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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 June 30, 1999
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 6,107,663 shares outstanding of registrant's Common Stock, par
value $.001 per share, as of August 12, 1999, consisting of 2,733,563 shares
of Class A Common Stock and 3,374,100 shares of Class B Common Stock.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
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SCHEID VINEYARDS INC.
FORM 10-QSB INDEX
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
a. Consolidated Balance Sheets at June 30, 1999 and December 31, 3
1998
b. Consolidated Statements of Operations for the three and six 4
months ended June 30, 1999 and 1998
c. Consolidated Statements of Cash Flows for the six months ended 5
June 30, 1999 and 1998
d. Notes to Consolidated 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 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
Page 2 of 15
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCHEID VINEYARDS INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................................... $ 1,933 $ 5,031
Accounts receivable, trade ......................................................... 2 728
Accounts receivable, other ......................................................... -- 398
Inventories ........................................................................ 4,391 742
Supplies, prepaid expenses and other current assets ................................ 717 614
Deferred income taxes .............................................................. 594 38
Current portion of long-term receivable ............................................ 501 --
------------ ------------
Total current assets ........................................................ 8,138 7,551
PROPERTY, PLANT AND EQUIPMENT, NET .................................................... 42,399 32,937
LONG-TERM RECEIVABLE .................................................................. 4,509 5,572
OTHER ASSETS, NET ..................................................................... 474 472
------------ ------------
$ 55,520 $ 46,532
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................................................. $ 3,586 $ 275
Accounts payable and accrued liabilities ........................................... 2,335 716
Accrued interest payable ........................................................... 258 197
Income taxes payable ............................................................... -- 2,480
------------ ------------
Total current liabilities ................................................... 6,179 3,668
LONG-TERM DEBT, NET OF CURRENT PORTION ................................................ 19,489 11,562
DEFERRED INCOME TAXES ................................................................. 867 867
------------ ------------
Total liabilities ........................................................... 26,535 16,097
------------ ------------
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;
2,733,563 and 2,872,950 shares outstanding at June 30, 1999 and December
31, 1998, respectively
Class B, $.001 par value; 10,000,000 shares authorized; 3,374,100 shares
issued and outstanding at June 30, 1999 and December 31, 1998................... 7 7
Additional paid-in capital ......................................................... 21,868 21,868
Retained earnings .................................................................. 10,102 10,936
Less: treasury stock; 591,750 Class A shares at cost at
June 30, 1999 and 452,050 at December 31, 1998..................................... (2,992) (2,376)
------------ ------------
Total stockholders' equity ................................................. 28,985 30,435
------------ ------------
$ 55,520 $ 46,532
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 3 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
--------- ---------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Sales .............................................. $ 45 $ 438 $ 295 $ 745
Vineyard management, services and other fees ....... 226 224 413 437
------- ------- ------- -------
Total revenues ................................ 271 662 708 1,182
COST OF SALES .......................................... 22 212 180 343
------- ------- ------- -------
GROSS PROFIT ........................................... 249 450 528 839
General and administrative expenses ................ 953 944 1,945 2,147
Interest expense (income), net ..................... (19) (17) (27) (32)
------- ------- ------- -------
LOSS BEFORE INCOME TAX BENEFIT ......................... (685) (477) (1,390) (1,276)
INCOME TAX BENEFIT ..................................... 274 191 556 510
------- ------- ------- -------
NET LOSS ............................................... (411) $ (286) $ (834) $ (766)
======= ======= ======= =======
BASIC AND DILUTED NET LOSS PER SHARE ................... $ (0.07) $ (0.04) $ (0.14) $ (0.11)
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING .................... 6,108 6,699 6,112 6,700
======= ======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
Page 4 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
JUNE 30,
--------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................................... $ (834) $ (766)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and abandonments .................................... 778 813
Deferred compensation .......................................................... -- 44
Noncash compensation ........................................................... -- 75
Deferred income taxes .......................................................... (556) 147
Changes in operating assets and liabilities:
Accounts receivable, trade .................................................... 726 162
Accounts receivable, other .................................................... 398 412
Inventories ................................................................... (3,649) (2,875)
Supplies, prepaid expenses and other current assets ........................... (103) 343
Accounts payable and accrued liabilities ...................................... 1,680 62
Income taxes payable .......................................................... (2,480) --
-------- --------
Net cash used in operating activities ...................................... (4,040) (1,583)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable .............................................................. 562 (97)
Additions to property, plant and equipment ........................................ (10,240) (5,423)
Other assets ...................................................................... (2) (109)
-------- --------
Net cash used in investing activities ...................................... (9,680) (5,629)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt ........................................................ 12,614 1,094
Repayment of long-term debt (1,376) (1,169)
Purchase of treasury shares ....................................................... (616) (344)
-------- --------
Net cash provided by (used in) financing activities ........................ 10,622 (419)
-------- --------
Decrease in cash and cash equivalents ...................................... (3,098) (7,631)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ...................................... 5,031 14,483
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ............................................ $ 1,933 $ 6,852
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5 of 15
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SCHEID VINEYARDS INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION
The consolidated 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
consolidated statements contain all adjustments necessary to present fairly
the financial position of the Company as of June 30, 1999, and its results of
operations for the three and six-month periods ended June 30, 1999 and 1998
and cash flows for the six-month periods ended June 30, 1999 and 1998. Due to
the seasonality of the wine grape business, the interim results reflected in
the foregoing consolidated financial statements are not considered indicative
of the results expected for the full fiscal year. The Company's consolidated
balance sheet as of December 31, 1998 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 consolidated
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.
RECENT DEVELOPMENTS
In December 1998, the Company signed a long-term lease for
approximately 750 acres of undeveloped land suitable for wine grape vineyards in
Greenfield, a few miles from the Company's vineyard headquarters. The lease is
for a term of up to 34 years. The planting of the entire 750-acre Mesa del Rio
vineyard, including rootstock and irrigation and trellising systems, has been
completed, with the first harvest expected in 2001.
In October 1998, the Company instituted a 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 August 12,
1999, the Company had repurchased 387,050 shares under this program for
approximately $1,747,000. In connection with the adoption of the stock
repurchase program in October 1998, the Company terminated a prior stock
repurchase program that authorized the purchase of up to 200,000 shares of
Class A Common Stock. Under the prior repurchase program, the Company
repurchased 102,600 shares of Class A Common Stock for an aggregate purchase
price of $542,000 from July to October 1998. The Company also made other
repurchases earlier in 1998 of 103,000 shares of Class A Common Stock at an
aggregate purchase price of approximately $708,000.
Page 6 of 15
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scheid Vineyards Inc. is a leading independent (I.E., not winery
controlled) producer of premium varietal wine grapes. The Company currently
operates approximately 6,000 acres of wine grape vineyards. Of this total,
approximately 4,400 acres are operated for the Company's own account, and
1,600 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 13 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon and Sauvignon Blanc.
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. Similar to most
nondiversified agricultural crop producers, the Company recognizes
substantially all of its crop 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
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 the 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 year. From time to time, the
Company has in the past, and may in the future, convert grapes into bulk wine
for sale in years subsequent to the harvest year, which may impact quarterly
results. These are significant factors in comparing quarterly operating
results between fiscal years.
Unusually cool spring and summer weather in the coastal growing
regions of California has had a negative effect on the potential yield of
white grapes for the 1999 harvest, particularly Chardonnay, and the Company
anticipates that these weather conditions will have a significant impact on
the financial results of the Company for the year ended December 31, 1999.
The Western Regional Climate Center registered the coldest average June
temperatures ever recorded for the King City area, where a large portion of
the Company's vineyards are located. Many other areas in the state also had
the coolest June in many years. Recent industry surveys for the coastal
regions estimate that the 1999 grape crop may be 20% to 25% below normal, and
the Company's own internal crop projection supports this estimate. As a
consequence, SVI management believes that 1999 revenues and earnings per
share will be substantially lower than those expected by the investment
community.
Page 7 of 15
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RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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.
Sales (which is comprised of revenue from sales of wine grapes, bulk
wine and wine and wine-related merchandise) decreased by 60% to $295,000 in
the six months ended June 30, 1999 from $745,000 in the 1998 period, a
decrease of $450,000. Sales for the six months ended June 30, 1999 is
comprised of $215,000 in bulk wine sales and $80,000 from the sale of wine
and wine-related merchandise. Sales for the six months ended June 30, 1998 is
comprised of $669,000 in bulk wine sales and $76,000 from the sale of wine
and wine-related merchandise.
Revenue from vineyard management, services and other fees decreased
by 5% to $413,000 for the six months ended June 30, 1999 from $437,000 in the
1998 period, a decrease of $24,000. The decrease was primarily due to the
elimination of a 68-acre vineyard management contract.
GROSS PROFIT. Gross profit for the six months ended June 30, 1999
was $528,000 compared to $839,000 for the six months ended June 30, 1998, a
decrease of $311,000 or 37%. This decrease resulted primarily from the
reductions in sales of bulk wine and the decrease in management fees from
1998 to 1999.
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
decreased by 9% to $1,945,000 for the six months ended June 30, 1999 from
$2,147,000 in the 1998 period, a decrease of $202,000. The decrease was due
primarily to reductions in executive salaries, professional fees and vineyard
write-downs.
INTEREST EXPENSE (INCOME), NET. Net interest income was $27,000 for
the six months ended June 30, 1999 and $32,000 in the 1998 period, a decrease
of $5,000, and is comprised of the following:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Interest expense .................... $ 379,000 $ 568,000
Less capitalized interest ........... (373,000) (277,000)
---------- ----------
Net interest expense ................ 6,000 291,000
Interest income ..................... (33,000) (323,000)
---------- ----------
Net interest expense (income) ....... $ (27,000) $ (32,000)
========== ==========
</TABLE>
Total interest expense decreased primarily as a result of lower
interest rates in the 1999 period and lower average amounts outstanding under
the Company's long-term revolving credit facilities. Capitalized
Page 8 of 15
<PAGE>
interest increased in the 1999 period due to the increased expenditures for
vineyard acreage being improved or developed. The decrease in interest income
in 1999 was due to the decrease in cash holdings of the Company from 1998 to
1999, primarily as the result of the continued development of Company-owned
vineyards, the repayment of amounts borrowed on long-term revolving credit
facilities and the repurchase of the Company's Class A Common Stock.
INCOME TAX BENEFIT. The income tax benefit increased to $556,000 for
the six months ended June 30, 1999 from $510,000 in the 1998 period.
NET LOSS. As a result of the above, the Company had a net loss for
the six months ended June 30, 1999 of $834,000 as compared to $766,000 in the
1998 period.
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. The Company
had working capital at June 30, 1999 of $1,959,000 as compared to $3,883,000
at December 31, 1998, a decrease of $1,924,000. The decrease in working
capital was primarily due to increases in the current portion of long-term
debt, primarily from borrowings on the Company's crop line of credit, as well
as increases in accounts payable, primarily for crop costs. These decreases
in working capital were partially offset by increases in crop inventories.
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 Company's "crop" line has maximum credit available
of $10,500,000 and is intended to finance the Company's anticipated working
capital needs. The crop line expires June 5, 2000, and is secured by crops
and other assets of the Company. There was $2,080,000 outstanding under the
crop line at June 30, 1999. The interest rate on this line is based on the
bank's "reference" or "cost of funds" rate. At June 30, 1999, the interest
rate on this line was 7.42%.
SVI also has long-term credit facilities which expire through June
2008 and provide for maximum borrowings totaling $9,720,000, which diminish
annually through the expiration dates to a maximum allowable commitment of
$5,412,000. At June 30, 1999, the outstanding amount owed by the Company
Page 9 of 15
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under these facilities was $9,720,000. The interest rate on each of these
lines is based on the bank's "reference" or "cost of funds" rate. At June 30,
1999, the weighted average per annum interest rate on these lines was 7.23%.
These credit lines are secured by deeds of trust on underlying vineyard
property.
The Company also has other long-term notes payable which, as of June
30, 1999, totaled approximately $6,265,000. The interest rate on each of
these notes is based on the bank's "reference" or "cost of funds" rate. At
June 30, 1999, the weighted average per annum interest rate on these notes
was 7.18%. These notes are secured by deeds of trust on underlying vineyard
property.
The Company also has a bank line of credit with an original maximum
loan commitment of $7,500,000, 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. Any amount borrowed on the line, even if repaid
before the end of the availability period, permanently reduces the remaining
available line of credit. At June 30, 1999, the maximum available balance on
this line of credit was $5,297,000 and the outstanding balance was
$5,010,000. This line bears interest at the bank's reference rate (5.45% at
June 30, 1999) 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 June 30, 1999, the Company
was in compliance with these covenants.
Although no assurances can be given, 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 year ending December 31, 1999. At August
12, 1999, the Company had $8,420,000 in borrowing availability under its
long-term revolving credit facilities and crop line of credit.
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 $16
million in capital investment through December 31, 2001, and continued
improvements and redevelopments of existing vineyards are expected to require
approximately $7 million. In addition, the Company expects to invest
approximately $3 million in equipment purchases. Of these expected capital
requirements, the Company has expended approximately $6.5 million for the
development of new vineyards, $2.5 million for the continued improvement and
redevelopment of existing vineyards, and $1 million for equipment purchases
for the six months ended June 30, 1999. 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.
Page 10 of 15
<PAGE>
Cash used in operating activities was $4,040,000 for the six months
ended June 30, 1999, compared to $1,583,000 for the same period in 1998, an
increase of $2,457,000. The increase was primarily due to the timing of the
payment of 1998 income tax liabilities and increased crop inventories from
December 31, 1998 to June 30, 1999. Costs incurred for the current years'
harvest are included in inventories until the crop is harvested in the third
and fourth quarters.
Cash used in investing activities was $9,680,000 for the six months
ended June 30, 1999, compared to $5,629,000 for the same period in 1998, an
increase of $4,051,000. The increase was principally the result of
expenditures for the ongoing development of approximately 1,300 acres of new
vineyards and improvements in the Company's existing vineyards.
Cash provided by financing activities was $10,622,000 for the six
months ended June 30, 1999, compared to cash used in financing activities of
$419,000 for the same period in 1998. Net borrowings under the Company's
long-term credit lines were $11,238,000 in 1999 as compared to net repayments
in 1998 of $75,000. The borrowings in 1999 were used primarily for
expenditures for the 1999 crop and to fund vineyard development, primarily on
the Company's new 750-acre vineyard which the Company began developing in the
fourth quarter of 1998. In addition, the Company repurchased shares of its
Class A Common Stock in the amount of $616,000 during the six months ended
June 30, 1999 as compared to $344,000 in the 1998 period.
YEAR 2000
The Year 2000 issue is the result of computer systems, including
information technology ("IT") and non-IT systems, which have the inability to
process date sensitive information with respect to the Year 2000 and
thereafter. Computers or other equipment with date-sensitive software may
recognize "00" as 1900 rather than 2000. If not corrected, many computer
systems 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 materially 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 in
the third quarter of 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.
The Company is also evaluating its non-IT systems with respect to
the Year 2000 issue. These non-IT systems include phones and security
systems. The cost to the Company of addressing its own systems is not
expected to be material.
In addition, there are also risks associated with key suppliers,
including utility companies and financial institutions, and customers 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. However,
the Company does not yet know the status of
Page 11 of 15
<PAGE>
Year 2000 compliance of major vendors that are integral to the Company's
business and the Company is therefore not able to currently assess the risk
to the Company of third party failures.
Although no assurances can be given, the Company currently believes
that through its ongoing upgrade of its accounting and financial systems and
its evaluation of non-IT 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. In addition, in addressing the Year
2000 issue, the Company has thus far not expended a material amount, and does
not anticipate future expenditures regarding this issue to be material. To
the extent the Company is not able to address any of its Year 2000 issues,
the Company believes that it could revert to manual processes previously
employed with minimal costs.
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 24, 1999. 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
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 Annual Meeting of Stockholders on May 13,
1999. A total of 2,329,352 shares of Class A Common Stock and 3,065,034
shares of Class B Common Stock or 85.2% and 90.9%, of the stockholders
of record as of April 1, 1999 respectively, were present or represented
at the meeting.
Each class of Common Stock votes separately in the election of
directors, with the holders of Class A Common Stock currently being
entitled to elect two directors and the holders of Class B Common Stock
currently being entitled to elect three directors. 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 other matters submitted to a
vote of stockholders.
The following persons were elected to the Board of Directors of the
Company by the Class A stockholders, each of whom was an existing
director at that time: John L. Crary and Robert P. Hartzell. The number
of shares voting in favor of each nominee was 2,151,752 and the number
of shares withholding votes was 177,600.
The following persons were elected to the Board of Directors of the
Company by the Class B stockholders, each of whom was an existing
director at that time: Alfred G. Scheid, Scott D. Scheid and Heidi M.
Scheid. The number of shares voting in favor of each nominee was
3,065,034 and the number of shares withholding votes was 0.
No other persons were nominated for election to the Board of Directors.
Page 13 of 15
<PAGE>
ITEM 5. OTHER INFORMATION
FUTURE STOCKHOLDER PROPOSALS -
Any stockholder proposal intended to be presented at the 2000 Annual
Meeting of Stockholders in accordance with the procedures set forth in
Rule 14a-8 of the Securities and Exchange Commission must be submitted
sufficiently far in advance so that it is received by the Company not
later than December 14, 1999. In the event that any stockholder
proposal is presented at the 2000 Annual Meeting of Stockholders other
than in accordance with the procedures set forth in Rule 14a-8, proxies
solicited by the Company for such meeting will confer upon the proxy
holders discretionary authority to vote on any matter so presented of
which the Company does not have notice prior to February 27, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith:
10.1 First Amendment to Lease as of March 31, 1998, by and
between Sam Avila and Margaret J. Avila, as Trustees
Under Declaration of Trust dated August 16, 1989;
Margaret J. Avila and Valarie Bassetti (also known as
Valerie Bassetti), as Successor Co-Trustees of the
Testamentary Trust of Joseph Laberere, Deceased; and
Sam Avila (also known as Samuel R. Avila, Jr.) and
Margaret J. Avila, husband and wife, (all of the
above persons and entities are collectively called
"Lessor"); and Scheid Vineyards California Inc.
(formerly known as Scheid Vineyards and Management
Co.), a California corporation ("Lessee").
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.
Page 14 of 15
<PAGE>
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: August 12, 1999 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
<PAGE>
EXHIBIT 10.1
FIRST AMENDMENT TO LEASE
This First Amendment to Lease (this "Amendment") is made as of
March 31, 1998, by and between Sam Avila and Margaret J. Avila, as Trustees
Under Declaration of Trust dated August 16, 1989; Margaret J. Avila and
Valarie Bassetti (also known as Valerie Bassetti), as Successor Co-Trustees
of the Testamentary Trust of Joseph Laberere, Deceased; and Sam Avila (also
known as Samuel R. Avila, Jr.) and Margaret J. Avila, husband and wife,
(hereinafter, all of the above-referenced persons and entities are
collectively called "Lessor"); and Scheid Vineyards California Inc. (formerly
Scheid Vineyards and Management Co.), a California corporation (hereinafter
called "Lessee").
WHEREAS, Lessor and Lessee have entered into that certain Lease
made as of January 1, 1997 (the "Lease") with respect to certain real
property described in the Lease as the "Property".
WHEREAS, although the Lease refers to up to one thousand one
hundred (1,100) acres which Lessee has the option to lease, four hundred
forty-four and seven/tenths (444.7) acres in the area described on EXHIBIT A
attached hereto (the "Excluded Property") are not part of the Property and,
instead, are the subject of a Lease dated January 1, 1997, entered into by
and between Lessor, as lessor, and Canandaigua West, Inc. and Canandaigua
Wine Company, Inc. (collectively, "Canandaigua"), as lessee.
WHEREAS, Lessor and Lessee desire to amend the Lease to exclude the
Excluded Property from the "Property" and from the takedown calculations
described in Paragraph 1 of the Lease.
NOW, THEREFORE, in consideration of the foregoing and for other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:
1
<PAGE>
1. The Property shall not include the "Excluded Property". The
amendment effected by this paragraph shall be effective as of January 1, 1997.
2. For the purpose of making the calculations described in
clauses (b)(ii)A and (b)(ii)B of the first sentence of the first grammatical
paragraph of Paragraph 1 of the Lease and for any other purpose for which it
is necessary to calculate the amount of acreage leased in the Initial
Takedown, the amount of acreage leased in the Initial Takedown shall be
conclusively deemed to be 644.7 acres (the 200 acres leased by Lessee in 1997
plus the 444.7 acres leased by Lessor to Canandaigua).
3. Lessor acknowledges that: (a) the letter dated March 31, 1997,
from Heidi M. Scheid of Lessee to both of Lessor's Representatives satisfies
the Initial Takedown requirements of Paragraph 1 of the Lease and (b) the
maximum acreage which Lessee may lease in 1998, 1999 and 2000 has not been
reduced or diminished as a result of the Initial Takedown (except by reason
of the exclusion of the Excluded Property). Lessor further acknowledges
that: (a) the letter dated March 11, 1998 from Heidi Scheid of Lessee to
both of Lessor's Representatives satisfies the requirements of Paragraph 1 of
the Lease and (b) the maximum acreage which Lessee may lease in 1999 and in
2000 has not been reduced or diminished as a result of the 1998 subsequent
takedown.
4. The parties hereto agree to execute and have acknowledged a
Memorandum of Lease Amendment for purposes of recording in Monterey County,
California, which Memorandum shall be in the form prepared by Lessee.
5. All terms which are capitalized herein but not defined herein
shall have the meanings assigned to them in the Lease.
6. Except as specifically modified herein, the Lease shall remain
in full force and effect without modification.
2
<PAGE>
7. This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment
as of the day and year written above.
LESSOR: LESSEE:
/s/ Sam Avila
- -------------------------------- SCHEID VINEYARDS CALIFORNIA
SAM AVILA, individually and INC. (formerly Scheid
as Trustee Under Declaration Vineyards and Management Co.),
of Trust dated August 16, 1989 a California corporation
/s/ Margaret J. Avila
- -------------------------------- By /s/ Heidi M. Scheid
MARGARET J. AVILA, individually Name Heidi M. Scheid
and as Trustee Under Declaration Its CFO/Vice President
of Trust dated August 16, 1989 Finance
/s/ Margaret J. Avila
- --------------------------------
MARGARET J. AVILA, as Successor
Co-Trustee of the Testamentary
Trust of Joseph Laberere,
Deceased
/s/ Valerie Bassetti
- --------------------------------
VALARIE BASSETTI (also known
as Valerie Bassetti), as
Successor Co-Trustee of the
Testamentary Trust of Joseph
Laberere, Deceased
3
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF SCHEID VINEYARDS INC. AS OF JUNE 30, 1999 AND THE STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 INCLUDED IN FORM 10-QSB FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
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<BONDS> 19,489
0
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<COMMON> 7
<OTHER-SE> (2,992)
<TOTAL-LIABILITY-AND-EQUITY> 55,520
<SALES> 295
<TOTAL-REVENUES> 708
<CGS> 180
<TOTAL-COSTS> 0
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<INTEREST-EXPENSE> (27)
<INCOME-PRETAX> (1,390)
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