Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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**x****    QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

** **

**For theQuarterly Period Ended June 30, 2008**

** **

**o****    TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**CommissionFile Number 0-21522**

 

**WILLAMETTEVALLEY VINEYARDS, INC.**

(Exact name ofregistrant as specified in charter)

 

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

 

**8800Enchanted Way, S.E.**

**Turner,Oregon 97392**

**(503)-588-9463**

(Address,including Zip code, and telephone number,

including areacode, of registrant’s principal executive offices)

 

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Check whether theregistrant (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

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

 

Check whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.

 

| o Large accelerated filer |   | o Accelerated filer         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| o Non-accelerated filer   |   | x Smaller reporting company |

 

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

 

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

 

Number of sharesof common stock outstanding as of June 30, 2008:

4,850,327 shares,no par value

 

 

 

Table of Contents

 

WILLAMETTE VALLEYVINEYARDS, INC.

INDEX TO FORM 10-Q

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

 

2

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Table of Contents

 

| Part 1 |   | FINANCIAL  INFORMATION |
|-------------|--------|------------------------|
|        |   |                   |
| Item 1      |   | FINANCIAL  STATEMENTS  |

 

WILLAMETTE VALLEY VINEYARDS, INC.

Balance Sheet

 
| ** **                                                                                                                                                     | ** ** | **June 30,** | ** **       | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------------|-----------------------|------------|
| ** **                                                                                                                                                     | ** ** | **2008**          | ** **       | **2007**              | ** ** |
|                                                                                                                                                           |       | **(unaudited)**   |             |                  |       |
| ASSETS                                                                                                                                                         |       |              |             |                  |       |
| Current assets:                                                                                                                                                |       |              |             |                  |       |
| Cash and cash  equivalents                                                                                                                                     |       | $                 | 66,146           |                  | $          | 1,083,405 |   |
| Accounts  receivable trade, net                                                                                                                                |       | 1,075,099         |             | 1,804,168             |       |
| Inventories                                                                                                                                                    |       | 9,734,976         |             | 7,976,432             |       |
| Prepaid expenses  and other current assets                                                                                                                     |       | 315,551           |             | 91,981                |       |
| Current portion  of notes receivable                                                                                                                           |       | 62,415            |             | 62,415                |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total current  assets                                                                                                                                          |       | 11,254,187        |             | 11,018,401            |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Vineyard  development cost, net                                                                                                                                |       | 1,671,138         |             | 1,690,055             |       |
| Property and  equipment, net                                                                                                                                   |       | 4,403,540         |             | 4,200,155             |       |
| Note receivable                                                                                                                                                |       | 187,585           |             | 187,585               |       |
| Debt issuance  costs, net                                                                                                                                      |       | 17,531            |             | 21,106                |       |
| Other assets                                                                                                                                                   |       | 6,424             |             | 65,893                |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total assets                                                                                                                                                   |       | $                 |  17,540,405 |                  | $          |  17,183,195 |   |
|                                                                                                                                                           |       |              |             |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                     |       |              |             |                  |       |
| Current  liabilities                                                                                                                                           |       |              |             |                  |       |
| Current portion  of long term debt                                                                                                                             |       | $                 | 284,786          |                  | $          | 284,786 |   |
| Revolving credit  line                                                                                                                                         |       | 440,533           |             | —                |       |
| Accounts payable                                                                                                                                               |       | 764,633           |             | 564,494               |       |
| Accrued expenses                                                                                                                                               |       | 414,191           |             | 420,825               |       |
| Income taxes  payable                                                                                                                                          |       | 138,287           |             | 76,516                |       |
| Deferred income  taxes                                                                                                                                         |       | 1,000             |             | 1,000                 |       |
| Grapes payable                                                                                                                                                 |       | 62,901            |             | 508,545               |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total current  liabilities                                                                                                                                     |       | 2,106,331         |             | 1,856,166             |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Long-term debt,  less current portion                                                                                                                          |       | 805,994           |             | 946,372               |       |
| Deferred rent  liability                                                                                                                                       |       | 215,000           |             | 223,936               |       |
| Deferred gain                                                                                                                                                  |       | 361,977           |             | 378,025               |       |
| Deferred income  taxes                                                                                                                                         |       | 262,000           |             | 262,000               |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total  liabilities                                                                                                                                             |       | 3,751,302         |             | 3,666,499             |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Shareholders’  equity                                                                                                                                     |       |              |             |                  |       |
| Common stock, no  par value - 10,000,000 shares authorized, 4,850,327 and 4,835,902 shares  issued and outstanding at June 30, 2008 and December 31, 2007 |       | 8,480,171         |             | 8,425,389             |       |
| Retained  earnings                                                                                                                                             |       | 5,308,932         |             | 5,091,307             |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total  shareholders’ equity                                                                                                                               |       | 13,789,103        |             | 13,516,696            |       |
|                                                                                                                                                           |       |              |             |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                               |       | $                 | 17,540,405       |                  | $          | 17,183,195 |   |

 

The accompanying notesare an integral part of this financial statement.

 

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WILLAMETTE VALLEY VINEYARDS, INC.

Statement of Operations

(unaudited)

 
| ** **                                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                             | ** ** | **2007**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                                                        |       |                                 |       |                               |       |   |   |   |   |
| Case revenue                                                        |       | $                                    | 3,884,983  |                               | $          | 3,717,426 |   | $ | 7,287,656 |   | $ | 7,303,987 |   |
| Facility Lease                                                      |       | —                               |       | 8,793                              |       | — |   | 17,586 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Total net  revenues                                                 |       | 3,884,983                            |       | 3,726,219                          |       | 7,287,656 |   | 7,321,573 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Cost of sales                                                       |       |                                 |       |                               |       |   |   |   |   |
| Case                                                                |       | 1,973,844                            |       | 1,999,942                          |       | 3,727,678 |   | 3,896,173 |   |
| Bulk                                                                |       | —                               |       | 986                                |       | — |   | 986 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Total cost of  sales                                                |       | 1,973,844                            |       | 2,000,928                          |       | 3,727,678 |   | 3,897,159 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Gross profit                                                        |       | 1,911,139                            |       | 1,725,291                          |       | 3,559,978 |   | 3,424,414 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Selling, general  and administrative expenses                       |       | 1,645,963                            |       | 1,266,844                          |       | 3,174,471 |   | 2,577,017 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net operating  income                                               |       | 265,176                              |       | 458,447                            |       | 385,507 |   | 847,397 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Other income  (expense)                                             |       |                                 |       |                               |       |   |   |   |   |
| Interest income                                                     |       | 16,222                               |       | 11,053                             |       | 17,193 |   | 28,111 |   |
| Interest expense                                                    |       | (17,715                              | )          | (27,523                            | )          | (40,043 | ) | (55,760 | ) |
| Other income (expense)                                              |       | (1,139                               | )          | —                             |       | 53 |   | 12,667 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net income  before income taxes                                     |       | 262,544                              |       | 441,977                            |       | 362,710 |   | 832,415 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Income tax                                                          |       | 105,017                              |       | 176,800                            |       | 145,085 |   | 332,975 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net income                                                          |       | 157,527                              |       | 265,177                            |       | 217,625 |   | 499,440 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Retained  earnings beginning of period                              |       | 5,151,405                            |       | 3,638,909                          |       | 5,091,307 |   | 3,404,646 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Retained  earnings end of period                                    |       | $                                    | 5,308,932  |                               | $          | 3,904,086 |   | $ | 5,308,932 |   | $ | 3,904,086 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Basic earnings  per common share                                    |       | $                                    | .03        |                               | $          | .06 |   | $ | .04 |   | $ | .10 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Diluted earnings  per common share                                  |       | $                                    | .03        |                               | $          | .05 |   | $ | .04 |   | $ | .10 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  number of basic common shares outstanding         |       | 4,844,475                            |       | 4,805,877                          |       | 4,840,882 |   | 4,803,326 |   |
|                                                                |       |                                 |       |                               |       |   |   |   |   |
| Weighted average  number of diluted common shares  outstanding |       | 5,006,888                            |       | 5,014,213                          |       | 4,997,528 |   | 5,009,580 |   |

 

The accompanying notes are an integral part of this financialstatement.

 

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WILLAMETTE VALLEY VINEYARDS, INC.

Statement of Cash Flows

(unaudited)

 
| ** **                                                                            | ** ** | **Six Months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                           | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                |       |                               |       |   |   |
| Net income                                                                            |       | $                                  | 217,625    |   | $ | 499,440 |   |
| Reconciliation  of net income to net cash provided by (used in) operating activities: |       |                               |       |   |   |
| Depreciation and  amortization                                                        |       | 308,241                            |       | 268,879 |   |
| Bad debt expense                                                                      |       | —                             |       | 8,333 |   |
| Stock based  compensation expense                                                     |       | 20,733                             |       | 22,386 |   |
|                                                                                  |       |                               |       |   |   |
| Changes in  operating assets and liabilities:                                         |       |                               |       |   |   |
| Accounts  receivable trade                                                            |       | 729,069                            |       | 567,623 |   |
| Inventories                                                                           |       | (1,758,542                         | )          | 159,483 |   |
| Prepaid expenses  and other current assets                                            |       | (223,572                           | )          | (63,702 | ) |
| Prepaid income  taxes                                                                 |       |                               |       | (23,817 | ) |
| Other assets                                                                          |       | 59,469                             |       | (1,234 | ) |
| Accounts payable                                                                      |       | 200,138                            |       | (360,275 | ) |
| Accrued expenses                                                                      |       | (6,633                             | )          | (9,096 | ) |
| Income taxes payable                                                                  |       | 61,771                             |       | (305,608 | ) |
| Grape payables                                                                        |       | (445,644                           | )          | (387,238 | ) |
| Deferred rent  liability                                                              |       | (8,936                             | )          | 16,493 |   |
| Deferred gain                                                                         |       | (16,048                            | )          | (16,047 | ) |
|                                                                                  |       |                               |       |   |   |
| Net cash used in  operating activities                                                |       | (862,329                           | )          | 375,620 |   |
|                                                                                  |       |                               |       |   |   |
| Cash flows from  investing activities;                                                |       |                               |       |   |   |
| Additions to  property and equipment                                                  |       | (489,132                           | )          | (72,446 | ) |
|                                                                                  |       |                               |       |   |   |
| Net cash used in  investing activities                                                |       | (489,132                           | )          | (72,446 | ) |
|                                                                                  |       |                               |       |   |   |
| Cash flows from  financing activities:                                                |       |                               |       |   |   |
| Proceeds from  stock options exercised                                                |       | 27,250                             |       | 36,240 |   |
| Revolving line of  credit                                                             |       | 440,533                            |       | — |   |
| Loan to grape  producer                                                               |       | —                             |       | (250,000 | ) |
| Repayments of  long-term debt                                                         |       | (140,379                           | )          | (124,663 | ) |
| Excess tax  benefit on stock option exercises                                         |       | 6,798                              |       | — |   |
|                                                                                  |       |                               |       |   |   |
| Net cash  provided by (used in) financing activities                                  |       | 334,202                            |       | (338,423 | ) |
|                                                                                  |       |                               |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (1,017,259                         | )          | (35,249 | ) |
|                                                                                  |       |                               |       |   |   |
| Cash and cash  equivalents:                                                           |       |                               |       |   |   |
| Beginning of  period                                                                  |       | 1,083,405                          |       | 1,612,470 |   |
|                                                                                  |       |                               |       |   |   |   |   |
| End of period                                                                         |       | $                                  | 66,146     |   | $ | 1,577,221 |   |

 

The accompanying notes are an integral part of this financialstatement.

 

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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

 

1)   BASIS OFPRESENTATION

 

Theaccompanying unaudited financial statements for the three and six months ended June 30,2008 and 2007, have been prepared in conformity with accounting principlesgenerally accepted in the United States (“GAAP”). The financial information asof December 31, 2007 is derived from the audited financial statementspresented in the Willamette Valley Vineyards, Inc. (the “Company”) AnnualReport on Form 10-KSB for the year ended December 31, 2007. Certaininformation or footnote disclosures normally included in financial statementsprepared in accordance with GAAP have been condensed or omitted pursuant to therules and regulations of the Securities and Exchange Commission. In theopinion of management, the accompanying financial statements include alladjustments necessary (which are of a normal recurring nature) for the fairstatement of the results of the interim periods presented. The accompanyingfinancial statements should be read in conjunction with the Company’s auditedfinancial statements for the year ended December 31, 2007, as presented inthe Company’s Annual Report on Form 10-KSB.

 

Operatingresults for the three and six months ended June 30, 2008 are notnecessarily indicative of the results that may be expected for the entire yearending December 31, 2008, or any portion thereof.

 

TheCompany historically has reported as a single operating segment consisting ofthe retail, in-state self-distribution and out-of-state sales departments.  These departments have mostly similareconomic characteristics, offer comparable products to customers, and utilizesimilar processes for production and distribution. The in-stateself-distribution business known as Bacchus Fine Wines has the uniquecharacteristic of selling wholesale purchased wines in addition to Companyproduced wines and glassware. The Company now reports limited financialinformation for two operating segments as follows: Bacchus Distribution andProduced Wines. Discrete financial information was not available to allow forsegment reporting in prior year periods, however, the addition of a new orderfulfillment and accounting system now provides this additional information.

 

Basic earnings per shareare computed based on the weighted-average number of common shares outstandingeach period. Diluted earnings per share are computed using the weighted averagenumber of shares of common stock and potentially dilutive common sharesoutstanding during the year.  Potentiallydilutive shares from stock options and other potentially dilutive shares areexcluded from the computation when their effect is anti-dilutive. There were nopotentially dilutive shares excluded from the computation for the six monthsended June 30, 2008. 162,413 and 156,647 potentially dilutive shares areincluded in the computation of dilutive earnings per share for the three andsix months ended June 30, 2008. 208,336 and 206,254 potentiallydilutive shares areincluded in the computation of dilutive earnings per share for the three andsix months ended June 30, 2007.

 

2)   STOCK BASEDCOMPENSATION

 

The Company has two stockoption plans, the 1992 Stock Incentive Plan (“1992 Plan”) and 2001 Stock OptionPlan (“2001 Plan”).  No additional grantsmay be made under the 1992 Plan.  The2001 Plan, which was approved by the shareholders, permits the grant of stockoptions and restricted stock awards for up to 900,000 shares.  All stock options have an exercise price thatis equal to the fair market value of the Company’s stock on the date theoptions were granted.  Administration ofthe plan, including determination of the number, term, and type of options tobe granted, lies with the Board of Directors or a duly authorized committee ofthe Board of Directors.  Options aregenerally granted based on employee performance with vesting periods ranging fromdate of grant to seven years.  Themaximum term before expiration for all grants is ten years.

 

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

 
| ** **                          | ** ** | **Three months ended** | ** ** | **Six months ended**   | ** ** |
|-------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **June 30, 2008** | ** ** | **June 30, 2008** | ** ** |
| ** **                          | ** ** | ** **             | ** ** | **Weighted**           | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | ** **             | ** ** | **average**            | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                          | ** ** | ** **             | ** ** | **exercise**           | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                          | ** ** | **Shares**             | ** ** | **price**              | ** ** | **Shares** | ** ** | **price** | ** ** |
| Outstanding at  beginning of period |       | 432,700                |       | $                      | 3.91       |   | 434,200 |   | $ | 3.90 |   |
| Granted                             |       | —                 |       | —                 |       |   |   |   |   |
| Exercised                           |       | (12,500                | )          | $                      | 4.99       |   | (14,000 | ) | $ | 4.62 |   |
| Forfeited                           |       | —                 |       | —                 |       |   |   |   |   |
|                                |       |                   |       |                   |       |   |   |   |   |   |   |
| Outstanding at  end of Period       |       | 420,200                |       | $                      | 3.87       |   | 420,200 |   | $ | 3.87 |   |

 

AtJanuary 1, 2006, the Company began recognizing compensation expense forstock options with the adoption of Statement of Financial Accounting Standards(“SFAS”) No. 123 (Revised), “Share-Based Payment,” (“SFAS 123R”). The fairvalue of each stock option granted is estimated on the date of grant using theBlack-Scholes stock option valuation model. This model uses the assumptionslisted in the table below. Expected volatilities are based on impliedvolatilities from the Company’s stock, historical volatility of the Company’sstock, and other factors.  Expecteddividends are based on the Company’s plan not to pay dividends for theforeseeable future.  The Company useshistorical data to estimate option exercises and employee terminations withinthe valuation model. The risk-free rate for periods within the contractual lifeof the option is based on the U.S. Treasury yield curve in effect at the timeof grant.

 

 Black-Scholes assumptions

 
| ** **                | ** ** | **June 30, 2008** | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | ** **             | ** ** |
| Risk Free  interest rates |       | 3.99                   | %          |
| Expected  dividend        |       | 0                      | %          |
| Expected lives,  in years |       | 5-10                   |       |
| Expected  volatility      |       | 44.2                   | %          |

 

TheCompany expenses stock options on a straight-line basis over the options’related vesting term.  For the threemonths ended June 30, 2008 and 2007, the Company recognized pretaxcompensation expense related to stock options and restricted stock grants of$8,143 and $8,325, respectively; and for the six months ended June 30,2008 and 2007, the Company recognized pretax compensation expense related tostock options of $20,733 and $22,386, respectively.

 

During the six monthsended June 30, 2008, the following transactions related to stock optionexercise occurred:

 
| ** **               | ** ** | ** ** | ** ** | **Exercise** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
| ** **               | ** ** | **Shares** | ** ** | **Price**    | ** ** |
|                     |       |       |       |         |       |
| Stock Options  Exercised |       | 1,500      |       | $            | 1.50       |   |
|                     |       | 5,000      |       | $            | 5.00       |   |
|                     |       | 5,000      |       | $            | 4.98       |   |
|                     |       | 2,500      |       | $            | 5.00       |   |

 

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The exercise of theaforementioned options resulted in a reduction of $6,798 in the Company’s taxliability.  Since the deduction exceedsthe compensation costs recognized in the financial statements, the excess taxbenefit is recognized as additional paid in capital.

 

3)   INVENTORIES

 

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

 
| ** **                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                        | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Winemaking and  packaging materials                                               |       | $                 | 227,735    |                  | $          | 283,200 |   |
| Work-in-progress  (costs relating to unprocessed and/or bulk  wine products) |       | 3,099,487         |       | 2,710,399             |       |
| Finished goods  (bottled wines and related products)                              |       | 6,407,754         |       | 4,982,833             |       |
|                                                                              |       |              |       |                  |       |
| Current  inventories                                                              |       | $                 | 9,734,976  |                  | $          | 7,976,432 |   |

 

4)   PROPERTY AND EQUIPMENT

 

The Company’sproperty and equipment consists of the following, as of the dates shown:

 
| ** **                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                              | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| Land and  improvements                  |       | $                 | 1,027,310  |                  | $          | 959,064 |   |
| Winery building  and hospitality center |       | 4,975,002         |       | 4,848,249             |       |
| Equipment                               |       | 4,946,446         |       | 4,617,040             |       |
|                                    |       |              |       |                  |       |
|                                    |       | 10,948,758        |       | 10,424,353            |       |
|                                    |       |              |       |                  |       |
| Less accumulated  depreciation          |       | (6,545,218        | )          | (6,224,198            | )          |
|                                    |       |              |       |                  |       |
|                                    |       | $                 | 4,403,540  |                  | $          | 4,200,155 |   |

 

5)   INTEREST AND TAXES PAID

 

During the second quarterended June 30, 2008, the Company paid $0 in Federal, State and Localincome taxes and $81,238 in Payroll tax. Additionally, $17,715 was paid ininterest on the long-term debt and revolving credit line for the same period.For the six month period ended June 30, 2008, the Company paid $314,300 inFederal, State and Local income taxes and $172,871 in Payroll tax. Additionally,$40,043 was paid in interest on the long-term debt and revolving credit linefor the same period.

 

6)   SEGMENT REPORTING

 

The Company hasidentified two operating segments, Produced Wine and Bacchus Distribution.Bacchus Distribution (dba Bacchus Fine Wines), is the company’s in-statedistribution department. Bacchus distributes produced wine, purchased wine andglassware at wholesale prices to in-state customers. Produced wine 

 

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represents all WillametteValley Vineyard branded wine which is produced at the winery.  Purchased wines and glassware are brandspurchased from other wine distributors and wineries for sale to in-statecustomers. For segment reporting, the produced wines distributed by Bacchus areconsolidated with Retail and Out-of-State sales and shown as Produced Wines.

 

Discrete financialinformation for these operating segments was not available in prior periods,which resulted in the segments being aggregated and reflected as a singlesegment.  Effective for the three monthsended March 31, 2008, certain discrete financial information becameavailable with the implementation of new accounting and inventory trackingsoftware.  The two segments reflect howthe Company’s operations are evaluated by senior management and the structureof its internal financial reporting.  TheCompany evaluates performance based on the gross profit of the respectivebusiness segment.  Sales, general andadministrative expenses are not allocated between operating segments, thereforenet income information for the respective segments is not available.  Discrete financial information related tosegment assets, other than inventory, is not available and that informationcontinues to be aggregated.

 

The following tablesoutline the sales, cost of sales and gross profit, for the three and six monthperiods ended June 30, 2008 by operating segment:

 
| ** **    | ** ** | **Three months ended June 30, 2008** | ** ** |
|---------------|------------|-------------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                               | ** ** | **Produced** | ** ** | ** ** | ** ** |
|          |       | **Distribution**                          | ** ** | **Wine** | ** ** | **Total** |   |
|          |       |                                      |       |   |   |   |   |
| Net Sales     |       | $                                         | 1,157,831  |   | $ | 2,727,152 |   | $ | 3,884,983 |   |
|          |       |                                      |       |   |   |   |   |
| Cost of Sales |       | $                                         | 858,033    |   | $ | 1,115,811 |   | $ | 1,973,844 |   |
|          |       |                                      |       |   |   |   |   |
| Gross Profit  |       | $                                         | 299,798    |   | $ | 1,611,341 |   | $ | 1,911,139 |   |
|          |       |                                      |       |   |   |   |   |
| % of sales    |       | 25.9                                      | %          | 59.1 | % | 49.2 | % |

 

 
| ** **    | ** ** | **Six months ended June 30, 2008** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                             | ** ** | **Produced** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Distribution**                        | ** ** | **Wine** | ** ** | **Total** | ** ** |
|          |       |                                    |       |   |   |   |   |
| Net Sales     |       | $                                       | 2,229,097  |   | $ | 5,058,559 |   | $ | 7,287,656 |   |
|          |       |                                    |       |   |   |   |   |
| Cost of Sales |       | $                                       | 1,619,374  |   | $ | 2,108,304 |   | $ | 3,727,678 |   |
|          |       |                                    |       |   |   |   |   |
| Gross Profit  |       | $                                       | 609,723    |   | $ | 2,950,255 |   | $ | 3,559,978 |   |
|          |       |                                    |       |   |   |   |   |
| % of sales    |       | 27.4                                    | %          | 58.3 | % | 48.8 | % |

 

Total inventory forBacchus Distribution was $2,230,858 of purchased wines and $257,485 of non-winemerchandise at period end June 30, 2008. This compares to Produced Wine wine inventory of $6,333,354 and $913,279of non-wine merchandise and work-in-process for the same period.

 

Item 2

 

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward LookingStatements

 

This Management’sDiscussion and Analysis of Financial Condition and Results of Operation andother sections of this Form 10-Q contain forward-looking 

 

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statements within themeaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements involverisks and uncertainties that are based on current expectations, estimates andprojections about the Company’s business, and beliefs and assumptions made bymanagement.  Words such as “expects,” “anticipates,”“intends,” “plans,” “believes,” “seeks,” “estimates” and variations of suchwords and similar expressions are intended to identify such forward-lookingstatements.  Therefore, actual outcomesand results may differ materially from what is expressed or forecasted in suchforward-looking statements due to numerous factors, including, but not limitedto:  availability of financing forgrowth, availability of adequate supply of high quality grapes, successfulperformance of internal operations, impact of competition, changes in winebroker or distributor relations or performance, impact of possible adverseweather conditions, impact of reduction in grape quality or supply due todisease, impact of governmental regulatory decisions, and other risks detailedbelow as well as those discussed elsewhere in this Form 10-Q and from timeto time in the Company’s Securities and Exchange Commission filings andreports.  In addition, such statementscould be affected by general industry and market conditions and growth rates,and general domestic economic conditions. The Company undertakes no obligation to revise forward-lookingstatements to reflect events or changes after the date of this discussion or toreflect the occurrence of unanticipated events.

 

Critical Accounting Policies

 

**The foregoing discussion and analysis of our financialcondition and results of operations are based upon our financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America. The preparation of these financial statements requires the Company’smanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.  On anon-going basis, we evaluate our estimates, including those related to revenuerecognition, collection of accounts receivable, valuation of inventories, andamortization of vineyard development costs. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances.  Actual results may differ from these estimatesunder different assumptions or conditions. A description of our critical accounting policies and related judgmentsand estimates that affect the preparation of our financial statements is setforth in our Annual Report on Form 10-KSB for the year ended December 31,2007.  Such policies were unchangedduring the three months ended June 30, 2008.**

** **

Overview

 

Sales revenue for the three months ended June 30,2008 increased $158,764 or 4.3% from the comparable prior year period.  Sales revenue for the six months ended June 30,2008 decreased $33,917 or -0.5% for the comparable prior year period.

 

Sales revenue growth for the first six months of 2008versus 2007 is being constrained principally due to three Pinot Noir productsbeing out of stock.  These products willbe available for sale sometime in the 4th Quarter of 2008.

 

Taken as a whole, the three sales departments:National Sales, Oregon Wholesale (Bacchus Fine Wines) and Retail improved ontheir net contribution for the three months ended June 30, 2008 versus thecomparable prior year period.

 

Net operating income performance versus for thequarter and year ended June 30, 2008 was less mainly due to one-time auditand legal fees resulting from the implementation problems of the new OregonWholesale order fulfillment and accounting system. Additionally, incrementalshipping charges due to higher fuel costs, sales salaries and overallinflationary general and administrative expenses led to decreased net operatingincome versus prior year.

 

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As a result, the Company generated $0.03 and $0.04basic earnings per share during the three and six months ended June 30,2008, a decrease of $0.03 and $0.06 basic earnings per share versus thecomparable prior year periods.

 

The winery bottled approximately 32,000 cases in thesecond quarter, mainly 2007 vintage Pinot Gris, Riesling and Oregon Blossom.

 

The Company has anasset-based loan agreement with Umpqua Bank that allows it to borrow up to$2,000,000.  The maturity date on thisnote is January, 5, 2009.  At June 30,2008, the Company had a credit line balance of $440,533 and $1,559,467 ofavailable credit. The interest rate in the quarter was 5.0%. The interest rateon this note is a variable interest rate and is subject to change from time totime based on changes in an independent index which is the Prime Rate aspublished in the Wall Street Journal (the “Index”).  The index rate at June 30, 2008 is5.00%. The loan agreement contains, among other things, certain restrictivefinancial covenants with respect to total equity, debt-to-equity and debtcoverage that must be maintained by the Company on a quarterly basis.  As of June 30, 2008, the Company was incompliance with all of the financial covenants.

 

One of the nation’s leading wine consumer magazines,Wine Enthusiast recently issued high marks for the Company’s 2006 vintage PinotNoirs as follows:

 

91 pts. for Signature Cuvée Pinot Noir

90 pts. for Estate Vineyard Pinot Noir

90 pts. for Tualatin Estate Vineyard Pinot Noir

89 pts. for Hannah Vineyard Pinot Noir

88 pts. for Willamette Valley Pinot Noir

 

The newly released 2007 Pinot Gris earned gold medalsat the 2008 Los Angeles International Wine & Spirits Awards, the 2008National Women’s Wine Competition and was selected as a winner at the PacificCoast Oyster Wine Competition for the third consecutive year.

 

Oregon’s leading industry organization dedicated tosustainable environmental practice, LIVE, Inc. (Low Input Viticulture andEnology) presented winery founder and CEO Jim Bernau with the organization’sfirst Founder’s Award at its Annual Meeting held April 3, 2008.

 

RESULTS OF OPERATIONS

 

Revenue

 

Netrevenue for the three and six months ended June 30, 2008 increased$158,764 or 4.3% and decreased $33,917 or -0.5%, respectively, versus thecorresponding periods in the preceding year. The increase in the quarter isprimarily due to increased order activity from out-of-state distributors andincreased retail wine club sales. This is slightly offset by the decrease inin-state wholesale sales due to outages of certain core Pinot Noirproducts.  The decrease for the first sixmonths is primarily due to out-of-state distributors ordering less in the firstfive months of 2008 and the in-state wholesale lost placements previouslymentioned.

 

Our revenues from wineryoperations are summarized as follows:

 
| ** **                                 | ** ** | **Three months ended June 30, ** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **2008**                                                  | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |                                                      |       |                                              |       |   |   |   |   |   |   |   |   |
| Tasting  Room Sales and Rental Income |       | $                                                         | 567,321    |                                              | $          | 517,080 |   | $ | 1,058,371 |   | $ | 962,544 |   |
| On-site  and off-site Festivals            |       | 25,356                                                    |       | 14,634                                            |       | 62,887 |   | 64,739 |   |
| In-state  sales                            |       | 1,864,762                                                 |       | 1,877,754                                         |       | 3,577,877 |   | 3,644,981 |   |
| Out-of-state  sales                        |       | 1,505,630                                                 |       | 1,420,283                                         |       | 2,758,066 |   | 2,829,140 |   |
| Bulk  wine/Misc. sales                     |       | —                                                    |       | 8,793                                             |       | — |   | 17,586 |   |
|                                       |       |                                                      |       |                                              |       |   |   |   |   |
| Total  Revenue                             |       | 3,963,069                                                 |       | 3,838,544                                         |       | 7,457,201 |   | 7,518,990 |   |
|                                       |       |                                                      |       |                                              |       |   |   |   |   |
| Less  excise taxes                         |       | (78,086                                                   | )          | (112,325                                          | )          | (169,545 | ) | (197,417 | ) |
|                                       |       |                                                      |       |                                              |       |   |   |   |   |   |   |   |   |
| Net  Revenue                               |       | $                                                         | 3,884,983  |                                              | $          | 3,726,219 |   | $ | 7,287,656 |   | $ | 7,321,573 |   |

 

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Tastingroom sales and rental income for the three and six months ended June 30,2008 increased $50,241 or 9.7% and $95,827 or 10.0%, respectively, compared tothe corresponding prior year periods. The incremental revenue is primarily due to a higher volume of casessold in the tasting room and mail order sales offset slightly by a reducednumber of on-site room rentals versus prior year.

 

Sales in the state ofOregon, through our wholesale department, Bacchus Fine Wines, decreased $12,992or -0.7% and $67,104or -1.8% in the three and six months ended June 30, 2008, respectively,compared to the corresponding prior year periods.  In the three and six months ended June 30,2008, our direct in-state sales to our largest customer decreased $58,919 or-25.0% and $260,056or -45.3%, respectively, over the comparable prior year periods.  The decrease is largely the result of reducedorder activity with a key customer due to the outage of specific WillametteValley Vineyard brand Pinot Noir varietal. This was mostly offset by the increased product placements anddevelopment of the wholesale department’s portfolio of brands produced bywineries outside of Oregon. It is anticipated that the key customer reducedorder activity will be renewed in 2008 once the release of the 2007 harvestPinot Noir is complete later this year.

 

Out-of-state sales in thethree and six months ended June 30, 2008 increased $85,347 or 6.0% anddecreased $71,074 or -2.5%, respectively, versus the comparable prior yearperiods. The decrease in the year is primarily due to reduced order activity bydistributors whom are reducing their inventory levels even though sales to endconsumers are up over last year.  In June orderactivity was greatly improved and resulted in a 6.0% increase in the quarterversus prior year.

 

Gross Profit

 

Gross profits for thethree and six months ended June 30, 2008 increased $185,848 or 10.8% and$135,564 or 4.0%, respectively, versus the comparable prior year periods.

 

As a percentage of netrevenue, gross profit from winery operations was 49.2% and 48.8% in the threeand six months ended June 30, 2008, respectively, as compared to 46.3% and46.8% in the comparable prior year periods. The improvement in gross profit as a percentage of net revenue is mainlydue to the impact of Retail which, for this year, represents a higherpercentage of total gross profit and the mix of out of state sales towardshigher margin products.  The Companycontinues to focus on improved distribution of higher margin Willamette ValleyVineyards brand products as well as continuing our efforts to reduce grape andproduction costs.  Our increasedrepresentation of brands other than our own through our Oregon Wholesale salesforce and increases in cost of production may erode future gross margin as apercentage of sales due to the lower margins associated with selling thosebrands.

 

Selling, General andAdministrative Expense

 

Selling, general andadministrative expenses for the three and six months ended June 30, 2008increased $379,119 or 29.9% and $597,454 or 23.2%, respectively, compared tothe corresponding prior year periods. These increases are due primarily to one-time incremental professionalservice fees 

 

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for Accounting auditservices and legal services. Additionally, inflationary shipping costs have hadan unfavorable impact for the quarter and year versus prior year.  As a percentage of net revenues from wineryoperations, selling, general and administrative expenses increased to 42.4% and43.6% for the three and six months ended June 30, 2008, respectively, ascompared to 34.0% and 35.2% for the comparable prior year periods.

 

Interest Income, InterestExpense

 

Interest income increased$5,169 or 46.8% and decreased $10,918 or -38.8% for the three and six monthsended June 30, 2008, respectively, compared to the comparable prior yearperiods.  Interest expense for the threeand six months ended June 30, 2008 decreased $9,808 or -35.6% and $15,717or -28.2%, respectively, compared to the corresponding prior year periods.  The average interest rate paid for the threeand six months ended June 30, 2008 was 5.0% and 6.0%, respectively.

 

Income Taxes

 

Income tax expense was$105,017 and $145,085, respectively, for the three and six months ended June 30,2008, compared to $176,800 and $332,975, respectively, for the prior yearperiods.  Our estimated tax rate for the three and six months ended June 30,2008 and 2007 was 40% and 40% respectively. As a result of taking a tax deduction for exercises of stock options inthe year the current tax liability was reduced by $6,798.  This benefit increases additional paid incapital in stockholders equity and is reflected on the statement of cash flowsas excess tax benefits on stock option exercises.

 

Net Income and Earningsper Share

 

As a result of thefactors listed above, net income for the three and six months ended June 30,2008 was $157,527 and $217,625, respectively compared to net income of $265,177and $499,440 in the comparable prior year periods. Diluted earnings per sharewere $0.03 and $0.04 for the quarter and year-to date ended June 30, 2008,respectively, compared to $0.05 and $0.10 per diluted share, in the comparableprior year periods.

 

# **Liquidityand Capital Resources**

# ** **

At June 30, 2008, wehad a working capital balance of $9.1 million and a current ratio of5.34:1.  At December 31, 2007, wehad a working capital balance of $9.1 million and a current ratio of5.91:1.  We had a cash balance of $66,146at June 30, 2008, compared to a cash balance of $1,083,405 at December 31,2007.  The decrease in cash was primarilydue to the build-up of inventory required to support 2008 anticipated highersales volume and capital expenditures for property, plant and equipment.

 

Total cash used inoperating activities in the six months ended June 30, 2008 was ($862,329)compared to cash provided by operating activities of $375,620 for the sameperiod in the prior year.  The increasein cash used in operating activities versus prior year was primarily due to thesignificant build-up of inventory required to support 2008 anticipated highersales volume.

 

Total cash used ininvesting activities in the six months ended June 30, 2008 was ($489,132),compared to ($72,446) in the prior year period. The decrease was mainly due to construction expenditures required toimprove the Tualatin production facility, a five acre real estate acquisitionalso at Tualatin, two new replacement vehicles added for executive staff and anadded delivery vehicle for Bacchus Fine Wines.

 

Total cash provided byfinancing activities in the six months ended June 30, 2008 was $334,202compared to ($338,423) used in financing activities in the prior yearperiod.  Cash provided by financingactivities primarily consisted 

 

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of revolving credit lineadvances needed to support working capital requirements. This is offsetsomewhat by cash used to repay long-term debt.

 

At June 30, 2008,the line of credit balance was $440,533, on a maximum borrowing amount of$2,000,000.  We have a loan agreementwith Umpqua Bank that contains, among other things, certain restrictivefinancial covenants with respect to total equity, debt-to-equity and debtcoverage that must be maintained by us on a quarterly basis.  As of June 30, 2008, we were incompliance with all of the financial covenants.

 

As of June 30, 2008,we had a total long-term debt balance of $1,090,780, including the portion duein the next year, owed to Farm Credit Services. There was no new long-term debtincurred in the three months ended June 30, 2008. The debt balanceremaining represents the debt service with Farm Credit Services which was usedto finance our Hospitality Center, invest in new winery equipment to increaseour winemaking capacity and complete a larger storage facility.

 

At June 30, 2008, weowed $62,901 on grape contracts.  Thisamount is owed to a single grape grower, which will be paid as the wine madefrom those grapes is sold. For the 2008 harvest, there are grape purchasecontracts in place with local growers that will be accrued when the grapes arereceived, typically in October.

 

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

 

Segment Reporting

 

The Company’s in-stateself-distribution business know as Bacchus Fine Wines sells wholesale purchasedwines from other wineries and glassware in addition to Company produced wines.The sale of purchased wines and glassware is a unique characteristic versus theRetail and Out-Of-State sales organizations of the Company and thereforewarrants segment discussion.  Thepurchased wine and glassware segment is shown below as Bacchus Distribution.For purposes of segment reporting the produced wines sold by Bacchus areconsolidated with Retail and Out-of-State sales and shown below as ProducedWines.  Sales, general and administrativeexpenses are not allocated between operating segments, therefore net incomeinformation for the respective segments is not available.  This quarter is only the second quarter thatspecific segment information for purchased wines and non-wine has beendisclosed.

 

The following tableoutlines the sales, cost of sales and gross profit, for the three and six monthperiods ended June 30, 2008 by operating segment:

 
| ** **    | ** ** | **Three months ended June 30, 2008** | ** ** |
|---------------|------------|---------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus  Distribution**                                     | ** ** | **Produced  Wine** | ** ** | **Total** | ** ** |
| Net Sales     |       | $                                                             | 1,157,831  |   | $ | 2,727,152 |   | $ | 3,884,983 |   |
|          |       |                                                          |       |   |   |   |   |   |   |   |
| Cost of Sales |       | $                                                             | 858,033    |   | $ | 1,115,811 |   | $ | 1,973,844 |   |
|          |       |                                                          |       |   |   |   |   |   |   |   |
| Gross Profit  |       | $                                                             | 299,798    |   | $ | 1,611,341 |   | $ | 1,911,139 |   |
|          |       |                                                          |       |   |   |   |   |   |   |   |
| % of sales    |       | 25.9                                                          | %          | 59.1 | % | 49.2 |   |

 
| ** **    | ** ** | **Six months ended June 30, 2008** | ** ** |
|---------------|------------|-------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus  Distribution**                                   | ** ** | **Produced  Wine** | ** ** | **Total** | ** ** |
| Net Sales     |       | $                                                           | 2,229,097  |   | $ | 5,058,559 |   | $ | 7,287,656 |   |
|          |       |                                                        |       |   |   |   |   |   |   |   |
| Cost of Sales |       | $                                                           | 1,619,374  |   | $ | 2,108,304 |   | $ | 3,727,678 |   |
|          |       |                                                        |       |   |   |   |   |   |   |   |
| Gross Profit  |       | $                                                           | 609,723    |   | $ | 2,950,255 |   | $ | 3,559,978 |   |
|          |       |                                                        |       |   |   |   |   |   |   |   |
| % of sales    |       | 27.4                                                        | %          | 58.3 | % | 48.8 | % |

 

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Total inventory for BacchusDistribution was $2,230,858 of purchased wines and $257,485 of non-winemerchandise at period end June 30, 2008. This compares to Produced Wine wine inventory of $6,333,354 and $913,279of non-wine merchandise and work-in-process for the same period.

 

Item 3

 

QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reportingcompany we are not required to provide the information required by this item.

 

Item 4

 

CONTROLS AND PROCEDURES

 

DisclosureControls and Procedures

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports under the Securities Exchange Act of 1934, asamended (the “Exchange Act”), is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and thatsuch information is accumulated and communicated to management, including ourChief Executive Officer, as appropriate, to allow timely decisions regardingrequired disclosure.  For the period endedJune 30, 2008, the Company performed an evaluation, under the supervisionand with the participation of the Chief Executive Officer, Chief FinancialOfficer and other management personnel, of the effectiveness of our disclosurecontrols and procedures, as defined in Rules 13a-15(e) and 15d-15(e) ofthe Securities and Exchange Act of 1934. Management, including our ChiefExecutive Officer and Chief Financial Officer, has concluded that thedisclosure controls and procedures as of June 30, 2008 were effective atthe assurance level as of the end of the period covered by this report.

 

The Company does notexpect that its disclosure controls and procedures will prevent all error andinstances of fraud. A control procedure, no matter how well conceived and operated,can provide only reasonable, not absolute, assurance that the objectives of thecontrol procedure are met. Because of the inherent limitations in all controlprocedures, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected. These inherent limitations include the realities that judgments indecision-making can be faulty, and that breakdowns can occur because of simpleerror or mistake. Additionally, controls can be circumvented by the individualacts of some persons, by collusion of two or more people, or by managementoverride of the control. The Company considered these limitations during thedevelopment of its disclosure controls and procedures, and will continuallyreevaluate them to ensure they provide reasonable assurance that such controlsand procedures are effective.

 

Internal Control overFinancial Reporting

 

In our Management’sReport on Internal Control Over Financial Reporting included in the Company’s Form 10-KSBfor the year ended December 31, 2007, management concluded that ourinternal control over financial reporting was 

 

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not effective due to theexistence of certain material weaknesses as of December 31, 2007.

 

Beginning during thefourth quarter of fiscal 2007 and in the first and second quarters of fiscalyear 2008, we formulated a remediation plan and initiated remedial action toaddress those material weaknesses. The elements of the remediation plan were asfollows:

 

·              Inadequate segregation of dutieswithin a significant account or process. We commenced a thorough review of ouraccounting staff’s duties and where necessary we have been segregating suchduties with other personnel.

 

·              Inadequate documentation of the componentsof internal control. We commenced a thorough review of our documentation andwhere necessary we have put into place policies and procedures to document suchevidence to comply with our internal control requirements. We also retained afinancial consultant to assist us in further reviewing and improving ourinternal control processes.

 

We believe that thesemeasures, which were effectively implemented and maintained, have notcompletely remediated the material weaknesses identified above.

 

The above remedialmeasures initiated during the fourth quarter of fiscal year 2007 and pursued inthe six months ended June 30, 2008, have materially affected our internalcontrol over financial reporting.

 

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PART II.                                  OTHERINFORMATION

                                                  

Item1.             Legal Proceedings.

                         

                         None.

                         

Item2.             Unregistered Sales ofEquity Securities and Use of Proceeds.

                         

                         None.

                         

Item3.             Defaults Upon SeniorSecurities.

                         

                         None.

                         

Item4.             Submission of Matters to aVote of Security Holders.

                         

                         None.

                         

Item 5.             Other Information

                         

                         None.

 

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Item6.             Exhibits

 
| **Exhibit No.** | ** ** | **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, (Commission File No. 24S-2996)     |
|                 |       |                                                                                                                                                                                                                |
| 3.2                  |       | Plan of Merger and  Articles of Merger, dated April 15, 1997 (incorporated herein by  reference to Exhibit 99 to the Company’s Form 10QSB, filed  May 15, 1997 (File No. 000-21522)   |
|                 |       |                                                                                                                                                                                                                |
| 3.3                  |       | Plan of Merger and  Articles of Merger, dated April 15, 1997 (incorporated herein by  reference to Exhibit 99.1 to the Company’s Form 10QSB, filed  May 15, 1997 (File No. 000-21522) |
|                 |       |                                                                                                                                                                                                                |
| *3.4                 |       | Articles of Amendment,  dated August 22, 2000                                                                                                                                                                  |
|                 |       |                                                                                                                                                                                                                |
| *3.5                 |       | Bylaws of Willamette  Valley Vineyards, Inc. (incorporated by reference from the Company’s  Regulation A Offering Statement on Form 1-A (Commission File  No. 24S-2996)                         |
|                 |       |                                                                                                                                                                                                                |
| *31.1                |       | Certification by James  W. Bernau pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934                                                                                                      |
|                 |       |                                                                                                                                                                                                                |
| *31.2                |       | Certification by  Jeffrey J. Fox pursuant to Rule 13a-14(a) of the Securities  Exchange Act of 1934                                                                                                       |
|                 |       |                                                                                                                                                                                                                |
| *32.1                |       | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                  |
|                 |       |                                                                                                                                                                                                                |
| *32.2                |       | Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                  |

 

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* Filed herewith

 

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SIGNATURES

 

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

 

 
| WILLAMETTE  VALLEY VINEYARDS, INC. |
|------------------------------------|
|                               |   |
|                               |   |
| Date: August 14,  2008        | By | /s/  James W. Bernau |
|                               |   |     James W. Bernau |
|                               |   |     President |
|                               |   |   |
|                               |   |   |
| Date: August 14,  2008        | By | /s/  Jeffrey J. Fox |
|                               |   |     Jeffrey J. Fox |
|                               |   |     Controller |

 

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