**UNITEDSTATES SECURITIES AND EXCHANGE**

**COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-KSB**

**(Mark One)**

| **ý**                                           |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE  ACT OF 1934** |
|------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                 |   |                                                                                                |
| **For the Fiscal Year Ended December 31, 2003** |
|                                                 |   |                                                                                                |
| **o**                                                |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                                 |   |                                                                                                |
| **Commission File Number 000-22857**                 |

 

**SCHEID VINEYARDS INC.**

(Name of smallbusiness issuer in its charter)

 

|   | **Delaware**                                                    |   | **77-0461833**                           |   |
|--------|-----------------------------------------------------------------|--------|------------------------------------------|--------|
|   | (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  Number) |   |
|   |                                                            |   |                                     |   |
|   | **305 Hilltown Road  Salinas, California**                      |   | **93908**                                |   |
|   | (Address of principal executive offices)                        |   | (Zip Code)                               |   |

 

**(831)455-9990**

(Issuer’s telephone number)

 

Securitiesregistered under Section 12(b) of the Exchange Act: **None**

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

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (or forsuch 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 ý  No o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B is not contained in this form, and no disclosure will becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB.  ý

 

Issuer’srevenues for its most recent fiscal year:  $26,356,000

 

Aggregatemarket value of the voting stock held by non-affiliates computed by referenceto the closing price at which the Class A Common Stock was sold on the NasdaqStock Market SmallCap Market System on March 26, 2004: $10,697,912.  The voting stock held by non-affiliates onthat date consisted of 2,205,755 shares of Class A Common Stock.

 

Numberof shares outstanding of each of the issuer’s classes of common stock atMarch 29, 2004:

| Class  A |   | 2,325,755 |   | Class  B |   | 3,149,115 |
|----------|--------|-----------|--------|----------|--------|-----------|

 

Portionsof the registrant’s Proxy Statement for its June 3, 2004 AnnualStockholders Meeting, which has not been filed as of the date of this filing,are incorporated by reference into Part III of this Report.

 

TransitionalSmall Business Disclosure Format (check one)  Yes o  No  ý

 

 

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**FORM 10-KSBINDEX**

 
| Note  Concerning Forward-Looking Statements |                                                                                                                    |
|---------------------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                                        |                                                                                                                    |   |
|                                        | **PART I**                                                                                                              |   |
|                                        |                                                                                                                    |   |
| Item 1.                                     | Description of Business.                                                                                                |   |
| Item 2.                                     | Description of Properties.                                                                                              |   |
| Item 3.                                     | Legal Proceedings.                                                                                                      |   |
| Item  4.                                    | Submission  of Matters to a Vote of Security Holders.                                                                   |   |
|                                        |                                                                                                                    |   |
|                                        | **PART  II**                                                                                                            |   |
|                                        |                                                                                                                    |   |
| Item  5.                                    | Market  for Common Equity and Related Stockholder Matters.                                                              |   |
| Item  6.                                    | Management’s  Discussion and Analysis or Plan of Operation.                                                        |   |
| Item 7.                                     | Financial Statements.                                                                                                   |   |
| Item  8.                                    | Changes  In and Disagreements With Accountants on Accounting and Financial  Disclosures.                                |   |
| Item  8a.                                   | Controls  and Procedures.                                                                                               |   |
|                                        |                                                                                                                    |   |
|                                        | **PART III**                                                                                                            |   |
|                                        |                                                                                                                    |   |
| Item  9.                                    | Directors,  Executive Officers, Promoters and Control Persons; Compliance With  Section 16(a) of the Exchange Act. |   |
| Item  10.                                   | Executive  Compensation.                                                                                                |   |
| Item  11.                                   | Security  Ownership of Certain Beneficial Owners and Management.                                                        |   |
| Item  12.                                   | Certain  Relationships and Related Transactions.                                                                        |   |
| Item  13.                                   | Exhibits  and Reports on Form 8-K.                                                                                      |   |
| Item  14.                                   | Principal  Accountant Fees and Services.                                                                                |   |
|                                        |                                                                                                                    |   |
| Signatures                                  |                                                                                                                    |   |

 

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**NOTECONCERNING FORWARD-LOOKING STATEMENTS**

 

ThisReport contains certain forward-looking statements, including the plans andobjectives of management for the business, operations, and economic performanceof Scheid Vineyards Inc. (the “Company”). These forward-looking statements generally can be identified by thecontext of the statement or the use of words such as the Company or itsmanagement “believes,” “anticipates,” “intends,” “expects,” “plans” or words ofsimilar meaning.  Similarly, statementsthat describe the Company’s future operating performance, financial results,plans, objectives, strategies, or goals are forward-looking statements.  Although management believes that theassumptions underlying the forward-looking statements are reasonable, theseassumptions 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 differmaterially from those contemplated by the forward-looking statements.  In addition to the other cautionarystatements relating to certain forward-looking statements throughout thisReport, attention is directed to “Business — Cautionary Information RegardingForward-Looking Statements” below for discussion of some of the factors, risksand uncertainties that could affect the outcome of future results contemplatedby forward-looking statements.

 

**PART I**

 

**ITEM 1.****                                                    ****DESCRIPTION OF BUSINESS**

 

ScheidVineyards Inc., a Delaware corporation (“SVI” or the “Company”), is a leadingindependent (*i.e*., not winerycontrolled) producer of premium varietal wine grapes.  The Company currently operates approximately 5,600 acres of winegrape vineyards on the Central Coast of California.  Of this total, approximately 4,100 acres are operated for theCompany’s own account and 1,500 acres are operated under management contractsfor others.  All of the propertiescurrently operated by the Company are located in Monterey and San BenitoCounties, both of which are generally recognized as excellent regions forgrowing high quality wine grape varieties.

 

TheCompany currently produces 17 varieties of premium wine grapes, primarilyChardonnay, Cabernet Sauvignon, Merlot, Pinot Noir, Sauvignon Blanc andSyrah.  The majority of the Company’swine grapes are sold under short and long-term grape purchase agreements to avariety of winery clients.  In 2003, theCompany sold approximately 81% of its wine grapes under such supply agreementsto over 30 different wineries.  TheCompany also converts a portion of its grapes, approximately 10% in 2003, topremium bulk wine which is sold pursuant to wine purchase agreements or on theopen bulk market.  The Company alsosells a portion of its grapes, approximately 9% in 2003, pursuant to an acreagecontract whereby the winery client purchases the entire grape production fromspecified acreage for a set price per acre.

 

TheCompany believes that its clients contract with SVI to assure a consistent,reliable source of high quality premium grapes for their wines.  The Company’s largest winery client isDiageo Chateau & Estate Wines Company, a division of Diageo plc (“Diageo”),a global premium drinks business and the tenth largest U.S. winery in terms of2003 case shipments.  Grape purchasecontracts with Diageo covered 61% of the Company’s producing acreage in 2003and accounted for approximately 71% and 74% of the Company’s 2003 and 2002total revenues, respectively.  Diageoproduces and markets the wines of *BeaulieuVineyard (BV)*, *BV Coastal*,*Sterling Vineyards*, *The Monterey Vineyard* and *Blossom Hill*.  The Company also has long-term grape or bulk wine purchaseagreements with other well-known producers of ultra premium wines, includingNiebaum-Coppola Estate Winery, Canandaigua Wine Company (“Canandaigua”, adivision of Constellation Brands, Inc.), Chalone Wine Group, Beringer BlassWine Estates, David Bruce Winery, Morgan Winery, and The Hess Collection Winery.

 

TheCompany sells the majority of its wine grape production under long-term grapepurchase contracts.  The terms of theCompany’s grape purchase contracts extend to between 2004 and 2014, andgenerally have “evergreen” provisions requiring one to three years’ priorwritten notice of termination.  Thesecontracts generally require the clients to purchase substantially all of theCompany’s production

 

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fromspecified vineyards at a formula price based upon the previous harvest year’ssales prices in California’s leading coastal regions, including Napa, Sonoma,Mendocino and Monterey Counties.

 

SVIalso provides vineyard management services to two winery clients, Diageo andPacific Wine Partners, LLC (a joint venture between Constellation Brands, Inc.and BRL Hardy, Inc.).  Under thesearrangements, the Company provides its farming services for a set fee peracre.  In 2003, vineyard managementservices accounted for approximately 4% of the Company’s total revenues.

 

TheCompany’s executive offices are located at 305 Hilltown Road, Salinas,California 93908, telephone number (831) 455-9990, and its vineyardheadquarters are located at 1972 Hobson Avenue, Greenfield, California 93927.

 

TheCompany’s business is conducted through a wholly owned subsidiary, ScheidVineyards California Inc., a California corporation (“SVI-Cal”).  References in this Report to “SVI-Del” referonly 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 andSVI-Cal on a consolidated basis. SVI-Del was incorporated in Delaware in 1997 and SVI-Cal wasincorporated in California in 1971.

 

##### **Recent Developments**

 

* 2003 Harvest*.  Forthe year 2003, the Company harvested approximately 20,700 tons of wine grapes,an 18% increase from the 2002 harvest of 17,550 tons.  This increase was primarily due to a 19% increase inaverage yield per acre from 2002 to 2003, as recently planted acres continuedto mature.

 

* Vineyard Write-Downs.*  The 2003 financial results include awrite-down of vineyard improvements in the amount of $1,269,000 due toapproximately 260 acres of under-performing vines.  A similar write-down in the amount of $1,040,000 on 150 acres wastaken in 2002.

 

* 2004 Grape Prices*. Approximately 50% of the Company’s producing acreage is covered bypurchase contracts that use data from the Final Grape Crush Report (the “CrushReport”), published by the California Department of Food and Agriculture (the“CDFA”) on or about March 10 of each year, to calculate prices.  Based on the 2003 Crush Report publishedMarch 10, 2004, the Company anticipates receiving prices in 2004 for thosecontracts utilizing the Crush Report that are 4% to 12% lower than pricesreceived under similar contracts in 2003. The Company anticipates that the prices it may receive for grapes whichare currently not covered by purchase contracts will be significantly less thanthe prices it will receive for contracted grapes.  See “The Company’s Grape Production Operations-GrapeSales-Pricing.”

 

* Notice of Termination ofContracts.*  In December 2003, the Company’slargest customer, Diageo, delivered a notice to the Company terminating grapepurchase contracts covering approximately 1,300 acres, or 38%, of the Company’sproducing acreage, such termination to become effective after the harvest of2006.  Diageo had previously delivered anotice to the Company terminating a contract covering an additional 570 acres,or 15%, of the Company’s producing acreage. This contract terminated after the 2003 harvest.

 

**Company Strategy**

 

The Company’s strategic objective is to become the leading independentproducer of premium varietal wine grapes in California.  The Company believes that its success todate has resulted from execution of a coherent strategy that includes thefollowing elements:

 

*Produce High Quality, High Value Wine Grapesand Bulk Wine.* The Company has positioned itself as an ultra-premium grower on theCentral Coast and management believes it has developed an excellent reputationin the wine industry due to its emphasis on quality and performance.  SVI strives to consistently provide itsclients with wine grapes that meet demanding specifications for

 

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quality, as measured by sugar content and other objectivecharacteristics.  The Company employsvarious programs to promote top quality grapes, including regulated deficitirrigation on appropriate varieties, upgrades to certain trellis systems toimprove air circulation and light penetration, and a pruning strategy thatemphasizes low spur densities and balanced vines.  In recent years, the Company has provided winemaking services tovarious clients and produced wine that is sold on the bulk wine market.  This avenue of growth accounted forapproximately 10% of revenues in 2003. SVI offers a custom approach to both farming and winemaking whereby ittailors its programs to meet the specific needs of each customer.  See “The Company’s Grape ProductionOperations—GrapeProduction.”

 

* Continue Long-TermRelationships with Leading Wine Producers*.  TheCompany believes that forming and maintaining long-lasting relationships withclients is the key to being successful as an independent grape grower.  The Company has had grape purchase contractswith Diageo and its predecessors since 1972 and with Canandaigua and itspredecessors since 1979.  More recently,SVI has expanded its customer list to over 30 different wineries, including BeringerBlass Wine Estates, Niebaum-Coppola Estate Winery, Chalone Wine Group and TheHess Collection Winery.  To increase itsability to retain current clients and attract new clients, the Company providescustomized farming and winemaking to meet the specific needs of each client,stresses customer service by allowing clients to access weather, irrigation andfarming data through the Company’s proprietary web-based system, VitWatch® andprovides clients with customized quarterly reports outlining the farmingpractices that have been utilized on their contracted grapes.  See “The Company’s Grape ProductionOperations—Grape Sales.”

 

* Combine FundamentalViticultural Practices with Cutting Edge Technology*.  TheCompany invests in the development of new and improved viticultural practicesand the use of innovative technological tools in order to increase the quality,productivity and sustainability of its vineyards.  The Company extensively uses true lyre and modified lyre trellissystems which are designed to achieve balanced vines, leading to productionsustainability without a sacrifice in quality. The Company utilizes many technological tools including irrigationmonitoring tools such as neutron probes and pressure baums, weather stations,geographic information systems technology, global positioning systemstechnology and analytical grape chemistry.

 

 *Develop High Quality Vineyards, Market UncontractedGrapes.*  The Companycurrently has approximately 1,280 producing acres of wine grapes, or 37% of theCompany’s total producing net vine acres, that are uncontracted.  The Company’s primary focus at this time isto market the production from the uncontracted acres and complete the vineyarddevelopment of acres not yet in full production.  As part of its marketing strategy, the Company has developed amarketing and sales team to perform certain duties, including contactingpotential winery clients on a regular basis, maintaining communication withcurrent winery clients, attending industry events, and attending and exhibitingat trade shows.  The Company believesthat there may be opportunities to acquire existing vineyards and purchase orlease undeveloped land suitable for wine grape vineyards, however, the Companyis focusing its efforts primarily on completing its vineyards that are not yetmature and contracting the resultant wine grape production to current or newwinery clients.

 

**California Wine and Grape Industry**

 

The market for California table wine has grown significantly over thelast 10 years.  California winery tablewine revenues have increased at an average 8.7% compound annual rate, fromapproximately $3.2 billion in 1994 to approximately $6.8 billion in 2003,according to Gomberg, Fredrikson & Associates.  In 2003, wine shipments to the United States grew 5%, to a record264 million cases.  This 13 million caseincrease came almost equally from California wines, which were up by 4%, andimports, which were up by 10%.  Thegrowth in California wines was impacted considerably by extreme value wines ($2to $3 per 750 ml. bottle).  Firstintroduced in 2002, extreme value wines had total sales of 6.8 million cases in2003.

 

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Total California wine shipments worldwide in 2003 increased byapproximately 12.3 million cases, or 6.3%. Wines in the ultra-premium category (over $14 per 750 ml. bottle) grewby approximately 8% and accounted for about one-third of total Californiawinery revenues.  California wines inthe super-premium category ($7 to $14 per 750 ml. bottle) were hurt by imports,although sales still grew by approximately 5%. The popular premium category ($3 to $7 per 750 ml. bottle) contractedslightly, with a decrease in sales of about 1%, as some consumers traded downto the extreme value category.

 

Aided by the strong U.S. dollar for the first half of the year,imported wines achieved record volumes in 2003, reaching 68.6 million cases, anincrease of 10% over 2002.  Australianimports had total sales of 16.8 million cases in 2003, an increase of 39%,making Australia the second largest wine exporter to the U.S. behind Italy,which experienced an increase in sales to the U.S. of 7%.  The weakening of the U.S. dollar during thelatter half of 2003 effectively raised the prices of many imported wines andslowed sales growth.

 

California wine exports in 2003 increased by more than 18% due to asurge in bulk wine exports.  An 88%increase in bulk wine exports has been fueled by the availability of Californiawines and the desire of wineries to bottle the wine in the country ofdestination.  Exports of bottledCalifornia wine grew approximately 6% in 2003, slowed by the strength of theU.S. dollar, making it difficult to market California wines in foreign markets.

 

According to the Crush Report, the 2003harvest of California wine grapes totaled 2.9 million tons, an 8% decrease fromthe 2002 crush of 3.1 million tons. California wine grape growers received an average price in 2003 forwhite wine grapes of $429 per ton, down 1% from 2002, and an average price forred wine grapes of $609 per ton, also down 1% from 2002.  For growers in California grape pricingdistrict 7 (Monterey and San Benito Counties), the average price for white winegrapes increased by 1%, from $927 per ton in 2002 to $933 in 2003, and theaverage price for red wine grapes decreased by 6%, from $1,231 per ton in 2002to $1,163 in 2003.

 

**The Company’s Grape Production Operations**

 

***Vineyard Operations***

 

SVI currently owns or manages approximately 5,600 acres of wine grapevineyards in Monterey and San Benito counties. These properties consist of approximately 4,100 acres in Monterey Countyoperated for the Company’s own account and approximately 1,500 acres operatedunder management contracts for others. Of the Company’s approximately 4,080 net vine acres of wine grapes (*i.e*., excluding acreage devoted to roads,storage areas, equipment yards or uses other than vineyards), the Companyexpects that in 2004 approximately 83% will be in full production, 2% will bein partial production, and 15% will be non-producing or out of production.  The Company sells the majority of its winegrape production under long-term grape or bulk wine purchase contracts.  Approximately 63% of the Company’s producingacres are currently contracted for the harvest of 2004, and approximately 58%are contracted through at least the harvest of 2006.  See “Recent Developments — Vineyards Write-Downs.”

 

***Grape Production***

 

The harvest of wine grapes occurs annually, generally inSeptember and October for the coastal vineyards of California.  Grape production varies according to thevariety of grape produced, location, weather, vine density, the quality andtype of soil, water conditions, and other factors.  Newly planted vines take approximately five to six years to reachfull maturity and grafted vines take approximately four years to reach fullproduction.  In 1999, the Companydeveloped a 740-acre vineyard and grafting of the final 120 acres of thisvineyard is scheduled to occur in 2004. The Company is also planning on grafting an additional 35 acres at othervineyards.  The Company believes thatthese acres will be in partial production in 2005 and reach full production in2007, although no assurances can be given that such production increases willoccur with any predictability or at all.

 

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SVI’svineyards are divided into blocks, each block generally consisting ofapproximately 20 to 25 acres.  TheCompany continually evaluates its vineyards on a block-by-block basis andconsiders various factors, such as the overall product mix of the Company’svineyards and the productivity of each block. In 2003, the Company moved certain winery clients from under-performingblocks to more reliable and consistently producing blocks, and removedapproximately 260 acres of vines.  Theeffect of these vineyard removals will be a small reduction in the Company’soverall farming costs and a reduction in the amount of uncontracted grapes theCompany has available.

 

The following table shows SVI’s net vine acres by variety from 2000 to2004, total tons produced from 2000 to 2003, and tons produced by variety for2003:

 

## **Net Vine Acres Owned by SVIand Tons Produced**

 
|                 |   | **Net Vine  Acres** |   | **Tons** |   |
|----------------------|--------|---------------------|--------|----------|--------|
| **Variety**          |   | **2000**            |   | **2001** |   | **2002** |   | **2003** |   | **2004(4)** |   | **2003** |   |
|                 |   |                |   |     |   |   |   |   |   |   |   |   |   |
| Chardonnay           |   | 1,057               |   | 1,374    |   | 1,399 |   | 1,293 |   | 1,107 |   | 8,261 |   |
| Cabernet Sauvignon   |   | 748                 |   | 776      |   | 767 |   | 727 |   | 727 |   | 4,535 |   |
| Merlot               |   | 556                 |   | 556      |   | 600 |   | 600 |   | 600 |   | 2,704 |   |
| Pinot Noir           |   | 160                 |   | 387      |   | 318 |   | 362 |   | 393 |   | 1,296 |   |
| Sauvignon Blanc      |   | 240                 |   | 240      |   | 240 |   | 240 |   | 240 |   | 1,467 |   |
| Syrah                |   | 62                  |   | 174      |   | 174 |   | 174 |   | 174 |   | 923 |   |
| Gewürztraminer  |   | 82                  |   | 82       |   | 82 |   | 82 |   | 82 |   | 484 |   |
| Zinfandel            |   | 86                  |   | 86       |   | 73 |   | 73 |   | 36 |   | 331 |   |
| Petite Sirah         |   | 31                  |   | 31       |   | 31 |   | 31 |   | 31 |   | 227 |   |
| White Riesling       |   | 58                  |   | 58       |   | 58 |   | 58 |   | 22 |   | 214 |   |
| Valdiguie            |   | 20                  |   | 20       |   | 20 |   | 20 |   | 20 |   | 162 |   |
| Others               |   | 31                  |   | 31       |   | 30 |   | 28 |   | 28 |   | 96 |   |
| Replants/Grafts(1)   |   | 209                 |   | 64       |   | 78 |   | 100 |   | 71 |   | — |   |
| New Acreage(2)       |   | 740                 |   | 201      |   | 210 |   | 185 |   | 185 |   | — |   |
| Fallow(3)            |   | —              |   | —   |   | — |   | 107 |   | 364 |   | — |   |
| Total Net Vine Acres |   | 4,080               |   | 4,080    |   | 4,080 |   | 4,080 |   | 4,080 |   |   |   |
|                 |   |                |   |     |   |   |   |   |   |   |   |   |   |
| Total Tons Produced  |   | 10,693              |   | 14,019   |   | 17,550 |   | — |   | — |   | 20,700 |   |

 

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(1)                                  Replants/grafts are acres which aretemporarily taken out of production due to grafting or replanting to changevarieties. Acres are deemed to be back in production in the third crop year.

(2)                                  New acreage represents bare ground which is inthe development stage.  The developmentstage is generally the first three years of the vineyard’s life, when theCompany expects little or no production.

(3)                                  Fallow acres are under-performing acres thathave been removed from production and may be replanted.

(4)                                  As of March 26, 2004.

 

***Grape Sales***

 

*Primary Customers*.  Thewine grape tonnage harvested from the Company’s approximately 3,687 net vineacres in production in 2003 (*i.e.*,excluding vineyards under development or redevelopment) was largely subject togrape purchase contracts with various wine producing companies.  The largest set of these contracts,representing approximately 77% of the Company’s 2003 grape sales revenues and71% of the Company’s 2003 total revenues, is with Diageo Chateau & EstateWines Company, a division of Diageo plc. Diageo is a global premium drinks business headquartered in the UnitedKingdom and the tenth largest U.S. winery in terms of 2003 case shipments.  The Company’s contractual relationship withDiageo’s predecessor began in 1972 and has been continuous since that time.  In addition, the Company has purchasecontracts for its current wine grape production with other wine producers,including Niebaum-Coppola Estate Winery, Canandaigua, Chalone Wine Group,Beringer Blass Wine Estates, David Bruce Winery, Morgan Winery and The HessCollection Winery.  The Company alsoprovides vineyard management services to Diageo and Pacific Wine Partners, LLCon an aggregate of approximately 1,500 acres of wine grapes.  See “Vineyard Management Contracts.”

 

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The terms of the Company’s grape purchase contracts generally requirethe clients to purchase substantially all of the Company’s production fromspecified vineyards at a formula price based upon the previous year’s salesprices for specified districts as reported in the annual Crush Report.  See “Pricing.”  The contracts generally require the Company to deliver grapesmeeting specified sugar levels and other quality measurements.  The majority of the contracts call forpayment in full within 60 days of delivery of the crop to the client.

 

The terms of the Company’s grape purchasecontracts extend to between 2004 and 2014. Contracts covering approximately 58% of SVI’s producing acreage extendthrough delivery of the 2006 crop and have “evergreen” renewal provisionswhereby the contracts continue until either party gives a two or three years’prior written notice of termination. The Company believes that these evergreen provisions are desirable toeither allow time to renegotiate the contract with its contracting client or tofind a new client for the grape production before the contract terminates,although there can be no assurance that either course of action will besuccessful.

 

In 2001, Diageo delivered a notice to theCompany terminating a grape purchase contract covering approximately 570 acres,and such termination became effective after the harvest of 2003.  In December 2003, Diageo delivered anotice to the Company terminating grape purchase contracts covering anadditional 1,300 acres, or 38% of the Company’s producing acreage, suchtermination to become effective after the harvest of 2006.  The marketing of uncontracted acres is aprimary focus of SVI, but there can be no assurances that these efforts will besuccessful and it is likely that any new purchase agreements will have lessfavorable terms.  See “Cautionary Information RegardingForward-Looking Statements — Dependence on Major Customers; Renewal of GrapePurchase Agreements.”

 

The Company believes that it has excellent relationships with itsclients that have been built over many years of satisfying their needs forquality, timely delivery and service. Long-term supply arrangements benefit clients by providing asignificant, reliable supply of high-quality grapes at predictable prices.  These contracts also benefit the Company byproviding reliable sources of revenues. SVI believes that these contracts are one of the major reasons for itspast success, and it plans to rely upon these and similar contracts in thefuture.  While contract terms aretypically a function of market factors and it is not possible to know what theterms of the Company’s future grape purchase arrangements will be, it isprobable that any renewal or replacement of the Company’s Diageo contracts, themajority of which will expire after the harvest of 2006, will have lessfavorable terms.

 

At the present time, the Company hascontracts on its net vine acres that have initial expiration dates as follows:

 

| **Initial Year   of Expiration** |   | **Net Vine  Acres** |   | **Percent** |   |
|----------------------------------|--------|---------------------|--------|-------------|--------|
| 2004                             |   | 140                 |   | 3.4         | %      |
| 2005                             |   | 40                  |   | 1.0         |   |
| 2006                             |   | 1,365               |   | 33.4        |   |
| 2007                             |   | 45                  |   | 1.1         |   |
| 2008                             |   | 85                  |   | 2.1         |   |
| 2009                             |   | 0                   |   | 0.0         |   |
| 2010                             |   | 0                   |   | 0.0         |   |
| 2011                             |   | 90                  |   | 2.2         |   |
| 2012                             |   | 20                  |   | 0.5         |   |
| 2013                             |   | 70                  |   | 1.7         |   |
| 2014                             |   | 325                 |   | 8.0         |   |
| Uncontracted                     |   | 1,280               |   | 31.4        |   |
| Non-Producing                    |   | 620                 |   | 15.2        |   |
| Total                            |   | 4,080               |   | 100.0       | %      |

 

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*Pricing*.  Each year the CDFA publishesthe Grape Crush Report on a preliminary basis on or around February 10,with a final report published on or around March 10.  The Crush Report discloses the prices, tonsand certain quality standards of all grapes crushed for wine from each ofCalifornia’s 17 wine grape producing districts in the grape harvest of theprevious autumn.  The report is reliedupon heavily by wineries and wine grape producers to negotiate contracts andestablish grape prices, as well as by financial and other institutions whoserve the wine industry.

 

Approximately 50% of SVI’s contract grape prices are established eachyear by various pricing formulas based on the previous year’s prices for eachwine grape variety in several specified CDFA reporting districts.  For example, grapes from the Company’s 2004harvest that are subject to these contracts will be sold at prices based on theactual prices for the 2003 harvest reported in the Crush Report publishedMarch 10, 2004.  This enables boththe Company and its clients to know final grape prices (on a per ton basis byvariety) approximately eight months in advance of each year’s harvest.  These multiple district formula prices, asopposed to sales on the short-term spot market, tend to moderate year-to-yearswings in prices.  The Company’s grapepurchase contracts typically utilize pricing based in part upon prices forNapa, Sonoma and Mendocino county grapes, which tend to be higher than pricesfor the same varieties produced in Monterey county.  Some recent agreements use pricing formulas that are based moreheavily on Monterey county data or use fixed prices which do not fluctuate,which may also be the case for the renewal or replacement of the Diageoagreements and additional agreements covering new or replanted vineyards.

 

The chart below shows the weighted averageprices SVI has received, or expects to receive, per ton of contracted grapesfor the primary varieties it has produced since 2000 based on the pricingformulas of its various tonnage-based grape purchase contracts.  As of March 26, 2004, tonnage-basedgrape and wine purchase contracts covered approximately 54% of the Company’scurrently producing acreage.

 

**WeightedAverage Prices Per Ton Received by SVI (1)**

 
| **Variety**        |   | **2000** |       | **2001** |       | **2002** |       | **2003** |       | **2004(2)** |       |
|--------------------|--------|----------|------------|----------|------------|----------|------------|----------|------------|-------------|------------|
|               |   |     | ** ** |     | ** ** |     | ** ** |     | ** ** |        | ** ** |
| Cabernet Sauvignon |   | $        | 1,747      |     | $          | 2,044    |       | $        | 1,448      |        | $          | 1,578 |   | $ | 1,428 |   |
| Chardonnay         |   | 1,647    |       | 1,615    |       | 1,323    |       | 1,159    |       | 1,243       |       |
| Gewurztraminer     |   | 988      |       | 943      |       | 984      |       | 1,048    |       | 961         |       |
| Merlot             |   | 1,516    |       | 1,552    |       | 1,557    |       | 1,445    |       | 1,395       |       |
| Petite Sirah       |   | 1,240    |       | 1,315    |       | 1,313    |       | 1,337    |       | 1,293       |       |
| Pinot Noir         |   | 1,781    |       | 1,789    |       | 1,765    |       | 1,470    |       | 1,546       |       |
| Sauvignon Blanc    |   | 1,160    |       | 1,181    |       | 1,001    |       | 856      |       | 1,052       |       |
| Syrah              |   | 1,468    |       | 1,442    |       | 1,158    |       | 982      |       | 1,015       |       |
| Valdiguie          |   | 890      |       | 887      |       | 863      |       | 845      |       | 749         |       |
| White Riesling     |   | 852      |       | 884      |       | 880      |       | 870      |       | 874         |       |
| Zinfandel          |   | 1,347    |       | 1,473    |       | 1,158    |       | 1,599    |       | 1,402       |       |
|                    |        |          |            |          |            |          |            |          |            |             |            |  |  |  |  |  |

 

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(1)                                  Prices for most premium varieties decreased in2002 and 2003 largely as a result of supply and demand conditions.  Supply and demand factors will change overtime and there can be no assurance that the prices received by the Company inthe future will match or exceed historical prices.

 

(2)                                  Price estimates for2004 are based upon existing contracts, Company production and sales estimatesfor contracted acres, and the 2003 Final Grape Crush Report releasedMarch 10, 2004.  These weightedaverage prices per ton do not include estimated production and sales ofuncontracted vineyard acres.  TheCompany anticipates that prices for grapes produced from uncontracted acres, in particular Cabernet Sauvignon, will besubstantially lower than those from its contracted acres.  Currently, the Company has 63% of itsproducing vineyard acres contracted for the 2004 harvest.

 

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***Vineyard Production Cycle***

 

The vineyard production cycle begins each year in December, aftercompletion of harvest.  FromDecember through March vines are pruned and tied to trellises, anddamaged stakes, trellises, irrigation systems and other vineyard components arerepaired or refurbished.  After winterrains end, irrigation and cultivation of the vineyards begin and continuethrough the harvest season.  Herbicidesare applied as needed through the summer. Necessary applications of pesticides and fertilizer begin in the springand continue until harvest.  Graftingand planting also generally take place in the first four or five months of theyear.  As growth of the vinesaccelerates beginning in late spring, they are trained and tied, and excessleaves are sometimes pulled to promote more efficient growth of vines andfruit.  Depending on the rate at whichfruit ripens, harvest typically begins in late-August tomid-September and is completed by the end of October or early November.  Direct farming costs currently range from$2,300 to $3,200 per acre over the course of the year for vineyards in fullproduction, and revenues are realized at the time of harvest.  Approximately one-half of annual productioncosts are incurred by June 30.

 

***Capital Investment Requirement forAcquisition, Development and Improvement of Vineyards***

 

Part of the Company’s strategy has been to expand its operations andgrape production through the development of bare land into vineyards, theacquisition of existing vineyards, and the redevelopment of the Company’s oldervineyards.  The Company has implementedthis strategy through the lease in 1998 of approximately 790 acres of bare landlocated near the Company’s vineyard headquarters it has developed into vineyards,the 1997 acquisition of the 370-acre Riverview Vineyard, the lease in 1997 ofapproximately 575 acres of bare land in Hames Valley it has developed intovineyards, and the redevelopment of certain of the Company’s existingvineyards.

 

Generally, significant amounts of fruit are not produced for threeyears from newly planted vines and for two years from vines which are graftedto a new variety.  During this time, theCompany incurs significant development and production costs that are not offsetby revenues from these vineyards and must be financed from other sources.  Newly planted vines that are four to fiveyears of age and grafted vines that are three to four years of age generallybegin to produce grapes in sufficient quantities to cover production costs andcontribute to gross profit, subject to some variation due to the effects offactors such as weather conditions, geographic location, variety of grapegrown, vine density, quality and type of soil, and water quality.

 

It has been the Company’s experience that itcurrently costs approximately $15,000 to $18,000 per acre over a three-yearperiod 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 thecondition of the vineyard and the scope of the redevelopment plan. During the past five years, the Company has made over $24 million incapital expenditures to redevelop existing vineyards and develop newvineyards.  Improvement andrefurbishment is an ongoing process. The Company estimates that there will always be some portion of itstotal net vine acres undergoing some type of redevelopment.  See “-Net Vine Acres Owned by SVI and TonsProduced.”

 

Due to the development of new vineyards, the redevelopment of existingvineyards and the acres recently taken out of production, approximately 17% ofthe Company’s vineyard acreage has not yet reached full productive capacity oris out of production.  There can be noassurance that the Company’s properties will achieve their full productivecapacity at the rate indicated, if at all.

 

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The following table shows recent and anticipated maturity of theCompany’s vineyards.

 

**Anticipated Maturity Levelsof SVI’s Net Vine Acres (1)**

 
|                                                       |   | **Crop Year** |   |
|------------------------------------------------------------|--------|---------------|--------|
|                                                       |   | **2003**      |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **2008** |   |
| Acres five or more years old (at or near full  production) |   | 3,552         |   | 3,381 |   | 3,429 |   | 3,460 |   | 3,571 |   | 3,716 |   |
| Acres three and four years old (partial production)        |   | 136           |   | 78 |   | 142 |   | 111 |   | 145 |   | — |   |
| Acres one and two years old (not yet in  production)       |   | 285           |   | 257 |   | 145 |   | 145 |   | — |   | — |   |
| Acres out of production (2)                                |   | 107           |   | 364 |   | 364 |   | 364 |   | 364 |   | 364 |   |
|                                                       |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Total Acres                                                |   | 4,080         |   | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   |

 

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(1)  The net vine acreage shown above is SVI’splanted acreage only.  It does notinclude acreage devoted to roads, storage areas, equipment yards or uses otherthan vineyards.

 

(2)  Certain marginally-producing acres have beentaken out of production and it has not been determined when these acres will bereplanted, if at all.

 

***Water Supply***

 

TheCompany’s vineyards are located in the Salinas Valley through which flows theSalinas River.  The watershed of theSalinas Valley is from the Ventana Wilderness in the Los Padres National Forestand Santa Lucia range of coastal mountains. The Salinas River supplies a large aquifer which is tapped byagricultural users.  In addition, theSalinas River is fed by two large reservoirs, Lake Nacimiento and Lake SanAntonio, which were built primarily for agricultural water supply purposes toserve the Salinas Valley.  Thesereservoirs are maintained by the Monterey County Water Resource Agency.  The Company drip irrigates all of itsvineyards from wells located on or near its vineyards.  The quality of the water obtained from thewells is good, and the wells have proven to be a plentiful and reliable sourceof water for the Company’s operations, even during the drought years of thelate 1980’s.  See “CautionaryInformation Regarding Forward-Looking Statements - Water.”

 

**Vineyard Management Contracts**

 

The Company provides vineyard management services on approximately1,500 acres in Monterey and San Benito Counties for Diageo and PacificWine Partners, LLC (a joint venture between Constellation Brands, Inc. and BRLHardy, Inc.).  Pursuant to thesemanagement contracts, budgeted costs of labor and equipment are advanced to theCompany on a monthly basis and the Company receives management fees based onthe acreage managed and harvested.  TheCompany’s vineyard management contracts expire no earlier than the completionof harvest in years ranging from 2009 to 2013. In certain cases the Company has also received fees for financingvineyard improvements, securing property and designing vineyards.  The Company may enter into similararrangements for other vineyard properties in the future.

 

**Wine Production and Sales**

 

SVI began limited production of its own ultra premium varietal winesunder the *Scheid Vineyards* labelin 1991.  The Company has contracted forits wine production with Storrs Winery, a small producer of award-winning wineslocated in Santa Cruz, California, approximately 50 miles from the Company’svineyard headquarters compound.  TheCompany currently subleases space in a 1,600 square foot building from StorrsWinery, including certain space dedicated for the Company’s exclusive use inconnection with its winemaking activities. In 1996, the Company obtained a winery license, and a tasting

 

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roomwas opened in 1997 at the Company’s vineyard headquarters compound located onU.S. Highway 101 (a major north-south thoroughfare between San Francisco andLos Angeles) just south of Greenfield and north of King City in MontereyCounty.

 

Production and sales have been limited to date.  SVI produced approximately 2,660 and 1,250cases in 2003 and 2002, respectively, of ultra premium varietal wines,including Chardonnay, Cabernet Sauvignon, Merlot, Pinot Noir, Syrah andSauvignon Blanc, using Company-grown grapes. While its actual wine production will depend on various factors, theCompany currently plans for production in 2004 of approximately 2,500 cases.  The Company intends to continue todistribute its current wine production directly through its tasting room, website, restaurants, clubs and a few selected retailers.

 

Since 1997, the Company has offered an annual “wine dividend” toholders of at least 100 shares of its Class A Common Stock, whereby suchshareholders were entitled to a $0.50 per share credit for use in makingpurchases of the Company’s wine at up to a 50% discount from the retailprice.  The Company intends to offeranother “wine dividend” in 2004.  SVIhas not yet earned a profit on its wine business and cannot predict when, orif, these operations will become profitable. Further, SVI does not expect its wine business to have a material impacton sales or earnings in the foreseeable future.  No assurances can be given that wine production and sales everwill be a major source of profit for the Company.

 

**Competition**

 

Wine grape growing and wine production are highly competitive.  California has over 1,000 bonded wineriesalthough, according to Gomberg, Fredrikson & Associates, the top twelvewineries accounted for approximately 80% of sales based on total Californiawine shipments in 2003.  In addition,there are many sources of supply of wine grapes in California and in countriesoutside the United States.  Since 1996,acres planted to wine grapes in California have increased 47%, fromapproximately 378,000 acres at the end of 1996 to 556,000 at the end of 2002,according to the California Agricultural Statistics Service.  Most wine grape producers have small,privately owned operations and sell their production to wineries, often at spotmarket prices from year to year. Quality of production and yields can vary widely from vineyard tovineyard in the same geographic area. Many wineries, including certain of the Company’s customers, grow asignificant amount of the grapes they need to produce wine in addition topurchasing grapes from independent producers such as SVI.  Although holdings of vineyard properties arenot publicly reported, the Company believes it is one of the largest independentproducers of premium wine grapes in California, and that there areapproximately four or five independent producers of comparable size in terms ofacreage.

 

In addition, there are numerous wine producers in Europe, Australia,South America, New Zealand and South Africa. Increasing production in these regions is being targeted at therelatively affluent United States market. Most imports are bottled wines, however, some American producers haveimported bulk wine for bottling and sale in the United States.  In 2003, imports of foreign bulk wine toCalifornia were 2.6 million gallons, the equivalent of 1.1 million cases.  Since 1996, American wineries have importedthe equivalent of 22.7 million cases of foreign bulk wine.

 

**Environmental Issues**

 

SVI currently maintains 30 above-ground fuel storage tanks on its ownvineyard properties to provide fuel to its various vehicles and machinery.  These tanks have capacities ranging fromapproximately 500 to 10,000 gallons and are installed on concrete slabs withcatch basins to protect the ground surface from any inadvertent release.  No underground storage tanks are located onthe Company’s properties.

 

The Company’s current operations require the periodic usage of variouschemical herbicides, fungicides and pesticides, some of which contain hazardousor toxic substances. The usage and storage of these chemicals are, to varyingdegrees, subject to federal and state regulation. To the extent that theCompany stores such chemicals, they are contained in a secured storage facilityat the Company’s vineyard headquarters compound.  The Company also maintains a comprehensive safety program

 

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supervisedby the Company’s human resources safety director and a state-licensed pestcontrol advisor.

 

**Trademarks and Labels**

 

The Company has registered a trademark relating to a specific sloganwhich the Company uses on souvenirs and paraphernalia sold at the Company’swine tasting room and has filed an application to trademark “VitWatch”, theCompany’s proprietary winery client web site. The Company also has wine labels approved by the Trade and Tax Bureau(“TTB”).

 

**Employees and Labor Relations**

 

The Company has approximately 75 full-time employees and employsseasonal and contract labor for vineyard development, pruning, harvesting andother related tasks during peak seasons. Field labor needs are seasonal, normally peaking at approximately 400field workers at harvest, and dropping to a low of approximately 50 immediatelyafter harvest.  The Company also usescontracted labor for specialized work, such as grafting, and otherwise whennecessary.

 

The United Farm Workers, AFL-CIO (“UFW”) has represented the Company’sfarm workers since 1993.  InJanuary 2002, the Company completed the negotiation of a new five-yearcontract with the UFW that will expire at the end of 2006.  The Company believes its labor relations aresatisfactory.  The Company has never hada walk-out, sit-down, slow-down or strike, and the existing contract has a “nostrike” clause.  The Company has,however, been picketed, particularly during the organizing effort by the UFWand 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 a variety of agricultural risksthat can materially and adversely affect the quality and quantity of grapesproduced.  These hazards include, amongother things, adverse weather such as drought, frost, excessive rain, excessiveheat or prolonged periods of cold weather. To the extent a grape producer’s properties are geographicallyconcentrated, the effects of local weather can be material.  The vineyards owned by SVI are spread over adistance of approximately 70 miles, north to south, close to Highway 101 inMonterey County.  Accordingly, adverseweather in the future could affect a substantial portion of the Company’svineyards in any year and have a material adverse effect on the Company’sbusiness, 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 thatfeeds on the roots of grape vines, has infested many vineyards in the winegrape producing regions of California, causing grape yields to decrease.  Phylloxera infestation has been widespreadin California, particularly in Napa, Sonoma, Mendocino and Monterey Counties,and most of the other wine grape producing areas of the state have beenaffected to some degree.  As a result ofthis widespread problem, thousands of vineyard acres throughout California havebeen replanted with phylloxera-resistant rootstock or, in some cases, taken outof production completely.  Substantiallyall of the Company’s approximately 4,080 net vine acres of wine grapes areplanted or interplanted with rootstock that is designated asphylloxera-resistant.

 

Another potentially devastating pest is the glassy-winged sharpshooter(“GWSS”).  GWSS poses a significantthreat to viticulture throughout California due to its ability to transmit *Xylella fastidiosa*, the bacterium that causesPierce’s Disease.  Pierce’s Disease, adeadly 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 newand far stronger disease carrier than the blue-green sharpshooter.  The GWSS became established in the Temecularegion of southern California in 1999 and, as a result, Pierce’s Disease is sowidespread that the future viability of the Temecula region to produce winegrapes is in doubt.  According to theCalifornia Department of Food and Agriculture, the list of

 

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countiesin California infested with the GWSS numbers fourteen, with localizedinfestations found in parts of Butte, Sacramento, Santa Clara, Fresno, Tulare,Kern, Santa Barbara, Ventura, Los Angeles, San Bernardino, Orange, Riverside,San Diego and Imperial counties.  Thusfar, no infestations have occurred in Monterey County and the Company has seenno evidence of the GWSS or Pierce’s Disease in its own vineyards.  The wine industry, along with scientists andcertain governmental agencies in California, are searching for ways to controland combat the pest, including a comprehensive system of inspections andmonitoring, pesticide spraying and numerous research projects.  Growers statewide pay an annual assessmentof $2 per $1,000 of value of grapes to help fund these programs.

 

Other pests that may infest vineyards include leafhoppers, thrips,nematodes, mites, insects, orange tortrix, twigbore, microflora and variousgrapevine diseases.  Pesticides and theselection of resistant rootstocks reduce losses from these pests, but do noteliminate the risk of such loss. Gophers, rabbits, deer, wild hogs and birds can also pose a problem forvineyards, and wine grape vines are also susceptible to certain virusinfections which may cause reduction of yields.  None of these currently poses a major threat to the Company’svineyards, although they could do so in the future and, at that time, will havethe potential to subject the vineyards to severe damage.

 

***Dependence on Major Customer;Renewal of Grape Purchase Agreements***

 

Grape purchase contracts with Diageo covered61% of the Company’s producing acreage in 2003 and accounted for approximately71% and 74% of the Company’s 2003 and 2002 total revenues, respectively.  The terms of the grape purchase contractswith Diageo extend to between 2006 and 2014. In 2001, Diageo delivered a notice to the Company terminating agrape purchase contract covering approximately 570 acres, such termination tobecome effective after the harvest of 2003. In December 2003, Diageo delivered a notice to the Companyterminating grape purchase contracts covering an additional 1,300 acres, or 38%of the Company’s producing acreage, such termination to become effective afterthe harvest of 2006.  For 2004,contracts with Diageo cover 58% of the Company’s producing acreage.  The marketing of uncontracted acres is aprimary focus of SVI, but there can be no assurances that these efforts will besuccessful and it is likely that any purchase agreements covering new vineyardswill have less favorable terms.

 

***Wine Grape Supply and Demand;Pricing***

 

Due to recent developments, an oversupplysituation for certain varieties currently exists in the wine grapeindustry.  Plantings of new vineyards,yield enhancements through technological advances, and denser plantings ofvines have contributed to supply pressure. In addition, economic uncertainty and increased foreign competition haveexacerbated market conditions.  Thesefactors have had a significant impact on grape and bulk wine prices for certainvarieties, in particular, Cabernet Sauvignon. Pricing pressure for the Company’s grape production is expected to continueand could have a material adverse affect on our business and future results.

 

***Uncertainty of Revenue Growth***

 

In 2003, approximately 87% of the Company’s net vine acres were at ornear full production, and it is anticipated that a certain portion of theCompany’s vineyards will always be out of production or below maximumproduction due to initial development, replanting, regrafting and various otherfactors.  While some productivityincreases may be expected from further development of vineyard acreage not yetin full production or from enhancements of fully productive vineyards, thegrowth potential of the Company’s existing properties is limited and theCompany’s ability to increase revenue depends ultimately upon its ability toacquire, develop and operate more vineyard properties.  There can be no assurance that suitableproperties will be available to the Company at prices that would make theCompany’s growth plans viable.  Revenuesare also substantially dependent on grape yields and prices, both of which aresubject to variation as discussed elsewhere in this section and can havean effect on revenue growth unrelated to the number of acres in fullproduction.

 

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***Fixed Costs and Revenue Fluctuations;Uncertainty of Profitability***

 

The Company incurs annual farming costs currently averagingapproximately $2,300 to $3,200 per acre in production.  These costs are incurred throughout the yearpreceding harvest and are relatively fixed. Revenues from grape sales are not realized until harvest and varydepending upon yields and prices. Vineyard productivity varies from year to year depending upon a numberof factors, and significant variations in annual yields should be expected fromtime to time.  Furthermore, grape priceshave fluctuated significantly in the past and should be expected to continue tofluctuate from year to year and to decrease at times in the future.  Because production costs are notsignificantly adjustable in light of productivity or revenue levels, weakharvests or lower grape prices cannot be mitigated by cost reductions andshould be expected to have significant adverse effects upon profitability.

 

***Capital Requirements***

 

The farming of vineyards in production requires substantial amounts ofworking capital.  Historically, theCompany has relied heavily on short-term credit to finance its working capitalrequirements.  There can be no assurancethat the Company will be able to obtain financing when required or that suchfinancing will be available on reasonable terms, and lack of access to adequatelines of credit or other capital sources could impair the Company’s ability togrow and adversely affect the Company’s business, financial condition andresults of operations.

 

Substantial capital expenditures are required to develop and acquirenew vineyards and improve existing vineyards. The Company has made and may continue to make such expenditures tofinance its expansion, and has incurred and may continue to incurindebtedness.  As a consequence, theCompany has and will continue to have significant interest and principalrepayment obligations and earnings and cash flow will be adversely affected byincreases in interest rates.

 

***Risks Associated with BusinessExpansion and Acquisition Strategy; Long-Term Strategies***

 

As part of its long-term strategy, SVI continually evaluatesopportunities available in the wine industry, such as acquisitions of developedvineyard properties and increasing acreage under management.  There can be no assurance that the Companywill be able to locate suitable properties to buy or lease at viable prices, orif it does locate such properties, that it will be able to secure adequatefinancing.  In addition, any propertiesacquired by the Company may require significant capital investment and severalyears of development before becoming productive.

 

***Competition; Industry Fragmentation***

 

The wine grape industry is extremely competitive.  Many of the Company’s competitors havesubstantially greater financial, production, personnel and other resources thanthe Company.  The Company competes withmany other producers of premium wine grapes in California, including a fewthousand small independent (*i.e*.,not winery controlled) wine grape producers who sell their production towineries.  In addition, some wineriessell excess production from their own vineyards in the open market.  Moreover, to a significant extent, winegrapes of a particular variety are fungible, and the ability of foreignproducers to compete with the Company on the basis of price due to their lowerproduction costs may have a negative impact upon the Company’s profitability.

 

***Possible Termination of VineyardManagement Agreements***

 

Substantially all of the Company’s vineyard management agreements maybe terminated in the event that Alfred G. Scheid, Kurt J. Gollnick and certainmembers of their families cease to maintain specified shareholdings in theCompany.  Sales to the public by membersof the Scheid or Gollnick families or further public offerings by the Companymay result in a change of control of the Company, which could result intermination of these agreements.

 

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***Labor Regulations and Union Contract***

 

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

 

The UFW is the major union representing farm labor and has representedSVI’s farm workers since 1993.  InJanuary 2002, the Company completed the negotiation of a new five-yearcontract with the UFW that will expire at the end of 2006.  Although the Company historically has hadsatisfactory labor relations, it has been picketed from time to time during theinitial organization of its employees and during contract negotiations.  No assurance can be given that the Company’ssatisfactory 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 theseactions.  The Company’s business isheavily dependent upon farm labor, and the failure of the Company to maintainadequate labor relations on terms acceptable to the Company could have amaterial adverse effect upon the Company’s business, financial condition andresults of operations.

 

***Dependence on Consumer Demand***

 

Trends in consumer spending and changes in consumer tastes have a substantialimpact on the wine industry and the Company’s business.  To the extent that wine purchases arenegatively impacted by economic and other factors, or wine consumers reduceconsumption of wine in favor of other beverages, demand for wine grapes coulddecrease.

 

***Government Regulation; Taxes***

 

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

 

Wine production and sales are subject to extensive regulation by theFederal Trade and Tax Bureau, the California Department of Alcohol BeverageControl and other state and federal governmental authorities that regulatelicensing, trade and pricing practices, labeling, advertising and otheractivities.  In recent years, federaland state authorities have required warning labels on beverages containingalcohol.  Restrictions imposed bygovernment authorities on the sale of wine could increase the retail price ofwine, which could have an adverse effect on demand for wine in general.  Increases in excise taxes on wine, ifenacted, could reduce demand for wine and wine grapes, which could materiallyand adversely affect the Company’s business, financial condition and results ofoperations.

 

***Reliance on Key Personnel***

 

The Company believes its continued success depends to a significantextent on the active involvement of certain members of the Scheid family andthe retention of its senior non-family executives.  There can be no assurance that the key persons will remain intheir management positions with the Company, and the loss of the services ofany of the key persons could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

***Environmental Risks***

 

Ownership of real property creates a potential for environmentalliability on the part of the Company. If hazardous substances are discovered on or emanating from any of theCompany’s vineyards and the release of hazardous substances (including fuelsand 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 maybe held strictly liable for the cost of remediation of these hazardoussubstances.  See “-

 

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EnvironmentalIssues.”

 

***Water***

 

The Company is dependent upon wells locatedon or near its vineyards for water to irrigate the vineyards, which wells aresupplied by aquifers fed by the Salinas River and reservoirs operated byMonterey County.  Although historicallythe quality of water from these wells has been good and the wells haveconsistently supplied a plentiful and reliable source of water, even during thedrought years of the late 1980’s, and the Company believes its sources of waterwill be available for the foreseeable future, it is possible that the Company’swater supplies could be impaired in the future due to drought, contamination orother circumstances.  An impairment inthe Company’s water supplies could adversely affect the business, financialcondition and results of operations of the Company.

 

***Electricity***

 

The Company is dependent upon electricity toprovide power to pumps that run the irrigation systems on certain of itsvineyard properties.  The Company’s dripirrigation system is largely responsible for the application of water andcertain fertilizers.  In the recentpast, California has experienced statewide energy shortages, blackouts andincreases in electricity costs.  TheCompany currently spends approximately 4% of its direct farming costs per acreon electricity annually.  Prolongedelectricity outages could affect the timing of water or other applications,which could adversely affect the Company’s vineyards.  The Company has not experienced any prolonged electricityblackouts and could, if necessary, use other methods of application of waterand fertilizers.

 

***Legislative Actions and PotentialNew Accounting Pronouncements.***

 

In order to comply with the newlyadopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listingstandards by Nasdaq and proposed accounting changes by the Securities andExchange Commission, the Company may be required to increase its internal controls,hire additional personnel, and engage outside legal, accounting and advisoryservices, all of which could cause the Company’s general and administrativecosts to increase.  Proposed changes inthe accounting rules, including legislative and other proposals to account foremployee stock options as compensation expense, among others, could increasethe expenses that the Company reports under Generally Accepted AccountingPrinciples and could adversely affect operating results.

 

**ITEM 2.****                                                    ****DESCRIPTION OF PROPERTIES**

 

*Corporate Headquarters*.  TheCompany leases approximately 6,700 square feet of office space in Salinas,California under a three-year term which expires January 31, 2007.

 

The Company believes that its existingfacilities will be adequate to meet the Company’s needs for the foreseeablefuture.  Should the Company needadditional space, management believes it will be able to secure additionalspace at commercially reasonable rates.

 

*Vineyards*.  The Company currently ownsapproximately 1,800 acres of land and leases approximately 2,600 acres ofland underlying its vineyards, all of which are located in Monterey County,California.  The five leases to whichthe 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 yearsand 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.

 

**ITEM 3.****                                                    ****LEGAL PROCEEDINGS**

 

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

 

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

 

There were no matters submitted to a vote ofsecurity holders during the Company’s fourth quarter ended December 31,2003.

 

**PART II**

 

**ITEM 5.****                                                    ****MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS AND SMALL BUSINESS ISSUER PURCHASE OF EQUIT Y SECURITIES**

 

**Market for Class A Common Stock; Related Information**

 

The Company’s Class A Common Stock is traded on the Nasdaq SmallCapMarket System under the symbol “SVIN”. The following table sets forth, for the fiscal quarter indicated, thehigh and low closing price per share sales prices for the Class A Common Stock,as reported by Nasdaq:

 
|           |   | **High** |   | **Low** |   |
|----------------|--------|----------|--------|---------|--------|
| **2002**       |   |     |   |    |   |
| First quarter  |   | $        | 3.900  |    | $      | 3.070 |   |
| Second quarter |   | $        | 3.850  |    | $      | 3.210 |   |
| Third quarter  |   | $        | 3.260  |    | $      | 2.800 |   |
| Fourth quarter |   | $        | 2.890  |    | $      | 2.240 |   |
| **2003**       |   |     |   |    |   |
| First quarter  |   | $        | 2.680  |    | $      | 2.350 |   |
| Second quarter |   | $        | 3.070  |    | $      | 2.350 |   |
| Third quarter  |   | $        | 3.651  |    | $      | 2.810 |   |
| Fourth quarter |   | $        | 5.139  |    | $      | 3.610 |   |

 

In October 2002, Nasdaq notified theCompany that it was not in compliance with the Nasdaq National Market publicfloat requirement that requires the Company to maintain a $5,000,000 minimummarket value float.  To ensurecontinuity of its Nasdaq listing and to protect the interests of Companyshareholders, Scheid Vineyards elected to transfer to the Nasdaq SmallCapMarket, effective March 3, 2003.

 

On March 23, 2004, there were 204 holders of record of theCompany’s Class A Common Stock and 14 holders of record of the Company’s ClassB Common Stock..  For informationconcerning historical dividends and the Company’s dividend policy, see “Item 6- Management’s Discussion and Analysis or Plan of Operation - Dividends andDistributions.”

 

On March 26, 2004 there were stock options exercisable to purchase152,625 shares of the Company’s Class A Common Stock.

 

18

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**ITEM 6.****    ****MANAGEMENT’S DISCUSSION AND ANALYSIS****OR PLAN OF OPERATION**

 

**Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

*The following discussion should be read inconjunction with the Company’s Financial Statements, including the related notesthereto, and other financial information included herein.  The information in this Report includesforward-looking statements.  Inaddition, past operating results are not necessarily indicative of the resultsto 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 ofpremium varietal wine grapes.  TheCompany currently operates approximately 5,600 acres of wine grape vineyards onthe Central Coast of California.  Ofthis total, approximately 4,100 acres are operated for the Company’s ownaccount and 1,500 acres are operated under management contracts forothers.  All of the properties currentlyoperated by the Company are located in Monterey and San Benito Counties, bothof which are generally recognized as excellent regions for growing high qualitywine grape varieties.

 

The Company currently produces 17 varietiesof premium wine grapes, primarily Chardonnay, Cabernet Sauvignon, Merlot, PinotNoir, Sauvignon Blanc and Syrah.  Themajority of the Company’s wine grapes are sold under short and long-term grapepurchase agreements to a variety of winery clients.  In 2003, the Company sold approximately 81% of its wine grapesunder such supply agreements to over 30 different wineries.  The Company also converts a portion of itsgrapes, approximately 10% in 2003, to premium bulk wine which is sold pursuantto wine purchase agreements or on the open bulk market.  The Company also sells a portion of itsgrapes, approximately 9% in 2003, pursuant to an acreage contract whereby thewinery client purchases the entire grape production from specified acreage fora set fee per acre.

 

In 2003, the Company harvested approximately 20,700 tons of winegrapes, an 18% increase from the 2002 harvest of 17,550 tons.  This increase was primarily due to a 19%increase in the average yield per acre from 2002 to 2003, as recently plantedacres continued to mature.

 

The Company’s largest winery client is Diageo Chateau & EstateWines Company, a subsidiary of Diageo plc (“Diageo”), a global premium drinksbusiness and the tenth largest U.S. winery in terms of 2003 case shipments.  The Company has had grape purchase contractswith Diageo and its predecessors since 1972. Contracts with Diageo covered 61% of the Company’s producing acreage andaccounted for approximately 71% and 74% of the Company’s 2003 and 2002 totalrevenues, respectively.  The terms ofthe purchase contracts with Diageo extend to between 2006 and 2014.  In 2001, Diageo delivered a notice tothe Company terminating a grape purchase contract covering approximately 570acres, such termination to become effective after the harvest of 2003.  In December 2003, Diageo delivered anotice to the Company terminating grape purchase contracts covering anadditional 1,300 acres, or 38% of the Company’s producing acreage, such terminationto become effective after the harvest of 2006. For 2004, contracts with Diageo cover 48% of the Company’s producingacreage.  The marketing of uncontractedacres is a primary focus of SVI, but there can be no assurances that theseefforts will be successful and it is likely that any purchase agreementscovering new vineyards will have less favorable terms.

 

SVI also provides vineyard managementservices pursuant to management contracts with two winery clients, Diageo andPacific Wine Partners, LLC (a joint venture between Constellation Brands, Inc.and BRL Hardy, Inc.).  Under thisarrangement, the Company provides its farming services for a set fee peracre.  In 2003, vineyard managementservices related to approximately 1,600 acres accounted for approximately 4% ofthe Company’s total revenues.

 

19

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As of March 29, 2004, approximately 63%of the Company’s producing acreage is covered by purchase contracts and 37% ofproducing acreage is uncontracted.  Forthe contracted acres, approximately 50% are covered by purchase contracts thatuse data from the Final Grape Crush Report (the “Crush Report”), published bythe California Department of Food and Agriculture (the “CDFA”) on or aboutMarch 10 of each year, to calculate prices.  Based on the 2003 Crush Report published March 10, 2004, theCompany anticipates receiving prices under these contracts that areapproximately 4% to 12% less than those received in 2003.

 

Although the prices for contracted grapes remain relatively strong,prices for uncontracted grapes throughout the industry have been affected bysupply outpacing demand.  The largestdrop in prices has occurred in the Central Valley, an area which produces morethan 70% of the state’s wine grapes and whose production is largely destinedfor the generic and jug wine market. Prices for grapes in the coastal regions, however, have also beenaffected.  During the 2002 and 2003harvests, spot market prices for uncontracted grapes in Monterey Countydecreased from previous year levels. The majority of grapes that were not contracted, in particular CabernetSauvignon, were difficult to market, and some blocks of fruit were notpicked.  With new vineyards coming intoproduction, yield enhancements through technological advances and otherfactors, pricing pressure is expected to continue and it is difficult topredict when the demand for certain grape varieties will be in balance withsupply.  The Company anticipates that the prices itmay receive for grapes which are currently not contracted could besignificantly less than the prices it will receive for contracted grapes.

 

At the present time, the Company hascontracts on its net vine acres that have initial expiration dates as follows:

 

| **Initial Year   of Expiration** |   | **Net Vine  Acres** |   | **Percent** |   |
|----------------------------------|--------|---------------------|--------|-------------|--------|
| 2004                             |   | 140                 |   | 3.4         | %      |
| 2005                             |   | 40                  |   | 1.0         |   |
| 2006                             |   | 1,365               |   | 33.4        |   |
| 2007                             |   | 45                  |   | 1.1         |   |
| 2008                             |   | 85                  |   | 2.1         |   |
| 2009                             |   | 0                   |   | 0.0         |   |
| 2010                             |   | 0                   |   | 0.0         |   |
| 2011                             |   | 90                  |   | 2.2         |   |
| 2012                             |   | 20                  |   | 0.5         |   |
| 2013                             |   | 70                  |   | 1.7         |   |
| 2014                             |   | 325                 |   | 8.0         |   |
| Uncontracted                     |   | 1,280               |   | 31.4        |   |
| Non-Producing                    |   | 620                 |   | 15.2        |   |
| Total                            |   | 4,080               |   | 100.0       | %      |

 

The wine grape business is extremely seasonal.  Similar to most nondiversified agriculturalcrop producers, the Company recognizes substantially all of its crop salesrevenues at the time of its annual harvest in September and October.  Because success of the Company’s operationsis dependent upon the results of the Company’s annual harvest, the first twoquarters have historically resulted in a loss and quarterly results are notconsidered indicative of those to be expected for a full year.  Profits, if any, are recognized in the lasttwo fiscal quarters of the year when revenues from grape sales arerecognized.  In addition, the timing ofthe annual harvest varies each year based primarily on seasonal growingconditions, resulting in timing differences in the portion of grape revenuesrecognized in the third and fourth quarters of any one year.  This is a significant factor in comparingquarterly operating results.  TheCompany derives a portion of its revenues from sales of bulk wine.  These sales have in the past, and may in thefuture, occur in years subsequent to the harvest year, which may impactquarterly results.

 

20

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**Critical Accounting Policies Used in Financial Statements**

 

The Company prepares its consolidated financial statements inaccordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Management’s estimates and judgements arebased on historical experience and various other factors that are believed tobe reasonable under the circumstances, the results of which form the basis formaking judgements about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

The principal accounting issues which management believes are the mostcritical to aid in fully understanding and evaluating the Company’s reportedfinancial results are the carrying value, capitalization policy and depreciablelife of its long-lived assets, primarily its vineyards.  Costs capitalized as vineyards assetsinclude the cost of acquiring the underlying land, vineyard improvements (whichinclude, among other costs, the costs of the vines, the trellis and irrigationsystems and pre-productive labor and materials), and interest paid during thedevelopment period.  The carrying valueand depreciable life associated with these vineyard assets is periodicallyreviewed by management to ascertain the validity of amounts recorded in thefinancial statements.  These reviewprocedures include analyzing estimates of future cash flows, comparisons ofcarrying value with bank appraisals and recent sales of similar vineyards, andanalysis of the condition, productivity and estimated remaining life of thevineyard.

 

The underlying value of vineyard propertiesis primarily determined by (i) the geographic location of the vineyard, (ii)the varieties planted, (iii) the design, condition and age of the vineyard,(iv) the general state of the wine grape industry, and (v) contracts for thesale of the grape production.  Asignificant change in the condition of the Company’s vineyards, the generalstate of the wine industry (particularly the demand for the coastal grapes theCompany produces), or the Company’s ability to contract its grape production towineries, could have a material adverse affect on the carrying values and livesof its vineyard assets as well as the Company’s operating results for theperiod or periods when the change occurs.                During the years endedDecember 31, 2003 and 2002, the Company wrote down the value ofunder-performing portions of its vineyard improvements in the amounts of $1,269,000and $1,040,000, respectively.

 

**Results of Operations — Years Ended December 31, 2003and 2002**

 

The following table sets forth certain statement of operations data forthe years ended December 31, 2003 and 2002:

 
|                                         |   | **Year Ended  December 31,** |   |
|----------------------------------------------|--------|-----------------------------------|--------|
|                                         |   | **2003**                          |   | **2002** |   |
|                                         |   | **(in  thousands)**               |   |
|                                         |   |                              |   |   |   |
| Revenues:                                    |   |                              |   |   |   |
| Sales                                        |   | $                                 | 25,296 |   | $ | 23,232 |   |
| Vineyard management, services and other fees |   | 1,060                             |   | 1,051 |   |
| Total revenues                               |   | 26,356                            |   | 24,283 |   |
| Cost of sales                                |   | 14,501                            |   | 14,283 |   |
| Gross profit                                 |   | 11,855                            |   | 10,000 |   |
| General and administrative expenses          |   | 4,694                             |   | 4,060 |   |
| Write-down of vineyard improvements          |   | 1,269                             |   | 1,040 |   |
| Partnership income                           |   | —                            |   | (263 | ) |
| Interest expense                             |   | 770                               |   | 1,051 |   |
| Interest income                              |   | (14                               | )      | (19 | ) |
| Income before provision for income taxes     |   | 5,136                             |   | 4,131 |   |
| Provision for income taxes                   |   | 2,096                             |   | 1,673 |   |
| Net income                                   |   | $                                 | 3,040  |   | $ | 2,458 |   |

 

21

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*Revenues*.  SVI derives its revenues fromfour sources:  (i) sales of wine grapes;(ii) sales of bulk wine; (iii)  vineyardmanagement and services revenues consisting primarily of management and harvestfees and equipment rentals for services provided to owners of vineyards; and(iv)  sales of wine and wine-relatedmerchandise sold primarily through the Company’s tasting room.  Sales (which are comprised of revenue fromsales of wine grapes, bulk wine, and wine and wine-related merchandise)increased to $25,296,000 in the year ended December 31, 2003 from$23,232,000 in the 2002 period, an increase of $2,064,000 or 9%.

 

Revenue from grape sales increased by 7% to $23,664,000 for the yearended December 31, 2003 from $22,111,000 in 2002, an increase of$1,553,000.  Overall, tons harvested for theCompany’s own account increased by about 18%, with approximately 20,700 tonsharvested in 2003 compared to 17,550 tons in 2002.  Of the total tons harvested, approximately 2,150 tons in 2003were converted to bulk wine compared to 1,600 tons in 2002.  The increase in tons harvested in 2003 wasprimarily due to the continuing maturation of recently planted vineyard acres.  The increase in yields was partially offsetby a decrease in prices in 2003 which were, on average, approximately 8% lessthan in 2002 due to a continuing oversupply of certain grape varieties on theopen market.  The average price per tonreceived in 2003 was $1,280, as compared to $1,386 in 2002.

 

Revenue from sales of bulk wine increased 70% to $1,273,000 for theyear ended December 31, 2003 from $747,000 in the 2002 period, an increaseof $526,000.  The increase in sales of bulkwine was due primarily to an increase in the amount of grapes made into bulkwine under wine contracts and for the speculative market.

 

Revenue from the sale of wine and wine-related merchandise was $359,000for the year ended December 31, 2003 as compared to $374,000 in the 2002period, a decrease of $15,000 or 4%.

 

Revenue from vineyard management, services and other fees increased to$1,060,000 for the year ended December 31, 2003 from $1,051,000 in the2002 period, an increase of $9,000 or 1%.

 

*Gross Profit*.  Gross profit for the yearended December 31, 2003 was $11,855,000 as compared to $10,000,000 for theyear ended December 31, 2001, an increase of $1,855,000 or 19%.

 

Gross margin on grape sales increased to 46% in 2003 as compared to 42%in 2002.  The increase in margin wasprimarily due to an increase in the average yield per acre of approximately19%.  This increase in yields waspartially offset by an 8% decrease in the average price per ton that theCompany received for its grape production.  Although the prices the Company received for its grape productionthat was under contract remained relatively strong, the prices the Companyreceived for grapes sold on the spot market were substantially lower.  See “Description of Business — The Company’sGrape Production Operations — Grape Sales — Pricing.”

 

Gross margin on the sale of bulk wine increased substantially in2003.  The Company recognized grossprofit on the sale of its bulk wine of $178,000 in 2003 as compared to a losson bulk wine in 2002 of $157,000.  Dueto a decrease in the prices of available bulk wine in 2002, the Company wrotedown its 2001 bulk wine inventory by $140,000 in 2002.

 

Costs associated with the provision of management services arereimbursed by the Company’s clients, therefore, no cost of sales is deducted indetermining gross profit on these services.

 

*General and Administrative Expenses*. General and administrative expenses increased 16% to $4,694,000 for theyear ended December 31, 2003 from $4,060,000 in the 2002 period, anincrease of $634,000.  The increase wasdue primarily to an increase in salaries and benefits for executive andadministrative personnel and increases in insurance costs, professional fees,and industry related dues and contributions.

 

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*Write-down of Vineyard Improvements*.  During the year ended December 31,2003, the Company wrote down the value of under-performing portions of itsvineyard improvements in the amount of $1,269,000, representing approximately260 acres, as compared to a write-down in 2002 of $1,040,000, representingapproximately 150 acres.

 

*Income From Related Partnership.* During the year ended December 31, 2002, the Company recognizedincome of $263,000 from a related partnership.  The Company was the 20% general partner of TESH Partners, L.P.which owned an office building in Marina del Rey, California.  The limited partners of the partnership werethe four children of the Chairman of the Company, two of whom are executiveofficers and directors of the Company. The office building was sold in April 2002, and the partnership wasdissolved in December 2002.

 

*Interest Expense*.    Interest expense was $770,000 for the yearended December 31, 2003 as compared to $1,051,000 in the 2002 period, adecrease of $281,000, and is comprised of the following:

 
|                                        |   | **2003** |    | **2002** |   |
|---------------------------------------------|--------|----------|---------|----------|--------|
| Interest expense                            |   | $        | 871,000 |     | $      | 1,177,000 |   |
| Less capitalized interest                   |   | (101,000 | )       | (126,000 | )      |
| Interest expense, net of amount capitalized |   | $        | 770,000 |     | $      | 1,051,000 |   |

 

Total interest expense decreased primarily as a result of decreasedborrowings and lower average interest rates in 2003.

 

*Provision for Income Taxes*.  Theprovision for income taxes was $2,096,000 for the year ended December 31,2003 as compared to $1,673,000 in 2002. The effective tax rate was 40.9% in 2003 as compared to 40.5% in 2002.

 

*Net Income*.  As a result of the above, netincome increased $582,000, or 24%, to $3,040,000 for the year endedDecember 31, 2003 as compared to $2,458,000 in the 2002 period.

 

**Liquidity and Capital Resources**

 

SVI’s primary sources of cash havehistorically been funds provided by internally generated cash flow and bankborrowings.  The Company has madesubstantial capital expenditures to redevelop its existing vineyard propertiesand acquire and develop new acreage, and the Company intends to continue thesetypes of expenditures.  Cash generatedfrom operations has not been sufficient to satisfy all of the Company’s workingcapital and capital expenditure needs. As a consequence, the Company has depended upon, and continues to relyupon, both short and long-term bank borrowings.  Working capital at December 31, 2003 was $12,256,000 ascompared to $8,013,000 at December 31, 2002, an increase of$4,243,000.  The increase in working capitalover the past three years is primarily due to decreased expenditures forvineyard improvements, which have been funded out of working capital.  Expenditures for vineyard improvements havedecreased from $7.3 million and $3.5 million in 2000 and 2001, to $1.4 millionand $0.8 million in 2002 and 2003.

 

Under the Company’s historical workingcapital cycle, working capital is required primarily to finance the costs ofgrowing and harvesting its wine grape crop. The Company normally delivers substantially all of its crop inSeptember and October, and receives the majority of its cash from grapesales in early November.  In order tobridge the gap between incurrence of expenditures and receipt of cash fromgrape sales, large working capital outlays are required for approximatelyeleven months each year.  Historically,SVI has obtained these funds pursuant to credit lines with banks.

 

The Company currently has borrowing under facilities that provide bothshort-term and long-term funds.  TheCompany’s “crop” line has maximum credit available of $15,000,000 and isintended to finance the Company’s anticipated working capital needs.  This crop line expires July 5, 2005 andis secured by crops and other assets of the Company.  Interest on the borrowings is due quarterly at the bank’sreference rate or the LIBOR rate plus 1.75%. There were no borrowings outstanding on this line of

 

23

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creditat December 31, 2003.

 

The Company has long-term credit facilities which expire July 5,2005 and are secured by leasehold interests in vineyards.  At December 31, 2003, the outstandingamount owed by the Company under these facilities was $5,107,000.  Interest on the borrowings is due quarterlyat the bank’s reference rate or the LIBOR rate plus 2.25%.  At December 31, 2003, the weightedaverage interest rate on these facilities was 3.46%.

 

The Company also has long-term credit facilities which expireJuly 5, 2008 and are secured by trust deeds on vineyards.  At December 31, 2003, the outstandingamount owed by the Company under these facilities was $13,800,000.  Interest on the borrowings is due quarterlyat the bank’s reference rate or the LIBOR rate plus 2.10%.  At December 31, 2003, the weightedaverage interest rate on these facilities was 3.44%.

 

The Company also has a bank line of credit with an original maximumloan commitment of $7,500,000, the proceeds of which were used to develop avineyard owned by a major client and managed under a long-term contract by theCompany.  Any amount borrowed on theline, even if repaid before the end of the availability period, permanentlyreduces the remaining available line of credit.  At December 31, 2003, the maximum available balance and outstandingbalance on this line of credit was $3,149,000. This line bears interest at the bank’s reference rate minus 0.50% (1.65%at December 31, 2003) and is repayable in six annual installments whichbegan in January 2000.  The note issecured by a letter of credit provided by the client and by the Company’smanagement contract.  The managementcontract provides for the Company’s client to make payment of the annualprincipal installments under this line as and when they become due.

 

The Company’s principal credit facilities bind the Company to a numberof affirmative and negative covenants, including requirements to maintaincertain financial ratios within certain parameters and to satisfy otherfinancial tests.  At December 31,2003, the Company was in compliance with all covenants.

 

Although no assurances can be given, management believes that theCompany’s anticipated working capital levels and borrowing capabilities will beadequate to meet the Company’s currently anticipated liquidity needs during thefiscal year ending December 31, 2004. At March 29, 2004, the Company had $15,000,000 in borrowingavailability under its crop line of credit.

 

Management expects that capital requirements will result in theexpenditure of the Company’s available cash, and additional borrowing undercredit lines and/or new arrangements for term debt may be necessary.  The Company’s planned vineyard developmentand improvements are expected to require approximately $2.0 million in capitalinvestment over the next three years. In addition, the Company expects to invest approximately $1.5 million inequipment purchases.  Managementbelieves it should be able to obtain long-term funds from its present principallender, but there can be no assurance that the Company will be able to obtainfinancing when required or that such financings will be available on reasonableterms.

 

Cash provided by operating activities was $8,296,000 for the year endedDecember 31, 2003, compared to $7,881,000 for the same period in 2002, anincrease of $415,000***. ***The increase was primarilydue to an increase in net income in 2003 of $582,000 over 2002.

 

Cash used in investing activities was$10,725,000 for the year ended December 31, 2003, compared to $1,551,000for the same period in 2002, an increase of $9,174,000.  The increase was principally the result ofthe Company’s investment of $10,000,000 in excess cash in highly liquidshort-term marketable securities. Expenditures for property and equipment decreased $717,000 to $1,256,000in 2003 from $1,973,000 in 2002.  Thedecrease was principally the result of decreases in expenditures for thedevelopment of new vineyards and decreases in improvements to the Company’sexisting vineyards.  Expenditures fornew development and improvements decreased in 2003 as the result of fewer acresbeing in development.

 

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Cash used in financing activities was$3,624,000 for the year ended December 31, 2003, compared to $7,209,000for the same period in 2002, a decrease of $3,585,000.  The decrease was due primarily to decreasedborrowings and repayments of the Company’s crop line of credit.  The decrease in expenditures for vineyardimprovements has freed up available cash flows to fund crop costs, enabling theCompany to rely on bank borrowings to a lesser extent than in recent years.

 

**Disclosures Regarding Contractual Obligations and Commitments**

 

The Company is contractually committed to payment on long-term debtobligations and long-term leases as follows:

 
|                               |   | **Payments  Due by Period** |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   | **Total**                   |   | **Less Than  1  Year** |   | **1-3 Years** |   | **4-5 Years** |   | **After  5 Years** |   |
| Long-term debt                     |   | $                           | 22,056 |   | $ | 1,624 |   | $ | 9,032 |   | $ | 11,400 |   | $ | — |   |
| Operating lease obligations        |   | 13,803                      |   | 1,016 |   | 2,879 |   | 1,774 |   | 8,134 |   |
| Total contractual cash obligations |   | $                           | 35,859 |   | $ | 2,640 |   | $ | 11,911 |   | $ | 13,174 |   | $ | 8,134 |   |

 

**Dividends and Distributions**

 

The Company has not paid any cash dividends to date.  The Company intends to retain its futureearnings, if any, and does not anticipate paying cash dividends on either classof its Common Stock in the foreseeable future. In addition, the Company’s principal bank credit facilities prohibit thepayment of cash dividends without the consent of the lender.

 

**ITEM 7.****                                                    ****FINANCIAL STATEMENTS****.**

 

The audited financial statements of the Company are set forth in thisReport beginning on page 26.

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
| Independent Auditors’  Report                                             |   |
|--------------------------------------------------------------------------------|--------|
|                                                                           |   |
| Consolidated Balance Sheets                                                    |   |
|                                                                           |   |
| Consolidated  Statements of Operations                                         |   |
|                                                                           |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income |   |
|                                                                           |   |
| Consolidated  Statements of Cash Flows                                         |   |
|                                                                           |   |
| Notes to  Consolidated Financial Statements                                    |   |

 

26

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**INDEPENDENT AUDITORS’ REPORT**

 

Tothe Board of Directors and Stockholders of

ScheidVineyards Inc.:

 

We have audited the accompanying consolidated balance sheets of ScheidVineyards Inc. and subsidiary (the “Company”) as of December 31, 2003 and 2002,and the related consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for the years then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

Weconducted our audits in accordance with auditing standards generally acceptedin the United States of America. Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as ofDecember 31, 2003 and 2002, and the results of its operations and its cashflows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
| /s/  DELOITTE & TOUCHE LLP |   |
|--------------------------------|--------|
| San  Jose, California          |
| March  24, 2004                |

 

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**(amounts inthousands, except share and per share data)**

 
|                                                                                                             |   |      |   | **December  31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|-----------|--------|-------------------|--------|
|                                                                                                             |   | **Notes** |   | **2003**          |   | **2002** |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **ASSETS**                                                                                                       |   |      |   |              |   |   |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **CURRENT  ASSETS:**                                                                                             |   |      |   |              |   |   |   |
| Cash and cash equivalents                                                                                        |   |      |   | $                 | 1,012  |   | $ | 7,065 |   |
| Marketable securities                                                                                            |   |      |   | 10,009            |   | — |   |
| Accounts receivable, trade                                                                                       |   |      |   | 1,197             |   | 1,722 |   |
| Accounts receivable, other                                                                                       |   |      |   | 15                |   | 167 |   |
| Inventories                                                                                                      |   | 3         |   | 2,538             |   | 1,698 |   |
| Supplies, prepaid expenses and other current assets                                                              |   |      |   | 657               |   | 505 |   |
| Current portion of long-term receivable                                                                          |   | 5         |   | 525               |   | 525 |   |
| Total current assets                                                                                             |   |      |   | 15,953            |   | 11,682 |   |
| **PROPERTY,  PLANT AND EQUIPMENT, net**                                                                          |   | 4,7       |   | 48,087            |   | 51,174 |   |
| **LONG-TERM  RECEIVABLE**                                                                                        |   | 5         |   | 2,624             |   | 3,149 |   |
| **OTHER  ASSETS, net**                                                                                           |   |      |   | 838               |   | 950 |   |
|                                                                                                             |   |      |   | $                 | 67,502 |   | $ | 66,955 |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                    |   |      |   |              |   |   |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **CURRENT  LIABILITIES:**                                                                                        |   |      |   |              |   |   |   |
| Current portion of long-term debt                                                                                |   | 7         |   | $                 | 1,624  |   | $ | 1,624 |   |
| Accounts payable                                                                                                 |   |      |   | 486               |   | 576 |   |
| Accrued liabilities                                                                                              |   | 10        |   | 606               |   | 229 |   |
| Accrued interest payable                                                                                         |   |      |   | 9                 |   | 9 |   |
| Income taxes payable                                                                                             |   | 9         |   | 922               |   | 1,190 |   |
| Deferred income taxes                                                                                            |   | 9         |   | 50                |   | 41 |   |
| Total current liabilities                                                                                        |   |      |   | 3,697             |   | 3,669 |   |
| **LONG-TERM  DEBT, net of current portion**                                                                      |   | 7         |   | 20,432            |   | 24,056 |   |
| **DEFERRED  INCOME TAXES**                                                                                       |   | 9         |   | 5,062             |   | 3,968 |   |
| Total liabilities                                                                                                |   |      |   | 29,191            |   | 31,693 |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **COMMITMENTS  AND CONTINGENCIES**                                                                               |   | 10        |   |              |   |   |   |
|                                                                                                             |   |      |   |              |   |   |   |
| **STOCKHOLDERS’  EQUITY:**                                                                                  |   | 6,11,12   |   |              |   |   |   |
| Preferred stock, $.001 par value; 2,000,000 sharesauthorized; no shares issued and outstanding                   |   |      |   | —            |   | — |   |
| Common stock,                                                                                                    |   |      |   |              |   |   |   |
| Class A, $.001 par value; 20,000,000 shares authorized;  2,248,755 shares outstanding  in 2003 and 2002          |   |      |   |              |   |   |   |
| Class B, $.001 par value; 10,000,000 shares authorized;3,226,115 shares issued and outstanding in  2003 and 2002 |   |      |   | 7                 |   | 7 |   |
| Additional paid-in capital                                                                                       |   |      |   | 21,868            |   | 21,868 |   |
| Retained earnings                                                                                                |   |      |   | 21,926            |   | 18,886 |   |
| Accumulated other comprehensive income                                                                           |   |      |   | 9                 |   | — |   |
| Less: treasury stock; 1,171,558 Class A Common Stockat cost in 2003 and 2002                                     |   |      |   | (5,499            | )      | (5,499 | ) |
| Total stockholders’ equity                                                                                  |   |      |   | 38,311            |   | 35,262 |   |
|                                                                                                             |   |      |   | $                 | 67,502 |   | $ | 66,955 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

28

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**SCHEID VINEYARDS INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(amounts in thousands,except per share data)**

 
|                                          |   |      |   | **Year Ended  December 31,** |   |
|-----------------------------------------------|--------|-----------|--------|------------------------------|--------|
|                                          |   | **Notes** |   | **2003**                     |   | **2002** |   |
| **REVENUES:**                                 |   |      |   |                         |   |   |   |
| Sales                                         |   |      |   | $                            | 25,296 |   | $ | 23,232 |   |
| Vineyard management, services and other fees  |   |      |   | 1,060                        |   | 1,051 |   |
| Total revenues                                |   |      |   | 26,356                       |   | 24,283 |   |
| **COST OF  SALES**                            |   |      |   | 14,501                       |   | 14,283 |   |
| **GROSS  PROFIT**                             |   |      |   | 11,855                       |   | 10,000 |   |
| General and administrative expenses           |   |      |   | 4,694                        |   | 4,060 |   |
| Write-down of vineyard improvements           |   |      |   | 1,269                        |   | 1,040 |   |
| Income from related partnership               |   | 8         |   | —                       |   | (263 | ) |
| Interest expense                              |   |      |   | 770                          |   | 1,051 |   |
| Interest income                               |   |      |   | (14                          | )      | (19 | ) |
| **INCOME  BEFORE PROVISION FOR INCOME TAXES** |   |      |   | 5,136                        |   | 4,131 |   |
| **PROVISION  FOR INCOME TAXES**               |   | 9         |   | 2,096                        |   | 1,673 |   |
| **NET  INCOME**                               |   |      |   | $                            | 3,040  |   | $ | 2,458 |   |
|                                          |   |      |   |                         |   |   |   |
| **BASIC AND  DILUTED EARNINGS PER SHARE**     |   | 2         |   | $                            | 0.56   |   | $ | 0.45 |   |
|                                          |   |      |   |                         |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**      |   | 2         |   | 5,475                        |   | 5,475 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

29

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**SCHEID VINEYARDS INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’** EQUITY

**AND COMPREHENSIVE INCOME**

**(amounts in thousands,except share data)**

 

 
|                                        |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Accumulated  Other  Comprehensive  Income** |   | **Treasury  Stock** |   | **Total  Stockholders’  Equity** |   | **Comprehensive  Income** |   |
|---------------------------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|-----------------------------------------------|--------|---------------------|--------|---------------------------------------|--------|---------------------------|--------|
| **BALANCE, January 1, 2002**                |   | $                 | 7      |                             | $      | 21,868                 |   | $                                             | 16,428 |                | $      | —                                |   | $                         | (5,499 | ) | $ | 32,804 |   |   |   |
| Net income                                  |   | —            |   | —                           |   | 2,458                  |   | —                                        |   | —              |   | 2,458                                 |   | $                         | 2,458  |   |
| **BALANCE,   December 31,  2002** |   | 7                 |   | 21,868                           |   | 18,886                 |   | —                                        |   | (5,499              | )      | 35,262                                |   |                      |   |
| Net income                                  |   | —            |   | —                           |   | 3,040                  |   | —                                        |   | —              |   | 3,040                                 |   | $                         | 3,040  |   |
| Unrealized gain on marketable securities    |   | —            |   | —                           |   | —                 |   | 9                                             |   | —              |   | 9                                     |   | 9                         |   |
| **BALANCE, December 31, 2003**              |   | $                 | 7      |                             | $      | 21,868                 |   | $                                             | 21,926 |                | $      | 9                                     |   | $                         | (5,499 | ) | $ | 38,311 |   | $ | 3,049 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

30

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**SCHEID VINEYARDS INC. ANDSUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 

 
|                                                                               |   | **Year Ended  December 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                               |   | **2003**                     |   | **2002** |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |   |                         |   |   |   |
| Net income                                                                         |   | $                            | 3,040  |   | $ | 2,458 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                         |   |   |   |
| Depreciation, amortization and abandonments                                        |   | 4,395                        |   | 4,298 |   |
| Deferred income taxes                                                              |   | 1,103                        |   | 1,154 |   |
| Other                                                                              |   | 54                           |   | 141 |   |
| Changes in operating assets and liabilities:                                       |   |                         |   |   |   |
| Accounts receivable, trade                                                         |   | 525                          |   | 185 |   |
| Accounts receivable, other                                                         |   | 152                          |   | (22 | ) |
| Inventories                                                                        |   | (840                         | )      | (329 | ) |
| Supplies, prepaid expenses and other current assets                                |   | (152                         | )      | 25 |   |
| Accounts payable and accrued liabilities                                           |   | 287                          |   | (162 | ) |
| Income taxes payable                                                               |   | (268                         | )      | 133 |   |
| Net cash provided by operating activities                                          |   | 8,296                        |   | 7,881 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |   |                         |   |   |   |
| Collection of long-term receivable                                                 |   | 525                          |   | 525 |   |
| Purchase of marketable securities                                                  |   | (10,000                      | )      | — |   |
| Proceeds from sale of property, plant and equipment                                |   | 6                            |   | 12 |   |
| Additions to property, plant and equipment                                         |   | (1,256                       | )      | (1,973 | ) |
| Other assets                                                                       |   | —                       |   | (115 | ) |
| Net cash used in investing activities                                              |   | (10,725                      | )      | (1,551 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |   |                         |   |   |   |
| Increase in long-term debt                                                         |   | 7,200                        |   | 13,550 |   |
| Repayment of long-term debt                                                        |   | (10,824                      | )      | (20,674 | ) |
| Loan fees paid                                                                     |   | —                       |   | (85 | ) |
| Net cash used in financing activities                                              |   | (3,624                       | )      | (7,209 | ) |
| Decrease in cash and cash equivalents                                              |   | (6,053                       | )      | (879 | ) |
| **CASH AND  CASH EQUIVALENTS, beginning of year**                                  |   | 7,065                        |   | 7,944 |   |
| **CASH AND  CASH EQUIVALENTS, end of year**                                        |   | $                            | 1,012  |   | $ | 7,065 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

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**SCHEID VINEYARDS INC. AND SUBSIDIARY**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31,2003 AND 2002**

 

**1. ORGANIZATION AND BASIS OF PRESENTATION**

 

*Organization*— The principal business of the Company isthe production of premium varietal wine grapes.  The Company currently operates approximately 5,600 acres ofpremium wine grape vineyards in Monterey and San Benito Counties, California.

 

The majority of the Company’s wine grapes are sold under short andlong-term grape purchase agreements to a variety of winery clients.  The terms of these contracts extend tobetween 2006 to 2014. The largest set of these contracts with a single wineryclient covered approximately 61% of the Company’s producing acreage through theharvest of 2003 and accounted for approximately 71% and 74% of the Company’stotal revenues in 2003 and 2002, respectively. In 2001, this client delivered a notice to the Company terminating agrape purchase contract covering approximately 570 acres, or 15% of theCompany’s producing acreage, such termination to became effective after theharvest of 2003.  In 2003, this clientdelivered a notice to the Company terminating other grape purchase contractscovering an additional 1,300 acres, or 38%, of the Company’s producing acreage,such terminations to become effective after the harvest of 2006.

 

*Basis of Presentation* — The Company conducts all of its businessthrough its wholly owned subsidiary, Scheid Vineyards California Inc., aCalifornia corporation.  All significantintercompany balances have been eliminated in consolidation.

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents* — The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.  At December 31,2003 and 2002, substantially all cash balances were on deposit with theCompany’s major bank.

 

*Inventories* — Inventories are stated at the lower of FIFO (first-in, first-out)cost or market.  Cost includes the costof grown grapes, harvesting, production, aging and bottling, and tasting roommerchandise. Bulk and bottled wine inventories are classified as current assetsin accordance with recognized trade practice although certain inventories willbe aged for periods longer than one year. Crop costs associated with farming vineyards prior to the harvest aredeferred and recognized in the year the grapes are harvested.  On a quarterly basis, the Company evaluatesthe cost of its inventories and reduces such inventories to market if required.

 

*Marketable Securities*— Marketable securities consist of investment in municipal bond funds and areclassified as available for sale.  Thesedebt securities are stated at market value based on the most recently tradedprice of these securities at December 31, 2003.  Unrealized gains and losses, determined by the difference betweenhistorical purchase price and the market value at each balance sheet date, arerecorded as a component of Accumulated Other Comprehensive Income inStockholders’ Equity.  Realized gainsand losses are determined by the difference between historical purchase price,the cost for which is based upon specific identification method, and grossproceeds received when the marketable securities are sold.

 

32

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*Property, Plant and Equipment* — Property, plant and equipment are statedat cost and are depreciated using straight-line and accelerated methods overthe 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 thedevelopment period of a vineyard including related interest arecapitalized.  Depreciation commences inthe initial year the vineyard becomes commercially productive, generally in thefourth year.  Any revenue generatedprior to a vineyard becoming commercially productive reduces the capitalizedcost of the vineyard.  The Companycapitalized interest totaling $101,000 and $126,000 in 2003 and 2002,respectively.

 

*Accounting for Impairment or Disposal ofLong-Lived Assets*—  On January 1, 2002 the Companyadopted Statement of FinancialAccounting Standards (“SFAS”) No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets”.  Thestatement requires that an impairment loss be recognized if the carrying amountof a long-lived asset is not recoverable from its undiscounted cash flows.  The impairment loss is measured by thedifference between the carrying amount and fair value of the asset.  After the harvest of 2003, the Companydetermined that approximately 240 acres of its vineyards were not economicallyproductive and wrote off their carrying value in the amount of $1,269,000.  A similar impairment write-down onapproximately 150 acres in the amount of $1,040,000 was taken in 2002.

 

*Revenue Recognition* — The Company generally recognizes revenuefrom grape and bulk wine sales upon delivery to the winery.  The Company does not have any allowance forreturns because grapes are tested and accepted upon delivery.  Vineyard management and other services arerecognized as provided.  Substantiallyall revenues of the Company are derived from customers within the UnitedStates.

 

*Fair Value of Financial Instruments*—**Thefair values of accounts receivable and accounts payable approximate book valuebecause of their short duration. Long-term receivables and long-term debt approximate book value becausesuch financial instruments have variable, market driven, interest rates.

 

*Use of Estimates* — The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported revenues and expenses during thereporting period.  Actual results coulddiffer from reported amounts of assets, liabilities, revenues and expenses.

 

*Earnings Per Share and Classes of Common Stock* — Weighted average shares outstandingincludes both Class A and Class B Common Stock outstanding for the periodspresented.  The computation of dilutedearnings per share did not include stock options which were antidilutive, astheir exercise price was greater than the average market price of the Company’sClass A Common Stock during the year. The number of such options was 172,000 and 152,000 for the years endedDecember 31, 2003 and 2002, respectively.

 

*StockCompensation* — TheCompany accounts for its stock-based awards using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees” and its related interpretations.  Accordingly, no compensation expense hasbeen recognized in the financial statements for employee stock arrangements.

 

33

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SFAS No. 123, “Accountingfor Stock-Based Compensation”, requires the disclosure of pro forma net incomeand net income per share.  Under SFASNo. 123, the fair value of stock-based awards to employees is calculatedthrough the use of options pricing models, even though such models weredeveloped to estimate the fair value of freely-tradable, fully transferableoptions without vesting restrictions, which significantly differ from theCompany’s stock option awards.  Thesemodels also require subjective assumptions, including future stock pricevolatility and expected time to exercise, which greatly affect the calculatedvalues.  The Company’s calculations weremade using the Black-Scholes option pricing model with the following weightedaverage assumptions: expected life, 5 years; 47% and 49% stock price volatilityin 2003 and 2002, respectively; weighted average risk free rate of  returnof 3.0% and 4.4% in 2003 and 2002, respectively; and no dividends during theexpected term.  Forfeitures arerecognized as they occur.

 

Ifthe computed fair values of the Company’s stock option awards had beenamortized to expense over the vesting period of the awards, net income for theyears ended December 31, 2003 and 2002 would have been reduced to the pro formaamounts indicated below.

 

|                                                                                                                                          |   | **Year Ended  December 31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                                                                          |   | **2003**                     |      | **2002** |   |
| Net income:                                                                                                                                   |   |                         |      |   |   |
| As reported                                                                                                                                   |   | $                            | 3,040,000 |   | $ | 2,458,000 |   |
| Deduct: Total stock-based employee compensation expense determined  under fair value based method for all rewards, net of related tax effects |   | (19,000                      | )         | (64,000 | ) |
| Pro forma                                                                                                                                     |   | $                            | 3,021,000 |   | $ | 2,394,000 |   |
|                                                                                                                                          |   |                         |      |   |   |
| Net income per share (Basic and Diluted):                                                                                                     |   |                         |      |   |   |
| As reported                                                                                                                                   |   | $                            | 0.56      |   | $ | 0.45 |   |
| Pro forma                                                                                                                                     |   | $                            | 0.55      |   | $ | 0.44 |   |

 

*New Financial Accounting Standards* — In June 2002, the Financial Accounting Standards Board (“FASB”) issuedSFAS No. 146, “Accounting for Exit or Disposal Activities.”  SFAS No. 146 requires the recognition ofcosts associated with exit or disposal activities when incurred rather than atthe date of a commitment to an exit or disposal plan.  SFAS No. 146 replaces previous accounting guidance provided bythe FASB’s Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring)” and is effective for theCompany for exit or disposal activities initiated after December 31, 2002.

 

In November 2002, the FASB issued Interpretation Number 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (“FIN 45”).  FIN 45 elaborates on the disclosures to bemade by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it issued.  It also clarifies that a guarantor is required to recognize, atthe inception of a guarantee, a liability for the fair value of the obligationundertaken in issuing the guarantee. The initial recognition and measurement provisions of FIN 45 areapplicable on a prospective basis to guarantees issued or modified afterDecember 31, 2002.  The adoption of the recognition andmeasurement provisions of FIN 45 did not have an impact on the Company’s consolidatedresults of operations or financial position.

 

34

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In January 2003, the FASB issued Interpretation No. 46 (“FIN46”),“Consolidation of Variable Interest Entities”, and a revised interpretation of FIN46 (“FIN 46-R”) in December 2003.  FIN46 requires certain variable interest entities (“VIEs”) to be consolidated bythe primary beneficiary of the entity if the equity investors in the entity donot have the characteristics of a controlling financial interest or do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties. The provisions ofFIN 46-R are effective immediately for all VIE arrangements entered into afterDecember 31, 2003.  Prior to December31, 2003, the Company had not invested in any entities it believes are variableinterest entities for which the Company is the primary beneficiary.  The Company does not expect the adoption ofFIN 46-R to have an impact on the Company’s consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity”, which requires that certain financial instruments be presented asliabilities that were previously presented as equity or as temporaryequity.  Such instruments includemandatory redeemable preferred and common stock, and certain options andwarrants. SFAS No. 150 is effective for financial instruments entered into ormodified after May 31, 2003 and was effective at the beginning of the firstinterim period beginning after June 15, 2003. In November 2003, the FASB issued FASB Staff Position (“FSP”) No. 150-3,“Effective Date, Disclosures, and Transition for Mandatorily RedeemableFinancial Instruments of Certain Nonpublic Entities and Certain MandatorilyRedeemable Noncontrolling Interests under SFAS No. 150”, which defers theeffective date for various provisions of SFAS No. 150.  SFAS No. 150 did not have a material impacton the Company’s financial statements. The Company does not expect the adoption of FSP No. 150-3 to have animpact on the Company’s consolidated financial statements.

 

*Reclassifications**—* Certain amounts in the December 31, 2002financial statements have been reclassified to conform to the December 31, 2003presentations.  Such reclassificationshad no impact on net income or stockholders’ equity.

 

**3. INVENTORIES**

 

Inventories consist of the following:

 

|                     |   | **December  31,** |      |
|--------------------------|--------|-------------------|-----------|
|                     |   | **2003**          |      | **2002** |   |
| Deferred crop costs      |   | $                 | 662,000   |   | $ | 457,000 |   |
| Bulk and bottled wine    |   | 1,853,000         |      | 1,214,000 |   |
| Tasting room merchandise |   | 23,000            |      | 27,000 |   |
| Total                    |   | $                 | 2,538,000 |   | $ | 1,698,000 |   |

 

**4****. PROPERTY, PLANT ANDEQUIPMENT**

 

Property, plant and equipment consists of the following:

 

|                                           |   | **December  31,** |       |
|------------------------------------------------|--------|-------------------|------------|
|                                           |   | **2003**          |       | **2002** |   |
| Land and buildings                             |   | $                 | 6,643,000  |   | $ | 6,618,000 |   |
| Vineyard improvements                          |   | 48,799,000        |       | 49,428,000 |   |
| Vineyard improvements under development        |   | 4,389,000         |       | 4,839,000 |   |
| Machinery and equipment                        |   | 6,824,000         |       | 6,994,000 |   |
| Total                                          |   | 66,655,000        |       | 67,879,000 |   |
| Less accumulated depreciation and amortization |   | (18,568,000       | )          | (16,705,000 | ) |
| Property, plant and equipment — net       |   | $                 | 48,087,000 |   | $ | 51,174,000 |   |

 

35

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**5. LONG-TERM RECEIVABLE**

 

The Company has a contract to redevelop and manage certain vineyardsowned or controlled by a major client. The contract originally called for theexpenditure of approximately $7,500,000 over a three-year period.  The funds for this project were borrowed, asan accommodation to the client, by the Company under a line of credit (see Note7).  The interest rate and payment termsof this receivable are the same as the related note payable.  The note payable to the bank is secured by aletter of credit provided by the client and by the management contract.  The contract calls for the payment of thisreceivable by the client’s payment of the six annual principal installmentsunder the line, beginning January 5, 2000.  At December 31, 2003, the receivable was due as follows:  $525,000 in 2004, and $2,624,000 in2005.  The redevelopment of the propertywas completed in 1999 and the Company continues to manage the operations of thevineyard for the client.

 

**6. CROP LINE OF CREDIT**

 

The Company has a crop line of credit with a bank which currentlyprovides for maximum borrowings of $15,000,000 through July 5, 2005.  Borrowings are secured by crops and otherassets with interest due quarterly at the bank’s reference rate or the LIBORrate plus 1.75%.  There were no borrowingsoutstanding under this credit facility at December 31, 2003.  There was $2,000,000 outstanding under theCompany’s crop line of credit at December 31, 2002.

 

The crop line prohibits the payment of dividends without the consent ofthe lender and contains various financial covenants, including minimum tangiblenet worth and current working capital amounts.

 

**7. LONG-TERM DEBT**

 

Long-term debt consists of the following:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **December  31,** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2003**          |       | **2002** |   |
| Crop line of credit (see Note 6)                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $                 | —     |   | $ | 2,000,000 |   |
| Note payable to bank, principal due in annual installments of  $214,000 through July 5, 2005, secured by a leasehold interest in 707  vineyard acres.  Interest is payable  quarterly at the lower of a bank-quoted reference rate or a fixed rate of  2.25% over LIBOR (3.50% at December 31, 2003)                                                                                                                                        |   | 1,286,000         |       | 1,500,000 |   |
| Note payable to bank, principal due in annual installments of $96,000  through July 5, 2005, secured by a leasehold interest in 352 vineyard  acres.  Interest is payable quarterly  at  the lower of a  bank-quoted reference rate or a fixed rate of 2.25% over LIBOR (3.38% at  December 31, 2003)                                                                                                                                  |   | 874,000           |       | 970,000 |   |
| Note payable to bank, principal due in annual installments of$114,000 through July 5, 2005, secured by a  leasehold interest in 352  vineyard acres.  Interest is payable  quarterly at  the lowerof a bank-quoted reference rate or a  fixed rate of 2.25% over LIBOR  (3.50% at December 31, 2003)                                                                                                                                   |   | 2,047,000         |       | 2,161,000 |   |
| Note payable to bank, principal due in annual installments of$75,000 through July 5, 2005, secured by a  leasehold interest in 707 vineyard acres.   Interest is payable quarterly at the lower of a bank-quoted reference  rate or a fixed rate of 2.25% over LIBOR (3.38% at December 31, 2003)                                                                                                                                           |   | 900,000           |       | 975,000 |   |
| Note payable to bank, principal due in annual installments of  $178,000 through June 5, 2008, secured by a trust deed on 1,063 vineyard  acres.  Interest is payable quarterly  at the lower of a bank-quoted reference rate or a fixed rate of 2.10% over  LIBOR (3.44% at December 31, 2003)                                                                                                                                              |   | 4,094,000         |       | 4,272,000 |   |
| Note payable to bank, principal due in annual installments of  $422,000 through June 5, 2008, secured by a trust deed on 775 vineyard  acres.  Interest is payable quarterly  at the lower of a bank-quoted reference rate or a fixed rate of 2.10% over  LIBOR (3.44% at December 31, 2003)                                                                                                                                                |   | 9,706,000         |       | 10,128,000 |   |
| Note payable to bank represents borrowings on a $7,500,000 line of  credit, which bears interest at the bank’s reference rate less 0.50% (1.65%  at December 31, 2003).  The note is  secured by a letter of credit provided by a major client, and is used for  costs incurred for the redevelopment of certain vineyards owned by the client  (see Note 5).  Principal due in six  annual installments which began January 2000 |   | 3,149,000         |       | 3,674,000 |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | 22,056,000        |       | 25,680,000 |   |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                                          |   | (1,624,000        | )          | (1,624,000 | ) |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                                |   | $                 | 20,432,000 |   | $ | 24,056,000 |   |

 

36

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Principal payments required on long-term debt for each of thenext five years ending December 31 are as follows:

 

| 2004  |   | $          | 1,624,000  |   |
|-------|--------|------------|------------|--------|
| 2005  |   | 7,832,000  |       |
| 2006  |   | 600,000    |       |
| 2007  |   | 600,000    |       |
| 2008  |   | 11,400,000 |       |
| Total |   | $          | 22,056,000 |   |

 

Substantially all of the Company’s assets serve as collateral for long-termdebt.  In addition, the creditfacilities and notes contain various financial covenants, including minimumtangible net worth and current working capital amounts.

 

37

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**8. INCOME FROM RELATED PARTNERSHIP**

 

In April 2002, the Company recognized income of $263,000 from a relatedpartnership.  The Company was the 20%general partner of TESH Partners, L.P. which owned an office building in Marina del Rey, California. Thelimited partners of the partnership are the four children of the Chairman ofthe Company, two of whom are executive officers and directors of theCompany.  The Company leased officespace in the building until the relocation of its executive offices to Salinas,California in 2001, at which time the office building was offered forsale.  The partnership was terminatedsubsequent to the sale of the building.

 

**9. INCOME TAXES**

 

Significant components of the Company’s net deferred income tax assetsand liabilities are as follows:

 

|                                                                |   | **December  31,** |       |
|---------------------------------------------------------------------|--------|-------------------|------------|
|                                                                |   | **2003**          |       | **2002** |   |
| Current deferred income tax assets -  State income taxes            |   | $                 | 63,000     |   | $ | 76,000 |   |
| Current deferred income tax liabilities -Prepaid expenses           |   | (113,000          | )          | (117,000 | ) |
| Net current deferred income tax liability                           |   | $                 | (50,000    | ) | $ | (41,000 | ) |
|                                                                |   |              |       |   |   |
| Long-term deferred income tax assets -  Deferred state income taxes |   | $                 | 381,000    |   | $ | 300,000 |   |
| Long-term deferred income tax liabilities -  Depreciation           |   | (5,443,000        | )          | (4,268,000 | ) |
| Net long-term deferred income tax liability                         |   | $                 | (5,062,000 | ) | $ | (3,968,000 | ) |

 

 

Theprovision for income taxes is as follows:

 

|                             |   | **Year Ended  December 31,** |      |
|----------------------------------|--------|------------------------------|-----------|
|                             |   | **2003**                     |      | **2002** |   |
| Current:                         |   |                         |      |   |   |
| Federal                          |   | $                            | 755,000   |   | $ | 408,000 |   |
| State                            |   | 238,000                      |      | 111,000 |   |
| Total                            |   | 993,000                      |      | 519,000 |   |
| Deferred:                        |   |                         |      |   |   |
| Federal                          |   | 876,000                      |      | 893,000 |   |
| State                            |   | 227,000                      |      | 261,000 |   |
| Total                            |   | 1,103,000                    |      | 1,154,000 |   |
| Total provision for income taxes |   | $                            | 2,096,000 |   | $ | 1,673,000 |   |

 

38

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The Company’s effective income tax rate differs from the federalstatutory income tax rate due to the following:

 

|                                |   | **Year Ended  December 31,** |   |
|-------------------------------------|--------|------------------------------|--------|
|                                |   | **2003**                     |   | **2002** |   |
| Federal statutory rate              |   | 34.0                         | %      | 34.0 | % |
| State taxes, net of federal benefit |   | 6.0                          |   | 5.9 |   |
| Other                               |   | 0.9                          |   | 0.6 |   |
| Total                               |   | 40.9                         | %      | 40.5 | % |

 

**10. COMMITMENTS AND CONTINGENCIES**

 

*Lease Obligations* — The Company has various operating leaseagreements for office space and farm land. The Company has a lease for office space which expires January 31, 2007and contains a provision for annual rent adjustments based upon the ConsumerPrice Index.

 

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

 

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

 

| 2004       |   | $         | 1,016,000  |   |
|------------|--------|-----------|------------|--------|
| 2005       |   | 992,000   |       |
| 2006       |   | 992,000   |       |
| 2007       |   | 895,000   |       |
| 2008       |   | 887,000   |       |
| Thereafter |   | 9,021,000 |       |
| Total      |   | $         | 13,803,000 |   |

 

Rent charged to operations was $904,000 and $892,000 for the yearsended December 31, 2003 and 2002, respectively.  Rent capitalized into vineyard development was $106,000 and$103,000 for the years ended December 31, 2003 and 2002, respectively.

 

*Pension Plans* — The Company has two 401(k) Profit SharingPlans.  The first plan is for thebenefit of the Company’s employees who are covered by the United Farm Workersof America Collective Bargaining Agreement. All union employees of the Company are eligible to participate afterhaving worked 500 hours within a one-year period.  The Company contributes 15 cents for each hour worked by eligibleemployees, subject to the limitations imposed by the Internal RevenueCode.  The Company’s contribution to theunion employees’ plan amounted to $63,000 and $57,000 for the years endedDecember 31, 2003 and 2002, respectively.

 

The second plan covers the Company’s non-union employees.  All non-union employees of the Company areeligible to participate in the plan after one year of employment.  Employees may contribute between 1% and 15%of their annual compensation.  TheCompany matches 50 cents for every dollar of employee contributions up to 6% oftheir annual salaries, subject to the limitations imposed by the InternalRevenue Code.  The Company’scontribution to this plan amounted to $65,000 and $56,000 for the years endedDecember 31, 2003 and 2002, respectively.

 

39

----

 

*Department of Labor Penalty*** — TheCompany has accrued a liability in the amount of $350,000 at December 31, 2003for potential additional payroll expense to be paid to employees as the resultof penalties levied by the California Department of Labor due to allegedviolations of the California Labor Code.

 

**11. COMMON STOCK**

 

*Rights —*Each share of Class A Common Stock is entitled to one vote and eachshare of Class B Common Stock is entitled to five votes on all matterssubmitted 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 of the Company, rounded up to thenearest whole number, and the holders of the Class B Common Stock, voting as aseparate class, elect the remaining directors. Each share of Class B Common Stock is convertible into one share ofClass A Common Stock at the option of the holder or automatically upon transferto a person other than certain specified persons.  Except for the differing voting rights, the shares of Class A andClass B common stock have substantially identical rights, preferences andprivileges.

 

*Warrants —*The Company granted the representative of the underwriters of itsinitial public offering in 1997 warrants to purchase 200,000 shares of commonstock at an exercise price of $14.00 per share.  The warrants expired in July 2002.

 

*Conversion of Shares** —*During the year ended December31, 2002 two non-employee children of the Chairman of the Board converted atotal of 95,000 Class B Common Shares into Class A Common Shares.

 

**12. STOCK OPTION PLAN**

 

In 1997, the Board ofDirectors of the Company adopted the 1997 Stock Option/Stock Issuance Planauthorizing the issuance of qualified or non-qualified stock options todirectors, officers, employees, consultants and others to purchase up to200,000 shares of the Company’s Class A Common Stock at prices equal to thefair value of the Company’s stock at the date of grant.  Options granted to date under the Plan vestone-quarter each year, beginning one year after the grant date or a specifiedvesting commencement date and expire ten years after the earlier of the grantdate and the vesting commencement date.

 

The following summarizesstock option activity for the periods presented:

 

|                           |   | **Shares** |   | **Weighted  Average  Exercise Prices** |   |
|--------------------------------|--------|------------|--------|----------------------------------------|--------|
| Outstanding, January 1, 2002   |   | 156,000    |   | $                                      | 6.38   |   |
| Granted                        |   | 9,000      |   | $                                      | 3.49   |   |
| Cancelled                      |   | (2,000     | )      | $                                      | 3.35   |   |
| Outstanding, December 31, 2002 |   | 163,000    |   | $                                      | 6.26   |   |
| Granted                        |   | 14,000     |   | $                                      | 3.34   |   |
| Cancelled                      |   | (5,000     | )      | $                                      | 4.14   |   |
| Outstanding, December 31, 2003 |   | 172,000    |   | $                                      | 6.12   |   |

 

40

----

 

|                                                  |   |             |   | **Range of  Exercise Prices at  December 31, 2003** |   |       |   |       |   |
|-------------------------------------------------------|--------|------------------|--------|-----------------------------------------------------|--------|------------|--------|------------|--------|
|                                                  |   | **Under  $4.00** |   | **$4.00-$9.99**                                     |   | **$10.00** |   | **Total**  |   |
| Options outstanding                                   |   | 43,000           |   | 69,000                                              |   | 60,000     |   | 172,000    |   |
| Weighted average exercise price ofoptions outstanding |   | $                | 3.42   |                                                | $      | 4.42       |   | $          | 10.00  |   | $ | 6.12 |   |
| Options exercisable                                   |   | 22,689           |   | 68,876                                              |   | 60,000     |   | 151,565    |   |
| Weighted average exercise price ofoptions exercisable |   | $                | 3.48   |                                                | $      | 4.42       |   | $          | 10.00  |   | $ | 6.49 |   |
| Weighted average fair value ofoptions granted in 2003 |   | $                | 1.64   |                                                | None   |       | None   |       | $      | 1.64 |   |
| Weighted average remaining contractual life           |   | 8.3  years       |   | 4.0  years                                          |   | 3.5  years |   | 4.0  years |   |

 

**13. SUPPLEMENTAL CASH FLOW INFORMATION**

 

Supplemental disclosures tothe statements of cash flows are as follows:

 
|                                      |   | **Year Ended  December 31,** |      |
|-------------------------------------------|--------|------------------------------|-----------|
|                                      |   | **2003**                     |      | **2002** |   |
| Interest paid (net of amount capitalized) |   | $                            | 705,000   |   | $ | 1,055,000 |   |
| Income taxes paid (net of refunds)        |   | $                            | 1,261,000 |   | $ | 386,000 |   |

 

****

 

41

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**ITEM 8****.****                                                    ****CHANGES****IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.**

 

Not applicable.

 

**ITEM8a****.****                                              ****CONTROLS****AND****PROCEDURES.**

 

Under the supervision and with theparticipation of the Company’s management, including its principal executiveofficer and principal financial officer, the Company conducted an evaluation ofthe effectiveness of its disclosure controls and procedures, as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, asamended, as of the end of the period covered by this report (the “EvaluationDate”).  Based on this evaluation, theCompany’s principal executive officer and principal financial officer concludedas of the Evaluation Date that the Company’s disclosure controls and procedureswere effective as of the end of the period covered by this Annual Report.

 

There has been no change in the Company’sinternal control of financial reporting during the quarter ended December 31,2003 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART III**

 

**ITEM 9****.****                                                    ****DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT.**

 

The information required by this Item is set forth under the captions“Proposal No. 1 — Election of Directors — Information Concerning the Nominees”and “ — Directors and Executive Officers” in the Company’s definitive ProxyStatement to be filed with the Securities and Exchange Commission and isincorporated herein by this reference as if set forth in full.

 

**ITEM 10****.****                                             ****EXECUTIVE COMPENSATION.**

 

The information required by this Item is set forth under the caption“Executive Compensation” in the Company’s definitive Proxy Statement to befiled with the Securities and Exchange Commission and is incorporated herein bythis reference as if set forth in full.

 

**ITEM 11****.****                                             ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT.**

 

The information required by this Item is set forth under the captions“Security Ownership of Certain Beneficial Owners and Management” and “EquityCompensation Plan Information” in the Company’s definitive Proxy Statement tobe filed with the Securities and Exchange Commission and is incorporated hereinby this reference as if set forth in full.

 

**ITEM 12****.****                                             ****CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS.**

 

The information required by this Item is set forth under the caption“Certain Transactions” in the Company’s definitive Proxy Statement to be filedwith the Securities and Exchange Commission and is incorporated herein by thisreference as if set forth in full.

 

42

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**ITEM 13.****                                             ****EXHIBITS AND REPORTS ON FORM8-K.**

 

**(a)****                                 ****Exhibits**

** **
| **Exhibit Number** |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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                |   | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2                |   | 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). |
| 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  29, 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

43

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| 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 January 25, 2002 to December 31, 2006,  between Scheid Vineyards Inc. and The United Farm Workers of America, AFL-CIO  (incorporated by reference to Exhibit number 10.9 to Registrant’s Form 10-KSB  for the fiscal year ended December 31, 2001 filed March 29, 2002).                                                                                                                                                                                                                                                                |
| 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)                                                                                                                                                                                                                                                                                                              |
| 10.11a       |   | Amendment  to Credit Agreement [L31-L36] by and between United California Bank (formerly  Sanwa Bank California) and Scheid Vineyards California Inc., dated August 27,  2001 (incorporated by reference to Exhibit number 10.4 to Registrants Form  10-QSB for the quarterly period ended September 30, 2001 filed November 14,  2001).                                                                                                                                                                                                                                                      |
| 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)                                                                                                                                                                                                                                                                                      |
| 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) |

 

44

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| 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. (incorporated by reference to Exhibit  number 10.21 to Registrant’s Report on Form 10-KSB for the fiscal year ended  December 31, 1999 filed March 13, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.22† |   | Lease,  dated as of October 18, 1998 between Scheid Vineyards California Inc. and  California Orchard Company (incorporated by reference to Exhibit number 10.22  to Registrant’s Report on Form 10-KSB for the fiscal year ended December 31,  1998 filed March 24, 1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

45

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| 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 Registrant’s Form  10-QSB for the quarterly period ended September 30, 1999 filed November 12,  1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.28a      |   | Amendment  to Credit Agreement [Crop Line] by and between Bank of the West and Scheid  Vineyards California Inc., dated September 19, 2003 (incorporated by  reference to Exhibit number 10.1 to Registrant’s Form 10-QSB for the  quarterly period ended September 30, 2003).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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 March 22, 2001, by and between Scheid Vineyards Inc.  and Scott D. Scheid (incorporated by reference to Exhibit number 10.32 to  Registrant’s Form 10-KSB for the fiscal year ended December 31, 2001 filed  March 29, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| 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)                                                                                  |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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)                                                                                                                                                             |
| 10.36 |   | Lease  Agreement, effective as of February 1, 2001 and dated March 9, 2001, by and  between Hilltown Properties and Scheid Vineyards Inc. (incorporated by  reference to Exhibit number 10.36 to Registrant’s Form 10-KSB for the fiscal  year ended December 31, 2000 filed March 29, 2001).                                                      |
| 10.37 |   | Standard  Office Lease, dated March 20, 2001, by and between Dennis K. Cooper and  Scheid Vineyards Inc.(incorporated by reference to Exhibit number 10.1 to  Registrant’s Form 10-QSB for the quarterly period ended March 31, 2001 filed  May 11, 2001.                                                                                          |
| 10.38 |   | Amendment  to Credit Agreement [Scheid Ranch] by and between United California Bank  (formerly Sanwa Bank California) and Scheid Vineyards California Inc., dated  August 27, 2001 (incorporated by reference to Exhibit number 10.2 to  Registrant’s Form 10-QSB for the quarterly period ended September 30, 2001  filed November 14, 2001).     |
| 10.39 |   | Amendment  to Credit Agreement [Viento/Riverview] by and between United California Bank  (formerly Sanwa Bank California) and Scheid Vineyards California Inc., dated  August 27, 2001 (incorporated by reference to Exhibit number 10.3 to  Registrant’s Form 10-QSB for the quarterly period ended September 30, 2001  filed November 14, 2001). |
| 10.40 |   | Amendment  to Credit Agreement [San Lucas First] by and between United California Bank  (formerly Sanwa Bank California) and Scheid Vineyards California Inc., dated  August 27, 2001 (incorporated by reference to Exhibit number 10.5 to  Registrant’s Form 10-QSB for the quarterly period ended September 30, 2001  filed November 14, 2001).  |
| 10.41 |   | Amendment  to Credit Agreement [San Lucas Second] by and between United California Bank  (formerly Sanwa Bank California) and Scheid Vineyards California Inc., dated  August 27, 2001 (incorporated by reference to Exhibit number 10.6 to  Registrant’s Form 10-QSB for the quarterly period ended September 30, 2001  filed November 14, 2001). |
| 10.42 |   | Term  Loan Credit Agreement [Hames Loan] by and between United California Bank  (formerly Sanwa Bank California) and Scheid Vineyards California Inc., dated  August 27, 2001 (incorporated by reference to Exhibit number 10.7 to Registrant’s  Form 10-QSB for the quarterly period ended September 30, 2001 filed November  14, 2001).          |
| 10.43 |   | Employment  Agreement, dated as of March 22, 2001, by and between Scheid Vineyards Inc.  and Michael S. Thomsen (incorporated by reference to Exhibit number 10.43 to  Registrant’s Form 10-KSB for the fiscal year ended December 31, 2001 filed  March 29, 2002).(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.                                                                                                                                                                                                                                                                                                                    |
| 31.1* |   | Certification  of Chief Executive Officer of Registrant pursuant to Rule13A-4(a) or Rule  15d-14(a) adopted under the Securities Exchange Act of 1934, as amended, and  Section 302 of the Sarbanes-Oxley Act 0f 2002.                                                                                                                                  |
| 31.2* |   | Certification  of Chief Financial Officer of Registrant pursuant to Rule13A-4(a) or Rule  15d-14(a) adopted under the Securities Exchange Act of 1934, as amended, and  Section 302 of the Sarbanes-Oxley Act 0f 2002.                                                                                                                                  |
| 32.1* |   | Certification  of Chief Executive Officer Pursuant to 18 U.S.C Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     |

 

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| 32.2* |   | Certification  of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

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*                                         Electronically filed herewith.

 

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

 

(1)                                  The contracting party is a predecessor ininterest to Scheid Vineyards California Inc., Registrant’s wholly ownedsubsidiary.

 

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

 

(b)                                 Current Reports on Form 8-K

 

A Report on Form 8-K was filed by the Company on November 13, 2003(Items 7 and 12).  The Report announcedthe Company’s earnings release dated November 13, 2003.

 

##### **ITEM 14.**               PRINCIPAL ACCOUNTANT FEES ANDSERVICES

 

The information required by this Item is set forth under the caption“Principal Accountant  Fees andServices” in the Company’s definitive Proxy Statement to be filed with theSecurities and Exchange Commission and is incorporated herein by this referenceas if set forth in full.

 

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**SIGNATURES**

 

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

 

Scheid Vineyards Inc.

 

 
|                            | By: | /s/  SCOTT D. SCHEID |   |
|---------------------------------|-----|----------------------|--------|
| Scott D. Scheid                 |
| *Chief Executive Officer*       |
| *(Principal Executive Officer)* |

 

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

 

 
| **Signature**                 |   | **Title**                                                              |   | **Date**        |
|-------------------------------|--------|------------------------------------------------------------------------|--------|-----------------|
|                          |   |                                                                   |   |            |
|   /s/ ALFRED G. SCHEID   |   | Chairman  of the Board                                                 |   | March  29, 2004 |
| Alfred  G. Scheid             |   |                                                                   |   |            |
|                          |   | President,  Chief Executive Officer  (Principal Executive Officer) and |   | March  29, 2004 |
|   /s/ SCOTT D. SCHEID    |   | Director                                                               |   |            |
| Scott  D. Scheid              |   |                                                                   |   |            |
|                          |   |                                                                   |   |            |
|   /s/ HEIDI M. SCHEID    |   | Senior  Vice President, Secretary,                                     |   | March  29, 2004 |
| Heidi  M. Scheid              |   | Treasurer  and Director                                                |   |            |
|                          |   |                                                                   |   |            |
|   /s/ MICHAEL S. THOMSEN |   | Chief  Financial Officer (Principal                                    |   | March  29, 2004 |
| Michael  S. Thomsen           |   | Financial  and Accounting Officer)                                     |   |            |
|                          |   |                                                                   |   |            |
|   /s/ JOHN L. CRARY      |   | Director                                                               |   | March  29, 2004 |
| John  L. Crary                |   |                                                                   |   |            |
|                          |   |                                                                   |   |            |
|   /s/ ROBERT P. HARTZELL |   | Director                                                               |   | March  29, 2004 |
| Robert  P. Hartzell           |   |                                                                   |   |            |

 

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