.
NOTE 7 – LONG-TERM DEBT
Long-term
debt consists of:
|
|
|
|
|
|
|
|
|
|
|
|
Northwest
Farm Credit Services Loan #1
|
$1,081,296
|
$1,162,073
|
|
Northwest
Farm Credit Services Loan #2
|
981,263
|
1,070,991
|
|
Northwest
Farm Credit Services Loan #3
|
1,056,491
|
1,131,912
|
|
Northwest
Farm Credit Services Loan #4
|
1,705,046
|
1,808,042
|
|
Toyota
Credit Corporation
|
45,899
|
-
|
|
|
4,869,995
|
5,173,018
|
|
Debt
issuance costs
|
(45,839)
|
(50,221)
|
|
Current
portion of long-term debt
|
(380,471)
|
(349,003)
|
|
|
|
|
|
|
$4,443,685
|
$4,773,794
|
The
Company has four agreements with Northwest Farm Credit Services
(“FCS”). Loan #1 requires monthly payments of $12,266,
bears interest at a rate of 5.90%, is collateralized by real estate
and equipment, and matures in 2026. Loan #2 requires monthly
payments of $13,232, bears interest at a rate of 6.70%, is
collateralized by real estate and equipment, and matures in 2024.
Loan #3 requires monthly payments of $12,004, bears interest at a
rate of 6.25%, is collateralized by real estate and equipment, and
matures in 2026. Loan #4 requires monthly payments of $15,556,
bears interest at a rate of 4.75%, is collateralized by real estate
and equipment, and matures in 2028.
The
loan agreements contain covenants, which require the Company to
maintain certain financial ratios and balances. At December 31,
2016, the Company was in compliance with these covenants. In the
event of future noncompliance with the Company’s debt
covenants, 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 for
the years ending December 31:
|
2017
|
380,471
|
|
2018
|
403,659
|
|
2019
|
427,253
|
|
2020
|
452,290
|
|
2021
|
468,341
|
|
Thereafter
|
2,737,981
|
|
|
|
|
|
$4,869,995
|
The
weighted-average interest rates on the aforementioned borrowings
for the fiscal years ended December 31, 2016 and 2015 was 5.68% and
5.74% respectively.
NOTE 8 – 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 so long as the Company has paid or set aside funds
for all cumulative dividends on its preferred stock. The Board does
not anticipate paying dividends on its common stock in the
foreseeable future.
The
Company is authorized to issue 10,000,000 shares of preferred
stock. Each share of the Company’s currently issued preferred
stock is non-voting. The Company’s Series A Redeemable
Preferred Stock includes an annual dividend of $0.22 per share and
is payable annually. Additionally, the Series A Redeemable
Preferred Stock contains a liquidation preference over the
Company’s common stock and is subject to optional redemption
after June 1, 2021 at the sole discretion of the Company’s
Board of Directors. The liquidation preference is calculated at the
original issue price of $4.15 per share plus all accrued but unpaid
dividends. The optional redemption, if implemented, would be at the
original issue price of $4.15 per share plus all accrued but unpaid
dividends plus a redemption premium of 3% of the original issue
price. The Company is current on its dividend
obligations.
NOTE 9 – STOCK INCENTIVE PLAN
The
Company has a stock incentive plan, originally created in 1992,
most recently amended in 2001. No additional grants may be made
under the plan. 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
granted, resides with the Board of Directors or a duly authorized
committee of the Board of Directors. Options were generally granted
based on employee performance with vesting periods ranging from
date of grant to seven years. At the date of the grant, the maximum
term before expiration is ten years.
The
following table presents information on stock options outstanding
for the periods shown:
|
|
|
|
|
|
Weighted
Average Exercise
|
Weighted
Average Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of period
|
67,000
|
$3.22
|
222,971
|
$3.79
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
(60,000)
|
3.23
|
(155,971)
|
4.04
|
|
Forfeited
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
Outstanding
at end of period
|
7,000
|
$3.09
|
67,000
|
$3.22
|
The
following table presents information on stock options outstanding
for the periods shown:
|
|
|
|
|
|
|
|
|
Intrinsic
value of options exercised in the period
|
$260,685
|
$427,363
|
|
Stock
options fully vested and expected to vest
|
7,000
|
67,000
|
|
Weighted
average exercise price
|
$3.09
|
$3.22
|
|
Aggregate
intrinsic value
|
$34,440
|
$258,678
|
|
Weighted
average contractual term of options
|
4.55
|
1.37
|
|
Stock
options vested and currently exercisable
|
7,000
|
60,000
|
|
Weighted
average exercise price
|
$3.09
|
$3.23
|
|
Aggregate
intrinsic value
|
$34,440
|
$230,748
|
|
Weighted
average contractual term of options
|
4.55
|
0.89
|
Weighted-average
options outstanding and exercisable at December 31, 2016 are as
follows:
|
|
Options
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.09
|
7,000
|
4.55
|
$3.09
|
7,000
|
$3.09
|
|
|
|
|
|
|
|
All
share-based compensation is measured at the grant date based on the
fair value of the award, and is recognized as an expense in
earnings over the requisite service period. 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. There were no stock options granted during the years
ended December 31, 2016 and 2015.
Stock
compensation expense was $748 and $17,685 for the years ended
December 31, 2016 and 2015, respectively.
As of
December 31, 2016, there was no unrecognized compensation expense
related to stock options.
NOTE 10 – INCOME TAXES
The
provision (benefit) for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax expense:
|
|
|
|
Federal
|
$1,094,647
|
$641,822
|
|
State
|
300,663
|
202,592
|
|
|
|
|
|
|
1,395,310
|
844,414
|
|
|
|
|
|
Deferred
tax expense (benefit):
|
|
|
|
Federal
|
72,452
|
376,226
|
|
State
|
10,548
|
54,774
|
|
|
|
|
|
|
83,000
|
431,000
|
|
|
|
|
|
Total
|
$1,478,310
|
$1,275,414
|
The
effective income tax rate differs from the federal statutory rate
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory rate
|
34.00%
|
34.00%
|
|
State
taxes, net of federal benefit
|
4.95%
|
4.95%
|
|
Permanent
differences
|
-2.27%
|
-1.13%
|
|
Tax
credits
|
0.00%
|
-0.23%
|
|
Prior
year adjustments
|
-0.71%
|
1.35%
|
|
Changes
in tax rates and other
|
0.02%
|
1.20%
|
|
|
|
|
|
|
35.99%
|
40.14%
|
Permanent differences for the periods consist primarily of tax
deductions for domestic production activities.
Net
deferred tax assets and (liabilities) at December 31 consist
of:
|
|
|
|
|
|
|
|
|
Deferred
gain on sale-leaseback
|
35,000
|
47,000
|
|
Other
|
110,000
|
27,000
|
|
Prepaids
|
(48,000)
|
(49,000)
|
|
Depreciation
|
(1,784,000)
|
(1,463,000)
|
|
Inventory
|
(244,000)
|
(410,000)
|
|
Net
noncurrent deferred tax liability
|
(1,931,000)
|
(1,848,000)
|
|
|
|
|
|
Valuation
allowance
|
-
|
-
|
|
Net
deferred tax liability
|
$(1,931,000)
|
$(1,848,000)
|
NOTE 11 – RELATED PARTY TRANSACTIONS
The
Company provides living accommodations in a residence on the
Company’s premises, at its convenience, for the
Company’s President. The President provides security and
lock-up services and is required to live on premises as a condition
of his employment. Over the years the Company has recorded annual
expenses less than $12,000, exclusive of depreciation, related to
the housing provided for its president.
In
February 2007, the Company entered into a lease agreement for 59
acres of vineyard land at Elton Vineyards. This lease is for a
10-year term with four five-year renewals at the Company’s
option and a first right of refusal in the event of the
vineyard’s sale. For 2016, the annual costs of this lease,
including utility reimbursements, were $121,344. For subsequent
years there is an escalation provision tied to the CPI not to
exceed 2% per annum. Betty M. O’Brien, a Director of the
Company, is a principal owner of Elton Vineyards.
NOTE 12 – 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 litigation,
the ultimate outcome of any potential actions cannot presently be
determined.
Operating leases – In
December 1999, under a sale-leaseback agreement, the Company sold
approximately 79 acres 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 life of the lease. This property is referred to as the
Peter Michael Vineyard, and includes approximately 69 acres of
producing vineyards.
In
December 2004, under a sale-leaseback agreement, the Company sold
approximately 75 acres 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 for the
vineyard portion of the property. Approximately $99,000 of the
total gain of $176,000 has been deferred and is being amortized
over the life of the lease. This property is referred to as the
Meadowview Vineyard, and includes approximately 45 acres of
producing vineyards.
The
amortization of the deferred gain totals approximately $25,000 per
year for the 1999 sale-leaseback agreement and $7,000 for the 2004
sale-leaseback agreement, and is recorded as an offset to the
related lease expense in selling, general and administrative
expenses.
In
February 2007, the Company entered into a lease agreement for 59
acres of vineyard land at Elton Vineyards. This lease is for a
10-year term with four five-year renewals at the Company’s
option and a first right of refusal in the event of the
vineyard’s sale. For 2016, the annual costs of this lease
were $121,344. For subsequent years there is an escalation
provision tied to the CPI not to exceed 2% per annum. Betty M.
O’Brien, a Director of the Company, is principal owner of
Elton Vineyards. The terms of the lease currently call for a
monthly payment of $10,112, plus utility costs not to exceed $1,500
per year, with the annual adjustment ending January 2017 unless
renewed.
In July
2008, the Company entered into a 34-year lease agreement with a
property owner in the Eola Hills for approximately 109 acres
adjacent to the existing Elton Vineyards site. These 109 acres is
being developed into vineyards. Terms of this agreement contain
rent escalation that rises as the vineyard is developed. The
current terms call for monthly payments of $1,427.
In
September 2014, the Company entered into a two year lease, with an
option to renew for an additional two years, for its McMinnville
tasting room. In September 2016 the Company exercised its option to
renew the lease until August 31, 2018. The monthly payment for this
lease is $3,000 with potential negotiated escalations not to exceed
5%.
Grape Purchases - The Company has entered into three
long-term grape purchase agreements with one of its Willamette
Valley wine grape growers. These contracts, entered into in 2004,
2006 and 2007, were extended through harvest year 2019. With these
contracts, the Company is obligated to purchase, at pre-determined
prices, 100% of the crop produced within the strict quality
standards and crop loads, equating to maximum payments of
approximately $1,500,000 per year. The Company cannot calculate the
minimum payment as such a calculation is dependent in large part on
an unknown – the amount of grapes produced that meet the
strict quality standards in any given year. If no grapes are
produced that meet the contractual quality levels, the grapes may
be refused and no payment would be due. The Company received
$233,122 and $959,446 worth of grapes from these long-term
contracts during the years ended December 31, 2016 and 2015,
respectively.
As of
December 31, 2016, future minimum lease payments are as follows for
the years ending December 31:
|
2017
|
415,230
|
|
2018
|
405,356
|
|
2019
|
352,861
|
|
2020
|
173,612
|
|
2021
|
171,569
|
|
Thereafter
|
937,061
|
|
|
|
|
Total
|
$2,455,689
|
The
Company is also committed to lease payments for various pieces of
office equipment. Total rental expense for these operating leases
amounted to $9,770 and $8,353 in 2016 and 2015, respectively. In
addition, payments for the leased vineyards have been included in
inventory or vineyard developments costs and aggregate
approximately $380,096 and $363,566 for the years ended December
31, 2016 and 2015, respectively.
NOTE 13 – EMPLOYEE BENEFIT PLAN
In
February 2006, the Company instituted a 401(k) profit sharing plan
(the “Plan”) covering all eligible employees. Employees
who participate may elect to make salary deferral contributions to
the Plan up to 100% of the employees’ eligible payroll
subject to annual Internal Revenue Code maximum limitations. The
Company may make a discretionary contribution to the entire
qualified employee pool, in accordance with the Plan. For the years
ended December 31, 2016 and 2015 there were $67,090 and $71,609
contributions made by the Company to the 401(k) plan,
respectively.
NOTE 14 - SALE OF PREFERRED STOCK
In August 2015, the Company commenced a public offering of Series A
Redeemable Preferred Stock pursuant to a registration statement
filed with the Securities and Exchange Commission. The preferred
stock under this issue is non-voting and ranks senior in rights and
preferences to the Company’s common stock. Shareholders of
this issue are entitled to receive dividends, when and as declared
by the Company’s Board of Directors, at a rate of $0.22 per
share. Dividends accrued but not paid will be added to the
liquidation preference of the stock until the dividend is declared
and paid. The Company registered this transaction with the
securities authorities of the States of Oregon and Washington and,
in November 2015, obtained listing status on the NASDAQ stock
exchange under the trading symbol WVVIP. The initial issue has
1,445,783 shares registered with an aggregate initial offering
price not to exceed $6,000,000 and was fully subscribed as of
December 31, 2015.
On December 22, 2015 the Company filed a Registration Statement on
Form S-3 with the SEC pertaining to the potential future issuance
of one or more classes or series of debt, equity or derivative
securities. On February 28, 2016 shareholders of the Series A
Redeemable Preferred Stock approved an increase in shares
designated as Series A Redeemable Preferred Stock, from 1,445,783
to 2,857,548 shares, and amended the certificate of designation for
those shares to allow the Company’s Board of Directors to
make future increases. On March 10, 2016 the Company filed a
Prospectus Supplement to the December 2015 Form S-3, pursuant to
which the Company proposed to offer and sell, on a delayed or
continuous basis, up to 970,588 additional shares of Series A
redeemable Preferred stock having proceeds not to exceed
$4,125,000. This stock was established to be sold in four offering
periods beginning with an offering price of $4.25 per share and
concluding at $4.55 per share. The Company sold substantially all
preferred stock, available under this offering, as of June 30,
2016.
Under
the terms of the offering, proceeds from the sale of preferred
stock for the three months ended December 31, 2015 were held in
escrow until the stock was subsequently issued effective January 1,
2016. At December 31, 2015 $1,476,232 in stock sale proceeds were
held as restricted cash and subsequently released to the Company in
January 2016. As of December 31, 2016 the Company had no cash that
was considered restricted.
NOTE 15 – SEGMENT REPORTING
The
Company has identified two operating segments, Direct Sales and
Distributor Sales, based upon their different distribution
channels, margins and selling strategies. Direct Sales includes
retail sales in the tasting room and remote sites, Wine Club sales,
on-site events, kitchen and catering sales and other sales made
directly to the consumer without the use of an intermediary.
Distributor Sales include all sales through a third party where
prices are given at a wholesale rate.
The two
segments reflect how the Company’s operations are evaluated
by senior management and the structure of its internal financial
reporting. The Company evaluates performance based on the gross
profit of the respective business segments. Selling expenses that
can be directly attributable to the segment, including depreciation
of segment specific assets, are included however centralized
selling expenses and general and administrative expenses are not
allocated between operating segments. Therefore, net income
information for the respective segments is not available. Discrete
financial information related to segment assets, other than segment
specific depreciation associated with selling, is not available and
that information continues to be aggregated.
The
following table outlines the sales, cost of sales, gross margin,
directly attributable selling expenses, and contribution margin of
the segments for the twelve month periods ending December 31, 2016
and 2015. Sales figures are net of related excise
taxes.
|
|
Twelve Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales,
net
|
$7,032,287
|
$6,948,210
|
$12,393,125
|
$10,990,662
|
$19,425,412
|
$17,938,872
|
|
Cost
of Sales
|
1,876,751
|
2,027,451
|
5,328,133
|
5,064,660
|
7,204,884
|
7,092,111
|
|
Gross
Margin
|
5,155,536
|
4,920,759
|
7,064,992
|
5,926,002
|
12,220,528
|
10,846,761
|
|
Selling
Expenses
|
3,226,831
|
3,070,473
|
1,568,433
|
1,545,944
|
4,795,264
|
4,616,417
|
|
Contribution
Margin
|
$1,928,705
|
$1,850,286
|
$5,496,559
|
$4,380,058
|
$7,425,264
|
$6,230,344
|
|
Percent
of Sales
|
36.2%
|
38.7%
|
63.8%
|
61.3%
|
100.0%
|
100.0%
|
Direct
sales include $245,097 and $777,538 of bulk wine and grape sales in
the years ended December 31, 2016 and 2015,
respectively.
Net
direct-to-consumer sales, including bulk wine, miscellaneous sales,
and grape sales, represented approximately 36.2% and 38.7% of total
net revenue for 2016 and 2015, respectively.
Net
sales through distributors represented approximately 63.8% and
61.3% of total net revenue for 2016 and 2015,
respectively.
NOTE 16 – SUBSEQUENT EVENTS
Subsequent
events are events or transactions that occur after the balance
sheet date but before financial statements are issued. The Company
recognizes in the financial statements the effects of all
subsequent events that provide additional evidence about conditions
that existed at the date of the balance sheet, including the
estimates inherent in the process of preparing the financial
statements. The Company’s financial statements do not
recognize subsequent events that provide evidence about conditions
that did not exist at the date of the balance sheet but arose after
the balance sheet date and before financial statements are
issued.
In
February 2017, the Company completed the purchase of approximately
16 acres in the Dundee Hills AVA. In March 2017, the Company
completed the purchase of approximately 45 acres in the Walla Walla
AVA.
In
February 2017, the Board of Directors authorized an increase in
funding for the repurchase of common stock of
$250,000.
In
February 2017, the Board of Directors authorized the refinancing of
three of the Company’s Northwest Farm Credit loans and
securing additional debt against the Estate Winery property. The
Company refinanced approximately $3.1 million in debt with a new
$5.8 million loan. After fees and prepayment costs, the Company
received approximately $2.6 million in cash. This activity is part
of the Company’s long-range development plan and takes
advantage of the current low interest rate
environment.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We
carried out an evaluation as of the end of the period covered by
this Annual Report on Form 10-K, under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-5(e) under the Exchange Act) pursuant to
paragraph (b) of Rules 13a-15 and 15d-5 under the Exchange Act.
Based on that review, the Chief Executive Officer and the Chief
Financial Officer have concluded that, as of the end of the period
covered by this Annual Report on Form 10-K, our disclosure controls
and procedures are effective to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act (1) is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (2) is accumulated and
communicated to our management, including our principal executive
officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
It
should be noted that any system of controls is based in part upon
certain assumptions designed to obtain reasonable (and not
absolute) assurance as to its effectiveness, and there can be no
assurance that any design will succeed in achieving its stated
goals.
Internal Control over Financial Reporting
Management’s report on internal control over financial
reporting
The
Company’s management is responsible for establishing and
maintaining adequate internal control over financial reporting. The
Company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of the Company’s financial reporting and the
preparation of the Company’s financial statements for
external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange
Act and includes those policies and procedures that:
(a) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the Company’s assets; (b) provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that the
Company’s receipts and expenditures are being made only in
accordance with authorizations of the Company’s management
and directors; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a
material effect on the Company’s financial statements. All
internal controls, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
The
Company’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of
December 31, 2016. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”) in Internal Control – Integrated Framework
(2013). Based on this assessment, management has concluded
that, as of December 31, 2016, our internal control over financial
reporting was effective.
Changes in Internal Control over Financial Reporting
There
have not been any other changes in the Company’s internal
control over financial reporting (as such term is defined in Rule
13a-15(f) and 15d-15(f) under the Exchange Act) during the
Company’s fourth fiscal quarter that our certifying officers
concluded materially affected, or are reasonably likely to
materially affect, the Company’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
following table sets forth certain information regarding the
Company’s directors and executive officers:
|
|
|
|
|
|
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Group
|
|
Term
|
|
Name
|
|
Position(s) with the Company
|
|
Age
|
|
Number
|
|
Ends
|
|
|
|
|
|
|
|
|
|
|
|
James W. Bernau (3)
|
|
Chairperson of the Board,
|
|
63
|
|
I
|
|
2017
|
|
|
|
President and Director
|
|
|
|
|
|
|
|
Craig Smith (2)(3)(4)
|
|
Secretary and Director
|
|
70
|
|
II
|
|
2018
|
|
Richard F. Goward Jr.
|
|
Chief Financial Officer
|
|
61
|
|
NA
|
|
NA
|
|
James L. Ellis (3)
|
|
Director
|
|
72
|
|
III
|
|
2019
|
|
Sean M. Cary (2)
|
|
Director
|
|
43
|
|
I
|
|
2017
|
|
Christopher Sarles (1)(4)
|
|
Director
|
|
52
|
|
I
|
|
2017
|
|
Betty M. O’Brien (1)
|
|
Director
|
|
73
|
|
II
|
|
2018
|
|
Stan G. Turel (2)(3)(4)
|
|
Director
|
|
68
|
|
II
|
|
2018
|
|
Heather Westing (4)
|
|
Director
|
|
58
|
|
III
|
|
2019
|
|
Jonathan Ricci (1)
|
|
Director
|
|
49
|
|
III
|
|
2019
|
|
(1) Member of the Compensation Committee
|
|
(2) Member of the Audit Committee
|
|
(3) Member of the Executive Committee
|
|
(4) Member of the Capital Development Committee
|
All
directors hold office until the end of their term’s
respective 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.
The Board is divided into three groups (I, II, and III). Each
director shall serve for a term ending on the date of the third
annual meeting following the annual meeting at which such director
was elected; provided, that each director initially appointed to
Group I shall serve for an initial term expiring at our first
annual meeting of stockholders following the 2016 annual meeting of
stockholders; each director initially appointed to Group II shall
serve for an initial term expiring at our second annual meeting of
stockholders following the 2016 annual meeting of stockholders; and
each director initially appointed to Group III shall serve for an
initial term expiring at our third annual meeting of stockholders
following the 2016 annual meeting of stockholders.
Except
for Mr. Goward’s stepdaughter who is married to Mr.
Smith’s son, there are no family relationships among any of
our current directors or executive officers. 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. Mr. Bernau, an Oregon winegrower, originally
established Willamette Valley Vineyards as a sole proprietorship 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. Mr.
Bernau’s qualifications to serve on the Company’s Board
of Directors include his more than 30 years of leadership of the
Company and his industry experience and contacts.
Craig Smith, MBA, JD – Mr. Smith has served as a
director since October 2007 and as Secretary since 2009. For over
20 years Mr. Smith served as the Vice President/Chief Financial
Officer of Chemeketa Community College in Salem, Oregon. He was an
Adjunct Professor at the Atkinson Graduate School of Management at
Willamette University, as well as Managing Partner of Faler, Grove,
Mueller & Smith, a large local CPA firm. He has served on many
State of Oregon commissions and as the Board Chairperson for many
of the local non-profit and educational institutions including the
Salem Keizer School Board, Chemeketa Community College Board of
Education, Oregon State Fair Council, State Fair Dismissal Appeals
Board, Mid-Willamette Valley Council of Governments, Oregon School
Boards Association and the United Way. Mr. Smith is a member of the
Oregon State Bar and a retired Certified Public Accountant. Mr.
Smith’s qualifications to serve on the Company’s Board
of Directors include his financial and accounting
experience.
Richard F. Goward Jr., CPA, CMA, MBA – Mr. Goward has
been the Company’s Chief Financial Officer since May of 2013.
Prior to being appointed, Mr. Goward served as Chief Financial
Officer for Oregon’s largest city, the City of Portland, a
position he retired from after serving from April 2010 to May 2013.
From June 1997 to April 2010, Mr. Goward served as Chief Financial
Officer at Salem-Keizer Public Schools, the second largest school
district in the State of Oregon. From November 1986 to June 1997,
Mr. Goward worked at Chemeketa Community College as manager of the
Business Office and Director of Auxiliary Services. Mr. Goward has
also worked as a partner in Faler, Grove, Mueller & Smith CPAs,
has 26 years of experience as an officer in the United States Navy
and Navy Reserve; retiring at the rank of Captain, for 20 years was
an Adjunct Professor in Accounting at Willamette University’s
Atkinson Graduate School of Management and has served on many
community boards and committees. Mr. Goward is licensed as a CPA in
the State of Oregon and is a Certified Management Accountant. He
holds a Bachelor of Science Degree in Business from Oregon State
University and a Masters in Business Administration from Willamette
University.
James L. Ellis – Mr. Ellis has served as a director
since July 1991. Mr. Ellis retired from full time duties with the
Company in July of 2009. He currently serves as the Company’s
ombudsman and works part-time on selected projects. Mr. Ellis
previously served as the Company’s Director of Human
Resources from 1993 to 2009. He was the Company’s Secretary
from 1997 to 2009, and Vice President /Corporate from 1998 to 2009.
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. Mr. Ellis’ qualifications to serve on the
Company’s Board of Directors include his prior experience as
a member of the Company’s senior management, as well as more
than 40 years of business experience.
Sean M. Cary –
Mr. Cary has served as a director since July 2007. Mr. Cary is the
Chief Financial Officer of Pacific Excavation, Inc., a Eugene,
Oregon based heavy and civil engineering contractor. Previously,
Mr. Cary served as the CFO of CBT Nuggets, LLC, the Corporate
Controller of National Warranty Corporation, the CFO of Cascade
Structural Laminators and prior to that as Controller of Willamette
Valley Vineyards. Mr. Cary served in the U.S. Air Force as a
Financial Officer. Mr. Cary holds a Master of Business
Administration degree from the University of Oregon and a Bachelor
of Science Degree in Management from the U.S. Air Force Academy.
Mr. Cary’s qualifications to serve on the Company’s
Board of Directors include his financial and accounting
expertise.
Christopher L. Sarles – Mr. Sarles has served as a
director since January of 2015. Mr. Sarles is the President/CEO of
Oregon Fruit Products, a position he has held since July of 2014.
From May of 1998 until June of 2014 Mr. Sarles worked in various
executive capacities in Columbia Distributing/Young’s Market,
most recently as Executive Vice President of Sales from 2011 to
2014. From 1987 to 1995 he was President/Chief Operating Officer of
Alehouse Distributing Company in Seattle Washington. Mr. Sarles has
been actively involved in the wine industry, been a speaker on Wine
Industry issues, and served as President of the Oregon Beer and
Wine Wholesalers Association. He holds a Bachelor of Science degree
in Business Marketing from Oregon State University. Mr. Sales is
qualified to serve on the Company’s Board of Directors as a
result of his many years of executive experience in the alcohol
distribution industry.
Betty M. O’Brien – Ms. O’Brien has served
as a director since July 1991. Ms. O’Brien is owner of Elton
Vineyards L.L.C., 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 has
served as a director, President and Treasurer of the Oregon
Winegrowers Association. Ms. O’Brien is chairman of the Wine
Studies Program Advisory Committee at Chemeketa Community College
(CCC). She headed a wine industry task force developing a new wine
marketing program and curriculum leading to a two-year degree at
CCC. She taught Wine Marketing classes there for seven years. Ms.
Obrien served as Chair of the Board of Directors of LIVE (Low Input
Viticulture and Enology). She was president of the Eola-Amity Hills
Winegrowers Association in 2014-15. Ms. O”Brien and her
husband received a 2010 Oregon Wine Industry Outstanding Service
Award. Ms. O’Brien’s qualifications to serve on the
Company’s Board of Directors include her industry experience
and contacts.
Stan G. Turel – Mr. Turel has served as a director
since November 1994. Mr. Turel is President of Turel Enterprises, a
real estate management company managing his own properties in
Oregon, Washington and Idaho and is president of Columbia Pacific
Tax in Bend, Oregon. Prior to his current activities, Mr. Turel was
the Principal and CEO of Columbia Turel, (formerly 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 approximately 26,000 annual
tax clients including approximately 4,000 small business clients.
Additionally Mr. Turel successfully operated as majority owner of
two cable TV companies during the 80’s and 90’s which
were eventually sold to several public corporations. Mr. Turel is a
pilot, author, was a former delegate to the White House Conference
on Small Business and held positions on several state and local
Government committees. Mr. Turel’s qualifications to serve on
the Company’s Board of Directors include his more than 20
years of accounting and business management
experience.
Heather Westing – Ms. Westing has served as a director
since March 2016. Ms. Westing owns several real estate
developments, restaurant and financial companies in Oregon. She is
the former owner of The Subway Group – franchisor agency for
over 350 Subway Restaurants and served on Subway’s Worldwide
Advisory Board. Ms. Westing is an active member in the Oregon Angel
Fund, and oversees the Westing Family Foundation. Previously, Ms.
Westing owned an advertising and marketing agency, with offices in
Eugene, Portland and Bend. She has also owned and operated a
50-acre farm of filberts, grass seed and Christmas trees. She
served on Umpqua Bank’s Regional Board of Advisory and The
Oregon Bach Festival’s Board of Directors. She is a Lifetime
Alumni of University of Oregon, where she studied finance and real
estate. Ms. Westing’s qualifications to serve on the
Company’s Board of Directors include her extensive business
experience and expertise in marketing.
Jonathan Ricci – Mr. Ricci has served as a director
since March 2016. Mr. Ricci is currently the President of Stumptown
Coffee Roasters in Portland, Oregon. Prior to joining Stumptown in
2013, he was a managing partner in the First Beverage Group for
several years. He served as CEO at Jones Beverage, and prior to
that was Director of Customer Marketing at Columbia Distributing
for seven years. Mr. Ricci was raised in Oregon, graduating with a
degree in Education from Oregon State University. He was formerly
the head of the OSU Alums and also served as a Trustee of the OSU
Foundation. Mr. Ricci is serving on Portland’s 2020 strategic
effort to meet that population’s challenges. Mr.
Ricci’s qualifications to serve on the Company’s Board
of Directors include his beverage industry and public company
experience.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires the Company’s
officers, directors and persons who own more than 10% of a
registered class of the Company’s equity securities to file
certain reports with the SEC regarding ownership of, and
transactions in, the Company’s securities. These officers,
directors and stockholders are also required by SEC rules to
furnish the Company with copies of all Section 16(a) reports
that are filed with the SEC. Based solely on a review of copies of
such forms received by the Company and written representations
received by the Company from certain reporting persons, the Company
believes that for the year ended December 31, 2016 all Section
16(a) reports required to be filed by the Company’s executive
officers, directors and 10% stockholders were filed on a timely
basis with the exception of one Form 4 filing for Heather Westing
and one for James Bernau that were filed late.
Code of Ethics
The
Company has adopted a code of ethics applicable to its principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, which is a “code of ethics” as defined by
applicable rules of the SEC. A copy of the Company’s Code of
Business Conduct and Ethics is posted on the Company’s web
site, www.wvv.com.
Amendments to the Company’s Code of Business Conduct and
Ethics or any grant of a waiver from a provision of the
Company’s Code of Business Conduct and Ethics requiring
disclosure under applicable SEC rules, if any, will be disclosed on
the Company website at www.wvv.com.
Any person may request a copy of the Company’s Code of
Business Conduct and Ethics, at no cost, by writing to the Company
at the following address:
Willamette
Valley Vineyards, Inc.
Attention:
Corporate Secretary
8800
Enchanted Way SE
Turner,
OR 97392
Audit Committee
The
Company has a separately designated standing audit committee
established in accordance with Section 3(a)(58)(A) of the
Exchange Act. The members of the Audit Committee are Craig Smith,
Sean Cary and Stan G. Turel. All members of the Audit Committee are
independent as defined under the applicable rules and regulations
of the SEC and the director independence standards of the NASDAQ
Stock Market, as currently in effect.
Audit Committee Financial Expert
Chairperson
Craig Smith serves as the Audit Committee’s “financial
expert” as defined in applicable SEC rules and NASDAQ listing
standards. Mr. Smith is independent as defined under the applicable
rules and regulations of the SEC and the director independence
standards of the NASDAQ Stock Market, as currently in
effect.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The
following table sets forth certain information concerning
compensation paid or accrued by the Company, to or on behalf of the
Company’s principal executive officer, James W. Bernau and
Chief Financial Officer, Richard F. Goward Jr. for the fiscal years
ended December 31, 2016 and December 31, 2015. No other executive
officer of the Company other than Mr. Bernau and Mr. Goward
received total compensation in 2016 in excess of $100,000, and thus
disclosure is not required for any other person. Summary
compensation information is as follows:
Summary Compensation Table
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Name,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
Bernau, James W.,
|
|
|
|
|
|
|
|
|
|
|
|
President, Chief Executive
|
2016
|
$256,645
|
$356,000
|
$-
|
$-
|
$-
|
$-
|
$50,806
|
$663,451
|
|
|
President, Chief Executive
|
2015
|
$256,389
|
$128,195
|
$-
|
$-
|
$-
|
$-
|
$51,862
|
$436,446
|
|
Goward, Richard F. Jr
|
|
|
|
|
|
|
|
|
|
|
|
Chief Financial Officer
|
2016
|
$122,269
|
$12,000
|
$-
|
$-
|
$-
|
$-
|
$5,921
|
$140,190
|
|
|
Chief Financial Officer
|
2015
|
$106,134
|
$10,000
|
$-
|
$-
|
$-
|
$-
|
$21,817
|
$137,951
|
|
* All other compensation includes Company payments for medical
insurance, value of lodging, Board of Director stipends, life
insurance payments and Company 401(k) matching
contributions.
|
Bernau Employment Agreement – The Company and Mr.
Bernau are parties to an employment agreement dated August 3, 1988
as amended on February 20, 1997, in January of 1998, in November
2010, and again on November 8, 2012. Under the amended agreement,
Mr. Bernau is paid an annual salary of $235,000 with annual
increases tied to increases in the consumer price index. Mr.
Bernau’s 2016 bonus is calculated as a percentage of Company
net income before taxes; 5% on the first $1.75 million of pre-tax
income, and 7.5% on the pre-tax net income over $1.75 million, not
to exceed $256,000. In 2016 the Board awarded a one-time
meritorious bonus of $100,000. The Board intends to evaluate and
revise Mr. Bernau’s bonus structure in 2017. Additionally,
Mr. Bernau participates in the employer sponsored 401(k) plan.
Pursuant to the terms of the employment agreement, the Company is
to provide Mr. Bernau with housing on the Company’s property.
Mr. Bernau resides in the estate house, free of rent, which is also
used to accommodate overnight stays for Company guests. Mr. Bernau
resides in the residence for the convenience of the Company 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.
Goward Employment Agreement – The Company and Mr.
Goward are parties to an employment agreement dated April 16, 2013
as amended on July 15, 2015. Under the agreement Mr. Goward is paid
an annual salary of $122,269 and is reviewed annually for potential
meritorious awards. Additionally, Mr. Goward receives the
equivalent of a board stipend for board meetings outside of the
normal working schedule. Mr. Goward also participates in the
employer sponsored 401(k) plan.
Stock options
In
order to reward performance and retain high-quality employees, the
Company has, in the past, granted stock options to its employees.
The Company has not ordinarily directly issued shares of stock to
its employees. Options were typically issued at a per share
exercise price equal to the closing price as reported by the Nasdaq
Capital Market at the time the option was 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. The Company is not currently
granting new options and does not intend to do so at this
time.
Director compensation
The
following table sets forth information concerning compensation of
the Company’s directors other than Mr. Bernau for the fiscal
year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
L. Ellis
|
$12,600
|
-
|
-
|
-
|
-
|
$384
|
$12,984
|
|
Sean
M. Cary
|
4,350
|
-
|
-
|
-
|
-
|
-
|
4,350
|
|
Christopher
L. Sarles
|
4,150
|
-
|
-
|
-
|
-
|
-
|
4,150
|
|
Craig
Smith
|
5,550
|
-
|
-
|
-
|
-
|
-
|
5,550
|
|
Betty
M. O'Brien
|
5,700
|
-
|
-
|
-
|
-
|
-
|
5,700
|
|
Stan
G. Turel
|
5,760
|
-
|
-
|
-
|
-
|
-
|
5,760
|
|
Heather
Westing
|
2,600
|
-
|
-
|
-
|
-
|
-
|
2,600
|
|
Jonathan
Ricci
|
1,800
|
-
|
-
|
-
|
-
|
-
|
1,800
|
(1)
There were no option awards granted or outstanding to the
Company’s directors in the fiscal year ended December 31,
2016.
Other
compensation for James L. Ellis includes a monthly stipend for
ongoing consultation services as well as serving as administrator
of any potential employee complaint that might rise to the board of
directors’ level.
The
members of the Board received cash compensation for their service
on the Board in 2016, and were reimbursed for out-of-pocket and
travel expenses incurred in attending Board meetings. The Company
adopted a Stock Incentive Plan that was approved by the
shareholders in 1992 and further amended by the shareholders in
1996. There are no remaining stock options, owned by Directors,
under this plan. In the foreseeable future, as a result of FASB ASC
Topic 718, Stock Compensation, 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.
In
January 2009, the Board, upon recommendation of the Board’s
Compensation Committee (the “Compensation Committee”),
who had sought outside counsel regarding revision of the
Company’s Board Compensation Plan, adopted the final version
of the revised WVV Board Member Compensation Plan. Under the terms
of the revised plan, any Board member may elect not to receive any
or all of the compensation components. The Board also reserved the
right to suspend this plan at any time on the basis of prevailing
economic conditions and their impact on the company. The basic
elements of the revised plan are: $1,000 yearly stipend for service
on the Board, $500 per Board meeting attended in person, $250 per
Board meeting via teleconference, $200 per committee meeting in
person and $100 per committee meeting via teleconference. A set per
diem for expenses associated with meeting attendance, as well as a
yearly wine allowance were also approved.
Compensation Committee Interlocks and Insider
Participation
No
member of the Compensation Committee is a current or former officer
or employee of the Company. Ms. Betty O’Brien, who was a
member of the Compensation Committee in 2016, had a relationship
with the Company requiring disclosure under Item 404 of Regulation
S-K. See Item 13. “Certain Relationships and Related
Transactions, and Director Independence” in this Annual
Report on Form 10-K for further details.
There
are no Compensation Committee interlocks between the Company and
any other entities involving any of the executive officers or
directors of such entities. No interlocking relationship exists
between any member of our Board or our Compensation Committee and
any member of the board of directors or compensation committee of
any other company and no such interlocking relationship has existed
in the past.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Equity compensation plan information – The following
table summarizes information, as of December 31, 2016, with respect
to shares of the Company’s common stock that may be issued
under the Company’s existing equity compensation
plans:
|
|
Securities
to be Issued upon Exercise of Outstanding Options, Warrants and
Rights
|
Weighted
Average Exercise Price of Outstandaing Options and
Warrants
|
Available
for Future Issuance under Equity Compensation Plans (Excluding
Securities Reflected in Column A)
|
|
|
|
|
|
|
Equity
compensation plans
|
|
|
|
|
approved
by security holders (1)
|
7,000
|
$3.09
|
-
|
|
Equity
compensation plans not
|
|
|
|
|
approved
by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
7,000
|
$3.09
|
-
|
(1)
Includes shares of our common stock issuable upon exercise of
options from the Company’s 1992 Stock Incentive
Plan.
The
Company does not have compensation plans under which equity
securities of the Company are authorized for issuance which were
adopted without the approval of security holders.
Security ownership of certain beneficial owners and
management
The
following table sets forth certain information with respect to
beneficial ownership of the Company’s Common Stock as of
March 23, 2016, 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.
Except as indicated in the footnotes to this table, each person has
sole voting and investment power with respect to all shares
attributable to such person.
Information
concerning persons who beneficially own more than 5% of the
Company’s common stock who are not otherwise affiliated with
the Company is based solely upon statements made in filings with
the SEC or other information we believe to be
reliable.
Unless
otherwise noted, the address of each beneficial owner listed in the
table is 8800 Enchanted Way SE Turner, OR
97392.
|
|
|
|
Percent of
|
|
|
Number of
|
|
Shares
|
|
|
Shares Outstanding
|
|
Beneficially
|
|
|
Stock
|
|
Owned (1)
|
|
|
|
|
|
|
|
James W. Bernau, President/CEO, Chair of the Board
|
508,205
|
|
|
10.2%
|
|
|
|
|
|
|
|
Richard F. Goward Jr., CFO
|
500
|
|
|
**
|
|
|
|
|
|
|
|
James L. Ellis, Director
|
19,865
|
|
|
**
|
|
|
|
|
|
|
|
Christopher L. Sarles
|
-
|
|
|
**
|
|
|
|
|
|
|
|
Sean M. Cary, Director
|
5,200
|
|
|
**
|
|
|
|
|
|
|
|
Betty M. O'Brien, Director
|
40,624
|
|
|
**
|
|
|
|
|
|
|
|
Stan G. Turel, Director
|
16,692
|
|
|
**
|
|
|
|
|
|
|
|
Craig Smith, Director
|
1,500
|
|
|
**
|
|
|
|
|
|
|
|
Heather Westing, Director
|
1,700
|
|
|
**
|
|
|
|
|
|
|
|
Jonathan Ricci, Director
|
715
|
|
|
**
|
|
|
|
|
|
|
|
Christopher Riccardi
|
385,485
|
|
|
7.7%
|
|
100 Tall Pine Ln., Apt 2102, Naples, FL 34105
|
|
|
|
|
|
|
|
|
|
|
|
Carl D. Thoma
|
336,189
|
|
|
6.7%
|
|
300 N. LaSalle St, Suite 4350. Chicago, IL 60654
|
|
|
|
|
|
|
|
|
|
|
|
All Directors and Executive Officers as a group (8
persons)
|
595,001
|
|
|
11.9%
|
|
|
|
|
|
|
|
** Less than one percent
|
|
|
|
|
(1) The
percentage of outstanding shares of common stock is calculated out
of a total of 4,999,225 shares of common stock outstanding as of
March 16, 2017. Shares owned do not include ownership of preferred
stock shares.
(2)
Based on a Form 4 filed by Mr. Riccardi with the SEC on December
29, 2015
(3)
Based on a Schedule 13G/A filed by Mr. Thoma with the SEC on
February 8, 2017. Beneficial ownership includes 139,429 shares held
by the Carl D. Thoma Roth IRA, TD Ameritrade Clearing Custodian for
the benefit of Mr. Thoma.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
In
2007, the Company entered into a long-term lease for Elton
vineyards which consists of 54 acres of mature grapevines, of which
approximately 42 acres are Pinot Noir. The agreement was for an
initial 10-year lease with the option to renew for four successive
terms of five years each, plus a first right of refusal on the
property’s sale. Betty O’ Brien, a member of the Board,
is the owner of the lessor, Elton Vineyards, LLC. As such, she is
therefore entitled to the net income of Elton Vineyards, LLC. In
2016, the Company paid Elton Vineyards, LLC $121,344 in lease
payments and utility reimbursements.
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 Board, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third parties.
After reviewing the relationship between the Company and Elton
Vineyards, LLC, in each of the last three years, the Board has
determined that Ms. O’Brien is “independent”
within the meaning of the applicable rules and regulations of the
SEC and the director independence standards of the NASDAQ Stock
Market (“NASDAQ”).
Except
for payments to Elton Vineyards, LLC described above, during 2016
the Company did not participate in any transactions with related
persons that had a direct or indirect material interest in an
amount exceeding $120,000 and there are no currently proposed
transactions with related persons that exceed
$120,000.
The
Board has determined that each of our directors, except
Mr. Bernau and Mr. Ellis is “independent” within
the meaning of the applicable rules and regulations of the SEC and
the director independence standards of NASDAQ, as currently in
effect. Furthermore, the Board has determined that, with the
exception of the Executive Committee, each of the members of each
of the committees of the Board is “independent” under
the applicable rules and regulations of the SEC and the director
independence standards of NASDAQ, as currently in
effect.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Moss
Adams LLP served as the Company’s independent registered
public accounting firm for the years ended December 31, 2016 and
2015. Fees for
professional services provided by our independent registered public
accounting firm in each of the last two fiscal years, in each of
the following categories are:
|
|
|
|
|
|
|
|
|
|
|
|
Audit
fees (1)
|
$141,000
|
$151,895
|
|
Tax
fees (2)
|
46,469
|
34,101
|
|
All
other fees (3)
|
3,471
|
33,550
|
|
|
|
|
|
|
$190,940
|
$219,546
|
(1)
Audit fees
represent fees for services rendered for the audit of the
Company’s annual financial statements and review of the
Company’s quarterly financial statements.
(2)
Tax fees represent
fees for services rendered for tax compliance, tax advice and tax
planning
(3)
All other fees
represent limited engagement activity.
The
Company did not incur any audit related fees in either 2016 or
2015.
Pre-approval policies and procedures
It is
the policy of the Company not to enter into any agreement for Moss
Adams LLP to provide any non-audit services to the Company unless
(a) the agreement is approved in advance by the Audit
Committee or (b) (i) the aggregate amount of all such
non-audit services constitutes no more than 5% of the total amount
the Company pays to Moss Adams LLP during the fiscal year in which
such services are rendered, (ii) such services were not
recognized by the Company as constituting non-audit services at the
time of the engagement of the non-audit services and
(iii) such services are promptly brought to the attention of
the Audit Committee and prior to the completion of the audit were
approved by the Audit Committee or by one or more members of the
Audit Committee who are members of the Board to whom authority to
grant such approvals has been delegated by the Audit Committee. The
Audit Committee will not approve any agreement in advance for
non-audit services unless (1) the procedures and policies are
detailed in advance as to such services, (2) the Audit
Committee is informed of such services prior to commencement and
(3) such policies and procedures do not constitute delegation
of the Audit Committee’s responsibilities to management under
the Exchange Act.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The
following documents are filed as part of this report:
(1)
Financial
Statements
See
“Index to Financial Statements” in Item 8 of this
Annual Report on Form 10-K.
(2)
Financial
Statement Schedules
All
financial statement schedules are omitted either because they are
not required, not applicable or the required information is
included in the financial statements or notes thereto.
(3)
Exhibits
|
Exhibit
Number
|
|
Description
|
|
|
|
|
|
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
|
|
Amended
and Restated Bylaws of Willamette Valley Vineyards, Inc.
(incorporated by reference from
the Company’s Current Report on Form 8-K filed with the SEC
on November 20, 2015 [File No. 001-37610])
|
|
|
|
|
|
4.1
|
|
Amended
and Restated Certificate of Designation regarding the Series A
Redeemable Preferred Stock (incorporated by reference from the
Company’s Current Report on Form 8-K filed with the SEC on
March 16, 2016 [File No. 001-37610])
|
|
|
|
|
|
10.1*
|
|
Employment
Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated August 3, 1988 as amended on February 20, 1997, in
January of 1998, in November 2010, and on November 8, 2012
(incorporated by reference from
the Company’s Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
|
|
|
|
|
|
10.2
|
|
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])
|
|
|
|
|
|
10.3
|
|
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])
|
|
|
|
|
|
10.4
|
|
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])
|
|
|
|
|
|
10.5
|
|
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])
|
|
|
|
|
|
10.6
|
|
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])
|
|
10.7
|
|
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])
|
|
|
|
|
|
10.8
|
|
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])
|
|
|
|
|
|
10.9
|
|
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])
|
|
|
|
|
|
|
|
Exclusive
Distribution Agreement by and amount Young’s Market Company
of Oregon, LLC an Oregon limited liability company, Young’s
Market Company of Washington, LLC, and Oregon limited liability
company, and the Company dated August 1, 2011 (incorporated by reference to Exhibit 10.10 to
the Company’s Quarterly Report on Form 10-Q for the quarter
ended September 30, 2011 [File No. 000-21522])
|
|
|
|
|
|
14.1
|
|
Code of
Ethics (incorporated by reference
from the Company’s Proxy Statement on Schedule 14A, filed on
June 30, 2004)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
The
following financial information from the Corporation’s Annual
Report on Form 10-K for the year ended December 31, 2016, furnished
electronically herewith, and formatted in XBRL (Extensible Business
Reporting Language); (i) Consolidated Balance Sheets; (ii)
Consolidated Statements of Income; (iii) Consolidated Statements of
Shareholders’ Equity; (iv) Consolidated Statements of Cash
Flows; and (v) Notes to Consolidated Financial Statements, tagged
as blocks of text. (Filed herewith)
|
*Management
contract or compensatory plan or arrangement required to be filed
as an Exhibit to this Annual Report on Form 10-K pursuant
to Item 15(b) thereof.
**Confidential
treatment of certain portions of this exhibit has been granted by
the SEC pursuant to a request for confidential treatment dated
November 10, 2011.
(1)
The exhibits listed
under Item 15(a)(3) hereof are filed as part of this Form
10-K, other than Exhibits 32.1 and 32.2, which shall be deemed
furnished.
(2)
All financial
statement schedules are omitted either because they are not
required, not applicable or the required information is included in
the financial statements or notes thereto.
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)
By:_/s/
James W. Bernau____________
James
W. Bernau,
Chairperson
of the Board, President
Date:
March 23, 2017
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ James W. Bernau
|
|
Chairperson of the Board,
|
|
March 23,
2017
|
|
James W. Bernau
|
|
President
|
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ Richard F. Goward Jr.
|
|
Chief Financial Officer
|
|
March 23,
2017
|
|
Richard F. Goward Jr.
|
|
(Principal Financial
|
|
|
|
|
|
and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ James L. Ellis
|
|
Director
|
|
March 23,
2017
|
|
James L. Ellis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Christopher L. Sarles
|
|
Director
|
|
March 23,
2017
|
|
Christopher L. Sarles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Craig Smith
|
|
Director
|
|
March 23,
2017
|
|
Craig Smith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Betty M. O'Brien
|
|
Director
|
|
March 23,
2017
|
|
Betty M. O'Brien
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Stan G. Turel
|
|
Director
|
|
March 23,
2017
|
|
Stan G. Turel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Sean M. Cary
|
|
Director
|
|
March 23,
2017
|
|
Sean M. Cary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Heather Westing
|
|
Director
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March 23,
2017
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Heather Westing
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/s/ Jonathan Ricci
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Director
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March 23,
2017
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Jonathan Ricci
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