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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-22857
SCHEID VINEYARDS INC.
(Exact name of small business issuer as specified in its charter)
Delaware 77-0461833
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13470 Washington Blvd., Suite 300
Marina del Rey, California 90292
(Address of principal executive offices) (Zip Code)
(310) 301-1555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- --------
There were 6,700,000 shares outstanding of registrant's Common Stock, par
value $.001 per share, as of November 12, 1997, consisting of 2,300,000
shares of Class A Common Stock and 4,400,000 shares of Class B Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
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SCHEID VINEYARDS INC.
Page 1 of 13
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FORM 10-QSB INDEX
PAGE NO.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
a. Balance Sheets at September 30,
1997 and December 31, 1996 3
b. Statements of Operations for the
three and nine months ended
September 30, 1997 and 1996 4
c. Statements of Cash Flows for the
nine months ended September 30,
1997 and 1996 5
d. Notes to Financial Statements 6
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of
Proceeds 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
Page 2 of 13
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHEID VINEYARDS INC. AND SUBSIDIARY
BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 7,265 $ 4,024
Accounts receivable, trade 12,751 274
Accounts receivable, other 12 3
Inventories 2,176 100
Supplies and prepaid expenses 1,076 819
--------- --------
Total current assets 23,280 5,220
PROPERTY, PLANT AND EQUIPMENT, NET 25,413 16,342
LONG-TERM RECEIVABLE 4,467 2,233
OTHER ASSETS 100 274
--------- --------
$ 53,260 $ 24,069
--------- --------
--------- --------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 765 $ 458
Notes payable to affiliates -- 807
Amounts due stockholder 163 1,000
Accounts payable and accrued liabilities 2,436 497
Accrued interest payable 338 204
Income taxes payable 2,430 --
--------- --------
Total current liabilities 6,132 2,966
LONG-TERM DEBT 17,968 11,458
DEFERRED COMPENSATION 643 584
DEFERRED INCOME TAXES 1,390 --
--------- --------
Total liabilities 26,133 15,008
--------- --------
EQUITY:
Common stock 7 2
Additional paid-in capital 21,768 124
Retained earnings 5,352 5,621
Partners' capital -- 3,314
--------- --------
Total equity 27,127 9,061
--------- --------
$ 53,260 $ 24,069
--------- --------
--------- --------
Page 3 of 13
See accompanying Notes to Financial Statements
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SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 12,410 $ 6,414 $ 12,426 $ 6,414
Vineyard management, services and
other fees 341 155 903 584
---------- ---------- ---------- ----------
12,751 6,569 13,329 6,998
Cost of sales 4,512 2,499 4,536 2,499
---------- ---------- ---------- ----------
GROSS PROFIT 8,239 4,070 8,793 4,499
General and administrative 1,260 664 2,718 1,766
Interest expense (net of interest
income) 351 129 673 378
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,628 3,277 5,402 2,355
PROVISION FOR INCOME TAXES - CURRENT 2,430 -- 2,430 --
---------- ---------- ---------- ----------
NET INCOME BEFORE DEFERRED TAX ADJUSTMENT 4,198 3,277 2,972 2,355
DEFERRED TAXES FROM REORGANIZATION
OF S-CORPORATION 1,390 -- 1,390 --
---------- ---------- ---------- ----------
NET INCOME $ 2,808 $ 3,277 $ 1,582 $ 2,355
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE $ 0.48 $ 0.74 $ 0.32 $ 0.54
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA AMOUNTS:
INCOME BEFORE INCOME TAXES AS REPORTED $ 6,628 $ 3,277 $ 5,402 $ 2,355
PRO FORMA INCOME TAX PROVISION 2,651 1,311 2,161 942
---------- ---------- ---------- ----------
PRO FORMA NET INCOME $ 3,977 $ 1,966 $ 3,241 $ 1,413
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRO FORMA NET INCOME PER SHARE $ 0.68 $ 0.45 $ 0.66 $ 0.32
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE SHARES OUTSTANDING 5,845,000 4,400,000 4,887,000 4,400,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying Notes to Financial Statements
Page 4 of 13
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SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,582 $ 2,355
Adjustments to reconcile net income to net
cash used in operating activities:
Deferred compensation 59 53
Depreciation 738 641
Loss on disposal of assets 170 - -
Deferred income taxes 1,390 - -
Changes in operating assets and
liabilities:
Accounts receivable, trade (12,476) (8,714)
Accounts receivable, stockholder (12) - -
Accounts receivable, other 3 (1)
Inventories (1,257) (292)
Supplies and prepaid expenses (1,382) (527)
Accounts payable and accrued
liabilities 1,760 197
Due to stockholder 163 - -
Income taxes payable 2,430 - -
---------- ----------
Net cash used in operating
activities (6,832) (6,288)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable (2,233) - -
Additions to property, plant and equipment (9,506) (2,338)
Other assets 173 (3)
---------- ----------
Net cash used in investing
activities (11,566) (2,341)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable, short-term 13,400 - -
Repayments on notes payable, short-term (13,400) (463)
Proceeds received from long-term debt 8,977 5,122
Payments on long-term debt (2,160) - -
Payments on note payable, stockholder (1,000) 1,000
Payments on notes payable, affiliates (807) 62
Proceeds from issuance of common stock 20,700 - -
Offering costs (398) - -
Subchapter S-Corporation and partnership
distributions (3,673) (46)
---------- ----------
Net cash provided by financing
activities 21,639 5,675
---------- ----------
Increase (decrease) in cash 3,241 (2,954)
CASH, BEGINNING OF PERIOD 4,024 3,559
---------- ----------
CASH, END OF PERIOD $ 7,265 $ 605
---------- ----------
---------- ----------
</TABLE>
See accompanying Notes to Financial Statements
Page 5 of 13
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SCHEID VINEYARDS INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The financial statements included herein have been prepared by Scheid
Vineyards Inc. (the "Company" or "SVI") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations. In the opinion of the
Company, the foregoing statements contain all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1997, and its
results of operations and cash flows for the three- and nine-month periods ended
September 30, 1997 and 1996, respectively. The interim results reflected in the
foregoing financial statements are not necessarily indicative of the results
expected for the full fiscal year. The Company's balance sheet as of December
31, 1996 included herein has been taken from the Company's audited financial
statements of that date included in the Company's Registration Statement on Form
SB-2 (File No. 333-27871). The accompanying financial statements should be read
in conjunction with the financial statements and the notes thereto filed as part
of the Company's Registration Statement on Form SB-2.
The Company completed its initial public offering of 2,000,000 shares of
Class A Common Stock, par value $.001 per share, on July 30, 1997. The
additional capital received by the Company was $18,000,000. The increase in net
worth due to the public offering totaled approximately $17,289,000, after
deduction of offering-related expenses. On September 3, 1997, the underwriters
of the Company's public offering exercised their over-allotment option to
purchase 300,000 additional shares of Class A Common Stock. The additional
capital received by the Company on September 8, 1997 was $2,700,000.
The Company reported its operations through the date of the Exchange
Transaction described below on a combined basis. See "Exchange Transaction,
S-Corporation Conversion and Pro Forma Amounts (Unaudited)". Since the date
of the Exchange Transaction, the Company reports its operations on a
consolidated basis. All significant intercompany balances have been
eliminated in the combinations and consolidation.
EXCHANGE TRANSACTION, S-CORPORATION CONVERSION AND PRO FORMA AMOUNTS (UNAUDITED)
EXCHANGE OF SHARES, PARTNERSHIP UNITS AND LIMITED LIABILITY COMPANY
INTERESTS FOR CLASS B COMMON STOCK -- Prior to the Company's initial public
offering, Scheid Vineyards California Inc., a California corporation and
wholly-owned subsidiary of the Company ("SVI-Cal"), was the general partner
of two California limited partnerships, Vineyard Investors 1972 ("VI-1972")
and Vineyard 405 ("V-405") and was a member of a California limited liability
company, Quadra Partners LLC ("Quadra Partners"). SVI-Cal and VI-1972 were
the only limited partners of V-405. In connection with the Company's public
offering, Scheid Vineyards Inc., a Delaware corporation ("SVI-Del") was
formed to act as a holding company for SVI-Cal. The capital stock of SVI-Cal
held by its sole stockholder, the membership interests held by all members
(other than SVI-Cal) of Quadra Partners, and the limited partnership units
held by all limited partners (other than SVI-Cal) in VI-1972 were contributed
to SVI-Del in exchange for (i) 4,400,000 shares of Class B Common Stock of
the Company (the "Exchange Transaction") and (ii) a commitment by SVI-Cal to
make the distributions described below. See "-- Distributions". SVI-Del, as
part of the Exchange Transaction, simultaneously contributed such limited
partnership units in VI-1972 and such membership interests in Quadra Partners
to SVI-Cal. As a result, each of VI-1972, V-405 and Quadra Partners was
terminated and dissolved, and SVI-Cal succeeded to their respective assets
and liabilities.
S CORPORATION CONVERSION -- The Exchange Transaction resulted in
termination of SVI-Cal's S Corporation status. As a result, after July 30,
1997, SVI will pay income taxes at the corporate level. The pro forma income
tax provision in the combined statements of operations is based upon an assumed
40% federal and state income tax rate.
DISTRIBUTIONS -- SVI-Cal's cumulative S Corporation earnings were
determined up to the effective date of the offering and a distribution in the
amount of $3,193,000 was made to its former sole stockholder in respect of such
earnings. In addition, a distribution of $480,000 was made to the limited
partners of VI-1972 (as of immediately prior to the Exchange Transaction) to pay
income taxes on income allocated to them by the partnership. These
distributions resulted in a decrease in net worth immediately prior to the
offering.
Page 6 of 13
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DEFERRED INCOME TAXES -- In connection with the conversion of SVI-Cal's S
Corporation Status to C Corporation status, SVI is required by FASB No. 109 to
record deferred tax liabilities and deferred tax assets. Such change resulted
in a net charge to earnings of $1,390,000 in the third quarter of 1997, when the
conversion to C Corporation status took place. This one-time charge is a result
of differences in the accounting and tax treatment of certain of the Company's
assets and liabilities and is reflected through an increase in deferred income
tax liabilities.
EARNINGS PER SHARE AND CLASSES OF COMMON STOCK -- The weighted average
shares outstanding in the statements of operations for the three and nine month
periods ended September 30, 1996 is based upon the 4,400,000 shares of Class B
Common Stock outstanding after giving pro forma effect to the Exchange
Transaction. In connection with the stock offering, the Company sold 2,300,000
shares of Class A Common Stock. Each share of Class A Common Stock is entitled
to one vote and each share of Class B Common stock is entitled to five votes on
all matters submitted to a vote of the shareholders. The holders of the Class A
Common Stock, voting as a separate class, elect 25% of the total Board of
Directors, rounded up to the nearest whole number, of the Company and the
holders of the Class B Common Stock, voting as a separate class, elect the
remaining directors. Each share of Class B Common Stock is convertible into one
share of Class A Common Stock at the option of the holder or automatically upon
transfer to a person other than certain specified persons. Except for the
differing voting rights, the shares of Class A and Class B common stock have
substantially identical rights, preferences and privileges. The weighted
average shares outstanding for the three and nine month periods ended September
30, 1997 are based on the actual weighted average shares of Class A and Class B
Common Stock outstanding for the periods. The effect of outstanding stock
options on the weighted average shares was immaterial for the periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SVI derives its revenues from three sources: (i) sales of wine grapes
pursuant to long-term purchase contracts; (ii) vineyard management and services
revenues consisting primarily of management and harvest fees and equipment
rentals for services provided to owners of vineyards; and (iii) sales of wine
and wine-related merchandise sold primarily through the Company's tasting room
which opened in late April 1997. A substantial majority of SVI's revenue is
derived from sales of wine grapes, and the Company recognizes all of its grape
sales revenues at the time of its annual harvest in September and October.
Because success of the Company's operations is dependent upon the results of the
Company's annual harvest, the first two fiscal quarters have historically
resulted in a loss and quarterly results are not considered indicative of those
to be expected for a full year. Profits, if any, are recognized in the last two
fiscal quarters of the year when revenues from grape sales are recognized.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Grape sales increased by 93.0% to $12,377,000 for the three months
ended September 30, 1997 from $6,414,000 in the 1996 period, an increase of
$5,963,000. The increase was due primarily to (i) a 28.5% increase in the
average price per ton received on grape sales from 1996 to 1997 (contributing
approximately $1,830,000 of the increase), (ii) a 25.7% increase in the yields
produced by the Company's existing vineyards on acres harvested through
September 30 (contributing approximately $1,570,000 of the increase), (iii) the
acquisition of a 370-acre vineyard in June 1997 (contributing approximately
$946,000 of the increase), and (iv) more acreage harvested in the third quarter
of 1997 than in the third quarter of 1996 with approximately 63% compared to 56%
of the Company's acres harvested through September 30, 1997 and 1996,
respectively (contributing approximately $1,617,000 of the increase).
Revenue from the sale of wine and wine-related merchandise at the Company's
tasting room totaled $33,000 for the three months ended September 30, 1997. The
tasting room was opened in April 1997.
Revenue from vineyard management services and other fees increased by 120.0% to
$341,000 for the three months ended September 30, 1997 from $155,000 in the 1996
period, an increase of $186,000. This increase was primarily due to the
addition of a 445-acre long-term management contract which became operative in
early 1997.
GROSS PROFIT. As a result of the factors discussed above, gross profit
increased by 102.4% to $8,239,000 for the three months ended September 30, 1997
from $4,070,000 in the 1996 period, an increase of $4,169,000. Gross profit on
grape sales as a percentage of revenues increased to 63.5% in the 1997 third
quarter from 61.0% in the 1996 period. The increase in gross profit is
primarily the result of higher revenues related to increased yields and higher
grape prices per ton in relation to relatively stable farming costs.
Page 7 of 13
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GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
89.8% to $1,260,000 for the three months ended September 30, 1997 from $664,000
in the 1996 period, an increase of $596,000. The increase was due primarily to
costs associated with additional compensation and related benefits and overall
office expense due to the expansion of the Company's business and its initial
public offering, as well as promotional activities surrounding the opening and
initial operations of the Company's tasting room.
INTEREST EXPENSE, NET. Net interest expense increased 172.1% to $351,000 for
the three months ended September 30, 1997 from $129,000 in the 1996 period, an
increase of $222,000. The increase in interest expense was primarily due to
increased levels of borrowing by the Company to finance crop growing costs and
the completion of certain vineyard development and improvement projects for
which interest is capitalized instead of expensed during the development or
improvement period.
PROVISION FOR INCOME TAXES. The provision for income taxes - current increased
to $2,430,000 for the three months ended September 30, 1997 from $0 in the 1996
period. The effective tax rate for 1997 of 45% is higher than the Company's
anticipated future effective tax rate as losses of the Company through the date
the Company became a C-Corporation were allocated to the S-Corporation's sole
shareholder. The Company paid no income taxes prior to becoming a C-Corporation
in July 1997.
NET INCOME BEFORE DEFERRED TAX ADJUSTMENT. Due to the above factors, the
Company had net income before deferred tax adjustment for the three months ended
September 30, 1997 of $4,198,000 as compared to $3,277,000 in the 1996 period,
an increase of $921,000 or 28.1%.
DEFERRED TAXES FROM REORGANIZATION OF S-CORPORATION. The Company incurred a
one-time noncash charge to earnings in the amount of $1,390,000 to record the
deferred tax liability arising from the reorganization of the Company's business
from S-Corporation and partnerships to a taxable C-Corporation in connection
with the Company's initial public offering in July 1997.
NET INCOME. Net income for the three months ended September 30, 1997 was
$2,808,000 as compared to $3,277,000 in the 1996 period, a decrease of $469,000
or 14.3%. On a pro forma basis, net income for the three months ended September
30, 1997 and 1996 was $3,977,000 and $1,966,000, respectively, an increase of
$2,011,000 or 102.3%. Pro forma net income is derived by providing a provision
for income taxes as if the Company would have been a C-Corporation for all
periods presented.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
REVENUES. Grape sales increased by 93.0% to $12,377,000 for the nine months
ended September 30, 1997 from $6,414,000 in the 1996 period, an increase of
$5,963,000. The increase was due primarily to (i) a 28.5% increase in the
average price per ton received on grape sales from 1996 to 1997 (contributing
approximately $1,830,000 of the increase), (ii) a 25.7 % increase in the yields
produced by the Company's existing vineyards on acres harvested through
September 30 (contributing approximately $1,570,000 of the increase), (iii) the
acquisition of a 370-acre vineyard in June 1997 (contributing approximately
$946,000 of the increase), and (iv) more acreage harvested in the third quarter
of 1997 than in the third quarter of 1996, with approximately 63% compared to
56% of the Company's acres harvested through September 30, 1997 and 1996,
respectively (contributing approximately $1,617,000 of the increase).
Revenue from the sale of wine and wine-related merchandise at the Company's
tasting room totaled $49,000 for the nine months ended September 30, 1997. The
tasting room was opened in April 1997.
Revenue from vineyard management services and other fees increased by 54.6% to
$903,000 for the nine months ended September 30, 1997 from $584,000 in the 1996
period, an increase of $319,000. This increase was primarily due to the
addition of a 445-acre long-term management contract which became operative in
early 1997.
GROSS PROFIT. As a result of the factors discussed above, gross profit
increased by 95.4% to $8,793,000 for the nine months ended September 30, 1997
from $4,499,000 in the 1996 period, an increase of $4,294,000. Gross profit on
grape sales as a percentage of revenues increased to 63.5% in the 1997 third
quarter from 61.0% in the 1996 period. The increase in gross profit is
primarily the result of higher revenues related to increased yields and higher
grape prices per ton in relation to relatively stable farming costs.
Page 8 of 13
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GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by
53.9% to $2,718,000 for the nine months ended September 30, 1997 from $1,766,000
in the 1996 period, an increase of $952,000. The increase was due primarily to
costs associated with additional compensation and related benefits and overall
office expense due to the expansion of the Company's business and its initial
public offering, as well as promotional activities surrounding the opening and
initial operations of the Company's tasting room.
INTEREST EXPENSE, NET. Net interest expense increased 78.0% to $673,000 for
the nine months ended September 30, 1997 from $378,000 in the 1996 period, an
increase of $295,000. The increase in interest expense was primarily due to
increased levels of borrowing by the Company to finance crop growing costs and
the completion of certain vineyard development and improvement projects for
which interest is capitalized instead of expensed during the development or
improvement period.
PROVISION FOR INCOME TAXES. The provision for income taxes - current increased
to $2,430,000 for the nine months ended September 30, 1997 from $0 in the 1996
period. The effective tax rate for 1997 of 45% is higher than the Company's
anticipated future effective tax rate as losses of the Company through the date
the Company became a C-Corporation were allocated to the S-Corporation's sole
shareholder. The Company paid no income taxes prior to becoming a C-Corporation
in July 1997.
NET INCOME BEFORE DEFERRED TAX ADJUSTMENT. Due to the above factors, the
Company had net income before deferred tax adjustment for the nine months ended
September 30, 1997 of $2,972,000 as compared to $2,355,000 in the 1996 period,
an increase of $617,000 or 26.2%.
DEFERRED TAXES FROM REORGANIZATION OF S-CORPORATION. The Company incurred a
one-time noncash charge to earnings in the amount of $1,390,000 to record the
deferred tax liability arising from the reorganization of the Company's business
from S-Corporation and partnerships to a taxable C-Corporation in connection
with the Company's initial public offering in July 1997.
NET INCOME. Net income for the nine months ended September 30, 1997 was
$1,582,000 as compared to $2,355,000 in the 1996 period, a decrease of $773,000
or 32.8%. On a pro forma basis, net income for the nine months ended September
30, 1997 and 1996 was $3,241,000 and $1,413,000, respectively, an increase of
$1,828,000 or 129.4%. Pro forma net income is derived by providing a provision
for income taxes as if the Company would have been a C-Corporation for all
periods presented.
ANTICIPATED REVENUES FOR FISCAL YEAR ENDING DECEMBER 31, 1997
The 1997 harvest of the Company's vineyards has been completed and the
Company estimates that for the fiscal year ending December 31, 1997 it will
record revenues from grape sales in excess of $17,000,000 and revenues from
vineyard management, services and other fees in excess of $1,000,000. Although
the Company believes these estimates are realistic, it should be noted that not
all information used to derive amounts due from customers has been finalized as
of the date of this report and actual revenues may differ from those projected
above. The Company cautions that historical amounts of cost of goods sold and
other expenses deducted in arriving at net income or historical ratios of costs
and expenses to revenues may not provide an indication of gross profit or net
income to be reported by the Company for fiscal 1997. See "--Special Note
Regarding Forward-Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
SVI's primary sources of cash have historically been funds provided by
internally generated cash flow and bank borrowings. The Company has made
substantial capital expenditures to redevelop its existing vineyard properties
and acquire and develop new acreage, and intends to continue these types of
expenditures. Cash generated from operations has not been sufficient to satisfy
all of the Company's working capital and capital expenditure needs. As a
consequence, the Company has depended upon and continues to rely upon, both
short and long-term bank borrowings. Following the application of the net
proceeds from the Company's initial public offering, working capital increased
to $17,148,000 at September 30, 1997 from $9,011,000 at September 30, 1996 and
$2,254,000 at December 31, 1996, increases of $8,137,000 and $14,894,000,
respectively. Such increase is expected to reduce dependence on borrowings in
the near-term to meet working capital and capital expenditure requirements.
Page 9 of 13
<PAGE>
Under the Company's historical working capital cycle, working capital is
required primarily to finance the costs of growing and harvesting its wine grape
crop. The Company normally delivers substantially all of its crop in September
and October, and receives the majority of its cash from grape sales in November.
In order to bridge the gap between incurrence of expenditures and receipt of
cash from grape sales, large working capital outlays are required for
approximately eleven months each year. Historically, SVI has obtained these
funds pursuant to credit lines with banks.
The Company currently has credit lines that provide both short-term and
long-term funds. The short-term "crop" line has maximum credit available of
$10,500,000 and is intended to finance the Company's anticipated working capital
needs through early 1998. There were no amounts outstanding under this line at
September 30, 1997 as it was repaid following the Company's initial public
offering. This crop line expires on June 5, 1998.
SVI also has long-term credit facilities which expire through June 2007 and
provide for maximum borrowings totaling $6,856,000 which diminish annually
through the expiration dates to a maximum allowable commitment of $3,432,000.
At September 30, 1997, the outstanding amount owed by the Company was the
maximum allowable commitment. The annual interest rates on these lines are
based on the bank's "reference rate" and range from
8 1/2% to 9%.
In addition, on June 23, 1997, the Company borrowed $3,000,000 under a
short-term note payable with an expiration date of September 5, 1997.
Proceeds from the short-term note payable and a portion of the borrowings
under the long-term credit facilities were used to acquire a 370-acre
vineyard known as Riverview Vineyard on June 26, 1997 for a total purchase
price of approximately $5,500,000. The short-term note was repaid on July
30, 1997.
The Company also has other long-term notes payable which, as of September
30, 1997, totaled approximately $11,877,000. These notes are primarily secured
by deeds of trust, leasehold interests or equipment, and have interest rates
based on the bank's reference rate plus 1/4% to 1 1/4%.
Management expects that capital requirements will expand significantly to
support expected future growth and that this will result in additional borrowing
under credit lines and/or new arrangements for term debt. The Company's planned
new vineyard developments are expected to require approximately $8,400,000 in
capital investment over the next three years and continued improvements of
existing vineyards are expected to require approximately $4,000,000. Management
believes it should be able to obtain long-term funds from its present lender,
but there can be no assurance that the Company will be able to obtain financing
when required or that such financings will be available on reasonable terms.
See "--Special Note Regarding Forward-Looking Statements."
Cash used in operating activities was $6,832,000 for the nine months
ended September 30, 1997, compared to $6,288,000 for the same period in 1996,
an increase of $544,000. The increase was primarily due to increases in
trade receivables due to the increase in revenues from 1997 to 1996, and an
increase in inventories due to an increase in deferred crop production costs.
These increases were partially offset by deferred and current income taxes
recorded in 1997 due to the conversion of the Company's income tax status
from an S-Corporation to a C-Corporation.
Cash used in investing activities was $11,566,000 for the nine months
ended September 30, 1997, compared to $2,341,000 for the same period in 1996,
an increase of $9,225,000. The increase was principally the result of
additions to property, plant and equipment and an increase in a long-term
receivable. The additions to property and equipment were primarily due to the
Company's acquisition of a 370-acre vineyard known as Riverview Vineyard on
June 26, 1997 for $5,500,000, improvements of the Company's existing
vineyards, and ongoing development of approximately 374 acres of new
vineyards. The increase in long-term receivables was for the costs incurred
for the development of certain vineyards owned by a major client of the
Company who has provided a letter of credit to secure repayment.
Cash provided by financing activities was $21,639,000 for the nine months
ended September 30, 1997, compared to $5,675,000 for the same period in 1996, an
increase of $15,964,000. The increase was primarily due to the proceeds
received in the Company's initial public offering in July 1997 of $20,700,000,
which were offset by distributions to partners and shareholders of $3,673,000.
Page 10 of 13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Management's Discussion and Analysis
of Financial Condition and Results of Operations are "forward-looking
statements". These forward-looking statements can generally be identified as
such because the context of the statement will include such words as the
company "believes," "anticipates," "expects," or words of similar import.
Similarly, statements that describe the Company's future operating
performance, financial results, plans, objectives or goals are also
forward-looking statements. Such forward looking statements are subject to
certain factors, risks and uncertainties which could cause actual results to
differ materially from those currently anticipated. Such factors, risks and
uncertainties include, but are not limited to, (i) success in planting,
cultivating and harvesting of existing and new vineyards, (ii) success in,
and the timing of, future acquisitions, if any, of additional properties for
vineyard development and related businesses as well as variability in
acquisition and development costs , (iii) consumer demand and preferences for
the wine grape varieties produced by the Company, (iv) general health and
social concerns regarding consumption of wine and spirits, (v) the size and
growth rate of the California wine industry, (vi) seasonality of the wine
grape producing business, (vii) increases or changes in government
regulations regarding environmental impact, water use, labor or consumption
of alcoholic beverages, (viii) competition from other producers and
wineries, (ix) proposed expansion of the Company's wine business (x)
effects of variances in grape yields and prices from harvest to harvest due
to agricultural, market and other factors and relatively fixed farming costs,
(xi) the Company's dependence on a small number of clients for the purchase
of a substantial portion of the Company's grape production, (xii) the
availability of financing on terms acceptable to the Company and (xiii) the
Company's labor relations. These and other factors, risks and uncertainties
are discussed in greater detail under the caption " Risk Factors" in the
Company's prospectus dated July 24, 1997 (File No. 333-27871) filed with the
Securities and Exchange Commission on July 25, 1997. Stockholders, potential
investors and other readers are urged to consider these factors carefully in
evaluating the forward-looking statements and are cautioned not to place undo
reliance on such forward-looking statements. The forward-looking statements
made herein are only made as of the date of this Form 10-QSB and the Company
undertakes no obligation to publicly update such forward-looking statements
to reflect subsequent events or circumstances.
Page 11 of 13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
CHANGE IN SECURITIES - None
USE OF PROCEEDS -
As part of the Company's initial public offering, the Company issued
2,000,000 and 300,000 shares, respectively, of its Class A Common Stock,
$.001 par value (the "IPO Shares"), on July 30 and September 8, 1997. The
offering terminated upon the consummation of the closing of the exercise of
the underwriters' overallotment option on September 8, 1997. The IPO Shares
were issued in a registered offering pursuant to a Registration Statement on
Form SB-2 (Commission File No. 333-27871; effective date July 24, 1997)
through a syndicate of underwriters, the representatives of which were
Cruttenden Roth Incorporated, Laidlaw Equities, Inc. and Rodman & Renshaw,
Inc. The IPO shares were offered and sold by the underwriters at an initial
public offering price of $10.00 per share, resulting in aggregate gross
offering proceeds of $23,000,000.
The Company incurred offering expenses in connection with this offering as
follows:
Underwriting discounts and commissions $1,725,000
Expenses paid to or for underwriters 575,000
Other expenses 711,000
----------
Total expenses $3,011,000
----------
----------
None of the above expenses were paid either directly or indirectly to
directors, officers, general partners of the Company or its associates, or to
persons owning more than 10% of any class of equity security of the Company
or to affiliates of the Company.
Through September 30, 1997, the Company has applied approximately
$16,000,000 of the $19,989,000 in net offering proceeds as follows:
Repayment of working capital indebtedness (1) $ 9,200,000
Development of vineyards in Hames Valley 1,300,000
Repayment of short-term note payable (1) 3,000,000
Working capital for existing vineyards and
general corporate purposes 2,500,000
-----------
Total proceeds applied $16,000,000
-----------
-----------
______________________
(1) In order to reduce net interest expense, the Company temporarily used a
portion of the proceeds from the initial closing of the offering to repay
outstanding indebtedness related to its acquisition of Riverview Vineyard
with the intention of funding expenditures for acquiring and developing
additional vineyard properties out of future borrowings under its lines of
credit or other indebtedness. In this regard, the Company is evaluating
long-term financing alternatives for the recently acquired Riverview
Vineyard. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".
None of the above applications of the net offering proceeds were paid either
directly or indirectly to directors, officers, general partners of the
Company or its associates, to persons owning more than 10% of any class of
equity security of the Company or to affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
Page 12 of 13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith:
27.1 Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the
quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1997 SCHEID VINEYARDS INC.
/S/ Heidi M. Scheid
--------------------------------------
Heidi M. Scheid
Vice President Finance and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
/S/ Ernest M. Brown
--------------------------------------
Ernest M. Brown
Vice President and Secretary
(Duly Authorized Officer and Principal
Accounting Officer)
Page 13 of 13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AS OF SEPTEMBER 30, 1997 AND THE STATEMENTS OF OPERATIONS AND CASH FLOWS
OF SCHEID VINEYARDS INC. FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH IN FORM 10-QSB FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,265
<SECURITIES> 0
<RECEIVABLES> 12,751
<ALLOWANCES> 0
<INVENTORY> 2,176
<CURRENT-ASSETS> 23,280
<PP&E> 25,413
<DEPRECIATION> 0
<TOTAL-ASSETS> 53,260
<CURRENT-LIABILITIES> 6,132
<BONDS> 18,733
0
0
<COMMON> 7
<OTHER-SE> 27,120
<TOTAL-LIABILITY-AND-EQUITY> 53,260
<SALES> 12,426
<TOTAL-REVENUES> 13,329
<CGS> 4,536
<TOTAL-COSTS> 4,536
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 673
<INCOME-PRETAX> 5,402
<INCOME-TAX> 3,820<F1>
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,582
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0
<FN>
<F1>INCOME TAX EXPENSE INCLUDES A ONE-TIME DEFERRED TAX CHARGE OF $1,390 FOR
CHANGE FROM S-CORPORATION TO C-CORPORATION TAX STATUS.
</FN>
</TABLE>
