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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 March 31, 1998
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.
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 May 13, 1998, consisting of 3,325,000 shares of Class A
Common Stock and 3,375,000 shares of Class B Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
SCHEID VINEYARDS INC.
Page 1 of 15
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FORM 10-QSB INDEX
PART I - FINANCIAL INFORMATION
PAGE NO.
--------
Item 1. Financial Statements:
a. Balance Sheets at March 31, 1998 and December 31, 1997 3
b. Statements of Operations for the three months ended
March 31, 1998 and 1997 4
c. Statements of Cash Flows for the three months ended
March 31, 1998 and 1997 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 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Page 2 of 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHEID VINEYARDS INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . $11,390 $14,483
Accounts receivable, trade. . . . . . . . . . . . . . . . . 268 349
Accounts receivable, other. . . . . . . . . . . . . . . . . 6 412
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 2,582 1,102
Supplies, prepaid expenses and other current assets . . . . 646 813
------- -------
Total current assets. . . . . . . . . . . . . . . 14,892 17,159
PROPERTY, PLANT AND EQUIPMENT, NET . . . . . . . . . . . . . . . 29,802 27,795
LONG-TERM RECEIVABLE . . . . . . . . . . . . . . . . . . . . . . 4,537 4,679
OTHER ASSETS, NET. . . . . . . . . . . . . . . . . . . . . . . . 403 236
------- -------
$49,634 $49,869
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt . . . . . . . . . . . . . $660 $660
Accounts payable and accrued liabilities. . . . . . . . . . 827 519
Accrued interest payable. . . . . . . . . . . . . . . . . . 295 315
------- -------
Total current liabilities . . . . . . . . . . . . 1,782 1,494
LONG-TERM DEBT, NET OF CURRENT PORTION . . . . . . . . . . . . . 17,709 17,851
DEFERRED COMPENSATION. . . . . . . . . . . . . . . . . . . . . . 684 662
DEFERRED INCOME TAXES. . . . . . . . . . . . . . . . . . . . . . 741 741
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . 20,916 20,748
------- -------
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value; 2,000,000 shares authorized;
no shares issued and outstanding. . . . . . . . . . . . . . -- --
Common stock,
Class A, $.001 par value; 20,000,000 shares authorized;
2,325,000 and 2,300,000 shares issued and outstanding in
1998 and 1997, respectively
Class B, $.001 par value; 10,000,000 shares authorized;
4,375,000 and 4,440,000 outstanding in 1998 and 1997,
respectively. . . . . . . . . . . . . . . . . . . . . . . 7 7
Additional paid-in capital. . . . . . . . . . . . . . . . . 21,872 21,797
Retained earnings . . . . . . . . . . . . . . . . . . . . . 6,839 7,317
------- -------
Total stockholders' equity . . . . . . . . . . . . . . . 28,718 29,121
------- -------
$49,634 $49,869
------- -------
------- -------
</TABLE>
See accompanying Notes to Financial Statements
Page 3 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1998 1997
---- ----
<S> <C> <C>
REVENUES:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 307 $ --
Vineyard management, services and other fees. . . . . . . . . 213 347
------ ------
Total revenues. . . . . . . . . . . . . . . . . . . . . 520 347
COST OF SALES. . . . . . . . . . . . . . . . . . . . . . . . . . 131 --
------ ------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . . . . . . . . 389 347
General and administrative expenses . . . . . . . . . . . . 1,202 628
Interest expense (income), net. . . . . . . . . . . . . . . (15) 185
------ ------
LOSS BEFORE INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . (798) (466)
INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . . . . . . . (320) --
------ ------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (478) $(466)
------ ------
------ ------
BASIC AND DILUTED LOSS PER SHARE . . . . . . . . . . . . . . . . $(0.07) $(0.11)
------ ------
------ ------
PRO FORMA AMOUNTS:
LOSS BEFORE INCOME TAXES AS REPORTED . . . . . . . . . . . . . . $ (466)
PRO FORMA INCOME TAX BENEFIT . . . . . . . . . . . . . . . . . . (186)
------
PRO FORMA NET LOSS . . . . . . . . . . . . . . . . . . . . . . . $ (280)
------
------
PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE . . . . . . . . . $(0.06)
------
------
WEIGHTED AVERAGE SHARES OUTSTANDING. . . . . . . . . . . . . . . 6,700 4,400
------ ------
------ ------
</TABLE>
See accompanying Notes to Financial Statements
Page 4 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (478) $ (466)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and abandonments . . . . . . . . . . . . . . . . 459 263
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20
Noncash compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 --
Changes in operating assets and liabilities
Accounts receivable, trade. . . . . . . . . . . . . . . . . . . . . . . . 81 (260)
Accounts receivable, stockholder. . . . . . . . . . . . . . . . . . . . . -- (2,161)
Accounts receivable, other. . . . . . . . . . . . . . . . . . . . . . . . 406 (2)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,480) (1,292)
Supplies, prepaid expenses and other current assets . . . . . . . . . . . 167 105
Accounts payable and accrued liabilities. . . . . . . . . . . . . . . . . 288 534
------- -------
Net cash used in operating activities . . . . . . . . . . . . . . . . . (460) (3,259)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 (567)
Additions to property, plant and equipment. . . . . . . . . . . . . . . . . (2,466) (1,438)
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) 18
------- -------
Net cash used in investing activities . . . . . . . . . . . . . . . . . (2,491) (1,987)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . 855 3,029
Repayment of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . (997) --
Borrowings on notes payable, short-term . . . . . . . . . . . . . . . . . . . . -- 203
Repayments on notes payable, short-term . . . . . . . . . . . . . . . . . . . . -- (1,807)
------- -------
Net cash (used in) provided by financing activities . . . . . . . . . . . . . (142) 1,425
------- -------
Decrease in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (3,093) (3,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 14,483 4,024
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $11,390 $ 203
------- -------
------- -------
</TABLE>
See accompanying Notes to Financial Statements.
Page 5 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
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 (the "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 management of the Company, the foregoing statements contain
all adjustments necessary to present fairly the financial position of the
Company as of March 31, 1998, and its results of operations and cash flows
for the three-month periods ended March 31, 1998 and 1997, respectively. Due
to the seasonality of the wine grape business, 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, 1997 included herein has been derived from the Company's audited
financial statements as of that date included in the Company's Annual Report
on Form 10-KSB. The accompanying financial statements should be read in
conjunction with the financial statements and the notes thereto filed as part
of the Company's Annual Report on Form 10-KSB.
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. 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. In connection with such sales of Class A Common
Stock, the Company realized approximately $20 million in net proceeds.
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
Page 6 of 15
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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 certain 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 pays income taxes at the corporate level. The pro forma income tax
benefit in the statement of operations for the three months ended March 31,
1997 is based upon an assumed 40% combined federal and state income tax rate.
EARNINGS PER SHARE AND CLASSES OF COMMON STOCK -- The weighted average
shares outstanding in the statement of operations for the three-month period
ended March 31, 1997 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. The weighted average shares outstanding for the
three-month period ended March 31, 1998 are based on the actual weighted
average shares of Class A and Class B Common Stock outstanding for the
period. The effect of outstanding stock options on the weighted average
shares was antidilutive for the periods presented.
SUBSEQUENT EVENT
On May 13, 1998, a principal stockholder of the Company sold 1,000,000
shares of Class A Common Stock in an underwritten public offering. Such shares
were Class B Common Stock in the hands of the principal stockholder but
automatically converted into Class A Common Stock on a share-for-share basis in
connection with the sale in the offering. The Company received no proceeds from
the sale of these shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
SVI is a leading independent (i.e., not winery controlled) producer of
premium varietal wine grapes. The Company currently operates approximately
5,280 acres of wine grape vineyards. Of this total, approximately 3,600 acres
are operated for the Company's own account, and 1,680 acres are operated
under management contracts for others. All of the properties currently
operated by the Company are located in Monterey and San Benito Counties in
California, both of which are generally recognized as excellent regions for
growing high quality wine grape varieties.
The Company currently produces 14 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon, Chenin Blanc, Gewurztraminer
and Sauvignon Blanc. Substantially all of the
Page 7 of 15
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Company's current wine grape production is contracted at least through the
harvest of 2001, and the majority is contracted at least through the harvest
of 2006.
The wine grape business is extremely seasonal. The Company recognizes
substantially all of its crop sales revenues at the time of its annual
harvest in September and October, and costs incurred throughout the year to
farm and harvest the Company's wine grape crop are capitalized until the
revenues associated with such costs are recognized. 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. From
time to time, the Company has in the past, and may in the future, convert
grapes into bulk wine for sales in years subsequent to the harvest year,
which may impact quarterly results.
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. SVI derives its revenues from four sources: (i) sales of
wine grapes pursuant to long-term purchase contracts; (ii) sales of bulk
wine; (iii) vineyard management and services revenues consisting primarily of
management and harvest fees and equipment rentals for services provided to
owners of vineyards; and (iv) sales of wine and wine-related merchandise sold
primarily through the Company's tasting room which opened in late April 1997.
Sales (which include all revenues other than revenues from vineyard
management services and other fees) increased to $307,000 in the three months
ended March 31, 1998. There were no such sales in 1997. Sales for the three
months ended March 31, 1998 is comprised of $283,000 in bulk wine sales and
$24,000 from the sale of wine and wine-related merchandise at the Company's
tasting room.
Revenue from vineyard management services and other fees decreased by
39% to $213,000 for the three months ended March 31, 1998 from $347,000 in
the 1997 period, a decrease of $134,000. The decrease was primarily due to a
one-time development fee received under a new management agreement entered
into in the first quarter of 1997.
GROSS PROFIT. Gross profit for the three months ended March 31, 1998
was $389,000 compared to $347,000 for the three months ended March 31, 1997,
an increase of $42,000 or 12%. This increase resulted from the sales of bulk
wine and wine and wine-related merchandise through the Company's tasting room
in the 1998 period compared to none in the 1997 period, partially offset by
the decrease in vineyard management services and other fees discussed above.
Costs associated with the provision of management services are reimbursed by
the Company's clients, and therefore no cost of sales is deducted in
determining gross profit on these services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 91% to $1,202,000 for the three months ended March 31, 1998 from
$628,000 in the 1997 period, an increase of $574,000. The increase was due
primarily to costs associated with additional compensation and related
benefits and overall
Page 8 of 15
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office expense due to the expansion of the Company's business, costs
associated with the operations of a public company, as well as the operations
of the Company's tasting room.
INTEREST EXPENSE (INCOME), NET. Net interest expense (income) was
($15,000) for the three months ended March 31, 1998 and $185,000 in the 1997
period, an decrease of $200,000. Interest expense decreased to $171,000 for
the three months ended March 31, 1998 from $200,000 in the 1997 period,
primarily as a result of lower interest rates in the 1998 period. Interest
income increased to $186,000 for the three months ended March 31, 1998 from
$15,000 in the 1997 period. The increase in interest income was due to the
increases in cash holdings of the Company from 1997 to 1998, primarily as the
result of funds received in the Company's initial public offering in July
1997, and cash received from an above-average harvest in 1997.
INCOME TAX BENEFIT. The income tax benefit increased to $320,000 for
the three months ended March 31, 1998 from $0 in the 1997 period. The
Company paid no income taxes prior to becoming a C Corporation in July 1997.
NET LOSS. Net loss for the three months ended March 31, 1998 was
$478,000 as compared to $466,000 in the 1997 period, an increase of $12,000
or 3%. On a pro forma basis, net loss for the three months ended March 31,
1997 was $280,000. Pro forma net loss is derived by providing an income tax
benefit as if the Company had been a C Corporation for three months ended
March 31, 1997.
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 the Company 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. Primarily
as the result of the net proceeds received from the Company's initial public
offering and operating cash flows from the 1997 harvest, working capital
increased to $13,110,000 at March 31, 1998 from $3,113,000 at March 31, 1997,
an increase of $9,997,000. At December 31, 1997 working capital was
$15,665,000. The reduction in working capital from December 31, 1997 to
March 31, 1998 was primarily due to the expenditures of current working
capital to fund vineyard development.
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.
Page 9 of 15
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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. There were no amounts outstanding under this line at March
31, 1998. This crop line expires on June 5, 1998, and the Company expects to
replace the line prior to maturity. Although no assurances can be given,
management believes that the Company's existing working capital and
short-term borrowing capabilities will be adequate to meet the Company's
currently anticipated liquidity needs during the fiscal year ending December
31, 1998.
SVI also has long-term credit facilities which expire through July 2007
and provide for maximum borrowings totaling $7,285,000, which diminish
annually through the expiration dates to a maximum allowable commitment of
$3,432,000. At March 31, 1998, the outstanding amount owed by the Company
under these facilities was $6,857,000. The interest rate on each of these
lines is based on the bank's "reference rate". At March 31, 1998, the
weighted average per annum interest rate on these lines was 8.24%.
The Company also has other long-term notes payable which, as of March
31, 1998, totaled approximately $6,975,000. Each of these notes is primarily
secured by deeds of trust, leasehold interests or equipment, and has an
interest rate based on the bank's reference rate. At March 31, 1998, the
weighted average per annum interest rate on these notes payable was 8.25%.
The Company also has a $7,500,000 bank line of credit, the proceeds of
which are being used to develop a vineyard owned by a major client and
managed under a long-term contract by the Company. At March 31, 1998, the
outstanding balance on this line of credit was $4,537,000. This line bears
interest at the bank's reference rate (6.18% at March 31, 1998) and is
repayable in six annual installments beginning January 2000. The note is
secured by a letter of credit provided by the client and by the Company's
management contract. The management contract provides for the Company's
client to make payment of the annual principal installments under this line
as and when they become due.
The Company's principal credit facilities and notes payable bind the
Company to a number of affirmative and negative covenants, including
requirements to maintain certain financial ratios within certain parameters
and to satisfy certain other financial tests. At March 31, 1998, the Company
was in compliance with these covenants.
Management expects that capital requirements will expand significantly
to support expected future growth and that this will result in the
expenditure of the Company's available cash and additional borrowing under
credit lines and/or new arrangements for term debt. The Company's planned
new vineyard developments are expected to require approximately $7.3 million
in capital investment over the next three years, and continued improvements
of existing vineyards are expected to require approximately $8 million.
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.
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Cash used in operating activities was $460,000 for the three months
ended March 31, 1998, compared to $3,259,000 for the same period in 1997, a
decrease of $2,799,000. In the 1997 period, the primary use of cash in
operating activities was the receivable due from a Company stockholder in the
amount of $2,161,000.
Cash used in investing activities was $2,491,000 for the three months
ended March 31, 1998, compared to $1,987,000 for the same period in 1997, an
increase of $504,000. The increase was principally the result of additions
to property, plant and equipment, which was partially offset by net
repayments of a long-term receivable. The additions to property and equipment
were primarily due to the improvements of the Company's existing vineyards,
and ongoing development of approximately 374 acres of new vineyards. The
decrease in long-term receivables was due to the repayment of a portion of
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 used in financing activities was $142,000 for the three months
ended March 31, 1998, compared to cash provided by financing activities of
$1,425,000 for the same period in 1997. For the three months ended March 31,
1998, the credit line and related receivable from a major client were reduced
by $997,000 as described above. There were no such repayments for the same
period in 1997. In addition, in 1997, the Company borrowed approximately
$2,500,000 against a line of credit. There were no such additional
borrowings in 1998.
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
Page 11 of 15
<PAGE>
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 "Business -Cautionary Information
Regarding Forward Looking Statements" in the Company's Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission on March
30, 1998 and under the caption "Risk Factors" in the Company's
Prospectus dated May 8, 1998 filed with the Securities and Exchange
Commission. 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 12 of 15
<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 FROM INITIAL PUBLIC OFFERING -
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:
<TABLE>
<S> <C>
Underwriting discounts and commissions $1,725,000
Expenses paid to or for underwriters 575,000
Other expenses 732,000
----------
Total expenses $3,032,000
----------
----------
</TABLE>
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 March 31, 1998, the Company has applied approximately $16,600,000 of the
$19,968,000 in net offering proceeds as follows:
<TABLE>
<CAPTION>
<S> <C>
Repayment of working capital indebtedness (1) $ 9,200,000
Development of vineyards in Hames Valley 1,900,000
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 $16,600,000
-----------
-----------
</TABLE>
Page 13 of 15
<PAGE>
________________________________________________________________
(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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
The Company has recently completed the negotiation of a new four-year
contract with the United Farm Workers, AFL-CIO ("UFW"), the major
union representing farm workers, which will expire at the end of
2001. The UFW has represented the Company's farm workers since 1993.
The terms of the new contract are not expected to have a material
economic impact on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith:
10.1 Joint Agreement, dated as of November 7, 1997, by and
among Samuel R. Avila (also know as Sam Avila) and
Margaret J. Avila, individually and as trustees under
declaration of trust dated August 19, 1989, and Margaret
J. Avila and Valarie Bassetti (also known as Valerie
Bassetti), as successor co-trustees of the testamentary
trust of Joseph Labarere, deceased, Central Coast Federal
Land Bank Association, FLCA, Scheid Vineyards and
Management Co., Canandaigua Wine Company, a New York
corporation, successor by merger to Canandaigua Wine
Company, Inc., a Delaware corporation, and Canandaigua
West, Inc. (Incorporated by reference to Exhibit numbers
10.27a and 99.1 to Amendment No. 1 to the Company's
Registration Statement on
Page 14 of 15
<PAGE>
Form SB-2 (File No. 333-51055) filed May 8, 1998).
10.2 Collective Bargaining Agreement, for the period April 9,
1998 to December 31, 2001, between Scheid Vineyards Inc.
and The United Farm Workers of America, AFL-CIO.
(Incorporated by reference to Exhibit number 10.23a to
Amendment No. 1 to the Company's Registration Statement
on Form SB-2 (File No. 333-51055) filed May 8, 1998).
27.1 Financial Data Schedule (electronically filed herewith)
(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: May 14, 1998 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 15 of 15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF MARCH 31, 1998 AND THE STATEMENT OF OPERATIONS OF SCHEID VINEYARDS,
INC. FOR THE THREE MONTHS ENDED MARCH 31, 1998 INCLUDED IN FORM 10-QSB FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,390
<SECURITIES> 0
<RECEIVABLES> 268
<ALLOWANCES> 0
<INVENTORY> 2,582
<CURRENT-ASSETS> 14,892
<PP&E> 29,802
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,634
<CURRENT-LIABILITIES> 1,782
<BONDS> 17,709
0
0
<COMMON> 7
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 28,718
<SALES> 307
<TOTAL-REVENUES> 520
<CGS> 131
<TOTAL-COSTS> 131
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (15)
<INCOME-PRETAX> (798)
<INCOME-TAX> (320)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (478)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
