SCHEID VINEYARDS INC, 10KSB, 2000-03-13

SCHEID VINEYARDS INC
10KSB, 2000-03-13
AGRICULTURAL PRODUCTION-CROPS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-KSB

(MARK ONE)

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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
</TABLE>

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

COMMISSION FILE NUMBER 000-22857

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SCHEID VINEYARDS INC.

(Name of small business issuer in its charter)

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<S> <C>
DELAWARE 77-0461833
(State or other jurisiction of (I.R.S. Employer Identification Number)
incorporation or organization)

13470 WASHINGTON BLVD. 90292
MARIA DEL REY, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
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(310) 301-1555
(Issuer's telephone number)

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Securities registered under Section 12(b) of the Exchange Act: None

Securities registered under Section 12(g) of the Exchange Act: Class A
Common Stock, $.001 Par Value

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 / /

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. / /

Issuer's revenues for its most recent fiscal year: $12,844,000

Aggregate market value of the voting stock held by non-affiliates computed
by reference to the closing price at which the Class A Common Stock was sold on
the Nasdaq Stock Market National Market System on March 8, 2000: $10,108,000.
The voting stock held by non-affiliates on that date consisted of 2,310,463
shares of Class A Common Stock.

Number of shares outstanding of each of the issuer's classes of common stock
at March 8, 2000:

Class A 2,310,463 Class B 3,374,100

Portions of the registrant's Proxy Statement for its May 18, 2000 Annual
Stockholders Meeting, which has not been filed as of the date of this filing,
are incorporated by reference into Part III of this Report.

Transitional Small Business Disclosure Format (check one) Yes / / No /X/

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FORM 10-KSB INDEX

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PAGE
NUMBER
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Note Concerning Forward-Looking Statements............................ 3

PART I

Item 1. Description of Business..................................... 3

Item 2. Description of Properties................................... 19

Item 3. Legal Proceedings........................................... 20

Item 4. Submission of Matters to a Vote of Security Holders......... 20

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.... 20

Item 6. Management's Discussion and Analysis or Plan of Operation... 21

Item 7. Financial Statements........................................ 26

Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosures................................... 26

PART III

Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange
Act......................................................... 26

Item 10. Executive Compensation...................................... 26

Item 11. Security Ownership of Certain Beneficial Owners and
Management.................................................. 26

Item 12. Certain Relationships and Related Transactions.............. 26

Item 13. Exhibits and Reports on Form 8-K............................ 27

Signatures............................................................ 32
</TABLE>

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NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Report contains certain forward-looking statements, including the plans
and objectives of management for the business, operations, and economic
performance of the Company. These forward-looking statements generally can be
identified by the context of the statement or the use of words such as the
Company or its management "believes," "anticipates," "intends," "expects,"
"plans" or words of similar meaning. Similarly, statements that describe the
Company's future operating performance, financial results, plans, objectives,
strategies, or goals are forward-looking statements. Although management
believes that the assumptions underlying the forward-looking statements are
reasonable, these assumptions and the forward-looking statements are subject to
various factors, risks and uncertainties, many of which are beyond the control
of the Company. Accordingly, actual results could differ materially from those
contemplated by the forward-looking statements. In addition to the other
cautionary statements relating to certain forward-looking statements throughout
this Report, attention is directed to "Business--Cautionary Information
Regarding Forward-Looking Statements" below for discussion of some of the
factors, risks and uncertainties that could affect the outcome of future results
contemplated by forward-looking statements.

PART 1

ITEM 1. DESCRIPTION OF BUSINESS

OVERVIEW

Scheid Vineyards Inc., a Delaware corporation ("SVI" or the "Company"), 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 18 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon and Sauvignon Blanc. The
Company believes that its customers contract with SVI to assure a consistent,
reliable source of high-quality premium grapes for their wines. The Company's
two largest winery customers are Canandaigua Brands, Inc. ("Canandaigua") and
United Distillers and Vintners North America, a subsidiary of Diageo plc
("UDV"), the second and eighth largest U.S. wineries in terms of 1999 case
shipments, respectively. These customers' labels include GLEN ELLEN, BEAULIEU
VINEYARD, BV COASTAL, BLOSSOM HILL, PAUL MASSON, ALMADEN, DEER VALLEY,
DUNNEWOOD, and MYSTIC CLIFFS. Grape purchase contracts with UDV cover 57% of the
Company's acreage and accounted for approximately 76% and 74% of the Company's
1999 and 1998 total revenues, respectively.

The Company also has long-term grape purchase agreements with other
well-known producers of ultra premium wines, including Beringer Wine Estates,
Chalone Wine Group, The Hess Collection Winery, David Bruce Winery and
Gundlach-Bundschu Winery. The terms of the Company's long-term grape purchase
contracts extend to between 2001 and 2014, and have "evergreen" provisions
requiring two or three years' prior written notice of termination. These
contracts generally require the customers to purchase substantially all of the
Company's production from specified vineyards at a formula price based upon the
previous harvest year's sales prices in California's leading coastal regions,
including Napa, Sonoma, Mendocino and Monterey Counties.

The Company believes that selling its production through long-term contracts
allows it to attain reliable sources of revenues and profits not available
through sales on the yearly spot market or short-term contracts with wineries.
This, in turn, has allowed the Company to implement long-term programs

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to redevelop and upgrade its older vineyards and develop new vineyard
properties. The Company's ongoing redevelopment and improvement program began in
1993 with the aim of changing low priced, low demand varieties such as Chenin
Blanc and French Colombard to higher priced, high demand varieties such as
Chardonnay, Cabernet Sauvignon and Merlot. In addition, the Company sought to
increase the quality of its wine grapes through innovative farming techniques.
Because it takes from five to six years for a vineyard to reach full production,
the Company anticipates increases in average yields until its redeveloped and
newly developed vineyards reach full maturity, subject to weather conditions and
other agricultural risks. See "--Cautionary Information Regarding
Forward-Looking Statements--Agricultural Risks".

The Company's executive offices are located at 13470 Washington Blvd.,
Marina del Rey, California 90292, telephone number (310) 301-1555, and its
vineyard headquarters compound is located at 1972 Hobson Avenue, Greenfield,
California 93927.

The Company's business is conducted through a wholly owned subsidiary,
Scheid Vineyards California Inc., a California corporation ("SVI-Cal").
References in this Report to "SVI-Del" refer only to Scheid Vineyards Inc., the
parent holding company. Unless otherwise required by the context, references in
this Report to "SVI" and the "Company" include SVI-Del and SVI-Cal on a
consolidated basis.

RECENT DEVELOPMENTS

Due to a prolonged cold spell in the coastal growing regions of California,
the harvest of 1999 was substantially below historical average levels. The
weather conditions throughout most of the summer of 1999 were not favorable and
there was no sustained warming until early October. Consequently, the "sizing
up" of grapes which is promoted by warm weather in the summer months did not
occur and the wine grape harvest was delayed three to four weeks throughout the
coastal regions. As a result, Company revenues decreased 27% to $12.8 million
from $17.5 million in 1998. Net income decreased to $636,000, or $0.11 per
share, for 1999 compared to net income of $3.6 million, or $0.55 per share, for
1998. Overall, tons harvested for the Company's own account decreased by about
30%, with approximately 7,700 tons harvested in 1999 compared to 10,900 tons in
1998. Chardonnay was the variety most impacted by the cool weather patterns of
1999, experiencing an average decrease in yield of about 48% from 1998 and about
a 60% decrease from what the Company would consider an average year. Since about
37% of the Company's producing acreage in 1999 was planted to Chardonnay, the
decrease in Chardonnay yields had a dramatic impact on operating results.

Based on the Preliminary Grape Crush Report published by the California
Department of Food and Agriculture covering the 1999 harvest (from which the
Company's 2000 grape prices are primarily determined), the Company anticipates
that wine grape prices for the varieties it produces will be moderately
increased from prices received for the same varieties in 1999.

On September 9, 1999, 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 December 31, 2000, and replaces a previously existing
repurchase program that was to expire on September 30, 1999. Through December
31, 1999, the Company had repurchased 423,100 shares under this program for
approximately $1,897,000. Under previous stock repurchase programs and other
repurchases, the Company had previously repurchased 592,650 shares for an
aggregate purchase price of approximately $2,997,000. The repurchase plans were
initiated due to management's belief that the Company's stock was undervalued in
the market place. The Company continues to explore a variety of alternatives to
enhance shareholder value.

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On September 7, 1999, the Company entered into a new long-term crop line of
credit agreement with its principal bank. The new crop line expires on June 5,
2001, provides for maximum borrowings totaling $12,000,000, and replaces the
Company's previous crop line of credit.

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 720--net vine acre vineyard, named Mesa del
Rio Vineyard, including rootstock and irrigation and trellising systems, has
been completed, with the first harvest expected in 2001.

COMPANY STRATEGY

The Company's strategic objective is to become the leading independent
producer of premium varietal wine grapes in California. The Company believes
that its success to date has resulted from execution of a coherent strategy that
includes the following elements:

PRODUCE HIGH VALUE PREMIUM WINE GRAPES. The Company has consistently
emphasized production of high value wine grapes that its customers can use
to produce premium varietal wine. These varieties principally include
Chardonnay, Cabernet Sauvignon and Merlot, in addition to other varieties
that command premium prices. Throughout its history, SVI has consistently
provided its customers with wine grapes that meet demanding specifications
for quality, as measured by sugar content and other objective
characteristics. The Company maintains an ongoing program of grafting,
replanting and new vineyard development to conform its product mix to take
advantage of trends in the wine industry. The Company believes it has
developed an excellent reputation in the grape producing industry due to its
emphasis on quality and performance. See "--The Company's Grape Production
Operations--Grape Production."

CONTINUE LONG-TERM RELATIONSHIPS WITH LEADING WINE PRODUCERS. The Company
has had grape purchase contracts with UDV and its predecessors since 1972
and with Canandaigua and its predecessors since 1979. More recently, SVI has
been contracting for grape sales with additional wineries with reputations
for producing excellent wines such as Beringer Wine Estates, Chalone Wine
Group and The Hess Collection Winery. Substantially all of the Company's
production is contracted at least through the harvest of 2001, and the
majority is contracted at least through the harvest of 2006 with pricing
arrangements the Company considers favorable. See "--The Company's Grape
Production Operations--Grape Sales." The Company believes that its
utilization of long-term contracts allows it to build long-term and mutually
beneficial relationships with its customers and attain reliable sources of
revenues not readily available to producers relying on the yearly spot
market or short-term contracts with wineries.

MAXIMIZE REVENUES AND PROFITABILITY PER ACRE. The Company invests in new
equipment and the development of new and improved viticultural practices in
order to increase the productivity and efficiency of its vineyards. These
practices include methods of interplanting grape vines to increase vine
density, new trellising systems designed to support more grape production
while maintaining quality, and other state-of-the-art vineyard practices
that facilitate increased production and mechanization. Because increased
yields per acre do not significantly increase fixed or variable costs of
operating vineyards, productivity improvements contribute substantially to
gross profits. Due to its continuing redevelopment and improvement program
on approximately 2,500 acres since 1993, the Company believes that much of
its acreage is now capable of producing significantly more higher value and
better quality grapes. See "--The Company's Grape Production
Operations--Viticultural Practices".

ACQUIRE HIGH QUALITY VINEYARD PROPERTIES. The Company has developed a
disciplined property acquisition strategy in order to increase its
productive capacity and leverage its available management and equipment
resources. Due to the significant capital required to own, improve and

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operate vineyards, SVI believes that there may be opportunities to purchase
or lease undeveloped land suitable for wine grape vineyards and acquire
existing vineyards. The Company plans to capitalize on the experience and
reputation of its senior management to pursue this strategy primarily in
Monterey County. The Company's criteria for land and vineyard acquisitions
emphasize value concepts intended to maintain long-term rates of return
within certain ranges, although no assurances can be given regarding the
profitability of any vineyard development or acquisition. As a result, the
Company continually evaluates growth opportunities, but it only pursues
those selected transactions that satisfy the Company's investment criteria.
See "--New Vineyards and Redevelopment of Existing Vineyards".

While the Company's long-term strategic objectives remain intact, poor crops
in 1998 and 1999 have limited the Company's cash flows and thus the ability
of the Company to expand through vineyard acquisitions.

CALIFORNIA WINE AND GRAPE INDUSTRY

The market for California premium varietal table wines has grown
significantly over the last 20 years. Since 1980, California premium wine
revenues have increased at an average 17% compound annual rate to approximately
$4.4 billion, or approximately 83% of total California table wine revenues of
approximately $5.3 billion in 1999, according to Gomberg, Fredrikson &
Associates. This growth in California premium wine revenue reflects, among other
things, an increase in U.S. per capita spending on premium California table
wines from $1.82 in 1980 to $32.62 in 1999, and an increase in U.S. per capita
consumption of premium California table wines during the same time period, from
0.07 gallons in 1980 to 0.73 gallons in 1999. In addition, exports of California
wine have grown significantly, increasing over 200% in the last 10 years, from
16 million gallons in 1989 to 50 million gallons in 1999.

THE COMPANY'S GRAPE PRODUCTION OPERATIONS

VINEYARD OPERATIONS

SVI currently owns or manages approximately 6,000 acres of wine grape
vineyards in Monterey and San Benito Counties. These properties consist of
approximately 4,400 acres in Monterey County operated for the Company's own
account and approximately 1,600 acres operated under management contracts for
others. Of the Company's approximately 4,050 net vine acres of wine grapes,
approximately 2,290 net vine acres, or 57%, have been contracted for sale to UDV
under long-term grape purchase contracts, approximately 560 net vine acres have
been contracted for sale to other winery clients, approximately 220 net vine
acres represent newly redeveloped acreage planted by the Company in 1997 and
1998 which is not subject to grape purchase contracts, and approximately 980
acres are newly leased land for which development began in 1997, 1998 and 1999.
See "--New Vineyards and Redevelopment of Existing Vineyards".

GRAPE PRODUCTION

SVI's acreage of higher value varieties (E.G., Chardonnay, Cabernet
Sauvignon, Merlot, Sauvignon Blanc and Pinot Noir) has increased in recent years
due to changes in product mix through grafting and replanting of the Company's
original vineyards, the acquisition of a vineyard, and the development of new
vineyards. In addition, yield potential has been increased through interplanting
which increases vine density and improvements in wine grape production
technology and know-how. See "--Viticultural Practices." In 1993, the Company
began a major improvement and refurbishment program and took many acres out of
production temporarily in order to graft the original vines or replant new
rootstock. This planned decline in grape production caused grape sales revenues
for 1993 and 1994 to be lower than they otherwise would have been and resulted
in a significant decline in tonnage produced through 1996. In 1996, as replanted
acreage started to mature, production of high value premium varieties

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increased. In addition, the Company acquired a 370-acre vineyard in June 1997
and developed into new vineyards approximately 54 acres in 1996, 316 acres in
1997, 322 acres in 1998 and 720 acres in 1999.

The Company believes that its potential production of high value wine grapes
in these vineyards will increase for the next few years as replanted,
interplanted and newly planted vines continue to mature. However, while
potential production may increase, actual grape production varies according to
the variety of grape produced, vine density, the quality and type of soil, water
conditions, weather and other factors, and no assurances can be given that such
production increases will occur with any predictability or at all. The following
table shows SVI's net vine acres by variety from 1995 to 2000, total tons
produced from 1995 to 1999, and tons produced by variety for 1999:

NET VINE ACRES OWNED BY SVI AND TONS PRODUCED

<TABLE>
<CAPTION>
NET VINE ACRES TONS
--------------------------------------------------------------- --------
VARIETY 1995 1996 1997 1998 1999 2000 1999
- ------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Chardonnay.............................. 656 756 901 881 1,002 1,078 2,114
Merlot.................................. 307 454 506 555 555 556 2,404
Cabernet Sauvignon...................... 286 274 296 297 441 738 1,536
Sauvignon Blanc......................... 133 133 133 122 238 241 526
Pinot Noir.............................. -- -- 102 104 133 151 294
Gewurztraminer.......................... 103 103 103 82 82 82 127
White Riesling.......................... 103 83 87 87 58 58 217
Zinfandel............................... 107 83 83 83 86 86 231
Syrah................................... -- -- -- 26 64 62 184
Petite Sirah............................ -- -- -- -- -- 31 --
Napa Gamay.............................. 39 39 39 20 20 20 47
Grenache(1)............................. 28 28 28 28 2 2 5
Souzao.................................. -- -- 10 11 11 11 8
Semillon................................ -- -- 26 -- 3 3 --
Chenin Blanc............................ 228 187 84 84 -- -- --
Others.................................. 13 -- -- -- 30 26 --
Replants/Grafts(2)...................... 313 164 255 328 295 185 --
New Acreage(3).......................... -- 54 374 632 1,030 720 --
----- ------ ------ ------ ----- -----
Total Net Vine Acres.................. 2,316 2,358 3,027 3,340 4,050 4,050
===== ====== ====== ====== ===== ===== -----
Total Tons Produced................... 8,390 11,241 15,610 10,932 -- 7,693
===== ====== ====== ====== =====
</TABLE>

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(1) Included 28 acres leased to Joseph Phelps Vineyards through December 31,
1998 and operated by the Company for the account of Joseph Phelps Vineyards.

(2) Replants/grafts are acres which are temporarily taken out of production due
to grafting or replanting to change varieties. Acres are deemed to be back
in production in the third crop year.

(3) New acreage represents newly acquired bare ground which is in the
development stage. The development stage is the first three years of the
vineyard's life, when the Company expects little or no production.

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GRAPE SALES

PRIMARY CUSTOMERS. The wine grape tonnage harvested from the Company's
approximately 2,725 net vine acres in production in 1999 (I.E., excluding
vineyards under development or redevelopment) is largely subject to grape
purchase contracts with a small number of well-known wine producing companies.
The largest set of these contracts, representing approximately 80% of the
Company's 1999 grape sales revenues and 76% of the Company's 1999 total
revenues, is with UDV. UDV is a unit of Diageo plc, one of the world's largest
wine and spirits sales companies, which is headquartered in the United Kingdom.
In 1999, UDV was California's eighth largest wine producing company with sales
of approximately 5.8 million cases of wine. The Company's contractual
relationship with UDV's predecessor began in 1972 and has been continuous since
that time. The Company believes that it is currently the largest supplier of
wine grapes to UDV. The Company has sales contracts for substantially all of the
balance of its wine grape production with other wine producers, including
Canandaigua, Beringer Wine Estates, Chalone Wine Group and The Hess Collection
Winery. The Company also manages, as a contract vineyard operator, an aggregate
of approximately 1,533 acres of wine grapes for UDV and Canandaigua,
representing 96% of the total acres managed by the Company in 1999. See
"--Vineyard Management Contracts."

The terms of the Company's grape purchase contracts generally require the
customers to purchase substantially all of the Company's production from
specified vineyards at a formula price based upon the previous harvest year's
sales prices for specified districts as reported in the Final Grape Crush Report
published by the California Department of Food and Agriculture ("CDFA"). See
"--Pricing." The contracts generally require the Company to deliver grapes
meeting specified sugar levels and other quality measurements. Substantially all
of the contracts call for payment in full within 30 days of delivery of the crop
to the customer.

The terms of the Company's long-term grape purchase contracts extend to
between 2001 and 2014. Contracts covering most of SVI's acreage extend to 2006
and have "evergreen" renewal provisions whereby the contracts continue until
either party gives a two or three years' prior written notice of termination.
The Company believes that these evergreen provisions allow it time either to
renegotiate the contract with its contracting customer or to find a new customer
for the grape production before the contract terminates. See "--Cautionary
Information Regarding Forward-Looking Statements--Dependence on Major Customers;
Renewal of Grape Purchase Agreements."

The Company has enjoyed excellent relationships with its customers that have
been built over many years of satisfying their needs for quality, timely
delivery and service. Long-term supply arrangements benefit customers by
providing a significant, reliable supply of high-quality grapes at predictable
prices, and the Company believes that in many respects UDV and Canandaigua
prefer their supply arrangements with the Company to the purchase of comparable
amounts of grapes on the open market from multiple producers. These contracts
also benefit the Company by providing reliable sources of revenues. SVI believes
that these contracts are one of the major reasons for its past success, and it
plans to rely upon these and similar contracts in the future. While contract
terms are typically a function of market factors and it is not possible to know
what the terms of the Company's future grape purchase arrangements will be, it
is probable that any renewal or replacement of the Company's UDV and Canandaigua
contracts, the majority of which will expire in 2006, and any purchase
agreements covering new vineyards will have different terms. Among other
potential contract terms, the Company intends to consider entering into
long-term grape purchase contracts with generally fixed maximum and minimum
prices per acre instead of prices per ton that are subject to annual variation.
It is anticipated that such acreage contracts would provide for the customer to
bear more of the crop risk than is typically borne by the Company under a
tonnage contract.

PRICING. Each year the CDFA publishes the Grape Crush Report on a
preliminary basis on February 10, with a final report published on March 10. The
Grape Crush Report discloses the prices,

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tons and certain quality standards of all grapes crushed for wine from each of
California's 17 wine grape producing districts in the grape harvest of the
previous autumn. The report is relied upon heavily by wineries and wine grape
producers to negotiate contracts and establish grape prices, as well as by
financial and other institutions who serve the wine industry.

SVI's contract grape prices are established each year by formulas which are
different for each of its customers. However, substantially all of its contracts
utilize a formula which is used to calculate a price for each wine grape variety
based on the previous year's prices in several specified CDFA reporting
districts. For example, grapes from the Company's 2000 harvest that are subject
to these contracts will be sold at prices based on the actual prices for the
1999 harvest reported in the Final Grape Crush Report published March 10, 2000.
This enables both the Company and its customers to know final grape prices (on a
per ton basis by variety) approximately eight months in advance of each year's
harvest. These multiple district formula prices, as opposed to sales on the
short-term spot market, tend to moderate year-to-year swings in prices. The
Company's grape purchase contracts typically utilize pricing based in part upon
prices for Napa, Sonoma and Mendocino County grapes, which tend to be higher
than prices for the same varieties produced in Monterey County. Some recent
agreements use pricing formulas that are based more heavily on Monterey County
data, which may also be the case for the renewal or replacement of the UDV and
Canandaigua agreements and additional agreements covering new or replanted
vineyards. The chart below shows the weighted average prices SVI has received,
or expects to receive, per ton of grapes for the primary varieties it has
produced since 1995 based on the pricing formulas of its various tonnage-based
grape purchase contracts.

WEIGHTED AVERAGE PRICES PER TON RECEIVED BY SVI(1)

<TABLE>
<CAPTION>
VARIETY 1995 1996 1997 1998 1999 2000(2)
- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Chardonnay.................................. $1,060 $1,188 $1,444 $1,577 $1,577 $1,649
Cabernet Sauvignon.......................... 1,097 1,193 1,425 1,571 1,658 1,764
Pinot Noir.................................. -- -- 1,371 1,555 1,727 1,817
Merlot...................................... 1,098 1,184 1,432 1,532 1,533 1,545
Zinfandel................................... 623 790 971 1,096 1,217 1,346
Sauvignon Blanc............................. 682 742 902 1,027 1,084 1,124
Gewurztraminer.............................. 589 663 825 908 959 989
Napa Gamay.................................. 555 603 717 885 858 980
White Riesling.............................. 514 624 803 832 847 852
</TABLE>

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(1) Prices for premium varieties have increased in recent years largely as a
result of supply and demand conditions. Supply and demand factors will
change over time and there can be no assurance that the prices received by
the Company in the future will continue to increase or will match or exceed
historical prices.

(2) Based upon existing contracts, Company production estimates, and the 1999
Preliminary Grape Crush Report released February 10, 2000. Although
historically there have not been significant differences in the pricing data
reported in the Preliminary and the Final Grape Crush Reports, it is
possible that there may be some adjustments to the Company's expected 2000
grape prices when the Final Grape Crush Report is published on March 10,
2000.

VITICULTURAL PRACTICES

The Company continually investigates and experiments to develop enhanced
viticultural practices in order to improve the yields of its vineyards and the
quality of grapes it produces. Innovations developed or employed by SVI over the
past ten years have included new grafting methods,

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interplanting, new trellis designs and improved machine harvesting technology
and practices. In addition, the Company has experimented with increased vine
densities in order to improve productivity.

VINEYARD PRODUCTION CYCLE

The vineyard production cycle begins each year in December, after completion
of harvest. From December through March vines are pruned and tied to trellises,
and damaged stakes, trellises, irrigation systems and other vineyard components
are repaired or refurbished. After winter rains end, irrigation and cultivation
of the vineyards begin and continue through the harvest season. Herbicides are
applied as needed through the summer. Necessary applications of pesticides and
fertilizer begin in the spring and continue until harvest. Grafting and planting
also generally take place in the first four or five months of the year. As
growth of the vines accelerates beginning in late spring, they are trained and
tied, and excess leaves are sometimes pulled to promote more efficient growth of
vines and fruit. Depending on the rate at which fruit ripens, harvest typically
begins in late-August to mid-September and is completed by the end of October or
early November. Direct farming costs currently range from $2,000 to $3,000 per
acre over the course of the year for vineyards in full production, and revenues
are realized at the time of harvest. Approximately one-half of annual production
costs are incurred by June 30.

CAPITAL INVESTMENT REQUIREMENT FOR ACQUISITION, DEVELOPMENT AND IMPROVEMENT
OF VINEYARDS

Because of the increasing demand for premium wine, the Company's customers
as well as other wineries have been seeking additional long-term sources of
premium wine grapes. Accordingly, part of the Company's strategy has been to
expand its operations and grape production through the development of bare land
into vineyards, the acquisition of existing vineyards, and the redevelopment of
the Company's older vineyards. As discussed below, the Company has implemented
this strategy through the lease in 1998 of approximately 750 acres of bare land
it is developing into vineyards near the Company's vineyard headquarters, the
1997 acquisition of the 370-acre Riverview Vineyard, the lease in 1997 of
approximately 520 acres of bare land in Hames Valley it is developing into
vineyards and the redevelopment of the Company's existing vineyards begun in
1993.

Generally, significant amounts of fruit are not produced for three years
from newly planted vines and for two years from vines which are grafted to a new
variety. During this time, the Company incurs significant development and
production costs that are not offset by revenues from these vineyards and must
be financed from other sources. Newly planted vines that are four to five years
of age and grafted vines that are three to four years of age generally begin to
produce grapes in sufficient quantities to cover production costs and contribute
to gross profit, subject to some variation due to the effects of factors such as
geographic location, variety of grape grown, vine density, quality and type of
soil, water quality and weather conditions.

It has been the Company's experience that it currently costs approximately
$15,000 to $18,000 per acre over a three-year period to develop open land into a
producing premium wine grape vineyard, before taking into account the cost of
land. The costs of redeveloping existing vineyards vary depending upon the
condition of the vineyard and the scope of the redevelopment plan.

Due to the acquisition and development of new vineyards and the
redevelopment of existing vineyards, much of the Company's vineyard acreage has
not yet reached full productive capacity. While there can be no assurance that
the Company's properties will achieve their full productive capacity at the rate
indicated, if at all, the Company believes that its existing acreage under
development or redevelopment represents significant potential for revenue
growth. The following table shows recent and anticipated maturity of the
Company's vineyards.

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<PAGE>
MATURITY LEVELS OF SVI'S NET VINE ACRES(1)

<TABLE>
<CAPTION>
CROP YEAR
---------------------------------------------------------------
1999 2000 2001 2002 2003 2004
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Acres five or more years old (at or near full
production).......................................... 2,100 2,215 2,725 3,145 4,050 4,050
Acres three and four years old (partial production).... 625 930 1,325 905 -- --
Acres one and two years old (not in production)........ 1,325 905 -- -- -- --
----- ----- ----- ----- ----- -----
Total Acres.......................................... 4,050 4,050 4,050 4,050 4,050 4,050
===== ===== ===== ===== ===== =====
</TABLE>

- ------------------------

(1) The net vine acreage shown above is SVI's planted acreage only. It does not
include acreage devoted to roads, storage areas, equipment yards or uses
other than vineyards.

If the Company's vineyards under development mature consistently with
historical experience and no significant problems are encountered, they should
be at or near their full productive capacity in or about 2003. Therefore,
acquisitions of producing vineyards will be required prior to 2003 to achieve
production increases in excess of those anticipated from the Company's existing
vineyards. In addition, acquisitions of producing vineyards or open land
suitable for vineyard development will be required to sustain productivity
increases after 2003 and moderate any productivity losses from the Company's
existing vineyards due to grafting to new varieties and various other factors
that take vineyards out of production from time to time. See "--Uncertainty of
Revenue Growth," "--Capital Requirements," and "--Risks Associated with Business
Expansion and Acquisition Strategy" under "--Cautionary Information Regarding
Forward-Looking Statements" below.

NEW VINEYARDS AND REDEVELOPMENT OF EXISTING VINEYARDS

GREENFIELD. In December 1998, the Company entered into a lease for a term
of 24 years of approximately 750 acres of undeveloped land suitable for wine
grape vineyards located near the Company's vineyard headquarters. The Company
has two options to extend the term of the lease for successive five-year terms
(for a total of ten years). The Company completed the planting of the entire 750
acres in May 1999, with the first harvest expected in 2001. The Company intends
to seek long-term grape purchase contracts for the grape production from this
new vineyard.

HAMES VALLEY. In 1997, the Company acquired an option to lease, for a term
of up to 50 years, approximately 520 acres of undeveloped land suitable for wine
grape vineyards in Hames Valley, which is located approximately 45 miles south
of the Company's vineyard headquarters. The Company exercised its option and
began development on approximately 200 acres in 1997 and, in the first quarter
of 1998, exercised its option and began development on the remaining
approximately 320 acres. This acquisition has allowed the Company to leverage
its existing resources, and it establishes SVI in a region where it believes
additional property suitable for premium wine grape production is available. The
Company is currently in the process of seeking long-term grape purchase
contracts for the grape production from these new vineyards. There can be no
assurance, however, that the Company will be successful in finding a winery or
wineries which will agree to such long-term grape purchase contracts for newly
developed or acquired vineyards, including those under development in Greenfield
and Hames Valley.

After negotiating its own Hames Valley lease, SVI arranged for Canandaigua
to lease an additional approximately 445 acres in Hames Valley. Pursuant to a
long-term management contract with Canandaigua, in 1997 SVI began to manage and
develop this acreage into vineyards. Under the contract, SVI receives monthly
fees, equipment rental income and, when the vineyard begins to produce wine
grapes, harvest fees. The Company has no investment in the vineyard because
development money and working capital are provided by Canandaigua.

11
<PAGE>
RIVERVIEW VINEYARD. In June 1997, the Company acquired the 370-acre
Riverview Vineyard located approximately 12 miles north of SVI's vineyard
headquarters. The purchase price was approximately $5.5 million. The vineyard is
planted with several varieties, including approximately 175 acres of Chardonnay
and 130 acres of Pinot Noir. In 1998, the Company secured long-term grape
purchase contracts for the majority of the grape production from this vineyard.

REDEVELOPMENT OF EXISTING VINEYARDS. In 1993, SVI began a major improvement
and refurbishment program at its vineyards in order to increase production and
to upgrade its variety mix to those grapes that were expected to be in greater
demand and sell at higher prices. From 1993 through 1999, the Company made
capital expenditures on its vineyards of over $16 million, and the improvement
and refurbishment program is continuing. From 1993 through 1999, the Company
replanted or regrafted approximately 1,330 acres to higher value varieties and
interplanted an additional 1,200 acres. In 2000 and 2001, the Company will be
replanting approximately 135 acres. See "--Net Vine Acres Owned by SVI and Tons
Produced."

WATER SUPPLY

The Company's vineyards are located in the Salinas Valley through which
flows the Salinas River. The watershed of the Salinas Valley is from the Ventana
Wilderness in the Los Padres National Forest and Santa Lucia range of coastal
mountains. The Salinas River supplies a large aquifer which is tapped by
agricultural users. In addition, the Salinas River is fed by two large
reservoirs, Lake Nacimiento and Lake San Antonio, which were built primarily for
agricultural water supply purposes to serve the Salinas Valley. These reservoirs
are maintained by the Monterey County Water Resource Agency. The Company drip
irrigates all of its vineyards from wells located on or near its vineyards. The
quality of the water obtained from the wells is good, and the wells have proven
to be a plentiful and reliable source of water for the Company's operations,
even during the drought years of the late 1980's. See "--Cautionary Information
Regarding Forward-Looking Statements--Water."

VINEYARD MANAGEMENT CONTRACTS

The Company manages, as a contract vineyard operator, approximately 1,600
acres in Monterey and San Benito Counties for three vineyard owners in 1999,
including approximately 1,533 acres managed for UDV and Canandaigua. Pursuant to
its management and harvest contracts, budgeted costs of labor and equipment are
advanced to the Company on a monthly basis and the Company receives management
fees based on the acreage managed and harvested. The Company's vineyard
management contracts generally expire no earlier than the completion of harvest
in years ranging from 2004 to 2012, and otherwise may be terminated by either
party with one or two years' advance notice. In certain cases the Company has
also received fees for financing vineyard improvements, securing property and
designing vineyards. The Company may enter into similar arrangements for other
vineyard properties in the future.

WINE PRODUCTION AND SALES

SVI began limited production of its own ultra premium varietal wines under
the SCHEID VINEYARDS and SAN LUCAS VINEYARD labels in 1991. The Company has
contracted for its wine production with Storrs Winery, a small producer of award
winning wines located in Santa Cruz, California, approximately 50 miles from the
Company's vineyard headquarters compound. The Company currently subleases space
in a 1,600 square foot building from Storrs Winery, including certain space
dedicated for the Company's exclusive use in connection with its winemaking
activities. In 1996, the Company obtained a winery license, and a tasting room
was opened in April 1997 at the Company's vineyard headquarters compound located
on U.S. Highway 101 (a major north-south thoroughfare between San Francisco and
Los Angeles) just south of Greenfield and north of King City in Monterey County.

12
<PAGE>
Production and sales have been limited to date. SVI produced approximately
4,000 and 5,000 cases in 1998 and 1999, respectively, of ultra premium varietal
wines, including Chardonnay, Cabernet Sauvignon, Merlot, Pinot Noir and
Sauvignon Blanc, using Company-grown grapes. While its actual wine production
will depend on various factors, the Company currently plans to maintain its
annual production at approximately 5,000 cases for 2000. As it increases wine
production, the Company intends to distribute directly through its tasting room,
restaurants, clubs and a few selected retailers. Since 1997, the Company has
offered an annual "wine dividend" to holders of at least 100 shares of its Class
A Common Stock, whereby such shareholders were entitled to a $0.50 per share
credit for use in making purchases of the Company's wine at up to a 50% discount
from the retail price. The Company intends to offer another "wine dividend" in
2000. SVI has not yet earned a profit on its wine business and cannot predict
when, or if, these operations will become profitable. Further, SVI does not
expect its wine business to have a material impact on sales or earnings in the
foreseeable future. No assurances can be given that wine production and sales
ever will be a major source of profit for the Company.

COMPETITION

Wine grape growing and wine production are extremely competitive. There are
an estimated 800 commercial wineries which produce and market California table
wine, approximately half of which produce fewer than 5,000 cases per year. The
top eight wineries account for approximately 76% of sales based on total
California wine shipments in 1999. In addition, there are many sources of supply
of wine grapes in California and in countries outside the United States. At the
end of 1997, approximately 407,000 acres were planted to wine grapes in
California according to the California Agricultural Statistics Service, and the
number of planted acres is growing. Most wine grape producers have small,
privately owned operations and sell their production to wineries, often at spot
market prices from year to year. Quality of production and yields can vary
widely from vineyard to vineyard in the same geographic area. To supplement the
grapes they buy from independent producers, many wineries also own or lease
vineyards to supply some of their grape needs. Certain major wineries, such as
Kendall-Jackson and Robert Mondavi, are large wine grape producers and produce a
significant proportion of the grapes they need to make wine. Substantial
vineyard acreage is also owned by other wineries and more is being developed.
There are no published data regarding the size of the wine grape production
industry in California, and holdings of properties are not publicly reported.
However, the Company believes it is one of the largest independent producers of
premium wine grapes in California, and that there are approximately four or five
independent producers of comparable size in terms of acreage.

In addition, there are numerous wine producers in Europe, South America,
South Africa, Australia and New Zealand. All of these regions export wine into
the United States. California grape and wine supply shortages, especially in red
wines, have prompted some domestic national brand marketers to purchase wine
from foreign sources. Most imports are bottled wines; however, some wineries
have imported bulk table wine in large tanks for bottling and sale in the United
States. Imports to California for these purposes decreased from approximately
20.3 million gallons in 1997 to approximately 4.9 million gallons in 1999.

ENVIRONMENTAL ISSUES

SVI currently maintains 17 above-ground fuel storage tanks on its own
vineyard properties to provide fuel to its various vehicles and machinery. These
tanks have capacities ranging from approximately 500 to 10,000 gallons and are
installed on concrete slabs with catch basins to protect the ground surface from
any inadvertent release. No underground storage tanks are located on the
Company's properties.

The Company's current operations require the periodic usage of various
chemical herbicides, fungicides and pesticides, some of which contain hazardous
or toxic substances. The usage and storage

13
<PAGE>
of these chemicals are, to varying degrees, subject to federal and state
regulation. To the extent that the Company stores such chemicals, they are
contained in a secured storage facility at the Company's vineyard headquarters
compound. The most toxic pesticide used by the Company, Furadan-TM-, is not
stored on-site, but is delivered as needed by an unaffiliated company and
applied to the vineyard under the supervision of a state-licensed applicator.
The Company also maintains a comprehensive safety program supervised by the
Company's human resources safety director and a licensed pest control advisor.

TRADEMARKS AND LABELS

The Company has registered a trademark relating to a specific slogan which
the Company uses on souvenirs and paraphernalia sold at the Company's
wine-tasting room. The Company also has wine labels approved by the Bureau of
Alcohol, Tobacco and Firearms ("BATF"), including the SCHEID VINEYARDS and SAN
LUCAS VINEYARD brand names.

EMPLOYEES AND LABOR RELATIONS

The Company has approximately 75 full-time employees and employs seasonal
and contract labor for vineyard development, pruning, harvesting and other
related tasks during peak seasons. Field labor needs are seasonal, normally
peaking at approximately 400 field workers at harvest, and dropping to a low of
approximately 50 immediately after harvest. The Company also uses contracted
labor for specialized work, such as grafting, and otherwise when necessary.

The United Farm Workers, AFL-CIO ("UFW") has represented the Company's farm
workers since 1993. In 1998, the Company completed the negotiation of a new
four-year contract with the UFW that will expire at the end of 2001. The Company
believes its labor relations are satisfactory. The Company has never had a
walk-out, sit-down, slow-down or strike, and the existing contract has a "no
strike" clause. The Company has, however, been picketed, particularly during the
organizing effort by the UFW and during negotiation of the first contract in
1995. See "Cautionary Information Regarding Forward-Looking Statements--Labor
Regulations and Union Contract."

CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

AGRICULTURAL RISKS

Wine grape production is subject to many risks common to agriculture that
can materially and adversely affect the quality and quantity of grapes produced.
These hazards include, among other things, adverse weather such as drought,
frost, excessive rain, excessive heat or prolonged periods of cold weather.
These weather conditions can materially and adversely affect the quality and
quantity of grapes produced by the Company and its profitability. To the extent
a grape producer's properties are geographically concentrated, the effects of
local weather can be material. The vineyards owned by SVI are spread over a
distance of approximately 70 miles, north to south, close to Highway 101 in
Monterey County. Accordingly, adverse weather in the future could affect a
substantial portion of the Company's vineyards in any year and have a material
adverse effect on the Company's business, financial condition and results of
operations.

Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields or kill vines. In recent years
phylloxera, a louse that feeds on the roots of grape vines, has infested many
vineyards in the wine grape producing regions of California and caused grape
yields to decrease. Within a few years of the initial infestation, phylloxera
can leave a vine entirely unproductive. Phylloxera infestation has been
widespread in California, particularly in Napa, Sonoma, Mendocino and Monterey
Counties, and most of the other wine grape producing areas of the state are
affected to some degree. Phylloxera infestation can be reduced through use of
the chemical pesticides Furadan-TM- and Enzone-TM-. While Furadan-TM- is still
approved for use in Monterey County, its use is no

14
<PAGE>
longer legal in certain other viticultural regions of California, including
Napa, Sonoma and Mendocino Counties. Furadan-TM- is currently under
investigation by the Environmental Protection Agency which may result in the
prohibition of its use. There can be no assurance that Furadan-TM- will continue
to be available as a method of controlling phylloxera for the Company and, if
its use is prohibited in Monterey County, the Company will rely more on the use
of Enzone-TM-. If the use of Enzone-TM- is prohibited in Monterey County,
however, there can be no assurance that the Company will be able to find a safe,
cost-effective alternative.

As a result of this widespread problem, thousands of vineyard acres
throughout California have been replanted with phylloxera-resistant rootstock
or, in some cases, taken out of production completely. It takes approximately
four to five years for a replanted vineyard to bear grapes in quantities
sufficient for profitable operations. The Company estimates that it currently
costs approximately $15,000 to $18,000 per acre to replant vineyards. Of the
Company's approximately 4,050 net vine acres (I.E., excluding acreage devoted to
roads, storage areas, equipment yards or uses other than vineyards) of wine
grapes, approximately 3,940 net vine acres, or 97%, are planted or interplanted
with phylloxera-resistant rootstock. The remaining approximately 140 acres are
planted on non-resistant rootstock and are, therefore, potentially susceptible
to phylloxera infestation. The Company is managing the non-resistant acres
through application of Furadan-TM- and a program of selective replantings.

Another potentially devastating pest is the glassy-winged sharpshooter
("GWSS"). GWSS poses a significant threat to viticulture throughout California
due to its ability to transmit XYLELLA FASTIDIOSA, the bacterium that causes
Pierce's Disease. Pierce's Disease, a deadly vine disorder, has been present in
California for more than a century, vectored by the blue-green sharpshooter. It
now presents a much more significant threat because the GWSS is a new and far
stronger disease carrier than the blue-green sharpshooter. The GWSS recently
became established in the Temecula region of southern California and, as a
result, Pierce's Disease is so widespread that the future viability of the
Temecula region to produce wine grapes is in doubt. The February 2000 issue of
WINES & VINES quoted Ed Weber, Napa County viticulture farm advisor for
University of California Cooperative Extension: "Currently, glassy-winged
sharpshooters are found throughout the southern California basin in Los Angeles,
Orange, Riverside, San Bernardino and San Diego counties. They also occur in
Ventura and parts of Santa Barbara counties. Additionally, Kern County, at the
southern end of the San Joaquin Valley has populations well-established in one
area. Single insects also have been captured near Lodi and in Berkeley." The
Company has seen no evidence of the GWSS or Pierce's Disease in its own
vineyards but views the spread of the GWSS throughout California's grape growing
regions as a significant threat.

Other pests that may infest vineyards include leafhoppers, thrips,
nematodes, mites, insects, orange tortrix, twigbore, microflora and various
grapevine diseases. Pesticides and the selection of resistant rootstocks reduce
losses from these pests, but do not eliminate the risk of such loss. Gophers,
rabbits, deer, wild hogs and birds can also pose a problem for vineyards, and
wine grape vines are also susceptible to certain virus infections which may
cause reduction of yields. None of these currently poses a major threat to the
Company's vineyards, although they could do so in the future and, at that time,
will have the potential to subject the vineyards to severe damage.

DEPENDENCE ON MAJOR CUSTOMERS; RENEWAL OF GRAPE PURCHASE AGREEMENTS

The majority of SVI's current grape production is contracted for sale to UDV
which accounted for approximately 76% of the Company's total revenues in 1999.
The terms of the long-term grape purchase contracts with UDV extend to between
2001 and 2014. The majority of the contracts extend to 2006 and have an
"evergreen" renewal provision whereby the contract continues unless either party
gives a three-year advance written notice of termination. Although these
contracts do not specifically provide for termination prior to expiration of
their stated terms, it is possible that they could be terminated under various
circumstances, including material breach. If these contracts are terminated,

15
<PAGE>
there can be no assurance that the Company will be able to replace UDV as
significant a purchaser of its grape production or that the Company will be able
to enter into agreements with other purchasers on similar terms. Termination of
these contracts with UDV could have a material adverse effect on the Company's
business, financial condition and results of operations.

UNCERTAINTY OF REVENUE GROWTH

In 2000, approximately 55% of the Company's net vine acres are at or near
full production, and it is anticipated that a certain portion of the Company's
vineyards will always be out of production or below maximum production due to
initial development, replanting, regrafting and various other factors. While
some productivity increases may be expected from further development of vineyard
acreage not yet in full production or from enhancements of fully productive
vineyards, the growth potential of the Company's existing properties is limited
and the Company's ability to increase revenue depends ultimately upon its
ability to acquire, develop and operate more vineyard properties. There can be
no assurance that suitable properties will be available to the Company at prices
that would make the Company's growth plans viable. Revenues are also
substantially dependent on grape yields and prices, both of which are subject to
variation as discussed elsewhere in this section and can have an effect on
revenue growth unrelated to the number of acres in full production.

FIXED COSTS AND REVENUE FLUCTUATIONS; UNCERTAINTY OF PROFITABILITY

The Company incurs annual farming costs currently averaging approximately
$2,000 to $3,000 per acre in production. These costs are incurred throughout the
year preceding harvest and are relatively fixed. Revenues from grape sales are
not realized until harvest and vary depending upon yields and prices. Vineyard
productivity varies from year to year depending upon a number of factors, and
significant variations in annual yields should be expected from time to time.
Furthermore, grape prices have fluctuated significantly in the past and should
be expected to continue to fluctuate from year to year and to decrease at times
in the future. Because production costs are not significantly adjustable in
light of productivity or revenue levels, weak harvests or lower grape prices
cannot be mitigated by cost reductions and should be expected to have
significant adverse effects upon profitability.

CAPITAL REQUIREMENTS

The farming of vineyards in production requires substantial amounts of
working capital. Historically, the Company has relied heavily on short-term
credit to finance its working capital requirements. Working capital requirements
are expected to increase to support the expansion anticipated by the Company.
There can be no assurance that the Company will be able to obtain financing when
required or that such financing will be available on reasonable terms, and lack
of access to adequate lines of credit or other capital sources could impair the
Company's ability to grow and adversely affect the Company's business, financial
condition and results of operations.

Substantial capital expenditures are required to develop and acquire new
vineyards and improve existing vineyards. The Company has made and intends to
continue to make such expenditures to finance its expansion, and has incurred
and plans to continue to incur indebtedness. As a consequence, (i) the Company
has and will continue to have significant interest and principal repayment
obligations, (ii) the Company's earnings and cash flows will be adversely
affected by increases in interest rates, and (iii) the presence of this debt
will limit the Company's ability to pay dividends on its common stock.

RISKS ASSOCIATED WITH BUSINESS EXPANSION AND ACQUISITION STRATEGY; LONG-TERM
STRATEGIES

As part of its long-term strategy, SVI continually evaluates expanding its
business through (i) the purchase or lease of undeveloped land suitable for wine
grape vineyards and (ii) acquisitions of developed vineyard properties. There
can be no assurance that the Company will be able to locate

16
<PAGE>
suitable properties to buy or lease at viable prices, and any undeveloped
properties acquired by the Company will require significant capital investment
and several years of development before becoming productive. The Company does
not expect to receive the full benefit from any newly planted vineyards for at
least five to six years after planting due to the time required for the vines to
mature and produce economic yields. In addition, the Company's ability to
increase profits through acquisitions depends to a significant degree upon the
prices at which properties can be purchased or leased. Furthermore, increased
acreage under management will create additional demands on Company management
and may require the Company to hire and integrate more employees. Accordingly,
the Company's strategies are long-term strategies designed to increase the
Company's production capacity and expand the Company's business. As a result,
the full economic impact in terms of projected earnings and other beneficial
effects of the Company's expansion program will not be fully realized for
several years, if at all. The Company has also recently pursued a strategy of
repurchasing its own shares of common stock. To the extent the Company continues
its repurchase program, the capital available to expand the business through
additional vineyard development and acquisitions is reduced.

WINE GRAPE SUPPLY AND DEMAND; PRICING

Prices for premium California wine grapes are at historically high levels
due to (i) a shortage of grapes due to a variety of factors and (ii) an increase
in demand. Recent plantings of new vineyards, yield enhancements through
technological advances, foreign competition and other factors are expected to
increase supply. Furthermore, there can be no assurance that demand will not
decline. Increases in supply or reductions in demand may cause California
premium wine grape prices to decline significantly, and there can be no
assurance that the prices received by the Company will continue to increase.
Some declines in prices received by the Company should be expected, and these
declines may be significant.

COMPETITION; INDUSTRY FRAGMENTATION

The wine grape industry is extremely competitive. Many of the Company's
current and prospective competitors have substantially greater financial,
production, personnel and other resources than the Company. The Company competes
with many other producers of premium wine grapes in California, including a few
thousand small independent (I.E., not winery controlled) wine grape producers
who sell their production to wineries. Moreover, to a significant extent, wine
grapes of a particular variety are fungible, and the ability of foreign
producers to compete with the Company on the basis of price due to their lower
production costs may have a negative impact upon the Company's profitability. In
addition, the Company's principal winery customers compete with each other and
with other wineries located in the United States and abroad.

POSSIBLE TERMINATION OF VINEYARD MANAGEMENT AGREEMENTS

Substantially all of the Company's vineyard management agreements may be
terminated in the event that Alfred G. Scheid, Kurt J. Gollnick and certain
members of their families cease to maintain specified shareholdings in the
Company. Sales to the public by members of the Scheid or Gollnick families or
further public offerings by the Company may result in a change of control of the
Company, which could result in termination of these agreements.

LABOR REGULATIONS AND UNION CONTRACT

California has many laws and regulations concerning labor in general and
farm labor in particular. The Agricultural Labor Relations Board has promulgated
many regulations concerning farm labor and a body of court decisions has
developed. SVI is subject to many of these regulations, laws and precedents.

17
<PAGE>
The UFW is the major union representing farm labor and has represented SVI's
farm workers since 1993. In 1998, the Company completed the negotiation of a new
four-year contract with the UFW that will expire at the end of 2001. Although
the Company historically has had satisfactory labor relations, it has been
picketed from time to time during the initial organization of its employees and
during contract negotiations. No assurance can be given that the Company's
satisfactory labor relations will continue or that the UFW will not engage in,
picketing, walk-outs, sit-downs, slow-downs or strikes or the threat of these
actions. The Company's business is heavily dependent upon farm labor, and the
failure of the Company to maintain adequate labor relations on terms acceptable
to the Company could have a material adverse effect upon the Company's business,
financial condition and results of operations.

DEPENDENCE ON CONSUMER DEMAND

Trends in consumer spending and changes in consumer tastes have a
substantial impact on the wine industry and the Company's business. To the
extent that wine purchases are negatively impacted by economic and other
factors, or wine consumers reduce consumption of wine in favor of other
beverages, demand for wine grapes could decrease.

GOVERNMENT REGULATION; TAXES

SVI is subject to a broad range of federal and state regulatory requirements
regarding its operations and practices. The Company's current operations and
future expansion are subject to regulations governing the storage and use of
fertilizers, fungicides, herbicides, pesticides, fuels, solvents and other
chemicals. These regulations are subject to change and conceivably could have a
significant impact on operating practices, chemical usage, and other aspects of
the Company's business.

Wine production and sales are subject to extensive regulation by the Federal
Bureau of Alcohol, Tobacco and Firearms, the California Department of Alcohol
Beverage Control and other state and federal governmental authorities that
regulate licensing, trade and pricing practices, labeling, advertising and other
activities. In recent years, federal and state authorities have required warning
labels on beverages containing alcohol. Restrictions imposed by government
authorities on the sale of wine could increase the retail price of wine, which
could have an adverse effect on demand for wine in general. Increases in excise
taxes on wine, if enacted, could reduce demand for wine and wine grapes, which
could materially and adversely effect the Company's business, financial
condition and results of operations.

RELIANCE ON KEY PERSONNEL

The Company believes its continued success depends to a significant extent
on the active involvement of certain members of the Scheid family and the
retention of its senior non-family executives. There can be no assurance that
the key persons will remain in their management positions with the Company, and
the loss of the services of any of the key persons could have a material adverse
effect on the Company's business, financial condition and results of operations.

ENVIRONMENTAL RISKS

Ownership of real property creates a potential for environmental liability
on the part of the Company. If hazardous substances are discovered on or
emanating from any of the Company's vineyards and the release of hazardous
substances (including fuels and chemicals kept by the Company on its properties
for use in its business) presents a threat of harm to public health or the
environment, the Company may be held strictly liable for the cost of remediation
of these hazardous substances. See "--Enviromental Issues."

18
<PAGE>
WATER

The Company is dependent upon wells located on or near its vineyards for
water to irrigate the vineyards, which wells are supplied by aquifers fed by the
Salinas River and reservoirs operated by Monterey County. Although historically
the quality of water from these wells has been good and the wells have
consistently supplied a plentiful and reliable source of water, even during the
drought years of the late 1980's, and the Company believes its sources of water
will be available for the foreseeable future, it is possible that the Company's
water supplies could be impaired in the future due to drought, contamination or
other circumstances. An impairment in the Company's water supplies could
adversely affect the business, financial condition and results of operations of
the Company.

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 has completed the upgrading of its accounting and financial
software, and, in conjunction with the upgrade, the Company believes that any
known Year 2000 issues have been corrected.

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 made inquiries of certain of
its principal suppliers and customers with respect to their Year 2000 readiness
and its potential effects on the Company. 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.

Although no assurances can be given, based on currently available
information and discussions with the Company's customers and suppliers,
management does not believe that the Year 2000 issues discussed above will have
a material impact on the Company's ability to conduct its business.

ITEM 2. DESCRIPTION OF PROPERTIES

CORPORATE HEADQUARTERS. The Company's executive corporate office occupies
approximately 6,400 square feet in Marina del Rey, California under a five-year
lease with Tesh Partners, L.P., a limited partnership of which SVI is the
general partner and four members of the Scheid family are limited partners. Each
of these members of the Scheid family is a principal stockholder of the Company.
See the information incorporated by reference under "Item 12--Certain
Relationships and Related Transactions." The lease expires in June 2004. The
Company believes that its existing facilities will be adequate to meet the
Company's needs for the foreseeable future. Should the Company need additional
space, management believes it will be able to secure additional space at
commercially reasonable rates.

VINEYARDS. The Company currently owns approximately 1,800 acres of land and
leases approximately 2,600 acres of land underlying its vineyards, all of which
are located in Monterey County, California. The five leases to which the Company
is a party were entered into in 1973, 1979, 1996, 1997 and 1998, respectively,
and each of the land leases has an initial term of 24 to 30 years and options to
extend for up to an additional 10 to 20 years. Substantially all of the
Company's property, plant and equipment serves as collateral for long-term debt.

19
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
Company's fourth quarter ended December 31, 1999.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

MARKET FOR CLASS A COMMON STOCK; RELATED INFORMATION

The Company's Class A Common Stock is traded on the Nasdaq National Market
System under the symbol "SVIN". The following table sets forth, for the fiscal
quarter indicated, the high and low closing price per share sales prices for the
Class A Common Stock, as reported by Nasdaq:

<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First quarter............................................. $11.500 $6.750
Second quarter............................................ $12.000 $6.750
Third quarter............................................. $ 7.438 $3.938
Fourth quarter............................................ $ 5.938 $3.938
1999
First quarter............................................. $ 6.125 $4.500
Second quarter............................................ $ 5.750 $4.813
Third quarter............................................. $ 5.063 $4.063
Fourth quarter............................................ $ 5.000 $3.500
</TABLE>

On March 3, 2000, there were 87 holders of record of the Company's Class A
Common Stock and 14 holders of record of the Company's Class B Common Stock. On
that date, the Company believes that the number of beneficial owners of its
Class A Common Stock was approximately 1,300. For information concerning
historical dividends and the Company's dividend policy, see "Item 6--
Management's Discussion and Analysis or Plan of Operation--Dividends and
Distributions."

20
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES THERETO, AND OTHER FINANCIAL
INFORMATION INCLUDED HEREIN. THE INFORMATION IN THIS REPORT INCLUDES
FORWARD-LOOKING STATEMENTS. IN ADDITION, PAST OPERATING RESULTS ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR FUTURE PERIODS. SEE
"NOTE CONCERNING FORWARD-LOOKING STATEMENTS" AND "ITEM 1--BUSINESS--CAUTIONARY
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS".

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 18 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 Company's two largest winery customers are
United Distillers and Vintners North America ("UDV"), a subsidiary of Diageo plc
and the eighth largest U.S. winery in terms of 1999 case shipments, and
Canandaigua Brands, Inc. ("Canandaigua"), the second largest U.S. winery. Grape
purchase contracts with UDV covered 57% of the Company's acreage as of December
31, 1999 and accounted for approximately 76% and 74% of the Company's 1999 and
1998 total revenues, respectively. Thus, the Company is substantially dependent
on UDV, and termination of these contracts could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has had grape purchase contracts with UDV and its predecessors since
1972.

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

21
<PAGE>
third and fourth quarters of any one year. This is a significant factor in
comparing quarterly operating results. 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.

RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1999 AND 1998

The following table sets forth certain statement of operations data for the
years ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Revenues:
Sales........................................... $11,804 $16,436
Vineyard management, services and other fees.... 1,040 1,037
------- -------
12,844 17,473
Cost of sales..................................... 8,219 7,911
------- -------
Gross profit...................................... 4,625 9,562
General and administrative expenses............... 3,572 4,274
------- -------
Operating income.................................. 1,053 5,288
Reversal of deferred compensation................. -- (706)
Interest income, net.............................. (33) (46)
------- -------
Income before provision for income taxes.......... 1,086 6,040
Provision for income taxes........................ 450 2,421
------- -------
Net income........................................ $ 636 $ 3,619
======= =======
</TABLE>

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 to $11,804,000 in the year ended
December 31, 1999 from $16,436,000 in the 1998 period, a decrease of $4,632,000
or 28%.

Revenue from grape sales decreased by 26% to $11,347,000 for the year ended
December 31, 1999 from $15,260,000 in 1998, a decrease of $3,913,000. Overall,
tons harvested for the Company's own account decreased by about 30%, with
approximately 7,700 tons harvested in 1999 compared to 10,900 tons in 1998.
Chardonnay was the variety most impacted by the cool weather patterns of 1999,
experiencing an average decrease in yield of about 48% from 1998. Since about
37% of the Company's producing acreage in 1999 was planted to Chardonnay, the
decrease in Chardonnay yields had a dramatic impact on fiscal 1999 revenues.

Revenue from sales of bulk wine decreased 78% to $216,000 for the year ended
December 31, 1999 from $982,000 in the 1998 period, a decrease of $766,000.

Revenue from the sale of wine and wine-related merchandise increased by 24%
to $241,000 for the year ended December 31, 1999 from $194,000 in the 1998
period, an increase of $47,000.

Revenue from vineyard management, services and other fees increased to
$1,040,000 for the year ended December 31, 1998 from $1,037,000 in the 1998
period, an increase of $3,000. The increase was

22
<PAGE>
primarily due to equipment rentals and harvest fees charged to management
clients, which was partially offset by the elimination of a 68-acre vineyard
management contract.

GROSS PROFIT. Gross profit for the year ended December 31, 1999 was
$4,625,000 compared to $9,562,000 for the year ended December 31, 1998, a
decrease of $4,937,000 or 52%. This decrease resulted primarily from decreases
in grape sales and sales of bulk wine from 1998 to 1999.

Gross margin on grape sales decreased to 30% in 1999 as compared to 52% in
1998. The decrease in gross margin on grape sales is primarily the result of
substantially lower yields per acre in 1999 than in 1998, partially offset by an
increase in the prices received by the Company 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 EXPENSES. General and administrative expenses
decreased by 16% to $3,572,000 for the year ended December 31, 1999 from
$4,274,000 in the 1998 period, a decrease of $702,000. The decrease in general
and administrative expenses was primarily due to reductions in executive
salaries and bonuses and professional fees.

REVERSAL OF DEFERRED COMPENSATION. During the year ended December 31, 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.

INTEREST INCOME, NET. Net interest income was $33,000 for the year ended
December 31, 1999 and $46,000 in the 1998 period, a decrease of $13,000, and is
comprised of the following:

<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Interest expense..................................... $ 1,185,000 $ 977,000
Less capitalized interest............................ (1,185,000) (641,000)
----------- ---------
Interest expense, net of amount capitalized........ -- 336,000
Interest income...................................... (33,000) (382,000)
----------- ---------
Interest (income), net............................. $ (33,000) $ (46,000)
=========== =========
</TABLE>

Total interest expense increased primarily as a result of increased
borrowings in 1999 and are partially offset by lower interest rates in 1999.
Capitalized interest increased in the 1999 period due to 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.

PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
$450,000 for the year ended December 31, 1999 from $2,421,000 in 1998.

NET INCOME. The Company had net income for the year ended December 31, 1999
of $636,000 as compared to $3,619,000 in the 1998 period.

23
<PAGE>
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 December 31, 1999 was
$90,000 as compared to $3,883,000 at December 31, 1998, a decrease of
$3,793,000. The reduction in working capital from 1998 to 1999 was primarily due
to the expenditures of current working capital to fund vineyard development,
repay balances of certain long-term revolving 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 early
November. Due to the three to four week delay in the start of the 1998 and 1999
harvests, the crops for each of the past two years were delivered in October and
November, and the majority of cash from grape sales was 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
$12,000,000 and is intended to finance the Company's anticipated working capital
needs. This crop line expires June 5, 2001 and is secured by crops and other
assets of the Company. The interest rate on this line is based on the bank's
"reference" or "cost of funds" rate. At December 31, 1999, the weighted average
interest rate on borrowings under this line of $2,700,000 was 7.91%.

SVI also has long-term credit facilities which expire through June 2008 and
provide for maximum borrowings totaling $9,506,000, which diminish annually
through the expiration dates to a maximum allowable commitment of $5,412,000. At
December 31, 1999, the outstanding amount owed by the Company under these
facilities was $9,506,000. The interest rate on each of these lines is based on
the bank's "reference" or "cost of funds" rate. At December 31, 1999, the
weighted average interest rate on these lines was 7.97%. These credit lines are
secured by deeds of trust on underlying vineyard properties.

The Company also has other long-term notes payable which, as of December 31,
1999, totaled approximately $5,990,000. The interest rate on these notes is
based on the bank's "reference" or "cost of funds" rate. At December 31, 1999,
the weighted average per annum interest rate on these notes was 7.97%. These
notes are secured by deeds of trust on underlying vineyard properties.

The Company also has a bank line of credit with an original maximum loan
commitment of $7,500,000, the proceeds of which were 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 December 31, 1999, the maximum available balance and outstanding balance on
this line of credit was $5,249,000. This line bears interest at the bank's
reference rate (6.97% at December 31, 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.

24
<PAGE>
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 December 31, 1999, the Company was in
compliance with all covenants except for the current ratio covenant. The Company
received a waiver from the bank regarding the noncompliance with its current
ratio covenant at December 31, 1999, and expects to be in compliance with all
covenants at December 31, 2000.

Although no assurances can be given, management believes that the Company's
anticipated working capital levels and short-term and long-term borrowing
capabilities will be adequate to meet the Company's currently anticipated
liquidity needs during the fiscal year ending December 31, 2000. At December 31,
1999, the Company had $9,300,000 in borrowing availability under its 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 $6.0 million in capital investment over
the next three years, and continued improvements and redevelopments of existing
vineyards are expected to require approximately $6.5 million. In addition, the
Company expects to invest approximately $2.5 million in equipment purchases.
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 provided by operating activities was $992,000 for the year ended
December 31, 1999, compared to $8,021,000 for the same period in 1998, a
decrease of $7,029,000. The decrease was primarily due to the decrease in net
income from $3,619,000 in 1998 to $636,000 in 1999, and the timing of the
payments of 1998 income tax liabilities which affected the change in cash
provided by operating activities in the amount of $4,663,000 from 1998 to 1999.

Cash used in investing activities was $14,706,000 for the year ended
December 31, 1999, compared to $8,419,000 for the same period in 1998, an
increase of $6,287,000. The increase was principally the result of expenditures
for the ongoing development of approximately 1,300 acres of new vineyards and
improvements to the Company's existing vineyards.

Cash provided by financing activities was $9,094,000 for the year ended
December 31, 1999, compared to cash used in financing activities of $9,054,000
for the same period in 1998. Net borrowings under the Company's long-term credit
lines were $11,608,000 in 1999 as compared to net repayments in 1998 of
$6,674,000. The borrowings in 1999 were used primarily for expenditures 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 $2,514,000 in
1999, as compared to $2,380,000 in 1998.

YEAR 2000

The Company has completed the upgrading of its accounting and financial
software, and, in conjunction with the upgrade, the Company believes that any
known Year 2000 issues have been corrected.

25
<PAGE>
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 made inquiries of certain of
its principal suppliers and customers with respect to their Year 2000 readiness
and its potential effects on the Company. 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.

DIVIDENDS AND DISTRIBUTIONS

The Company intends to retain its future earnings, if any, and does not
anticipate paying cash dividends on either class of its Common Stock in the
foreseeable future. In addition, the Company's principal bank credit facilities
prohibit the payment of cash dividends without the consent of the lender.

ITEM 7. FINANCIAL STATEMENTS

The audited financial statements of the Company are set forth in this Report
beginning on page F-1.

26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
2.1 Exchange and Contribution Agreement, dated as of July 29,
1997, among Registrant and certain affiliated entities and
stockholders of Registrant (incorporated by reference to
Exhibit number 2.1 to Registrant's Report on Form 10-KSB for
the fiscal year ended December 31, 1997 filed March 30,
1998).

3.1a Certificate of Incorporation (incorporated by reference to
Exhibit number 3.1a to Registrant's Report on Form 10-KSB
for the fiscal year ended December 31, 1998 filed March 24,
1999).

3.1b Certificate of Amendment of Certificate of Incorporation
(incorporated by reference to Exhibit number 3.1b to
Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1998 filed March 24, 1999).

3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit number 3.2 to Registrant's Report on Form 10-KSB for
the fiscal year ended December 31, 1998 filed March 24,
1999).

4.1 Warrant Agreement, dated as of July 30, 1997, by and among
the Company, Cruttenden Roth Incorporated, Laidlaw Equities,
Inc. and Rodman & Renshaw, Inc (incorporated by reference to
Exhibit number 4.1 to Registrant's Report on Form 10-KSB for
the fiscal year ended December 31, 1997 filed March 30,
1998).

4.2 Form of Certificate Evidencing Ownership of Class A Common
Stock of Scheid Vineyards Inc (incorporated by reference to
Exhibit number 4.2 to Registrant's Report on Form 10-KSB
for the fiscal year ended December 31, 1997 filed March 30,
1998).

4.3 Form of Certificate Evidencing Ownership of Class B Common
Stock of Scheid Vineyards Inc. (incorporated by reference to
Exhibit number 4.3 to Amendment No. 1 to Registrant's
Registration Statement on Form SB-2 filed July 3, 1997).

10.1 1997 Stock Option/Stock Issuance Plan, as amended and
restated through March 10, 1998 (incorporated by reference
to Exhibit number 10.1 to Registrant's Report on
Form 10-KSB for the fiscal year ended December 31, 1997
filed March 30, 1998).(2)

10.2a Lease, dated as of January 1, 1997, by and among Sam Avila
and Margaret J. Avila, as trustees under declaration of
trust dated August 16, 1989, and Margaret J. Avila and
Valarie Bassetti successor co-trustees of the testamentary
trust of Joseph Laberere, and Sam Avila, and Margaret J.
Avila, and Scheid Vineyards and Management Co. (incorporated
by reference to Exhibit number 10.3 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)

10.2b 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")(incorporated by reference to Exhibit
number 10.1 to Registrants Form 10-QSB for the quarterly
period ended June 30, 1999 filed August 12, 1999).
</TABLE>

27
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.3 Lease, dated as of January 1, 1996, by and between Echenique
Ranch and Scheid Vineyards and Management Co., as amended by
a Letter Agreement dated March 27, 1996 (incorporated by
reference to Exhibit number 10.4 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)

10.4 Land Lease by and between William McHenry Bland and Monterey
Farming Corporation and Addendum to Land Lease, dated
September 26, 1973, by and between William McHenry Bland and
Monterey Farming Corporation (incorporated by reference to
Exhibit number 10.5 to Registrant's Registration Statement
on Form SB-2 filed May 28, 1997).(1)

10.5 Lease, dated September 27, 1979, by and among Luis
Echenique, Francis D. Echenique, Ricardo Echenique and
Monterey Farming Corporation, as amended by (i) a Memorandum
of Lease, dated September 27, 1979, (ii) an Amendment to
Memorandum of Lease, dated September 4, 1987, (iii) a First
Amendment to Lease, dated September 4, 1987, and (iv) a
Second Amendment of Lease, dated September 4, 1987
(incorporated by reference to Exhibit number 10.6 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.6+ Vineyard Management Agreement, dated as of January 1, 1997,
by and among Scheid Vineyards and Management Co.,
Canandaigua West, Inc. and Canandaigua Wine Company, Inc.
(incorporated by reference to Exhibit number 10.7 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.7+ Vineyard Management Agreement, dated as of January 1, 1996,
by and among Scheid Vineyards and Management Co.,
Canandaigua West, Inc. and Canandaigua Wine Company, Inc.
(incorporated by reference to Exhibit number 10.8 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.8+ Grape Purchase Agreement, dated April 15, 1998, between
Scheid Vineyards California Inc. and International
Distillers and Vintners North America, Inc. (incorporated by
reference to Exhibit numbers 10.1 and 99 to Registrant's
Report on Form 10-QSB for the quarterly period ended June
30, 1998 filed August 13, 1998).

10.9 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
Registrant's Registration Statement on Form SB-2 (File
No. 333-51055) filed May 8, 1998).

10.10a+ Vineyard Development and Management Agreement, dated as of
December 1, 1995, by and between Heublein, Inc. and Scheid
Vineyards and Management Co. (incorporated by reference to
Exhibit number 10.12 to Registrant's Registration Statement
on Form SB-2 filed May 28, 1997).(1)

10.10b Amendment No. 1 to Vineyard Development and Management
Agreement, dated as of March 28, 1997, by and between
Heublein, Inc. and Scheid Vineyards and Management Co.
(incorporated by reference to Exhibit number 10.11b to
Registrant's Report on Form 10-KSB for the fiscal year
ended December 31, 1997 filed March 30, 1998).(1)

10.11 Agricultural Credit Agreement (General Term Loan), dated
October 6, 1994, between Vineyard Investors 1972 and Sanwa
Bank California (incorporated by reference to Exhibit
number 10.15 to Registrant's Registration Statement on
Form SB-2 filed May 28, 1997).(1)

10.12 Business Loan Agreement, dated as of March 28, 1997, between
Scheid Vineyards and Management Co. and Bank of America
National Trust and Savings Association (incorporated by
reference to Exhibit number 10.20 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
</TABLE>

28
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.13+ Long Term Grape Purchase Contract, dated February 12, 1973,
between Monterey Farming Corporation and Almaden Vineyards,
Inc., as amended by (i) a Memorandum of Understanding, dated
August 6, 1987, (ii) a Letter Agreement, dated May 14, 1990,
and (iii) an Amendment to Long Term Grape Purchase Contract,
dated as of March 12, 1993, between Scheid Vineyards and
Management Co. and Heublein, Inc. (incorporated by reference
to Exhibit number 10.21 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)

10.14+ Long Term Grape Purchase Contract, dated December 21, 1972,
between Vineyard Investors 1972 and Almaden Vineyards, Inc.,
as amended by (i) a Memorandum of Understanding, dated
August 6, 1987, (ii) an Amendment to Long Term Grape
Purchase Contract, dated April 19, 1988, between Vineyard
Investors 1972 and Heublein, Inc., (iii) a Second Amendment
to Long Term Grape Purchase Contract, dated June 2, 1988,
(iv) a Third Amendment to Long Term Grape Purchase Contract,
dated as of March 12, 1993 and (v) a letter agreement, dated
April 6, 1990 (incorporated by reference to Exhibit
number 10.22 to Registrant's Registration Statement on
Form SB-2 filed May 28, 1997).(1)

10.15+ Long Term Grape Purchase Contract, dated February 12, 1973,
between Monterey Farming Corporation, as General Partner on
behalf of Vineyard 405, and Almaden Vineyards, Inc., as
amended by (i) a certain Memorandum of Understanding, dated
August 6, 1987, and (ii) an Amendment to Long Term Grape
Purchase Contract, dated as of March 12, 1993, between
Vineyard 405 and Heublein, Inc. (incorporated by reference
to Exhibit number 10.23 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)

10.16+ Long Term Wine Grape Purchase Agreement, dated as of
March 12, 1993, by and between Scheid Vineyards and
Management Co. and Heublein, Inc. (incorporated by reference
to Exhibit number 10.24 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)

10.17+ Grape Purchase Agreement, dated as of April 1, 1996, by and
between Scheid Vineyards and Management Co. and The Hess
Collection Winery (incorporated by reference to Exhibit
number 10.25 to Registrant's Registration Statement on
Form SB-2 filed May 28, 1997).(1)

10.18+ Grape Purchase Agreement, dated July 1, 1996, by and among
Scheid Vineyards and Management Co., Stephen Dooley Wine
Co., Inc. and The Chalone Wine Group, Ltd. (incorporated by
reference to Exhibit number 10.26 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)

10.19 Alternating Winery Agreement, dated November 30, 1995, by
and between Scheid Vineyards and Management Co. and Storrs
Winery (incorporated by reference to Exhibit number 10.27
to Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.20 Winery Services Agreement, dated January 1, 1996, by and
between Scheid Vineyards and Management Co. and Storrs
Winery (incorporated by reference to Exhibit number 10.28 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.21* Standard Office Lease, dated July 1, 1999, by and between
Scheid Vineyards California Inc. and Tesh Partners, L.P.

10.22+ Lease, dated as of October 18, 1998 between Scheid Vineyards
California Inc. and California Orchard Company.

10.23 Amended and Restated Buy-Sell Agreement, dated as of
December 31, 1997, by and among Scheid Vineyards Inc. and
holders of Class B Common Stock (incorporated by reference
to Exhibit number 10.24 to Registrant's Report on
Form 10-KSB for the fiscal year ended December 31, 1997
filed March 30, 1998).
</TABLE>

29
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.24 Joint Agreement, dated as of November 7, 1997, by and among
Samuel R. Avila (also known 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 Registrant's Registration Statement on Form SB-2
(File No. 333-51055) filed May 8, 1998).(1)

10.25 Water Supply Agreement, dated as of January 1, 1997, by
Scheid Vineyards and Management Co. and Canandaigua West,
Inc. (incorporated by reference to Exhibit number 10.36 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.26 Agreement Regarding Water, dated as of January 1, 1996, by
Luis Echenique, Ricardo Echenique and Margaret Echenique,
Executrix of the Estate of Francis D. Echenique, in favor of
each of Scheid Vineyards and Management Co. and Canandaigua
West, Inc. (incorporated by reference to Exhibit
number 10.37 to Registrant's Registration Statement on
Form SB-2 filed May 28, 1997).(1)

10.27 Easement Agreement, dated January 1, 1997, by Sam Avila and
Margaret J. Avila, as trustees under declaration of trust
dated August 16, 1989, and Margaret J. Avila and Valarie
Bassetti successor co-trustees of the testamentary trust of
Joseph Labarere and Sam Avila and Margaret J. Avila and
Scheid Vineyards and Management Co., in favor of Canandaigua
West, Inc. (incorporated by reference to Exhibit
number 10.38 to Registrant's Registration Statement on
Form SB-2 filed May 28, 1997).(1)

10.28 Credit Agreement (Crop Line of Credit) dated September 7,
1999, by and between Sanwa Bank California and Scheid
Vineyards Inc. and Scheid Vineyards California
Inc.(incorporated by reference to Exhibit number 10.1 to
Registrants Form 10-QSB for the quarterly period ended
September 30, 1999 filed November 12, 1999).

10.29+ Grape Purchase Agreement, dated as of May 9, 1997, by and
between Scheid Vineyards Inc. and The Hess Collection Winery
(incorporated by reference to Exhibit number 10.42 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.30+ Grape Purchase Agreement, dated as of April 1, 1997, by and
between Vineyard Investors 1972 and Stephen Dooley Wine Co.,
Inc. (incorporated by reference to Exhibit number 10.43 to
Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)

10.31 Employment Agreement, dated as of July 19, 1997, by and
between Scheid Vineyards Inc. and Alfred G. Scheid
(incorporated by reference to Exhibit number 10.44 to
Amendment No. 2 to Registrant's Registration Statement on
Form SB-2 filed July 21, 1997).(2)

10.32 Employment Agreement, dated as of July 19, 1997, by and
between Scheid Vineyards Inc. and Scott D. Scheid
(incorporated by reference to Exhibit number 10.45 to
Amendment No. 2 to Registrant's Registration Statement on
Form SB-2 filed July 21, 1997).(2)

10.33 Employment Agreement, dated as of July 19, 1997, by and
between Scheid Vineyards Inc. and Heidi M. Scheid
(incorporated by reference to Exhibit number 10.46 to
Amendment No. 2 to Registrant's Registration Statement on
Form SB-2 filed July 21, 1997).(2)

10.34 Employment Agreement, dated as of July 19, 1997, by and
between Scheid Vineyards Inc. and Kurt J. Gollnick
(incorporated by reference to Exhibit number 10.47 to
Amendment No. 2 to Registrant's Registration Statement on
Form SB-2 filed July 21, 1997).(2)
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------------------
<C> <S>
10.35 Form of Indemnification Agreement (incorporated by reference
to Exhibit number 10.48 to Amendment No. 1 to Registrant's
Registration Statement on Form SB-2 filed July 3, 1997).(2)

21.1 List of Subsidiaries (incorporated by reference to Exhibit
number 21.1 to Amendment No. 1 to Registrant's Registration
Statement on Form SB-2 filed July 3, 1997).

23.1* Independent Auditors' Consent.

27.1* Financial Data Schedule.
</TABLE>

- ------------------------

* Electronically filed herewith.

+ Portions of this Exhibit have been deleted pursuant to the Registrant's
requests for confidential treatment pursuant to Rule 406 promulgated under
the Securities Act or Rule 24b-2 promulgated under the Securities Exchange
Act.

(1) The contracting party is a predecessor in interest to Scheid Vineyards
California Inc., Registrant's wholly owned subsidiary.

(2) Indicates a management contract or compensating plan or arrangement required
to be filed as an exhibit to this Form 10-KSB.

(b) Current Reports on Form 8-K

None.

31
<PAGE>
SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

<TABLE>
<S> <C> <C>
SCHEID VINEYARDS INC.

By: /s/ ALFRED G. SCHEID
-----------------------------------------
Alfred G. Scheid
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
</TABLE>

In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALFRED G. SCHEID Chairman of the Board and Chief
------------------------------------ Executive Officer (Principal March 8, 2000
Alfred G. Scheid Executive Officer)

Vice President Finance, Chief
/s/ HEIDI M. SCHEID Financial Officer, Secretary,
------------------------------------ Treasurer and Director (Principal March 8, 2000
Heidi M. Scheid Financial Officer)

/s/ SCOTT D. SCHEID
------------------------------------ Vice President, Chief Operating March 8, 2000
Scott D. Scheid Officer and Director

/s/ JOHN L. CRARY
------------------------------------ Director March 8, 2000
John L. Crary

/s/ ROBERT P. HARTZELL
------------------------------------ Director March 8, 2000
Robert P. Hartzell
</TABLE>

32
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Independent Auditors' Report................................ F-2

Consolidated Balance Sheets................................. F-3

Consolidated Statements of Operations....................... F-4

Consolidated Statements of Cash Flows....................... F-5

Consolidated Statements of Stockholders' Equity............. F-6

Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Scheid Vineyards Inc.:

We have audited the accompanying consolidated balance sheets of Scheid
Vineyards Inc. and subsidiary (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, cash flows, and
stockholders' equity for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.

/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
Los Angeles, California
February 18, 2000

F-2
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
NOTES 1999 1998
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. 2 $ 411 $ 5,031
Accounts receivable, trade................................ 1,177 728
Accounts receivable, other................................ 581 398
Inventories............................................... 3 673 742
Supplies, prepaid expenses and other current assets....... 384 614
Deferred income taxes..................................... 8 -- 38
Current portion of long-term receivable................... 5 525 --
------- -------
Total current assets.................................... 3,751 7,551
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 4,7 46,170 32,937
LONG-TERM RECEIVABLE........................................ 5 4,724 5,572
OTHER ASSETS, NET........................................... 575 472
------- -------
$55,220 $46,532
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt......................... 7 $ 1,530 $ 275
Accounts payable and accrued liabilities.................. 1,365 716
Accrued interest payable.................................. 409 197
Income taxes payable...................................... 8 297 2,480
Deferred income taxes..................................... 8 60 --
------- -------
Total current liabilities............................... 3,661 3,668
LONG-TERM DEBT, NET OF CURRENT PORTION...................... 7 21,915 11,562
DEFERRED INCOME TAXES....................................... 8 1,087 867
------- -------
Total liabilities....................................... 26,663 16,097
------- -------
COMMITMENTS AND CONTINGENCIES............................... 10
STOCKHOLDERS' EQUITY:....................................... 6,11,12
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;
2,310,463 and 2,872,950 shares outstanding in 1999 and
1998, respectively
Class B, $.001 par value; 10,000,000 shares authorized;
3,374,100 shares issued and outstanding in 1999 and
1998.................................................. 7 7
Additional paid-in capital................................ 21,868 21,868
Retained earnings......................................... 11,572 10,936
Less: treasury stock; 1,014,850 and 452,050 Class A Common
Stock at cost in 1999 and 1998, respectively............ (4,890) (2,376)
------- -------
Total stockholders' equity.............................. 28,557 30,435
------- -------
$55,220 $46,532
======= =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
NOTES 1999 1998
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Sales..................................................... $11,804 $16,436
Vineyard management, services and other fees.............. 1,040 1,037
------- -------
Total revenues.......................................... 12,844 17,473
COST OF SALES............................................... 8,219 7,911
------- -------
GROSS PROFIT................................................ 4,625 9,562
General and administrative expenses....................... 3,572 4,274
Reversal of deferred compensation......................... 9 -- (706)
Interest income (net of interest expense of $0 in 1999 and
$336 in 1998)........................................... (33) (46)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 1,086 6,040
PROVISION FOR INCOME TAXES.................................. 8 450 2,421
------- -------
NET INCOME.................................................. $ 636 $ 3,619
======= =======
BASIC AND DILUTED EARNINGS PER SHARE........................ 2 $ 0.11 $ 0.55
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2 5,996 6,611
======= =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 636 $ 3,619
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, amortization and abandonments........... 1,693 2,148
Deferred compensation................................. -- (662)
Noncash compensation.................................. -- 75
Deferred income taxes................................. 318 88
Changes in operating assets and liabilities:
Accounts receivable, trade.............................. (449) (379)
Accounts receivable, other.............................. (183) 14
Inventories............................................. 69 360
Supplies, prepaid expenses and other current assets..... 230 199
Accounts payable and accrued liabilities................ 861 79
Income taxes payable.................................... (2,183) 2,480
-------- --------
Net cash provided by operating activities............. 992 8,021
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable...................................... 323 (893)
Proceeds from sale of property, plant and equipment....... -- 710
Additions to property, plant and equipment................ (14,926) (8,000)
Other assets.............................................. (103) (236)
-------- --------
Net cash used in investing activities................. (14,706) (8,419)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt................................ 21,103 4,440
Repayment of long-term debt............................... (9,495) (11,114)
Repurchase of common stock................................ (2,514) (2,380)
-------- --------
Net cash provided by (used in) financing activities... 9,094 (9,054)
-------- --------
Decrease in cash and cash equivalents................. (4,620) (9,452)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 5,031 14,483
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 411 $ 5,031
======== ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-5
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK OUTSTANDING
---------------------------------
NUMBER OF NUMBER OF ADDITIONAL
CLASS A CLASS B PAID-IN RETAINED TREASURY
SHARES SHARES AMOUNT CAPITAL EARNINGS SHARES
--------- ---------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1998.................. 2,300,000 4,400,000 $7 $21,797 $ 7,317 --
Conversion of Class B shares to
Class A shares (Note 11).............. 1,025,000 (1,025,000) -- -- -- --
Repurchase of common stock (Note 11).... (452,050) (900) -- -- -- $(2,380)
Shares cancelled........................ -- -- -- (4) -- 4
Stock issued for compensation........... -- -- -- 75 -- --
Net income.............................. -- -- -- -- 3,619 --
--------- ---------- -- ------- ------- -------
BALANCE, DECEMBER 31, 1998................ 2,872,950 3,374,100 7 21,868 10,936 (2,376)
Repurchase of common stock (Note 11).... (562,800) -- -- -- -- (2,514)
Stock options exercised (Note 12)....... 313 -- -- -- -- --
Net income.............................. -- -- -- -- 636 --
--------- ---------- -- ------- ------- -------
BALANCE, DECEMBER 31, 1999................ 2,310,463 3,374,100 $7 $21,868 $11,572 $(4,890)
========= ========== == ======= ======= =======
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

F-6
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

1. ORGANIZATION AND BASIS OF PRESENTATION

ORGANIZATION--The principal business of the Company is the production of
premium varietal wine grapes. The Company currently operates approximately 6,000
acres of premium wine grape vineyards in Monterey and San Benito Counties,
California.

The Company has long-term grape purchase agreements with several wineries
whereby the wineries agree to purchase substantially all of the Company's
current grape production. These contracts generally expire no earlier than the
completion of harvest in years ranging from 2001 to 2014 and are extended if
neither party cancels two or three years before the expiration date. The largest
set of these winery contracts with a single customer covers approximately 57% of
the Company's acreage at December 31, 1999 and accounted for approximately 76%
and 74% of the Company's total revenues in 1999 and 1998, respectively.

BASIS OF PRESENTATION--The Company conducts all of its business through its
wholly owned subsidiary, Scheid Vineyards California Inc., a California
corporation. All significant intercompany balances have been eliminated in
consolidation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. At December 31, 1999 and 1998, substantially all cash balances
were on deposit with the Company's major bank.

INVENTORIES--Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Cost includes the cost of grown grapes, harvesting,
production, aging and bottling, and tasting room merchandise. Wine inventories
are classified as current assets in accordance with recognized trade practice
although certain inventories will be aged for periods longer than one year. Crop
costs associated with farming vineyards prior to the harvest are deferred and
recognized in the year the grapes are harvested. On a quarterly basis, the
Company evaluates the cost of its inventories and reduces such inventories to
market if required.

PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost and are depreciated using straight-line and accelerated methods over the
estimated useful lives of the assets. Vineyards generally have estimated
depreciable lives of 25 to 30 years, buildings 30 years, and furniture and
equipment 5 to 7 years. Development costs incurred during the development period
of a vineyard including related interest are capitalized. Depreciation commences
in the initial year the vineyard becomes commercially productive, generally in
the fourth year. Any revenue generated prior to a vineyard becoming commercially
productive reduces the capitalized cost of the vineyard. Capitalized costs were
reduced by revenues totaling $184,000 and $0 in 1999 and 1998, respectively. The
Company capitalized interest totaling $1,185,000 and $641,000 in 1999 and 1998,
respectively.

REVENUE RECOGNITION--The Company recognizes revenue from grape sales when
the grapes are delivered to the winery. The Company does not have any allowance
for returns because grapes are tested and accepted upon delivery. Vineyard
management and other services are recognized as provided. All revenues of the
Company are derived from customers within the United States.

F-7
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair values of accounts receivable
and accounts payable approximate book value because of their short duration.
Long-term receivables and long-term debt approximate book value because such
financial instruments have variable, market driven, interest rates.

IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF--Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" requires that long-lived assets and certain identifiable intangibles to be
held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. For the year ended December 31, 1998 the Company wrote down
vineyard acres it intends to remove and redevelop by $555,000. The write-down of
the acres being redeveloped was based upon a comparison of net book values to
total estimated revenues less estimated operating costs of the acres prior to
removal. There were no such write-downs for the year ended December 31, 1999.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting period.
Actual results could differ from reported assets, liabilities, revenues and
expenses.

EARNINGS PER SHARE AND CLASSES OF COMMON STOCK--Weighted average shares
outstanding includes both Class A and Class B Common Stock outstanding for the
periods presented (Note 11). The effect of outstanding stock options and
warrants on the weighted average shares was immaterial for the periods
presented.

NEW FINANCIAL ACCOUNTING STANDARD--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instrument and
Hedging Activities." SFAS No. 133 establishes accounting and reporting standards
for derivative instruments. It requires the recognition of all derivatives as
either assets or liabilities in the statement of position and measurement of the
instruments at fair value. The Company plans to adopt SFAS No.133 on January 1,
2001 and is currently evaluating the impact on the financial statements.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred crop costs..................................... $354,000 $376,000
Bulk and bottled wine................................... 291,000 339,000
Tasting room merchandise................................ 28,000 27,000
-------- --------
Total................................................. $673,000 $742,000
======== ========
</TABLE>

F-8
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Land and buildings................................. $ 6,535,000 $ 5,843,000
Vineyard improvements.............................. 22,910,000 15,452,000
Vineyard improvements under development............ 21,464,000 16,201,000
Machinery and equipment............................ 5,520,000 4,030,000
----------- -----------
Total............................................ 56,429,000 41,526,000
Less accumulated depreciation and amortization..... 10,259,000 8,589,000
----------- -----------
Property, plant and equipment--net................. $46,170,000 $32,937,000
=========== ===========
</TABLE>

5. LONG-TERM RECEIVABLE

The Company has a contract to redevelop and manage certain vineyards owned
or controlled by a major client. The contract originally called for the
expenditure of approximately $7,500,000 over a three-year period. The funds for
this project have been borrowed, as an accommodation to the client, by the
Company under a line of credit (see Note 7). The interest rate and payment terms
of this receivable are the same as the related note payable. The note payable to
the bank is secured by a letter of credit provided by the client and by the
management contract. The contract calls for the payment of this receivable by
the client's payment of the six annual principal installments under the line,
beginning January 5, 2000. At December 31, 1999, the receivable was due as
follows: $525,000 in 2000, $525,000 in 2001, $525,000 in 2002, $525,000 in 2003,
$525,000 in 2004, and $2,624,000 in 2005. The redevelopment of the property was
completed in 1999 and the Company will continue to manage the operations of the
vineyard for the client.

6. CROP LINE OF CREDIT

The Company has a crop line of credit with a bank which currently provides
for maximum borrowings of $12,000,000 through June 5, 2001. Borrowings are
secured by crops and other assets with interest due quarterly at the bank's
reference rate. At December 31, 1999, the weighted average interest rate on
outstanding borrowings under this line of $2,700,000 was 7.91%. No amounts were
outstanding under the Company's crop line of credit at December 31, 1998.

The crop line prohibits the payment of dividends without the consent of the
lender and contains various financial covenants, including minimum tangible net
worth amounts, and current and total debt to net worth ratios. At December 31,
1999, the Company was in compliance with all covenants except for the current
ratio covenant. The Company has received a waiver from the bank regarding the
noncompliance of the current ratio covenant at December 31, 1999, and expects to
be in compliance with all covenants at December 31, 2000.

F-9
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 1999 AND 1998

7. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revolving/Declining Line of Credit Agreement with a bank
which provided for a maximum borrowing of $3,000,000
diminishing annually to a maximum allowable commitment of
$1,071,000, which is due on July 5, 2005. The line of
credit is secured by a leasehold interest in 707 vineyard
acres. Interest is payable quarterly at the lower of a
bank-quoted fixed rate or 3/4% over the bank's reference
rate (7.97% at December 31, 1999)......................... $ 2,143,000 $ --

Revolving/Declining Line of Credit Agreement with a bank
which provided for a maximum borrowing of $2,835,000
diminishing annually to a maximum allowable commitment of
$1,775,000, which is due on June 5, 2007. The line of
credit is secured by a deed of trust on 405 vineyard
acres. Interest is payable quarterly at the lower of a
bank-quoted fixed rate or 1/4% over the bank's reference
rate (7.97% at December 31, 1999)......................... 2,685,000 --

Revolving/Declining Line of Credit Agreement with a bank
which provided for a maximum borrowing of $1,450,000
diminishing annually to a maximum allowable commitment of
$586,000, which is due on June 5, 2007. The line of credit
is secured by a leasehold interest in 352 vineyard acres.
Interest is payable quarterly at the lower of a
bank-quoted fixed rate or 1/4% over the bank's reference
rate (7.97% at December 31, 1999)......................... 1,258,000 --

Revolving/Declining Line of Credit Agreement with a bank
which provided for a maximum borrowing of $3,600,000
diminishing annually to a maximum allowable commitment of
$1,980,000, which is due on June 5, 2008. The line of
credit is secured by a deed of trust on 370 vineyard
acres. Interest is payable quarterly at the lower of a
bank-quoted fixed rate or the bank's reference rate (7.97%
at December 31, 1999)..................................... 3,420,000 --

Note payable to bank, with interest at the lower of a
bank-quoted fixed rate or the bank's reference rate plus
3/4% (7.97% at December 31, 1999), principal due in annual
installments through July 5, 2005, secured by a trust deed
on 707 vineyard acres..................................... 1,200,000 1,275,000

Note payable to bank, with interest at the lower of a
bank-quoted fixed rate or the bank's reference rate plus
3/4% (7.97% at December 31, 1999), principal due in annual
installments through October 5, 2004, secured by a first
deed of trust on 1,063 acres of real property............. 4,650,000 4,850,000

Note payable, with interest at 1% over a bank's reference
rate (9% at December 31, 1999), secured by deeds of trust,
due January 10, 2000...................................... 140,000 140,000
</TABLE>

F-10
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

7. LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Note payable to bank represents borrowings on a $7,500,000
line of credit, which bears interest at the bank's
reference rate (6.97% at December 31, 1999). The note is
secured by a letter of credit provided by a major client,
and is used for costs incurred for the development of
certain vineyards owned by the client (see Note 5).
Principal due in six annual installments beginning January
5, 2000................................................... 5,249,000 5,572,000
----------- -----------
Total................................................... 20,745,000 11,837,000
Less current maturities..................................... 1,530,000 275,000
----------- -----------
Long-term portion........................................... $19,215,000 $11,562,000
=========== ===========
</TABLE>

Principal payments required on long-term debt (including the crop line of
credit--Note 6) for each of the next five years ending December 31 are as
follows:

<TABLE>
<S> <C>
2000........................................................ $ 1,530,000
2001........................................................ 4,178,000
2002........................................................ 1,478,000
2003........................................................ 1,478,000
2004........................................................ 4,846,000
Thereafter.................................................. 9,935,000
-----------
Total....................................................... $23,445,000
===========
</TABLE>

Substantially all of the Company's property, plant and equipment serves as
collateral for long-term debt. In addition, the credit facilities and notes
contain various financial covenants, including minimum tangible net worth
amounts, and current and total debt to net worth ratios. At December 31, 1999,
the Company was in compliance with all covenants except for the current ratio
covenant. The Company has received a waiver from the bank regarding the
noncompliance of the current ratio covenant at December 31, 1999, and expects to
be in compliance with all covenants at December 31, 2000.

F-11
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

8. INCOME TAXES

Significant components of the Company's net deferred income tax assets and
liabilities at December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Current deferred income tax assets:
State income taxes................................. $ 34,000 $ 169,000
Miscellaneous reserves............................. 86,000 86,000
Current deferred income tax liabilities:
Prepaid expenses................................... (180,000) (217,000)
----------- ---------
Net current deferred income tax (liability) asset.... $ (60,000) $ 38,000
=========== =========
Long-term deferred income tax assets:
State income taxes................................. $ 75,000 $ 73,000
Long-term deferred income tax liabilities:
Depreciation....................................... (1,162,000) (940,000)
----------- ---------
Net long-term deferred income tax liability.......... $(1,087,000) $(867,000)
=========== =========
</TABLE>

The provision for income taxes is as follows:

<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Current:
Federal............................................. $ 77,000 $1,797,000
State............................................... 55,000 536,000
-------- ----------
Total................................................. 132,000 2,333,000
-------- ----------
Deferred:
Federal............................................. 273,000 87,000
State............................................... 45,000 1,000
-------- ----------
Total................................................. 318,000 88,000
-------- ----------
Total provision for income taxes...................... $450,000 $2,421,000
======== ==========
</TABLE>

The Company's effective income tax rate differs from the federal statutory
income tax rate due to the following:

<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Federal statutory rate...................................... 34.0% 34.0%
State taxes, net of federal benefit......................... 6.0 5.9
Other....................................................... 1.4 0.2
---- ----
Total....................................................... 41.4% 40.1%
==== ====
</TABLE>

F-12
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

9. DEFERRED COMPENSATION

The Company had a non-qualified deferred compensation arrangement with an
employee. The arrangement provided for annual payments of $100,000 commencing
upon the employee's retirement. The employee passed away in August 1998 negating
the need for the accrued liability which totaled $706,000. Compensation expense
related to the arrangement was $44,000 for the year ended December 31, 1998.

10. COMMITMENTS AND CONTINGENCIES

LEASE OBLIGATIONS--The Company has various operating lease agreements for
office space and farm land. The lease for office space is with a related
partnership and runs until June 2004. The rent is currently $119,000 annually.

Farm land leases cover approximately 2,600 acres with initial terms ranging
from 24 to 30 years. The land leases provide for options to renew ranging from
10 to 20 years and contain provisions for rent adjustments based upon the
prevailing market rate, Consumer Price Index, or revenue generated by the
property, and also provide for payments of taxes, insurance and maintenance
costs.

Aggregate minimum rental payments for each of the next five years ending
December 31 are as follows:

<TABLE>
<S> <C> <C>
2000.................................................. $ 931,000
2001.................................................. 945,000
2002.................................................. 945,000
2003.................................................. 832,000
2004.................................................. 772,000
Thereafter............................................ 11,183,000
</TABLE>

Rent charged to operations was $466,000 and $429,000 for the years ended
December 31, 1999 and 1998, respectively. Rent capitalized into vineyard
development was $481,000 and $151,000 for the years ended December 31, 1999 and
1998, respectively.

PENSION PLANS--The Company has two 401(k) Profit Sharing Plans. The first
plan is for the benefit of the Company's employees who are covered by the United
Farm Workers of America Collective Bargaining Agreement. All union employees of
the Company are eligible to participate after having worked 500 hours within a
one-year period. The Company contributes 15 cents for each hour worked by
eligible employees, subject to the limitations imposed by the Internal Revenue
Code. The Company's contribution to the union employees' plan amounted to
$79,000 and $62,000 for the years ended December 31, 1999 and 1998,
respectively.

The second plan covers the Company's non-union employees. All non-union
employees of the Company are eligible to participate in the plan after one year
of employment. Employees may contribute between 1% and 15% of their annual
compensation. The Company matches 50 cents for every dollar of employee
contributions up to 6% of their annual salaries, subject to the limitations
imposed by the Internal Revenue Code. The Company's contribution to this plan
amounted to $37,000 and $36,000 for the years ended December 31, 1999 and 1998,
respectively.

OTHER--The Company was committed to the purchase of vineyard materials at
December 31, 1999 in the amount of $668,000.

F-13
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

11. COMMON STOCK

RIGHTS--

Each share of Class A Common Stock is entitled to one vote and each share of
Class B Common Stock is entitled to five votes on all matters submitted to a
vote of the stockholders. The holders of the Class A Common Stock, voting as a
separate class, elect 25% of the total Board of Directors, rounded up to the
nearest whole number, of the Company and the holders of the Class B Common
Stock, voting as a separate class, elect the remaining directors. Each share of
Class B Common Stock is convertible into one share of Class A Common Stock at
the option of the holder or automatically upon transfer to a person other than
certain specified persons. Except for the differing voting rights, the shares of
Class A and Class B common stock have substantially identical rights,
preferences and privileges. In 1998, the Company's Chairman/Chief Executive
Officer and his wife sold and gifted a total of 1,025,000 shares of Class B
Common Stock which were automatically converted to an equal number of shares of
Class A Common Stock at the time of gift or transfer.

WARRANTS--

The Company granted the representative of the underwriters of its initial
public offering in 1997 warrants to purchase 200,000 shares of common stock. The
warrants are exercisable at $14.00 per share any time between July 24, 1998
through July 24, 2002.

STOCK REPURCHASES--

12. STOCK OPTION PLAN

In 1997, the Board of Directors of the Company adopted the 1997 Stock
Option/Stock Issuance Plan authorizing the issuance of qualified or
non-qualified stock options to directors, officers, employees, consultants and
others to purchase up to 200,000 shares of the Company's Class A Common Stock at
prices equal to the fair value of the Company's stock at the date of grant.
Options granted to date under the Plan vest one-quarter each year, beginning one
year after the grant date or a specified vesting commencement date and expire
ten years after the earlier of the grant date and the vesting commencement date.

On October 8, 1998, the Board of Directors approved the cancellation of
71,000 options, excluding those stock options granted to Directors, and
regranted such options at $4.00 per share, the then fair market value of the
Class A Common Stock of the Company. All other terms of the options remained
identical.

F-14
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

12. STOCK OPTION PLAN (CONTINUED)

The following summarizes stock option activity for the periods presented:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICES
-------- ----------------
<S> <C> <C>
Outstanding, January 1, 1998....................... 162,000 $10.00
Granted.......................................... 76,000 $ 4.29
Cancelled........................................ (102,000) $10.00
-------- ------
Outstanding, December 31, 1998..................... 136,000 $ 6.81
Granted.......................................... 15,000 $ 4.76
Cancelled........................................ (10,687) $ 4.14
Exercised........................................ (313) $ 4.00
-------- ------
Outstanding, December 31, 1999..................... 140,000 $ 6.80
======== ======
</TABLE>

<TABLE>
<CAPTION>
RANGE OF
EXERCISE PRICES AT
DECEMBER 31, 1999
-----------------------
$4.00-$5.06 $10.00
----------- ---------
<S> <C> <C>
Options outstanding..................................... 80,000 60,000
Weighted average exercise price of options
outstanding........................................... $4.40 $10.00
Options exercisable..................................... 37,917 36,250
Weighted average exercise price of options
exercisable........................................... $4.23 $10.00
Weighted average fair value of options granted in
1999.................................................. $2.55 None
Weighted average remaining contractual life............. 8.0 years 7.5 years
</TABLE>

The Company accounts for its stock-based awards using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations.
Accordingly, no compensation expense has been recognized in the financial
statements for employee stock arrangements.

SFAS No. 123, "Accounting for Stock-Based Compensation", requires the
disclosure of pro forma net income and net income per share. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated through
the use of options pricing models, even though such models were developed to
estimate the fair value of freely-tradable, fully transferable options without
vesting restrictions, which significantly differ from the Company's stock option
awards. These models also require subjective assumptions, including future stock
price volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 5 years following vesting; 54% and 62% stock price volatility in 1999 and
1998, respectively; weighted average risk free rate of return of 6.0%; and no
dividends during the expected term. Forfeitures are recognized as they occur.

F-15
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1999 AND 1998

12. STOCK OPTION PLAN (CONTINUED)
If the computed fair values of the Company's stock option awards had been
amortized to expense over the vesting period of the awards, net income for the
years ended December 31, 1999 and 1998 would have been reduced to the pro forma
amounts indicated below.

<TABLE>
<CAPTION>
1999 1998
-------- ----------
<S> <C> <C>
Net income:
As reported......................................... $636,000 $3,619,000
Pro forma........................................... $544,000 $3,466,000

Net income per share:
As reported......................................... $ 0.11 $ 0.55
Pro forma........................................... $ 0.09 $ 0.52
</TABLE>

13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures to the statements of cash flows are as follows:

<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Interest paid (net of amount capitalized)............ $ -- $ 454,000
Income taxes paid.................................... $2,550,000 $ --
</TABLE>

F-16

<PAGE>

EXHIBIT 10.21

STANDARD OFFICE LEASE -- GROSS

AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION

1. BASIC LEASE PROVISIONS ("Basic Lease Provisions")

1.1 PARTIES: This Lease, dated, for reference purposes only, May 10,
1999, is made by and between TESH PARTNERS, L.P., (herein called "Lessor")
and SCHEID VINEYARDS CALIFORNIA INC., doing business under the name of SAME,
(herein called "Lessee").

1.2 PREMISES: Suite Number(s) 300, 301*, 2 floors, consisting of
approximately 6,436 feet, more or less, as defined in paragraph 2 and as
shown on Exhibit "A" hereto (the "Premises").

*Premises shall also include a storage room located on the first
floor of the building adjacent to the electrical room.

1.3 BUILDING: Commonly described as being located at 13470 Washington
Boulevard, in the City of Marina Del Rey, County of Los Angeles, State of
California, as more particularly described in Exhibit N/A hereto, and as
defined in paragraph 2.

1.4 USE: General Office, subject to paragraph 6.

1.5 TERM: Five (5) year commencing July 1, 1999 ("Commencement Date")
and ending June 30, 2004, as defined in paragraph 3.

1.6 BASE RENT: _________ per month, payable on the 1st day of each
month, per paragraph 4.1.

1.7 BASE RENT INCREASE: On NONE the monthly Base Rent payable under
paragraph 1.6 above shall be adjusted as provided in paragraph 4.3 below.

1.8 RENT PAID UPON EXECUTION: Nineteen Thousand Eight Hundred
Ninety-Four ($19,894) Dollars for $9,947 First Month's Rent, $9,947 Security
Deposit.

1.9. SECURITY DEPOSIT: Nine Thousand Nine Hundred Forty-Seven ($9,947)
Dollars.

1.10. LESSEE'S SHARE OF OPERATING EXPENSE INCREASE: 53.333% as defined
in paragraph 4.2.

2. PREMISES, PARKING AND COMMON AREAS.

2.1 PREMISES: The Premises are a portion of a building, herein
sometimes referred to as the "Building" identified in paragraph 1.3 of the
Basic Lease Provisions. "Building" shall include adjacent parking structures
used in connection therewith. The Premises, the Building, the Common Areas,
the land upon which the same are located, along with all other buildings and
improvements thereon or thereunder, are herein collectively referred to as
the "Office Building Project." Lessor hereby leases to Lessee and Lessee
leases from Lessor for the term, at the rental, and upon all of the
conditions set forth herein, the real property referred to in the Basic Lease
Provisions, paragraph 1.2, as the "Premises", including rights to the Common
Areas as hereinafter specified.

2.2 VEHICLE PARKING: So long as Lessee is not in default, and subject
to the rules and regulations attached hereto, and as established by Lessor
from time to time, Lessee shall be entitled to rent and use 10 parking spaces
in the Office Building Project at the monthly rate applicable from time to
time for monthly parking as set by Lessor and/or its licensee.

2.2.1 If Lessee commits, permits or allows any of the prohibited
activities described in the Lease or the rules then in effect, then Lessor
shall have the right, without notice, in addition to such other rights and
remedies that it may have, to remove or tow away the vehicle involved and
charge the cost to Lessee, which cost shall be immediately payable upon
demand by Lessor.

2.2.2 The monthly parking rate per parking space will be $40 per
month at the commencement of the term of this Lease, and is subject to change
upon five (5) days prior written notice to Lessee. Monthly parking fees shall
be payable one month in advance prior to the first day of each calendar month.

2.3 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as
all areas and facilities outside the Premises and within the exterior
boundary line of the Office Building Project that are provided and designated
by the Lessor from time to time for the general non-exclusive use of Lessor,
Lessee and of other lessees of the Office Building Project and their
respective employees, suppliers, shippers, customers and invitees, including
but not limited to common entrances, lobbies, corridors, stairways and
stairwells, public restrooms, elevators, escalators, parking areas to the
extent not otherwise prohibited by this Lease, loading and unloading areas,
trash areas, roadways, sidewalks, walkways, parkways, ramps, driveways,
landscaped areas and decorative walls.

2.4 COMMON AREAS - RULES AND REGULATIONS. Lessee agrees to abide by
and conform to the rules and regulations attached hereto as Exhibit B with
respect to the Office Building Project and Common Areas, and to cause its
employees, suppliers, shippers, customers, and invitees to so abide and
conform. Lessor or such other person(s) as Lessor may appoint shall have the
exclusive control and management of the Common Areas and shall have the
right, from time to time, to modify, amend and enforce said rules and
regulations. Lessor shall not be responsible to Lessee for the non-compliance
with said rules and regulations by other lessees, their agents, employees and
invitees of the Office Building Project.

2.5 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's
sole discretion, from time to time:

(a) To make changes to the Building interior and exterior and
Common Areas, including, without limitation, changes in the location, size,
shape, number, and appearance thereof, including but not limited to the
lobbies, windows, stairways, air shafts, elevators, escalators, restrooms,
driveways, entrances, parking spaces, parking areas, loading and unloading
areas, ingress, egress, direction of traffic, decorative walls, landscaped
areas and walkways; provided, however, Lessor shall at all times provide the
parking facilities required by applicable law;

(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;

(c) To designate other land and improvements outside the
boundaries of the Office Building Project to be a part of the Common Areas,
provided that such other land and improvements have a reasonable and
functional relationship to the Office Building Project;

(d) To add additional buildings and improvements to the Common
Areas;

(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Office Building Project, or any
portion thereof;

(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Office Building Project as
Lessor may, in the exercise of sound business judgment deem to be appropriate.

3. TERM.

3.1 TERM. The term and Commencement Date of this Lease shall be as
specified in paragraph 1.5 of the Basic Lease Provisions.

3.2 DELAY IN POSSESSION. Notwithstanding said Commencement Date, if
for any reason Lessor cannot deliver possession of the Premises to Lessee on
said date and subject to paragraph 3.2.2, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease
or the obligations of Lessee hereunder or extend the term thereof, but in
such case, Lessee shall not be obligated to pay rent or perform any other
obligation of

PAGE 1 OF 12
<PAGE>

Lessee under the terms of this Lease, except as may be otherwise provided in
this Lease, until possession of the Premises is tendered to Lessee, as
hereinafter defined; provided, however, that if Lessor shall not have
delivered possession of the Premises within sixty (60) days following said
Commencement Date, as the same may be extended under the terms of a Work
Letter executed by Lessor and Lessee, Lessee may, at Lessee's option, by
notice in writing to Lessor within ten (10) days thereafter, cancel this
Lease, in which event the parties shall be discharged from all obligations
hereunder; provided, however, that, as to Lessee's obligations, Lessee first
reimburses Lessor for all costs incurred for Non-Standard Improvements and, as
to Lessor's obligations, Lessor shall return any money previously deposited
by Lessee (less any offsets due Lessor for Non-Standard Improvements); and
provided further, that if such written notice by Lessee is not received by
Lessor within said ten (10) day period, Lessee's right to cancel this Lease
hereunder shall terminate and be of no further force or effect.

3.2.1 POSSESSION TENDERED - DEFINED. Possession of the Premises
shall be deemed tendered to Lessee ("Tender of Possession") when (1) the
improvements to be provided by Lessor under this Lease are substantially
completed, (2) the Building utilities are ready for use in the Premises, (3)
Leases has reasonable access to the Premises, and (4) ten (10) days shall
have expired following advance written notice to Lessee of the occurrence of
the matters described in (1), (2) and (3), above of this paragraph 3.2.1.

3.2.2 DELAYS CAUSED BY LESSEE. There shall be no abatement of
rent, and the sixty (60) days period following the Commencement Date before
which Lessee's right to cancel this Lease accrues under paragraph 3.2, shall
be deemed extended to the extent of any delays caused by acts or omissions of
Lessee, Lessee's agents, employees and contractors.

3.3 EARLY POSSESSION. If Lessee occupies the Premises prior to said
Commencement Date, such occupancy shall be subject to all provisions of this
Lease, such occupancy shall not change the termination date, and Lessee shall
pay rent for such occupancy.

3.4 UNCERTAIN COMMENCEMENT. In the event commencement of the Lease
term is defined as the completion of the improvements, Lessee and Lessor shall
execute an amendment to this Lease establishing the date of Tender of
Possession (as defined in paragraph 3.2.1) or the actual taking of possession
by Lessee, whichever first occurs, as the Commencement Date.

4. RENT.

4.1 BASE RENT. Subject to adjustment as hereinafter provided in
paragraph 4.3, and except as may be otherwise expressly provided in this
Lease, Lessee shall pay to Lessor the Base Rent for the Premises set forth in
paragraph 1.6 of the Basic Lease Provisions, without offset or deduction.
Lessee shall pay Lessor upon execution hereof the advance Base Rent described
in paragraph 1.8 of the Basic Lease Provisions. Rent for any period during
the term hereof which is for less than one month shall be prorated based upon
the actual number of days of the calendar month involved. Rent shall be
payable in lawful money of the United States to Lessor at the address stated
herein or to such other persons or at such other places as Lessor may
designate in writing.

4.2 DELETED.

4.3 RENT INCREASES.

4.3.1 At the times set forth in paragraph 1.7 of the Basic Lease
Provisions, the monthly Base Rent payable under paragraph 4.1 of this Lease
shall be adjusted by the increase, if any, in the Consumer Price Index of the
Bureau of Labor Statistics of the Department of Labor for All Urban
Consumers, (1967=100), "All Items," for the city nearest the location of the
Building, herein referred to as "C.P.I.," since the date of this Lease.

4.3.2 The monthly Base Rent payable pursuant to paragraph 4.3.1
shall be calculated as follows: the Base Rent payable for the first month of
the term of this Lease, as set forth in paragraph 4.1 of this Lease, shall be
multiplied by a fraction the numerator of which shall be the C.P.I. of the
calendar

PAGE 2 OF 12
<PAGE>

month during which the adjustment is to take effect, and the denominator of
which shall be the C.P.I. for the calendar month in which the original Lease
term commences. The sum so calculated shall constitute the new monthly Base
Rent hereunder, but, in no event, shall such new monthly Base Rent be less
than the Base Rent payable for the month immediately preceding the date for
the rent adjustment.

4.3.3 In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency
or shall be discontinued, then the index most nearly the same as the C.P.I.
shall be used to make such calculations. In the event that Lessor and Lessee
cannot agree on such alternative index, then the matter shall be submitted
for decision to the American Arbitration Association in the county in which
the Premises are located, in accordance with the then rules of said
association and the decision of the arbitrators shall be binding upon the
parties, notwithstanding one party failing to appear after due notice of the
proceeding. The cost of said arbitrators shall be paid equally by Lessor and
Lessee.

4.3.4 Lessee shall continue to pay the rent at the rate previously in
effect until the increase, if any, is determined. Within five (5) days
following the date on which the increase is determined, Lessee shall make
such payment to Lessor as will bring the increased rental current, commencing
with the effective date of such increase through the date of any rental
instalments then due. Thereafter the rental shall be paid at the increased
rate.

4.3.5 At such time as the amount of any change in the rental required
by this Lease is known or determined, Lessor and Lessee shall execute an
amendment to this Lease setting forth such change.

5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof
the security deposit set forth in paragraph 1.9 of the Basic Lease Provisions
as security for Lessee's faithful performance of Lessee's obligations
hereunder. If Lessee fails to pay rent or other charges due hereunder, or
otherwise defaults with respect to any provision of this Lease, Lessor may
use, apply, or retain all or any portion of said deposit for the payment of
any rent or other charge in default for the payment of any other sum to which
Lessor may become obligated by reason of Lessee's default, or to compensate
Lessor for any loss or damage which Lessor may suffer thereby. If Lessor so
uses or applies all or any portion of said deposit, Lessee shall within ten
(10) days after written demand therefor deposit cash with Lessor in an amount
sufficient to restore said deposit to the full amount then required of
Lessee. If the monthly Base Rent shall, from time to time, increase
during the term of this Lease, Lessee shall, at the time of such increase,
deposit with Lessor additional money as a security deposit so that the total
amount of the security deposit held by Lessor shall at all times bear the
same proportion to the then current Base Rent as the initial security
deposit bears to the initial Base Rent set forth in paragraph 1.6 of the
Basic Lease Provisions. Lessor shall not be required to keep said security
deposit separate from its general accounts. If Lessee performs all of
Lessee's obligations hereunder, said deposit, or so much thereof as has not
heretofore been applied by Lessor, shall be returned, without payment of
interest or other increment for its use, to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest hereunder) at the
expiration of the term hereof, and after Lessee has vacated the Premises. No
trust relationship is created herein between Lessor and Lessee with respect
to said Security Deposit.

6. USE.

6.1 USE. The Premises shall be used and occupied only for the purpose
set forth in paragraph 1.4 of the Basic Lease Provisions or any other use
which is reasonably comparable to that use and for other purpose.

6.2 COMPLIANCE WITH LAW.

(a) Lessee shall, at Lessee's expense, promptly comply with all
applicable statutes, ordinances, rules, regulations, orders, covenants and
restrictions of record, and requirements of any fire insurance underwriters
of rating bureaus, now in effect or which may hereafter come into effect,
whether or not they reflect a change in policy from that now existing, during
the term or any part of the term hereof, relating in any manner to the
Premises and the occupation and use by Lessee of the Premises. Lessee shall
conduct its business in a lawful manner and shall not use or permit the use
of the Premises or the Common Areas in any manner that will tend to create
waste or a nuisance or shall tend to disturb other occupants of the Office
Building Project.

6.3 CONDITION OF PREMISES.

(a) Lessor shall deliver the Premises to Lessee in a clean
condition on the Lease Commencement Date (unless Lessee is already in
possession) and that the plumbing, lighting, air conditioning, and heating
system in the Premises shall be in good operating condition. In the event
that it is determined that this provision has been violated, then it shall be
the obligation of Lessor, after receipt of written notice from Lessee setting
forth with specificity the nature of the violation, to promptly, at Lessor's
sole cost, rectify such violation.

(b) Except as otherwise provided in this Lease, Lessee hereby
accepts the Premises and the Office Building Project in their condition
existing as of the Lease Commencement Date or the date that Lessee takes
possession of the Premises, whichever is earlier, subject to all applicable
zoning, municipal, county and state laws, ordinances and regulations
governing and regulating the use of the Premises, and any easements,
covenants or restrictions of record, and accepts this Lease subject thereto
and to all matters disclosed thereby and by any exhibits attached hereto.
Lessee acknowledges that it has satisfied itself by its own independent
investigation that the Premises are suitable for its intended use, and that
neither Lessor nor Lessor's agent or agents has made any representation or
warranty as to the present or future suitability of the Premises, Common
Areas, or Office Building Project for the conduct of Lessee's business.

7. MAINTENANCE, REPAIRS, ALTERATIONS AND COMMON AREA SERVICES.

7.1 LESSOR'S OBLIGATIONS. Lessor shall keep the Office Building
Project, including the Premises, interior and exterior walls, roof, and
common areas, and the equipment whether used exclusively for the Premises or
in common with other premises, in good condition and repair; provided,
however, Lessor shall not be obligated to paint, repair or replace wall
coverings, or to repair or replace any improvements that are not ordinarily a
part of the Building or are above then Building standards. Except as provided
in paragraph 9.5, there shall be no abatement of rent or liability of Lessee
on account of any injury or interference with Lessee's business with respect
to any improvements, alterations or repairs made by Lessor to the Office
Building Project or any part thereof. Lessee expressly waives the benefits of
any statute now or hereafter in effect which would otherwise afford Lessee
the right to make repairs at Lessor's expense of to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.

7.2 LESSEE'S OBLIGATIONS.

(a) Notwithstanding Lessor's obligation to keep the Premises in
good condition and repair, Lessee shall be responsible for payment of the
cost thereof to Lessor as additional rent for that portion of the cost of any
maintenance and repair of the Premises, or any equipment (wherever located)
that serves only Lessee or the Premises, to the extent such cost is
attributable to causes beyond normal wear and tear. Lessee shall be
responsible for the cost of painting, repairing or replacing wall coverings,
and to repair or replace any Premises improvements that are not ordinarily a
part of the Building or that are above then Building standards. Lessor may,
at its option, upon reasonable notice, elect to have Lessee perform any
particular such maintenance or repairs the cost of which is otherwise
Lessee's responsibility hereunder.

(b) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Any damage or deterioration of the Premises shall not be deemed
ordinary wear and tear if the same could have been prevented by good
maintenance practices by Lessee. Lessee shall repair any damage to the
Premises occasioned by the installation or removal of Lessee's trade
fixtures, alterations, furnishings and equipment. Except as otherwise stated
in this Lease, Lessee shall leave the air lines, power panels, electrical
distribution systems, lightening fixtures, air conditioning, window
coverings, wall coverings, carpets, wall panelling, ceilings and plumbing on
the Premises and in good operating condition.

7.3 ALTERATIONS AND ADDITIONS.

(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, Utility Installations or repairs
in, on or about the Premises, or the Office Building Project. As used in this
paragraph 7.3 the term "Utility Installation" shall mean carpeting, window
and wall coverings, power panels, electrical distribution systems, lighting
fixtures, air conditioning, plumbing, and telephone and telecommunication
wiring and equipment. At the expiration of the term, Lessor may require the
removal of any or all of said alterations, improvements, additions or Utility
Installations, and the restoration of the Premises and the Office Building
Project to their prior condition, at Lessee's expense. Should Lessor permit
Lessee to make its own alterations, improvements, additions, or Utility
Installations, Lessee shall use only such contractor as has been expressly
approved by Lessor, and Lessor may

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require Lessee to provide Lessor, at Lessee's sole cost and expense, a lien
and completion bond in an amount equal to one and one-half times the
estimated cost of such improvements, to insure Lessor against any liability
for mechanic's and materialmen's liens and to insure completion of the work.
Should Lessee make any alterations, improvements, additions or Utility
Installations without the prior approval of Lessor, or use a contractor not
expressly approved by Lessor, Lessor may, at any time during the term of this
Lease, require that Lessee remove any part or all of the same.

(b) Any alterations, improvements, additions or Utility
Installations in or about the Premises or the Office Building Project that
Lessee shall desire to make shall be presented to Lessor in written form,
with proposed detailed plans. If Lessor shall give its consent to Lessee's
making such alteration, improvement, addition or Utility Installation, the
consent shall be deemed conditioned upon Lessee acquiring a permit to do so
from the applicable governmental agencies, furnishing a copy thereof to
Lessor prior to the commencement of the work, and compliance by Lessee with
all conditions of said permit in a prompt and expeditious manner.

(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises, the Building or the Office Building
Project, or any interest therein.

(d) Lessee shall give Lessor not less than ten (10) days' notice
prior to the commencement of any work in the Premises by Lessee, and Lessor
shall have the right to post notices of non-responsibility in or on the
Premises or the Building as provided by law. If Lessee shall, in good faith,
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend itself and Lessor against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises, the Building or the
Office Building Project, upon the condition that if Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an
amount equal to such contested lien claim or demand indemnifying Lessor
against liability for the same and holding the Premises, the Building and the
Office Building Project free from the effect of such lien or claim. In
addition, Lessor may require Lessee to pay Lessor's reasonable attorneys fees
and costs in participating in such action if Lessor shall decide it is to
Lessor's best interest so to do.

(e) All alterations, improvements, additions and Utility
Installations (whether or not such Utility Installations constitute trade
fixtures of Lessee) which may be made to the Premises by Lessee, including
but not limited to, floor coverings, panelings, doors, drapes, built-ins,
moldings, sound attenuation and lighting and telephone or communication
systems, conduit, wiring and outlets, shall be made and done in a good and
workmanlike manner and of good and sufficient quality and materials and shall
be the property of Lessor and remain upon and be surrendered with the
Premises at the expiration of the Lease term, unless Lessor requires their
removal pursuant to paragraph 7.3(a). Provided Lessee is not in default,
notwithstanding the provisions of this paragraph 7.3(e), Lessee's personal
property and equipment, other than that which is affixed to the Premises so
that it cannot be removed without material damage to the Premises or the
Building, and other than Utility Installations, shall remain the property of
Lessee and may be removed by Lessee subject to the provisions of paragraph 7.2

(f) Lessee shall provide Lessor with as-built plans and
specifications for any alterations, improvements, additions or Utility
Installations.

7.4 UTILITY ADDITIONS. Lessor reserves the right to install new or
additional utility facilities throughout the Office Building Project for the
benefit of Lessor or Lessee, or any other lessee of the Office Building
Project, including, but not by way of limitation, such utilities as plumbing,
electrical systems, communication systems, and fire protection and detection
systems, so long as such installations do not unreasonably interfere with
Lessee's use of the Premises.

8. INSURANCE; INDEMNITY.

8.1 LIABILITY INSURANCE - LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of
Comprehensive General Liability insurance utilizing an Insurance Services
Office standard form with Broad Form General Liability Endorsement (GL0404),
or equivalent, in an amount of not less than $1,000,000 per occurrence of
bodily injury and property damage combined or in a greater amount as
reasonably determined by Lessor and shall insure Lessee with Lessor as an
additional insured against liability arising out of the use, occupancy or
maintenance of the premises. Compliance with the above requirement shall not,
however, limit the liability of Lessee hereunder.

8.2 LIABILITY INSURANCE - LESSOR. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Broad Form Property Damage Insurance, plus coverage against such
other risks Lessor deems advisable from time to time, insuring Lessor, but
not Lessee, against liability arising out of the ownership, use, occupancy or
maintenance of the Office Building Project in an amount not less than
$5,000,000.00 per occurrence.

8.3 PROPERTY INSURANCE - LESSEE. Lessee shall at Lessee's expense,
obtain and keep in force during the term of this Lease for the benefit of
Lessee, replacement cost fire and extended coverage insurance, with vandalism
and malicious mischief, sprinkler leakage and earthquake sprinkler leakage
endorsements, in an amount sufficient to cover not less than 100% of the full
replacement cost, as the same may exist from time to time, of all of Lessee's
personal property, fixtures, equipment and tenant improvements.

8.4 PROPERTY INSURANCE - LESSOR. Lessor shall not obtain and keep in
force during the term of this Lease a policy or policies of insurance
covering loss or damage to the Office Building Project improvements, but not
Lessee's personal property, fixtures, equipment or tenant improvements, in
the amount of the full replacement cost thereof, as the same may exist from
time to time, utilizing Insurance Services Office standard form, or
equivalent, providing protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
plate glass, and such other perils as Lessor deems advisable or may be required
by a lender having a lien on the Office Building Project. In addition, Lessor
shall obtain and keep in force, during the term of this Lease, a policy of
rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all Operating Expenses for said
period. Lessee will not be named in any such policies carried by Lessor and
shall have no right to any proceeds therefrom. The policies required by these
paragraphs 8.2 and 8.4 shall contain such deductibles as Lessor or the
aforesaid lender may determine. In the event that the Premises shall suffer
an insured loss as defined in paragraph 9.1(f) hereof, the deductible amounts
under the applicable insurance policies shall be deemed an Operating Expense.
Lessee shall not do or permit to be done anything which shall invalidate the
insurance policies carried by Lessor. Lessee shall pay the entirety of any
increase in the property insurance premium for the Office Building Project
over what it was immediately prior to the commencement of the term of this
Lease if the increase is specified by Lessor's insurance carrier as being
caused by the nature of Lessee's occupancy or any act or omission of Lessee.

8.5 INSURANCE POLICIES. Lessee shall deliver to Lessor copies of
liability insurance policies required under paragraph 8.1 or certificates
evidencing the existence and amounts of such insurance within seven (7) days
after the Commencement Date of this Lease. No such policy shall be cancelable
or subject to reduction of coverage or other modification except after thirty
(30) days prior to written notice to Lessor. Lessee shall, at least thirty
(30) days prior to the expiration of such policies, furnish Lessor with
renewals thereof thereof.

8.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for direct or consequential loss or damage arising out of or incident to the
perils covered by property insurance carried by such party, whether due to
the negligence of Lessor or Lessee or their agents, employees, contractors
and/or invitees. If necessary all property insurance policies required under
this Lease shall be endorsed to so provide.

8.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor and its
agents, Lessor's master or ground lessor, partners and lenders, from and
against any and all claims for damage to the person or property of anyone or
any entity arising from Lessee's use of the Office Building Project, or from
the conduct of Lessee's business or from any activity, work or things done,
permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims, costs and expenses arising from any breach or default in the
performance of any obligation on Lessee's part to be performed under the
terms of this Lease, or arising from any act or omission of Lessee, or any of
Lessee's agents, contractors, employees or invitees, and from and against all
costs, attorney's fees, expenses and liabilities incurred by Lessor as the
result of any such use, conduct, activity, work, things done, permitted or
suffered, breach, default or negligence, and in dealing reasonably therewith,
including but not limited to the defense or pursuit of any claim or any
action or proceeding involved therein; and in case any action or proceeding
be brought against Lessor by reason of any such matter, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such
defense. Lessor need not have first paid any such claim in order to be so
indemnified. Lessee, as a material part of the consideration to Lessor,
hereby assumes all risk of damage to property of Lessee or injury to persons,
in, upon or about the Office Building Project arising from any cause and
Lessee hereby waives all claims in respect thereof against Lessor.

8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for loss of or damage to the goods, wares, merchandise or
other property of Lessee, Lessee's employees, invitees, customers, or any
other person in or about the Premises of the Office Building Project, nor
shall Lessor be liable for injury to the person of Lessee, Lessee's
employees, agents or contractors, whether such damage or injury is caused by
or results from theft, fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from
any other cause, whether said

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damage or injury results from conditions arising upon the Premises or upon
other portions of the Office Building Project, or from other sources or
places, or from new construction or the repair, alteration or improvement of
any part of the Office Building Project, or of the equipment, fixtures or
appurtenances applicable thereto, and regardless of whether the cause of such
damage or injury or the means of repairing the same is inaccessible, Lessor
shall not be liable for any damages arising from any act or neglect of any
other lessee, occupant or user of the Office Building Project, nor from the
failure of Lessor to enforce the provisions of any other lease of any other
lessee of the Office Building Project.

8.9 NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease. Lessor's obligation to insure under this paragraph 8 may be
satisfied by blanket coverage of self-insurance.

9. DAMAGE OR DESTRUCTION.

9.1 DEFINITIONS.

(a) "Premises Damage" shall mean if the Premises are damaged or
destroyed to any extent.

(b) "Premises Building Partial Damage" shall mean if the Building
of which the Premises are a part is damaged or destroyed to the extent that
the cost to repair is less than fifty percent (50%) of the then Replacement
Cost of the Building.

(c) "Premises Building Total Destruction" shall mean if the
Building of which the Premises are a part is damaged or destroyed to the
extent that the cost to repair is fifty percent (50%) or more of the then
Replacement Cost of the Building.

(d) "Office Building Project Buildings" shall mean all of the
buildings on the Office Building Project site.

(e) "Office Building Project Buildings Total Destruction" shall
mean if the Office Building Project Buildings are damaged or destroyed to the
extent that the cost to repair is fifty percent (50%) or more of the then
Replacement Cost of the Office Building Project Buildings.

(f) "Insured Loss" shall mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 8. The fact that an Insured Loss has a deductible amount shall not
make the loss an uninsured loss.

(g) "Replacement Cost" shall mean the amount of money necessary to
be spent in order to repair or rebuild the damaged area to the condition that
existed immediately prior to the damage occurring, excluding all improvements
made by lessees, other than those installed by Lessor at Lessee's expense.

9.2 PREMISES DAMAGE; PREMISES BUILDING PARTIAL DAMAGE.

(a) Insured Loss: Subject to the provisions of paragraphs 9.4 and
9.5, if at any time during the term of this Lease there is damage which is an
Insured Loss and which falls into the classification of either Premises
Damage or Premises Building Partial Damage, then Lessor shall, as soon as
reasonably possible and to the extent the required materials and labor are
readily available through usual commercial channels, at Lessors' expense,
repair such damage (but not Lessee's fixtures, equipment or tenant
improvements originally paid for by Lessee) to its condition existing at the
time of the damage, and this Lease shall continue in full force and effect.

(b) Uninsured Loss: Subject to the provisions of paragraphs 9.4
and 9.5, if at any time during the term of this Lease there is damage which
is not an Insured Loss and which falls within the classification of Premises
Damage or Premises Building Partial Damage, unless caused by a negligent or
willful act of Lessee (in which event Lessee shall make the repairs at
Lessee's expense), which damage prevents Lessee from making any substantial
use of the Premises, Lessor may at Lessor's option either (i) repair such
damage as soon as reasonably possible at Lessors' expense, in which event
this Lease shall continue in full force and effect, or (ii) given written
notice to Lessee within thirty (30) days after the date of the occurrence of
such damage of Lessor's intention to cancel and terminate this Lease as of
the date of the occurrence of such damage, in which event this Lease shall
terminate as of the date of the occurrence of such damage.

9.3 PREMISES BUILDING TOTAL DESTRUCTION; OFFICE BUILDING PROJECT TOTAL
DESTRUCTION. Subject to the provisions of paragraphs 9.4 and 9.4, if at any
time during the term of this Lease there is damage, whether or not it is an
Insured Loss, which falls into the classifications of either (i) Premises
Building Total Destruction, or (ii) Office Building Project Total
Destruction, then Lessor may at Lessor's option either (i) repair such damage
or destruction as soon as reasonably possible at Lessor's expense (to the
extent the required materials are readily available through usual commercial
channels) to its condition existing at the time of the damage, but not
Lessee's fixtures, equipment or tenant improvements, and this Lease shall
continue in full force and effect, or (ii) give written notice to Lessee
within thirty (30) days after the date of occurrence of such damage of
Lessor's intention to cancel and terminate this Lease, in which case this
Lease shall terminate as of the date of the occurrence of such damage.

9.4 DAMAGE NEAR END OF TERM.

(a) Subject to paragraph 9.4(b), if at any time during the last
twelve (12) months of the term of this Lease there is substantial damage to
the Premises, Lessor may at Lessor's option cancel and terminate this Lease
as of the date of occurrence of such damage by giving written notice to Lessee
of Lessor's election to do so within 30 days after the date of occurrence of
such damage.

(b) Notwithstanding paragraph 9.4(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said
option may be exercised has not yet expired, Lessee shall exercise such
option, if it is to be exercised at all, no later than twenty (20) days after
the occurrence of an Insured Loss falling within the classification of
Premises Damage during the last twelve (12) months of the term of this Lease.
If Lessee duly exercises such option during said twenty (20) day period,
Lessor shall, at Lessor's expense, repair such damage, but not Lessee's
fixtures, equipment or tenant improvements as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to
exercise such option during said twenty (20) day period, then Lessor may at
Lessor's option terminate and cancel this Lease as of the expiration of said
twenty (20) day period by giving written notice to Lessee of Lessor's
election to do so within ten (10) days after the expiration of said twenty
(20) day period, notwithstanding any term or provision in the grant of option
to the contrary.

9.5 ABATEMENT OF RENT; LESSEE'S REMEDIES.

(a) In the event Lessor repairs or restores the Building or
Premises pursuant to the provisions of this paragraph 9, and any part of the
Premises are not usable (including loss of use due to loss of access or
essential services), the rent payable hereunder (including Lessee's Share of
Operating Expense Increase) for the period during which such damage, repair
or restoration continues shall be abated, provided (1) the damage was not
the result of the negligence of Lessee, and (2) such abatement shall only be
to the extent the operation and profitability of Lessee's business as
operated from the Premises is adversely affected. Except for said abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.

(b) If Lessor shall be obligated to repair or restore the Premises
or the Building under the provisions of this Paragraph 9 and shall not
commence such repair or restoration within ninety (90) days after such
occurrence, or if Lessor shall not complete the restoration and repair within
six (6) months after such occurrence, Lessee may at Lessee's option cancel
and terminate this Lease by giving Lessor written notice of Lessee's election
to do so at any time prior to the commencement or completion, respectively,
of such repair or restoration. In such event this Lease shall terminate as of
the date of such notice.

(c) Lessee agrees to cooperate with Lessor in connection with any
such restoration and repair, including but not limited to the approval
and/or execution of plans and specifications required.

9.6 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this paragraph 9, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall,
in addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.

9.7 WAIVER. Lessor and Lessee waive the provisions of any statute which
relate to termination of leases when leased property is destroyed and agree
that such event shall be governed by the terms of this Lease.

10. REAL PROPERTY TAXES.

10.1 PAYMENT OF TAXES. Lessor shall pay the real property tax, as
defined in paragraph 10.3, applicable to the Office Building Project subject
to reimbursement by Lessee of Lessee's Share of such taxes in accordance
with the provisions of paragraph 4.2, except as otherwise provided in
paragraph 10.2.

10.2 ADDITIONAL IMPROVEMENTS. Lessee shall not be responsible for
paying any increase in real property tax specified in the tax assessor's
records and work sheets as being caused by additional improvements placed
upon the Office Building Project by other lessees or by Lessor for the
exclusive enjoyment of any other lessee. Lessee shall, however, pay to
Lessor at the time that Operating Expenses are payable under paragraph
4.2(c) the entirety of any increase in real property tax if assessed solely
by reason of additional improvements placed upon the Premises by Lessee or at
Lessee's request.

10.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal

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income or estate taxes) imposed on the Office Building Project or
any portion thereof by any authority having the direct or indirect power to
tax, including any city, county, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage or other improvement district
thereof, as against any legal or equitable interest of Lessor in the Office
Building Project or in any portion thereof, as against Lessor's right to rent
or other income therefrom, and as against Lessor's business of leasing the
Office Building Project. The term "real property tax" shall also include any
tax, fee, levy, assessment or charge (i) in substitution of, partially or
totally, any tax, fee, levy, assessment or charge hereinabove included within
the definition of "real property tax", or (ii) the nature of which was
hereinbefore included within the definition of "real property tax", or
(iii) which is imposed for a service or right not charged prior to June 1,
1978 or, if previously charged, has been increased since June 1, 1978, or
(iv) which is imposed as a result of a change in ownership, as defined by
applicable local statutes for property tax purposes, of the Office Building
Project or which is added to a tax or charge hereinbefore included within the
definition of real property tax by reason of such change of ownership, or (v)
which is imposed by reason of this transaction, any modifications or changes
hereto, or any transfers hereof.

10.4 JOINT ASSESSMENT. If the improvements or property, the taxes for
which are to be paid separately by Lessee under paragraph 10.2 or 10.5 are
not separately assessed, Lessee's portion of that tax shall be equitably
determined by Lessor from the respective valuations assigned in the
assessor's work sheets or such other information (which may include the cost
of construction) as may be reasonably available. Lessor's reasonable
determination thereof, in good faith, shall be conclusive.

10.5 PERSONAL PROPERTY TAXES.

(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere.

(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay to Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement setting
forth the taxes applicable to Lessee's property.

11. UTILITIES.

11.1 SERVICES PROVIDED BY LESSOR. Lessor shall provide heating,
ventilation, air conditioning and janitorial service as reasonably required,
reasonable amounts of electricity for normal lighting and office machines,
water for reasonable and normal drinking and lavatory use, and replacement
light bulbs and/or fluorescent tubes and ballasts for standard overhead
fixtures.

11.2 SERVICES EXCLUSIVE TO LESSEE. Lessee shall pay for all water, gas,
heat, light, power, telephone and other utilities and services specially or
exclusively supplied and/or metered exclusively to the Premises or to Lessee,
together with any taxes thereon. If any such services are not separately
metered to the Premises, Lessee shall pay at Lessor's option, either Lessee's
Share or a reasonable proportion to be determined by Lessor of all charges
jointly metered with other premises in the Building.

11.3 HOURS OF SERVICE. Said services and utilities shall be provided
during generally accepted business days and hours or such other days or hours
as may hereafter be set forth. Utilities and services required at other times
shall be subject to advance request and reimbursement by Lessee to Lessor of
the cost thereof.

11.4 EXCESS USAGE BY LESSEE. Lessee shall not make connection to the
utilities except by or through existing outlets and shall not install or use
machinery or equipment in or about the Premises that uses excess water,
lighting or power, or suffer or permit any act that causes extra burden upon
the utilities or services, including but not limited to security services,
over standard office usage for the Office Building Project. Lessor shall
require Lessee to reimburse Lessor for any excess expenses or costs that may
arise out a breach of this subparagraph by Lessee. Lessor may, in its sole
discretion, install at Lessee's expense supplemental equipment and/or
separate metering applicable to Lessee's excess usage or loading.

11.5 INTERRUPTIONS. There shall be no abatement of rent and Lessor
shall not be liable in any respect whatsoever for the inadequacy, stoppage,
interruption or discontinuance of any utility or service due to riot, strike,
labor dispute, breakdown, accident, repair or other cause beyond Lessor's
reasonable control or in cooperation with governmental request or directions.

12. ASSIGNMENT AND SUBLETTING.

12.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in the Lease or in the
Premises, without Lessor's prior written consent, which Lessor shall not
unreasonably withhold. Lessor shall respond to Lessee's request for consent
hereunder in a timely manner and any attempted assignment, transfer, mortgage,
encumbrance or subletting without such consent shall be void, and shall
constitute a material default and breach of this Lease without the need for
notice to Lessee under paragraph 13.1. "Transfer" within the meaning of this
paragraph 12 shall include the transfer or transfers aggregating: (a) if
Lessee is a corporation, more than twenty-five percent (25%) of the voting
stock of such corporation, or (b) if Lessee is a partnership, more than
twenty-five percent (25%) of the profit and loss participation in such
partnership.

12.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 12.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, all of which are referred to as "Lessee
Affiliate"; provided that before such assignment shall be effective, (a) said
assignee shall assume, in full, the obligations of Lessee under this Lease
and (b) Lessor shall be given written notice of such assignment and
assumption. Any such assignment shall not, in any way, affect or limit the
liability of Lessee under the terms of this Lease even if after such
assignment or subletting the terms of this Lease are materially changed or
altered without the consent of Lessee, the consent of whom shall not be
necessary.

12.3 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.

(a) Regardless of Lessor's consent, no assignment or subletting
shall release Lessee of Lessee's obligation hereunder or alter the primary
liability of Lessee to pay the rent and other sums due Lessor hereunder
including Lessee's Share of Operating Expense Increase, and to perform all
other obligations to be performed by Lessee hereunder.

(b) Lessor may accept rent from any person other than Lessee
pending approval or disapproval of such assignment.

(c) Neither a delay in the approval or disapproval of such
assignment or subletting, nor the acceptance of rent, shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the breach
of any of the terms or conditions of this paragraph 12 or this Lease.

(d) If Lessee's obligation under this Lease have been guaranteed
by third parties, then an assignment or sublease, and Lessor's consent
thereto, shall not be effective unless said guarantors give their written
consent to such sublease and the terms thereof.

(e) The consent by Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto
without notifying Lessee or anyone else liable on the Lease or sublease and
without obtaining their consent and such action shall not relieve such
persons from liability under this Lease or said sublease; however, such
persons shall not be responsible to the extent any such amendment or
modification enlarges or increases the obligations of the Lessee or sublessee
under this Lease or such sublease.

(f) In the event of any default under this Lease, Lessor may
proceed directly against Lessee, any guarantors or anyone else responsible
for the performance of this Lease, including the sublessee, without first
exhausting Lessor's remedies against any other person or entity responsible
therefor to Lessor, or any security held by Lessor or Lessee.

(g) Lessor's written consent to any assignment or subletting of
the Premises by Lessee shall not constitute an acknowledgment that no default
then exists under this Lease of the obligations to be performed by Lessee nor
shall such consent be deemed a waiver of any then existing default, except as
may be otherwise stated by Lessor at the time.

(h) The discovery of the fact that any financial statement relied
upon by Lessor in giving its consent to an assignment or subletting was
materially false shall, at Lessor's election, render Lessor's said consent
null and void.

12.4 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING.
Regardless of Lessor's consent, the following terms and conditions shall
apply to any subletting by Lessee of all or any part of the Premises and
shall be deemed included in all subleases under this Lease whether or not
expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease heretofore or
hereafter made by Lessee, and Lessor may collect such rent and income and
apply same toward Lessee's obligations under this Lease; provided, however,
that until a default shall occur in the performance of Lessee's obligations
under this Lease, Lessee may receive, collect and enjoy the rents accruing
under such sublease. Lessor shall not, by reason of this or any other
assignment of such sublease to Lessor nor by reason of the collection of the
rents from a sublessee, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee under such

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sublease. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a
default exists in the performance of Lessee's obligations under this Lease,
to pay to Lessor the rents due and to become due under the sublease. Lessee
agrees that such sublessee shall have the right to rely upon any such
statement and request from Lessor, and that such sublessee shall pay such
rents to Lessor without an obligation or right to inquire as to whether such
default exists and notwithstanding any notice from or claim from Lessee to
the contrary Lessee shall have no right or claim against said sublessee or
Lessor for any such rents so paid by said sublessee to Lessor.

(b) No sublease entered into by Lessee shall be effective unless
and until it has been approved in writing by Lessor. In entering into any
sublease, Lessee shall use only such form of sublease as is satisfactory to
Lessor, and once approved by Lessor, such sublease shall not be changed to
modified without Lessor's prior written consent. Any sublease shall, by
reason of entering into a sublease under this Lease, be deemed for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every obligation herein to be performed by Lessee other than such
obligations as are contrary to or inconsistent with provisions contained in
a sublease to which Lessor has expressly consented in writing.

(c) In the event Lessee shall default in the performance of its
obligations under this Lease, Lessor at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of Lessee under such sublease
from the time of the exercise of said option to the termination of such
sublease; provided, however, Lessor shall not be liable for any prepaid rents
or security deposit paid by such sublessee to Lessee or for any other prior
defaults of Lessee under such sublease.

(d) No sublessee shall further assign or sublet all or any part of
the Premises without Lessor's prior written consent.

(e) With respect to any subletting to which Lessor has consented,
Lessor agrees to deliver a copy of any notice of default by Lessee to the
sublessee. Such sublessee shall have the right to cure a default of Lessee
within three (3) days after service of said notice of default upon such
sublessee, and the sublessee shall have a right of reimbursement and offset
from and against Lessee for any such defaults cured by the sublessee.

12.5 LESSOR'S EXPENSES. In the event Lessee shall assign or sublet the
Premises or request the consent of Lessor to any assignment or subletting or
if Lessee shall request the consent of Lessor for any act Lessee proposes to
do then Lessee shall pay Lessor's reasonable costs and expenses incurred in
connection therewith, including attorneys', architects', engineers' or other
consultants' fees.

12.6 CONDITIONS TO CONSENT. Lessor reserves the right to condition any
approval to assign or sublet upon Lessor's determination that (a) the
proposed assignee or sublessee shall conduct a business on the Premises of a
quality substantially equal to that of Lessee and consistent with the general
character of the other occupants of the Office Building Project and not in
violation of any exclusives or rights then held by other tenants, and (b) the
proposed assignee or sublessee be at least as financially responsible as
Lessee was expected to be at the time of the execution of this Lease or of
such assignment or subletting, whichever is greater.

13. DEFAULT; REMEDIES.

13.1 DEFAULT. The occurrence of any one or more of the following events
shall constitute a material default of this Lease by Lessee:

(a) The vacation or abandonment of the Premises by Lessee.
Vacation of the Premises shall include the failure to occupy the Premises for
a continuous period of thirty (30) days or more, whether or not the rent is
paid.

(b) The breach by Lessee of any of the covenants, conditions or
provisions of paragraphs 7.3(a), (b) or (d) (alterations), 12.1 (assignment
or subletting), 13.1(a) (vacation or abandonment), 13.1(e) (insolvency),
13.1(f) (false statement), 16(a) (estoppel certificate), 30(b)
(subordination), 33 (auctions), or 41.1 (easements), all of which are hereby
deemed to be material, non-curable defaults without the necessity of any
notice by Lessor to Lessee thereof.

(c) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three (3) days thereof from
Lessor to Lessee. In the event that Lessor serves Lessee with a Notice to Pay
Rent or Quit pursuant to applicable Unlawful Detainer statutes such Notice to
Pay Rent or Quit shall also constitute the notice required by this
subparagraph.

(d) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee other than those referenced in subparagraphs (b) and (c), above,
where such failure shall continue for a period of thirty (30) days after
written notice thereof from Lessor to Lessee; provided, however, that if the
nature of Lessee's noncompliance is such that more than thirty (30) days are
reasonably required for its cure, then Lessee shall not be deemed to be in
default if Lessee commenced such cure within said thirty (30) day period and
thereafter diligently pursues such cure to completion. To the extent
permitted by law, such thirty (30) day notice shall constitute the sole and
exclusive notice required to be given to Lessee under applicable Unlawful
Detainer statutes.

(e) (i) The making by Lessee of any general arrangement or
general assignment for the benefit of creditors; (ii) Lessee becoming a
"debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto
(unless, in the case of a petition filed against Lessee, the same is
dismissed within sixty (60) days; (iii) the appointment of a trustee or
receiver to take possession of substantially all of Lessee's assets located
at the Premises or of Lessee's interest in this Lease, where possession is
not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days. In the event that any
provision of this paragraph 13.1(e) is contrary to any applicable law, such
provision shall be of no force or effect.

(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee, or its successor in interest or by any guarantor of
Lessee's obligation hereunder, was materially false.

13.2 REMEDIES. In the event of any material default or breach of this
Lease by Lessee, Lessor may at any time thereafter, with or without notice or
demand and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such default:

(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor.
In such event Lessor shall be entitled to recover from Lessee all damages
incurred by Lessor by reason of Lessee's default including, but not limited
to, the cost of recovering possession of the Premises; expenses of reletting
including necessary renovation and alteration of the Premises, reasonable
attorney's fees, and any real estate commission actually paid; the worth at
the time of award by the court having jurisdiction thereof of the amount by
which the unpaid rent for the balance of the term after the time of such
award exceeds the amount of such rental loss for the same period that Lessee
proves could be reasonably avoided; that portion of the leasing commission
paid by Lessor pursuant to paragraph 15 applicable to the unexpired term of
this Lease.

(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have vacated or
abandoned the Premises. In such event Lessor shall be entitled to enforce all
of Lessor's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.

(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.

13.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to
Lessee in writing, specifying wherein Lessor has failed to perform such
obligation; provided, however, that if the nature of Lessor's obligation is
such that more than thirty (30) days are required for performance then Lessor
shall not be in default if Lessor commences performance within such 30-day
period and thereafter diligently pursues the same to completion.

13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of Base Rent, Lessee's Share of Operating Expense Increase
or other sums due hereunder will cause Lessor to incur costs not contemplated
by this Lease, the exact amount of which will be extremely difficult to
ascertain. Such costs include, but are not limited to, processing and
accounting charges, and late charges which may be imposed on Lessor by the
terms of any mortgage or trust deed covering the Office Building Project.
Accordingly, if any installment of Base Rent, Operating Expense Increase, or
any other sum due from Lessee shall not be received by Lessor or Lessor's
designee within ten (10) days after such amount shall be due, then, without
any requirement for notice to Lessee, Lessee shall pay to Lessor a late
charge equal to 6% of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payment by Lessee. Acceptance of such late
charge by Lessor shall in no event constitute a waiver of Lessee's default
with respect to such overdue amount, nor prevent Lessor from exercising any
of the other rights and remedies granted hereunder.

14. CONDEMNATION. If the Premises or any portion thereof or the Office
Building Project are taken under the power of eminent domain, or sold under
the threat of the exercise of said power (all of which are herein called
"condemnation"), this Lease shall terminate as to the part so taken as of the
date the

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<PAGE>

condemning authority takes title or possession, whichever first occurs;
provided that is so much of the Premises or the Office Building Project are
taken by such condemnation as would substantially and adversely affect the
operation and profitability of Lessee's business conducted from the Premises,
Lessee shall have the option, to be exercised only in writing within thirty
(30) days after Lessor shall have given Lessee written notice of such taking
(or in the absence of such notice, within thirty (30) days after the
condemning authority shall have taken possession), to terminate this Lease as
of the date the condemning authority takes such possession. If Lessee does
not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the rent and Lessee's Share of Operating Expense Increase shall
be reduced in the proportion that the floor area of the Premises taken bears
to the total floor area of the Premises. Common Areas taken shall be excluded
from the Common Areas usable by Lessee and no reduction of rent shall occur
with respect thereto or by reason thereof. Lessor shall have the option in
its sole discretion to terminate this Lease as of the taking of possession by
the condemning authority, by giving written notice to Lessee of such election
within thirty (30) days after receipt of notice of a taking by condemnation
of any part of the Premises or the Office Building Project. Any award for the
taking of all or any part of the Premises or the Office Building Project
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution in value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that
Lessee shall be entitled to any separate award for loss of or damage to
Lessee's trade fixtures, removable personal property and unamortized tenant
improvements that have been paid for by Lessee. For that purpose the cost of
such improvements shall be amortized over the original term of this Lease
excluding any options. In the event that this Lease is not terminated by
reason of such condemnation, Lessor shall to the extent of severance damages
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefor by the condemning authority. Lessee shall pay any
amount in excess of such severance damages required to complete such repair.

15. BROKER'S FEE.

(a) The brokers involved in this transaction are PINNACLE REALTY
MANAGEMENT COMPANY as "listing broker" and SAME as "cooperating broker,"
licensed real estate broker(s). A "cooperating broker" is defined as any
broker other than the listing broker entitled to a share of any commission
arising under this Lease. Upon execution of this Lease by both parties,
Lessor shall pay to said brokers jointly, or in such separate shares as they
may mutually designate in writing, a fee as set forth in a separate agreement
between Lessor and said broker(s), or in the event there is no separate
agreement between Lessor and said broker(s), the sum of $250.00, for
brokerage services rendered by said broker(s) to Lessor in this transaction.

(b) Deleted.

(c) Lessor agrees to pay said fee not only on behalf of Lessor but also
on behalf of any person, corporation, association, or other entity having an
ownership interest in said real property or any part thereof, when such fee
is due hereunder. Any transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this paragraph 15. Each listing and
cooperating broker shall be a third party beneficiary of the provisions of
this paragraph 15 to the extent of their interest in any commission arising
under this Lease and may enforce that right directly against Lessor;
provided, however, that all brokers having a right to any part of such total
commission shall be a necessary party to any suit with respect thereto.

(d) Lessee and Lessor each represent and warrant to the other that
neither has had any dealings with any person, firm, broker or finder (other
than the person(s), if any, whose names are set forth in paragraph 15(a)
above) in connection with the negotiation of this Lease and/or the
consummation of the transaction contemplated hereby, and no other broker or
other person, firm or entity is entitled to any commission or finder's fee in
connection with said transaction and Lessee and Lessor do each hereby
indemnify and hold the other harmless from and against any costs, expenses,
attorneys' fees or liability for compensation or charges which may be claimed
by any such unnamed broker, finder or other similar party by reason of any
dealings or actions of the indemnifying party.

16. ESTOPPEL CERTIFICATE.

(a) Each party (as "responding party") shall at any time upon not less
than ten (10) days' prior written notice from the other party ("requesting
party") execute, acknowledge and deliver to the requesting party a statement
in writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to the responding party's knowledge,
any uncured defaults on the part of the requesting party, or specifying such
defaults if any are claimed. Any such statement may be conclusively relied
upon by any prospective purchaser or encumbrancer of the Office Building
Project or of the business of Lessee.

(b) At the requesting party's option, the failure to deliver such
statement within such time shall be a material default of this Lease by the
party who is to respond, without any further notice to such party, or it
shall be conclusive upon such party that (i) this Lease is in full force and
effect without modification except as may be represented by the requesting
party, (ii) there are no uncured defaults in the requesting party's
performance, and (iii) if Lessor is the requesting party, not more than one
month's rent has been paid in advance.

(c) If Lessor desires to finance, or sell the Office Building Project,
or any part thereof, Lessee hereby agrees to deliver to any lender or
purchaser designated by Lessor such financial statements of Lessee as may be
reasonably required by such lender or purchaser. Such statements shall
include the past three (3) years' financial statements of Lessee. All such
financial statements shall be received by Lessor and such lender or purchaser
in confidence and shall be used only for the purposes herein set forth.

17. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners, at the time in question, of the fee title or a lessee's
interest in a ground lease of the Office Building Project, and except as
expressly provided in paragraph 15, in the event of any transfer of such
title or interest, Lessor herein named (and in case of any subsequent
transfers then the grantor) shall be relieved from and after the date of such
transfer of all liability as respects Lessor's obligations thereafter to be
performed, provided that any funds in the hands of Lessor or the then grantor
at the time of such transfer, in which Lessee has an interest, shall be
delivered to the grantee. The obligations contained in this Lease to be
performed by Lessor shall, subject as aforesaid, be binding on Lessor's
successors and assigns, only during their respective periods of ownership.

18. SEVERABILITY. The invalidity of any provision of this Lease as
determined by a court of competent jurisdiction shall in no way affect the
validity of any other provision hereof.

19. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided,
any amount due to Lessor not paid when due shall bear interest at the maximum
rate then allowable by law or judgments from the date due. Payment of such
interest shall not excuse or cure any default by Lessee under this Lease;
provided, however, that interest shall not be payable on late charges
incurred by Lessee nor on any amounts upon which late charges are paid by
Lessee.

20. TIME OF ESSENCE. Time is of the essence with respect to the obligations
to be performed under this Lease.

21. ADDITIONAL RENT. All monetary obligations of Lessee to Lessor under the
terms of this Lease, including but not limited to Lessee's Share of Operating
Expense Increase and any other expenses payable by Lessee hereunder shall be
deemed to be rent.

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22. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mention herein. No prior
or contemporaneous agreement or understanding pertaining to any such matter
shall be effective. This Lease may be modified in writing only, signed by the
parties in interest at the time of modification. Except as otherwise stated
in this Lease, Lessee hereby acknowledges that neither the real estate
broker listed in paragraph 15 hereof nor any cooperating broker on this
transaction nor the Lessor or any employee or agents of any of said persons
has made any oral written warranties or representations to Lessee relative to
the condition or use by Lessee of the Premises or the Office Building Project
and Lessee acknowledges that Lessee assumes all responsibility regarding the
Occupational Safety Health Act, the legal use and adaptability of the
Premises and the compliance thereof with all applicable laws and regulations
in effect during the term of this Lease.

23. NOTICES. Any notice required or permitted to be given hereunder shall be
in writing and may be given by personal delivery or by certified or
registered mail, and shall be deemed sufficiently given if delivered to
Lessee or to Lessor at the address noted below or adjacent to the signature
of the respective parties, as the case may be. Mailed notices shall be deemed
given upon actual receipt at the address required, or forty-eight hours
following deposit in the mail, postage prepaid, whichever first occurs.
Either party may by notice to the other specify a different address for
notice purposes except that upon Lessee's taking possession of the Premises,
the Premises shall constitute Lessee's address for notice purposes. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.

24. WAIVERS. No waiver by Lessor of any provision hereof shall be deemed a
waiver of any other provision hereof or of any subsequent breach by Lessee of
the same or any other provision. Lessor's consent to, or approval of, any act
shall be deemed to render unnecessary the obtaining of Lessor's consent to or
approval of any subsequent act by Lessee. The acceptance or rent hereunder by
Lessor shall not be a waiver of any preceding breach by Lessee of any
provision hereof, other than the failure of Lessee to pay the particular rent
so accepted, regardless of Lessor's knowledge of such preceding breach at the
time of acceptance of such rent.

25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of
this Lease for recording purposes.

26. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of
this Lease pertaining to the obligations of Lessee, except that the rent
payable shall be two hundred percent (200%) of the rent payable immediately
preceding the termination date of this Lease, and all Options, if any,
granted under the terms of this Lease shall be deemed terminated and be of no
further effect during said month to month tenancy.

27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.

28. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.

29. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provision
of paragraph 17, this Lease shall bind the parties, their personal
representatives, successors and assign. This Lease shall be governed by the
laws of the State where the Office Building Project is located and any
litigation concerning this Lease between the parties hereto shall be
initiated in the county in which the Office Building Project is located.

30. SUBORDINATION.

(a) This Lease, and any Option or right of first refusal granted hereby,
at Lessor's option, shall be subordinate to any ground lease, mortgage, deed
of trust, or any other hypothecation or security now or hereafter placed upon
the Office Building Project and to any and all advances made on the security
thereof and to all renewals, modifications, consolidations, replacements and
extensions thereof. Notwithstanding such subordination, Lessee's right to
quiet possession of the Premises shall not be disturbed if Lessee is not in
default and so long as Lessee shall pay the rent and observe and perform all
of the provisions of this Lease, unless this Lease is otherwise terminated
pursuant to its terms. If any mortgagee, trustee or ground lessor shall elect
to have this Lease and any Options granted hereby proior to the lien of its
mortgage, deed of trust or ground lease, and shall give written notice
thereof to Lessee, this Lease and such Option shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease or such Options
are dated prior or subsequent to the date of said mortgage, deed of trust or
ground lease or the date of recording thereof.

(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination, or to make this Lease or any Option granted
herein prior to the lien of any mortgage, deed of trust or ground lease, as
the case may be. Lessee's failure to execute such documents within ten (10)
days after written demand shall constitute a material default by Lessee
hereunder without further notice to Lessee or, at Lessor's option, Lessor
shall execute such documents on behalf of Lessee as Lessee's
attorney-in-fact. Lessee does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to
execute such documents in accordance with this paragraph 30(b).

31. ATTORNEYS' FEES.

31.1 If either party or the broker(s) named herein bring an action to
enforce the terms hereof or declare rights hereunder the prevailing party
in any such action, trial, or appeal thereon, shall be entitled to his
reasonable attorneys' fees to be paid by the losing party as fixed by the
court in the same or separate suit, and whether or not such action is
pursued to decision or judgment. The provisions of this paragraph shall inure
to the benefit of the broker named herein who seeks to enforce a right
hereunder.

31.2 The attorneys' fee award shall not be computed in accordance with
any court fee schedule, but shall be such as to fully reimburse all attorneys'
fees reasonably incurred in good faith.

31.3 Lessor shall be entitled to reasonable attorneys' fees and all other
costs and expense incurred in the preparation and service of notices of
default and consultations in connection therewith, whether or not a legal
transaction is subsequently commenced in connection with such default.

32. LESSOR'S ACCESS.

32.1 Lessor and Lessor's agents shall have the right to enter the
Premises at reasonable times for the purpose of inspecting the same,
performing any services required of Lessor, showing the same to prospective
purchasers, lenders, or lessees, taking such safety measures, erecting such
scaffolding or other necessary structures, making such alterations, repairs,
improvements or additions to the Premises or to the Office Building Project
as Lessor may reasonably deem necessary or desirable and the erecting, using
and maintaining of utilities, services, pipes and conduits through the Premises
and/or other premises as long as there is no material adverse effect to
Lessee's use of the Premises. Lessor may at any time place on or about the
Premises or the Building any ordinary "For Sale" signs and Lessor may at any
time during the last 120 days of the term hereof place on or about the
Premises any ordinary "For Lease" signs.

32.2 All activities of Lessor pursuant to this paragraph shall be without
abatement of rent, nor shall Lessor have any liability to Lessee for the
same.

32.3 Lessor shall have the right to retain keys to the Premises and to
unlock all doors in or upon the Premises other than to files, vaults and
safes, and in the case of emergency to enter the Premises by any reasonably
appropriate means, and any such entry shall not be deemed a forceable or
unlawful entry or detainer of the Premises or an eviction. Lessee waives any
charges for damages or injuries or interference with Lessee's property or
business in connection therewith.

33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises or the Common
Areas without first having obtained Lessor's prior written consent.
Notwithstanding anything to the contrary in this Lease, Lessor shall not be
obligated to exercise any standard of reasonableness in determining whether to
grant such consent. The holding of any auction on the Premises or Common
Areas in violation of this paragraph shall constitute a material default of
this Lease.

34. SIGNS. Lessee shall not place any sign upon the Premises or the Office
Building Project without Lessor's prior written consent. Under no
circumstances

PAGE 9 OF 12

<PAGE>

shall Lessee place a sign on any roof of the Office Building Project.

35. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.

36. CONSENTS. Except for paragraph 33 (auctions) and 34 (signs) hereof,
wherever in this Lease the consent of one party is required to an act of the
other party such consent shall not be unreasonably withheld or delayed.

37. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.

38. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Office Building Project.

39. OPTIONS.

39.1 DEFINITION. As used in this paragraph the word "Option" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option of right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other space within the Office Building Project or
other property of Lessor or the right of first offer to lease other space
within the Office Building Project or other property of Lessor; (3) the right
or option to purchase the Premises or the Office Building Project, or the
right of first refusal to purchase the Premises or the Office Building
Project or the right of first offer to purchase the Premises or the Office
Building Project, or the right or option to purchase other property of Lessor,
or the right of first refusal to purchase other property of Lessor or the
right of first offer to purchase other property of Lessor.

39.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease is
personal to the original Lessee and may be exercised only by the original
Lessee while occupying the Premises who does so without the intent of
thereafter assigning this Lease or subletting the Premises or any portion
thereof, and may not be exercised or be assigned, voluntarily or involuntarily,
by or to any person or entity other than Lessee; provided, however, than an
Option may be exercised by or assigned to any Lessee Affiliate as defined in
paragraph 12.2 of this Lease. The Options, if any, herein granted to Lessee
are not assignable separate and apart from this Lease, nor may any Option be
separated from this Lease in any manner, either by reservation or otherwise.

39.3 MULTIPLE OPTIONS. In the event that Lessee has any mulitiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.

39.4 EFFECT OF DEFAULT ON OPTIONS.

(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary, (i)
during the time commencing from the date Lessor gives to Lessee a notice of
default pursuant to paragraph 13.1(c) or 13.1(d) and continuing until the
noncompliance alleged in said notice of default is cured, or (ii) during the
period of time commencing on the day after a monetary obligation to Lessor is
due from Lessee and unpaid (without any necessity for notice thereof to
Lessee) and continuing until the obligation is paid, or (iii) in the event
that Lessor has given to Lessee three or more notices of default under
paragraph 13.1(c), or paragraph 13.1(d), whether or not the defaults are
cured, during the 12 month period of time immediately prior to the time that
Lessee attempts to exercise the subject Option, (iv) if Lessee has committed
any non-curable breach, including without limitation those describe in
paragraph 13.1(b), or is otherwise in default of any of the terms,
covenants or conditions of this Lease.

(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of paragraph 39.4(a).

(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due
and timely exercise of the Option, if, after such exercise and during the term
of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or (ii)
Lessee fails to commence to cure a default specified in paragraph 13.1(d)
within thirty (30) days after the date that Lessor gives notice to Lessee of
such default and/or Lessee fails thereafter to diligently prosecute said cure
to completion, or (iii) Lessor gives to Lessee three or more notices of
default under paragraph 13.1(c), or paragraph 13.1(d), whether or not the
defaults are cured, or (iv) if Lessee has committed any non-curable breach,
including without limitation those described in paragraph 13.1(b), or is
otherwise in default of any of the terms, covenants and conditions of this
Lease.

40. SECURITY MEASURES - LESSOR'S RESERVATIONS.

40.1 Lessee hereby acknowledges that Lessor shall have no obligation
whatsoever to provide guard service or other security measures for the
benefit of the Premises or the Office Building Project. Lessee assumes all
responsibility for the protection of Lessee, its agents, and invitees and the
property of Lessee and of Lessee's agents and invitees form acts of third
parties. Nothing herein contained shall prevent Lessor, at Lessor's sole
option, from providing security protection for the Office Building Project or
any part thereof, in which event the cost thereof shall be included within
the definition of Operating Expenses, as set forth in paragraph 4.2(b).

40.2 Lessor shall have the following rights:

(a) To change the name, address or title of the Office Building
Project or building in which the Premises are located upon not less than 90
days prior written notice;

(b) To, at Lessee's expense, provide and install Building standard
graphics on the door of the Premises and such portions of the Common Areas as
Lessor shall reasonably deem appropriate;

(c) To permit any lessee the exclusive right to conduct any business
as long as such exclusive does not conflict with any rights expressly given
herein;

(d) To place such signs, notices or displays as Lessor reasonably
deems necessary or advisable upon the roof, exterior of the buildings or the
Office Building Project or on pole signs in the Common Areas;

40.3 Lessee shall not:

(a) Use a representation (photographic or otherwise) of the Building
or the Office Building Project or their name(s) in connection with Lessee's
business;

(b) Suffer or permit anyone, except in emergency, to go upon the
roof of the Building.

41. EASEMENTS.

41.1 Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or
desirable, and to cause the recordation of Parcel Maps and restrictions, so
long as such easements, rights, dedications, Maps and restrictions do not
unreasonably interfere with the use of the Premises by Lessee. Lessee shall
sign any of the aforementioned documents upon request of Lessor and failure
to do so shall constitute a material default of this Lease by Lessee without
the need for further notice to Lessee.

41.2 The obstruction of Lessee's view, air, or light by any structure
erected in the vicinity of the Building, whether by Lessor or third parties,
shall in no way affect this Lease or impose any liability upon Lessor.

42. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the
provisions hereof, the party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment, and there shall survive
the right on the part of said party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said party to pay such sum or any part thereof, said party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay under the provisions of this Lease.

43. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, Lessee, and each individual executing this Lease on behalf of
such entity

PAGE 10 OF 12
<PAGE>

represent and warrant that such individual is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation,
trust or partnership, Lessee shall, within thirty (30) days after execution
of this Lease, deliver to Lessor evidence of such authority satisfactory to
Lessor.

44. CONFLICT. Any conflict between the printed provisions, Exhibits or
Addenda of this Lease and the typewritten or handwritten provisions, if any,
shall be controlled by the typewritten or handwritten provisions.

45. NO OFFER. Preparation of this Lease by Lessor or Lessor's agent and
submission of same to Lessee shall not be deemed an offer to Lessee to lease.
This Lease shall become binding upon Lessor and Lessee only when fully
executed by both parties.

46. LENDER MODIFICATION. Lessee agrees to make such reasonable modifications
to this Lease as may be reasonably required by an institutional lender in
connection with the obtaining of normal financing or refinancing of the
Office Building Project.

47. MULTIPLE PARTIES. If more than one person or entity is named as either
Lessor or Lessee herein, except as otherwise expressly provided herein, the
obligations of the Lessor or Lessee herein shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or
Lessee, respectively.

48. WORK LETTER. This Lease is supplemented by that certain Work Letter of
even date executed by Lessor and Lessee, attached hereto as Exhibit C, and
incorporated herein by this reference.

49. ATTACHMENTS. Attached hereto are the following documents which
constitute a part of this Lease:

1) Floor Plan and Regulations
2) Lease Rider 1
3) Lease Rider 2

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.

IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION OR BY THE REAL ESTATE BROKER OR ITS AGENTS OR EMPLOYEES
AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF
THIS LEASE OR THE TRANSACTION RELATING THERETO; THE PARTIES SHALL
RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO THE
LEGAL AND TAX CONSEQUENCES OF THIS LEASE.

LESSOR LESSEE

TESH PARTNERS, L.P. SCHEID VINEYARDS CALIFORNIA INC.
- ------------------------------------ ------------------------------------
BY: SCHEID VINEYARDS CALIFORNIA INC.
ITS: GENERAL PARTNER

By /s/ SCOTT D. SCHEID By /s/ HEIDI M. SCHEID
----------------------------------- ---------------------------------
Scott D. Scheid, Vice President Heidi M. Scheid, Vice President
Finance

Its Its
----------------------------------- --------------------------------

By By
----------------------------------- --------------------------------
Its Its
----------------------------------- --------------------------------

Executed at Marina del Rey, CA Executed at Marina del Rey, CA
-------------------------- -------------------------

on 5/10/99 on 5/10/99
------------------------------------ --------------------------------

Address 13470 Washington Blvd., #300 Address 13470 Washington Blvd., #300
MDR, CA 90292 MDR, CA 90292
-------------------------------- ----------------------------

PAGE 11 OF 12
<PAGE>

PAGE 12 OF 12

<PAGE>

STANDARD OFFICE LEASE
FLOOR PLAN

[LOGO]

NOT APPLICABLE

EXHIBIT A

<PAGE>

RULES AND REGULATIONS FOR
STANDARD OFFICE LEASE

[LOGO]

Dated: MAY 10, 1999
By and Between TESH PARTNERS, L.P. & SCHEID VINEYARDS CALIFORNIA INC.

GENERAL RULES

1. Lessee shall not suffer or permit the obstruction of any Common
Areas, including driveways, walkways and stairways.

2. Lessor reserves the right to refuse access to any persons Lessor in
good faith judges to be a threat to the safety, reputation, or property of
the Office Building Project and its occupants.

3. Lessee shall not make or permit any noise or odors that annoy or
interfere with other lessees or persons having business within the Office
Building Project.

4. Lessee shall not keep animals or birds within the Office Building
Project, and shall not bring bicycles, motorcycles or other vehicles into
areas not designated as authorized for same.

5. Lessee shall not make, suffer or permit litter except in
appropriate receptacles for that purpose.

6. Lessee shall not alter any lock or install new or additional locks
or bolts.

7. Lessee shall be responsible for the inappropriate use of any toilet
rooms, plumbing or other utilities. No foreign substances of any kind are to
be inserted therein.

8. Lessee shall not deface the walls, partitions or other surfaces of
the Premises or Office Building Project.

9. Lessee shall not suffer or permit anything in or around the
Premises or Building that causes excessive vibration or floor loading in any
part of the Office Building Project.

10. Furniture, significant freight and equipment shall be moved into or
out of the building only with the Lessor's knowledge and consent, and subject
to such reasonable limitations, techniques and timing, as may be designated
by Lessor. Lessee shall be responsible for any damage to the Office Building
Project arising from any such activity.

11. Lessee shall not employ any service or contractor for services or
work to be performed in the Building, except as approved by Lessor.

12. Lessor reserves the right to close and lock the Building on
Saturdays, Sundays and legal holidays, and on other days between the hours of
7:00 P.M. and 8:00 A.M. of the following day. If Lessee uses the Premises
during such periods, Lessee shall be responsible for securely locking any
doors it may have opened for entry.

13. Lessee shall return all keys at the termination of its tenancy and
shall be responsible for the cost of replacing any keys that are lost.

14. No window coverings, shades or awnings shall be installed or used
by Lessee.

15. No Lessee, employee or invitee shall go upon the roof of the
Building.

16. Lessee shall not suffer or permit smoking or carrying of lighted
cigars or cigarettes in areas reasonably designated by Lessor or by
applicable governmental agencies as non-smoking areas.

17. Lessee shall not use any method of heating or air conditioning
other than as provided by Lessor.

18. Lessee shall not install, maintain or operate any vending machines
upon the Premises without Lessor's written consent.

19. The Premises shall not be used for lodging or manufacturing,
cooking or food preparation.

20. Lessee shall comply with all safety, fire protection and evacuation
regulations established by Lessor or any applicable governmental agency.

21. Lessor reserves the right to waive any one of these rules or
regulations, and/or as to any particular Lessee, and any such waiver shall
not constitute a waiver of any other rule or regulation or any subsequent
application thereof to such Lessee.

22. Lessee assumes all risks from theft or vandalism and agrees to keep
its Premises locked as may be required.

23. Lessor reserves the right to make such other reasonable rules and
regulations as it may from time to time deem necessary for the appropriate
operation and safety of the Office Building Project and it occupants. Lessee
agrees to abide by these and such rules and regulations.

PARKING RULES

1. Parking areas shall be used only for parking by vehicles no longer
than full size, passenger automobiles herein called "Permitted Size
Vehicles." Vehicles other than Permitted Size Vehicles are herein referred to
as "Oversized Vehicles."

2. Lessee shall not permit or allow any vehicles that belong to or are
controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
or invitees to be loaded, unloaded, or parked in areas other than those
designated by Lessor for such activities.

3. Parking stickers or identification devices shall be the property of
Lessor and be returned to Lessor by the holder thereof upon termination of
the holder's parking privileges. Lessee will pay such replacement charge as
is reasonably established by Lessor for the loss of such devices.

4. Lessor reserves the right to refuse the sale of monthly
identification devices to any person or entity that willfully refuses to
comply with the applicable rules, regulations, laws and/or agreements.

5. Lessor reserves the right to relocate all or a part of parking
spaces from floor to floor, within one floor, and/or to reasonably adjacent
offsite location(s), and to reasonably allocate them between compact and
standard size spaces, as long as the same complies with applicable laws,
ordinances and regulations.

6. Users of the parking area will obey all posted signs and park only
in the areas designated for vehicle parking.

7. Unless otherwise instructed, every person using the parking area is
required to park and lock his own vehicle. Lessor will not be responsible for
any damage to vehicles, injury to persons or loss of property, all of which
risks are assumed by the party using the parking area.

8. Validation, if established, will be permissible only by such method
or methods as Lessor and/or its licensee may establish at rates generally
applicable to visitor parking.

9. The maintenance, washing, waxing or cleaning of vehicles in the
parking structure or Common Areas is prohibited.

10. Lessee shall be responsible for seeing that all of its employees,
agents and invitees comply with the applicable parking rules, regulations,
laws and agreements.

11. Lessor reserves the right to modify these rules and/or adopt such
other reasonable and non-discriminatory rules and regulations as it may deem
necessary for the proper operation of the parking area.

12. Such parking use as is herein provided is intended merely as a
license only and no bailment is intended or shall be created hereby.

EXHIBIT B

PAGE 1 OF 1
<PAGE>

LEASE RIDER 1

STANDARD OFFICE LEASE

I. HAZARDOUS SUBSTANCE LAWS:

A. COMPLIANCE. Lessee shall not cause or permit any Hazardous
Substance to be brought upon or kept or used in or about the Premises or the
Office Building Project without Lessor's prior written consent. If Lessor
consents in writing to any Hazardous Substance being brought on to the
Premises or the Office Building Project, then Lessee shall at its own expense
fully comply with all Hazardous Substance Laws and prudent industry
practices regarding use, management, or disposal of Hazardous Substances.
Except as discharged into the sanitary sewer in strict accordance and
conformity with all applicable Hazardous Substance Laws, Lessee shall cause
any and all Hazardous Substances removed from the Premises to be transported
solely by duly licensed haulers to duly licensed facilities for final
disposal of such materials and wastes. If Lessee breaches its obligations
herein, or if contamination of the Premises or the Office Building Project by
Hazardous Substances occurs for which Lessee is legally liable to Lessor for
damages resulting therefrom, or if Lessee's activities or those of its
contractors, agents, invitees and licenses or employees result in or cause a
Hazardous Substance Claim, then Lessee shall indemnify, defend, protect and
hold Lessor harmless from any and all claims, judgments, damages, penalties,
fines, costs, liabilities or losses (including, without limitation,
diminution in value of the Premises or the Office Building Project, damages
for the loss or restriction on use of rentable space or of any amenity of the
Premises or the Office Building Project, damages arising from any adverse
impact on marketing of space, and sums paid in settlement of claims,
attorneys' fees, consultants fees and experts' fees) which arise during or
after the Lease term as a result of such contamination. This indemnification
of Lessor by Lessee includes, without limitation, costs incurred in
connection with any investigation for the conditions or any clean-up,
remedial, removal or restoration work required by any Hazardous Substance
Law. The foregoing indemnification shall survive the expiration or earlier
termination for this Lease.

B. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings:

(1) "Hazardous Substances" shall include without limitation:

1
<PAGE>

(i) Those substances included within the definitions of
"hazardous substances," hazardous materials," "toxic substances," or "solid
waste" in the Comprehensive Environmental Response Compensation and Liability
Act of 1980 (42 U.S.C. S 9601 ET SEQ.) ("CERCLA"), as amended by Superfund
Amendments and Reauthorization Act of 1986 (Pub. L. 99-499 100 Stat. 1613)
("SARA"), the Resource Conservation and Recovery Act of 1976 (42 U.S.C. S
6901 ET SEQ.) ("RCRA"), and the Hazardous Materials Transportation Act, 49
U.S.C. S 1801 ET SEQ., and in the regulations promulgated pursuant to said
laws, all as amended;

(ii) Those substances listed in the United States Department of
Transportation Table (49 CFR 172.101 and amendments thereto) or by the
Environmental Protection Agency (or any successor agency) as hazardous
substances (40 CFR Part 302 and amendments thereto);

(iii) Any material, waste or substance which is (A) petroleum, (B)
asbestos, (C) polychlorinated biphenyls, (D) designated as a "hazardous
substance" pursuant to Section 311 of the Clean Water Act, 33 U.S.C. S 1251
ET SEQ. (33 U.S.C. S 1321) or listed pursuant to Section 307 of the Clean
Water Act (33 U.S.C. 1317); (E) flammable explosives; or (F) radioactive
materials;

(iv) Those substances defined as "hazardous wastes" in Section
25117 of the California Health & Safety Code, or as "hazardous substances" in
Section 25316 of the California Health & Safety Code, and in the regulations
promulgated pursuant to said laws;

(v) Those chemicals known to cause cancer or reproductive
toxicity, as published pursuant to the Safe Drinking Water and Toxic
Enforcement Act of 1986, Section 25249.5 ET SEQ. of the California Health &
Safety Code; and

(vi) Such other substances, materials and wastes which are or
become regulated as hazardous or toxic under applicable local, state or
federal law, or the United States government, or which are classified as
hazardous or toxic under federal, state, or local laws or regulations,
including without limitation any oils, solvents, paint thinner, acids,
caustics, insecticides, pesticides, herbicides, corrosives, flammable
explosives, vinyl chloride, cyanide solutions, area formaldehyde, waste
chemicals, sludges, radioactive materials, infectious waste, and any other
substance or material that, after release into the environment and upon
exposure, ingestion, inhalation, or assimilation, either directly from the
environmental or indirectly by ingestion through food chains, will or may
reasonably be anticipated to cause death, disease, behavior abnormalities,
cancer, reproductive harm, or genetic abnormalities.

2
<PAGE>

(2) "Hazardous Substance Claim" shall include, but not be limited to,
any claim, demand, action, cause of action, suit, loss, cost, damage, fine,
penalty, expense, liability, judgment, proceeding, or injury, whether
threatened, sought, brought, or imposed, that seeks to impose costs or
liabilities for (i) noise; (ii) pollution or contamination of the air,
surface water, ground water, or soil; (iii) solid, gaseous, or liquid waste
generation, handling, treatment, storage, disposal, or transportation; (iv)
exposure to Hazardous Substances; (v) the manufacture, processing,
distribution in commerce, use, or storage of Hazardous Substances; (vi)
injury to or death of any person or persons directly or indirectly connected
with Hazardous Substances and directly or indirectly related to the Premises;
(vii) destruction or contamination of any property directly or indirectly
connected with Hazardous Substances and directly or indirectly related to
the Premises; or (viii) any and all penalties directly or indirectly
connected with Hazardous Substances and directly or indirectly related to the
Premises. The term "Hazardous Substance Claim" also includes (i) the costs of
removal of any and all Hazardous Substances from all or any portion of the
Premises or the Office Building Project, (ii) costs required to take
necessary precautions to protect against the release of Hazardous Substances
at, on, in, about, under, within, near or in connection with the Premises or
the Office Building Project in or into the air, soil, surface water, ground
water, or soil vapor, any public domain, or any surrounding areas, and (iii)
costs incurred to comply, in connection with all or any portion of the
Premises or the Office Building Project or any surrounding areas, with all
applicable laws with respect to Hazardous Substances, including any such laws
applicable to the work referred to in this sentence. "Hazardous Substance
Claim" also means any asserted or actual breach or violation of any
requirements of Hazardous Substance Law, or any event, occurrence, or
condition as a consequence of which (i) Lessee, Lessor or any owner,
occupant, or person having any interest in the Office Building Project shall
be liable or suffer any disability, or (ii) the Office Building Project shall
be subject to any restriction on use, ownership, transferability, or (iii) any
remedial work shall be required.

(3) "Hazardous Substance Laws" shall mean all requirements of
environmental or ecological laws or regulations or controls related to the
Office Building Project, including all requirements imposed by any law, rule,
order, plan, or regulations of any federal, state, or local executive,
legislative, judicial, regulatory, or administrative agency, board, or
authority, or any private agreement (such as covenants, conditions and
restrictions), which relate to (i) noise; (ii) pollution or protection of the
air, surface water, ground water, or soil, including without limitation all
permit and license requirements for air emissions and sanitary sewer
discharge; (iii) solid, gaseous, or liquid waste generation, treatment,
storage, disposal, release, discharge, or transportation; (iv) exposure to
Hazardous Substances; or

<PAGE>

(v) regulation of the use, manufacture, processing, distribution and commerce,
use, or storage of Hazardous Substances.

C. ENVIRONMENTAL REPORT. At any time during the term of the Lease that
Lessor has reasonable cause to believe that the Premises contain Hazardous
Substances or Lessee has violated any Hazardous Substance Laws, Lessor may
require Lessee to provide a Phase I Environmental Report, as Lessee's sole
cost. Lessee prior to termination of this Lease, shall remove any and all
Hazardous Substances, on the Premises prior to the termination of the Lease
and surrender the Premises to the Lessor. Lessee shall provide an additional
Phase I Environmental Report by a reputable engineering firm acceptable to
Lessor, at Lessee's sole cost, prior to the termination of the Lease.

LESSOR LESSEE

TESH PARTNERS, L.P. SCHEID VINEYARDS CALIFORNIA INC.
BY: SCHEID VINEYARDS CALIFORNIA INC.
ITS: GENERAL PARTNER

/s/ SCOTT D. SCHEID /s/ Heidi M. Scheid
------------------------------------- ----------------------------------
Scott D. Scheid, Vice President Heidi M. Scheid, Vice President
Finance

<PAGE>

LEASE RIDER 2

STANDARD OFFICE LEASE

This Lease Rider is attached to and forms a part of that certain
Standard Office Lease dated May 10, 1999 by and between TESH PARTNERS, L.P.,
("Lessor") and Scheid Vineyards California Inc. ("Lessee"). To the extend
that the provisions of this Lease Rider are in conflict with the printed
provisions of this Lease, the terms and provisions of this Lease Rider shall
govern and prevail.

AMERICANS WITH DISABILITIES ACT DISCLOSURE

The United States Congress has recently enacted the Americans with
Disabilities Act. Among other things, this act is intended to make many
business establishments equally accessible to persons with a variety of
disabilities; modifications to real property may be required; at Landlord's
cost. State and local laws also may mandate changes.

Mandated changes may be required now, or in the future. Lessees should
consult attorneys and qualified design professionals of their choice for
information regarding these matters.

"Without limiting the generality of the foregoing, Lessee acknowledges
he/she shall comply with all governmental rules, regulations, or requirements
regarding environmental laws within the rentable space they currently occupy
and Americans with Disabilities Act."

LESSOR LESSEE

TESH PARTNERS, L.P. SCHEID VINEYARDS CALIFORNIA INC.
BY: SCHEID VINEYARDS CALIFORNIA INC.
ITS: GENERAL PARTNER

/s/ SCOTT D. SCHEID /s/ Heidi M. Scheid
------------------------------------- ----------------------------------
Scott D. Scheid, Vice President Heidi M. Scheid, Vice President
Finance

<PAGE>
EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
333-47485 of Scheid Vineyards Inc. on Form S-8 of our report dated February 18,
2000 appearing in this Annual Report on Form 10-KSB of Scheid Vineyards Inc. for
the year ended December 31, 1999.

/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
Los Angeles, California

March 9, 2000

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE BALANCE SHEET OF SCHEID VINEYARDS INC. AS OF DECEMBER 31, 1999 AND THE
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 INCLUDED ON FORM
10-KSB FOR THE YEAR ENDED DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 411
<SECURITIES> 0
<RECEIVABLES> 1,177
<ALLOWANCES> 0
<INVENTORY> 673
<CURRENT-ASSETS> 3,751
<PP&E> 46,170
<DEPRECIATION> 0
<TOTAL-ASSETS> 55,220
<CURRENT-LIABILITIES> 3,661
<BONDS> 21,915
0
0
<COMMON> 7
<OTHER-SE> (4,890)
<TOTAL-LIABILITY-AND-EQUITY> 55,220
<SALES> 11,804
<TOTAL-REVENUES> 12,844
<CGS> 8,219
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (33)
<INCOME-PRETAX> 1,086
<INCOME-TAX> 450
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 636
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11

</TABLE>