Saturday, May 13, 2006

Getting Around Sarbanes Oxley
Scheid Vineyards (SVIN)

You may have seen our original post on this issue back in 12/04. We followed up on this interesting issue with another report on 2/22/05.

I'd urge you to read those reports for background, but in summary, some small publicly traded companies have found a way to stay publicly traded, while avoiding filing with the SEC, and costly compliane with Sarbanes Oxley. The way to do this is to reduce registered shareholder roles to 300 or less. Companies have gotten creative in their attempts to make this happen. One way is to effect a reverse split, then buy out very small shareholder positions for cash. For instance, by effecting a 1 for 100 reverse split, any shareholder with less than 100 shares will be left with a fractional share, which is then bought back by the company. Once below 300 shareholders, the company files a from 15-12G with the SEC, which effectively ends their need to file with the SEC, or comply with SarbOx. For some companies, this can drastically cut pre-tax expenses.

The Downsides
While avoiding somewhat prohibitive costs, and freeing up senior staff who spend a lot of their time on SarbOx issues are pluses, there are negatives to be aware of. First, many of these companies go from barely trading to never trading. Their shares outstanding drop proportianate to the reverse split, so often there is little in terms of public float. While these companies continue to trade, they do so on the pink sheets, and bid/ask spreads tend to be very wide. There is little, if any liquidity in these companies. If you find one that is compelling, be prepared to hold for a long time. Finally, once these companies no longer file, it is sometimes very difficult, even for shareholders to get information. Your Cheapstocks editor currently owns positions in two companies which no longer file, Avoca, which still sends out quarterly reports, and JG Boswell, which does not. (Incidentally, JG Boswell has never filed as far as I know, and was not part of the latest wave of companies avoiding filing).

Scheid Vineyards
Ticker: SVIND
Price: $32.10
Market Cap: $25.84 million
Shares Out: 805 thousand
P/E: 8
Enterprise Value: $70 milliom

Scheid Vinyards is a small, California based grape and bulk wine producer. The company grows 17 varieties of grapes, most of which are sold under short and long term purchase agreements. The company also makes bulk wine with a portion of the grapes. Your Cheap Stocks editor has followed this company on and off for the past five years, but to date, has yet to pull the trigger. We first learned of this company when we discovered they were a dividend paying stock, but not in the traditional sense. The dividend in this case was a wine dividend. As we recall, it was good for a 50% discount on a case of Scheid wine.

The Fundamentals

Fiscal Year 2005 sales were up 51 percent from $23.6 million to $31.2 million. Net income rose sharply, from $1.3 million in 2004 to $4.4 million in 2005. Grape growing is a tough industry, dependent not only on weather, but also the ultimate quality and supply. Hence, Scheid's sales and earnings numbers can jump around quite a bit from year to year.

Scheid's balance sheet is not great, with $1.2 million in cash, but $36 million in long term debt. Bolstering this is Scheid's land holdings. Of the 5700 acres the company operates, it owns 1800, or nearly 3 square miles, in Monterey. California. On an Enterprise value/Acre calculation, (one that we are both fond of, and we believe originated) that's $23,333. Does not sound cheap based on the land alone, but we admit that we don't know what a vineyard acre in Monterey is worth.

"Going Private":The Reverse Stock Split

The company's recent 1 for 5 reverse stock split was intended to reduce shareholder roles below the magic 300 shareholder level. This allowed the company to de-list its stock fropm NASDAQ, while still allowing it to trade on the pink sheets. The main purpose for this was to save the company an estimated $485,000 in annual fees, broken down as follows:

Audit and Accounting
$ 100,000

Legal Fees

Stockholder Expenses

Nasdaq Fees


Internal Control Compliance*

$ 485,000

While $485,000(pretax) may seem like a pittance to many companies, its substantial to a company that earned $4 million last year. The other potential benefit is that management will no longer spend time and energy on SarbOx and SEC related issues, allowing it to focus more on the business. We'll see if they are succesful.

We are interested in Scheid's situation and will follow it closely. For more on the de-listing, please read the companies latest proxy, which goes into great detail about the process and reasoning.

*The author does not have a position in this stock. This is neither a recommendation to buy or sell this security. All information provided believed to be reliable and presented for information purposes only.

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