Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| **x****      QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                        |   |
| **For the  Quarterly Period Ended September 30, 2008**                                                                                 |
|                                                                                                                                        |   |
| **o****      TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**                          |

 

**CommissionFile Number 0-21522**

 

**WILLAMETTE VALLEY 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 telephonenumber,

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 September 30, 2008:

4,850,327 shares,no par value

 

 

 

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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                                                                                                |   |

 

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

 

WILLAMETTE VALLEYVINEYARDS, INC.

Balance Sheet

 
| ** **                                                                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                          | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                          | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                                              |       |                   |       |                  |       |
| Current assets:                                                                                                                                                     |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                          |       | $                      | 18,776     |                  | $          | 1,083,405 |   |
| Accounts  receivable trade, net                                                                                                                                     |       | 1,051,689              |       | 1,804,168             |       |
| Inventories                                                                                                                                                         |       | 9,929,994              |       | 7,976,432             |       |
| Prepaid expenses  and other current assets                                                                                                                          |       | 112,531                |       | 91,981                |       |
| Current portion  of notes receivable                                                                                                                                |       | 93,623                 |       | 62,415                |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total current  assets                                                                                                                                               |       | 11,206,613             |       | 11,018,401            |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Vineyard  development cost, net                                                                                                                                     |       | 1,654,104              |       | 1,690,055             |       |
| Property and  equipment, net                                                                                                                                        |       | 6,001,328              |       | 4,200,155             |       |
| Note receivable                                                                                                                                                     |       | 156,377                |       | 187,585               |       |
| Debt issuance  costs, net                                                                                                                                           |       | 15,743                 |       | 21,106                |       |
| Other assets                                                                                                                                                        |       | 57,181                 |       | 65,893                |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total assets                                                                                                                                                        |       | $                      | 19,091,346 |                  | $          | 17,183,195 |   |
|                                                                                                                                                                |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Current  liabilities                                                                                                                                                |       |                   |       |                  |       |
| Current portion  of long term debt                                                                                                                                  |       | $                      | 340,969    |                  | $          | 284,786 |   |
| Revolving credit  line                                                                                                                                              |       | 403,485                |       | —                |       |
| Accounts payable                                                                                                                                                    |       | 776,064                |       | 564,494               |       |
| Accrued expenses                                                                                                                                                    |       | 315,593                |       | 420,825               |       |
| Income taxes  payable                                                                                                                                               |       | 71,223                 |       | 76,516                |       |
| Deferred income  taxes                                                                                                                                              |       | 1,000                  |       | 1,000                 |       |
| Grapes payable                                                                                                                                                      |       | 53,976                 |       | 508,545               |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total current  liabilities                                                                                                                                          |       | 1,962,310              |       | 1,856,166             |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Long-term debt,  less current portion                                                                                                                               |       | 2,255,150              |       | 946,372               |       |
| Deferred rent  liability                                                                                                                                            |       | 217,057                |       | 223,936               |       |
| Deferred gain                                                                                                                                                       |       | 353,954                |       | 378,025               |       |
| Deferred income  taxes                                                                                                                                              |       | 262,000                |       | 262,000               |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                  |       | 5,050,471              |       | 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 September 30, 2008 and December 31, 2007 |       | 8,488,314              |       | 8,425,389             |       |
| Retained  earnings                                                                                                                                                  |       | 5,552,561              |       | 5,091,307             |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total  shareholders’ equity                                                                                                                                    |       | 14,040,875             |       | 13,516,696            |       |
|                                                                                                                                                                |       |                   |       |                  |       |
| Total  liabilities and shareholders’ equity                                                                                                                    |       | $                      | 19,091,346 |                  | $          | 17,183,195 |   |

 

The accompanying notes are an integral part of this financialstatement.

 

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WILLAMETTE VALLEYVINEYARDS, INC.

Statement of Operations

(unaudited)

 
| ** **                                                    | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                    | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net revenues                                                  |       |                             |       |                            |       |   |   |   |   |
| Case revenue                                                  |       | $                                | 4,056,522  |                            | $          | 4,247,388 |   | $ | 11,344,179 |   | $ | 11,551,376 |   |
| Facility Lease                                                |       | —                           |       | 2,981                           |       | — |   | 20,567 |   |
| Total net revenues                                            |       | 4,056,522                        |       | 4,250,369                       |       | 11,344,179 |   | 11,571,943 |   |
| Cost of sales                                                 |       |                             |       |                            |       |   |   |   |   |
| Case                                                          |       | 2,075,400                        |       | 2,124,364                       |       | 5,803,078 |   | 6,020,537 |   |
| Bulk                                                          |       | —                           |       | —                          |       | — |   | 986 |   |
| Total cost of  sales                                          |       | 2,075,400                        |       | 2,124,364                       |       | 5,803,078 |   | 6,021,523 |   |
| Gross profit                                                  |       | 1,981,122                        |       | 2,126,005                       |       | 5,541,101 |   | 5,550,420 |   |
| Selling, general  and administrative expenses                 |       | 1,519,417                        |       | 1,346,636                       |       | 4,693,892 |   | 3,923,654 |   |
| Net operating income                                          |       | 461,705                          |       | 779,369                         |       | 847,209 |   | 1,626,766 |   |
| Other income  (expense)                                       |       |                             |       |                            |       |   |   |   |   |
| Interest income                                               |       | —                           |       | 18,193                          |       | 17,193 |   | 46,304 |   |
| Interest expense                                              |       | (34,906                          | )          | (26,583                         | )          | (74,949 | ) | (82,343 | ) |
| Other  income(expense)                                        |       | —                           |       | —                          |       | 56 |   | 12,667 |   |
| Net income  before income taxes                               |       | 426,799                          |       | 770,979                         |       | 789,509 |   | 1,603,394 |   |
| Income tax                                                    |       | 183,170                          |       | 248,241                         |       | 328,255 |   | 581,217 |   |
| Net income                                                    |       | 243,629                          |       | 522,738                         |       | 461,254 |   | 1,022,177 |   |
| Retained  earnings beginning of period                        |       | 5,308,932                        |       | 3,904,086                       |       | 5,091,307 |   | 3,404,647 |   |
| Retained  earnings end of period                              |       | $                                | 5,552,561  |                            | $          | 4,426,824 |   | $ | 5,552,561 |   | $ | 4,426,824 |   |
| Basic earnings  per common share                              |       | $                                | .05        |                            | $          | .11 |   | $ | .10 |   | $ | .21 |   |
| Diluted earnings  per common share                            |       | $                                | .05        |                            | $          | .10 |   | $ | .09 |   | $ | .20 |   |
| Weighted average  number of basic common shares outstanding   |       | 4,850,327                        |       | 4,806,112                       |       | 4,844,053 |   | 4,804,324 |   |
| Weighted average  number of diluted common shares outstanding |       | 4,948,301                        |       | 5,003,549                       |       | 4,970,900 |   | 5,007,660 |   |

 

The accompanying notes are an integral part of this financialstatement.

 

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WILLAMETTE VALLEYVINEYARDS, INC.

Statementof Cash Flows

(unaudited)

 
| ** **                                                                            | ** ** | **Nine Months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2008**                                                | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                |       |                                                    |       |   |   |
| Net income                                                                            |       | $                                                       | 461,254    |   | $ | 1,022,177 |   |
| Reconciliation  of net income to net cash provided by (used in) operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                                        |       | 473,613                                                 |       | 396,633 |   |
| Bad debt expense                                                                      |       | 20,483                                                  |       | 8,333 |   |
| Deferred income  taxes                                                                |       |                                                    |       | (13,000 | ) |
| Stock based  compensation expense                                                     |       | 28,877                                                  |       | 36,781 |   |
| Changes in  operating assets and liabilities:                                         |       |                                                    |       |   |   |
| Accounts  receivable trade                                                            |       | 731,996                                                 |       | 564,654 |   |
| Inventories                                                                           |       | (1,953,562                                              | )          | (216,594 | ) |
| Prepaid expenses  and other current assets                                            |       | (20,550                                                 | )          | (318,522 | ) |
| Other assets                                                                          |       | 8,712                                                   |       | (1,864 | ) |
| Accounts payable                                                                      |       | 211,570                                                 |       | 474,374 |   |
| Accrued expenses                                                                      |       | (105,232                                                | )          | (1,547 | ) |
| Income taxes  payable                                                                 |       | (5,293                                                  | )          | (305,608 | ) |
| Grape payables                                                                        |       | (454,569                                                | )          | (387,238 | ) |
| Deferred rent  liability                                                              |       | (6,879                                                  | )          | 24,739 |   |
| Deferred gain                                                                         |       | (24,071                                                 | )          | (24,071 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Net cash used in  operating activities                                                |       | (633,651                                                | )          | 1,259,247 |   |
|                                                                                  |       |                                                    |       |   |   |
| Cash flows from  investing activities;                                                |       |                                                    |       |   |   |
| Additions to  property and equipment                                                  |       | (2,233,472                                              | )          | (485,886 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Net cash used in  investing activities                                                |       | (2,233,472                                              | )          | (485,886 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Cash flows from  financing activities:                                                |       |                                                    |       |   |   |
| Proceeds from  stock options exercised                                                |       | 27,250                                                  |       | 36,240 |   |
| Revolving line  of credit                                                             |       | 403,485                                                 |       | — |   |
| Loan to grape  producer                                                               |       | —                                                  |       | (250,000 | ) |
| Proceeds from long-term  debt                                                         |       | 1,584,374                                               |       | — |   |
| Payments on  long-term debt                                                           |       | (219,413                                                | )          | (192,854 | ) |
| Excess tax  benefit on stock option exercises                                         |       | 6,798                                                   |       | 260,407 |   |
|                                                                                  |       |                                                    |       |   |   |
| Net cash  provided by (used in) financing activities                                  |       | 1,802,494                                               |       | (146,207 | ) |
|                                                                                  |       |                                                    |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                 |       | (1,064,629                                              | )          | 627,154 |   |
|                                                                                  |       |                                                    |       |   |   |
| Cash and cash  equivalents:                                                           |       |                                                    |       |   |   |
| Beginning of  period                                                                  |       | 1,083,405                                               |       | 1,612,470 |   |
|                                                                                  |       |                                                    |       |   |   |   |   |
| End of period                                                                         |       | $                                                       | 18,776     |   | $ | 2,239,624 |   |

 

The accompanying notesare an integral part of this financial statement.

 

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NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS

 

1)              BASIS OFPRESENTATION

 

Theaccompanying unaudited financial statements for the three and nine months endedSeptember 30, 2008 and 2007, have been prepared in conformity withaccounting principles generally accepted in the United States (“GAAP”). Thefinancial information as of December 31, 2007 is derived from the auditedfinancial statements presented in the Willamette Valley Vineyards, Inc.(the “Company”) Annual Report on Form 10-KSB for the year ended December 31,2007. Certain information or footnote disclosures normally included infinancial statements prepared in accordance with GAAP have been condensed or omittedpursuant to the rules and regulations of the Securities and ExchangeCommission. In the opinion of management, the accompanying financial statementsinclude all adjustments necessary (which are of a normal recurring nature) forthe fair statement of the results of the interim periods presented. Theaccompanying financial statements should be read in conjunction with theCompany’s audited financial statements for the year ended December 31,2007, as presented in the Company’s Annual Report on Form 10-KSB.

 

Operatingresults for the three and nine months ended September 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 nine monthsended September 30, 2008. 97,974 and 126,847 potentially dilutive sharesare included in the computation of dilutive earnings per share for the threeand nine months ended September 30, 2008. 197,437 and 203,336 potentially dilutive shares are includedin the computation of dilutive earnings per share for the three and nine monthsended September 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 rangingfrom date 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** | ** ** | **Nine months ended**  | ** ** |
|-------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **Weighted**                     | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **average**                      | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **                          | ** ** | ** **                       | ** ** | **exercise**                     | ** ** | ** ** | ** ** | **exercise** | ** ** |
| ** **                          | ** ** | **Shares**                       | ** ** | **price**                        | ** ** | **Shares** | ** ** | **price** | ** ** |
| Outstanding at  beginning of period |       | 420,200                          |       | $                                | 3.87       |   | 434,200 |   | $ | 3.90 |   |
| Granted                             |       | —                           |       | —                           |       |   |   |   |   |
| Exercised                           | ** ** | **—**                       | ** ** | **—**                       |       | (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

 
| ** **                | ** ** | **September 30,** | ** ** |
|---------------------------|------------|------------------------|------------|
| ** **                | ** ** | **2008**               | ** ** |
|                      |       |                   |       |
| Risk Free  interest rates |       | 3.85                   | %          |
| Expected  dividend        |       | 0                      | %          |
| Expected lives,  in years |       | 5-10                   |       |
| Expected  volatility      |       | 37.3                   | %          |

 

TheCompany expenses stock options on a straight-line basis over the options’related vesting term.  For the threemonths ended September 30, 2008 and 2007, the Company recognized pretax compensationexpense related to stock options and restricted stock grants of $8,143 and$14,395, respectively; and for the nine months ended September 30, 2008and 2007, the Company recognized pretax compensation expense related to stockoptions and restricted stock grants of $28,877 and $36,781, respectively.

 

During the nine monthsended September 30, 2008, the following transactions related to stockoption exercise 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’s inventories,by major classification, are summarized as follows, as of the dates shown:

 
| ** **                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                  | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                                                        |       |                   |       |                  |       |   |   |
| Winemaking and  packaging materials                                         |       | $                      | 112,605    |                  | $          | 283,200 |   |
| Work-in-progress  (costs relating to unprocessed and/or bulk wine products) |       | 1,457,478              |       | 2,710,399             |       |
| Finished goods  (bottled wines and related products)                        |       | 8,359,911              |       | 4,982,833             |       |
|                                                                        |       |                   |       |                  |       |   |   |
| Current  inventories                                                        |       | $                      | 9,929,994  |                  | $          | 7,976,432 |   |

 

4)              PROPERTY ANDEQUIPMENT

 

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

 
| ** **                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                              | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
|                                    |       |                   |       |                  |       |
| Land and  improvements                  |       | $                      | 2,581,094  |                  | $          | 959,064 |   |
| Winery building  and hospitality center |       | 4,962,769              |       | 4,848,249             |       |
| Equipment                               |       | 5,149,234              |       | 4,617,040             |       |
|                                    |       | 12,693,097             |       | 10,424,353            |       |
| Less accumulated  depreciation          |       | (6,691,769             | )          | (6,224,198            | )          |
|                                    |       | $                      | 6,001,328  |                  | $          | 4,200,155 |   |

 

5)              INTEREST AND TAXESPAID

 

During the third quarterended September 30, 2008, the Company paid $20,000 in Federal, State andLocal income taxes and $74,639 in Payroll tax. Additionally, $34,906 was paidin interest on the long-term debt and revolving credit line for the sameperiod. For the nine month period ended September 30, 2008, the Companypaid $334,300 in Federal, State and Local income taxes and $247,510 in Payrolltax. Additionally, $74,949 was paid in interest on the long-term debt andrevolving credit line for the same period.

 

6)              LONG-TERM DEBT

 

During the third quarterended September 30, 2008, the Company entered into a new loan agreement withNorthwest Farm Credit Services.  The newdebt was necessary to acquire three new vineyard sites each adjacent to thewinery’s current operations: 15 additional acres at the Estate Vineyard southof Salem, 80 additional acres at the Elton Vineyard in Yamhill County and 6additional acres at Tualatin Estate Vineyard near Forest Grove. The gross loanamount is for $1,600,000. This is a three year adjustable rate loan with aninitial interest rate of 5.95%. The interest rate is based on the United StatesTreasury Securities Average Yield Index as published by the federal reserve.Interest and principal payments for the first three years are $11,417 per monthcommencing on September 1, 2008. Conditions of the loan require the Company tomeet certain financial covenants.

 

7)              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 

 

8

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wine and glassware atwholesale prices to in-state customers. Produced wine 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 years,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 information continuesto be aggregated.

 

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

 
| ** **    | ** ** | **Three months ended September 30, 2008** | ** ** |
|---------------|------------|--------------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                                                        | ** ** | **Produced** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Distribution**                                                   | ** ** | **Wine** | ** ** | **Total** | ** ** |
|          |       |                                                               |       |   |   |   |   |
| Net Sales     |       | $                                                                  | 1,157,139  |   | $ | 2,899,383 |   | $ | 4,056,522 |   |
|          |       |                                                               |       |   |   |   |   |
| Cost of Sales |       | $                                                                  | 927,960    |   | $ | 1,147,440 |   | $ | 2,075,400 |   |
|          |       |                                                               |       |   |   |   |   |
| Gross Profit  |       | $                                                                  | 229,179    |   | $ | 1,751,943 |   | $ | 1,981,122 |   |
|          |       |                                                               |       |   |   |   |   |
| % of sales    |       | 19.8                                                               | %          | 60.4 | % | 48.8 | % |

 
| ** **    | ** ** | **Nine months ended September 30, 2008** | ** ** |
|---------------|------------|-------------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                                                       | ** ** | **Produced** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Distribution**                                                  | ** ** | **Wine** | ** ** | **Total** | ** ** |
|          |       |                                                              |       |   |   |   |   |
| Net Sales     |       | $                                                                 | 3,335,587  |   | $ | 8,008,592 |   | $ | 11,344,179 |   |
|          |       |                                                              |       |   |   |   |   |
| Cost of Sales |       | $                                                                 | 2,514,532  |   | $ | 3,288,546 |   | $ | 5,803,078 |   |
|          |       |                                                              |       |   |   |   |   |
| Gross Profit  |       | $                                                                 | 821,055    |   | $ | 4,720,046 |   | $ | 5,541,101 |   |
|          |       |                                                              |       |   |   |   |   |
| % of sales    |       | 24.6                                                              | %          | 58.9 | % | 48.8 | % |
|               |            |                                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

Total inventory forBacchus Distribution was $2,210,265 of purchased wines and $231,205 of non-winemerchandise at period end September 30, 2008.  This compares to produced wine inventory of$5,732,155 and $1,756,369 of non-wine merchandise and work-in-process for thesame period.

 

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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 statements withinthe meaning 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 and reports.  In addition, such statements could beaffected by general industry and market conditions and growth rates, andgeneral 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, whichhave been prepared in accordance with accounting principles generally acceptedin the United States of America.  Thepreparation of these financial statements requires the Company’s management tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates, including those related to revenue recognition, collectionof accounts receivable, valuation of inventories, and amortization of vineyarddevelopment costs.  We base our estimateson historical experience and on various other assumptions that are believed tobe reasonable under the circumstances. Actual results may differ from these estimates under differentassumptions or conditions.  A descriptionof our critical accounting policies and related judgments and estimates thataffect the preparation of our financial statements is set forth in our AnnualReport on Form 10-KSB for the year ended December 31, 2007.  Such policies were unchanged during the threemonths ended September 30, 2008.**

** **

Overview

 

Sales revenue for the three months ended September 30,2008 decreased $193,847 or -4.6% from the comparable prior year period.  Sales revenue for the nine months ended September 30,2008 decreased $227,764 or -2.0% for the comparable prior year period.

 

Sales revenue growth for the first nine months of 2008versus 2007 is being constrained principally due to out of state customers whomare ordering less and conserving cash. Additionally, in-state sales are adversely affected by three Pinot Noirproducts being out of stock.  Theseproducts are now available for sale in the 4th Quarter of 2008.

 

Taken as a whole, the three sales departments:National Sales, Oregon Wholesale (Bacchus Fine Wines) and Retail showed reducedperformance on their net contribution for the three and nine months ended September 30,2008 versus the comparable prior year periods.

 

Net operating income performance for the quarter and yearended September 30, 2008 was less mainly due the reduced sales volume inNational Sales and In-State 

 

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Distribution coupled with incremental sales, generaland administrative expenses. Cost of sales has increased mainly due to theimpact of one-time accounting adjustments on in-state wholesale purchasedbrands inventory and adjustments to reconcile the physical count to theperpetual inventory on-hand. Sales, General and Administrative expenseincreases are primarily due to incremental shipping charges due to higher fuelcosts, higher labor costs including related fringe benefits and overallinflationary general and administrative expenses versus prior year.

 

As a result, the Company generated $0.05 and $0.10basic earnings per share during the three and nine months ended September 30,2008, a decrease of $0.06 and $0.11 basic earnings per share versus the comparableprior year periods.

 

The winery bottled approximately 44,000 cases in thethird quarter of 2008, mainly 2007 vintage Pinot Noir, Barrel Select Pinot Noirand Founder’s Reserve Pinot Noir.

 

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 September 30,2008, the Company had a credit line balance of $403,485 and $1,596,515 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 September 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 September 30, 2008, the Companywas in compliance with all of the financial covenants.

 

The Company’s wines continued to accumulate prizedrecognition from national wine groups and publications.

 

The winery’s 2006 Estate Pinot Noir was awarded thetop honor for the $35-$40 price range in the 2008 Tasters Guild Wine LoversInternational Consumer Wine Judging with a double gold.  This wine also received a score of 89 pointsfrom Wine Spectator Magazine in its September 2008 issue.

 

The regional wine publication, Wine Press Northwest,in its Fall 2008 issue gave the winery’s flagship Pinot Noir, the 2006Willamette Valley, an “Excellent” rating.

 

The Company’s Tualatin Estate Vineyard took the tophonors in the Oregon State Fair Professional Wine Competition this August bywinning “Best in Show” and also “Best of Varietal” at the Denver InternationalWine Competition with the 2006 Pinot Noir.

 

Consumer Reports magazine in their July issuenamed the 2006 Willamette Valley Vineyards Pinot Gris among the bestwarm-weather wines.  The winery’sRiesling had previously been recognized by Consumer Reports in December of2007.

 

RESULTS OF OPERATIONS

 

Revenue

 

Netrevenue for the three and nine months ended September 30, 2008 decreased$193,847 or -4.6% and $227,764 or -2.0%, respectively, versus the correspondingperiods in the preceding year. The decrease in the quarter is primarily due todecreased order activity from in-state wholesale customers and out-of-statedistributors.  This is offset somewhat byincreased retail direct to consumer sales. The decrease in in-state wholesalerevenue is primarily due to outages of certain core Pinot Noir products.  The overall decrease in revenue for the firstnine months is primarily due to out-of-state distributors ordering less in thefirst nine months of 2008 and the in-state 

 

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wholesalelost placements previously mentioned. Retail direct to consumer sales for the firstnine months are favorable over last year by 78.4%.

 

Our revenues from wineryoperations are summarized as follows:

 
| ** **                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                              | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Retail Sales,  Rental Income and Events |       | $                                | 711,358    |                            | $          | 662,458 |   | $ | 1,832,616 |   | $ | 1,689,742 |   |
| In-state sales                          |       | 1,828,933                        |       | 1,886,224                       |       | 5,178,767 |   | 5,301,522 |   |
| Out-of-state  sales                     |       | 1,618,816                        |       | 1,782,429                       |       | 4,604,926 |   | 4,841,251 |   |
| Bulk wine/Misc.  sales                  |       | —                           |       | 2,981                           |       | – |   | 20,567 |   |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Total Revenue                           |       | 4,159,107                        |       | 4,334,092                       |       | 11,616,309 |   | 11,853,082 |   |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Less excise  taxes                      |       | (102,585                         | )          | (83,723                         | )          | (272,130 | ) | (281,139 | ) |
|                                    |       |                             |       |                            |       |   |   |   |   |
| Net Revenue                             |       | $                                | 4,056,522  |                            | $          | 4,250,369 |   | $ | 11,344,179 |   | $ | 11,571,943 |   |

 

Retailsales, rental income and events for the three and nine months ended September 30,2008 increased $48,900 or 7.4% and $142,874 or 8.5%, respectively, compared tothe corresponding prior year periods. The incremental revenue is primarily due to increased volumes of directto consumer retail sales in the quarter. This is somewhat offset by a reduced number of on-site room rentals andevent revenue versus prior year.

 

Sales in the state ofOregon, through our wholesale department, Bacchus Fine Wines, decreased $57,291or -3.0% and $122,755 or -2.3% in the three and nine months ended September 30,2008, respectively, compared to the corresponding 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. As a result of the recent release of the 2007vintage Pinot Noir in the fourth quarter of 2008, the key customer noted above willbegin receiving shipments in the fourth quarter of 2008.

 

Out-of-state sales in thethree and nine months ended September 30, 2008 decreased $163,613 or -9.2%and decreased $236,325 or -4.9%, 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.

 

Gross Profit

 

Gross profits for thethree and nine months ended September 30, 2008 decreased $144,883 or -6.8%and $9,319 or -0.2%, respectively, versus the comparable prior year periods.

 

As a percentage of netrevenue, gross profit from winery operations was 48.8% and 48.8% in the threeand nine months ended September 30, 2008, respectively, as compared to50.0% and 48.0% in the comparable prior year periods.  The stability in gross profit as a percentageof net revenue is mainly due to the impact of Retail which, for this year,represents a higher percentage of total gross profit and the mix of out ofstate sales towards higher margin products. The Company continues to focus on improved distribution of higher marginWillamette Valley Vineyards brand products as well as continuing our efforts toreduce grape and production costs.  Ourincreased representation of brands 

 

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other than our ownthrough our Oregon Wholesale sales force and increases in cost of productionmay erode future gross margin as a percentage of sales due to the lower marginsassociated with selling those brands.

 

Selling, General andAdministrative Expense

 

Selling, general andadministrative expenses for the three and nine months ended September 30,2008 increased $172,781 or 12.8% and $770,238 or 19.6%, respectively, comparedto the corresponding prior year periods. These increases are due primarily to one-time incremental professionalservice fees for Accounting audit services and legal services. Additionally,inflationary shipping costs have had an unfavorable impact for the quarter andyear versus prior year.  Lastly,incremental labor and fringe expenses for sales and administrative staff havealso unfavorably impacted the quarter and year versus prior year.  As a percentage of net revenues from wineryoperations, selling, general and administrative expenses increased to 37.4% and41.4% for the three and nine months ended September 30, 2008,respectively, as compared to 31.7% and 33.9% for the comparable prior yearperiods.

 

Interest Income, InterestExpense

 

Interest income decreased$18,193 or -100% and decreased $29,111 or -62.9% for the three and nine monthsended September 30, 2008, respectively, compared to the comparable prioryear periods.  Interest expense for thethree and nine months ended September 30, 2008 increased $8,323 or 31.3%and decreased $7,394 or -9.0%, respectively, compared to the correspondingprior year periods.  The average interestrate paid for the three and nine months ended September 30, 2008 was 6.1%and 6.0%, respectively.

 

Income Taxes

 

Income tax expense was$183,170 and $328,255, respectively, for the three and nine months ended September 30,2008, compared to $248,241 and $581,217, respectively, for the prior yearperiods.  Our estimated tax rate for the three and nine months ended September 30,2008 and 2007 was 43% 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 nine months ended September 30,2008 was $243,629 and $461,254, respectively compared to net income of $522,738and $1,022,177 in the comparable prior year periods. Diluted earnings per sharewere $0.05 and $0.09 for the quarter and year-to date ended September 30,2008, respectively, compared to $0.10 and $0.20 per diluted share, in thecomparable prior year periods.

 

# **Liquidityand Capital Resources**

# ** **

At September 30,2008, we had a working capital balance of $9.2 million and a current ratio of5.71:1.  At December 31, 2007, wehad a working capital balance of $9.2 million and a current ratio of5.91:1.  We had a cash balance of $18,776at September 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 nine months ended September 30, 2008 was($633,651) compared to cash provided by operating activities of $1,259,247 forthe same period in the prior year.  Thedecrease in cash used in operating activities versus prior year was primarilydue to the significant build-up of inventory required to support 2008anticipated higher sales volume.

 

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Total cash used ininvesting activities in the nine months ended September 30, 2008 was($2,223,472), compared to ($485,886) in the prior year period.  The increase was mainly due to theacquisition of $1.6 million in real estate parcels to be used for futurevineyard development, two new replacement vehicles added for executive staff,an added delivery vehicle for Bacchus Fine Wines, improvements to the Tualatinproduction facility and racking for the warehouse.

 

Total cash provided byfinancing activities in the nine months ended September 30, 2008 was$1,802,494 compared to ($146,207) used in financing activities in the prioryear period.  Cash provided by financingactivities primarily consists of $1.6 million in new long-term debt related tothe financing of the real estate acquired for future vineyard development andrevolving credit line advances needed to support working capital requirements.This is offset somewhat by cash used to repay long-term debt.

 

At September 30,2008, the line of credit balance was $403,485, 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 September 30, 2008, we were incompliance with all of the financial covenants.

 

As of September 30,2008, we had a total long-term debt balance of $2,596,119, including theportion due in the next year, owed to Farm Credit Services. There was $1.6million in new long-term debt incurred in the three months ended September 30,2008 which was used to finance the acquisition of approximately 100 acres ofreal estate which will be used for future vineyard development. The remainingdebt balance represents the debt service with Farm Credit Services which wasused to finance our Hospitality Center, invest in new winery equipment toincrease our winemaking capacity and complete a larger storage facility.

 

At September 30,2008, we owed $53,976 on grape contracts. This amount is owed to a single grape grower, which will be paid as thewine made from those grapes is sold. For the 2008 harvest, there are grapepurchase contracts in place with local growers that will be accrued when thegrapes are received, 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.

 

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The following tableoutlines the sales, cost of sales and gross profit, for the three and ninemonth periods ended September 30, 2008 by operating segment:

 
| ** **    | ** ** | **Three months ended September 30, 2008** | ** ** |
|---------------|------------|--------------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                                                        | ** ** | **Produced** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Distribution**                                                   | ** ** | **Wine** | ** ** | **Total** | ** ** |
| Net Sales     |       | $                                                                  | 1,157,139  |   | $ | 2,899,383 |   | $ | 4,056,522 |   |
|          |       |                                                               |       |   |   |   |   |
| Cost of Sales |       | $                                                                  | 927,960    |   | $ | 1,147,440 |   | $ | 2,075,400 |   |
|          |       |                                                               |       |   |   |   |   |
| Gross Profit  |       | $                                                                  | 229,179    |   | $ | 1,751,943 |   | $ | 1,981,122 |   |
|          |       |                                                               |       |   |   |   |   |
| % of sales    |       | 19.8                                                               | %          | 60.4 | % | 48.8 | % |

 
| ** **    | ** ** | **Nine months ended September 30, 2008** | ** ** |
|---------------|------------|-------------------------------------------------------------------|------------|
| ** **    | ** ** | **Bacchus**                                                       | ** ** | **Produced** | ** ** | ** ** | ** ** |
| ** **    | ** ** | **Distribution**                                                  | ** ** | **Wine** | ** ** | **Total** | ** ** |
| Net Sales     |       | $                                                                 | 3,335,587  |   | $ | 8,008,592 |   | $ | 11,344,179 |   |
|          |       |                                                              |       |   |   |   |   |
| Cost of Sales |       | $                                                                 | 2,514,532  |   | $ | 3,288,546 |   | $ | 5,803,078 |   |
|          |       |                                                              |       |   |   |   |   |
| Gross Profit  |       | $                                                                 | 821,055    |   | $ | 4,720,046 |   | $ | 5,541,101 |   |
|          |       |                                                              |       |   |   |   |   |
| % of sales    |       | 24.6                                                              | %          | 58.9 | % | 48.8 | % |

 

Total inventory forBacchus Distribution was $2,210,265 of purchased wines and $231,205 of non-winemerchandise at period end September 30, 2008.  This compares to produced wine inventory of$5,732,155 and $1,756,369 of non-wine merchandise and work-in-process for thesame 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 periodended September 30, 2008, the Company performed an evaluation, under thesupervision and with the participation of the Chief Executive Officer, ChiefFinancial Officer and other management personnel, of the effectiveness of ourdisclosure controls and procedures, as defined in Rules 13a-15(e) and15d-15(e) of the Securities and Exchange Act of 1934. Management,including our Chief Executive Officer and Chief Financial Officer, hasconcluded that the disclosure controls and procedures as of September 30,2008 were effective at the assurance level as of the end of the period coveredby 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 

 

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well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control procedure are met. Because of the inherentlimitations in all control procedures, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control. The Company consideredthese limitations during the development of its disclosure controls andprocedures, and will continually reevaluate them to ensure they providereasonable assurance that such controls and 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 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 nine months ended September 30, 2008, have materially affected ourinternal control over financial reporting.

 

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| PART II. | OTHER  INFORMATION                                            |
|---------------|---------------------------------------------------------------|
|          |                                                          |
| Item 1.       | Legal Proceedings.                                            |
|          |                                                          |
|          | None.                                                         |
|          |                                                          |
| Item 2.       | Unregistered Sales of  Equity Securities and Use of Proceeds. |
|          |                                                          |
|          | None.                                                         |
|          |                                                          |
| Item 3.       | Defaults Upon Senior  Securities.                             |
|          |                                                          |
|          | None.                                                         |
|          |                                                          |
| Item 4.       | Submission of Matters  to a Vote of Security Holders.         |
|          |                                                          |
|          | None.                                                         |
|          |                                                          |
| Item 5.       | Other Information                                             |
|          |                                                          |
|          | None.                                                         |

 

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Item 6.      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     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 (incorporated herein by reference to  Exhibit 3.4 to the Company’s Form 10-Q for the quarterly period  ended June 30, 2008, filed August 14, 2008, File  No. 000-21522). |
|                                                                                                                                                                                                                                                                                       |       |            |
| 3.5     Bylaws  of Willamette Valley Vineyards, Inc. ((incorporated herein by reference  to Exhibit 3.5 to the Company’s Form 10-Q for the quarterly period  ended June 30, 2008, filed August 14, 2008, File  No. 000-21522)  |
|                                                                                                                                                                                                                                                                                       |       |            |
| *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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Tableof Contents

 

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:  November  14, 2008 | By | /s/ James W.  Bernau |   |
|                                |   | James W. Bernau |
|                                |   | President |
|                                |   |
|                                |   |
| Date:  November  14, 2008 | By | /s/ Jeffrey J. Fox |   |
|                                |   | Jeffrey J. Fox |   |
|                                |   | Controller |

 

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