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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, 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 6,480,950 shares outstanding of registrant's Common Stock, par
value $.001 per share, as of November 11, 1998, consisting of 3,105,950
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
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Page 1 of 15
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SCHEID VINEYARDS INC.
FORM 10-QSB INDEX
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements:
a. Balance Sheets at September 30, 1998 and December 31, 1997 3
b. Statements of Operations for the three and nine months ended
September 30, 1998 and 1997 4
c. Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 5
d. Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
</TABLE>
Page 2 of 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHEID VINEYARDS INC. AND SUBSIDIARY
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 669 $ 14,483
Accounts receivable, trade ............................................ 962 349
Accounts receivable, other ............................................ -- 412
Inventories ........................................................... 6,017 1,102
Supplies, prepaid expenses and other current assets ................... 469 813
-------- --------
Total current assets ............................................. 8,117 17,159
PROPERTY, PLANT AND EQUIPMENT, NET ....................................... 32,504 27,795
LONG-TERM RECEIVABLE ..................................................... 5,491 4,679
OTHER ASSETS, NET ........................................................ 465 236
-------- --------
$ 46,577 $ 49,869
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ..................................... $ 660 $ 660
Accounts payable and accrued liabilities .............................. 1,196 519
Accrued interest payable .............................................. 237 315
-------- --------
Total current liabilities ........................................ 2,093 1,494
LONG-TERM DEBT, NET OF CURRENT PORTION ................................... 16,007 17,851
DEFERRED COMPENSATION .................................................... -- 662
DEFERRED INCOME TAXES .................................................... 888 741
-------- --------
Total liabilities ............................................... 18,988 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; 3,325,000 and
2,300,000 shares issued in 1998 and 1997, respectively
Class B, $.001 par value; 10,000,000 shares authorized; 3,375,000 and
4,400,000 shares issued in 1998 and 1997, respectively ............ 7 7
Additional paid-in capital ............................................ 21,872 21,797
Retained earnings ..................................................... 6,902 7,317
Less treasury stock; 194,000 Class A shares at cost in 1998,
none in 1997 ........................................................ (1,192) --
-------- --------
Total stockholders' equity ....................................... 27,589 29,121
-------- --------
$ 46,577 $ 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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Sales ...................................... $ 1,009 $12,410 $ 1,754 $12,426
Vineyard management, services and
other fees................................ 259 341 696 903
------- ------- ------- -------
Total revenues ....................... 1,268 12,751 2,450 13,329
COST OF SALES ................................. 469 4,512 812 4,536
------- ------- ------- -------
GROSS PROFIT .................................. 799 8,239 1,638 8,793
General and administrative expenses ........ 891 1,260 3,038 2,718
Deferred compensation provision ............ (706) -- (706) --
Interest expense (income), net ............. 29 351 (3) 673
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) ......................... 585 6,628 (691) 5,402
INCOME TAX PROVISION (BENEFIT) ................ 234 2,430 (276) 2,430
------- ------- ------- -------
INCOME (LOSS) BEFORE DEFERRED TAX
ADJUSTMENT .................................. 351 4,198 (415) 2,972
DEFERRED INCOME TAXES FROM
REORGANIZATION TO C CORPORATION ............ -- 1,390 -- 1,390
------- ------- ------- -------
NET INCOME (LOSS) ............................. $ 351 $ 2,808 $ (415) $ 1,582
------- ------- ------- -------
------- ------- ------- -------
BASIC AND DILUTED INCOME (LOSS)
PER SHARE ................................... $ 0.05 $ 0.48 $ (0.06) $ 0.32
------- ------- ------- -------
------- ------- ------- -------
PRO FORMA AMOUNTS:
INCOME BEFORE INCOME TAXES AS
REPORTED .................................... $ 6,628 $ 5,402
PRO FORMA INCOME TAX PROVISION ................ 2,651 2,161
------- -------
PRO FORMA NET INCOME .......................... $ 3,977 $ 3,241
------- -------
------- -------
PRO FORMA BASIC AND DILUTED NET
INCOME PER SHARE ............................ $ 0.68 $ 0.66
------- -------
------- -------
WEIGHTED AVERAGE SHARES OUTSTANDING ........... 6,564 5,845 6,654 4,887
------- ------- ------- -------
------- ------- ------- -------
</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>
Nine Months Ended
September 30,
---------------------------
1998 1997
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ (415) $ 1,582
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation, amortization and abandonments ................ 1,141 908
Deferred compensation ...................................... (662) 59
Noncash compensation ....................................... 75 --
Deferred income taxes ...................................... 147 1,390
Changes in operating assets and liabilities:
Accounts receivable, trade ................................ (613) (12,476)
Accounts receivable, stockholder .......................... -- (12)
Accounts receivable, other ................................ 412 3
Inventories ............................................... (4,915) (1,257)
Supplies, prepaid expenses and other current assets ....... 344 (1,382)
Accounts payable and accrued liabilities .................. 599 1,923
Income taxes payable ...................................... -- 2,430
-------- --------
Net cash used in operating activities ................... (3,887) (6,832)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable ......................................... (812) (2,233)
Additions to property, plant and equipment ................... (6,486) (9,506)
Proceeds from sale of property, plant and equipment .......... 201 --
Other assets ................................................. (229) 173
-------- --------
Net cash used in investing activities ................... (7,326) (11,566)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt ................................... 3,558 8,977
Repayment of long-term debt .................................. (4,967) (2,160)
Borrowings on notes payable, short-term ...................... -- 13,400
Repayments on notes payable, short-term ...................... -- (13,400)
Payments on note payable, stockholder ........................ -- (1,000)
Payments on notes payable, affiliates ........................ -- (807)
Proceeds from issuance of common stock ....................... -- 20,700
Offering costs ............................................... -- (398)
Repurchase of shares ......................................... (1,192) --
Subchapter S Corporation and partnership distributions ....... -- (3,673)
-------- --------
Net cash (used in) provided by financing activities ..... (2,601) 21,639
-------- --------
(Decrease) increase in cash and cash equivalents ........ (13,814) 3,241
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .................. 14,483 4,024
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................ $ 669 $ 7,265
-------- --------
-------- --------
</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 September 30, 1998, and its results of operations for the three
and nine-month periods ended September 30, 1998 and 1997 and its cash flows
for the nine-month periods ended September 30, 1998 and 1997. Due to the
seasonality of the wine grape business, the interim results reflected in the
foregoing financial statements are not considered 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". 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.
RECENT DEVELOPMENTS
On October 28, 1998 the Company announced that it has instituted a
new stock repurchase program in which the Company may spend up to $2.5
million in open market transactions to purchase outstanding shares of its
Class A Common Stock at such times, in such amounts or blocks and at such
prices as deemed appropriate. This repurchase program will expire on
September 30, 1999. Through November 11, 1998, the Company had purchased
9,450 shares under this program for approximately $52,000.
In connection with the adoption of the new stock repurchase program,
the Company has terminated its prior stock repurchase program adopted in July
1998. This program would have expired on January 30, 1999 and authorized the
purchase of up to 200,000 shares of Class A Common Stock. Under the prior
Page 6 of 15
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repurchase program, the Company repurchased 103,100 shares of Class A Common
Stock. The Company also made other repurchases earlier in 1998 of 103,000
shares of Class A Common Stock. The aggregate purchase price for these
206,100 shares was approximately $1,252,000.
In July 1998, the Company entered into a long-term line of credit
agreement with its principal bank which expires in July 2008 and provides for
maximum borrowings totaling $3,600,000, which diminish annually through the
expiration date. Borrowings on the facility bear interest at the bank's
"reference" or "cost of funds" rate, and are collateralized by a first deed
of trust on the Company's 370-acre Riverview Vineyard. In addition, the
Company renewed its "crop" line of credit with its bank in June 1998. The
current crop loan has maximum credit available of $10,500,000 and expires in
June 2000. There are currently no amounts outstanding under either of the
above credit facilities.
EXCHANGE TRANSACTION, S CORPORATION CONVERSION AND PRO FORMA AMOUNTS
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 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
provision in the statements of operations for the three and nine-month
periods ended September 30, 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 and
nine-month periods ended September 30, 1997 are based upon the 4,400,000
shares of Class B Common Stock outstanding after giving pro forma effect to
the Exchange Transaction and the 2,300,000 shares of Class A Common Stock
sold in connection with the Company's initial public stock offering in July
1997. The weighted average shares outstanding for the three and nine-month
periods ended September 30, 1998 are based on the actual weighted average
shares of Class A and Class B Common Stock outstanding for the respective
periods. The effect of outstanding stock options on the weighted average
shares was antidilutive for the periods presented.
Page 7 of 15
<PAGE>
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 grows 20 varieties of premium wine grapes,
with over 64% of its acreage planted in the so-called "Big 3" varieties of
Chardonnay, Merlot and Cabernet Sauvignon. Substantially all of the 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 revenue at the time of its
annual harvest, which generally occurs 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. In addition, the timing of annual harvest varies
each year based primarily on seasonal growing conditions, resulting in timing
differences in the portion of grape revenues recognized in the third and
fourth quarters of any one fiscal year. This is a significant factor in
comparing operating results for 1997 and 1998. See "-Results of Operations -
Nine Months Ended September 30, 1998 and 1997." 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 - NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
REVENUES. SVI derives its revenues from four sources: (i) sales of
wine grapes; (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 April 1997.
Sales (which include all revenues other than revenues from vineyard
management services and other fees) decreased to $1,754,000 in the nine
months ended September 30, 1998 from $12,426,000 in the 1997 period, a
decrease of $10,672,000. Sales for the nine months ended September 30, 1998
is comprised of $635,000 in grape sales, $982,000 in bulk wine sales and
$137,000 from the sale of wine and wine-related merchandise. Sales for the
nine months ended September 30, 1997 is comprised of $12,377,000 in grape
Page 8 of 15
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sales and $49,000 from the sale of wine and wine-related merchandise. There
were no sales of bulk wine in 1997.
The 1998 harvest growing season was one of unseasonably cool and
cloudy weather, causing delayed vine growth and crop development
industry-wide. These poor growing conditions resulted in reduced crop yields
and caused an approximately three to four week delay in the start of harvest,
which factors account for the decrease in grape sales for the nine months
ended September 30, 1998 as compared to the 1997 period. Through September
30, 1998 only 7% of Company-owned vineyard acres had been harvested as
compared to 63% by September 30, 1997. See "- Anticipated Revenues For Fiscal
Year Ending December 31, 1998."
Revenue from vineyard management services and other fees decreased
by 23% to $696,000 for the nine months ended September 30, 1998 from $903,000
in the 1997 period, a decrease of $207,000. 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 nine months ended September 30,
1998 was $1,638,000 compared to $8,793,000 for the nine months ended
September 30, 1997, a decrease of $7,155,000 or 81%. This decrease resulted
primarily from the decrease in grape sales and vineyard management services
and other fees discussed above, and is partially offset by the sale of bulk
wine in 1998.
Gross margin on grape sales decreased to 51% in the 1998 third
quarter as compared to 64% in the 1997 period. The decrease in gross margin
on grape sales is primarily the result of lower yields per acre in 1998 than
in 1997, partially offset by price increases from 1997 to 1998. In addition,
the 1998 growing season was one of unseasonably cool and cloudy weather which
continued from late May into mid-July. This weather condition caused mildew
and other problems, delaying vine growth and crop development industry-wide.
Controlling these problems in the Company's vineyards necessitated leaf
removal, thinning, spraying and other activities, resulting in higher than
expected farming expenses.
Costs associated with the provision of management services are
reimbursed by the Company's clients, therefore, no cost of sales is deducted
in determining gross profit on these services.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 12% to $3,038,000 for the nine months ended September 30, 1998
from $2,718,000 in the 1997 period, an increase of $320,000. The increase was
due primarily to costs associated with additional compensation and related
benefits due to the expansion of the Company's business and costs associated
with the operations of a public company.
DEFERRED COMPENSATION PROVISION. During the three-months ended
September 30, 1998, the Company reversed an accrual of deferred compensation
in the amount of $706,000. The deferred compensation liability was due to an
arrangement whereby the Company would make annual payments to a certain
employee commencing upon his retirement. The employee passed away in August
1998 negating the need for the provision.
Page 9 of 15
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INTEREST EXPENSE (INCOME), NET. Net interest expense (income) was
($3,000) for the nine months ended September 30, 1998 and $673,000 in the 1997
period, a decrease of $676,000, and is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C>
Interest expense ............ $ 797,000 $ 957,000
Less capitalized interest ... (446,000) (200,000)
--------- ---------
Net interest expense ...... 351,000 757,000
Interest income ............. (354,000) (84,000)
--------- ---------
Net interest expense (income) $ (3,000) $ 673,000
--------- ---------
--------- ---------
</TABLE>
Total interest expense decreased primarily as a result of lower
interest rates in the 1998 period and borrowings in 1997 under the Company's
crop line of credit. There have been no such borrowings in 1998. Capitalized
interest increased in the 1998 period due to increased expenditures for
vineyard acreage being improved or developed. The increase in interest income
in 1998 was due to the increase 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 PROVISION (BENEFIT). The income tax provision (benefit)
decreased to ($276,000) for the nine months ended September 30, 1998 from
$2,430,000 in the 1997 period. The Company paid no income taxes prior to
becoming a C Corporation in July 1997.
NET INCOME (LOSS) BEFORE DEFERRED TAX ADJUSTMENT. Due to the above
factors, the Company had a net loss before deferred tax adjustment for the
nine month ended September 30, 1998 of $415,000 as compared to net income
before deferred tax adjustment of $2,972,000 in the 1997 period.
DEFERRED TAXES FROM REORGANIZATION TO C CORPORATION. In July 1997,
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 an S Corporation and
partnerships to a taxable C Corporation in connection with the Company's
initial public offering.
NET INCOME (LOSS). The Company had a net loss for the nine months
ended September 30, 1998 of $415,000 as compared to net income of $1,582,000
in the 1997 period. On a pro forma basis, net income for the nine months
ended September 30, 1997 was $3,241,000. Pro forma net income is derived by
providing an income tax provision as if the Company had been a C Corporation
for the nine months ended September 30, 1997.
Page 10 of 15
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ANTICIPATED REVENUES FOR FISCAL YEAR ENDING DECEMBER 31, 1998
At November 11, 1998, approximately 94% of the Company's vineyard
acres had been harvested. The Company estimates that the size of the 1998
crop is approximately 30% less than 1997's record harvest and approximately
15% less than the Company's expectations in an "average" year. Because of
this reduction in crop yields, revenue from grape sales in 1998 will be
materially affected and the reduction will only be partially offset by
year-to-year price increases ranging from 7% to 11%. The Company estimates
that for the fiscal year ending December 31, 1998 it will record revenues in
excess of $16,000,000. In addition, the Company incurred above-average
farming expenses in 1998 due to the need for leaf removal, thinning, spraying
and other activities necessary to combat unfavorable weather conditions.
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 should not be expected to
provide an indication of gross profit or net income to be reported by the
Company for fiscal 1998. 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 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. Working
capital at September 30, 1998 was $6,024,000 as compared to $15,665,000 at
December 31, 1997, a decrease of $9,641,000. The reduction in working capital
from December 31, 1997 to September 30, 1998 was primarily due to the
expenditures of current working capital to fund vineyard development, repay
certain long-term credit facilities and repurchase shares of the Company's
Class A Common Stock.
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. Due to the three to four week delay in the start of
the 1998 harvest, this years' crop will be delivered in October and November,
and the majority of cash from grape sales is expected to be received in late
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. This crop line was renewed in June 1998 and expires June 5,
2000. There were no amounts outstanding under this line at September 30,
1998. Although no assurances can be given,
Page 11 of 15
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management believes that the Company's anticipated working capital levels and
short-term borrowing capabilities will be adequate to meet the Company's
currently anticipated liquidity needs during the fiscal years ending December
31, 1998 and 1999.
SVI also has long-term credit facilities which expire through July
2008 and provide for maximum borrowings totaling $10,885,000, which diminish
annually through the expiration dates to a maximum allowable commitment of
$5,412,000. At September 30, 1998, the outstanding amount owed by the Company
under these facilities was $4,711,000. The interest rate on each of these
lines is based on the bank's "reference" or "cost of funds" rate. At
September 30, 1998, the weighted average per annum interest rate on these
lines was 7.64%.
The Company also has other long-term notes payable which, as of
September 30, 1998, totaled approximately $6,465,000. 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" or "cost of funds" rate.
At September 30, 1998, the weighted average per annum interest rate on these
notes payable was 7.68%.
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 September 30, 1998, the
outstanding balance on this line of credit was $5,491,000. This line bears
interest at the bank's reference rate (5.87% at September 30, 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 September 30, 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 principal 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.
Cash used in operating activities was $3,887,000 for the nine months
ended September 30, 1998, compared to $6,832,000 for the same period in 1997,
a decrease of $2,945,000. The decrease was primarily due to the reduction in
accounts receivable and revenues in 1998 as compared to 1997 due to the delay
in the start of the 1998 harvest.
Page 12 of 15
<PAGE>
Cash used in investing activities was $7,326,000 for the nine months
ended September 30, 1998, compared to $11,566,000 for the same period in
1997, a decrease of $4,240,000. The decrease was principally the result of
reductions in additions to property, plant and equipment, and reductions in
the additions to a long-term receivable. The additions to property and
equipment in 1998 were primarily due to the improvements of the Company's
existing vineyards, and ongoing development of approximately 329 acres of new
vineyards. In 1997, the additions were due to the acquisition of the
Company's Riverview Vineyard in June 1997, the improvement of existing
vineyards, and the development of new vineyards. The decrease in the
additions to 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 $2,601,000 for the nine months
ended September 30, 1998, compared to cash provided by financing activities
of $21,639,000 for the same period in 1997. During the nine months ended
September 30, 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 1998, the Company
repurchased 194,000 shares of its Common Stock for $1,192,000. In July, 1997
the Company received proceeds from its initial public offering in the amount
of $20,700,000 and made distributions to partners and shareholders in
connection with the offering in the amount of $3,673,000.
YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits (rather than four) to define years. Computers or other
equipment with date-sensitive software may recognize "00" as 1900 rather than
2000. If not corrected, many computer programs could fail or produce
erroneous results. If the Company, or its significant customers, suppliers,
lenders, or other third parties fail to correct Year 2000 issues, the
Company's ability to operate its business could be affected.
The Company is currently in the process of upgrading its accounting
and financial software, and, in conjunction with the upgrade, any known Year
2000 issues will be corrected. This upgrade is anticipated to be completed by
mid-1999. In the event that this upgrade is not completed by December 31,
1999, the most likely worst-case scenario would be that the majority of the
Company's accounting functions would have to be performed manually. In
addition, there are also risks associated with certain suppliers, including
utility companies, over which the Company has little or no control. The
Company has begun making inquiries of certain of its principal suppliers and
customers with respect to their year 2000 readiness and its potential effects
on the Company. Although no assurances can be given, the Company currently
believes that through its planned upgrade of its accounting and financial
systems, as well as ongoing correspondence with suppliers and customers, the
Year 2000 issue will not materially impair the Company's ability to conduct
business, nor be material to the Company's financial position, results of
operations or cash flows.
Page 13 of 15
<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, including the
effects of weather conditions (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 "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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
Page 14 of 15
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith:
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: November 11, 1998 SCHEID VINEYARDS INC.
/s/ Heidi M. Scheid
-----------------------------
Heidi M. Scheid
Vice President Finance and Chief Financial
Officer (Duly Authorized Officer and
Principal Financial and 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 SEPTEMBER 30, 1998 AND THE STATEMENT OF OPERATIONS OF
SCHEID VINEYARDS INC AND SUBSIDIARY FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 INCLUDED ON FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
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<NAME> SCHEID VINEYARDS INC.
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