**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION**

**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, 2004** |
|                                                  |       |                                                                                                |   |
| **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 (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes  ý    No  o

 

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

 

Issuer’srevenues for its most recent fiscal year:    $23,624,000

 

Aggregatemarket value of the voting stock held by non-affiliates computed by referenceto the closing price at which the Class A Common Stockwas sold on the Nasdaq Stock Market SmallCap Market System on March 29, 2005: $12,574,706.  The voting stock held by non-affiliates onthat date consisted of 2,034,742 shares of Class ACommon Stock.

 

Numberof shares outstanding of each of the issuer’s classes of common stock at March 30,2005:

Class A   2,034,742     ClassB   3,068,715

 

Portionsof the registrant’s Proxy Statement for its June 9, 2005 AnnualStockholders Meeting, which has not been filed as of the date of this filing,are incorporated by reference into Part III of this Report.`

 

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

 

 

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**FORM10-KSB INDEX**

 
| Note Concerning  Forward-Looking Statements |       |
|---------------------------------------------|------------|
|                                        |       |   |   |
| ** **                                  | ** ** | **PART I** | ** ** |
| Item 1.                                     |       | Description of  Business. |   |
| Item 2.                                     |       | Description of Properties. |   |
| Item 3.                                     |       | Legal Proceedings. |   |
| Item  4.                                    |       | Submission  of Matters to a Vote of Security Holders. |   |
| ** **                                  | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | **PART II** | ** ** |
| Item  5.                                    |       | Market  for Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities. |   |
| 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 and Reports on Form 8-K. |   |
| Item  14.                                   |       | Principal  Accountant Fees and Services. |   |
|                                        |       |   |   |
| Signatures                                  |       |   |   |

 

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**NOTE CONCERNING FORWARD-LOOKING STATEMENTS**

 

This Report contains certainforward-looking statements, including the plans and objectives of managementfor the business, operations, and economic performance of ScheidVineyards Inc. (the “Company”).  Theseforward-looking statements generally can be identified by the context of thestatement or the use of words such as the Company or its management “believes,”“anticipates,” “intends,” “expects,” “plans” or words of similar meaning.  Similarly, statements that describe theCompany’s future operating performance, financial results, plans, objectives,strategies, or goals are forward-looking statements.  Although management believes that theassumptions underlying the forward-looking statements are reasonable, theseassumptions and the forward-looking statements are subject to various factors,risks and uncertainties, many of which are beyond the control of the Company.  Accordingly, actual results could differmaterially from those contemplated by the forward-looking statements.  In addition to the other cautionarystatements relating to certain forward-looking statements throughout thisReport, attention is directed to “Business — Cautionary Information RegardingForward-Looking Statements” below for discussion of some of the factors, risksand uncertainties that could affect the outcome of future results contemplatedby forward-looking statements.

 

**PART I**

 

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

 

Scheid Vineyards Inc., a Delaware corporation (“SVI”or the “Company”), is a leading independent (*i.e*.,not winery controlled) producer of premium varietalwine grapes and bulk wine.  The Companycurrently operates approximately 5,700 acres of wine grape vineyards on theCentral Coast of California.  Of thistotal, approximately 4,300 acres are operated for the Company’s own account and1,400 acres are operated under management contracts for others.  All of the properties the Company currentlyoperates are located in Monterey and San Benito counties, both of which aregenerally recognized as excellent regions for growing high quality wine grapevarieties.

 

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 2004, the Company soldapproximately 58% of its wine grapes under such purchase agreements to over 25different wineries.  The Company alsoconverts a portion of its grapes, approximately 33% in 2004, to premium bulkwine which is sold pursuant to wine purchase agreements or on the open bulkmarket.  The Company also sells a portionof its grapes, approximately 9% in 2004, pursuant to an acreage contractwhereby the winery client purchases the entire grape production from specifiedacreage for a set price per acre.

 

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 is DiageoChateau & Estate Wines Company, a division of Diageoplc (“Diageo”), a global premium drinks business andone of the ten largest U.S. wineries in terms of 2004 case shipments.  Grape purchase contracts with Diageo covered 49% of the Company’s producing acreage in2004 and accounted for approximately 53% and 71% of the Company’s 2004 and 2003total revenues, respectively.  Diageo produces and markets the wines of *Beaulieu Vineyard (BV)*, *BV Coastal*, *Sterling Vineyards*, *TheMonterey Vineyard* and *BlossomHill*.  The Company also haslong-term grape or bulk wine purchase agreements with other well-knownproducers of ultra premium wines, including Don Sebastiani& Sons, Niebaum-Coppola Estate Winery,Canandaigua Wine Company (“Canandaigua”, a division of Constellation Brands,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 grapepurchase contracts extend to between 2005 and 2014, and generally have “evergreen”provisions requiring one to three years’ prior written notice oftermination.  SVI also provides vineyardmanagement services to two winery clients, Diageo andPacific Wine Partners,

 

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LLC (a subsidiary of Constellation Brands, Inc.).  Underthese arrangements, the Company provides its farming services for a set fee peracre.  In 2004, vineyard managementservices accounted for approximately 5% of the Company’s total revenues.

 

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

 

The Company’s business isconducted through a wholly owned subsidiary, ScheidVineyards California Inc., a California corporation (“SVI-Cal”).  References in this Report to “SVI-Del” referonly to Scheid Vineyards Inc., the parent holdingcompany.  Unless otherwise required bythe context, references in this Report to “SVI” and the “Company” includeSVI-Del and SVI-Cal on a consolidated basis. SVI-Del was incorporated in Delaware in 1997 and SVI-Cal wasincorporated in California in 1971.

 

##### **Recent Developments**

##### ** **

 *2004 Harvest*.  For the year 2004, the Company harvestedapproximately 19,700 tons of wine grapes, a 5% decrease from the 2003 harvestof 20,700 tons.  This decrease wasprimarily due to a 6% decrease in the number of producing acres from 2003 to 2004,as approximately 260 acres of under performing vineyards were removed after theharvest of 2003.  Overall yields per acrein 2004 were relatively unchanged from 2003, and the average price per tonreceived in 2004 decreased approximately 3% from 2003.

 

The Company continues to expand the amount of grapesthat it processes into bulk wine for sale under wine purchase agreements and onthe open bulk wine market.  The Companycrushed approximately 6,400 tons of grapes into bulk wine during the 2004harvest, as compared to 2,150 tons in 2003, an almost 200% increase.

 

 *2005 Grape Prices*.  Approximately 47% of the Company’s producingacreage is covered by 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, to calculate prices.  Based on the 2004 Crush Report published March 10,2005, the most significant changes to prices in 2005 for those contracts utilizing the Crush Report arein Cabernet Sauvignon, with a price decrease of 10%; Merlot, with a pricedecrease of 7%; and Chardonnay, with a price increase of 3%.  The Company anticipates that the prices itwill receive for grapes currently not under contract, representing about 11% ofanticipated production, could be less than the prices it will receive forcontracted grapes for some varietals.  See “The Company’s Grape ProductionOperations-Grape Sales-Pricing.”

 

* Winery Facility.*  On January 24,2005, the Company announced that its Board of Directors had approved theconstruction of a new winery facility (the “ScheidWinery”) to be located at the Company’s vineyard headquarters just off of U. S.Highway 101 on Hobson Avenue near Greenfield, California. When completed, thestate-of-the-art winery will cater to premium wine customers in the heart ofthe Monterey County wine grape growing region. The completion of the first phase of ScheidWinery will result in the capacity to crush approximately 10,000 tons of grapesand will require an estimated investment of $18 to $20 million.  It is expected that ScheidWinery will operate both as a custom crush facility for present and futurewinery customers, as well as a winemaking facility for the Company’s own grapeproduction.  It is anticipated that thenew facility will be in partial operation by the harvest season in the fall of2005.  See “Management’s Discussion andAnalysis or Plan of Operation – Liquidity and Capital Resources.”

 

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**Company Strategy**

 

The Company’s strategic objective is to become theleading independent producer of premium varietal winegrapes and bulk wine in California.  TheCompany believes that its success to date has resulted from execution of acoherent strategy that includes 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.  This avenue of growthaccounted for approximately 24% of revenues in 2004.  The construction of ScheidWinery enhances the Company’s ability to control quality and produce wines thatmeet the needs of its clients.

 

 *Continue Long-Term Relationships with**Leading**Wine Producers*.   The Company believes thatforming and maintaining long-lasting relationships with clients is the key tobeing successful as an independent grape grower.  The Company has had grape purchase contractswith Diageo and its predecessors since 1972 and withCanandaigua and its predecessors since 1979. More recently, SVI has expanded its customer list to over 25 differentwineries, including Don Sebastiani & Sons, Niebaum-Coppola Estate Winery, Purple Wine Company andDavid 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,stresses customer service by allowing clients to access weather, irrigation andfarming data through the Company’s proprietary web-based system, VitWatch®, and provides clients with customized quarterlyreports outlining the farming practices that have been utilized on theircontracted grapes.  See “The Company’sGrape Production Operations—Grape Sales.”

 

 *Combine Fundamental ViticulturalPractices with Cutting Edge Technology*.   The Company invests in the development ofnew and improved viticultural practices and the useof 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 asacrifice in quality.  The Companyutilizes many technological tools including irrigation monitoring tools such asneutron probes and pressure baums, weather stations,geographic information systems technology, global positioning systemstechnology and analytical grape chemistry.

 

 * Market Uncontracted Grapes and Complete Vineyard Development.*  The Company currently has approximately 390producing acres of wine grapes, or 11% of the Company’s total producing netvine acres, that are not under contract. The Company’s primary focus at this time is to market the productionfrom these uncontracted acres and complete thevineyard 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 8.1%compound annual rate, from approximately $3.2 billion in 1994 to approximately$7.0 billion in 2004, according to Gomberg, Fredrikson & Associates.  In 2004, wine shipments to the United Statesgrew 4%, to a record 281 million cases. This 11 million case increase came from California wines, which were up by4.6 million cases or 4%; imports, which were up by 3.7 million cases or 5%; andother states in the U.S, which were up 2.1 million cases or 8%.  The growth in California wines wassignificantly impacted by extreme value wines ($2 to $3 per 750 ml. bottle).  First introduced in 2002, extreme value wineshad total sales of 6.9 million cases in 2004.

 

Total California wine shipments worldwide in2004 increased by approximately 12.1 million cases, or 5.8%.  Wines in the ultra-premium category (over $14per 750 ml. bottle) grew by approximately 10% and accounted for over one-thirdof total California winery revenues. California wines in the super-premium category ($7 to $14 per 750 ml.bottle) were helped by the slowing of import growth, and sales grew byapproximately 9%.  The popular premiumcategory ($3 to $7 per 750 ml. bottle) increased only slightly, with anincrease in sales of about 1%, as the result of some consumers trading down tothe extreme value category, and an increase in imports in this price category.

 

The weakening of the U.S. dollar for thesecond half of 2003 and through 2004 slowed the growth of imported wines, however, imports achieved record volumes in 2004,reaching 73.1 million cases, an increase of 5% over 2003.  Australian imports continued to increasedramatically with total sales of 20.1 million cases in 2004, an increase of20%.  Australia is the second largestwine exporter to the U.S. behind Italy, which experienced a decrease in salesto the U.S. of 6%.   The weakening of theU.S. dollar has effectively raised the prices of many imported wines and slowedsales growth.

 

Theweakening of the U.S. dollar has also helped increase California wineexports.  In 2004 exports increased bymore than 25% over 2003 levels.  A 59%increase in bulk wine exports in 2004 compared to 2003 was fueled by the availabilityof California wines and the desire of wineries to bottle the wine in thecountry of destination.  Exports ofbottled California wine grew approximately 10% in 2004.

 

According tothe Crush Report, the 2004 harvest of California wine grapes totaled 2.8million tons, a 3% decrease from the 2003 crush of 2.9 million tons.  California wine grape growers received anaverage price in 2004 for white wine grapes of $487 per ton, up 14% from 2003,and an average price for red wine grapes of $627 per ton, up 3% from 2003.  For growers in California grape pricingdistrict 7 (Monterey and San Benito Counties), the average price for white winegrapes increased by 2%, from $933 per ton in 2003 to $951 in 2004, and the averageprice for red wine grapes decreased by 4%, from $1,163 per ton in 2003 to$1,111 in 2004.

 

**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 4,080 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 2005 approximately 84% willbe in full production, 3% will be in partial production, and 13% 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 89% of the Company’s producing acres are currentlycontracted for the harvest of 2005, and approximately 66% are contracted throughat least the harvest of 2006.

 

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*** Grape Production***

 

The harvest of wine grapes occurs annually,generally in September and October for the coastal vineyards ofCalifornia.  Grape production varies accordingto the variety of grape produced, location, weather, vine density, the qualityand 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 fouryears to reach full production.  In 1999,the Company developed a 740-acre vineyard, with the final 120 acres of thisvineyard being grafted in 2004.

 

SVI’s vineyards are divided intoblocks, each block generally consisting of approximately 20 to 25 acres.  The Company continually evaluates itsvineyards on a block-by-block basis and considers various factors, such as theoverall product mix of the Company’s vineyards and the productivity of eachblock.  In 2002 and 2003, the Companymoved certain winery clients from under-performing blocks to more reliable andconsistently producing blocks, and removed approximately 365 acres ofvines.  In 2005, the Company isreplanting 180 of those acres.  TheCompany believes that these acres will be in partial production in 2006 andreach full production in 2009, although no assurances can be given that suchproduction increases will occur with any predictability or at all.  The remaining 185 acres have been leasedunder short-term agreements to other farming concerns.  The effect of these vineyard removals will bea small reduction in the Company’s overall farming costs and a reduction in theamount of uncontracted grapes the Company hasavailable.

 

The following table shows SVI’snet vine acres by variety from 2001 to 2005, total tons produced from 2001 to2004, and tons produced by variety for 2004:

 

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

 
| ** **            | ** ** | **Net Vine Acres** | ** ** | **Tons** | ** ** |
|-----------------------|------------|--------------------|------------|----------|------------|
| **Variety**           | ** ** | **2001**           | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005(4)** | ** ** | **2004** | ** ** |
| Chardonnay            |       | 1,374              |       | 1,399    |       | 1,293 |   | 1,107 |   | 1,123 |   | 5,868 |   |
| Cabernet  Sauvignon   |       | 776                |       | 767      |       | 727 |   | 727 |   | 735 |   | 4,209 |   |
| Merlot                |       | 556                |       | 600      |       | 600 |   | 600 |   | 600 |   | 4,037 |   |
| Pinot Noir            |       | 387                |       | 318      |       | 362 |   | 393 |   | 393 |   | 1,618 |   |
| Sauvignon  Blanc      |       | 240                |       | 240      |       | 240 |   | 240 |   | 264 |   | 1,097 |   |
| Syrah                 |       | 174                |       | 174      |       | 174 |   | 174 |   | 174 |   | 958 |   |
| Gewürztraminer   |       | 82                 |       | 82       |       | 82 |   | 82 |   | 82 |   | 874 |   |
| Petite Sirah     |       | 31                 |       | 31       |       | 31 |   | 31 |   | 56 |   | 244 |   |
| Petit Verdot          |       | —             |       | —   |       | — |   | — |   | 37 |   | 97 |   |
| Zinfandel             |       | 86                 |       | 73       |       | 73 |   | 36 |   | 36 |   | 194 |   |
| White  Riesling       |       | 58                 |       | 58       |       | 58 |   | 22 |   | 22 |   | 90 |   |
| Valdiguie             |       | 20                 |       | 20       |       | 20 |   | 20 |   | 20 |   | 261 |   |
| Others                |       | 31                 |       | 30       |       | 28 |   | 28 |   | 28 |   | 119 |   |
| Replants/Grafts(1)    |       | 64                 |       | 78       |       | 100 |   | 70 |   | 190 |   | — |   |
| New  Acreage(2)       |       | 201                |       | 210      |       | 185 |   | 185 |   | 135 |   | — |   |
| Fallow(3)             |       | —             |       | —   |       | 107 |   | 365 |   | 185 |   | — |   |
| Total Net  Vine Acres |       | 4,080              |       | 4,080    |       | 4,080 |   | 4,080 |   | 4,080 |   |   |   |
|                  |       |               |       |     |       |   |   |   |   |   |   |   |   |
| Total Tons  Produced  |       | 14,019             |       | 17,550   |       | 20,700 |   | 19,666 |   | — |   | 19,666 |   |

 

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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 30, 2005.

 

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***Grape and Wine Sales***

 

*PrimaryCustomers*.   Thewine grape tonnage harvested from the Company’s approximately 3,460 net vineacres in production in 2004 (*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 74% of the Company’s 2004 grape sales revenues and53% of the Company’s 2004 total revenues, is with DiageoChateau & Estate Wines Company, a division of Diageoplc.  Diageo isa global premium drinks business headquartered in the United Kingdom and one ofthe ten largest U.S. wineries.  TheCompany’s contractual relationship with Diageo’spredecessor began in 1972 and has been continuous since that time.  In addition, the Company has purchase contractsfor its current wine grape production with other wine producers, including Don Sebastiani & Sons, Niebaum-CoppolaEstate Winery, Canandaigua, David Bruce Winery, Morgan Winery and The HessCollection Winery.  The Company alsoprovides vineyard management services to Diageo andPacific Wine Partners, LLC on an aggregate of approximately 1,400 acres of winegrapes.  See “Vineyard ManagementContracts.”

 

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 2005 and 2014.  Contracts covering approximately 66% of SVI’s producing acreage extend through delivery of the 2006crop.  A portion of these contracts have “evergreen”renewal provisions whereby the contracts continue until either party gives atwo or three years’ prior written notice of termination.  The Company believes that these evergreenprovisions are desirable to either allow time to renegotiate the contract withits contracting client or to find a new client for the grape production beforethe contract terminates, although there can be no assurance that either course ofaction will be successful.

 

In 2003, Diageodelivered a notice to the Company terminating grape purchase contracts covering1,300 acres, or 38% of the Company’s producing acreage, such termination tobecome effective after the harvest of 2006. The marketing of uncontracted acres is aprimary focus of SVI.  However, there canbe no assurances that these efforts will be successful and it is likely thatany new purchase agreements will have less favorable terms.  See “Cautionary Information Regarding Forward-Looking Statements —Dependence on Major Customers; Renewal of Grape Purchase 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 converted certain grapes that were unsold at the time of harvestto bulk wine to be sold on the open market. SVI has contracted with various third-party processing facilities to “customcrush” the wine it has produced.  In2004, SVI contracted with six processing facilities to crush a total ofapproximately 6,400 tons of grapes into wine, equivalent toapproximately 1,060,000 gallons.  Thisrepresents approximately 33% of the Company’s total production in 2004.  Of this 2004 bulk wine production, approximately3,600 tons, or 19% of the Company’s total production, was sold pursuant to winepurchase agreements with seven different customers and approximately 2,800tons, or 14% of SVI’s total production, was producedto be sold on the open bulk wine market.

 

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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 sourcesof revenues.  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, themajority of which will expire after the harvest of 2006, will have lessfavorable 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** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------|------------|
| 2005                            |       | 870                 |       | 21.3        | %          |
| 2006                            |       | 1,490               |       | 36.5        |       |
| 2007                            |       | 80                  |       | 2.0         |       |
| 2008                            |       | 60                  |       | 1.5         |       |
| 2009                            |       | 40                  |       | 1.0         |       |
| 2010                            |       | 95                  |       | 2.3         |       |
| 2011                            |       | 125                 |       | 3.1         |       |
| 2012                            |       | 25                  |       | 0.6         |       |
| 2013                            |       | 70                  |       | 1.7         |       |
| 2014                            |       | 325                 |       | 8.0         |       |
| Uncontracted                    |       | 390                 |       | 9.5         |       |
| Non-Producing                   |       | 510                 |       | 12.5        |       |
| Total                           |       | 4,080               |       | 100.0       | %          |

 

*Pricing*.  Each year the CDFA publishesthe Grape Crush Report on a preliminary basis on or around February 10,with a final report published on or around March 10.  The Crush Report discloses the prices, tonsand certain quality standards of all grapes crushed for wine from each ofCalifornia’s 17 wine grape producing districts in the grape harvest of theprevious autumn.  The report is 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 47% of SVI’scurrent contract grape prices are established each year by various pricingformulas based on the previous year’s prices for each wine grape variety inseveral specified CDFA reporting districts. For example, grapes from the Company’s 2005 harvest that are subject tothese contracts will be sold at prices based on the actual prices for the 2004harvest reported in the Crush Report published March 10, 2005.  This enables both the Company and its clientsto know final grape prices (on a per ton basis by variety) approximately eightmonths in advance of each year’s harvest. These multiple district formula prices, as opposed to sales on theshort-term spot market, tend to moderate year-to-year swings in prices.  The Company’s grape purchase contractstypically utilize pricing based in part upon prices for Napa, Sonoma andMendocino county grapes, which tend to be higher than prices for the samevarieties 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 agreementscovering new or replanted vineyards.

 

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 2001 based onthe pricing formulas of its various tonnage-based grape purchasecontracts.  As of March 30, 2005,tonnage-based grape and wine purchase contracts covered approximately 77% ofthe Company’s currently producing acreage.

 

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

 
| **Variety**         | ** ** | **2001**   | ** ** | **2002**   | ** ** | **2003**   | ** ** | **2004**   | ** ** | **2005(2)** | ** ** |
|---------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** |
| Cabernet  Sauvignon |       | $          | 2,044      |       | $          | 1,488      |       | $          | 1,578      |        | $          | 1,227 |   | $ | 1,258 |   |
| Chardonnay          |       | 1,615      |       | 1,323      |       | 1,159      |       | 1,221      |       | 1,220       |       |
| Gewurztraminer      |       | 943        |       | 984        |       | 1,048      |       | 1,029      |       | 936         |       |
| Merlot              |       | 1,552      |       | 1,557      |       | 1,445      |       | 1,212      |       | 1,140       |       |
| Petite Sirah        |       | 1,315      |       | 1,313      |       | 1,337      |       | 1,197      |       | 1,235       |       |
| Pinot Noir          |       | 1,789      |       | 1,765      |       | 1,470      |       | 1,349      |       | 1,138       |       |
| Sauvignon  Blanc    |       | 1,181      |       | 1,001      |       | 856        |       | 1,018      |       | 1,072       |       |
| Syrah               |       | 1,442      |       | 1,158      |       | 982        |       | 858        |       | 908         |       |
| Valdiguie           |       | 887        |       | 863        |       | 845        |       | 715        |       | 644         |       |
| White  Riesling     |       | 884        |       | 880        |       | 870        |       | 985        |       | 946         |       |
| Zinfandel           |       | 1,473      |       | 1,158      |       | 1,599      |       | 1,339      |       | 1,231       |       |
|                     |            |            |            |            |            |            |            |            |            |             |            |  |  |  |  |  |

 

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(1)                                  Prices for most premium varieties havedecreased since 2001, 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 for2005 are based upon existing contracts, Company production and sales estimatesfor contracted acres, and the 2004 Final Grape Crush Report released March 10,2005.  These weighted average prices perton do not include estimated production and sales of uncontractedvineyard acres.  The Company anticipatesthat prices for grapes produced from uncontractedacres, in particular CabernetSauvignon, will be lower than those from its contracted acres.  Currently, the Company has 89% of itsproducing vineyard acres contracted for the 2005 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$2,400 to $3,200 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 to expandits operations and grape production through the development of bare land intovineyards, the acquisition of existing vineyards, and the redevelopment of theCompany’s older vineyards.  The Companyhas implemented this strategy through the lease in 1998 of approximately 790acres of bare land located near the Company’s vineyard headquarters which theCompany has developed into vineyards, the 1997 acquisition of the 370-acreRiverview Vineyard, the lease in 1997 of approximately 575 acres of bare landin Hames Valley which the Company has developed intovineyards, 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

 

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significant development and production costs that arenot offset by revenues from these vineyards and 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,before taking into account the cost of land. The costs of redeveloping existing vineyards vary depending upon thecondition of the vineyard and the scope of the redevelopment plan. During the past six years, the Company has made over $25 million incapital expenditures to redevelop existing vineyards and develop newvineyards.  Improvement and refurbishmentis an ongoing process.  The Companyestimates that there will always be some portion of its total net vine acresundergoing some type of redevelopment. See “-Net Vine Acres 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** | ** ** |
|------------------------------------------------------------|------------|---------------|------------|
| ** **                                                 | ** ** | **2004**      | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** |
| Acres five  or more years old (at or near full production) |       | 3,340         |       | 3,440 |   | 3,460 |   | 3,570 |   | 3,715 |   | 3,895 |   |
| Acres three  and four years old (partial production)       |       | 120           |       | 130 |   | 255 |   | 325 |   | 180 |   | — |   |
| Acres one  and two years old (not yet in production)       |       | 255           |       | 325 |   | 180 |   | — |   | — |   | — |   |
| Acres out of  production (2)                               |       | 365           |       | 185 |   | 185 |   | 185 |   | 185 |   | 185 |   |
|                                                       |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Total Acres                                                |       | 4,080         |       | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   |

 

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

 

(2)  Certain marginally-producing acres have beentaken out of production.  Certain of theacres are being replanted in 2005.  Ithas not been determined when the 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 VentanaWilderness in the Los Padres National Forest and Santa Lucia range of coastalmountains.  The Salinas River supplies alarge aquifer which is tapped by agricultural users.  In addition, the Salinas River is fed by twolarge reservoirs, Lake Nacimiento and Lake SanAntonio, which were built primarily for agricultural water supply purposes toserve the Salinas Valley.  Thesereservoirs are maintained by the Monterey County Water Resource Agency.  The Company drip irrigates all of itsvineyards from wells located on or near its vineyards.  The quality of the water obtained from thewells is good, and the wells have proven to be a plentiful and reliable sourceof water for the Company’s operations, even during the drought years of thelate 1980’s.  See “Cautionary InformationRegarding 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 Diageo and Pacific Wine Partners, LLC (a joint venturebetween Constellation Brands, Inc. and BRL Hardy, Inc.).  Pursuant to these management contracts,budgeted costs of labor and equipment are advanced to the Company on a monthlybasis and the Company receives management fees based on the acreage managed andharvested.  The Company’s vineyardmanagement contracts expire no earlier than the completion of harvest in yearsranging from 2009 to 2013.  In certaincases the Company has also received fees for financing vineyard improvements,securing property and designing vineyards. The Company may enter into similar arrangements for other vineyardproperties in the future.

 

**Bottled Wine Production and Sales**

 

SVI produces its own ultra premium varietal wines under the *Scheid**Vineyards* label.  TheCompany has contracted for its wine production with Storrs Winery, a smallproducer of award-winning wines located in Santa Cruz, California,approximately 50 miles from the Company’s vineyard headquarters compound.  The Company currently subleases space in a1,600 square foot building from Storrs Winery, including certain spacededicated for the Company’s exclusive use in connection with its winemakingactivities.  The Company’s tasting roomis located at the Company’s vineyard headquarters compound located on U.S.Highway 101 (a major north-south thoroughfare between San Francisco and LosAngeles) just south of Greenfield and north of King City in Monterey County.

 

Production and sales have been limited to date.  SVI produced approximately 2,950 and 2,660cases in 2004 and 2003, respectively, of ultra premium varietalwines, 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 2005 of approximately 3,500cases.  The Company intends to continueto distribute its current wine production directly through its tasting room,web site, restaurants, clubs and a few selected retailers.

 

Since 1997, the Company has offered an annual “winedividend” to holders of at least 100 shares of its Class A Common Stock,whereby such shareholders were entitled to a $0.50 per share credit for use inmaking purchases of the Company’s wine at up to a 50% discount from the retailprice.  It has not yet been determined ifthe Company will offer another “wine dividend” in 2005.  SVI has not yet earned a profit on itsbottled wine business and cannot predict when, or if, these operations will becomeprofitable.  Further, SVI does not expectits wine business to have a material impact on sales or earnings in theforeseeable future.  No assurances can begiven that wine production and sales ever will be a major source of profit forthe Company.

 

**Competition**

 

Wine grape growing andwine production are highly competitive. California has over 1,000 bonded wineries although, according to Gomberg, Fredrikson &Associates, the top twelve wineries accounted for approximately 80% of salesbased on total California wine shipments in 2004.  In addition, there are many sources of supplyof wine grapes in California and in countries outside the United States.  Since 1996, acres planted to wine grapes inCalifornia have increased 40%, from approximately 378,000 acres at the end of1996 to 529,000 at the end of 2003, according to the California AgriculturalStatistics Service.  Most wine grapeproducers have small, privately owned operations and sell their production towineries, often at spot market prices from year to year.  Quality of production and yields can varywidely 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.

 

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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, someAmerican producers have imported bulk wine for bottling and sale in the UnitedStates.  Imports of foreign bulk wine toCalifornia increased 100% from 2003 to 2004, to 5.2 million gallons, theequivalent of 2.2 million cases.  Since1996, American wineries have imported the equivalent of 24.9 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 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 asecured storage 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 website.  The Company also has wine labelsapproved by the Trade and Tax Bureau (“TTB”).

 

**Employees and Labor Relations**

 

The Company has approximately 90 full-time employeesand 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.  In January 2002, the Company completedthe negotiation of a new five-year contract with the UFW that will expire atthe end of 2006.  The Company believesits labor relations are satisfactory. The Company has never had a walk-out, sit-down, slow-down or strike, andthe existing contract has a “no strike” clause. The Company has, however, been picketed, particularly during theorganizing effort by the UFW and during negotiation of the first contract in1995.  See “Cautionary InformationRegarding Forward-Looking Statements — Labor Regulations 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

 

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weather can be material.  The vineyardsowned by SVI are spread over a distance of approximately 70 miles, north tosouth, close to Highway 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 yearsphylloxera, a louse that feeds on the roots of grapevines, has infested many vineyards in the wine grape producing regions ofCalifornia, causing grape yields to decrease. Phylloxera infestation has been widespread inCalifornia, particularly in Napa, Sonoma, Mendocino and Monterey Counties, andmost of the other wine grape-producing areas of the state have been affected tosome degree.  As a result of thiswidespread problem, thousands of vineyard acres throughout California have beenreplanted with phylloxera-resistant rootstock or, insome cases, taken out of production completely. Substantially all of the Company’s approximately 4,080 net vine acres ofwine grapes are planted or interplanted withrootstock that is designated as phylloxera-resistant.

 

Another potentially devastating pest is theglassy-winged sharpshooter (“GWSS”). GWSS poses a significant threat to viticulture throughout California dueto its ability to transmit *Xylella**fastidiosa*, thebacterium that causes Pierce’s Disease.  Pierce’s Disease, adeadly vine disorder, has been present in California for more than a century,vectored by the blue-green sharpshooter. It now presents a much more significant threat because the GWSS is a newand far stronger disease carrier than the blue-green sharpshooter.  The GWSS became established in the Temecularegion of southern California in 1999 and, as a result, Pierce’sDisease is so widespread that the future viability of the Temecula region toproduce wine grapes is in doubt. According to the California Department of Food and Agriculture, the listof counties in California infested with the GWSS numbers fourteen, withlocalized infestations found in parts of Butte, Sacramento, Santa Clara,Fresno, Tulare, Kern, Santa Barbara, Ventura, Los Angeles, San Bernardino,Orange, Riverside, San Diego and Imperial counties.  Thus far, no infestations have occurred inMonterey County and the Company has seen no evidence of the GWSS or Pierce’s Disease in its own vineyards.  The wine industry, along with scientists andcertain governmental agencies in California, aresearching for ways to control and combat the pest, including a comprehensivesystem of inspections and monitoring, pesticide spraying and numerous researchprojects.  Growers statewide pay anannual assessment of $2 per $1,000 of value of grapes to help fund theseprograms.

 

Other pests that may infest vineyards includeleafhoppers, thrips, nematodes, mites, insects,orange tortrix, twigbore, microflora and various grapevine diseases.  Pesticides and the selection of resistantrootstocks reduce losses from these pests, but do not eliminate the risk ofsuch loss.  Gophers, rabbits, deer, wildhogs and birds can also pose a problem for vineyards, and wine grape vines arealso susceptible 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 Diageocovered 49% of the Company’s producing acreage in 2004 and accounted forapproximately 53% and 71% of the Company’s 2004 and 2003 total revenues,respectively.  The terms of the grapepurchase contracts with Diageo extend to between 2006and 2014.  In 2001, Diageo delivered a notice to the Company terminating agrape purchase contract covering approximately 570 acres, such termination tobecome effective after the harvest of 2003. In December 2003, Diageo delivered anotice to the Company terminating grape purchase contracts covering anadditional 1,300 acres, or 38% of the Company’s producing acreage, suchtermination to become effective after the harvest of 2006.  Although the Company is marketing these uncontracted acres, there can be no assurances that theseefforts will be successful and it is likely that any purchase agreements coveringthese vineyards will have less favorable terms.

 

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*** 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 technologicaladvances, and denser plantings of vines have contributed to supplypressure.  In addition, economic uncertaintyand increased foreign competition have exacerbated market conditions.  These factors have had a significant impacton grape and bulk wine prices for certain varieties, in particular, CabernetSauvignon.  Industry experts believe thatsupply and demand are coming into balance for most varieties, however, theCompany may continue to experience pricing pressures and this could have amaterial adverse affect on its business and future results.

 

*** Uncertainty of Revenue Growth***

 

In 2004, approximately 82% of the Company’s net vineacres were at or near full production.  Itis anticipated that a certain portion of the Company’s vineyards will always beout of production or below maximum production due to initial development,replanting, regrafting and various otherfactors.  While some productivityincreases may be expected from further development of vineyard acreage not yetin full production or from enhancements of fully productive vineyards, thegrowth potential of the Company’s existing properties is limited and theCompany’s ability to increase revenue depends upon its ability to acquire,develop and operate more vineyard properties or expand its business into otherareas.  There can be no assurance thatsuitable properties will be available to the Company at prices that would makethe Company’s growth plans viable or that the development of Scheid Winery will be successful.  Revenues are also substantially dependent ongrape yields and prices, both of which are subject to variation as discussedelsewhere in this section and can have an effect on revenue growthunrelated to the number of acres in full production.

 

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

 

The Company incurs annual farming costs currentlyaveraging approximately $2,400 to $3,200 per acre in production.  These costs are incurred throughout the yearpreceding harvest and are relatively fixed. Revenues from grape sales are not realized until harvest and varydepending upon yields and prices. Vineyard productivity varies from year to year depending upon a numberof factors, and significant variations in annual yields should be expected fromtime to time.  Furthermore, grape priceshave fluctuated significantly in the past and should be expected to continue tofluctuate from year to year and to decrease at times in the future.  Because production costs are notsignificantly adjustable in light of productivity or revenue levels, weakharvests or lower grape prices cannot be mitigated by cost reductions andshould be expected to have significant adverse effects upon profitability.

 

*** Capital Requirements***

 

The farming of vineyards in production 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’s business,financial condition and results of operations.

 

Substantial capital expenditures are required todevelop and acquire new vineyards and improve existing vineyards.  In addition, the Company estimates that aninvestment of $18 to $20 million will be required to complete the first phaseof Scheid Winery. See “Recent Developments”.  TheCompany has made and may continue to make such expenditures to finance itsexpansion, and has incurred and may continue to incur indebtedness.  As a consequence, the Company has and willcontinue to have significant interest and principal repayment obligations andearnings and cash flow will be adversely affected by increases in interestrates.

 

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*** 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 decision to construct a winery facility. See “Recent Developments.”  Therecan be no assurance that Scheid Winery will be in operation by the harvestseason in the fall of 2005 or that Scheid Winery will be profitable.  In addition, there can be no assurance thatthe Company will be able to expand it business by locating suitable propertiesto buy or lease at viable prices, or if it does locate such properties, that itwill be able to secure adequate financing. The development of Scheid Winery and any properties that may be acquiredby the Company in the future will require significant capital investment and,in the case of vineyardproperties, 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.  The development of ScheidWinery and some wineries sell excess production from their own vineyards in theopen market.  Moreover, to a significantextent, wine grapes of a particular variety are fungible, and the ability offoreign producers to compete with the Company on the basis of price due to theirlower production costs may have a negative impact upon the Company’sprofitability.

 

*** 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 andcertain members of their families cease to maintain specified shareholdings inthe Company.  Sales to the public bymembers of the Scheid or Gollnickfamilies or further public offerings by the Company may result in a change ofcontrol of the Company, which could result in termination of 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 since1993.  In January 2002, the Companycompleted the negotiation of a new five-year contract with the UFW that willexpire at the end of 2006.  Although theCompany historically has had satisfactory labor relations, it has been picketedfrom time to time during the initial organization of its employees and duringcontract negotiations.  No assurance canbe given that the Company’s satisfactory labor relations will continue or thatthe UFW will not engage in, picketing, walk-outs, sit-downs, slow-downs orstrikes or the threat of these actions. The Company’s business is heavily dependent upon farm labor, and thefailure of the Company to maintain adequate labor relations on terms acceptableto the Company could have a material adverse effect upon the Company’sbusiness, financial condition and results 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

 

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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 the Scheid family and the retention of its senior non-familyexecutives.  There can be no assurancethat the key persons will remain in their management positions with theCompany, and the loss of the services of any of the key persons could have amaterial adverse effect on the Company’s business, financial condition andresults 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, which wells aresupplied by aquifers fed by the Salinas River and reservoirs operated byMonterey County.  Although historicallythe quality of water from these wells has been good and the wells haveconsistently supplied a plentiful and reliable source of water, even during thedrought years of the late 1980’s, and the Company believes its sources of waterwill be available for the foreseeable future, it is possible that the Company’swater supplies could be impaired in the future due to drought, contamination orother circumstances.  Animpairment in the Company’s water supplies could adversely affect thebusiness, financial condition 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 andPotential New Accounting Pronouncements.***

 

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002,as well as proposed changes to listing standards by Nasdaq and proposed accounting changes by theSecurities and Exchange

 

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Commission, theCompany may be required to increase its internal controls, hire additionalpersonnel, and engage outside legal, accounting and advisory services, all ofwhich could cause the Company’s general and administrative costs toincrease.  Proposed changes in theaccounting rules, including legislative and other proposals to account foremployee stock options as compensation expense, among others, could increasethe expenses that the Company reports under Generally Accepted AccountingPrinciples and could adversely affect operating results.

 

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

 

*CorporateHeadquarters*.  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.

 

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

 

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

 

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

 

The Company is not a party to any material legalproceedings.

 

**ITEM  4****.****                                                 ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

There were no matters submitted to a vote ofsecurity holders during the Company’s fourth quarter ended December 31,2004.

 

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**PART II**

 

**ITEM  5****.****                                                 ****MARKET FOR COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUIT YSECURITIES**

 

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

 

The Company’s Class ACommon Stock is traded 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** | ** ** |
|-----------------|------------|----------|------------|---------|------------|
| **2003**        |       |     |       |    |       |
| First  quarter  |       | $        | 2.680      |    | $          | 2.350 |   |
| Second  quarter |       | $        | 3.070      |    | $          | 2.350 |   |
| Third  quarter  |       | $        | 3.651      |    | $          | 2.810 |   |
| Fourth quarter  |       | $        | 5.139      |    | $          | 3.610 |   |
| **2004**        |       |     |       |    |       |
| First  quarter  |       | $        | 6.350      |    | $          | 4.760 |   |
| Second  quarter |       | $        | 5.340      |    | $          | 4.810 |   |
| Third  quarter  |       | $        | 5.950      |    | $          | 4.910 |   |
| Fourth  quarter |       | $        | 6.260      |    | $          | 5.130 |   |

 

On March 17, 2005, there were 322 holders ofrecord of the Company’s Class A Common Stock and 14holders of record of the Company’s Class B Common Stock.  For information concerning historicaldividends and the Company’s dividend policy, see “Item 6 - Management’sDiscussion and Analysis or Plan of Operation - Dividends and Distributions.”

 

On March 30, 2005, there were stock optionsexercisable to purchase 162,792 shares of the Company’s Class A Common Stock.

 

In October 2004, the Company acquired370,300 shares of its Class A Common Stock fromWellington Management Company, LLP, at a total purchase price of$2,038,000.  The shares will remain inthe Company’s treasury.

 

**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.  The Company currently operates approximately5,700 acres of wine grape vineyards on the Central Coast of California.  Of this total, approximately 4,300 acres areoperated for the Company’s own account and 1,400 acres are operated undermanagement contracts for others.  All ofthe properties the Company currently operates are located in Monterey and SanBenito counties, both of which are generally recognized as excellent regionsfor growing high quality wine grape varieties.

 

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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 2004, the Company soldapproximately 58% of its wine grapes under such purchase agreements to over 25different wineries.  The Company alsoconverts a portion of its grapes, approximately 33% in 2004, to premium bulkwine which is sold pursuant to wine purchase agreements or on the open bulkmarket.  The Company also sells a portionof its grapes, approximately 9% in 2004, pursuant to an acreage contractwhereby the winery client purchases the entire grape production from specifiedacreage for a set fee per acre.

 

In 2004, the Company harvested approximately 19,700tons of wine grapes, a 5% decrease from the 2003 harvest of 20,700 tons.  This decrease was primarily due to a 6%decrease in the amount of producing acres from 2003 to 2004.  After the harvest of 2003, the Companyremoved approximately 260 acres of underperforming vineyards.

 

The Company’s largest winery client is Diageo Chateau & Estate Wines Company, a subsidiary of Diageo plc (“Diageo”), a globalpremium drinks business, and one of the ten largest U.S. wineries in terms of2004 case shipments.  The Company has hadgrape purchase contracts with Diageo and itspredecessors since 1972.  Contracts with Diageo covered 49% of the Company’s producing acreage andaccounted for approximately 53% and 71% of the Company’s 2004 and 2003 totalrevenues, respectively.  The terms of thepurchase contracts with Diageo extend to between 2006and 2014.  In 2001, Diageo delivered a notice to the Company terminating agrape purchase contract covering approximately 570 acres, such terminationbecoming effective after the harvest of 2003. In December 2003, Diageo delivered anotice to the Company terminating grape purchase contracts covering anadditional 1,300 acres, or 38% of the Company’s producing acreage, suchtermination to become effective after the harvest of 2006.  The marketing of uncontractedacres is a primary focus of SVI, but there can be no assurances that theseefforts will be successful and it is likely that any purchase agreementscovering new vineyards will have less favorable terms.

 

SVI also provides vineyard managementservices pursuant to management contracts with two winery clients, Diageo and Pacific Wine Partners, LLC (a joint venturebetween Constellation Brands, Inc. and BRL Hardy, Inc.).  Under this arrangement, the Company providesits farming services for a set fee per acre. In 2004, vineyard management services related to approximately 1,400acres accounted for approximately 5% of the Company’s total revenues.

 

As of March 30, 2005, approximately 89%of the Company’s producing acreage was covered by purchase contracts and 11% ofproducing acreage was uncontracted.  For the contracted acres, approximately 47%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 2004 Crush Report published March 10,2005, the most significant changes to prices in 2005 for those contractsutilizing the Crush Report are in Cabernet Sauvignon, with a pricedecrease of 10%; Merlot, with a price decrease of 7%; and Chardonnay, with aprice increase of 3%.  The Companyanticipates that the prices it will receive for grapes which are currently notcontracted could be less than the prices it will receive for contracted grapesfor some varietals.

 

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

 
| **Initial Year  of Expiration** | ** ** | **Net Vine  Acres** | ** ** | **Percent** | ** ** |
|---------------------------------|------------|---------------------|------------|-------------|------------|
| 2005                            |       | 870                 |       | 21.3        | %          |
| 2006                            |       | 1,490               |       | 36.5        |       |
| 2007                            |       | 80                  |       | 2.0         |       |
| 2008                            |       | 60                  |       | 1.5         |       |
| 2009                            |       | 40                  |       | 1.0         |       |
| 2010                            |       | 95                  |       | 2.3         |       |
| 2011                            |       | 125                 |       | 3.1         |       |
| 2012                            |       | 25                  |       | 0.6         |       |
| 2013                            |       | 70                  |       | 1.7         |       |
| 2014                            |       | 325                 |       | 8.0         |       |
| Uncontracted                    |       | 390                 |       | 9.5         |       |
| Non-Producing                   |       | 510                 |       | 12.5        |       |
| Total                           |       | 4,080               |       | 100.0       | %          |

 

The wine grape business is extremely seasonal.  Similar to most nondiversifiedagricultural crop producers, the Company recognizes a large portion of its cropsales revenues at the time of its annual harvest in September andOctober.  Because success of the Company’soperations is dependent upon the results of the Company’s annual harvest, thefirst two quarters have historically resulted in a loss and quarterly resultsare not considered indicative of those to be expected for a full year.  Profits, if any, are recognized in the lasttwo fiscal quarters of the year when revenues from grape sales arerecognized.  In addition, the timing ofthe annual harvest varies each year based primarily on seasonal growing conditions,resulting in timing differences in the portion of grape revenues recognized inthe third and fourth quarters of any one year. This is a significant factor in comparing quarterly operating results.  In addition, the Company derives a portion ofits revenues (24% in 2004) from sales of bulk wine.  These sales have in the past, and may in thefuture, occur in years subsequent to the harvest year, which may impactquarterly results.

 

**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 thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  Management’s estimates and judgments are basedon historical experience and various other factors that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

The principal accounting issues which 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 valueand depreciable life associated with these vineyard assets is periodicallyreviewed by management to ascertain the validity of amounts recorded in thefinancial statements.  These reviewprocedures include analyzing estimates of future cash flows, comparisons ofcarrying value with bank appraisals and recent sales of similar vineyards, andanalysis of the condition, productivity and estimated remaining life of thevineyard.

 

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The underlying value ofvineyard properties is primarily determined by (i)the geographic location of the vineyard, (ii) the varieties planted, (iii) thedesign, condition and age of the vineyard, (iv) thegeneral state of the wine grape industry, and (v) contracts for the sale of thegrape production.  A significant changein the condition of the Company’s vineyards, the general state of the wineindustry (particularly the demand for the coastal grapes the Company produces),or the Company’s ability to contract its grape production to wineries, couldhave a material adverse affect on the carrying values and lives of its vineyardassets as well as the Company’s operating results for the period or periodswhen the change occurs.                During theyears ended December 31, 2004 and 2003, the Company wrote down the value ofunder-performing portions of its vineyard improvements in the amounts of$78,000 and $1,269,000, respectively.

 

The Company generally recognizes revenue from grapesales upon delivery to the winery.  TheCompany does not have any allowance for returns because grapes are tested andaccepted 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 sold under wine purchasecontracts is recognized when title has transferred to the customer, the priceis determinable, and collectibility is reasonablyassured.  Title transfers to the customerupon receipt of a required amount of the contract price and acceptance of thewine.  Vineyard management and otherservices are recognized as provided.

 

**Results of Operations — Years Ended December 31,2004 and 2003**

 

The following table sets forth certain statement ofoperations data for the years ended December 31, 2004 and 2003:

 
| ** **                                    | ** ** | **Year Ended  December 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| ** **                                    | ** ** | **2004**                          | ** ** | **2003** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                | ** ** |
| Revenues:                                     |       |                              |       |   |   |
| Sales                                         |       | $                                 | 22,506     |   | $ | 25,296 |   |
| Vineyard  management, services and other fees |       | 1,118                             |       | 1,060 |   |
| Total  revenues                               |       | 23,624                            |       | 26,356 |   |
| Cost of  sales                                |       | 15,372                            |       | 14,501 |   |
| Gross profit                                  |       | 8,252                             |       | 11,855 |   |
| General and  administrative expenses          |       | 4,809                             |       | 4,313 |   |
| Selling  expenses                             |       | 537                               |       | 381 |   |
| Write-down  of vineyard improvements          |       | 78                                |       | 1,269 |   |
| Interest  expense                             |       | 660                               |       | 770 |   |
| Investment  and interest income               |       | (61                               | )          | (14 | ) |
| Income  before provision for income taxes     |       | 2,229                             |       | 5,136 |   |
| Provision  for income taxes                   |       | 894                               |       | 2,096 |   |
| Net income                                    |       | $                                 | 1,335      |   | $ | 3,040 |   |

 

*Revenues*.  SVI derives its revenues fromfour sources:  (i)sales of wine grapes; (ii) sales of bulk wine; (iii) sales of wine andwine-related merchandise sold primarily through the Company’s tasting room; and(iv) vineyard management and services revenues consisting primarily ofmanagement and harvest fees and equipment rentals for services provided toowners of vineyards.

 

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  Salesare comprised of the following:

 
| ** **                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **2004**                         | ** ** | **2003** | ** ** |
| ** **                         | ** ** | **(in thousands)**               | ** ** |
| Grape sales                        |       | $                                | 16,429     |   | $ | 23,664 |   |
| Bulk wine  sales                   |       | 5,658                            |       | 1,273 |   |
| Wine and  wine-related merchandise |       | 419                              |       | 359 |   |
| Total sales                        |       | $                                | 22,506     |   | $ | 25,296 |   |

 

Revenue from grape sales decreased by 31% to$16,429,000 for the year ended December 31, 2004 from $23,664,000 in 2003,a decrease of $7,235,000.  The decreasein sales was due to a number of factors. Overall, tons harvested from the Company’s vineyards decreased by 5%,with approximately 19,700 tons harvested in 2004 compared to 20,700 tons in2003.  The decrease in tons harvested in2004 was primarily due to a 6% decrease in the number of producing acres, fromapproximately 3,690 acres in 2003 to 3,460 in 2004.  After the harvest of 2003, the Companyremoved approximately 260 acres of underperforming vineyards.  Ofthe total tons harvested, approximately 6,400 tons in 2004 were converted tobulk wine, compared to 2,150 tons in 2003, an increase of almost 200%.  In addition, the average price per tonreceived in 2004 was approximately 3% lower than the average price received in2003.

 

Revenue from sales of bulk wine increased 344% to$5,658,000 for the year ended December 31, 2004 from $1,273,000 in the2003 period, an increase of $4,385,000.  The increasein sales of bulk wine was due to an increase in the amount of grapes made intobulk wine under wine contracts and for the speculative market.  The Company sold approximately 877,000 gallonsof bulk wine in 2004 as compared to approximately 177,000 gallons in 2003, anincrease of almost 400%.  The averageprice per gallon received for bulk wine in 2004 decreased 9% from the pricereceived in 2003.

 

Revenue from the sale of wine and wine-relatedmerchandise was $419,000 for the year ended December 31, 2004 as comparedto $359,000 in the 2003 period, an increase of $60,000, or 17%.

 

Revenue from vineyard management, services and otherfees increased to $1,118,000 for the year ended December 31, 2004 from$1,060,000 in the 2003 period, an increase of $58,000, or 5%.  The increase was due primarily tolease income derived from the leasing of certain acres that were formerlyvineyards but were removed from production after the 2003 harvest.  Lease income for the year ended December 30,2004 totaled $110,000.  This increase wasoffset by decreases in management fees and equipment rentals.

 

*GrossProfit*.  Grossprofit for the year ended December 31, 2004 was $8,252,000 as compared to$11,855,000 for the year ended December 31, 2003, a decrease of$3,603,000, or 30%.

 

Gross margin on grape sales decreased to 36% in 2004as compared to 46% in 2003.  The decreasein margin was primarily due to a 3% decrease in the average price per ton thatthe Company received for its grape production, as well as an approximately 8%increase in farming costs.  See “Descriptionof Business — The Company’s Grape Production Operations — Grape Sales —Pricing.”   Farming costs increasedprimarily due to increases in insurance and other employee-related costs, aswell as increases in fuel costs.

 

Gross margin on the sale of bulk wine increased to22% in 2004, as compared to 14% in 2003. Although the prices received for wine sold in 2004 decreased byapproximately 9%, the cost of producing the wine sold in 2004 was approximately18% less than cost of the wine sold in 2003.

 

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

 

*Generaland Administrative Expenses*.   General and administrative expensesincreased to  $4,809,000for the year ended December 31, 2004 from $4,313,000 in the 2003 period,an increase of $496,000, or 12%.  Theincrease was due primarily to increases in insurance and benefits costs forexecutive and administrative personnel, as well as an increase in the number ofadministrative personnel.

 

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*SellingExpenses.*  Selling expenses increased to $537,000 forthe year ended December 31, 2004 from $381,000 in the 2003 period, anincrease of $156,000, or 41%.  Theincrease was primarily due to increases in sales commissions paid for the saleof grapes and bulk wine, as well as costs associated with the opening of asales office.

 

                                                *Write-down of VineyardImprovements*.  Duringthe year ended December 31, 2004, the Company wrote down the value ofunder-performing portions of its vineyard improvements in the amount of$78,000, representing approximately 12 acres, as compared to a write-down in2003 of $1,269,000, representing approximately 260 acres.

 

*InterestExpense*.  Interest expense was $660,000 for the year ended December 31, 2004,as compared to $770,000 in the 2003 period, a decrease of $110,000, and iscomprised of the following:

 
| ** **                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Interest  expense                            |       | $        | 787,000    |     | $          | 871,000 |   |
| Less  capitalized interest                   |       | (127,000 | )          | (101,000 | )          |
| Interest  expense, net of amount capitalized |       | $        | 660,000    |     | $          | 770,000 |   |

 

Interest expense decreased primarily as a result ofdecreased borrowings and lower average interest rates in 2004.

 

*Investmentand Interest Income.*  Interest income was $61,000 forthe year ended December 31, 2004, as compared to $14,000 in the 2003period, an increase of $47,000.  Theincrease was due to the investment of excess cash in marketable securities forthe first nine months of 2004.  Thoseinvestments were outstanding for only the last month of 2003.

 

*Provisionfor Income Taxes*.  Theprovision for income taxes was $894,000 for the year ended December 31,2004, as compared to $2,096,000 in 2003. The effective tax rate was 40.1% in 2004 as compared to 40.9% in 2003.

 

*Net Income*.   As a result of the above, netincome decreased $1,705,000, to $1,335,000 for the year ended December 31,2004 as compared to $3,040,000 in the 2003 period.

 

**Liquidity and Capital Resources**

 

SVI’s primarysources of cash have historically been funds provided by internally generatedcash flow and bank borrowings.  TheCompany has made substantial capital expenditures to redevelop its existingvineyard properties and acquire and develop new acreage, and the Companyintends to continue these types of expenditures.  In addition the Company’s winery facility,which is under construction, will require significant investment ofcapital.  Cash generated from operationshas not been sufficient to satisfy all of the Company’s working capital andcapital expenditure needs.  As aconsequence, the Company has depended upon, and continues to rely upon, bothshort and long-term bank borrowings. Working capital at December 31, 2004 was $7,698,000 as compared to$12,256,000 at December 31, 2003, a decrease of $4,558,000.  The decrease in working capital was primarilydue to the reclassifying of approximately $4.6 million in long-term bankfinancing, which is due in July of 2005, to current liabilities.

 

Under the Company’shistorical working capital cycle, working capital is required primarily tofinance the costs of growing and harvesting its wine grape crop.  The Company normally delivers substantially all of its crop in September and October, and receivesthe majority of its cash from grape sales in early November.  In order to bridge the gap between incurrenceof expenditures and receipt of cash from grape sales, large working capitaloutlays are required for approximately eleven months each year.  Historically, SVI has obtained these fundspursuant to credit lines with banks.

 

The Company currently has borrowing under facilitiesthat provide both short-term and long-term

 

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funds.  The Company’s “crop” line hasmaximum credit available of $15,000,000 and is intended to finance the Company’santicipated current working capital needs. This crop line expires July 5, 2006 and is secured by crops andother assets of the Company.  Interest onthe borrowings is due quarterly at the bank’s reference rate or the LIBOR rateplus 1.75%.  There were no borrowingsoutstanding on this line of credit at December 31, 2004.

 

The Company has long-term credit facilities whichexpire July 5, 2005 and are secured by leasehold interests invineyards.  At December 31, 2004,the outstanding amount owed by the Company under these facilities was$4,608,000.  Interest on the borrowingsis due quarterly at the bank’s reference rate or the LIBOR rate plus2.25%.  At December 31, 2004, theweighted average interest rate on these facilities was 4.38%.  The Company is currently negotiating with itscurrent lender, as well as other financial institutions, for the extension ofthe terms of this credit agreement.

 

The Company also has long-term credit facilities whichexpire July 5, 2008 and are secured by trust deeds on vineyards.  At December 31, 2004, the outstandingamount owed by the Company under these facilities was $13,200,000.  Interest on the borrowings is due quarterlyat the bank’s reference rate or the LIBOR rate plus 2.10%.  At December 31, 2004, the weightedaverage interest rate on these facilities was 4.40%.

 

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.  Any amount borrowedon the line, even if repaid before the end of the availability period,permanently reduces the remaining available line of credit.  At December 31, 2004, the maximumavailable balance and outstanding balance on this line of credit was$2,625,000.  This line bore interest atthe bank’s reference rate minus 0.50% (2.85% at December 31, 2004) and wasrepayable in six annual installments, which began in January 2000.  The note was secured by a letter of creditprovided by the client and by the Company’s management contract.  The management contract provides for theCompany’s client to make payment of the annual principal installments underthis line as and when they become due. This note and related receivable was repaid in January 2005.

 

The Company’s principal credit facilities bind theCompany to a number of affirmative and negative covenants, includingrequirements to maintain certain financial ratios within certain parameters andto satisfy other financial tests.  TheCompany was not in compliance with one of its financial covenants at December 31,2004 and has received a waiver of such default from the bank.

 

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 may benecessary.  The Company anticipates thatits winery facility will require approximately $18 to $20 million tocomplete.  In addition, the Company’splanned vineyard development and improvements are expected to requireapproximately $2.5 million in capital investment over the next threeyears.  In addition, the Company alsoexpects to invest approximately $1.5 million in equipment purchases.

 

Management is currently in discussions with itspresent principal lender, as well as other potential lenders, to obtainadditional financing for the construction of its winery facility, and to extendthe terms of its existing debt facilities. Management believes it should be able to obtain these long-termfunds, but there can be no assurance that the Company will be able to obtainfinancing when required or that such financings will be available on favorableterms.

 

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 year ending December 31, 2005.  At March 30, 2005, the Company had$15,000,000 in borrowing available under its crop line of credit.

 

Cash provided by operating activities was $2,555,000for the year ended December 31, 2004, compared to $8,296,000 for the sameperiod in 2003, a decrease of $5,741,000. The decrease was primarily due to a decrease in net income in 2004 from2003, as well as increases in receivables and

 

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inventories due to the substantial increase in theamount of bulk wine that the Company produced in 2004.  Bulk wine is typically sold in the year afterit is produced.

 

For the year ended December 31,2004, cash provided by investing activities totaled $9,974,000, compared tocash used in investing activities of $10,725,000 for the same period in 2003,an increase in net cash provided of $20,699,000.  The increase was principally the result ofproceeds from the sale of investments in short-term marketable securities inthe amount of $10,048,000.  In 2003, theCompany purchased those investments for $10,000,000.  Expenditures for property and equipmentincreased $2,083,000, to $3,339,000 in 2004 from $1,256,000 in 2003.  The increase was principally the result ofexpenditures for the grafting of 140 acres of vineyards in 2004.

 

Cash used in financing activities was$3,659,000 for the year ended December 31, 2004, compared to $3,624,000for the same period in 2003, an increase of  $35,000.  The increase was due to the repurchase of theCompany’s Class A Common Stock in the amount of$2,038,000, which was offset by decreased borrowings and repayments of theCompany’s crop line of credit.

 

**Disclosures Regarding Contractual Obligations andCommitments**

 

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

 
| ** **                          | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **Total**                  | ** ** | **Less Than  1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After  5 Years** | ** ** |
| Long-term  debt                     |       | $                          | 20,432     |   | $ | 7,832 |   | $ | 12,600 |   | $ | — |   | $ | — |   |
| Operating  lease obligations .      |       | 12,945                     |       | 1,058 |   | 2,842 |   | 1,556 |   | 7,489 |   |
| Total  contractual cash obligations |       | $                          | 33,377     |   | $ | 8,890 |   | $ | 15,442 |   | $ | 1,556 |   | $ | 7,489 |   |

 

**Dividends and Distributions**

 

The Company has not paid any cash dividends todate.  The Company intends to retain itsfuture earnings, if any, and does not anticipate paying cash dividends oneither class of its Common Stock in the foreseeable future.  In addition, the Company’s principal bankcredit facilities prohibit the payment of cash dividends without the consent ofthe lender.

 

**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                       |   |
|--------------------------------------------------------------------------------|--------|
|                                                                           |   |
| 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.

 

Wehave audited the accompanying consolidated balance sheet of Scheid VineyardsInc. as of December 31, 2004, and the related consolidated statements ofoperations, stockholders’ equity and comprehensive income, and cash flows forthe year then ended. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe our audit provides a reasonable basis forour opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Scheid VineyardsInc. as of December 31, 2004, and the results of its operations and cashflows for the year then ended, in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
| /s/ MOSS ADAMS LLP                                                          |   |
|-----------------------------------------------------------------------------|--------|
| Santa Rosa, California                                                      |
| February 11, 2005, except for  Note 13, which is  as of March 29, 2005 |

 

28

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**REPORT OF**INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

** **

Tothe Board of Directors and Stockholders of

ScheidVineyards Inc.

Salinas, California

 

 

Wehave audited the accompanying consolidated balance sheet of Scheid VineyardsInc. and subsidiary (the "Company") as of December 31, 2003, and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for the year then ended. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit.

 

Weconducted our audit in accordance with standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audit provides a reasonable basisfor our opinion.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Scheid Vineyards Inc. andsubsidiary as of December 31, 2003, and the results of their operationsand their cash flows for the year then ended, in conformity with accountingprinciples generally accepted in the United States of America.

 

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

 

29

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATEDBALANCE SHEETS**

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

 
| ** **                                                                                                                                    | ** ** | ** ** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|
| ** **                                                                                                                                    | ** ** | **Notes**  | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **ASSETS**                                                                                                                                    |       |       |       |             |       |   |   |
| **CURRENT ASSETS:**                                                                                                                           |       |       |       |             |       |   |   |
| Cash and cash equivalents                                                                                                                     |       |       |       | $                | 9,882      |   | $ | 1,012 |   |
| Marketable securities                                                                                                                         |       |       |       | —           |       | 10,009 |   |
| Accounts receivable, trade                                                                                                                    |       |       |       | 2,096            |       | 1,197 |   |
| Accounts receivable, other                                                                                                                    |       |       |       | 41               |       | 15 |   |
| Inventories                                                                                                                                   |       | 3          |       | 3,577            |       | 2,538 |   |
| Supplies, prepaid expenses and other  current assets                                                                                          |       |       |       | 874              |       | 657 |   |
| Current portion of long-term receivable                                                                                                       |       | 5          |       | 525              |       | 525 |   |
| Total current assets                                                                                                                          |       |       |       | 16,995           |       | 15,953 |   |
| **PROPERTY, PLANT AND EQUIPMENT, net**                                                                                                        |       | 4,7        |       | 48,368           |       | 48,087 |   |
| **LONG-TERM RECEIVABLE**                                                                                                                      |       | 5          |       | —           |       | 2,624 |   |
| **OTHER ASSETS, net**** **                                                                                                               |       |       |       | 117              |       | 838 |   |
|                                                                                                                                          |       |       |       | $                | 65,480     |   | $ | 67,502 |   |
|                                                                                                                                          |       |       |       |             |       |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                |       |       |       |             |       |   |   |
| **CURRENT LIABILITIES:**                                                                                                                      |       |       |       |             |       |   |   |
| Current portion of long-term debt                                                                                                             |       | 7          |       | $                | 7,832      |   | $ | 1,624 |   |
| Accounts payable                                                                                                                              |       |       |       | 751              |       | 486 |   |
| Accrued liabilities                                                                                                                           |       | 9          |       | 636              |       | 615 |   |
| Income taxes payable                                                                                                                          |       | 8          |       | —           |       | 922 |   |
| Deferred income taxes                                                                                                                         |       | 8          |       | 78               |       | 50 |   |
| Total current liabilities                                                                                                                     |       |       |       | 9,297            |       | 3,697 |   |
| **LONG-TERM DEBT, net of current portion**                                                                                                    |       | 7          |       | 12,600           |       | 20,432 |   |
| **DEFERRED INCOME TAXES**                                                                                                                     |       | 8          |       | 5,981            |       | 5,062 |   |
| Total liabilities                                                                                                                             |       |       |       | 27,878           |       | 29,191 |   |
| ** **                                                                                                                                    |       |       |       |             |       |   |   |
| **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; 2,016,530 and 2,248,755 shares outstanding in 2004 and 2003,  respectively           |       |       |       |             |       |   |   |
| Class B, $.001 par value; 10,000,000 shares  authorized; 3,088,715 and 3,226,115 shares issued and outstanding in 2004 and  2003, repectively |       |       |       | 7                |       | 7 |   |
| Additional paid-in capital                                                                                                                    |       |       |       | 21,871           |       | 21,868 |   |
| Retained earnings                                                                                                                             |       |       |       | 23,261           |       | 21,926 |   |
| Accumulated other comprehensive income                                                                                                        |       |       |       | —           |       | 9 |   |
| Less: treasury stock; 1,542,058 and  1,171,558 shares of Class A Common Stock at cost in 2004 and 2003,  respectively                         |       |       |       | (7,537           | )          | (5,499 | ) |
| Total stockholders’ equity                                                                                                               |       |       |       | 37,602           |       | 38,311 |   |
|                                                                                                                                          |       |       |       | $                | 65,480     |   | $ | 67,502 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

30

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                    | ** ** | ** ** | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **Notes**  | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| **REVENUES:**                                 |       |       |       |                        |       |   |   |
| Sales                                         |       |       |       | $                           | 22,506     |   | $ | 25,296 |   |
| Vineyard management, services and other  fees |       |       |       | 1,118                       |       | 1,060 |   |
| Total revenues                                |       |       |       | 23,624                      |       | 26,356 |   |
| **COST OF SALES**                             |       |       |       | 15,372                      |       | 14,501 |   |
| **GROSS PROFIT**                              |       |       |       | 8,252                       |       | 11,855 |   |
| General and administrative expenses           |       |       |       | 4,809                       |       | 4,313 |   |
| Selling expenses                              |       |       |       | 537                         |       | 381 |   |
| Write-down of vineyard improvements           |       |       |       | 78                          |       | 1,269 |   |
| Interest expense                              |       |       |       | 660                         |       | 770 |   |
| Investment and interest income                |       |       |       | (61                         | )          | (14 | ) |
| **INCOME BEFORE PROVISION FOR INCOME TAXES**  |       |       |       | 2,229                       |       | 5,136 |   |
| **PROVISION FOR INCOME TAXES**                |       | 8          |       | 894                         |       | 2,096 |   |
| **NET INCOME**                                |       |       |       | $                           | 1,335      |   | $ | 3,040 |   |
|                                          |       |       |       |                        |       |   |   |
| **NET INCOME PER SHARE:**                     |       | 2          |       |                        |       |   |   |
| **BASIC**                                     |       |       |       | $                           | 0.25       |   | $ | 0.56 |   |
| **DILUTED**** **                         |       |       |       | $                           | 0.25       |   | $ | 0.56 |   |
|                                          |       |       |       |                        |       |   |   |
| **WEIGHTED AVERAGE SHARES OUTSTANDING:**      |       | 2          |       |                        |       |   |   |
| **BASIC**                                     |       |       |       | 5,388                       |       | 5,475 |   |
| **DILUTED**                                   |       |       |       | 5,419                       |       | 5,475 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

31

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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, 2003**                | ** ** | $                 | 7          |                             | $          | 21,868                 |       | $                                             | 18,886     |                | —     |                                  | $          | (5,499                    | )          | $ | 35,262 |   |   |   |
| Net income                                   |       | —            |       | —                           |       | 3,040                  |       | —                                        |       | —              |       | 3,040                                 |       | $                         | 3,040      |   |
| Unrealized gain  on marketable securities    |       | —            |       | —                           |       | —                 |       | 9                                             |       | —              |       | 9                                     |       | 9                         |       |
| **BALANCE,  December 31,****2003**** ** | ** ** | 7                 |       | 21,868                           |       | 21,926                 |       | 9                                             |       | (5,499              | )          | 38,311                                |       | $                         | 3,049      |   |
| 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 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

32

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts inthousands)**

 
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          |       |                        |       |   |   |
| Net income                                                                         |       | $                           | 1,335      |   | $ | 3,040 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                        |       |   |   |
| Depreciation, amortization and abandonments                                        |       | 3,058                       |       | 4,395 |   |
| Deferred income taxes                                                              |       | 947                         |       | 1,103 |   |
| Gain on sale of marketable securities                                              |       | (48                         | )          | — |   |
| Other                                                                              |       | 80                          |       | 54 |   |
| Changes in operating assets and  liabilities:                                      |       |                        |       |   |   |
| Accounts receivable, trade                                                         |       | (899                        | )          | 525 |   |
| Accounts receivable, other                                                         |       | (26                         | )          | 152 |   |
| Inventories                                                                        |       | (1,039                      | )          | (840 | ) |
| Supplies, prepaid expenses and other  current assets                               |       | (217                        | )          | (152 | ) |
| Accounts payable and accrued liabilities                                           |       | 286                         |       | 287 |   |
| Income taxes payable                                                               |       | (922                        | )          | (268 | ) |
| Net cash provided by operating activities                                          |       | 2,555                       |       | 8,296 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                        |       |   |   |
| Collection of long-term receivable                                                 |       | 2,624                       |       | 525 |   |
| Purchase of marketable securities                                                  |       | —                      |       | (10,000 | ) |
| Proceeds from sale of marketable securities                                        |       | 10,048                      |       | — |   |
| Proceeds from sale of property, plant and  equipment                               |       | —                      |       | 6 |   |
| Additions to property, plant and equipment                                         |       | (3,339                      | )          | (1,256 | ) |
| Proceeds for surrender of life insurance  policy                                   |       | 641                         |       | — |   |
| Net cash provided by (used in) investing  activities                               |       | 9,974                       |       | (10,725 | ) |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                        |       |   |   |
| Increase in long-term debt                                                         |       | 3,250                       |       | 7,200 |   |
| Repayment of long-term debt                                                        |       | (4,874                      | )          | (10,824 | ) |
| Proceeds from exercise of stock options                                            |       | 3                           |       | — |   |
| Repurchase of common stock                                                         |       | (2,038                      | )          | — |   |
| Net cash used in financing activities                                              |       | (3,659                      | )          | (3,624 | ) |
| Increase (decrease) in cash and cash  equivalents                                  |       | 8,870                       |       | (6,053 | ) |
| **CASH AND CASH EQUIVALENTS, beginning of  year**                                  |       | 1,012                       |       | 7,065 |   |
| **CASH AND CASH EQUIVALENTS, end of year**                                         |       | $                           | 9,882      |   | $ | 1,012 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

33

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**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDEDDECEMBER 31, 2004 AND 2003**

 

**1. ORGANIZATION AND BASIS OF PRESENTATION**

 

*Organization*— The principal business of the Company isthe production of premium varietal wine grapes. The Company currently operates approximately 5,700 acres of premiumwine grape vineyards in Monterey and San 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 contractsextend to between 2006 to 2014.  Thelargest set of these contracts with a single winery client coveredapproximately 49% of the Company’s producing acreage through the harvest of2004 and accounted for approximately 53% and 71% of the Company’s totalrevenues in 2004 and 2003, respectively. In 2001, this client delivered a notice to the Company terminating agrape purchase contract covering approximately 570 acres, or 15% of the Company’sproducing acreage.  Such terminationbecame effective after the harvest of 2003. In 2003, this client delivered a notice to the Company terminating othergrape purchase contracts covering an additional 1,300 acres, or 38%, of theCompany’s producing acreage.  Thistermination is to become effective after the harvest of 2006.  In addition, wine sales to another customertotaled 10% of the Company’s total revenue during the year ended December 31,2004.

 

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

 

**2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Cash and Cash Equivalents* — The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.  At December 31,2004 and 2003, substantially all cash balances were on deposit with the Company’smajor bank.

 

*Inventories* — Inventories are stated at the lower ofFIFO (first-in, first-out) cost or market. Cost includes the cost of grown grapes, harvesting, production, agingand bottling, and tasting room merchandise. Bulk and bottled wine inventoriesare classified as current assets in accordance with recognized trade practicealthough certain inventories will be aged for periods longer than oneyear.  Crop costs associated with farmingvineyards prior to the harvest are deferred and recognized in the year thegrapes are harvested.  On a quarterlybasis, the Company evaluates the cost of its inventories and reduces suchinventories to market if required.

 

*Marketable Securities*— Marketable securities at December 31, 2003 consisted of investments inmunicipal bond funds and were classified as available for sale.  These debt securities were stated at marketvalue based on the most recently traded price of these securities at December31, 2003.  Unrealized gains and losses,determined by the difference between historical purchase price and the marketvalue at each balance sheet date, are recorded as a component of AccumulatedOther Comprehensive Income in Stockholders’ Equity.  Realized gains and losses are determined bythe difference between historical purchase price, the cost for which is basedupon specific identification method, and gross proceeds received when themarketable securities are sold.

 

*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, 2004 and 2003.

 

34

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*Property, Plant and Equipment* — Property, plant and equipment are statedat cost and are depreciated using straight-line and accelerated methods overthe estimated useful lives of the assets. Vineyards generally have estimated depreciable lives of 25 to 30 years,buildings 30 years, and furniture and equipment 5 to 7 years.  Development costs incurred during thedevelopment period of a vineyard, including related interest are capitalized.  Depreciation commences in the initial yearthe vineyard becomes commercially productive, generally in the fourthyear.  Any revenue generated prior to avineyard becoming commercially productive reduces the capitalized cost of thevineyard.  The Company capitalizedinterest totaling $127,000 and $101,000 in 2004 and 2003, respectively.

 

*Accounting forImpairment or Disposal of Long-Lived Assets* —  Wheneverfacts and circumstances indicate that the carrying value of a long-lived assetmay not be recoverable, the carrying value is reviewed.  If this review indicates that the carryingvalue of the asset will not be recovered, as determined based on projectedundiscounted cash flows related to the asset over its remaining life, thecarrying value of the asset is reduced to 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.  A similar impairment write-down onapproximately 240 acres in the amount of $1,269,000 was taken in 2003.

 

*Revenue Recognition* — The Company generally recognizes revenuefrom grape sales upon delivery to the winery. The Company does not have any allowance for returns because grapes aretested 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.  Revenue from wine sold under wine purchasecontracts is recognized when title has transferred to the customer, the priceis determinable, and collectibility is reasonably assured.  Title transfers to the customer upon receiptof a required amount of the contract price and acceptance of the wine.  Vineyard management and other services arerecognized as provided.  Substantiallyall revenues of the Company are derived from customers within the UnitedStates.

 

*Fair Value of FinancialInstruments*—**The fair values of accounts receivableand accounts payable approximate book value because of their shortduration.  Long-term receivables andlong-term debt approximate book value because such financial instruments havevariable, market driven, interest rates.

 

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

 

*Earnings Per Share and Classes 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 dilutedearnings per share did not include stock options which were antidilutive, astheir exercise price was greater than the average market price of the Company’sClass A Common Stock during the year. Options to purchase 55,000 and 172,000 shares of the Company’s Class ACommon Stock were excluded for the years ended December 31, 2004 and 2003,respectively.

 

35

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*Stock Compensation* — The Company accounts for its stock-basedawards using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees” andits related interpretations. Accordingly, no compensation expense has been recognized in thefinancial statements for employee stock arrangements.

 

SFAS No. 123, “Accounting for Stock-BasedCompensation”, requires the disclosure of pro forma net income and net incomeper share.  Under SFAS No. 123, the fairvalue of stock-based awards to employees is calculated through the use ofoptions pricing models, even though such models were developed to estimate thefair value of freely-tradable, fully transferable options without vestingrestrictions, which significantly differ from the Company’s stock optionawards.  These models also requiresubjective assumptions, including future stock price volatility and expectedtime to exercise, which greatly affect the calculated values.  The Company’s calculations were made using theBlack-Scholes option pricing model with the following weighted averageassumptions: expected life, 5 years;  47%stock price volatility in 2004 and 2003; weighted average risk free rate ofreturn of 3.9% and 3.0% in 2004and 2003, respectively; and no dividends during the expected term.  Forfeitures are recognized as they occur.

 

If the computed fair values of the Company’s stockoption awards had been amortized to expense over the vesting period of theawards, net income for the years ended December 31, 2004 and 2003 would havebeen reduced to the pro forma amounts indicated below.

 
| ** **                                                                                                                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                     | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Net income:                                                                                                                                    |       |                        |       |   |   |
| As reported                                                                                                                                    |       | $                           | 1,335,000  |   | $ | 3,040,000 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all  rewards, net of related tax effects |       | (19,000                     | )          | (19,000 | ) |
| Pro forma                                                                                                                                      |       | $                           | 1,316,000  |   | $ | 3,021,000 |   |
|                                                                                                                                           |       |                        |       |   |   |
| Net income per share (Basic and Diluted):                                                                                                      |       |                        |       |   |   |
| As reported                                                                                                                                    |       | $                           | 0.25       |   | $ | 0.56 |   |
| Pro forma                                                                                                                                      |       | $                           | 0.24       |   | $ | 0.55 |   |

 

*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 ofSFAS No. 123, “Accounting for Stock-Based Compensation”, and supercedes APB No.25, “Accounting for Stock Issued to Employees”. SFAS No. 123 requires companies to expense the fair value of stockoptions and similar awards and is effective for the Company beginning January1, 2006.  The Company believes that theadoption of this Statement will not have a material effect on the financialposition of the Company.  See thedisclosure above for the pro forma impact on current and prior year results.

 

36

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**3. INVENTORIES**

 

Inventoriesconsist of the following:

 
| ** **               | ** ** | **December 31,** | ** **      |
|--------------------------|------------|------------------|-----------------|
| ** **               | ** ** | **2004**         | ** **      | **2003** | ** ** |
| Deferred crop costs      |       | $                |  625,000   |   | $ | 662,000 |   |
| Bulk and bottled wine    |       | 2,920,000        |            | 1,853,000 |   |
| Tasting room merchandise |       | 32,000           |            | 23,000 |   |
| Total                    |       | $                |  3,577,000 |   | $ | 2,538,000 |   |

 

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

 

Property,plant and equipment consists of the following:

 
| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------|------------|
| ** **                                      | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Land and buildings                              |       | $                | 6,674,000  |   | $ | 6,643,000 |   |
| Vineyard improvements                           |       | 50,389,000       |       | 48,799,000 |   |
| Vineyard improvements under development         |       | 3,959,000        |       | 4,389,000 |   |
| Machinery and equipment                         |       | 7,686,000        |       | 6,824,000 |   |
| Winery construction in progress                 |       | 1,070,000        |       | — |   |
| Total                                           |       | 69,778,000       |       | 66,655,000 |   |
| Less accumulated depreciation and  amortization |       | (21,410,000      | )          | (18,568,000 | ) |
| Property, plant and equipment — net        |       | $                | 48,368,000 |   | $ | 48,087,000 |   |

 

**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 athree-year period.  The funds for thisproject were borrowed, as an accommodation to the client, by the Company undera line of credit (see Note 7).  Theinterest rate and payment terms of this receivable are the same as the relatednote payable.  The note payable to thebank is secured by a letter of credit provided by the client and by themanagement contract.  The contract calledfor the payment of this receivable by the client’s payment of the six annualprincipal installments under the line, beginning January 5, 2000.  During the year ended December 31, 2004, theclient repaid $2,624,000 of the receivable, and the remaining amount of$525,000 was repaid in January 2005.  TheCompany continues to manage the operations of the vineyard for the client.

 

**6. CROP LINE OF CREDIT**

 

The Company has a crop line of credit with a bank,which currently provides for maximum borrowings of $15,000,000 throughJuly 5, 2006.  Borrowings aresecured by crops and other assets with interest due quarterly at the bank’sreference rate or the LIBOR rate plus 1.75%. There were no borrowings outstanding under this credit facility atDecember 31, 2004 and 2003.

 

The crop line prohibits the payment of dividendswithout the consent of the lender and contains various financial covenants,including minimum tangible net worth and current working capital amounts.    TheCompany was not in compliance with one of its financial covenants at December31, 2004 and has received a waiver of such default from the bank.

 

37

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**7. LONG-TERM DEBT**

 

Long-term debt consists of the following:

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Note payable to bank, principal due in  annual installments of $214,000 through July 5, 2005, secured by a leasehold  interest in 707 vineyard acres. Interest is payable quarterly at the lower of  a bank-quoted reference rate or a fixed rate of 2.25% over LIBOR (4.23% at  December 31, 2004)                                                                                                                                 |       | $                | 1,071,000  |   | $ | 1,286,000 |   |
| Note payable to bank, principal due in annual  installments of $96,000 through July 5, 2005, secured by a leasehold interest  in 352 vineyard acres. Interest is payable quarterly at  the lower  of a bank-quoted reference rate or a fixed rate of 2.25% over LIBOR (4.67% at  December 31, 2004)                                                                                                                            |       | 778,000          |       | 874,000 |   |
| Note payable to bank, principal due in  annual installments of $114,000 through July 5, 2005, secured by a leasehold  interest in 352 vineyard acres. Interest is payable quarterly at  the  lower of a bank-quoted reference rate or a fixed rate of 2.25% over LIBOR  (4.23% at December 31, 2004)                                                                                                                           |       | 1,934,000        |       | 2,047,000 |   |
| Note payable to bank, principal due in  annual installments of $75,000 through July 5, 2005, secured by a leasehold  interest in 707 vineyard acres. Interest is payable quarterly at the lower of  a bank-quoted reference rate or a fixed rate of 2.25% over LIBOR (4.67% at  December 31, 2004)                                                                                                                                  |       | 825,000          |       | 900,000 |   |
| Note payable to bank, principal due in  annual installments of $178,000 through June 5, 2008, secured by a trust deed  on 1,063 vineyard acres. Interest is payable quarterly at the lower of a  bank-quoted reference rate or a fixed rate of 2.10% over LIBOR (4.40% at  December 31, 2004)                                                                                                                                       |       | 3,916,000        |       | 4,094,000 |   |
| Note payable to bank, principal due in  annual installments of $422,000 through June 5, 2008, secured by a trust deed  on 775 vineyard acres. Interest is payable quarterly at the lower of a  bank-quoted reference rate or a fixed rate of 2.10% over LIBOR (4.40% at  December 31, 2004)                                                                                                                                         |       | 9,284,000        |       | 9,706,000 |   |
| Note payable to bank represents borrowings  on a $7,500,000 line of credit, which bears interest at the bank’s reference  rate less 0.50% (2.85% at December 31, 2004). The note is secured by a letter  of credit provided by a major client, and is used for costs incurred for the  redevelopment of certain vineyards owned by the client (see Note 5).  Principal due in six annual installments which began January 2000 |       | 2,624,000        |       | 3,149,000 |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                               |       | 20,432,000       |       | 22,056,000 |   |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                             |       | (7,832,000       | )          | (1,624,000 | ) |
| Long-term portion                                                                                                                                                                                                                                                                                                                                                                                                                   |       | $                | 12,600,000 |   | $ | 20,432,000 |   |

 

38

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Principal payments required on long-term debt foreach of the next four years ending December 31 are as follows:

 
| 2005  |   | $          | 7,832,000  |   |
|-------|--------|------------|------------|--------|
| 2006  |   | 600,000    |       |
| 2007  |   | 600,000    |       |
| 2008  |   | 11,400,000 |       |
| Total |   | $          | 20,432,000 |   |

 

Substantially all of the Company’s assets serve ascollateral for long-term debt.  Inaddition, the credit facilities and notes contain various financial covenants,including minimum tangible net worth and current working capital amounts.  The Company was not in compliance with one ofits financial covenants at December 31, 2004 and has received a waiver of suchdefault from the bank.

 

**8. INCOME TAXES**

 

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

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                          | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Current deferred income tax assets:                                 |       |             |       |   |   |
| Tax credits                                                         |       | $                | 62,000     |   | $ | — |   |
| State income taxes                                                  |       | —           |       | 63,000 |   |
| Current deferred income tax liabilities - Prepaid  expenses         |       | (140,000         | )          | (113,000 | ) |
| Net current deferred income tax liability                           |       | $                | (78,000    | ) | $ | (50,000 | ) |
|                                                                |       |             |       |   |   |
| Long-term deferred income tax assets - Deferred  state income taxes |       | $                | 441,000    |   | $ | 381,000 |   |
| Long-term deferred income tax liabilities -  Depreciation           |       | (6,422,000       | )          | (5,443,000 | ) |
| Net long-term deferred income tax liability                         |       | $                | (5,981,000 | ) | $ | (5,062,000 | ) |

 

The provision for income taxes is as follows:

 
| ** **                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Current:                         |       |                        |       |   |   |
| Federal                          |       | $                           | (63,000    | ) | $ | 755,000 |   |
| State                            |       | 10,000                      |       | 238,000 |   |
| Total                            |       | (53,000                     | )          | 993,000 |   |
| Deferred:                        |       |                        |       |   |   |
| Federal                          |       | 759,000                     |       | 876,000 |   |
| State                            |       | 188,000                     |       | 227,000 |   |
| Total                            |       | 947,000                     |       | 1,103,000 |   |
| Total provision for income taxes |       | $                           | 894,000    |   | $ | 2,096,000 |   |

 

39

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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,** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Federal statutory rate              |       | 34.0                        | %          | 34.0 | % |
| State taxes, net of federal benefit |       | 5.9                         |       | 6.0 |   |
| Other                               |       | 0.2                         |       | 0.9 |   |
| Total                               |       | 40.1                        | %          | 40.9 | % |

 

**9. COMMITMENTS AND CONTINGENCIES**

 

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

 

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

 

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

 
| 2005       |   | $         | 1,058,000  |   |
|------------|--------|-----------|------------|--------|
| 2006       |   | 1,027,000 |       |
| 2007       |   | 912,000   |       |
| 2008       |   | 903,000   |       |
| 2009       |   | 903,000   |       |
| Thereafter |   | 8,142,000 |       |
| Total      |   | $         | 12,945,000 |   |

 

Rent charged to operations was $1,038,000 and$904,000 for the years ended December 31, 2004 and 2003,respectively.  Rent capitalized intovineyard development was $59,000 and $106,000 for the years endedDecember 31, 2004 and 2003, respectively.

 

*Pension Plans* — The Company has two 401(k) Profit SharingPlans.  The first plan is for the benefitof the Company’s employees who are covered by the United Farm Workers ofAmerica Collective Bargaining Agreement. All union employees of the Company are eligible to participate afterhaving worked 500 hours within a one-year period.  The Company contributes 15 cents for eachhour worked by eligible employees, subject to the limitations imposed by theInternal Revenue Code.  The Company’scontribution to the union employees’ plan amounted to $68,000 and $63,000 forthe years ended December 31, 2004 and 2003, respectively.

 

The second plan covers the Company’s non-unionemployees.  All non-union employees ofthe Company are eligible to participate in the plan after one year ofemployment.  Employees may contributebetween 1% and 15% 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 to this planamounted to $62,000 and $65,000 for the years ended December 31, 2004 and2003, respectively.

 

40

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*Department of LaborPenalty*** — The Company has accrued a liabilityin the amount of $350,000 at December 31, 2004 and 2003 for potentialadditional payroll expense to be paid to employees as the result of penaltieslevied by the California Department of Labor due to alleged violations of theCalifornia Labor Code.

 

**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 of the Class A Common Stock, votingas a separate class, elect 25% of the total Board of Directors of the Company,rounded up to the nearest whole number, and the holders of the Class B CommonStock, voting as a separate class, elect the remaining directors.  Each share of Class B Common Stock isconvertible into one share of Class A Common Stock at the option of the holderor automatically upon transfer to a person other than certain specifiedpersons.  Except for the differing votingrights, the shares of Class A and Class B common stock have substantiallyidentical rights, preferences and privileges.

 

*Conversion of Shares** —*During the year ended December31, 2004, Class B Common Shareholders converted 137,400 shares of Class BCommon Shares into Class A Common Shares.

 

*Repurchase of Shares —* During the year ended December 31, 2004, theCompany repurchased 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 date under the Plan vestone-quarter each year, beginning one year after the grant date or a specifiedvesting commencement date and expire ten years after the earlier of the grantdate and the vesting commencement date.

 

The following summarizesstock option activity for the periods presented:

 
| ** **                     | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Prices** | ** ** |
|--------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding, January 1, 2003   |       | 163,000    |       | $                                      | 6.26       |   |
| Granted                        |       | 14,000     |       |                                   | 3.34       |   |
| Cancelled                      |       | (5,000     | )          |                                   | 4.14       |   |
| Outstanding, December 31, 2003 |       | 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       |   |

 

41

----

 
| ** **                                              | ** ** | **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 |   |

 

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

 

**12. SUPPLEMENTAL CASH FLOWINFORMATION**

 

Supplemental disclosures tothe statements of cash flows are as follows:

 
| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **2004**                    | ** ** | **2003** | ** ** |
| Interest paid (net of amount capitalized) |       | $                           | 600,000    |   | $ | 705,000 |   |
| Income taxes paid (net of refunds)        |       | $                           | 948,000    |   | $ | 1,261,000 |   |

 

**13.****SUBSEQUENT EVENTS**

 

On January 24, 2005, the Company announcedthat its Board of Directors had approved the construction of a new wineryfacility to be located at the Company’s vineyard headquarters.  The completion of the first phase of thewinery will result in the capacity to crush approximately 10,000 tons of grapesand will require an estimated investment of $18 to $20 million.  It is anticipated that the new facility willbe in partial operation by the harvest season in the fall of 2005.  On March 24, 2005, the Company entered into aconstruction contract for the project in the amount of $11,594,000.  On March 29, 2005, the Company entered into acontract for the construction of winery tanks in the amount of $3,553,000.

 

****

 

42

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**ITEM  8.                CHANGES IN AND DISAGREEMENTSWITH ACCOUNTANTS ON****ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

Not applicable.

 

**ITEM 8A.               CONTROLS AND PROCEDURES.**

 

Under thesupervision and with the participation of the Company’s management, includingits principal executive officer and principal financial officer, the Companyconducted an evaluation of theeffectiveness of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934, as amended, as ofthe end of the period covered by this report (the “Evaluation Date”).  Based on this evaluation, theCompany’s principal executive officer and principal financial officer concluded as of the Evaluation Date that the Company’s disclosure controlsand procedures were effective as of the end of the period covered by this Annual Report.

 

There has been no change in the Company’s internalcontrol of financial reporting during the quarter ended December 31, 2004 thathas materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**ITEM 8B.               OTHER INFORMATION.**

 

None.

 

**PART III**

 

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

 

The information required by this Item is set forthunder the captions “Proposal No. 1 — Election of Directors — InformationConcerning the Nominees” and “ — Directors and Executive Officers” in theCompany’s definitive Proxy Statement to be filed with the Securities andExchange Commission and is incorporated herein by this reference as if setforth in full.

 

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

 

The information required by this Item is set forthunder the caption “Executive Compensation” in the Company’s definitive ProxyStatement to be filed with the Securities and Exchange Commission and isincorporated herein by this reference as if set forth in full.

 

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

 

The information required by this Item is set forthunder the captions “Security Ownership of Certain Beneficial Owners andManagement” and “Equity Compensation Plan Information” in the Company’sdefinitive Proxy Statement to be filed with the Securities and ExchangeCommission and is incorporated herein by this reference as if set forth infull.

 

43

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

 

The information required by this Item is set forthunder the caption “Certain Transactions” in the Company’s definitive ProxyStatement to be filed with the Securities and Exchange Commission and isincorporated herein by this reference as if set forth in full.

 

**ITEM 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)                                                                                                                                                                                                                                                                                                               |
| 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). |

 

44

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| 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)                                                                                                                                                                                                                                                                       |
| 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)                                                                                                                                                                                                                                               |

 

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| 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.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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| 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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| 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)                                                                             |
| 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.                                                                                                                                                                                                                                                                                              |
| 23.2* |   | 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.                                                                                                                                                                                                     |

 

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

 

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| *      |   | Electronically filed  herewith.                                                                                                                                                                                                                 |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| † |   | Portions of this Exhibit  have been deleted pursuant to the Registrant’s requests for confidential  treatment pursuant to Rule 406 promulgated under the Securities Act or  Rule 24b-2 promulgated under the Securities Exchange Act. |
|   |   |                                                                                                                                                                                                                                            |
| (1)    |   | The contracting party is a  predecessor in interest to Scheid Vineyards California Inc., Registrant’s  wholly owned subsidiary.                                                                                                            |
|   |   |                                                                                                                                                                                                                                            |
| (2)    |   | Indicates a management  contract or compensating plan or arrangement required to be filed as an  exhibit to this Form 10-KSB.                                                                                                                   |

 

##### **ITEM 14.               PRINCIPALACCOUNTANT FEES AND SERVICES**

##### ** **

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

 

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon 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 of1934, this report has been signed below by the following persons on behalf ofthe registrant and in the capacities and on the dates indicated.

 

 
| **Signature**                | ** ** | **Title**                                                                       | ** ** | **Date**       |
|------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------|
|                         |       |                                                                            |       |           |
|  /s/ ALFRED G. SCHEID   |       | Chairman of the Board                                                           |       | March 30, 2005 |
| Alfred G. Scheid             |       |                                                                            |       |           |
|  /s/ SCOTT D. SCHEID    |       | President, Chief Executive Officer  (Principal Executive Officer) and  Director |       | March 30, 2005 |
| Scott D. Scheid              |       |                                                                            |       |           |
|                         |       |                                                                            |       |           |
|  /s/ HEIDI M. SCHEID    |       | Senior Vice President, Secretary,                                               |       | March 30, 2005 |
| Heidi M. Scheid              |       | Treasurer and Director                                                          |       |           |
|                         |       |                                                                            |       |           |
|  /s/ MICHAEL S. THOMSEN |       | Chief Financial Officer (Principal                                              |       | March 30, 2005 |
| Michael S. Thomsen           |       | Financial and Accounting Officer)                                               |       |           |
|                         |       |                                                                            |       |           |
|  /s/ JOHN L. CRARY      |       | Director                                                                        |       | March 30, 2005 |
| John L. Crary                |       |                                                                            |       |           |
|                         |       |                                                                            |       |           |
|  /s/ ROBERT P. HARTZELL |       | Director                                                                        |       | March 30, 2005 |
| Robert P. Hartzell           |       |                                                                            |       |           |

 

50

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