10QSB 1 wvv032q10q.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ___________________________________________________________ FORM 10-QSB ___________________________________________________________ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 2003 Commission File Number 0-21522 WILLAMETTE VALLEY VINEYARDS, INC. (Exact name of registrant as specified in charter) Oregon 93-0981021 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ___________________________________________________________ 8800 Enchanted Way, S.E., Turner, Oregon 97392 (503)-588-9463 (Address, including Zip code, and telephone number, including area code, of registrant's principal executive offices) ___________________________________________________________ Indicate by check mark whether the registrant (1) has filed, all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Number of shares of common stock outstanding as of June 30, 2003 4,474,854 shares, no par value Transitional Small Business Disclosure [ ] YES [X] NO WILLAMETTE VALLEY VINEYARDS, INC. INDEX TO FORM 10-QSB Part I - Financial Information Item 1--Financial Statements Balance Sheet Statement of Operations Statement of Cash Flows Notes to Consolidated Financial Statements Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3--Controls and Procedures Part II - Other Information Item 1--Exhibits and Reports of Form 8-K Item 5--Other Information Signatures Exhibit Index PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS, INC. Balance Sheet June 30, December 31, 2003 2002 (unaudited) ASSETS. __________ __________ Current Assets: Cash and cash equivalents $ 276,436 $ 632,183 Accounts receivable trade, net 453,044 519,861 Inventories 7,456,049 7,550,291 Prepaid expenses and other current assets 35,735 47,908 Deferred income taxes 148,212 148,212 __________ __________ Total current assets 8,369,476 8,898,455 Vineyard development cost, net 1,678,040 1,707,274 Inventories 520,408 520,408 Property and equipment, net 4,796,322 5,046,893 Notes receivable from officer and other 64,023 61,948 Debt issuance costs, net 71,703 73,628 Other assets 223,880 238,647 __________ __________ Total assets $15,723,852 $16,547,253 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Line of credit $ 1,743,074 $ 2,050,171 Current portion of long term debt 237,838 237,838 Accounts payable 235,318 371,253 Accrued commissions and payroll 215,669 214,029 Income taxes payable 87,753 111,837 Grapes payable 566,503 870,058 __________ __________ Total current liabilities 3,086,155 3,855,186 Long-term debt 2,814,946 2,944,511 Distributor obligation 1,500,000 1,500,000 Deferred rent liability 97,599 86,203 Deferred gain 412,235 424,727 Deferred income taxes 209,095 209,095 __________ __________ Total liabilities 8,120,030 9,019,722 __________ __________ Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,474,854 and 4,469,444 shares issued and outstanding at June 30, 2003 and December 31, 2002 7,163,981 7,155,162 Retained earnings 439,841 372,369 __________ __________ Total shareholders' equity 7,603,822 7,527,531 __________ __________ Total liabilities and shareholders' equity $15,723,852 $16,547,253 ========== ========== The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Operations (unaudited) Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 __________ __________ __________ __________ Net Revenues Case Revenue $ 1,545,706 $ 1,341,378 $ 2,883,892 $ 2,599,018 Custom Crush- Bulk Revenue 8,640 28,215 163,815 28,215 __________ __________ __________ __________ Total Revenue 1,554,346 1,369,593 $ 3,047,707 2,627,233 Cost of Sales Case 715,459 580,199 1,345,916 1,175,985 Bulk 6,324 28,405 121,611 28,405 __________ __________ __________ __________ Total Cost of Sales 721,783 608,604 1,467,527 1,204,390 Gross Margin 832,563 760,989 1,580,180 1,422,843 Selling, general and administrative expense 676,422 675,377 1,306,833 1,319,354 __________ __________ __________ __________ Net operating income 156,141 85,612 273,347 103,489 Other income (expense) Interest income 1,313 1,288 2,627 2,394 Interest expense (86,411) (89,350) (173,532) (177,944) Other income (expense) (22,101) 6,267 10,068 12,513 __________ __________ __________ __________ Net income (loss) before income taxes 48,942 3,817 112,510 (59,548) Income tax 19,611 - 45,038 - __________ __________ __________ __________ Net income (loss) 29,331 3,817 67,472 (59,548) Retained earnings beginning of period 410,510 172,529 372,369 235,894 __________ __________ __________ __________ Retained earnings end of period $ 439,841 $ 176,346 $ 439,841 $ 176,346 ========== ========== ========== ========== Basic income (loss) per common share $ .01 $ .00 $ .02 $ (.01) Diluted income (loss) per common share $ .01 $ .00 $ .02 $ (.01) Weighted average number of basic common shares outstanding 4,474,854 4,469,444 4,473,663 4,468,110 Weighted average number of diluted common shares outstanding 4,474,854 4,478,925 4,473,663 4,468,110 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Cash Flows (unaudited) Six months ended June 30, 2003 2002 __________ __________ Cash flows from operating activities: Net income (loss) $ 67,472 $ (59,548) Reconciliation of net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 363,721 379,265 Gain on disposal of fixed assets (3,004) - Stock issued for compensation 8,819 3,941 Changes in assets and liabilities: Accounts receivable trade 66,817 348,864 Inventories 94,242 (170,516) Prepaid expenses and other current assets 12,173 68,618 Note receivable (2,075) 9,105 Other assets 8,657 8,920 Accounts payable (135,935) (279,172) Accrued commissions and payroll costs 1,640 (45,083) Income taxes payable (24,084) - Grape payables (303,555) (574,664) Deferred rent liability 11,396 12,906 Deferred gain (12,492) (12,492) __________ __________ Net cash provided by (used in) operating activities 153,792 (309,856) __________ __________ Cash flows from investing activities; Additions to property and equipment (70,238) (34,730) Vineyard development expenditures (6,057) (21,870) Proceeds from the sale of property and equipment 15,128 - Investments 1,000 (50,026) __________ __________ Net cash used in investing activities (60,167) (106,626) __________ __________ Cash flows from financing activities: Debt issuance costs (12,710) - Net (decrease) increase in line of Credit balance (307,097) 147,500 Proceeds from stocks options exercised - 8,575 Repayments of long-term debt (129,565) (123,267) __________ __________ Net cash (used in) provided by financing activities (449,372) 32,808 __________ __________ Net decrease in cash and cash equivalents (355,747) (383,674) Cash and cash equivalents: Beginning of period 632,183 504,510 __________ __________ End of period $ 276,436 $ 120,836 ========== ========== The accompanying notes are an integral part of this financial statement. NOTES TO CONSOLIDATED FINANCIAL STATEMENT 1) BASIS OF PRESENTATION The interim financial statements have been prepared by the Company, without audit and subject to year-end adjustment, in accordance with generally accepted accounting principles, except that certain information and footnote disclosure made in the latest annual report have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and are allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period. The financial statements reflect all adjustments, which are, in the opinion of management, necessary for fair presentation. Basic and diluted net income per share and Basic earnings per share are computed based on the weighted-average number of common shares outstanding each year. Diluted earnings per share are computed using the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the year. Common equivalent shares from stock options and other common stock equivalents are excluded from the computation when their effect is antidilutive. Options to purchase shares of common stock outstanding at June 30, 2003 were not included in the computation of diluted earnings per share for the three and six-month period ending June 30, 2003 because the exercise prices were greater than fair value. Options to purchase shares of common stock outstanding at June 30, 2002 were not included in the computation of diluted earnings per share for the six-month period ending June 30, 2002 because inclusion of such shares would be antidilutive. For the three-month period ending June 30, 2002 Options were included in the calculation of earnings per share. 2) STOCK BASED COMPENSATION The Company accounts for the employee and director stock options in accordance with provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Pro forma disclosures as required under SFAS No. 123, Accounting for Stock Based Compensation, and as amended by SFAS No. 148, Accounting for Stock Based Compensation - Transition and Disclosure, are presented below. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards consistent with the provisions of SFAS No. 123, the Company's net earnings would have been reduced to the pro forma amounts indicated as follows for the quarter and six months ended June 30: June 30, June 30, 2003 2002 (unaudited) Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 (unaudited) (unaudited) __________ __________ __________ __________ Net income (loss), as reported $ 29,331 $ 3,817 $ 67,472 $ (59,548) Add Stock-based employee compensation expense included in reported net income, net of related tax effects - - - - Deduct total stock based employee compensation expense determined under fair value based method for all awards, Net of related tax effects (5,948) (5,882) (11,896) (11,764) __________ __________ __________ __________ Pro forma net income (loss) $ 23,383 $ (2,065) $ 55,576 $ (47,784) Earnings per share: Basic - as reported $ 0.01 $ 0.00 $ 0.02 $ (0.01) Basic - pro forma $ 0.01 $ 0.00 $ 0.01 $ (0.01) Diluted - as reported $ 0.01 $ 0.00 $ 0.02 $ (0.01) Diluted - pro forma $ 0.01 $ 0.00 $ 0.01 $ (0.01) For purposes of disclosure, the Black-Scholes option pricing model was used to calculate fair values for stock options granted. The estimated fair value of the options is amortized to expense over the options' vesting period. 3) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW: June 30, December 31, 2003 2002 (unaudited) __________ __________ Winemaking and packaging materials $ 151,984 $ 96,123 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 2,467,164 2,773,750 Finished goods (bottled wines 5,357,309 5,200,826 and related products) __________ __________ $ 7,976,457 $ 8,070,699 Less: amounts designated for distributor (520,408) (520,408) __________ __________ Current inventories $ 7,456,049 $ 7,550,291 ========== ========== 4) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: June 30, December 31, 2003 2002 (unaudited) __________ __________ Land and improvements $ 976,838 $ 984,954 Winery building and hospitality center 4,570,426 4,567,076 Equipment 4,737,394 4,670,506 __________ __________ 10,284,658 10,222,536 Less accumulated depreciation (5,488,336) (5,175,643) __________ __________ $ 4,796,322 $ 5,046,893 ========== ========== 5) RECENT ACCOUNTING PRONOUNCEMENTS: In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. This statement is effective for fiscal years ending after December 15, 2002 and for the interim periods beginning after December 15, 2002. We continue to report stock-based employee compensation costs using the intrinsic value method as defined by APB 25, adoption of the provisions of the new statement affects only our disclosure of these costs, which is presented in Note 2. 6) SUBSEQUENT EVENTS: None. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statement: This Management's Discussion and Analysis of Financial Condition and Results of Operation and other sections of this Form 10-QSB contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, and beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease, impact of governmental regulatory decisions, and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's continued focus on quality received recognition this past Quarter in a recently published book entitled, "Northwest Winery Guide" written by Andy Purdue, publisher and editor of Wine Press Northwest magazine. He lists the Top Northwest Wineries: "If you want top quality in a broad range of wines, look to these wineries:" (7 in Washington including L'Ecole and Woodward Canyon, 2 in British Columbia, and 1 in Oregon - Willamette Valley Vineyards) The Company's financial performance continued to improve showing a net profit for the quarter ended June 30, 2003, which exceeded our profit for the comparable period last year. The Company's expanded wine distribution effort in Oregon and sales to out-of-state distributors showed improvement in the Second Quarter of 2003 compared to the same period in the prior year. The results from the Company's retail operation were weaker for the quarter ended June 30, 2003, compared to the same quarter in the prior year. Beginning in the First Quarter of 2003, the Company converted its long standing self-distribution sales organization into an enterprise titled Bacchus Fine Wines by hiring an experienced wine sales manager, increasing substantially the brands represented by the sales force and adding additional delivery vehicles and drivers. Bacchus Fine Wines manager Mike Kuenz began mid-January of this year and now reports Bacchus is proud to represent products from around the world that exemplify the same quality and passion from their growing region as Company wines from the Willamette Valley and Southern Oregon. From Napa Valley Bacchus represents Elyse Winery, Anderson's Conn Valley, and Jarvis Vineyards from winemaker Dimitri Tchelistcheff. From California, organically grown Lolonis Vineyards, Thomas Fogarty and Toad Hollow. From Washington State in the Red Mountain AVA, Kiona Vineyards & Winery. Bacchus believes it has one of best portfolios for Australian wines in Oregon with the addition of Click Imports. The Australian portfolio includes Andrew Harris, Kangarilla Road, Koppamurra, Meerea Park, Mitchell, Nepenthe Vineyards, Plantagenet and Sticks (found at Costco). From Chile, the portfolio includes family owned and estate fruit wines from Santa Alicia. Canadian Ice Wine is beginning to develop a strong following and Paradise Ranch is considered at the top of the list. From Burgundy France in the Caves of Notre Dame, Bacchus views it an honor to represent Maison Jaffelin established in 1816. Also from France, Champagne Bricout, one of the most respected houses in Champagne, is part of the Bacchus offerings. Last but not least in the Bacchus book is the Spanish portfolio from Bodegas Franco. All together Bacchus represents 26 wineries and 161 different wines. This change in distribution practices by the Company in Oregon has improved its ability to serve retail and restaurant accounts with a broader selection of fine wines. Gross revenues from this self-distribution operation (Bacchus) increased 23% in the quarter ended June 30, 2003 from the same quarter in the prior year, with an increase in net operating income from this department of 22%. Company officials discovered a significant loss of wine inventory in the control of a now former sales representative of approximately $100,000 at wholesale prices. This inventory was WVV wines and was not a result of the new distribution enterprise, Bacchus Fine Wines. The Company has filed an insurance claim with the maximum coverage limit of $50,000 less the $1,000 deductible and has notified local law enforcement officials. This loss of inventory has been recorded as Other Expense. If the claim is paid, it will be recorded as Other Income in a future quarter. Sales revenue to out-of-state distributors increased 36% in the quarter compared to the prior year with an increase in net operating income from this department of 39% compared to the prior year. Increased sales are resulting from higher promotional allowances given to distributors by the Company, and from the reduction in inventories of the Company's largest distributor network. Inventories of Company products held by this network have declined by 55% from the previous year. As a result, orders for shipment from the Company are increasing and are expected to continue to increase. A review of Company invoices to the out-of-state distribution network and bill-backs received by this network and credits taken against Company invoices by this network show a significant net balance owed to the Company. This balance has accumulated over the two year period the distribution contract has been in force. If the Company's analysis is accepted by the distribution network, the Company will record this revenue in a future quarter. Retail sales revenue declined by 8% in the quarter compared to the prior year and the net operating income from the Retail Department declined by 18% in the quarter ended June 30, 2003 compared to the prior year period. Gross margins for this department fell to 63% in the quarter ended June 30, 2003 compared to 66% in the same quarter in the prior year, accounting for the significant variation in net operating income reduction relative to sales. The Company saw an increase in revenue from rental activities of 28% compared to the prior year period, partially offsetting weaker retail performance. Lower customer counts and purchases of lower margin, more popularly priced wines are affecting this quarter's performance. The Company is focusing on strengthening its retail programming and systems to measure and improve performance. General and administrative expenses were 12% lower in this quarter as compared with previous year; due in part to the Company not filling vacated positions. The Company increased depletions of its wine inventories by 8% in the quarter ended June 30, 2003 compared to the same quarter in the prior year. However, the Company continues to hold inventories in excess of an orderly production and depletion pattern. These inventories are a result of a larger than expected 2001 harvest and an attempt to produce and market wines from Southern Oregon in volume priced below the Company's Bordeaux and Rhone style flagship Griffin Creek brand. The Company will continue to deplete these excess inventories and will do so at the expense of gross margins. RESULTS OF OPERATIONS Revenue Winery Operations The Company's revenues from winery operations are summarized as follows: Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 __________ __________ __________ __________ Tasting Room Sales and Rental Income $ 351,414 $ 382,516 $ 647,081 $ 722,579 On-site and off-site festivals 21,826 33,037 64,997 78,863 In state sales 756,171 613,195 1,320,803 1,153,203 Out of state sales 481,064 354,809 955,000 722,686 Bulk wine/ Misc. sales 8,640 28,215 163,815 28,215 __________ __________ __________ __________ Total Revenue $ 1,619,115 $ 1,411,772 $ 3,151,696 $ 2,705,546 Less Excise Taxes 64,769 42,179 103,989 78,313 __________ __________ __________ __________ Net Revenue $ 1,554,346 $ 1,369,593 $ 3,047,707 $ 2,627,233 ========== ========== ========== ========== Tasting room and retail sales, and rental income for the three months ending June 30, decreased 8% to $351,414 in 2003 from $382,516 for the same period in 2002. For the first six months of 2003, sales decreased 10% over the same period in 2002. Retail sales decreased during the second quarter of 2003 due in part to lower customer counts and purchases of lower margin, lower priced wines. On-site and off-site festival sales for the second quarter of 2003 decreased 34% to $21,826 from $33,037 over the second quarter of 2002. During the f irst half of 2003, sales in this category decreased 18% over the same period in 2002. This decrease is due primarily to the continuing focus away from on-site and off-site events, in favor of telephone, mail order and retail sales. In prior periods, direct sales from the winery to independent distributors in the state of Oregon were included in out-of-state sales category. Beginning in the quarter ended June 30, these sales are accounted for in the in state sales category. In the second quarter of 2003 these sales increased 161% to $88,571 from $33,940 over the same period of 2002. The higher sales are a result of increased sales focus on these distributors by the new Bacchus management. Sales in the state of Oregon, through the Company's independent sales force and through direct sales from the winery, increased 23% to $756,171 in the second quarter of 2003 from $613,195 in the second quarter of 2002, adjusted for the change in reporting of in state distributor sales. Sales through the Company's independent sales force alone for the second quarter of 2003 increased 14% to $591,272 from $517,726 in the second quarter of 2002. The Company's direct instate sales to our largest customer increased 24% to $76,328 from $61,529 in 2002. These increases are largely the result of the improved sales management and broader product lines presented through the conversion to Bacchus Fine Wines. Out-of-state sales in the second quarter of 2003 increased 36% to $481,064 from $354,809 in the second quarter of 2002, adjusted for the change in reporting of in state distributor sales. During the first six months on 2003, sales increased 32% over the same period in 2002. The higher sales are a result of increased promotional allowances offered to distributors by the Company that are resulting in higher depletions by the Company's distributors. Excise taxes The Company's excise taxes increased in the second quarter of 2003 to $64,769 from $42,179 for the same period in 2002. For the first half of 2003, excise taxes increased to $103,989 from $78,313 for the same period in 2002. This was due in part to the increased sales in the first half of 2003, increasing overall sales volumes and taxes paid by volume. Gross Profit Winery Operations As a percentage of revenue, gross profit for the winery operations decreased to 54% in the second quarter of 2003 as compared to 56% in the second quarter of 2002. We believe this non-GAAP disclosure provides a useful comparison to the second quarter of 2002. The Company has sold through many of the white wines from the very successful 2001 crush, and moved on to the slightly higher cost 2002 products reducing the gross margin. The Company is continuing its focus on, and improved distribution of, higher margin products, as well as continuing to reduce grape and production costs. Selling, General and Administrative Expense Selling, general and administrative expenses increased to $676,422 in the second quarter of 2003 from $675,377 in the second quarter of 2002. As a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 44% in the second quarter of 2003 from 49% in the second quarter of 2002. In a continued effort to reduce overhead and reliance on credit, the Company elected not to fill several positions vacated by employee turnover, and continued to manage sales expenditures to produce quantifiable increases in revenues. Interest Income, Other Income and Expense Interest income increased to $1,313 for the second quarter of 2003 from $1,288 for the second quarter of 2002. Interest expense decreased to $86,411 in the second quarter of 2003 from $89,350 in 2002. Interest costs were lower because the Company paid a lower interest rate on its line of credit. The Company's other income (expense) is summarized as follows: Three months ended June 30, Six months ended June 30, 2003 2002 2003 2002 __________ __________ __________ __________ Amortization of deferred gain on 1999 Tualatin sale-lease back $ 6,246 $ 6,246 $ 12,492 $ 12,492 Miscellaneous rebates 1,076 21 1,378 21 Inventory loss (29,423) - (29,423) - Gain on Tualatin bare land sale - - 3,004 - Farm Credit interest rebate - - 22,617 - __________ __________ __________ __________ Other income (expense) $ (22,101) $ 6,267 $ 10,068 $ 12,513 Other income and expense was an expense of $22,101 for the second quarter of 2003 compared to income of $6,267 for the Second quarter of 2002. In the quarter ended June 30, 2003, in accordance with the 1999 sale-lease back at the Tualatin site, the Company recognized a gain of $6,246. The Company also received various rebate checks totaling $1,076 in the quarter ended June 30, 2003. The Company discovered a significant loss of inventory in the control of a now former independent sales representative with a wholesale value of approximately $100,000, and an inventory cost of $29,423 that the Company expensed as other expense. The Company has filed an insurance claim with a maximum coverage limit of $50,000 less a $1,000 deductible, and has notified local law enforcement officials. If the insurance company pays the claim, it will be recorded as other income in a future quarter. Income Taxes As the Company experienced a net profit for the second quarter and first half of 2003 a $19,611 income tax expense was accrued for the quarter ended June 30, 2003, making the total accrued $45,038 for the six months ended June 30, 2003, based on the expected effective tax rate for 2003. Liquidity and Capital Resources At June 30, 2003, the Company had a working capital balance of $5.3 million and a current ratio of 2.7:1. At December 31, 2002, the Company had a working capital balance of $5.0 million and a current ratio of 2.3:1. The Company had a cash balance of $276,436 at June 30, 2003. At June 30, 2003, the line of credit balance was $1,743,074. The Company has a loan agreement with GE Commercial Distribution Finance Corporation that contains, among other things, certain restrictive financial covenants with respect to total equity, debt-to-equity and debt coverage, which must be maintained by the Company on a quarterly basis. As of June 30, 2003, the Company was in compliance with all of the financial covenants. As of June 30, 2003, the Company had a total long-term debt balance of $3,052,784 owed to Farm Credit Services. This debt was used to finance the Hospitality Center, invest in winery equipment to increase the Company's winemaking capacity, complete the storage facility, and purchase Tualatin Vineyards. At December 31, 2002, the Company was in violation of 1 of 5 of its debt coverage covenants. Farm Credit Services has signed a waiver letter to the Company for this covenant. At June 30, 2003, the Company owed $566,503 on grape contracts. A large portion is owed to a single grape grower, which will be paid as the wine made from those grapes is sold. The Company believes that cash flow from operations and funds available under credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months. Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our financial statements is set forth in our Annual Report on Form 10-K for the year ended December 31, 2002. Recent Accounting Pronouncements In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This statement provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, it amends the disclosure requirements of SFAS 123 to require prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reporting results. This statement is effective for fiscal years ending after December 15, 2002 and for the interim periods beginning after December 15, 2002. As we continue to report stock-based employee compensation costs using the intrinsic value method as defined by APB 25, adoption of the provisions of the new statement affects only our disclosure of these costs, which is presented in Note 2. ITEM 3 Controls and Procedures a) Evaluation of disclosure controls and procedures. As of June 30, 2003, the end of the period covered by this report, the Company's chief executive officer and its chief financial officer reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15(d)-15(e)), which are designed to ensure that material information the Company must disclose in its report filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed, summarized, and reported on a timely basis, and have concluded, based on that evaluation, that to the best of their knowledge and as of such date, the Company's disclosure controls and procedures are effective to ensure that all material information required to be filed by the Company in this quarterly report that it files or submits under the Exchange Act is accumulated and communicated to the Company's chief executive officer and chief financial officer as appropriate to allow timely decisions regarding required disclosure. b) Changes in internal control over financial reporting. In the three months ended June 30, 2003, there has been no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. PART II. OTHER INFORMATION Item 1 Exhibits and Reports on Form 8-K. (a) The exhibits filed herewith are listed in the Exhibit Index following the signature page of this report. ITEM 5 Other Information Non-Audit Fees: The Audit Committee of the Board Of Directors has approved the following non- audit services, which are being performed by PricewaterhouseCoopers, our independent accountants, during the calendar year ending December 31, 2003: - Income tax advisory services related to: income tax returns; acquisitions; and formation and liquidation of foreign subsidiaries SIGNATURES Pursuant to the requirements of the Security Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILLAMETTE VALLEY VINEYARDS, INC. Date: August 14, 2003 By /s/ James W. Bernau James W. Bernau President Date: August 14, 2003 By /s/ Sean M. Cary Sean M. Cary Controller EXHIBIT INDEX Exhibit 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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.