**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

**(Mark One)**

** **
| **ý**                                       |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934** |
|--------------------------------------------------|--------|------------------------------------------------------------------------------------------------|
|                                             |   |                                                                                           |
| **For the  Fiscal Year Ended December 31, 2001** |
|                                             |   |                                                                                           |
| **o**                                            |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| **Commission  File Number 000-22857**            |

 

**SCHEID VINEYARDS INC.**

(Name of smallbusiness issuer in its charter)

 

| **Delaware**                                                    |   | **77-0461833**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |   | (I.R.S. Employer Identification  Number) |
| **301 Hilltown Road**

**Salinas, California**                  |   | **93908**                                |
| (Address of principal executive  offices)                       |   | (Zip Code)                               |

 

**(831) 455–9990**

(Issuer’stelephone number)

 

Securities registered under Section12(b) of the Exchange Act: None

Securities registered under Section12(g) of the Exchange Act: Class A Common Stock, $.001 Par Value

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes ý  No o

 

Check if there is no disclosure ofdelinquent filers in response to Item 405 of Regulation S-B is not contained inthis form, and no disclosure will be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.    ý

 

Issuer’s revenues for its most recentfiscal year:      $21,689,000

 

Aggregate market value of the votingstock held by non-affiliates computed by reference to the closing price atwhich the Class A Common Stock was sold on the Nasdaq Stock Market NationalMarket System on March 29, 2002: $7,648,000. The voting stock held bynon-affiliates on that date consisted of 2,154,455 shares of Class A CommonStock.

 

Number of shares outstanding of each ofthe issuer’s classes of common stock at March 29, 2002:

ClassA    2,154,455       Class B    3,321,115

 

Portions of the registrant’s ProxyStatement for its June 11, 2002 Annual Stockholders Meeting, which has not beenfiled as of the date of this filing, are incorporated by reference into PartIII of this Report.

 

Transitional Small Business DisclosureFormat (check one)    Yes o     No ý

 

 

**FORM 10-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 and Related Stockholder Matters. |
| Item 6.                                     | Management’s  Discussion and Analysis or Plan of Operation. |
| Item 7.                                     | Financial  Statements. |
| Item 8.                                     | Changes  In and Disagreements With Accountants on  Accounting and Financial Disclosures. |
|                                        |   |
| PART III                                    |
| Item 9.                                     | Directors,  Executive Officers, Promoters and Control  Persons; Compliance With Section 16(a) of the Exchange Act. |
| Item 10.                                    | Executive Compensation. |
| Item 11.                                    | Security  Ownership of Certain Beneficial Owners and Management. |
| Item 12.                                    | Certain  Relationships and Related Transactions. |
| Item 13.                                    | Exhibits and Reports  on Form 8-K. |
|                                        |   |
| Signatures                                  |

 

 

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**NOTE CONCERNING FORWARD-LOOKING STATEMENTS**

 

                ThisReport contains certain forward-looking statements, including the plans andobjectives of management for the business, operations, and economic performanceof Scheid Vineyards Inc. (the “Company”). These forward-looking statements generally can be identified by thecontext of the statement or the use of words such as the Company or itsmanagement “believes,” “anticipates,” “intends,” “expects,” “plans” or words ofsimilar meaning.  Similarly, statementsthat describe the Company’s future operating performance, financial results,plans, objectives, strategies, or goals are forward-looking statements.  Although management believes that theassumptions underlying the forward-looking statements are reasonable, theseassumptions and the forward-looking statements are subject to various factors,risks and uncertainties, many of which are beyond the control of theCompany.  Accordingly, actual resultscould differ materially from those contemplated by the forward-lookingstatements.  In addition to the othercautionary statements relating to certain forward-looking statements throughoutthis Report, attention is directed to “Business — Cautionary InformationRegarding Forward-Looking Statements” below for discussion of some of thefactors, risks and uncertainties that could affect the outcome of futureresults contemplated by forward-looking statements.

 

 

**PART I**

 

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

 

                ScheidVineyards Inc., a Delaware corporation (“SVI” or the “Company”), is a leadingindependent (*i.e*., not winerycontrolled) producer of premium varietal wine grapes.  The Company currently operates approximately 6,000 acres of winegrape vineyards on the Central Coast of California.  Of this total, approximately 4,400 acres are operated for theCompany’s own account and 1,600 acres are operated under management contractsfor others.  All of the propertiescurrently operated by the Company are located in Monterey and San BenitoCounties, both of which are generally recognized as excellent regions forgrowing high quality wine grape varieties.

 

                TheCompany currently produces 18 varieties of premium wine grapes, primarilyChardonnay, Merlot, Cabernet Sauvignon, Pinot Noir, Sauvignon Blanc andSyrah.  The majority of the Company’swine grapes are sold under short and long-term grape purchase agreements to avariety of winery clients.  In 2001, theCompany sold approximately 84% of its wine grapes under such supply agreementsto 25 different wineries.  The Companyalso converts a portion of its grapes, approximately 9% in 2001, to premiumbulk wine which is sold pursuant to wine purchase agreements or on the bulkwine market.  The Company also sells aportion of its grapes, approximately 7% in 2001, pursuant to an acreagecontract whereby the winery client purchases the entire grape production fromspecified acreage for a set price per acre.

 

                TheCompany believes that its clients contract with SVI to assure a consistent,reliable source of high-quality premium grapes for their wines.  The Company’s largest winery client isDiageo Chateau & Estate Wines Company, a division of Diageo plc (“Diageo”),a global premium drinks business and the eighth largest U.S. winery in terms of2001 case shipments.

 

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Grape purchase contracts withDiageo cover 54% of the Company’s acreage and accounted for approximately 76%and 73% of the Company’s 2001 and 2000 total 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 Niebaum-Coppola Estate Winery,Canandaigua Wine Company (“Canandaigua”, a division of Constellation Brands,Inc.), Chalone Wine Group, Beringer Blass Wine Estates, David Bruce Winery,Morgan Winery, and The Hess Collection Winery.

 

                TheCompany sells the majority of its wine grape production under long-term grapepurchase contracts.  The terms of theCompany’s grape purchase contracts extend to between 2002 and 2014, andgenerally have “evergreen” provisions requiring one to three years’ priorwritten notice of termination.  Thesecontracts generally require the clients to purchase substantially all of theCompany’s production from specified vineyards at a formula price based upon theprevious harvest year’s sales prices in California’s leading coastal regions,including Napa, Sonoma, Mendocino and Monterey Counties.

 

                SVIalso provides vineyard management services to two winery clients, Diageo andPacific Wine Partners, LLC (a joint venture between Constellation Brands, Inc.and BRL Hardy, Inc.).  Under thisarrangement, the Company provides its farming services for a set fee peracre.  In 2001, vineyard managementservices accounted for approximately 5% of the Company’s total revenues.

 

                TheCompany’s executive offices are located at 305 Hilltown Road, Salinas,California 93908, telephone number (831) 455-9990, and its vineyardheadquarters are located at 1972 Hobson Avenue, Greenfield, California93927.  See “-RecentDevelopments-Relocation of Executive Offices.”

 

                TheCompany’s business is conducted through a wholly owned subsidiary, ScheidVineyards California Inc., a California corporation (“SVI-Cal”).  References in this Report to “SVI-Del” referonly to Scheid Vineyards Inc., the parent holding company.  Unless otherwise required by the context,references in this Report to “SVI” and the “Company” include SVI-Del and SVI-Calon a consolidated basis.

 

**RecentDevelopments**

 

                                                *2001 Harvest*.  For the year 2001,the Company harvested approximately 14,000 tons of wine grapes, a 31% increasefrom the 2000 harvest of 10,700 tons, primarily due to an approximately 18%increase in acres that are in partial or full production.

 

                                                *2002 Grape Prices*. A significant portion of the Company’s acreage is coveredby purchase contracts that use data from the Final Grape Crush Report (the“Crush Report”), published by the California Department of Food and Agriculture(the “CDFA”) on or about March 10, to calculate prices.  Based on the 2001 Crush Report publishedMarch 8, 2002, the Company anticipates receiving prices for the majority of its2002 crop that are relatively unchanged from the prices the Company received in2001, with the exception of the price for Chardonnay.  The price for Chardonnay showed the most change with a decreasein the anticipated average price per ton of approximately 8%.  The Company anticipates that the prices itmay receive for grapes which are currently not covered by purchase contractscould be significantly less that the prices it will receive for contractedgrapes.  See “The Company’s GrapeProduction Operations-Grape Sales-Pricing.”

 

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                                                *Relocation of Executive Offices*.  In June 2001, theCompany relocated its executive offices from Marina del Rey, California to 305Hilltown Road, Salinas, California.  Thepurpose of the relocation was to place the Company’s executive office ingreater proximity to the Company’s vineyards. In conjunction with the relocation, certain of the Company’s employeeswere given a relocation package, including monetary payments intended toreimburse such employees for the time and expenses associated with their move,and other employees who did not relocate were given severance packages.  The total one-time expense of relocating theexecutive offices, including relocation packages, severance packages, andmoving expenses, was approximately $659,000. In addition, tenant improvements at the Company’s new executive officestotaled approximately $92,000.

 

 

**CompanyStrategy**

 

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

 

                                                 *Produce High Value Premium Wine Grapes*.  The Company has consistently emphasizedproduction of high value wine grapes that its clients can use to producepremium varietal wine. These varieties principally include Chardonnay, CabernetSauvignon and Merlot, in addition to other varieties that command premiumprices.  Throughout its history, SVI hasconsistently provided its clients with wine grapes that meet demandingspecifications for quality, as measured by sugar content and other objectivecharacteristics.  The Company hasinitiated several new programs in a continuing effort to remain a top qualityproducer, including regulated deficit irrigation on appropriate varieties,upgrades to certain trellis systems to improve air circulation and lightpenetration, and an increased focus on balancing each vine through shootthinning, cluster thinning, and other advanced farming practices.  The Company believes it has developed anexcellent reputation in the grape producing industry due to its emphasis onquality and performance. See “The Company’s Grape Production Operations—GrapeProduction.”

 

                                                 *Continue Long-Term Relationships with Leading WineProducers*.   The Company believesthat forming and maintaining long-lasting relationships with clients is the keyto being successful as a premium wine grape grower.  The Company has had grape purchase contracts with Diageo and itspredecessors since 1972 and with Canandaigua and its predecessors since1979.  More recently, SVI has formedcontractual relationships with additional premium wineries such as BeringerBlass Wine Estates, Niebaum-Coppola Estate Winery, Chalone Wine Group and TheHess Collection Winery.  To service andretain its current clients and attract new clients, the Company has positioneditself as an ultra-premium grower on the Central Coast.  As part of this approach, the Companyprovides customized farming to meet the specific needs of each client andstresses customer service by allowing clients to access weather, irrigation andfarming data through the Company’s proprietary web-based system, VitWatch, andproviding each client with quarterly reports outlining the farming practicesthat have been utilized on their contracted grapes.  See “The Company’s Grape Production Operations—Grape Sales.”

 

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                                                 *Combine Fundamental Viticultural Practices withCutting Edge Technology*.  The Company invests in the development of new and improved viticulturalpractices and the use of innovative technological tools in order to increasethe quality, productivity and sustainability of its vineyards.  One of the viticultural tools employed bythe Company is the extensive use of modified lyre trellis systems which aredesigned to achieve balanced vines, leading to production sustainabilitywithout a sacrifice in quality.  TheCompany utilizes many technological tools including irrigation monitoring toolssuch as neutron probes and pressure baums, weather stations, geographicinformation systems technology, global positioning systems technology anddisease models.  See “The Company’sGrape Production Operations—Viticultural Practices.”

 

                                                 *Develop High Quality Vineyard Properties*.   The Company has a disciplined propertydevelopment strategy in order to increase its productive capacity and leverageits available management and equipment resources.  The Company’s criteria for land and vineyard acquisitionsemphasizes value concepts intended to maintain long-term rates of return withincertain ranges, although no assurances can be given regarding the profitabilityof any vineyard development or acquisition. Currently, approximately 900, or 22% of the Company’s net vine acres,are not yet in production or are only partially productive and it is expectedthat all or nearly all of these net vine acres will not be at or near fullproduction until 2006.  Although theCompany believes that there may be opportunities to purchase or leaseundeveloped land suitable for wine grape vineyards and acquire existingvineyards, at this time, SVI is not actively pursuing additional vineyarddevelopment projects.  The Company isfocusing its efforts on completing the 900 acres of high quality vineyard whichis not yet mature and contracting the resultant wine grape production tocurrent or new winery clients.  See“-New Vineyards and Redevelopment of Existing Vineyards”.

 

 

**California Wineand Grape Industry**

 

                Themarket for California premium varietal table wines has grown significantly overthe last 20 years.  Since 1980,California premium wine revenues have increased at an average 17% compoundannual rate to approximately $5.6 billion, or approximately 88% of totalCalifornia table wine revenues of approximately $6.4 billion in 2001, accordingto Gomberg, Fredrikson & Associates. This growth was fueled by the high premium wine segment ($7 and over per750 ml. bottle), as consumers continued to shift upward in purchasepatterns.  In 2001, high premiumsrepresented 28% of California traditional table wine volume and contributedapproximately 61% of industry revenues. According to ACNielsen/Adams, the greatest absolute volume growth infood stores was in the $7 to $10 per 750 ml. bottle price category, which grewby 0.6 million cases, up 9%.  Brands athigher price points also grew rapidly. From a smaller base, wines in the $10 to $14 per 750 ml. bottle categoryincreased 17%, while wines in the $14 and over segment climbed 7%.  In contrast, wines in the fighting varietalprice range of $3 to $7 per 750 ml. bottle grew by only 2%.  Exports of California bottled wine have alsogrown significantly, increasing over 250% in the last 10 years, from 6.2million cases in 1991 to 22.3 million cases in 2001.

 

                Accordingto the Crush Report, the 2001 harvest of California wine grapes totaled 3.0million tons, down 9% from the record 2000 crush of 3.3 million tons.  California wine grape growers received anaverage price in 2001 for white wine grapes of $491 per ton, down 2% from 2000,and an average price for red wine grapes of $679 per ton, up 8% from 2000.  For

 

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growers in California grapepricing district 7 (Monterey and San Benito Counties), the average price forwhite wine grapes decreased by 15%, from $1,215 per ton in 2000 to $1,037 in2001, and the average price for red wine grapes decreased by 3%, from $1,326per ton in 2000 to $1,287 in 2001.

 

                Althoughwine grape prices as reported in the Crush Report are relatively strong in thecoastal districts, there has been a drop in demand and a corresponding decreasein prices for certain varietals perceived to be in oversupply.  The largest drop in prices has occurred inthe Central Valley, an area which produces more than 70% of the state’s winegrapes and whose production is largely destined for the generic and jug winemarket.  Prices for grapes in thecoastal regions, however, have also been affected, most significantly inChardonnay.  During the 2001 harvest,spot market prices for uncontracted grapes in Monterey County decreased from2000 levels.  Chardonnay that was notcontracted was difficult to market, and small amounts of fruit were notpicked.  With new vineyards coming intoproduction, yield enhancements through technological advances and otherfactors, the supply of coastal wine grapes is expected to further increase infuture harvests and reduce prices.

 

 

**The Company’sGrape Production Operations**

 

***  Vineyard Operations***

 

                SVIcurrently owns or manages approximately 6,000 acres of wine grape vineyards inMonterey and San Benito Counties.  Theseproperties consist of approximately 4,400 acres in Monterey County operated forthe Company’s own account and approximately 1,600 acres operated undermanagement contracts for others.  Of theCompany’s approximately 4,080 net vine acres of wine grapes, approximately 78%are in full production, 17% are in partial production, and 5% arenon-producing.  The Company sells themajority of its wine grape production under long-term grape purchase contracts.  Approximately 71% of the Company’s totalacres are contracted through at least the harvest of 2003, and approximately52% are contracted through at least the harvest of 2006.

 

***  Grape Production***

 

                SVI’sacreage of higher value varieties (e.g., Chardonnay, Cabernet Sauvignon,Merlot, Pinot Noir, Sauvignon Blanc and Syrah) has increased in recent yearsdue to changes in product mix through grafting and replanting of the Company’soriginal vineyards, the acquisition of a vineyard, and the development of newvineyards.  The Company acquired a370-acre vineyard in June 1997 and developed into new vineyards approximately54 acres in 1996, 316 acres in 1997, 322 acres in 1998 and 740 acres in1999.  Because it takes approximatelysix years for a newly planted vine to reach full maturity, the Company believesthat its potential production of high value wine grapes in these vineyards willincrease for the next few years as replanted, interplanted and newly plantedvines continue to mature.  However,while potential production may increase, actual grape production variesaccording to the variety of grape produced, weather, vine density, the qualityand type of soil, water conditions, and other factors, and no assurances can begiven that such production increases will occur with any predictability or atall.

 

 

 

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                Thefollowing table shows SVI’s net vine acres by variety from 1998 to 2002, totaltons produced from 1998 to 2001, and tons produced by variety for 2001:

 

**Net Vine Acres Ownedby SVI and Tons Produced**

 
|                  |   | **Net Vine Acres** |   | **Tons** |   |
|-----------------------|--------|--------------------|--------|----------|--------|
| **Variety**           |   | **1998**           |   | **1999** |   | **2000** |   | **2001** |   | **2002** |   | **2001** |   |
| Chardonnay            |   | 881                |   | 1,002    |   | 1,057 |   | 1,374 |   | 1,400 |   | 4,410 |   |
| Merlot                |   | 555                |   | 555      |   | 556 |   | 556 |   | 597 |   | 3,390 |   |
| Cabernet  Sauvignon   |   | 297                |   | 441      |   | 748 |   | 776 |   | 764 |   | 2,612 |   |
| Sauvignon  Blanc      |   | 122                |   | 238      |   | 240 |   | 240 |   | 240 |   | 1,254 |   |
| Pinot Noir            |   | 104                |   | 133      |   | 160 |   | 387 |   | 366 |   | 629 |   |
| Syrah                 |   | 26                 |   | 64       |   | 62 |   | 174 |   | 174 |   | 589 |   |
| Gewürztraminer   |   | 82                 |   | 82       |   | 82 |   | 82 |   | 82 |   | 431 |   |
| Zinfandel             |   | 83                 |   | 86       |   | 86 |   | 86 |   | 86 |   | 221 |   |
| White  Riesling       |   | 87                 |   | 58       |   | 58 |   | 58 |   | 58 |   | 132 |   |
| Valdiguie             |   | 20                 |   | 20       |   | 20 |   | 20 |   | 20 |   | 127 |   |
| Petite  Sirah         |   | —             |   | —   |   | 31 |   | 31 |   | 31 |   | 103 |   |
| Chenin  Blanc         |   | 84                 |   | —   |   | — |   | — |   | — |   | — |   |
| Others                |   | 39                 |   | 46       |   | 31 |   | 31 |   | 39 |   | 121 |   |
| Replants/Grafts(1)    |   | 328                |   | 295      |   | 209 |   | 64 |   | 22 |   | — |   |
| New  Acreage(2)       |   | 632                |   | 1,060    |   | 740 |   | 201 |   | 201 |   | — |   |
| Total Net  Vine Acres |   | 3,340              |   | 4,080    |   | 4,080 |   | 4,080 |   | 4,080 |   |   |   |
|                  |   |               |   |     |   |   |   |   |   |   |   |   |   |
| Total Tons  Produced  |   | 10,932             |   | 7,693    |   | 10,693 |   | — |   | — |   | 14,019 |   |
|                  |   |               |   |     |   |   |   |   |   |   |   |   |   |

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                                                (1)           Replants/graftsare acres which are temporarily taken out of production due to grafting orreplanting to change varieties. Acres are deemed to be back in production inthe third crop year.

 

                                                (2)           Newacreage represents newly acquired bare ground which is in the developmentstage.  The development stage is thefirst three years of the vineyard’s life, when the Company expects little or noproduction.

 

 

***  Grape Sales***

 

                                *Primary Customers*.   The wine grape tonnage harvested from theCompany’s approximately 3,815 net vine acres in production in 2001 (*i.e.*, excluding vineyards underdevelopment or redevelopment) was largely subject to grape purchase contractswith various wine producing companies. The largest set of these contracts, representing approximately 81% ofthe Company’s 2001 grape sales revenues and 76% of the Company’s 2001 total

 

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revenues, is with Diageo Chateau& Estate Wines Company, a division of Diageo plc.  Diageo is a global premium drinks business headquartered in theUnited Kingdom and the eighth largest U.S. winery in terms of 2001 caseshipments.  The Company’s contractualrelationship with Diageo’s predecessor began in 1972 and has been continuoussince that time.  The Company haspurchase contracts for a significant portion of the balance of its current winegrape production with other wine producers, including Niebaum-Coppola EstateWinery, Canandaigua, Chalone Wine Group, Beringer Blass Wine Estates, DavidBruce Winery, Morgan Winery and The Hess Collection Winery.  The Company also provides vineyardmanagement services to Diageo and Pacific Wine Partners, LLC on an aggregate ofapproximately 1,600 acres of wine grapes. See “Vineyard Management Contracts.”

 

                Theterms of the Company’s grape purchase contracts generally require the clientsto purchase substantially all of the Company’s production from specifiedvineyards at a formula price based upon the previous year’s sales prices forspecified districts as reported in the annual Crush Report.  See “Pricing.”  The contracts generally require the Company to deliver grapesmeeting specified sugar levels and other quality measurements.  The majority of the contracts call forpayment in full within 60 days of delivery of the crop to the client.

 

                Theterms of the Company’s grape purchase contracts extend to between 2002 and2014.  Contracts covering the majorityof SVI’s acreage extend to 2006 and have “evergreen” renewal provisions wherebythe contracts continue until either party gives a two or three years’ priorwritten notice of termination.  TheCompany believes that these evergreen provisions are desirable to either allowtime to renegotiate the contract with its contracting client or to find a newclient for the grape production before the contract terminates, although therecan be no assurance that either course of action will be successful.  In 2001, Diageo delivered a notice to the Companyterminating a grape purchase contract covering approximately 570 acres, suchtermination to become effective after the harvest of 2003.  The Company is currently looking at otherpotential winery clients to replace Diageo on this acrerage, as well as holdingdiscussions with Diageo regarding the renegotiation of the contract.  The marketing of uncontracted acres is aprimary focus of SVI, but there can be no assurance that these efforts will besuccessful and it is likely that any purchase agreements covering new vineyardswill have different terms.  See “-Cautionary Information Regarding Forward-LookingStatements — Dependence on Major Customers; Renewal of Grape PurchaseAgreements.”

 

                TheCompany has enjoyed excellent relationships with its clients that have been builtover many years of satisfying their needs for quality, timely delivery andservice.  Long-term supply arrangementsbenefit clients by providing a significant, reliable supply of high–qualitygrapes at predictable prices.  Thesecontracts also benefit the Company by providing reliable sources ofrevenues.  SVI believes that thesecontracts are one of the major reasons for its past success, and it plans torely upon these and similar contracts in the future.  While contract terms are typically a function of market factorsand it is not possible to know what the terms of the Company’s future grapepurchase arrangements will be, it is probable that any renewal or replacementof the Company’s Diageo contracts, the majority of which will expire in 2006,and any purchase agreements covering new vineyards will have different terms.

 

                *Pricing*. Each year the CDFA publishes the Grape Crush Report on a preliminarybasis on or around February 10, with a final report published on or aroundMarch 10.  The Crush Report disclosesthe prices, tons and certain quality standards of all grapes crushed for winefrom each of California’s 17 wine grape producing districts in the grapeharvest of the previous autumn.  Thereport is relied upon heavily by wineries and wine grape producers to negotiatecontracts and establish grape prices, as well as by financial and otherinstitutions who serve the wine industry.

 

                SVI’scontract grape prices are established each year by formulas which are differentfor each of its clients.  However,substantially all of its contracts utilize a pricing formula based on theprevious year’s prices for each wine grape variety in several specified CDFAreporting districts.  For example,grapes from the Company’s 2002 harvest that are subject to these

 

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contracts will be sold at pricesbased on the actual prices for the 2001 harvest reported in the Crush Reportpublished March 8, 2002.  Thisenables both the Company and its clients to know final grape prices (on a perton basis by variety) approximately eight months in advance of each year’sharvest.  These multiple districtformula prices, as opposed to sales on the short-term spot market, tend tomoderate year-to-year swings in prices. The Company’s grape purchase contracts typically utilize pricing basedin part upon prices for Napa, Sonoma and Mendocino County grapes, which tend tobe higher than prices for the same varieties produced in Monterey County.  Some recent agreements use pricing formulasthat are based more heavily on Monterey County data, which may also be the casefor the renewal or replacement of the Diageo agreements and additionalagreements covering new or replanted vineyards.

 

 

                Thechart below shows the weighted average prices SVI has received, or expects toreceive, per ton of contracted grapes for the primary varieties it has producedsince 1998 based on the pricing formulas of its various tonnage-based grapepurchase contracts.  Tonnage-based grapepurchase contracts cover approximately 68% of the Company’s currently producingacreage.

 

**Weighted AveragePrices Per Ton Received by SVI (1)**

 
| **Variety**        |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   | **2002(2)** |   |
|--------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|-------------|--------|
|               |   |     |   |     |   |     |   |     |   |        |   |
| Cabernet Sauvignon |   | $        | 1,571  |     | $      | 1,658    |   | $        | 1,747  |        | $      | 2,044 |   | $ | 2,198 |   |
| Chardonnay         |   | 1,577    |   | 1,577    |   | 1,647    |   | 1,615    |   | 1,482       |   |
| Gewurztraminer     |   | 908      |   | 959      |   | 988      |   | 943      |   | 984         |   |
| Merlot             |   | 1,532    |   | 1,533    |   | 1,516    |   | 1,552    |   | 1,555       |   |
| Petite  Sirah      |   | —   |   | —   |   | 1,240    |   | 1,315    |   | 1,383       |   |
| Pinot Noir         |   | 1,555    |   | 1,727    |   | 1,781    |   | 1,789    |   | 1,759       |   |
| Sauvignon  Blanc   |   | 1,027    |   | 1,084    |   | 1,160    |   | 1,181    |   | 1,180       |   |
| Syrah              |   | 1,135    |   | 1,319    |   | 1,468    |   | 1,442    |   | 1,385       |   |
| Valdiguie          |   | 885      |   | 858      |   | 890      |   | 887      |   | 863         |   |
| White  Riesling    |   | 832      |   | 847      |   | 852      |   | 884      |   | 863         |   |
| Zinfandel          |   | 1,096    |   | 1,217    |   | 1,347    |   | 1,473    |   | 1,653       |   |
|                    |        |          |        |          |        |          |        |          |        |             |        |  |  |  |  |  |

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                                                (1)           Pricesfor premium varieties have increased in recent years largely as a result ofsupply and demand conditions.  Supplyand demand factors will change over time and there can be no assurance that theprices received by the Company in the future will match or exceed historicalprices.

 

                                                (2)           Priceestimates for 2002 are based upon existing contracts, Company production andsales estimates for contracted acres, and the 2001 Final Grape Crush Reportreleased March 8, 2002.  These weightedaverage prices per ton do not include estimated production and sales ofuncontracted vineyard acres.  TheCompany anticipates that prices for grapes produced from uncontracted acreswill be lower than those from its contracted acres.

 

***  Viticultural Practices***

 

                                TheCompany continually invests in the development of new and improved viticulturalpractices and the use of innovative technological tools in order to increasethe quality, productivity and sustainability of its vineyards.  Innovations developed or employed by SVIover the past ten years have included new grafting methods, interplanting,regulated deficit

 

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irrigation, and improved machineharvesting technology and practices. The Company extensively uses modified lyre trellis systems in itsvineyards which are designed to achieve balanced vines, leading to production sustainabilitywithout a sacrifice in quality.  TheCompany utilizes many technological tools including irrigation monitoring toolssuch as neutron probes and pressure baums, weather stations, geographicinformation systems technology, global positioning systems technology and diseasemodels.

 

***  Vineyard Production Cycle***

 

                Thevineyard production cycle begins each year in December, after completion ofharvest. 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 neededthrough the summer.  Necessaryapplications of pesticides and fertilizer begin in the spring and continueuntil harvest.  Grafting and plantingalso generally take place 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 therate at which fruit ripens, harvest typically begins in late-August tomid-September and is completed by the end of October or early November.  Direct farming costs currently range from$2,300 to $3,000 per acre over the course of the year for vineyards in fullproduction, and revenues are realized at the time of harvest.  Approximately one-half of annual productioncosts are incurred by June 30.

 

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

 

                Becauseof the increasing demand for premium wine, the Company’s clients as well asother wineries have been seeking additional long-term sources of premium winegrapes.  Accordingly, part of theCompany’s strategy has been to expand its operations and grape productionthrough the development of bare land into vineyards, the acquisition ofexisting vineyards, and the redevelopment of the Company’s oldervineyards.  As discussed below, theCompany has implemented this strategy through the lease in 1998 ofapproximately 790 acres of bare land located near the Company’s vineyardheadquarters and currently being developed into vineyards, the 1997 acquisitionof the 370-acre Riverview Vineyard, the lease in 1997 of approximately 575acres of bare land in Hames Valley it has developed into vineyards, and theredevelopment of certain of the Company’s existing vineyards.

 

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

 

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                Ithas been the Company’s experience that it currently costs approximately $15,000to $18,000 per acre over a three-year period to develop open land into aproducing premium wine grape vineyard, before taking into account the cost ofland.  The costs of redevelopingexisting vineyards vary depending upon the condition of the vineyard and thescope of the redevelopment plan.

 

                Dueto the acquisition and development of new vineyards and the redevelopment ofexisting vineyards, much of the Company’s vineyard acreage has not yet reachedfull productive capacity.  While therecan be no assurance that the Company’s properties will achieve their fullproductive capacity at the rate indicated, if at all, the Company believes thatits existing acreage under development or redevelopment represents potentialfor revenue growth.

 

 

                Thefollowing table shows recent and anticipated maturity of the Company’svineyards.

 

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

 
|                                                        |   | **Crop Year** |   |
|-------------------------------------------------------------|--------|---------------|--------|
|                                                        |   | **2001**      |   | **2002** |   | **2003** |   | **2004** |   | **2005** |   | **2006** |   |
| Acres five  or more years old (at or near full  production) |   | 2,716         |   | 3,173 |   | 3,717 |   | 3,857 |   | 3,878 |   | 4,080 |   |
| Acres three  and four years old (partial  production)       |   | 990           |   | 684 |   | 161 |   | 223 |   | 202 |   | — |   |
| Acres one  and two years old (not in  production)           |   | 374           |   | 223 |   | 202 |   | — |   | — |   | — |   |
|                                                        |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Total Acres                                                 |   | 4,080         |   | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   | 4,080 |   |
|                                                        |   |          |   |   |   |   |   |   |   |   |   |   |   |

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

 

                Ifthe Company’s vineyards under development mature consistently with historicalexperience and no significant problems are encountered, they should be at ornear their full productive capacity in or about 2006.  Therefore, acquisitions of producing vineyards will be required priorto 2006 to achieve production increases in excess of those anticipated from theCompany’s existing vineyards.  Inaddition, acquisitions of producing vineyards or open land suitable forvineyard development will be required to sustain productivity increases after2006 and moderate any productivity losses from the Company’s existing vineyardsdue to grafting to new varieties and various other factors that take vineyardsout of production from time to time.  See “-Uncertainty of Revenue Growth,” “-Capital Requirements,” and “-RisksAssociated with Business Expansion and Acquisition Strategy” under “-CautionaryInformation Regarding Forward-Looking Statements” below.

 

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***NewVineyards and Redevelopment of Existing Vineyards***

 

                *Greenfield*.   In December 1998, the Company entered into a lease for an intialterm of 24 years of approximately 790 gross acres (740 plantable acres) ofundeveloped land suitable for wine grape vineyards located near the Company’svineyard headquarters.  The Company hastwo options to extend the term of the lease for successive five-year terms (fora total of ten years).  The Companycompleted the planting of rootstock on the entire 740 plantable acres in May1999.  A total of approximately 540acres of the rootstock was either planted with bench grafts or was grafted to avarietal in 1999, with the first harvest of these acres occurring in 2001.  It is anticipated that the remainingapproximately 200 acres of rootstock will be grafted in 2002 and 2003.  The Company intends to seek grape purchasecontracts for the grape production from this new vineyard.

 

                *Hames Valley*.   In 1997, the Company acquired an option to lease, for a term ofup to 50 years,  approximately 575 grossacres (520 plantable acres) of undeveloped land suitable for wine grapevineyards in Hames Valley, which is located approximately 45 miles south of theCompany’s vineyard headquarters.  TheCompany began development on approximately 200 acres in 1997 and the remaining320 acres in the first quarter of 1998. The Company has entered into a long-term purchase contract with Diageofor approximately 325 acres, and is currently in the process of seeking grapepurchase contracts for the production from the remaining acres on thisvineyard.  There can be no assurance, however,that the Company will be successful in finding a winery or wineries which willagree to grape purchase contracts for newly developed vineyards, includingthose which have recently been developed in Greenfield and Hames Valley.

 

                *Redevelopment of Existing Vineyards*.   Throughout the past 10 years, SVI hasaccomplished major improvements on its vineyards which were planted in the1970’s.  These improvements include thereplanting and grafting of undesirable varieties to higher value varieties andupgrading the trellis systems to improve quality and productionsustainability.  From 1993 through 2001,the Company made capital expenditures on these vineyards of over $19 million,replanting or regrafting approximately 1,330 acres to more appropriate varietiesand interplanting an additional 1,200 acres. Improvement and refurbishment is an ongoing process.  The Company estimates that there will alwaysbe at least 5% of its total net vine acres undergoing some type ofredevelopment. See “-Net Vine Acres Owned by SVI and Tons Produced.”

 

 

***  Water Supply***

 

                TheCompany’s vineyards are located in the Salinas Valley through which flows theSalinas River.  The watershed of theSalinas Valley is from the Ventana Wilderness in the Los Padres National Forestand Santa Lucia range of coastal mountains. The Salinas River supplies a large aquifer which is tapped byagricultural users. In addition, the Salinas River is fed by two largereservoirs, Lake Nacimiento and Lake San Antonio, which were built primarilyfor agricultural water supply purposes to serve the Salinas Valley.  These reservoirs are

 

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maintained by the MontereyCounty Water Resource Agency.  TheCompany drip irrigates all of its vineyards from wells located on or near itsvineyards. The quality of the water obtained from the wells is good, and thewells have proven to be a plentiful and reliable source of water for theCompany’s operations, even during the drought years of the late 1980’s.  See “-Cautionary Information RegardingForward-Looking Statements - Water.”

 

**VineyardManagement Contracts**

 

                TheCompany provides vineyard management services on approximately 1,600 acresin Monterey and San Benito Counties for Diageo and Pacific Wine Partners, LLC(a joint venture between 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 generally expire no earlier than the completion of harvestin years ranging from 2004 to 2012, and otherwise may be terminated by eitherparty with one or two years’ advance notice. In certain cases the Company has also received fees for financingvineyard improvements, securing property and designing vineyards.  The Company may enter into similararrangements for other vineyard properties in the future.

 

**Wine Productionand Sales**

 

                SVIbegan limited production of its own ultra premium varietal wines under the *Scheid Vineyards* and *San Lucas Vineyard* labels in 1991.  The Company has contracted for its wineproduction with Storrs Winery, a small producer of award-winning wines locatedin Santa Cruz, California, approximately 50 miles from the Company’s vineyardheadquarters compound.  The Companycurrently subleases space in a 1,600 square foot building from Storrs Winery,including certain space dedicated for the Company’s exclusive use in connectionwith its winemaking activities. In 1996, the Company obtained a winery license,and a tasting room was opened in April 1997 at the Company’s vineyardheadquarters compound located on U.S. Highway 101 (a major north-souththoroughfare between San Francisco and Los Angeles) just south of Greenfieldand north of King City in Monterey County.

 

                Productionand sales have been limited to date. SVI produced approximately 1,400 and 2,200 cases in 2000 and 2001,respectively, of ultra premium varietal wines, including Chardonnay, CabernetSauvignon, Merlot, Pinot Noir and Sauvignon Blanc, using Company-growngrapes.  While its actual wineproduction will depend on various factors, the Company currently plans forproduction in 2002 of approximately 3,000 cases.  The Company intends to continue to distribute its current wineproduction directly through its tasting room, web site, restaurants, clubs anda few selected retailers.  Since 1997,the Company has offered an annual “wine dividend” to holders of at least 100shares of its Class A Common Stock, whereby such shareholders wereentitled to a $0.50 per share credit for use in making purchases of theCompany’s wine at up to a 50% discount from the retail price.  The Company intends to offer another “winedividend” in 2002.  SVI has not yetearned a profit on its wine business and cannot predict when, or if, theseoperations will become profitable. Further, SVI does not expect its wine business to have a material impacton sales or earnings in the foreseeable future.  No assurances can be given that wine production and sales everwill be a major source of profit for the Company.

** **

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**Competition**

 

                Winegrape growing and wine production are extremely competitive.  There are an estimated 800 commercialwineries which produce and market California table wine, approximately half ofwhich produce fewer than 5,000 cases per year. The top eight wineries account for approximately 74% of sales based ontotal California wine shipments in 2001. In addition, there are many sources of supply of wine grapes in Californiaand in countries outside the United States. Since 1996, acres planted to wine grapes in California have increased50% from approximately 378,000 acres at the end of 1996 to 568,000 at the endof 2000, according to the California Agricultural Statistics Service, and thenumber of planted acres is growing. Most wine grape producers have small, privately owned operations andsell their production to wineries, often at spot market prices from year toyear.  Quality of production and yieldscan vary widely from vineyard to vineyard in the same geographic area.  To supplement the grapes they buy fromindependent producers, many wineries also own or lease vineyards to supply someof their grape needs.  Certain majorwineries, such as Kendall-Jackson and Robert Mondavi, are large wine grapeproducers and produce a significant proportion of the grapes they need to makewine. Substantial vineyard acreage is also owned by other wineries and more isbeing developed.  Although holdings ofvineyard properties are not publicly reported, the Company believes it is oneof the largest independent producers of premium wine grapes in California, andthat there are approximately four or five independent producers of comparablesize in terms of acreage.

 

                Inaddition, there are numerous wine producers in Europe, South America,Australia, New Zealand and South Africa. Increasing production in these regions is being targeted at therelatively affluent United States market, especially while the dollar remainsstrong.  California grape and winesupply shortages, especially in red wines, have prompted some domestic nationalbrand marketers to purchase wine from foreign sources.  Most imports are bottled wines; however,some wineries have imported bulk table wine in large tanks for bottling andsale in the United States.  Althoughimports to California for these purposes increased 39% from 2000 to 2001, bulkwine imports have decreased from approximately 20.3 million gallons in 1997 toapproximately 2.6 million gallons in 2001.

 

 

**EnvironmentalIssues**

 

                SVIcurrently maintains 26 above–ground fuel storage tanks on its ownvineyard properties to provide fuel to its various vehicles and machinery.  These tanks have capacities ranging fromapproximately 500 to 10,000 gallons and are installed on concrete slabs withcatch basins to protect the ground surface from any inadvertent release.  No underground storage tanks are located onthe Company’s properties.

 

                TheCompany’s current operations require the periodic usage of various chemical herbicides,fungicides and pesticides, some of which contain hazardous or toxic substances.The usage and storage of these chemicals are, to varying degrees, subject tofederal and state regulation. To the extent that the Company stores suchchemicals, they are contained in a secured storage facility at the Company’svineyard headquarters compound.  Themost toxic pesticide used by the Company, FuradanTM, is not stored on–site,but is delivered as needed by an unaffiliated company and applied to thevineyard under the supervision of a state-licensed applicator.  The Company also maintains a comprehensivesafety program supervised by the Company’s human resources safety director anda licensed pest control advisor.

 

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**Trademarks andLabels**

 

The Company has registered atrademark relating to a specific slogan which the Company uses on souvenirs andparaphernalia sold at the Company’s wine-tasting room and has filed anapplication to trademark “VitWatch”, the Company’s proprietary winery clientweb site.  The Company also has winelabels approved by the Bureau of Alcohol, Tobacco and Firearms (“BATF”),including the *Scheid Vineyards*and *San Lucas Vineyard* brandnames.

 

**Employees andLabor Relations**

 

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

 

                TheUnited Farm Workers, AFL-CIO (“UFW”) has represented the Company’s farm workerssince 1993.  In January 2002, theCompany completed the negotiation of a new five-year contract with the UFW thatwill expire at the end of 2006.  TheCompany believes its labor relations are satisfactory.  The Company has never had a walk-out,sit-down, slow-down or strike, and the existing contract has a “no strike”clause.  The Company has, however, beenpicketed, particularly during the organizing effort by the UFW and duringnegotiation of the first contract in 1995. See “Cautionary Information Regarding Forward-Looking Statements — LaborRegulations and Union Contract.”

 

 

**CautionaryInformation Regarding Forward-Looking Statements**

 

***  Agricultural Risks***

 

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

 

                Vineyardsare also susceptible to certain diseases, insects and pests, which can increaseoperating expenses, reduce yields or kill vines.  In recent years phylloxera, a louse that feeds on the roots ofgrape vines, has infested many vineyards in the wine grape producing regions ofCalifornia and caused grape yields to decrease.  Within a few years of the initial infestation, phylloxera canleave a vine entirely unproductive. Phylloxera infestation has been widespread in California, particularlyin Napa, Sonoma, Mendocino and Monterey Counties, and most of the other winegrape producing areas of the state have been affected to some degree.  As a result of this widespread problem,thousands of vineyard acres throughout California have been replanted withphylloxera-resistant rootstock or, in some cases, taken out of production

 

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completely.  It takes approximately four to five yearsfor a replanted vineyard to bear grapes in quantities sufficient for profitableoperations.  The Company estimates thatit currently costs approximately $15,000 to $18,000 per acre to replantvineyards.  Of the Company’sapproximately 4,080 net vine acres (*i.e*.,excluding acreage devoted to roads, storage areas, equipment yards or usesother than vineyards) of wine grapes, approximately 3,940 net vine acres, or97%, are planted or interplanted with phylloxera–resistantrootstock.  The remaining approximately140 acres are planted on non-resistant rootstock and are, therefore,potentially susceptible to phylloxera infestation.  The Company is managing the non-resistant acres throughapplication of FuradanTM and a program of selective replantings.

 

                Anotherpotentially devastating pest is the glassy-winged sharpshooter (“GWSS”).  GWSS poses a significant threat toviticulture throughout California due to its ability to transmit *Xylella fastidiosa*, the bacterium thatcauses Pierce’s Disease.  Pierce’sDisease, a deadly vine disorder, has been present in California for more than acentury, vectored by the blue-green sharpshooter.  It now presents a much more significant threat because the GWSSis a new and far stronger disease carrier than the blue-green sharpshooter.  The GWSS became established in the Temecularegion of southern California in 1999 and, as a result, Pierce’s Disease is sowidespread that the future viability of the Temecula region to produce winegrapes is in doubt.  The list ofcounties in California infested with the GWSS numbers fourteen, with localizedinfestations found in parts of Butte, Contra Costa, Fresno, Kern, Imperial,Sacramento, Santa Barbara and Tulare counties. Thus far, no trace of sharpshooters has been reported in Monterey Countyand the Company has seen no evidence of the GWSS or Pierce’s Disease in its ownvineyards.  The wine industry, alongwith scientists and certain governmental agencies in California, are searchingfor ways to control and combat the pest, including a comprehensive system ofinspections and monitoring, pesticide spraying and numerous research projects.

 

                Otherpests that may infest vineyards include leafhoppers, thrips, nematodes, mites,insects, orange tortrix, twigbore, microflora and various grapevinediseases.  Pesticides and the selectionof resistant rootstocks reduce losses from these pests, but do not eliminatethe risk of such loss.  Gophers,rabbits, deer, wild hogs and birds can also pose a problem for vineyards, andwine grape vines are also susceptible to certain virus infections which maycause reduction of yields.  None ofthese currently poses a major threat to the Company’s vineyards, although theycould do so in the future and, at that time, will have the potential to subjectthe vineyards to severe damage.

 

***  Dependence on Major Customer; Renewal ofGrape Purchase Agreements***

 

                Grapepurchase contracts with Diageo cover 54% of the Company’s acreage and accountedfor approximately 76% and 73% of the Company’s 2001 and 2000 total revenues,respectively.  The terms of the grapepurchase contracts with Diageo extend to between 2003 and 2014.  In 2001, Diageo delivered a notice to the Companyterminating a grape purchase contract covering approximately 570 acres, suchtermination to become effective after the harvest of 2003.  The Company is currently looking at otherpotential winery clients to replace Diageo on this acrerage, as well as holdingdiscussions with Diageo regarding the renegotiation of the contract.  The marketing of uncontracted acres is aprimary focus of SVI, but there can be no assurance that these efforts will besuccessful and it is likely that any purchase agreements covering new vineyardswill have different terms.  The remaining purchase contracts, coveringapproximately 41% of the Company’s acreage, extend to 2006 and 2014 and have an“evergreen” renewal provision whereby the contract continues unless eitherparty gives a three-year advance written notice of termination.   Although these contracts do notspecifically provide for termination prior to expiration of their stated terms,it is possible that they could be terminated under various circumstances,including material breach.  If thesecontracts are terminated, there can be no

 

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assurance that the Company will be able toreplace Diageo with as significant a purchaser of its grape production or thatthe Company will be able to enter into agreements with other purchasers onsimilar terms.  Termination of thesecontracts with Diageo could have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

 

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

 

                Atotal of 3.0 million tons of wine grapes were crushed in 2001 in California, a9% decrease from the record 3.3 million tons crushed in 2000.  Statewide, the average price per tonincreased by 5%, from $570 per ton in 2000 to $598 per ton in 2001.  The large crops of 2000 and 2001 have had abig impact on grape and bulk wine prices for some varietals perceived to be inoversupply.  The largest drop in pricesoccurred in the Central Valley, an area which produces more than 70% of thestate’s wine grapes and whose production is largely destined for the genericand jug wine market.  Prices for grapesin the coastal regions, however, have also been affected, most significantly inChardonnay.  During the 2001 harvest,spot market prices for uncontracted grapes in Monterey County decreased from2000 levels.  Chardonnay that was notcontracted was difficult to market, and small amounts of fruit were not picked.  With new vineyards coming into production,yield enhancements through technological advances and other factors, the supplyof coastal wine grapes is expected to further increase in future harvests andreduce prices.

 

***  Uncertainty of Revenue Growth***

 

                In2002, approximately 78% of the Company’s net vine acres are at or near fullproduction, and it is anticipated that a certain portion of the Company’svineyards will always be out of production or below maximum production due toinitial development, replanting, regrafting and various other factors.  While some productivity increases may beexpected from further development of vineyard acreage not yet in fullproduction or from enhancements of fully productive vineyards, the growthpotential of the Company’s existing properties is limited and the Company’sability to increase revenue depends ultimately upon its ability to acquire,develop and operate more vineyard properties. There can be no assurance that suitable properties will be available tothe Company at prices that would make the Company’s growth plans viable.  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 growth unrelated tothe number of acres in full production.

 

 

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

 

                TheCompany incurs annual farming costs currently averaging approximately $2,300 to$3,000 per acre in production.  Thesecosts are incurred throughout the year preceding harvest and are relativelyfixed.  Revenues from grape sales arenot realized until harvest and vary depending upon yields and prices.  Vineyard productivity varies from year toyear depending upon a number of factors, and significant variations in annualyields should be expected from time to time. Furthermore, grape prices have fluctuated significantly in the past andshould be expected to continue to fluctuate from year to year and to decreaseat times in the future.  Becauseproduction costs are not significantly adjustable in light of productivity orrevenue levels, weak harvests or lower grape prices cannot be mitigated by costreductions and should be expected to have significant adverse effects uponprofitability.

 

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***  Capital Requirements***

 

                Thefarming of vineyards in production requires substantial amounts of workingcapital.  Historically, the Company hasrelied heavily on short-term credit to finance its working capitalrequirements.  Working capitalrequirements are expected to increase to support the expansion anticipated bythe Company.  There can be no assurancethat the Company will be able to obtain financing when required or that suchfinancing will be available on reasonable terms, and lack of access to adequatelines of credit or other capital sources could impair the Company’s ability togrow and adversely affect the Company’s business, financial condition andresults of operations.

 

                Substantialcapital expenditures are required to develop and acquire new vineyards andimprove existing vineyards.  The Companyhas made and may continue to make such expenditures to finance its expansion,and has incurred and may continue to incur indebtedness.  As a consequence, (i) the Company has andwill continue to have significant interest and principal repayment obligations,(ii) the Company’s earnings and cash flows will be adversely affected byincreases in interest rates, and (iii) the presence of this debt will limit theCompany’s ability to pay dividends on its common stock.

 

***  Risks Associated with Business Expansion andAcquisition Strategy; Long-Term Strategies***

 

                Aspart of its long-term strategy, SVI continually evaluates expanding itsbusiness through (i) the purchase or lease of undeveloped land suitable forwine grape vineyards, (ii) acquisitions of developed vineyard properties and(iii) increasing acreage under management. There can be no assurance that the Company will be able to locatesuitable properties to buy or lease at viable prices, and any undeveloped propertiesacquired by the Company will require significant capital investment and severalyears of development before becoming productive.  The Company does not expect to receive the full benefit from anynewly planted vineyards for at least five to six years after planting due tothe time required for the vines to mature and produce economic yields.  In addition, the Company’s ability toincrease profits through acquisitions depends to a significant degree upon the pricesat which properties can be purchased or leased.  Furthermore, increased acreage under management will createadditional demands on Company management and may require the Company to hireand integrate more employees. Accordingly, the Company’s strategies are long-term strategies designedto increase the Company’s production capacity and expand the Company’sbusiness.  As a result, the fulleconomic impact in terms of projected earnings and other beneficial effects ofthe Company’s expansion program will not be fully realized for several years,if at all.

 

***  Competition; Industry Fragmentation***

 

                Thewine grape industry is extremely competitive. Many of the Company’s current and prospective competitors havesubstantially greater financial, production, personnel and other resources thanthe Company.  The Company competes withmany other producers of premium wine grapes in California, including a fewthousand small independent (*i.e*.,not winery controlled) wine grape producers who sell their production towineries.  Moreover, to a significant extent,wine grapes of a particular variety are fungible, and the ability of foreignproducers to compete with the Company on the basis of price due to their lowerproduction costs may have a negative impact upon the Company’s profitability.  In addition, the Company’s principal wineryclients compete with each other and with other wineries located in the UnitedStates and abroad.

 

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***  Possible Termination of Vineyard ManagementAgreements***

 

                Substantiallyall of the Company’s vineyard management agreements may be terminated in theevent that Alfred G. Scheid, Kurt J. Gollnick and certain members of theirfamilies cease to maintain specified shareholdings in the Company.  Sales to the public by members of the Scheidor Gollnick families or further public offerings by the Company may result in achange of control of the Company, which could result in termination of theseagreements.

 

***  Labor Regulations and Union Contract***

 

                Californiahas many laws and regulations concerning labor in general and farm labor inparticular.  The Agricultural LaborRelations Board has promulgated many regulations concerning farm labor and abody of court decisions has developed. SVI is subject to many of these regulations, laws and precedents.

 

                TheUFW is the major union representing farm labor and has represented SVI’s farmworkers since 1993.  In January 2002,the Company completed the negotiation of a new five-year contract with the UFWthat will expire at the end of 2006. Although the Company historically has had satisfactory labor relations,it has been picketed from time to time during the initial organization of itsemployees and during contract negotiations. No assurance can be given that the Company’s satisfactory labor relationswill continue or that the UFW will not engage in, picketing, walk-outs,sit-downs, slow-downs or strikes or the threat of these actions.  The Company’s business is heavily dependentupon farm labor, and the failure of the Company to maintain adequate laborrelations on terms acceptable to the Company could have a material adverseeffect upon the Company’s business, financial condition and results ofoperations.

 

***  Dependence on Consumer Demand***

 

                Trendsin consumer spending and changes in consumer tastes have a substantial impacton the wine industry and the Company’s business.  To the extent that wine purchases are negatively impacted byeconomic and other factors, or wine consumers reduce consumption of wine infavor of other beverages, demand for wine grapes could decrease.

 

***  Government Regulation; Taxes***

 

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

 

                Wineproduction and sales are subject to extensive regulation by the Federal Bureauof Alcohol, Tobacco and Firearms, the California Department of Alcohol BeverageControl and other state and federal governmental authorities that regulatelicensing, trade and pricing practices, labeling, advertising and otheractivities.  In recent years, federaland state authorities have required warning labels on beverages containingalcohol.  Restrictions imposed bygovernment authorities on the sale of wine could increase the retail price ofwine, which could

 

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have an adverse effect on demandfor wine in general.  Increases inexcise taxes on wine, if enacted, could reduce demand for wine and wine grapes,which could materially and adversely effect the Company’s business, financialcondition and results of operations.

 

***  Reliance on Key Personnel***

 

                TheCompany believes its continued success depends to a significant extent on theactive involvement of certain members of the Scheid family and the retention ofits senior non-family executives.  Therecan be no assurance that the key persons will remain in their managementpositions with the Company, and the loss of the services of any of the keypersons could have a material adverse effect on the Company’s business, financialcondition and results of operations.

 

***  Environmental Risks***

 

                Ownershipof real property creates a potential for environmental liability on the part ofthe Company.  If hazardous substancesare discovered on or emanating from any of the Company’s vineyards and therelease of hazardous substances (including fuels and chemicals kept by theCompany on its properties for use in its business) presents a threat of harm topublic health or the environment, the Company may be held strictly liable forthe cost of remediation of these hazardous substances.  See “-Environmental Issues.”

 

***  Water***

 

                TheCompany is dependent upon wells located on or near its vineyards for water toirrigate the vineyards, which wells are supplied by aquifers fed by the SalinasRiver and reservoirs operated by Monterey County.  Although historically the quality of water from these wells hasbeen good and the wells have consistently supplied a plentiful and reliablesource of water, even during the drought years of the late 1980’s, and theCompany believes its sources of water will be available for the foreseeablefuture, it is possible that the Company’s water supplies could be impaired inthe future due to drought, contamination or other circumstances.  An impairment in the Company’s watersupplies could adversely affect the business, financial condition and resultsof operations of the Company.

 

***  Electricity***

 

                TheCompany is dependent upon electricity to provide power to pumps that run theirrigation systems on certain of its vineyard properties.  The Company’s drip irrigation system islargely responsible for the application of water and certain fertilizers.  In 2001, California experienced statewideenergy shortages, blackouts and increases in electricity costs.  The Company currently spends approximately3% of its direct farming costs per acre on electricity annually.  Prolonged electricity outages could effectthe timing of water or other applications, which could adversely affect theCompany’s vineyards.  The Company hasnot experienced any prolonged electricity blackouts and could, if necessary,use other methods of application of water and fertilizers.

 

 

20

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

 

                *Corporate Headquarters*.  Through June 2001, the Company’s executiveoffice occupied approximately 6,400 square feet in Marina del Rey, Californiaunder a lease with TESH Partners, L.P. (the “Lessor”), a limited partnership ofwhich SVI is the general partner and four members of the Scheid family arelimited partners. Each of these members of the Scheid family is a principalstockholder of the Company.  The leasewas terminated under an agreement with the Lessor on June 30, 2001.  See the information incorporated byreference under “Item 12 — Certain Relationships and Related Transactions.”

 

                Inconnection with the relocation of its corporate headquarters, on March 19,2001, the Company entered into a three-year lease for approximately 6,700square feet of office space in Salinas, California.  The Company has an option to lease the office space for anadditional three-year term.

 

                TheCompany believes that its existing facilities will be adequate to meet theCompany’s needs for the foreseeable future. Should the Company need additional space, management believes it will beable to secure additional space at commercially reasonable rates.

 

                *Vineyards*.  The Company currently owns approximately 1,800 acres of landand leases approximately 2,600 acres of land underlying its vineyards, all ofwhich are located in Monterey County, California.  The five leases to which the Company is a party were entered intoin 1973, 1979, 1996, 1997 and 1998, respectively, and each of the land leaseshas an initial term of 24 to 30 years and options to extend for up to anadditional 10 to 20 years. Substantially all of the Company’s property, plant and equipment servesas collateral for long-term debt.

 

 

**ITEM  3.********                                              ****LEGALPROCEEDINGS**

 

                TheCompany is not a party to any material legal proceedings.

 

 

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

 

                Therewere no matters submitted to a vote of security holders during the Company’sfourth quarter ended December 31, 2001.

 

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**PART II**

 

**ITEM  5.********                                              ****MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

**Market forClass A Common Stock; Related Information**

 

                TheCompany’s Class A Common Stock is traded on the Nasdaq National Market Systemunder the symbol “SVIN”.  The followingtable sets forth, for the fiscal quarter indicated, the high and low closingprice per share sales prices for the Class A Common Stock, as reported byNasdaq:

 
|            |   | **High** |   | **Low** |
|-----------------|--------|----------|--------|---------|
| **2000**        |   |     |   |    |
| First  quarter  |   | $        | 5.000  |    | $ | 3.625 |
| Second  quarter |   | $        | 4.031  |    | $ | 3.344 |
| Third  quarter  |   | $        | 4.500  |    | $ | 3.250 |
| Fourth  quarter |   | $        | 4.000  |    | $ | 2.625 |
| **2001**        |   |     |   |    |
| First quarter   |   | $        | 3.625  |    | $ | 2.938 |
| Second  quarter |   | $        | 4.000  |    | $ | 2.900 |
| Third  quarter  |   | $        | 4.020  |    | $ | 2.890 |
| Fourth  quarter |   | $        | 3.580  |    | $ | 3.000 |

 

 

                OnMarch 22, 2002, there were 176 holders of record of the Company’s Class ACommon Stock and 14 holders of record of the Company’s Class B CommonStock.  On that date, the Companybelieves that the number of beneficial owners of its Class A Common Stock wasapproximately 900.  For informationconcerning historical dividends and the Company’s dividend policy, see “Item 6- Management’s Discussion and Analysis or Plan of Operation - Dividends andDistributions.”

 

 

 

 

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

 

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

                *The following discussion should be read inconjunction with the Company’s Financial Statements, including the relatednotes thereto, and other financial information included herein.  The information in this Report includes forward-lookingstatements.  In addition, past operatingresults are not necessarily indicative of the results to be expected for futureperiods.  See “Note ConcerningForward-Looking Statements” and “Item 1 — Business — Cautionary InformationRegarding Forward-Looking Statements”.*

 

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**Overview**

 

                ScheidVineyards Inc. is a leading independent (*i.e.*,not winery controlled) producer of premium varietal wine grapes.  The Company currently operates approximately6,000 acres of wine grape vineyards on the Central Coast of California.  Of this total, approximately 4,400 acres areoperated for the Company’s own account and 1,600 acres are operated undermanagement contracts for others.  All ofthe properties currently operated by the Company are located in Monterey andSan Benito Counties, both of which are generally recognized as excellentregions for growing high quality wine grape varieties.

 

                TheCompany currently produces 18 varieties of premium wine grapes, primarilyChardonnay, Merlot, Cabernet Sauvignon, Pinot Noir, Sauvignon Blanc andSyrah.  The majority of the Company’swine grapes are sold under short and long-term grape purchase agreements to avariety of winery clients.  In 2001, theCompany sold approximately 84% of its wine grapes under such supply agreementsto 25 different wineries.  The Companyalso converts a portion of its grapes, approximately 9% in 2001, to premiumbulk wine which is sold pursuant to wine purchase agreements or on the bulkwine market.  The Company also sells aportion of its grapes, approximately 7% in 2001, pursuant to an acreagecontract whereby the winery client purchases the entire grape production fromspecified acreage for a set fee per acre.

 

                TheCompany’s largest winery client is Diageo Chateau & Estate Wines Company, asubsidiary of Diageo plc (“Diageo”), a global premium drinks business and theeighth largest U.S. winery in terms of 2001 case shipments.  The Company has had grape purchase contractswith Diageo and its predecessors since 1972. Contracts with Diageo cover 54% of the Company’s acreage and accountedfor approximately 76% and 73% of the Company’s 2001 and 2000 total revenues,respectively.  The terms of the purchasecontracts with Diageo extend to between 2003 and 2014.  In 2001, Diageo delivered a notice to the Companyterminating a grape purchase contract covering approximately 570 acres, suchtermination to become effective after the harvest of 2003.  The Company is currently looking at otherpotential winery clients to replace Diageo on this acrerage, as well as holdingdiscussions with Diageo regarding the renegotiation of the contract.  The marketing of uncontracted acres is aprimary focus of SVI, but there can be no assurance that these efforts will besuccessful and it is likely that any purchase agreements covering new vineyardswill have different terms.  The remaining purchase contracts, coveringapproximately 41% of the Company’s acreage, extend to 2006 and 2014 and have an“evergreen” renewal provision whereby the contract continues unless eitherparty gives a three-year advance written notice of termination.  The Company is substantially dependent onDiageo and termination of these contracts could have a material adverse effecton the Company’s business, financial condition and results of operations.

 

                SVIalso provides vineyard management services pursuant to management contractswith 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 2001, vineyard management services accounted for approximately 5% ofthe Company’s total revenues.

 

                Asignificant portion of the Company’s projected tons for 2002 are covered bypurchase contracts and prices under these contracts are similar to those paidin 2001.  The price for Chardonnayshowed the most change, with a decrease in the anticipated average price perton of approximately 8%.  Although theprices for contracted grapes remain strong, prices for uncontracted grapes throughoutthe industry have been affected by large crops in 2000 and 2001.  The largest drop in prices has occurred inthe Central Valley, an area which produces more than 70% of the state’s winegrapes and whose production is largely destined for the

 

23

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generic and jug winemarket.  Prices for grapes in thecoastal regions, however, have also been affected, most significantly inChardonnay.  During the 2001 harvest,spot market prices for uncontracted grapes in Monterey County decreased from2000 levels.  Chardonnay that was notcontracted was difficult to market, and small amounts of fruit were notpicked.  With new vineyards coming intoproduction, yield enhancements through technological advances and otherfactors, the supply of coastal wine grapes is expected to further increase infuture harvests and reduce prices.  TheCompany anticipates that the prices it may receive for grapes which arecurrently not contracted could be significantly less than the prices it willreceive for contracted grapes.

 

                In2001, the Company harvested approximately 14,000 tons of wine grapes, a 31%increase from the 2000 harvest of 10,700 tons, primarily due to anapproximately 18% increase in acres that are in partial or full production.

 

                Thewine grape business is extremely seasonal. Similar to most nondiversified agricultural crop producers, the Companyrecognizes substantially all of its crop sales revenues at the time of itsannual harvest in September and October. Because success of the Company’s operations is dependent upon theresults of the Company’s annual harvest, the first two quarters havehistorically resulted in a loss and quarterly results are not consideredindicative of those to be expected for a full year.  Profits, if any, are recognized in the last two fiscal quartersof the year when revenues from grape sales are recognized.  In addition, the timing of the annualharvest 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 operatingresults.  The Company derives a portionof its revenues from sales of bulk wine. These sales have in the past, and may in the future, occur in yearssubsequent to the harvest year, which may impact quarterly results.

 

**CriticalAccounting Policies Used in Financial Statements**

 

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

 

                Theprincipal accounting issues which management believes are the most critical toaid in fully understanding and evaluating the Company’s reported financialresults are the carrying value, capitalization policy and depreciable life ofits long-lived assets, primarily its vineyards.  Costs capitalized as vineyards assets include the cost ofacquiring the underlying land, vineyard improvements (which include, amongother costs, the costs of the vines, the trellis and irrigation systems andpre-productive labor and materials), and interest paid during the developmentperiod.  The carrying value anddepreciable life associated with these vineyard assets is periodically reviewedby management to ascertain the validity of amounts recorded in the financialstatements.  These review proceduresinclude analyzing estimates of future cash flows, comparisons of carrying valuewith bank appraisals and recent sales of similar vineyards,

 

24

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and analysis of the condition,productivity and estimated remaining life of the vineyard.

 

                Theunderlying value of vineyard properties is primarily determined by (i) thegeographic location of the vineyard, (ii) the varieties planted, (iii) thedesign, condition and age of the vineyard, (iv) the general state of the winegrape industry, and (v) contracts for the sale of the grape production.  A significant change in the condition of theCompany’s vineyards, the general state of the wine industry (particularly thedemand for the coastal grapes the Company produces), or the Company’s abilityto contract its grape production to wineries, could have a material adverseaffect on the carrying values and lives of its vineyard assets as well as theCompany’s operating results for the period or periods when the change occurs.

 

**Results ofOperations — Years Ended December 31, 2001 and 2000**

 

                Thefollowing table sets forth certain statement of operations data for the yearsended December 31, 2001 and 2000:

 
|                                          |   | **Year Ended  December 31,** |   |
|-----------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2001**                     |   | **2000** |   |
|                                          |   | **(in thousands)**           |   |
| Revenues:                                     |   |                         |   |   |   |
| Sales                                         |   | $                            | 20,678 |   | $ | 16,416 |   |
| Vineyard  management, services and other fees |   | 1,011                        |   | 958 |   |
|                                          |   |                         |   |   |   |
| Total  revenues                               |   | 21,689                       |   | 17,374 |   |
| Cost of  sales                                |   | 11,879                       |   | 8,947 |   |
|                                          |   |                         |   |   |   |
| Gross  profit                                 |   | 9,810                        |   | 8,427 |   |
| General and  administrative expenses          |   | 3,960                        |   | 3,594 |   |
| Relocation  expenses                          |   | 659                          |   | — |   |
|                                          |   |                         |   |   |   |
| Operating  income                             |   | 5,191                        |   | 4,833 |   |
| Interest  expense, net                        |   | 984                          |   | 604 |   |
|                                          |   |                         |   |   |   |
| Income  before provision for income taxes     |   | 4,207                        |   | 4,229 |   |
| Provision  for income taxes                   |   | 1,707                        |   | 1,704 |   |
|                                          |   |                         |   |   |   |
| Net income                                    |   | $                            | 2,500  |   | $ | 2,525 |   |

 

                *Revenues*. SVI derives its revenues from four sources:  (i)  sales of wine grapes;(ii) sales of bulk wine; (iii)  vineyardmanagement and services revenues consisting primarily of management and harvestfees and equipment rentals for services provided to owners of vineyards; and(iv)  sales of wine and wine-relatedmerchandise sold primarily through the Company’s tasting room.  Sales (which are comprised of revenue fromsales of wine grapes, bulk wine, and wine and wine-related merchandise)increased to $20,678,000 in the year ended December 31, 2001 from $16,416,000in the 2000 period, an increase of $4,262,000 or 26%.

 

                Revenuefrom grape sales increased by 23% to $19,437,000 for the year ended December31, 2001 from $15,860,000 in 2000, an increase of $3,577,000.  Overall, tons harvested for theCompany’s own account increased by about 31%, with approximately 14,000 tonsharvested in 2001 compared to 10,700 tons in 2000.  Of the total tons harvested, approximately 1,300 tons in 2001were converted to bulk wine compared to no bulk wine conversions in 2000.  The increase in tons harvested in 2001 wasprimarily due to 18% more acres in partial or full production in 2001 ascompared to 2000.

 

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                Revenuefrom sales of bulk wine increased over 300% to $921,000 for the year endedDecember 31, 2001 from $228,000 in the 2000 period, an increase of $693,000.The increase in sales of bulk wine was due primarily to the signing of new bulkwine contracts during 2001.

 

                Revenuefrom the sale of wine and wine-related merchandise was $320,000 for the yearended December 31, 2001 as compared to $328,000 in the 2000 period, a decreaseof $8,000.

 

                Revenuefrom vineyard management, services and other fees increased to $1,011,000 forthe year ended December 31, 2001 from $958,000 in the 2000 period, an increaseof $53,000.

 

                TheSecurities and Exchange Commission has issued Staff Accounting Bulletin 101,which deals with revenue recognition. The Company has evaluated this pronouncement and believes that it doesnot effect the way it recognizes revenues.

 

                *Gross Profit*.  Gross profit for the year ended December 31, 2001 was $9,810,000compared to $8,427,000 for the year ended December 31, 2000, an increase of$1,383,000 or 16%.  Gross margin ongrape sales decreased to 45% in 2001 as compared to 47% in 2000.

 

                Theincrease in overall gross profit from 2000 to 2001 was primarily due to anapproximately 18% increase in acres that are in partial or fullproduction.  The greater number of newervineyard acres attributed to the decrease in the gross profit margin as thesevineyard acres produce lower yields than fully producing vineyards.  The Company received prices for the majorityof its 2001 grape crop ranging from a slight decrease to a moderate increasefrom the prices it received for the same varieties in 2000.  See “Description of Business — The Company’sGrape Production Operations — Grape Sales — Pricing.”

 

                Costsassociated with the provision of management services are reimbursed by theCompany’s clients, therefore, no cost of sales is deducted in determining grossprofit on these services.

 

                *General and Administrative Expenses*.   General and administrative expensesincreased 10% to $3,960,000 for the year ended December 31, 2001 from$3,594,000 in the 2000 period, an increase of $366,000.   The increase was due primarily to anincrease in the number and amount of salaries for executive and administrativepersonnel.

 

                *Relocation Expenses*.  In June 2001, the Company relocated itsexecutive offices from Marina del Rey, California to 305 Hilltown Road,Salinas, California.  The purpose of therelocation was to place the Company’s executive office in greater proximity tothe Company’s vineyards.  In conjunctionwith the relocation, certain of the Company’s employees were given a relocationpackage, including monetary payments intended to reimburse such employees forthe time and expenses associated with their move, and other employees who didnot relocate were given a severance package. The total one-time expense ofrelocating the executive offices, including relocation packages, severancepackages, and moving expenses, was approximately $659,000.

 

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                *Interest Expense, Net*.   Net interest expense was $984,000 for theyear ended December 31, 2001 as compared to $604,000 in the 2000 period, anincrease of $380,000, and is comprised of the following:

 
|                                         |   | **2001** |      | **2000**   |   |
|----------------------------------------------|--------|----------|-----------|------------|--------|
| Interest  expense                            |   | $        | 1,776,000 |       | $      | 2,157,000 |   |
| Less  capitalized interest                   |   | (786,000 | )         | (1,535,000 | )      |
|                                         |   |     |      |       |   |
| Interest  expense, net of amount capitalized |   | 990,000  |      | 622,000    |   |
| Interest  income                             |   | (6,000   | )         | (18,000    | )      |
|                                         |   |     |      |       |   |
| Interest  expense, net                       |   | $        | 984,000   |       | $      | 604,000 |   |
|                                         |   |     |      |       |   |

 

                Totalinterest expense decreased primarily as a result of decreased borrowings andlower average interest rates in 2001. However, because capitalized interest decreased in the 2001 period dueto decreased expenditures for vineyard acreage being improved or developed, theCompany’s net interest expense increased from 2000 to 2001.

 

                *Provision for Income Taxes*.  The provision for income taxes was$1,707,000 for the year ended December 31, 2001 as compared to $1,704,000 in2000.

 

                *Net Income*.   Net income was $2,500,000 for the year ended December 31, 2001as compared to $2,525,000 in the 2000 period.

 

**Liquidity andCapital Resources**

 

                SVI’sprimary sources of cash have historically been funds provided by internallygenerated cash flow and bank borrowings. The Company has made substantial capital expenditures to redevelop itsexisting vineyard properties and acquire and develop new acreage, and theCompany intends to continue these types of expenditures.  Cash generated from operations has not beensufficient to satisfy all of the Company’s working capital and capitalexpenditure needs.  As a consequence,the Company has depended upon and continues to rely upon, both short andlong-term bank borrowings.  Workingcapital at December 31, 2001 was $8,713,000 as compared to $5,190,000 atDecember 31, 2000, an increase of $3,523,000. The increase in working capital from 2000 to 2001 was primarily due tothe timing of repayments of grape sales revenues to reduce the Company’slong-term crop line of credit.

 

                Underthe Company’s historical working capital cycle, working capital is requiredprimarily to finance the costs of growing and harvesting its wine grapecrop.  The Company normally deliverssubstantially all of its crop in September and October, and receives themajority of its cash from grape sales in early November.  In order to bridge the gap betweenincurrence of expenditures and receipt of cash from grape sales, large workingcapital outlays are required for approximately eleven months each year.  Historically, SVI has obtained these fundspursuant to credit lines with banks.

 

                TheCompany currently has borrowing under facilities that provide both short-termand long-term funds.  The Company’s“crop” line has maximum credit available of $15,000,000 and is intended tofinance the Company’s anticipated working capital needs.  This crop line expires June 5, 2003 and issecured by crops and other assets of the Company.  Interest on the borrowings is due quarterly at the bank’sreference rate or the LIBOR rate plus 1.75%. At December 31, 2001, the weighted average interest rate on borrowingsunder this line of $7,500,000 was 4.75%. The borrowings on the crop line at December 31, 2001 were substantiallyrepaid in January 2002.

 

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                TheCompany has long-term credit facilities which expire July 5, 2005 and aresecured by leasehold interests in vineyards. At December 31, 2001, the outstanding amount owed by the Company underthese facilities was $6,105,000. Interest on the borrowings is due quarterly at the bank’s reference rateor the LIBOR rate plus 2.25%.  AtDecember 31, 2001, the weighted average interest rate on these facilities was4.25%.

 

                TheCompany also has long-term credit facilities which expire July 5, 2008 and aresecured by trust deeds on vineyards.  AtDecember 31, 2001, the outstanding amount owed by the Company under thesefacilities was $15,000,000.  Interest onthe borrowings is due quarterly at the bank’s reference rate or the LIBOR rateplus 2.10%.  At December 31, 2001, theweighted average interest rate on these facilities was 4.05%.

 

                TheCompany also has a bank line of credit with an original maximum loan commitmentof $7,500,000, the proceeds of which were used to develop a vineyard owned by amajor client and managed under a long-term contract by the Company.  Any amount borrowed on the line, even ifrepaid before the end of the availability period, permanently reduces theremaining available line of credit.  AtDecember 31, 2001, the maximum available balance and outstanding balance onthis line of credit was $4,199,000. This line bears interest at the bank’s reference rate (2.51% at December31, 2001) and is repayable in six annual installments which began in January2000.  The note is secured by a letterof credit provided 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.

 

                TheCompany’s principal credit facilities bind the Company to a number ofaffirmative and negative covenants, including requirements to maintain certainfinancial ratios within certain parameters and to satisfy other financialtests.  At December 31, 2001, theCompany was in compliance with all covenants.

 

                Althoughno assurances can be given, management believes that the Company’s anticipatedworking capital levels and borrowing capabilities will be adequate to meet theCompany’s currently anticipated liquidity needs during the fiscal year endingDecember 31, 2002.  At December 31,2001, the Company had $7,500,000 in borrowing availability under its crop lineof credit.

 

                Managementexpects that capital requirements will result in the expenditure of theCompany’s available cash, and additional borrowing under credit lines and/ornew arrangements for term debt may be necessary.  The Company’s planned new vineyard developments are expected torequire approximately $2.3 million in capital investment over the next threeyears, and continued improvements and redevelopments of existing vineyards areexpected to require approximately $1.5 million.  In addition, the Company expects to invest approximately $1.5million in equipment purchases. Management believes it should be able to obtain long-term funds from itspresent principal lender, but there can be no assurance that the Company willbe able to obtain financing when required or that such financings will beavailable on reasonable terms.

 

                Cashprovided by operating activities was $5,982,000 for the year ended December 31,2001, compared to $4,500,000 for the same period in 2000, an increase of$1,482,000.  The increase was primarilydue to the timing of the collection of accounts receivable and accountspayable, offset by costs of bulk wine inventories accumulated in 2001.

 

28

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                Cashused in investing activities was $3,930,000 for the year ended December 31,2001, compared to $7,661,000 for the same period in 2000, a decrease of$3,731,000.  The decrease wasprincipally the result of reduced expenditures for the ongoing development ofapproximately 1,300 acres of new vineyards and improvements to the Company’sexisting vineyards.  Expenditures fordevelopment of vineyards are substantially incurred in the first two years ofdevelopment.  A large amount of theseacres became productive in 2001 or will become productive in 2002.

 

                Cashprovided by financing activities was $1,632,000 for the year ended December 31,2001, compared to $7,010,000 for the same period in 2000, a decrease of$5,378,000.  Net borrowings under theCompany’s long-term credit lines were $1,740,000 in 2001, as compared to $7,619,000in 2000.  The borrowings in both yearswere used primarily for expenditures to fund vineyard development, primarily onthe Company’s new 740-acre vineyard which the Company began developing in thefourth quarter of 1998.  Expenditures onthis vineyard were substantially reduced in 2001.  In addition, the Company repurchased shares of its Class A CommonStock in the amount of $609,000 in 2000. There were no such repurchases in 2001.

 

**DisclosuresRegarding Contractual Obligations and Commitments**

 

                TheCompany is contractually committed to payment on long-term debt obligations andlong-term leases as follows:

 

|             |   |          |       | **Long-Term** |   |       |
|------------------|--------|---------------|------------|---------------|--------|------------|
| **Payments Due** |   | **Long-Term** |       | **Operating** |   |       |
| **by Year**      |   | **Debt**      |       | **Leases**    |   | **Total**  |
| 2002             |   | $             | 1,624,000  |          | $      | 989,000    |   | $ | 2,613,000 |
| 2003             |   | 9,124,000     |       | 857,000       |   | 9,981,000  |
| 2004             |   | 1,624,000     |       | 760,000       |   | 2,384,000  |
| 2005             |   | 7,832,000     |       | 751,000       |   | 8,583,000  |
| 2006             |   | 600,000       |       | 751,000       |   | 1,351,000  |
| 2007             |   | 600,000       |       | 751,000       |   | 1,351,000  |
| 2008             |   | 11,400,000    |       | 751,000       |   | 12,151,000 |
| 2009             |   | —        |       | 751,000       |   | 751,000    |
| 2010             |   | —        |       | 751,000       |   | 751,000    |
| 2011             |   | —        |       | 751,000       |   | 751,000    |
| Thereafter       |   | —        |       | 6,000,000     |   | 6,000,000  |
| Total            |   | $             | 32,804,000 |          | $      | 13,863,000 |   | $ | 46,667,000 |

 

**Dividends andDistributions**

 

                TheCompany intends to retain its future earnings, if any, and does not anticipatepaying cash dividends on either class of its Common Stock in the foreseeablefuture.  In addition, the Company’sprincipal bank credit facilities prohibit the payment of cash dividends withoutthe consent of the lender.

 

 

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** **

**ITEM 7.****                  FINANCIALSTATEMENTS.**

 

                Theaudited financial statements of the Company are set forth in this Reportbeginning on page

F-1.

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

 

F-1

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INDEPENDENTAUDITORS’ REPORT

 

To the Board of Directors andStockholders of

 Scheid Vineyards Inc.:

 

                Wehave audited the accompanying consolidated balance sheets of Scheid VineyardsInc. and subsidiary (the “Company”) as of December 31, 2001 and 2000, and therelated consolidated statements of operations, cash flows, and stockholders’equity for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

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

 

                Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of the Company as ofDecember 31, 2001 and 2000, and the results of its operations and its cashflows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America.

 

 

 
| /s/ DELOITTE & TOUCHE LLP |
|-------------------------------|
| Los Angeles, California       |
| February 27, 2002             |

 

F-2

----

 

**SCHEID VINEYARDS INC. AND SUBSIDIARY**

 

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                                                         |   | **Notes**  |   | **2001** |   | **2000** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|--------|----------|--------|----------|--------|
| **ASSETS**                                                                                                                                   |   |
| **CURRENT ASSETS:**                                                                                                                          |   |       |   |     |   |     |   |
| Cash and  cash equivalents                                                                                                                   |   |       |   | $        | 7,944  |     | $      | 4,260 |   |
| Accounts  receivable, trade                                                                                                                  |   |       |   | 1,907    |   | 1,526    |   |
| Accounts  receivable, other                                                                                                                  |   |       |   | 145      |   | 769      |   |
| Inventories                                                                                                                                  |   | 3          |   | 1,369    |   | 580      |   |
| Supplies,  prepaid expenses and other current assets                                                                                         |   |       |   | 530      |   | 560      |   |
| Current  portion of long-term receivable                                                                                                     |   | 5          |   | 525      |   | 525      |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
| Total  current assets                                                                                                                        |   |       |   | 12,420   |   | 8,220    |   |
| **PROPERTY, PLANT AND EQUIPMENT, net**                                                                                                       |   | 4,7        |   | 53,511   |   | 51,941   |   |
| **LONG-TERM RECEIVABLE**                                                                                                                     |   | 5          |   | 3,674    |   | 4,199    |   |
| **OTHER ASSETS, net**                                                                                                                        |   |       |   | 891      |   | 898      |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
|                                                                                                                                         |   |       |   | $        | 70,496 |     | $      | 65,258 |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               |   |
| **CURRENT LIABILITIES:**                                                                                                                     |   |       |   |     |   |     |   |
| Current  portion of long-term debt                                                                                                           |   | 7          |   | $        | 1,624  |     | $      | 1,478 |   |
| Accounts  payable and accrued liabilities                                                                                                    |   |       |   | 963      |   | 802      |   |
| Accrued  interest payable                                                                                                                    |   |       |   | 13       |   | 59       |   |
| Income  taxes payable                                                                                                                        |   | 9          |   | 1,057    |   | 599      |   |
| Deferred  income taxes                                                                                                                       |   | 9          |   | 50       |   | 92       |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
| Total  current liabilities                                                                                                                   |   |       |   | 3,707    |   | 3,030    |   |
| **LONG-TERM DEBT, net of current portion**                                                                                                   |   | 7          |   | 31,180   |   | 29,586   |   |
| **DEFERRED INCOME TAXES**                                                                                                                    |   | 9          |   | 2,805    |   | 2,169    |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
| Total liabilities                                                                                                                            |   |       |   | 37,692   |   | 34,785   |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
| **COMMITMENTS AND CONTINGENCIES**                                                                                                            |   | 10         |   |     |   |     |   |
| **STOCKHOLDERS’ EQUITY:**                                                                                                               |   | 6,11,12,13 |   |     |   |     |   |
| Preferred  stock, $.001 par value; 2,000,000 shares authorized;

noshares  issued and outstanding                                            |   |       |   | —   |   | —   |   |
| Common  stock,                                                                                                                               |   |       |   |     |   |     |   |
| Class A,  $.001 par value; 20,000,000 shares authorized;2,154,455 shares outstanding  in 2001 and 2000                                       |   |       |   |     |   |     |   |
| Class B,  $.001 par value; 10,000,000 shares authorized;3,321,115 and 3,374,100 shares  issued and outstandingin 2001 and 2000, respectively |   |       |   | 7        |   | 7        |   |
| Additional  paid-in capital                                                                                                                  |   |       |   | 21,868   |   | 21,868   |   |
| Retained  earnings                                                                                                                           |   |       |   | 16,428   |   | 14,097   |   |
| Less:  treasury stock; 1,170,858 Class A Common Stockat cost in 2001 and 2000                                                                |   |       |   | (5,499   | )      | (5,499   | )      |
|                                                                                                                                         |   |       |   |     |   |     |   |
| Total  stockholders’ equity                                                                                                             |   |       |   | 32,804   |   | 30,473   |   |
|                                                                                                                                         |   |       |   |     |   |     |   |
|                                                                                                                                         |   |       |   | $        | 70,496 |     | $      | 65,258 |   |
|                                                                                                                                         |   |       |   |     |   |     |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

 

F-3

----

 

**SCHEID VINEYARDS INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 

 

 

 
|                                          |   |      |   | **Year Ended December 31,** |   |
|-----------------------------------------------|--------|-----------|--------|-----------------------------|--------|
|                                          |   | **Notes** |   | **2001**                    |   | **2000** |   |
| **REVENUES:**                                 |   |      |   |                        |   |   |   |
| Sales                                         |   |      |   | $                           | 20,678 |   | $ | 16,416 |   |
| Vineyard  management, services and other fees |   |      |   | 1,011                       |   | 958 |   |
|                                          |   |      |   |                        |   |   |   |
| Total  revenues                               |   |      |   | 21,689                      |   | 17,374 |   |
| **COST OF SALES**                             |   |      |   | 11,879                      |   | 8,947 |   |
|                                          |   |      |   |                        |   |   |   |
| **GROSS PROFIT**                              |   |      |   | 9,810                       |   | 8,427 |   |
| General and  administrative expenses          |   |      |   | 3,960                       |   | 3,594 |   |
| Relocation  expenses                          |   | 8         |   | 659                         |   | — |   |
| Interest  expense, net                        |   |      |   | 984                         |   | 604 |   |
|                                          |   |      |   |                        |   |   |   |
| **INCOME BEFORE PROVISION FOR INCOME TAXES**  |   |      |   | 4,207                       |   | 4,229 |   |
| **PROVISION FOR INCOME TAXES**                |   | 9         |   | 1,707                       |   | 1,704 |   |
|                                          |   |      |   |                        |   |   |   |
| **NET INCOME**                                |   |      |   | $                           | 2,500  |   | $ | 2,525 |   |
|                                          |   |      |   |                        |   |   |   |
| **BASIC AND  DILUTED EARNINGS PER SHARE**     |   | 2         |   | $                           | 0.46   |   | $ | 0.45 |   |
|                                          |   |      |   |                        |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING**      |   | 2         |   | 5,489                       |   | 5,587 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

 

 

F-4

----

 

**SCHEID VINEYARDS INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

 

 
|                                                                                |   | **Year Ended December 31,** |   |
|-------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                |   | **2001**                    |   | **2000** |   |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                           |   |                        |   |   |   |
| Net income                                                                          |   | $                           | 2,500  |   | $ | 2,525 |   |
| Adjustments  to reconcile net income to net cash provided by operating  activities: |   |                        |   |   |   |
| Depreciation,  amortization and abandonments                                        |   | 2,831                       |   | 2,092 |   |
| Deferred  income taxes                                                              |   | 594                         |   | 1,114 |   |
| Changes in  operating assets and liabilities:                                       |   |                        |   |   |   |
| Accounts  receivable, trade                                                         |   | (381                        | )      | (349 | ) |
| Accounts  receivable, other                                                         |   | 624                         |   | (188 | ) |
| Inventories                                                                         |   | (789                        | )      | 93 |   |
| Supplies,  prepaid expenses and other current assets                                |   | 30                          |   | (176 | ) |
| Accounts  payable and accrued liabilities                                           |   | 115                         |   | (913 | ) |
| Income  taxes payable                                                               |   | 458                         |   | 302 |   |
|                                                                                |   |                        |   |   |   |
| Net cash  provided by operating activities                                          |   | 5,982                       |   | 4,500 |   |
|                                                                                |   |                        |   |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                           |   |                        |   |   |   |
| Long-term  receivable                                                               |   | 525                         |   | 525 |   |
| Proceeds  from sale of property, plant and equipment                                |   | 133                         |   | 49 |   |
| Additions  to property, plant and equipment                                         |   | (4,534                      | )      | (7,912 | ) |
| Other  assets                                                                       |   | (54                         | )      | (323 | ) |
|                                                                                |   |                        |   |   |   |
| Net cash  used in investing activities                                              |   | (3,930                      | )      | (7,661 | ) |
|                                                                                |   |                        |   |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                           |   |                        |   |   |   |
| Increase in  long-term debt                                                         |   | 21,947                      |   | 20,700 |   |
| Repayment  of long-term debt                                                        |   | (20,207                     | )      | (13,081 | ) |
| Loan fees  paid                                                                     |   | (108                        | )      | — |   |
| Repurchase  of common stock                                                         |   | —                      |   | (609 | ) |
|                                                                                |   |                        |   |   |   |
| Net cash  provided by financing activities                                          |   | 1,632                       |   | 7,010 |   |
|                                                                                |   |                        |   |   |   |
| Increase in  cash and cash equivalents                                              |   | 3,684                       |   | 3,849 |   |
| **CASH AND CASH EQUIVALENTS, beginning of year**                                    |   | 4,260                       |   | 411 |   |
|                                                                                |   |                        |   |   |   |
| **CASH AND CASH EQUIVALENTS, end of year**                                          |   | $                           | 7,944  |   | $ | 4,260 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

 

F-5

----

 

**SCHEID VINEYARDS INC. AND SUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

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

 

 

 
|                                                       |   | **Common Stock Outstanding**   |   |                                 |   |       |   |                             |   |
|------------------------------------------------------------|--------|--------------------------------|--------|--------------------------------------|--------|------------|--------|----------------------------------|--------|
|                                                       |   | **Number of  Class A  Shares** |   | **Number of********Class B  Shares** |   | **Amount** |   | **Additional  Paid-in  Capital** |   | **Retained  Earnings** |   | **Treasury********Shares** |   |
| **BALANCE, January 1, 2000**                               |   | 2,310,463                      |   | 3,374,100                            |   | $          | 7      |                             | $      | 21,868 |   | $ | 11,572 |   | $ | (4,890 | ) |
| Repurchase  of common stock(Note 11)                       |   | (156,008                       | )      | —                               |   | —     |   | —                           |   | — |   | (609 | ) |
| Net income                                                 |   | —                         |   | —                               |   | —     |   | —                           |   | 2,525 |   | — |   |
|                                                       |   |                           |   |                                 |   |       |   |                             |   |   |   |   |   |
| **BALANCE, December 31, 2000**                             |   | 2,154,455                      |   | 3,374,100                            |   | 7          |   | 21,868                           |   | 14,097 |   | (5,499 | ) |
| Repayment  of note receiveable  withcommon stock (Note 13) |   | —                         |   | (52,985                              | )      | —     |   | —                           |   | (169 | ) | — |   |
| Net income                                                 |   | —                         |   | —                               |   | —     |   | —                           |   | 2,500 |   | — |   |
|                                                       |   |                           |   |                                 |   |       |   |                             |   |   |   |   |   |
| **BALANCE, December 31, 2001**                             |   | 2,154,455                      |   | 3,321,115                            |   | $          | 7      |                             | $      | 21,868 |   | $ | 16,428 |   | $ | (5,499 | ) |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

 

F-6

----

 

**SCHEIDVINEYARDS INC. AND SUBSIDIARY**

** **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

** **

**YEARS ENDED DECEMBER 31, 2001 AND 2000**

 

 

**1. ORGANIZATION ANDBASIS OF PRESENTATION**

 

                *Organization*— The principal business ofthe Company is the production of premium varietal wine grapes.  The Company currently operates approximately6,000 acres of premium wine grape vineyards in Monterey and San BenitoCounties, California.

 

                Themajority of the Company’s wine grapes are sold under short and long-term grapepurchase agreements to a variety of winery clients. The terms of thesecontracts extend to between 2002 to 2014. The largest set of these contractswith a single winery client covers approximately 54% of the Company’s acreageat December 31, 2001 and accounted for approximately 76% and 73% of theCompany’s total revenues in 2001 and 2000, respectively.  In 2001, this client delivered a notice tothe Company terminating a grape purchase contract covering approximately 570acres, such termination to become effective after the harvest of 2003.  The remaining purchase contracts, coveringapproximately 41% of the Company’s acreage, extend to 2006 and 2014 and have an“evergreen” renewal provision whereby the contract continues unless eitherparty gives a three-year advance written notice of termination.

 

                *Basis of Presentation* — The Companyconducts all of its business through its wholly owned subsidiary, ScheidVineyards California Inc., a California corporation.  All significant intercompany balances have been eliminated inconsolidation.

 

 

**2. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

                *Cash and Cash Equivalents* — The Companyconsiders all highly liquid investments purchased with an original maturity ofthree months or less to be cash equivalents. At December 31, 2001 and 2000, substantially all cash balances wereon deposit with the Company’s major bank.

 

                *Inventories* — Inventories are stated at thelower of FIFO (first-in, first-out) cost or market.  Cost includes the cost of grown grapes, harvesting, production,aging and bottling, and tasting room merchandise. Wine inventories areclassified as current assets in accordance with recognized trade practicealthough certain inventories will be aged for periods longer than oneyear.  Crop costs associated withfarming vineyards prior to the harvest are deferred and recognized in the yearthe grapes are harvested.  On aquarterly basis, the Company evaluates the cost of its inventories and reducessuch inventories to market if required.

 

                *Property, Plant and Equipment* — Property,plant and equipment are stated at cost and are depreciated using straight-lineand accelerated methods over the estimated useful lives of the assets.  Vineyards generally have estimateddepreciable lives of 25 to 30 years, buildings 30 years, and furniture andequipment 5 to 7 years.  Development costsincurred during the development period of a vineyard including related interestare capitalized.  Depreciation commencesin the initial year the vineyard becomes commercially productive, generally inthe fourth year.  Any revenue generatedprior to a vineyard becoming commercially productive

 

 

 

F-7

----

 

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

 

reduces the capitalized cost of thevineyard.  Capitalized costs werereduced by revenues totaling $341,000 and $363,000 in 2001 and 2000,respectively.  The Company capitalized interesttotaling $786,000 and $1,535,000 in 2001 and 2000, respectively.

 

                *Revenue Recognition* — The Companygenerally recognizes revenue from grape and bulk wine sales upon delivery tothe winery.  The Company does not haveany allowance for returns because grapes are tested and accepted upondelivery.  Vineyard management and otherservices are recognized as provided. Substantially all revenues of the Company are derived from customerswithin the United States.

 

                *Fair Value of Financial Instruments*—**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.

 

                *Impairment of Long-Lived Assets and for Long-LivedAssets to be Disposed Of* — Statement of Financial AccountingStandards (“SFAS”) No. 121, “Accounting for the Impairment of Long–LivedAssets and for Long–Lived Assets to be Disposed of” requires that long–livedassets and certain identifiable intangibles to be held and used by the Companybe reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable.  The carrying value and depreciable lifeassociated with these vineyard assets is periodically reviewed by management toascertain the validity of amounts recorded in the financial statements.  These review procedures include analyzingestimates of future cash flows, comparisons of carrying value with bankappraisals and recent sales of similar vineyards, and analysis of thecondition, productivity and estimated remaining life of the vineyard.  During the year ended December 31, 2001 theCompany wrote down vineyard acres that were removed and redeveloped by$195,000.  There were no suchwrite-downs for the year ended December 31, 2000.

 

                *Use of Estimates* — The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedrevenues and expenses during the reporting period.  Actual results could differ from reported amounts of assets,liabilities, revenues and expenses.

 

                *Earnings Per Share and Classes of Common Stock*— Weighted average shares outstanding includes both Class A and Class B CommonStock outstanding for the periods presented (Note 11).  The effect of outstanding stock options andwarrants on the weighted average shares was antidilutive for the periodspresented.

 

                *New Financial Accounting Standards* — In1998, the Financial Accounting Standards Board (the “FASB”) issued SFAS No.133, “Accounting for Derivative Instrument and Hedging Activities.”  SFAS No. 133 establishes accounting andreporting standards for derivative instruments and requires the recognition ofall derivatives as either assets or liabilities on the balance sheet andmeasurement of the instruments at fair value. The Company adopted SFAS No. 133 on January 1, 2001.  The Company did not have any derivativeinstruments during 2001.

 

 

F-8

----

 

                InAugust 2001, the FASB issued SFAS No. 144, “Accounting for Impairment orDisposal of Long-Lived Assets”.  SFASNo. 144 refines existing impairment accounting guidance and extends the use ofthis accounting to discontinued operations. SFAS No. 144 allows the use of discontinued operations treatment forboth reporting segments and distinguishable components thereof.  The adoption of the statement on January 1,2002 is not expected to have an impact on the Company’s consolidated results ofoperations or financial position.

 

**3. INVENTORIES**

 
| Inventories  consist of the following: |   |     |      |     |   |
|----------------------------------------|--------|----------|-----------|----------|--------|
|                                   |   | **2001** |      | **2000** |   |
| Deferred  crop costs                   |   | $        | 419,000   |     | $      | 356,000 |   |
| Bulk and  bottled wine                 |   | 923,000  |      | 196,000  |   |
| Tasting  room merchandise              |   | 27,000   |      | 28,000   |   |
|                                   |   |     |      |     |   |
| Total                                  |   | $        | 1,369,000 |     | $      | 580,000 |   |

 

 

**4****. PROPERTY, PLANT AND EQUIPMENT**

 
| Property,  plant and equipment consists of the following: |   |       |       |       |   |
|-----------------------------------------------------------|--------|------------|------------|------------|--------|
|                                                      |   | **2001**   |       | **2000**   |   |
| Land and  buildings                                       |   | $          | 6,618,000  |       | $      | 6,521,000 |   |
| Vineyard  improvements                                    |   | 40,308,000 |       | 28,428,000 |   |
| Vineyard  improvements under development                  |   | 14,354,000 |       | 23,140,000 |   |
| Machinery  and equipment                                  |   | 6,517,000  |       | 6,049,000  |   |
|                                                      |   |       |       |       |   |
| Total                                                     |   | 67,797,000 |       | 64,138,000 |   |
| Less  accumulated depreciation and amortization           |   | 14,286,000 |       | 12,197,000 |   |
|                                                      |   |       |       |       |   |
| Property,  plant and equipment — net                 |   | $          | 53,511,000 |       | $      | 51,941,000 |   |

 

 

**5. LONG-TERMRECEIVABLE**

 

                TheCompany has a contract to redevelop and manage certain vineyards owned orcontrolled by a major client. The contract originally called for theexpenditure of approximately $7,500,000 over a three–year period.  The funds for this project were borrowed, asan accommodation to the client, by the Company under a line of credit (see Note7).  The interest rate and payment termsof this receivable are the same as the related note payable.  The note payable to the bank is secured by aletter of credit provided by the client and by the management contract.  The contract calls for the payment of thisreceivable by the client’s payment of the six annual principal installmentsunder the line, beginning January 5, 2000.  At December 31, 2001, the receivable was due as follows: $525,000

 

 

F-9

----

 

in 2002, $525,000 in 2003, $525,000 in2004, and $2,624,000 in 2005.  Theredevelopment of the property was completed in 1999 and the Company continuesto manage the operations of the vineyard for the client.

 

 

**6. CROP LINE OF CREDIT**

 

                TheCompany has a crop line of credit with a bank which currently provides formaximum borrowings of $15,000,000 through July 5, 2003.  Borrowings are secured by crops and otherassets with interest due quarterly at the bank’s reference rate or the LIBORrate plus 1.75%.  At December 31, 2001,the weighted average interest rate on outstanding borrowings under this line of$7,500,000 was 4.75%.  There was$11,850,000 outstanding under the Company’s crop line of credit atDecember 31, 2000.

 

                Thecrop line prohibits the payment of dividends without the consent of the lenderand contains various financial covenants, including minimum tangible net worthand current working capital amounts.  At December 31,2001, the Company was in compliance with all covenants.

 

 

**7. LONG-TERM DEBT**

 

                Long–termdebt consists of the following:

 
|                                                                                                                                                                                                                                                                                                                                                    |   | **2001**  |      | **2000**  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| 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 (4.25% at December 31, 2001)                                                    |   | $         | 1,714,000 |      | $      | 1,928,000 |   |
| 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 (4.25% at December 31, 2001)                                       |   | 1,066,000 |      | 1,162,000 |   |
| Note  payable to bank, principal due in annual installments of$114,000 through July 5, 2005,  secured by a leasehold  interestin 352 vineyard acres. Interest is payable quarterly  at  the lowerof  a bank-quoted reference rate or a fixed rate  of 2.25% overLIBOR (4.25% at December 31, 2001)                                                 |   | 2,275,000 |      | —    |   |
| 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 (4.25% at  December 31, 2001)                                               |   | 1,050,000 |      | 1,125,000 |   |
| Revolving/Declining  Line of Credit Agreement with a bank  which provided for a maximum borrowing of $2,835,000  diminishing annually to a maximum allowable commitment  of $1,775,000, which was due on June 5, 2007. The line of  credit was secured by a deed of trust on 405 vineyard  acres.  This line was repaid and  replaced in 2001 |   | —    |      | 2,585,000 |   |
| Revolving/Declining  Line of Credit Agreement with a bank  whichprovided for a maximum borrowing of $3,600,000  diminishingannually to a maximum allowable commitment  of $1,980,000,which was due on June 5, 2008. The line of  credit was securedby a deed of trust on 370 vineyard  acres. This line was repaidand replaced in 2001                  |   | —    |      | 3,240,000 |   |
| 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 (4.05% at December 31, 2001)                                                   |   | 4,450,000 |      | 4,450,000 |   |
|                                                                                                                                                                                                                                                                                                                                                         |        |           |           |           |        |  |  |

 

 

F-10

----

 

**7. LONG-TERM DEBT (Continued)**

** **
| 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 (4.05% at December 31, 2001)                                                                                                                        |   | 10,550,000 |       | —     |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Note  payable to bank represents borrowings on a $7,500,000  line of credit, which bears interest at the bank’s reference  rate (2.51% at December 31, 2001). 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 |   | 4,199,000  |       | 4,724,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                       |   |       |       |       |   |
| Total                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 25,304,000 |       | 19,214,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                       |   |       |       |       |   |
| Less  current maturities                                                                                                                                                                                                                                                                                                                                                                                                   |   | 1,624,000  |       | 1,478,000  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                       |   |       |       |       |   |
| Long-term  portion                                                                                                                                                                                                                                                                                                                                                                                                         |   | $          | 23,680,000 |       | $      | 17,736,000 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                            |        |            |            |            |        |  |  |

 

 

F-11

----

 

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

 

| 2002       |   | $          | 1,624,000  |
|------------|--------|------------|------------|
| 2003       |   | 9,124,000  |
| 2004       |   | 1,624,000  |
| 2005       |   | 7,832,000  |
| 2006       |   | 600,000    |
| Thereafter |   | 12,000,000 |
|       |   |       |
| Total      |   | $          | 32,804,000 |

 

                Substantiallyall of the Company’s property, plant and equipment serves as collateral forlong–term debt.  In addition, thecredit facilities and notes contain various financial covenants, includingminimum tangible net worth and current working capital amounts.  At December 31, 2001, the Company was incompliance with all covenants.

 

 

**8. RELOCATION EXPENSES**

 

                Inconnection with the relocation of the Company’s executive offices in June 2001,the Company incurred $659,000 of costs consisting primarily of relocationpayments to employees intended to reimburse such employees for the time andexpenses associated with their move, and severance packages to other employeeswho did not relocate.  All costs werepaid by December 31, 2001.

 

 

**9. INCOME TAXES**

 

                Significantcomponents of the Company’s net deferred income tax assets and liabilities atDecember 31, 2001 and 2000 are as follows:

 
|                                       |   | **2001** |    | **2000** |   |
|--------------------------------------------|--------|----------|---------|----------|--------|
| Current  deferred income tax assets:       |   |     |    |     |   |
| State  income taxes                        |   | $        | 68,000  |     | $      | 59,000 |   |
| Current  deferred income tax liabilities:  |   |     |    |     |   |
| Prepaid expenses                           |   | (118,000 | )       | (151,000 | )      |
|                                       |   |     |    |     |   |
| Net current deferred  income tax liability |   | $        | (50,000 | )        | $      | (92,000 | ) |

 
| Long-term  deferred income tax assets:       |       |       |       |   |
|----------------------------------------------|------------|------------|------------|--------|
| Deferred  state income taxes                 | $          | 210,000    |       | $      | 149,000 |   |
| Long-term  deferred income tax liabilities:  |       |       |       |   |
| Depreciation                                 | (3,015,000 | )          | (2,318,000 | )      |
|                                         |       |       |       |   |
| Net  long-term deferred income tax liability | $          | (2,805,000 | )          | $      | (2,169,000 | ) |

 

 

F-12

----

 

                Theprovision for income taxes is as follows:

 
|                              |   | **2001**  |      | **2000**  |   |
|-----------------------------------|--------|-----------|-----------|-----------|--------|
| Current:                          |   |      |      |      |   |
| Federal                           |   | $         | 914,000   |      | $      | 418,000 |   |
| State                             |   | 199,000   |      | 172,000   |   |
|                              |   |      |      |      |   |
| Total                             |   | 1,113,000 |      | 590,000   |   |
|                              |   |      |      |      |   |
| Deferred:                         |   |      |      |      |   |
| Federal                           |   | 414,000   |      | 908,000   |   |
| State                             |   | 180,000   |      | 206,000   |   |
|                              |   |      |      |      |   |
| Total                             |   | 594,000   |      | 1,114,000 |   |
|                              |   |      |      |      |   |
| Total  provision for income taxes |   | $         | 1,707,000 |      | $      | 1,704,000 |   |

 

                The Company’s effective incometax rate differs from the federal statutory income tax rate due to thefollowing:

 
|                                |   | **2001** |   | **2000** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
| Federal statutory rate              |   | 34.0     | %      | 34.0     | %      |
| State taxes, net of federal benefit |   | 6.0      |   | 5.9      |   |
| Other                               |   | 0.6      |   | 0.4      |   |
|                                |   |     |   |     |   |
| Total                               |   | 40.6     | %      | 40.3     | %      |

 

 

 

**10. COMMITMENTS AND CONTINGENCIES**

 

                *Lease Obligations* — The Company hasvarious operating lease agreements for office space and farm land.  Through September 30, 2001, the Companyleased office space with a related partnership at a rental rate of $124,000 peryear.  In connection with the relocationof the Company’s executive office (see Note 8), the Company entered into athree-year lease for new office space and the lease with the relatedpartnership was canceled on September 30, 2001.  Rental payments to the related partnership totaled $93,000 and$124,000 in 2001 and 2000, respectively.

 

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

 

 

F-13

----

 

                Aggregate minimumrental payments for each of the next five years ending December 31 are asfollows:

| 2002       |   | $         | 989,000    |
|------------|--------|-----------|------------|
| 2003       |   | 857,000   |
| 2004       |   | 760,000   |
| 2005       |   | 751,000   |
| 2006       |   | 751,000   |
| Thereafter |   | 9,755,000 |
|       |   |      |
| Total      |   | $         | 13,863,000 |

 

                Rent charged tooperations was $817,000 and $489,000 for the years ended December 31, 2001and 2000, respectively.Rent capitalized into vineyard development was $321,000 and $494,000 for theyears ended December 31, 2001 and 2000, respectively.

 

                *Pension Plans* — The Company has two 401(k)Profit Sharing Plans.  The first plan isfor the benefit of the Company’s employees who are covered by the United FarmWorkers of America Collective Bargaining Agreement.  All union employees of the Company are eligible to participateafter having 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 $61,000 and $78,000 forthe years ended December 31, 2001 and 2000, respectively.

 

                The second plancovers the Company’s non-union employees. All non-union employees of the Company are eligible to participate inthe plan after one year of employment. Employees may contribute between 1% and 15% of their annualcompensation.  The Company matches 50cents for every dollar of employee contributions up to 6% of their annualsalaries, subject to the limitations imposed by the Internal Revenue Code.  The Company’s contribution to this planamounted to $49,000 and $43,000 for the years ended December 31, 2001 and2000, respectively.

 

 

**11. COMMON STOCK**

 

*Rights—*

 

                Each share of ClassA Common Stock is entitled to one vote and each share of Class B Common Stockis entitled to five votes on all matters submitted to a vote of thestockholders.  The holders of the ClassA Common Stock, voting as a separate class, elect 25% of the total Board ofDirectors of the Company, rounded up to the nearest whole number, and the holdersof the Class B Common Stock, voting as a separate class, elect the remainingdirectors.  Each share of Class B CommonStock is convertible into one share of Class A Common Stock at the option ofthe holder or automatically upon transfer to a person other than certainspecified persons.  Except for thediffering voting rights, the shares of Class A and Class B common stock havesubstantially identical rights, preferences and privileges.

 

 

F-14

----

 

*Warrants —*

 

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

 

*Stock Repurchases —*

 

                In July 2000, the Companyinstituted a stock repurchase program in which the Company could spend up to $3million in open market transactions to purchase outstanding shares of its ClassA Common Stock at such times, in such amounts or blocks and at such prices asdeemed appropriate.  This repurchaseprogram expired on June 30, 2001.  Underthis and previous stock repurchase programs, the Company repurchased 116,708shares in 2000 for an aggregate purchase price of approximately $452,000.  In previous years, the Company repurchased1,014,850 shares for an aggregate purchase price of approximately$4,890,000.  There were no sharesrepurchased in 2001.

 

 

**12. STOCK OPTION PLAN**

 

                In 1997, the Board of Directorsof the Company adopted the 1997 Stock Option/Stock Issuance Plan authorizingthe issuance of qualified or non-qualified stock options to directors,officers, employees, consultants and others to purchase up to 200,000 shares ofthe Company’s Class A Common Stock at prices equal to the fair value of the Company’sstock at the date of grant.  Optionsgranted to date under the Plan vest one-quarter each year, beginning one yearafter the grant date or a specified vesting commencement date and expire tenyears after the earlier of the grant date and the vesting commencement date.

 

Thefollowing summarizes stock option activity for the periods presented:

 

|                           |   | **Shares** |   | **Weighted Average Exercise Prices** |   |
|--------------------------------|--------|------------|--------|--------------------------------------|--------|
| Outstanding, January 1, 2000   |   | 140,000    |   | $                                    | 6.80   |   |
| Granted                        |   | 9,000      |   | $                                    | 3.90   |   |
| Cancelled                      |   | (5,000     | )      | $                                    | 4.10   |   |
|                           |   |       |   |                                 |   |
| Outstanding, December 31, 2000 |   | 144,000    |   | $                                    | 6.71   |   |
| Granted                        |   | 17,000     |   | $                                    | 3.00   |   |
| Cancelled                      |   | (5,000     | )      | $                                    | 4.27   |   |
|                           |   |       |   |                                 |   |
| Outstanding, December 31, 2001 |   | 156,000    |   | $                                    | 6.38   |   |

 

 

 

F-15

----

 

|                                                    |   | **Range of Exercise Prices at  December 31, 2001** |   |
|---------------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                    |   | **Under $4.00**                                    |   | **$****4.00-$9.99** |   | **$****10.00** |   |
| Options  outstanding                                    |   | 24,000                                             |   | 72,000 |   | 60,000 |   |
| Weighted average exercise price of  options outstanding |   | $                                                  | 3.38   |   | $ | 4.42 |   | $ | 10.00 |   |
| Options  exercisable                                    |   | 5,833                                              |   | 68,688 |   | 60,000 |   |
| Weighted average exercise price of  options exercisable |   | $                                                  | 3.83   |   | $ | 4.42 |   | $ | 10.00 |   |
| Weighted average fair value of  options granted in 2001 |   | $                                                  | 1.50   |   | None |   | None |   |
| Weighted  average remaining contractual life            |   | 9.4 years                                          |   | 6.0 years |   | 5.5 years |   |

 

 

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

 

                SFASNo. 123, “Accounting for Stock-Based Compensation”, requires the disclosure ofpro forma net income and net income per share. Under SFAS No. 123, the fair value of stock-based awards to employees iscalculated through the use of options pricing models, even though such modelswere developed to estimate the fair value of freely-tradable, fullytransferable options without vesting restrictions, which significantly differfrom the Company’s stock option awards. These models also require subjective assumptions, including future stockprice volatility and expected time to exercise, which greatly affect thecalculated values.  The Company’scalculations were made using the Black-Scholes option pricing model with thefollowing weighted average assumptions: expected life, 5 years followingvesting;  51% stock price volatility in2001 and 2000; weighted average risk free rate of return of 4.8% and 5.9% in2001 and 2000, respectively; and no dividends during the expected term.  Forfeitures are recognized as they occur.

 

 

 

 

F-16

----

 

**12. STOCKOPTION PLAN (Continued)**

 

                Ifthe computed fair values of the Company’s stock option awards had beenamortized to expense over the vesting period of the awards, net income for theyears ended December 31, 2001 and 2000 would have been reduced to the pro formaamounts indicated below.

 

|                   |   | **2001** |      | **2000** |   |
|------------------------|--------|----------|-----------|----------|--------|
| Net income:            |   |     |      |     |   |
| As reported            |   | $        | 2,500,000 |     | $      | 2,525,000 |   |
| Pro forma              |   | $        | 2,401,000 |     | $      | 2,430,000 |   |
|                   |   |     |      |     |   |
| Net income  per share: |   |     |      |     |   |
| As reported            |   | $        | 0.46      |     | $      | 0.45 |   |
| Pro forma              |   | $        | 0.44      |     | $      | 0.43 |   |

 

 

**13.SUPPLEMENTAL CASH FLOW INFORMATION**

 

                Supplementaldisclosures to the statements of cash flows are as follows:

 

|                                       |   | **2001** |      | **2000** |   |
|--------------------------------------------|--------|----------|-----------|----------|--------|
| Interest  paid (net of amount capitalized) |   | $        | 1,036,000 |     | $      | 972,000 |   |
| Income  taxes paid                         |   | $        | 655,000   |     | $      | 288,000 |   |

 

 

 

                InMarch 2001, an officer/stockholder of the Company repaid a note and relatedaccrued interest to the Company by tendering 52,985 shares of Company’s Class BCommon Stock valued at $169,000.  Theshares were subsequently canceled.

 

 

F-17

----

 

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

 

                Notapplicable.

 

 

**PART III**

 

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

 

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

 

 

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

 

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

 

 

**ITEM 11.********                                          ****SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT.**

 

                Theinformation required by this Item is set forth under the caption “SecurityOwnership of Certain Beneficial Owners and Management” 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.

 

 

 

**ITEM 12.****                                             ****CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**

 

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

 

 

31

----

 

**ITEM 13.****                                          ****EXHIBITS AND REPORTS ON FORM 8-K.**

 

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

** **
| **Exhibit**

**Number** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|  2.1               | Exchange and Contribution Agreement,  dated as of July 29, 1997, among Registrant and certain affiliated entities  and stockholders of Registrant (incorporated by reference to Exhibit number  2.1 to Registrant’s Report on Form 10-KSB for the fiscal year ended December  31, 1997 filed March 30, 1998).                                                                                                                                                                              |
|  3.1a              | Certificate of Incorporation  (incorporated by reference to Exhibit number 3.1a to Registrant’s Report on  Form 10-KSB for the fiscal year ended December 31, 1998 filed March 24,  1999).                                                                                                                                                                                                                                                                                                 |
|  3.1b              | Certificate of Amendment of  Certificate of Incorporation (incorporated by reference to Exhibit number  3.1b to Registrant’s Report on Form 10-KSB for the fiscal year ended December  31, 1998 filed March 24, 1999).                                                                                                                                                                                                                                                                     |
|  3.2               | Amended and Restated Bylaws  (incorporated by reference to Exhibit number 3.2 to Registrant’s Report on  Form 10-KSB for the fiscal year ended December 31, 1998 filed March 24,  1999).                                                                                                                                                                                                                                                                                                   |
|  4.1               | Warrant Agreement, dated as of July  30, 1997, by and among the Company, Cruttenden Roth Incorporated, Laidlaw  Equities, Inc. and Rodman & Renshaw, Inc (incorporated by reference to  Exhibit number 4.1 to Registrant’s Report on Form 10-KSB for the fiscal year  ended December 31, 1997 filed March 30, 1998).                                                                                                                                                                   |
|  4.2               | Form of Certificate Evidencing  Ownership of Class A Common Stock of Scheid Vineyards Inc (incorporated  by reference to Exhibit number 4.2 to Registrant’s Report on Form 10-KSB for  the fiscal year ended December 31, 1997 filed March 30, 1998).                                                                                                                                                                                                                                 |
|  4.3               | Form of Certificate Evidencing  Ownership of Class B Common Stock of Scheid Vineyards Inc.  (incorporated by reference to Exhibit  number 4.3 to Amendment No. 1 to Registrant’s Registration Statement on Form  SB-2 filed July 3, 1997).                                                                                                                                                                                                                                       |
| 10.1                    | 1997 Stock Option/Stock Issuance  Plan, as amended and restated through March 10, 1998 (incorporated by  reference to Exhibit number 10.1 to Registrant’s Report on Form 10-KSB for  the fiscal year ended December 31, 1997 filed March 30, 1998).(2)                                                                                                                                                                                                                                     |
| 10.2a                   | Lease, dated as of January 1,  1997, by and among Sam Avila and Margaret J. Avila, as trustees under  declaration of trust dated August 16, 1989, and Margaret J. Avila and  Valarie Bassetti successor co-trustees of the testamentary trust of Joseph  Laberere, and Sam Avila, and Margaret J. Avila, and Scheid Vineyards and  Management Co. (incorporated by reference to Exhibit number 10.3 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1) |

 

32

----

 
| 10.2b        | First Amendment to Lease as of March  31, 1998, by and between Sam Avila and Margaret J. Avila, as Trustees Under  Declaration of Trust dated August 16, 1989; Margaret J. Avila and Valarie  Bassetti (also known as Valerie Bassetti), as Successor Co-Trustees of the  Testamentary Trust of Joseph Laberere, Deceased; and Sam Avila (also known as  Samuel R. Avila, Jr.) and Margaret J. Avila, husband and wife, (all of the  above persons and entities are collectively called “Lessor”); and Scheid  Vineyards California Inc. (formerly known as Scheid Vineyards and Management  Co.), a California corporation (“Lessee”)(incorporated by reference to  Exhibit number 10.1 to Registrants Form 10-QSB for the quarterly period ended  June 30, 1999 filed August 12, 1999). |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3         | Lease, dated as of January 1,  1996, by and between Echenique Ranch and Scheid Vineyards and Management Co.,  as amended by a Letter Agreement dated March 29, 1996 (incorporated by  reference to Exhibit number 10.4 to Registrant’s Registration Statement on  Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.4         | Land Lease by and between William  McHenry Bland and Monterey Farming Corporation and Addendum to Land Lease,  dated September 26, 1973, by and between William McHenry Bland and Monterey  Farming Corporation (incorporated by reference to Exhibit number 10.5 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.5         | Lease, dated September 27, 1979,  by and among Luis Echenique, Francis D. Echenique, Ricardo Echenique and  Monterey Farming Corporation, as amended by (i) a Memorandum of Lease, dated  September 27, 1979, (ii) an Amendment to Memorandum of Lease, dated September  4, 1987, (iii) a First Amendment to Lease, dated September 4, 1987, and (iv)  a Second Amendment of Lease, dated September 4, 1987 (incorporated by  reference to Exhibit number 10.6 to Registrant’s Registration Statement on  Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                         |
| 10.6 †  | Vineyard Management Agreement, dated  as of January 1, 1997, by and among Scheid Vineyards and Management Co.,  Canandaigua West, Inc. and Canandaigua Wine Company, Inc.  (incorporated by reference to Exhibit number 10.7 to Registrant’s  Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 †  | Vineyard Management Agreement, dated  as of January 1, 1996, by and among Scheid Vineyards and Management Co.,  Canandaigua West, Inc. and Canandaigua Wine Company, Inc.  (incorporated by reference to Exhibit number 10.8 to Registrant’s  Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.8†   | Grape Purchase Agreement, dated April  15, 1998, between Scheid Vineyards California Inc. and International  Distillers and Vintners North America, Inc. (incorporated by reference to  Exhibit numbers 10.1 and 99 to Registrant’s Report on Form 10-QSB for the  quarterly period ended June 30, 1998 filed August 13, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.9*        | Collective Bargaining Agreement, for  the period January 25, 2002 to December 31, 2006, between Scheid Vineyards  Inc. and The United Farm Workers of America, AFL-CIO.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

33

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| 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 10.1 to Registrants Form 10-QSB for the quarterly  period ended March 31, 2001 filed May 11, 2001).                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12       | Business Loan Agreement, dated as of  March 28, 1997, between Scheid Vineyards and Management Co. and Bank of  America National Trust and Savings Association (incorporated by reference to  Exhibit number 10.20 to Registrant’s Registration Statement on Form SB-2  filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.13† | Long Term Grape Purchase Contract,  dated February 12, 1973, between Monterey Farming Corporation and  Almaden Vineyards, Inc., as amended by (i) a Memorandum of  Understanding, dated August 6, 1987, (ii) a Letter Agreement, dated  May 14, 1990, and (iii) an Amendment to Long Term Grape Purchase  Contract, dated as of March 12, 1993, between Scheid Vineyards and  Management Co. and Heublein, Inc. (incorporated by reference to Exhibit  number 10.21 to Registrant’s Registration Statement on Form SB-2 filed May  28, 1997).(1)                                                                                                                                                                                              |
| 10.14† | Long Term Grape Purchase Contract,  dated December 21, 1972, between Vineyard Investors 1972 and Almaden  Vineyards, Inc., as amended by (i) a Memorandum of Understanding,  dated August 6, 1987, (ii) an Amendment to Long Term Grape Purchase  Contract, dated April 19, 1988, between Vineyard Investors 1972 and  Heublein, Inc., (iii) a Second Amendment to Long Term Grape  Purchase Contract, dated June 2, 1988, (iv) a Third Amendment  to Long Term Grape Purchase Contract, dated as of March 12, 1993 and  (v) a letter agreement, dated April 6, 1990 (incorporated by  reference to Exhibit number 10.22 to Registrant’s Registration Statement on  Form SB-2 filed May 28, 1997).(1) |
| 10.15† | Long Term Grape Purchase Contract,  dated February 12, 1973, between Monterey Farming Corporation, as  General Partner on behalf of Vineyard 405, and Almaden Vineyards, Inc.,  as amended by (i) a certain Memorandum of Understanding, dated  August 6, 1987, and (ii) an Amendment to Long Term Grape Purchase  Contract, dated as of March 12, 1993, between Vineyard 405 and  Heublein, Inc. (incorporated by reference to Exhibit number 10.23 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                  |
| 10.16† | Long Term Wine Grape Purchase  Agreement, dated as of March 12, 1993, by and between Scheid Vineyards  and Management Co. and Heublein, Inc. (incorporated by reference to Exhibit  number 10.24 to Registrant’s Registration Statement on Form SB-2 filed May  28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.17† | Grape Purchase Agreement, dated as of  April 1, 1996, by and between Scheid Vineyards and Management Co. and  The Hess Collection Winery (incorporated by reference to Exhibit number 10.25  to Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

 

34

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| 10.18† | Grape Purchase Agreement, dated  July 1, 1996, by and among Scheid Vineyards and Management Co., Stephen  Dooley Wine Co., Inc. and The Chalone Wine Group, Ltd. (incorporated by  reference to Exhibit number 10.26 to Registrant’s Registration Statement on  Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19       | Alternating Winery Agreement, dated  November 30, 1995, by and between Scheid Vineyards and Management Co.  and Storrs Winery (incorporated by reference to Exhibit number 10.27 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.20       | Winery Services Agreement, dated  January 1, 1996, by and between Scheid Vineyards and Management Co. and  Storrs Winery (incorporated by reference to Exhibit number 10.28 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.21       | Standard Office Lease, dated  July 1, 1999, by and between Scheid Vineyards California Inc. and Tesh  Partners, L.P. (incorporated by reference to Exhibit number 10.21 to  Registrant's Report on Form 10-KSB for the fiscal year ended December 31,  1999 filed March 13, 2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.22† | Lease, dated as of October 18, 1998  between Scheid Vineyards California Inc. and California Orchard Company  (incorporated by reference to Exhibit number 10.22 to Registrant's Report on  Form 10-KSB for the fiscal year ended December 31, 1998 filed March 24,  1999.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.23       | Amended and Restated Buy-Sell  Agreement, dated as of December 31, 1997, by and among Scheid Vineyards Inc.  and holders of Class B Common Stock (incorporated by reference to Exhibit  number 10.24 to Registrant’s Report on Form 10-KSB for the fiscal year ended  December 31, 1997 filed March 30, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.24       | Joint Agreement, dated as of November  7, 1997, by and among Samuel R. Avila (also known as Sam Avila) and Margaret  J. Avila, individually and as trustees under declaration of trust dated  August 19, 1989, and Margaret J. Avila and Valarie Bassetti (also known as  Valerie Bassetti), as successor co-trustees of the testamentary trust of  Joseph Labarere, deceased, Central Coast Federal Land Bank Association, FLCA,  Scheid Vineyards and Management Co., Canandaigua Wine Company, a New York  corporation, successor by merger to Canandaigua Wine Company, Inc., a  Delaware corporation, and Canandaigua West, Inc. (incorporated by reference  to Exhibit numbers 10.27a and 99.1 to Amendment No. 1 to Registrant’s  Registration Statement on Form SB-2 (File No. 333-51055) filed May 8,  1998).(1) |
| 10.25       | Water Supply Agreement, dated as of  January 1, 1997, by Scheid Vineyards and Management Co. and Canandaigua  West, Inc. (incorporated by reference to Exhibit number 10.36 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.26       | Agreement Regarding Water, dated as  of January 1, 1996, by Luis Echenique, Ricardo Echenique and Margaret  Echenique, Executrix of the Estate of Francis D. Echenique, in favor of each  of Scheid Vineyards and Management Co. and Canandaigua West, Inc.  (incorporated by reference to Exhibit number 10.37 to Registrant’s  Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.27       | Easement Agreement, dated  January 1, 1997, by Sam Avila and Margaret J. Avila, as trustees under  declaration of trust dated August 16, 1989, and Margaret J. Avila and  Valarie Bassetti successor co-trustees of the testamentary trust of Joseph  Labarere and Sam Avila and Margaret J. Avila and Scheid Vineyards and  Management Co., in favor of Canandaigua West, Inc. (incorporated by  reference to Exhibit number 10.38 to Registrant’s Registration Statement on  Form SB-2 filed May 28, 1997).(1)                                                                                                                                                                                                                                                                                           |
| 10.28       | Credit Agreement (Crop Line of  Credit) dated September 7, 1999, by and between Sanwa Bank California and  Scheid Vineyards Inc. and Scheid Vineyards California Inc.(incorporated by  reference to Exhibit number 10.1 to Registrant's Form 10-QSB for the  quarterly period ended September 30, 1999 filed November 12, 1999).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 10.28a      | Amendment to Credit Agreement [Crop  Line] 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 10.1 to Registrant's Form 10-QSB for the  quarterly period ended March 31, 2001 filed May 11, 2001).        |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29† | Grape Purchase Agreement, dated as of  May 9, 1997, by and between Scheid Vineyards Inc. and The Hess  Collection Winery (incorporated by reference to Exhibit number 10.42 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                                       |
| 10.30† | Grape Purchase Agreement, dated as of  April 1, 1997, by and between Vineyard Investors 1972 and Stephen Dooley  Wine Co., Inc. (incorporated by reference to Exhibit number 10.43 to  Registrant’s Registration Statement on Form SB-2 filed May 28, 1997).(1)                                                           |
| 10.31       | Employment Agreement, dated as of  July 19, 1997, by and between Scheid Vineyards Inc. and Alfred G. Scheid  (incorporated by reference to Exhibit number 10.44 to Amendment No. 2 to  Registrant’s Registration Statement on Form SB-2 filed July 21, 1997).(2)                                                                    |
| 10.32*      | Employment Agreement, dated as of  March 22, 2001, by and between Scheid Vineyards Inc. and Scott D. Scheid.                                                                                                                                                                                                                             |
| 10.33       | Employment Agreement, dated as of  July 19, 1997, by and between Scheid Vineyards Inc. and Heidi M. Scheid  (incorporated by reference to Exhibit number 10.46 to Amendment No. 2 to Registrant’s  Registration Statement on Form SB-2 filed July 21, 1997).(2)                                                                     |
| 10.34       | Employment Agreement, dated as of  July 19, 1997, by and between Scheid Vineyards Inc. and Kurt J. Gollnick  (incorporated by reference to Exhibit number 10.47 to Amendment No. 2 to  Registrant’s Registration Statement on Form SB-2 filed July 21, 1997).(2)                                                                    |
| 10.35       | Form of Indemnification Agreement  (incorporated by reference to Exhibit number 10.48 to Amendment No. 1 to  Registrant’s Registration Statement on Form SB-2 filed July 3, 1997).(2)                                                                                                                                               |
| 10.36       | Lease Agreement, effective as of  February 1, 2001 and dated March 9, 2001, by and between Hilltown Properties  and Scheid Vineyards Inc. (incorporated by reference to Exhibit number 10.36  to Registrant's Form 10-KSB for the fiscal year ended December 31, 2000 filed  March 29, 2001).                                            |
| 10.37       | Standard Office Lease, dated March  20, 2001, by and between Dennis K. Cooper and Scheid Vineyards  Inc.(incorporated by reference to Exhibit number 10.1 to Registrant's Form  10-QSB for the quarterly period ended March 31, 2001 filed May 11, 2001.                                                                                 |
| 10.38       | Amendment to Credit Agreement [Scheid  Ranch] by and between United California Bank (formerly Sanwa Bank California)  and Scheid Vineyards California Inc., dated August 27, 2001 (incorporated by  reference to Exhibit number 10.1 to Registrant's Form 10-QSB for the  quarterly period ended March 31, 2001 filed May 11, 2001).     |
| 10.39       | Amendment to Credit Agreement  [Viento/Riverview] by and between United California Bank (formerly Sanwa Bank  California) and Scheid Vineyards California Inc., dated August 27, 2001  (incorporated by reference to Exhibit number 10.1 to Registrant's Form 10-QSB  for the quarterly period ended March 31, 2001 filed May 11, 2001). |
| 10.40       | Amendment to Credit Agreement [San  Lucas First] by and between United California Bank (formerly Sanwa Bank  California) and Scheid Vineyards California Inc., dated August 27, 2001  (incorporated by reference to Exhibit number 10.1 to Registrant's Form 10-QSB  for the quarterly period ended March 31, 2001 filed May 11, 2001).  |

 

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| 10.41  | Amendment to Credit Agreement [San  Lucas Second] by and between United California Bank (formerly Sanwa Bank  California) and Scheid Vineyards California Inc., dated August 27, 2001  (incorporated by reference to Exhibit number 10.1 to Registrant's Form 10-QSB  for the quarterly period ended March 31, 2001 filed May 11, 2001). |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42  | Term Loan Credit Agreement [Hames  Loan] by and between United California Bank (formerly Sanwa Bank California)  and Scheid Vineyards California Inc., dated August 27, 2001 (incorporated by  reference to Exhibit number 10.1 to Registrant's Form 10-QSB for the  quarterly period ended March 31, 2001 filed May 11, 2001).          |
| 10.43* | Employment Agreement, dated as of  March 22, 2001, by and between Scheid Vineyards Inc. and Michael S. Thomsen.                                                                                                                                                                                                                          |
| 21.1   | List of Subsidiaries (incorporated by  reference to Exhibit number 21.1 to Amendment No. 1 to Registrant’s  Registration Statement on Form SB-2 filed July 3, 1997).                                                                                                                                                                |
| 23.1*  | Independent Auditors’ Consent.                                                                                                                                                                                                                                                                                                      |

                _______________________________

 

                                                *              Electronicallyfiled herewith.

 

                                                †              Portionsof this Exhibit have been deleted pursuant to the Registrant’s requests forconfidential treatment pursuant to Rule 406 promulgated under theSecurities Act or Rule 24b-2 promulgated under the Securities Exchange Act.

 

 

                                                (1)           Thecontracting party is a predecessor in interest to Scheid Vineyards CaliforniaInc., Registrant’s wholly owned subsidiary.

 

                                                (2)           Indicatesa management contract or compensating plan or arrangement required to be filedas an exhibit to this Form 10-KSB.

 

(b)                                 Current Reports on Form 8-K

 

                None.

 

 

**SIGNATURES**

 

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

 

 

Scheid Vineyards Inc.

 

 

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

 

37

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     Inaccordance with the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 

| **Signature**                       |   | **Title**                                                                      |   | **Date**       |
|-------------------------------------|--------|--------------------------------------------------------------------------------|--------|----------------|
|                                |   |                                                                           |   |           |
|   /s/ ALFRED G. SCHEID    |   | Chairman of the Board                                                          |   | March 29, 2002 |
| Alfred G. Scheid                    |   |                                                                           |   |           |
|   /s/ SCOTT D. SCHEID     |   | President, Chief Executive Officer  (Principal Executive Officer) and Director |   | March 29, 2002 |
| Scott D. Scheid                     |   |                                                                           |   |           |
|                                |   |                                                                           |   |           |
|   /s/ HEIDI M. SCHEID     |   | Senior Vice President, Secretary,  Treasurer and Director                      |   | March 29, 2002 |
| Heidi M. Scheid                     |   |                                                                           |   |
|                                |   |                                                                           |   |           |
|   /s/ MICHAEL S.  THOMSEN |   | Chief  Financial Officer (Principal  Financial and Accounting Officer)         |   | March 29, 2002 |
| Michael S. Thomsen                  |   |                                                                           |   |
|                                |   |                                                                           |   |           |
|   /s/ JOHN L.  CRARY      |   | Director                                                                       |   | March 29, 2002 |
| John L.  Crary                      |   |                                                                           |   |           |
|                                |   |                                                                           |   |           |
|   /s/ ROBERT P.  HARTZELL |   | Director                                                                       |   | March 29, 2002 |
| Robert P.  Hartzell                 |   |                                                                           |   |           |

 

38

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