**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, 2005** |
|                                                  |       |                                                                                                     |
| **o**                                                 | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 
| **Commission  File Number 000-22857** |
|---------------------------------------|

 

**SCHEIDVINEYARDS INC.**

(Name of small business issuerin 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 is not required to file reports pursuant to Section 13 of 15(d) ofthe Exchange Act  o

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen 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 Form 10-KSBor any amendment to this Form 10-KSB.  o

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act) Yes o     No  ý

 

Issuer’srevenues for its most recent fiscal year:     $31,209,000

 

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 theNasdaq Stock Market SmallCap Market System on April 7, 2006: $13,888,317.  The voting stock held by non-affiliates onthat date consisted of 1,998,319 shares of Class A Common Stock.

 

Numberof shares outstanding of each of the issuer’s classes of common stock at April 7,2006:

 

Class A   4,024,419       Class B    1,097,215

 

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

 

 

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**INDEX**

 
| ** **                                 | ** **                                                                                                                   | **Page**   |
|--------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| Note Concerning Forward-Looking Statements |                                                                                                                         |
|                                       |                                                                                                                         |       |
| **PART I**                            | ** **                                                                                                                   |
| Item 1.                                    | Description of  Business.                                                                                                    |       |
| Item 2.                                    | Description of  Property.                                                                                                    |       |
| Item 3.                                    | Legal Proceedings.                                                                                                           |       |
| Item 4.                                    | Submission of  Matters to a Vote of Security Holders.                                                                        |       |
| ** **                                 | ** **                                                                                                                   | ** ** |
| **PART II**                           | ** **                                                                                                                   |
| Item 5.                                    | Market for Common  Equity, 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.                                                                                                     |       |
| Item 8B.                                   | Other Information                                                                                                            |       |
| ** **                                 | ** **                                                                                                                   | ** ** |
| **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 and Related Stockholder Matters.                             |       |
| Item 12.                                   | Certain Relationships and  Related Transactions.                                                                             |       |
| Item 13.                                   | Exhibits.                                                                                                                    |       |
| Item 14.                                   | Principal Accountant Fees  and Services.                                                                                     |       |
|                                       |                                                                                                                         |       |
| Signatures                                 |                                                                                                                         |       |

 

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**NOTECONCERNING FORWARD-LOOKING STATEMENTS**

 

This Report contains certainforward-looking statements, including the plans and objectives of managementfor the business, operations, and economic performance of Scheid Vineyards Inc.(the “Company”).  These forward-lookingstatements generally can be identified by the context of the statement or theuse of words such as the Company or its management “believes,” “anticipates,” “intends,”“expects,” “plans” or words of similar meaning. Similarly, statements that describe the Company’s future operatingperformance, financial results, plans, objectives, strategies, or goals areforward-looking statements.  Althoughmanagement believes that the assumptions underlying the forward-lookingstatements are reasonable, these assumptions and the forward-looking statementsare subject to various factors, risks and uncertainties, many of which arebeyond the control of the Company. Accordingly, actual results could differ materially from thosecontemplated by the forward-looking statements. In addition to the other cautionary statements relating to certainforward-looking statements throughout this Report, attention is directed to “Business— Cautionary Information Regarding Forward-Looking Statements” below fordiscussion of some of the factors, risks and uncertainties that could affectthe outcome of future results contemplated by forward-looking statements.

 

**PART I**

 

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

 

Scheid Vineyards Inc., a Delaware corporation (“SVI”or the “Company”), is a leading independent (*i.e*.,not winery controlled) producer of premium varietal wine grapes and bulkwine.  The Company currently operatesapproximately 5,700 acres of wine grape vineyards on the Central Coast ofCalifornia.  Of this total, approximately4,300 acres are operated for the Company’s own account and 1,400 acres areoperated under management contracts for others. All of the properties the Company currently operates are located inMonterey and San Benito counties, both of which are generally recognized asexcellent regions for growing high quality wine grape varieties.

 

The Company currentlyproduces 17 varieties of premium wine grapes, primarily Chardonnay, CabernetSauvignon, Merlot, Pinot Noir, Sauvignon Blanc and Syrah.  The majority of the Company’s wine grapes aresold under short and long-term grape purchase agreements to a variety of wineryclients.  In 2005, the Company soldapproximately 53% of its wine grapes under such purchase agreements to over 30different wineries.  The Company alsoconverts a portion of its grapes, approximately 36% in 2005, to premium bulk winewhich is sold pursuant to wine purchase agreements or on the open bulkmarket.  The Company also sells a portionof its grapes, approximately 11% in 2005, pursuant to an acreage contractwhereby the winery client purchases the entire grape production from specifiedacreage for a set price per acre.

 

In September 2005, theCompany completed construction of a new winery facility located at the Company’svineyard headquarters near Greenfield, California.  The facility has the capacity to processapproximately 11,000 tons of grapes into wine during any one harvest, as wellas to process additional grapes into juice. The facility is being used to produce wine for the Company’s own bulkwine production, as well as process and store bulk wine for third partycustomers.

 

The Company believes that its clients contract withSVI to assure a consistent, reliable source of high quality premium grapesand/or bulk wine for their wine programs. The Company’s largest winery client in 2005 was Diageo Chateau &Estate Wines Company, a division of Diageo plc (“Diageo”), a global premiumdrinks business and one of the ten largest U.S. wineries in terms of 2005 caseshipments.  Grape purchase contracts withDiageo covered 43% of the Company’s producing acreage in 2005 and accounted forapproximately 56% and 53% of the Company’s 2005 and 2004 total revenues,respectively.  Diageo produces andmarkets the wines of *Beaulieu Vineyard (BV)*,*BV Coastal*, *Sterling Vineyards*, *The Monterey Vineyard,**Blossom Hill and Chalone Vineyards*.  The Company also has long-term grape or bulkwine purchase agreements with other well-known producers of ultra premiumwines, including Don Sebastiani & Sons, Niebaum-Coppola Estate Winery,Canandaigua Wine Company (“Canandaigua”, a 

 

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division of ConstellationBrands, Inc.), Purple Wine Company, David Bruce Winery, and Morgan Winery.

 

The Company sells the majority of its wine grapeproduction under long-term grape and wine purchase contracts.  The terms of these grape purchase contractsextend to between 2006 and 2014, and generally have “evergreen” provisionsrequiring one to three years’ prior written notice of termination.  SVI also provides vineyard managementservices to two winery clients, Diageo and Pacific Wine Partners, LLC (asubsidiary of Constellation Brands, Inc.). Under these arrangements, the Company provides its farming services fora set fee per acre.  In 2005, vineyardmanagement services accounted for approximately 3% of the Company’s totalrevenues.

 

The Company’s executive offices are located at 305Hilltown Road, Salinas, California 93908, telephone number (831) 455-9990, andits vineyard and winery headquarters are located at 1972 Hobson Avenue,Greenfield, California 93927.  TheCompany’s sales office is located at 373 Healdsburg Avenue, Healdsburg,California 95488.

 

The Company’s business isconducted through a wholly owned subsidiary, Scheid Vineyards California Inc.,a California corporation (“SVI-Cal”). References in this Report to “SVI-Del” refer only to Scheid VineyardsInc., the parent holding company.  Unlessotherwise required by the context, references in this Report to “SVI” and the “Company”include SVI-Del and SVI-Cal on a consolidated basis.  SVI-Del was incorporated in Delaware in 1997and SVI-Cal was incorporated in California in 1971.

 

##### **Recent Developments**

##### ** **

 *2005 Harvest*.  California crushed a record 3.74million tons of grapes in the 2005 harvest, 35% more than the 2.77 millioncrushed in 2004, according to figures released by the California AgriculturalStatistics Service, making the 2005 wine grape harvest the biggest inCalifornia history.  The Company harvested approximately 31,700tons of wine grapes, a 61% increase from the 2004 harvest of 19,700 tons.  Approximately 64% of the Company’s 2005production was sold as grapes.  Thebalance was processed into wine either under wine purchase contracts forcustomers or for future sale on the open bulk market.

 

The Company continues to expand the amount of grapesthat it processes into bulk wine.  TheCompany crushed approximately 11,400 tons of grapes into bulk wine during the2005 harvest, as compared to 6,400 tons in 2004, a 78% increase.  Of the total crushed in 2005, 7,200 tons werecrushed at the Company’s new winery facility and 4,200 tons were crushed at thirdparty winery facilities.

 

*WineryFacility.*   The Company’s new 40,000 square foot wineryfacility began processing grapes on September 2, 2005 and processedapproximately 10,500 tons of grapes into bulk wine during the 2005 harvest.  Thistotal represents both custom processing of white and red wines for the Company’soutside customers and processing of the Company’s own grape production.

 

* 2006 Grape Prices*. Approximately 40% 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 2005 Crush Report published March 10,2006, these prices show slight decreases for most varieties.  The largest of the Company’s acreage isplanted in Chardonnay, which shows a price decrease of approximately 2%,followed by Cabernet Sauvignon with a price decrease of 2%, and Merlot with aprice decrease of 3%.  The past few yearshave seen the industry trying to cope with an excess supply of certainvarieties of grapes and wine.  Prior tothe 2005 harvest, there were signs that the market for most varieties wascoming more into balance.  With the impactof the record crop, the over supply problem for certain varieties has beenexacerbated and the Company anticipates that the prices it will receive forgrapes which are currently not contracted, representing about 20% ofanticipated production, could be less than the prices the Company will receivefor contracted grapes for some varietals.

 

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**Company Strategy**

 

The Company’s strategic objective is to become theleading independent producer of premium varietal wine grapes and bulk wine inCalifornia.  The Company believes thatits success to date has resulted from execution of a coherent strategy thatincludes the following elements:

 

*Produce HighQuality, High Value Wine Grapes and Bulk Wine.*  The Company has positioned itself as anultra-premium grower on the Central Coast, and management believes it hasdeveloped an excellent reputation in the wine industry due to its emphasis onquality and performance.  SVI strives toconsistently provide its clients with wine grapes and bulk wine that meetdemanding specifications for quality. The Company employs various programs to promote top quality grapes,including regulated deficit irrigation on appropriate varieties, upgrades tocertain trellis systems to improve air circulation and light penetration, and apruning strategy that emphasizes low spur densities and balanced vines.  In recent years, the Company has providedwinemaking services to various clients and produced wine that is sold on thebulk wine market.  The completion of theScheid Vineyards Winery enhances the Company’s ability to control quality andproduce wines that meet the needs of its clients.  Bulk wine sales accounted for approximately20% and 24% of total revenues in 2005 and 2004, respectively.

 

 *Continue Long-Term Relationships with Leading WineProducers*.   The Companybelieves that forming and maintaining long-lasting relationships with clientsis 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 25 different wineries, including DonSebastiani & Sons, Niebaum-Coppola Estate Winery, Purple Wine Companyand David Bruce 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, stressescustomer service by allowing clients to access weather, irrigation and farmingdata 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 Fundamental Viticultural Practices withCutting 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 andmodified lyre trellis systems which are designed to achieve balanced vines,leading to production sustainability without a sacrifice in quality.  The Company utilizes many technological toolsincluding irrigation monitoring tools such as neutron probes and pressurebaums, weather stations, geographic information systems technology, globalpositioning systems technology and analytical grape chemistry.

 

 * MarketUncontracted Grapes and Complete Vineyard Development.*  The Company currently has approximately 300producing acres of wine grapes, or 8% of the Company’s total producing net vineacres, that are not under contract for the 2006 harvest.  An additional 1,500 acres, or 40% of theCompany’s total producing vine acres, have contracts that expire after deliveryof the 2006 harvest.  The Company’sprimary focus at this time is to market the production from these uncontracted acresand complete the vineyard development of acres not yet in full production.  As part of its marketing strategy, theCompany has developed a marketing and sales team to perform certain duties,including contacting potential winery clients on a regular basis, maintainingcommunication with current winery clients, attending industry events, andattending and exhibiting at trade shows. The Company believes that there may be opportunities to acquire existingvineyards and purchase or lease undeveloped land suitable for wine grapevineyards, however, the Company is focusing its efforts primarily on completingits vineyards that are not yet mature and contracting the resultant wine grapeproduction to current or new winery clients.

 

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**California Wine and Grape Industry**

 

The market for California table wine hasgrown significantly over the last 10 years. California winery table wine revenues have increased at an average 7.1%compound annual rate, from approximately $4.1 billion in 1996 to approximately$7.6 billion in 2005, according to Gomberg, Fredrikson &Associates.  In 2005, wine shipments tothe United States grew 5%, to a record 296 million cases.  This 15 million case increase came fromimports, which were up by 8.0 million cases or 11%; California wines, whichwere up by 5.3 million cases or 3%; and other states in the U.S, which were up1.6 million cases or 6%.

 

Total California wine shipments worldwide in2005 increased by approximately 5.1 million cases, or 3.2%.  Wines in the ultra-premium category (over $14per 750 ml. bottle) grew by approximately 9% and accounted for over one-thirdof total California winery revenues.  Californiawines in the super-premium category ($7 to $14 per 750 ml. bottle) were helpedby the continued slowing of import growth, and sales grew by approximately16%.  The popular premium category ($3 to$7 per 750 ml. bottle) increased approximately 3%.

 

Imports into the United States have growndramatically over the past ten years, although a weakening of the U.S. dollarfor the second half of 2003 and through 2004 had slowed the growth of importedwines. Imports rebounded in 2005, increasing 11% over 2004, to a record 81million cases or 27% of the U.S. market. Australian imports continued to increase dramatically with total salesof 22.3 million cases in 2005, an increase of 11%.  Australia is the second largest wine exporterto the U.S. behind Italy, which experienced an increase in sales to the U.S. of9%.

 

In 2005exports decreased by 2% over the record levels of 2004.   Bulk wine exports grew 25% in 2005 comparedto 2004, but were offset by a 17% decrease in the export of bottled Californiawine.  This decrease was caused bywineries opting to bottle the wine in the country of destination to save costs.

 

According tothe Crush Report, the 2005 harvest of California wine grapes grew to a record3.74 million tons, a 35% increase from the 2004 crush of 2.77 milliontons.  California wine grape growersreceived an average price in 2005 for white wine grapes of $506 per ton, up 4%from 2004, and an average price for red wine grapes of $633 per ton, up 1% from2004.  For growers in California grapepricing district 7 (Monterey and San Benito Counties), the average price forwhite wine grapes decreased by 6%, from $951 per ton in 2004 to $898 in 2005,and the average price for red wine grapes decreased by 2%, from $1,111 per tonin 2004 to $1,086 in 2005.

 

**The Company’s Grape Production Operations**

 

*** Vineyard Operations***

 

SVI currently owns or manages approximately 5,700acres of wine grape vineyards in Monterey and San Benito counties.  These properties consist of approximately4,300 acres in Monterey County operated for the Company’s own account andapproximately 1,400 acres operated under management contracts for others.  Of the Company’s approximately 4,070 net vineacres of wine grapes (*i.e*.,excluding acreage devoted to roads, storage areas, equipment yards or usesother than vineyards), the Company expects that in 2006 approximately 85% willbe in full production, 6% will be in partial production, and 9% will benon-producing or out of production.  TheCompany sells the majority of its wine grape production under long-term grapeor bulk wine purchase contracts. Approximately 92% of the Company’s producing acres are currentlycontracted for the harvest of 2006.

 

*** Grape Production***

 

The harvest of wine grapes occurs annually,generally in September and October for the coastal vineyards ofCalifornia.  Grape production variesaccording to the variety of grape produced, location, weather, vine density,the quality and type of soil, water conditions, and other factors.  Newly planted vines take approximately fiveto six years to reach full maturity and grafted vines take approximately four 

 

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years to reach fullproduction.  In 1999, the Companydeveloped a 740-acre vineyard, with the final 120 acres of this vineyard beinggrafted in 2004.

 

SVI’s vineyards are divided into blocks, each block generallyconsisting of approximately 20 to 25 acres. The Company continually evaluates its vineyards on a block-by-blockbasis and considers various factors, such as the overall product mix of theCompany’s vineyards and the productivity of each block.  In 2002 and 2003, the Company moved certainwinery clients from under-performing blocks to more reliable and consistentlyproducing blocks, and removed approximately 365 acres of vines.  In 2005, the Company replanted 180 of thoseacres.  The Company believes that theseacres will be in partial production in 2006 and reach full production in 2009,although no assurances can be given that such production increases will occurwith any predictability or at all.  Theremaining 185 acres have been leased under short-term agreements to otherfarming concerns.  The effect of thesevineyard removals will be a small reduction in the Company’s overall farmingcosts and a reduction in the amount of uncontracted grapes the Company hasavailable.

 

The following table shows SVI’s net vine acres byvariety from 2002 to 2006, total tons produced from 2002 to 2005, and tonsproduced by variety for 2005:

 

## **Net Vine Acres Owned by SVI and Tons Produced**

 
| ** **               | ** ** | **Net Vine Acres** | ** ** | **Tons** | ** ** |
|--------------------------|------------|--------------------|------------|----------|------------|
| **Variety**              | ** ** | **2002**           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006(4)** | ** ** | **2005** | ** ** |
| Chardonnay               |       | 1,399              |       | 1,293    |       | 1,107 |   | 1,115 |   | 1,135 |   | 10,223 |   |
| Cabernet  Sauvignon      |       | 767                |       | 727      |       | 727 |   | 734 |   | 734 |   | 6,550 |   |
| Merlot                   |       | 600                |       | 600      |       | 600 |   | 600 |   | 643 |   | 5,923 |   |
| Pinot Noir               |       | 318                |       | 362      |       | 393 |   | 393 |   | 393 |   | 2,690 |   |
| Sauvignon  Blanc         |       | 240                |       | 240      |       | 240 |   | 264 |   | 264 |   | 2,184 |   |
| Syrah                    |       | 174                |       | 174      |       | 174 |   | 174 |   | 174 |   | 1,489 |   |
| Gewürztraminer      |       | 82                 |       | 82       |       | 82 |   | 82 |   | 82 |   | 964 |   |
| Petite Sirah             |       | 31                 |       | 31       |       | 31 |   | 55 |   | 55 |   | 482 |   |
| White  Riesling          |       | 58                 |       | 58       |       | 22 |   | 22 |   | 47 |   | 180 |   |
| Zinfandel                |       | 73                 |       | 73       |       | 36 |   | 36 |   | 44 |   | 343 |   |
| Petit Verdot             |       | —             |       | —   |       | — |   | 37 |   | 37 |   | 202 |   |
| Pinot Gris               |       | —             |       | —   |       | — |   | — |   | 36 |   | 145 |   |
| Valdiguie                |       | 20                 |       | 20       |       | 20 |   | 20 |   | 20 |   | 259 |   |
| Others                   |       | 30                 |       | 28       |       | 28 |   | 28 |   | 41 |   | 72 |   |
| Replants/Grafts(1)  |       | 78                 |       | 100      |       | 70 |   | 190 |   | 180 |   | — |   |
| New  Acreage(2)     |       | 210                |       | 185      |       | 185 |   | 135 |   | — |   | — |   |
| Fallow(3)           |       | —             |       | 107      |       | 365 |   | 185 |   | 185 |   | — |   |
| Total Net Vine Acres     |       | 4,080              |       | 4,080    |       | 4,080 |   | 4,070 |   | 4,070 |   |   |   |
|                     |       |               |       |     |       |   |   |   |   |   |   |   |   |
| Total Tons Produced      |       | 17,550             |       | 20,700   |       | 19,666 |   | 31,706 |   | — |   | 31,706 |   |

 

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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 31, 2006.

 

***Grape and Wine Sales***

 

*Primary Customers*.   Thewine grape tonnage harvested from the Company’s approximately 3,565 net vineacres in production in 2005 (*i.e.*,excluding vineyards under development or redevelopment) was largely subject togrape and wine purchase contracts with various wine producing companies.  The largest set of these contracts,representing approximately 77% of the Company’s 2005 

 

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grape sales revenues and 56% ofthe Company’s 2005 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 one of the ten largest U.S. wineries.  The Company’s contractual relationship withDiageo’s predecessor began in 1972 and has been continuous since thattime.  In addition, the Company haspurchase contracts for its current wine grape production with other wineproducers, including Don Sebastiani & Sons, Niebaum-Coppola EstateWinery, Canandaigua, David Bruce Winery, Morgan Winery and The Hess CollectionWinery.  The Company also providesvineyard management services to Diageo and Pacific Wine Partners, LLC on anaggregate of approximately 1,400 acres of wine grapes.  See “Vineyard Management Contracts.”

 

The terms of the Company’s grape purchase contractsgenerally require the clients to purchase substantially all of the Company’sproduction from specified vineyards at a formula price based upon the previousyear’s sales prices for specified districts as reported in the annual CrushReport.  See “Pricing.”  The contracts generally require the Companyto deliver grapes meeting specified sugar levels and other qualitymeasurements.  The majority of thecontracts call for payment in full within 60 days of delivery of the crop tothe client.

 

The terms of the Company’s wine purchase contractsgenerally require the clients to purchase specific quantities of wine atspecified fixed prices.  The contractsgenerally require the Company to produce wine that meets normal and customaryindustry standards for quality.  Themajority of the contracts call for partial payment before the end of the yearthat the grapes are harvested, with the balance due the following year.

 

The terms of the Company’sgrape and wine purchase contracts extend to between 2006 and 2014.  Approximately 92% of SVI’s producing acreageis contracted for the 2006 harvest.  Aportion of these contracts have “evergreen” renewal provisions whereby thecontracts continue until either party gives a two or three years’ prior writtennotice of termination.  The Companybelieves that these evergreen provisions are desirable to either allow time torenegotiate the contract with its contracting client or to find a new clientfor the grape production before the contract terminates, although there can beno assurance that either course of action will be successful.

 

In 2003, Diageo delivered a notice to theCompany terminating grape purchase contracts covering 1,300 acres, or 35% ofthe Company’s producing acreage, such termination to become effective after theharvest of 2006.  The marketing ofuncontracted acres is a primary focus of SVI. However, 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.”

 

SVI began selling wine under wine purchaseagreements in 2002 as an adjunct to its traditional method of selling grapesunder grape purchase agreements.  Inaddition, SVI converts certain grapes that are unsold at the time of harvest tobulk wine to be sold on the open market. SVI uses its own winery facility and has contracted with third-partyprocessing facilities to “custom crush” the wine it has produced.  In 2005, SVI crushed a total of approximately11,400 tons of grapes, or approximately 37% of the Company’s total wine grapeproduction, into wine.  Of this total,approximately 6,400 tons, or 21% of the Company’s total wine grape production,was sold pursuant to wine purchase agreements with fifteen different customers,and approximately 5,000 tons, or 16% of SVI’s total wine grape production, wasproduced to be sold on the open bulk market.

 

The Company believes that it has excellentrelationships with its clients that have been built over many years ofsatisfying their needs for quality, timely delivery and service.  Long-term supply arrangements benefit clientsby providing a significant, reliable supply of high quality grapes and/or bulkwine at predictable prices.  Thesecontracts also benefit the Company by providing reliable sources ofrevenues.  SVI believes that thesecontracts are one of the major reasons for its past success, and it plans torely upon these and similar contracts in the future.  While contract terms are typically a functionof market factors and it is not possible to know what the terms of the Company’sfuture grape purchase arrangements will be, it is probable that any renewal orreplacement of the Company’s Diageo contracts, 

 

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the majority of which willexpire after the harvest of 2006, will have less favorable terms.

 

At the present time, theCompany has contracts on its net vine acres that have initial expiration datesas follows:

 
| **Initial Year  of Expiration** | ** ** | **Net Vine  Acres** | ** ** | **Percent** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------|------------|
| 2006                            |       |                | 1,535      |        | 37.7       |   |
| 2007                            |       |                | 455        |        | 11.2       |   |
| 2008                            |       |                | 760        |        | 18.7       |   |
| 2009                            |       |                | 60         |        | 1.5        |   |
| 2010                            |       |                | 85         |        | 2.1        |   |
| 2011                            |       |                | 110        |        | 2.7        |   |
| 2012                            |       |                | 25         |        | 0.6        |   |
| 2013                            |       |                | 50         |        | 1.2        |   |
| 2014                            |       |                | 325        |        | 8.0        |   |
| Uncontracted                    |       |                | 300        |        | 7.4        |   |
| Non-Producing                   |       |                | 365        |        | 8.9        |   |
| Total                           |       |                | 4,070      |        | 100.0      | % |

 

*Pricing*.  Eachyear the CDFA publishes the Grape Crush Report on a preliminary basis on oraround 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 utilizedby wineries and wine grape producers to negotiate contracts and establish grapeprices, as well as by financial and other institutions who serve the wineindustry.

 

Approximately 40% of SVI’s current contract grapeprices are established each year by various pricing formulas based on theprevious year’s prices for each wine grape variety in several specified CDFAreporting districts.  For example, grapesfrom the Company’s 2006 harvest that are subject to these contracts will besold at prices based on the actual prices for the 2005 harvest reported in theCrush Report published March 10, 2006. This enables both the Company and its clients to know final grape prices(on a per ton basis by variety) approximately eight months in advance of eachyear’s harvest.  These multiple districtformula prices, as opposed to sales on the short-term spot market, tend tomoderate year-to-year swings in prices. The Company’s grape purchase contracts typically utilize pricing basedin part upon prices for Napa, Sonoma and Mendocino county grapes, which tend tobe higher than prices for the same varieties produced in Monterey county.  Some recent agreements use pricing formulasthat are based more heavily on Monterey county data or use fixed prices whichdo not fluctuate, which may also be the case for the renewal or replacement ofthe Diageo agreements and additional agreements covering new or replantedvineyards.  In addition, certain of theCompany’s vineyards are contracted for sale on a per acre basis.  Bulk wine sold under contract is sold basedupon fixed prices.

 

The chart below shows theweighted average prices SVI has received, or expects to receive, per ton ofcontracted grapes for the primary varieties it has produced since 2002.  As of March 31, 2006, tonnage-based grapepurchase contracts covered approximately 58% of the Company’s currentlyproducing acreage.

 

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

 
| **Variety**         | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005**   | ** ** | **2006(2)** | ** ** |
|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Cabernet  Sauvignon |       | $          | 1,488      |       | $          | 1,578      |       | $          | 1,227      |        | $          | 2,034 |   | $ | 1,915 |   |
| Chardonnay          |       | 1,323      |       | 1,159      |       | 1,221      |       | 1,061      |       | 1,228       |       |
| Gewurztraminer      |       | 984        |       | 1,048      |       | 1,029      |       | 1,059      |       | 1,058       |       |
| Merlot              |       | 1,557      |       | 1,445      |       | 1,212      |       | 1,223      |       | 1,158       |       |
| Petite Sirah        |       | 1,313      |       | 1,337      |       | 1,197      |       | 1,144      |       | 1,127       |       |
| Pinot Noir          |       | 1,765      |       | 1,470      |       | 1,349      |       | 1,323      |       | 1,472       |       |
| Sauvignon  Blanc    |       | 1,001      |       | 856        |       | 1,018      |       | 958        |       | 1,136       |       |
| Syrah               |       | 1,158      |       | 982        |       | 858        |       | 969        |       | 974         |       |
| Valdiguie           |       | 863        |       | 845        |       | 715        |       | 644        |       | 587         |       |
| White  Riesling     |       | 880        |       | 870        |       | 985        |       | 1,200      |       | 1,200       |       |
| Zinfandel           |       | 1,158      |       | 1,599      |       | 1,339      |       | 1,316      |       | 1,371       |       |
|                     |            |            |            |            |            |            |            |            |            |             |            |  |  |  |  |  |

 

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(1)           Prices for most premium varieties havedecreased since 2002, 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 for2006 are based upon existing tonnage-based grape purchase contracts, Companyproduction and sales estimates for contracted acres, and the 2005 Final GrapeCrush Report released March 10, 2006. These weighted average prices per ton do not include estimatedproduction and sales of bulk wine or uncontracted vineyard acres.  The Company anticipates that prices forgrapes produced from uncontracted acres will be lower than those from itscontracted acres.  Currently, the Companyhas 92% of its producing vineyard acres contracted under grape or wine purchaseagreement for the 2006 harvest.

 

***Vineyard Production Cycle***

 

The vineyard production cycle begins each year inDecember, after completion of harvest. From December through March vines are pruned and tied totrellises, and damaged stakes, trellises, irrigation systems and other vineyardcomponents are repaired or refurbished. After winter rains end, irrigation and cultivation of the vineyardsbegin and continue through the harvest season. Herbicides are applied as needed through the summer.  Necessary applications of pesticides andfertilizer begin in the spring and continue until harvest.  Grafting and planting also generally takeplace in the first four or five months of the year.  As growth of the vines accelerates beginningin late spring, they are trained and tied, and excess leaves are sometimespulled to promote more efficient growth of vines and fruit.  Depending on the rate at which fruit ripens,harvest typically begins in late-August to early-September and iscompleted by the end of October or early November.  Direct farming costs currently range from$2,500 to $3,400 per acre over the course of the year for vineyards in fullproduction, and revenue from grape purchase contracts are realized at the timeof harvest.  Approximately one-half ofannual production costs are incurred by June 30.

 

*** Capital Investment Requirement for Acquisition, Development andImprovement of Vineyards***

 

Part of the Company’s strategy has been toexpand its operations and grape production through the development of bare landinto vineyards, the acquisition of existing vineyards, and the redevelopment ofthe Company’s older vineyards.  TheCompany has implemented this strategy through the lease in 1998 ofapproximately 790 acres of bare land located near the Company’s vineyardheadquarters which the Company has developed into vineyards, the 1997acquisition of the 370-acre Riverview Vineyard, the lease in 1997 ofapproximately 575 acres of bare land in Hames Valley which the Company hasdeveloped into vineyards, and the redevelopment of certain of the Company’s existingvineyards.

 

Generally, significant amounts of fruit are notproduced for three years from newly planted vines and for two years from vineswhich are grafted to a new variety. During this time, the Company incurs significant development andproduction costs that are not offset by revenues from these vineyards and 

 

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must be financed from othersources.  Newly planted vines that arefour to five years of age and grafted vines that are three to four years of agegenerally begin to produce grapes in sufficient quantities to cover productioncosts and contribute to gross profit, subject to some variation due to theeffects of factors such as weather conditions, geographic location, variety ofgrape grown, 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, beforetaking 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.  Overthe past 10 years, the Company has made over $43 million in capital expendituresto redevelop existing vineyards and develop new vineyards.  Improvement and refurbishment is an ongoingprocess.  The Company estimates thatthere will always be some portion of its total net vine acres undergoing sometype of redevelopment.  See “-Net VineAcres Owned by SVI and Tons Produced.”

 

Due to the development of new vineyards, theredevelopment of existing vineyards and the acres recently taken out ofproduction, approximately 15% of the Company’s vineyard acreage has not yetreached full productive capacity or is out of production.  There can be no assurance that the Company’sproperties will achieve their full productive capacity at the rate indicated,if at all.

 

The following table shows recent and anticipatedmaturity of the Company’s vineyards.

 

**AnticipatedMaturity Levels of SVI’s Net Vine Acres (1)**

 
| ** **                                                 | ** ** | **Crop Year** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|
| ** **                                                 | ** ** | **2005**      | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** |
| Acres five or more years old (at or near  full production) |       | 3,430         |       | 3,450 |   | 3,560 |   | 3,705 |   | 3,885 |   | 3,885 |   |
| Acres three and four years old (partial  production)       |       | 130           |       | 255 |   | 325 |   | 180 |   | — |   | — |   |
| Acres one and two years old (not yet in  production)       |       | 325           |       | 180 |   | — |   | — |   | — |   | — |   |
| Acres out of production (2)                                |       | 185           |       | 185 |   | 185 |   | 185 |   | 185 |   | 185 |   |
|                                                       |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Total Acres                                                |       | 4,070         |       | 4,070 |   | 4,070 |   | 4,070 |   | 4,070 |   | 4,070 |   |

 

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

 

(2) Certain marginally-producing acres have been taken out of production.  Certain of the acres were replanted in2005.  It has not been determined whenthe remaining acres will be replanted, if at all.

 

***  Water Supply***

 

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

 

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**Vineyard Management Contracts**

 

The Company provides vineyard management services onapproximately 1,400 acres in Monterey and San Benito Counties for Diageoand Pacific Wine Partners, LLC (a joint venture between Constellation Brands, Inc.and BRL Hardy, Inc.).  Pursuant tothese management contracts, budgeted costs of labor and equipment are advancedto the Company on a monthly basis and the Company receives management feesbased on the acreage managed and harvested. The Company’s vineyard management contracts expire no earlier than thecompletion of harvest in years ranging from 2009 to 2013.  In certain cases the Company has alsoreceived fees for financing vineyard improvements, securing property anddesigning vineyards.  The Company mayenter into similar arrangements for other vineyard properties in the future.

 

**Bottled Wine Production and Sales**

 

SVI produces its own ultra premium varietal winesunder the *Scheid Vineyards*label.  The Company’s tasting room islocated at the Company’s vineyard headquarters compound located on U.S. Highway101 (a major north-south thoroughfare between San Francisco and Los Angeles)just south of Greenfield and north of King City in Monterey County.

 

Production and sales have been limited to date.  SVI produced approximately 3,825 and 2,950cases in 2005 and 2004, 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 2006 of approximately 6,000cases.  The Company intends to continueto distribute its current wine production directly through its tasting room,web site, restaurants, clubs and a few selected retailers.

 

**Competition**

 

Wine grape growing andwine production are highly competitive. California has over 1,000 bonded wineries although, according toGomberg, Fredrikson & Associates, the top twelve wineries accountedfor approximately 80% of sales based on total California wine shipments in2005.  In addition, there are manysources of supply of wine grapes in California and in countries outside theUnited States.  Since 1996, acres plantedto wine grapes in California have increased 36%, from approximately 378,000acres at the end of 1996 to 513,000 at the end of 2004, according to theCalifornia Agricultural Statistics Service. Most wine grape producers have small, privately owned operations andsell their production to wineries, often at spot market prices from year toyear.  Quality of production and yieldscan vary widely from vineyard to vineyard in the same geographic area.  Many wineries, including certain of theCompany’s customers, grow a significant amount of the grapes they need toproduce wine in addition to purchasing grapes from independent producers suchas SVI.  Although holdings of vineyardproperties are not publicly reported, the Company believes it is one of thelargest independent producers of premium wine grapes in California, and thatthere are approximately four or five independent producers of comparable sizein terms of acreage.

 

In addition, there arenumerous wine producers in Europe, Australia, South America, New Zealand andSouth Africa.  Producers in thesecountries are increasing their production in these regions and targeting 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.  Imports of foreign bulk wine to Californiaincreased almost 100% from 2004 to 2005, to 10.3 million gallons, theequivalent of 4.3 million cases.  Since1996, American wineries have imported the equivalent of 29.2 million cases offoreign bulk wine.

 

**Environmental Issues**

 

SVI currently maintains 30 above-ground fuel storagetanks on its own vineyard properties to provide fuel to its various vehiclesand machinery.  These tanks havecapacities ranging from approximately 500 to 10,000 gallons and are installedon concrete slabs with catch basins to protect the 

 

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ground surface from anyinadvertent release.  No undergroundstorage tanks are located on the Company’s properties.

 

The Company’s current operations require theperiodic usage of various chemical herbicides, fungicides and pesticides, someof which contain hazardous or toxic substances. The usage and storage of thesechemicals are, to varying degrees, subject to federal and state regulation. Tothe extent that the Company stores such chemicals, they are contained in a securedstorage facility at the Company’s vineyard headquarters compound.  The Company also maintains a comprehensivesafety program supervised by the Company’s human resources safety director anda state-licensed pest control advisor.

 

**Trademarks and Labels**

 

The Company has registered a trademark relating to aspecific slogan which the Company uses on souvenirs and paraphernalia sold atthe Company’s wine tasting room and has filed an application to trademark “VitWatch”,the Company’s proprietary winery client web site.  The Company also has wine labels approved bythe Trade and Tax Bureau (“TTB”).

 

**Employees and Labor Relations**

 

The Company has approximately 100 full-timeemployees and employs seasonal and contract labor for vineyard development,pruning, harvesting and other related tasks during peak seasons.  Field labor needs are seasonal, normallypeaking at approximately 400 field workers at harvest, and dropping to a low ofapproximately 50 immediately after harvest. The Company also uses contracted labor for specialized work, such asgrafting, and otherwise when necessary.

 

The United Farm Workers, AFL-CIO (“UFW”) hasrepresented the Company’s farm workers since 1993.  The Company’s current five-year contract withthe UFW will expire at the end of 2006. The Company believes its labor relations are satisfactory.  The Company has never had a walk-out,sit-down, slow-down or strike, and the existing contract has a “no strike”clause.  The Company has, however, beenpicketed, particularly during the organizing effort by the UFW and duringnegotiation of the first contract in 1995. See “Cautionary Information Regarding Forward-Looking Statements — LaborRegulations and Union Contract.”

 

**Cautionary Information Regarding Forward-LookingStatements**

 

***   Agricultural Risks***

 

Wine grape production is subject to a variety ofagricultural risks that can materially and adversely affect the quality andquantity of grapes produced.  Thesehazards include, among other things, adverse weather such as drought, frost,excessive rain, excessive heat or prolonged periods of cold weather.  To the extent a grape producer’s propertiesare geographically concentrated, the effects of local weather can bematerial.  The vineyards owned by SVI arespread over a distance of approximately 70 miles, north to south, close toHighway 101 in Monterey County. Accordingly, adverse weather in the future could affect a substantialportion of the Company’s vineyards in any year and have a material adverseeffect on the Company’s business, financial condition and results ofoperations.

 

Vineyards are also susceptible to certain diseases,insects and pests, which can increase operating expenses, reduce yields or killvines.  In recent years phylloxera, alouse that feeds on the roots of grape vines, has infested many vineyards inthe wine grape producing regions of California, causing grape yields todecrease.  Phylloxera infestation hasbeen widespread in California, particularly in Napa, Sonoma, Mendocino andMonterey Counties, and most of the other wine grape-producing areas of thestate have been affected to some degree. As a result of this widespread problem, thousands of vineyard acresthroughout California have been replanted with phylloxera-resistant rootstockor, in some cases, taken out of production completely.  Substantially all of the Company’sapproximately 4,070 net vine acres of wine grapes are planted or interplantedwith rootstock that is designated as phylloxera-resistant.

 

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Another potentially devastating pest is theglassy-winged sharpshooter (“GWSS”). GWSS poses a significant threat to viticulture throughout California dueto its ability to transmit *Xylellafastidiosa*, the bacterium that causes Pierce’s Disease.  Pierce’s Disease, a deadly vine disorder, hasbeen present in California for more than a century, vectored by the blue-greensharpshooter.  It now presents a muchmore significant threat because the GWSS is a new and far stronger diseasecarrier than the blue-green sharpshooter. The GWSS became established in the Temecula region of southernCalifornia in 1999 and, as a result, Pierce’s Disease is so widespread that thefuture viability of the Temecula region to produce wine grapes is indoubt.  According to the CaliforniaDepartment of Food and Agriculture, the list of counties in California infestedwith the GWSS numbers fourteen, with localized infestations found in parts ofButte, Sacramento, Santa Clara, Fresno, Tulare, Kern, Santa Barbara, Ventura,Los Angeles, San Bernardino, Orange, Riverside, San Diego and Imperialcounties.  Thus far, no infestations haveoccurred in Monterey County and the Company has seen no evidence of the GWSS orPierce’s Disease in its own vineyards. The wine industry, along with scientists and certain governmentalagencies in California, are searching for ways to control and combat the pest,including a comprehensive system of inspections and monitoring, pesticidespraying and numerous research projects. Growers statewide pay an annual assessment of $2 per $1,000 of value ofgrapes to help fund these programs.

 

Other pests that may infest vineyards includeleafhoppers, thrips, nematodes, mites, insects, orange tortrix, twigbore,microflora and various grapevine diseases. Pesticides and the selection of resistant rootstocks reduce losses fromthese pests, but do not eliminate the risk of such loss.  Gophers, rabbits, deer, wild hogs and birdscan also pose a problem for vineyards, and wine grape vines are alsosusceptible to certain virus infections, which may cause reduction ofyields.  None of these currently poses amajor threat to the Company’s vineyards, although they could do so in thefuture and, at that time, will have the potential to subject the vineyards tosevere damage.

 

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

 

Grape purchase contracts with Diageo covered 40% ofthe Company’s producing acreage in 2005 and accounted for approximately 56% and53% of the Company’s 2005 and 2004 total revenues, respectively.  The terms of the grape purchase contractswith Diageo extend to between 2006 and 2014. In December 2003, Diageo delivered a notice to the Companyterminating grape purchase contracts covering 1,300 acres, or 35% of theCompany’s producing acreage, such termination to become effective after theharvest of 2006.  Although the Company ismarketing these uncontracted acres, there can be no assurances that theseefforts will be successful and it is likely that any purchase agreementscovering these vineyards will have less favorable terms.

 

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

 

An oversupply situation for certain varieties has existed in the winegrape industry for the past few years. Plantings of new vineyards, yield enhancements through technological advances,and denser plantings of vines have contributed to supply pressure.  In addition, economic uncertainty andincreased foreign competition have exacerbated market conditions.  These factors have had a significant impacton grape and bulk wine prices for certain varieties.  Industry experts believe that supply anddemand are coming into balance for most varieties, however, especially afterthe record crop levels of the 2005 harvest, the Company may continue to experiencepricing pressures and this could have a material adverse affect on its businessand future results.

 

*** Uncertainty of Revenue Growth***

 

In 2005, approximately 84% of the Company’s net vineacres were at or near full production. It is anticipated that a certain portion of the Company’s vineyards willalways be out of production or below maximum production due to initialdevelopment, replanting, regrafting and various other factors.  While some productivity increases may beexpected from further development of vineyard acreage not yet in fullproduction or from enhancements of fully productive vineyards, the growthpotential of the Company’s existing properties is limited and the Company’sability to increase revenue depends upon its ability to acquire, develop andoperate more vineyard properties or expand its business into other areas.  There can 

 

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be no assurance that suitableproperties will be available to the Company at prices that would make theCompany’s growth plans viable or that the development of Scheid Winery will besuccessful.  Revenues are alsosubstantially dependent on grape yields and prices, both of which are subjectto variation as discussed elsewhere in this section and can have an effecton revenue growth unrelated to the number of acres in full production.

 

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

 

The Company incurs annual farming costs currentlyaveraging approximately $2,500 to $3,400 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 requiressubstantial amounts of working capital. Historically, the Company has relied heavily on short-term credit tofinance its working capital requirements. There can be no assurance that the Company will be able to obtainfinancing when required or that such financing will be available on reasonableterms, and lack of access to adequate lines of credit or other capital sourcescould impair the Company’s ability to grow and adversely affect the Company’sbusiness, financial condition and results of operations.

 

Substantial capital expenditures are required todevelop and acquire new vineyards and improve existing vineyards.  In addition, the Company investedapproximately $23 million to complete the first phase of the Scheid VineyardsWinery.  See “Recent Developments”.  The Company has made and may continue to makesuch expenditures to finance its expansion, and has incurred and may continueto incur indebtedness.  As a consequence,the Company 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 Business Expansion andAcquisition Strategy; Long-Term Strategies***

 

As part of its long-term strategy, SVI continuallyevaluates opportunities available in the wine industry, such as acquisitions ofdeveloped vineyard properties, increasing acreage under management, and itsrecent construction of a winery facility. See “Recent Developments”.  Therecan be no assurance that the Company will be able to expand its business bylocating suitable properties to buy or lease at viable prices, or if it doeslocate such properties, that it will be able to secure adequate financing.  Any expansion of the Scheid Vineyards Winery,and any properties that may be acquired by the Company in the future, willrequire significant capital investment and, in the case of vineyard properties,may require several years of development before becoming productive.

 

*** Competition; Industry Fragmentation***

 

The wine grape industry is extremelycompetitive.  Many of the Company’scompetitors have substantially greater financial, production, personnel andother resources than the Company.  TheCompany competes with many other producers of premium wine grapes inCalifornia, including a few thousand small independent (*i.e*., not winery controlled) wine grapeproducers who sell their production to wineries.  In addition, some wineries sell excessproduction 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.

 

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*** Possible Termination of Vineyard Management Agreements***

 

Substantially all of the Company’s vineyardmanagement agreements may be terminated in the event that Alfred G. Scheid,Kurt J. Gollnick and certain members of their families cease to maintainspecified shareholdings in the Company. Sales to the public by members of the Scheid or Gollnick families mayresult in a change of control of the Company, which could result in terminationof these agreements.

 

*** Labor Regulations and Union Contract***

 

California has many laws and regulations concerninglabor in general and farm labor in particular. The Agricultural Labor Relations Board has promulgated many regulationsconcerning farm 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 laborand has represented SVI’s farm workers since 1993.  The Company’s current five-year contract withthe UFW will expire at the end of 2006. Although the Company historically has had satisfactory labor relations,it has been picketed from time to time during the initial organization of itsemployees and during contract negotiations. No assurance can be given that the Company’s satisfactory laborrelations 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 consumertastes have a substantial impact on the wine industry and the Company’sbusiness.  To the extent that winepurchases are negatively impacted by economic and other factors, or wineconsumers reduce consumption of wine in favor of other beverages, demand forwine grapes could decrease.

 

*** Government Regulation; Taxes***

 

SVI is subject to a broad range of federal and stateregulatory requirements regarding its operations and practices.  The Company’s current operations and futureexpansion are subject to regulations governing the storage and use offertilizers, fungicides, herbicides, pesticides, fuels, solvents and otherchemicals.  These regulations are subjectto change and conceivably could have a significant impact on operatingpractices, chemical usage, and other aspects of the Company’s business.

 

Wine production and sales are subject to extensiveregulation by the Federal Trade and Tax Bureau, the California Department ofAlcohol Beverage Control and other state and federal governmental authoritiesthat regulate licensing, trade and pricing practices, labeling, advertising andother activities.  In recent years,federal and state authorities have required warning labels on beveragescontaining alcohol.  Restrictions imposedby government authorities on the sale of wine could increase the retail priceof wine, 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 dependsto a significant extent on the active involvement of certain members of theScheid family and the retention of its senior non-family executives.  There can be no assurance that the keypersons will remain in their management positions with the Company, and theloss of the services of any of the key persons could have a material adverse 

 

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effect on the Company’sbusiness, financial condition and results of operations.

 

*** Environmental Risks***

 

Ownership of real property creates a potential forenvironmental liability on the part of the Company.  If hazardous substances are discovered on oremanating from any of the Company’s vineyards and the release of hazardoussubstances (including fuels and chemicals kept by the Company on its propertiesfor use in its business) presents a threat of harm to public health or theenvironment, the Company may be held strictly liable for the cost ofremediation of these hazardous substances. See “Environmental Issues.”

 

*** Water***

 

The Company is dependent upon wells located on ornear its vineyards for water to irrigate the vineyards.  These wells are supplied by aquifers fed bythe Salinas River and reservoirs operated by Monterey County.  Although historically the quality of waterfrom these wells has been good and the wells have consistently supplied aplentiful and reliable source of water, even during the drought years of thelate 1980’s, and the Company believes its sources of water will be availablefor the foreseeable future, it is possible that the Company’s water suppliescould be impaired in the future due to drought, contamination or othercircumstances.  An impairment in theCompany’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 recent past,California has experienced statewide energy shortages, blackouts and increasesin electricity costs.  The Companycurrently spends approximately 4% of its direct farming costs per acre onelectricity 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 prolongedelectricity blackouts and could, if necessary, use other methods of applicationof water and fertilizers.

 

***  Legislative Actions and Potential NewAccounting Pronouncements.***

 

In order to comply with the Sarbanes-OxleyAct of 2002, as well as changes to listing standards by Nasdaq and accountingchanges by the Securities and Exchange Commission, the Company will be requiredto increase its internal controls, hire additional personnel, and engageoutside legal, accounting and advisory services, all of which could cause theCompany’s general and administrative costs to increase.  Proposed changes in the accounting rules,including legislative and other proposals to account for employee stock optionsas compensation expense, among others, could increase the expenses that theCompany reports under Generally Accepted Accounting Principles and couldadversely affect operating results.

 

**ITEM  2.****                ****DESCRIPTION OF PROPERTY**

 

*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 existing facilitieswill be adequate to meet the Company’s needs for the foreseeable future.  Should the Company need additional space,management believes it will be able to secure additional space at commerciallyreasonable rates.

 

*Winery.*  The Company owns a 40,000 square foot wineryfacility in Greenfield, California.  Thewinery facility was constructed and completed in 2005.

 

*Sales Office.*  The Company leases approximately 1,265 squarefeet of office space in Healdsburg, California under a two-year term, whichexpires August 31, 2006.

 

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*Vineyards*.  TheCompany currently owns approximately 1,800 acres of land and leasesapproximately 2,600 acres of land underlying its vineyards, all of which arelocated in Monterey County, California. The five leases to which the Company is a party were entered into in1973, 1979, 1996, 1997 and 1998, respectively, and each of the land leases hasan initial term of 24 to 30 years and options to extend for up to an additional10 to 20 years.  Substantially all of theCompany’s property, plant and equipment serves as collateral for long-termdebt.

 

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

 

In December 2005, Matrix Service, Inc. (“Matrix”),a large subcontractor of the Company’s general contractor for the building ofit new winery facility, filed an action (the “Complaint”) against the Companyin Monterey County Superior Court.  TheComplaint alleges causes of action for foreclosure of a mechanic’s lien in theamount of $3.2 million, reasonable value of services provided, unjustenrichment, and negligence.  The Companyhas denied the material allegations of the Complaint, alleged various defenses,and has filed a cross complaint against Matrix. Management of the Company believes that the Complaint is without meritand intends to vigorously defend its case. Although the Company is currently unable to predict the impact of thisComplaint, these proceedings could involve significant legal expenses, and anyadverse determination could have a material impact on the Company’s results ofoperations and cash flows.

 

**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 31,2005.

 

**PART II**

 

**ITEM  5.****                ****MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

 

**Market for Class A Common Stock**

 

The Company’s Class A Common Stock is currentlytraded on the Nasdaq SmallCap Market System under the symbol “SVIN”.  The following table sets forth, for thefiscal quarter indicated, the high and low closing price per share sales pricesfor the Class A Common Stock, as reported by Nasdaq:

 
| ** **     | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------|------------|----------|------------|---------|------------|
| **2004**       |       |     |       |    |       |
| First quarter  |       | $        | 6.35       |    | $          | 4.76 |   |
| Second quarter |       | $        | 5.34       |    | $          | 4.81 |   |
| Third quarter  |       | $        | 5.95       |    | $          | 4.91 |   |
| Fourth quarter |       | $        | 6.26       |    | $          | 5.13 |   |
| **2005**       |       |     |       |    |       |
| First quarter  |       | $        | 6.59       |    | $          | 6.00 |   |
| Second quarter |       | $        | 6.34       |    | $          | 5.20 |   |
| Third quarter  |       | $        | 6.63       |    | $          | 5.85 |   |
| Fourth quarter |       | $        | 7.20       |    | $          | 6.01 |   |

 

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##### **Holders**

##### ** **

On April 6, 2006, there were approximately 381holders of record of the Company’s Class A Common Stock and 15 holders ofrecord of the Company’s Class B Common Stock.

 

**Dividends**

 

For information concerning historical dividends andthe Company’s dividend policy, see “Item 6 - Management’s Discussion andAnalysis or Plan of Operation - Dividends and Distributions.”

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 

For information concerningsecurities authorized for issuance under equity compensation plans, see “Item10 – Executive Compensation – Equity Compensation Plan Information.”

 

**ProposedReverse Stock Split**

 

On January 30,2006, the Company announced that its Board of Directors and stockholders owninga majority of its voting stock had approved a 1-for-5 reverse stock split ofits Class A and Class B Common Stock. If the transaction is consummated, the Company expects to have fewerthan 300 stockholders of record, which would enable the Company to voluntarilyterminate the registration of its Class A Common Stock under theSecurities Exchange Act of 1934, as amended, and become a non-reportingcompany.  As a result, the Company wouldno longer be required to file periodic reports and other information with theSecurities and Exchange Commission (the “SEC”).

 

The Companyhas filed documents with the SEC describing the Reverse Stock Split in detail,and following any review by the SEC, the Company plans to disseminate a DefinitiveInformation Statement to its stockholders and amend its Certificate ofIncorporation (the “Amendment”) with the Delaware Secretary of State.  The Company is unable to determine the exacteffective date of the Reverse Stock Split at this time.  The Company’s Board of Directors, in its solediscretion, reserves the right to abandon the Reverse Stock Split prior to itseffective date, if it determines that abandoning the Reverse Stock Split is inthe best interests of the Company.  Inconnection with the deregistration process, the Company will request thatNasdaq delist its Class A Common Stock from The Nasdaq SmallCap Market.

 

On theeffective date of the Amendment, stockholders holding fewer than five (5) sharesimmediately prior to the effectiveness of the Amendment, and stockholdersholding a number of shares not evenly divisible by five (5), of either Class Aor Class B Common Stock, will receive a cash payment in the amount of$9.25 per pre-split share, in lieu of a fraction of a share of new Class ACommon Stock and/or new Class B Common Stock that would otherwise beissued following the Reverse Stock Split.

 

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

 

**Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

 

*The following discussion should beread in conjunction with the Company’s Financial Statements, including therelated notes thereto, and other financial information included herein.  The information in this Report includesforward-looking statements.  In addition,past operating results are not necessarily indicative of the results to beexpected for future periods.  See “NoteConcerning Forward-Looking Statements” and “Item 1 — Business — CautionaryInformation 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 5,700 acres of wine grape vineyards 

 

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on the Central Coast ofCalifornia.  Of this total, approximately4,300 acres are operated for the Company’s own account and 1,400 acres areoperated under management contracts for others. All of the properties the Company currently operates are located inMonterey and San Benito counties, both of which are generally recognized asexcellent regions for growing high quality wine grape varieties.  The Company also recently completed theconstruction of an approximately 11,000-ton capacity winery facility located inGreenfield, California.

 

The Company currentlyproduces 17 varieties of premium wine grapes, primarily Chardonnay, CabernetSauvignon, Merlot, Pinot Noir, Sauvignon Blanc and Syrah.  The majority of the Company’s wine grapes aresold under short and long-term grape purchase agreements to a variety of wineryclients.  In 2005, the Company soldapproximately 53% of its wine grapes under such purchase agreements to over 25different wineries.  The Company alsoconverts a substantial portion of its grapes, approximately 36% in 2005, topremium bulk wine which is sold pursuant to wine purchase agreements or on theopen bulk market.  The Company also sellsa portion of its grapes, approximately 11% in 2005, pursuant to an acreagecontract whereby the winery client purchases the entire grape production fromspecified acreage for a set fee per acre.

 

The Company’s largest winery client in 2005 wasDiageo Chateau & Estate Wines Company, a subsidiary of Diageo plc (“Diageo”),a global premium drinks business, and one of the ten largest U.S. wineries interms of 2005 case shipments.  TheCompany has had grape purchase contracts with Diageo and its predecessors since1972.  Contracts with Diageo covered 43%of the Company’s producing acreage and accounted for approximately 56% and 53%of the Company’s 2005 and 2004 total revenues, respectively.  The terms of the purchase contracts withDiageo extend to between 2006 and 2014.  InDecember 2003, Diageo delivered a notice to the Company terminating grapepurchase contracts covering 1,300 acres, or 35% of the Company’s producingacreage, such termination 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 purchase agreements covering new vineyardswill have less favorable terms.

 

In September 2005, theCompany completed construction of a new winery facility located at the Company’svineyard headquarters near Greenfield, California.  The facility has the capacity to processapproximately 11,000 tons of grapes into wine during any one harvest, as wellas to process additional grapes into juice. The facility is being used to produce wine for the Company’s own bulkwine production, as well as process and store bulk wine for third partycustomers.

 

SVI also provides vineyardmanagement services pursuant to management contracts with two winery clients,Diageo and Pacific Wine Partners, LLC (a joint venture between ConstellationBrands, Inc. and BRL Hardy, Inc.). Under this arrangement, the Company provides its farming services for aset fee per acre.  In 2005, vineyardmanagement services related to approximately 1,400 acres accounted forapproximately 3% of the Company’s total revenues.

 

As of April 7,2006, approximately 92% of the Company’s producing acreage was covered bypurchase contracts and 8% of producing acreage was uncontracted.  For the contracted acres, approximately 40%are covered by grape purchase contracts that use data from the Final GrapeCrush Report (the “Crush Report”), published by the California Department ofFood and Agriculture (the “CDFA”) on or about March 10 of each year, tocalculate prices.  Based on the 2005 Crush Report published March 10,2006, these prices show slight decreases for most varieties.  The largest of the Company’s acreage isplanted in Chardonnay, which shows a price decrease of approximately 2%,followed by Cabernet Sauvignon with a price decrease of 2%, and Merlot with aprice decrease of 3%.  The past few yearshave seen the industry trying to cope with an excess supply of certainvarieties of grapes and wine.  Prior tothe 2005 harvest, there were signs that the market for most varieties wascoming more into balance.  With theimpact of the record crop, the over supply problem for certain varieties hasbeen exacerbated and the Company anticipates that the prices it will receivefor grapes which are currently not contracted, representing about 20% ofanticipated production, could be less than the prices the Company will receivefor contracted grapes for some varietals.

 

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At the present time, the Company has contracts on its net vine acresthat have initial expiration dates as follows:

 

| **Initial Year  of Expiration** | ** ** | **Net Vine  Acres** | ** ** | **Percent** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------|------------|
| 2006                            |       |                | 1,535      |        | 37.7       |   |
| 2007                            |       |                | 455        |        | 11.2       |   |
| 2008                            |       |                | 760        |        | 18.7       |   |
| 2009                            |       |                | 60         |        | 1.5        |   |
| 2010                            |       |                | 85         |        | 2.1        |   |
| 2011                            |       |                | 110        |        | 2.7        |   |
| 2012                            |       |                | 25         |        | 0.6        |   |
| 2013                            |       |                | 50         |        | 1.2        |   |
| 2014                            |       |                | 325        |        | 8.0        |   |
| Uncontracted                    |       |                | 300        |        | 7.4        |   |
| Non-Producing                   |       |                | 365        |        | 8.9        |   |
| Total                           |       |                | 4,070      |        | 100.0      | % |

 

The wine grape business is extremely seasonal. Similarto most nondiversified agricultural crop producers, the Company recognizes alarge portion of its crop sales revenues at the time of its annual harvest inSeptember and October. Because success of the Company’s operations is dependentupon the results of the Company’s annual harvest, the first two quarters havehistorically resulted in a loss and quarterly results are not consideredindicative of those to be expected for a full year. Profits, if any, arerecognized in the last two fiscal quarters of the year when revenues from grapesales are recognized. In addition, the timing of the annual harvest varies eachyear based primarily on seasonal growing conditions, resulting in timingdifferences in the portion of grape revenues recognized in the third and fourthquarters of any one year. This is a significant factor in comparing quarterlyoperating results. In addition, the Company derives a portion of its revenues(20% in 2005) from sales of bulk wine. These sales have in the past, and may inthe future, occur in years subsequent to the harvest year, which may impactquarterly results.

 

**Critical Accounting Policies Used in FinancialStatements**

 

The Company prepares its consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Management’s estimates andjudgments are based on historical experience and various other factors that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

The principal accounting issues which managementbelieves are the most critical to aid in fully understanding and evaluating theCompany’s reported financial results are the carrying value, capitalizationpolicy and depreciable life of its long-lived assets, primarily its vineyardsand its revenue recognition policy.

 

Costs capitalized as vineyards assets include thecost of acquiring the underlying land, vineyard improvements (which include,among other costs, the costs of the vines, the trellis and irrigation systemsand pre-productive labor and materials), and interest paid during thedevelopment period. The carrying value and depreciable life associated withthese vineyard assets is periodically reviewed by management to ascertain thevalidity of amounts recorded in the financial 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.

 

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The underlying value ofvineyard properties is primarily determined by (i) the geographic location ofthe vineyard, (ii) the varieties planted, (iii) the design, condition and ageof the vineyard, (iv) the general state of the wine grape industry, and (v)contracts for the sale of the grape production. A significant change in thecondition of the Company’s vineyards, the general state of the wine industry(particularly the demand for the coastal grapes the Company produces), or theCompany’s ability to contract its grape production to wineries, could have amaterial adverse affect on the carrying values and lives of its vineyard assetsas well as the Company’s operating results for the period or periods when thechange occurs.  During the years endedDecember 31, 2004, the Company wrote down the value of under-performingportions of its vineyard improvements in the amounts of $78,000. There were nosuch write-downs in 2005.

 

The Company generally recognizes revenue from grapesales upon delivery to the winery. The Company does not have any allowance forreturns because grapes are tested and accepted upon delivery. The Companygenerally recognizes revenue from the sale of bulk wine on the speculativemarket at the time the wine is shipped to the customer. Revenue from wine soldunder wine purchase contracts is recognized when title has transferred to thecustomer, the price is determinable, and collectibility is reasonably assured. Titletransfers to the customer upon receipt of a required amount of the contractprice and acceptance of the wine. Winery processing and other revenues arerecognized as the service is performed. Vineyard management and other servicesare recognized as provided.

 

**Results of Operations – Years Ended December 31, 2005and 2004**

 

The following table sets forth certain statement ofoperations data for the years ended December 31, 2005 and 2004:

 
| ** **                                    | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **2005**                     | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(in thousands)**           | ** ** |
| Revenues:                                     |       |                         |       |   |   |
| Grape sales                                   |       | $                            | 22,105     |   | $ | 16,429 |   |
| Bulk wine sales                               |       | 6,210                        |       | 5,658 |   |
| Winery processing and other revenues          |       | 1,446                        |       | — |   |
| Vineyard management, services and other  fees |       | 1,018                        |       | 1,118 |   |
| Tasting room sales                            |       | 430                          |       | 419 |   |
| Total revenues                                |       | 31,209                       |       | 23,624 |   |
| Cost of  sales                                |       | 17,627                       |       | 15,372 |   |
| Gross profit                                  |       | 13,582                       |       | 8,252 |   |
| General and administrative expenses           |       | 5,551                        |       | 4,809 |   |
| Selling expenses                              |       | 543                          |       | 537 |   |
| Write-down of vineyard improvements           |       | —                       |       | 78 |   |
| Interest expense                              |       | 1,103                        |       | 660 |   |
| Investment and interest income                |       | (36                          | )          | (61 | ) |
| Gain on sale of land and equipment            |       | (943                         | )          | — |   |
| Income  before provision for income taxes     |       | 7,364                        |       | 2,229 |   |
| Provision  for income taxes                   |       | 2,957                        |       | 894 |   |
| Net income                                    |       | $                            | 4,407      |   | $ | 1,335 |   |

 

*Revenues.*SVIderives its revenues from five primary sources: (i) sales of wine grapes; (ii) sales of bulk wine; (iii) wineryservices, including custom crush and juicing services, and storage feesrevenues; (iv) vineyard management and services revenues, consisting primarilyof management and harvest fees and equipment rentals for services provided toowners of vineyards; and (v) sales of wine and wine-related merchandise soldprimarily through the Company’s tasting room.

 

The revenues generated by the Company’s vineyards are affected by variousfactors, including the timing of the harvest, the yield per acre, and the priceper ton received. Revenues from grape sales are

 

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generally recognized at the time of delivery to the winery. The Companyalso produces bulk wine under contract and for the speculative market. These sales have occurred in the past, andmay in the future occur, in years subsequent to the harvest year, which mayimpact quarterly and annual results.

 

Revenues from grape sales increased by 35% to $22,105,000 for the yearended December 31, 2005 from $16,429,000 in 2004, an increase of $5,676,000. Theincrease was due primarily to the large size of the 2005 crop. Overall, tons harvested from the Company’svineyards increased by 61%, with approximately 31,700 tons harvested in 2005,compared to 19,700 tons in 2004. The total tons sold as grapes increased 53%,to 20,300 in 2005 from 13,300 in 2004. This increase was partially offset by a12% decrease in the average price per ton received on grape sales forthe year ended December 31, 2005 as compared to 2004.

 

The Company crushed approximately 11,400 tons of grapes into wineduring the 2005 harvest, as compared to approximately 6,400 tons during the2004 harvest, an increase of 78%. Bulk wine sales increased by 10% to$6,210,000 for the year ended December 31, 2005, from $5,658,000 in the 2004period, an increase of $552,000. Revenues from the sale of bulk wine aretypically recognized throughout the twelve months following the harvesting ofthe grapes. The Company sold approximately 886,000 gallons of bulk wine for theyear ended December 31, 2005, as compared to 877,000 gallons in the 2004period, an increase of 1%. The Company processed grapes into bulk wine at itsown winery facility and at several third-party winery facilities.

 

The Company’s winery facility opened for business on September 2, 2005.Revenues for the year ended December 31, 2005 totaled $1,446,000, and consistedprimarily of revenues from the custom processing of grapes for clients. TheCompany also processed its own grapes into wine for its bulk wine program. Thewinery processed a total of 10,500 tons of grapes into wine, and converted4,400 tons of grapes into juice during the harvest of 2005. The total number oftons processed in 2005 was at or near capacity for the facility as currentlyoperated.

 

Revenue from vineyard management, servicesand other fees decreased by 9% to $1,018,000 for the year ended December 31,2005, from $1,118,000 in the 2004 period, a decrease of $100,000. The decreasewas due primarily to decreased financing fees charged to a management customerduring 2005.

 

*Gross Profit*. Gross profit for the year ended December31, 2005 was $13,582,000 as compared to $8,252,000 for the year ended December31, 2004, an increase of $5,330,000, or 65%.

 

Gross margin on grape sales increased to 51% in2005, as compared to 36% in 2004. The increase in margin was primarily due tothe 61% increase in the tons harvested in 2005 on a relatively unchanged numberof producing acres, which was somewhat offset by a 12% decrease in the averageprice per ton that the Company received for its grape production and an 8%increase in farming costs. In addition, see “Description of Business — TheCompany’s Grape Production Operations — Grape Sales — Pricing.”   Farming costs increased primarily due to anincrease in harvest costs due to the large crop size, as well as increases ininsurance and other employee-related costs, and fuel costs.

 

Gross margin on the sale of bulk wine increased to28% in 2005, as compared to 22% in 2004. This increase was primarilyattributable to an increase in the average sales price per gallon of 9% in 2005as compared to 2004.

 

Gross margin on winery processing was 21% for theyear ended December 31, 2005. There is no comparative number for 2004, as thewinery began operations in September of 2005. There can be no assurances thatfuture margins for the winery will be similar to that of 2005.

 

Costs associated with the provision of managementservices are reimbursed by the Company’s clients, therefore, no cost of salesis deducted in determining gross profit on these services.

 

*General and AdministrativeExpenses*. General andadministrative expenses increased to $5,551,000 for the year ended December 31, 2005, from $4,809,000 in the2004 period, an increase of

 

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$742,000,or 15%. The increase was due primarily to the new winery facility, increases ininsurance and benefits costs for executive and administrative personnel, aswell as an increase in the number of administrative personnel.

 

*Selling Expenses.*Selling expenses increased to $543,000 forthe year ended December 31, 2005 from $537,000 in the 2004 period, an increaseof $6,000, or 1%.

 

*Write-down ofVineyard Improvements*. During the year ended December31, 2004, the Company wrote down the value of under-performing portions of itsvineyard improvements in the amount of $78,000, representing approximately 12acres. There were no such write-downs in 2005.

 

*Interest Expense*. Interest expense was $1,103,000 for theyear ended December 31, 2005, as compared to $660,000 in the 2004 period, anincrease of $443,000, and is comprised of the following:

 

| ** **                                  | ** ** | **2005**           | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|--------------------|------------|----------|------------|
| ** **                                  | ** ** | **(in thousands)** | ** ** |
| Interest  expense                           |       | $                  | 1,539      |     | $          | 787 |   |
| Write-off of  loan costs                    |       | 102                |       | —   |       |
| Less  capitalized interest                  |       | (538               | )          | (127     | )          |
| Interest expense, net of amount capitalized |       | $                  | 1,103      |     | $          | 660 |   |

 

Interest expense increased primarily as a result ofincreased borrowings to fund the construction of the Company’s winery facility,as well as higher average interest rates in 2005. The weighted average interestrate in 2005 was 5.3% as compared to 3.7% during 2004. Capitalized interestincreased due primarily to the construction of the Company’s winery facility in2005.

 

*Investment and Interest Income.*Interest income was $36,000 for the yearended December 31, 2005, as compared to $61,000 in the 2004 period, a decreaseof $25,000. The decrease was due to the investment of excess cash in marketablesecurities for the first nine months of 2004. There were no such investments in2005.

 

*Gain on Sales of Land and Equipment.*InJune 2005, the Company sold approximately 10 acres of vineyard land andrecognized a gain of $833,000. The land had recently been incorporated into thecity of Greenfield, California, and was sold to a developer of low-incomehousing. In addition, the Company sold outdated farm equipment during the 2005period and recognized a gain in the amount of $110,000.

 

**Liquidity and Capital Resources**

 

SVI’s primary sources ofcash have historically been funds provided by internally generated cash flowand bank borrowings. The Company has made substantial capital expenditures toredevelop its existing vineyard properties and acquire and develop new acreage,and the Company intends to continue these types of expenditures. In additionthe construction of the Company’s winery facility required significantinvestment of capital. Cash generated from operations has not been sufficientto satisfy all of the Company’s working capital and capital expenditure needs. Asa consequence, the Company has depended upon, and continues to rely upon, bothshort and long-term bank borrowings. Working capital at December 31, 2005 was$14,212,000, as compared to $7,698,000 at December 31, 2004, an increase of$6,514,000. The increase in working capital was primarily due to the increasein sales in 2005 due to the large crop size in 2005.

 

Underthe Company’s historical operating cycle, internally generated cash flow andbank borrowings are required to finance the costs of growing and harvesting thewine grape crop. The Company normally delivers substantially all of its crop inSeptember and October, and receives the majority of its cash from grape salesin November and December. In addition, the majority of the Company’s grape cropthat is made into bulk wine is not sold until the next fiscal year. In order tobridge the gap between incurrence of expenditures and receipt of cash fromgrape and bulk wine sales, large cash outlays are required for approximatelyeleven months each year. Historically, SVI has obtained these

 

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fundspursuant to credit lines with banks.

 

In June 2005, the Company refinanced its crop line of credit andlong-term credit facilities that the Company had in place with Bank of the Westwith a new lender, Rabobank N.A. The new credit agreement provides for up to$15,000,000 in revolving commitments intended to finance the Company’santicipated working capital needs. This revolving commitment matures July 15,2008, and is secured by crops and other assets of the Company. At December 31,2005, there were no amounts outstanding under this portion of the facility. Intereston borrowings is due monthly at the bank’s reference rate or the LIBOR rateplus 1.75%.

 

In addition, the new facility provides for up to $37,000,000 in termcommitments. This portion of the facility is secured by trust deeds on vineyardproperties as well as leasehold deeds of trust. The term commitment matures onJuly 15, 2015, and requires annual principal payments of $2,000,000 beginningDecember 15, 2007. At December 31, 2005, the outstanding amount due under thisportion of the facility was $35,804,000. Interest on borrowings is due monthlyat the bank’s reference rate or the LIBOR rate plus 1.75%. At December 31,2005, the weighted average interest rate on this portion of the facility was5.68%.

 

The Company also had a bank line of credit with anoriginal maximum loan commitment of $7,500,000, the proceeds of which were usedto develop a vineyard owned by a major client and managed under a long-termcontract by the Company. The note was secured by a letter of credit provided bythe client and by the Company’s management contract. The management contractprovided for the Company’s client to make payments of the annual principalinstallments under this line as and when they became due. This note and relatedreceivable was repaid in January 2005.

 

TheCompany’s principal credit facilities bind the Company to a number ofaffirmative and negative covenants, including requirements to maintainfinancial ratios within certain parameters and to satisfy certain otherfinancial tests. The credit facilities also prohibit the payment of cash dividends.At December 31, 2005, the Company was in compliance with these covenants.

 

Management expects that capital requirements willresult in the expenditure of the Company’s available cash, and additionalborrowing under credit lines and/or new arrangements for term debt will benecessary. The Company’s planned vineyard development and improvements areexpected to require approximately $1,500,000 in capital investment over thenext three years. In addition, the Company expects to invest approximately $1,500,000in vineyard equipment purchases. The Company expects to invest approximately$2,800,000 in winery improvements during 2006, and anticipates that anyexpansion of its winery to full build-out potential could require anexpenditure of an additional $30,000,000 over the next two to five years.

 

Although no assurances can be given, managementbelieves that the Company’s anticipated working capital levels and borrowingcapabilities will be adequate to meet the Company’s currently anticipatedliquidity needs through the year ending December 31, 2006. At April 7, 2006,the Company had approximately $12,000,000 in borrowing availability under itsrevolving and term commitments from its bank.

 

Cash provided by operating activities was $314,000for the year ended December 31, 2005, compared to $2,555,000 for the sameperiod in 2004, a decrease of $2,241,000. The decrease was primarily due to alater than normal harvest in 2005, which delayed the payments on some grapesale accounts receivables into January of 2006. In addition, a larger portionof the Company’s crop was converted into bulk wine in 2005, resulting in largerinventory balances at December 31, 2005 than at December 31, 2004. Bulk wine istypically sold in the year after it is produced.

 

For the year ended December31, 2005, cash used in investing activities totaled $24,065,000, compared tocash provided by investing activities of $9,974,000 for the same period in2004, an increase in net cash used of $34,039,000. This increase in cash usedwas primarily due to the expenditure of funds to construct the Company’s wineryfacility and related equipment at a cost of approximately $22,625,000.

 

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In addition, in 2004, the Company received cashproceeds from the sale of investments in short-term marketable securities inthe amount of $10,048,000. Expenditures for vineyard improvements and equipmenttotaled $2,965,000 in 2005 and $3,339,000 in 2004.

 

Cashprovided by financing activities was $15,066,000 for the year ended December31, 2005, compared to cash used of $3,659,000 for the same period in 2004, anincrease in cash provided of $18,725,000. The increase was due to the borrowingof funds on the Company’s long-term credit facility to fund the construction ofthe Company’s new winery. In 2004, the Company repurchased Class A Common Stockin the amount of $2,038,000.

 

**Disclosures Regarding Contractual Obligations andCommitments**

 

The Company is contractually committed to payment onlong-term debt obligations and long-term leases as follows (in thousands):

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| Long-term  debt                     |       | $                          | 35,804     |   | $ | — |   | $ | 6,000 |   | $ | 4,000 |   | $ | 25,804 |   |
| Operating  lease obligations        |       | 11,915                     |       | 1,052 |   | 2,720 |   | 1,307 |   | 6,836 |   |
| Total  contractual cash obligations |       | $                          | 47,719     |   | $ | 1,052 |   | $ | 8,720 |   | $ | 5,307 |   | $ | 32,640 |   |

 

**Dividends and Distributions**

 

The Company has not paid any cash dividends to date.The Company intends to retain its future earnings, if any, and does notanticipate paying cash dividends on either class of its Common Stock in theforeseeable future. In addition, the Company’s principal bank credit facilitiesprohibit the payment of cash dividends without the consent of the lender.

 

**Off-BalanceSheet Arrangements**

 

The Company does not haveany off-balance sheet arrangements as defined in Item 303(c) of RegulationsS-B.

 

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

 

The audited financial statements of the Company areset forth in this Report beginning on page 27.

 

26

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of  Independent Registered Public Accounting Firm                       |   |   |
|--------------------------------------------------------------------------------|--------|--------|
|                                                                           |   |   |
| 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                                    |   |   |

 

27

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

Tothe Board of Directors and Stockholders

ScheidVineyards Inc.

 

We have audited the accompanying consolidatedbalance sheets of Scheid Vineyards Inc., and Subsidiary as of December 31, 2005and 2004, and the related consolidated statements of operations, stockholders’equity and comprehensive income, and cash flows for the years then ended. Thesefinancial statements 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 the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting. Our audit included consideration of internal control over financialreporting as a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly,we express no such opinion. An audit includes examining, on a testbasis, 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 our audits provide a reasonablebasis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Scheid VineyardsInc., and Subsidiary as of December 31, 2005 and 2004, and the results ofits operations and cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 
|                   | /s/ Moss Adams LLP |   |
|------------------------|--------------------|--------|
|                   |               |
| Santa Rosa, California |               |
| April 7, 2006          |               |

 

28

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                     | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                                                                                     | ** ** | **Notes**  | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **ASSETS**                                                                                                                                     |       |       |       |             |       |   |   |
| **CURRENT  ASSETS:**                                                                                                                           |       |       |       |             |       |   |   |
| Cash and cash equivalents                                                                                                                      |       |       |       | $                | 1,197      |   | $ | 9,882 |   |
| Accounts receivable, trade                                                                                                                     |       |       |       | 9,802            |       | 2,096 |   |
| Accounts receivable, other                                                                                                                     |       |       |       | 471              |       | 41 |   |
| Inventories                                                                                                                                    |       | 3          |       | 6,992            |       | 3,746 |   |
| Supplies, prepaid expenses and other  current assets                                                                                           |       |       |       | 949              |       | 705 |   |
| Current portion of long-term receivable                                                                                                        |       | 5          |       | —           |       | 525 |   |
| Total current assets                                                                                                                           |       |       |       | 19,411           |       | 16,995 |   |
| **PROPERTY,  PLANT AND EQUIPMENT, net**                                                                                                        |       | 4,7        |       | 69,964           |       | 48,368 |   |
| **OTHER ASSETS, net**** **                                                                                                                |       |       |       | 550              |       | 117 |   |
|                                                                                                                                           |       |       |       | $                | 89,925     |   | $ | 65,480 |   |
|                                                                                                                                           |       |       |       |             |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                  |       |       |       |             |       |   |   |
| **CURRENT  LIABILITIES:**                                                                                                                      |       |       |       |             |       |   |   |
| Current portion of long-term debt                                                                                                              |       | 7          |       | $                | —     |   | $ | 7,832 |   |
| Accounts payable                                                                                                                               |       |       |       | 2,227            |       | 751 |   |
| Accrued liabilities                                                                                                                            |       | 9          |       | 729              |       | 636 |   |
| Deferred revenues                                                                                                                              |       |       |       | 233              |       | — |   |
| Income taxes payable                                                                                                                           |       | 8          |       | 1,612            |       | — |   |
| Deferred income taxes                                                                                                                          |       | 8          |       | 398              |       | 78 |   |
| Total current liabilities                                                                                                                      |       |       |       | 5,199            |       | 9,297 |   |
| **LONG-TERM  DEBT, net of current portion**                                                                                                    |       | 7          |       | 35,804           |       | 12,600 |   |
| **DEFERRED  INCOME TAXES**                                                                                                                     |       | 8          |       | 6,905            |       | 5,981 |   |
| Total liabilities                                                                                                                              |       |       |       | 47,908           |       | 27,878 |   |
|                                                                                                                                           |       |       |       |             |       |   |   |
| **COMMITMENTS  AND CONTINGENCIES**                                                                                                             |       | 9,13       |       |             |       |   |   |
| ** **                                                                                                                                     |       |       |       |             |       |   |   |
| **STOCKHOLDERS’  EQUITY:**                                                                                                                |       | 6,10,11    |       |             |       |   |   |
| Preferred stock, $.001 par value; 2,000,000  shares authorized; no shares issued and outstanding                                               |       |       |       | —           |       | — |   |
| Common stock,                                                                                                                                  |       |       |       |             |       |   |   |
| Class A, $.001 par value; 20,000,000 shares  authorized; 2,046,252 and 2,016,530 shares outstanding in 2005 and 2004,  respectively            |       |       |       |             |       |   |   |
| Class B, $.001 par value; 10,000,000 shares  authorized; 3,062,215 and 3,088,715 shares issued and outstanding in 2005 and  2004, respectively |       |       |       | 7                |       | 7 |   |
| Additional paid-in capital                                                                                                                     |       |       |       | 21,892           |       | 21,871 |   |
| Retained earnings                                                                                                                              |       |       |       | 27,668           |       | 23,261 |   |
| Less: treasury stock; 1,544,149 and  1,542,058 shares of Class A Common Stock at cost in 2005 and 2004,  respectively                          |       |       |       | (7,550           | )          | (7,537 | ) |
| Total stockholders’ equity                                                                                                                |       |       |       | 42,017           |       | 37,602 |   |
|                                                                                                                                           |       |       |       | $                | 89,925     |   | $ | 65,480 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

29

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                    | ** ** | ** ** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Notes**  | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| **REVENUES:**                                 |       |       |       |                        |       |   |   |
| Grape sales                                   |       |       |       | $                           | 22,105     |   | $ | 16,429 |   |
| Bulk wine sales                               |       |       |       | 6,210                       |       | 5,658 |   |
| Winery processing and other revenues          |       |       |       | 1,446                       |       | — |   |
| Vineyard management, services and other  fees |       |       |       | 1,018                       |       | 1,118 |   |
| Tasting room revenues                         |       |       |       | 430                         |       | 419 |   |
| Total revenues                                |       |       |       | 31,209                      |       | 23,624 |   |
| **COST OF SALES**                             |       |       |       | 17,627                      |       | 15,372 |   |
| **GROSS PROFIT**                              |       |       |       | 13,582                      |       | 8,252 |   |
| General and administrative expenses           |       |       |       | 5,551                       |       | 4,809 |   |
| Selling expenses                              |       |       |       | 543                         |       | 537 |   |
| Write-down of vineyard improvements           |       |       |       | —                      |       | 78 |   |
| Interest expense                              |       |       |       | 1,103                       |       | 660 |   |
| Investment and interest income                |       |       |       | (36                         | )          | (61 | ) |
| Gain on sale of land and equipment            |       |       |       | (943                        | )          | — |   |
| **INCOME  BEFORE PROVISION FOR INCOME TAXES** |       |       |       | 7,364                       |       | 2,229 |   |
| **PROVISION  FOR INCOME TAXES**               |       | 8          |       | 2,957                       |       | 894 |   |
| **NET INCOME**                                |       |       |       | $                           | 4,407      |   | $ | 1,335 |   |
|                                          |       |       |       |                        |       |   |   |
| **NET  INCOME PER SHARE:**                    |       | 2          |       |                        |       |   |   |
| **BASIC**                                     |       |       |       | $                           | 0.86       |   | $ | 0.25 |   |
| **DILUTED**** **                         |       |       |       | $                           | 0.86       |   | $ | 0.25 |   |
|                                          |       |       |       |                        |       |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING:**     |       | 2          |       |                        |       |   |   |
| **BASIC**                                     |       |       |       | 5,105                       |       | 5,388 |   |
| **DILUTED**                                   |       |       |       | 5,146                       |       | 5,419 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

30

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**AND COMPREHENSIVE INCOME**

**(amounts inthousands, 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, 2004**           | ** ** | $                 | 7          |                             | $          | 21,868                 |       | $                                           | 21,926     |                | $          | 9                                     |       | $                         | (5,499     | ) | $ | 38,311 |   | — |   |
| Repurchase of common stock (Note 10)   |       | —            |       | —                           |       | —                 |       | —                                      |       | (2,038              | )          | (2,038                                | )          | —                    |       |
| Exercise of stock options              |       | —            |       | 3                                |       | —                 |       | —                                      |       | —              |       | 3                                     |       | —                    |       |
| Net income                             |       | —            |       | —                           |       | 1,335                  |       | —                                      |       | —              |       | 1,335                                 |       | $                         | 1,335      |   |
| Realized gain on marketable securities |       | —            |       | —                           |       | —                 |       | (9                                          | )          | —              |       | (9                                    | )          | (9                        | )          |
| **BALANCE, December 31, 2004**         | ** ** | 7                 |       | 21,871                           |       | 23,261                 |       | —                                      |       | (7,537              | )          | 37,602                                |       | $                         | 1,326      |   |
| Repurchase of common stock (Note 10)   |       | —            |       | —                           |       | —                 |       | —                                      |       | (13                 | )          | (13                                   | )          | —                    |       |
| Exercise of stock options              |       | —            |       | 21                               |       | —                 |       | —                                      |       | —              |       | 21                                    |       | —                    |       |
| Net income                             |       | —            |       | —                           |       | 4,407                  |       | —                                      |       | —              |       | 4,407                                 |       | $                         | 4,407      |   |
| **BALANCE, December 31, 2005**         | ** ** | $                 | 7          |                             | $          | 21,892                 |       | $                                           | 27,668     |                | —     |                                  | $          | (7,550                    | )          | $ | 42,017 |   | $ | 4,407 |   |
|                                        |            |                   |            |                                  |            |                        |            |                                             |            |                     |            |                                       |            |                           |            |  |  |  |  |  |  |  |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

31

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts inthousands)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                        |       |   |   |
| Net income                                                                         |       | $                           | 4,407      |   | $ | 1,335 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                        |       |   |   |
| Depreciation, amortization and abandonments                                        |       | 3,961                       |       | 3,058 |   |
| Write-off of loan costs                                                            |       | 102                         |       | — |   |
| Deferred income taxes                                                              |       | 1,244                       |       | 947 |   |
| Gain on sale of marketable securities                                              |       | —                      |       | (48 | ) |
| Gain on sale of land and equipment                                                 |       | (943                        | )          | 80 |   |
| Changes in operating assets and  liabilities:                                      |       |                        |       |   |   |
| Accounts receivable, trade                                                         |       | (7,706                      | )          | (899 | ) |
| Accounts receivable, other                                                         |       | (430                        | )          | (26 | ) |
| Inventories                                                                        |       | (3,246                      | )          | (1,024 | ) |
| Supplies, prepaid expenses and other  current assets                               |       | (244                        | )          | (232 | ) |
| Other assets                                                                       |       | (245                        | )          | — |   |
| Accounts payable and accrued liabilities                                           |       | 1,569                       |       | 286 |   |
| Deferred revenues                                                                  |       | 233                         |       | — |   |
| Income taxes payable                                                               |       | 1,612                       |       | (922 | ) |
| Net cash provided by operating activities                                          |       | 314                         |       | 2,555 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                        |       |   |   |
| Collection of long-term receivable                                                 |       | 525                         |       | 2,624 |   |
| Proceeds from sale of marketable securities                                        |       | —                      |       | 10,048 |   |
| Proceeds from sale of property, plant and  equipment                               |       | 1,000                       |       | — |   |
| Additions to property, plant and equipment                                         |       | (25,590                     | )          | (3,339 | ) |
| Proceeds for surrender of life insurance  policy                                   |       | —                      |       | 641 |   |
| Net cash (used in) provided by investing  activities                               |       | (24,065                     | )          | 9,974 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                        |       |   |   |
| Increase in long-term debt                                                         |       | 51,234                      |       | 3,250 |   |
| Repayment of long-term debt                                                        |       | (35,862                     | )          | (4,874 | ) |
| Payment for loan fees                                                              |       | (314                        | )          | — |   |
| Proceeds from exercise of stock options                                            |       | 21                          |       | 3 |   |
| Repurchase of common stock                                                         |       | (13                         | )          | (2,038 | ) |
| Net cash provided by (used in) financing  activities                               |       | 15,066                      |       | (3,659 | ) |
| (Decrease) increase in cash and cash  equivalents                                  |       | (8,685                      | )          | 8,870 |   |
| **CASH AND  CASH EQUIVALENTS, beginning of year**                                  |       | 9,882                       |       | 1,012 |   |
| **CASH AND  CASH EQUIVALENTS, end of year**                                        |       | $                           | 1,197      |   | $ | 9,882 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

32

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**SCHEID VINEYARDSINC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDEDDECEMBER 31, 2005 AND 2004**

 

**1. ORGANIZATION AND BASIS OF PRESENTATION**

 

*Organization*— The principal business of the Company isthe production of premium varietal wine grapes. The Company currently operatesapproximately 5,700 acres of premium wine grape vineyards in Monterey andSan Benito Counties, California.

 

The majority of the Company’s wine grapes are soldunder short and long-term grape and wine purchase agreements to a variety ofwinery clients. The terms of these contracts extend to between 2006 to 2014. Thelargest set of these contracts with a single winery client coveredapproximately 43% of the Company’s producing acreage and accounted forapproximately 56% and 53% of the Company’s total revenues in 2005 and 2004,respectively. In 2003, this client delivered a notice to the Companyterminating grape purchase contracts covering 1,300 acres, or 35%, of theCompany’s producing acreage. This termination is to become effective after theharvest of 2006. In addition, wine sales to another customer totaled 11% and10% of the Company’s total revenue during the years ended December 31, 2005 and2004, respectively.

 

*Basis of Presentation* — The Company conducts all of its businessthrough its wholly owned subsidiary, Scheid Vineyards California Inc., aCalifornia corporation. All significant intercompany balances have beeneliminated 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, 2005 and 2004, substantially all cashbalances were on deposit with the Company’s major banks.

 

*Inventories* — Inventories are stated at the lower ofFIFO (first-in, first-out) cost or market. Cost includes the cost of growngrapes, 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 farmingvineyards prior to the harvest are deferred and recognized in the year thegrapes are harvested. On a quarterly basis, the Company evaluates the cost ofits inventories and reduces such inventories to market if required.

 

*Trade ReceivablesAllowance*— The Company’s policy is to identify allspecific customers from whom a payment would be considered doubtful based uponthe customer’s financial condition, payment history, credit rating and otherrelevant factors and reserve for the portion of those outstanding balanceswhere collection does not seem likely. There was no such reserve at December 31,2005 and 2004.

 

*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 estimateddepreciable lives of 25 to 30 years, buildings 30 years, and furniture andequipment 5 to 7 years. Development costs incurred during the developmentperiod of a vineyard, including related interest, are capitalized. Depreciationcommences in the initial year the vineyard becomes commercially productive,generally in the fourth year. Any revenue generated prior to a vineyardbecoming commercially productive reduces the capitalized cost of the vineyard. TheCompany’s winery consists of a building and the related equipment necessary tooperate the facility. The winery building is being depreciated over 20 yearsand winery equipment between 5 and 15 years. The Company capitalized interestrelated to the development of vineyards totaling $218,000 and $127,000 in 2005and 2004, respectively. In addition, the Company capitalized interest relatedto the construction of its winery facility in the amount of $320,000 during theyear ended December 31, 2005.

 

33

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**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

*Accounting forImpairment or Disposal of Long-Lived Assets* — Whenever facts and circumstances indicate that the carrying value of along-lived asset may not be recoverable, the carrying value is reviewed. Ifthis review indicates that the carrying value of the asset will not berecovered, as determined based on projected undiscounted cash flows related tothe asset over its remaining life, the carrying value of the asset is reducedto its estimated fair value. After the harvest of 2004, the Companydetermined that approximately 12 acres of its vineyards were not economicallyproductive and wrote off their carrying value in the amount of $78,000. Therewere no such write-downs in 2005.

 

*Revenue Recognition* — The Company generally recognizes revenuefrom grape sales upon delivery to the winery. The Company does not have anyallowance for returns because grapes are tested and accepted upon delivery. TheCompany generally recognizes revenue from the sale of bulk wine on thespeculative market at the time the wine is shipped to the customer. Revenuefrom wine sold under wine purchase contracts is recognized when title hastransferred to the customer, the price is determinable, and collectibility isreasonably assured. Title transfers to the customer upon receipt of a requiredamount of the contract price and acceptance of the wine. Revenues are deferredwhen payments or deposits are made by the customer before the delivery ofgrapes or wine has occurred, and title has not transferred to the customer. Wineryprocessing and other revenues are recognized as the service is performed. Vineyardmanagement and other services are recognized as provided. Substantially allrevenues of the Company are derived from customers within the United States.

 

*Fair Value of FinancialInstruments*—**The fair values of accounts receivableand accounts payable approximate book value because of their short duration. Long-termreceivables and long-term debt approximate book value because such financial instrumentshave 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 could differ from reported amounts of assets,liabilities, revenues and expenses.

 

*Earnings Per Share and Classes ofCommon Stock* —Weighted average shares outstanding includes both Class A and Class B CommonStock outstanding and the effect of dilutive stock options for the periodspresented. The computation of diluted earnings per share did not include stockoptions which were antidilutive, as their exercise price was greater than theaverage market price of the Company’s Class A Common Stock during the year. Optionsto purchase 38,000 and 55,000 shares of the Company’s Class A Common Stock wereexcluded for the years ended December 31, 2005 and 2004, 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, nocompensation expense has been recognized in the financial statements foremployee stock arrangements.

 

34

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**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued)**

 

SFAS No. 123, “Accountingfor Stock-Based Compensation”, requires the disclosure of pro forma net incomeand net income per share. Under SFAS No. 123, the fair value of stock-basedawards to employees is calculated through the use of options pricing models,even though such models were developed to estimate the fair value offreely-tradable, fully transferable options without vesting restrictions, whichsignificantly differ from the Company’s stock option awards. These models alsorequire subjective assumptions, including future stock price volatility andexpected time to exercise, which greatly affect the calculated values. TheCompany’s calculations were made using the Black-Scholes option pricing modelwith the following weighted average assumptions: expected life, 5 years; 44%and 47% stock price volatility in 2005 and 2004, respectively; weighted averagerisk free rate of returnof 4.3% and 3.9% in 2005 and 2004, respectively; and no dividends during theexpected term. Forfeitures are recognized as they occur.

 

If the computed fair valuesof the Company’s stock option awards had been amortized to expense over thevesting period of the awards, net income for the years ended December 31, 2005and 2004 would have been reduced to the pro forma amounts indicated below (inthousands, except per share data).

 

| ** **                                                                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Net income:                                                                                                                                    |       |                        |       |   |   |
| As reported                                                                                                                                    |       | $                           | 4,407      |   | $ | 1,335 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all  rewards, net of related tax effects |       | (18                         | )          | (19 | ) |
| Pro forma                                                                                                                                      |       | $                           | 4,389      |   | $ | 1,316 |   |
|                                                                                                                                           |       |                        |       |   |   |
| Net income  per share (Basic):                                                                                                                 |       |                        |       |   |   |
| As reported                                                                                                                                    |       | $                           | 0.86       |   | $ | 0.25 |   |
| Pro forma                                                                                                                                      |       | $                           | 0.86       |   | $ | 0.24 |   |
| Net income  per share (Diluted):                                                                                                               |       |                        |       |   |   |
| As reported                                                                                                                                    |       | $                           | 0.86       |   | $ | 0.25 |   |
| Pro forma                                                                                                                                      |       | $                           | 0.85       |   | $ | 0.24 |   |

 

*Union Agreement -*The United Farm Workers, AFL-CIO (“UFW”) hasrepresented the Company’s farm workers since 1993. The Company’s current five-yearcontract with the UFW will expire December 31, 2006. Approximately 80% of theCompany’s employees are represented by the UFW.

 

*New Financial Accounting Standards* – In December 2004, the Financial AccountingStandards Board issued SFAS No. 123-Revised 2004, “Share-Based Payments” (“SFAS123R”). SFAS No. 123R is a revision of SFAS No. 123, “Accounting forStock-Based Compensation”, and supercedes APB No. 25, “Accounting for StockIssued to Employees”. SFAS No. 123 requires companies to expense the fair valueof stock options and similar awards and is effective for the Company beginningJanuary 1, 2006. The Company believes that the adoption of this Statement willnot have a material effect on the financial position of the Company. See thedisclosure above for the pro forma impact on current and prior year results.

 

*Certain Reclassifications* – Certainreclassifications have been made to 2004 balance sheet accounts to conform withthe 2005 presentation.

 

35

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**3. INVENTORIES**

 

Inventories consist of the following:

 
| ** **                | ** ** | **December 31,**   | ** ** |
|---------------------------|------------|--------------------|------------|
| ** **                | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(in thousands)** | ** ** |
| Deferred  crop costs      |       | $                  | 657        |   | $ | 625 |   |
| Vineyard  supplies        |       | 365                |       | 169 |   |
| Bulk wine                 |       | 5,740              |       | 2,920 |   |
| Winery  supplies          |       | 110                |       | — |   |
| Tasting room  inventories |       | 120                |       | 32 |   |
| Total                     |       | $                  | 6,992      |   | $ | 3,746 |   |

 

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

 

Property, plant and equipment consists of thefollowing:

 
| ** **                                      | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------|------------|--------------------|------------|
| ** **                                      | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Vineyard  land and buildings                    |       | $                  | 6,204      |   | $ | 6,171 |   |
| Vineyard  improvements                          |       | 50,156             |       | 50,389 |   |
| Vineyard  improvements under development        |       | 6,489              |       | 3,959 |   |
| Vineyard  machinery and equipment               |       | 7,344              |       | 7,117 |   |
| Winery  building                                |       | 15,656             |       | — |   |
| Winery  machinery and equipment                 |       | 6,969              |       | — |   |
| Winery  construction in progress                |       | 735                |       | 1,070 |   |
| Tasting room  building and equipment            |       | 375                |       | 363 |   |
| Office  furniture and equipment                 |       | 828                |       | 709 |   |
| Total                                           |       | 94,756             |       | 69,778 |   |
| Less  accumulated depreciation and amortization |       | (24,792            | )          | (21,410 | ) |
| Property,  plant and equipment — net       |       | $                  | 69,964     |   | $ | 48,368 |   |

 

**5. LONG-TERM RECEIVABLE**

 

The Company has a contract to redevelop and managecertain vineyards owned or controlled by a major client. The contractoriginally called for the expenditure of approximately $7,500,000 over a three-yearperiod. The funds for this project were borrowed, as an accommodation to theclient, by the Company under a line of credit (see Note 7). The interest rateand payment terms of this receivable were due the same as the related notepayable. The note payable to the bank was secured by a letter of creditprovided by the client and by the management contract. The contract called forthe payment of this receivable by the client’s payment of the six annualprincipal installments under the line, beginning January 5, 2000. During theyear ended December 31, 2005, the client repaid the remaining amount of thereceivable. The Company continues to manage the operations of the vineyard forthe client.

 

36

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**7. LONG-TERM DEBT**

 

Long-term debt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **December 31,**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                                                                                                                                              | ** ** | **(in thousands)** | ** ** |
| Note payable to bank, see below for  description                                                                                                                                                                                                                                                        |       | $                  | 35,804     |   | $ | — |   |
| Note payable to bank, principal due in  annual installments of $214,000 through July 5, 2005, secured by a leasehold  interest. This note was repaid in June 2005                                                                                                                                       |       | —             |       | 1,071 |   |
| Note payable to bank, principal due in  annual installments of $96,000 through July 5, 2005, secured by a leasehold  interest. This note was repaid in June 2005                                                                                                                                        |       | —             |       | 778 |   |
| Note payable to bank, principal due in  annual installments of $114,000 through July 5, 2005, secured by a leasehold  interest. This note was repaid in June 2005                                                                                                                                       |       | —             |       | 1,934 |   |
| Note payable to bank, principal due in  annual installments of $75,000 through July 5, 2005, secured by a leasehold  interest. This note was repaid in June 2005                                                                                                                                        |       | —             |       | 825 |   |
| Note payable to bank, principal due in  annual installments of $178,000 through June 5, 2008, secured by a trust  deed. This note was repaid in June 2005                                                                                                                                               |       | —             |       | 3,916 |   |
| Note payable to bank, principal due in  annual installments of $422,000 through June 5, 2008, secured by a trust.  This note was repaid in June 2005                                                                                                                                                    |       | —             |       | 9,284 |   |
| Note payable to bank represents borrowings  on a $7,500,000 line of credit. The note was secured by a letter of credit  provided by a major client, and was used for costs incurred for the  redevelopment of certain vineyards owned by the client (see Note 5). This  note was repaid in January 2005 |       | —             |       | 2,624 |   |
| Total                                                                                                                                                                                                                                                                                                   |       | 35,804             |       | 20,432 |   |
| Less current maturities                                                                                                                                                                                                                                                                                 |       | —             |       | (7,832 | ) |
| Long-term portion                                                                                                                                                                                                                                                                                       |       | $                  | 35,804     |   | $ | 12,600 |   |

 

In June 2005, the Company refinanced it existingdebt with Bank of the West by securing long-term revolving financing withRabobank, N.A. in the amount of up to $52,000,000. The proceeds of the newfinancings were used to repay Bank of the West and finance the construction of anew winery facility.

 

The new facility has a term component in the amountof up to $37,000,000, which is secured by deeds of trust and leaseholdinterests in approximately 4,100 acres of the Company’s vineyards. The totalterm loan commitment is reduced annually beginning on December 15, 2007 by theamount of $2,000,000, and is due July 15, 2015. There was $35,804,000outstanding on this portion of the facility at December 31, 2005, bearinginterest at a weighted average rate of 5.68%.

 

The facility also has a revolving note for up to$15,000,000 in borrowings, which is intended to fund annual operating costs ofthe Company. This note is secured by the cash, receivables, crop and otherinventories, and equipment of the Company. This portion of the note is due July15, 2008. There were no amounts outstanding on this note at December 31, 2005.

 

Interest on the facility is due monthly at the bank’sprime rate or the LIBOR rate plus a percentage based upon certain financialratios of the Company. At December 31, 2005, this additional percentage aboveLIBOR was 1.75%. The facility prohibits the payment of dividends without theconsent of the lender and contains various financial covenants, includingcurrent working capital amounts, interest coverage ratios and the amount oftotal liabilities to tangible net worth. The Company was in compliance with its financial covenants at December31, 2005.

 

37

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Principal payments required on long-term debt foreach of the next five years ending December 31 are as follows (in thousands):

 

| 2006       |   | $      | — |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 2,000  |   |
| 2008       |   | 2,000  |   |
| 2009       |   | 2,000  |   |
| 2010       |   | 2,000  |   |
| Thereafter |   | 27,804 |   |
| Total      |   | $      | 35,804 |   |

 

**8. INCOME TAXES**

 

Significant components of the Company’s net deferredincome tax assets and liabilities are as follows:

 

| ** **                                                  | ** ** | **December 31,**   | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                  | ** ** | **2005**           | ** ** | **2004** | ** ** |
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
| Current  deferred income tax assets:                        |       |               |       |   |   |
| Tax credits                                                 |       | $                  | —     |   | $ | 62 |   |
| State income taxes                                          |       | 114                |       | — |   |
| Current  deferred income tax liabilities - Prepaid expenses |       | (512               | )          | (140 | ) |
| Net current  deferred income tax liability                  |       | $                  | (398       | ) | $ | (78 | ) |

 

| Long-term deferred income tax assets - Deferred  state income taxes |   | $      | 544    |   | $ | 441    |   |
|---------------------------------------------------------------------|--------|--------|--------|--------|---|--------|--------|
| Long-term deferred income tax liabilities -  Depreciation           |   | (7,449 | )      | (6,442 | ) |
| Net long-term deferred income tax liability                         |   | $      | (6,905 | )      | $ | (5,981 | )      |

 

The provision for income taxes is as follows:

 

| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(in thousands)**          | ** ** |
| Current:                          |       |                        |       |   |   |
| Federal                           |       | $                           | 1,349      |   | $ | (63 | ) |
| State                             |       | 364                         |       | 10 |   |
| Total                             |       | 1,713                       |       | (53 | ) |
| Deferred:                         |       |                        |       |   |   |
| Federal                           |       | 947                         |       | 759 |   |
| State                             |       | 297                         |       | 188 |   |
| Total                             |       | 1,244                       |       | 947 |   |
| Total  provision for income taxes |       | $                           | 2,957      |   | $ | 894 |   |

 

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The Company’s effective income tax rate differs fromthe federal statutory income tax rate due to the following:

 
| ** **                           | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Federal  statutory rate              |       | 34.0                        | %          | 34.0 | % |
| State taxes,  net of federal benefit |       | 5.9                         |       | 5.9 |   |
| Other                                |       | 0.3                         |       | 0.2 |   |
| Total                                |       | 40.2                        | %          | 40.1 | % |

 

**9. COMMITMENTS AND CONTINGENCIES**

 

*Lease Obligations* – The Company has various operating leaseagreements for office space and farm land. The Company has a lease for officespace which expires January 31, 2007 and contains a provision for annual rentadjustments based upon the Consumer Price Index.

 

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

 

Aggregate minimum rental payments for each of thenext five years ending December 31 are as follows (in thousands):

 
| 2006       |   | $     | 1,052  |   |
|------------|--------|-------|--------|--------|
| 2007       |   | 914   |   |
| 2008       |   | 903   |   |
| 2009       |   | 903   |   |
| 2010       |   | 653   |   |
| Thereafter |   | 7,490 |   |
| Total      |   | $     | 11,915 |   |

 

Rent charged to operations was $1,097,000 and$1,038,000 for the years ended December 31, 2005 and 2004, respectively. Rentcapitalized into vineyard development was $61,000 and $59,000 for the yearsended December 31, 2005 and 2004, respectively.

 

*Pension Plans* — The Company has two 401(k) Profit SharingPlans. The first plan is for the benefit of the Company’s employees who arecovered by the United Farm Workers of America Collective Bargaining Agreement. Allunion employees of the Company are eligible to participate after having worked500 hours within a one-year period. The Company contributes 15 cents for eachhour worked by eligible employees, subject to the limitations imposed by theInternal Revenue Code. The Company’s contribution to the union employees’ planamounted to $53,000 and $68,000 for the years ended December 31, 2005 and2004, respectively.

 

The second plan covers the Company’s non-unionemployees. All non-union employees of the Company are eligible to participatein the plan after one year of employment. Employees may contribute between 1% and15% of their annual compensation. The Company matches 50 cents for every dollarof employee contributions up to 6% of their annual salaries, subject to thelimitations imposed by the Internal Revenue Code. The Company’s contribution tothis plan amounted to $72,000 and $62,000 for the years ended December 31,2005 and 2004, respectively.

 

39

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*Department of LaborPenalty* — TheCompany has accrued a liability in the amount of $350,000 at December 31, 2005and 2004 for potential additional payroll expense to be paid to employees asthe result of penalties levied by the California Department of Labor due toalleged violations of the California Labor Code.

 

*Matrix Lawsuit and Liens*— In December 2005, Matrix Service,Inc. (“Matrix”), a large subcontractor of the Company’s general contractor forthe building of its new winery facility, filed an action (the “Complaint”)against the Company in Monterey County Superior Court. The Complaint allegescauses of action for foreclosure of a mechanic’s lien in the amount of $3.2million, reasonable value of services provided, unjust enrichment, andnegligence. The Company has denied the material allegations of the Complaint,alleged various defenses, and has filed a cross complaint against Matrix.Management of the Company believes that the Complaint is without merit andintends to vigorously defend its case. Although the Company is currently unableto predict the impact of this Complaint, these proceedings could involve significantlegal expenses, and any adverse determination could have a material impact onthe Company’s results of operations and cash flows.

 

**10. COMMON STOCK**

 

*Rights —*Each share of Class A Common Stock isentitled to one vote and each share of Class B Common Stock is entitled to fivevotes on all matters submitted to a vote of the stockholders. The holders ofthe Class A Common Stock, voting as a separate class, elect 25% of the totalBoard of Directors of the Company, rounded up to the nearest whole number, andthe holders of the Class B Common Stock, voting as a separate class, elect theremaining directors. Each share of Class B Common Stock is convertible into oneshare of Class A Common Stock at the option of the holder or automatically upontransfer to a person other than certain specified persons. Except for thediffering voting rights, the shares of Class A and Class B common stock havesubstantially identical rights, preferences and privileges.

 

*Conversion of Shares —*During the years ended December 31, 2005 and2004, Class B Common Shareholders converted 26,500 and 137,400 shares,respectively, of Class B Common Shares into Class A Common Shares. On January20, 2006, Class B Common Shareholders converted 1,960,000 shares of Class BCommon Stock into Class A Common Stock.

 

*Repurchase of Shares —* During the year ended December 31, 2005, theCompany repurchased 2,091 shares of its Class A Common Stock for an aggregatepurchase price of $13,000. During the year ended December 31, 2004, the Companyrepurchased 370,500 shares of its Class A Common Stock for an aggregatepurchase price of $2,038,000.

 

**11. 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 dateunder the Plan vest one-quarter each year, beginning one year after the grantdate or a specified vesting commencement date and expire ten years after theearlier of the grant date and the vesting commencement date.

 

40

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The followingsummarizes stock option activity for the periods presented:

 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted   Average Exercise Prices** | ** ** |
|---------------------------------|------------|------------|------------|---------------------------------------------|------------|
| Outstanding,  January 1, 2004   |       | 172,000    |       | $                                           | 6.12       |   |
| Granted                         |       | 5,000      |       | 5.19                                        |       |
| Exercised                       |       | (875       | )          | 3.49                                        |       |
| Cancelled                       |       | (1,000     | )          | 3.75                                        |       |
| Outstanding,  December 31, 2004 |       | 175,125    |       | 6.12                                        |       |
| Granted                         |       | 5,000      |       | 6.01                                        |       |
| Exercised                       |       | (5,313     | )          | 3.99                                        |       |
| Cancelled                       |       | (687       | )          | 3.75                                        |       |
| Outstanding,  December 31, 2005 |       | 174,125    |       | $                                           | 6.19       |   |

 
| ** **                                              | ** ** | **Range of Exercise Prices at  December 31, 2005** | ** ** | ** **      | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **Under $4.00**                               | ** ** | **$4.00-$9.99** | ** ** | **$10.00** | ** ** | **Total** | ** ** |
| Options  outstanding                                    |       | 40,125                                             |       | 74,000          |       | 60,000 |   | 174,125 |   |
| Weighted  average exercise price of options outstanding |       | $                                                  | 3.40       |            | $          | 4.61 |   | $ | 10.00 |   | $ | 6.19 |   |
| Options  exercisable                                    |       | 37,086                                             |       | 69,000          |       | 60,000 |   | 166,086 |   |
| Weighted  average exercise price of options exercisable |       | $                                                  | 3.37       |            | $          | 4.51 |   | $ | 10.00 |   | $ | 6.24 |   |
| Weighted  average fair value of options granted in 2005 |       | None                                               |       | $               | 2.66       |   | None |   | $ | 2.66 |   |
| Weighted  average remaining contractual life            |       | 6.3 years                                          |       | 2.9 years       |       | 1.5 years |   | 3.0 years |   |

 
| ** **                                              | ** ** | **Range of Exercise Prices at  December 31, 2004** | ** ** | ** **      | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------|------------|
| ** **                                              | ** ** | **Under $4.00**                               | ** ** | **$4.00-$9.99** | ** ** | **$10.00** | ** ** | **Total** | ** ** |
| Options  outstanding                                    |       | 41,125                                             |       | 74,000          |       | 60,000 |   | 175,125 |   |
| Weighted  average exercise price of options outstanding |       | $                                                  | 3.49       |            | $          | 4.47 |   | $ | 10.00 |   | $ | 6.12 |   |
| Options  exercisable                                    |       | 32,796                                             |       | 69,000          |       | 60,000 |   | 161,796 |   |
| Weighted  average exercise price of options exercisable |       | $                                                  | 3.39       |            | $          | 4.42 |   | $ | 10.00 |   | $ | 6.28 |   |
| Weighted  average fair value of options granted in 2004 |       | None                                               |       | $               | 2.35       |   | None |   | $ | 2.35 |   |
| Weighted  average remaining contractual life            |       | 7.3 years                                          |       | 3.4 years       |       | 2.5 years |   | 3.5 years |   |

 

41

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**12. SUPPLEMENTAL CASH FLOW INFORMATION**

 

Supplementaldisclosures to the statements of cash flows are as follows (in thousands):

 
| ** **                                 | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **2005**                    | ** ** | **2004** | ** ** |
| Interest  paid (net of amount capitalized) |       | $                           | 1,056      |   | $ | 600 |   |
| Income taxes  paid (net of refunds)        |       | $                           | 21         |   | $ | 948 |   |

 

**13. SUBSEQUENT EVENT**

 

On January 30, 2006, the Company announced that its Board of Directorsand stockholders owning a majority of its voting stock had approved a 1-for-5reverse stock split of its Class A and Class B Common Stock.  If the transaction is consummated, theCompany expects to have fewer than 300 stockholders of record, which wouldenable the Company to voluntarily terminate the registration of its Class ACommon Stock under the Securities Exchange Act of 1934, as amended, and becomea non-reporting company.  As a result,the Company would no longer be required to file periodic reports and otherinformation with the Securities and Exchange Commission (the “SEC”).

 

The Company has filed documents with the SEC describing the ReverseStock Split in detail, and following any review by the SEC, the Company plansto disseminate a Definitive Information Statement to its stockholders and amendits Certificate of Incorporation (the “Amendment”) with the Delaware Secretaryof State.  The Company is unable todetermine the exact effective date of the Reverse Stock Split at thistime.  The Company’s Board of Directors,in its sole discretion, reserves the right to abandon the Reverse Stock Splitprior to its effective date, if it determines that abandoning the Reverse StockSplit is in the best interests of the Company. In connection with the deregistration process, the Company will requestthat Nasdaq delist its Class A Common Stock from The Nasdaq SmallCap Market.

 

On the effective date of the Amendment, stockholders holding fewer thanfive (5) shares immediately prior to the effectiveness of the Amendment, andstockholders holding a number of shares not evenly divisible by five (5), ofeither Class A or Class B Common Stock, will receive a cash paymentin the amount of $9.25 per pre-split share, in lieu of a fraction of a share ofnew Class A Common Stock and/or new Class B Common Stock that wouldotherwise be issued following the Reverse Stock Split.

 

****

 

42

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**ITEM  8.****              ****CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE.**

 

None.

 

**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 31,2005 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**ITEM8B.****             ****OTHER INFORMATION.**

 

None.

 

**PART III**

 

**ITEM 9. ****               ****DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLPERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.**

 

Thefollowing table sets forth certain information as of April 7, 2006 with regardto each of the Directors and executive officers of the Company.

 
| **Name**                  | ** ** | **Age** | ** ** | **Primary Occupation**                                            |
|---------------------------|------------|---------|------------|-------------------------------------------------------------------|
| Alfred  G. Scheid(1)      |       | 74      |       | Chairman  of the Board of Directors of the Company                |
| Scott  D. Scheid          |       | 45      |       | President,  Chief Executive Officer and Director of the Company   |
| Heidi  M. Scheid          |       | 42      |       | Senior  Vice President, Treasurer and Secretary of the Company    |
| Kurt  J. Gollnick         |       | 46      |       | Senior  Vice President and Chief Operating Officer of the Company |
| Michael  S. Thomsen       |       | 44      |       | Chief  Financial Officer of the Company                           |
| John  L. Crary(1)(2)      |       | 52      |       | President  of Crary Enterprises LLC                               |
| Robert  P. Hartzell(1)(2) |       | 71      |       | Owner  and operator of Harmony Vineyards                          |
| Keith  L. Krum(2)         |       | 61      |       | Retired  Senior Business Executive                                |

 

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(1)   Member of the Compensation Committee.

(2)   Member of the Audit Committee.

 

AlfredG. Scheid, the Company’s Chairman of the Board, was one of the founders of theCompany in 1972 and served continuously as its Chief Executive Officer untilDecember 31, 2001.  Mr. Scheid has beenengaged full-time in the business of the Company since 1988, when he became thesole owner of the Company. Mr. Scheid is a founder of the CaliforniaAssociation of Winegrape Growers, a trade association that represents theinterests of California wine grape producers, and has served as its chairman.  He is also a founder of Monterey CountyVintners and Growers Association, a trade association composed primarily ofwine grape and wine producers.  Mr.Scheid is a graduate of the

 

43

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Harvard Graduate School ofBusiness, and is the father of Scott D. Scheid and Heidi M. Scheid.

 

ScottD. Scheid, President and Chief Executive Officer of the Company, hascontinuously served as a Director since 1997. Mr. Scheid was named the Company’s Chief Executive Officer on January 1,2002. Previously, Mr. Scheid served as the Company’s Chief OperatingOfficer.  Mr. Scheid joined the Companyin 1986 as Vice President and has been engaged full-time in the business of theCompany since that time. Prior to joining the Company, he was employed as an optionstrader with E.F. Hutton & Company Inc. Mr. Scheid is a director and serves on the executive committee of theCalifornia Association of Winegrape Growers, and he previously has served as adirector of Monterey County Vintners and Growers Association.  Mr. Scheid holds a B.A. degree in economicsfrom Claremont Men’s College.  Scott D.Scheid is the son of Alfred G. Scheid and the brother of Heidi M. Scheid.

 

HeidiM. Scheid, Senior Vice President of the Company, has continuously served as theCompany’s Treasurer and Secretary since 1997. From 1997 until 2005 Ms. Scheid was a Director of the Company.  Ms. Scheid joined the Company in 1992 asDirector of Planning and served as the Company’s Vice President Finance andChief Financial Officer from 1997 to 2001. Prior to joining the Company, she served as a senior valuation analystat Ernst & Young, LLP.  Ms. Scheid isa director of Wine Market Council, a wine industry association aimed atexpanding the American wine consumer base. She holds an M.B.A. degree from the University of SouthernCalifornia.  Heidi M. Scheid is thedaughter of Alfred G. Scheid and the sister of Scott D. Scheid.

 

KurtJ. Gollnick became Senior Vice President and Chief Operating Officer of theCompany on January 1, 2002.  Previously,Mr. Gollnick served as the Company’s Vice President Vineyard Operations. Mr.Gollnick joined the Company in 1988 as General Manager, VineyardOperations.  For seven years prior tojoining the Company, Mr. Gollnick was a vineyard manager for Thornhill Ranchesof Santa Maria, California, where he managed 1,200 acres of vineyards.  He has served as a director of the CaliforniaAssociation of Winegrape Growers, Wine Institute, and American VineyardFoundation, and has also served as president of the Central Coast Grape Growersand Monterey County Vintners and Growers Associations.  Mr. Gollnick holds a B.S. degree inagricultural economics from the California Polytechnic State University SanLuis Obispo.

 

MichaelS. Thomsen has served as the Company’s Chief Financial Officer since March2001. Mr. Thomsen joined the Company in 1997 as Controller after working twelveyears at the accounting firm of Deloitte & Touche LLP as a senior auditmanager.  Mr. Thomsen is a CertifiedPublic Accountant and has a B.A. degree in Business Economics from theUniversity of California, Santa Barbara.

 

JohnL. Crary became a Director of the Company in 1997, and has served continuouslyas a Director since that time. Currently, Mr. Crary is President of Crary Enterprises LLC, a privateinvestment company.  Since 1988, Mr.Crary has been a corporate financial advisor and venture capital investor withearly stage companies and oil and gas investments.  Previously, he was an investment banker withE.F. Hutton & Company Inc., which he joined in 1979.  He is also a director of microHelix, Inc.,and Chairman of the Board of Trustees of the OCM Gold Fund.  Mr. Crary is a graduate of the University ofCalifornia at Irvine and the Columbia University Graduate School of Business.

 

RobertP. Hartzell became a Director of the Company in 1997, and has servedcontinuously as a Director since that time. Mr. Hartzell is the owner of Harmony Vineyards, a producer of premiumZinfandel wine grapes near Lodi, California. From 1978 to 1996, Mr. Hartzell was President of the CaliforniaAssociation of Winegrape Growers.  Forsix years during this period, Mr. Hartzell also served on the AgriculturalPolicy Advisory Committee to the U.S. Secretary of Agriculture and the U.S.Trade Representative in connection with the General Agreement on Trade andTariffs negotiations.  Mr. Hartzell hasalso served as Deputy Director of the California Department of Food andAgriculture.  Mr. Hartzell holds a B.S.degree from the University of California at Davis.

 

KeithL. Krum became a Director of the Company on October 18, 2005.  Mr. Krum retired in January 2005 afterserving thirteen years as Senior Vice President and Manager of AgriculturalBanking Group for Bank of the West.  Mr.Krum has over 35 years of commercial banking experience.  Mr. Krum

 

44

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has an Associate of Arts Degreefrom Fresno City College, and is a graduate of the National AdvancedAgricultural Banking School at Iowa State University.

 

Officersserve at the discretion of the Board of Directors.  The address of each executive officer anddirector is: c/o Scheid Vineyards Inc., 305 Hilltown Road, Salinas, California93908.

 

Noperson set forth above (i) was convicted in a criminal proceeding during thepast five years (excluding traffic violations or similar misdemeanors); or (ii)was a party to any judicial or administrative proceeding during the past fiveyears (except for matters that were dismissed without sanction or settlement)that resulted in a judgment, decree or final order enjoining the person fromfuture violations of, or prohibition activities subject to, federal or statesecurities laws, or a finding of any violation of federal or state securitieslaws.

 

ScottD. Scheid and Heidi M. Scheid are the son and daughter, respectively, of AlfredG. Scheid.  Each of the Company’sexecutive officers and directors is a citizen of the United States.

 

**Compliance withSection 16(a) of the Exchange Act**

 

Section 16(a) of the Securities Exchange Act of1934, as amended requires the Company’s executive officers and directors andpersons who beneficially own more than 10% of the Company’s Common Stock tofile initial reports of beneficial ownership and reports of changes inbeneficial ownership with the SEC.  Suchpersons are required by SEC regulations to furnish the Company with copies ofall Section 16(a) forms filed by such person.

 

Basedsolely on the Company’s review of such forms furnished to the Company andwritten representations from certain reporting persons, the Company believesthat all filing requirements applicable to executive officers, directors andgreater-than-10% stockholders were complied with, except for a statement ofchange in beneficial ownership of securities with respect to options to purchase10,000 shares of Class A Common Stock issued to Keith L. Krum.  A corrective filing has since been made.

 

**Board of Directors, Committees and Compensation**

 

Directors are elected to serve a one-year term and until theirsuccessors are duly elected and qualified. The Company currently pays each non-employee Director an annual fee of$7,500 and meeting fees at the rate of $500 for each Board meeting attended inperson and reimburses such Director for all expenses incurred by him in hiscapacity as a Director of the Company.  No fees are paid for participation in telephonic meetings of the Boardof Directors or its committees or actions taken in writing.

 

Under the Company’s 1997 Stock Option/Stock Issuance Plan (the “Plan”),each individual who was serving as a non-employee Director on the date theunderwriting agreement for the Company’s initial public offering was executed(July 24, 1997) received an option grant on such date for 10,000 shares ofClass A Common Stock, provided such individual had not been in the prioremploy of the Company.  Such optiongrants were made to each of Messrs. Crary, Hartzell and Krum.  Each individual who first becomes anon-employee Director in the future will receive a 10,000-share option grant ofClass A Common Stock on the date such individual joins the Board, providedthat such individual has not been in the prior employ of the Company and hasnot previously received an option grant from the Company in his or her capacityas a non-employee Director.  In addition,at each Annual Meeting of Stockholders, each non-employee Director with atleast six months’ service who is to continue to serve as a non-employeeDirector after the Annual Meeting receives an additional option grant topurchase 2,500 shares of Class A Common Stock, whether or not suchindividual has been in the prior employ of the Company.

 

Each automatic option grant to a non-employee Director has or will havea term of 10 years, subject to earlier termination following the optionee’scessation of Board service and, to date, have been granted at exercise pricesequal to the market price on the date of grant. The initial 10,000-share option grant becomes or will become exercisablein a series of four successive equal annual installments, subject to theoptionee’s

 

45

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continued Board service.  Each additional 2,500-share option grantbecomes or will become exercisable upon the optionee’s completion of one yearof Board service measured from the grant date. However, each outstanding option will immediately vest upon(i) certain changes in the ownership or control of the Company, or(ii) the death or disability of the optionee while serving as a Director.

 

The Board of Directors has appointed an Audit Committee and a CompensationCommittee.

 

The Audit Committee is comprised, and was comprised during 2005, of thethree independent members of the Board of Directors, Messrs. Crary,Hartzell and Krum, and operates under a written charter adopted by the Board ofDirectors.  The function of the AuditCommittee is to provide oversight of the financial management and financialreporting process of the Company, and recommend to the Board of Directors theselection of the Company’s independent accountants.  The Audit Committee held four meetings in2005.  The Board of Directors hasdetermined that Mr. Crary is qualified as an “audit committee financial expert”as that term is defined by the Securities and Exchange Commission.

 

TheCompensation Committee is comprised, and was comprised during 2005, ofMessrs. Crary, Hartzell and Alfred G. Scheid.  The Company’s Compensation Committeeestablishes and reviews salary, bonus and other forms of compensation forofficers of the Company, provides recommendations to the Board of Directors forthe salaries and incentive compensation of the employees and consultants of theCompany, reviews training and human resources policies, and makesrecommendations to the Board of Directors regarding such matters.  The Compensation Committee held one meetingin 2005.

 

TheCompany has no nominating committee or committee performing similarfunctions.  Should the Board of Directorsneed additional members, or need to replace a member, the Board of Directorswill elect a nominating committee consisting of the then independent members ofthe Board of Directors.  Recommendationsfor potential new members of the Board of Directors would be submitted byexisting members of the Board of Directors, Company management, or from any stockholderrecommendations.

 

TheBoard of Directors held five meetings in 2005. Each Director attended at least 75% of the total number of the meetingsheld of the Board of Directors and each committee thereof on which suchDirector served during the fiscal year ended December 31, 2005.  Board members are required to attend theCompany’s annual meeting.

 

TheCompany has an informal process for security holders to send communications tothe Board of Directors.  If a securityholder wishes to communicate with the Board of Directors, they may contact theCompany’s Chief Financial Officer who gathers such information for presentationto the Board of Directors in anticipation of scheduled Board of Directorsmeetings.  Such inquiries should bedirected in writing to Scheid Vineyards Inc., 305 Hilltown Road, Salinas,California 93908; Attention: Chief Financial Officer.

 

**Code of Ethics**

 

The Board hasadopted a Code of Business Conduct and Ethics that applies to all of itsemployees, officers and directors.  Acopy of the Code of Business Conduct and Ethics is available without charge onrequest.  Requests should be directed inwriting to Scheid Vineyards Inc., 305 Hilltown Road, Salinas, California 93908;Attention: Chief Financial Officer.  Inaddition, the Code of Business Conduct and Ethics is available on the Company’swebsite at www.scheidvineyards.com.

 

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

 

**Summary of Cash and Certain Other Compensation ofNamed Executive Officers**

 

The following table sets forth information concerningthe annual and long-term compensation earned by the Named Executive Officersfor services rendered in all capacities to the Company for the fiscal yearsended December 31, 2005, 2004 and 2003.  The “Named Executive Officers” include (i) each person who servedas Chief Executive Officer during 2005 (one person), (ii) each person who(a) served as an executive officer at December 31, 2005, (b) wasamong the four most highly paid executive officers of the Company, not includingthe Chief Executive Officer, during 2005 and (c) earned total annualsalary and bonus compensation in 2005 in excess of $100,000 (four persons), and(iii) up to two persons who would be included under clause (ii) abovehad they served as an executive officer at December 31, 2005 (no persons).

 
| ** **                                           | ** ** | ** **                 | ** ** | ** **         | ** ** | **Long-Term  Compensation** | ** ** | ** **               | ** ** |
|------------------------------------------------------|------------|----------------------------|------------|--------------------|------------|-----------------------------|------------|--------------------------|------------|
| ** **                                           | ** ** | **Annual Compensation(1)** | ** ** | **Other  Annual**  | ** ** | **Shares  Underlying**      | ** ** | **All Other**            | ** ** |
| **Name and Capacity in Which Served**                | ** ** | **Fiscal  Year**           | ** ** | **Salary  ($)(2)** | ** ** | **Bonus  ($)**              | ** ** | **Compensation  ($)(3)** | ** ** | **Options/SARs  (#)(4)** | ** ** | **Compensation  ($)(5)(6)** | ** ** |
| Alfred G.  Scheid                                    |       | 2005                       |       | $                  | 375,000    |                        | $          | 0                        |       | — |   | 0 |   | $ | 265,450 |   |
| *Chairman  of the Board*                             |       | 2004                       |       | $                  | 375,000    |                        | $          | 0                        |       | — |   | 0 |   | $ | 265,450 |   |
| * *                                             |       | 2003                       |       | $                  | 375,000    |                        | $          | 0                        |       | — |   | 0 |   | $ | 0 |   |
|                                                 |       |                       |       |               |       |                        |       |                     |       |   |   |   |   |
| Scott D.  Scheid                                     |       | 2005                       |       | $                  | 275,000    |                        | $          | 150,000                  |       | — |   | 0 |   | $ | 7,000 |   |
| *President  and Chief Executive*                     |       | 2004                       |       | $                  | 260,000    |                        | $          | 100,000                  |       | — |   | 0 |   | $ | 6,125 |   |
| *Officer*                                            |       | 2003                       |       | $                  | 260,000    |                        | $          | 125,000                  |       | — |   | 0 |   | $ | 6,000 |   |
|                                                 |       |                       |       |               |       |                        |       |                     |       |   |   |   |   |
| Heidi M.  Scheid                                     |       | 2005                       |       | $                  | 185,000    |                        | $          | 70,000                   |       | — |   | 0 |   | $ | 5,550 |   |
| *Senior  Vice President, Treasurer and Secretary*    |       | 2004                       |       | $                  | 180,000    |                        | $          | 60,000                   |       | — |   | 0 |   | $ | 5,400 |   |
|                                                 | 2003       |                       | $          | 165,000            |       | $                           | 65,000     |                     | —     |   | 0 |   | $ | 4,950 |   |
|                                                 |       |                       |       |               |       |                        |       |                     |       |   |   |   |   |
| Kurt J.  Gollnick                                    |       | 2005                       |       | $                  | 260,000    |                        | $          | 185,000                  |       | — |   | 0 |   | $ | 7,000 |   |
| *Senior  Vice President and Chief Operating Officer* |       | 2004                       |       | $                  | 240,000    |                        | $          | 125,000                  |       | — |   | 0 |   | $ | 6,112 |   |
|                                                 | 2003       |                       | $          | 240,000            |       | $                           | 150,000    |                     | —     |   | 0 |   | $ | 6,000 |   |
| * *                                             |       |                       |       |               |       |                        |       |                     |       |   |   |   |   |
| Michael S.  Thomsen                                  |       | 2005                       |       | $                  | 185,000    |                        | $          | 55,000                   |       | — |   | 0 |   | $ | 5,550 |   |
| *Chief Financial  Officer*                           |       | 2004                       |       | $                  | 180,000    |                        | $          | 40,000                   |       | — |   | 0 |   | $ | 5,400 |   |
| * *                                             |       | 2003                       |       | $                  | 175,000    |                        | $          | 40,000                   |       | — |   | 0 |   | $ | 5,250 |   |

 

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(1)           Amounts shown include cash compensationearned for the periods reported whether paid or accrued in such periods.

 

(2)           As of March 31, 2006, the annual salarylevels for the Named Executive Officers were: Alfred G. Scheid ($375,000);Scott D. Scheid ($286,000); Heidi M. Scheid ($192,000); Kurt J. Gollnick($270,000); and Michael S. Thomsen ($192,000).

 

(3)           During each of 2005, 2004 and 2003, the NamedExecutive Officers received personal benefits, the aggregate amounts of whichfor each Named Executive Officer did not exceed the lesser of $50,000 or 10% ofthe total of the annual salary and bonus reported for such Named ExecutiveOfficer in such years.

 

(4)           The Named Executive Officers did not receiveany restricted stock awards or long-term incentive plan payouts in 2005, 2004or 2003.

 

(5)           Except as described in note 6, all amounts inthis column represent matching contributions under the Company’s 401(k) plan.

 

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(6)           In the case of AlfredG. Scheid, includes $265,450 in 2005 and 2004, representing benefits receivedunder a $5,990,000 term life insurance policy the beneficiary of which is atrust, the trustees of which include Scott D. Scheid and Heidi M. Scheid, eachof whom is an executive officer and Director of the Company and a child ofAlfred G. Scheid.

 

**OptionGrants**

 

No stock options or stockappreciation rights were granted to the Named Executive Officers during fiscal2005.

 

**Option Exercises and Holdings**

 

The following table sets forth with respect to the Named ExecutiveOfficers information concerning the exercise of stock options during fiscal2005 and the value of unexercised options held as of the end of the year.  The Company has never granted stockappreciation rights.

 

**AGGREGATEDOPTION EXERCISES**

**AND FISCAL2005 YEAR-END OPTION/SAR VALUES**

 
| ** **          | ** ** | **Shares  Acquired on** | ** ** | **Value**        | ** ** | **Number of Unexercised   Securities  Underlying Options at  Fiscal Year End(#)** | ** ** | **Value of Unexercised  In-the-Money Options  at Fiscal Year End($)(1)** | ** ** |
|---------------------|------------|-------------------------|------------|------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| **Name**            | ** ** | **Exercise(#)**         | ** ** | **Realized ($)** | ** ** | **Unexercisable**                                                                 | ** ** | **Exercisable**                                                          | ** ** | **Unexercisable** | ** ** | **Exercisable** | ** ** |
| Alfred G.  Scheid   |       | 0                       |       | $                | 0          |                                                                              | 0          |                                                                     | 0          |   | — |   | — |   |
| Scott D.  Scheid    |       | 0                       |       | $                | 0          |                                                                              | 0          |                                                                     | 20,000     |   | $ | 0 |   | $ | 0 |   |
| Heidi M.  Scheid    |       | 0                       |       | $                | 0          |                                                                              | 0          |                                                                     | 20,000     |   | $ | 0 |   | $ | 0 |   |
| Kurt J. Gollnick    |       | 0                       |       | $                | 0          |                                                                              | 0          |                                                                     | 20,000     |   | $ | 0 |   | $ | 64,000 |   |
| Michael S.  Thomsen |       | 0                       |       | $                | 0          |                                                                              | 0          |                                                                     | 10,000     |   | $ | 0 |   | $ | 32,000 |   |

 

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(1)           The values of unexercised in-the-moneyoptions have been determined based on the per share closing price of theCompany’s Common Stock as reported on the Nasdaq National Market onDecember 31, 2005 ($7.20).

** **

**EQUITY COMPENSATION PLANINFORMATION**

 

The following table provides information about theCompany’s Common Stock that may be issued upon the exercise of options underthe Company’s existing equity compensation plan as of December 31, 2005.

 

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| **(a)**                                                         | ** ** | **(b)**                                                                                                  | ** ** | **(c)**                                                                                  | ** ** | **(d)**                                                                                                                                                    | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                               | ** ** | **Number of securities to   be issued upon exercise   of outstanding options, warrants and rights** | ** ** | **Weighted-average   exercise price of   outstanding options, warrants and rights** | ** ** | **Number of securities   remaining available for   future issuance under   equity compensation   plans (excluding   securities reflected in   column (b)** | ** ** |
| Equity compensation plans approved by  security holders         |       | None                                                                                                     |       | n/a                                                                                      |       | n/a                                                                                                                                                        |       |
| Equity compensation plans not approved by  security holders (1) |       | 174,125                                                                                                  |       | $                                                                                        | 6.19       |                                                                                                                                                       | 19,374     |   |
| Total                                                           |       | 174,125                                                                                                  |       | $                                                                                        | 6.19       |                                                                                                                                                       | 19,374     |   |

 

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(1)           Issuedunder the 1997 Stock Option Plan

 

Some of the principal features of the 1997 Stock OptionPlan, also referred to as the 1997 Plan, are summarized below, but the summaryis qualified in its entirety by the full text of the 1997 Plan.  Stockholder approval of the 1997 Plan was notrequired.

 

The Board of Directors of theCompany adopted the 1997 Plan in July 1997, authorizing the issuance ofqualified or non-qualified stock options to directors, officers, employees,consultants and others to purchase up to 200,000 shares of the Company’s ClassA Common Stock at prices equal to the fair value of the Company’s stock at thedate of grant.  Options granted to dateunder the Plan vest one-quarter each year, beginning one year after the grantdate or a specified vesting commencement date and expire ten years after theearlier of the grant date and the vesting commencement date.

 

**Employment Agreements, Termination of Employment andChange-in-Control Arrangements**

 

The Company has employment agreements with each of Alfred G. Scheid,Heidi M. Scheid and Kurt J. Gollnick which provided for an initial term ofthree years beginning on July 19, 1997, except for Alfred G. Scheid, whoseemployment agreement had an initial term of one year.  The term of each of these employmentagreements has an automatic one-year renewal if either party has not givenwritten notice of termination at least three months prior to the expiration ofthe term.  Under their respectiveemployment agreements, Alfred G. Scheid, Heidi M. Scheid and Kurt J. Gollnickare currently entitled to annual base salaries of $375,000, $192,000 and $270,000,respectively.  The Company may terminateeach Employee’s employment at any time with or without cause, and no severancepayment obligations are provided.

 

The base salary under eachof the above employment agreements is subject to upward adjustment, and eachemployee is eligible for bonus compensation pursuant to bonus arrangements, asdetermined by the Board of Directors upon the recommendation of theCompensation Committee.

 

The outstanding stock options exercisable for shares of Class ACommon Stock of the Company that have been granted under the Plan, includingthose granted to the Directors and Named Executive Officers, provide foraccelerated vesting in connection with certain corporate transactions involvingcertain changes in control of the Company unless the options are assumed, orreplaced with comparable options or a cash incentive program, by the successorcorporation.  In addition, the stockoptions that have been granted to the Named Executive Officers provide forimmediate acceleration of these options upon an “involuntary termination” ofemployment occurring within 18 months of a “change in control.”   In the event of such an acceleration, theoptions will remain exercisable until the earlier of the expiration datespecified in the option grant and one year after the date of involuntarytermination.  For purposes of theseprovisions: an “involuntary termination” means, generally, termination by theCompany other than for “misconduct” (as

 

49

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defined) or termination by theemployee following an involuntary material change in position andresponsibility, an involuntary reduction in compensation by more than 15% or aninvoluntary relocation by more than 50 miles; and a “change in control” means,generally, the acquisition of securities representing a majority of the votingpower of the Company other than by the Company and its affiliates, a change ina majority of the Board of Directors over a period of 36 months or lessinvolving new Directors that have not been elected or nominated by the otherDirectors or a change in ownership of securities representing more than amajority of the voting power of certain subsidiaries of the Company.

 

The Company has entered into agreements to provide indemnification forthe Company’s Directors and certain officers in addition to the indemnificationprovided for in the Company’s Bylaws. These agreements, among other things, will indemnify the Company’sDirectors and certain officers to the fullest extent permitted by Delaware lawfor certain expenses (including attorneys’ fees), and all losses, claims,liabilities, judgments, fines and settlement amounts incurred by such personarising out of or in connection with such persons’ service as Directors orofficers of the Company or an affiliate of the Company.  These agreements provide for the advancementof expenses incurred in defending a claim prior to resolution of the merits ofthe claim.  These agreements also requirethe Company to maintain directors and officers liability insurance.  The Employment Agreements impose similarindemnification obligations on the Company. There is no pending litigation orproceeding involving a Director, officer, employee or agent of the Company, andthe Company is not aware of any threatened litigation or proceeding which mayresult in a claim for such indemnification.

 

**ITEM 11.****             ****SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.**

 

**Security Ownership**

 

Thefollowing table sets forth certain information as of April 7, 2006, withrespect to persons known by the Company to be beneficial owners of more thanfive percent of either the Company’s Class A Common Stock or the Company’sClass B Common Stock, as well as beneficial ownership of such classes of CommonStock by the executive officers and Directors of the Company, and all executiveofficers and Directors as a group.  Thepersons named in the table have sole voting and investment power with respect toall shares beneficially owned, unless otherwise indicated.  

 
| ** **                                   | ** ** | **Class A** | ** ** | **Class B**    | ** ** |
|----------------------------------------------|------------|-------------|------------|----------------|------------|
| **Name and Address of Beneficial  Owner(2)** | ** ** | **Total**   | ** ** | **Percentage** | ** ** | **Total** | ** ** | **Percentage** | ** ** |
| Alfred G.  Scheid(3)                         |       | 1,621,489   |       | 35.3           | %          | 564,404 |   | 51.4 | % |
| Scott D.  Scheid(4)                          |       | 347,493     |       | 8.4            | %          | 120,458 |   | 11.0 | % |
| Heidi M.  Scheid(5)                          |       | 365,293     |       | 8.8            | %          | 128,483 |   | 11.7 | % |
| Kurt J.  Gollnick(6)                         |       | 227,108     |       | 5.5            | %          | 72,088 |   | 6.6 | % |
| Michael S.  Thomsen(7)                       |       | 10,000      |       |           | *          | 0 |   | 0.0 | % |
| John L.  Crary(7)                            |       | 28,500      |       |           | *          | 0 |   | 0.0 | % |
| Robert P.  Hartzell(7)(8)                    |       | 27,500      |       |           | *          | 0 |   | 0.0 | % |
| Keith L.  Krum(7)                            |       | 10,000      |       |           | *          | 0 |   | 0.0 | % |
| Emily K.  Liberty(9)                         |       | 258,166     |       | 6.3            | %          | 88,956 |   | 8.1 | % |
| Tyler P.  Scheid(10)                         |       | 280,966     |       | 6.8            | %          | 98,716 |   | 9.0 | % |
| Advisory  Research, Inc.(11)                 |       | 331,132     |       | 8.2            | %          | 0 |   | 0 |   |
|                                         |       |        |       |           |       |   |   |   |   |
| All  executive officers and Directors        |       | 2,637,383   |       | 52.6           | %          | 885,433 |   | 80.7 | % |

 

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*              Less than one percent.

 

(1)           Exceptin the case of Advisory Research, Inc. and for certain stock optionsexercisable for shares of Class A Common Stock as described in notes 4 through6 below, all shares of Class A Common Stock reflected as beneficially owned byeach person named in this table represent shares issuable upon conversion ofthe beneficial holder’s shares of Class B Common Stock.  

 

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Beneficialownership and the percentages of the Class A Common Stock and Class B CommonStock outstanding have been determined in accordance with Section 13(d) of theExchange Act, and the rules promulgated thereunder.  Any additional shares of Common Stock that astockholder has the right to acquire within 60 days after March 31, 2006 aredeemed to be outstanding for the purpose of calculating that stockholder’spercentage beneficial ownership.  In thecase of Advisory Research, Inc., the stockholdings reported reflect data setforth in the latest Schedule 13G furnished to the Company by Advisory Research,Inc.

 

(2)           Theaddress of each of the persons named in this table, other than AdvisoryResearch, Inc. is c/o Scheid Vineyards Inc., 305 Hilltown Road, Salinas,California 93908.  The addresses ofAdvisory Research, Inc. is set forth in note 11 below.  Scott D. Scheid, Heidi M. Scheid, Emily K.Liberty and Tyler P. Scheid are children of Alfred G. Scheid.

 

(3)           Ownedby Alfred G. Scheid as Trustee of the Alfred G. Scheid Revocable Trust datedOctober 8, 1992.  Class A shares includethe assumed conversion of 564,404 shares of Class B Common Stock as well as1,057,085 shares of Class A Common Stock owned. Does not include 65,190 shares of Class A Common Stock and 34,810 sharesof Class B Common Stock owned by a revocable trust of which Mr. Scheid’s wifeis the sole trustee and over which Mr. Scheid does not have any voting power orinvestment power.  Mr. Scheid disclaimsbeneficial ownership of the shares beneficially owned by his wife’s trust.

 

(4)           ClassA shares include, 1) 203,135 shares of Class A Common Stock owned, 2) theassumed conversion of 120,458 shares of Class B Common Stock beneficiallyowned, 3) 2,600 shares owned by trusts for the benefit of the children of Mr.Scheid, 4) 1,300 shares owned in trust by a child of Heidi M. Scheid, of whichMr. Scheid is a co-trustee together with Heidi M. Scheid, and 5) 20,000 sharesthat may be acquired upon the exercise of options.  Class B shares include 108,458 shares of ClassB Common Stock owned by Scott D. Scheid and 12,000 shares of Class B CommonStock owned by trusts for the benefit of the children of Heidi M. Scheid, ofwhich Mr. Scheid is a co-trustee together with Heidi M. Scheid.  Does not include 1,000 shares of Class BCommon Stock owned by Scott D. Scheid’s wife, Nancy B. Scheid, and over whichScott D. Scheid does not have any voting power or investment power.  Scott D. Scheid disclaims beneficialownership of the shares beneficially owned by his wife.

 

(5)           ClassA shares include, 1) 212,910 shares of Class A Common Stock owned 2) theassumed conversion of 125,683 shares of Class B Common Stock beneficiallyowned, 3) 1,300 shares owned by a trust for the benefit of a child of Ms.Scheid, 4) 2,600 shares owned by trusts for the benefit of children of Scott D.Scheid, of which Scott D. Scheid is a co-trustee together with Heidi M. Scheid,5) 2,800 shares of Class B Common Stock owned by a trust for the benefit of achild of Tyler P. Scheid, of which Tyler P. Scheid is a co-trustee togetherwith Heidi M. Scheid, and 6) 20,000 shares that may be acquired upon theexercise of options.  Class B sharesinclude 1) 113,683 shares of Class B Common Stock owned by Heidi M. Scheid, 2)12,000 shares of Class B Common Stock owned by trusts for the benefit of thechildren of Ms. Scheid, of which Ms. Scheid is a co-trustee together with ScottD. Scheid, and 3) 2,800 shares of Class B Common Stock owned by a trust for thebenefit of Tyler P. Scheid, of which Tyler P. Scheid is a co-trustee togetherwith Heidi M. Scheid. Does not include 1,000 shares of Class B Common Stockowned by Ms. Scheid’s husband and over which Ms. Scheid does not have anyvoting power or investment power.  Ms.Scheid disclaims beneficial ownership of the shares beneficially owned by herhusband.

 

(6)           ClassA shares include 135,020 shares of Class A Common Stock owned, assume theconversion of 72,088 shares of Class B Common Stock, and also include 20,000shares that may be acquired upon the exercise of options.  Does not include 1,000 shares of Class BCommon Stock owned by Mr. Gollnick’s wife and over which Mr. Gollnick does nothave any voting power or investment power. Mr. Gollnick disclaims beneficial ownership of the shares beneficiallyowned by his wife.

 

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(7)           Representsshares that may be acquired upon the exercise of options.  For Mr. Crary, also includes 1,000 shares ofClass A Common Stock owned.

 

(8)           Doesnot include 600 shares of Class B Common Stock owned by Mr. Hartzell’s wife andover which Mr. Hartzell does not have any voting power or investmentpower.  Mr. Hartzell disclaims beneficialownership of the shares beneficially owned by his wife.

 

(9)           ClassA shares include 166,610 shares of Class A Common Stock owned, the assumedconversion of 88,956 shares of Class B Common Stock beneficially owned, as wellas 2,600 shares owned by a trust for the benefit of children of Ms. Liberty, ofwhich Ms. Liberty is a co-trustee together with Tyler P. Scheid.

 

(10)         ClassA shares include 179,650 shares of Class A Common Stock owned, the assumedconversion of 98,716 shares of Class B Common Stock beneficially owned, as wellas 2,600 shares owned by a trust for the benefit of children of Emily K.Liberty, of which Ms. Liberty is a co-trustee together with Mr. Scheid. Class BShares include 95,916 shares of Class B Common Stock owned by Tyler P. Scheidand 2,800 shares of Class B Common Stock owned by a trust for the benefit of achild of Mr. Scheid, of which Heidi M. Scheid is a co-trustee together with Mr.Scheid.

 

(11)         AdvisoryResearch, Inc. is an investment advisor. The address of Advisory Research, Inc. is 180 North Stetson St., Suite5500, Chicago, IL 60601.

 

**Agreement Among Certain Stockholders**

 

AlfredG. Scheid, Heidi M. Scheid, Scott D. Scheid, Emily K. Liberty, Tyler P. Scheid,Kurt J. Gollnick and Shirley G. Scheid are parties to an Agreement of CertainStockholders of Scheid Vineyards Inc. (“Stockholders Agreement”).  Pursuant to the Stockholders Agreement, noneof the parties thereto other than Alfred G. Scheid may, with limitedexceptions, transfer any Class A Common Stock or Class B Common Stock withoutfirst offering such stock first to the Company, second to Alfred G. Scheid, andthird to the other parties to the Stockholders Agreement.  The Stockholders Agreement shall terminate onDecember 31, 2012 or at the election of the Company’s Board of Directors,whichever occurs sooner.

 

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

 

**Conversion of Shares**

 

Duringthe past two years, the following shares of Class B Common Stock were convertedto shares of Class A Common Stock:

 

| **Name**           | ** ** | **Number of  Shares** | ** ** |
|--------------------|------------|-----------------------|------------|
| Alfred G.  Scheid  |       | 1,069,885             |       |
| Heidi M.  Scheid   |       | 232,910               |       |
| Scott D.  Scheid   |       | 228,135               |       |
| Emily K.  Liberty  |       | 176,610               |       |
| Kurt J.  Gollnick  |       | 175,020               |       |
| Tyler P.  Scheid   |       | 159,650               |       |
| Shirley G.  Scheid |       | 65,190                |       |
| Nancy B.  Scheid   |       | 10,000                |       |
| Total              |       | 2,117,400             |       |

 

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**Other Transactions**

 

InJuly and August 2005, Alfred G. Scheid purchased 9,600 shares of Class A CommonStock on the open market at an average price of $6.14 per share for a totalpurchase price of $58,953.

 

InDecember 2005, Alfred G. Scheid gifted an aggregate of 6,500 shares of Class BCommon Stock to the following individuals in the amount of 1,500 shares each:Scott D. Scheid, Heidi M. Scheid, Emily K. Liberty, Tyler P. Scheid and thechild of Tyler P. Scheid.

 

InDecember 2005, Shirley G. Scheid (the wife of Alfred G. Scheid) gifted 1,300shares of Class B Common Stock and 6,500 shares of Class A Common Stock (uponconversion of Class B Common Stock) to Alfred G. Scheid’s grandchildren.

 

InJanuary 2006, Alfred G. Scheid gifted 7,800 shares of Class B Common Stock toShirley G. Scheid.

 

InJanuary 2006, the Company purchased 5,000 shares of Class B Common Stock fromTyler P. Scheid at $6.91 per share for a total purchase price of $34,529.

 

**ITEM 13.****             ****EXHIBITS.**

 

**(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) |

 

53

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| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 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)                                                                                                                                                                                               |
| 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† | 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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

55

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| 10.22       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23       | 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) |
| 10.24       | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.25       | 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)                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26       | 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)                                                                                                                                                                                                                                                                                           |
| 10.27       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.27a      | Amendment  to Credit Agreement [Crop Line] by and between Bank of the West and Scheid Vineyards  California Inc., dated August 4, 2004 (incorporated by reference to Exhibit  number 10.1 to Registrant’s Form 10-QSB for the quarterly period ended June  30, 2004).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.28† | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29† | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.30       | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 10.31       | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

56

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| 10.32 | Employment  Agreement, dated as of July 19, 1997, by and between Scheid Vineyards Inc.  and Heidi M. Scheid (incorporated by reference to Exhibit number 10.46 to  Amendment No. 2 to Registrant’s Registration Statement on Form SB-2 filed  July 21, 1997).(2)                                                                                   |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.33 | 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)                                                                                  |
| 10.34 | 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)                                                                                                                                                             |
| 10.35 | 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).                                                      |
| 10.36 | 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.                                                                                          |
| 10.37 | 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).     |
| 10.38 | 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). |
| 10.39 | 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).  |
| 10.40 | 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). |
| 10.41 | 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).          |
| 10.42 | 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)                                                                             |
| 10.43 | Credit  Agreement dated as of June 28, 2005 between Scheid Vineyards California Inc.  as the borrower and Rabobank N.A. (incorporated by reference to Exhibit  number 10.1 to Registrant’s Form 10-QSB for the quarterly period ended June  30, 2005 filed August 15, 2005).                                                                       |
| 10.44 | Security  Agreement dated as of June 28, 2005 between Scheid Vineyards California Inc.  to and in favor of Rabobank N.A. (incorporated by reference to Exhibit number  10.2 to Registrant’s Form 10-QSB for the quarterly period ended June 30, 2005  filed August 15, 2005).                                                                      |

 

57

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| 10.45 | Guaranty  dated as of June 28, 2005 by Scheid Vineyards Inc. in favor of Rabobank N.A.  (incorporated by reference to Exhibit number 10.3 to Registrant’s Form 10-QSB  for the quarterly period ended June 30, 2005 filed August 15, 2005). |
|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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* | Consent  of Independent Registered Public Accounting Firm.                                                                                                                                                                                       |
| 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.                                                                                              |
| 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.                                                                                              |

 

----

*              Electronically filed herewith.

 

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

 

##### **ITEM 14.**               PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

**Audit and Non-Audit Fees**

 

The Company’s independent public accountants for thefiscal years ended December 31, 2005 and 2004 were Moss Adams, LLP (“MossAdams”), which firm is expected to be appointed by the Audit Committee to servein such capacity for the current year. Moss Adams replaced Deloitte & Touche LLP (“Deloitte”) as theCompany’s independent accountants during the year ended December 31, 2004.

 

OnSeptember 10, 2004, the Company dismissed Deloitte as the Company’s independentregistered public accounting firm. The audit reports of Deloitte on theconsolidated financial statements of the Company as of and for the fiscal yearended December 31, 2003, did not contain any adverse opinion or disclaimer ofopinion, nor was it modified as to uncertainty, audit scope, or accountingprinciples.  The decision to changeaccountants was approved by the Audit Committee of the Company.  The Company did not have any disagreementswith Deloitte on any matter of accounting principles or practices, financialstatement disclosure, or auditing scope or procedure, which, if not resolved toDeloitte’s satisfaction, would have caused it to make reference to the subjectmatter of the disagreement in connection with its report.

 

During the year ended December 31, 2005 and 2004, the Audit Committeeapproved in advance all audit and non-audit services provided by Moss Adams andDeloitte.

 

For the year ended December 31, 2005, fees for services providedby Moss Adams were as follows:

 

58

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*Audit Fees:*  Audit fees billed to the Companyin connection with Moss Adams’ audit of the Company’s annual consolidatedfinancial statements for the years ended December 31, 2005 and 2004, andreview of the Company’s interim financial statements included in the Company’sQuarterly Reports on Form 10-QSB for such years totaled $93,600 and$79,000, respectively.

 

*Audit-Related Fees:*  TheCompany did not engage Moss Adams to provide advice to the Company regardingthe audit or review of the Company’s financial statements during the yearsended December 31, 2005 and 2004 that is not disclosed under Audit Feesabove.

 

*Tax Fees:*  During the year ended December31, 2005, the Company was billed $6,700 by Moss Adams for the preparation ofits corporate income tax returns and other related services.  The Audit Committee determined that theprovision of non-audit services by Moss Adams is compatible with maintainingMoss Adams’ independence.

 

*All Other Fees:*  None

 

For the year ended December 31, 2004, fees for services providedby Deloitte were as follows:

 

*Audit Fees:*  Audit fees billed to theCompany in connection with Deloitte’s review of the Company’s interim financialstatements included in the Company’s Quarterly Reports on Form 10-QSBduring the year ended December 31, 2004 totaled $20,500.

 

*Audit-Related Fees:*  TheCompany did not engage Deloitte to provide advice to the Company regarding theaudit or review of the Company’s financial statements during the years endedDecember 31, 2004 that is not disclosed in Audit Fees above.

 

*Tax Fees:*  None.

 

*All Other Fees:*  None

 

59

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**SIGNATURES**

 

Inaccordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,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                      |       | April  7, 2006 |
| Alfred  G. Scheid       |       |                                        |       |           |
|                    |       |                                        |       |           |
| /s/  SCOTT D. SCHEID    |       | President,  Chief Executive Officer         |       | April  7, 2006 |
| Scott  D. Scheid        |       | (Principal  Executive Officer) and Director |       |           |
|                    |       |                                        |       |           |
| /s/  HEIDI M. SCHEID    |       | Senior  Vice President, Secretary,          |       | April  7, 2006 |
| Heidi  M. Scheid        |       | Treasurer  and Director                     |       |           |
|                    |       |                                        |       |           |
| /s/  MICHAEL S. THOMSEN |       | Chief  Financial Officer (Principal         |       | April  7, 2006 |
| Michael  S. Thomsen     |       | Financial  and Accounting Officer)          |       |           |
|                    |       |                                        |       |           |
| /s/  JOHN L. CRARY      |       | Director                                    |       | April  7, 2006 |
| John  L. Crary          |       |                                        |       |           |
|                    |       |                                        |       |           |
| /s/  ROBERT P. HARTZELL |       | Director                                    |       | April  7, 2006 |
| Robert  P. Hartzell     |       |                                        |       |           |
|                    |       |                                        |       |           |
| /s/  KEITH L. KRUM      |       | Director                                    |       | April  7, 2006 |
| Keith  L. Krum          |       |                                        |       |           |

 

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