<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997
REGISTRATION NO. 333-27871
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCHEID VINEYARDS INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 0172 95-2766024
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) Number)
</TABLE>
------------------------------
13470 WASHINGTON BLVD., SUITE 300
MARINA DEL REY, CALIFORNIA 90292
(310) 301-1555
(Address and telephone number of principal executive offices and principal place
of business)
------------------------------
ALFRED G. SCHEID
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SCHEID VINEYARDS INC.
13470 WASHINGTON BLVD., SUITE 300
MARINA DEL REY, CALIFORNIA 90292
(310) 301-1555
(Name, address and telephone number of agent for service)
------------------------------
COPIES TO:
V. JOSEPH STUBBS, ESQ. BRIAN W. COPPLE, ESQ.
THOMAS B. YOUTH, ESQ. MONTE M. BREM, ESQ.
BROBECK, PHLEGER & HARRISON LLP GIBSON, DUNN & CRUTCHER LLP
550 SOUTH HOPE STREET JAMBOREE CENTER
LOS ANGELES, CALIFORNIA 90071 4 PARK PLAZA
(213) 489-4060 IRVINE, CALIFORNIA 92614-8557
(714) 451-3800
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SCHEID VINEYARDS INC.
CROSS REFERENCE SHEET SHOWING LOCATION IN
PROSPECTUS OF PART I OF FORM SB-2
<TABLE>
<CAPTION>
ITEM
NO. HEADING CAPTION OR LOCATION IN PROSPECTUS
- ---- ------------------------------------ ------------------------------------
<S> <C> <C>
1. Front of Registration Statement and
Outside Front Cover Page of
Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page; Outside
Back Cover Page
3. Summary Information and Risk
Factors............................ Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds..................... Prospectus Summary; Risk Factors;
Use of Proceeds
5. Determination of Offering Price..... Outside Front Cover Page; Risk
Factors; Underwriting
6. Dilution............................ Risk Factors; Dilution
7. Selling Security Holders............ Not Applicable
8. Plan of Distribution................ Outside Front Cover Page;
Underwriting
9. Legal Proceedings................... Legal Matters
10. Directors, Executive Officers,
Promoters and Control Persons...... Management; Principal Stockholders
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Stockholders
12. Description of Securities........... Outside Front Cover Page; Risk
Factors; Prospectus Summary;
Description of Capital Stock
13. Interests of Named Experts and
Counsel............................ Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Management
15. Organization Within Last Five
Years.............................. Management; Certain Transactions
16. Description of Business............. Prospectus Summary; Risk Factors;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis
or Plan of Operation............... Management's Discussion and Analysis
of Financial Condition and Results
of Operations; Business
18. Description of Property............. Business
19. Certain Relationships and Related
Transactions....................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters................ Management; Description of Capital
Stock; Shares Eligible for Future
Sale
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM
NO. HEADING CAPTION OR LOCATION IN PROSPECTUS
- ---- ------------------------------------ ------------------------------------
<S> <C> <C>
21. Executive Compensation.............. Management
22. Financial Statements................ Combined Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure............... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 3, 1997
PROSPECTUS
2,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
------------
All of the 2,000,000 shares (the "Shares") of Class A common stock (the
"Class A Common Stock") offered hereby are being offered for sale by Scheid
Vineyards Inc. ("SVI" or the "Company"). It is currently estimated that the
initial public offering price per share of the Class A Common Stock will be
between $9.00 and $10.00.
The Company has two classes of Common Stock, Class A Common Stock, which is
offered hereby, and Class B Common Stock. Holders of Class A Common Stock are
entitled to one vote per share, and holders of Class B Common Stock are entitled
to five votes per share. Class A Common Stock is freely transferable and Class B
Common Stock is transferable only to certain permitted transferees but is
convertible into Class A Common Stock. Immediately after the completion of this
offering, the holders of Class A Common Stock will be entitled to elect 25% of
the Company's authorized directors, rounded up to the nearest whole number, and
the holders of Class B Common Stock will be entitled to elect the Company's
remaining authorized directors.
The Company conducts its business through its wholly-owned subsidiary,
Scheid Vineyards California Inc.
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. See "Underwriting" for a discussion of factors
considered in determining the initial public offering price. The Company's Class
A Common Stock has been approved for listing on the Nasdaq National Market under
the symbol "SVIN," subject to official notice of issuance.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN RISKS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Share....................................... $ $ $
Total (3)....................................... $ $ $
</TABLE>
(1) Excludes a non-accountable expense allowance payable by the Company to the
Representatives of the Underwriters and issuance by the Company to the
Representatives for nominal consideration of five-year warrants to purchase
up to 200,000 shares of Class A Common Stock at a price per share equal to
120% of the Price to Public. The Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at
$ , including the Representative's nonaccountable expense
allowance.
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 300,000 additional shares of Class A Common Stock on the same terms per
share solely to cover over-allotments, if any. If this option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
---------------------
The shares of Class A Common Stock are being offered severally by the
Underwriters named herein, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters, and subject to other conditions. It is
expected that delivery of the certificates representing the shares of Class A
Common Stock will be made against payment therefor at the offices of Cruttenden
Roth Incorporated, Irvine, California, on or about , 1997.
------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
LAIDLAW EQUITIES, INC.
RODMAN & RENSHAW, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[PROSPECTUS FRONT AND BACK COVER: COLOR PHOTOGRAPH DEPICTING ONE OF THE
COMPANY'S VINEYARDS]
[INSIDE FRONT COVER OF THE PROSPECTUS: GRAPHIC OF MAP SHOWING CALIFORNIA'S 17
GRAPE GROWING DISTRICTS AND LOCATIONS OF THE COMPANY'S OPERATIONS]
<PAGE>
[PHOTO #1 OF THE COMPANY'S VINEYARD WORKERS HARVESTING GRAPES; PHOTO #2 INTERIOR
OF THE COMPANY'S WINE TASTING ROOM (NO PEOPLE); PHOTO #3 OF PANORAMIC VIEW OF
ONE OF THE COMPANY'S VINEYARDS]
<PAGE>
[PHOTO #1 OF ONE OF THE COMPANY'S HARVESTING MACHINES IN OPERATION; PHOTO #2 OF
FIVE BOTTLES OF THE COMPANY'S WINES; PHOTO #3 OF PANORAMIC VIEW OF ONE OF THE
COMPANY'S VINEYARDS]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION, INCLUDING THE COMPANY'S
COMBINED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO, APPEARING ELSEWHERE
IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS
PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION
AND (II) ASSUMES NO EXERCISE OF OPTIONS GRANTED UNDER THE COMPANY'S 1997 STOCK
OPTION/STOCK INCENTIVE PLAN. THE TERM "COMPANY" OR "SVI" WHEN USED IN THIS
PROSPECTUS INCLUDES, WHEN THE CONTEXT SO REQUIRES, SCHEID VINEYARDS INC., A
DELAWARE CORPORATION ("SVI-DEL") AND THE ISSUER OF THE CLASS A COMMON STOCK
OFFERED HEREBY, AND ITS WHOLLY-OWNED SUBSIDIARY, SCHEID VINEYARDS CALIFORNIA
INC., A CALIFORNIA CORPORATION ("SVI-CAL"), THROUGH WHICH SVI-DEL CONDUCTS ALL
OF ITS BUSINESS.
THE COMPANY
Scheid Vineyards Inc. ("SVI" or the "Company") is a leading independent
(I.E., not winery controlled) producer of premium varietal wine grapes. The
Company currently operates approximately 4,950 acres of wine grape vineyards. Of
this total, approximately 3,270 acres are operated for the Company's own
account, including the 370-acre Riverview Vineyard purchased by the Company on
June 26, 1997, and 1,680 acres are operated under management contracts for
others. All of the properties currently operated by the Company are located in
Monterey and San Benito Counties in California, both of which are generally
recognized as excellent regions for growing high quality wine grape varieties.
Since 1980, sales revenues of premium California table wines have grown at a
compound annual rate of 18%, according to Gomberg, Frederickson & Associates, a
wine industry consulting firm in San Francisco. The same source indicates that
in 1996, approximately 90% of all wine made in the United States was produced in
California and total California table wine sales reached approximately $4.3
billion, of which $2.9 billion, or 67%, represented the premium table wine
segment. The Company believes that nearly all of the grapes it produces are used
to make wines for the premium segment of the California wine market.
The Company currently produces 14 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon, Chenin Blanc, Gewurztraminer
and Sauvignon Blanc. The Company believes that its customers contract with SVI
to assure a consistent, reliable source of high-quality premium grapes for their
wines. The Company's two largest winery customers are Canandaigua Wine Company,
Inc. ("Canandaigua") and Heublein, Inc., a subsidiary of Grand Metropolitan, plc
("Heublein"), the second and sixth largest U.S. wineries in terms of 1996 case
shipments, respectively. These customers' labels include GLEN ELLEN, BEAULIEU
VINEYARD, BLOSSOM HILL, CHRISTIAN BROS., INGLENOOK, PAUL MASSON, ALMADEN, DEER
VALLEY, DUNNEWOOD, and TAYLOR CALIFORNIA CELLARS. Grape purchase contracts with
Heublein cover 77% of the Company's acreage and accounted for approximately 84%
of the Company's 1996 total revenues.
The Company also has long-term grape purchase agreements with other
well-known producers of ultra premium wines, including The Chalone Wine Group,
Ltd., The Hess Collection Winery, Joseph Phelps Vineyards, and Independence Wine
Company. The terms of the Company's long-term grape purchase contracts extend to
between 2001 and 2013, and have "evergreen" provisions requiring two or three
years prior written notice of termination. These contracts generally require the
customers to purchase substantially all of the Company's production from
specified vineyards at a formula price based upon the previous harvest year's
sales prices in California's leading coastal regions, including Napa, Sonoma,
Mendocino and Monterey Counties.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS AND PURCHASES, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
3
<PAGE>
The Company believes that selling its production through long-term contracts
allows it to attain reliable sources of revenues and profits not available
through sales on the yearly spot market or short-term contracts with wineries.
This, in turn, has allowed the Company to implement long-term programs for
upgrading vineyard productivity, increasing product quality and mechanizing its
field operations. Because increased yields per acre do not significantly
increase the Company's costs of operating vineyards, productivity improvements
contribute substantially to gross profits. The Company has increased its yields
of higher value and better quality wine grapes in recent years through a
continuing redevelopment and improvement program begun in 1993, and anticipates
continued increases in average yields until its redeveloped vineyards reach full
maturity. See "Business--The Company's Grape Production Operations--Grape
Production."
The Company's strategic objective is to become the leading independent
producer of premium varietal wine grapes in California. In furtherance of this
strategy, the Company recently leased, for a term of up to 50 years, 207 acres
of open land which is currently being planted into premium varietal wine grape
vineyards, and executed an option to lease, for up to 50 years, approximately
450 additional acres which it intends to begin developing in 1998. Due to the
significant capital required to own and operate vineyards and what the Company
believes to be the demographic structure of wine grape vineyard ownership in
California, SVI believes there are significant opportunities for growth of its
business through additional acquisitions. The Company plans to utilize a portion
of the net proceeds of this offering to purchase existing vineyards and purchase
or lease land that is suitable for vineyards in Monterey County and other
regions of California.
The Company's executive offices are located at 13470 Washington Blvd., Suite
300, Marina del Rey, California 90292, telephone number (310) 301-1555, and its
vineyard headquarters' compound is located at 1972 Hobson Avenue, Greenfield,
California 93927.
RECENT DEVELOPMENTS
On June 26, 1997, the Company purchased a 370-acre vineyard known as
Riverview Vineyard. In connection with this acquisition, the Company increased
its bank borrowings by approximately $5.5 million. The vineyard is planted with
several varieties including approximately 145 acres of Chardonnay and 100 acres
of Pinot Noir. This vineyard is not subject to any long-term grape purchase
contracts.
THE OFFERING
<TABLE>
<S> <C>
Class A Common Stock Offered by the
Company.............................. 2,000,000 shares
Common Stock Outstanding after the
offering:
Class A Common Stock................. 2,000,000 shares (1)
Class B Common Stock................. 4,400,000 shares
Total.............................. 6,400,000 shares (1)
Voting Rights (2):
Class A Common Stock................. One vote per share; entitled to elect 25% of the
authorized directors rounded up to the nearest
whole number.
Class B Common Stock................. Five votes per share; entitled to elect the
remainder of the authorized directors.
Use of Proceeds........................ Repayment of indebtedness, planting and development
of new vineyards, potential acquisitions and
working capital. See "Use of Proceeds."
Nasdaq National Market Symbol for Class
A Common Stock....................... SVIN
</TABLE>
- ------------------------
(1) Excludes (i) 200,000 shares of Class A Common Stock reserved for issuance
under the Company's 1997 Stock Option/Stock Issuance Plan, (ii) 200,000
shares of Class A Common Stock issuable upon exercise of the
Representatives' Warrants and (iii) 300,000 shares of Class A Common Stock
which may be purchased by the Underwriters to cover over-allotments, if any.
(2) Except with respect to voting rights, certain dividend features and
convertibility, the Class A Common Stock and the Class B Common Stock have
identical rights. See "Description of Capital Stock."
4
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................................. $ 7,640 $ 11,691 $ 210 $ 347
Gross profit......................................................... 3,970 7,147 210 347
Operating income (loss).............................................. 1,387 4,543 (468) (281)
Income (loss) before income taxes.................................... 481 3,889 (562) (466)
Net income (loss).................................................... 480 3,845 (562) (466)
PRO FORMA AMOUNTS (1)(2):
Income (loss) before income taxes as reported........................ $ 481 $ 3,889 $ (562) $ (466)
Pro Forma income tax benefit (provision)............................. (192) (1,556) 225 186
Pro Forma net income (loss).......................................... 289 2,333 (337) (280)
Pro Forma net income (loss) per share................................ 0.07 0.53 (0.08) (0.06)
Shares used in computing net income (loss) per share................. 4,400 4,400 4,400 4,400
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------
PRO FORMA
DECEMBER 31, AS ADJUSTED
1996 ACTUAL PRO FORMA (2) (3)
------------ --------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 2,254 $ 3,113 $ (392) $ 16,208
Current assets....................................... 5,220 5,009 2,848 19,448
Total assets......................................... 24,069 25,582 23,421 40,021
Current liabilities.................................. 2,966 1,896 3,240 3,240
Long-term liabilities (4)............................ 12,042 15,091 16,391 16,391
Total liabilities.................................... 15,008 16,987 19,631 19,631
Equity............................................... 9,061 8,595 3,790 20,390
</TABLE>
- ------------------------------
(1) The Exchange Transaction (as defined in "The Company--Exchange Transaction")
will result in conversion of SVI-Cal's S Corporation status to C Corporation
status. The Pro Forma statement of operations data reflect provisions for
federal and state income taxes as if SVI-Cal had been subject to federal and
state income taxation as a C Corporation at an assumed 40% combined federal
and state income tax rate during the periods presented. See "The Company."
In addition, Pro Forma net income (loss) per share is based upon 4,400,000
shares of Class B Common Stock which will be outstanding immediately prior
to the offering. See "Principal Stockholders."
(2) Pro Forma Balance Sheet Data reflect the assumed conversion of SVI-Cal to C
Corporation status, the establishment of $1,300,000 of related deferred
income taxes, certain distributions of approximately $3,505,000 to SVI-Cal's
sole stockholder and certain partners in Vineyard Investors 1972, a
California limited partnership, and the issuance of 4,400,000 shares of
Class B Common Stock to be outstanding prior to the offering resulting from
the Exchange Transaction. See "The Company--S Corporation Conversion;
Distributions" and "Certain Transactions--Exchange of Shares, Partnership
Units and Limited Liability Company Interests for Class B Common Stock."
(3) Adjusted to reflect the sale of 2,000,000 shares of Class A Common Stock
offered by the Company hereby at an assumed offering price of $9.50 per
share and the anticipated application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
(4) Long-term liabilities include borrowings of $2,233,000 at December 31, 1996
and $2,800,000 at March 31, 1997 used for costs incurred for the development
of certain vineyards owned by Heublein. Heublein is obligated to advance
budgeted costs to the Company on a monthly basis and has provided a letter
of credit to secure repayment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." See Note 13 of "Notes to Combined Financial Statements" for
subsequent bank refinancings.
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED IN EVALUATING THE COMPANY
AND ITS BUSINESS PROSPECTS BEFORE PURCHASING SHARES OFFERED BY THIS PROSPECTUS.
AGRICULTURAL RISKS
Wine grape production is subject to many risks common to agriculture that
can materially and adversely affect the quality and quantity of grapes produced.
These hazards include, among other things, adverse weather such as drought,
frost, excessive rain, excessive heat or prolonged periods of cold weather.
These weather conditions can materially and adversely affect the quality and
quantity of grapes produced by the Company and its profitability. For example,
in 1995 and 1996, poor weather (combined with a planned reduction in producing
acreage for redevelopment during this period) contributed to a significant
decline in the tonnage of grapes produced by the Company. To the extent a grape
producer's properties are geographically concentrated, the effects of local
weather can be material. The vineyards owned by SVI are spread over a distance
of approximately 50 miles, north to south, close to Highway 101 in Monterey
County. There can be no assurance that adverse weather in the future could not
affect a substantial portion of the Company's vineyards in any year and have a
material adverse effect on the Company's business, financial condition and
results of operations.
Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields or kill vines. In recent years
phylloxera, a louse that feeds on the roots of grape vines, has infested many
vineyards in the wine grape producing regions of California and caused grape
yields to decrease. Within a few years of the initial infestation, phylloxera
can leave a vine entirely unproductive. Phylloxera infestation has been
widespread in California, particularly in Napa, Sonoma, Mendocino and Monterey
Counties, and most of the other wine grape producing areas of the state are
affected to some degree. Phylloxera infestation can be reduced through use of
the chemical pesticides Furadan-TM- and Enzone-TM-. While Furadan-TM- is still
approved for use in Monterey County, its use is no longer legal in certain other
viticultural regions of California, including Napa, Sonoma and Mendocino
Counties. Furadan-TM- is currently under investigation by the Environmental
Protection Agency which may result in the prohibition of its use. There can be
no assurance that Furadan-TM- will continue to be available as a method of
controlling phylloxera for the Company and, if its use is prohibited in Monterey
County, the Company will rely more on the use of Enzone-TM-. If the use of
Enzone-TM- is prohibited in Monterey County, however, there can be no assurance
that the Company will be able to find a safe, cost-effective alternative.
As a result of this widespread problem, thousands of vineyard acres
throughout the State of California have been replanted with phylloxera-resistant
rootstock or, in some cases, taken out of production completely. It takes
approximately four to five years for a replanted vineyard to bear grapes in
quantities sufficient for profitable operations. The Company estimates that it
currently costs approximately $15,000 per acre to replant vineyards. Of the
Company's approximately 3,026 net vine acres (I.E., excluding acreage devoted to
roads, storage areas, equipment yards or uses other than vineyards) of wine
grapes, approximately 2,264 net vine acres, or 75%, are planted or interplanted
with phylloxera-resistant rootstock. The remaining approximately 762 acres are
planted on non-resistant rootstock and are, therefore, potentially susceptible
to phylloxera infestation. The Company is managing the non-resistant acres
through application of Furadan-TM- and a program of selective replantings. See
"Business--The Company's Grape Production Operations--Property Development and
Capital Investment." There can be no assurance that the Company's vineyards will
not have serious phylloxera infestations in the future, causing reduced yields
and requiring significant investments in replanting.
6
<PAGE>
Other pests that may infest vineyards include leafhoppers, thrips,
nematodes, mites, insects, orange tortrix, twigbore, microflora and various
grapevine diseases. Pesticides and the selection of resistant rootstocks reduce
losses from these pests, but do not eliminate the risk of such loss. Gophers,
rabbits, deer, wild hogs and birds can also pose a problem for vineyards, and
wine grape vines are also susceptible to certain virus infections which may
cause reduction of yields. None of these currently poses a major threat to the
Company's vineyards, although they could do so in the future and, at that time,
will have the potential to subject the vineyards to severe damage.
DEPENDENCE ON MAJOR CUSTOMERS; RENEWAL OF GRAPE PURCHASE AGREEMENTS
Substantially all of SVI's current grape production is contracted for sale
to two winery customers, Heublein, Inc., a subsidiary of Grand Metropolitan plc
("Heublein"), which accounted for approximately 91% of the Company's grape sales
revenues and approximately 84% of its total revenues in 1996, and Canandaigua
Wine Company, Inc. ("Canandaigua"), which accounted for approximately 7% of both
the Company's grape sales revenues and its total revenues in 1996. The terms of
the long-term grape purchase contracts with these customers extend to between
2001 and 2013. The majority of the contracts extend to 2006 and have an
"evergreen" provision whereby the contract continues unless either party gives a
three-year advance written notice of termination. Although these contracts do
not specifically provide for termination prior to expiration of their stated
terms, they could nevertheless be terminated under various circumstances,
including material breach. If these contracts are terminated, there can be no
assurance that the Company will be able to replace Heublein or Canandaigua as
significant purchasers of its grape production or that the Company will be able
to enter into agreements with other purchasers on similar terms. Termination of
these contracts with Heublein or Canandaigua could have a material adverse
effect on the Company's business, financial condition and results of operations.
Furthermore, the original terms of the Heublein and Canandaigua contracts were
for longer terms than typical purchase contracts currently being entered into
for Monterey County premium wine grapes and utilize pricing based in part upon
prices for Napa, Sonoma and Mendocino County grapes, which tend to be higher
than prices for Monterey County premium wine grapes. Renewal or replacement of
the Heublein and Canandaigua agreements and agreements covering new vineyards
will have different terms than the original contracts and pricing that may be
based more heavily on Monterey County harvests.
UNCERTAINTY OF REVENUE GROWTH
Approximately 67% of the Company's net vine acres are at or near full
production, and a certain portion of the Company's vineyards will always be out
of production or below maximum production due to replanting, regrafting and
various other factors. See "Business--The Company's Grape Production
Operations--Maturity Levels of SVI's Net Vine Acres." While some productivity
increases may be expected from further development of vineyard acreage not yet
in full production or from enhancements of fully productive vineyards, the
growth potential of the Company's existing properties is limited and the
Company's ability to increase revenue depends ultimately upon its ability to
acquire more vineyard properties. To the extent that market prices for wine
grapes decline, vineyard acquisitions become even more essential to revenue
growth. There can be no assurance that suitable properties will be available to
the Company at prices that would make the Company's growth plans viable.
FIXED COSTS AND REVENUE FLUCTUATIONS; UNCERTAINTY OF PROFITABILITY
The Company incurs annual farming costs averaging approximately $1,500 to
$2,500 per acre in production, depending upon the specific characteristics of
the vineyards, including vine spacing and the viticultural characteristics of
specific varieties, among other factors. These costs are incurred throughout the
year preceding harvest and are relatively fixed. Revenues from grape sales are
not
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realized until harvest and vary depending upon yields and prices. Vineyard
productivity varies from year to year depending upon a number of factors, and
significant variations in annual yields should be expected from time to time.
Furthermore, grape prices have fluctuated significantly in the past and should
be expected to continue to fluctuate from year to year and to decrease at times
in the future. Because production costs are not significantly adjustable in
light of productivity or revenue levels, weak harvests or lower grape prices
cannot be mitigated by cost reductions and should be expected to have
significant adverse effects upon profitability.
CAPITAL REQUIREMENTS
The farming of vineyards in production requires substantial amounts of
working capital. The Company's annual farming costs range from approximately
$1,500 to $2,500 per acre, which the Company must finance until harvest is
completed each year. The Company relies heavily on short-term credit to finance
its working capital requirements, and has entered into a line of credit
agreement with the Company's major bank that provides for maximum borrowings of
$10.5 million through June 1998. This arrangement is for a one-year term and
must be renewed annually. Working capital requirements are expected to grow to
support the expansion anticipated by the Company. There can be no assurance that
the Company will be able to obtain financing when required or that such
financing will be available on reasonable terms, and lack of access to adequate
lines of credit could impair the Company's ability to grow and adversely affect
the Company's business, financial condition and results of operations.
Substantial capital expenditures are required to develop and acquire new
vineyards and improve existing vineyards. Over the next three years, the
Company's planned development of new vineyard properties already leased or
subject to lease option are expected to require approximately $8.4 million in
capital investment and continued improvements of existing vineyards are expected
to require approximately $4.0 million. The Company has made and intends to
continue to make such expenditures to finance its expansion, and has incurred
and plans to continue to incur indebtedness. In addition, it costs approximately
$15,000 to $18,000 per acre in capital expenditures over a three-year period to
develop open land into a producing premium wine grape vineyard, before taking
into account the cost of land, and additional indebtedness may be required to
finance these costs. As a consequence, (i) the Company has and will continue to
have significant interest and principal repayment obligations, (ii) the
Company's earnings and cash flows would be adversely affected by increases in
interest rates, and (iii) the presence of this debt will limit the Company's
ability to pay dividends on its common stock.
RISKS ASSOCIATED WITH BUSINESS EXPANSION AND ACQUISITION STRATEGY; LONG-TERM
STRATEGIES
SVI intends to expand its business in several areas, which will create new
demands on management. The Company has recently leased, for a term of up to 50
years, approximately 207 acres of undeveloped land in Hames Valley, Monterey
County, and has also acquired an option to lease approximately 450 additional
undeveloped acres in Hames Valley. The Company plans to develop these
approximately 657 acres into premium varietal vineyards beginning in 1997 and
1998. The Company also recently purchased a 370-acre vineyard known as Riverview
Vineyard located in Monterey County, with respect to which the Company has no
operating history. The Company expects to continue to seek additional property
for vineyard development and it may purchase or lease developed vineyards.
However, there can be no assurance that the Company will exercise its option to
lease the additional 450 Hames Valley acres or be able to locate other suitable
properties to buy or lease at viable prices, and any additional undeveloped
properties acquired by the Company will require significant capital investment
and development before becoming fully productive. In addition, the Company's
ability to increase profits through acquisition depends to a significant degree
upon the prices at which properties can be purchased or leased. Market factors
have contributed to high prices
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for vineyard properties in recent years, and if prices continue to increase or
the Company's productivity expectations decrease, the Company's acquisition
strategy might not be viable. Furthermore, increased acreage under management
will create additional demands on Company management in operations, quality
control and other areas and may require the Company to hire and integrate more
employees.
In addition, the Company is initiating wine production and limited marketing
operations in 1997. The Company has not previously engaged in this business and
it will be competing against hundreds of larger and more experienced
competitors. The Company produced only 2,000 cases of wine in 1996 and has made
no significant commercial wine sales. The Company does not expect wine sales to
make a material contribution to revenues or profits for several years, if at
all. The Company has no experience as a vintner, and the Company's wines are
produced under contract by an independent winemaker. There can be no assurance
that this winemaking contract will remain in effect, and if the Company is
required to find a new winemaker, it may suffer an interruption in supply and
inconsistencies in the characteristics of its wines, which could adversely
affect its wine sales revenue. See "Business--Wine Production and Sales."
The Company's strategies are long-term strategies designed to increase the
Company's production capacity and expand the Company's business. The Company
does not expect to receive the full benefit from any newly planted vineyards as
described herein for at least four to five years after their acquisition due to
the length of time required for newly-planted grape vines to reach economic
levels of production. As a result, the full economic impact in terms of
projected earnings and the other beneficial effects of the Company's expansion
program will not be fully realized for several years, if at all.
Following the Exchange Transaction (as described in "Certain
Transactions--Exchange of Shares, Partnership Units and Limited Liability
Company Interests for Class B Common Stock"), the Company does not intend to
acquire, or enter into any transactions with, related parties. The Company's
acquisition strategy will focus on producing vineyard properties and land that
is suitable for development into vineyards.
WINE GRAPE SUPPLY AND DEMAND; PRICING
The California wine industry has recently experienced a shortage of grapes
due to insufficient plantings of premium varieties in the late 1980s and early
1990s, acreage taken out of production due to phylloxera infestation, and
reduced yields due to poor weather in 1995 and 1996. The Company believes that
the demand for wine grapes has also increased substantially over recent years
and has generally outpaced the supply. As a result, prices for premium
California wine grapes are at historically high levels. Recent plantings of new
vineyards, yield enhancements through technological advances, availability of
wine from foreign sources and other factors are expected to increase supply.
Furthermore, there can be no assurance that demand for premium wine grapes will
not decline. Increases in supply or reductions in demand may cause California
premium wine grape prices to decline significantly, and there can be no
assurance that the prices received by the Company will continue to increase or
will match or exceed historical prices received by the Company. Some declines in
prices received by the Company should be expected, and these declines may be
significant.
CONTROL BY SCHEID FAMILY
The Company has two classes of Common Stock: Class A Common Stock, which is
entitled to one vote per share; and Class B Common Stock, which is entitled to
five votes per share. Following completion of this offering, Alfred G. Scheid
(as Trustee of the Alfred G. Scheid Revocable Trust, dated October 8, 1992),
Scott D. Scheid, Heidi M. Scheid (all of whom are officers of the Company), Kurt
J. Gollnick (an officer of the Company who is not related to the Scheid family),
Emanty Limited Liability
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Company, of which Emily K. Liberty (a daughter of Alfred G. Scheid who is not
involved with the Company) and Tyler P. Scheid (a son of Alfred G. Scheid who is
not involved with the Company) are members and Alfred G. Scheid is the managing
member and certain other members of the Scheid family will own or control all of
the outstanding shares of Class B Common Stock, having the power to elect 75% of
the Board of Directors of the Company and representing approximately 92% of the
combined voting power of both classes of Common Stock, assuming no exercise of
the Underwriters' over-allotment option. The holders of Class B Common Stock are
parties to a Buy-Sell Agreement which provides that no holder of Class B Common
Stock may, with limited exceptions, transfer Class B Common Stock without first
offering such stock to the Company and then to the other parties to such
agreement. So long as these stockholders and their direct lineal descendants and
current and former spouses directly or indirectly hold shares of Class B Common
Stock representing more than approximately 17% of the total number of shares of
Class A Common Stock and Class B Common Stock outstanding they will be entitled
to elect all of the directors entitled to be elected by the holders of Class B
Common Stock, constituting 75% of the Company's Board of Directors, thereby
ensuring that they will for the foreseeable future be able to control the
management and policies of the Company, determine the outcome of any matter
submitted to a vote of the Company's stockholders, including any merger,
consolidation, sale of all or substantially all of the Company's assets or
"going private" transactions, take action by written consent without a
stockholders' meeting, and cause or prevent a change in control of the Company.
Furthermore, the Company is permitted to issue additional shares of Class B
Common Stock. No such issuance may be made prior to July 15, 2000 without the
approval, by vote or written consent, in the manner provided by law, of a
majority of the Class A Common Stock outstanding and of a majority of the Class
B Common Stock outstanding, each voting separately as a class. Except with
respect to the issuance of shares of Class B Common Stock in connection with a
stock split of such Class B Common Stock or for payment of dividends on such
Class B Common Stock in Class B Common Stock, no issuance of Class B Common
Stock may be made from and after July 15, 2000 without the approval, by vote or
written consent, in the manner provided by law, of a majority of the Class A
Common Stock outstanding and of a majority of the Class B Common Stock
outstanding, each voting separately as a class, or the unanimous approval, by
vote or written consent, in the manner provided by law, of directors elected by
the holders of Class A Common Stock, consisting of not less than two persons,
who are not, directly or indirectly, beneficial owners of any Class B Common
Stock and who have not been officers or employees of the Company or any of its
subsidiaries within the three-year period immediately preceding such issuance.
Any such issuance to existing holders of Class B Common Stock could extend their
control of the Company. In addition, issuance of additional shares of Class B
Common Stock could result in a change of control of the Company without approval
of the outstanding shares of Class A Common Stock. The Company has no present
plans to issue additional shares of Class B Common Stock. This concentration of
voting control may have the effect of delaying, deferring or preventing a change
in control of the Company, including any business combination with an
unaffiliated party, or of impeding the ability of the stockholders to replace
management even if factors warrant such a change. This concentration of voting
control may also affect the price that investors might be willing to pay in the
future for shares of Class A Common Stock. See "Principal Stockholders."
Most of the Company's senior management positions are currently held by
members of the Scheid family. Alfred G. Scheid is Chairman of the Board of
Directors and Chief Executive Officer. His son, Scott D. Scheid, is Vice
President, Chief Operating Officer and a director, and his daughter, Heidi M.
Scheid, is Vice President Finance, Chief Financial Officer, Treasurer and a
director. This family relationship may affect, among other things, the
management style and decision-making process of these members of the Company's
senior management team and may produce results different from those that would
be expected if the Company's senior management consisted of unrelated persons.
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COMPETITION; INDUSTRY FRAGMENTATION
The wine grape industry is extremely competitive. Many of the Company's
current and prospective competitors have substantially greater financial,
production, personnel and other resources than the Company. The Company competes
with many other producers of premium wine grapes in California, including a few
thousand small independent (I.E., not winery controlled) wine grape producers
who sell their production to wineries. Many wineries also own vineyards, and
there has been a significant trend among major wineries to develop additional
acreage to produce wine grapes for their own use. To meet recent shortfalls in
supply of premium grape varieties in California, there have been significant new
plantings of vineyards which can be expected to result in increased production
of California wine grapes in future years. In order to meet near-term shortfalls
in supply, a number of wineries have commenced purchases of wine from foreign
sources. Because of higher production costs in the United States and the high
prices of grapes in California, especially in comparison to the prices of years
past, some wineries can achieve significant cost savings, even after taking into
account shipping costs, by importing wine from abroad. Some countries, such as
France, have launched marketing campaigns to increase their sales in the United
States. Foreign competition can be expected to continue and increase. Moreover,
to a significant extent, wine grapes of a particular variety are fungible, and
the ability of foreign producers to compete with the Company on the basis of
price due to their lower production costs may have a negative impact upon the
Company's profitability. In addition, the Company's principal winery customers
compete with each other and with other wineries located in the United States,
Europe, South America, South Africa, Australia and New Zealand.
SEASONALITY OF BUSINESS; HARVEST REVENUES; REPORTING
The wine grape business is extremely seasonal. Similar to most
nondiversified agricultural crop producers, the Company recognizes all of its
crop sales revenues at the time of its annual harvest in September and October.
SVI is not managed to maximize quarter-to-quarter results, but seeks instead to
achieve maximum production of wine grapes at harvest and long-term productivity
of its vineyards. Because success of the Company's operations is dependent upon
the results of the Company's annual harvest, its quarterly results are not
considered indicative of those to be expected for a full year and little or no
information about annual grape sales revenues or profitability will be available
until year end. SVI has historically recognized losses for the first two fiscal
quarters. Profits, if any, are recognized in the last two fiscal quarters of the
year when revenues from grape sales are realized. From time to time the Company
has in the past, and may in the future, convert grapes into bulk wines for sales
in years subsequent to their harvest years which may impact quarterly results.
Seasonality of revenue also affects the Company's cash flow requirements. In the
past, SVI has borrowed funds under annual lines of credit beginning in February
or March to finance crop production costs through harvest and repaid such
borrowings from the proceeds of each harvest. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POSSIBLE TERMINATION OF VINEYARD MANAGEMENT AGREEMENTS
Each of the Company's vineyard management agreements with Heublein,
Canandaigua and Joseph Phelps Vineyards may be terminated in the event that
Alfred G. Scheid, a major stockholder of the Company and its Chairman of the
Board and Chief Executive Officer, and certain members of his family, cease to
beneficially own, directly or indirectly, at least 51% of the capital stock of
the Company. Sales to the public by members of the Scheid family or further
public offerings by the Company may result in a change of control of the
Company, which could result in termination of these agreements.
LABOR REGULATIONS AND UNION CONTRACT
California has many laws and regulations concerning labor in general and
farm labor in particular. The Agricultural Labor Relations Board has promulgated
many regulations concerning farm labor
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and a body of court decisions has developed. SVI is subject to many of these
regulations, laws and precedents.
The United Farm Workers, AFL-CIO ("UFW") is the major union representing
farm labor. In 1993, the UFW organized SVI's farm workers and now represents
them. The Company currently has a two-year contract with the UFW which expires
at the end of 1997. SVI believes that this contract is fair to both the workers
and the Company and intends to negotiate a new contract to succeed the one
currently in force. No assurances, however, can be given that the Company's
satisfactory labor relations will continue or that a new contract can be
negotiated without picketing, walk-outs, sit-downs, slow-downs and strikes and
the threat of these actions by the UFW.
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, been
picketed, particularly during the organizing effort by the UFW and during
negotiation of the first contract in 1995. A walk-out, sit-down, slow-down or
strike during the Company's harvest "window," when grapes reach optimal sugar
content and the Company's grape purchase agreements require prompt delivery to
its winery customers, could have a material adverse effect upon the Company's
business, financial condition and results of operations.
DEPENDENCE ON CONSUMER DEMAND
In recent years there has been substantial publicity regarding the possible
health benefits of moderate wine consumption. The results of a number of
studies, including research conducted at Brigham and Women's Hospital, Harvard
Medical School and the University of Illinois, suggest that moderate consumption
of wine (or other alcoholic beverages) could result in decreased mortality and
other health benefits. See "Business--California Wine and Grape Industry--Grape
Demand and Supply." Anti-alcohol groups have, in the past, successfully
advocated more stringent labeling requirements and other regulations designed to
discourage consumption of alcoholic beverages, including wine. More restrictive
regulations, negative publicity regarding alcohol consumption, publication of
studies that indicate a significant health risk from moderate consumption of
alcohol or changes in consumer perceptions of the relative healthfulness or
safety of wine generally could adversely affect the sale and consumption of wine
and the demand for wine and wine grapes and could have a material adverse effect
on the Company's business, financial condition and results of operations.
Trends in consumer spending have a substantial impact on the wine industry
and the Company's business. Factors that influence consumer spending include the
general condition of the economy, federal, state and local taxation, the
deductibility of business entertainment expenses under federal and state tax
laws and general levels of consumer confidence. Imposition of excise or other
taxes on wine could negatively impact the wine industry by increasing wine
prices for consumers. These factors are especially relevant to premium wines,
which constitute the majority of wines for which the Company produces grapes.
The wine industry is also subject to changes in consumer tastes and preferences.
To the extent wine consumers reduce consumption of wine in favor of other
beverages, demand for wine grapes could decrease. Similarly, to the extent wine
consumers shift their preferences to different varieties of wines or imports,
the Company and other producers of certain grape varieties may experience
reduced demand for their grape production. Increasing demand for wine products,
and therefore wine grapes, may depend on advertising expenditures and expanded
new product introductions by the wineries.
GOVERNMENT REGULATION; TAXES
SVI is subject to a broad range of federal and state regulatory requirements
regarding its operations and practices. The Company's current operations and
future expansion are subject to regulations governing the storage and use of
fertilizers, fungicides, herbicides, pesticides, fuels,
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solvents and other chemicals. These regulations are subject to change and
conceivably could have a significant impact on operating practices, chemical
usage, and other aspects of the Company's business. There can be no assurance
that new or revised regulations pertaining to the wine grape production industry
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
Wine production and sales are subject to extensive regulation by the Federal
Bureau of Alcohol, Tobacco and Firearms ("BATF"), the California Department of
Alcohol Beverage Control and other state and federal governmental authorities
that regulate licensing, trade and pricing practices, labeling, advertising and
other activities. In recent years, federal and state authorities have required
warning labels on beverages containing alcohol. Restrictions imposed by
government authorities on the sale of wine could increase the retail price of
wine, which could have an adverse effect on demand for wine in general. There
can be no assurance that there will not be new or revised laws or regulations
pertaining to the wine industry which could have a negative impact on the
Company's business. On January 1, 1991, the federal excise tax on table wine
increased by over 500% from $0.41 per case to $2.55 per case. Various states,
including California, also impose excise taxes on wine. Further increases in
excise taxes on wine, if enacted, could reduce demand for wine and wine grapes,
which could materially and adversely affect the Company's business, financial
condition and results of operations.
RELIANCE ON KEY PERSONNEL
The Company believes its continued success depends to a significant extent
on the active involvement of certain members of the Scheid family and the
retention of its senior non-family executives. Alfred G. Scheid, age 65, serves
as Chairman of the Board and Chief Executive Officer. Mr. Scheid's son, Scott D.
Scheid, age 37, is Vice President and Chief Operating Officer, Heidi M. Scheid,
his daughter, age 34, is Vice President Finance, Chief Financial Officer and
Treasurer, and Kurt J. Gollnick, a senior non-family executive, age 38, is Vice
President Vineyard Operations. There can be no assurance that these persons will
remain in their management positions with the Company, and the loss of the
services of any one of these persons could have a material adverse effect on the
Company's business, financial condition and results of operations. The continued
success and expansion of SVI will depend on its ability to retain key executives
and to attract additional highly-skilled personnel.
DILUTION
The initial public offering price is substantially higher than the book
value per share of the Class A Common Stock. Investors purchasing shares of
Class A Common Stock in this offering will therefore incur immediate,
substantial dilution in the net tangible book value of their shares. In
addition, investors purchasing shares of Class A Common Stock in this offering
will incur additional dilution upon exercise of stock options and issuances of
Class A Common Stock in public offerings and in connection with future
acquisitions. See "Dilution."
ABSENCE OF TRADING MARKET; DETERMINATION OF OFFERING PRICE; VOLATILITY OF STOCK
PRICE
Prior to this offering, there has been no public market for the Class A
Common Stock. Although the Class A Common Stock has been approved for listing on
the Nasdaq National Market, subject to official notice of issuance, there can be
no assurance that an active trading market will develop, or if one does develop,
that it will be maintained. The initial public offering price of the Class A
Common Stock will be established by negotiation among the Company and Cruttenden
Roth Incorporated, Laidlaw Equities, Inc. and Rodman & Renshaw, Inc. who are
acting as representatives (the "Representatives") of the Underwriters and may
not be indicative of the market price of the Class A Common Stock after this
offering. See "Underwriting." Trading activity in the Class A Common Stock and
any
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associated market price volatility may be concentrated at year-end after
harvest, when grape sales revenues are known, and in early February and early
March, when the Grape Crush Report is issued by the CDFA. There can be no
assurance that the market price of the Class A Common Stock after this offering
will equal or exceed the public offering price set forth on the cover page of
this Prospectus. In addition, the stock market from time to time has experienced
price and volume fluctuations that have affected the market price for many
companies and that frequently have been unrelated to the operating performance
of those companies. Such market fluctuations may adversely affect the market
price of the Class A Common Stock. After the offering, the Company's market
float will be small and the shares of Class A Common Stock will be thinly
traded, so sales of Class A Common Stock by a few stockholders, or even a single
significant stockholder, may have a significant adverse impact on the market
price of the Class A Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock (including shares
issued upon the exercise of employee stock options or upon conversion of the
Class B Common Stock) in the public market following this offering could
adversely affect the market price of the Class A Common Stock. Although only the
2,000,000 shares being sold in this offering will be available for sale in the
public market immediately after the offering, 4,400,000 shares of Class A Common
Stock issuable upon conversion of outstanding shares of Class B Common Stock
will be eligible for sale in the public market beginning 90 days (subject to the
one-year lock-up period described below) after the date of this Prospectus,
subject to certain rights of first refusal held by the Company and the other
Class B stockholders and subject to the volume and manner of sale limitations
imposed by Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). See "Principal Stockholders--Agreement Among Class B
Stockholders." Rule 144 generally provides that beneficial owners of common
stock who have held such common stock for one year may sell within a three-month
period a number of shares not exceeding the greater of 1% of the total
outstanding shares or the average weekly trading volume of the shares during the
four calendar weeks preceding such sale. Future sales of restricted Class A
Common Stock under Rule 144 could negatively impact the market price of the
Class A Common Stock. Pursuant to the terms of the underwriting agreement
between the Company and the Representatives, the Representatives have required
that the Class A Common Stock issuable upon conversion of the Class B Common
Stock owned by officers, directors and certain holders of the Company's Class B
Common Stock, as well as option holders, may not be sold for one year from the
date of this Prospectus, but Cruttenden Roth Incorporated may waive this
requirement. See "Shares Eligible for Future Sale."
BROAD MANAGEMENT DISCRETION OVER USE OF PROCEEDS
Management of the Company will have broad discretion with respect to the use
of the proceeds derived from the offering and there can be no assurance that
management's actual use of the proceeds will correlate exactly with the
Company's intended use of proceeds. See "Use of Proceeds."
FORMER S CORPORATION STATUS OF SVI-CAL AND SHAREHOLDER DISTRIBUTIONS; NO PAYMENT
OF DIVIDENDS
SVI-Cal has been a Subchapter S Corporation for federal and California state
income tax purposes since 1989. As a result, the net income of SVI-Cal for
federal and certain state income tax purposes for such periods was reported by,
and taxed directly to, SVI-Cal's sole stockholder, Alfred G. Scheid, whether or
not such earnings were distributed. Prior to the offering, SVI-Cal's cumulative
S Corporation earnings will be determined and a distribution will be made to Mr.
Scheid. This amount is estimated at $3.0 million. In addition, a distribution of
approximately $475,000 will be made to the limited partners of Vineyard
Investors 1972 (as of immediately prior to the Exchange Transaction) to pay
income taxes on income from the partnership. The Exchange Transaction will
result in conversion
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of SVI-Cal's S Corporation status to C Corporation status. See "Certain
Transactions--Exchange of Shares, Partnership Units and Limited Liability
Company Interests for Class B Common Stock."
The Company currently intends to retain its future earnings, if any, to fund
the development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future. See "The Company" and
"Dividend Policy."
IMPORTANT FACTORS RELATED TO FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements, including the
plans and objectives of management for the business, operations, and economic
performance of the Company. The forward-looking statements and associated risks
set forth in this Prospectus may include or relate to, among other things, (i)
planting and harvesting of new vineyards, including Hames Valley, (ii) potential
acquisitions of additional properties for vineyard development and related
businesses, (iii) consumer demand and preferences for the wine grape varieties
produced by the Company, (iv) general health and social concerns regarding
consumption of wine and spirits, (v) the size and growth rate of the California
wine industry, (vi) seasonality of the wine grape producing business, (vii)
increases or changes in government regulations regarding environmental impact,
water use, labor or consumption of alcoholic beverages, (viii) competition from
other producers and wineries and (ix) proposed expansion of the Company's wine
business.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These
forward-looking statements are based upon assumptions that the Company will
continue to manage and operate vineyards effectively, that competitive
conditions within the California wine industry will not change materially or
adversely, that demand for California varietal wine grapes will remain strong
and that there will be no material adverse change in the Company's business,
financial condition and results of operations. Assumptions relating to the
foregoing involve judgments with respect, among other things, to future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and most of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there can be no assurance
that the results contemplated in forward-looking information will be realized.
In addition, as disclosed above, the business and operations of the Company are
subject to substantial risks that increase the uncertainty inherent in such
forward-looking statements. Any of the other factors disclosed above could cause
the Company's net sales or net income, or growth in net sales or net income, to
differ materially from prior results. Growth in absolute amounts of cost of
sales and general and administrative expenses or the occurrence of extraordinary
events could cause actual results to vary materially from the results
contemplated in the forward-looking statements. Budgeting and other management
decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience in business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
results of operations. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved.
ANTITAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW;
"BLANK CHECK"
PREFERRED STOCK
Certain provisions of the Delaware General Corporation Law (the "DGCL") and
the Company's Certificate of Incorporation and Bylaws (the "Bylaws") could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire,
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control of the Company. Such provisions could limit the price that investors
might be willing to pay in the future for the Class A Common Stock.
The Board of Directors of the Company has the authority to issue up to
2,000,000 shares of Preferred Stock (the "Preferred Stock") and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Class A Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Furthermore, the Company is permitted to issue up to 5,600,000 additional shares
of Class B Common Stock, which also could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. See "--Control by Scheid Family." The Company has no
present plans to issue additional shares of Class B Common Stock. In addition,
the Company will, upon consummation of the offering, be subject to the
anti-takeover provisions of Section 203 of the DGCL. In general, this statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested stockholder
unless such business combination is approved in the prescribed manner. See
"Management--Executive Officers and Directors," "Description of Capital Stock--
Preferred Stock" and "--Certain Provisions of the Delaware General Corporation
Law."
ENVIRONMENTAL RISKS
Ownership of real property creates a potential for environmental liability
on the part of the Company. If hazardous substances are discovered on or
emanating from any of the Company's vineyards and the release of hazardous
substances (including fuels and chemicals kept by the Company on its properties
for use in its business) presents a threat of harm to public health or the
environment, the Company may be held strictly liable for the cost of remediation
of these hazardous substances.
16
<PAGE>
THE COMPANY
COMPANY HISTORY
SVI-Cal was founded in 1972 to act as general partner for several limited
partnerships using vineyards as an investment vehicle to create tax shelter and
eventual cash flow for high income investors. In addition to acting as general
partner of these partnerships, the Company's responsibilities included buying
land and developing it as vineyards and marketing the resultant grape
production. The Company also developed new vineyards for its own account. Alfred
G. Scheid, the Company's principal stockholder, has been Chief Executive Officer
of the Company from the time of its founding and concurrently engaged in several
other business enterprises until 1988 when he acquired complete ownership of the
Company. All of the interests of the limited partners were acquired by the
Company, the Scheid family and Kurt J. Gollnick, in three transactions in 1988,
1994 and 1996, and the partnership vineyards are all being transferred to the
Company concurrently with this offering. Until Mr. Scheid acquired the Company,
the vineyards owned by the partnerships and the Company were managed principally
for maximum current income and were not substantially upgraded or improved.
Since 1993, the Company has installed improved irrigation systems, new stakes
and trellising systems, and has selectively replanted, grafted and implemented
other improvements for a total incremental investment of over $6.0 million.
These improvements were funded primarily with internally generated cash, loans
from Mr. Scheid, and bank borrowings. As of the date of this Prospectus, the
Company operates for its own account approximately 3,270 acres of vineyards, at
various production levels ranging from new plantings in 1997 to fully mature.
S CORPORATION CONVERSION; DISTRIBUTIONS
SVI-Cal has been a Subchapter S Corporation for federal and California state
income tax purposes since 1989. As a result, the net income of SVI-Cal for
federal and certain state income tax purposes for such periods was reported by,
and taxed directly to, SVI-Cal's sole stockholder, Alfred G. Scheid, whether or
not such earnings were distributed. Prior to the offering, SVI-Cal's cumulative
S Corporation earnings will be determined and a distribution will be made to Mr.
Scheid. This amount is estimated at $3.0 million. In addition, a distribution of
approximately $475,000 will be made to the limited partners of Vineyard
Investors 1972 (as of immediately prior to the Exchange Transaction) to pay
income taxes on income from the partnership. The Exchange Transaction will
result in conversion of SVI-Cal's S Corporation status to C Corporation status.
See "Certain Transactions--Exchange of Shares, Partnership Units and Limited
Liability Company Interests for Class B Common Stock."
In March 1997, SVI-Cal paid $1.0 million to Mr. Scheid as repayment of a
working capital loan made by him to SVI-Cal.
ACCOUNTING EFFECT
In connection with the conversion of SVI-Cal's S Corporation status to C
Corporation status, the Company is required by FASB No. 109 to record deferred
tax liabilities and deferred tax assets. Such change will result in a net charge
to earnings of approximately $1.3 million in the fiscal quarter in which the
conversion to C Corporation takes place. This one-time charge is a result of
differences in the accounting and tax treatment of certain of the Company's
assets and liabilities and is reflected through (i) an increase in deferred
income tax liabilities, partially offset by (ii) an increase in the Company's
deferred tax assets.
EXCHANGE TRANSACTION
In connection with this offering, the capital stock of SVI-Cal held by its
sole shareholder, the membership interests held by all members of each of Quadra
Partners LLC, a California limited liability company, and Big Vines Limited
Liability Company, a California limited liability company,
17
<PAGE>
and the limited partnership units held by all limited partners (other than
SVI-Cal) in Vineyard Investors 1972 ("VI-1972"), a California limited
partnership, are being contributed to SVI-Del in exchange for 4,400,000 shares
of Class B Common Stock of the Company (the "Exchange Transaction") representing
100% of the pre-offering issued and outstanding capital stock of the Company on
a fully-diluted basis. See "Certain Transactions--Exchange of Shares,
Partnership Units and Limited Liability Company Interests for Class B Common
Stock."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,000,000 shares of Class A Common Stock offered hereby are estimated to be
approximately $16,600,000 ($19,165,000 if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of $9.50
per share and after deducting the estimated underwriting discount and offering
expenses.
The Company intends to use the proceeds it receives from this offering to
repay borrowings under its short-term line of credit which management estimates
will be approximately $6.0 million, continue
development of approximately 374 acres in Monterey County (including 207 acres
in Hames Valley), begin developing approximately 450 additional acres in 1998 in
Hames Valley, finance working capital requirements of its existing properties
and conduct a limited expansion of its wine business. The Company also plans to
utilize a portion of the net proceeds of this offering to buy or lease and
develop existing vineyards or land that is suitable for vineyards in Monterey
County and potentially other regions in California if, among other things, the
size, configuration, grape variety mix and anticipated earnings and cash flow of
such properties satisfy the Company's acquisition criteria. There can be no
assurance, however, that any acquisitions will be consummated in the future. Any
such acquisitions and vineyard development may also be effected in whole or in
part through bank debt or similar financing. The following table sets forth the
anticipated use of proceeds from this offering:
<TABLE>
<CAPTION>
<S> <C>
Repayment of working capital indebtedness..................................... $ 6,000,000
Development of vineyards in Hames Valley...................................... 4,500,000
Acquisitions.................................................................. 4,100,000
Working capital for existing vineyards and general corporate purposes......... 2,000,000
--------------
Total Net Proceeds........................................................ $ 16,600,000
--------------
--------------
</TABLE>
Pending such uses, the Company intends to invest the net proceeds in
short-term, interest-
bearing securities, including government obligations and money market
instruments. The working capital indebtedness to be repaid from proceeds of the
offering accrues interest at the bank's "reference" rate per year and matures on
June 5, 1998.
DIVIDEND POLICY
The Company currently intends to retain its future earnings, if any, to fund
the development and growth of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
March 31, 1997, (ii) pro forma as of March 31, 1997, after giving effect to the
Exchange Transaction and (iii) adjusted as of March 31, 1997 to reflect the sale
of 2,000,000 shares of Class A Common Stock offered by the Company hereby (after
deducting the estimated underwriting discount and offering expenses) at an
assumed initial public offering price of $9.50 per share and the application of
the estimated net proceeds therefrom. This table should be read in conjunction
with the "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Combined Financial
Statements, including the related notes thereto, and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------
PRO FORMA AS
HISTORICAL PRO FORMA (1) ADJUSTED (2)
--------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Total debt (including current portion) (3)............................. $ 15,549 $ 16,849 $ 16,849
Stockholders' equity:
Preferred Stock, par value $.001 per share; 2,000,000 shares
authorized; no shares issued and outstanding historical; no shares
issued and outstanding Pro Forma; no shares issued and outstanding
Pro Forma as adjusted.............................................. 0 0 0
Class A Common Stock, par value $.001 per share; 20,000,000 shares
authorized; no shares issued and outstanding historical; no shares
issued and outstanding Pro Forma; 2,000,000 shares issued and
outstanding Pro Forma as adjusted (4).............................. 0 0 2
Class B Common Stock, par value $.001 per share; 10,000,000 shares
authorized; 97,413 shares issued and outstanding historical;
4,400,000 shares issued and outstanding Pro Forma; 4,400,000 shares
issued and outstanding Pro Forma as adjusted....................... 2 4 4
Paid-in capital........................................................ 124 2,852 19,450
Retained earnings...................................................... 8,469 934 934
--------- ------------- --------------
Total stockholders' equity............................................. 8,595 3,790 20,390
--------- ------------- --------------
Total capitalization................................................... $ 24,144 $ 20,639 $ 37,239
--------- ------------- --------------
--------- ------------- --------------
</TABLE>
- ------------------------------
(1) Gives effect to the Exchange Transaction and SVI-Cal's conversion to C
Corporation status. See "The Company-- Exchange Transaction" and "Certain
Transactions--Exchange of Shares, Partnership Units and Limited Liability
Company Interests for Class B Common Stock."
(2) Adjusted to give effect to the receipt and application of the estimated net
proceeds of this offering. See "Use of Proceeds."
(3) See Note 13 of "Notes to Combined Financial Statements" for subsequent bank
refinancings.
(4) Excludes (i) 200,000 shares of Class A Common Stock reserved for issuance
under the Company's restated 1997 Stock Option/Stock Issuance Plan, as of
the date of this offering, (ii) 200,000 shares of class A Common Stock
issuable upon exercise of the Representatives' Warrants and (iii) 300,000
shares of Class A Common Stock which may be purchased by the Underwriters to
cover over-allotments, if any. See "Management--1997 Stock Option/Stock
Issuance Plan" and "Underwriting."
19
<PAGE>
DILUTION
The Pro Forma net tangible book value of the Company at March 31, 1997 was
approximately $3,790,000, or $0.86 per share based upon 4,400,000 shares
outstanding. "Pro Forma net tangible book value per share" represents the total
amount of tangible assets less total liabilities after giving effect to the
Exchange Transaction and SVI-Cal's conversion to C Corporation status, divided
by the number of shares of Common Stock outstanding immediately prior to the
offering. After giving effect to the sale of 2,000,000 shares of Class A Common
Stock offered hereby (after deducting the estimated underwriting discount and
offering expenses) at an assumed initial public offering price of $9.50 per
share, and the initial application of the net proceeds of this offering in the
manner described under "Use of Proceeds," the pro forma net tangible book value
of the Company at March 31, 1997 would have been $20,390,000 or $3.19 per share
of the Company's Common Stock. This represents an immediate increase in Pro
Forma net tangible book value of $2.33 per share to the Company's stockholders
and an immediate, substantial dilution of approximately 66.4% or $6.31 per share
to investors purchasing shares of Class A Common Stock offered hereby (the "New
Investors"). "Dilution" per share represents the difference between the price
per share to be paid by the New Investors and the Pro Forma net tangible book
value per share after giving effect to this offering. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share of Class A Common
Stock (1).................................................. $ 9.50
Pro Forma net tangible book value per share before giving
effect to the public offering (2)........................ $ 0.86
Increase in Pro Forma net tangible book value per share
attributable to New Investors............................ 2.33
---------
Pro Forma net tangible book value per share after giving
effect to the public offering (2).......................... 3.19
---------
Dilution per share to New Investors.......................... $ 6.31
---------
---------
</TABLE>
- ------------------------------
(1) Before deduction of underwriting discounts and commissions and estimated
expenses payable by the Company in connection with this offering.
(2) Excludes (i) 200,000 shares of Class A Common Stock reserved for issuance
under the Company's 1997 Stock Option/Stock Issuance Plan, (ii) 200,000
shares of Class A Common Stock issuable upon exercise of the
Representatives' Warrants and (iii) 300,000 shares of Class A Common Stock
which may be purchased by the Underwriters to cover over-allotments, if any.
See "Management--1997 Stock Option/Stock Issuance Plan" and "Underwriting."
The following table summarizes, on a Pro Forma basis as of March 31, 1997,
the number of shares purchased from the Company, the total consideration paid to
the Company and the average price per share paid by the Company's pre-offering
stockholders, and by the New Investors, assuming the sale of 2,000,000 shares of
Class A Common Stock by the Company at an assumed initial public offering price
of $9.50 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- --------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Pre-offering stockholders....................... 4,400,000 68.75% $ 3,790,000 16.63% $ 0.86
New Investors................................... 2,000,000 31.25% 19,000,000 83.37% 9.50
----------- --------- -------------- ---------
Total....................................... 6,400,000 100.00% $ 22,790,000 100.00%
----------- --------- -------------- ---------
----------- --------- -------------- ---------
</TABLE>
20
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The following selected combined financial data at December 31, 1996 and for
the fiscal years ended December 31, 1995 and 1996 have been derived from the
Company's financial statements, which have been audited by Deloitte & Touche
LLP, independent auditors, whose report thereon is included elsewhere in this
Prospectus. The selected combined financial data at March 31, 1997 and for the
three months ended March 31, 1996 and 1997 have been derived from unaudited
combined financial statements of the Company. In the opinion of the Company, its
unaudited combined financial statements have been prepared on the same basis as
the audited combined financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The financial data for March 31, 1997 and for the three months ended
March 31, 1996 and 1997, however, are not necessarily indicative of results to
be expected for the full fiscal year. The financial data should be read in
conjunction with, and are qualified in their entirety by, the Company's Combined
Financial Statements, including the related notes thereto. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH
DECEMBER 31, 31,
--------------- --------------
1995 1996 1996 1997
------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Sales................................. $7,164 $10,769 $ 0 $ 0
Vineyard management, service and other
fees................................ 476 922 210 347
------ ------- ------ ------
Total............................. 7,640 11,691 210 347
Cost of sales........................... 3,670 4,544 0 0
------ ------- ------ ------
Gross profit............................ 3,970 7,147 210 347
General and administrative.............. 2,583 2,604 678 628
------ ------- ------ ------
Operating income (loss)................. 1,387 4,543 (468) (281)
Other income (expense):
Interest, net......................... (906) (654) (94) (185)
------ ------- ------ ------
Income (loss) before income taxes....... 481 3,889 (562) (466)
Provision for income taxes.............. 1 44 0 0
------ ------- ------ ------
Net income (loss)....................... $ 480 $ 3,845 $ (562) $ (466)
------ ------- ------ ------
------ ------- ------ ------
PRO FORMA AMOUNTS (1)(2):
Income (loss) before income taxes as
reported.............................. $ 481 $ 3,889 $ (562) $ (466)
Pro Forma income tax benefit
(provision)........................... (192) (1,556) 225 186
------ ------- ------ ------
Pro Forma net income (loss)............. $ 289 $ 2,333 $ (337) $ (280)
------ ------- ------ ------
------ ------- ------ ------
Pro Forma net income (loss) per share... $ 0.07 $ 0.53 $(0.08) $(0.06)
Shares used in computing net income
(loss) per share...................... 4,400 4,400 4,400 4,400
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------------
DECEMBER 31, PRO FORMA AS
1996 ACTUAL PRO FORMA (2) ADJUSTED (3)
------------ ------- ------------- ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ 2,254 $ 3,113 $ (392) $16,208
Current assets.......................... 5,220 5,009 2,848 19,448
Total assets............................ 24,069 25,582 23,421 40,021
Current liabilities..................... 2,966 1,896 3,240 3,240
Long-term liabilities (4)............... 12,042 15,091 16,391 16,391
Total liabilities....................... 15,008 16,987 19,631 19,631
Equity.................................. 9,061 8,595 3,790 20,390
</TABLE>
- ------------------------------
(1) The Exchange Transaction will result in conversion of SVI-Cal's S
Corporation status to C Corporation status. The Pro Forma statement of
operations data reflect provisions for federal and state income taxes as if
SVI-Cal had been subject to federal and state income taxation as a C
Corporation at an assumed 40% combined federal and state income tax rate
during the periods presented. See "The Company." In addition, Pro Forma net
income (loss) per share is based upon 4,400,000 shares of Class B Common
Stock which will be outstanding immediately prior to the offering. See
"Principal Stockholders."
(2) Pro Forma Balance Sheet Data reflect the assumed conversion of SVI-Cal to C
Corporation status, the establishment of $1,300,000 of related deferred
income taxes, certain distributions of approximately $3,505,000 to SVI-Cal's
sole stockholder and certain partners in Vineyard Investors 1972, a
California limited partnership, and the issuance of 4,400,000 shares of
Class B Common Stock to be outstanding prior to the offering resulting from
the Exchange Transaction. See "The Company--S Corporation Conversion;
Distributions" and "Certain Transactions--Exchange of Shares, Partnership
Units and Limited Liability Company Interests for Class B Common Stock."
(3) Adjusted to reflect the sale of 2,000,000 shares of Class A Common Stock
offered by the Company hereby at an assumed offering price of $9.50 per
share and the anticipated application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
(4) Long-term liabilities include borrowings of $2,233,000 at December 31, 1996
and $2,800,000 at March 31, 1997 used for costs incurred for the development
of certain vineyards owned by Heublein. Heublein is obligated to advance
budgeted costs to the Company on a monthly basis and has provided a letter
of credit to secure repayment. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." See Note 13 of "Notes to Combined Financial Statements" for
subsequent bank refinancings.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
COMBINED FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES THERETO, AND OTHER
FINANCIAL INFORMATION INCLUDED HEREIN. THE FOLLOWING INFORMATION ALSO INCLUDES
FORWARD-LOOKING STATEMENTS, THE REALIZATION OF WHICH MAY BE IMPACTED BY CERTAIN
IMPORTANT FACTORS DISCUSSED UNDER "RISK FACTORS."
OVERVIEW
SVI is a leading independent (I.E., not winery controlled) producer of
premium varietal wine grapes. The Company currently operates approximately 4,950
acres of wine grape vineyards. Of this total, approximately 3,270 acres are
operated for the Company's own account, including the 370-acre Riverview
Vineyard which was purchased by the Company on June 26, 1997, and 1,680 acres
are operated under management contracts for others. The Company recently leased,
for a term of up to 50 years, 207 acres of open land which is currently being
planted into premium varietal wine grape vineyards, and executed an option to
lease, for up to 50 years, approximately 450 additional acres which it intends
to begin developing in 1998. All of the properties currently operated by the
Company are located in Monterey and San Benito Counties in California, both of
which are generally recognized as excellent regions for growing high quality
wine grape varieties. The Company leases the underlying land for certain of its
vineyards. See "Business--The Company's Grape Production Operations-- Vineyard
Operations."
The Company has had grape purchase contracts with Heublein and its
predecessors since 1972 and with Canandaigua and its predecessors since 1979.
For the year ended December 31, 1996, the Company's long-term purchase contracts
with Heublein accounted for approximately 91% of grape sales revenues and
approximately 84% of total revenues, and the Company's long-term purchase
contracts with Canandaigua accounted for approximately 7% of both grape sales
revenues and total revenues. In the past year, the Company has signed several
long-term purchase contracts with new winery clients, including The Chalone Wine
Group, Ltd., The Hess Collection Winery, Joseph Phelps Vineyards and
Independence Wine Company. These new contracts cover approximately 172 acres, or
6.4% of the Company's net vine acreage, and such acres were planted by the
Company in 1996 and 1997 and should be at or near full production in 2000 or
2001. Thus, the Company is substantially dependent on Heublein and termination
of its contracts with Heublein could have a material adverse effect on the
Company's business, financial condition and results of operations. In the long
term, the Company will continue its efforts to broaden its customer base and
will seek additional long-term grape purchase contracts with new winery clients.
The revenue growth potential of the Company's existing vineyards is limited
and the Company's ability to increase revenue long term depends upon its ability
to acquire additional mature vineyard properties and/or develop new vineyards.
Recent prices for premium California wine grapes are at historically high
levels. A decline in the prices received by the Company should be expected, and
these declines may be significant. This expected decline in prices makes
execution of the Company's vineyard acquisition strategy even more essential to
revenue growth.
The financial information presented below does not include revenues and
costs associated with operation of Riverview Vineyard, which was acquired by the
Company in June 1997 and will be reflected in the Company's operating results in
future periods.
QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly combined
financial data for the four quarters in fiscal 1996 and the first quarter of
1997. In the opinion of the Company's management, this unaudited information has
been prepared on the same basis as the audited information and includes all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the information set forth therein. The operating results for any
quarter are not necessarily indicative
22
<PAGE>
of results for any future period, and results presented below do not include
provision for income taxes that will be payable in future periods following the
Exchange Transaction.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------
FISCAL 1996 FISCAL 1997
---------------------------------------------- -----------
MAR 31 JUNE 30 SEPT 30 DEC 31 MAR 31
----------- ----------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales........................................................ $ 0 $ 0 $ 6,414 $ 4,355 $ 0
Vineyard management, services and other fees................. 210 219 155 338 347
----------- ----------- --------- --------- -----------
210 219 6,569 4,693 347
Cost of sales.................................................. 0 0 2,499 2,045 0
----------- ----------- --------- --------- -----------
Gross profit................................................... 210 219 4,070 2,648 347
General and administrative..................................... 678 423 665 838 628
----------- ----------- --------- --------- -----------
Operating income (loss)........................................ (468) (204) 3,405 1,810 (281)
Other income (expense):
Interest (net)............................................... (94) (155) (129) (276) (185)
----------- ----------- --------- --------- -----------
Income (loss) before income taxes.............................. (562) (359) 3,276 1,534 (466)
Provision for income taxes..................................... 0 0 0 44 0
----------- ----------- --------- --------- -----------
Net income (loss).............................................. $ (562) $ (359) $ 3,276 $ 1,490 $ (466)
----------- ----------- --------- --------- -----------
----------- ----------- --------- --------- -----------
</TABLE>
RESULTS OF OPERATIONS
SVI derives its revenues from two sources: sales of wine grapes pursuant to
long-term purchase contracts, and vineyard management and services revenues
consisting primarily of management and harvest fees and equipment rentals for
services provided to owners of vineyards. Sales of the Company's wines have not
significantly contributed to revenues. Revenue from grape sales varies from year
to year primarily due to yield and price fluctuations which can be significantly
influenced by weather conditions. Approximately 92% of the Company's revenues
for the year ended December 31, 1996 were derived from grape sales and
approximately 8% of revenues were derived from vineyard management, services and
other fees. Because grape sales revenues are not recognized until September and
October, the first two fiscal quarters have historically resulted in a loss.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Revenues:
Sales........................................................................................ 93.8% 92.1%
Vineyard management, services and other fees................................................. 6.2 7.9
--------- ---------
100.0 100.0
Cost of sales.................................................................................. 48.0 38.9
--------- ---------
Gross profit................................................................................... 52.0 61.1
General and administrative..................................................................... 33.8 22.3
--------- ---------
Operating income............................................................................... 18.2 38.8
Interest (net)................................................................................. 11.9 5.6
--------- ---------
Income before income taxes..................................................................... 6.3 33.2
Provision for income taxes..................................................................... -- 0.3
--------- ---------
Net income..................................................................................... 6.3% 32.9%
--------- ---------
--------- ---------
</TABLE>
23
<PAGE>
YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
REVENUES. Grape sales increased by 50.3% to $10,769,000 for the year ended
December 31, 1996 from $7,164,000 in 1995, an increase of $3,605,000.
Approximately $2,436,000 of this increase was due to increased yields in 1996
brought about by the maturation of vines which had been grafted or replanted to
higher value varieties as part of the Company's overall improvement and
refurbishment program which began in 1993. The remaining $1,169,000 of the grape
sales increase was due to an approximately 12% increase in the average price
received as well as the combined effect of higher prices on an increase in tons.
Declines in grape prices should be expected from time to time and the revenue
growth potential of the Company's existing vineyards is limited, so there can be
no assurance that comparable increases will be realized in future years. Revenue
from vineyard management, services and other fees increased by 93.7% to $922,000
for the year ended December 31, 1996 from $476,000 in 1995, an increase of
$446,000. This increase was due primarily to the addition of two long-term
management contracts which became operative in early 1996.
GROSS PROFIT. As a result of the factors discussed above, gross profit
increased by 80.0% to $7,147,000 for the year ended December 31, 1996 from
$3,970,000 in 1995, an increase of $3,177,000. Gross profit as a percentage of
revenues increased from 52.0% in 1995 to 61.1% in 1996. Excluding the Company's
revenue derived from management contracts, gross profit as a percentage of
revenue was approximately 55.4% in 1995 and 66.4% in 1996. The increase in gross
profit is primarily the result of higher revenues related to increased yields
and higher grape prices per ton in relationship to relatively stable farming
costs. Cost of sales consists entirely of farming costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by less than 1% to $2,604,000 for the year ended December 31, 1996 from
$2,583,000 in 1995, an increase of $21,000. Increased yields of grapes harvested
or higher grape prices per ton generally do not influence general and
administrative expenses.
INTEREST EXPENSE, NET. Net interest expense decreased by 27.8% to $654,000
for the year ended December 31, 1996 from $906,000 in 1995, a decrease of
$252,000. This decrease was due primarily to the capitalization of interest
expense on acreage being improved or developed and lower interest rates on bank
borrowings. Interest capitalized was $291,000 and $430,000 in 1995 and 1996,
respectively.
NET INCOME. As a result of the above factors, and in particular, increases
in yields and prices, net income increased to $3,845,000 for the year ended
December 31, 1996 from $480,000 in 1995, an increase of $3,365,000. Net income
as a percentage of sales increased to 32.9% in 1996 from 6.3% in 1995.
THREE MONTH PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1996
REVENUES. Revenues, consisting entirely of vineyard management, services
and other fees, increased by 65.2% to $347,000 for the quarter ended March 31,
1997 from $210,000 for the same period in 1996, an increase of $137,000. This
increase was due primarily to the addition of a 445 acre long-term management
contract which became operative in early 1997.
GROSS PROFIT. Because the costs incurred throughout the year to farm and
harvest the Company's wine grape crop are capitalized until the revenues
associated with such costs are recognized, gross profit for the quarters ended
March 31, 1997 and 1996 are equal to the revenues for the same periods. The
costs associated with provision of management services are reimbursed by the
Company's clients.
GENERAL AND ADMINISTRATIVE. General and administrative costs decreased by
7.4% to $628,000 for the quarter ended March 31, 1997 from $678,000 for the same
period in 1996, a decrease of $50,000, due to, among other things, a slight
decrease in office expenditures.
24
<PAGE>
INTEREST EXPENSE, NET. Net interest expense increased to $185,000 for the
quarter ended March 31, 1997 from $94,000 for the same period in 1996, an
increase of $91,000. This increase in net interest expense was due to increased
levels of borrowing by the Company to finance crop growing costs and vineyard
development, and decreased income from earned interest.
NET LOSS. Due to the above factors, the Company had a net loss for the
first quarter ended March 31, 1997 of $466,000, compared to a net loss of
$562,000 for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
SVI's primary sources of cash have historically been funds provided by
internally generated cash flow and bank borrowings. The Company has made
substantial capital expenditures to redevelop its existing vineyard properties
and develop new acreage, and it intends to continue these types of expenditures.
Cash generated from operations has not been sufficient to satisfy all of the
Company's working capital and capital expenditure needs. As a consequence, the
Company has depended upon, and continues to rely upon, both short and long-term
bank borrowings.
Under the Company's historical working capital cycle, working capital is
required primarily to finance the costs of growing and harvesting its wine grape
crop. The Company normally delivers substantially all of its crop in September
and October, and receives the majority of its cash from grape sales in November.
In order to bridge the gap between incurrence of expenditures and receipt of the
majority of its cash from grape sales, large working capital outlays are
required for approximately eleven months each year. Historically, SVI has
obtained these funds pursuant to credit lines with banks.
The Company currently has credit lines that provide both short-term and
long-term funds. The short-term "crop" line has maximum credit available of
$10,500,000 and is intended to finance the Company's anticipated working capital
needs through early 1998. This crop line expires on June 5, 1998 and replaces
the lines of credit in place at December 31, 1996 which totaled $3,900,000. The
increased levels of borrowing by the Company are primarily due to: (i)
approximately 374 additional vineyard acres which are being planted by the
Company; (ii) repayment of indebtedness of $1,000,000 to Alfred G. Scheid; (iii)
certain distributions of approximately $3,505,000; (iv) capital equipment
expenditures of approximately $500,000; and (v) anticipated expenditures of
approximately $500,000 due to expansion of the Company's wine inventory. See
"The Company--S Corporation Conversion." SVI also has a long-term credit line
which expires on July 5, 2005 and provides for a maximum borrowing of $2,786,000
diminishing annually through the expiration date to a maximum allowable
commitment of $1,071,000. As of the date of this Prospectus, the outstanding
amount owed by the Company is the maximum allowable commitment. The annual
interest rates on these lines are based on the bank's "reference rate" and
ranged from 8 1/2% to 9% at December 31, 1996.
On June 25, 1997, the Company replaced notes payable totaling $1,722,000
with two long-term credit lines which provide for maximum aggregate borrowings
of $4,285,000, diminishing annually to a maximum aggregate allowable commitment
of $2,361,000 which is due on June 4, 2007. In addition, on June 23, 1997, the
Company borrowed on a short-term note payable of $3,000,000 with an expiration
date of September 5, 1997. The net proceeds from the credit lines and the
short-term note payable were used to acquire a 370-acre vineyard known as
Riverview Vineyard on June 26, 1997 for a total purchase price of approximately
$5,500,000. The Company intends to refinance the short-term note payable to a
long-term note prior to its due date.
The Company also has other long-term notes payable which, as of March 31,
1997, totaled approximately $9,359,000. These notes are primarily secured by
deeds of trust, leasehold interests or equipment and have interest rates based
on the bank's reference rate plus 1/4% to 1 1/4%.
25
<PAGE>
Management expects that capital requirements will expand significantly to
support expected future growth and that this will result in additional borrowing
under credit lines and/or new arrangements for term debt. The Company's planned
new vineyard developments are expected to require approximately $8,400,000 in
capital investment over the next three years and continued improvements of
existing vineyards are expected to require approximately $4,000,000. Management
believes it should be able to obtain long-term funds from its present lender,
but there can be no assurance that the Company will be able to obtain financing
when required or that such financing will be available on reasonable terms.
Cash provided by operating activities for the years ended December 31, 1996
and 1995, generated $4,461,000 and $2,287,000, respectively. The increase was
primarily a result of increased net income. Cash used in operating activities
for the quarters ended March 31, 1997 and 1996, was $4,863,000 and $1,194,000,
respectively. The increase in cash used was primarily a result of a $2,161,000
receivable from the Company's principal stockholder resulting from advances
related to SVI-Cal's S Corporation status and the repayment of short-term notes
payable.
Cash used in investing activities increased for the year ended December 31,
1996 to $5,962,000 from $2,454,000 in 1995. The increase was principally the
result of a long-term receivable of $2,233,000 and additions to property, plant
and equipment. The long-term receivable is for the costs incurred for the
development of certain vineyards owned by Heublein. Heublein is obligated to
advance budgeted costs to the Company on a monthly basis and has provided a
letter of credit to secure repayment. The original management agreement with
Heublein called for the expenditure of approximately $5,600,000 over a
three-year period, such contract amended subsequent to December 31, 1996 to an
expenditure amount of approximately $7,500,000. The amended contract calls for
the repayment of the loan and concurrent reduction of the long-term receivable
in six annual installments beginning January 5, 2000. Cash used in investing
activities increased for the quarter ended March 31, 1997 to $1,987,000 from
$824,000 for the same period in 1996. The increase was principally the result of
a further increase of $566,000 in the long-term receivable due from Heublein
described above and additions to property, plant and equipment.
Cash provided by financing activities was $1,966,000 for the year ended
December 31, 1996. This was an increase from 1995 of $3,178,000. The increase
reflects $7,267,000 of proceeds from long-term debt (which includes borrowings
of $2,233,000 under the Heublein arrangement), reduced by $4,832,000 of
repayments on long-term debt in 1996. In the prior year, the Company borrowed
$5,040,000 in long-term debt and repaid $5,867,000. Cash provided by financing
activities was $3,029,000 for the quarter ended March 31, 1997. This was an
increase from the same period in 1995 of $3,390,000. The increase reflects
$3,029,000 of proceeds from long-term debt, which includes additional borrowings
of $567,000 under the Heublein arrangement.
26
<PAGE>
BUSINESS
OVERVIEW
SVI is a leading independent (I.E., not winery controlled) producer of
premium varietal wine grapes. The Company currently operates approximately 4,950
acres of wine grape vineyards. Of this total, approximately 3,270 acres are
operated for the Company's own account, including the 370-acre Riverview
Vineyard which was purchased by the Company on June 26, 1997, and 1,680 acres
are operated under management contracts for others. All of the properties
currently operated by the Company are located in Monterey and San Benito
Counties in California, both of which are generally recognized as excellent
regions for growing high quality wine grape varieties.
The Company currently produces 14 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon, Chenin Blanc, Gewurztraminer
and Sauvignon Blanc. The Company believes that its customers contract with SVI
to assure a consistent, reliable source of high-quality premium grapes for their
wines. The Company's two largest winery customers are Canandaigua Wine Company,
Inc. ("Canandaigua") and Heublein, Inc., a subsidiary of Grand Metropolitan, plc
("Heublein"), the second and sixth largest U.S. wineries in terms of 1996 case
shipments, respectively. These customers' labels include GLEN ELLEN, BEAULIEU
VINEYARD, BLOSSOM HILL, CHRISTIAN BROS., INGLENOOK, PAUL MASSON, ALMADEN, DEER
VALLEY, DUNNEWOOD, and TAYLOR CALIFORNIA CELLARS. Grape purchase contracts with
Heublein cover 77% of the Company's acreage and accounted for approximately 84%
of the Company's 1996 total revenues.
The Company also has long-term grape purchase agreements with other
well-known producers of ultra premium wines, including The Chalone Wine Group,
Ltd., The Hess Collection Winery, Joseph Phelps Vineyards, and Independence Wine
Company. The terms of the Company's long-term grape purchase contracts extend to
between 2001 and 2013, and have "evergreen" provisions requiring two or three
years prior written notice of termination. These contracts generally require the
customers to purchase substantially all of the Company's production from
specified vineyards at a formula price based upon the previous harvest year's
sales prices in California's leading coastal regions, including Napa, Sonoma,
Mendocino and Monterey Counties.
The Company believes that selling its production through long-term contracts
allows it to attain reliable sources of revenues and profits not available
through sales on the yearly spot market or short-term contracts with wineries.
This, in turn, has allowed the Company to implement long-term programs for
upgrading vineyard productivity, increasing product quality and mechanizing its
field operations. Because increased yields per acre do not significantly
increase the Company's costs of operating vineyards, productivity improvements
contribute substantially to gross profits. The Company has increased its yields
of higher value and better quality wine grapes in recent years through a
continuing redevelopment and improvement program begun in 1993, and anticipates
continued increases in average yields until its redeveloped vineyards reach full
maturity.
The Company's strategic objective is to become the leading independent
producer of premium varietal wine grapes in California. In furtherance of this
strategy, the Company recently leased, for a term of up to 50 years, 207 acres
of open land which is currently being planted into premium varietal wine grape
vineyards, and executed an option to lease, for up to 50 years, approximately
450 additional acres which it intends to begin developing in 1998. Due to the
significant capital required to own and operate vineyards and what the Company
believes to be the demographic structure of wine grape vineyard ownership in
California, SVI believes there are significant opportunities for growth of its
business through additional acquisitions. The Company plans to utilize a portion
of the net proceeds of this offering to purchase existing vineyards and purchase
or lease land that is suitable for vineyards in Monterey County and other
regions of California.
27
<PAGE>
CALIFORNIA WINE AND GRAPE INDUSTRY
WINE CONSUMPTION
Table wines are still (I.E., nonsparkling) wines usually containing less
than 14% alcohol and are generally consumed with food or as cocktails. Table
wines represent about 84% of total U.S. wine consumption, with dessert and
sparkling wines accounting for most of the remaining 16%. Table wines are
characterized as either "non-varietal" or "varietal." Non-varietal, also
referred to as "generic" or "jug" wines include wines named after the European
regions where similar types of wines were originally produced (E.G., Burgundy),
as well as wines labeled simply red or white and relatively small quantities of
niche products and proprietary blends. Generic wines are packaged primarily in
large-size containers (E.G., three, four and five liter sizes) and usually
retail for less than $3.00 per equivalent 750 ml. unit. Varietal wines are those
named for the grape that comprises the principal component of the wine (E.G.,
Chardonnay), are generally considered "premium" wines and typically retail for
more than $3.00 per 750 ml. unit. The premium category often is divided by the
wine trade into three major segments: "popular premium" wines, which retail for
between $3.00 and $7.00 per 750 ml. unit; "super premium" wines, which retail
for between $7.00 and $14.00 per 750 ml. unit; and "ultra premium" wines, which
retail for $14.00 and over per 750 ml. unit. The Company's grapes are generally
used to produce popular premium and super premium wines, while its own limited
wine production is aimed at the ultra premium level. Chardonnay, Cabernet
Sauvignon, Sauvignon Blanc, Merlot and Zinfandel are among the most popular
California premium varietal table wines. The table below shows 1996 California
premium table wine shipments by category, as estimated by Gomberg, Fredrikson &
Associates.
1996 CALIFORNIA PREMIUM WINE SHIPMENTS BY MARKET SEGMENT
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED
CASES SHIPPED (1) WINERY REVENUES
-------------------------------------------------------------------
----------------------
RETAIL PRICE MILLIONS
MARKET SEGMENT PER 750 ML. UNIT MILLIONS % ($) %
- ------------------------------------------------------- ------------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Ultra premium.......................................... $ 14.00 and over 3.4 6% $ 380 13%
Super premium.......................................... $ 7.00 to $14.00 12.7 22% 990 34%
Popular premium........................................ $ 3.00 to $7.00 41.4 72% 1,570 53%
--- --- ----------- ---
Total premium wine................................. 57.5 100% $ 2,940 100%
--- --- ----------- ---
--- --- ----------- ---
</TABLE>
- ------------------------
Source: Gomberg, Fredrikson & Associates.
(1) A case of twelve 750 ml. units contains nine liters or approximately 2.38
gallons.
The market for California premium varietal table wines has grown
significantly over the last 17 years. Since 1980, unit sales of these California
wines have increased at a 14% compound annual rate from approximately 6.6
million nine-liter cases to approximately 57.5 million nine-liter cases in 1996,
according to Gomberg, Fredrikson & Associates. During the same time period,
premium wine revenues grew at an 18% compound annual rate to approximately $2.9
billion, or approximately 67% of total California table wine sales of
approximately $4.3 billion, in 1996. Approximately 90% of all wines made in the
United States and 76% of all table wine consumed in the United States are made
in California. The following chart shows estimated revenues for California
premium and jug wines since 1980.
28
<PAGE>
CALIFORNIA PREMIUM AND JUG WINE REVENUES FROM 1980 TO 1996
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
1980 1981 1982 1983 1984 1985 1986 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Jug Wine Revenues (millions of $) $ 930 $ 1,022 $ 1,053 $ 1,031 $ 984 $ 905 $ 876 $ 848
Premium Wine Revenues (millions of $) $ 211 $ 269 $ 318 $ 337 $ 478 $ 572 $ 750 $ 891
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995
<S> <C>
Jug Wine Revenues (millions of $) $ 841 $ 858 $ 922 $ 1,076 $ 1,154 $ 1,150 $ 1,209 $ 1,242
Premium Wine Revenues (millions of $) $ 1,094 $ 1,204 $ 1,392 $ 1,616 $ 1,883 $ 2,002 $ 2,224 $ 2,518
<CAPTION>
1996
Jug Wine Revenues (millions of $) $ 1,310
Premium Wine Revenues (millions of $) $ 2,942
</TABLE>
- ------------------------
Source: Estimated by Gomberg, Fredrikson & Associates.
The growth in California premium wine revenues reflects, among other things,
an increase in U.S. per capita consumption of premium California table wines
from 0.2 gallons in 1986 to 0.5 gallons in 1996. During the same period, per
capita consumption of all California table wines increased from 1.1 gallons to
1.2 gallons and U.S. per capita consumption of all table wines (domestically
produced and imported) increased from 1.5 gallons to 1.6 gallons. These data may
be indicative of both increased wine consumption and increased popularity of
California premium wines among wine drinkers.
Notwithstanding the growth in table wine sales and per capita consumption,
industry reports indicate that approximately 88% of all table wine sold in the
U.S. is still consumed by only 16% of the adult population between the ages of
21 and 59. Accordingly, the Company perceives significant room for growth in
sales of California table wines, including premium wines.
GRAPE DEMAND AND SUPPLY
GRAPE DEMAND FACTORS. The demand for premium wine grapes is driven by the
demand for premium wine. The Company believes that the growth in the wine market
and shifts in consumer preferences from generic to premium categories reflect
several factors, including medical studies linking possible health benefits to
moderate wine consumption, growing awareness and interest in wines, especially
by adults over 30 years of age, greater consumer education with respect to
higher quality wines and general consumer preferences. The results of recent
studies, including research conducted at Brigham and Women's Hospital and
Harvard Medical School published in THE NEW ENGLAND JOURNAL OF MEDICINE and THE
COPENHAGEN HEART STUDY, have indicated there may be positive health benefits
associated with moderate consumption of wine. These studies have been reported
in the news, including the November 1991 and November 1995 CBS television 60
MINUTES broadcasts concerning the "French Paradox," which suggested that
moderate red wine consumption may reduce the risk of heart disease. The paradox
focused on the lower incidence of heart disease among the French, compared to
Americans, despite a French diet that includes cheese and other rich foods. In
addition, revised dietary guidelines issued by the U.S. Department of
Agriculture currently state that moderate wine drinking is associated with a
lower risk of heart disease for some individuals. More recently, studies have
been published that confirm a more favorable mortality profile for moderate
29
<PAGE>
male wine drinkers compared to nondrinkers (the Physician's Health Study from
Harvard University), and that resveratrol, a compound found in wine, inhibits
processes that result in the formation and spreading of cancerous tumors
(University of Illinois). These reports and others like them are believed to
have contributed to recent increases in the consumption of premium wines.
Changes in consumer perceptions of the potential health benefits of wine,
however, could have an adverse effect on the demand for wine and result in a
reduction in wine grape prices.
Wine grapes are produced in many regions in California. The climate of the
coastal valleys, extending approximately 500 miles from Mendocino County in the
north to Santa Barbara County in the south, is characterized by warm days and
cool nights moderated by proximity to the Pacific Ocean. These are excellent
conditions for production of high quality varietal wine grapes. Monterey County,
the Company's focus of operations, is located approximately in the middle of
this area. In contrast, the inland areas of California have more extreme summer
heat conditions and are less well-suited to the production of high quality
varietals. Wine grapes produced in those areas are generally better suited for
use as generic wines or inexpensive premium wines. Consequently, the prices of
the premium varieties produced in the inland regions are lower than the prices
of the same varieties produced in the coastal regions. For example, according to
the California Department of Food and Agriculture (the "CDFA") the weighted
average price in 1996 for Chardonnay grapes purchased and crushed for wine was
$1,543 in Napa County and $1,421 in Monterey County, compared to a range from
$687 to $773 in the inland area known as the San Joaquin Valley, and the 1996
weighted average prices per ton of all wine grapes purchased and crushed ranged
from $1,020 to $1,510 in the eight coastal districts, compared to a range from
$278 to $899 in California's remaining nine grape producing districts. The
following table shows production and prices for grapes crushed for wine in
California's 17 grape producing districts.
30
<PAGE>
GRAPES PURCHASED AND CRUSHED IN CALIFORNIA IN 1996 (1)
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TONS OF GROWER RETURN
GRAPES % OF GRAPES PER TON
DISTRICT REGION CRUSHED CRUSHED PURCHASED (2)
- ----------- ---------------------------------------------------------------- ----------- ----------- -------------
<C> <S> <C> <C> <C>
1 Mendocino County................................................ 44,023 2.3% $ 1,175
2 Lake County..................................................... 9,297 0.5 1,023
3 Sonoma & Marin Counties......................................... 89,675 4.8 1,359
4 Napa County..................................................... 67,586 3.6 1,510
5 Solano County................................................... 8,202 0.4 1,020
6 San Francisco Bay Area Counties (3)............................. 7,445 0.4 1,257
7 Monterey and San Benito Counties................................ 76,462 4.1 1,144
8 South Central Coast (4)......................................... 50,881 2.7 1,138
9 Northern Sacramento Valley (5).................................. 24,335 1.3 445
10 Sierra Foothills (6)............................................ 9,766 0.5 868
11 San Joaquin and Sacramento Counties (7)......................... 263,401 13.9 628
12 Northern San Joaquin Valley (8)................................. 228,300 12.1 392
13 Central San Joaquin Valley (9).................................. 719,712 38.1 278
14 Southern San Joaquin Valley (10)................................ 256,103 13.6 289
15 Los Angeles and San Bernardino Counties......................... 2,508 0.1 569
16 Orange, Riverside, San Diego and Imperial Counties.............. 6,253 0.3 899
17 Southern Yolo County............................................ 24,642 1.3 687
----------- -----
Statewide Totals................................................ 1,888,591 100.0%
----------- -----
----------- -----
</TABLE>
- ------------------------------
Source: CDFA, Final 1996 Grape Crush Report.
Note: Districts are shown on the Location Map located on the inside front cover
of this Prospectus.
(1) This table includes tonnage of all grapes purchased for wine, concentrate,
juice, vinegar and beverage brandy by California processors. Grapes pooled
by cooperatives, grown by processors and used for their own wine production
and crushed to growers' accounts are not included.
(2) Weighted average grower return per ton represents the weighted average
price per ton (delivered basis) of all tonnage purchased for wine,
concentrate, juice, vinegar and beverage brandy by California's processors
from annual crops.
(3) Alameda, Contra Costa, Santa Clara, San Francisco, San Mateo and Santa Cruz
Counties.
(4) Santa Barbara, San Luis Obispo and Ventura Counties.
(5) Northern portion of Yolo and Sacramento Counties, and Del Norte, Siskiyou,
Modoc, Humboldt, Trinity, Shasta, Lassen, Tehama, Plumas, Glenn, Butte,
Colusa, Sutter, Yuba and Sierra Counties.
(6) Nevada, Placer, El Dorado, Amador, Calaveras, Tuolumne and Mariposa
Counties.
(7) Northern portion of San Joaquin County and southern portion of Sacramento
County.
(8) Southern portion of San Joaquin County and Stanislaus and Merced Counties.
(9) Madera and Fresno Counties, northern portions of Tulare and Kings Counties
and Alpine, Mono and Inyo Counties.
(10) Kern County and southern portions of Kings and Tulare Counties.
The most important coastal wine grape districts in terms of price and tons
purchased are districts one through eight, as shown in the preceding table.
While, to some extent, grapes from all districts compete, SVI considers the
eight coastal regions to be its primary competitive environment and intends to
focus its acquisition strategy on these areas. See "--New Vineyards." The
following chart shows recent production and price history for these eight
districts.
31
<PAGE>
GRAPES PURCHASED AND CRUSHED AND AVERAGE PRICES RECEIVED
IN EIGHT COASTAL DISTRICTS FROM 1992 TO 1996
<TABLE>
<CAPTION>
1992 1993 1994 1995
------------------------ ------------------------ ------------------------ -----------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
GROWER GROWER GROWER
TONS RETURN PER TONS RETURN PER TONS RETURN PER TONS
DISTRICT REGION PURCHASED TON ($) PURCHASED TON ($) PURCHASED TON ($) PURCHASED
- ------------- ----------------------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Mendocino County....... 50,063 $ 724 49,079 $ 679 36,841 $ 727 47,507
2 Lake County............ 7,860 723 8,782 697 6,554 709 8,511
3 Sonoma and Marin
Counties............. 104,244 980 99,548 935 107,099 980 95,191
4 Napa County............ 81,564 1,218 69,082 1,175 79,742 1,198 70,497
5 Solano County.......... 7,849 634 7,135 591 9,638 626 9,835
6 SF Bay Area Counties... 5,475 909 5,206 850 5,220 854 5,554
7 Monterey and San Benito
Counties............. 68,567 762 81,476 753 67,008 762 51,017
8 South Central Coast.... 44,182 819 59,192 778 49,263 784 47,571
----------- ----------- ----------- -----------
Total Tons Purchased
and Weighted Average
Grower Return Per
Ton.................. 369,804 $ 924 379,500 $ 869 361,365 $ 918 335,683
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
<CAPTION>
1996
------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
GROWER GROWER
RETURN PER TONS RETURN PER
DISTRICT TON ($) PURCHASED TON ($)
- ------------- ----------- ----------- -----------
<S> <C> <C> <C>
1 $ 886 44,023 $ 1,175
2 817 9,297 1,023
3
1,122 89,675 1,359
4 1,282 67,586 1,510
5 748 8,202 1,020
6 937 7,445 1,257
7
882 76,462 1,144
8 851 50,881 1,138
-----------
$ 1,026 353,571 $ 1,268
-----------
-----------
</TABLE>
- ------------------------
Source: CDFA, Final 1992-1996 Grape Crush Reports.
GRAPE SUPPLY FACTORS. The supply and price of available grapes are subject
to considerable fluctuations caused by, among other things, poor weather
conditions, such as excessive rain, drought, frost, excessive heat and prolonged
periods of cold weather, and phylloxera infestation. The California wine
industry has recently experienced a shortage of grapes due to growth in consumer
demand which has outpaced supply increases because of insufficient plantings of
grapes in the late 1980s, acreage taken out of production due to phylloxera
infestation and reduced yields due to below average weather conditions during
the growing seasons in 1995 and 1996. These factors have led to substantial
price increases for wine grapes, including those produced by the Company. The
Company believes that these conditions may continue for the next two to three
years because new vineyards planted in recent years in response to this supply
shortfall take four to six years to reach full levels of production. However,
due to unpredictable factors such as consumer demand and foreign competition, no
assurances can be given that grape prices will sustain recent levels.
Phylloxera infestation has had, and is expected to have in the future, a
significant impact on the California wine industry. Phylloxera is a tiny louse
that feeds on the roots of non-resistant vines, generally rendering them
unproductive within a few years following initial infestation. Approved
pesticides, most notably Furadan-TM- and Enzone-TM-, do not eliminate, but only
kill part of the phylloxera population, thus reducing the speed with which it
spreads. See "Risk Factors--Agricultural Risks." The only reliable, long-term
solution is to remove infested vines and replant them with phylloxera-resistant
rootstock. Phylloxera infestation has been widespread in Napa, Sonoma, Mendocino
and Monterey Counties, and most of the other wine grape producing areas in
California are affected to some degree. Of the Company's approximately 3,026 net
vine acres of wine grapes, approximately 2,264 net vine acres, or 75%, are
planted or interplanted with phylloxera-resistant rootstock.
PRODUCTION AND MARKETING OF CALIFORNIA PREMIUM WINE AND GRAPES
The most popular California premium wine varieties include Chardonnay,
Cabernet Sauvignon, Sauvignon Blanc and Merlot. According to estimates by
Gomberg, Fredrikson & Associates, case shipments for these varietal wines in
1996 were 22.5 million, 10.8 million, 4.8 million and 4.7 million cases,
respectively. Varietal grapes grown in the coastal wine grape producing
districts of California
32
<PAGE>
tend to have sugar, flavor and other characteristics that allow wineries to make
wines that consumers value more highly than varietal wines produced with grapes
from other regions of the state.
The California grape production industry is highly fragmented and consists
of several thousand vineyard owners. Most wine grape producers have small,
privately owned operations and sell their production to wineries, often at spot
market prices from year to year. To supplement the grapes they buy from
independent producers, many wineries also own or lease vineyards to supply some
of their grape needs. Certain major wineries, such as Robert Mondavi, are large
grape producers and produce a significant proportion of the grapes they need to
make wine. There are no published data regarding ownership or contractual
relationships in the California wine grape production industry and individual
holdings of properties are not publicly reported. However, the Company believes
it is one of the largest independent producers of premium wine grapes in
California, and that there are approximately four or five independent producers
of comparable size.
California wine is produced and marketed by approximately 800 commercial
wineries. However, seven wineries, E&J Gallo, Canandaigua, The Wine Group,
Sutter Home, Sebastiani, Robert Mondavi and Heublein, accounted for
approximately 77% of total California wine shipments in 1996. The Company
historically has been, and currently is, a supplier to Heublein and Canandaigua.
In 1996, Heublein was the sixth largest winery in terms of case shipments, and
its brands include GLEN ELLEN, BEAULIEU VINEYARD, BLOSSOM HILL and CHRISTIAN
BROS. Canandaigua was the second largest winery in 1996, and its brands include
DEER VALLEY, DUNNEWOOD, TAYLOR CALIFORNIA CELLARS, INGLENOOK, PAUL MASSON and
ALMADEN. The Company believes its relationships with Heublein and Canandaigua
have contributed significantly to its success.
COMPANY STRATEGY
The Company's strategic objective is to become the leading independent
producer of premium varietal wine grapes in California. The Company believes
that its success to date has resulted from execution of a coherent strategy that
includes the following elements:
PRODUCE HIGH VALUE PREMIUM WINE GRAPES. The Company has consistently
emphasized production of high value wine grapes that its customers can use
to produce premium varietal wine. These varieties principally include
Chardonnay, Cabernet Sauvignon and Merlot, in addition to other varieties
that command premium prices. Throughout its history, SVI has consistently
provided its customers with wine grapes that meet demanding specifications
for quality, as measured by sugar content and other objective
characteristics. The Company maintains an ongoing program of grafting,
replanting and new vineyard development to conform its product mix to take
advantage of trends in the wine industry. The Company believes it has
developed an excellent reputation in the grape producing industry due to its
emphasis on quality and performance. See "--The Company's Grape Production
Operations--Grape Production."
CONTINUE LONG-TERM RELATIONSHIPS WITH LEADING WINE PRODUCERS. The
Company has had grape purchase contracts with Heublein and its predecessors
since 1972 and with Canandaigua and its predecessors since 1979. More
recently, SVI has begun contracting for grape sales to smaller wineries with
reputations for producing excellent wines such as The Chalone Wine Group,
Ltd., Joseph Phelps Vineyards and The Hess Collection Winery. Substantially
all of the Company's production is contracted at least through the harvest
of 2001, and the majority is contracted at least through the harvest of 2006
with pricing arrangements the Company considers favorable. See "--The
Company's Grape Production Operations--Grape Sales." The Company believes
that its utilization of long-term contracts allows it to build long-term and
mutually beneficial relationships with its customers and attain reliable
sources of revenues not readily available to producers relying on the yearly
spot market or short-term contracts with wineries.
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<PAGE>
MAXIMIZE REVENUES AND PROFITABILITY PER ACRE. The Company consistently
invests in new equipment and the development of new and improved
viticultural practices in order to increase the productivity and efficiency
of its vineyards. These practices include methods of interplanting grape
vines to increase vine density, new trellising systems designed to support
more grape production while maintaining quality, and other state-of-the-art
vineyard practices that facilitate increased production and mechanization.
Because increased yields per acre do not significantly increase fixed or
variable costs of operating vineyards, productivity improvements contribute
substantially to gross profits. Due to its continuing redevelopment and
improvement program begun in 1993 on approximately 1,900 acres, the Company
believes that much of its acreage now produces significantly more higher
value and better quality grapes. See "--The Company's Grape Production
Operations--Viticultural Practices" and "--Property Development and Capital
Investment."
ACQUIRE HIGH QUALITY VINEYARD PROPERTIES. The Company has developed a
disciplined property acquisition strategy in order to increase its
productive capacity and leverage its available management and equipment
resources. Due to the significant capital required to own and operate
vineyards and the demographic structure in the California wine grape
industry, SVI believes that there may be significant opportunities for
acquisitions of existing vineyards. The Company plans to capitalize on the
experience and reputation of its senior management to purchase existing
vineyards and purchase or lease, for terms of up to 50 years, land that is
suitable for vineyards in Monterey County and other regions in California.
See "--New Vineyards."
THE COMPANY'S GRAPE PRODUCTION OPERATIONS
VINEYARD OPERATIONS
SVI currently owns or manages approximately 4,950 acres of wine grape
vineyards in Monterey and San Benito Counties. These properties consist of
approximately 3,270 acres in Monterey County operated for the Company's own
account (including the 370-acre Riverview Vineyard purchased by the Company on
June 26, 1997 and approximately 207 new acres currently under development in
Hames Valley) and approximately 1,680 acres operated under management contracts
for others (including approximately 445 acres being developed in Hames Valley).
As shown in the table below, the Company leases the underlying land for certain
of its vineyards. Of the Company's approximately 3,026 net vine acres of wine
grapes, approximately 2,050 net vine acres, or 68%, have been contracted for
sale to Heublein under long-term grape purchase contracts, approximately 300 net
vine acres have been contracted for sale to other winery clients, including
Canandaigua, The Hess Collection Winery and The Chalone Wine Group, Ltd.,
approximately 320 net vine acres represent newly developed acreage which was
planted by the Company in 1996 and 1997, and approximately 357 net vine acres
represent the Company's recent Riverview Vineyard acquisition. In addition, the
Company has acquired an option to lease an additional 450 acres in Hames Valley,
which it intends to begin developing with premium varietal wine grapes in 1998.
See "Location Map," "--New Vineyards--The Hames Valley Properties," and "--New
Vineyards--Riverview Vineyard." The following table sets forth a description of
the Company's vineyards and the wine grape varieties planted thereon.
34
<PAGE>
THE COMPANY'S VINEYARD PROPERTIES
<TABLE>
<CAPTION>
APPROXIMATE PROPERTY
VINEYARD NAME ACRES INTEREST (1) VARIETIES
- ---------------------------- ------------- ---------------- -------------------------------------------------
<S> <C> <C> <C>
Scheid Vineyard............. 352 Land Lease(2) Chardonnay, Cabernet Sauvignon, Merlot, Chenin
Blanc, Gewurztraminer, Napa Gamay, Sauvignon
Blanc
Viento Vineyard............. 231 Owned Chardonnay, Merlot, Gewurztraminer, White
Riesling
Baja Viento Vineyard........ 175 Owned Chardonnay, Merlot, Sauvignon Blanc
Central Avenue Vineyard..... 264 Owned Chardonnay, Merlot, Chenin Blanc, Gewurztraminer,
Sauvignon Blanc
Hacienda Vineyard........... 147 Owned Chardonnay, Cabernet Sauvignon, Merlot,
Gewurztraminer, Napa Gamay, Sauvignon Blanc,
Zinfandel
Elm Avenue Vineyard......... 67 Owned Chardonnay
Pueblo Vineyard............. 90 Owned Chardonnay
El Camino Vineyard.......... 47 Owned Chardonnay, Zinfandel
Wild Horse Vineyard......... 446(3) Owned Chardonnay, Cabernet Sauvignon, Merlot, Grenache,
Zinfandel
Riverview Vineyard.......... 370 Owned(4) Chardonnay, Pinot Noir, White Riesling, Semillon,
Souzao
San Lucas Vineyard.......... 874 Land Lease(5) Chardonnay, Cabernet Sauvignon, Merlot, Sauvignon
Blanc, Syrah
Hames Valley................ 207(6) Land Lease(7) Rootstock planted in 1997 and varieties to be
determined in 1998
-----
Total................... 3,270
-----
-----
</TABLE>
- ------------------------------
(1) All of the real property owned and leased by the Company is encumbered by
deeds of trust to secure indebtedness.
(2) The initial term of this land lease expires on October 31, 2002, and SVI has
an option to extend it for an additional 20 years.
(3) 28 acres of this vineyard are leased to Joseph Phelps Vineyards and managed
by the Company.
(4) Acquired by the Company on June 26, 1997.
(5) Comprised of two land leases with the initial term of 707 acres expiring on
November 30, 2009 and the initial term of 167 acres expiring on December 31,
2026. SVI has an option to extend either or both leases for an additional 20
years.
(6) The Company has an option to lease an additional 450 contiguous acres for up
to 50 years, which it plans to begin developing in 1998.
(7) The initial term of the land lease for the 207 acres already leased and the
450 acres subject to lease option expires on December 31, 2026, and SVI has
an option to extend it for an additional 20 years.
GRAPE PRODUCTION
SVI's tons per acre and overall yields of higher value varieties (E.G.,
Chardonnay and Merlot) have increased in recent years due to, among other
factors, changes in product mix through grafting, replanting, increased vine
density and improvements in wine grape production technology and know-how. See
"--Viticultural Practices." In 1993, the Company began a major improvement and
refurbishment program and took many acres out of production temporarily in order
to graft or replant new
35
<PAGE>
rootstock. This planned decline in grape production, along with poor weather,
caused grape sales revenues for 1993 and 1994 ($10.9 million and $9.4 million,
respectively) to be lower than they otherwise would have been and resulted in a
significant decline in tonnage produced through 1996. In 1996, as replanted
acreage started to mature, production of high value premium varieties increased.
The Company believes that its production of high value wine grapes in these
vineyards will continue to increase for the next few years as replanted and
interplanted vines continue to mature. However, actual grape production varies
according to the variety of grape produced, vine density, the quality and type
of soil, water conditions, weather and other factors and no assurances can be
given that such production increases will occur with any predictability or at
all. See "Risk Factors--Agricultural Risks." The following table shows SVI's net
vine acres by variety from 1993 to 1997 and wine grape tonnage produced by SVI
for 1996.
NET VINE ACRES OWNED BY SVI AND TONS PRODUCED (1)
<TABLE>
<CAPTION>
NET VINE ACRES TONS
----------------------------------------------------- ---------
VARIETY 1993 1994 1995 1996 1997 1996
- ------------------------------------------------------ --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Chardonnay............................................ 552 574 656 756 778 4,045
Merlot................................................ 66 150 307 454 508 1,727
Cabernet Sauvignon.................................... 286 286 286 274 295 1,372
Chenin Blanc.......................................... 350 302 228 187 84 1,055
Sauvignon Blanc....................................... 171 133 133 133 133 816
Gewurztraminer........................................ 103 103 103 103 103 827
Zinfandel............................................. 138 107 107 83 83 324
White Riesling........................................ 183 124 103 83 39 463
Napa Gamay............................................ 39 39 39 39 39 428
Grenache(2)........................................... 49 49 28 28 28 184
Early Burgundy........................................ 34 13 13 -- -- --
French Colombard...................................... 20 -- -- -- -- --
Replants/Grafts(3).................................... 325 436 313 164 205 --
New Acreage(4)........................................ -- -- -- 54 374
--------- --------- --------- --------- ---------
Total Net Vine Acres.............................. 2,316 2,316 2,316 2,358 2,669(1)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
---------
Total Tons Produced............................... 12,734 11,158 8,384 11,241 -- 11,241
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) Does not include the 370-acre Riverview Vineyard acquired by the Company on
June 26, 1997. The underlying land on approximately 1,433 acres is subject
to long-term leases.
(2) Includes 28 acres leased to Joseph Phelps Vineyards and managed by the
Company.
(3) Replants/grafts are acres which are temporarily taken out of production due
to grafting or replanting to change varieties. Acres are deemed to be back
in production in the third crop year.
(4) New acreage represents newly acquired bare ground which the Company began
developing in the year shown.
GRAPE SALES
PRIMARY CUSTOMERS. The wine grape tonnage harvested from the Company's
approximately 3,270 acres is largely subject to grape purchase contracts with a
small number of well-known wine
36
<PAGE>
producing companies. The largest of these contracts, representing approximately
91% of the Company's 1996 grape sales revenues and 84% of the Company's 1996
total revenues, is with Heublein, a subsidiary of Grand Metropolitan, plc, which
is headquartered in the United Kingdom and is one of the world's largest wine
and spirits sales companies. In 1996, Heublein was California's sixth largest
wine producing company with sales of approximately 6.4 million cases of wine.
The Company's contractual relationship with Heublein's predecessor began in 1972
and has been continuous since that time. The Company believes that it is
currently the largest supplier of wine grapes to Heublein. The Company has sales
contracts for substantially all of the balance of its wine grape production with
Canandaigua, the second largest marketer of wine in the United States, and other
wine producers, including The Chalone Wine Group, Ltd., Joseph Phelps Vineyards
and The Hess Collection Winery. The Company also manages, as a contract vineyard
operator, an aggregate of approximately 1,533 acres of wine grapes for Heublein
and Canandaigua. See "--Vineyard Management Contracts."
The terms of the Company's grape purchase contracts generally require the
customers to purchase substantially all of the Company's production from
specified vineyards at a formula price based upon the previous harvest year's
sales prices as reported in the Final Grape Crush Report published by the CDFA.
See "--Pricing." The contracts require the Company to deliver grapes meeting
specified sugar levels and other quality measurements. Substantially all of the
contracts call for payment in full within 30 days of delivery of the crop to the
customer.
The terms of the Company's long-term grape purchase contracts extend to
between 2001 and 2013. Contracts covering most of SVI's acreage extend to 2006
and have "evergreen" provisions whereby the contracts continue until either
party gives a three-year prior written notice of termination. The Company
believes that these evergreen provisions allow it time either to renegotiate the
contract with its contracting customer or to find a new customer for the grape
production before the contract terminates. If these contracts are terminated,
there can be no assurance that the Company will be able to replace Heublein or
Canandaigua as significant purchasers of its grape production or that the
Company will be able to enter into agreements with other purchasers on similar
terms. Termination of these contracts with Heublein or Canandaigua could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has enjoyed excellent relationships with its customers that have
been built over many years of satisfying customer needs for quality, timely
delivery and service. Long-term supply arrangements benefit customers by
providing a significant, reliable supply of high-quality grapes at predictable
prices, and the Company believes that in many respects Heublein and Canandaigua
prefer their supply arrangements with the Company to the purchase of comparable
amounts of grapes on the open market from multiple producers. These contracts
also benefit the Company by providing reliable sources of revenues. SVI believes
that these contracts are one of the major reasons for its past success, and it
plans to rely upon these and similar contracts in the future. While contract
terms are typically a function of market factors and it is not possible to know
what the terms of the Company's future grape purchase arrangements will be, it
is probable that any renewal or replacement of the Company's Heublein and
Canandaigua 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
preliminary basis on February 10, with a final report published on March 10. The
Grape Crush Report discloses the prices, tons and certain quality standards of
all grapes crushed for wine from each of California's 17 wine grape producing
districts in the grape harvest of the previous autumn. The report is relied upon
heavily by wineries and wine grape producers to negotiate contracts and
establish grape prices, as well as by financial and other institutions who serve
the wine industry.
SVI's contract grape prices are established each year by formulas which are
different for each of its customers. However, substantially all of its contracts
utilize a formula which is used to calculate a
37
<PAGE>
price for each wine grape variety based on the previous year's prices in several
specified CDFA reporting districts. For example, grapes from the Company's 1997
harvest, subject to these contracts, will be sold at prices based on the actual
prices for the 1996 harvest reported in the Final Grape Crush Report published
March 10, 1997. This enables both the Company and its customers to know final
grape prices (on a per ton basis by variety) approximately eight months in
advance of each year's harvest. These multiple district formula prices, as
opposed to sales on the short-term spot market, tend to moderate year-to-year
swings in prices. The Company's grape purchase contracts typically utilize
pricing based in part upon prices for Napa, Sonoma and Mendocino County grapes,
which tend to be higher than prices for the same varieties produced in Monterey
County. Renewal or replacement of the Heublein and Canandaigua agreements and
agreements covering new vineyards may result in pricing that may be based more
heavily on Monterey County harvests. The chart below shows the weighted average
prices SVI has received per ton of grapes since 1994 and the prices it will
receive for the 1997 harvest (which will occur in September and October) based
on the pricing formulas of its various contracts.
WEIGHTED AVERAGE PRICES PER TON RECEIVED BY SVI (1)
<TABLE>
<CAPTION>
VARIETY 1994 1995 1996 1997 (2)
- ------------------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Chardonnay.............................................................. $ 1,092 $ 1,060 $ 1,188 $ 1,445
Merlot.................................................................. 1,083 1,090 1,183 1,436
Cabernet Sauvignon...................................................... 1,129 1,113 1,193 1,420
Zinfandel............................................................... 582 623 790 971
Sauvignon Blanc......................................................... 649 682 742 898
Gewurztraminer.......................................................... 590 589 663 823
White Riesling.......................................................... 512 514 624 754
Chenin Blanc............................................................ 417 420 482 666
</TABLE>
- ------------------------------
(1) Does not include the 370-acre Riverview Vineyard acquired by the Company on
June 26, 1997. Prices for premium varieties have increased in recent years
largely as a result of supply and demand conditions. Supply and demand
factors will change over time and there can be no assurance that the prices
received by the Company in the future will continue to increase or will
match or exceed historical prices.
(2) Prices established by formula from the 1996 Final Grape Crush Report
published by CDFA on March 10, 1997, assuming that delivered grapes meet the
quality standards established in the relevant contracts.
VITICULTURAL PRACTICES
The Company continually investigates and experiments to develop enhanced
viticultural practices in order to improve the yields of its vineyards and the
quality of grapes it produces. Innovations developed by SVI over the past ten
years have included new grafting methods, interplanting, new trellis designs and
improved machine harvesting technology. In addition, the Company has
experimented with increased vine densities in order to improve productivity.
The vineyards owned by the Company were originally planted in the early
1970s with 454 vines to the acre, but in recent years wine grape producers and
wineries have found that larger, more reliable production can be achieved by
increasing vineyard density. SVI has increased vine density in approximately
1,750 acres by either removing the acres from production and completely
replanting them at increased densities or interplanting grafted or low vine
density acreage. These replanted, grafted and interplanted acres generally now
range from 709 to 792 vines per acre. The Company believes that these greater
vine densities are well-suited for the climate and local conditions at its
vineyard properties.
38
<PAGE>
The Company frequently uses grafting to change the varieties of grapes it
produces from low value varieties, such as French Colombard, to high value
varieties, such as Chardonnay and Merlot. Since 1994, the Company has grafted
approximately 325 acres of its vineyards, thereby changing the vineyard to a
different variety. SVI has experimented with and adapted to use in vineyards
grafting techniques originally developed in apple orchards. Using this method,
the graft can be more precisely aligned with the vascular tissue of the rooted
vine trunk and the vascular tissue of the grafting stock. This method is
particularly useful when grafting mature vines and provides excellent bonding of
the graft to the trunk, leading to more vigorous growth and a stronger graft
union. The increased vigor encourages more grape production earlier in the
productive life of the vine. While this technique was originally considered
unusual for the wine grape industry, it has proven to be very effective in the
Company's vineyards and has been adopted by others. The Company frequently uses
other commonly accepted and proven grafting techniques on young vines and when
conditions require them.
Interplanting is a process whereby a new rootstock is planted between two
mature vines, thus approximately doubling the vine density per acre. When the
new interplanted rootstock has grown sufficiently (generally one or two years),
it is grafted to the same variety as the mature vines on either side of it. The
interplanted vine will then begin bearing small amounts of fruit after one
additional year and will reach relatively full production in three more years.
The cost of interplanting is far less than planting a new vineyard, and it has
proven to be a very effective means of increasing production of low vine density
vineyards. Due to crowding, it is necessary to prune the vines each pruning
season (December, January and February) in a manner that allows sufficient space
and sunlight for the grapes to ripen at the appropriate time for harvest. The
Company believes that doubling the vine count, in conjunction with certain
trellis changes, increases production approximately 60% in most wine grape
varieties. SVI believes it was a leader in developing this technique and
employed it on hundreds of its acres before it became a widely accepted
practice.
The Company's original vineyards, planted in the early 1970s, had overhead
sprinkler or furrow irrigation, wooden stakes and a two or three-wire vertical
trellis. Over the past eight years all of the Company's vineyards have been
converted to drip irrigation, steel stakes have replaced wood and most acres
have been converted to more complex, multiple wire trellising systems. Drip
irrigation permits the placement of water at the base of each vine in controlled
quantities and time frames with minimal evaporation and weed growth between
rows, and the system is also used to deliver fertilizer and other chemical
treatments to the base of the vines. Steel stakes last longer than wood and
their strength is needed to support a large trellis configuration.
Trellis design and coordinated vine training practices are two key elements
for maximizing production and quality. Improved trellising systems increase per
acre yields by exposing more leaf surface to sunlight and by supporting a larger
crop load. Through several years of experimentation, the Company has developed a
divided canopy trellis system with alternating bilateral cordons. The system
promotes excellent sunlight penetration and is easily machine harvestable. SVI's
divided canopy trellis system is an adaptation from the Geneva Double Curtain
system developed in New Zealand. While both systems provide for even sunlight
penetration on the fruit, the system developed by SVI works well with California
mechanization and machine harvesting practices. Recent advances in machine
harvest technology and complementary techniques and innovations have been
employed on the Company's machine harvesters, which shake fruit off the vines
efficiently with little or no plant injury while maintaining high quality
standards. Vine foliage remains intact for post-harvest growth thereby promoting
vine carbohydrate storage, which is necessary for healthy winter dormancy.
VINEYARD PRODUCTION CYCLE
The vineyard production cycle begins each year in December, after completion
of harvest. From December through March vines are pruned and tied to trellises,
and damaged stakes, trellises, irrigation systems and other vineyard components
are repaired or refurbished. After winter rains end,
39
<PAGE>
irrigation and cultivation of the vineyards begin and continue through the
harvest season. Herbicides are applied as needed through the summer. Necessary
applications of pesticides and fertilizer begin in the spring and continue until
harvest. Grafting and planting also take place in the first four or five months
of the year. As growth of the vines accelerates beginning in late spring, they
are trained and tied, and excess leaves are sometimes pulled to promote more
efficient growth of vines and fruit. Depending on the rate at which fruit
ripens, harvest typically begins in late-August to mid-September and is
completed by the end of October or early November. Direct farming costs range
from $1,500 to $2,500 per acre over the course of the year for vineyards in full
production, and revenues are realized at the time of harvest. Approximately
one-half of annual production costs are incurred by June 30.
PROPERTY DEVELOPMENT AND CAPITAL INVESTMENT
Many factors affect the productive capacity of a vineyard, including
geographic location, age of the vines, variety of grape grown, vine density,
quality and type of soil, water quality and weather conditions. While actual
grape production varies according to the combined effect of these various
factors, certain growth patterns based on the maturity of the vine are generally
accepted by experienced grape producers and have been confirmed by the Company's
experience. Generally, newly planted vines do not produce significant amounts of
fruit for the first three years and grafted vines for the first two years.
During this time, the Company incurs significant development and production
costs that are not offset by revenues from these vineyards and must be financed
from other sources. Newly planted vines that are four to five years of age and
grafted vines that are three to four years of age generally produce grapes in
sufficient quantities to cover production costs and contribute to gross profit.
In 1993, SVI began a major improvement and refurbishment program on its
vineyards in order to increase production and to upgrade its variety mix to
those grapes that are expected to be in greater demand and sell at higher
prices. Since that time, the Company has made capital expenditures in its
vineyards of over $6.0 million through the end of 1996 and is continuing its
improvement and refurbishment program in 1997. From 1993 through 1997, the
Company will have replanted or grafted approximately 995 acres to higher value
varieties and interplanted an additional 870 acres. See "--Net Vine Acres Owned
by SVI and Tons Produced."
The Company's vineyard redevelopment investments during the last four years
were in addition to the Company's original costs of developing its properties.
It has been the Company's experience that it currently costs approximately
$15,000 to $18,000 per acre over a three-year period to develop open land into a
producing premium wine grape vineyard, before taking into account the cost of
land. Accordingly, the Company estimates that the current replacement value of
its existing 3,270 acres is approximately $49.1 to $58.9 million, before cost of
land and ignoring the amount of time necessary to produce grapes economically.
As indicated below, much of the Company's vineyard acreage has not yet
reached full productive capacity. While there can be no assurance that the
Company's properties will achieve their full productive capacity at the rate
indicated, if at all, the Company believes that its existing acreage represents
significant potential for revenue growth. The following table shows current and
anticipated maturity of the Company's vineyards. The table includes the recently
purchased Riverview Vineyard (357 net vine acres) but does not include the 450
acres of undeveloped land located in Hames Valley which the Company has an
option to lease and intends to begin developing in 1998.
40
<PAGE>
MATURITY LEVELS OF SVI'S NET VINE ACRES (1)
<TABLE>
<CAPTION>
CROP YEAR
----------------------------------------------------------------
1996 1997 1998 1999 2000 2001
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Acres five or more years old (at or near full
production)........................................ 1,454 2,019 2,144 2,261 2,425 2,926
Acres three and four years old (partial
production)........................................ 615 343 281 665 602 101
Acres one and two years old (not in production)..... 281 665 602 101 -- --
--------- --------- --------- --------- --------- ---------
Total Acres..................................... 2,350 3,027(2) 3,027 3,027 3,027 3,027
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------------
(1) The net vine acreage shown above is SVI's planted acreage only. It does not
include acreage devoted to roads, storage areas, equipment yards or uses
other than vineyards.
(2) In 1997, SVI purchased a 357 net vine acre vineyard and began development on
approximately 320 additional acres.
If the Company's vineyards (excluding the 450 optioned acres in Hames
Valley) mature consistently with historical experience and no significant
problems are encountered, they should be at or near their full productive
capacity in or about 2002. Therefore, acquisitions of producing vineyards will
be required prior to 2002 to achieve production increases in excess of what the
Company anticipates from its existing vineyards. In addition, acquisitions of
producing vineyards or open land suitable for development into vineyards will be
required to sustain productivity increases after 2002 and moderate any
productivity losses from the Company's existing vineyards due to grafting to new
varieties, replanting with phylloxera-resistant rootstock, and various other
factors that take vineyards out of production from time to time.
NEW VINEYARDS
THE HAMES VALLEY PROPERTIES
The Company has recently leased, for a term of up to 50 years, approximately
207 undeveloped acres and acquired an option to lease approximately 450
additional undeveloped acres in Hames Valley, which is located approximately 45
miles south of the Company's vineyard headquarters and approximately 20 miles
south of the Company's San Lucas Vineyard. The Company is currently planting the
207 leased acres and plans to begin developing the additional 450 acres as
vineyards in 1998. This acquisition is expected to allow the Company to leverage
its existing resources, and it establishes SVI in a region where it believes
additional property suitable for premium wine grape production is available. The
Company intends to secure long-term grape purchase contracts for the grape
production from these new vineyards. There can be no assurance, however, that
the Company will be successful in finding a winery or wineries which will agree
to such long-term wine grape purchase contracts. See "Location Map."
After negotiating its own Hames Valley lease, SVI arranged for Canandaigua
to lease an additional approximately 445 acres in Hames Valley. Pursuant to a
long-term contract with Canandaigua, in 1997 SVI began to develop this acreage
into vineyards that it will manage thereafter for Canandaigua. Under the
contract, SVI receives monthly fees, equipment rental income and, when the
vineyard begins to produce wine grapes, harvest fees. The Company has no
investment in the vineyard because development money and working capital will be
provided by Canandaigua.
41
<PAGE>
RIVERVIEW VINEYARD
On June 26, 1997, the Company acquired a 370-acre vineyard known as
Riverview Vineyard located approximately 12 miles north of SVI's vineyard
headquarters. The purchase price was approximately $5.5 million and was financed
through bank borrowings. The vineyard is planted with several varieties
including approximately 145 acres of Chardonnay and 100 acres of Pinot Noir.
This vineyard is not subject to any long-term grape purchase contracts.
FUTURE VINEYARD ACQUISITIONS AND CAPITAL INVESTMENT
Because of the increasing demand for premium wine, the Company's customers
as well as other wineries have been seeking additional long-term sources of
premium wine grapes. Accordingly, the Company plans to expand its operations,
and it believes that with adequate capital it will have opportunities to obtain
additional properties by acquiring existing vineyards and by developing new
vineyards. The goals of SVI's property acquisition strategy are to increase and
diversify the vineyard assets it manages, to leverage its existing management
and equipment resources, to better serve its customers and develop new customers
by helping them solve their grape supply problems on a long-term basis, and, in
general, to capitalize on the Company's experience in vineyard management and
development.
The Company believes it will have opportunities to acquire existing vineyard
properties due to a number of recent trends in the California wine grape
industry. These include the increase in the scale of operations the Company
perceives as necessary to satisfy the requirements of expanding wineries, large
amounts of capital required to develop and service up-to-date vineyards and what
the Company believes to be the demographic structure of wine grape vineyard
ownership in California. The Company believes that, in comparison, many smaller
property owners do not have the management, know how or access to capital
necessary to own, develop or operate vineyards on a scale that will be
competitive in the long run.
Prior to acquisition of an existing vineyard, the Company plans to evaluate
carefully the size, location and configuration of the property, the varieties
and quantities of the grapes it produces, historical yield patterns, vineyard
density, trellising configurations, irrigation systems, water quality, other
operating assets that are part of the proposed acquisition (E.G., farming
equipment), proximity to other SVI operations and the anticipated cash flow from
the property. Another important consideration in any prospective acquisition of
existing vineyards will be the opportunity to increase revenues by upgrading or
redeveloping the property. The Company's goal is to acquire properties on terms
that will increase earnings. In addition, the Company anticipates that
acquisitions can be structured in several ways, and could include components
such as cash, equity securities, seller financed debt or mortgage debt.
The Company also believes that it can develop new vineyards. Land may be
acquired either through fee-simple purchase or through long-term ground leases.
In connection with new developments, the Company will consider, among other
things, size, location, topography, soil characteristics, the quality, type and
yields of wine grapes produced in the vicinity, access to reliable water supply
and proximity to other Company operations. It has been the Company's experience
that it costs approximately $15,000 to $18,000 per acre in capital expenditures
over a three-year period to develop open land into a producing premium wine
grape vineyard, before taking into account the cost of land. In general, a
vineyard will become partially productive approximately three years after
development has begun and at or near full productivity in approximately five
years.
While the Company is aware of many operating vineyards that could
efficiently be added to the Company's operations and several properties that
would be suitable for future development of vineyards, there can be no assurance
that the Company will acquire additional properties.
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ADDITIONAL OPERATIONAL MATTERS
AGRICULTURAL HAZARDS. Wine grape production is subject to many risks common
to agriculture that can materially and adversely affect the quality and quantity
of grapes produced. These hazards include, among other things, adverse weather
such as drought, frost, excessive rain, excessive heat or prolonged periods of
cold weather. These weather conditions can materially and adversely affect the
quality and quantity of grapes produced by the Company and its profitability.
For example, in 1995 and 1996, poor weather (combined with a planned reduction
in producing acreage for redevelopment during this period) contributed to a
significant decline in the tonnage of grapes produced by the Company. To the
extent a grape producer's properties are geographically concentrated, the
effects of local weather can be material. The vineyards owned by SVI are spread
over a distance of approximately 50 miles, north to south, close to Highway 101
in Monterey County. There can be no assurance that adverse weather in the future
could not affect a substantial portion of the Company's vineyards in any year
and have a material adverse effect on the Company's business, financial
condition and results of operations.
Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields or kill vines. In recent years
phylloxera, a louse that feeds on the roots of grape vines, has infested many
vineyards in the wine grape producing regions of California and caused grape
yields to decrease. Within a few years of the initial infestation, phylloxera
can leave a vine entirely unproductive. Phylloxera infestation has been
widespread in California, particularly in Napa, Sonoma, Mendocino and Monterey
Counties, and most of the other wine grape producing areas of the state are
affected to some degree. Phylloxera infestation can be reduced through use of
the chemical pesticides Furadan-TM- and Enzone-TM-. While Furadan-TM- is still
approved for use in Monterey County, its use is no longer legal in certain other
viticultural regions of California, including Napa, Sonoma and Mendocino
Counties. Furadan-TM- is currently under investigation by the Environmental
Protection Agency which may result in the prohibition of its use. There can be
no assurance that Furadan-TM- will continue to be available as a method of
controlling phylloxera for the Company and, if its use is prohibited in Monterey
County, the Company will rely more on the use of Enzone-TM-. If the use of
Enzone-TM- is prohibited in Monterey County, however, there can be no assurance
that the Company will be able to find a safe, cost-effective alternative.
As a result of this widespread problem, thousands of vineyard acres
throughout the State of California have been replanted with phylloxera-resistant
rootstock or, in some cases, taken out of production completely. It takes
approximately four to five years for a replanted vineyard to bear grapes in
quantities sufficient for profitable operations. The Company estimates that it
currently costs approximately $15,000 per acre to replant vineyards. Of the
Company's approximately 3,026 net vine acres of wine grapes, approximately 2,264
net vine acres, or 75%, are planted or interplanted with phylloxera-resistant
rootstock. The remaining approximately 762 acres are planted on non-resistant
rootstock and are, therefore, potentially susceptible to phylloxera infestation.
The Company is managing the non-resistant acres through application of
Furadan-TM- and a program of selective replantings. There can be no assurance
that the Company's vineyards will not have serious phylloxera infestations in
the future, causing reduced yields and requiring significant investments in
replanting.
Other pests that may infest vineyards include leafhoppers, thrips,
nematodes, mites, insects, orange tortrix, twigbore, microflora and various
grapevine diseases. Pesticides and the selection of resistant rootstocks reduce
losses from these pests, but do not eliminate the risk of such loss. Gophers,
rabbits, deer, wild hogs and birds can also pose a problem for vineyards, and
wine grape vines are also susceptible to certain virus infections which may
cause reduction of yields. None of these currently poses a major threat to the
Company's vineyards, although they could do so in the future and, at that time,
will have the potential to subject the vineyards to severe damage.
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WATER SUPPLY. The Company's vineyards are located in the Salinas Valley
through which flows the Salinas River. The watershed of the Salinas Valley is
from the Ventana Wilderness in the Los Padres National Forest and Santa Lucia
range of coastal mountains. The Salinas River supplies a very large aquifer
which is tapped by agricultural users. In addition, the Salinas River is fed by
two large reservoirs, Lake Nacimiento and Lake San Antonio, which were built
primarily for agricultural water supply purposes to serve the Salinas Valley.
These reservoirs are maintained by the Monterey County Water Resource Agency.
The Company drip irrigates its vineyards from wells located on or near its
vineyards. The quality of the water obtained from the wells is good, and the
wells have proven to be a plentiful and reliable source of water for the
Company's operations, even during the drought years of the late 1980s. The
Company believes its sources of water will be available for the foreseeable
future, but various factors such as drought or contamination could impair the
Company's water supply and adversely affect its business, financial condition
and results of operations.
ENVIRONMENTAL ISSUES
SVI currently maintains 14 above-ground fuel storage tanks on its own
vineyard properties to provide fuel to its various vehicles and machinery. These
tanks have capacities ranging from approximately 500 to 10,000 gallons and are
installed on concrete slabs with catch basins to protect the ground surface from
any inadvertent release. No underground storage tanks are located on the
Company's properties.
The Company'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 to federal and state regulation. To the extent that the Company
stores such chemicals, they are contained in a secured storage facility at the
Company's vineyard headquarters' compound. The most toxic pesticide used by the
Company, Furadan-TM-, is not stored on-site, but is delivered as needed by an
unaffiliated company and applied to the vineyard under the supervision of a
state licensed applicator. The Company also maintains a comprehensive safety
program supervised by the Company's human resources safety director and a
licensed pest control advisor.
VINEYARD MANAGEMENT CONTRACTS
The Company manages, as a contract vineyard operator, approximately 1,684
acres in Monterey and San Benito Counties for four vineyard owners, including
approximately 1,533 acres managed for Heublein and Canandaigua. Pursuant to its
management and harvest contracts, budgeted costs of labor and equipment are
advanced to the Company on a monthly basis and the Company receives management
fees based on the acreage managed and harvested. The Company's vineyard
management contracts generally expire no earlier than the completion of harvest
in years ranging from 2004 to 2012, and otherwise may be terminated by either
party with one or two years' advance notice. In certain cases the Company has
also received fees for financing vineyard improvements, securing property and
designing vineyards. The Company may enter into similar arrangements for other
vineyard properties in the future.
WINE PRODUCTION AND SALES
SVI began 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 wine production with Storrs Winery, a small producer of award
winning wines located in Santa Cruz, California, approximately 50 miles from the
Company's vineyard headquarters' compound. The Company currently subleases space
in a 1,600 square foot building from Storrs Winery, including certain space
dedicated
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for the Company's exclusive use in connection with its winemaking activities. In
1996, the Company obtained a winery license, and a tasting room was opened in
April 1997 at the Company's vineyard headquarters' compound located on U.S.
Highway 101 (a major north-south thoroughfare between San Francisco and Los
Angeles) just south of Greenfield and north of King City in Monterey County.
Production and sales have been limited to date. In 1996, SVI produced
approximately 2,000 cases of ultra premium varietal wines, including Chardonnay,
Cabernet Sauvignon, Merlot and White Riesling, using portions of the Company's
grapes. While its actual wine production will depend on various factors, the
Company currently plans to increase its annual production to approximately 5,000
cases by late 1998. As it increases wine production, the Company intends to
distribute directly through its tasting room, restaurants, clubs and a few
selected retailers. It also intends to offer its wines at discounts from retail
to holders of at least 100 shares of its Class A Common Stock. SVI has not yet
earned a profit on its wine business and cannot predict when, or if, these
operations will become profitable. Further, SVI does not expect its wine
business to have a material impact on sales or earnings in the foreseeable
future. No assurances can be given that wine production and sales ever will be a
major source of profit for the Company.
COMPETITION
Wine grape growing and wine production are extremely competitive. There are
an estimated 800 commercial wineries which produce and market California table
wine, approximately half of which produce fewer than 5,000 cases per year. Seven
wineries account for approximately 77% of sales based on total California wine
shipments in 1996. In addition, there are many sources of supply of wine grapes
in California and in countries outside the United States. At the end of 1995,
approximately 360,000 acres were planted to wine grapes in California according
to the CDFA, and the number of planted acres is growing. Most wine grape
producers have small, privately owned operations and sell their production to
wineries, often at spot market prices from year to year. Quality of production
and yields can vary widely from vineyard to vineyard in the same geographic
area. To supplement the grapes they buy from independent producers, many
wineries also own or lease vineyards to supply some of their grape needs.
Certain major wineries, such as Robert Mondavi, are large wine grape producers
and produce a significant proportion of the grapes they need to make wine.
Substantial vineyard acreage is also owned by other wineries and more is being
developed. There are no published data regarding the size of the wine grape
production industry in California, and holdings of properties are not publicly
reported. However, the Company believes it is one of the largest independent
producers of premium wine grapes in California, and that there are approximately
four or five independent producers of comparable size in terms of acreage.
In addition, there are numerous wine producers in Europe, South America,
South Africa, Australia and New Zealand. All of these regions export wine into
the United States. California grape and wine supply shortages, especially in red
wines, have prompted some domestic national brand marketers to purchase wine
from foreign sources. Most imports are bottled wines; however, some wineries
have imported bulk wine in large tanks for bottling and sale in the United
States. Imports to California for these purposes increased from approximately
279,000 gallons in 1995 to approximately 6 million gallons in 1996. Over 90% of
the bulk wine imported for this purpose came from Chile and France.
TRADEMARKS AND LABELS
The Company has commenced the trademark registration process with respect to
a specific slogan which the Company wishes to use on souvenirs and paraphernalia
to be sold at the Company's wine-tasting room. The Company also has wine labels
approved by BATF, including the SCHEID VINEYARDS and SAN LUCAS VINEYARD brand
names.
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EMPLOYEES AND LABOR RELATIONS
The Company has approximately 53 full-time employees and employs seasonal
and contract labor for vineyard development, pruning, harvesting and other
related tasks during peak seasons. Field labor needs are seasonal, normally
peaking at approximately 280 field workers at harvest, and dropping to a low of
approximately 50 immediately after harvest. The Company also uses contracted
labor for specialized work, such as grafting, and otherwise when necessary.
SVI entered into a two-year contract with the UFW in January 1996. The
contract calls for an increase of approximately 2% in field labor costs through
1997. The Company believes its labor relations are satisfactory. The Company has
never had a walk-out, sit-down, slow-down or strike, and the existing contract
has a "no strike" clause. The Company has, however, been picketed, particularly
during the organizing effort by the UFW and during negotiation of the first
contract in 1995.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
PROPERTIES
CORPORATE HEADQUARTERS. The Company's executive corporate office occupies
approximately 5,685 square feet in Marina del Rey, California under a five-year
lease with Tesh Partners, L.P., a limited partnership of which SVI is the
general partner and four members of the Scheid family are limited partners. See
"Certain Transactions." The lease expires in 1999. The Company believes that its
existing facilities will be adequate to meet the Company's needs for the
foreseeable future. Should the Company need additional space, management
believes it will be able to secure additional space at commercially reasonable
rates.
VINEYARDS. The Company currently owns approximately 1,837 acres of land and
leases approximately 1,433 acres of land underlying its vineyards, all of which
are located in Monterey County, California. See "--The Company's Vineyard
Properties." The four leases to which the Company is a party were entered into
in 1973, 1979, 1996 and 1997, respectively, and each of the land leases has an
initial term of approximately 30 years and options to extend for an additional
20 years. In addition, if the owner of any leased property decides to sell, the
Company has rights of first purchase or first refusal.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below are the names, ages, positions and a brief description of
the business experience of the Company's executive officers and directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------------------------------------------
<S> <C> <C>
Alfred G. Scheid (1)................. 65 Chairman of Board of Directors and Chief Executive Officer
Scott D. Scheid...................... 37 Vice President and Chief Operating Officer and a Director
Heidi M. Scheid (2).................. 34 Vice President Finance, Chief Financial Officer, Treasurer and a
Director
Kurt J. Gollnick..................... 38 Vice President Vineyard Operations
Ernest M. Brown...................... 70 Vice President, Controller and Secretary
John L. Crary (1)(2)(3).............. 43 Director
Robert P. Hartzell (1)(2)(3)......... 63 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Plan Administrative Committee.
ALFRED G. SCHEID, the Company's Chairman and Chief Executive Officer, was
one of the founders of SVI in 1972 and has served continuously as its Chief
Executive Officer since that time. Mr. Scheid has been engaged full-time in the
business of SVI since 1988, when he became the sole owner of the Company. Prior
to 1988, Mr. Scheid had other business affairs outside SVI. Mr. Scheid is a
founder of the California Association of Winegrape Growers, a trade association
that represents the interests of California wine grape producers and has served
as its chairman. He is also a founder of Monterey Wine Country Associates, a
trade association composed primarily of wine grape and wine producers, and has
been an associate member of the Wine Institute, a San Francisco-based trade
organization, for 25 years. Mr. Scheid is a graduate of the Harvard Graduate
School of Business, and is the father of Scott D. and Heidi M. Scheid.
SCOTT D. SCHEID became Chief Operating Officer and a Director of the Company
in 1997. Mr. Scheid joined the Company in 1986 as Vice President and has been
engaged full-time in the business of the Company since that time. Prior to
joining SVI, he was employed as an options trader with E.F. Hutton & Company
Inc. Mr. Scheid holds a B.A. degree in economics from Claremont Mens College and
is a director of Monterey Wine Country Associates.
HEIDI M. SCHEID became the Company's Vice President Finance, Chief Financial
Officer and a Director in 1997. Ms. Scheid joined the Company in 1992 as
Director of Planning after serving as a senior valuation analyst at Ernst &
Young, LLP for two years. Prior to that, she was an associate with Interven
Partners, a venture capital firm. Ms. Scheid holds an M.B.A. degree from the
University of Southern California.
KURT J. GOLLNICK has been the Company's Vice President Vineyard Operations,
since 1997. Mr. Gollnick joined SVI in 1988 as General Manager, Vineyard
Operations. For seven years prior to joining the Company, Mr. Gollnick was a
vineyard manager for Thornhill Ranches of Santa Maria, California, where he
managed 1,200 acres of vineyards. He has served as a director of the California
Association of Winegrape Growers since 1989. Mr. Gollnick has also served as
president of the Central Coast Grape Growers and Monterey Grape Growers
Associations. Mr. Gollnick holds a B.S. degree in agricultural economics from
the California Polytechnic State University, San Luis Obispo.
ERNEST M. BROWN joined the Company in 1972, and at various times has served
as the Company's Vice President, Controller and Secretary. Mr. Brown currently
holds all three of these positions.
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Mr. Brown is a licensed certified public accountant and was formerly a partner
with the accounting firm of Lee, Sperling, Brown and Hisamune.
JOHN L. CRARY became a Director of the Company in 1997. Since 1988 Mr. Crary
has been a corporate financial advisor and venture capital investor active with
companies in the agricultural, bioscience and energy industries. From 1980 to
1988 Mr. Crary was an investment banker in the corporate finance department of
E.F. Hutton & Company Inc. Mr. Crary has been a consultant to SVI and its
predecessors since 1993 in connection with financial matters, acquisitions and
business strategy. Mr. Crary is a founder and director of Petroleum Capital
Associates, Inc., a privately held oil and gas investment concern, and is a
graduate of the University of California, Irvine and the Columbia University
Graduate School of Business.
ROBERT P. HARTZELL became a Director of the Company in 1997. Mr. Hartzell is
the owner of Harmony Vineyards, a producer of premium Zinfandel wine grapes near
Lodi, California. From 1978 to 1996 Mr. Hartzell was President of the California
Association of Winegrape Growers. For six years during this period, Mr. Hartzell
also served on the Agricultural Policy Advisory Committee to the U.S. Secretary
of Agriculture and the U.S. Trade Representative in connection with the General
Agreement on Trade and Tariffs negotiations. Mr. Hartzell has also served as
Deputy Director of the California Department of Food and Agriculture. Mr.
Hartzell holds a B.S. degree from the University of California, Davis.
All directors hold office until the next annual meeting of stockholders and
until their successors have been duly elected and qualified. The total number of
directors comprising the Board of Directors is currently set at five. See
"Description of Capital Stock--Class A Common Stock and Class B Common
Stock--Voting Rights."
BOARD OF DIRECTORS, COMMITTEES AND COMPENSATION
The Board of Directors has appointed an Audit Committee, a Compensation
Committee and a Stock Plan Administrative Committee. The members of the Audit
Committee are Messrs. Crary and Hartzell and Ms. Scheid. Responsibilities of the
Audit Committee include reviewing financial statements and consulting with the
independent auditors concerning the Company's financial statements, accounting
and financial policies and internal controls and reviewing the scope of the
independent auditors' activities and fees. The members of the Compensation
Committee are Messrs. Alfred G. Scheid, Crary and Hartzell. The Company's
Compensation Committee establishes and reviews salary, bonus and other forms of
compensation for officers of the Company, provides recommendations for the
salaries and incentive compensation of the employees and consultants of the
Company, reviews training and human resources policies and makes recommendations
to the Board of Directors regarding such matters. The members of the Stock Plan
Administrative Committee are Messrs. Crary and Hartzell. The Stock Plan
Administrative Committee administers the 1997 Stock Option/Stock Issuance Plan.
The Company pays each non-employee director an annual fee of $5,000 and $500
for each Board meeting attended in person and reimburses such director for all
expenses incurred by him in his capacity as a director of the Company. Under the
Company's 1997 Stock Option/Stock Issuance Plan, each individual who is serving
as a non-employee director on the date the Underwriting Agreement between the
Company and the Representatives is executed will receive an option grant on such
date for 10,000 shares of Class A Common Stock, provided such individual has not
been in the prior employ of the Company. See "--1997 Stock Option/Stock Issuance
Plan."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid, during the year ended
December 31, 1996, to (i) the Chief Executive Officer of the Company and (ii)
the Company's only other executive officers
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whose total compensation for the 1996 fiscal year exceeded $100,000 (the "Named
Executive Officers") for services rendered in all capacities to the Company. No
other Company employee earned more than $100,000 during the 1996 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 COMPENSATION (1)
----------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- ------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
Alfred G. Scheid
Chairman of Board and
Chief Executive Officer...................................................... $ 400,000 --
Scott D. Scheid
Vice President and Chief Operating Officer................................... $ 90,000 $ 75,000
Heidi M. Scheid
Vice President Finance, Chief Financial Officer
and Treasurer................................................................ $ 75,000 $ 30,000
Kurt J. Gollnick
Vice President Vineyard Operations........................................... $ 92,700 $ 85,000
Ernest M. Brown
Vice President, Controller and Secretary..................................... $ 118,000 $ 72,000
</TABLE>
- ------------------------
(1) With respect to each of the Named Executive Officers, the aggregate amount
of perquisites and other personal benefits, securities or property received
was less than either $50,000 or 10% of the total annual salary and bonus
reported for such Named Executive Officer.
STOCK OPTION GRANTS
No stock options or appreciation rights were granted to any Named Executive
Officers during the 1996 fiscal year. The Company may grant options exercisable
for shares of Class A Common Stock to certain employees, including officers of
the Company, on or shortly after the effective date of the offering. Any such
option grants will be made by the Stock Plan Administrative Committee. If
granted, the options will become exercisable in a series of installments over
the four-year period of service measured from the grant date and have an
exercise price at the fair market value.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
An aggregate of 200,000 shares of Class A Common Stock have been authorized
for direct issuance to, or issuance upon exercise of options that may be granted
to, directors, officers, employees and consultants of the Company under the 1997
Stock Option/Stock Issuance Plan (the "Plan"). In no event, however, may any one
participant in the Plan receive option grants or direct stock issuances for more
than 100,000 shares of Class A Common Stock in the aggregate per calendar year.
The terms and provisions of the outstanding options are substantially the same
as those which will be in effect for grants made under the Discretionary Option
Grant Program of the Plan, except outstanding options are not subject to
acceleration upon the termination of an optionee's employment following a change
in control in the same manner as described below for other options.
The Plan is divided into three separate components: (i) the Discretionary
Option Grant Program under which eligible individuals may, at the discretion of
the Plan Administrator, be granted options to purchase shares of Class A Common
Stock at an exercise price not less than 100% of the fair market value of those
shares on the grant date; (ii) the Stock Issuance Program under which such
individuals may, in the Plan Administrator's discretion, be issued shares of
Class A Common Stock directly, through the purchase of such shares at a price
not less than 100% of their fair market value at the time
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<PAGE>
of issuance or as a bonus tied to the performance of services; and (iii) the
Automatic Option Grant Program under which option grants will automatically be
made at periodic intervals to eligible non-employee directors to purchase shares
of Class A Common Stock at an exercise price equal to 100% of their fair market
value on the grant date.
The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Stock Plan Administrative Committee. The Stock Plan
Administrative Committee, as Plan Administrator, will have complete discretion
to determine which eligible individuals are to receive option grants or stock
issuances, the time or times when such option grants or stock issuances are to
be made, the number of shares subject to each such grant or issuance, the status
of any granted option as either an incentive stock option or a non-statutory
stock option under the federal tax laws, the vesting schedule to be in effect
for the option grant or stock issuance and the maximum term for which any
granted option is to remain outstanding.
In the event that the Company is acquired by merger or asset sale while
SVI-Del continues to own at least 50% of the outstanding voting securities of
SVI-Cal, or in the event SVI-Cal is acquired by merger or asset sale, each
outstanding option under the Discretionary Option Grant Program which is not to
be assumed by the successor corporation will automatically accelerate in full,
and all unvested shares under the Stock Issuance Program will immediately vest,
except to the extent the Company's repurchase rights with respect to those
shares are to be assigned to the successor corporation. However, the Plan
Administrator has the discretionary authority to structure option grants and
repurchase rights under the Discretionary Option Grant and Stock Issuance
Programs so that the shares subject to those options or repurchase rights will
vest immediately upon (i) a merger or asset sale in which those options are
assumed or those repurchase rights are assigned or (ii) the termination of the
individual's service, whether involuntarily or through a resignation for good
reason, within a designated period following a merger or asset sale in which
those options are assumed or those repurchase rights are assigned or following a
change in control of the Company effected by a successful tender offer for more
than 50% of the Company's outstanding voting securities or by proxy contest for
the election of directors. In addition, one or more options or repurchase rights
may be structured so that the shares subject to those options or repurchase
rights will vest immediately upon the termination of the individual's service
within a designated period following a change in ownership of more than 50% of
the outstanding voting securities of SVI-Cal.
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Plan in return for the grant of new options for
the same or different number of option shares with an exercise price per share
based upon the fair market value of the shares of Class A Common Stock on the
new grant date.
Under the Automatic Option Grant Program, each individual who is serving as
a non-employee director on the date the Underwriting Agreement between the
Company and the Representatives is executed will receive an option grant on such
date for 10,000 shares of Class A Common Stock, provided such individual has not
otherwise been in the prior employ of the Company and has not previously
received an option grant from the Company in his or her capacity as a
non-employee director. Each individual who first becomes a non-employee director
at any time after such date will receive a 10,000-share option grant on the date
such individual joins the Board, provided such individual has not been in the
prior employ of the Company. In addition, at each Annual Stockholders Meeting,
beginning with the 1998 Annual Meeting, each individual with at least six months
of Board service who is to continue to serve as a non-employee director after
the meeting will receive an additional option grant to purchase 2,500 shares of
Class A Common Stock, whether or not such individual has been in the prior
employ of the Company.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of Board service. The initial
10,000-share option grant will become exercisable in
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<PAGE>
a series of four successive equal annual installments over the optionee's period
of Board service. Each additional 2,500-share option grant will become
exercisable upon the optionee's completion of one year of Board service measured
from the grant date. However, each outstanding option will immediately vest upon
(i) certain changes in the ownership or control of the Company or (ii) the death
or disability of the optionee while serving as a director.
The Board may amend or modify the Plan at any time. The Plan will terminate
in June 2007, unless sooner terminated by the Board.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that a
corporation's certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director for monetary damages for breach
of their fiduciary duties as directors, except for liability (i) for any breach
of their duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for unlawful payments of dividends or unlawful
stock repurchases or redemptions as provided in Section 174 of the Delaware
General Corporation Law (the "DGCL") or (iv) for any transaction from which the
director derived an improper personal benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers and may indemnify its employees and agents to the fullest extent
permitted by law. Indemnification under the Company's Bylaws covers at least
negligence and gross negligence on the part of indemnified parties.
The Company has entered into agreements to provide indemnification for the
Company's directors and certain officers in addition to the indemnification
provided for in the Bylaws. These agreements, among other things, will indemnify
the Company's directors and certain officers to the fullest extent permitted by
Delaware law for certain expenses (including attorneys' fees), and all losses,
claims, liabilities, judgments, fines and settlement amounts incurred by such
person arising out of or in connection with such persons' service as directors
or officers of the Company or an affiliate of the Company.
There is no pending litigation or proceeding involving a director, officer,
employee or agent of the Company, and the Company is not aware of any threatened
litigation or proceeding which may result in a claim for such indemnification.
RETIREMENT PLANS
The Company has two 401(k) profit sharing plans. The first plan is for the
benefit of the Company's employees who are covered by the United Farm Workers of
America Collective Bargaining Agreement. All union employees of the Company are
eligible to participate after having worked 500 hours within a one-year period.
The Company contributes 15 cents for each hour worked by eligible employees. The
second plan covers SVI's non-union employees. All non-union employees of the
Company are eligible to participate in the plan after one year of employment.
Employees may contribute between 1% and 15% of their annual compensation. The
Company matches 50 cents for every dollar of an employee's contributions up to
6% of the employee's annual salary.
In addition to its 401(k) plans, SVI has an individual retirement agreement
with Ernest M. Brown, Vice President, Controller and Secretary of the Company,
age 70. This agreement provides for SVI to pay to Mr. Brown $100,000 per annum
at the time of his retirement or disability for the rest of his life. Mr. Brown
has not set a date for his retirement and this retirement agreement is unfunded;
therefore, it is not possible to determine the absolute dollar amount for which
the Company is liable in
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<PAGE>
the future. The Company has, however, reserved $584,000 for this contingency as
of December 31, 1996.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into an employment agreement (collectively, the
"Employment Agreements") with each of Alfred G. Scheid, Scott D. Scheid, Heidi
M. Scheid and Kurt J. Gollnick (collectively, the "Employees") providing for a
minimum employment of three years beginning on June 1, 1997 except for Alfred G.
Scheid, whose Employment Agreement has a one-year term. Under their respective
Employment Agreements, Alfred G. Scheid currently is entitled to an annual base
salary of $400,000, Scott D. Scheid currently is entitled to an annual base
salary of $130,000 and each of Heidi M. Scheid and Kurt J. Gollnick is entitled
to an annual base salary of $120,000. The base salary under each Employment
Agreement is subject to upward adjustment and each Employee is eligible for
bonus compensation pursuant to bonus arrangements, as determined by the
Compensation Committee. The Company may terminate each Employee's employment at
any time with or without cause, and no severance payment obligations are
provided. A Buy-Sell Agreement by and among the holders of Class B Common Stock
provides, among other things, that the shares of Class B Common Stock held by
Mr. Gollnick (currently 290,093) are purchasable at the option first of the
Company, next of Alfred G. Scheid if the Company does not exercise such option,
and thereafter of Scott D. Scheid and Heidi M. Scheid if the Company and Alfred
G. Scheid do not exercise such options, if Mr. Gollnick's employment with the
Company terminates for any reason. See "Principal Stockholders--Agreement Among
Class B Stockholders". If such termination is a voluntary termination by Mr.
Gollnick which occurs prior to July 1, 2004, or is for defined cause regardless
of when such termination for cause occurs, the per share purchase price for Mr.
Gollnick's shares of Class B Common Stock will be equal to the price per share
he paid for such shares, and if such termination occurs for any other reason or
under any other circumstances, or upon the death of Mr. Gollnick, the per share
purchase price will be the weighted average trading price of the Class A Common
Stock for the immediately preceding 20 trading days on which such Class A Common
Stock actually was traded.
The Stock Plan Administrative Committee, as Plan Administrator of the Plan,
will have the authority to provide for the accelerated vesting of the shares of
Class A Common Stock subject to outstanding options held by any of the executive
officers of the Company in connection with certain changes in control of the
Company or the subsequent termination of such executive officer's employment
following the change in control event.
CONSULTING AGREEMENTS
SVI periodically consults with John L. Crary and Robert P. Hartzell, both
directors of the Company, on various matters relating to its business
activities. The Company pays Messrs. Crary and Hartzell on an hourly basis, at
varying rates depending on the nature of service being provided.
CERTAIN TRANSACTIONS
CORPORATE HEADQUARTERS LEASE
Pursuant to a five-year lease (the "Lease"), SVI leases the third floor of a
newly remodeled, three-story office building in Marina del Rey, a suburb of Los
Angeles, from Tesh Partners, L.P., a limited partnership comprised of members of
the Scheid family. The Company occupies 5,685 square feet and the rest of the
building (approximately 5,300 square feet) is leased to unrelated parties. SVI
is the general partner and the limited partners of Tesh Partners, L.P. are
Alfred G. Scheid's four children, two of whom are Scott D. Scheid, Vice
President, Chief Operating Officer and a director of the Company, and Heidi M.
Scheid, Vice President Finance, Chief Financial Officer, Treasurer and a
director of the Company. The lease runs until 1999 and the rent is $91,416
annually, plus an additional
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annual amount of $3,660 for parking. The Company believes that the terms of the
Lease are at least as favorable to the Company as if the Lease were entered into
with an unaffiliated third party.
FORMATION OF SVI-DEL
SVI-Del was incorporated in Delaware in July 1997 to act as a holding
company for SVI-Cal and to participate in the Exchange Transaction described
below. See "--Exchange of Shares, Partnership Units and Limited Liability
Company Interests for Class B Common Stock."
TERMINATION OF SVI-CAL'S S CORPORATION STATUS
SVI-Cal has been a Subchapter S Corporation for federal and California state
income tax purposes since 1989. As a result, the net income of SVI-Cal for
federal and certain state income tax purposes for such periods was reported by,
and taxed directly to, SVI-Cal's sole stockholder, Alfred G. Scheid, whether or
not such earnings were distributed. Prior to the offering, SVI-Cal's cumulative
S Corporation earnings will be determined and a distribution will be made to Mr.
Scheid. This amount is estimated at $3.0 million. In addition, a distribution of
approximately $475,000 will be made to the limited partners of Vineyard
Investors 1972 (as of immediately prior to the Exchange Transaction) to pay
income taxes on income from the partnership. The Exchange Transaction will
result in termination of SVI-Cal's S Corporation status. See "--Exchange of
Shares, Partnership Units and Limited Liability Company Interests for Class B
Common Stock."
EXCHANGE OF SHARES, PARTNERSHIP UNITS AND LIMITED LIABILITY COMPANY INTERESTS
FOR CLASS B COMMON STOCK
Prior to the date of this offering, SVI-Cal was the general partner of (i)
Vineyard Investors 1972 ("VI-1972"), a California limited partnership having as
its limited partners SVI-Cal, Big Vines Limited Liability Company ("Big Vines"),
a California limited liability company having Scott D. Scheid (the son of Alfred
G. Scheid, Vice President, Chief Operating Officer and a director of the
Company) and Heidi M. Scheid (the daughter of Alfred G. Scheid, Vice President
Finance, Chief Financial Officer, Treasurer and a director of the Company) as
its members, Emanty Limited Liability Company, a California limited liability
company having Alfred G. Scheid (Chairman of the Board and Chief Executive
Officer of the Company), Tyler P. Scheid (the son of Alfred G. Scheid) and Emily
K. Liberty (the daughter of Alfred G. Scheid) as its members, and Kurt J.
Gollnick (Vice President Vineyard Operations of the Company); and (ii) Vineyard
405 ("V-405"), a California limited partnership having as its limited partners
SVI-Cal and VI-1972. Prior to such date, SVI-Cal also was a member of Quadra
Partners LLC ("Quadra Partners"), a California limited liability company having
Alfred G. Scheid, Scott D. Scheid, Heidi M. Scheid and Kurt J. Gollnick as
additional members. During their respective existences, VI-1972 was the owner of
the vineyard properties currently owned by the Company known as Central Avenue
Vineyard, Hacienda Vineyard, Elm Avenue Vineyard, Pueblo Vineyard, El Camino
Vineyard and Wild Horse Vineyard; V-405 was the owner of the vineyard properties
currently owned by the Company known as Viento Vineyard and Baja Viento
Vineyard; and Quadra Partners was the ground lessee of approximately 167 acres
of the vineyard property known as San Lucas Vineyard. See "Business--The
Company's Vineyard Properties."
In connection with this offering, the capital stock of SVI-Cal held by its
sole stockholder, the membership interests held by all members of each of Quadra
Partners and Big Vines and the limited partnership units held by all limited
partners (other than SVI-Cal) in VI-1972 are being contributed to SVI-Del in
exchange for (i) 4,400,000 shares of Class B Common Stock of the Company (the
"Exchange Transaction"), representing 100% of the pre-offering issued and
outstanding common stock of the Company on a fully-diluted basis and (ii) a
commitment by SVI-Cal to make the distributions described above. See
"--Termination of SVI-Cal's S Corporation Status." SVI-Del, as part of the
Exchange Transaction, is simultaneously contributing such limited partnership
units in VI-1972 and
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<PAGE>
such membership interests in each of Quadra Partners and Big Vines to SVI-Cal
and, as a result, each of Quadra Partners, Big Vines, VI-1972 and V-405 is being
terminated and dissolved and the assets and liabilities of each are becoming
assets and liabilities of SVI-Cal. The following table sets forth the number and
percentage of shares of Class B Common Stock of SVI to be received by the sole
stockholder of SVI-Cal and the members of and limited partners in Quadra
Partners, Big Vines and VI-1972 as a result of the Exchange Transaction:
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
SHARES OF CLASS B CLASS B COMMON
NAME OF MEMBER OR PARTNER COMMON STOCK RECEIVED STOCK OUTSTANDING
- ------------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Emanty Limited Liability Company............................. 573,870 13.0%
Alfred G. Scheid(1).......................................... 2,955,851(1) 67.2%
Scott D. Scheid.............................................. 290,093 6.6%
Heidi M. Scheid.............................................. 290,093 6.6%
Kurt J. Gollnick............................................. 290,093 6.6%
---------- ---
Total...................................................... 4,400,000 100%
---------- ---
---------- ---
</TABLE>
- ------------------------
(1) All of the shares are owned by Mr. Scheid as Trustee of the Alfred G.
Scheid Revocable Trust, dated 10/8/92.
GOLLNICK NOTE
On December 30, 1994, Kurt J. Gollnick, the Vice President of Vineyard
Operations of the Company, purchased 555 limited partnership units of VI-1972
from SVI in exchange for the delivery by Mr. Gollnick to the Company of a
Promissory Note (the "Gollnick Note") in the original principal amount of
$98,790. The Gollnick Note bears interest at the rate of 8.23% per annum, and is
payable interest only on the 30th day of December of each year until December
30, 2004, at which time the entire principal balance and all accrued, unpaid
interest is payable in full.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Class B Common Stock, after the Exchange
Transaction and immediately prior to the offering, as adjusted to reflect the
sale of the shares offered hereby (assuming no exercise of the Underwriters'
over-allotment option) (i) by each person known to the Company to beneficially
own more than 5% of the outstanding shares of the Company's Class A and Class B
Common Stock, (ii) by each of the Company's directors, (iii) by each of the
Named Executive Officers and (iv) by all directors and executive officers of the
Company as a group. Such persons do not own any shares of Class A Common Stock.
Unless otherwise indicated, each person has sole voting and investment power (or
shares such powers with his or her spouse) with respect to the shares set forth
in the following table.
<TABLE>
<CAPTION>
PERCENT OF TOTAL VOTING
POWER BASED ON SHARES OF
NUMBER OF SHARES OF CLASS B COMMON STOCK
CLASS B COMMON BENEFICIALLY OWNED
STOCK BENEFICIALLY ----------------------------
OWNED PRIOR TO AND PRIOR TO THE AFTER THE
NAME AND ADDRESS (1) AFTER THE OFFERING OFFERING (2) OFFERING (3)
- ----------------------------------------------------------------- ------------------- ------------- -------------
<S> <C> <C> <C>
Alfred G. Scheid (4)............................................. 3,523,721 80.1% 73.4%
Scott D. Scheid (5).............................................. 291,093 6.6 6.1
Heidi M. Scheid (6).............................................. 293,093 6.7 6.1
Kurt J. Gollnick................................................. 290,093 6.6 6.0
Ernest M. Brown.................................................. 0 0 0
John L. Crary.................................................... 0 0 0
Robert P. Hartzell............................................... 0 0 0
Emanty Limited Liability Company (7)............................. 573,870 13.0 12.0
All directors and officers as a group (7 persons)................ 3,760,130 85.8 78.6
</TABLE>
- ------------------------------
(1) Each stockholder's address is at the Company's principal executive offices.
(2) Based on 4,400,000 shares of Class B Common Stock outstanding.
(3) Based on 6,400,000 shares of Class A and Class B Common Stock outstanding.
(4) Consists of (i) 2,899,851 shares of Class B Common Stock owned by Alfred G.
Scheid as Trustee of the Alfred G. Scheid Revocable Trust, dated October
8,1992, (ii) 573,870 shares of Class B Common Stock owned by Emanty Limited
Liability Company, of which Mr. Scheid is the managing member and (iii)
50,000 shares of Class B Common Stock owned by Mr. Scheid's wife.
(5) Also includes 11,000 shares of Class B Common Stock owned by Mr. Scheid's
wife.
(6) Also includes 2,000 shares of Class B Common Stock held in trusts for the
benefit of Heidi M. Scheid's children, for which Ms. Scheid serves as a
trustee and with respect to which she disclaims beneficial ownership and
1,000 shares of Class B Common Stock owned by Ms. Scheid's husband.
(7) The members of Emanty Limited Liability Company are Tyler P. Scheid (49.5%
interest), the son of Alfred G. Scheid, and Emily K. Liberty (49.5%
interest), the daughter of Alfred G. Scheid, neither of whom is involved in
the Company's business, and the managing member is Alfred G. Scheid (1%
interest).
AGREEMENT AMONG CLASS B STOCKHOLDERS
The holders of the outstanding shares of Class B Common Stock and the
Company are parties to a Buy-Sell Agreement (the "Buy-Sell Agreement"). Pursuant
to the Buy-Sell Agreement, no holder of shares of Class B Common Stock may, with
limited exceptions, transfer Class B Common Stock or convert Class B Common
Stock into Class A Common Stock without first offering such stock to the Company
and then to other parties to the Buy-Sell Agreement in a specified order. The
Buy-Sell Agreement applies to a broad range of transfers and dispositions other
than transfers to (i) the Company, (ii) any other Class B stockholder, (iii) a
current or former spouse or direct lineal descendant of any Class B stockholder
including, without limitation, adopted persons (if adopted during minority) and
persons born out of wedlock, and excluding foster children and stepchildren,
(iv) a trust under
55
<PAGE>
which all of the beneficiaries are persons described in clauses (ii) or (iii)
above, and (v) a corporation, partnership or limited liability company, all of
the equity interests of which are owned by persons or entities described in
clauses (i), (ii), (iii) and (iv) above or corporations, partnerships and
limited liability companies described in this clause (v).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Class A Common Stock, par value $0.001 per share, 10,000,000 shares of Class B
Common Stock, par value $0.001 per share, and 2,000,000 shares of Preferred
Stock, par value $0.001 per share. Immediately prior to the offering, there were
no shares of Class A Common Stock outstanding, 4,400,000 shares of Class B
Common Stock outstanding held by 12 holders of record and no shares of Preferred
Stock outstanding.
CLASS A COMMON STOCK AND CLASS B COMMON STOCK
VOTING RIGHTS
Each share of Class A Common Stock is entitled to one vote and each share of
Class B Common Stock is entitled to five votes on all matters submitted to a
vote of the stockholders. Except for matters where applicable law requires the
approval of one or both classes of Common Stock voting as a separate class and
except as described below, the Class A Common Stock and the Class B Common Stock
vote together as a single class on all matters presented for a vote of the
stockholders. However, the holders of the Class A Common Stock, voting as a
separate class, will elect 25% of the authorized number of directors rounded up
to the nearest whole number, and the holders of the Class B Common Stock, voting
as a separate class, will elect the remaining directors. Immediately following
the offering, the holders of Class B Common Stock will retain effective control,
and will continue to direct the business, management and policies of the Company
through holding approximately 92% of the combined voting power of the
outstanding Class A and Class B Common Stock and the ability to elect three of
the five members of the Board of Directors. Stockholders do not have cumulative
voting rights with respect to election of directors.
Directors may be removed with or without cause by the holders of the class
of stock that elected them or, to the extent permitted by applicable law, with
cause by the Board of Directors. A vacancy on the Board created by the removal
or resignation of a director may be filled either by directors in office or, if
the directors have not filled the vacancy, by the stockholders upon application
to the Court of Chancery. Any director so appointed also may be removed with or
without cause by the holders of the class of stock entitled to elect such
director.
Because the Company's shareholders are permitted to act by written consent
in lieu of a meeting, the holders of the Class B Common Stock may take actions
required to be voted upon by stockholders without providing the holders of the
Class A Common Stock with an opportunity to make nominations or raise other
matters at a meeting.
The Company may not alter the rights, preferences, privileges or
restrictions of either the Class A Common Stock or the Class B Common Stock (i)
without the approval by vote or written consent, in the manner provided by law,
of holders of a majority of the total number of outstanding shares of such
changed class, or (ii) in any way that would adversely affect such class or that
would adversely affect the relative rights, preferences, privileges or
restrictions of the other class in comparison with the altered class without the
approval by vote or written consent, in the manner provided by law, of holders
of a majority of the total number of shares of the adversely affected class
outstanding, voting as a separate class. No increase in the authorized number of
shares of either the Class A Common Stock or the Class B Common Stock may be
effected without the approval, by vote or written consent, in the manner
provided by law, of a majority of the total number of shares of each such class
outstanding, voting as a separate class. In addition, except with respect to the
issuance of shares of
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<PAGE>
Class B Common Stock in connection with a stock split of such Class B Common
Stock or for payment of dividends on such Class B Common Stock in Class B Common
Stock, (i) no issuance of Class B Common Stock may be made prior to July 15,
2000 without the approval, by vote or written consent, in the manner provided by
law, of a majority of the Class A Common Stock outstanding and of a majority of
the Class B Common Stock outstanding, each voting separately as a class, and
(ii) no issuance of Class B Common Stock may be made from and after July 15,
2000 without the approval, by vote or written consent, in the manner provided by
law, of a majority of the Class A Common Stock outstanding and of the Class B
Common Stock outstanding, each voting separately as a class, or the unanimous
approval, by vote or written consent, in the manner provided by law, of
directors elected by the holders of Class A Common Stock, consisting of not less
than two persons, who are not, directly or indirectly, beneficial owners of any
Class B Common Stock and who have not been officers or employees of the Company
or any of its subsidiaries within the three-year period immediately preceding
such issuance.
DIVIDENDS
Each share of Class A Common Stock is entitled to receive dividends if, as
and when declared by the Board of Directors of the Company out of any funds
legally available therefor. Identical dividends, if any, must be paid or made on
the Class A Common Stock at any time that dividends are paid or made on the
Class B Common Stock, except that dividends payable in shares of Class B Common
Stock may be paid only on shares of Class B Common Stock and dividends payable
in shares of Class A Common Stock may be paid only on shares of Class A Common
Stock. Dividends other than dividends payable in Class A Common Stock may be
declared and paid or made on the Class A Common Stock without an identical or
equivalent dividend being declared and paid or made on the Class B Common Stock.
If a dividend payable in Class A Common Stock is made on the Class A Common
Stock, the Company must also make a pro rata and simultaneous dividend of Class
B Common Stock on the Class B Common Stock. If a dividend payable in Class B
Common Stock is made on the Class B Common Stock, the Company must also make a
pro rata and simultaneous dividend of Class A Common Stock on the Class A Common
Stock.
CONVERTIBILITY
Subject to the terms of the Buy-Sell Agreement, each share of Class B Common
Stock is convertible at any time at the option of the holder into Class A Common
Stock on a share-for-share basis. Shares of Class B Common Stock will be
automatically converted into shares of Class A Common Stock on the happening of
certain events described below. Transfers of shares of Class B Common Stock are
also subject to the terms of the Buy-Sell Agreement. The Company has reserved
4,400,000 shares of its Class A Common Stock for issuance upon the exercise of a
conversion right or automatic conversion. See "Principal Stockholders--Agreement
Among Class B Stockholders." The Class A Common Stock is not convertible.
Each share of Class B Common Stock shall automatically be converted into
Class A Common Stock, on a share-for-share basis, in the event that the
beneficial ownership of such share of Class B Common Stock shall be transferred
(including, without limitation, by way of gift, settlement, will or intestacy)
to any person or entity that was not (i) the Company, (ii) any of Alfred G.
Scheid, Scott D. Scheid, Heidi M. Scheid, Tyler P. Scheid, Emily K. Liberty,
Kurt J. Gollnick (the "Permitted Transferees") or Emanty Limited Liability
Company, (iii) a current or former spouse or direct lineal descendant of any of
the Permitted Transferees Class B stockholder including, without limitation,
adopted persons (if adopted during minority) and persons born out of wedlock,
and excluding foster children and stepchildren, (iv) a trust under which all of
the beneficiaries are persons described in clauses (ii) or (iii) above, or (v) a
corporation, partnership or limited liability company, all of the equity
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<PAGE>
interests of which are owned by persons or entities described in clauses (i),
(ii), (iii) and (iv) above or corporations, partnerships and limited liability
companies described in this clause (v).
LIQUIDATION RIGHTS
In the event of the liquidation, dissolution or winding up of the Company,
after satisfaction of
amounts payable to creditors and distribution to the holders of outstanding
Preferred Stock, if any, of amounts to which they may be preferentially
entitled, holders of the Class A Common Stock and Class B Common Stock are
entitled to share ratably in the assets available for distribution to the
stockholders.
OTHER PROVISIONS
There are no preemptive rights to subscribe to any additional securities
which the Company may issue and there are no redemption provisions or sinking
fund provisions applicable to the Class A Common Stock or the Class B Common
Stock, nor is either class subject to calls or assessments by the Company. All
outstanding shares are, and all shares to be outstanding upon completion of this
offering will be, legally issued, fully paid and nonassessable.
CAPITAL STOCK
Except with respect to the issuance of shares of Class B Common Stock in
connection with a stock split of such Class B Common Stock or for payment of
dividends on such Class B Common Stock in Class B Common Stock, (i) no issuance
of Class B Common Stock may be made prior to July 15, 2000 without the approval,
by vote or written consent, in the manner provided by law, of a majority of the
Class A Common Stock outstanding and of a majority of the Class B Common Stock
outstanding, each voting separately as a class, and (ii) no issuance of Class B
Common Stock may be made from and after July 15, 2000 without the approval, by
vote or written consent, in the manner provided by law, of a majority of the
Class A Common Stock outstanding and a majority of the Class B Common Stock
outstanding, each voting separately as a class, or the unanimous approval, by
vote or written consent, in the manner provided by law, of directors elected by
the holders of Class A Common Stock, consisting of not less than two persons,
who are not, directly or indirectly, beneficial owners of any Class B Common
Stock and who have not been officers or employees of the Company or any of its
subsidiaries within the three-year period immediately preceding such issuance.
PREFERRED STOCK
The Board of Directors has the authority, subject to any limitations
prescribed by law, without further action by the stockholders, to issue up to an
aggregate of 2,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted to or imposed
upon any unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series. The shares noted
above constitute "blank check" Preferred Stock, and, as of the date of the
offering, the Board of Directors has not yet designated any series thereof or
any rights, preferences, privileges or restrictions attaching thereto. The
issuance of Preferred Stock could adversely affect the voting power of the
holders of Class A Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation and may have the effect
of delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any Preferred Stock.
REPRESENTATIVE'S WARRANTS; REGISTRATION RIGHTS
The Company has issued to the Representatives of the Underwriters warrants
(the "Representatives' Warrants") to purchase up to 200,000 shares of Class A
Common Stock at an exercise price per
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<PAGE>
share equal to 120% of the price to public in this offering. The
Representatives' Warrants are exercisable for a period of five years commencing
one year after the effective date of the Registration Statement of which this
Prospectus forms a part. The holders of the Representatives' Warrants have the
right, on one occasion while such warrants are exercisable, to require the
Company at the Company's expense to register under the Securities Act the offer
and sale of such warrants or the underlying shares of Class A Common Stock. In
addition, the holders of the Representatives' Warrants may include them or the
underlying Class A Common Stock in any registration (other than on Form S-4 or
S-8) filed by the Company while such warrants are exercisable. See
"Underwriting."
BYLAW PROVISIONS
The Company's Bylaws provide that special meetings of stockholders may be
called only by the Chairman of the Board, the Chief Executive Officer, a
majority of the Board of Directors or the holders of shares entitled to cast not
less than 50% of the voting power at the meeting. The Bylaws also provide that
any action which may be taken at any meeting of stockholders may be taken
without a meeting, without prior notice and without a vote if written consents
approving the action are signed by the holders of outstanding shares having not
less than the minimum number of votes that would be necessary to take such
action at a meeting of stockholders. Accordingly, immediately following this
offering, the holders of Class A Common Stock will have insufficient voting
power, in the aggregate, to call special meetings of stockholders and the
holders of Class B Common Stock may take certain actions by written consent
without formally convening a meeting of stockholders. In addition, the Bylaws
provide that stockholders may not raise new matters or nominate directors at a
meeting of stockholders unless certain advance notice requirements are
satisfied.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% or more of
the corporation's outstanding voting stock) for three years following the date
such person became an interested stockholder unless (i) before the person
becomes an interested stockholder, the transaction resulting in such person
becoming an interested stockholder or the business combination is approved by
the board of directors of the corporation, (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the outstanding
voting stock of the corporation (excluding shares owned by directors who are
also officers of the corporation or shares held by employee stock plans that do
not provide employees with the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender offer or exchange offer)
or (iii) on or after such date on which such person became an interested
stockholder the business combination is approved by the board of directors and
authorized at an annual or special meeting, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock excluding
shares owned by the interested stockholders. The restrictions of Section 203 do
not apply, among other reasons, if a corporation, by action of its stockholders,
adopts an amendment to its certificate of incorporation or bylaws expressly
electing not to be governed by Section 203, provided that, in addition to any
other vote required by law, such amendment to the certificate of incorporation
or bylaws must be approved by the affirmative vote of a majority of the shares
entitled to vote. Moreover, an amendment so adopted is not effective until
twelve months after its adoption and does not apply to any business combination
between the corporation and any person who became an interested stockholder of
such corporation on or prior to such adoption. The Company's Certificate of
Incorporation and Bylaws do not currently contain any provisions electing not to
be governed by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of the Class A Common Stock. This
could have the effect of inhibiting changes in
59
<PAGE>
management and may also prevent temporary fluctuations in the Class A Common
Stock that often result from takeover attempts.
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The Company's
Certificate of Incorporation contains no such provision, and therefore
stockholders holding a majority of the voting power of the Common Stock (I.E.,
the Scheid family and its descendants and Kurt J. Gollnick) will be able to
approve a broad range of corporate actions requiring stockholder approval
without the necessity of holding a meeting of stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar of the Class A and Class B Common Stock is
American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
2,000,000 shares of Class A Common Stock and 4,400,000 shares of Class B Common
Stock (assuming the Underwriters' over-allotment option is not exercised). The
Class B Common Stock is convertible on a share-for-share basis into Class A
Common Stock and must be converted to effect any public sale of such stock. Of
these outstanding shares, the 2,000,000 shares of Class A Common Stock sold in
this offering will be freely tradeable without restriction under the Securities
Act, except for any shares purchased by an "affiliate" of the Company (as that
term is defined in the Securities Act), which will be subject to the resale
limitations and saleable under Rule 144 adopted under the Securities Act.
The 4,400,000 shares of Class B Common Stock held by members of the Scheid
family and Kurt J. Gollnick are "restricted" securities within the meaning of
Rule 144 and may not be resold in a public distribution (before or upon
conversion into Class A Common Stock) except in compliance with the registration
requirements of the Securities Act or pursuant to Rule 144.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or person (or persons whose shares are aggregated) who has beneficially
owned restricted shares for at least one year but less than two years, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Class A Common
Stock (approximately 2,000,000 shares immediately after the offering) or (ii)
the average weekly trading volume during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about the
Company. A person (or persons) other than an "affiliate" who has beneficially
owned his or her shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above. As
defined in Rule 144, an "affiliate" of an issuer is a person who directly, or
indirectly through the use of one or more intermediaries, controls, or is
controlled by, or is under common control with, such issuer. Rule 144A under the
Securities Act as currently in effect permits the immediate sale by current
holders of restricted shares of all or a portion of their shares to certain
qualified institutional buyers described in Rule 144A, subject to certain
conditions.
The members of the Scheid family and the Company's other officers and
directors, who in the aggregate hold beneficially 4,400,000 shares of Class B
Common Stock, have agreed that they will not
60
<PAGE>
sell any shares of capital stock of the Company, either publicly or privately,
without the prior consent of Cruttenden Roth Incorporated for a period of one
year from the date of this Prospectus.
The Company has reserved an aggregate of 200,000 shares of Class A Common
Stock for issuance pursuant to the Plan. The Company intends to file a
registration statement on Form S-8 under the Securities Act within 30 days after
the date of this Prospectus to register the shares to be issued pursuant to the
Plan. Shares of Class A Common Stock issued under the Plan after the effective
date of such registration statement will be freely tradeable in the public
market, subject to the lock-up restrictions and subject in the case of sales by
affiliates to the amount, manner of sale notice and public information
requirements of Rule 144.
There has been no prior market for the Class A Common Stock and there can be
no assurance that a significant public market for the Class A Common Stock will
develop or be sustained after the offering contemplated by this Prospectus.
Sales of substantial amounts of Class A Common Stock in the public market could
adversely affect the market price of the Class A Common Stock.
61
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Cruttenden Roth Incorporated, Laidlaw
Equities, Inc. and Rodman & Renshaw, Inc. are acting as Representatives, have
severally agreed, subject to the terms and conditions of the Underwriting
Agreement, to purchase from the Company the number of shares of Class A Common
Stock set forth opposite their respective names below at the price to public
less underwriting discounts and commissions set forth on the cover page of this
Prospectus. The nature of the Underwriters' obligations is such that if any such
shares are purchased, all must be purchased.
<TABLE>
<CAPTION>
UNDERWRITER PARTICIPATION
- -------------------------------------------------------------------------------- ------------
<S> <C>
Cruttenden Roth Incorporated....................................................
Laidlaw Equities, Inc...........................................................
Rodman & Renshaw, Inc...........................................................
------------
Total....................................................................... 2,000,000
------------
------------
</TABLE>
The several Underwriters propose to offer the shares of Class A Common Stock
in part directly to the public at the price to public set forth on the cover
page of this Prospectus, and in part to certain dealers who are members of the
National Association of Securities Dealers, Inc. (the "NASD"), or institutions
located outside the U.S. that are not registered under the Securities Exchange
Act of 1934 and agree to make no sales within the U.S. or its territories and
possessions or to persons who are nationals thereof or residents therein, at the
price to public less a concession not exceeding $0. per share. The Underwriters
may allow, and such dealers may reallow, a concession not exceeding $0. per
share. After the shares of Class A Common Stock are released for sale to the
public, the Representatives may change the initial price to public and other
selling terms. No change in such terms shall change the amount of proceeds to be
received by the Company as set forth on the cover page of this Prospectus.
The Company has granted the Underwriters an option, exercisable for 45 days
after the date of this Prospectus, to purchase up to 300,000 additional shares
of Class A Common Stock at the price to public less the underwriting discount
set forth on the cover page of this Prospectus. The Underwriters may exercise
the option solely to cover over-allotments, if any. To the extent the
Underwriters exercise the over-allotment option, each Underwriter will be
committed, subject to certain conditions, to purchase that number of additional
shares which is proportionate to such Underwriter's initial commitment.
The Company has also agreed to pay the Representatives a nonaccountable
expense allowance equal to 3% of the gross proceeds of the offering, and to sell
to the Representatives or their designees, for nominal consideration, the
Representatives' Warrants to purchase up to 200,000 shares of Class A Common
Stock (subject to certain antidilution adjustments). The Representatives'
Warrants will be exercisable for a period of five years commencing one year
after the effective date of the Registration Statement of which this Prospectus
forms a part, and cannot be transferred for a period of one year from the date
of issuance except to Underwriters, selling group members and their officers or
partners. The exercise price per share for the Representatives' Warrants is
equal to 120% of the initial price to public and may be paid in cash or on a
cashless net issuance basis by foregoing receipt of a number of shares otherwise
issuable upon exercise having a fair market value equal to the aggregate
exercise price. During the exercise period, holders of the Representatives'
Warrants are entitled to certain demand and incidental registration rights with
respect to the securities issuable upon exercise.
62
<PAGE>
The Company has granted to Cruttenden Roth Incorporated the right of first
refusal to manage or co-manage any private offering through an investment banker
or placement agent, or any public offering, of any debt or equity securities
(other than bank debt or similar financing) by the Company or any of its
stockholders owning at least five percent of the Class A Common Stock or Class B
Common Stock. This right of first refusal will terminate two years after
consummation of this offering or if Cruttenden Roth Incorporated earlier
declines to exercise the right.
Except in connection with acquisitions or pursuant to the exercise of
options granted under the Plan, the Company has agreed, for a period of one year
from the consummation of this offering, not to issue or sell or purchase any
equity securities without the prior written consent of Cruttenden Roth
Incorporated. In addition, the Company's officers, directors and pre-offering
stockholders have agreed not to transfer any equity securities of the Company
for a period of one year after the consummation of this offering, other than
intra-family transfers, transfers to family trusts, and certain other non-public
transfers without the prior written consent of Cruttenden Roth Incorporated.
Prior to this offering, there has not been a public market for the Class A
Common Stock. The public offering price of the Class A Common Stock has been
determined by arms-length negotiation between the Company and the
Representatives. There is no direct relation between the offering price of the
Class A Common Stock and the assets, book value or net worth of the Company.
Among the factors considered by the Company and the Representatives in pricing
the Class A Common Stock were the Company's results of operations, the current
financial condition and future prospects of the Company, the experience of
management, the amount of ownership to be retained by pre-offering stockholders,
the general condition of the economy and the securities markets, the rights,
preferences, privileges and restrictions of the Class A Common Stock, and the
demand for similar securities of companies considered comparable to the Company.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In connection with the offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Class A Common
Stock. Such transactions may include stabilization transactions effected in
accordance with the Securities Exchange Act of 1934 pursuant to which such
persons may bid for or purchase Class A Common Stock for the purpose of
stabilizing its market price. The Underwriters also may create a short position
for the account of the Underwriters by selling more Class A Common Stock in
connection with the offering than they are committed to purchase from the
Company, and in such case may purchase Class A Common Stock in the open market
following completion of the offering to cover all or a portion of such shares of
Class A Common Stock or may exercise the Underwriter's over-allotment option
referred to above. In addition, the Representatives, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby they may reclaim from an Underwriter (or dealers
participating in the offering), for the account of the other Underwriters, the
selling concession with respect to Class A Common Stock that is distributed in
the offering but subsequently purchased for the account of the Underwriters in
stabilization or syndicate covering transactions or otherwise. Any of these
activities may stabilize or maintain the price of the Class A Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and if they are undertaken
they may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
expect to confirm any sales to accounts over which they exercise discretionary
authority.
63
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Class A
Common Stock offered hereby are being passed upon for the Company by Brobeck,
Phleger & Harrison LLP, Los Angeles, California. Certain legal matters are being
passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, Orange County,
California.
EXPERTS
The Combined Financial Statements at December 31, 1996 and for the years
ended December 31, 1995 and 1996 included in this Prospectus have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein and are included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the Class A Common Stock
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, certain items of which are omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Class A Common Stock offered
hereby, reference is made to the Registration Statement and to the Company's
Combined Financial Statements, including the related notes thereto, schedules
and exhibits filed as a part thereof. The Registration Statement, including all
schedules and exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. and at the
Commission's regional offices at 7 World Trade Center, 13th floor, New York, New
York and 500 West Madison Street, Suite 1400, Chicago, Illinois. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such
material may also be accessed electronically by means of the Commission's web
site on the Internet at http://www.sec.gov.
Statements contained in this Prospectus concerning the contents of any
contract or other document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement with the Commission, each such statement
being qualified in all respects by such reference.
Prior to this offering, the Company has not been a reporting company under
the Securities Exchange Act of 1934 (the "Exchange Act"). Upon consummation of
this offering, the Company will become subject to the informational requirements
of the Exchange Act and, in accordance therewith, will file reports and other
information with the Commission in accordance with the Commission's rules. Such
reports and other information concerning the Company may be inspected at the
public reference facilities referred to above as well as at certain regional
offices of the Commission, and copies of such material may be obtained upon
payment of certain prescribed rates. The Company intends to furnish its
stockholders with annual reports containing financial statements audited by
independent certified public accountants.
64
<PAGE>
SCHEID VINEYARDS INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Combined Balance Sheets.................................................................................... F-3
Combined Statements of Operations.......................................................................... F-4
Combined Statements of Cash Flows.......................................................................... F-5
Combined Statements of Equity.............................................................................. F-6
Notes to Combined Financial Statements..................................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Scheid Vineyards Inc.
We have audited the accompanying combined balance sheet of Scheid Vineyards
Inc. as of December 31, 1996 and the related combined statements of operations,
cash flows and equity for the years ended December 31, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly in all material
respects, the combined financial position of Scheid Vineyards Inc. as of
December 31, 1996 and the combined results of its operations and its combined
cash flows for the years ended December 31, 1995 and 1996 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, CA
April 18, 1997
F-2
<PAGE>
SCHEID VINEYARDS INC.
COMBINED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1997
DECEMBER 31, ----------------------
------------ PRO FORMA
1996 ACTUAL (NOTE 14)
------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................ $ 4,024 $ 203 $ 203
Accounts receivable, trade............................................... 274 534 534
Accounts receivable, stockholder......................................... -- 2,161 --
Accounts receivable, other............................................... 3 5 5
Inventories.............................................................. 100 1,392 1,392
Supplies and prepaid expenses............................................ 819 714 714
------------ --------- -----------
Total current assets................................................. 5,220 5,009 2,848
PROPERTY, PLANT AND EQUIPMENT, NET......................................... 16,342 17,517 17,517
LONG-TERM RECEIVABLE....................................................... 2,233 2,800 2,800
OTHER ASSETS, NET.......................................................... 274 256 256
------------ --------- -----------
$ 24,069 $ 25,582 $ 23,421
------------ --------- -----------
------------ --------- -----------
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................................ $ 458 $ 458 $ 458
Notes payable to affiliates.............................................. 807 -- --
Notes payable, crop loan................................................. -- 203 203
Note due stockholder..................................................... 1,000 -- --
Distributions payable to stockholder/partners............................ -- -- 1,344
Accounts payable and accrued liabilities................................. 497 974 974
Accrued interest payable................................................. 204 261 261
------------ --------- -----------
Total current liabilities............................................ 2,966 1,896 3,240
LONG TERM DEBT............................................................. 11,458 14,487 14,487
DEFERRED COMPENSATION...................................................... 584 604 604
DEFERRED INCOME TAXES...................................................... -- -- 1,300
COMMITMENTS AND CONTINGENCIES (NOTE 9).....................................
EQUITY:....................................................................
Common stock............................................................. 2 2 4
Additional paid-in capital............................................... 124 124 2,852
Retained earnings........................................................ 5,621 5,264 934
Partners' capital........................................................ 3,314 3,205 --
------------ --------- -----------
9,061 8,595 3,790
------------ --------- -----------
$ 24,069 $ 25,582 $ 23,421
------------ --------- -----------
------------ --------- -----------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-3
<PAGE>
SCHEID VINEYARDS INC.
COMBINED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES:
Sales................................................................. $ 7,164 $ 10,769 $ -- $ --
Vineyard management, services and other fees.......................... 476 922 210 347
--------- --------- --------- ---------
7,640 11,691 210 347
Cost of sales......................................................... 3,670 4,544 -- --
--------- --------- --------- ---------
GROSS PROFIT............................................................ 3,970 7,147 210 347
General and administrative............................................ 2,583 2,604 678 628
Interest expense (net of interest income of $86,452 in 1996 and
$118,968 in 1995)................................................... 906 654 94 185
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES....................................... 481 3,889 (562) (466)
PROVISION FOR INCOME TAXES.............................................. 1 44 -- --
--------- --------- --------- ---------
NET INCOME (LOSS)....................................................... $ 480 $ 3,845 $ (562) $ (466)
--------- --------- --------- ---------
--------- --------- --------- ---------
PRO FORMA AMOUNTS (NOTE 14):
INCOME BEFORE INCOME TAXES AS REPORTED.................................. 481 3,889 (562) (466)
PRO FORMA INCOME TAX BENEFIT (PROVISION)................................ (192) (1,556) 225 186
--------- --------- --------- ---------
PRO FORMA NET INCOME (LOSS)............................................. $ 289 $ 2,333 $ (337) $ (280)
--------- --------- --------- ---------
--------- --------- --------- ---------
PRO FORMA NET INCOME (LOSS) PER SHARE................................... $ 0.07 $ 0.53 $ (0.08) $ (0.06)
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-4
<PAGE>
SCHEID VINEYARDS INC.
COMBINED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................ $ 480 $ 3,845 $ (562) $ (466)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation, amortization and abandonments............................ 914 909 213 263
Deferred compensation.................................................. 64 71 18 20
Changes in operating assets and liabilities-
Accounts receivable, trade............................................. 105 (111) (782) (260)
Accounts receivable, stockholder....................................... -- -- -- (2,161)
Accounts receivable, other............................................. 739 62 57 (2)
Inventories............................................................ (53) (46) (1,471) (1,292)
Supplies and prepaid expenses.......................................... (315) (249) 176 105
Accounts payable and accrued liabilities............................... 368 (20) 622 534
Borrowings on notes payable, short term................................ -- -- 537 203
Repayments on notes payable, short term................................ -- -- -- (1,807)
Income taxes payable................................................... (15) -- (2) --
--------- --------- --------- ---------
Net cash provided by (used in) operations............................ 2,287 4,461 (1,194) (4,863)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable..................................................... -- (2,233) -- (567)
Additions to property, plant and equipment............................... (2,383) (3,742) (821) (1,438)
Other assets............................................................. (71) 13 (3) 18
--------- --------- --------- ---------
Net cash used in investing activities................................ (2,454) (5,962) (824) (1,987)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt............................................... 5,040 7,267 (15) 3,029
Repayment of long-term debt.............................................. (5,867) (4,832) (300) --
Subchapter S distributions............................................... (336) (125) -- --
Partnership distributions................................................ (49) (344) (46) --
--------- --------- --------- ---------
Net cash provided by (used in) financing activities.................. (1,212) 1,966 (361) 3,029
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents..................... (1,379) 465 (2,379) (3,821)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................. 4,938 3,559 3,559 4,024
--------- --------- --------- ---------
Cash and cash equivalents, end of period................................. $ 3,559 $ 4,024 $ 1,180 $ 203
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-5
<PAGE>
SCHEID VINEYARDS INC.
COMBINED STATEMENTS OF EQUITY
(AMOUNTS IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
-------------------------- ADDITIONAL AND
NUMBER OF PAID-IN PARTNERS
SHARES AMOUNT CAPITAL CAPITAL
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994............................................ 97,413 $ 2 $ 124 $ 5,464
Subchapter "S" distribution......................................... -- -- -- (336)
Partnership distributions........................................... -- -- -- (50)
Net Income.......................................................... -- -- -- 480
--
----------- ----- -----------
BALANCE, December 31, 1995............................................ 97,413 $ 2 $ 124 $ 5,558
Subchapter "S" distribution......................................... -- -- -- (125)
Partnership distributions........................................... -- -- -- (343)
Net Income.......................................................... -- -- -- 3,845
--
----------- ----- -----------
BALANCE, December 31, 1996............................................ 97,413 $ 2 $ 124 $ 8,935
Net loss (unaudited)................................................ -- -- -- (466)
--
----------- ----- -----------
BALANCE, March 31, 1997 (unaudited)................................... 97,413 $ 2 $ 124 $ 8,469
--
--
----------- ----- -----------
----------- ----- -----------
RETAINED EARNINGS........................................................................................ $ 5,264
PARTNERS' CAPITAL........................................................................................ 3,205
-----------
$ 8,469
-----------
-----------
</TABLE>
See accompanying Notes to Combined Financial Statements.
F-6
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF COMBINATION--The accompanying combined financial statements include
the accounts of Scheid Vineyards Inc. ("SVI"), Vineyard Investors 1972, a
California Limited Partnership ("VI-1972"), Vineyard 405, a California Limited
Partnership ("V-405"), and Quadra Partners LLC, a California Limited Liability
Company ("Quadra Partners" and, together, with SVI, VI-1972 and V-405, the
"Company" or "Companies"). SVI and the Scheid family together own 84% of
VI-1972, 93% of V-405 and 70% of Quadra Partners. The Companies are affiliated
through common ownership and management. All significant intercompany balances
and transactions have been eliminated in the combined financial statement (see
Note 14).
Prior to December 31, 1996 the interests of all unrelated limited partners
were purchased by the Company. The accompanying combined financial statements
are based upon the historical cost of assets and liabilities except that assets
related to limited partnership interests purchased from unrelated partners are
recorded at the cost of acquisition.
ORGANIZATION--The principal business of the Company is the management and
farming of approximately 4,950 acres of premium wine grape vineyards in Monterey
and San Benito Counties, California.
The Company has long-term grape purchase agreements with several wineries
whereby the wineries agree to purchase substantially all of the Company's grape
production. These contracts generally expire no earlier than the completion of
harvest in years ranging from 2001 to 2013 and are extended if neither party
cancels two or three years before the expiration date. The largest winery
contract covers approximately 68% of the Company's acreage and accounted for
approximately 91% and 79% of the Company's revenues from grape sales in 1996 and
1995, respectively.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. At December 31, 1996, substantially all cash balances were held by
the Company's major bank.
ACCOUNTS RECEIVABLE, STOCKHOLDER--The $2,161,000 "accounts receivable,
stockholder" represents advances made for working capital purposes. Such
advances are charged against retained earnings in the March 31, 1997 pro forma
balance sheet because they represent partial distribution of accumulated
earnings related to the prior S Corporation status. The estimated remaining
accumulated earnings of $869,000 are included in the pro forma balance sheet
caption "distributions payable to stockholder/partners" (see Note 14).
INVENTORIES--Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Cost includes the cost of grown grapes and
harvesting, production, aging and bottling costs. Wine inventories are
classified as current assets in accordance with recognized trade practice
although certain inventories will be aged for periods longer than one year. Crop
costs associated with farming vineyards prior to the harvest are deferred and
recognized in the year the grapes are harvested. On a quarterly basis, the
Company evaluates the cost of its inventories (both crop costs and bottled wine)
and reduces such inventories to market if required.
F-7
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT--Property, plant and equipment are stated at
cost and are depreciated using straight-line and accelerated methods over the
estimated useful lives of the assets. Vineyards generally have estimated
depreciable lives of 30 years, buildings 30 years, and furniture and equipment 5
to 7 years. Development costs incurred during the development period of a
vineyard including related interest are capitalized. Depreciation commences in
the initial year the vineyard becomes commercially productive, generally in the
fourth year.
REVENUE RECOGNITION--The Company recognizes revenue from grape sales when
the grapes are delivered to the winery. The Company does not have any allowance
for returns because grapes are tested and accepted upon delivery.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair values of accounts receivable
and accounts payable approximate book value because of their short duration.
Long-term receivables and long-term debt approximate book value because such
financial instruments have variable interest rates.
RECENT PRONOUNCEMENTS--In March of 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." This statement requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. This statement also requires
that long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value, less cost to sell. The
impact of SFAS No. 121 is not expected to have a material effect on the Company.
INCOME TAXES--SVI has elected to be treated as an S Corporation for federal
income tax and California franchise tax purposes. Pursuant to this election, net
income or loss of SVI is included in the income tax returns of the stockholder.
Consequently, no federal income tax provision has been recorded in the
accompanying financial statements. However, under California state law, a
franchise tax equal to 1 1/2% of taxable income is imposed upon S Corporations
and is provided for in the accompanying financial statements. VI-1972, V-405 and
Quadra Partners are treated as partnerships for federal and state income tax
purposes such that their income or loss is included in the taxable income of the
partners.
INTERIM FINANCIAL INFORMATION--The interim financial statements as of March
31, 1997 and for the three months ended March 31, 1996 and 1997 have been
prepared by the Company without audit. In the opinion of the Company's
management, this unaudited information has been prepared on the same basis as
the audited information and includes all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The operating results for any quarter are not necessarily indicative of
results for any future period.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -------------
<S> <C> <C>
Bulk and Bottled Wine........................................... $ 56,000 $ 58,000
Deferred Crop Costs............................................. 44,000 1,334,000
------------ -------------
Total....................................................... $ 100,000 $ 1,392,000
------------ -------------
------------ -------------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Land and buildings........................................... $ 3,616,000 $ 3,679,000
Vineyard improvements........................................ 10,332,000 12,255,000
Vineyard improvements under development...................... 6,111,000 5,245,000
Machinery and equipment...................................... 2,696,000 3,014,000
-------------- --------------
Total.................................................... 22,755,000 24,193,000
Less accumulated depreciation and amortization............... 6,413,000 6,676,000
-------------- --------------
Property, plant and equipment--net........................... $ 16,342,000 $ 17,517,000
-------------- --------------
-------------- --------------
</TABLE>
4. LONG-TERM RECEIVABLE
SVI has a contract to redevelop certain vineyards owned or controlled by a
major client. The contract calls for the expenditure of approximately $5,600,000
over a three-year period. The funds for this project were borrowed, as an
accommodation to the client, by SVI. The interest rate and payment terms are the
same as the related note payable. The note payable to the bank is secured by a
letter of credit issued by the client and by the contract. The contract calls
for the payment of this receivable by direct payment by the client on the loan
in ten annual installments beginning January 5, 2000 (see Note 6). Under the
contract, the client is responsible on an annual basis for determining the
nature and amount of budgeted expenditures for the year. On a monthly basis, the
client is obligated to advance the budgeted costs to the Company.
5. LINES OF CREDIT
The Company has two Agricultural Credit Agreements with a bank which provide
for maximum aggregate borrowings of $3,900,000 through July 5, 1997. Borrowings
are secured by crops and other assets with interest due quarterly at 1/4% over
the bank's "reference rate" (8 1/4% at December 31, 1996). No amounts were
outstanding under these agreements at December 31, 1996 (see Note 13).
F-9
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
The Company has a Revolving/Declining Line of Credit Agreement with a bank which
provides for a maximum borrowing of $3,000,000 diminishing annually to a maximum
allowable commitment of $1,071,000, which is due on July 5, 2005. The line of
credit is secured by a leasehold interest in 707 vineyard acres. Interest is
payable quarterly at 3/4% over the bank's reference rate (8 1/4% at December 31,
1996)........................................................................... $ 327,000 $ 2,786,000
Note payable to bank, with interest at the bank's reference rate plus 3/4%,
principal due in annual installments through July 5, 2005, secured by trust
deed on 707 vineyard acres...................................................... 1,425,000 1,425,000
Note payable to bank, with interest at the bank's reference rate plus 1/4%,
principal due in annual installments through December 31, 1998, secured by
first deed of trust on real property (see Note 13).............................. 1,434,000 1,434,000
Note payable to bank, with interest at the bank's reference rate plus 3/4%,
principal due in annual installments through October 5, 2004, secured by first
deed of trust on 1,063 acres of real property................................... 5,200,000 5,200,000
Note secured by business residential real property, due November 1, 2014, variable
interest payable monthly based on the Wall Street Journal Index with maximum
ceiling of 18%; 8 3/4% at December 31, 1996..................................... 435,000 435,000
Various notes payable, with terms of interest at 3/4% to 1 1/4% over the bank's
reference rate, secured by deeds of trust, leasehold interest or equipment (see
Note 13)........................................................................ 862,000 865,000
Note payable to bank represents borrowings on a $5,600,000 line of credit, which
bears interest at the bank's reference rate. The note is secured by a letter of
credit issued by a major client, and is used for costs incurred for the
development of certain vineyards owned by the client. Principal due in ten
annual installments beginning January 5, 2000. Subsequent to December 31, 1996,
this line of credit was refinanced (see Note 4 and Note 13)..................... 2,233,000 2,800,000
-------------- --------------
Total......................................................................... 11,916,000 14,945,000
Less current maturities........................................................... 458,000 458,000
-------------- --------------
Long-term portion................................................................. $ 11,458,000 $ 14,487,000
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
6. LONG-TERM DEBT (CONTINUED)
Principal payments required on long-term debt for each of the next five
years ending December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
1997......................................................... $ 458,000 $ 458,000
1998......................................................... 1,895,000 2,109,000
1999......................................................... 342,000 556,000
2000......................................................... 342,000 556,000
2001......................................................... 634,000 852,000
Thereafter................................................... 8,245,000 10,414,000
-------------- --------------
Total........................................................ $ 11,916,000 $ 14,945,000
-------------- --------------
-------------- --------------
</TABLE>
Substantially all of the Company's property, plant and equipment serves as
collateral for long-term debt.
7. NOTES PAYABLE
<TABLE>
<S> <C>
Note payable to various affiliates, with interest at the federal rate of
5.75%, payable on January 10, 1997....................................... $ 807,000
</TABLE>
8. NOTE PAYABLE TO STOCKHOLDER
SVI has a note payable to its stockholder of $1,000,000 which bears interest
at the bank's reference rate (8 1/4% at December 31, 1996) plus 1/4%. The note
was repaid in March 1997.
9. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS--The Company has various operating lease agreements for
office space and farm land. The lease for office space is with a related
partnership and runs until 1999. The rent is $91,000 annually. Farm land leases
cover approximately 1,433 acres with unexpired terms ranging from 7 to 30 years.
Certain leases provide for options to renew, contain adjustment clauses
based upon the prevailing market rate or Consumer Price Index, and also provide
for payments of taxes, insurance and maintenance costs.
F-11
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Aggregate minimum rental expense for each of the next five years ending
December 31 is as follows:
<TABLE>
<S> <C>
1997........................................................... $ 455,000
1998........................................................... 455,000
1999........................................................... 402,000
2000........................................................... 384,000
2001........................................................... 384,000
Thereafter..................................................... 3,909,000
</TABLE>
Rent charged to operations in 1995 and 1996 was $388,000 in each period.
PENSION PLANS--SVI has two 401(k) Profit Sharing Plans. The first plan is
for the benefit of SVI's employees who are covered by the United Farm Workers of
America Collective Bargaining Agreement. All union employees of SVI are eligible
to participate after having worked 500 hours within a one-year period. The
Company contributes 15 cents for each hour worked by eligible employees, subject
to the limitations imposed by the Internal Revenue Code. The Company's
contribution to the union employees' plan amounted to $29,000 and $35,000 for
the years ended December 31, 1995 and 1996, respectively.
The second plan covers SVI's non-union employees. All non-union employees of
SVI are eligible to participate in the plan after one year of employment.
Employees may contribute between 1% and 15% of their annual compensation. SVI
matches 50 cents for every dollar of employee contributions up to 6% of their
annual salaries, subject to the limitations imposed by the Internal Revenue
Code. SVI's contribution to this plan amounted to $12,000 and $27,000 for the
years ended December 31, 1995 and 1996, respectively.
10. DEFERRED COMPENSATION
SVI has a non-qualified deferred compensation arrangement with an employee.
The arrangement provides for annual payments of $100,000 commencing upon the
employee's retirement. The deferred compensation liability included in the
accompanying combined balance sheet represents the net present value at 7% of
the expected future payments. Compensation expense related to the arrangement
was $64,000 and $71,000 in 1995 and 1996, respectively.
F-12
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the combined statements of cash flows are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEARS ENDED DECEMBER 31 31
------------------------ ------------------------
1996 1995 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest paid (net amount capitalized).... $ 654,000 $ 906,000 $ 185,000 $ 94,000
Interest capitalized...................... 430,000 291,000 35,000 108,000
Income taxes paid......................... 0 16,000 42,000 0
</TABLE>
12. STOCK OPTION PLAN
SVI has a Stock Option Plan (the "Plan") whereby it may grant options to
purchase shares of SVI's Class A Common Stock. SVI may issue a maximum of
200,000 shares of Class A Common Stock under the Plan, which amount may be
changed due to stock splits, stock dividends and other adjustments to SVI's
outstanding shares. The Company has not determined the terms of such options or
the vesting period. It is anticipated that all stock option grants will be at
fair market value at the date of the grant. Options can be either qualified or
non-qualified and no stock options have been granted to date (see Note 14).
13. SUBSEQUENT EVENTS (UNAUDITED)
NOTES PAYABLE
On March 28, 1997, SVI replaced its note payable to bank representing a
$5,600,000 line of credit with a new line of credit with maximum borrowings of
$7,500,000, which bears interest at the bank's reference rate minus 1/2%. The
note is secured by a letter of credit issued by a major client. The line of
credit is for costs incurred for the development of certain vineyards owned by
the client. Principal due in six annual installments beginning January 5, 2000.
On June 4, 1997, the Company replaced its two crop line of credit agreements
which provided for maximum aggregate borrowings of $3,900,000 with a crop line
of credit which provides for maximum borrowings of $10,500,000 through June 5,
1998. Borrowings are secured by crops and other assets with interest due
quarterly at the bank's reference rate.
On June 23, 1997, SVI borrowed on a short-term note payable to bank of
$3,000,000, due in full on September 5, 1997, with interest at the bank's
reference rate, to partially finance its acquisition of a 370-acre vineyard
property. The Company intends to refinance the note to a long-term note payable
prior to its due date.
On June 25, 1997, the Company replaced its note payable to bank of
$1,434,000 with a line of credit which provides for maximum borrowings of
$2,835,000 diminishing annually to a maximum allowable commitment of $1,775,000
which is due on June 4, 2007. The line of credit is secured by a deed of trust
on real property. Interest is payable quarterly at 1/4% over the bank's
reference rate.
F-13
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
13. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
On June 25, 1997, the Company replaced notes payable to bank of $288,000
with a line of credit which provides for maximum borrowings of $1,450,000
diminishing to a maximum allowable commitment of $586,000 which is due on June
4, 2007. The line of credit is secured by a leasehold interest. Interest is
payable quarterly at 1/4% over the bank's reference rate.
On June 26, 1997, the Company purchased a 370-acre vineyard known as
Riverview Vineyard for a purchase price of approximately $5.5 million. The
purchase price was financed by the notes payable established on June 23rd and
June 25th as referred to above.
14. PRO FORMA AMOUNTS (UNAUDITED)
EXCHANGE OF PARTNERSHIP UNITS AND LIMITED LIABILITY COMPANY INTERESTS FOR
CLASS B COMMON STOCK--Prior to the date of the Company's contemplated initial
public stock offering, the Company was the general partner of two California
limited partnerships (VI-1972 and V-405) and a member of a California limited
liability company (Quadra Partners). Effective with the stock offering, the
limited partnership units held by all limited partners in VI-1972 and V-405, and
the membership interests held by all members of each of Quadra Partners, other
than those held by SVI in each case, and Big Vines will be exchanged for Class B
Common Stock of SVI (the "Exchange Transaction"). As a result, each of VI-1972,
V-405, Big Vines and Quadra Partners will be terminated and dissolved, and their
respective former limited partners and members will receive an aggregate of
1,451,396 shares of Class B Common Stock. Prior to the initial public offering,
4,400,000 shares of Class B Common Stock will be outstanding.
S CORPORATION CONVERSION--In connection with the Company's contemplated
initial public stock offering, the Company has formed Scheid Vineyards Inc., a
Delaware corporation ("SVI-Del"), which will be the issuer of the Class A Common
Stock. SVI-Del conducts all of its business through its wholly-owned subsidiary,
Scheid Vineyards California Inc., a California corporation ("SVI-Cal"). The
Exchange Transaction will result in termination of SVI-Cal's S Corporation
status. As a result, SVI will pay income taxes at the corporate level. The pro
forma income tax provision in the combined statements of operations is based
upon an assumed 40% federal and state income tax rate.
DISTRIBUTIONS--Prior to the offering, SVI-Cal's cumulative S Corporation
earnings will be determined and a distribution will be made to its stockholder.
This amount is estimated at $3,030,000. In addition, a distribution of
approximately $475,000 will be made to the limited partners of VI-1972 (as of
immediately prior to the Exchange Transaction) to pay income taxes on income
from the partnership.
F-14
<PAGE>
SCHEID VINEYARDS INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996 AND 1995
(INFORMATION AS OF MARCH 31, 1997 AND FOR THE THREE MONTHS
ENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
14. PRO FORMA AMOUNTS (UNAUDITED) (CONTINUED)
DEFERRED INCOME TAXES--In connection with the conversion of SVI-Cal's S
Corporation status to C Corporation status, SVI is required by FASB No. 109 to
record deferred tax liabilities and deferred tax assets. Such change will result
in a net charge to earnings of approximately $1,300,000 in the fiscal quarter in
which the conversion to C Corporation status takes place. This one-time charge
is a result of differences in the accounting and tax treatment of certain of the
Company's assets and liabilities and is reflected through (i) an increase in
deferred income tax liabilities, partially offset by (ii) an increase in the
Company's deferred tax assets.
ADJUSTMENTS TO EQUITY--The pro forma adjustments to equity are as follows:
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED PARTNERS'
STOCK CAPITAL EARNINGS CAPITAL
----------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
March 31, 1997--Actual................................. $ 2,000 $ 124,000 $ 5,264,000 $ 3,205,000
Accounts receivable, stockholder....................... -- -- (2,161,000) --
Distribution payable to stockholder/partners........... -- -- (869,000) (475,000)
Deferred income taxes.................................. -- -- (1,300,000) --
Exchange of partnership interests for common stock..... 2,000 2,728,000 -- (2,730,000)
----------- -------------- -------------- --------------
March 31, 1997--Pro Forma.............................. $ 4,000 $ 2,852,000 $ 934,000 $ 0
----------- -------------- -------------- --------------
----------- -------------- -------------- --------------
</TABLE>
EARNINGS PER SHARE AND CLASSES OF COMMON STOCK--The pro forma earnings per
share in the combined statements of operations is based upon 4,400,000 shares of
Class B Common Stock. In connection with the contemplated stock offering, the
Company will offer 2,000,000 shares of Class A Common Stock. Each share of Class
A Common Stock will be entitled to one vote and each share of Class B Common
Stock will be entitled to five votes on all matters submitted to a vote of the
shareholders. The holders of the Class A Common Stock, voting as a separate
class, elect 25% of the total Board of Directors, rounded up to the nearest
whole number, of the Company and the holders of the Class B Common Stock, voting
as a separate class, elect the remaining directors. Each share of Class B Common
Stock is convertible into one share of Class A Common Stock at the option of the
holder or automatically upon transfer to a person other than certain specified
persons.
F-15
<PAGE>
[PHOTO #1 OF WINE GRAPES AND LEAVES ON ONE OF THE COMPANY'S VINEYARDS]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE CLASS
A COMMON STOCK TO WHICH IT RELATES, OR AN OFFER IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AT ANY TIME AFTER THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Company............................................................... 17
Use of Proceeds........................................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Dilution.................................................................. 20
Selected Combined Financial Data.......................................... 21
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.................................................... 22
Business.................................................................. 27
Management................................................................ 47
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 55
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 60
Underwriting.............................................................. 62
Legal Matters............................................................. 64
Experts................................................................... 64
Available Information..................................................... 64
Index to Combined Financial Statements.................................... F-1
</TABLE>
------------------------
UNTIL [ ], 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS AND
SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D
LAIDLAW EQUITIES, INC.
RODMAN & RENSHAW, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Certificate of Incorporation contains provisions
permitted by Section 102(b)(7) of the DGCL
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any person, including directors and officers, who are,
or are threatened to be made, parties to any threatened, pending or completed
legal action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
director, officer, employee or agent acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal actions or proceedings, had no
reasonable cause to believe that his or her conduct was unlawful. A Delaware
corporation may indemnify directors and/or officers in an action or suit by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the director or
officer is adjudged to be liable to the corporation. Where a director or officer
is successful on the merits or otherwise in the defense of any action referred
to above, the corporation must indemnify him or her against the expenses which
such director or officer actually and reasonably incurred.
The Registrant's Certificate of Incorporation filed as Exhibit 3.1 to this
Registration Statement provides for indemnification of directors of the
Registrant to the fullest extent permitted by the DGCL.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the Public Offering,
including certain liabilities under the Securities Act.
The Bylaws of the Company filed as Exhibit 3.2 to this Registration
Statement contain provisions requiring indemnification of directors and officers
to the maximum extent permitted by Delaware Law.
The Registrant may provide liability insurance for each director and officer
for certain losses arising from claims or charges made against them while acting
in their capacities as directors or officers of the Registrant.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Company in connection with the sale of the Class A Common Stock being
registered. All of the amounts shown are estimates except the registration fee
and the NASD filing fee.
<TABLE>
<CAPTION>
SEC registration fee.............................................. $ 7,698
<S> <C>
NASD filing fee................................................... 2,800
Nasdaq National Market listing fee................................ 16,000
Blue sky fees and expenses........................................ *
Accounting fees and expenses...................................... *
Legal fees and expenses of the Company............................ *
Printing and engraving............................................ *
Transfer agent and registrar fees and expenses.................... *
Miscellaneous..................................................... *
---------
Total......................................................... $ *
---------
---------
</TABLE>
- -------------------
* To be provided by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
(a) There have been no sales of unregistered securities by the Registrant
during the past three years, except that simultaneously with the offering, the
Registrant will issue an aggregate of 4,400,000 shares of Class B Common Stock
to the sole stockholder of Scheid Vinyards California Inc., a California company
and wholly-owned subsidiary of the Registrant, the limited partners of Vineyards
Investors 1972, a California limited partnership, and the members of each of
Quadra Partners LLC, a California limited liability company, other than the
Registrant, and Big Vines Limited Liability Company as applicable, in exchange
for all of their partnership and membership interests, respectively. These
shares were issued in reliance on Section 4(2) of the Act.
(b) There will be no underwriters employed in connection with the
transaction set forth in Section (a).
(c) The issuances of the securities set forth in this Item 26 are deemed to
be exempt from registration under the Securities Act in reliance on Section 4(2)
of the Act, Regulation D promulgated thereunder or Rule 701 promulgated under
Section 3(b) of the Act as transactions by an issuer not involving any public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. It is a condition in all
such transactions that the recipients of securities represent their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends are affixed
to the share certificates issued in such transactions. All recipients have
adequate access, through their relationships with the Registrant, to information
about the Registrant.
II-2
<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<S> <C>
1.1 (# ) Form of Underwriting Agreement.
3.1 (* ) Certificate of Incorporation.
3.2 (* ) Bylaws.
4.1 (* ) Warrant Agreement, dated as of , 1997, by and among the Company, Cruttenden Roth Incorporated,
Laidlaw Equities, Inc. and Rodman & Renshaw, Inc.
4.2 (# ) Form of Certificate Evidencing Ownership of Class A Common Stock of Scheid Vineyards Inc.
4.3 (# ) Form of Certificate Evidencing Ownership of Class B Common Stock of Scheid Vineyards Inc.
5.1 (* ) Opinion of Brobeck, Phleger & Harrison LLP as to the legality of the securities being registered.
10.1 (# ) Form of 1997 Stock Option/Stock Issuance Plan.
10.2 (* ) Form of Lock-Up Agreement between Cruttenden Roth Incorporated and the Scheid Vineyards Inc. Class B
Common Stockholders.
10.3 Lease, dated 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.(1)
10.4 Lease, dated January 1, 1996, by and between Echenique Ranch and Scheid Vineyards and Management Co.(1)
10.5 Land Lease, dated September 26, 1973, by and between William McHenry Bland and Monterey Farming
Corporation.(1)
10.6 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.(1)
10.7 + Vineyard Management Agreement, dated January 1, 1997, by and among Scheid Vineyards and Management Co.,
Canandaigua West, Inc. and Canandaigua Wine Company, Inc.(1)
10.8 + Vineyard Management Agreement, dated January 1, 1996, by and among Scheid Vineyards and Management Co.,
Canandaigua West, Inc. and Canandaigua Wine Company, Inc.(1)
10.9 + Grenache Vineyard Management Agreement, dated April 1, 1995, by and between Scheid Vineyards and
Management Co. and Joseph Phelps Vineyards.(1)
10.10+ Vineyard Management Agreement, dated April 1, 1995, by and between Scheid Vineyards and Management Co.
and Joseph Phelps Vineyards.(1)
10.11+ Vineyard Management Agreement, dated February 1, 1992, by and among Scheid Vineyards and Management Co.
and John Hill and Richard Hill as co-trustees of the Hill Living Trust.(1)
10.12+ Vineyard Development and Management Agreement, dated December 1, 1995, by and between Heublein, Inc.
and Scheid Vineyards and Management Co., as amended by Amendment No. 1, dated March 28, 1997.(1)
10.13(# ) Line of Credit Term Loan Agreement, dated June 25, 1997, between Vineyard 405 and Sanwa Bank
California.
</TABLE>
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<TABLE>
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10.14 Term Loan Agreement, dated June 15, 1992, between Scheid Vineyards and Management Co. and Sanwa Bank
California.(1)
10.15 Agricultural Credit Agreement, dated October 6, 1994, between Vineyard Investors 1972 and Sanwa Bank
California.(1)
10.16 Term Loan Agreement, dated July 24, 1995, between Scheid Vineyards and Management Co. and Sanwa Bank
California.(1)
10.17 Line of Credit Agreement, dated July 24, 1995, between Scheid Vineyards and Management Co. and Sanwa
Bank California.(1)
10.18(# ) Line of Credit Agreement (Reducing Commitment), dated June 25, 1997, by and between Sanwa Bank
California and Scheid Vineyards Inc.
10.19 Term Loan Agreement, dated September 30, 1991, between Scheid Vineyards and Management Co. and Sanwa
Bank California.(1)
10.20 Business Loan Agreement, dated March 28, 1997, between Scheid Vineyards and Management Co. and Bank of
America National Trust and Savings Association.(1)
10.21+ 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 March 12, 1993, between Scheid Vineyards and Management Co. and Heublein, Inc.(1)
10.22+ 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 March 12, 1993 and (v) a
letter agreement, dated April 6, 1990.(1)
10.23+ 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 March 12, 1993, between Vineyard 405 and Heublein, Inc.(1)
10.24+ Long Term Grape Purchase Agreement, dated March 12, 1993, by and between Scheid Vineyards and
Management Co. and Heublein, Inc.(1)
10.25+ Grape Purchase Agreement, dated April 1, 1996, by and between Scheid Vineyards and Management Co. and
The Hess Collection Winery.(1)
10.26+ Grape Purchase Agreement, July 1, 1996, by and among Scheid Vineyards and Management Co., Stephen
Dooley Wine Co., Inc. and The Chalone Wine Group, Ltd.(1)
10.27 Alternating Winery Agreement, dated November 30, 1995, by and between Scheid Vineyards and Management
Co. and Storrs Winery.(1)
10.28 Winery Services Agreement, dated January 1, 1996, by and between Scheid Vineyards and Management Co.
and Storrs Winery.(1)
10.29 Standard Office Lease, dated July 1, 1994, by and between Scheid Vineyards and Management Co. and Tesh
Partners, L.P.(1)
10.30 Collective Bargaining Agreement, dated January 1, 1996, by and between Scheid Vineyards and Management
Co. and United Farm Workers of America, AFL-CIO.(1)
</TABLE>
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<TABLE>
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10.31(* ) Form of Buy-Sell Agreement, dated July , 1997, by and among Scheid Vineyards Inc., Alfred G. Scheid,
Trustee of the Alfred G. Scheid Revocable Trust, dated October 8, 1992, Scott D. Scheid, Heidi M.
Scheid, Emanty Limited Liability Company and Kurt J. Gollnick.
10.32 Promissory Note, dated December 30, 1994, by Kurt Gollnick for the benefit of Scheid Vineyards and
Management Co.(1)
10.33(# ) Promissory Note, dated June 23, 1997, by Scheid Vineyards Inc. for the benefit of Sanwa Bank
California.
10.34(# ) Individual Retirement Agreement, dated May 1, 1997, by and between Scheid Vineyards Inc. and Ernest M.
Brown.
10.35 Joint Agreement, dated March 27, 1997, by and among Samuel R. Avila and Margaret J. Avila, individually
and as trustees under declaration of trust dated August 16, 1989, and Margaret J. Avila and Valarie
Bassetti, as successor co-trustees of the testamentary trust of Joseph Labarere, Metropolitan Life
Insurance Company, Scheid Vineyards and Management Co., Canandaigua West, Inc. and Canandaigua Wine
Company, Inc.(1)
10.36 Water Supply Agreement, dated as of January 1, 1997, by Scheid Vineyards and Management Co. and
Canandaigua West, Inc.(1)
10.37 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.(1)
10.38 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.(1)
10.39 Adjustable Rate Note, dated October 6, 1989, between Alfred G. Scheid and The Boston Safe Deposit and
Trust Company.(1)
10.40 Agricultural Credit Agreement, dated June 4, 1997, between Scheid Vineyards Inc. and Sanwa Bank.(1)
10.41 Lease, dated April 1, 1995, by and between Vineyard Investors 1972 and Joseph Phelps Vineyards.(1)
10.42+ Grape Purchase Agreement, dated May 9, 1997, by and between Scheid Vineyards Inc. and The Hess
Collection Winery.(1)
10.43+ Grape Purchase Agreement, dated April 1, 1997, by and between Vineyard Investors 1972 and Stephen
Dooley Wine Co., Inc.(1)
10.44(# ) Employment Agreement, dated July 3, 1997, by and between Scheid Vineyards Inc. and Alfred G. Scheid.
10.45(# ) Employment Agreement, dated July 3, 1997, by and between Scheid Vineyards Inc. and Scott D. Scheid.
10.46(# ) Employment Agreement, dated July 3, 1997, by and between Scheid Vineyards Inc. and Heidi M. Scheid.
10.47(# ) Employment Agreement, dated July 3, 1997, by and between Scheid Vineyards Inc. and Kurt J. Gollnick.
10.48(# ) Form of Indemnification Agreement.
10.49(# ) Security and Pledgeholder Agreement, dated June 23, 1997, by and among Sanwa Bank California, Sanwa
Bank California Trust Division and Alfred G. Scheid and Addendum to Security and Pledgeholder
Agreement, dated June 23, 1997.
</TABLE>
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<TABLE>
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10.50(# ) Security Agreement, dated June 23, 1997, by and between Sanwa Bank California and Alfred G. Scheid,
Trustee of the Alfred G. Scheid Revocable Trust dated October 8, 1992 and Addendum to Security
Agreement, dated June 23, 1997
21.1(# ) List of Subsidiaries.
23.1(# ) Independent Auditors' Consent.
23.2(* ) Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1 hereto).
24.1 Power of Attorney (see signature page of this Registration Statement).(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- ------------------------------
* To be filed by amendment.
# Filed herewith.
+ Portions of this Exhibit have been deleted pursuant to the Registrant's
request for confidential treatment pursuant to Rule 406 promulgated under
the Securities Act.
(1) Previously filed with the Securities and Exchange Commission as an exhibit
to the Company's Registration Statement on Form SB-2 as filed on May 28,
1997 and incorporated herein by reference.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes therein.
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance on Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(b)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California on this 2nd day of July, 1997.
SCHEID VINEYARDS INC.
By: /s/ ALFRED G. SCHEID
-----------------------------------------
Alfred G. Scheid
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board and
/s/ ALFRED G. SCHEID Chief Executive Officer
- ------------------------------ (Principal Executive July 2, 1997
Alfred G. Scheid Officer)
Vice President Finance,
/s/ HEIDI M. SCHEID Chief Financial Officer,
- ------------------------------ Treasurer and Director July 2, 1997
Heidi M. Scheid (Principal Financial and
Accounting Officer)
* Vice President, Chief
- ------------------------------ Operating Officer and July 2, 1997
Scott D. Scheid Director
*
- ------------------------------ Director July 2, 1997
John L. Crary
*
- ------------------------------ Director July 2, 1997
Robert P. Hartzell
* /s/ ALFRED G. SCHEID
- ------------------------------
Alfred G. Scheid
Attorney-in-fact
II-7
<PAGE>
Exhibit 1.1
________________ SHARES(1)
SCHEID VINEYARDS INC.
COMMON STOCK
UNDERWRITING AGREEMENT
July ___, 1997
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92715
LAIDLAW EQUITIES, INC.
100 Park Avenue, 28th Floor
New York, NY 10017
RODMAN & RENSHAW, INC.
225 Liberty Street
2 World Financial Center, 30th Floor
New York, NY 10281
Dear Sirs:
Scheid Vineyards Inc., a Delaware corporation (the "COMPANY"), addresses
you as the Representative of each of the parties listed in Schedule A hereto
(herein collectively called the "UNDERWRITERS") and hereby confirms its
agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
_____________ shares of its authorized and unissued Class A Common Stock, par
value $0.001 per share (the "FIRM SHARES") to the several Underwriters. The
Company also proposes to grant to the Underwriters an option to purchase up to
____________ additional shares of the Company's Class A Common Stock, par value
$0.001 per share (the "OPTION SHARES"), as provided in SECTION 7. The Company
also proposes to sell to the Representatives, at a purchase price of $0.001 per
warrant, warrants
- ---------------------
1 Plus an option to purchase up to _____________ additional shares from the
Company to cover over-allotments.
<PAGE>
exercisable for a period of five years commencing one year after the effective
date of the Registration Statement (as defined below) to purchase up to an
aggregate of ________________ shares of Class A Common Stock at a price of
$__________ per share (the "REPRESENTATIVES' WARRANTS"), which exercise and
purchase shall be effected in accordance with the Representatives' Warrant
Agreement in the form attached hereto as Exhibit A and entered into between the
Company and you concurrently herewith (the "REPRESENTATIVES' WARRANT
AGREEMENT"). As used in this Agreement, the term "SHARES" shall include the
Firm Shares and the Option Shares. All shares of Class A Common Stock, par
value $0.001 per share, of the Company, including the Shares, are hereinafter
referred to as "CLASS A COMMON STOCK," and all shares of Class B Common Stock,
par value $.001 per share, of the Company are hereafter referred to as "CLASS B
COMMON STOCK." The Class A Common Stock and the Class B Common Stock is
referred to herein collectively as the "COMMON STOCK."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY.
The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form SB-2 (File No. 333-27871) with
respect to the Shares, including a prospectus, has been prepared by the Company
in material conformity with the requirements of the Securities Act of 1933, as
amended (the "ACT"), and the applicable rules and regulations (the "RULES AND
REGULATIONS") of the Securities and Exchange Commission (the "COMMISSION") under
the Act and has been filed with the Commission; such amendments to such
registration statement, such amended prospectuses and such abbreviated
registration statements pursuant to Rule 462(b) of the Rules and Regulations as
may have been required prior to the date hereof have been similarly prepared and
filed with the Commission; and the Company will file such additional amendments
to such registration statement, such amended prospectuses and such abbreviated
registration statements as may hereafter be required. Copies of such
registration statement and amendments together with each exhibit filed
therewith, of each related prospectus (the "PRELIMINARY PROSPECTUSES") and of
any abbreviated registration statement pursuant to Rule 462(b) of the Rules and
Regulations have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission, pursuant to Rule 424(b) of the Rules and Regulations
or as part of a post-effective amendment to the registration statement
(including a final form of prospectus), the information omitted from the
registration statement pursuant to Rule 430A(a) of the Rules and Regulations or,
if Cruttenden Roth Incorporated, on behalf of the several Underwriters, shall
agree to the utilization of Rule 434 of the Rules and Regulations, the
information required to be included in any term sheet filed pursuant to Rule
434(b) or (c), as applicable, of the Rules and Regulations. If the registration
statement relating to the Shares has not been declared effective under the Act
by the Commission, the Company will prepare and promptly file an amendment to
the registration statement, including a final form of prospectus, or, if
Cruttenden Roth Incorporated, on behalf of the several Underwriters, shall agree
to the utilization of Rule 434 of the Rules and Regulations, the information
required to be included in any term sheet filed pursuant to Rule 434(b) or (c),
as applicable, of the Rules and Regulations.
2
<PAGE>
The term "REGISTRATION STATEMENT" as used in this Agreement shall mean
such registration statement, including financial statements, schedules and
exhibits (including exhibits incorporated by reference), in the form in which it
became or becomes, as the case may be, effective (including, if the Company
omitted information from the registration statement pursuant to Rule 430A(a) of
the Rules and Regulations or files a term sheet pursuant to Rule 434 of the
Rules and Regulations, the information deemed to be a part of the registration
statement at the time it became effective pursuant to Rule 430A(b) or Rule
434(d) of the Rules and Regulations) and, in the event of any amendment thereto
or the filing of any abbreviated registration statement pursuant to Rule 462(b)
of the Rules and Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness of
such amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "PROSPECTUS" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); PROVIDED, HOWEVER, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of Cruttenden Roth Incorporated, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the Underwriters
to all prospective purchasers of the Shares and the information deemed to be a
part of the Registration Statement at the time it became effective pursuant to
Rule 434(d) of the Rules and Regulations, and such Prospectus will not be
materially different from such prospectus subject to completion.
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or instituted proceedings for that
purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased,
(i) the Registration Statement and the Prospectus, and any amendments or
supplements thereto, contained and will contain all material information
required to be included therein by the Act and the Rules and Regulations and
will in all material respects conform to the requirements of the Act and the
Rules and Regulations, (ii) the Registration Statement, and any amendments or
supplements thereto, did not and will not include any untrue statement of a
material fact or omit to state a material fact required to be
3
<PAGE>
stated therein or necessary to make the statements therein not misleading, and
(iii) the Prospectus, and any amendments or supplements thereto, did not and
will not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement or Prospectus, or any amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for use in the
preparation thereof.
(c) The reincorporation of the Company in Delaware has been effected
through merger of the Company's predecessor, Scheid Vineyards Inc., a California
corporation into its wholly owned subsidiary incorporated in Delaware for
purposes of the reincorporation and to such counsel's knowledge having no
business, operations or assets prior to the reincorporation, and the Company is
duly incorporated and validly existing as a corporation in good standing under
the laws of the State of Delaware with full power and authority (corporate and
other) to own, lease and operate its properties and conduct its business as
described in the Registration Statement and the Prospectus; the Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where the failure to
be so qualified or be in good standing would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company; no proceeding has been instituted in any such
jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities that are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in violation of or breach
of or default under (nor has any event occurred that with notice, lapse of time
or both would constitute a breach of or default under) its charter or bylaws or
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, mortgage, deed of trust, loan agreement,
joint venture or other agreement or instrument to which the Company is a party
or by which its properties may be bound; and the Company is not in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or its properties. The Company
does not directly or indirectly own any equity interest in or securities of, or
control, any corporation, association or other entity. All of the partners of
Vineyard Investors 1972 and Vineyard 405, each a California limited partnership,
and the members of Quadra Partners LLC, a California limited liability company
(together with Vineyard Investors 1972 and Vineyard 405, the "PARTNERSHIPS"),
have contributed all of their interests in the Partnerships to the Company, and
released the Company from any claims or liabilities in respect of their
interests in the Partnerships or the assets and business formerly owned and
conducted by the Partnerships or transfer thereof to the Company, in exchange
for Class B Common Stock and the Company now owns all of the assets and business
formerly owned and conducted by the Partnerships free of any adverse claims
except security interests and deeds of trust described in the Registration
Statement.
(d) The Company has full legal right, power and authority to enter
into this Agreement and the Representatives' Warrant Agreement and perform the
transactions contemplated
4
<PAGE>
hereby and thereby. This Agreement and the Representatives' Warrant Agreement
have been duly authorized, executed and delivered by the Company and are valid
and binding agreements on the part of the Company, enforceable in accordance
with their respective terms, except as rights to indemnification hereunder may
be limited by applicable law and except as the enforcement hereof of thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the making and performance of this Agreement and
the Representatives' Warrant Agreement by the Company and the consummation of
the transactions herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any bond, debenture, note or other evidence of indebtedness, or under any
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or by
which its properties may be bound, (ii) the charter or bylaws of the Company or
(iii) any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, administrative agency, regulatory body, government or governmental
agency or body, domestic or foreign, having jurisdiction over the Company or its
properties. No consent, approval, authorization or order of or qualification
with any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or its properties is required for the
execution and delivery of this Agreement and the consummation by the Company of
the transactions herein contemplated, except such as may be required under the
Act, by the National Association of Securities Dealers, Inc. (the "NASD"), the
rules of the Nasdaq National Market, or under state or other securities or Blue
Sky laws, all of which requirements have been satisfied in all material
respects.
(e) There is not any pending or, to the Company's knowledge,
threatened, any action, suit, claim or proceeding against the Company, any of
its officers, directors, employees, or agents or any of its properties or assets
or rights, at law or in equity, before any court, administrative agency,
regulatory body, government or governmental agency or body, domestic or foreign,
which (i) might, individually or in the aggregate, result in any material
adverse change in the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company or might materially and adversely
affect the Company's properties, assets or rights, (ii) might prevent
consummation of the transactions contemplated hereby or (iii) is required to be
disclosed in the Registration Statement or Prospectus and is not so disclosed;
and there are no agreements, contracts, leases or documents of the Company of a
character required to be described or referred to in the Registration Statement
or Prospectus or to be filed as an exhibit to the Registration Statement by the
Act or the Rules and Regulations which have not been accurately described in all
material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement. The Company is not a party or subject
to the provisions of any injunction, judgment, decree or order of any court,
regulatory body, administrative agency, government or governmental agency or
body domestic or foreign, that could be expected to result in a material adverse
change in the condition (financial or other), earnings, operations, business or
business prospects of the Company.
(f) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and nonassessable, have
been issued in compliance with all federal and state securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"CAPITALIZATION" and conform in all material respects to the statements relating
thereto contained in the Registration Statement and the
5
<PAGE>
Prospectus (and such statements correctly state the substance of the instruments
defining the capitalization of the Company); the capital stock of the Company,
including the Shares, conforms in all material respects to the description
thereof contained in the Registration Statement and the Prospectus; the Shares
and the Representatives' Warrants and the shares of Class A Common Stock
issuable upon exercise of the Representatives' Warrants have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement,
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement or the Representatives' Warrant
Agreement, as the case may be, will be duly and validly issued and fully paid
and nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; no preemptive right, co-sale
right, registration right, right of first refusal or other similar right of
stockholders exists with respect to any of the Shares or the issuance and sale
thereof or the Representatives' Warrants or the Class A Common Stock issuable
upon exercise thereof; and the certificates for the Shares are in due and proper
form and the holders of the Shares and the Representatives' Warrants and the
Class A Common Stock issuable upon exercise thereof, after making payment
therefor will not be subject to personal liability by reason of being such
holders. No further approval or authorization of any stockholder, the Board of
Directors of the Company or others is required for the issuance and sale or
transfer of the Shares or the Representatives' Warrants or the Class A Common
Stock issuable upon exercise thereof except as may be required under the Act or
under state or other securities or Blue Sky laws. Except as disclosed in the
Registration Statement, Prospectus and the financial statements of the Company,
and the related notes thereto included in the Prospectus, the Company has no
outstanding options to purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations convertible into, or
any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus fairly and accurately presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(g) Deloitte & Touche LLP whose reports on the combined financial
statements of the Company and the Partnerships are included in the Registration
Statement and the Prospectus, are independent accountants within the meaning of
the Act and the Rules and Regulations; the audited financial statements of the
Company, together with the related schedules and notes, and the unaudited
financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
and cash flows of the Company at the respective dates and for the respective
periods to which they apply and have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved except as may be otherwise stated therein. The selected and summary
financial and statistical data included in the Registration Statement present
fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company, (ii) any transaction
that is material to the Company, except transactions entered into in the
ordinary course of business consistent with past practices, (iii) any
obligation, direct or contingent, that
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is material to the Company, incurred by the Company, except obligations incurred
in the ordinary course of business consistent with past practices, (iv) any
change in the capital stock of the Company, (v) any change in the outstanding
indebtedness of the Company that is material to the Company or is out of the
ordinary course of business of the Company, (vi) any dividend or distribution of
any kind declared, paid or made on the capital stock of the Company, (vii) any
default in the payment of principal of or interest on any outstanding debt
obligations, or (viii) any loss or damage (whether or not insured) to the
property of the Company which has been sustained or will have been sustained
which has a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(i) The Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
and valid and subsisting interests in all of the real property described in the
Registration Statement and Prospectus as leased by it, in each case free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest, other than as set forth in the Registration Statement and Prospectus
or as would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
The agreements to which the Company is a party described in, or filed as
exhibits to, the Registration Statement and Prospectus are valid agreements,
enforceable by the Company, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles and, to the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and the Company has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
Except as set forth in the Registration Statement and Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted, and all such properties are free of
contractual or legal restrictions that would impair the Company's use of such
properties in its business for the purposes described in the Registration
Statement and the Prospectus.
(j) The Company and its subsidiaries have timely filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due, and there is no tax deficiency that has been or, to
the Company's knowledge, might be asserted against the Company that might have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company; and all tax
liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
prudent for its business and consistent with insurance coverage maintained by
similar companies in similar businesses, including, but not limited to,
insurance covering real and personal property owned or leased by the Company
against theft, damage, destruction, acts of vandalism, products liability,
errors and omissions, and all other risks customarily insured against, all of
which insurance is in full force and effect; the Company has not been refused
any insurance coverage sought or applied for; and the Company does not have any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage
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<PAGE>
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not materially and adversely
affect the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company.
(l) To the Company's knowledge, no labor disturbance by the employees
of the Company exists or is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its principal
suppliers, subcontractors, authorized dealers or international distributors that
might be expected to result in a material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company. The Company does not have any reason to believe that
renegotiation of its current Collective Bargaining Agreement with the United
Farm Workers, AFL-CIO ("UFW") which terminates December 31, 1997, will result in
a labor disturbance or a material increase in the salaries and related costs of
its UFW workers. There are no pending grievances or arbitration awards against
the Company pursuant to such Collective Bargaining Agreement. No Unfair Labor
Practice filings have been made with the Agricultural Labor Relations Board
("ALRB") against the Company within the past five years, and there are no
pending ALRB proceedings or ALRB orders that have been issued against the
Company.
(m) To the best of the Company's knowledge, the Company owns or
possesses exclusive rights to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights that
are necessary to conduct its business as now conducted and as described in the
Registration Statement and Prospectus; except as set forth in the Registration
Statement and the Prospectus, the expiration of any patents, patent rights,
trade secrets, trademarks, service marks, trade names or copyrights would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company; the Company
has not received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of the Company by others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights; and the Company has not received any notice
of, and has no knowledge of, any infringement of or conflict with asserted
rights of others by the Company with respect to any patent, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade names or
copyrights which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company.
(n) The Class A Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"), and is
approved for quotation on the Nasdaq National Market, and the Company has taken
no action designed to, or likely to have the effect of, terminating the
registration of the Class A Common Stock under the Exchange Act or delisting the
Common Stock from the Nasdaq National Market, nor has the Company received any
notification that the Commission or the NASD is contemplating terminating such
registration or listing.
(o) The Company has been advised concerning the Investment Company
Act of 1940, as amended (the "1940 ACT"), and the rules and regulations
thereunder, and the Company and each of the Partnerships have in the past
conducted, and the Company intends in the future to conduct, its affairs in such
a manner as to ensure that it is not and will not become an "investment company"
or a company "controlled" by an "investment company" within the meaning of the
1940 Act and such rules and regulations.
8
<PAGE>
(p) The Company has not distributed and will not distribute prior to
the later of (i) the Closing Date, or any date on which Option Shares are to be
purchased, as the case may be, and (ii) completion of the distribution of the
Shares, any offering material in connection with the offering and sale of the
Shares other than any Preliminary Prospectuses, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Act.
(q) None of the Company, the Partnerships, or their officers,
directors, employees or agents has at any time during the last five (5) years
made (i) any unlawful contribution to any candidate for foreign office or failed
to disclose fully any contribution in violation of law, or (ii) any payment to
any federal or state governmental officer or official, or other person charged
with similar public or quasi-public duties, other than payments required or
permitted by the laws of the United States or any jurisdiction thereof, or
(iii) any other payment of funds of the Company or any of the Partnerships
prohibited by law, and no funds of the Company have been set aside for any
payment prohibited by law.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Class A Common
Stock to facilitate the sale or resale of the Shares (except for any action
taken by the Underwriters).
(s) Except as otherwise set forth in the Registration Statement and
the Prospectus, each officer, director and stockholder of the Company has agreed
in writing that such person will not, except as described below, for a period of
one year from the date of the final Prospectus (the "LOCK-UP PERIOD"), sell,
offer to sell, solicit an offer to buy, contract to sell, loan, pledge, grant
any option to purchase, or otherwise transfer or dispose of (collectively, a
"DISPOSITION"), any shares of Common Stock, or any securities convertible into
or exercisable or exchangeable for Common Stock (collectively, "SECURITIES"),
now owned or hereafter acquired by such person or with respect to which such
person has or hereafter acquires the power of disposition otherwise than (i) on
the transfer of shares of Common Stock or Securities during such person's
lifetime by BONA FIDE gift or upon death by will or intestacy, provided that any
transferee agrees to be bound by the Lock-Up Agreement, and (ii) on the transfer
or other disposition of shares of Common Stock or Securities as a distribution
to limited partners or stockholders of such person, provided that the
distributees thereof agree to be bound by the terms of the Lock-Up Agreement.
The foregoing restriction has been expressly agreed to preclude the holder of
the Securities from engaging in any hedging, pledge or other transaction which
is designed to or may reasonably be expected to lead to or result in a
Disposition by any stockholder or any other person of any Securities, whether or
not owned by a Stockholder, during the Lock-up Period, even if such Securities
would be disposed of by someone other than such stockholder. Such prohibited
hedging, pledge or other transactions would include, without limitation, any
short sale (whether or not against the box), any pledge of shares covering an
obligation that matures, or could reasonably mature during the Lock-Up Period,
or any purchase, sale or grant of any right (including, without limitation, any
put or call option) with respect to any Securities or with respect to any
security (other than a broad-based market basket or index) that includes,
relates to or derives any significant part of its value from Securities.
Furthermore, each such person has also agreed and consented to the entry of stop
transfer instructions with the Company's transfer agent against the transfer of
the Securities held by such person except in compliance with this restriction.
The Company has provided to counsel for the Underwriters a complete and accurate
list of all securityholders of the Company as of
9
<PAGE>
July ___, 1997 and the number and type of securities held by each
securityholder. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the agreements pursuant to which its
officers, directors and stockholders have agreed to such or similar restrictions
(the "LOCK-UP AGREEMENTS") presently in effect. The Company hereby represents
and warrants that it will not purport to release any of its officers, directors
or other stockholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of Cruttenden Roth
Incorporated.
(t) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) There are no outstanding loans, advances (except normal advances
for business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers,
directors, employees, or consultants of the Company or any of the Partnerships
or any of the members of the families of any of them, except as disclosed in the
Registration Statement and the Prospectus.
(v) Other than Cruttenden Roth Incorporated, on behalf of the several
Underwriters, no person is or will be owed any finders fee or commission or
similar payment in connection with the transactions contemplated by this
Agreement.
(w) There are no persons with registration or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the Act, except that the Underwriters
have registration rights with respect to the Underwriters' Warrants and the
underlying Class A Common Stock as described in the Underwriters Warrant
Agreement.
(x) The Company has conducted and is conducting its businesses, and
the Partnerships conducted their businesses, in compliance with all applicable
federal, state, local and foreign statutes, laws, rules, regulations,
ordinances, codes, decisions, decrees, directives and orders, except where the
failure to do so would not, singly or in the aggregate, have a material adverse
effect on the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company.
(y) The Company has complied with all provisions of Florida
H.B. 1771, codified as Section 517.075 of the Florida statutes, and all
regulations promulgated thereunder relating to issuers doing business with Cuba.
(z) Except as described in the Prospectus, to the Company's
knowledge, there are no rulemaking or similar proceedings before any federal,
state, local or foreign government or regulatory bodies which involve or affect
the Company which, if the subject of an action unfavorable to
10
<PAGE>
the Company would have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
(aa) To the knowledge of the Company, no officer, director, employee,
or consultant of the Company is in violation of any non-competition,
non-disclosure, confidentiality or other similar agreement with any party other
than the Company, and no such person is expected to be in violation thereof as a
result of the business conducted or expected to be conducted by the Company as
described in the Prospectus or such person's performance of his obligations to
the Company.
(bb) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), or any federal or state law relating to
discrimination in the hiring, promotion or pay of employees or any applicable
federal or state wages and hours laws, or any provisions of the Employee
Retirement Income Security Act or the rules and regulations promulgated
thereunder, which in each case might result in any material adverse effect on
the properties, assets, operations, business, business prospects or condition
(financial or other) of the Company.
(cc) The Company has such permits, licenses, franchises and
authorizations of governmental or regulatory authorities ("permits"), including
without limitation under any applicable Environmental Laws, as are necessary to
own, lease and operate its properties and to conduct its business; the Company
has fulfilled and performed all of its material obligations with respect to such
permits and no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other material
impairment of the rights of the holder of any such permit; and, except as
described in the Prospectus, such permits contain no restrictions that are
materially burdensome to the Company.
(dd) In the ordinary course of its business, the Company conducts a
periodic review of the effect of Environmental Laws on the business, operations
and properties of the Company, in the course of which it identifies and
evaluates associated costs and liabilities (including without limitation any
capital or operating expenditure required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities to
third parties). On the basis of such review, the Company reasonably has
concluded that such associated costs and liabilities, singly or in the
aggregate, would not have a material adverse effect on the properties, assets,
operations, business, business prospects or condition (financial or other) of
the Company.
3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $______ per share, the
respective number of Firm Shares set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in SECTION 10).
Delivery of definitive certificates for the Firm Shares to be purchased by
the several Underwriters pursuant to this SECTION 3 shall be made against
payment of the purchase price therefor
11
<PAGE>
by the several Underwriters by certified or official bank check or checks drawn
in same day funds, payable to the order of the Company, at the offices of
Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Suite 1700, Irvine, California (or at
such other place as may be agreed upon between the Representative and the
Company), at 7:00 a.m. California time, (a) on the third (3rd) full business day
following the first day that Shares are traded or (b) if this Agreement is
executed and delivered after 1:30 p.m. California time, the fourth (4th) full
business day following the day that this Agreement is executed and delivered or
(c) at such other time and date not later than seven (7) full business days
following the first day that Shares are traded as the Representative and the
Company may determine (or at such time and date to which payment and delivery
shall have been postponed pursuant to SECTION 10), such time and date of payment
and delivery being herein called the "CLOSING DATE"; PROVIDED, HOWEVER, that if
the Company has not made available to the Representative copies of the
Prospectus within the time provided in SECTION 4(d), the Representative may, in
its sole discretion, postpone the Closing Date until no later than two (2) full
business days following delivery of copies of the Prospectus to the
Representative.
The certificates for the Firm Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the Closing Date and will be in such
names and denominations as you shall specify at least two (2) full business days
prior to the Closing Date. If the Representative so elects, delivery of the
Firm Shares may be made by credit through full fast transfer to the accounts at
The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the Representative of
the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
The Underwriters intend to make a public offering (as described in SECTION
11) of the Firm Shares at the public offering price of $______ per share. After
the public offering the Underwriters may from time to time, in their discretion,
vary the public offering price.
The information set forth on the inside front cover page of the Prospectus
(insofar as such information relates to the Underwriters) concerning
stabilization, syndicate short covering transactions and penalty bids, and under
the first (including the table listing the Underwriters), second, third, ninth
and tenth paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the Prospectus constitutes the only information furnished by
the Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
Underwriters, represent and warrant to the Company that the statements made
therein do not include any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
4. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the
several Underwriters that:
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(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; the Company will use its best efforts to
cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules
and Regulations, the Company will provide evidence satisfactory to you that the
Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as
applicable, of the Rules and Regulations have been filed, within the time period
prescribed, with the Commission pursuant to Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("UNDERWRITERS' COUNSEL"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, and provide
you with copies of, any amendments or supplements to the Registration Statement
or Prospectus which may be necessary to correct any statements or omissions, if,
at any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; in case any Underwriter is required to
deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive
notice or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement, or suspension of the
qualification of the Shares for sale in any jurisdiction, or of
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<PAGE>
the initiation or threat of any proceeding for any such purpose; and it will
promptly use its best efforts to prevent the issuance of any stop order or to
obtain its withdrawal at the earliest possible moment if such stop order should
be issued.
(c) The Company will use its best efforts (including by providing
full cooperation with your counsel, whose services in this matter are required
and which you and the Company will seek to expedite) to qualify the Shares for
offering and sale under the securities laws of such jurisdictions as you may
designate and to continue such qualifications in effect for so long as may be
required for purposes of the distribution of the Shares, except that the Company
shall not be required in connection therewith or as a condition thereof to
qualify as a foreign corporation or to execute a general consent to service of
process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction for such purpose.
(d) The Company will furnish to you, as soon as available, and, in
the case of the Prospectus and any term sheet or abbreviated term sheet under
Rule 434, in no event later than the first full business day following the first
day that Shares are traded, copies of the Registration Statement (two of which
will be signed and which will include all exhibits), each Preliminary
Prospectus, the Prospectus and any amendments or supplements to such documents,
including any prospectus prepared to permit compliance with Section 10(a)(3) of
the Act, all in such quantities as you may from time to time reasonably request.
Notwithstanding the foregoing, if Cruttenden Roth Incorporated, on behalf of the
several Underwriters, shall agree to the utilization of Rule 434 of the Rules
and Regulations, the Company shall provide to you copies of a Preliminary
Prospectus updated in all respects through the date specified by you in such
quantities as you may from time to time reasonably request.
(e) The Company will make generally available to its securityholders
as soon as practicable, but in any event not later than the forty-fifth (45th)
day following the end of the fiscal quarter first occurring after the first
anniversary of the effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be audited) complying
with the provisions of Section 11(a) of the Act and covering a twelve (12) month
period beginning after the effective date of the Registration Statement.
(f) During a period of five (5) years after the date hereof, the
Company will furnish to its stockholders as soon as practicable after the end of
each respective period, annual reports (including financial statements audited
by independent certified public accountants) and, upon request by a stockholder,
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders,
(ii) concurrently with furnishing to its stockholders, a balance sheet of the
Company as of the end of such fiscal year, together with statements of
operations, of stockholders' equity, and of cash flows of the Company for such
fiscal year, accompanied by a copy of the certificate or report thereon of
independent certified public accountants, (iii) as soon as they are available,
copies of all reports (financial or other) mailed to stockholders, (iv) as soon
as they are available, copies of all reports and
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financial statements furnished to or filed with the Commission, any securities
exchange or the NASD, (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to stockholders or prepared by the Company, and (vi) any additional
information of a public nature concerning the Company, or its business which you
may reasonably request. During such five (5) year period, if the Company shall
have active subsidiaries, the foregoing financial statements shall be on a
consolidated basis to the extent that the accounts of the Company and such
subsidiaries are consolidated, and shall be accompanied by similar financial
statements for any significant subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of the
Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar (which may
be the same entity as the transfer agent) for its Class A Common Stock.
(i) The terms of Section 7 of that certain Letter Agreement dated
April 21, 1997 between you and the Company (the "LETTER AGREEMENT") are hereby
incorporated by reference and made obligations of the Company and Cruttenden
Roth Incorporated as part of this Agreement notwithstanding that the Letter
Agreement shall have ceased to be of full force or effect for any other purpose.
If the transactions contemplated hereby are not consummated by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed hereunder or to fulfill any condition of
the Underwriters' obligations hereunder, or if the Company shall terminate this
Agreement pursuant to SECTION 11(a), or if the Underwriters shall terminate this
Agreement pursuant to SECTION 11(a) or 11(b), then the provisions of Section 11
of the Letter Agreement shall govern payment and reimbursement obligations of
the parties notwithstanding that the Letter Agreement shall have ceased to be in
full force or effect for any other purpose.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Class A Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-up Period, the Company will not, without the
prior written consent of Cruttenden Roth Incorporated, effect the Disposition
of, directly or indirectly, any Securities other than the sale of the Firm
Shares and the Option Shares hereunder and the Company's issuance of options or
Common Stock under the Company's presently authorized stock option and stock
purchase plans described in the Registration Statement and the Prospectus.
(l) The Company shall pay to Cruttenden Roth Incorporated a
nonaccountable expense allowance equal to three percent (3%) of the total Price
to Public shown on the front cover of the Prospectus, including, if exercised,
with respect to the over-allotment option. Cruttenden Roth
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Incorporated acknowledges that $30,000 of the amount payable pursuant to this
paragraph has already been paid.
(m) The Company will use its best efforts to cause the Shares to be
included in the Nasdaq National Market.
(n) The company will refrain from investing the proceeds of the sale
of the Shares in such a manner as to cause the Company to become an "investment
company" within the meaning of the 1940 Act.
(o) The company will furnish to you as early as practicable before
the Closing Date and any later date on which Option Shares are to be purchased,
as the case may be, but not later than two business days prior thereto, a copy
of the latest available unaudited interim consolidated financial statements, if
any, of the Company that have been read by the Company's independent certified
public accountants as stated in their letter to be furnished pursuant to SECTION
6(f).
(p) On the Closing Date, the Company will sell the Representatives'
Warrants to the Representatives.
5. EXPENSES.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto; the
printing of this Agreement, the Representatives' Warrant Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters'
Questionnaire and Power of Attorney, and any instruments related to any of the
foregoing; the issuance and delivery of the Shares hereunder to the several
Underwriters, including transfer taxes, if any; the cost of all certificates
representing the Shares and transfer agents' and registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
Company's independent certified public accountants; the cost of furnishing to
the several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus, and any
amendments or supplements to any of the foregoing; NASD filing fees and the cost
of qualifying the Shares under the laws of such jurisdictions as you may
designate (including fees up to a maximum of $30,000 and disbursements of
Underwriters' Counsel and filing fees in connection with such NASD filings and
Blue Sky qualifications); the cost of any listing of the Shares on any
securities exchange or qualification of the Share for inclusion in the Nasdaq
National Market; registration and other fees payable to the Commission; the cost
of preparing bound volumes of the public offering documents for the
Representatives and Underwriters' Counsel; and all other expenses directly
incurred by the Company in connection with the performance of its obligations
hereunder. The provisions of this SECTION 5(a)(i) are intended to relieve the
Underwriters from the payment of the expenses and costs which the Company hereby
agrees to pay.
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(ii) In addition to its other obligations under SECTION 8(a), the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding described in SECTION 8(a), it
will reimburse the Underwriters on a monthly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
THE WALL STREET JOURNAL which represents the base rate on corporate loans posted
by a substantial majority of the nation's thirty (30) largest banks (the "PRIME
RATE"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under SECTION 8(b), the
Underwriters severally and not jointly agree that, as an interim measure during
the pendency of any claim, action, investigation, inquiry or other proceeding
described in SECTION 8(b), they will reimburse the Company on a monthly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Underwriters' obligation to reimburse
the Company for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company shall promptly return such payment to the Underwriters
together with interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made to the Company
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in SECTIONS 5(a)(ii) and 5(b),
including the amounts of any requested reimbursement payments, the method of
determining such amounts and the basis on which such amounts shall be
apportioned among the reimbursing parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in SECTIONS 5(a)(ii) and 5(b) and
will not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses that is created by the provisions of SECTIONS 8(a) and
8(b) or the obligation to contribute to expenses that is created by the
provisions of SECTION 8(d).
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6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not later
than 2:00 p.m., California time, on the date following the date of execution and
delivery of this Agreement, or such later date and time as shall be consented to
in writing by you; and no stop order suspending the effectiveness thereof shall
have been issued, no suspension of the qualification of the Shares for sale in
any jurisdiction shall have occurred, and no proceedings for any such purpose
shall have been initiated or, to the knowledge of the Company or any
Underwriter, threatened by the Commission or any other regulatory authority of
appropriate jurisdiction, and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to the satisfaction of Underwriters'
Counsel.
(b) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Shares, shall
have been reasonably satisfactory to the Underwriters' Counsel, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section.
(c) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, or any later date on which Option Shares are to be
purchased, as the case may be, there shall not have been any (i) present or
prospective change in the condition (financial or otherwise), earnings,
operations, properties, assets, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse to the Company and that makes it, in your
sole judgment, impracticable or inadvisable to proceed with the public offering
of the Shares as contemplated by the Prospectus; (ii) any transaction that is
material to the Company entered into or committed to by the Company other than
as described in the Registration Statement and the Prospectus; or (iii) any
material obligation, contingent or otherwise, directly or indirectly, incurred
by the Company other than as described in the Registration Statement and the
Prospectus.
(d) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Brobeck, Phleger & Harrison LLP, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) All of the partners (other than the Company) of Vineyard
Investors 1972 and Vineyard 405, each a California limited partnership, and the
members of Quadra Partners LLC, a California limited liability company (together
with Vineyard Investors 1972 and Vineyard 405, the "PARTNERSHIPS"), have
contributed all of their interests in the Partnerships to the Company, and
released the Company from any claims or liabilities in respect of their
interests in the Partnerships or the assets and business formerly owned and
conducted by the Partnerships
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or transfer thereof to the Company, in exchange for Class B Common Stock and the
Company now owns all of the assets and business formerly owned and conducted by
the Partnerships free of any adverse claims except security interests and deeds
of trust described in the Registration Statement.
(ii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware; and the reincorporation of the Company in Delaware has been effected
through the completed and effective merger of the Company's predecessor, Scheid
Vineyards Inc., a California corporation, into its wholly owned subsidiary
incorporated in Delaware for purposes of the reincorporation and to such
counsel's knowledge having no business, operations or assets prior to the
reincorporation.
(iii) To such counsel's knowledge, the Company is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing of its properties
or the conduct of its business requires such qualification, except where the
failure to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(iv) To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any stock or other equity or ownership interest
in any corporation, association or other entity.
(v) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under the caption "Capitalization" as
of the dates stated therein; the issued and outstanding shares of capital stock
of the Company have been duly and validly issued and are fully paid and
nonassessable, and to such counsel's knowledge have not been issued in violation
of any registration right or in violation of or subject to any preemptive right,
co-sale right, right of first refusal or other similar right;
(vi) The capital stock of the Company, including the Shares,
conforms in all material respects to the description thereof contained in the
Registration Statement and the Prospectus;
(vii) The Firm Shares or the Option Shares, as the case may
be, to be issued by the Company pursuant to the terms of this Agreement, the
Representatives' Warrants, and the Class A Common Stock issuable upon exercise
of the Representatives' Warrants have been duly authorized and, upon issuance
and delivery against payment therefor in accordance with the terms hereof or the
Representatives' Warrant Agreement, as the case may be, will be duly and validly
issued and fully paid and nonassessable, free of any pledge, lien or other
encumbrance, and will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or,
to the best of such counsel's knowledge, other similar right contained in the
Company's charter or bylaws or in any other agreement or contract to which the
Company is a party; and the forms of certificates evidencing the Class A Common
Stock comply with applicable law;
(viii) The Company has the corporate power and authority to
own, lease and operate its properties and to conduct its business as described
in the Prospectus; and to enter into this
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Agreement and the Representatives' Warrant Agreement and to issue, sell and
deliver to the Underwriters the Shares to be issued and sold by it hereunder,
the Representatives' Warrants, and the Class A Common Stock issuable upon
exercise of the Representatives' Warrants;
(ix) This Agreement and the Representatives' Warrant Agreement
have been duly authorized by all necessary corporate action on the part of the
Company and have been duly executed and delivered by the Company and, assuming
due authorization, execution and delivery by you, are valid and binding
agreements of the Company, enforceable in accordance with their respective
terms, except insofar as indemnification provisions may be limited by applicable
law and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles;
(x) The Registration Statement has become effective under the
Act, any required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the manner and
within the time period required by Rules 434 and 424(b), and, to such counsel's
knowledge, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(xi) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements (including
supporting schedules), and financial data derived therefrom as to which such
counsel need express no opinion), as of the effective date of the Registration
Statement, comply as to form in all material respects with the requirements of
the Act and the applicable Rules and Regulations and if the company elects to
rely on Rule 434, the Prospectus is "materially different," as such term is used
in Rule 434, from the prospectus included in the Registration Statement at the
time of its effectiveness or a post-effective amendment thereto (including
information that is permitted to be omitted pursuant to Rule 430A);
(xii) The information in the Prospectus under the captions
"Risk Factors--Labor Relations and Union Contract," "Risk Factors--Government
Regulation: Taxes," "Risk Factors--Shares Eligible for Future Sale," "Risk
Factors--Former S Corporation Status and Shareholder Distributions: No Payment
of Dividends," "Risk Factors--Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law; `Blank Check' Preferred Stock," "S
Corporation Conversion," "Business--the Company's Grape Production Operations--
Grape Sales," "Business--Additional Operating Matters--Crop Insurance,"
"Business--Vineyard Management Contracts," "Business--Trademarks and Labels,"
"Business--Employees and Labor Relations," "Business--Legal Proceedings,"
"Business--Properties," "Management--1997 Stock Option and /Stock Issuance
Plan," "Management--Limitation of Directors' Liability; Indemnification,"
"Management--Retirement Plans," "Management--Employment Agreements, Termination
of Employment and Change-in-Control Arrangements," "Management--Consulting
Agreements," "Certain Transactions," "Description of Capital Stock," and "Shares
Eligible For Future Sale" to the extent that it describes laws, regulations,
rules, legal or governmental proceedings, or contracts, or constitutes matters
of law or legal conclusions, has been reviewed by such counsel and is a fair and
accurate in all material respects;
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(xiii) The descriptions in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of statutes are accurate
and fairly present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xiv) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement which are
not described or referred to therein or filed as required;
(xv) The performance of this Agreement and the Representatives'
Warrant Agreement and the consummation of the transactions contemplated herein
and therein (other than performance of the Company's indemnification obligations
hereunder, concerning which no opinion need be expressed) do not and will not
(a) result in any violation of the charter or bylaws of the Company or
(b) result in a material breach or violation of any of the terms and provisions
of, or constitute a default under, of any event that with notice, lapse of time
or both would constitute a breach of or default under, any material bond,
debenture, note or other evidence of indebtedness, or any material lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by which its
properties are bound, or any applicable statute, rule or regulation or any
order, writ or decree of any court, government or governmental agency or body
having jurisdiction over the Company or any of its properties or operations;
provided, however, that such counsel need not express any opinion or belief with
respect to state securities or Blue Sky laws;
(xvi) No consent, approval, authorization or order of or
filing or qualification with any court, government or governmental agency or
body having jurisdiction over the Company or any of its properties or operations
is necessary in connection with the consummation by the Company of the
transactions contemplated in this Agreement or the Representatives' Warrant
Agreement, except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in connection with the
purchase and the distribution of the Shares by the Underwriters;
(xvii) To such counsel's best knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of a
character required to be disclosed in the Registration Statement or the
Prospectus by the Act or the Rules and Regulations, other than those described
therein;
(xviii) To such counsel's knowledge, the Company is not in
violation of its respective charter or bylaws and is not in breach or violation
of any of the terms and provisions of, or in default under, and no event has
occurred that, with notice, lapse of time or both would constitute a breach of
or default under any material bond, debenture, note or other evidence of
indebtedness, or any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company is a party or by which its properties are bound, or any applicable
statute, rule or regulation or any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the Company
or any of its properties or operations;
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(xix) To such counsel's best knowledge, except as set forth
in the Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights or preemptive rights
with respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
having rights to registration of such shares of Common Stock or other
securities, because of the filing of the Registration Statement by the Company
have, with respect to the offering contemplated thereby, waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement.
(xx) The Company is not an "investment company" or a person
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(xxi) The sales of securities by the Company described in
Item 15 of the Registration Statement were exempt from the registration
requirements of the Act.
In addition, such counsel shall state that such counsel has acted as
outside corporate legal counsel to the Company and participated in conferences
with officials and other representatives of the Company, the Representatives,
Underwriters' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although they have not
verified the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, nothing has come to the attention of
such counsel which leads such counsel to believe that, at the time the
Registration Statement became effective and at all times subsequent thereto up
to and on the Closing Date and on any later date on which Option Shares are to
be purchased, the Registration Statement and any amendment or supplement thereto
(other than the financial statements including supporting schedules and other
financial information derived therefrom, as to which such counsel need express
no opinion) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the State of California upon opinions
of local counsel, and as to questions of fact upon representations or
certificates of officers of the Company, and of government officials, in which
case their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representative of the
Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Gibson, Dunn & Crutcher LLP, in form and substance reasonably satisfactory to
you, with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such
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counsel such documents as they may have requested for the purpose of enabling
them to pass upon such matters.
(f) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter from
Deloitte & Touche LLP, Independent Auditors ("DELOITTE"), addressed to the
Underwriters, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be (in each case, the "BRING DOWN LETTER"),
confirming that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations and based upon the procedures described in a letter delivered to
you concurrently with the execution of this Agreement (herein called the
"ORIGINAL LETTER"), but carried out to a date not more than five (5) business
days prior to the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, (i) confirming, to the extent true, that the
statements and conclusions set forth in the Original Letter are accurate as of
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter that are necessary
to reflect any changes in the facts described in the Original Letter since its
date, or to reflect the availability of more recent financial statements, data
or information. The Bring Down Letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from Deloitte shall be addressed to or for the use of the Underwriters in
form and substance satisfactory to the Underwriters and shall (i) represent, to
the extent true, that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations, (ii) set forth their opinion with respect to
their examination of the combined balance sheet of the Company as of
December 31, 1996 and related combined statements of operations, equity and cash
flows for the twelve (12) months ended December 31, 1996, (iii) state that
Deloitte has performed the procedures set out in Statement on Auditing Standards
No. 71 ("SAS 71") for a review of interim financial information and providing
the report of Deloitte as described in SAS 71 on the financial statements for
the one-quarter period ended March 31, 1997 (the "QUARTERLY FINANCIAL
STATEMENTS"), (iv) state that in the course of such review, nothing came to
their attention that leads them to believe that any material modifications need
to be made to any of the Quarterly Financial Statements in order for them to be
in compliance with generally accepted accounting principles consistently applied
across the periods presented, (v) state that nothing came to their attention
that caused them to believe that the financial statements included in the
Registration Statement and Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Rules and
Regulations and that any adjustments thereto have not been properly applied to
the historical amounts in the compilation of such statements, and (vi) address
other matters agreed upon by Deloitte and you. In addition, you shall have
received from Deloitte a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1996, did not disclose any weaknesses in internal
controls that they considered to be material weaknesses.
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(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a certificate of
the Company, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, signed by the Chief Executive Officer
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in
this Agreement and the Representatives' Warrant Agreement are true and
correct, as if made on and as of the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions on its part
to be performed or satisfied at or prior to the Closing Date or any later date
on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective and at
all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been any (a) present or prospective material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company, (b) any transaction that is material to the Company, except
transactions entered into in the ordinary course of business, (c) any
obligation, direct or contingent, that is material to the Company, entered into
or committed to by the Company other than as described in the Registration
Statement and the Prospectus, (d) any change in the capital stock of the
Company, (e) any change in the outstanding indebtedness of the Company that is
material to the Company or is out of the ordinary course of business of the
Company, (f) any dividend or distribution of any kind declared, paid or made on
the capital stock of the Company, other than as described in the Registration
Statement and the Prospectus, or (g) any loss or damage (whether or not insured)
to the property of the Company which has been sustained or will have been
sustained which has a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company.
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(h) The Company shall have obtained and delivered to you an agreement
from each officer, director and stockholder of the Company in writing prior to
the date hereof that such person will not, except as described below, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) on the transfer of shares
of Common Stock or Securities during such person's lifetime by BONA FIDE gift or
upon death by will or intestacy, provided that any transferee agrees to be bound
by the Lock-Up Agreement, and (ii) on the transfer or other disposition of
shares of Common Stock or Securities as a distribution to limited partners or
stockholders of such person, provided that the distributees thereof agree to be
bound by the terms of the Lock-Up Agreement. The foregoing restriction shall
have been expressly agreed to preclude the holder of the Securities from
engaging in any hedging, pledge or other transaction which is designed to or may
reasonably be expected to lead to or result in a Disposition by any stockholder
or any other person of any Securities, whether or not owned by a stockholder,
during the Lock-Up Period, even if such Securities would be disposed of by
someone other than such holder. Such prohibited hedging, pledge or other
transactions would include, without limitation, any short sale (whether or not
against the box), any pledge of shares covering an obligation that matures or
could reasonably mature during the Lock-Up Period, or any purchase, sale or
grant of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a broad-
based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. Furthermore, such person will
have also agreed and consented to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(i) The Shares have been approved for inclusion in the Nasdaq
National Market.
(j) The Company shall have executed and delivered the
Representatives' Warrant Agreement and shall have tendered to the
Representatives the Representatives' Warrants.
(k) The Company shall have furnished to you such further certificates
and documents as you shall reasonably request (including certificates of
officers of the Company) as to the accuracy of the representations and
warranties of the Company herein, as to the performance by the Company of its
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
7. OPTION SHARES.
(a) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants to the several Underwriters, for the purpose of covering
over-allotments in connection with the distribution and sale of the Firm Shares
only, a nontransferable option to purchase up to an aggregate of ______ Option
Shares at the purchase price per share for the Firm Shares set forth in
SECTION 3. Such option
25
<PAGE>
may be exercised by the Representative on behalf of the several Underwriters on
one (1) or more occasions in whole or in part during the period of forty-five
(45) days after the date on which the Firm Shares are initially offered to the
public by giving written notice (the "OPTION NOTICE") to the Company. The
number of Option Shares to be purchased by each Underwriter upon the exercise of
such option shall be the same proportion of the total number of Option Shares to
be purchased by the several Underwriters pursuant to the exercise of such option
as the number of Firm Shares purchased by such Underwriter (set forth in
Schedule A hereto) bears to the total number of Firm Shares purchased by the
several Underwriters (set forth in Schedule A hereto), adjusted by the
Representative in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this SECTION 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in [NEXT DAY] [SAME-DAY] funds, payable to the order of the Company
(and the Company agrees not to deposit any such check in the bank on which it is
drawn, and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company, and in the event of any breach of the foregoing the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach). In the event of any breach of
such definitive certificate delivery obligations, the Company shall reimburse
the Underwriters for the interest lost and any other expenses borne by them by
reason of such breach. Such delivery and payment shall take place at the
offices of Gibson, Dunn & Crutcher LLP, 4 Park Plaza, Suite 1700, Irvine,
California or at such other place as may be agreed upon between the
Representative and the Company (i) on the Closing Date, if written notice of the
exercise of such option is received by the Company at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date the Company
receives written notice of the exercise of such option, if such notice is
received by the Company after the date two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location including, without
limitation, in New York City, as you may reasonably request for checking at
least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you shall specify at least two (2)
full business days prior to such date of payment and delivery. If the
Representative so elects, delivery of the Option Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representative.
It is understood that you, individually, and not as the Representative
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in SECTION 7(a), the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the
26
<PAGE>
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in SECTION 6, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants or agreements of the Company or the satisfaction of any of the
conditions herein contained.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including, without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under
the Act, the Exchange Act or otherwise, specifically including, but not limited
to, losses, claims, damages, judgments, liabilities and expenses (including the
fees and expenses of counsel and other expenses in connection with
investigating, defending or settling any such action or claim) (or actions in
respect thereof), as they are incurred and regardless of whether the Indemnitee
is a party to the litigation, if any, arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred; PROVIDED, HOWEVER, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
by such Underwriter, directly or through you, specifically for use in the
preparation thereof and, PROVIDED FURTHER, that the indemnity agreement provided
in this SECTION 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue statement or
alleged untrue statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of the Prospectus in
which such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with SECTION 4(d).
27
<PAGE>
The indemnity agreement in this SECTION 8(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act and each of the agents, employees, officers and directors of each
Underwriter and person who so controls any Underwriter. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company against any losses, claims, damages or
liabilities, joint or several, to which the Company may become subject under the
Act or otherwise, specifically including, but not limited to, losses, claims,
damages, judgments liabilities and expenses (including the fees and expenses of
counsel and other expenses in connection with investigating, defending or
settling any such action or claim) (or actions in respect thereof), as they are
incurred and regardless of whether the Indemnitee is a party to the litigation,
if any, arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of such Underwriter herein contained, (ii) any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this SECTION 8(b) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company for any legal or other expenses reasonably incurred by the Company
in connection with investigating or defending any such loss, claim, damage,
liability or action as such expenses are incurred.
The indemnity agreement in this SECTION 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, and each person, if any, who controls the Company within the meaning of
the Act or the Exchange Act. This indemnity agreement shall be in addition to
any liabilities which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
SECTION 8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this SECTION 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this SECTION 8 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; PROVIDED, HOWEVER, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded
28
<PAGE>
that there may be legal defenses available to it which are different from or
additional to those available to the indemnifying party, the indemnified party
or parties shall have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such action on behalf of
such indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of the indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
hereunder for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with appropriate local counsel) approved by the
indemnifying party representing all the indemnified parties under SECTION 8(a)
or 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; PROVIDED that such
consent shall not be unreasonably withheld. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnification could have
been sought hereunder by such indemnified party, unless such settlement includes
an unconditional release of such indemnified party from all liability on all
claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this SECTION 8
but it is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this SECTION 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price, and the Company is responsible for the remaining portion, PROVIDED,
HOWEVER, that (i) no Underwriter shall be required to contribute any amount in
excess of the amount by which the underwriting discount applicable to the Shares
purchased by such Underwriter exceeds the amount of damages which such
Underwriter has otherwise been required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this SECTION 8(d)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter or the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this SECTION 8, and are fully informed regarding
29
<PAGE>
said provisions. They further acknowledge that the provisions of this SECTION 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in SECTION 8
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter within the meaning of the Act or the Exchange Act, or by or on
behalf of the Company, or any of its officers, directors or controlling persons
within the meaning of the Act or the Exchange Act, and shall survive the
delivery of the Shares to the several Underwriters hereunder or termination of
this Agreement.
10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this SECTION 10, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus, or in any other
documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement, supplements to the Prospectus or other
such documents which may thereby be made necessary, and (ii) the respective
number of Firm Shares to be purchased by the remaining Underwriters and
substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and
pay for all such Firm Shares so agreed to be purchased by the defaulting
30
<PAGE>
Underwriter or Underwriters or substitute another underwriter or underwriters as
aforesaid and the Company shall not find or shall not elect to seek another
underwriter or underwriters for such Firm Shares as aforesaid, then this
Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this SECTION 10, then, other than as set forth in the Letter
Agreement, the Company shall not be liable to any Underwriter (except as
provided in SECTIONS 5 and 8 hereof) nor shall any Underwriter (other than an
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the number of Firm Shares agreed by such
Underwriter to be purchased hereunder, which Underwriter shall remain liable to
the Company and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company (except to the extent provided in SECTIONS 5
and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this SECTION 10.
11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i) 6:30
A.M., California time, on the first full business day following the effective
date of the Registration Statement, or (ii) the time of the public offering of
any of the Shares by the Underwriters after the Registration Statement becomes
effective. The time of the public offering shall mean the time of the release
by you, for publication, of the first newspaper advertisement relating to the
Shares, or the time at which the Shares are first generally offered by the
Underwriters to the public by letter, telephone, telegram or telecopy, whichever
shall first occur. By giving notice as set forth in SECTION 12 before the time
this Agreement becomes effective, you, as Representative of the several
Underwriters, or the Company, may prevent this Agreement from becoming effective
without liability of any party to any other party, except as provided in
SECTIONS 4(i) and 8.
(b) You, as Representative of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional governmental restrictions, not in
force and effect on the date hereof, shall have been imposed upon trading in
securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse
31
<PAGE>
change in the general political or economic conditions or financial markets as
in your judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the opinion of the Representative, makes it impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus. In the event of termination pursuant to subparagraph (i) above, the
Company shall remain obligated to pay costs and expenses pursuant to
SECTIONS [4(i), 5 and 8]. Any termination pursuant to any of subparagraphs (ii)
through (v) above shall be without liability of any party to any other party
except as provided in [SECTIONS 4(i) and 8].
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von Karman,
Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: General Counsel; if sent to the Company, such notice shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 13470 Washington Blvd., Suite 300, Marina del Rey,
California 90292, telecopier number (310) 301-1569, Attention: President.
13. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and their respective executors,
administrators, successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or entity, other
than the parties hereto and their respective executors, administrators,
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in SECTION 8, any
legal or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or entity. No purchaser of any of the Shares
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase.
In all dealings with the Company under this Agreement, you shall act on
behalf of each of the several Underwriters, and the Company shall be entitled to
act and rely upon any statement, request, notice or agreement made or given by
you jointly or by Cruttenden Roth Incorporated on behalf of you.
14. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California.
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<PAGE>
15. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the Company
and the several Underwriters, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
the Company and the several Underwriters.
Very truly yours,
SCHEID VINEYARDS INC.
By: _______________________________
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
LAIDLAW EQUITIES, INC.
RODMAN & RENSHAW, INC.
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By CRUTTENDEN ROTH INCORPORATED
By: ___________________________________________
Authorized Signatory
33
<PAGE>
SCHEDULE A
Number of Firm Shares
Underwriters to be Purchased
Cruttenden Roth Incorporated
Laidlaw Equities, Inc.
Rodman & Renshaw Inc.
Total
34
<PAGE>
1997
- -------------------------------------------------------------------------------
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
--------------- ----------------
- -------------------------------------------------------------------------------
SCHEID VINEYARDS INC.
AUTHORIZED CAPITAL STOCK: 32,000,000 SHARES
20,000,000 SHARES 2,000,000 SHARES 10,000,000 SHARES
CLASS A COMMON STOCK PREFERRED STOCK CLASS B COMMON STOCK
PAR VALUE $.001 PAR VALUE $.001 PAR VALUE $.001
- -------------------------------------------------------------------------------
Scheid Vineyards Inc. shall furnish, without charge, to each stockholder who
so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
COMMON
THIS CERTIFIES THAT _____________________________________________ is the record
holder of ________________________________________Shares of Class A Common Stock
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
C L A S S "A"
The Corporation will furnish at its principal office, without charge to each
stockholder who so requests, a statement of the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal hereunto affixed
this_______________ day of_____________A.D.__________
[SEAL]
_____________________________ _____________________________
Secretary President
- --------------------------------------------------------------------------------
CLASS "A"
COMMON
CERTIFICATE
NO._______________
FOR_________________________________________SHARES
ISSUED TO
__________________________________________________
__________________________________________________
DATED_______________________________________19____
FROM WHOM TRANSFERRED
__________________________________________________
DATED_______________________________________19____
NO. ORIGINAL NO. ORIGINAL NO. OF SHARES
SHARES CERTIFICATE TRANSFERRED
__________________________________________________
RECEIVED CERTIFICATE NO.__________________________
FOR_________________________________________SHARES
THIS________________DAY OF__________________19____
__________________________________________________
__________________________________________________
<PAGE>
FOR VALUE RECEIVED___________HEREBY SELL, ASSIGN AND TRANSFER UNTO
__________________________________________________________________
________________________________________________SHARES REPRESENTED
BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT __________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN
NAMED CORPORATION, WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED______________19____
IN PRESENCE OF ___________________________________________________
__________________________________________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
1997
- -------------------------------------------------------------------------------
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
--------------- ----------------
- -------------------------------------------------------------------------------
SCHEID VINEYARDS INC.
AUTHORIZED CAPITAL STOCK: 32,000,000 SHARES
20,000,000 SHARES 2,000,000 SHARES 10,000,000 SHARES
CLASS A COMMON STOCK PREFERRED STOCK CLASS B COMMON STOCK
PAR VALUE $.001 PAR VALUE $.001 PAR VALUE $.001
- -------------------------------------------------------------------------------
Scheid Vineyards Inc. shall furnish, without charge, to each stockholder who
so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
COMMON
THIS CERTIFIES THAT _____________________________________________ is the record
holder of ________________________________________Shares of Class B Common Stock
transferable only on the books of the Corporation by the holder hereof in
person or by Attorney upon surrender of this Certificate properly endorsed.
C L A S S "B"
The Corporation will furnish at its principal office, without charge to each
stockholder who so requests, a statement of the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal hereunto affixed
this_______________ day of_____________A.D.__________
[SEAL]
_____________________________ _____________________________
Secretary President
- --------------------------------------------------------------------------------
CLASS "B"
COMMON
CERTIFICATE
NO._______________
FOR_________________________________________SHARES
ISSUED TO
__________________________________________________
__________________________________________________
DATED_______________________________________19____
FROM WHOM TRANSFERRED
__________________________________________________
DATED_______________________________________19____
NO. ORIGINAL NO. ORIGINAL NO. OF SHARES
SHARES CERTIFICATE TRANSFERRED
__________________________________________________
RECEIVED CERTIFICATE NO.__________________________
FOR_________________________________________SHARES
THIS________________DAY OF__________________19____
__________________________________________________
__________________________________________________
<PAGE>
FOR VALUE RECEIVED___________HEREBY SELL, ASSIGN AND TRANSFER UNTO
__________________________________________________________________
________________________________________________SHARES REPRESENTED
BY THE WITHIN CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND
APPOINT __________________________________________________ATTORNEY
TO TRANSFER THE SAID SHARES ON THE SHARE REGISTER OF THE WITHIN
NAMED CORPORATION, WITH FULL POWER OF SUBSTITUTION IN THE PREMISES.
DATED______________19____
IN PRESENCE OF ___________________________________________________
__________________________________________________________________
NOTICE: THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
SCHEID VINEYARDS INC.
1997 STOCK OPTION/STOCK ISSUANCE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1997 Stock Option/Stock Issuance Plan is intended to promote the
interests of Scheid Vineyards Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms herein shall have the meanings assigned to such
terms in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into three (3) separate equity
programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Class A Common Stock,
(ii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of Class
A Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered to the Corporation (or any
Parent or Subsidiary), and
(iii) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive option grants at
periodic intervals to purchase shares of Class A Common Stock.
B. The provisions of Articles One and Five shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
<PAGE>
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board.
Beginning with the Section 12 Registration Date, the Primary Committee shall
have sole and exclusive authority to administer the Discretionary Option Grant
and Stock Issuance Programs with respect to Section 16 Insiders.
B. Administration of the Discretionary Option Grant and Stock
Issuance Programs with respect to all other persons eligible to participate in
those programs may, at the Board's discretion, be vested in the Primary
Committee or a Secondary Committee, or the Board may retain the power to
administer those programs with respect to all such persons.
C. Members of the Primary Committee or any Secondary Committee shall
serve for such period of time as the Board may determine and may be removed by
the Board at any time. The Board may also at any time terminate the functions
of any Secondary Committee and reassume all powers and authority previously
delegated to such committee.
D. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant and
Stock Issuance Programs and to make such determinations under, and issue such
interpretations of, the provisions of such programs and any outstanding options
or stock issuances thereunder as it may deem necessary or advisable. Decisions
of the Plan Administrator within the scope of its administrative functions under
the Plan shall be final and binding on all parties who have an interest in the
Discretionary Option Grant and Stock Issuance Programs under its jurisdiction or
any option or stock issuance thereunder.
E. Service on the Primary Committee or the Secondary Committee shall
constitute service as a Board member, and members of each such committee shall
accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any option grants or stock issuances under the
Plan.
F. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to any
option grants or stock issuances made under that program.
IV. ELIGIBILITY
2.
<PAGE>
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the non-
employee members of the board of directors of any Parent or
Subsidiary, and
(iii) consultants and other independent advisors who
provide services to the Corporation (or any Parent or Subsidiary).
B. The Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full authority to determine,
(i) with respect to the option grants under the Discretionary Option Grant
Program, which eligible persons are to receive option grants, the time or times
when such option grants are to be made, the number of shares to be covered by
each such grant, the status of the granted option as either an Incentive Option
or a Non-Statutory Option, the time or times when each option is to become
exercisable, the vesting schedule (if any) applicable to the option shares and
the maximum term for which the option is to remain outstanding and (ii) with
respect to stock issuances under the Stock Issuance Program, which eligible
persons are to receive such stock issuances, the time or times when such
issuances are to be made, the number of shares to be issued to each Participant,
the vesting schedule (if any) applicable to the issued shares and the
consideration to be paid for such shares.
C. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant Program or to
effect stock issuances in accordance with the Stock Issuance Program.
D. The individuals who shall be eligible to participate in the
Automatic Option Grant Program shall be those non-employee Board members
eligible to receive grants in accordance with Section I of Article Four.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Class A Common Stock, including shares repurchased by
the Corporation in the open market. The maximum number of shares of Class A
Common Stock which may be issued over the term of the Plan shall not exceed
200,000 shares, subject to adjustment from time to time in accordance with the
provisions of this Section V.
B. No one person participating in the Plan may receive option grants
or direct stock issuances for more than 100,000 shares of Class A Common Stock
in the aggregate per calendar year.
3.
<PAGE>
C. Shares of Class A Common Stock subject to outstanding options
shall be available for subsequent issuance under the Plan to the extent (i) the
options expire or terminate for any reason prior to exercise in full or (ii) the
options are cancelled in accordance with the cancellation-regrant provisions of
Article Two. Unvested shares issued under the Plan and subsequently repurchased
by the Corporation, at the option exercise or direct issue price paid per share,
pursuant to the Corporation's repurchase rights under the Plan shall be added
back to the number of shares of Class A Common Stock reserved for issuance under
the Plan and shall accordingly be available for reissuance through one or more
subsequent option grants or direct stock issuances under the Plan. However,
should the exercise price of an outstanding option under the Plan be paid with
shares of Class A Common Stock, then the number of shares of Class A Common
Stock available for issuance under the Plan shall be reduced by the gross number
of shares for which the option is exercised, and not by the net number of shares
of Class A Common Stock actually issued to the holder of such option.
D. Should any change be made to the Class A Common Stock by reason
of any stock split, stock dividend, recapitalization, combination of shares,
exchange of shares or other change affecting the outstanding Class A Common
Stock as a class without the Corporation's receipt of consideration, appropriate
adjustments shall be made to (i) the maximum number and/or class of securities
issuable under the Plan, (ii) the number and/or class of securities for which
any one person may receive option grants or direct stock issuances under the
Plan per calendar year, (iii) the number and/or class of securities for which
grants are subsequently to be made under the Automatic Option Grant Program to
new and continuing non-employee Board members, and (iv) the number and/or class
of securities and the exercise price per share in effect under each outstanding
option under the Plan. Such adjustments to the outstanding options are to be
effected in a manner which shall preclude the enlargement or dilution of rights
and benefits under those options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
4.
<PAGE>
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; PROVIDED, however, that each such document
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Class A Common Stock on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section I of
Article Five and the documents evidencing the option, be payable in cash or
check made payable to the Corporation. Should the Class A Common Stock be
registered under Section 12(g) of the 1934 Act at the time the option is
exercised, then the exercise price may also be paid as follows:
(i) in shares of Class A Common Stock held for
the requisite period necessary to avoid a charge to the Corporation's
earnings for financial reporting purposes and valued at Fair Market
Value on the Exercise Date, or
(ii) to the extent the option is exercised for
vested shares, through a special sale and remittance procedure
pursuant to which the Optionee shall concurrently provide irrevocable
instructions (A) to a Corporation-designated brokerage firm to effect
the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement
date, sufficient funds to cover the aggregate exercise price payable
for the purchased shares plus all applicable Federal, state and local
income and employment taxes required to be withheld by the Corporation
by reason of such exercise and (B) to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm
in order to complete the sale.
5.
<PAGE>
Except to the extent such sale and remittance procedure is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option grant. However, no option shall have a term in excess of
ten (10) years measured from the option grant date.
C. EFFECT OF TERMINATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options held by the Optionee at the time of cessation of Service or death:
- Should the Optionee cease to remain in Service for
any reason other than death, Disability or Misconduct, then the
Optionee shall have a period of three (3) months following the date of
such cessation of Service during which to exercise each outstanding
option held by such Optionee.
- Should Optionee's Service terminate by reason of
Disability, then the Optionee shall have a period of twelve (12)
months following the date of such cessation of Service during which to
exercise each outstanding option held by such Optionee.
- Should the Optionee die while holding an
outstanding option, then the personal representative of the Optionee's
estate or the person or persons to whom the option is transferred
pursuant to the Optionee's will or the laws of inheritance shall have
a twelve (12)-month period following the date of the Optionee's death
to exercise such option.
- Under no circumstances, however, shall any such
option be exercisable after the specified expiration of the option
term.
- During the applicable post-Service exercise
period, the option may not be exercised in the aggregate for more than
the number of vested shares for which the option is exercisable on the
date of the Optionee's cessation of Service. Upon the expiration of
the applicable exercise period or (if earlier) upon the expiration of
the option term, the option shall terminate and cease to be
outstanding for any vested shares for which the option has not been
exercised. However, the option shall,
6.
<PAGE>
immediately upon the Optionee's cessation of Service, terminate and
cease to be outstanding with respect to any and all option shares for
which the option is not otherwise at the time exercisable or in which
the Optionee is not otherwise at that time vested.
- Should the Optionee's Service be terminated for
Misconduct, then all outstanding options held by the Optionee shall
terminate immediately and cease to remain outstanding.
2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option
remains outstanding, to:
(i) extend the period of time for which the option is
to remain exercisable following the Optionee's cessation of Service or
death from the limited exercise period otherwise in effect for that
option to such greater period of time as the Plan Administrator shall
deem appropriate, but in no event beyond the expiration of the option
term, and/or
(ii) permit the option to be exercised, during the
applicable post-Service exercise period, not only with respect to the
number of vested shares of Class A Common Stock for which such option
is exercisable at the time of the Optionee's cessation of Service but
also with respect to one or more additional installments in which the
Optionee would have vested under the option had the Optionee continued
in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
E. UNVESTED SHARES. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Class A
Common Stock. Should the Optionee cease Service while holding such unvested
shares, the Corporation shall have the right to repurchase, at the exercise
price paid per share, any or all of those unvested shares. The terms upon which
such repurchase right shall be exercisable (including the period and procedure
for exercise and the appropriate vesting schedule for the purchased shares)
shall be established by the Plan Administrator and set forth in the document
evidencing such repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. However, a Non-Statutory
Option may, in connection with the Optionee's estate plan, be assigned in whole
or in part during the Optionee's lifetime
7.
<PAGE>
to one or more members of the Optionee's immediate family or to a trust
established exclusively for one or more such family members. The assigned
portion may only be exercised by the person or persons who acquire a
proprietary interest in the option pursuant to the assignment. The terms
applicable to the assigned portion shall be the same as those in effect for
the option immediately prior to such assignment and shall be set forth in
such documents issued to the assignee as the Plan Administrator may deem
appropriate.
G. WITHHOLDING. The Corporation's obligation to deliver shares of
Class A Common Stock upon the exercise of any options granted under the Plan
shall be subject to the satisfaction of all applicable Federal, state and local
income and employment tax withholding requirements.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Five shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall NOT be subject to this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to Employees.
B. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares
of Class A Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Class A Common Stock on the option grant date, and the option term shall not
exceed five (5) years measured from the option grant date.
III. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Corporate Transaction, become
fully exercisable with respect to the total number of shares of Class A Common
Stock at the time subject to such option and may be exercised for any or all of
those shares as fully-vested shares of Class A Common
8.
<PAGE>
Stock. However, an outstanding option shall not so accelerate if and to the
extent: (i) such option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation (or parent thereof) or to
be replaced with a comparable option to purchase shares of the capital stock
of the successor corporation (or parent thereof), (ii) such option is to be
replaced with a cash incentive program of the successor corporation which
preserves the spread existing on the unvested option shares at the time of
the Corporate Transaction and provides for subsequent payout in accordance
with the same vesting schedule applicable to those option shares or (iii) the
acceleration of such option is subject to other limitations imposed by the
Plan Administrator at the time of the option grant. The determination of
option comparability under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
B. All outstanding repurchase rights shall also terminate
automatically, and the unvested shares of Class A Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Corporate
Transaction, except to the extent: (i) those repurchase rights are assigned to
the successor corporation (or parent thereof) in connection with such Corporate
Transaction or (ii) such accelerated vesting is precluded by other limitations
imposed by the Plan Administrator at the time the repurchase right is issued.
C. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).
D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction, had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan following the consummation of
such Corporate Transaction and (ii) the exercise price payable per share under
each outstanding option, PROVIDED the aggregate exercise price payable for such
securities shall remain the same.
E. The Plan Administrator shall have the discretion, exercisable
either at the time the option is granted or at any time while the option remains
outstanding, to provide for the automatic acceleration (in whole or in part) of
one or more outstanding options (and the automatic termination of one or more
outstanding repurchase rights, with the immediate vesting of the shares of Class
A Common Stock subject to those terminated rights) upon the occurrence of a
Corporate Transaction, whether or not those options are to be assumed or
replaced in the Corporate Transaction.
F. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate
9.
<PAGE>
in the event the Optionee's Service terminates by reason of an Involuntary
Termination within a designated period (not to exceed eighteen (18) months)
following the effective date of any Corporate Transaction in which those
options are assumed or replaced and do not otherwise accelerate. Any options
so accelerated shall remain exercisable for fully-vested shares until the
EARLIER of (i) the expiration of the option term or (ii) the expiration of
the one (1)-year period measured from the effective date of the Involuntary
Termination. In addition, the Plan Administrator may provide that one or
more of the Corporation's outstanding repurchase rights with respect to
shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
G. The Plan Administrator shall have full power and authority to
grant options under the Discretionary Option Grant Program which will
automatically accelerate in the event the Optionee's Service subsequently
terminates by reason of an Involuntary Termination within a designated period
(not to exceed eighteen (18) months) following the effective date of any Change
in Control. Each option so accelerated shall remain exercisable for fully-
vested shares until the EARLIER of (i) the expiration of the option term or (ii)
the expiration of the one (1)-year period measured from the effective date of
the Involuntary Termination. In addition, the Plan Administrator may provide
that one or more of the Corporation's outstanding repurchase rights with respect
to shares held by the Optionee at the time of such Involuntary Termination shall
immediately terminate, and the shares subject to those terminated repurchase
rights shall accordingly vest in full.
H. The portion of any Incentive Option accelerated in connection
with a Corporate Transaction or a Change in Control shall remain exercisable as
an Incentive Option only to the extent the applicable One Hundred Thousand
Dollar ($100,000) limitation is not exceeded. To the extent such dollar
limitation is exceeded, the accelerated portion of such option shall be
exercisable as a Non-Statutory Option under the Federal tax laws.
I. The grant of options under the Plan shall in no way affect the
right of the Corporation to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
IV. CANCELLATION AND REGRANT OF OPTIONS
The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution therefor new options covering the
same or different number of shares of Class A Common Stock but with an exercise
price per share based on the Fair Market Value per share of Class A Common Stock
on the new option grant date.
10.
<PAGE>
ARTICLE THREE
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Class A Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening option
grants. Each such stock issuance shall be evidenced by a Stock Issuance
Agreement which complies with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share shall be fixed by the Plan
Administrator but shall not be less than one hundred percent (100%) of the Fair
Market Value per share of Class A Common Stock on the issue date.
2. Subject to the provisions of Section I of Article Five,
shares of Class A Common Stock may be issued under the Stock Issuance Program
for any of the following items of consideration which the Plan Administrator may
deem appropriate in each individual instance:
(i) cash or check made payable to the
Corporation, or
(ii) past services rendered to the Corporation (or
any Parent or Subsidiary).
B. VESTING PROVISIONS.
1. Shares of Class A Common Stock issued under the Stock
Issuance Program may, in the discretion of the Plan Administrator, be fully and
immediately vested upon issuance or may vest in one or more installments over
the Participant's period of Service or upon attainment of specified performance
objectives.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Class A Common Stock by reason of any stock dividend, stock
split, recapitalization, combination of shares, exchange of shares or other
change affecting the outstanding Class A Common Stock as a class without the
Corporation's receipt of consideration shall be issued subject to (i) the same
vesting requirements applicable to the Participant's unvested shares of Class
11.
<PAGE>
A Common Stock and (ii) such escrow arrangements as the Plan Administrator
shall deem appropriate.
3. The Participant shall have full stockholder rights with
respect to any shares of Class A Common Stock issued to the Participant under
the Stock Issuance Program, whether or not the Participant's interest in those
shares is vested. Accordingly, the Participant shall have the right to vote
such shares and to receive any regular cash dividends paid on such shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Class A Common Stock issued under the
Stock Issuance Program or should the performance objectives not be attained with
respect to one or more such unvested shares of Class A Common Stock, then those
shares shall be immediately surrendered to the Corporation for cancellation, and
the Participant shall have no further stockholder rights with respect to those
shares. To the extent the surrendered shares were previously issued to the
Participant for consideration paid in cash or cash equivalent (including the
Participant's purchase-money indebtedness), the Corporation shall repay to the
Participant the cash consideration paid for the surrendered shares and shall
cancel the unpaid principal balance of any outstanding purchase-money note of
the Participant attributable to such surrendered shares.
5. The Plan Administrator may in its discretion waive the
surrender and cancellation of one or more unvested shares of Class A Common
Stock (or other assets attributable thereto) which would otherwise occur upon
the non-completion of the vesting schedule applicable to such shares. Such
waiver shall result in the immediate vesting of the Participant's interest in
the shares of Class A Common Stock as to which the waiver applies. Such waiver
may be effected at any time, whether before or after the Participant's cessation
of Service or the attainment or non-attainment of the applicable performance
objectives.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. Upon the occurrence of a Corporate Transaction, all outstanding
repurchase rights under the Stock Issuance Program shall terminate
automatically, and the shares of Class A Common Stock subject to those
terminated rights shall immediately vest in full, except to the extent: (i)
those repurchase rights are assigned to the successor corporation (or parent
thereof) in connection with such Corporate Transaction or (ii) such accelerated
vesting is precluded by other limitations imposed by the Plan Administrator at
the time the repurchase right is issued.
B. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase rights with respect to those shares remain
outstanding, to provide that those rights shall automatically terminate on an
accelerated basis, and the shares of Class A Common Stock subject to those
terminated rights shall immediately vest, in the
12.
<PAGE>
event the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within a designated period (not to exceed eighteen
(18) months) following the effective date of any Corporate Transaction in
which those repurchase rights are assigned to the successor corporation (or
parent thereof).
C. The Plan Administrator shall have the discretionary authority,
exercisable either at the time the unvested shares are issued or any time while
the Corporation's repurchase/cancellation rights remain outstanding under the
Stock Issuance Program, to provide that those rights shall automatically
terminate in whole or in part, and the shares of Class A Common Stock subject to
those terminated rights shall immediately vest, in the event the Participant's
Service should subsequently terminate by reason of an Involuntary Termination
within a designated period (not to exceed eighteen (18) months) following the
effective date of any Change in Control.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.
13.
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ARTICLE FOUR
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Option grants shall be made under this Automatic
Option Grant Program on the dates specified below:
1. Each individual serving as a non-employee Board member on
the Underwriting Date shall automatically be granted on that date a Non-
Statutory Option to purchase 10,000 shares of Class A Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary and has not previously received an option grant from the
Corporation in his or her capacity as a non-employee Board member.
2. Each individual who is first elected or appointed as a non-
employee Board member at any time after the Underwriting Date shall
automatically be granted on the date of such initial election or appointment a
Non-Statutory Option to purchase 10,000 shares of Class A Common Stock, provided
that individual has not previously been in the employ of the Corporation or any
Parent or Subsidiary.
3. On the date of each Annual Stockholders Meeting held after
the Underwriting Date, each individual who is to continue to serve as a non-
employee Board member, whether or not that individual is standing for re-
election to the Board at that particular Annual Meeting, shall automatically be
granted a Non-Statutory Option to purchase 2,500 shares of Class A Common Stock,
provided such individual has served as a non-employee Board member for at least
six (6) months. There shall be no limit on the number of such 2,500-share
option grants any one non-employee Board member may receive over his or her
period of Board service, and non-employee Board members who have previously been
in the employ of the Corporation (or any Parent or Subsidiary) or who have
otherwise received a stock option grant from the Corporation prior to the
Underwriting Date shall be eligible to receive one or more such annual option
grants over their period of continued Board service.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Class A Common Stock on the
option grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under Article Two, Section I.A.2. Except to the
extent the sale
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and remittance procedure specified thereunder is utilized, payment of the
exercise price for the purchased shares must be made on the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each initial 10,000-share grant
shall become exercisable in a series of four (4) successive equal annual
installments upon the Optionee's completion of each year of Board service over
the four (4)-year period measured from the option grant date. Each annual
2,500-share grant shall become exercisable upon the Optionee's completion of one
(1) year of Board service measured from the automatic grant date.
E. EFFECT OF TERMINATION OF SERVICE. The following provisions shall
govern the exercise of any options granted to the Optionee pursuant to this
Automatic Option Grant Program and held at the time of his or her cessation of
Board service or death:
1. The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution) shall have a twelve (12)-month period
following the date of such cessation of Board service in which to exercise each
such option.
2. During the twelve (12)-month exercise period, the option may
not be exercised in the aggregate for more than the number of vested shares of
Class A Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.
3. Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time subject to
the option shall immediately vest so that such option may, during the twelve
(12)-month exercise period following such cessation of Board service, be
exercised for all or any portion of those shares as fully-vested shares of Class
A Common Stock.
4. In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Board service for any reason other than death
or Permanent Disability, terminate and cease to be outstanding with respect to
any option shares in which the Optionee is not otherwise vested at that time.
F. STOCKHOLDER RIGHTS. The holder of an option grant under this
Automatic Option Grant Program shall have no stockholder rights with respect to
the shares
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subject to the option until such person shall have exercised the option, paid
the exercise price and become a holder of record of the purchased shares.
G. LIMITED TRANSFERABILITY OF OPTIONS. This option may, in
connection with the Optionee's estate plan, be assigned in whole or in part
during Optionee's lifetime to one or more members of the Optionee's immediate
family or to a trust established for the exclusive benefit of one or more such
family members. The assigned portion shall be exercisable only by the person or
persons who acquire a proprietary interest in the option pursuant to such
assignment. The terms applicable to the assigned portion shall be the same as
those in effect for this option immediately prior to such assignment and shall
be set forth in such documents issued to the assignee as the Corporation may
deem appropriate. Should the Optionee die while holding this option, then this
option shall be transferred in accordance with Optionee's will or the laws of
descent and distribution.
II. CORPORATE TRANSACTION/CHANGE IN CONTROL
A. In the event of any Corporate Transaction, each outstanding
option under this Automatic Option Grant Program shall automatically accelerate
so that each such option shall, immediately prior to the specified effective
date for the Corporate Transaction, become fully exercisable for all of the
shares of Class A Common Stock at the time subject to that option and may be
exercised for all or any portion of such shares as fully-vested shares of Class
A Common Stock. Immediately following the consummation of the Corporate
Transaction, all automatic option grants under this Article Four shall terminate
and cease to be outstanding, unless assumed by the successor corporation or its
parent company.
B. In connection with any Change in Control, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Change in Control, become fully exercisable for all
of the shares of Class A Common Stock at the time subject to such option and may
be exercised for all or any portion of those shares as fully-vested shares of
Class A Common Stock. Each such option shall remain exercisable for such fully-
vested option shares until the expiration or sooner termination of the option
term.
C. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in the consummation of such Corporate Transaction,
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, PROVIDED the aggregate exercise price
payable for such securities shall remain the same.
D. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise
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change its capital or business structure or to merge, consolidate, dissolve,
liquidate or sell or transfer all or any part of its business or assets.
17.
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ARTICLE FIVE
MISCELLANEOUS
I. FINANCING
The Plan Administrator may permit any Optionee or Participant to pay
the option exercise price or the purchase price for shares issued to such person
under the Plan by delivering a full-recourse, interest-bearing promissory note
payable in one or more installments and secured by the purchased shares. The
terms of any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. In no event shall the maximum credit available to the Optionee or
Participant exceed the SUM of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.
II. EFFECTIVE DATE AND TERM OF PLAN
A. The Plan became effective upon its adoption by the Board on July
1, 1997 and the stockholders approved the Plan in July 1997.
B. The Plan shall terminate upon the EARLIEST of (i) June 30, 2007,
(ii) the date on which all shares available for issuance under the Plan shall
have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Corporate Transaction. All options and
unvested stock issuances outstanding at that time under the Plan shall continue
to have full force and effect in accordance with the provisions of the documents
evidencing such options or issuances.
III. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to options or unvested stock issuances at the time outstanding under the Plan
unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws and regulations.
B. Options may be granted under the Discretionary Option Grant
Program and shares may be issued under the Stock Issuance Program which are in
each instance in excess of the number of shares of Class A Common Stock then
available for issuance under the Plan, provided any excess shares actually
issued under those programs shall be held in escrow until there is obtained
stockholder approval of an amendment sufficiently increasing the number of
shares of Class A Common Stock available for issuance under the Plan. If
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such stockholder approval is not obtained within twelve (12) months after the
date the first such excess issuances are made, then (i) any unexercised
options granted on the basis of such excess shares shall terminate and cease
to be outstanding and (ii) the Corporation shall promptly refund to the
Optionees and the Participants the exercise or purchase price paid for any
excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the
shares were held in escrow, and such shares shall thereupon be automatically
cancelled and cease to be outstanding.
IV. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of shares
of Class A Common Stock under the Plan shall be used for general corporate
purposes.
V. WITHHOLDING
The Corporation's obligation to deliver shares of Class A Common Stock
upon the exercise of any options or upon the vesting of any shares issued under
the Plan shall be subject to the satisfaction of all applicable Federal, state
and local income and employment tax withholding requirements.
VI. REGULATORY APPROVALS
The implementation of the Plan, the granting of any options under the
Plan and the issuance of any shares of Class A Common Stock (i) upon the
exercise of any option or (ii) under the Stock Issuance Program shall be subject
to the Corporation's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the options granted
under it and the shares of Class A Common Stock issued pursuant to it.
VII. NO EMPLOYMENT OR SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
19.
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APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
program in effect under Article Four of the Plan.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean
(i) a change in ownership or control of the Corporation effected
through either of the following transactions:
(A) the acquisition, directly or indirectly by any
person or related group of persons (other than the Corporation, or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Corporation), of beneficial ownership
(within the meaning of Rule 13d-3 of the 1934 Act) of securities
possessing more than fifty percent (50%) of the total combined voting
power of the outstanding securities of the Corporation pursuant to a
tender or exchange offer made directly to the Corporation's
stockholders, or
(B) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that a
majority of the Board members ceases, by reason of one or more
contested elections for Board membership, to be comprised of
individuals who either (A) have been Board members continuously since
the beginning of such period or (B) have been elected or nominated for
election as Board members during such period by at least a majority of
the Board members described in clause (A) who were still in office at
the time the Board approved such election or nomination, or
(ii) a change in ownership of the Named Subsidiary effected through
the acquisition by any person (or related group of persons), whether by
tender or exchange offer made directly to the Corporation's stockholders,
private purchases from one or more of the Corporation's stockholders, one
or more direct issuance of securities from the Named Subsidiary or by any
other transaction, of beneficial ownership (within the meaning of Rule 13d-
3 of the 1934 Act) of securities possessing more than fifty percent
(50%) of the total combined voting power of the outstanding securities of
the Named Subsidiary.
A-1.
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D. CLASS A COMMON STOCK shall mean shares of the Corporation's Class A
Common Stock, which shall be registered under Section 12(g) of the 1934 Act and
shall have the right to one (1) vote per share on all matters subject to
stockholder approval.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMITTEE shall mean a committee of two (2) or more Board members
appointed by the Board to exercise one or more administrative functions under
the Plan.
G. CORPORATE TRANSACTION shall mean either of the following stockholder-
approved transactions to which (i) the Corporation is a party while the Parent
of the Named Subsidiary or (ii) the Named Subsidiary is a party:
(i) a merger or consolidation in which securities
possessing more than fifty percent (50%) of the total combined voting
power of the outstanding securities of the Corporation or the Named
Subsidiary (as the case may be) are transferred to a person or persons
different from the person or persons holding those securities
immediately prior to such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation or the Named
Subsidiary (as the case may be) in complete liquidation or dissolution
of the Corporation or the Named Subsidiary.
H. CORPORATION shall mean Scheid Vineyards Inc., a Delaware corporation,
and any successor corporation to all or substantially all of the assets or
voting stock of Scheid Vineyards Inc. which shall by appropriate action adopt
the Plan.
I. DISABILITY shall mean the inability of the Optionee or the
Participant to engage in any substantial gainful activity by reason of any
medically determinable physical or mental impairment and shall be determined by
the Plan Administrator on the basis of such medical evidence as the Plan
Administrator deems warranted under the circumstances.
J. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
grant program in effect under Article Two of the Plan.
K. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
L. EXERCISE DATE shall mean the date on which the Corporation shall have
received written notice of the option exercise.
A-2.
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M. FAIR MARKET VALUE per share of Class A Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Class A Common Stock is at the time traded on
the Nasdaq National Market, then the Fair Market Value shall be the
closing selling price per share of Class A Common Stock on the date in
question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no
closing selling price for the Class A Common Stock on the date in
question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.
(ii) If the Class A Common Stock is at the time listed on
any Stock Exchange, then the Fair Market Value shall be the closing
selling price per share of Class A Common Stock on the date in
question on the Stock Exchange determined by the Plan Administrator to
be the primary market for the Class A Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no closing selling price for the Class A Common
Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such
quotation exists.
N. INCENTIVE OPTION shall mean an option which satisfies the requirements
of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the Service of
any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation which materially
reduces his or her duties and responsibilities or the level of
management to which he or she reports, (B) a reduction in his or her
level of compensation (including base salary, fringe benefits and
target bonuses under any corporate-performance based bonus or
incentive programs) by more than fifteen percent (15%) or (C) a
relocation of such individual's place of employment by more than
fifty (50) miles, provided and only if such change, reduction or
relocation is effected without the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
or dishonesty by the Optionee or Participant, any unauthorized use or disclosure
by such person of confidential information or trade secrets of the Corporation
(or any Parent or
A-3.
<PAGE>
Subsidiary), or any other intentional misconduct by such person adversely
affecting the business or affairs of the Corporation (or any Parent or
Subsidiary) in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Corporation (or
any Parent or Subsidiary) may consider as grounds for the dismissal or
discharge of any Optionee, Participant or other person in the Service of the
Corporation (or any Parent or Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
R. NAMED SUBSIDIARY shall mean Scheid Vineyards California Inc., a
California corporation and a Subsidiary of the Corporation, and any successor
corporation to all or substantially all of the assets or voting stock of Scheid
Vineyards California Inc.
S. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
requirements of Code Section 422.
T. OPTIONEE shall mean any person to whom an option is granted under the
Plan.
U. PARENT shall mean any corporation (other than the Corporation) in an
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of Class A
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
of the Optionee or the Participant to engage in any substantial gainful activity
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more. However, solely for purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.
X. PLAN shall mean the Corporation's 1997 Stock Option/Stock Issuance
Plan, as set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether the
Primary Committee, the Board or the Secondary Committee, which is authorized to
administer the Discretionary Option Grant and Stock Issuance Programs with
respect to one or more classes of eligible persons, to the extent such entity is
carrying out its administrative functions under those programs with respect to
the persons under its jurisdiction.
A-4.
<PAGE>
Z. PRIMARY COMMITTEE shall mean the committee of two (2) or more non-
employee Board members appointed by the Board to administer the Discretionary
Option Grant and Stock Issuance Programs with respect to Section 16 Insiders.
AA. SECONDARY COMMITTEE shall mean a committee of one (1) or more Board
members appointed by the Board to administer the Discretionary Option Grant and
Stock Issuance Programs with respect to eligible persons other than Section 16
Insiders.
AB. SECTION 12 REGISTRATION DATE shall mean the date on which the Class A
Common Stock is first registered under Section 12(g) of Section 16 of the 1934
Act.
AC. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit restrictions of Section 16 of the
1934 Act.
AD. SERVICE shall mean the provision of services to the Corporation (or
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant.
AE. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
AF. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
Corporation and the Participant at the time of issuance of shares of Class A
Common Stock under the Stock Issuance Program.
AG. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
under Article Three of the Plan.
AH. SUBSIDIARY shall mean any corporation (other than the Corporation) in
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
AI. 10% STOCKHOLDER shall mean the owner of stock (as determined under
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
AJ. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Class A Common Stock.
A-5.
<PAGE>
AK. UNDERWRITING DATE shall mean the date on which the Underwriting
Agreement is executed and priced in connection with an initial public offering
of the Class A Common Stock.
A-6.
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SANWA BANK
California
LINE OF CREDIT AGREEMENT
(Reducing Commitment)
THIS LINE OF CREDIT AGREEMENT (the "Agreement") is made and entered into
this 25th day of June, 1997, by and between SANWA BANK CALIFORNIA (the "Bank")
and VINEYARD 405 (the "Borrower").
SECTION I
AGREEMENT TO LEND
1.01 Commitment to Lend. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to extend
to the Borrower the credit accommodations that follow (the "Line of Credit").
1.02 Line of Credit. The Bank agrees to make loans and advances
("Advances") to the Borrower from time to time, upon the Borrower's request
therefore, from the date hereof to the Expiration Date, provided that the
outstanding Advances under this Agreement shall not exceed the following:
Date: Amount:
06/30/97 to 06/04/98 $2,835,000.00
06/05/98 to 06/04/99 $2,760,000.00
06/05/99 to 06/04/00 $2,685,000.00
06/05/00 to 06/04/01 $2,585,000.00
06/05/01 to 06/04/02 $2,485,000.00
06/05/02 to 06/04/03 $2,385,000.00
06/05/03 to 06/04/04 $2,285,000.00
06/05/04 to 06/04/05 $2,115,000.00
06/05/05 to 06/04/06 $1,945,000.00
06/05/06 to 06/04/07 $1,775,000.00
(each such dollar amount being the relative "Commitment"). Within the foregoing
limit,s, the Borrower may borrow, partially of wholly, prepay, and reborrow
under this Section 1.02.
A. Purpose. Advances made under the Line of Credit shall be
used to refinance an existing real estate loan with the Bank and to increase
working capital.
B. Line Account. The Bank shall maintain on its books a record
of account in which the Bank shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the Line of Credit
(the "Line Account").
C. Interest. Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as quoted by the
Bank and as elected by the relevant Borrower pursuant to paragraph 1.02D. or
paragraph 1.02E. below:
1. Variable Rate Advances: A variable rate equivalent to
an index for a variable interest rate which is quoted, published or announced
from time to time by the Bank as its reference rate and as to which loans may be
made by Bank at, below or above such reference rate, plus .25% per annum (the
"Variable Rate"). Interest shall be adjusted concurrently with any change in
the reference rate quoted by Bank. An Advance based upon the Variable Rate is
hereinafter referred to as a "Variable Rate Advance".
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2. Fixed Rate Advance: A fixed rate quoted by Bank in
its sole discretion for each Advance (the "Fixed Rate") and for such period of
time that the Bank may quote and offer, provided that any such period of time
shall be for at least 30 days and shall not extend beyond the Expiration Date
(the "Interest Period") for Advances in the minimum amount of $100,000. Advances
based upon the Fixed Rate are hereinafter referred to as "Fixed Rate Advances".
Interest on any Advance shall be computed on the basis of
360 days per year, but charged on the actual number of days elapsed.
Interest on Variable Rate and Fixed Rate Advances shall be
paid in quarterly installments on the 5th day of each quarter of each year,
commencing on October 5, 1997.
If interest is not paid as and when it is due, it shall be
added to the principal, become and be treated as a part thereof, and shall
thereafter bear like interest.
D. Notice of Borrowing. Upon telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a business day,
any Borrower may borrow under the Crop Line of Credit by requesting:
1. A Variable Rate Advance: A Variable Rate Advance may
be made on the day notice is received by the Bank; provided, however, that if
the Bank shall not have received notice at or before 2:00 p.m. on the day such
Advance is requested to be made, such Variable Rate Advance may, at the Bank's
option, be made on the next business day.
2. A Fixed Rate Advance: Notice of any Fixed Rate Advance
shall be received by the Bank no later than two business days prior to the day
(which shall be a business day) on which any Borrower requests such Fixed Rate
Advance to be made.
E. Notice of Election to Adjust Interest Rate: Upon telephonic
notice which shall be received by the Bank at or before 11:00 a.m. (California
time) on a business day, any Borrower may elect:
1. That interest on a Variable Rate Advance shall be
adjusted to accrue at the Fixed Rate; provided, however, that such notice shall
be received by the Bank no later than two business days prior to the day (which
shall be a business day) on which such Borrower requests that interest be
adjusted to accrue at the Fixed Rate.
2. That interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Variable Rate; provided, however, that such notice shall be received by
the Bank no later than the last day of the Interest Period pertaining to such
Fixed Rate Advance. If the Bank shall not have received notice (as prescribed
herein) of such Borrower's election that interest on any Fixed Rate Advance
shall continue to accrue at the Fixed Rate, the relevant Borrower shall be
deemed to have elected that interest thereon shall be adjusted to accrue at the
Variable Rate upon the expiration of the Interest Period pertaining to such
Advance.
F. Prepayment. The Borrowers may prepay any Advance in whole
or in part, at any time and without penalty, provided, however, that: (i) any
partial prepayment shall first be applied at the Bank's option, to accrued and
unpaid interest and next to the outstanding principal balance; and (ii) during
any period of time in which interest is accruing on any Advance on the basis of
the Fixed Rate, no prepayment shall be made except on a day which is the last
day of the Interest Period pertaining thereto. If the whole or any part of any
Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the
Borrowers shall,jointly and severally, upon the Bank's request, promptly pay to
and indemnify the Bank for all costs and any loss actually
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<PAGE>
incurred by the Bank (including loss of profit resulting from the re employment
of funds) sustained by the Bank as a consequence of such prepayment.
G. Indemnification for Fixed Rate Costs. During any period of
time in which interest on any Advance is accruing on the basis of the Fixed
Rate, the Borrowers shall, jointly and severally, upon the Bank's request,
promptly pay to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a result of
the Bank's compliance with any directive or requirement of any regulatory
authority pertaining or relating to funds used by the Bank in quoting and
determining the Fixed Rate.
H. Conversion from Fixed Rate to Variable Rate. In the event
that the Bank shall at any time determine that the accrual of interest on the
basis of the Fixed Rate (i) has become infeasible because the Bank is unable to
determine the Fixed Rate due to the unavailability of U.S. Dollar deposits,
contracts or certificates of deposit in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately equal to
the relevant Interest period or (ii) is or has become unlawful by reason of the
Bank's compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation guideline or order, then
the Bank shall promptly give telephonic notice thereof (confirmed in writing) to
the Borrowers, in which event any Fixed Rate Advance shall be deemed to be a
Variable Rate Advance and interest shall thereupon immediately accrue at the
Variable Rate and shall continue at such rate until the Bank determines that the
Fixed Rate is no longer infeasible or unlawful.
I. Principal. Unless sooner due in accordance with the terms
of this Agreement:
(a) Commencing on July 5, 1998 and continuing on such date
annually thereafter, Borrower agrees to repay any outstanding Advances that
would exceed the relevant Commitment then in effect.
(b) On the Expiration Date, Borrower hereby promises and
agrees to pay to Bank in full the aggregate unpaid principal amount of the
Advances outstanding on such date plus accrued and unpaid interest thereon.
J. Expiration of Line of Credit. Unless earlier terminated in
accordance with the terms of this Agreement, the Bank's commitment to make
Advances to the Borrower hereunder shall automatically expire on July 5, 2007
(the "Expiration Date").
K. Late Payment: If any payment of principal or interest, or
any portion thereof, under this Agreement is not paid within ten (10) calendar
days after it is due, a late payment charge equal to five percent (5%) of such
past due payment may be assessed and shall be immediately payable.
1.03 Disbursement of Proceeds from Advances. Any Advance made
hereunder shall be conclusively presumed to have been made to and for the
Borrower's benefit when the proceeds of such Advance are disbursed in accordance
with the Borrower's instructions or deposited into a checking account of the
Borrower maintained at the Bank.
SECTION II
GUARANTORS; COLLATERAL; REAL PROPERTY
2.01 Guarantors. The indebtedness incurred under and pursuant to this
Agreement shall be guaranteed, in form and substance satisfactory to the Bank
("Guaranty"), by Alfred G. Scheid ("Guarantor").
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2.02 Collateral. To secure payment and performance of all the Borrower's
Obligations under this Agreement and all other liabilities, loans, guarantees,
covenants and duties owed by the Borrower to the Bank, whether or not evidenced
by this or by any other agreement, absolute or contingent, due or to become due,
now existing or hereafter and howsoever created, the Borrower hereby grants the
Bank a security interest in and to all of the following property ("Collateral")
:
(a) All goods now owned or hereafter acquired by the Borrower or
in which the Borrower now has or may hereafter acquire any interest, including,
but not limited to, all machinery, equipment, furniture, furnishings, fixtures,
tools, supplies and motor vehicles of every kind and description, and all
additions, accessions, improvements, replacements and substitutions thereto and
thereof.
(b) All inventory now owned or hereafter acquired by the
Borrower, including, but not limited to, all raw materials, work in process,
finished goods, merchandise, parts and supplies of every kind and description,
including inventory temporarily out of the Borrower's custody or possession,
together with all returns on accounts.
(c) All accounts, contract rights and general intangibles now
owned or hereafter created or acquired by the Borrower, including, but not
limited to, all receivables, goodwill, trademarks, trademark applications, trade
styles, trade names, patents, patent applications, copyrights and copyright
applications, customer lists, business records and computer programs, tapes,
disks and related data processing software that at any time evidence or contain
information relating to any of the Collateral.
(d) All documents, instruments and chattel paper now owned or
hereafter acquired by the Borrower, including, but not limited to, warehouse and
other receipts, bills of sale and bills of lading.
(e) All monies, deposit accounts, certificates of deposit and
securities of the Borrower now or hereafter in the Bank's or its agents'
possession.
(f) All crops now growing or hereafter to be grown, together
with all products and proceeds thereof (the "Crops"), on that certain real
property described in the attached Exhibit "B" (the "Real Property").
(g) All farm products now owned or hereafter acquired by or for
the benefit of the Borrower consisting of supplies used or produced in the
farming operations of the Borrower.
(h) All of Borrower's now existing or hereafter acquired water
rights of every kind and description, whether appurtenant, riparian or
prescriptive or arising by virtue of any contract or other agreement.
The Bank's security interest in the Collateral shall be a continuing lien
and shall include the proceeds and products of the Collateral including, but not
limited to, the proceeds of any insurance thereon.
2.03 The Deed of Trust. The Borrower hereby agrees that all Indebtedness
referenced in the Agreement to be paid by the Borrower to the Bank and the
Borrower's performance of each and all of the terms, covenants and agreements
contained in the Agreement shall be secured by a deed of trust in form and
substance satisfactory to the Bank (the "Deed of Trust") encumbering, as a lien
of first encumbrance, certain real property described in the attached Exhibit
"1" (the "Real Property"), located in the County of Monterey State of
California, subject only to current taxes and assessments not yet due and
payable and exceptions numbered 1-9 and 11-12 all as listed on a certain
Preliminary Title Report No. 97012149(the "Permitted Title Exceptions") dated
May 14, 1997 and issued by Stewart Title.
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SECTION III
CONDITIONS PRECEDENT
3.01 Conditions Precedent to First Advance. Prior to the first
Advance hereunder, the Borrower shall deliver or cause to be delivered to the
Bank, in form and substance satisfactory to the Bank:
A. Authority to Borrow. Evidence relating to the duly given
approval and authorization of the execution, delivery and performance of this
Agreement, all other documents, instruments and agreements required under this
Agreement and all other actions to be taken by the Borrower hereunder or
thereunder.
B. Loan Documents. The documents described in Section II
hereof, as applicable, and all other documents, instruments and agreements
required or necessary to consummate the transactions contemplated under this
Agreement (collectively the "Loan Documents"), all fully executed.
C. Real Property. The following in connection with the Real
Property:
1. An appraisal of the Real Property.
2. A title insurance policy or binder in the amount of
$2,835,000 issued by a title insurance company satisfactory to the Bank and in
such form and substance and with such endorsements as are satisfactory to the
Bank. Such title insurance policy or binder shall indicate to the Bank's
satisfaction that the Deed of Trust shall constitute a lien of first encumbrance
on the Real Property subject only to the Permitted Title Exceptions.
3. Evidence that the Deed of Trust has been recorded and
constitutes a lien on the Real Property subject only to the Permitted Title
Exceptions.
4. Evidence of flood insurance if the Real Property is
located in a flood plain.
D. Fees. A fee of $25,000 and reimbursement to the Bank in the
amount of all escrow, recordation and appraisal fees, title guaranty or
insurance premiums, closing costs and all other out-of-pocket expenses incurred
by the Bank.
E. Financing Statements. Executed UCC-1 financing statement(s)
describing the Collateral, together with evidence of the recordation of such
statement(s) as a lien of first priority.
F.. Miscellaneous Documents. Such other documents and opinions
as the Bank may require with respect to the transactions described in this
Agreement.
3.02 Conditions Precedent to All Advances. The obligation of the Bank
to make each Advance (including the first Advance) is subject to the further
conditions precedent that, as of the date of each Advance and after the making
of such Advance:
A. Representations and Warranties. The representations and
warranties set forth in Section IV hereof and in any other document, instrument,
agreement or certificate delivered to the Bank hereunder are true and correct.
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B. Event of Default. No event has occurred and is continuing
which constitutes, or, with the lapse of time or giving of notice or both, would
constitute an Event of Default as defined in Section VI hereof.
C. Collateral. The security interest in the Collateral has
been duly authorized, created and perfected with first priority and is in full
force and effect.
For the purposes hereof, the Borrower's acceptance of the proceeds of any
Advance shall be deemed to constitute the Borrower's representation and warranty
that the statements set forth in sections 3.02 A. and 3.02 B above are true and
correct.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to
the Bank, which representations and warranties are continuing:
4.01 Status. The Borrower is a partnership duly organized and validly
existing under the laws of the State of California, and is properly licensed,
qualified to do business and in good standing in, and, where necessary to
maintain the Borrower's rights and privileges, has complied with the fictitious
name statute of every jurisdiction in which the Borrower is doing business.
4.02 Authority. The execution, delivery and performance by the
Borrower of this Agreement and the Loan Documents have been duly authorized and
do not and will not: (i) violate any provision of any law, rule, regulation,
writ, judgment or injunction presently in effect affecting the Borrower; (ii)
result in a breach of or constitute a default under any material agreement to
which the Borrower is a party or by which it or its properties may be bound of
affected; or (iii) violate any provision of its partnership agreement.
4.03 Legal Effect. This Agreement constitutes, and any document,
instrument or agreement required hereunder when delivered will constitute,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
4.04 Ficticious Trade Styles. There are no fictitious trade styles used by
the Borrower in connection with its business operations. The Borrower shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
4.05 Financial Statements. All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the Borrower's financial condition
or, as applicable, the other information disclosed therein. Since the most
recent submission of any such financial statement, information or other data to
the Bank, the Borrower represents and warrants that no material adverse change
in the Borrower's financial condition or operations has occurred which has not
been fully disclosed to the Bank in writing.
4.06 Litigation. Except as have been disclosed to the Bank in
writing, there are no actions, suits or proceedings pending or, to the knowledge
of the Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations.
4.07 Title to Assets; Permitted Liens. The Borrower has good and
marketable title to all of its assets and the same are not subject to any
security interest, encumbrance, lien or claim of any third person other than:
(i) liens and security interests securing indebtedness owed by the
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Borrower to the Bank; (ii) liens for taxes, assessments or similar charges
either not yet due or being duly contested in good faith; (iii) liens of
mechanics, materialmen, warehousemen or other like liens arising in the ordinary
course of business and securing obligations which are not yet delinquent; (iv)
liens and security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Bank in writing; (v) purchase money liens or
purchase money security interests upon or in any property acquired or held by
the Borrower in the ordinary course of business to secure indebtedness
outstanding on the date hereof or permitted to be incurred hereunder; and (vi)
those liens and security interests which in the aggregate constitute an
immaterial and insignificant monetary amount with respect to the net value of
the Borrower's assets (collectively "Permitted Liens").
4.08 ERISA. If the Borrower has a pension, profit sharing or
retirement plan subject to the Employee Retirement Income Security Act of 1974,
as amended from time to time, including any rules and regulations promulgated
thereunder ("ERISA"), such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
4.09 Taxes. The Borrower has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than taxes which are currently payable without penalty or
interest or those which are being duly contested in good faith.
4.10 Margin Stock. The proceeds of any Advance under the Line of
Credit will not be used to purchase or carry margin stock as such term is
defined under Regulation U of the Board of Governors of the Federal Reserve
System.
4.11 Environmental Compliance. Borrower has implemented and
complied in all material respects with all applicable federal, state and
local laws, ordinances, statutes and regulations with respect to hazardous or
toxic wastes, substances or related materials, industrial hygiene or
environmental conditions. There are no suits, proceedings, claims or disputes
pending or, to the knowledge of such Borrower, threatened against or
affecting such Borrower or its property claiming violations of any federal,
state or local law, ordinance, statute or regulation relating to hazardous or
toxic wastes, substances or related materials.
4.12 Water. As of the date of this Agreement, sufficient water is
available and is projected to be available, from verifiable surface and ground
water sources, to conduct operations as described in the most recent budget
submitted by Borrower to the Bank or to conduct operations materially similar to
prior years' operations as evidenced by information provided by any Borrower to
the Bank. Borrower has filed with all governmental agencies, all notices and
other documents required under Federal, state and local laws and regulations in
connection with the supply of water to and use of water upon the Real Property.
SECTION V
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement,
and so long thereafter as the Borrower is indebted to the Bank under this
Agreement, the Borrower shall, unless the Bank otherwise consents in writing:
5.01 Preservation of Existence; Compliance with Applicable Laws.
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business in accordance with all
applicable laws, rules and regulations.
5.02 Maintenance of Insurance. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar
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properties in the same general areas in which the Borrower operates and maintain
such other insurance and coverages as may be required by the Bank. All such
insurance shall be in form and amount and with companies satisfactory to the
Bank. With respect to insurance covering properties in which the Bank maintains
a security interest or lien, such insurance shall name the Bank as loss payee
pursuant to a loss payable endorsement satisfactory to the Bank and shall not be
altered or canceled except upon 10 days' prior written notice to the Bank. Upon
the Bank's request, the Borrower shall furnish the Bank with the original policy
or binder of all such insurance.
5.03 Payment of Obligations and Taxes. Make timely payment of all
assessments and taxes and all of its liabilities and obligations unless the same
are being contested in good faith.
5.04 Inspection Rights. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies of the
records and visit the properties of the Borrower and to discuss the business and
operations of the Borrower with any employee or representative thereof. If the
Borrower now or at any time hereafter maintains any records (including, but not
limited to, computer generated records and computer programs for the generation
of such records) in the possession of a third party, the Borrower hereby agrees
to notify such third party to permit the Bank free access to such records at all
reasonable times and to provide the Bank with copies of any records it may
request, all at the Borrower's expense, the amount of which shall be payable
immediately upon demand.
5.05 Reporting Requirements. Deliver or cause to be delivered to the
Bank in form and detail satisfactory to the Bank:
A. Annual Statements. Not later than 120 days after the end of
each of the Borrower's fiscal years, (i) a copy of the annual audited financial
report of the Borrower for such year, which report shall be prepared by a firm
of certified public accountants acceptable to Bank and (ii) a copy of the
Borrower's annual crop budget for the succeding year.
B. Other Information. Promptly upon the Bank's request, such
other information pertaining to the Borrower or any Guarantor as the Bank may
reasonably request.
5.06 Redemption or Repurchase of Stock. Not redeem or repurchase any
class of the Borrower's stock now or hereafter outstanding.
5.07 Payment of Dividends: Not declare or pay any dividends on any
class of stock now or hereafter outstanding except dividends payable solely in
the Borrower's capital stock.
5.08 Liens and Encumbrances. Not create, assume or permit to exist
any security interest, encumbrance, mortgage, deed of trust or other lien
including, but not limited to, a lien of attachment, judgment or execution)
affecting any of the Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any such properties,
except for Permitted Liens and as otherwise provided in this Agreement.
5.09 Transfer Assets. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any of its assets except in the ordinary course of
business as presently conducted by the Borrower, and then, only for full, fair
and reasonable consideration.
5.10 Change in the Nature of Business. Not make any material change
in its financial structure or in the nature of its business as existing or
conducted as of the date of this Agreement.
5.11 Financial Condition. Maintain at all times:
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A. Net Worth. A minimum effective tangible net worth of not
less than $3,500,000.00
B. Debt to Net Worth Ratio. A debt to effective tangible net
worth ratio of not more than 1.5 to 1.
C. Current Ratio. A ratio of current assets to current
liabilities of not less than 2 to 1.
D. Debt Service Coverage Ratio. A ratio of the sum of net
profit after tax, plus depreciation, amortization and interest expense minus
dividends to the current portion of long-term debt plus interest expense of not
less than 1.25 to 1.
E. Working Capital. A minimum working capital of not less
than $3,000,000.
For purposes of the foregoing, the term "effective tangible net worth"
shall mean the Borrower's stated net worth less all its intangible assets (i.e.,
goodwill, trademarks, patents, copyrights, organization expense and similar
intangible items) but including leaseholds and leasehold improvements and plus
indebtedness subordinated (by its terms or by written agreement) to indebtedness
owed by the Borrower to the Bank and the term "debt" shall mean all of the
Borrower's liabilities excluding indebtedness subordinated (by its terms or by
written agreement) to indebtedness owed by the Borrower to the Bank.
5.12 Notices. Give prompt written notice to the Bank of any and all
Events of Default and litigation, arbitration or administrative proceedings to
which the Borrower is a party and in which the claim or liability exceeds
$50,000.00.
5.13 Environmental Compliance. Borrower shall:
A. Implement and comply in all material respects with all
applicable federal, state and local laws, ordinances, statutes and regulations
with respect to hazardous or toxic wastes, substances or related materials,
industrial hygiene or to environmental conditions.
B. Not own, use, generate, manufacture, store, handle, treat,
release or dispose of any hazardous or toxic wastes, substances or related
materials.
C. Give prompt written notice of any discovery of or suit,
proceeding, claim, dispute, threat, inquiry or filing respecting hazardous or
toxic wastes, substances or related materials.
D. At all times indemnify and hold harmless Bank from and
against any and all liability arising out of the use, generation, manufacture,
storage, handling, treatment, disposal or presence of hazardous or toxic wastes,
substances or related materials.
5.14 Maintenance of Collateral: Except for Permitted Liens, keep and
maintain the Collateral free and clear of all levies, liens, encumbrances and
security interests (including, but not limited to, any lien of attachment,
judgment or execution) and defend the Collateral against any such levy, lien,
encumbrance or security interest; comply with all laws, statutes and regulations
pertaining to the Collateral and its use and operation; execute, file and record
such statements, notices and agreements, take such actions and obtain such
certificates and other documents as necessary to perfect, evidence and continue
the Bank's security interest in the Collateral and the priority thereof;
maintain accurate and complete records of the Collateral which show all sales,
claims and allowances; and properly care for, house, store and maintain the
Collateral in good condition, free of misuse, abuse and deterioration, other
than normal wear and tear. The Borrower shall also maintain and preserve all
its properties in good working order
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and condition in accordance with the general practice of other businesses of
similar character and size, ordinary wear and tear excepted.
5.15 Compensation: Compensate its employees for services rendered at
an hourly rate at least equal to the minimum hourly rate prescribed by any
applicable federal or state law or regulation.
5.16 Location of Harvested Crops. Any Crops now or hereafter
harvested or removed from the Real Property shall not be stored with a bailee,
warehouseman or similar party without the Bank's prior written consent.
5.17 Care and Preservation of Crops..
(a) Attend to and care for the Crops and do or cause to be done
any and all acts that may at any time be appropriate or necessary to grow, farm,
cultivate, irrigate, fertilize, fumigate, prune, harvest, pick, clean, preserve
and protect the Crops.
(b) Not commit or suffer to be committed any waste of or damage
to the Crops
(c) Permit the Bank and any of its agents, employees or
representatives to enter upon the Real Property at any reasonable time and from
time to time for the purpose of examining and inspecting the Crops and the Real
Property.
(d) Harvest and prepare the Crops for market and promptly notify
the Bank when any of the Crops are ready for market.
(e) Keep the Crops separate and always capable of
identification.
(f) Comply with any requirements or instructions of the Bank
with respect to hauling, shipping, storing, marketing and otherwise preparing,
handling and disposing of the Crops.
5.18 Evidence of Water Availability. At such times as the Bank may
request, to deliver to the Bank a certificate stating that the amount of water
available and projected to be available is sufficient to conduct operations as
described in Borrower's budget or operations materially similar to prior years'
operations, as evidenced by information provided by the Borrower to the Bank.
Such certificate shall be signed, at the Bank's option, either by the Borrower
or by an independent third party, such as an officer of the Borrower's water
district or other supplier of water.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event
of default (an "Event of Default") under this Agreement:
6.01 Non-Payment. The Borrower shall fail to pay any payment of
principal or interest or any other sum referred to in this Agreement within 10
days of when due.
6.02 Performance Under This Agreement: The Borrower shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Agreement or in any document, instrument or agreement relating to this
Agreement and any such failure shall continue unremedied for more than 30 days
after the occurrence thereof.
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6.03 Other Agreements: If there is a default under any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness.
6.04 Representations and Warranties; Financial Statements. Any
representation or warranty made by the Borrower under or in connection with this
Agreement or any financial statement given by the Borrower or any Guarantor
shall prove to have been incorrect in any material respect when made or given or
when deemed to have been made or given.
6.05 Insolvency. The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or a substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment.
6.06 Execution. Any writ of execution or attachment or any judgment
lien shall be issued against any property of the Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
6.07 Revocation or Limitation of Guaranty. Any Guaranty shall be
revoked or limited or its enforceability or validity shall be contested by any
Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor
who is a natural person shall die.
6.08 Suspension. The Borrower shall voluntarily suspend the
transaction of business or allow to be suspended, terminated, revoked or expired
any permit, license or approval of any governmental body necessary to conduct
the Borrower's business as now conducted.
6.09 Change in Ownership: There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary to), or an
agreement shall be entered into to do so with, any Person or group of Persons
(as such terms are defined pursuant to Federal securities laws) with respect to
more than 20% of the issued and outstanding capital stock of the Borrower and,
as a result thereof, such Person or group of Persons has the ability to direct
or cause the direction of the management and policies of the Borrower.
6.10 Impairment of Collateral. There shall occur any injury or damage
to all or any part of the Collateral or all or any part of the Collateral shall
be lost, stolen or destroyed.
6.11 Water Quality/Amount. The Borrower's water is or is projected to
be insufficient in amount or unsuitable in quality, as determined by the Bank in
either case, to conduct operations as described in Borrower's most recent budget
or projections or by information provided by Borrower to the Bank.
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election, without demand and upon only such notice as may be required by law:
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7.01 Acceleration. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other document,
instrument or agreement, immediately due and payable, whether or not otherwise
due and payable.
7.02 Cease Extending Credit. Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between the
Borrower and the Bank.
7.03 Termination. Terminate this Agreement as to any future
obligation of the Bank without affecting the Borrower's obligations to the Bank
or the Bank's rights and remedies under this Agreement or under any other
document, instrument or agreement.
7.04 Notification of Account Debtors:
(a) Notify any account debtor, any buyers or transferee of the
Collateral or any other persons of the Bank's interest in the Collateral and the
proceeds thereof.
(b) Sign the Borrower's name (which authority the Borrower
hereby irrevocably and unconditionally grants to the Bank) on any invoice or
bill of lading relating to accounts or other drafts against the account debtors,
buyers or transferees, notify post office authorities to change the address for
delivery of mail addressed to the Borrower to such address as the Bank may
designate and take possession of and open mail addressed to the Borrower and
remove therefrom, proceeds of and payments on the Collateral, and demand,
receive and endorse payment and give receipts, releases and satisfactions for
and sue for all money payable to the Borrower.
(c) Require the Borrower to indicate on the face of all invoices
(or such other documentation as may be specified by the Bank relating to the
sale, delivery or shipment of goods giving rise to the account) that the account
has been assigned to the Bank and that all payments are to be made directly to
the Bank at such address as the Bank may designate.
(d) Require the Borrower to direct all account debtors, buyers
or transferees to forward all remittances, payments and proceeds of the
Collateral directly to the Bank at such address as the Bank may designate. In
connection therewith, the Borrower hereby irrevocably constitutes and appoints
the Bank as its attorney-in-fact to endorse the Borrower's name on any notes,
acceptances, checks, drafts, money orders or other evidence of payment that may
come into the Bank's possession.
(e) Require the Borrower to deliver to the Bank, at such times
designated by the Bank, records and schedules which show the status and
condition of the Collateral, where it is located and such contracts or other
matters which affect the Collateral.
(f) Send verification requests to any account debtor, buyer or
transferee.
(g) Make inquiries of the Borrower's trade vendors.
7.05 Care and Possession of the Crops. Enter upon the Real Property
and, using any and all of the Borrower's equipment, machinery, tools, farming
implements and supplies, and improvements located on the Real Property: (i)
farm, cultivate, irrigate, fertilize, fumigate, prune and perform any other act
of acts appropriate or necessary to grow, care for, maintain, preserve and
protect the Crops (using any water located in, on or adjacent to the Real
Property); (ii) harvest, pick, clean and remove the Crops from the Real
Property; and (iii) appraise, store, prepare for public or private sale,
exhibit, market and sell the Crops and the products thereof; provided that the
Borrower hereby agrees that, if the Borrower is the owner of the Real Property,
the Bank shall not be responsible or liable for returning the Real Property to
its condition
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immediately preceding the use of the Real Property as provided herein or for
doing such acts as may be necessary to permit future crops to be grown on the
Real Property.
7.06 Protection of Security Interests: Make such payments and do such
acts as the Bank, in its sole judgment, considers necessary and reasonable to
protect its security interest or lien in the Collateral. The Borrower hereby
irrevocably authorizes the Bank to pay, purchase, contest or compromise any
encumbrance, lien or claim which the Bank, in its sole judgment, deems to be
prior or superior to its security interest. Further, the Borrower hereby agrees
to pay to the Bank, upon demand therefor, all expenses and expenditures
(including attorneys' fees) incurred in connection with the foregoing.
7.07 Foreclosure: Enforce any security interest or lien given or
provided for under this Agreement or under any security agreement, mortgage,
deed of trust or other document, in such manner and such order, as to all or any
part of the properties subject to such security interest or lien, as the Bank,
in its sole judgment, deems to be necessary or appropriate and the Borrower
hereby waives any and all rights, obligations or defenses now or hereafter
established by law relating to the foregoing. In the enforcement of its
security interest or lien, the Bank is authorized to enter upon the premises
where any Collateral is located and take possession of the Collateral or any
part thereof, together with the Borrower's records pertaining thereto, or the
Bank may require the Borrower to assemble the Collateral and records pertaining
thereto and make such Collateral and records available to the Bank at a place
designated by the Bank. The Bank may sell the Collateral or any portions
thereof, together with all additions, accessions and accessories thereto, giving
only such notices and following only such procedures as are required by law, at
either a public or private sale, or both, with or without having the Collateral
present at the time of the sale, which sale shall be on such terms and
conditions and conducted in such manner as the Bank determines in its sole
judgment to be commercially reasonable. Any deficiency which exists after the
disposition or liquidation of the Collateral shall be a continuing liability of
the Borrower to the Bank and shall be immediately paid by the Borrower to the
Bank.
7.08 Non-Exclusivity of Remedies: Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Borrower and the Bank, or otherwise.
7.09 Application of Proceeds: All amounts received by the Bank as
proceeds from the disposition or liquidation of the Collateral shall be applied
to the Borrower's indebtedness to the Bank as follows: first, to the costs and
expenses of collection, enforcement, protection and preservation of the Bank's
lien in the Collateral, including court costs and reasonable attorneys' fees,
whether or not suit is commenced by the Bank; next, to those costs and expenses
incurred by the Bank in protecting, preserving, enforcing, collecting,
liquidating, selling or disposing of the Collateral; next, to the payment of
accrued and unpaid interest on all of the Obligations; next, to the payment of
the outstanding principal balance of the Obligations; and last, to the payment
of any other indebtedness owed by the Borrower to the Bank. Any excess
Collateral or excess proceeds existing after the disposition or liquidation of
the Collateral will be returned or paid by the Bank to the Borrower.
SECTION VIII
MISCELLANEOUS PROVISIONS
8.01 Amounts Payable on Demand. If the Borrower fails to pay on
demand any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default occasioned
by the Borrower's failure to pay such amount, create an Advance in an amount
equal to the amount so payable, which Advance shall thereafter bear interest as
provided under the Line of Credit.
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8.02 Default Interest Rate: If an Event of Default, or an event
which, with notice or passage of time could become an Event of Default, has
occurred or is continuing, the Borrower shall pay to the Bank interest on any
Indebtedness or amount payable under this Agreement at a rate which is 3% in
excess of the rate or rates then in effect under this Agreement.
8.03 Disposal of Invoices: All documents, schedules, invoices or
other papers received by the Bank from the Borrower may be destroyed or disposed
of six (6) months after receipt by the Bank, unless the Borrower requests in
writing the return thereof, which shall be done at the Borrower's expense.
8.04 Assignment of Borrower's Rights:
(a) If the Crops or any portion or portions thereof become
infected by disease or are destroyed by order of any local, state or federal
authority, and, by reason thereof, the Borrower is entitled to be indemnified by
such authority, the Borrower hereby assigns to the Bank any and all such sums
due from such authority, and the Bank is hereby authorized to receive, collect
and sue for the same, and the Borrower hereby orders and directs that any such
sums be paid directly to the Bank.
(b) In addition, the Borrower hereby assigns and transfers to
the Bank all of the Borrower's rights and interests in and to any monies now or
hereafter placed in any funds of any marketing association, corporation,
cooperative, partnership, firm or individual now, heretofore or hereafter
handling or having to do with any of the Crops now growing or heretofore or
hereafter grown on the Real Property or connected with the growing, marketing,
farming or other handling of such Crops and the Borrower hereby assigns and
transfers to the Bank all stock and all other interests, benefits and rights of
the Borrower in any such marketing association, corporation, cooperative,
partnership, firm or individual having anything to do with such Crops and all
monies due or becoming due to the Borrower from any one or more of them.
8.05 Accounting and Other Terms. All references to financial
statements, assets, liabilities and similar accounting terms not specifically
defined in this Agreement shall mean such financial statements prepared and such
terms determined in accordance with generally accepted accounting principles
consistently applied. Except where otherwise specified in this Agreement, all
financial data submitted or to be submitted to the Bank pursuant to this
Agreement shall be prepared in accordance with generally accepted accounting
principles consistently applied. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the California Uniform
Commercial Code.
8.06 Reliance. Each warranty, representation, covenant and agreement
contained in this Agreement shall be conclusively presumed to have been relied
upon by the Bank regardless of any investigation made or information possessed
by the Bank and shall be cumulative and in addition to any other warranties,
representations, covenants or agreements which the Borrower shall now or
hereafter give, or cause to be given, to the Bank.
8.07 Attorney's Fees: Borrower shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred by
Bank in connection with the administration, enforcement, including any
bankruptcy, appeal or the enforcement of any judgment or any refinancing or
restructuring of this Agreement or any document, instrument or agreement
executed with respect to, evidencing or securing the indebtedness hereunder.
8.08 Notices. All notices, payments, requests, information and
demands which either party hereto may desire, or may be required to give or make
to the other party shall be given or made to such party by hand delivery or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Agreement or to such other address as may be specified from time to time in
writing by either party to the other.
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8.09 Waiver. Neither the failure nor delay by the Bank in exercising
any right hereunder or under any document, instrument or agreement mentioned
herein shall operate as a waiver thereof, nor shall any single or partial
exercise of any right hereunder or under any document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise of
any other right; nor shall any waiver of any right or default hereunder or under
any other document, instrument or agreement mentioned herein constitute a waiver
of any other right or default or constitute a waiver of any other default of the
same or any other term or provision.
8.10 Conflicting Provisions. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document, instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions shall
be considered cumulative.
8.11 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell, assign or grant participations in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower.
8.12 Jurisdiction. This Agreement, any notes issued hereunder, and
any documents, instruments or agreements mentioned or referred to herein shall
be governed by and construed according to the laws of the State of California,
to the jurisdiction of whose courts the parties hereby submit.
8.13 Dispute Resolution. It is understood and agreed that upon the
request of any party to this agreement any dispute, claim, or controversy of any
kind, whether in contract or in tort, statutory or common law, legal or
equitable now existing or hereinafter arising between the parties in any way
arising out of, pertaining to or in connection with: (1) this Agreement, or
any related agreements, documents, or instruments, (2) all past and present
loans, credits, accounts, deposit accounts (whether demand deposits or time
deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of
credit, goods or services, or other transactions, contracts or agreements of any
kind, (3) any incidents, omissions, acts, practices, or occurrences causing
injury to either party whereby the other party or its agents, employees or
representatives may be liable, in whole or in part, or (4) any aspect of the
past or present relationships of the parties, shall be resolved through a two
step dispute resolution process administered by Judicial Arbitration & Mediation
Services, Inc. ("J-A-M-S") as follows:
a) Step I - Mediation: At the request of any party to the
dispute, claim or controversy of the matter shall be referred to the nearest
office of J-A-M-S for mediation, that is, an informal, non binding conference or
conferences between the parties in which a retired judge or justice for the
J-A-M-S panel will seek to guide the parties to a resolution of the case.
b) Step II - Unsecured Contracts - Arbitration: Should any
dispute, claim or controversy remain unresolved at the conclusion of the Step
I Mediation Phase then all such remaining matters shall be resolved by final
and binding arbitration before a different judicial panelist, unless the
parties shall agree to have the mediator panelist act as arbitrator. The
hearing shall be conducted at a location determined by the arbitrator in Los
Angeles County and shall be administered by and in accordance with the then
existing Rules of Practice and Procedure of Judicial Arbitration & Mediation
Services, Inc., and judgement upon any award rendered by the arbitrator may
be entered by any State or Federal Court having jurisdiction thereof. The
arbitrator shall determine which is the prevailing party and shall include in
the award that party's reasonable attorneys fees and costs. This
subparagraph (b) shall apply only if,
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at the time of the submission of the matter to J-A-M-S, the dispute(s) or
issue(s) do(es) not arise out of a transaction(s) which is/are secured by real
property collateral or, if so secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the arbitrator or
his/her designated representative shall determine a reasonable estimate of
anticipated fees and costs of the Arbitrator, and render a statement to each
party setting forth that party's pro rata share of said fees and costs.
Thereafter each party shall, within 10 days of receipt of said statement,
deposit said sum with the Arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non depositing party of the right to
prosecute or defend the claim which is the subject of the arbitration, but shall
not otherwise serve to abate, stay or suspend the arbitration proceedings.
c) Provisional Remedies, Self Help and Foreclosure: No
provision of, or the exercise of any right(s) under subparagraph (b), nor any
other provision of this Dispute Resolution Provision, shall limit the right of
any party to exercise self help remedies such as set off, to foreclose against
any real or personal property collateral, or obtain provisional or ancillary
remedies such as injunctive relief or the appointment of a receiver from any
court having jurisdiction before, during or after the pendency of any
arbitration. At Bank's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of power of sale under the deed of trust
or mortgage, or by judicial foreclosure. The institution and maintenance of an
action for provisional remedies pursuit of provisional or ancillary remedies or
exercise of self help remedies shall not constitute a waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to
arbitration.
8.14 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
8.15 Headings. The headings set forth herein are solely for the
purpose of identification and have no legal significance.
8.16 Entire Agreement. This Agreement and the Loan Documents shall
constitute the entire and complete understanding of the parties with respect to
the transactions contemplated hereunder. All previous conversations, memoranda
and writings between the parties or pertaining to the transactions contemplated
hereunder that are not incorporate or referenced in this Agreement or the Loan
Documents are superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the date first hereinabove written.
BANK: BORROWER:
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SANWA BANK CALIFORNIA VINEYARD 405.
By: /s/ Steven R. Edmonston By: /s/ Alfred G. Scheid
Name: Steven R. Edmonston Name: Alfred G. Scheid
Title: Vice President Title: General Partner
By: By /s/ Ernest M. Brown
Name: Name: Ernest M. Brown
Title: Title: General Partner
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SANWA BANK
California
LINE OF CREDIT AGREEMENT
(Reducing Commitment)
THIS LINE OF CREDIT AGREEMENT (the "Agreement") is made and entered into
this 25th day of June, 1997, by and between SANWA BANK CALIFORNIA (the "Bank")
and SCHEID VINEYARDS INC. (the "Borrower").
SECTION I
AGREEMENT TO LEND
1.01 Commitment to Lend. Subject to the terms and conditions of this
Agreement and so long as no Event of Default occurs, the Bank agrees to extend
to the Borrower the credit accommodations that follow (the "Line of Credit").
1.02 Line of Credit. The Bank agrees to make loans and advances
("Advances") to the Borrower from time to time, upon the Borrower's request
therefore, from the date hereof to the Expiration Date, provided that the
outstanding Advances under this Agreement shall not exceed the following:
Date: Amount:
06/30/97 to 06/04/98 $1,450,000.00
06/05/98 to 06/04/99 $1,354,000.00
06/05/99 to 06/04/00 $1,258,000.00
06/05/00 to 06/04/01 $1,162,000.00
06/05/01 to 06/04/02 $1,066,000.00
06/05/02 to 06/04/03 $970,000.00
06/05/03 to 06/04/04 $874,000.00
06/05/04 to 06/04/05 $778,000.00
06/05/05 to 06/04/06 $682,000.00
06/05/06 to 06/04/07 $586,000.00
(each such dollar amount being the relative "Commitment"). Within the foregoing
limit,s, the Borrower may borrow, partially of wholly, prepay, and reborrow
under this Section 1.02.
A. Purpose. Advances made under the Line of Credit shall be
used to refinance an existing real estate loan with the Bank and to increase
working capital.
B. Line Account. The Bank shall maintain on its books a record
of account in which the Bank shall make entries for each Advance and such other
debits and credits as shall be appropriate in connection with the Line of Credit
(the "Line Account").
C. Interest. Interest shall accrue from the date of each
Advance under the Line of Credit at one of the following rates, as quoted by the
Bank and as elected by the relevant Borrower pursuant to paragraph 1.02D. or
paragraph 1.02E. below:
1. Variable Rate Advances: A variable rate equivalent to
an index for a variable interest rate which is quoted, published or announced
from time to time by the Bank as its reference rate and as to which loans may be
made by Bank at, below or above such reference rate, plus .25% per annum (the
"Variable Rate"). Interest shall be adjusted concurrently with any change in
the reference rate quoted by Bank. An Advance based upon the Variable Rate is
hereinafter referred to as a "Variable Rate Advance".
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2. Fixed Rate Advance: A fixed rate quoted by Bank in
its sole discretion for each Advance (the "Fixed Rate") and for such period of
time that the Bank may quote and offer, provided that any such period of time
shall be for at least 30 days and shall not extend beyond the Expiration Date
(the "Interest Period") for Advances in the minimum amount of $100,000. Advances
based upon the Fixed Rate are hereinafter referred to as "Fixed Rate Advances".
Interest on any Advance shall be computed on the basis of
360 days per year, but charged on the actual number of days elapsed.
Interest on Variable Rate and Fixed Rate Advances shall be
paid in quarterly installments on the 5th day of each quarter of each year,
commencing on October 5, 1997.
If interest is not paid as and when it is due, it shall be
added to the principal, become and be treated as a part thereof, and shall
thereafter bear like interest.
D. Notice of Borrowing. Upon telephonic notice which shall be
received by the Bank at or before 2:00 p.m. (California time) on a business day,
any Borrower may borrow under the Crop Line of Credit by requesting:
1. A Variable Rate Advance: A Variable Rate Advance may
be made on the day notice is received by the Bank; provided, however, that if
the Bank shall not have received notice at or before 2:00 p.m. on the day such
Advance is requested to be made, such Variable Rate Advance may, at the Bank's
option, be made on the next business day.
2. A Fixed Rate Advance: Notice of any Fixed Rate Advance
shall be received by the Bank no later than two business days prior to the day
(which shall be a business day) on which any Borrower requests such Fixed Rate
Advance to be made.
E. Notice of Election to Adjust Interest Rate: Upon telephonic
notice which shall be received by the Bank at or before 11:00 a.m. (California
time) on a business day, any Borrower may elect:
1. That interest on a Variable Rate Advance shall be
adjusted to accrue at the Fixed Rate; provided, however, that such notice shall
be received by the Bank no later than two business days prior to the day (which
shall be a business day) on which such Borrower requests that interest be
adjusted to accrue at the Fixed Rate.
2. That interest on a Fixed Rate Advance shall continue to
accrue at a newly quoted Fixed Rate or shall be adjusted to commence to accrue
at the Variable Rate; provided, however, that such notice shall be received by
the Bank no later than the last day of the Interest Period pertaining to such
Fixed Rate Advance. If the Bank shall not have received notice (as prescribed
herein) of such Borrower's election that interest on any Fixed Rate Advance
shall continue to accrue at the Fixed Rate, the relevant Borrower shall be
deemed to have elected that interest thereon shall be adjusted to accrue at the
Variable Rate upon the expiration of the Interest Period pertaining to such
Advance.
F. Prepayment. The Borrowers may prepay any Advance in whole
or in part, at any time and without penalty, provided, however, that: (i) any
partial prepayment shall first be applied at the Bank's option, to accrued and
unpaid interest and next to the outstanding principal balance; and (ii) during
any period of time in which interest is accruing on any Advance on the basis of
the Fixed Rate, no prepayment shall be made except on a day which is the last
day of the Interest Period pertaining thereto. If the whole or any part of any
Fixed Rate Advance is prepaid by reason of acceleration or otherwise, the
Borrowers shall,jointly and severally, upon the Bank's request, promptly pay to
and indemnify the Bank for all costs and any loss actually
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incurred by the Bank (including loss of profit resulting from the re employment
of funds) sustained by the Bank as a consequence of such prepayment.
G. Indemnification for Fixed Rate Costs. During any period of
time in which interest on any Advance is accruing on the basis of the Fixed
Rate, the Borrowers shall, jointly and severally, upon the Bank's request,
promptly pay to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a result of
the Bank's compliance with any directive or requirement of any regulatory
authority pertaining or relating to funds used by the Bank in quoting and
determining the Fixed Rate.
H. Conversion from Fixed Rate to Variable Rate. In the event
that the Bank shall at any time determine that the accrual of interest on the
basis of the Fixed Rate (i) has become infeasible because the Bank is unable to
determine the Fixed Rate due to the unavailability of U.S. Dollar deposits,
contracts or certificates of deposit in an amount approximately equal to the
amount of the relevant Advance and for a period of time approximately equal to
the relevant Interest period or (ii) is or has become unlawful by reason of the
Bank's compliance with any new law, rule, regulation, guideline or order, or any
new interpretation of any present law, rule, regulation guideline or order, then
the Bank shall promptly give telephonic notice thereof (confirmed in writing) to
the Borrowers, in which event any Fixed Rate Advance shall be deemed to be a
Variable Rate Advance and interest shall thereupon immediately accrue at the
Variable Rate and shall continue at such rate until the Bank determines that the
Fixed Rate is no longer infeasible or unlawful.
I. Principal. Unless sooner due in accordance with the terms
of this Agreement:
(a) Commencing on July 5, 1998 and continuing on such date
annually thereafter, Borrower agrees to repay any outstanding Advances that
would exceed the relevant Commitment then in effect.
(b) On the Expiration Date, Borrower hereby promises and
agrees to pay to Bank in full the aggregate unpaid principal amount of the
Advances outstanding on such date plus accrued and unpaid interest thereon.
J. Expiration of Line of Credit. Unless earlier terminated in
accordance with the terms of this Agreement, the Bank's commitment to make
Advances to the Borrower hereunder shall automatically expire on July 5, 2007
(the "Expiration Date").
K. Late Payment: If any payment of principal or interest, or
any portion thereof, under this Agreement is not paid within ten (10) calendar
days after it is due, a late payment charge equal to five percent (5%) of such
past due payment may be assessed and shall be immediately payable.
1.03 Disbursement of Proceeds from Advances. Any Advance made
hereunder shall be conclusively presumed to have been made to and for the
Borrower's benefit when the proceeds of such Advance are disbursed in accordance
with the Borrower's instructions or deposited into a checking account of the
Borrower maintained at the Bank.
SECTION II
GUARANTORS; COLLATERAL; REAL PROPERTY
2.01 Guarantors. The indebtedness incurred under and pursuant to this
Agreement shall be guaranteed, in form and substance satisfactory to the Bank
("Guaranty"), by Alfred G. Scheid ("Guarantor").
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2.02 Collateral. To secure payment and performance of all the
Borrower's Obligations under this Agreement and all other liabilities, loans,
guarantees, covenants and duties owed by the Borrower to the Bank, whether or
not evidenced by this or by any other agreement, absolute or contingent, due or
to become due, now existing or hereafter and howsoever created, the Borrower
hereby grants the Bank a security interest in and to all of the following
property ("Collateral") :
(a) All goods now owned or hereafter acquired by the Borrower or
in which the Borrower now has or may hereafter acquire any interest, including,
but not limited to, all machinery, equipment, furniture, furnishings, fixtures,
tools, supplies and motor vehicles of every kind and description, and all
additions, accessions, improvements, replacements and substitutions thereto and
thereof.
(b) All inventory now owned or hereafter acquired by the
Borrower, including, but not limited to, all raw materials, work in process,
finished goods, merchandise, parts and supplies of every kind and description,
including inventory temporarily out of the Borrower's custody or possession,
together with all returns on accounts.
(c) All accounts, contract rights and general intangibles now
owned or hereafter created or acquired by the Borrower, including, but not
limited to, all receivables, goodwill, trademarks, trademark applications, trade
styles, trade names, patents, patent applications, copyrights and copyright
applications, customer lists, business records and computer programs, tapes,
disks and related data processing software that at any time evidence or contain
information relating to any of the Collateral.
(d) All documents, instruments and chattel paper now owned or
hereafter acquired by the Borrower, including, but not limited to, warehouse and
other receipts, bills of sale and bills of lading.
(e) All monies, deposit accounts, certificates of deposit and
securities of the Borrower now or hereafter in the Bank's or its agents'
possession.
(f) All crops now growing or hereafter to be grown, together
with all products and proceeds thereof (the "Crops"), on that certain real
property described in the attached Exhibit "B" (the "Real Property").
(g) All farm products now owned or hereafter acquired by or for
the benefit of the Borrower consisting of supplies used or produced in the
farming operations of the Borrower.
(h) All of Borrower's now existing or hereafter acquired water
rights of every kind and description, whether appurtenant, riparian or
prescriptive or arising by virtue of any contract or other agreement.
The Bank's security interest in the Collateral shall be a continuing lien
and shall include the proceeds and products of the Collateral including, but not
limited to, the proceeds of any insurance thereon.
2.03 The Deed of Trust. The Borrower hereby agrees that all
Indebtedness referenced in the Agreement to be paid by the Borrower to the Bank
and the Borrower's performance of each and all of the terms, covenants and
agreements contained in the Agreement shall be secured by a deed of trust in
form and substance satisfactory to the Bank (the "Deed of Trust") encumbering,
as a lien of first encumbrance, certain real property described in the attached
Exhibit "1" (the "Real Property"), located in the County of Monterey, State of
California, subject only to current taxes and assessments not yet due and
payable and [ ] no other exceptions [ ] exceptions numbered 1-7 and 10, all as
listed on a certain Preliminary Title Report No. 97012150 (the "Permitted Title
Exceptions") dated May 19, 1997 and issued byStewart Title
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SECTION III
CONDITIONS PRECEDENT
3.01 Conditions Precedent to First Advance. Prior to the first
Advance hereunder, the Borrower shall deliver or cause to be delivered to the
Bank, in form and substance satisfactory to the Bank:
A. Authority to Borrow. Evidence relating to the duly given
approval and authorization of the execution, delivery and performance of this
Agreement, all other documents, instruments and agreements required under this
Agreement and all other actions to be taken by the Borrower hereunder or
thereunder.
B. Loan Documents. The documents described in Section II
hereof, as applicable, and all other documents, instruments and agreements
required or necessary to consummate the transactions contemplated under this
Agreement (collectively the "Loan Documents"), all fully executed.
C. Real Property. The following in connection with the Real
Property:
1. An appraisal of the Real Property.
2. A title insurance policy or binder in the amount of
$1,450,000 issued by a title insurance company satisfactory to the Bank and in
such form and substance and with such endorsements as are satisfactory to the
Bank. Such title insurance policy or binder shall indicate to the Bank's
satisfaction that the Deed of Trust shall constitute a lien of first encumbrance
on the Real Property subject only to the Permitted Title Exceptions.
3. Evidence that the Deed of Trust has been recorded and
constitutes a lien on the Real Property subject only to the Permitted Title
Exceptions.
4. Evidence of flood insurance if the Real Property is
located in a flood plain.
D. Fees. A fee of $13,000 and reimbursement to the Bank in the
amount of all escrow, recordation and appraisal fees, title guaranty or
insurance premiums, closing costs and all other out-of-pocket expenses incurred
by the Bank.
E. Financing Statements. Executed UCC-1 financing statement(s)
describing the Collateral, together with evidence of the recordation of such
statement(s) as a lien of first priority.
F. Miscellaneous Documents. Such other documents and opinions
as the Bank may require with respect to the transactions described in this
Agreement.
3.02 Conditions Precedent to All Advances. The obligation of the Bank
to make each Advance (including the first Advance) is subject to the further
conditions precedent that, as of the date of each Advance and after the making
of such Advance:
A. Representations and Warranties. The representations and
warranties set forth in Section IV hereof and in any other document, instrument,
agreement or certificate delivered to the Bank hereunder are true and correct.
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B. Event of Default. No event has occurred and is continuing
which constitutes, or, with the lapse of time or giving of notice or both, would
constitute an Event of Default as defined in Section VI hereof.
C. Collateral. The security interest in the Collateral has
been duly authorized, created and perfected with first priority and is in full
force and effect.
For the purposes hereof, the Borrower's acceptance of the proceeds of any
Advance shall be deemed to constitute the Borrower's representation and warranty
that the statements set forth in sections 3.02 A. and 3.02 B above are true and
correct.
SECTION IV
REPRESENTATIONS AND WARRANTIES
The Borrower hereby makes the following representations and warranties to
the Bank, which representations and warranties are continuing:
4.01 Status. The Borrower is a corporation duly organized and validly
existing under the laws of the State of California, and is properly licensed,
qualified to do business and in good standing in, and, where necessary to
maintain the Borrower's rights and privileges, has complied with the fictitious
name statute of every jurisdiction in which the Borrower is doing business.
4.02 Authority. The execution, delivery and performance by the
Borrower of this Agreement and the Loan Documents have been duly authorized and
do not and will not: (i) violate any provision of any law, rule, regulation,
writ, judgment or injunction presently in effect affecting the Borrower; (ii)
result in a breach of or constitute a default under any material agreement to
which the Borrower is a party or by which it or its properties may be bound of
affected; or (iii) require any consent or approval of its stockholders or
violate any provision of its articles of incorporation or by-laws.
4.03 Legal Effect. This Agreement constitutes, and any document,
instrument or agreement required hereunder when delivered will constitute,
legal, valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms.
4.04 Ficticious Trade Styles. There are no fictitious trade styles used by
the Borrower in connection with its business operations. The Borrower shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
4.05 Financial Statements. All financial statements, information and
other data which may have been or which may hereafter be submitted by the
Borrower to the Bank are true, accurate and correct and have been or will be
prepared in accordance with generally accepted accounting principles
consistently applied and accurately represent the Borrower's financial condition
or, as applicable, the other information disclosed therein. Since the most
recent submission of any such financial statement, information or other data to
the Bank, the Borrower represents and warrants that no material adverse change
in the Borrower's financial condition or operations has occurred which has not
been fully disclosed to the Bank in writing.
4.06 Litigation. Except as have been disclosed to the Bank in
writing, there are no actions, suits or proceedings pending or, to the knowledge
of the Borrower, threatened against or affecting the Borrower or the Borrower's
properties before any court or administrative agency which, if determined
adversely to the Borrower, would have a material adverse effect on the
Borrower's financial condition or operations.
4.07 Title to Assets; Permitted Liens. The Borrower has good and
marketable title to all of its assets and the same are not subject to any
security interest, encumbrance, lien or claim
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of any third person other than: (i) liens and security interests securing
indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments
or similar charges either not yet due or being duly contested in good faith;
(iii) liens of mechanics, materialmen, warehousemen or other like liens arising
in the ordinary course of business and securing obligations which are not yet
delinquent; (iv) liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Bank in writing; (v)
purchase money liens or purchase money security interests upon or in any
property acquired or held by the Borrower in the ordinary course of business to
secure indebtedness outstanding on the date hereof or permitted to be incurred
hereunder; and (vi) those liens and security interests which in the aggregate
constitute an immaterial and insignificant monetary amount with respect to the
net value of the Borrower's assets (collectively "Permitted Liens").
4.08 ERISA. If the Borrower has a pension, profit sharing or
retirement plan subject to the Employee Retirement Income Security Act of 1974,
as amended from time to time, including any rules and regulations promulgated
thereunder ("ERISA"), such plan has been and will continue to be funded in
accordance with its terms and otherwise complies with and continues to comply
with the requirements of ERISA.
4.09 Taxes. The Borrower has filed all tax returns required to be
filed and paid all taxes shown thereon to be due, including interest and
penalties, other than taxes which are currently payable without penalty or
interest or those which are being duly contested in good faith.
4.10 Margin Stock. The proceeds of any Advance under the Line of
Credit will not be used to purchase or carry margin stock as such term is
defined under Regulation U of the Board of Governors of the Federal Reserve
System.
4.11 Environmental Compliance. Borrower has implemented and
complied in all material respects with all applicable federal, state and
local laws, ordinances, statutes and regulations with respect to hazardous or
toxic wastes, substances or related materials, industrial hygiene or
environmental conditions. There are no suits, proceedings, claims or disputes
pending or, to the knowledge of such Borrower, threatened against or
affecting such Borrower or its property claiming violations of any federal,
state or local law, ordinance, statute or regulation relating to hazardous or
toxic wastes, substances or related materials.
4.12 Water. As of the date of this Agreement, sufficient water is
available and is projected to be available, from verifiable surface and ground
water sources, to conduct operations as described in the most recent budget
submitted by Borrower to the Bank or to conduct operations materially similar to
prior years' operations as evidenced by information provided by any Borrower to
the Bank. Borrower has filed with all governmental agencies, all notices and
other documents required under Federal, state and local laws and regulations in
connection with the supply of water to and use of water upon the Real Property.
SECTION V
COVENANTS
The Borrower covenants and agrees that, during the term of this Agreement,
and so long thereafter as the Borrower is indebted to the Bank under this
Agreement, the Borrower shall, unless the Bank otherwise consents in writing:
5.01 Preservation of Existence; Compliance with Applicable Laws.
Maintain and preserve its existence and all rights and privileges now enjoyed;
not liquidate or dissolve, merge or consolidate with or into, or acquire any
other business organization; and conduct its business in accordance with all
applicable laws, rules and regulations.
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5.02 Maintenance of Insurance. Maintain insurance in such amounts and
covering such risks as is usually carried by companies engaged in similar
businesses and owning similar properties in the same general areas in which the
Borrower operates and maintain such other insurance and coverages as may be
required by the Bank. All such insurance shall be in form and amount and with
companies satisfactory to the Bank. With respect to insurance covering
properties in which the Bank maintains a security interest or lien, such
insurance shall name the Bank as loss payee pursuant to a loss payable
endorsement satisfactory to the Bank and shall not be altered or canceled except
upon 10 days' prior written notice to the Bank. Upon the Bank's request, the
Borrower shall furnish the Bank with the original policy or binder of all such
insurance.
5.03 Payment of Obligations and Taxes. Make timely payment of all
assessments and taxes and all of its liabilities and obligations unless the same
are being contested in good faith.
5.04 Inspection Rights. At any reasonable time and from time to time
permit the Bank or any representative thereof to examine and make copies of the
records and visit the properties of the Borrower and to discuss the business and
operations of the Borrower with any employee or representative thereof. If the
Borrower now or at any time hereafter maintains any records (including, but not
limited to, computer generated records and computer programs for the generation
of such records) in the possession of a third party, the Borrower hereby agrees
to notify such third party to permit the Bank free access to such records at all
reasonable times and to provide the Bank with copies of any records it may
request, all at the Borrower's expense, the amount of which shall be payable
immediately upon demand.
5.05 Reporting Requirements. Deliver or cause to be delivered to the
Bank in form and detail satisfactory to the Bank:
A. Annual Statements. Not later than 120 days after the end of
each of the Borrower's fiscal years, (i) a copy of the annual audited financial
report of the Borrower for such year, which report shall be prepared by a firm
of certified public accountants acceptable to Bank and (ii) a copy of the
Borrower's annual crop budget for the succeding year.
B. Other Information. Promptly upon the Bank's request, such
other information pertaining to the Borrower or any Guarantor as the Bank may
reasonably request.
5.06 Redemption or Repurchase of Stock. Not redeem or repurchase any
class of the Borrower's stock now or hereafter outstanding.
5.07 Payment of Dividends: Not declare or pay any dividends on any
class of stock now or hereafter outstanding except dividends payable solely in
the Borrower's capital stock.
5.08 Liens and Encumbrances. Not create, assume or permit to exist
any security interest, encumbrance, mortgage, deed of trust or other lien
including, but not limited to, a lien of attachment, judgment or execution)
affecting any of the Borrower's properties, or execute or allow to be filed any
financing statement or continuation thereof affecting any such properties,
except for Permitted Liens and as otherwise provided in this Agreement.
5.09 Transfer Assets. Not sell, contract for sale, transfer, convey,
assign, lease or sublet any of its assets except in the ordinary course of
business as presently conducted by the Borrower, and then, only for full, fair
and reasonable consideration.
5.10 Change in the Nature of Business. Not make any material change
in its financial structure or in the nature of its business as existing or
conducted as of the date of this Agreement.
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5.11 Financial Condition. Maintain at all times:
A. Net Worth. A minimum effective tangible net worth of not
less than $3,500,000.00
B. Debt to Net Worth Ratio. A debt to effective tangible net
worth ratio of not more than 1.5 to 1.
C. Current Ratio. A ratio of current assets to current
liabilities of not less than 2 to 1.
D. Debt Service Coverage Ratio. A ratio of the sum of net
profit after tax, plus depreciation, amortization and interest expense minus
dividends to the current portion of long-term debt plus interest expense of not
less than 1.25 to 1.
E. Working Capital. A minimum working capital of not less
than $3,000,000.
For purposes of the foregoing, the term "effective tangible net worth"
shall mean the Borrower's stated net worth less all its intangible assets (i.e.,
goodwill, trademarks, patents, copyrights, organization expense and similar
intangible items) but including leaseholds and leasehold improvements and plus
indebtedness subordinated (by its terms or by written agreement) to indebtedness
owed by the Borrower to the Bank and the term "debt" shall mean all of the
Borrower's liabilities excluding indebtedness subordinated (by its terms or by
written agreement) to indebtedness owed by the Borrower to the Bank.
5.12 Notices. Give prompt written notice to the Bank of any and all
Events of Default and litigation, arbitration or administrative proceedings to
which the Borrower is a party and in which the claim or liability exceeds
$50,000.00.
5.13 Environmental Compliance. Borrower shall:
A. Implement and comply in all material respects with all
applicable federal, state and local laws, ordinances, statutes and regulations
with respect to hazardous or toxic wastes, substances or related materials,
industrial hygiene or to environmental conditions.
B. Not own, use, generate, manufacture, store, handle, treat,
release or dispose of any hazardous or toxic wastes, substances or related
materials.
C. Give prompt written notice of any discovery of or suit,
proceeding, claim, dispute, threat, inquiry or filing respecting hazardous or
toxic wastes, substances or related materials.
D. At all times indemnify and hold harmless Bank from and
against any and all liability arising out of the use, generation, manufacture,
storage, handling, treatment, disposal or presence of hazardous or toxic wastes,
substances or related materials.
5.14 Maintenance of Collateral: Except for Permitted Liens, keep and
maintain the Collateral free and clear of all levies, liens, encumbrances and
security interests (including, but not limited to, any lien of attachment,
judgment or execution) and defend the Collateral against any such levy, lien,
encumbrance or security interest; comply with all laws, statutes and regulations
pertaining to the Collateral and its use and operation; execute, file and record
such statements, notices and agreements, take such actions and obtain such
certificates and other documents as necessary to perfect, evidence and continue
the Bank's security interest in the Collateral and the priority thereof;
maintain accurate and complete records of the Collateral which show all sales,
claims and allowances; and properly care for, house, store and maintain
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the Collateral in good condition, free of misuse, abuse and deterioration, other
than normal wear and tear. The Borrower shall also maintain and preserve all
its properties in good working order and condition in accordance with the
general practice of other businesses of similar character and size, ordinary
wear and tear excepted.
5.15 Compensation: Compensate its employees for services rendered at
an hourly rate at least equal to the minimum hourly rate prescribed by any
applicable federal or state law or regulation.
5.16 Location of Harvested Crops. Any Crops now or hereafter
harvested or removed from the Real Property shall not be stored with a bailee,
warehouseman or similar party without the Bank's prior written consent. and
shall be kept only at the following location(s):
________________________________________________________________________________
________________________________________________________________________________
____________.
5.17 Care and Preservation of Crops..
(a) Attend to and care for the Crops and do or cause to be done
any and all acts that may at any time be appropriate or necessary to grow, farm,
cultivate, irrigate, fertilize, fumigate, prune, harvest, pick, clean, preserve
and protect the Crops.
(b) Not commit or suffer to be committed any waste of or damage
to the Crops
(c) Permit the Bank and any of its agents, employees or
representatives to enter upon the Real Property at any reasonable time and from
time to time for the purpose of examining and inspecting the Crops and the Real
Property.
(d) Harvest and prepare the Crops for market and promptly notify
the Bank when any of the Crops are ready for market.
(e) Keep the Crops separate and always capable of
identification.
(f) Comply with any requirements or instructions of the Bank
with respect to hauling, shipping, storing, marketing and otherwise preparing,
handling and disposing of the Crops.
5.18 Evidence of Water Availability. At such times as the Bank may
request, to deliver to the Bank a certificate stating that the amount of water
available and projected to be available is sufficient to conduct operations as
described in Borrower's Development Budget or operations materially similar to
prior years' operations, as evidenced by information provided by the Borrower to
the Bank. Such certificate shall be signed, at the Bank's option, either by the
Borrower or by an independent third party, such as an officer of the Borrower's
water district or other supplier of water.
SECTION VI
EVENTS OF DEFAULT
Any one or more of the following described events shall constitute an event
of default (an "Event of Default") under this Agreement:
6.01 Non-Payment. The Borrower shall fail to pay any payment of
principal or interest or any other sum referred to in this Agreement within 10
days of when due.
6.02 Performance Under This Agreement: The Borrower shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Agreement or
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in any document, instrument or agreement relating to this Agreement and any such
failure shall continue unremedied for more than 30 days after the occurrence
thereof.
6.03 Other Agreements: If there is a default under any agreement to
which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness.
6.04 Representations and Warranties; Financial Statements. Any
representation or warranty made by the Borrower under or in connection with this
Agreement or any financial statement given by the Borrower or any Guarantor
shall prove to have been incorrect in any material respect when made or given or
when deemed to have been made or given.
6.05 Insolvency. The Borrower or any Guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or a substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment.
6.06 Execution. Any writ of execution or attachment or any judgment
lien shall be issued against any property of the Borrower and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
6.07 Revocation or Limitation of Guaranty. Any Guaranty shall be
revoked or limited or its enforceability or validity shall be contested by any
Guarantor, by operation of law, legal proceeding or otherwise or any Guarantor
who is a natural person shall die.
6.08 Suspension. The Borrower shall voluntarily suspend the
transaction of business or allow to be suspended, terminated, revoked or expired
any permit, license or approval of any governmental body necessary to conduct
the Borrower's business as now conducted.
6.09 Change in Ownership: There shall occur a sale, transfer,
disposition or encumbrance (whether voluntary or involuntary to), or an
agreement shall be entered into to do so with, any Person or group of Persons
(as such terms are defined pursuant to Federal securities laws) with respect to
more than 20% of the issued and outstanding capital stock of the Borrower and,
as a result thereof, such Person or group of Persons has the ability to direct
or cause the direction of the management and policies of the Borrower.
6.10 Impairment of Collateral. There shall occur any injury or damage
to all or any part of the Collateral or all or any part of the Collateral shall
be lost, stolen or destroyed.
6.11 Water Quality/Amount. The Borrower's water is or is projected to
be insufficient in amount or unsuitable in quality, as determined by the Bank in
either case, to conduct operations as described in Borrower's most recent budget
or projections or by information provided by Borrower to the Bank.
SECTION VII
REMEDIES ON DEFAULT
Upon the occurrence of any Event of Default, the Bank may, at its sole
election, without demand and upon only such notice as may be required by law:
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7.01 Acceleration. Declare any or all of the Borrower's indebtedness
owing to the Bank, whether under this Agreement or under any other document,
instrument or agreement, immediately due and payable, whether or not otherwise
due and payable.
7.02 Cease Extending Credit. Cease making Advances or otherwise
extending credit to or for the account of the Borrower under this Agreement or
under any other agreement now existing or hereafter entered into between the
Borrower and the Bank.
7.03 Termination. Terminate this Agreement as to any future
obligation of the Bank without affecting the Borrower's obligations to the Bank
or the Bank's rights and remedies under this Agreement or under any other
document, instrument or agreement.
7.04 Notification of Account Debtors:
(a) Notify any account debtor, any buyers or transferee of the
Collateral or any other persons of the Bank's interest in the Collateral and the
proceeds thereof.
(b) Sign the Borrower's name (which authority the Borrower
hereby irrevocably and unconditionally grants to the Bank) on any invoice or
bill of lading relating to accounts or other drafts against the account
debtors, buyers or transferees, notify post office authorities to change the
address for delivery of mail addressed to the Borrower to such address as the
Bank may designate and take possession of and open mail addressed to the
Borrower and remove therefrom, proceeds of and payments on the Collateral,
and demand, receive and endorse payment and give receipts, releases and
satisfactions for and sue for all money payable to the Borrower.
(c) Require the Borrower to indicate on the face of all
invoices (or such other documentation as may be specified by the Bank
relating to the sale, delivery or shipment of goods giving rise to the
account) that the account has been assigned to the Bank and that all payments
are to be made directly to the Bank at such address as the Bank may designate.
(d) Require the Borrower to direct all account debtors, buyers
or transferees to forward all remittances, payments and proceeds of the
Collateral directly to the Bank at such address as the Bank may designate.
In connection therewith, the Borrower hereby irrevocably constitutes and
appoints the Bank as its attorney-in-fact to endorse the Borrower's name on
any notes, acceptances, checks, drafts, money orders or other evidence of
payment that may come into the Bank's possession.
(e) Require the Borrower to deliver to the Bank, at such times
designated by the Bank, records and schedules which show the status and
condition of the Collateral, where it is located and such contracts or other
matters which affect the Collateral.
(f) Send verification requests to any account debtor, buyer or
transferee.
(g) Make inquiries of the Borrower's trade vendors.
7.05 Care and Possession of the Crops. Enter upon the Real Property
and, using any and all of the Borrower's equipment, machinery, tools, farming
implements and supplies, and improvements located on the Real Property: (i)
farm, cultivate, irrigate, fertilize, fumigate, prune and perform any other
act of acts appropriate or necessary to grow, care for, maintain, preserve
and protect the Crops (using any water located in, on or adjacent to the Real
Property); (ii) harvest, pick, clean and remove the Crops from the Real
Property; and (iii) appraise, store, prepare for public or private sale,
exhibit, market and sell the Crops and the products thereof; provided that
the Borrower hereby agrees that, if the Borrower is the owner of the Real
Property, the Bank shall not be responsible or liable for returning the Real
Property to its condition
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immediately preceding the use of the Real Property as provided herein or for
doing such acts as may be necessary to permit future crops to be grown on the
Real Property.
7.06 Protection of Security Interests: Make such payments and do
such acts as the Bank, in its sole judgment, considers necessary and
reasonable to protect its security interest or lien in the Collateral. The
Borrower hereby irrevocably authorizes the Bank to pay, purchase, contest or
compromise any encumbrance, lien or claim which the Bank, in its sole
judgment, deems to be prior or superior to its security interest. Further,
the Borrower hereby agrees to pay to the Bank, upon demand therefor, all
expenses and expenditures (including attorneys' fees) incurred in connection
with the foregoing.
7.07 Foreclosure: Enforce any security interest or lien given or
provided for under this Agreement or under any security agreement, mortgage,
deed of trust or other document, in such manner and such order, as to all or
any part of the properties subject to such security interest or lien, as the
Bank, in its sole judgment, deems to be necessary or appropriate and the
Borrower hereby waives any and all rights, obligations or defenses now or
hereafter established by law relating to the foregoing. In the enforcement
of its security interest or lien, the Bank is authorized to enter upon the
premises where any Collateral is located and take possession of the
Collateral or any part thereof, together with the Borrower's records
pertaining thereto, or the Bank may require the Borrower to assemble the
Collateral and records pertaining thereto and make such Collateral and
records available to the Bank at a place designated by the Bank. The Bank
may sell the Collateral or any portions thereof, together with all additions,
accessions and accessories thereto, giving only such notices and following
only such procedures as are required by law, at either a public or private
sale, or both, with or without having the Collateral present at the time of
the sale, which sale shall be on such terms and conditions and conducted in
such manner as the Bank determines in its sole judgment to be commercially
reasonable. Any deficiency which exists after the disposition or liquidation
of the Collateral shall be a continuing liability of the Borrower to the Bank
and shall be immediately paid by the Borrower to the Bank.
7.08 Non-Exclusivity of Remedies: Exercise one or more of the
Bank's rights set forth herein or seek such other rights or pursue such other
remedies as may be provided by law, in equity or in any other agreement now
existing or hereafter entered into between the Borrower and the Bank, or
otherwise.
7.09 Application of Proceeds: All amounts received by the Bank as
proceeds from the disposition or liquidation of the Collateral shall be
applied to the Borrower's indebtedness to the Bank as follows: first, to the
costs and expenses of collection, enforcement, protection and preservation of
the Bank's lien in the Collateral, including court costs and reasonable
attorneys' fees, whether or not suit is commenced by the Bank; next, to those
costs and expenses incurred by the Bank in protecting, preserving, enforcing,
collecting, liquidating, selling or disposing of the Collateral; next, to the
payment of accrued and unpaid interest on all of the Obligations; next, to
the payment of the outstanding principal balance of the Obligations; and
last, to the payment of any other indebtedness owed by the Borrower to the
Bank. Any excess Collateral or excess proceeds existing after the
disposition or liquidation of the Collateral will be returned or paid by the
Bank to the Borrower.
SECTION VIII
MISCELLANEOUS PROVISIONS
8.01 Amounts Payable on Demand. If the Borrower fails to pay on
demand any amount so payable under this Agreement, the Bank may, at its option
and without any obligation to do so and without waiving any default occasioned
by the Borrower's failure to pay such amount, create an Advance in an amount
equal to the amount so payable, which Advance shall thereafter bear interest as
provided under the Line of Credit.
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8.02 Default Interest Rate: If an Event of Default, or an event
which, with notice or passage of time could become an Event of Default, has
occurred or is continuing, the Borrower shall pay to the Bank interest on any
Indebtedness or amount payable under this Agreement at a rate which is 3% in
excess of the rate or rates then in effect under this Agreement.
8.03 Disposal of Invoices: All documents, schedules, invoices or
other papers received by the Bank from the Borrower may be destroyed or disposed
of six (6) months after receipt by the Bank, unless the Borrower requests in
writing the return thereof, which shall be done at the Borrower's expense.
8.04 Assignment of Borrower's Rights:
(a) If the Crops or any portion or portions thereof become
infected by disease or are destroyed by order of any local, state or federal
authority, and, by reason thereof, the Borrower is entitled to be indemnified by
such authority, the Borrower hereby assigns to the Bank any and all such sums
due from such authority, and the Bank is hereby authorized to receive, collect
and sue for the same, and the Borrower hereby orders and directs that any such
sums be paid directly to the Bank.
(b) In addition, the Borrower hereby assigns and transfers to
the Bank all of the Borrower's rights and interests in and to any monies now or
hereafter placed in any funds of any marketing association, corporation,
cooperative, partnership, firm or individual now, heretofore or hereafter
handling or having to do with any of the Crops now growing or heretofore or
hereafter grown on the Real Property or connected with the growing, marketing,
farming or other handling of such Crops and the Borrower hereby assigns and
transfers to the Bank all stock and all other interests, benefits and rights of
the Borrower in any such marketing association, corporation, cooperative,
partnership, firm or individual having anything to do with such Crops and all
monies due or becoming due to the Borrower from any one or more of them.
8.05 Accounting and Other Terms. All references to financial
statements, assets, liabilities and similar accounting terms not specifically
defined in this Agreement shall mean such financial statements prepared and such
terms determined in accordance with generally accepted accounting principles
consistently applied. Except where otherwise specified in this Agreement, all
financial data submitted or to be submitted to the Bank pursuant to this
Agreement shall be prepared in accordance with generally accepted accounting
principles consistently applied. Terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the California Uniform
Commercial Code.
8.06 Reliance. Each warranty, representation, covenant and
agreement contained in this Agreement shall be conclusively presumed to have
been relied upon by the Bank regardless of any investigation made or
information possessed by the Bank and shall be cumulative and in addition to
any other warranties, representations, covenants or agreements which the
Borrower shall now or hereafter give, or cause to be given, to the Bank.
8.07 Attorney's Fees: Borrower shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred by
Bank in connection with the administration, enforcement, including any
bankruptcy, appeal or the enforcement of any judgment or any refinancing or
restructuring of this Agreement or any document, instrument or agreement
executed with respect to, evidencing or securing the indebtedness hereunder.
8.08 Notices. All notices, payments, requests, information and
demands which either party hereto may desire, or may be required to give or make
to the other party shall be given or made to such party by hand delivery or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Agreement or to such other address as may be specified from time to time in
writing by either party to the other.
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8.09 Waiver. Neither the failure nor delay by the Bank in exercising
any right hereunder or under any document, instrument or agreement mentioned
herein shall operate as a waiver thereof, nor shall any single or partial
exercise of any right hereunder or under any document, instrument or agreement
mentioned herein preclude other or further exercise thereof or the exercise of
any other right; nor shall any waiver of any right or default hereunder or under
any other document, instrument or agreement mentioned herein constitute a waiver
of any other right or default or constitute a waiver of any other default of the
same or any other term or provision.
8.10 Conflicting Provisions. To the extent that any of the terms or
provisions contained in this Agreement are inconsistent with those contained in
any other document, instrument or agreement executed pursuant hereto, the terms
and provisions contained herein shall control. Otherwise, such provisions shall
be considered cumulative.
8.11 Binding Effect; Assignment. This Agreement shall be binding upon
and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns, except that the Borrower shall not have the right to
assign its rights hereunder or any interest herein without the Bank's prior
written consent. The Bank may sell, assign or grant participations in all or
any portion of its rights and benefits hereunder. The Borrower agrees that, in
connection with any such sale, grant or assignment, the Bank may deliver to the
prospective buyer, participant or assignee financial statements and other
relevant information relating to the Borrower.
8.12 Jurisdiction. This Agreement, any notes issued hereunder, and
any documents, instruments or agreements mentioned or referred to herein shall
be governed by and construed according to the laws of the State of California,
to the jurisdiction of whose courts the parties hereby submit.
8.13 Dispute Resolution. It is understood and agreed that upon the
request of any party to this agreement any dispute, claim, or controversy of any
kind, whether in contract or in tort, statutory or common law, legal or
equitable now existing or hereinafter arising between the parties in any way
arising out of, pertaining to or in connection with: (1) this Agreement, or
any related agreements, documents, or instruments, (2) all past and present
loans, credits, accounts, deposit accounts (whether demand deposits or time
deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of
credit, goods or services, or other transactions, contracts or agreements of any
kind, (3) any incidents, omissions, acts, practices, or occurrences causing
injury to either party whereby the other party or its agents, employees or
representatives may be liable, in whole or in part, or (4) any aspect of the
past or present relationships of the parties, shall be resolved through a two
step dispute resolution process administered by Judicial Arbitration & Mediation
Services, Inc. ("J-A-M-S") as follows:
a) Step I - Mediation: At the request of any party to the
dispute, claim or controversy of the matter shall be referred to the nearest
office of J-A-M-S for mediation, that is, an informal, non binding conference or
conferences between the parties in which a retired judge or justice for the
J-A-M-S panel will seek to guide the parties to a resolution of the case.
b) Step II - Unsecured Contracts - Arbitration: Should any
dispute, claim or controversy remain unresolved at the conclusion of the Step I
Mediation Phase then all such remaining matters shall be resolved by final and
binding arbitration before a different judicial panelist, unless the parties
shall agree to have the mediator panelist act as arbitrator. The hearing shall
be conducted at a location determined by the arbitrator in Los Angeles County
and shall be administered by and in accordance with the then existing Rules of
Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and
judgement upon any award rendered by the arbitrator may be entered by any State
or Federal Court having jurisdiction
15
<PAGE>
thereof. The arbitrator shall determine which is the prevailing party and shall
include in the award that party's reasonable attorneys fees and costs. This
subparagraph (b) shall apply only if, at the time of the submission of the
matter to J-A-M-S, the dispute(s) or issue(s) do(es) not arise out of a
transaction(s) which is/are secured by real property collateral or, if so
secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the arbitrator or
his/her designated representative shall determine a reasonable estimate of
anticipated fees and costs of the Arbitrator, and render a statement to each
party setting forth that party's pro rata share of said fees and costs.
Thereafter each party shall, within 10 days of receipt of said statement,
deposit said sum with the Arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non depositing party of the right to
prosecute or defend the claim which is the subject of the arbitration, but shall
not otherwise serve to abate, stay or suspend the arbitration proceedings.
c) Provisional Remedies, Self Help and Foreclosure: No
provision of, or the exercise of any right(s) under subparagraph (b), nor any
other provision of this Dispute Resolution Provision, shall limit the right of
any party to exercise self help remedies such as set off, to foreclose against
any real or personal property collateral, or obtain provisional or ancillary
remedies such as injunctive relief or the appointment of a receiver from any
court having jurisdiction before, during or after the pendency of any
arbitration. At Bank's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of power of sale under the deed of trust
or mortgage, or by judicial foreclosure. The institution and maintenance of an
action for provisional remedies pursuit of provisional or ancillary remedies or
exercise of self help remedies shall not constitute a waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to
arbitration.
8.14 Waiver of Jury Trial. THE BORROWER AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION
SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING,
THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION
HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS,
RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS.
8.15 Headings. The headings set forth herein are solely for the
purpose of identification and have no legal significance.
8.16 Entire Agreement. This Agreement and the Loan Documents shall
constitute the entire and complete understanding of the parties with respect to
the transactions contemplated hereunder. All previous conversations, memoranda
and writings between the parties or pertaining to the transactions contemplated
hereunder that are not incorporate or referenced in this Agreement or the Loan
Documents are superseded hereby.
IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto
as of the date first hereinabove written.
16
<PAGE>
BANK: BORROWER:
SANWA BANK CALIFORNIA SCHEID VINEYARDS INC.
By: /s/ Steven R. Edmonston By: /s/ Alfred G. Scheid
Name: Steven R. Edmonston Name: Alfred G. Scheid
Title: Vice President Title: President
By: By: /s/ Ernest M. Brown
Name: Name: Ernest M. Brown
Title: Title:Secretary
17
<PAGE>
[LOGO]
SANWA
BANK
CALIFORNIA
PROMISSORY NOTE
June 23, 1997 Fresno, California
FOR VALUE RECEIVED, the undersigned (the "Borrower") hereby promises to pay
to the order of SANWA BANK CALIFORNIA (the "Bank"), at its Fresno Commercial
Banking Center Office or at such other place or to such other parties as the
holder of this Note may from time to time designate in writing, the principal
sum of THREE MILLION DOLLARS ($3,000,000) or, if applicable, the aggregate
unpaid principal amount of all advances made by the Bank hereunder to the
Borrower, whichever is less, together with interest thereon. Any sums repaid
under this Note may not be reborrowed.
Interest shall accrue and principal and interest shall be payable as
follows:
1. Interest shall accrue from the date of each advance under this Note at
one of the following rates, as quoted by the Bank and as elected by the Borrower
below:
(a) VARIABLE RATE ADVANCES: A variable rate per annum equivalent to
an index for a variable interest rate which is quoted, published or announced
from time to time by the Bank as its reference rate (the "Reference Rate") and
as to which loans may be made by the Bank at, below or above such reference rate
(the "Variable Rate"). Interest shall be adjusted concurrently with any change
in the Reference Rate. An advance based upon the Variable Rate is hereinafter
referred to as a "Variable Rate Advance".
(b) FIXED RATE ADVANCES: A fixed rate quoted by Bank in its sole
discretion for each Advance (the "Fixed Rate") and for such period of time that
the Bank may quote and offer, provided that any such period of time shall be for
at least 30 days and provided that any such period of time does not extend
beyond the maturity date of this Note (the "Interest Period") for advances in
the minimum amount $100,000. Advances based upon the Fixed Rate are hereinafter
referred to as "Fixed Rate Advances".
Interest on any Advance shall be computed on the basis of 360
days per year, but charged on the actual number of days elapsed.
If interest is not paid as and when it is due, it shall be added
to the principal, become and be treated as a part thereof, and shall thereafter
bear like interest.
2. Upon telephonic notice which shall be received by the Bank at or before
2:00 p.m. (California time) on a business day, the Borrower may borrow under
this Note by requesting a Variable Rate Advance or a Fixed Rate Advance. A
Variable Rate Advance or a Fixed Rate Advance may be made on the day notice is
received by the Bank; provided, however, that if the Bank shall not have
received notice at or before 2:00 p. m. on the day such Advance is requested to
be made, such Variable Rate Advance or Fixed Rate Advance may, at the Bank's
option, be made on the next business day.
$3MM PROMISSORY NOTE - PAGE 1
<PAGE>
3. The Borrower may elect:
(a) That interest on a Variable Rate Advance shall be adjusted to
accrue at the Fixed Rate; provided, however, that such notice shall be received
by the Bank no later than 2:00 p.m. on the business day on which the Borrower
requests that interest be adjusted to accrue at the Fixed Rate.
(b) That interest on a Fixed Rate Advance shall continue to accrue at
a newly quoted Fixed Rate or shall be adjusted to commence to accrue at the
Variable Rate; provided, however, that such notice shall be received by the Bank
no later than 2:00 p.m. on the last day of the Interest Period pertaining to
such Fixed Rate Advance. If the Bank shall not have received notice (as
prescribed herein) of the Borrower's election that interest on any Fixed Rate
Advance shall continue to accrue at the newly quoted Fixed Rate the Borrower
shall be deemed to have elected that interest thereon shall be adjusted to
accrue at the Variable Rate upon the expiration of the Interest Period
pertaining to such Advance.
4. The Borrower may prepay any Advance in whole or in part, at any time
and without penalty, provided, however, that: (i) any partial prepayment shall
first be applied, at the Bank's option, to accrued and unpaid interest and next
to the outstanding principal balance; and (ii) during any period of time in
which interest is accruing on any Advance on the basis of the Fixed Rate, no
prepayment shall be made except on a day which is the last day of the Interest
Period pertaining thereto. If the whole or any part of any Fixed Rate Advance
is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the
Bank's request, promptly pay to and indemnify the Bank for all costs, expenses
and any loss (including loss of future interest income) actually incurred by the
Bank and any loss (including loss of profit resulting from the re-employment of
funds) deemed sustained by the Bank as a consequence of such prepayment.
The Bank shall be entitled to fund all or any portion of its advances in
any manner it may determine in its sole discretion, but all calculations and
transactions hereunder shall be conducted as though the Bank actually funded all
Advances through the purchase of U.S. Treasury securities in the amount of the
relevant advance and in maturities corresponding to (i) the then applicable
Interest Period (ii) the date of such purchase to the maturity date hereunder.
5. During any period of time in which interest on any advance is accruing
on the basis of the Fixed Rate the Borrower shall, upon the Bank's request,
promptly pay to and reimburse the Bank for all costs incurred and payments made
by the Bank by reason of any future assessment, reserve, deposit or similar
requirement or any surcharge, tax or fee imposed upon the Bank or as a result of
the Bank's compliance with any directive or requirement of any regulatory
authority pertaining or relating to funds used by the Bank in quoting and
determining the Fixed Rate.
6. In the event that the Bank shall at any time determine that the accrual
of interest on the basis of the Fixed Rate (i) is infeasible because the Bank is
unable to determine the Fixed Rate due to the unavailability of U.S. dollar
deposits, contracts or certificates of deposit in an amount approximately equal
to the amount of the relevant advance and for a period of time approximately
equal to the relevant Interest Period or (ii) is or has become unlawful or
infeasible by reason of the Bank's compliance with any new law, rule,
regulation, guideline or order, or any new interpretation of any present law,
rule, regulation, guideline or order, then the Bank shall give telephonic notice
thereof (confirmed in writing) to the Borrower, in which event any advance
bearing interest at the Fixed Rate, shall be deemed to be a Variable Rate
Advance and interest shall thereupon immediately accrue at the Variable Rate.
7. On September 5, 1997, the entire unpaid principal balance, together
with accrued and unpaid interest, shall be due and payable.
The acceptance by the holder of any payment under this Note after the date
that such payment is due shall not constitute a waiver of the right to require
prompt payment when due of future or succeeding
$3MM PROMISSORY NOTE - PAGE 2
<PAGE>
payments or to declare a default as herein provided for any failure to so pay.
The acceptance by the holder of the payment of a portion of any installment at
any time that such installment is due and payable in its entirety shall neither
cure nor excuse the default caused by failure to pay the whole of such
installment and shall not constitute a waiver of the holder's rights to require
full payment when due of all future or succeeding installments. Any partial
payments shall first be applied to pay accrued interest and the remaining
portion of such payments, if any, shall be applied to reduce the outstanding
principal balance.
Any advance under this Note shall be conclusively presumed to have been
made to and for the Borrower's benefit when the proceeds of such advance payment
are disbursed in accordance with the Borrower's instructions or deposited into
an account of the Borrower maintained at the Bank.
In the event that an action is instituted to collect this Note, or any
portion hereof, the Borrower promises to pay all costs of collection, including
but not limited to reasonable attorneys' fees, court costs and such other sums
as the court may establish.
8. Any one or more of the following described events shall constitute an
event of default under this Note:
(a) The Borrower shall fail to pay any amount under this Note when
due.
(b) If there is a default under any agreement to which Borrower is a
party with a third party or parties resulting in a right by such third party or
parties, whether or not exercised, to accelerate the maturity of any
indebtedness of the Borrower, whether such indebtedness is direct or indirect,
absolute or contingent.
(c) Any representation or warranty made by the Borrower under or in
connection with this Note or any financial statement given by the Borrower or
any guarantor of this Note shall prove to have been incorrect in any material
respect when made or given or when deemed to have been made or given.
(d) The Borrower or any guarantor of this Note shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties or assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; or (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment.
(e) Any writ of execution or attachment or any judgment lien shall be
issued against any property of the Borrower and shall not be discharged or
bonded against or released within 30 days after the issuance or attachment of
such writ or lien.
(f) Any guaranty of this Note shall be revoked or limited or its
enforceability or validity shall be contested by any guarantor, by operation of
law, legal proceeding or otherwise or any guarantor who is a natural person
shall die.
(g) Any subordination agreement shall be revoked or limited or its
enforceability or validity shall be contested by any creditor signatory thereto,
by operation of law, legal proceeding or otherwise.
$3MM PROMISSORY NOTE - PAGE 3
<PAGE>
(h) The Borrower shall voluntarily suspend the transaction of
business or allow to be suspended, terminated, revoked or expired any permit,
license or approval of any governmental body necessary to conduct the Borrower's
business as now conducted.
(i) If there occurs a material adverse change in the Borrower's
business or financial condition, or if there is a material impairment of the
prospect of repayment of any portion of the outstanding principal or interest
under this Note or there is a material impairment of the value or priority of
the Bank's security interest in any collateral securing the Borrower's
obligations under this Note.
(j) There shall occur a sale, transfer, disposition or encumbrance
(whether voluntary or involuntary), or an agreement shall be entered into to do
so, with respect to more than 10% of the issued and outstanding capital stock of
the Borrower.
Upon the occurrence of any event of default described above, the holder of
this Note, at its election, may declare the entire balance of principal and
interest thereon immediately due and payable, together with all costs of
collection, including, but not limited to, reasonable attorney's fees and all
expenses incurred in connection with the protection of, or realization on, the
security for this Note. The Borrower hereby waives presentment, demand, notice
and protest. Interest thereafter on the unpaid principal balance, accrued
interest and costs incurred shall be payable at a rate which is 3% per annum in
excess of the rate otherwise charged according to the terms of this Note.
This Note is not assumable without the express prior written consent of the
holder. No obligation is imposed upon the Bank or the holder of this Note to
make any advance to the Borrower, it being agreed that all advances hereunder
are optional.
Every provision hereof is intended to be several. If any provision of this
Note is determined by a court of competent jurisdiction to be illegal, invalid
or unenforceable, such illegality, invalidity or unenforceability shall not
affect the other provisions hereof, which shall remain binding and enforceable.
This Note is made in the State of California, and it is mutually agreed
that California law shall apply to the interpretation of the terms and
conditions of this Note.
The liability of the makers under this Note is joint and several. The
makers, endorsers and/or guarantors hereof do hereby severally waive
presentment, demand, protest and notice of protest, dishonor and nonpayment.
Such parties expressly consent to the extension of time for the performance
of any obligation hereunder and the release of any party liable for the
obligation. The release of any party liable hereon shall not operate to
release any other party liable hereon.
[PAGE 4 ENDS HERE. SIGNATURES APPEAR ON PAGE 5]
$3MM PROMISSORY NOTE - PAGE 4
<PAGE>
This Note is subject to the terms and conditions of that certain Crop Line
of Credit dated as of June 4, 1997, by and between Bank and Borrower and in the
principal amount of $10,500,000.
BORROWER:
SCHEID VINEYARDS, INC.
By: /s/ Alfred G. Scheid
----------------------------------------
Alfred G. Scheid, President
By: /s/ Ernest M. Brown
----------------------------------------
Ernest M. Brown, Secretary
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
$3MM PROMISSORY NOTE - PAGE 5
<PAGE>
INDIVIDUAL RETIREMENT AGREEMENT
THIS INDIVIDUAL RETIREMENT AGREEMENT (this "Agreement"), dated as of
May 1, 1997 (the "Effective Date"), is made and entered into by and
between SCHEID VINEYARDS AND MANAGEMENT CO., a California corporation (the
"Company"), and ERNEST M. BROWN ("Employee").
RECITALS
A. The Company and Employee entered into an oral agreement in 1982
with respect to the provision of certain retirement benefits to be paid by
the Company to Employee, and desire to memorialize such oral agreement in
writing in this Agreement.
B. The Company currently employs Employee as its Vice President and
Controller, and Employee willingly serves the Company in such capacities.
C. In appreciation of Employee's 25 years of continuous service to the
Company, pursuant to that certain oral agreement referred to in Paragraph A
above and in partial consideration for Employee's continued service to the
Company until the earlier to occur of his death or retirement, the Company
desires to provide Employee with certain retirement payments, as described
herein, to be paid to Employee notwithstanding his retirement from the
Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged,
the parties agree as follows:
1. TERM. The Company's obligations under this Agreement shall
commence on the retirement of Employee and shall terminate on the earlier to
occur of (i) the death of Employee or (ii) the existence of an incurable and
irreversible medical condition in Employee (A) which has been diagnosed by a
physician, (B) which will result in Employee's death within a relatively
short time without the administration of life-sustaining treatment or which
had produced an irreversible coma or persistent vegetative state and (C)
which leaves Employee unable to make decisions regarding his medical
treatment (the "Termination Date")(the "Term").
2. INDIVIDUAL RETIREMENT PAYMENTS. During the Term, the Company shall
pay Employee annual individual retirement payments in the amount of One
Hundred Thousand Dollars ($100,000) (the "Individual Retirement Payments") in
equal monthly installments on the first payroll day of each month in
accordance with the Company's payroll practices in effect from time to time;
PROVIDED, HOWEVER, that if Employee's employment with the Company is
terminated and such termination is the result of a permanent total disability
and Employee is entitled to any disability insurance payments as a result
thereof, the Company's obligation to make the Individual Retirement Payments
shall be reduced by
<PAGE>
the amount of any such disability insurance payments. The Company may, in
its sole discretion, purchase an annuity (from an insurance company or other
issuer of recognized financial standing) for the benefit of Employee
(which pays $100,000 to Employee in equal monthly installments on
substantially the same terms as set forth herein) in full payment and
discharge of its obligation to make the Individual Retirement Payments.
3. MISCELLANEOUS.
(a) BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, executors, representatives, estates, successors and assigns, including
any successor or assign to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock or otherwise and Employee shall not
assign all or any portion of Employee's rights or obligations under this
Agreement without the prior written consent of the Company.
(b) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter
hereof, and supersedes all prior agreements and understandings, oral or
written, between them as to such subject matter.
(c) NOTICES. Any notice, request, instruction or other document
required by this Agreement shall be given in writing and shall be deemed
effectively given if mailed with the United States Postal Services by
prepaid, first class, certified mail, return receipt requested, at the time
of receipt by the intended recipient at his of its address indicated below
his or its signature or at such other address as such party may designate by
ten (10) days advance written notice to the other party hereto.
(d) GOVERNING LAW; ENFORCEMENT. This Agreement is governed by the
internal laws of the State of California. The prevailing party in any action
to enforce this Agreement shall be entitled to attorneys' fees and costs.
(e) AMENDMENTS; WAIVERS. This Agreement represents the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all previous written or oral understandings. This Agreement may
only be amended with the written consent of the parties hereto, or the
successors or assigns of the foregoing, and no oral waiver or amendment shall
be effective under any circumstances.
(f) HEADINGS. The headings contained in the Agreement are inserted
for convenience or references only, and do not constitute a part of this
Agreement.
(g) NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to
confer any rights or remedies on any person not a party to this Agreement.
2.
<PAGE>
(h) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(i) INVALIDITY; SEVERABILITY. In the event that any provision of
this Agreement shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions
shall remain in full force and effect to the extent that such provisions
reasonably can still be given effect in accordance with the intentions of the
parties, and the invalid and unenforceable provisions shall be deemed,
without further action on the part of the parties, modified, amended and
limited solely to the extent necessary to render the same valid and
enforceable.
(j) MEDIATION; ARBITRATION. Any dispute which may arise between the
parties hereto as to the construction, interpretation or effect of this
Agreement which is not resolved by mutual agreement between the parties,
shall first be submitted to nonbinding mediation on terms and conditions to
be mutually agreed upon by the parties. In the event that a dispute is not
resolved by nonbinding mediation, the disputing party may give the other
party notice of such party's intention to cause the same to be submitted to
arbitration. After fifteen (15) days have elapsed from the giving of such
notice, but not before such time, the party who gave such notice may cause
any such dispute which then remains unresolved to be submitted to arbitration
by submitting the same to the Los Angeles, California office of the American
Arbitration Association (the "AAA") (or any successor thereto, but if no
organization is then performing a function reasonably similar to the AAA,
then to a court of competent jurisdiction in accordance with the rules of
such court) with a request for arbitration to be conducted in accordance with
the rules thereof by one (1) arbitrator to be jointly selected by the parties.
The prevailing party's expenses, including without limitation attorneys'
fees, in connection with such arbitration shall be borne by the losing party,
PROVIDED, HOWEVER, that if liability is allocated by the arbitrator between
the parties, the expenses of such arbitration, including without limitation
the parties' attorneys' fees, shall be borne by the parties in proportion to
their respective percentages or proportions of liability assessed by the
arbitrator. The decision of the arbitrator as to all matters properly
submitted to such arbitrator and as to the apportionment of expenses of
arbitration shall be conclusive and binding upon the parties and judgment
upon any award may be entered in any court of competent jurisdiction.
3.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
COMPANY:
SCHEID VINEYARDS AND MANAGEMENT CO.,
a California corporation
By:/s/Alfred G. Scheid
-----------------------------------------------------------
Alfred G. Scheid
Chief Executive Officer
Address: 13470 Washington Boulevard, Ste. 300
Marina del Rey, CA 90292
EMPLOYEE:
/s/Ernest M. Brown
--------------------------------------------------------------
Ernest M. Brown
Address: 23038 California Street
Woodland Hills, CA 91367
4.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of July 1,
1997, is made and entered into by and between SCHEID VINEYARDS INC., a Delaware
corporation (the "COMPANY"), and ALFRED G. SCHEID (the "EXECUTIVE").
RECITALS
A. The Company desires to employ the Executive as its Chairman of the
Board and Chief Executive Officer on the terms and conditions hereinafter set
forth and the Executive desires to accept such employment.
B. The Executive possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel.
C. The Company recognizes the valuable services that the Executive has
rendered, and desires to be assured that the Executive will continue his active
participation in the management and business of the Company.
D. The Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders, and the Company recognizes that the
existence of a possible change in control of the Company causes uncertainty
among management which may result in the possible departure or distraction of
members of management to the detriment of the Company and its shareholders.
E. The Company desires to secure the services and employment of the
Executive as its Chairman of the Board and Chief Executive Officer, and the
Executive is willing to serve the Company in such capacities, but desires
assurance that he will be protected against the financial impact of an
unexpected termination in the event of a change in control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the
parties agree as follows:
1. EMPLOYMENT. Subject to and pursuant to the terms of this
Agreement, the Company shall employ the Executive, and the Executive shall be
employed by and shall serve the Company, in the capacity of Chairman of the
Board and Chief Executive Officer.
2. TERM AND RENEWALS.
(a) TERM AND RENEWALS. Subject to the provisions for
earlier termination provided herein, the term of this Agreement (the "TERM")
shall commence on the date of this Agreement (the "EFFECTIVE DATE") and shall
terminate on the first anniversary of the
<PAGE>
Effective Date (the "INITIAL TERM") unless renewed pursuant to this
SECTION 2(A). The Initial Term shall be renewed for a one (1)-year period (the
"INITIAL RENEWAL TERM") if at least six (6) months prior to the expiration of
the Initial Term either party hereto shall not have given the other party
written notice not to renew this Agreement. The Initial Renewal Term and each
"Renewal Term" (as defined in this SECTION 2(A)) shall be renewed for successive
one (1)-year periods (each, a "RENEWAL TERM") if at least three (3) months prior
to the expiration of the Initial Renewal Term or a Renewal Term, as the case may
be, either party hereto shall not have given the other party written notice not
to renew this Agreement.
3. DUTIES. During the Term, the Executive shall serve as and shall
have the titles of the Chairman of the Board and Chief Executive Officer of the
Company, and shall have all duties and responsibilities customarily associated
with such positions, as limited or expanded pursuant to this Agreement. The
Executive shall devote such time to the business and affairs of the Company as
he in his sole judgement deems reasonably necessary in order to perform such
duties and responsibilities faithfully and efficiently.
4. COMPENSATION. For services rendered by the Executive pursuant to
this Agreement, the Company shall pay or award compensation to the Executive as
follows:
(a) BASE COMPENSATION. The Company shall pay to the Executive a
base salary ("BASE COMPENSATION") of $400,000 per annum from the date of this
Agreement, payable in accordance with the Company's customary practices for its
senior executive officers. The amount of Base Compensation shall be reviewed by
the Board on at least an annual basis, and may be increased to reflect inflation
or such other adjustments as the Board may deem appropriate; PROVIDED, HOWEVER,
that Base Compensation, as increased, may not be decreased.
(b) BONUS COMPENSATION. In addition to Base Compensation, the
Executive may be awarded, for each fiscal year of the Company ending with or
within the Term, an annual bonus ("BONUS"), whether pursuant to a formal bonus
or incentive plan or program of the Company or otherwise, in cash or other
property acceptable to the Executive, including stock options, rights or
warrants in the Company, which Bonus shall be based on such criteria as may be
deemed appropriate and adopted by the Board. If earned, the Bonus shall be paid
to the Executive within ninety (90) days after the end of each fiscal year of
the Company, except to the extent, if any, that the Executive otherwise shall
have elected to defer all or part of the receipt of such Bonus.
(c) WITHHOLDING. The Company shall deduct and withhold from the
compensation payable to the Executive hereunder any and all applicable federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statute or
regulation.
5. FRINGE BENEFITS; REIMBURSEMENT; VACATION. In addition to Base
Compensation and Bonus provided for in SECTION 4 above, during the Term the
Executive shall be entitled to receive:
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(a) all fringe benefits customarily offered by the Company
to its senior executive officers, including without limitation, participation in
any Company stock compensation plan and the various employee benefit plans or
programs (collectively, the "BENEFIT PLANS") provided to the employees of the
Company in general, subject to the eligibility requirements with respect to each
such Benefit Plan, and to such other benefits or perquisites as may be approved
by the Board during the Term;
(b) reimbursement from the Company for all customary,
ordinary and necessary business expenses incurred by the Executive in the
performance of his duties and responsibilities hereunder, PROVIDED that the
Executive furnishes the Company with vouchers, receipts and other substantiation
of such expenses within thirty (30) days after they are incurred; and
(c) paid vacation benefits in accordance with the Company's
vacation policy in effect for its senior executive officers.
The Executive may take accrued vacation at such times during each fiscal year of
the Company as mutually may be convenient to the Company and to the Executive,
and all unused vacation time as of the end of any fiscal year of the Company
shall accrue or lapse in accordance with the Company's vacation policy in effect
for its senior executive officers.
6. INDEMNIFICATION.
(a) OBLIGATION OF THE COMPANY. To the maximum extent permitted
by law, the Company hereby indemnifies and agrees to hold harmless the Executive
from any and all costs or expenses incurred by him on account of the fact that
he becomes a party, or is threatened to be made a party, to any pending,
threatened or contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is, was or
becomes a director, officer, employee or agent of the Company or of any parent
or subsidiary of the Company. Such costs and expenses shall include, without
limitation, expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any such action, suit or proceeding. To the maximum extent permitted by and
subject to any requirements of law, costs and expenses incurred by the Executive
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company as bills for such services are presented by the Executive to the
Company. In any such matter, the Executive shall be entitled to select his own
legal counsel.
(b) INSURANCE COVERAGE. To the maximum extent permitted by law,
the Company shall obtain and maintain standard form director's and officer's
liability insurance with responsible carriers and in reasonable amounts, and any
other additional insurance which reasonably may be obtained, covering to the
extent available any liability of the kind described in SECTION 6(A) above, and
protecting the Executive against costs and expenses described in SECTION 6(A)
above which are not for any reason satisfied by the Company.
3.
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(C) SUCCESSOR LIABILITY AND SURVIVAL. The obligations of the
Company set forth in this SECTION 6 shall bind any successor corporation to the
Company (whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock or otherwise) so that the Executive shall stand in the same
position under this Agreement with respect to any successor corporation as the
Executive would have with respect to the Company if its separate existence had
continued. The Company's obligations under this SECTION 6 shall survive
termination of this Agreement, and shall survive indefinitely with respect to
any costs, expenses or liabilities incurred by the Executive on account of any
actual or alleged action or inaction by the Executive while employed by the
Company.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION. Except as otherwise provided in this
Agreement, the Executive's employment by the Company hereunder shall terminate
upon the earliest to occur of the dates specified below (as applicable, the
"TERMINATION DATE"):
(i) The close of business on the date of expiration of
the Term.
(ii) The close of business on the date of the
Executive's death ("DEATH").
(iii) The close of business on the date specified as the
effective date of termination of the Executive's employment in a "Notice of
Termination" (as defined below) delivered by the Company to the Executive
due to the Executive's "Disability" (as defined below). For purposes of
this Agreement, the term "DISABILITY" shall mean the inability or
incapacity of the Executive, due to any medically determined physical or
mental impairment, to perform his duties and responsibilities for the
Company for a total of one hundred eighty (180) calendar days in any twelve
(12) month period during the Term.
(iv) The close of business on the date specified as the
effective date of termination of the Executive's employment by the
Executive in a Notice of Termination delivered by the Executive to the
Company (a "VOLUNTARY TERMINATION").
(v) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
for "Cause" (as defined below) in a Notice of Termination delivered by the
Company to the Executive. For purposes of this Agreement, the term "CAUSE"
shall mean termination based on (A) the Executive's material breach of this
Agreement which, if capable of cure, is not cured fully within ten (10)
days after written notice to the Executive identifying such breach,
PROVIDED, that such ten (10)-day period shall be extended to sixty (60)
days if such breach is not reasonably susceptible to cure within ten (10)
days and the Executive shall have commenced to cure and is then proceeding
with due diligence to cure such breach; (B) conviction of the Executive for
(x) any crime constituting a felony in the jurisdiction in which committed,
(y) any crime involving moral turpitude (whether or not a felony) or (z)
any other criminal act against the Company involving dishonesty or willful
misconduct intended to injure the Company (whether or not a felony);
4.
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(C) substance abuse by the Executive which is repeated after written notice
to the Executive identifying such abuse; (D) the failure or the refusal of
the Executive to follow lawful and proper directives of the Board (or of
any superior officer of the Company having direct supervisory authority
over the Executive), which is not corrected within ten (10) days after
written notice to the Executive identifying such failure or refusal;
(E) willful malfeasance or gross misconduct by the Executive which
discredits or damages the Company; (F) indictment of the Executive by a
grand jury for a felony violation of the federal securities laws; or
(G) the engagement by the Executive in any "Prohibited Activity" or
"Competitive Activity" (as such terms respectively are defined in SECTIONS
10(c)(I) and 10(c)(II) below) in violation of this Agreement.
(vi) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
other than for Death, Disability or Cause in a Notice of Termination
delivered by the Company to the Executive. The Executive acknowledges and
agrees that the Executive's employment hereunder is "at will" and that the
Company may terminate the Executive's employment at any time for any or no
reason, with or without Cause.
(b) NOTICE OF TERMINATION. Any termination of the Executive's
employment hereunder (other than termination as a result of Death) by the
Company or by the Executive shall be communicated by a Notice of Termination to
the other party hereto given in accordance with the provisions of SECTION 11(b)
below. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, and (ii) if applicable, sets forth the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment.
8. PAYMENT UPON TERMINATION OF EMPLOYMENT. If the Executive's
employment is terminated for any reason, then, without limiting any other rights
or remedies available to the Company at law or in equity, the Company shall pay
or provide to the Executive, his legal representatives, heirs, eligible
dependents, if any, or permitted assigns, as applicable, (i) within ten (10)
days after the Termination Date, all Base Compensation earned but unpaid as of
the Termination Date; and (ii) all benefits to which such persons may be
entitled under any of the Benefit Plans which provide for benefits after
termination of employment, in accordance with the terms thereof.
9. LIMITATION ON PAYMENTS. If any payments provided for under this
Agreement, either alone or together with other payments which the Executive
would have the right to receive from the Company, will constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the
"CODE") as in effect at the time of payment, such payment shall be reduced to
the largest amount which will result in no portion being subject to the excise
tax imposed by Section 4999 of the Code or the disallowance of a deduction by
the Company pursuant to Section 280G(a) of the Code. The determination of the
amount of any reduction under this SECTION 9 and the payments to which such
reduction shall apply, shall be made in good faith by the Executive and such
determination shall be binding on the Company.
5.
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10. EXECUTIVE COVENANTS.
(a) UNAUTHORIZED DISCLOSURE. The Executive agrees and
understands that due to the Executive's position with the Company, both prior
to, if applicable, and subsequent to the date of this Agreement, the Executive
has been and will be exposed to, and has received and will receive confidential
and proprietary information of the Company or relating to the Company's business
or affairs (collectively, the "TRADE SECRETS"), including but not limited to
technical information, computer software (including source and object code data
and related documentation), research and development, know-how, product
information, formulae, processes, business and marketing plans, strategies,
customer information, other information concerning the Company's products,
promotions, development, financing, expansion plans, business policies and
practices and other forms of information considered by the Company to be
proprietary and confidential and in the nature of trade secrets. Except to the
extent that the proper performance of the Executive's duties and
responsibilities hereunder may require disclosure, and except as such
information (i) was known to the Executive prior to his employment by the
Company or (ii) was or becomes generally available to the public other than as a
result of a disclosure by the Executive in violation of the provisions of this
SECTION 10(a), the Executive agrees that during the Term and at all times
thereafter the Executive will keep such Trade Secrets confidential and will not
disclose such information, either directly or indirectly, to any third person or
entity without the prior written consent of the Company. This confidentiality
covenant has no temporal, geographical or territorial restriction. On the
Termination Date, the Executive promptly will supply to the Company all
property, keys, notes, memoranda, writings, lists, files, reports, customer
lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines,
technical data, formulae or any other tangible product or document which have
been produced by, received by or otherwise submitted to the Executive in the
course of his employment with the Company, including the period during and prior
to the Term. Any material breach of the terms of this SECTION 10(a) shall be
considered Cause.
(b) INVENTIONS. The Executive agrees that any and all
inventions, discoveries, improvements, processes, formulae, business application
software patents, copyrights and trademarks made, developed, discovered or
acquired by him during his employment by the Company, including the Term, solely
or jointly with others or otherwise, which relate to the business of the
Company, and all knowledge possessed by the Executive relating thereto
(collectively, the "INVENTIONS"), shall be fully and promptly disclosed to the
Board and to such person or persons as the Board shall direct, and shall be the
sole and absolute property of the Company and the Company shall be the sole and
absolute owner thereof. The Executive agrees that he will at all times keep all
Inventions secret from everyone except the Company and such persons as the Board
may from time to time direct. The Executive shall, as requested by the Company
at any time and from time to time, whether prior to or after the expiration of
the Term, execute and deliver to the Company any instruments deemed necessary by
the Company to effect disclosure and assignment of the Inventions to the Company
or its designees and any patent applications (United States or foreign) and
renewals with respect thereto, including any other instruments deemed necessary
by the Company for the prosecution of patent applications or the acquisition of
letters patent. Reference is hereby made to APPENDIX A to this Agreement, which
reprints the text of Sections 2870 through 2872 of the California Labor Code.
Execution of this Agreement by the Executive shall confirm that the Executive
has received and read such APPENDIX A. The provisions of this SECTION 10(b)
shall
6.
<PAGE>
not apply to any invention which qualifies fully under the provisions of Section
2870 of the California Labor Code.
(c) PROHIBITED AND COMPETITIVE ACTIVITIES. The Executive and
the Company recognize that due to the nature of the Executive's engagement
hereunder and the relationship of the Executive to the Company, both prior and
subsequent to the date of this Agreement, the Executive has had and will have
access to, has had and will acquire, and has assisted and may continue to assist
in developing, confidential and proprietary information relating to the business
and operations of the Company and its affiliates, including Trade Secrets. The
Executive acknowledges that such information has been and will be of central
importance to the business of the Company and its affiliates and that disclosure
of it to, or its use by, others (including, without limitation, the Executive
(other than with respect to the Company's business and affairs)) could cause
substantial loss to the Company. The Executive and the Company also recognize
that an important part of the Executive's duties and responsibilities will be to
develop good will for the Company and its affiliates through his personal
contact with "Clients" (as defined below), employees and others having business
relationships with the Company, and that there is a danger that this good will,
a proprietary asset of the Company, may follow the Executive if and when his
relationship with the Company is terminated. The Executive accordingly agrees
as follows:
(i) PROHIBITED ACTIVITIES. The Executive will not at
any time during the Term and for two (2) years thereafter: (A) other than
in the course of his employment, disclose or furnish to any other person
or, directly or indirectly, use for his own account or the account of any
other person, any Trade Secrets, no matter from where or in what manner he
may have acquired such Trade Secrets, and he shall retain all such Trade
Secrets in trust for the benefit of the Company, its affiliates and the
successors and assigns of any of them; (B) directly or through one or more
intermediaries, solicit for employment any person who, at the time of such
solicitation, is employed by the Company or any affiliate thereof;
(C) directly or indirectly, whether for his own account or for the account
of any other person, solicit, divert or endeavor to entice away from the
Company or any entity controlled by the Company, or otherwise engage in any
activity intended to terminate, disrupt or interfere with, the Company's or
any of its affiliate's relationship with, Clients, or otherwise adversely
affect the Company's or any of its affiliate's relationship with Clients or
other business relationships of the Company or any affiliate thereof; or
(D) publish or make any statement critical of the Company or any
shareholder or affiliate of the Company, or in any way adversely affect or
otherwise malign the business or reputation of any of the foregoing persons
(any activity described in CLAUSE (A), (B), (C) OR (D) of this SECTION
10(c)(i) being herein referred to as a "PROHIBITED ACTIVITY"); PROVIDED,
HOWEVER, that if in the written opinion of counsel, the Executive is
legally compelled to disclose Trade Secrets to any tribunal or else stand
liable for contempt or suffer other similar censure or penalty, then the
disclosure to such tribunal of those Trade Secrets which such counsel
advises in writing legally are required to be disclosed shall not
constitute a Prohibited Activity, PROVIDED that the Executive shall give
the Company as much advance notice of such disclosure as is reasonably
practicable. For purposes of this Agreement, "CLIENTS" shall mean those
persons who, at any time during the Executive's course of employment with
the Company (including, without limitation, prior to the date of this
Agreement) are
7.
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or were clients or customers of the Company or any affiliate thereof or any
predecessor of any of the foregoing.
(ii) NON-COMPETITION. By and in consideration of the
Company's entering into this Agreement and providing the compensation and
benefits to be provided by the Company to the Executive, and further in
consideration of the Executive's continued exposure to the confidential and
proprietary information of the Company (including, without limitation, the
Trade Secrets), the Executive agrees that the Executive will not, during
the Term, engage in any "Competitive Activity" (as defined below). For
purposes of this Agreement, the term "COMPETITIVE ACTIVITY" shall mean
engaging in any of the following activities: (A) serving as a director of
any "Competitor" (as defined below); (B) directly or indirectly through one
or more intermediaries, either (x) controlling any Competitor or (y) owning
any equity or debt interests in any Competitor (other than equity or debt
interests which are publicly traded and, at the time of any acquisition, do
not exceed 5% of the particular class of interests outstanding) (it being
understood that, if interests in any Competitor are owned by an investment
vehicle or other entity in which the Executive owns an equity interest, a
portion of the interests in such Competitor owned by such entity shall be
attributed to the Executive, such portion determined by applying the
percentage of the equity interest in such entity owned by the Executive to
the interests in such Competitor owned by such entity); (C) employment by
(including, without limitation, serving as an officer or partner of),
providing consulting services to (including, without limitation, as an
independent contractor), or managing or operating the business or affairs
of, any Competitor; or (D) participating in the ownership, management,
operation or control of or being connected in any manner with any
Competitor. For purposes of this Agreement, the term "COMPETITOR" shall
mean any person (other than the Company or any affiliate thereof) that
competes, either directly or indirectly, at the time of determination, in
any "Restricted Area" (as defined below) with any of the business conducted
by the Company or any affiliate thereof. For purposes of this Agreement,
the term "RESTRICTED AREA" shall mean any state or territory of the United
States in which the Company or any affiliate thereof conducts business or
any state or similar subdivision of any foreign country.
(iii) REMEDIES. The Executive agrees that any
breach of the terms of this SECTION 10 would result in irreparable injury
and damage to the Company for which the Company would have no adequate
remedy at law. The Executive therefore also agrees that in the event of
any such breach or any threat of such breach, the Company shall be entitled
to an immediate injunction and restraining order to prevent such breach
and/or threatened breach and/or continued breach by the Executive and/or
any and all persons and/or entities acting for and/or with the Executive,
without having to prove damages, in addition to any other remedies to which
the Company may be entitled at law or in equity. The terms of this SECTION
10 shall not prevent the Company from pursuing any other available remedies
for any breach or threatened breach hereof, including but not limited to
the recovery of damages from the Executive.
8.
<PAGE>
The provisions of this SECTION 10 shall survive any termination of
this Agreement. The existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements set forth in this SECTION 10.
11. MISCELLANEOUS.
(a) BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, executors, representatives, estates, successors and assigns, including
any successor or assign to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock or otherwise; PROVIDED, HOWEVER, that the
Executive, or any beneficiary or legal representative of the Executive, shall
not assign all or any portion of the Executive's rights or obligations under
this Agreement without the prior written consent of the Company.
(b) NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given on
the day delivered if delivered personally, within three (3) "Business Days" (as
defined below) after being sent if sent by registered or certified mail (postage
prepaid, return receipt requested), the next day after being sent if sent by
overnight courier (prepaid) or the next day after being sent if sent by
telecopier to either party at the following address:
IF TO THE COMPANY:
Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
WITH A COPY TO:
Brobeck, Phleger & Harrison LLP
550 South Hope Street, 24th Floor
Los Angeles, CA 90071
Attention: V. Joseph Stubbs, Esq.
Telephone: (213) 239-1253
Telecopier: (213) 239-1324
9.
<PAGE>
IF TO THE EXECUTIVE:
Alfred G. Scheid
c/o Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
or to such other address as either party shall have specified for itself or
himself from time to time to the other party in writing. For purposes of this
Agreement, the term "BUSINESS DAY" shall mean any day other than a Saturday, a
Sunday or any day on which commercial banks in Los Angeles, California, are
authorized or required by law to close.
(c) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements and understandings, oral or written, between
them as to such subject matter.
(d) AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(e) HEADINGS. The headings contained in this Agreement are
inserted for convenience or reference only, and do not constitute a part of this
Agreement.
(f) NO THIRD PARTY BENEFICIARIES. This Agreement is not
intended to confer any rights or remedies on any person not a party to this
Agreement.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(h) INVALIDITY; SEVERABILITY. In the event that any provision
of this Agreement shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions reasonably
can still be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
(i) GOVERNING LAW. The validity and interpretation of this
Agreement shall be governed by the laws of the State of California, without
reference to the conflict of laws principles thereof.
(j) MEDIATION AND ARBITRATION. Any dispute which may arise
between the parties hereto as to the construction, interpretation or effect of
this Agreement which is not resolved by mutual agreement between the parties,
shall first be submitted to nonbinding mediation on terms and conditions to be
mutually agreed upon by the parties. In the event that
10.
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a dispute is not resolved by nonbinding mediation, the disputing party may give
the other party notice of such party's intention to cause the same to be
submitted to arbitration. After fifteen (15) days have elapsed from the giving
of such notice, but not before such time, the party who gave such notice may
cause any such dispute which then remains unresolved to be submitted to
arbitration by submitting the same to the Los Angeles, California office of the
American Arbitration Association (the "AAA") (or any successor thereto, but if
no organization is then performing a function reasonably similar to the AAA,
then to a court of competent jurisdiction in accordance with the rules of such
court) with a request for arbitration to be conducted in accordance with the
rules thereof by one (1) arbitrator to be jointly selected by the parties. The
prevailing party's expenses, including without limitation attorneys' fees, in
connection with such arbitration shall be borne by the losing party; PROVIDED,
HOWEVER, that if liability is allocated by the arbitrator between the parties,
the expenses of such arbitration, including without limitation the parties'
attorneys' fees, shall be borne by the parties in proportion to their respective
percentages or proportions of liability assessed by the arbitrator. The
decision of the arbitrator as to all matters properly submitted to such
arbitrator and as to the apportionment of expenses of arbitration shall be
conclusive and binding upon the parties and judgment upon any award may be
entered in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SCHEID VINEYARDS INC.,
a Delaware corporation
By: /s/ Heidi M. Scheid
--------------------------------------------------
Name: Heidi M. Scheid
Title: Chief Financial Officer
"COMPANY"
/s/ Alfred G. Scheid
--------------------------------------------------
ALFRED G. SCHEID
"EXECUTIVE"
11.
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Appendix A
NOTIFICATION TO EMPLOYEE
Set forth below is the text of Sections 2870, 2871 and 2872 of
the California Labor Code, as published in West's Ann. Cal. Labor Code (1989)
and West's Ann. Cal. Labor Code (1994 Supp.):
Section 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
Section 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE OF
INVENTIONS
No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
Section 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF
If an employee agreement entered into after January 1, 1980, contains
a provision requiring the employee to assign or offer to assign any of his or
her rights in any invention to his or her employer, the employer must also, at
the time the agreement is made, provide a written notification to the employee
that the agreement does not apply to an invention which qualifies fully under
the provisions of Section 2870. In any suit or action arising thereunder, the
burden of proof shall be on the employee claiming the benefits of its
provisions.
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of July 1,
1997, is made and entered into by and between SCHEID VINEYARDS INC., a Delaware
corporation (the "COMPANY"), and SCOTT D. SCHEID (the "EXECUTIVE").
RECITALS
--------
A. The Company desires to employ the Executive as its Vice President and
Chief Operating Officer on the terms and conditions hereinafter set forth and
the Executive desires to accept such employment.
B. The Executive possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel.
C. The Company recognizes the valuable services that the Executive has
rendered, and desires to be assured that the Executive will continue his active
participation in the management and business of the Company.
D. The Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders, and the Company recognizes that the
existence of a possible change in control of the Company causes uncertainty
among management which may result in the possible departure or distraction of
members of management to the detriment of the Company and its shareholders.
E. The Company desires to secure the services and employment of the
Executive as its Vice President and Chief Operating Officer, and the Executive
is willing to serve the Company in such capacities, but desires assurance that
he will be protected against the financial impact of an unexpected termination
in the event of a change in control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the
parties agree as follows:
1. EMPLOYMENT. Subject to and pursuant to the terms of this
Agreement, the Company shall employ the Executive, and the Executive shall be
employed by and shall serve the Company, in the capacity of Vice President and
Chief Operating Officer.
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TERM AND RENEWALS.
2. (a) TERM AND RENEWALS. Subject to the provisions for earlier
termination provided herein, the term of this Agreement (the "TERM") shall
commence on the date of this Agreement (the "EFFECTIVE DATE") and shall
terminate on the third anniversary of the Effective Date (the "INITIAL TERM")
unless renewed pursuant to this SECTION 2(a). The Initial Term shall be renewed
for a one (1)-year period (the "INITIAL RENEWAL TERM") if at least six (6)
months prior to the expiration of the Initial Term either party hereto shall not
have given the other party written notice not to renew this Agreement. The
Initial Renewal Term and each "Renewal Term" (as defined in this SECTION 2(a))
shall be renewed for successive one (1)-year periods (each, a "RENEWAL TERM") if
at least three (3) months prior to the expiration of the Initial Renewal Term or
a Renewal Term, as the case may be, either party hereto shall not have given the
other party written notice not to renew this Agreement.
3. DUTIES. During the Term, the Executive shall serve as and shall
have the titles of the Vice President and Chief Operating Officer of the
Company, and shall have all duties and responsibilities customarily associated
with such positions, as limited or expanded pursuant to this Agreement. The
Executive shall devote substantially his full working time and effort during
normal business hours to the business and affairs of the Company, and shall use
his reasonable best efforts to perform such duties and responsibilities
faithfully and efficiently.
4. COMPENSATION. For services rendered by the Executive pursuant to
this Agreement, the Company shall pay or award compensation to the Executive as
follows:
(a) BASE COMPENSATION. The Company shall pay to the Executive a
base salary ("BASE COMPENSATION") of $130,000 per annum from the date of this
Agreement, payable in accordance with the Company's customary practices for its
senior executive officers. The amount of Base Compensation shall be reviewed by
the Board on at least an annual basis, and may be increased to reflect inflation
or such other adjustments as the Board may deem appropriate; PROVIDED, HOWEVER,
that Base Compensation, as increased, may not be decreased.
(b) BONUS COMPENSATION. In addition to Base Compensation, the
Executive may be awarded, for each fiscal year of the Company ending with or
within the Term, an annual bonus ("BONUS"), whether pursuant to a formal bonus
or incentive plan or program of the Company or otherwise, in cash or other
property acceptable to the Executive, including stock options, rights or
warrants in the Company, which Bonus shall be based on such criteria as may be
deemed appropriate and adopted by the Board. If earned, the Bonus shall be paid
to the Executive within ninety (90) days after the end of each fiscal year of
the Company, except to the extent, if any, that the Executive otherwise shall
have elected to defer all or part of the receipt of such Bonus.
(c) WITHHOLDING. The Company shall deduct and withhold from the
compensation payable to the Executive hereunder any and all applicable federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statute or
regulation.
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5. FRINGE BENEFITS; REIMBURSEMENT; VACATION. In addition to Base
Compensation and Bonus provided for in SECTION 4 above, during the Term the
Executive shall be entitled to receive:
(a) all fringe benefits customarily offered by the Company to
its senior executive officers, including without limitation, participation in
any Company stock compensation plan and the various employee benefit plans or
programs (collectively, the "BENEFIT PLANS") provided to the employees of the
Company in general, subject to the eligibility requirements with respect to each
such Benefit Plan, and to such other benefits or perquisites as may be approved
by the Board during the Term;
(b) reimbursement from the Company for all customary, ordinary
and necessary business expenses incurred by the Executive in the performance of
his duties and responsibilities hereunder, PROVIDED that the Executive furnishes
the Company with vouchers, receipts and other substantiation of such expenses
within thirty (30) days after they are incurred; and
(c) paid vacation benefits in accordance with the Company's
vacation policy in effect for its senior executive officers.
The Executive may take accrued vacation at such times during each fiscal year of
the Company as mutually may be convenient to the Company and to the Executive,
and all unused vacation time as of the end of any fiscal year of the Company
shall accrue or lapse in accordance with the Company's vacation policy in effect
for its senior executive officers.
6. INDEMNIFICATION.
(a) OBLIGATION OF THE COMPANY. To the maximum extent permitted
by law, the Company hereby indemnifies and agrees to hold harmless the Executive
from any and all costs or expenses incurred by him on account of the fact that
he becomes a party, or is threatened to be made a party, to any pending,
threatened or contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is, was or
becomes a director, officer, employee or agent of the Company or of any parent
or subsidiary of the Company. Such costs and expenses shall include, without
limitation, expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any such action, suit or proceeding. To the maximum extent permitted by and
subject to any requirements of law, costs and expenses incurred by the Executive
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company as bills for such services are presented by the Executive to the
Company. In any such matter, the Executive shall be entitled to select his own
legal counsel.
(b) INSURANCE COVERAGE. To the maximum extent permitted by law,
the Company shall obtain and maintain standard form director's and officer's
liability insurance with responsible carriers and in reasonable amounts, and any
other additional insurance which reasonably may be obtained, covering to the
extent available any liability of the kind described in SECTION 6(a) above, and
protecting the Executive against costs and expenses described in SECTION 6(a)
above which are not for any reason satisfied by the Company.
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(c) SUCCESSOR LIABILITY AND SURVIVAL. The obligations of the
Company set forth in this SECTION 6 shall bind any successor corporation to the
Company (whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock or otherwise) so that the Executive shall stand in the same
position under this Agreement with respect to any successor corporation as the
Executive would have with respect to the Company if its separate existence had
continued. The Company's obligations under this SECTION 6 shall survive
termination of this Agreement, and shall survive indefinitely with respect to
any costs, expenses or liabilities incurred by the Executive on account of any
actual or alleged action or inaction by the Executive while employed by the
Company.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION. Except as otherwise provided in this
Agreement, the Executive's employment by the Company hereunder shall terminate
upon the earliest to occur of the dates specified below (as applicable, the
"TERMINATION DATE"):
(i) The close of business on the date of expiration of
the Term.
(ii) The close of business on the date of the
Executive's death ("DEATH").
(iii) The close of business on the date specified as the
effective date of termination of the Executive's employment in a "Notice of
Termination" (as defined below) delivered by the Company to the Executive
due to the Executive's "Disability" (as defined below). For purposes of
this Agreement, the term "DISABILITY" shall mean the inability or
incapacity of the Executive, due to any medically determined physical or
mental impairment, to perform his duties and responsibilities for the
Company for a total of one hundred eighty (180) calendar days in any twelve
(12) month period during the Term.
(iv) The close of business on the date specified as the
effective date of termination of the Executive's employment by the
Executive in a Notice of Termination delivered by the Executive to the
Company (a "VOLUNTARY TERMINATION").
(v) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
for "Cause" (as defined below) in a Notice of Termination delivered by the
Company to the Executive. For purposes of this Agreement, the term "CAUSE"
shall mean termination based on (A) the Executive's material breach of this
Agreement which, if capable of cure, is not cured fully within ten (10)
days after written notice to the Executive identifying such breach,
PROVIDED, that such ten (10)-day period shall be extended to sixty (60)
days if such breach is not reasonably susceptible to cure within ten (10)
days and the Executive shall have commenced to cure and is then proceeding
with due diligence to cure such breach; (B) conviction of the Executive for
(x) any crime constituting a felony in the jurisdiction in which committed,
(y) any crime involving moral turpitude (whether or not a felony) or (z)
any other criminal act against the Company involving dishonesty or willful
misconduct intended to injure the Company (whether or not a felony);
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(C) substance abuse by the Executive which is repeated after written notice
to the Executive identifying such abuse; (D) the failure or the refusal of
the Executive to follow lawful and proper directives of the Board (or of
any superior officer of the Company having direct supervisory authority
over the Executive), which is not corrected within ten (10) days after
written notice to the Executive identifying such failure or refusal;
(E) willful malfeasance or gross misconduct by the Executive which
discredits or damages the Company; (F) indictment of the Executive by a
grand jury for a felony violation of the federal securities laws; or
(G) the engagement by the Executive in any "Prohibited Activity" or
"Competitive Activity" (as such terms respectively are defined in SECTIONS
10(c)(i) and 10(c)(ii) below) in violation of this Agreement.
(vi) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
other than for Death, Disability or Cause in a Notice of Termination
delivered by the Company to the Executive. The Executive acknowledges and
agrees that the Executive's employment hereunder is "at will" and that the
Company may terminate the Executive's employment at any time for any or no
reason, with or without Cause.
(b) NOTICE OF TERMINATION. Any termination of the Executive's
employment hereunder (other than termination as a result of Death) by the
Company or by the Executive shall be communicated by a Notice of Termination to
the other party hereto given in accordance with the provisions of SECTION 11(b)
below. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, and (ii) if applicable, sets forth the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment.
8. PAYMENT UPON TERMINATION OF EMPLOYMENT. If the Executive's
employment is terminated for any reason, then, without limiting any other rights
or remedies available to the Company at law or in equity, the Company shall pay
or provide to the Executive, his legal representatives, heirs, eligible
dependents, if any, or permitted assigns, as applicable, (i) within ten (10)
days after the Termination Date, all Base Compensation earned but unpaid as of
the Termination Date; and (ii) all benefits to which such persons may be
entitled under any of the Benefit Plans which provide for benefits after
termination of employment, in accordance with the terms thereof.
9. LIMITATION ON PAYMENTS. If any payments provided for under this
Agreement, either alone or together with other payments which the Executive
would have the right to receive from the Company, will constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the
"CODE") as in effect at the time of payment, such payment shall be reduced to
the largest amount which will result in no portion being subject to the excise
tax imposed by Section 4999 of the Code or the disallowance of a deduction by
the Company pursuant to Section 280G(a) of the Code. The determination of the
amount of any reduction under this SECTION 9 and the payments to which such
reduction shall apply, shall be made in good faith by the Executive and such
determination shall be binding on the Company.
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10. EXECUTIVE COVENANTS.
(a) UNAUTHORIZED DISCLOSURE. The Executive agrees and
understands that due to the Executive's position with the Company, both prior
to, if applicable, and subsequent to the date of this Agreement, the Executive
has been and will be exposed to, and has received and will receive confidential
and proprietary information of the Company or relating to the Company's business
or affairs (collectively, the "TRADE SECRETS"), including but not limited to
technical information, computer software (including source and object code data
and related documentation), research and development, know-how, product
information, formulae, processes, business and marketing plans, strategies,
customer information, other information concerning the Company's products,
promotions, development, financing, expansion plans, business policies and
practices and other forms of information considered by the Company to be
proprietary and confidential and in the nature of trade secrets. Except to the
extent that the proper performance of the Executive's duties and
responsibilities hereunder may require disclosure, and except as such
information (i) was known to the Executive prior to his employment by the
Company or (ii) was or becomes generally available to the public other than as a
result of a disclosure by the Executive in violation of the provisions of this
SECTION 10(a), the Executive agrees that during the Term and at all times
thereafter the Executive will keep such Trade Secrets confidential and will not
disclose such information, either directly or indirectly, to any third person or
entity without the prior written consent of the Company. This confidentiality
covenant has no temporal, geographical or territorial restriction. On the
Termination Date, the Executive promptly will supply to the Company all
property, keys, notes, memoranda, writings, lists, files, reports, customer
lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines,
technical data, formulae or any other tangible product or document which have
been produced by, received by or otherwise submitted to the Executive in the
course of his employment with the Company, including the period during and prior
to the Term. Any material breach of the terms of this SECTION 10(a) shall be
considered Cause.
(b) INVENTIONS. The Executive agrees that any and all
inventions, discoveries, improvements, processes, formulae, business application
software patents, copyrights and trademarks made, developed, discovered or
acquired by him during his employment by the Company, including the Term, solely
or jointly with others or otherwise, which relate to the business of the
Company, and all knowledge possessed by the Executive relating thereto
(collectively, the "INVENTIONS"), shall be fully and promptly disclosed to the
Board and to such person or persons as the Board shall direct, and shall be the
sole and absolute property of the Company and the Company shall be the sole and
absolute owner thereof. The Executive agrees that he will at all times keep all
Inventions secret from everyone except the Company and such persons as the Board
may from time to time direct. The Executive shall, as requested by the Company
at any time and from time to time, whether prior to or after the expiration of
the Term, execute and deliver to the Company any instruments deemed necessary by
the Company to effect disclosure and assignment of the Inventions to the Company
or its designees and any patent applications (United States or foreign) and
renewals with respect thereto, including any other instruments deemed necessary
by the Company for the prosecution of patent applications or the acquisition of
letters patent. Reference is hereby made to APPENDIX A to this Agreement, which
reprints the text of Sections 2870 through 2872 of the California Labor Code.
Execution of this Agreement by the Executive shall confirm that the Executive
has received and read such APPENDIX A. The provisions of this SECTION 10(b)
shall
6.
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not apply to any invention which qualifies fully under the provisions of Section
2870 of the California Labor Code.
(c) PROHIBITED AND COMPETITIVE ACTIVITIES. The Executive and
the Company recognize that due to the nature of the Executive's engagement
hereunder and the relationship of the Executive to the Company, both prior and
subsequent to the date of this Agreement, the Executive has had and will have
access to, has had and will acquire, and has assisted and may continue to assist
in developing, confidential and proprietary information relating to the business
and operations of the Company and its affiliates, including Trade Secrets. The
Executive acknowledges that such information has been and will be of central
importance to the business of the Company and its affiliates and that disclosure
of it to, or its use by, others (including, without limitation, the Executive
(other than with respect to the Company's business and affairs)) could cause
substantial loss to the Company. The Executive and the Company also recognize
that an important part of the Executive's duties and responsibilities will be to
develop good will for the Company and its affiliates through his personal
contact with "Clients" (as defined below), employees and others having business
relationships with the Company, and that there is a danger that this good will,
a proprietary asset of the Company, may follow the Executive if and when his
relationship with the Company is terminated. The Executive accordingly agrees
as follows:
(i) PROHIBITED ACTIVITIES. The Executive will not at any
time during the Term and for two (2) years thereafter: (A) other than in
the course of his employment, disclose or furnish to any other person or,
directly or indirectly, use for his own account or the account of any other
person, any Trade Secrets, no matter from where or in what manner he may
have acquired such Trade Secrets, and he shall retain all such Trade
Secrets in trust for the benefit of the Company, its affiliates and the
successors and assigns of any of them; (B) directly or through one or more
intermediaries, solicit for employment any person who, at the time of such
solicitation, is employed by the Company or any affiliate thereof;
(C) directly or indirectly, whether for his own account or for the account
of any other person, solicit, divert or endeavor to entice away from the
Company or any entity controlled by the Company, or otherwise engage in any
activity intended to terminate, disrupt or interfere with, the Company's or
any of its affiliate's relationship with, Clients, or otherwise adversely
affect the Company's or any of its affiliate's relationship with Clients or
other business relationships of the Company or any affiliate thereof; or
(D) publish or make any statement critical of the Company or any
shareholder or affiliate of the Company, or in any way adversely affect or
otherwise malign the business or reputation of any of the foregoing persons
(any activity described in CLAUSE (A), (B), (C) OR (D) of this SECTION
10(c)(i) being herein referred to as a "PROHIBITED ACTIVITY"); PROVIDED,
HOWEVER, that if in the written opinion of counsel, the Executive is
legally compelled to disclose Trade Secrets to any tribunal or else stand
liable for contempt or suffer other similar censure or penalty, then the
disclosure to such tribunal of those Trade Secrets which such counsel
advises in writing legally are required to be disclosed shall not
constitute a Prohibited Activity, PROVIDED that the Executive shall give
the Company as much advance notice of such disclosure as is reasonably
practicable. For purposes of this Agreement, "CLIENTS" shall mean those
persons who, at any time during the Executive's course of employment with
the Company (including, without limitation, prior to the date of this
Agreement) are
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or were clients or customers of the Company or any affiliate thereof or any
predecessor of any of the foregoing.
(ii) NON-COMPETITION. By and in consideration of the
Company's entering into this Agreement and providing the compensation and
benefits to be provided by the Company to the Executive, and further in
consideration of the Executive's continued exposure to the confidential and
proprietary information of the Company (including, without limitation, the
Trade Secrets), the Executive agrees that the Executive will not, during
the Term, engage in any "Competitive Activity" (as defined below). For
purposes of this Agreement, the term "COMPETITIVE ACTIVITY" shall mean
engaging in any of the following activities: (A) serving as a director of
any "Competitor" (as defined below); (B) directly or indirectly through one
or more intermediaries, either (x) controlling any Competitor or (y) owning
any equity or debt interests in any Competitor (other than equity or debt
interests which are publicly traded and, at the time of any acquisition, do
not exceed 5% of the particular class of interests outstanding) (it being
understood that, if interests in any Competitor are owned by an investment
vehicle or other entity in which the Executive owns an equity interest, a
portion of the interests in such Competitor owned by such entity shall be
attributed to the Executive, such portion determined by applying the
percentage of the equity interest in such entity owned by the Executive to
the interests in such Competitor owned by such entity); (C) employment by
(including, without limitation, serving as an officer or partner of),
providing consulting services to (including, without limitation, as an
independent contractor), or managing or operating the business or affairs
of, any Competitor; or (D) participating in the ownership, management,
operation or control of or being connected in any manner with any
Competitor. For purposes of this Agreement, the term "COMPETITOR" shall
mean any person (other than the Company or any affiliate thereof) that
competes, either directly or indirectly, at the time of determination, in
any "Restricted Area" (as defined below) with any of the business conducted
by the Company or any affiliate thereof. For purposes of this Agreement,
the term "RESTRICTED AREA" shall mean any state or territory of the United
States in which the Company or any affiliate thereof conducts business or
any state or similar subdivision of any foreign country.
(iii) REMEDIES. The Executive agrees that any breach of
the terms of this SECTION 10 would result in irreparable injury and damage
to the Company for which the Company would have no adequate remedy at law.
The Executive therefore also agrees that in the event of any such breach or
any threat of such breach, the Company shall be entitled to an immediate
injunction and restraining order to prevent such breach and/or threatened
breach and/or continued breach by the Executive and/or any and all persons
and/or entities acting for and/or with the Executive, without having to
prove damages, in addition to any other remedies to which the Company may
be entitled at law or in equity. The terms of this SECTION 10 shall not
prevent the Company from pursuing any other available remedies for any
breach or threatened breach hereof, including but not limited to the
recovery of damages from the Executive.
8.
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The provisions of this SECTION 10 shall survive any termination of
this Agreement. The existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements set forth in this SECTION 10.
11. MISCELLANEOUS.
-------------
(a) BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, executors, representatives, estates, successors and assigns, including
any successor or assign to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock or otherwise; PROVIDED, HOWEVER, that the
Executive, or any beneficiary or legal representative of the Executive, shall
not assign all or any portion of the Executive's rights or obligations under
this Agreement without the prior written consent of the Company.
(b) NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given on
the day delivered if delivered personally, within three (3) "Business Days" (as
defined below) after being sent if sent by registered or certified mail (postage
prepaid, return receipt requested), the next day after being sent if sent by
overnight courier (prepaid) or the next day after being sent if sent by
telecopier to either party at the following address:
IF TO THE COMPANY:
Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
WITH A COPY TO:
Brobeck, Phleger & Harrison LLP
550 South Hope Street, 24th Floor
Los Angeles, CA 90071
Attention: V. Joseph Stubbs, Esq.
Telephone: (213) 239-1253
Telecopier: (213) 239-1324
9.
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IF TO THE EXECUTIVE:
Scott D. Scheid
c/o Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
or to such other address as either party shall have specified for itself or
himself from time to time to the other party in writing. For purposes of this
Agreement, the term "BUSINESS DAY" shall mean any day other than a Saturday, a
Sunday or any day on which commercial banks in Los Angeles, California, are
authorized or required by law to close.
(c) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements and understandings, oral or written, between
them as to such subject matter.
(d) AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(e) HEADINGS. The headings contained in this Agreement are
inserted for convenience or reference only, and do not constitute a part of this
Agreement.
(f) NO THIRD PARTY BENEFICIARIES. This Agreement is not
intended to confer any rights or remedies on any person not a party to this
Agreement.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(h) INVALIDITY; SEVERABILITY. In the event that any provision
of this Agreement shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions reasonably
can still be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
(i) GOVERNING LAW. The validity and interpretation of this
Agreement shall be governed by the laws of the State of California, without
reference to the conflict of laws principles thereof.
(j) MEDIATION AND ARBITRATION. Any dispute which may arise
between the parties hereto as to the construction, interpretation or effect of
this Agreement which is not resolved by mutual agreement between the parties,
shall first be submitted to nonbinding mediation on terms and conditions to be
mutually agreed upon by the parties. In the event that
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a dispute is not resolved by nonbinding mediation, the disputing party may give
the other party notice of such party's intention to cause the same to be
submitted to arbitration. After fifteen (15) days have elapsed from the giving
of such notice, but not before such time, the party who gave such notice may
cause any such dispute which then remains unresolved to be submitted to
arbitration by submitting the same to the Los Angeles, California office of the
American Arbitration Association (the "AAA") (or any successor thereto, but if
no organization is then performing a function reasonably similar to the AAA,
then to a court of competent jurisdiction in accordance with the rules of such
court) with a request for arbitration to be conducted in accordance with the
rules thereof by one (1) arbitrator to be jointly selected by the parties. The
prevailing party's expenses, including without limitation attorneys' fees, in
connection with such arbitration shall be borne by the losing party; PROVIDED,
HOWEVER, that if liability is allocated by the arbitrator between the parties,
the expenses of such arbitration, including without limitation the parties'
attorneys' fees, shall be borne by the parties in proportion to their respective
percentages or proportions of liability assessed by the arbitrator. The
decision of the arbitrator as to all matters properly submitted to such
arbitrator and as to the apportionment of expenses of arbitration shall be
conclusive and binding upon the parties and judgment upon any award may be
entered in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SCHEID VINEYARDS INC.,
a Delaware corporation
By: /s/ Alfred G. Scheid
--------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
"COMPANY"
/s/ Scott D. Scheid
-------------------
SCOTT D. SCHEID
"EXECUTIVE"
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Appendix A
NOTIFICATION TO EMPLOYEE
Set forth below is the text of Sections 2870, 2871 and 2872 of the
California Labor Code, as published in West's Ann. Cal. Labor Code (1989) and
West's Ann. Cal. Labor Code (1994 Supp.):
Section 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
Section 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE OF
INVENTIONS
No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
Section 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF
If an employee agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the
burden of proof shall be on the employee claiming the benefits of its
provisions.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of July 1,
1997, is made and entered into by and between SCHEID VINEYARDS INC., a Delaware
corporation (the "COMPANY"), and HEIDI M. SCHEID (the "EXECUTIVE").
RECITALS
A. The Company desires to employ the Executive as its Vice President
Finance, Chief Financial Officer and Treasurer on the terms and conditions
hereinafter set forth and the Executive desires to accept such employment.
B. The Executive possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel.
C. The Company recognizes the valuable services that the Executive has
rendered, and desires to be assured that the Executive will continue her active
participation in the management and business of the Company.
D. The Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders, and the Company recognizes that the
existence of a possible change in control of the Company causes uncertainty
among management which may result in the possible departure or distraction of
members of management to the detriment of the Company and its shareholders.
E. The Company desires to secure the services and employment of the
Executive as its Vice President Finance, Chief Financial Officer and Treasurer,
and the Executive is willing to serve the Company in such capacities, but
desires assurance that she will be protected against the financial impact of an
unexpected termination in the event of a change in control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the
parties agree as follows:
1. EMPLOYMENT. Subject to and pursuant to the terms of this
Agreement, the Company shall employ the Executive, and the Executive shall be
employed by and shall serve the Company, in the capacity of Vice President
Finance, Chief Financial Officer and Treasurer.
<PAGE>
2. TERM AND RENEWALS.
(a) TERM AND RENEWALS. Subject to the provisions for earlier
termination provided herein, the term of this Agreement (the "TERM") shall
commence on the date of this Agreement (the "EFFECTIVE DATE") and shall
terminate on the third anniversary of the Effective Date (the "INITIAL TERM")
unless renewed pursuant to this SECTION 2(a). The Initial Term shall be renewed
for a one (1)-year period (the "INITIAL RENEWAL TERM") if at least six (6)
months prior to the expiration of the Initial Term either party hereto shall not
have given the other party written notice not to renew this Agreement. The
Initial Renewal Term and each "Renewal Term" (as defined in this SECTION 2(a))
shall be renewed for successive one (1)-year periods (each, a "RENEWAL TERM") if
at least three (3) months prior to the expiration of the Initial Renewal Term or
a Renewal Term, as the case may be, either party hereto shall not have given the
other party written notice not to renew this Agreement.
3. DUTIES. During the Term, the Executive shall serve as and shall
have the titles of the Vice President Finance, Chief Financial Officer and
Treasurer of the Company, and shall have all duties and responsibilities
customarily associated with such position, as limited or expanded pursuant to
this Agreement. The Executive shall devote substantially her full working time
and effort during normal business hours to the business and affairs of the
Company, and shall use her reasonable best efforts to perform such duties and
responsibilities faithfully and efficiently.
4. COMPENSATION. For services rendered by the Executive pursuant to
this Agreement, the Company shall pay or award compensation to the Executive as
follows:
(a) BASE COMPENSATION. The Company shall pay to the Executive a
base salary ("BASE COMPENSATION") of $120,000 per annum from the date of this
Agreement, payable in accordance with the Company's customary practices for its
senior executive officers. The amount of Base Compensation shall be reviewed by
the Board on at least an annual basis, and may be increased to reflect inflation
or such other adjustments as the Board may deem appropriate; PROVIDED, HOWEVER,
that Base Compensation, as increased, may not be decreased.
(b) BONUS COMPENSATION. In addition to Base Compensation, the
Executive may be awarded, for each fiscal year of the Company ending with or
within the Term, an annual bonus ("BONUS"), whether pursuant to a formal bonus
or incentive plan or program of the Company or otherwise, in cash or other
property acceptable to the Executive, including stock options, rights or
warrants in the Company, which Bonus shall be based on such criteria as may be
deemed appropriate and adopted by the Board. If earned, the Bonus shall be paid
to the Executive within ninety (90) days after the end of each fiscal year of
the Company, except to the extent, if any, that the Executive otherwise shall
have elected to defer all or part of the receipt of such Bonus.
(c) WITHHOLDING. The Company shall deduct and withhold from the
compensation payable to the Executive hereunder any and all applicable federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statute or
regulation.
2.
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5. FRINGE BENEFITS; REIMBURSEMENT; VACATION. In addition to Base
Compensation and Bonus provided for in SECTION 4 above, during the Term the
Executive shall be entitled to receive:
(a) all fringe benefits customarily offered by the Company to
its senior executive officers, including without limitation, participation in
any Company stock compensation plan and the various employee benefit plans or
programs (collectively, the "BENEFIT PLANS") provided to the employees of the
Company in general, subject to the eligibility requirements with respect to each
such Benefit Plan, and to such other benefits or perquisites as may be approved
by the Board during the Term;
(b) reimbursement from the Company for all customary, ordinary
and necessary business expenses incurred by the Executive in the performance of
her duties and responsibilities hereunder, PROVIDED that the Executive furnishes
the Company with vouchers, receipts and other substantiation of such expenses
within thirty (30) days after they are incurred; and
(c) paid vacation benefits in accordance with the Company's
vacation policy in effect for its senior executive officers.
The Executive may take accrued vacation at such times during each fiscal year of
the Company as mutually may be convenient to the Company and to the Executive,
and all unused vacation time as of the end of any fiscal year of the Company
shall accrue or lapse in accordance with the Company's vacation policy in effect
for its senior executive officers.
6. INDEMNIFICATION.
(a) OBLIGATION OF THE COMPANY. To the maximum extent permitted
by law, the Company hereby indemnifies and agrees to hold harmless the Executive
from any and all costs or expenses incurred by her on account of the fact that
she becomes a party, or is threatened to be made a party, to any pending,
threatened or contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that she is, was or
becomes a director, officer, employee or agent of the Company or of any parent
or subsidiary of the Company. Such costs and expenses shall include, without
limitation, expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by her in connection with
any such action, suit or proceeding. To the maximum extent permitted by and
subject to any requirements of law, costs and expenses incurred by the Executive
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company as bills for such services are presented by the Executive to the
Company. In any such matter, the Executive shall be entitled to select her own
legal counsel.
(b) INSURANCE COVERAGE. To the maximum extent permitted by law,
the Company shall obtain and maintain standard form director's and officer's
liability insurance with responsible carriers and in reasonable amounts, and any
other additional insurance which reasonably may be obtained, covering to the
extent available any liability of the kind described in SECTION 6(a) above, and
protecting the Executive against costs and expenses described in SECTION 6(a)
above which are not for any reason satisfied by the Company.
3.
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(c) SUCCESSOR LIABILITY AND SURVIVAL. The obligations of the
Company set forth in this SECTION 6 shall bind any successor corporation to the
Company (whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock or otherwise) so that the Executive shall stand in the same
position under this Agreement with respect to any successor corporation as the
Executive would have with respect to the Company if its separate existence had
continued. The Company's obligations under this SECTION 6 shall survive
termination of this Agreement, and shall survive indefinitely with respect to
any costs, expenses or liabilities incurred by the Executive on account of any
actual or alleged action or inaction by the Executive while employed by the
Company.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION. Except as otherwise provided in this
Agreement, the Executive's employment by the Company hereunder shall terminate
upon the earliest to occur of the dates specified below (as applicable, the
"TERMINATION DATE"):
(i) The close of business on the date of expiration of
the Term.
(ii) The close of business on the date of the
Executive's death ("DEATH").
(iii) The close of business on the date specified as the
effective date of termination of the Executive's employment in a "Notice of
Termination" (as defined below) delivered by the Company to the Executive
due to the Executive's "Disability" (as defined below). For purposes of
this Agreement, the term "DISABILITY" shall mean the inability or
incapacity of the Executive, due to any medically determined physical or
mental impairment, to perform her duties and responsibilities for the
Company for a total of one hundred eighty (180) calendar days in any twelve
(12) month period during the Term.
(iv) The close of business on the date specified as the
effective date of termination of the Executive's employment by the
Executive in a Notice of Termination delivered by the Executive to the
Company (a "VOLUNTARY TERMINATION").
(v) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
for "Cause" (as defined below) in a Notice of Termination delivered by the
Company to the Executive. For purposes of this Agreement, the term "CAUSE"
shall mean termination based on (A) the Executive's material breach of this
Agreement which, if capable of cure, is not cured fully within ten (10)
days after written notice to the Executive identifying such breach,
PROVIDED, that such ten (10)-day period shall be extended to sixty (60)
days if such breach is not reasonably susceptible to cure within ten (10)
days and the Executive shall have commenced to cure and is then proceeding
with due diligence to cure such breach; (B) conviction of the Executive for
(x) any crime constituting a felony in the jurisdiction in which committed,
(y) any crime involving moral turpitude (whether or not a felony) or (z)
any other criminal act against the Company involving dishonesty or willful
misconduct intended to injure the Company (whether or not a felony);
4.
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(C) substance abuse by the Executive which is repeated after written notice
to the Executive identifying such abuse; (D) the failure or the refusal of
the Executive to follow lawful and proper directives of the Board (or of
any superior officer of the Company having direct supervisory authority
over the Executive), which is not corrected within ten (10) days after
written notice to the Executive identifying such failure or refusal;
(E) willful malfeasance or gross misconduct by the Executive which
discredits or damages the Company; (F) indictment of the Executive by a
grand jury for a felony violation of the federal securities laws; or (G)
the engagement by the Executive in any "Prohibited Activity" or
"Competitive Activity" (as such terms respectively are defined in SECTIONS
10(c)(i) and 10(c)(ii) below) in violation of this Agreement.
(vi) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
other than for Death, Disability or Cause in a Notice of Termination
delivered by the Company to the Executive. The Executive acknowledges and
agrees that the Executive's employment hereunder is "at will" and that the
Company may terminate the Executive's employment at any time for any or no
reason, with or without Cause.
(b) NOTICE OF TERMINATION. Any termination of the Executive's
employment hereunder (other than termination as a result of Death) by the
Company or by the Executive shall be communicated by a Notice of Termination to
the other party hereto given in accordance with the provisions of SECTION 11(b)
below. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, and (ii) if applicable, sets forth the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment.
8. PAYMENT UPON TERMINATION OF EMPLOYMENT. If the Executive's
employment is terminated for any reason, then, without limiting any other rights
or remedies available to the Company at law or in equity, the Company shall pay
or provide to the Executive, her legal representatives, heirs, eligible
dependents, if any, or permitted assigns, as applicable, (i) within ten (10)
days after the Termination Date, all Base Compensation earned but unpaid as of
the Termination Date; and (ii) all benefits to which such persons may be
entitled under any of the Benefit Plans which provide for benefits after
termination of employment, in accordance with the terms thereof.
9. LIMITATION ON PAYMENTS. If any payments provided for under this
Agreement, either alone or together with other payments which the Executive
would have the right to receive from the Company, will constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the
"CODE") as in effect at the time of payment, such payment shall be reduced to
the largest amount which will result in no portion being subject to the excise
tax imposed by Section 4999 of the Code or the disallowance of a deduction by
the Company pursuant to Section 280G(a) of the Code. The determination of the
amount of any reduction under this SECTION 9 and the payments to which such
reduction shall apply, shall be made in good faith by the Executive and such
determination shall be binding on the Company.
5.
<PAGE>
10. EXECUTIVE COVENANTS.
(a) UNAUTHORIZED DISCLOSURE. The Executive agrees and
understands that due to the Executive's position with the Company, both prior
to, if applicable, and subsequent to the date of this Agreement, the Executive
has been and will be exposed to, and has received and will receive confidential
and proprietary information of the Company or relating to the Company's business
or affairs (collectively, the "TRADE SECRETS"), including but not limited to
technical information, computer software (including source and object code data
and related documentation), research and development, know-how, product
information, formulae, processes, business and marketing plans, strategies,
customer information, other information concerning the Company's products,
promotions, development, financing, expansion plans, business policies and
practices and other forms of information considered by the Company to be
proprietary and confidential and in the nature of trade secrets. Except to the
extent that the proper performance of the Executive's duties and
responsibilities hereunder may require disclosure, and except as such
information (i) was known to the Executive prior to her employment by the
Company or (ii) was or becomes generally available to the public other than as a
result of a disclosure by the Executive in violation of the provisions of this
SECTION 10(a), the Executive agrees that during the Term and at all times
thereafter the Executive will keep such Trade Secrets confidential and will not
disclose such information, either directly or indirectly, to any third person or
entity without the prior written consent of the Company. This confidentiality
covenant has no temporal, geographical or territorial restriction. On the
Termination Date, the Executive promptly will supply to the Company all
property, keys, notes, memoranda, writings, lists, files, reports, customer
lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines,
technical data, formulae or any other tangible product or document which have
been produced by, received by or otherwise submitted to the Executive in the
course of her employment with the Company, including the period during and prior
to the Term. Any material breach of the terms of this SECTION 10(a) shall be
considered Cause.
(b) INVENTIONS. The Executive agrees that any and all
inventions, discoveries, improvements, processes, formulae, business application
software patents, copyrights and trademarks made, developed, discovered or
acquired by her during her employment by the Company, including the Term, solely
or jointly with others or otherwise, which relate to the business of the
Company, and all knowledge possessed by the Executive relating thereto
(collectively, the "INVENTIONS"), shall be fully and promptly disclosed to the
Board and to such person or persons as the Board shall direct, and shall be the
sole and absolute property of the Company and the Company shall be the sole and
absolute owner thereof. The Executive agrees that she will at all times keep
all Inventions secret from everyone except the Company and such persons as the
Board may from time to time direct. The Executive shall, as requested by the
Company at any time and from time to time, whether prior to or after the
expiration of the Term, execute and deliver to the Company any instruments
deemed necessary by the Company to effect disclosure and assignment of the
Inventions to the Company or its designees and any patent applications (United
States or foreign) and renewals with respect thereto, including any other
instruments deemed necessary by the Company for the prosecution of patent
applications or the acquisition of letters patent. Reference is hereby made to
APPENDIX A to this Agreement, which reprints the text of Sections 2870 through
2872 of the California Labor Code. Execution of this Agreement by the Executive
shall confirm that the Executive has received and read such APPENDIX A. The
provisions of this SECTION 10(b) shall
6.
<PAGE>
not apply to any invention which qualifies fully under the provisions of Section
2870 of the California Labor Code.
(b)
(c) PROHIBITED AND COMPETITIVE ACTIVITIES. The Executive and
the Company recognize that due to the nature of the Executive's engagement
hereunder and the relationship of the Executive to the Company, both prior and
subsequent to the date of this Agreement, the Executive has had and will have
access to, has had and will acquire, and has assisted and may continue to assist
in developing, confidential and proprietary information relating to the business
and operations of the Company and its affiliates, including Trade Secrets. The
Executive acknowledges that such information has been and will be of central
importance to the business of the Company and its affiliates and that disclosure
of it to, or its use by, others (including, without limitation, the Executive
(other than with respect to the Company's business and affairs)) could cause
substantial loss to the Company. The Executive and the Company also recognize
that an important part of the Executive's duties and responsibilities will be to
develop good will for the Company and its affiliates through her personal
contact with "Clients" (as defined below), employees and others having business
relationships with the Company, and that there is a danger that this good will,
a proprietary asset of the Company, may follow the Executive if and when her
relationship with the Company is terminated. The Executive accordingly agrees
as follows:
(i) PROHIBITED ACTIVITIES. The Executive will not at any
time during the Term and for two (2) years thereafter: (A) other than in
the course of her employment, disclose or furnish to any other person or,
directly or indirectly, use for her own account or the account of any other
person, any Trade Secrets, no matter from where or in what manner she may
have acquired such Trade Secrets, and she shall retain all such Trade
Secrets in trust for the benefit of the Company, its affiliates and the
successors and assigns of any of them; (B) directly or through one or more
intermediaries, solicit for employment any person who, at the time of such
solicitation, is employed by the Company or any affiliate thereof; (C)
directly or indirectly, whether for her own account or for the account of
any other person, solicit, divert or endeavor to entice away from the
Company or any entity controlled by the Company, or otherwise engage in any
activity intended to terminate, disrupt or interfere with, the Company's or
any of its affiliate's relationship with, Clients, or otherwise adversely
affect the Company's or any of its affiliate's relationship with Clients or
other business relationships of the Company or any affiliate thereof; or
(D) publish or make any statement critical of the Company or any
shareholder or affiliate of the Company, or in any way adversely affect or
otherwise malign the business or reputation of any of the foregoing persons
(any activity described in CLAUSE (A), (B), (C) OR (D) of this SECTION
10(c)(i) being herein referred to as a "PROHIBITED ACTIVITY"); PROVIDED,
HOWEVER, that if in the written opinion of counsel, the Executive is
legally compelled to disclose Trade Secrets to any tribunal or else stand
liable for contempt or suffer other similar censure or penalty, then the
disclosure to such tribunal of those Trade Secrets which such counsel
advises in writing legally are required to be disclosed shall not
constitute a Prohibited Activity, PROVIDED that the Executive shall give
the Company as much advance notice of such disclosure as is reasonably
practicable. For purposes of this Agreement, "CLIENTS" shall mean those
persons who, at any time during the Executive's course of employment with
the Company (including, without limitation, prior to the date of this
Agreement) are
7.
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or were clients or customers of the Company or any affiliate thereof or any
predecessor of any of the foregoing.
(ii) NON-COMPETITION. By and in consideration of the
Company's entering into this Agreement and providing the compensation and
benefits to be provided by the Company to the Executive, and further in
consideration of the Executive's continued exposure to the confidential and
proprietary information of the Company (including, without limitation, the
Trade Secrets), the Executive agrees that the Executive will not, during
the Term, engage in any "Competitive Activity" (as defined below). For
purposes of this Agreement, the term "COMPETITIVE ACTIVITY" shall mean
engaging in any of the following activities: (A) serving as a director of
any "Competitor" (as defined below); (B) directly or indirectly through one
or more intermediaries, either (x) controlling any Competitor or (y) owning
any equity or debt interests in any Competitor (other than equity or debt
interests which are publicly traded and, at the time of any acquisition, do
not exceed 5% of the particular class of interests outstanding) (it being
understood that, if interests in any Competitor are owned by an investment
vehicle or other entity in which the Executive owns an equity interest, a
portion of the interests in such Competitor owned by such entity shall be
attributed to the Executive, such portion determined by applying the
percentage of the equity interest in such entity owned by the Executive to
the interests in such Competitor owned by such entity); (C) employment by
(including, without limitation, serving as an officer or partner of),
providing consulting services to (including, without limitation, as an
independent contractor), or managing or operating the business or affairs
of, any Competitor; or (D) participating in the ownership, management,
operation or control of or being connected in any manner with any
Competitor. For purposes of this Agreement, the term "COMPETITOR" shall
mean any person (other than the Company or any affiliate thereof) that
competes, either directly or indirectly, at the time of determination, in
any "Restricted Area" (as defined below) with any of the business conducted
by the Company or any affiliate thereof. For purposes of this Agreement,
the term "RESTRICTED AREA" shall mean any state or territory of the United
States in which the Company or any affiliate thereof conducts business or
any state or similar subdivision of any foreign country.
(iii) REMEDIES. The Executive agrees that any
breach of the terms of this SECTION 10 would result in irreparable injury
and damage to the Company for which the Company would have no adequate
remedy at law. The Executive therefore also agrees that in the event of
any such breach or any threat of such breach, the Company shall be entitled
to an immediate injunction and restraining order to prevent such breach
and/or threatened breach and/or continued breach by the Executive and/or
any and all persons and/or entities acting for and/or with the Executive,
without having to prove damages, in addition to any other remedies to which
the Company may be entitled at law or in equity. The terms of this SECTION
10 shall not prevent the Company from pursuing any other available remedies
for any breach or threatened breach hereof, including but not limited to
the recovery of damages from the Executive.
8.
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The provisions of this SECTION 10 shall survive any termination of
this Agreement. The existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements set forth in this SECTION 10.
11. MISCELLANEOUS.
(a) BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, executors, representatives, estates, successors and assigns, including
any successor or assign to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock or otherwise; PROVIDED, HOWEVER, that the
Executive, or any beneficiary or legal representative of the Executive, shall
not assign all or any portion of the Executive's rights or obligations under
this Agreement without the prior written consent of the Company.
(b) NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given on
the day delivered if delivered personally, within three (3) "Business Days" (as
defined below) after being sent if sent by registered or certified mail (postage
prepaid, return receipt requested), the next day after being sent if sent by
overnight courier (prepaid) or the next day after being sent if sent by
telecopier to either party at the following address:
IF TO THE COMPANY:
Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
WITH A COPY TO:
Brobeck, Phleger & Harrison LLP
550 South Hope Street, 24th Floor
Los Angeles, CA 90071
Attention: V. Joseph Stubbs, Esq.
Telephone: (213) 239-1253
Telecopier: (213) 239-1324
9.
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IF TO THE EXECUTIVE:
Heidi M. Scheid
c/o Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
or to such other address as either party shall have specified for itself or
herself from time to time to the other party in writing. For purposes of this
Agreement, the term "BUSINESS DAY" shall mean any day other than a Saturday, a
Sunday or any day on which commercial banks in Los Angeles, California, are
authorized or required by law to close.
(c) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements and understandings, oral or written, between
them as to such subject matter.
(d) AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(e) HEADINGS. The headings contained in this Agreement are
inserted for convenience or reference only, and do not constitute a part of this
Agreement.
(f) NO THIRD PARTY BENEFICIARIES. This Agreement is not
intended to confer any rights or remedies on any person not a party to this
Agreement.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(h) INVALIDITY; SEVERABILITY. In the event that any provision
of this Agreement shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions reasonably
can still be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
(i) GOVERNING LAW. The validity and interpretation of this
Agreement shall be governed by the laws of the State of California, without
reference to the conflict of laws principles thereof.
(j) MEDIATION AND ARBITRATION. Any dispute which may arise
between the parties hereto as to the construction, interpretation or effect of
this Agreement which is not resolved by mutual agreement between the parties,
shall first be submitted to nonbinding mediation on terms and conditions to be
mutually agreed upon by the parties. In the event that
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a dispute is not resolved by nonbinding mediation, the disputing party may give
the other party notice of such party's intention to cause the same to be
submitted to arbitration. After fifteen (15) days have elapsed from the giving
of such notice, but not before such time, the party who gave such notice may
cause any such dispute which then remains unresolved to be submitted to
arbitration by submitting the same to the Los Angeles, California office of the
American Arbitration Association (the "AAA") (or any successor thereto, but if
no organization is then performing a function reasonably similar to the AAA,
then to a court of competent jurisdiction in accordance with the rules of such
court) with a request for arbitration to be conducted in accordance with the
rules thereof by one (1) arbitrator to be jointly selected by the parties. The
prevailing party's expenses, including without limitation attorneys' fees, in
connection with such arbitration shall be borne by the losing party; PROVIDED,
HOWEVER, that if liability is allocated by the arbitrator between the parties,
the expenses of such arbitration, including without limitation the parties'
attorneys' fees, shall be borne by the parties in proportion to their respective
percentages or proportions of liability assessed by the arbitrator. The
decision of the arbitrator as to all matters properly submitted to such
arbitrator and as to the apportionment of expenses of arbitration shall be
conclusive and binding upon the parties and judgment upon any award may be
entered in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SCHEID VINEYARDS INC.,
a Delaware corporation
By: /s/ Alfred G. Scheid
--------------------------------------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
"COMPANY"
/s/ Heidi M. Scheid
--------------------------------------------------
HEIDI M. SCHEID
"EXECUTIVE"
11.
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Appendix A
NOTIFICATION TO EMPLOYEE
Set forth below is the text of Sections 2870, 2871 and 2872 of
the California Labor Code, as published in West's Ann. Cal. Labor Code (1989)
and West's Ann. Cal. Labor Code (1994 Supp.):
Section 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
Section 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE OF
INVENTIONS
No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
Section 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF
If an employee agreement entered into after January 1, 1980, contains
a provision requiring the employee to assign or offer to assign any of his or
her rights in any invention to his or her employer, the employer must also, at
the time the agreement is made, provide a written notification to the employee
that the agreement does not apply to an invention which qualifies fully under
the provisions of Section 2870. In any suit or action arising thereunder, the
burden of proof shall be on the employee claiming the benefits of its
provisions.
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of July 1,
1997, is made and entered into by and between SCHEID VINEYARDS INC., a Delaware
corporation (the "COMPANY"), and KURT J. GOLLNICK (the "EXECUTIVE").
RECITALS
A. The Company desires to employ the Executive as its Vice President
Vineyard Operations on the terms and conditions hereinafter set forth and the
Executive desires to accept such employment.
B. The Executive possesses an intimate knowledge of the business and
affairs of the Company and its policies, procedures, methods and personnel.
C. The Company recognizes the valuable services that the Executive has
rendered, and desires to be assured that the Executive will continue his active
participation in the management and business of the Company.
D. The Company considers the establishment and maintenance of a sound and
vital management to be essential to protecting and enhancing the best interests
of the Company and its shareholders, and the Company recognizes that the
existence of a possible change in control of the Company causes uncertainty
among management which may result in the possible departure or distraction of
members of management to the detriment of the Company and its shareholders.
E. The Company desires to secure the services and employment of the
Executive as its Vice President Vineyard Operations and the Executive is willing
to serve the Company in such capacity, but desires assurance that he will be
protected against the financial impact of an unexpected termination in the event
of a change in control of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which hereby are acknowledged, the
parties agree as follows:
1. EMPLOYMENT. Subject to and pursuant to the terms of this
Agreement, the Company shall employ the Executive, and the Executive shall be
employed by and shall serve the Company, in the capacity of Vice President
Vineyard Operations.
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2. TERM AND RENEWALS.
(a) TERM AND RENEWALS. Subject to the provisions for earlier
termination provided herein, the term of this Agreement (the "TERM") shall
commence on the date of this Agreement (the "EFFECTIVE DATE") and shall
terminate on the third anniversary of the Effective Date (the "INITIAL TERM")
unless renewed pursuant to this SECTION 2(a). The Initial Term shall be renewed
for a one (1)-year period (the "INITIAL RENEWAL TERM") if at least six (6)
months prior to the expiration of the Initial Term either party hereto shall not
have given the other party written notice not to renew this Agreement. The
Initial Renewal Term and each "Renewal Term" (as defined in this SECTION 2(a))
shall be renewed for successive one (1)-year periods (each, a "RENEWAL TERM") if
at least three (3) months prior to the expiration of the Initial Renewal Term or
a Renewal Term, as the case may be, either party hereto shall not have given the
other party written notice not to renew this Agreement.
3. DUTIES. During the Term, the Executive shall serve as and shall
have the title of the Vice President Vineyard Operations of the Company, and
shall have all duties and responsibilities customarily associated with such
position, as limited or expanded pursuant to this Agreement. The Executive
shall devote all of his full working time and effort to the business and affairs
of the Company, and shall use his reasonable best efforts to perform such duties
and responsibilities faithfully and efficiently. The Executive shall not engage
in any business activity during the Term other than the provision of services to
the Company hereunder, whether as an owner, employee, consultant, investor or
otherwise; provided, however, that the Executive may hold as a passive investor
not more than 3% of any class of any equity securities of any entity listed for
trading on the New York Stock Exchange, the American Stock Exchange, the NASDAQ
National Market or the NASDAQ Small Cap Market.
4. COMPENSATION. For services rendered by the Executive pursuant to
this Agreement, the Company shall pay or award compensation to the Executive as
follows:
(a) BASE COMPENSATION. The Company shall pay to the Executive a
base salary ("BASE COMPENSATION") of $120,000 per annum from the date of this
Agreement, payable in accordance with the Company's customary practices for its
senior executive officers. The amount of Base Compensation shall be reviewed by
the Board on at least an annual basis, and may be increased to reflect inflation
or such other adjustments as the Board may deem appropriate; PROVIDED, HOWEVER,
that Base Compensation, as increased, may not be decreased.
(b) BONUS COMPENSATION. In addition to Base Compensation, the
Executive may be awarded, for each fiscal year of the Company ending with or
within the Term, an annual bonus ("BONUS"), whether pursuant to a formal bonus
or incentive plan or program of the Company or otherwise, in cash or other
property acceptable to the Executive, including stock options, rights or
warrants in the Company, which Bonus shall be based on such criteria as may be
deemed appropriate and adopted by the Board. If earned, the Bonus shall be paid
to the Executive within ninety (90) days after the end of each fiscal year of
the Company, except to the extent, if any, that the Executive otherwise shall
have elected to defer all or part of the receipt of such Bonus.
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(c) WITHHOLDING. The Company shall deduct and withhold from the
compensation payable to the Executive hereunder any and all applicable federal,
state and local income and employment withholding taxes and any other amounts
required to be deducted or withheld by the Company under applicable statute or
regulation.
5. FRINGE BENEFITS; REIMBURSEMENT; VACATION. In addition to Base
Compensation and Bonus provided for in SECTION 4 above, during the Term the
Executive shall be entitled to receive:
(a) all fringe benefits customarily offered by the Company to
its senior executive officers, including without limitation, participation in
any Company stock compensation plan and the various employee benefit plans or
programs (collectively, the "BENEFIT PLANS") provided to the employees of the
Company in general, subject to the eligibility requirements with respect to each
such Benefit Plan, and to such other benefits or perquisites as may be approved
by the Board during the Term;
(b) reimbursement from the Company for all customary, ordinary
and necessary business expenses incurred by the Executive in the performance of
his duties and responsibilities hereunder, PROVIDED that the Executive furnishes
the Company with vouchers, receipts and other substantiation of such expenses
within thirty (30) days after they are incurred; and
(c) paid vacation benefits in accordance with the Company's
vacation policy in effect for its senior executive officers.
The Executive may take accrued vacation at such times during each fiscal year of
the Company as mutually may be convenient to the Company and to the Executive,
and all unused vacation time as of the end of any fiscal year of the Company
shall accrue or lapse in accordance with the Company's vacation policy in effect
for its senior executive officers.
6. INDEMNIFICATION.
(a) OBLIGATION OF THE COMPANY. To the maximum extent permitted
by law, the Company hereby indemnifies and agrees to hold harmless the Executive
from any and all costs or expenses incurred by him on account of the fact that
he becomes a party, or is threatened to be made a party, to any pending,
threatened or contemplated action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he is, was or
becomes a director, officer, employee or agent of the Company or of any parent
or subsidiary of the Company. Such costs and expenses shall include, without
limitation, expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
any such action, suit or proceeding. To the maximum extent permitted by and
subject to any requirements of law, costs and expenses incurred by the Executive
in defending a civil or criminal action, suit or proceeding shall be paid by the
Company as bills for such services are presented by the Executive to the
Company. In any such matter, the Executive shall be entitled to select his own
legal counsel.
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(b) INSURANCE COVERAGE. To the maximum extent permitted by law,
the Company shall obtain and maintain standard form director's and officer's
liability insurance with responsible carriers and in reasonable amounts, and any
other additional insurance which reasonably may be obtained, covering to the
extent available any liability of the kind described in SECTION 6(a) above, and
protecting the Executive against costs and expenses described in SECTION 6(a)
above which are not for any reason satisfied by the Company.
(c) SUCCESSOR LIABILITY AND SURVIVAL. The obligations of the
Company set forth in this SECTION 6 shall bind any successor corporation to the
Company (whether direct or indirect, by purchase, merger, consolidation,
acquisition of stock or otherwise) so that the Executive shall stand in the same
position under this Agreement with respect to any successor corporation as the
Executive would have with respect to the Company if its separate existence had
continued. The Company's obligations under this SECTION 6 shall survive
termination of this Agreement, and shall survive indefinitely with respect to
any costs, expenses or liabilities incurred by the Executive on account of any
actual or alleged action or inaction by the Executive while employed by the
Company.
7. TERMINATION OF EMPLOYMENT.
(a) TERMINATION. Except as otherwise provided in this
Agreement, the Executive's employment by the Company hereunder shall terminate
upon the earliest to occur of the dates specified below (as applicable, the
"TERMINATION DATE"):
(i) The close of business on the date of expiration of the
Term.
(ii) The close of business on the date of the Executive's
death ("DEATH").
(iii) The close of business on the date specified as the
effective date of termination of the Executive's employment in a "Notice of
Termination" (as defined below) delivered by the Company to the Executive
due to the Executive's "Disability" (as defined below). For purposes of
this Agreement, the term "DISABILITY" shall mean the inability or
incapacity of the Executive, due to any medically determined physical or
mental impairment, to perform his duties and responsibilities for the
Company for a total of one hundred eighty (180) calendar days in any twelve
(12) month period during the Term.
(iv) The close of business on the date specified as the
effective date of termination of the Executive's employment by the
Executive in a Notice of Termination delivered by the Executive to the
Company (a "VOLUNTARY TERMINATION").
(v) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
for "Cause" (as defined below) in a Notice of Termination delivered by the
Company to the Executive. For purposes of this Agreement, the term "CAUSE"
shall mean termination based on (A) the Executive's material breach of this
Agreement which, if capable of cure, is not cured fully within ten (10)
days after written notice to the Executive identifying such
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breach, PROVIDED, that such ten (10)-day period shall be extended to sixty
(60) days if such breach is not reasonably susceptible to cure within ten
(10) days and the Executive shall have commenced to cure and is then
proceeding with due diligence to cure such breach; (B) conviction of the
Executive for (x) any crime constituting a felony in the jurisdiction in
which committed, (y) any crime involving moral turpitude (whether or not
a felony) or (z) any other criminal act against the Company involving
dishonesty or willful misconduct intended to injure the Company (whether
or not a felony); (C) substance abuse by the Executive which is repeated
after written notice to the Executive identifying such abuse; (D) the
failure or the refusal of the Executive to follow lawful and proper
directives of the Board (or of any superior officer of the Company having
direct supervisory authority over the Executive), which is not corrected
within ten (10) days after written notice to the Executive identifying such
failure or refusal; (E) willful malfeasance or gross misconduct by the
Executive which discredits or damages the Company; (F) indictment of the
Executive by a grand jury for a felony violation of the federal securities
laws; or (G) the engagement by the Executive in any "Prohibited Activity"
or "Competitive Activity" (as such terms respectively are defined in
SECTIONS 10(c)(i) and 10(c)(ii) below) in violation of this Agreement.
(vi) The close of business on the date specified as the
effective date of termination of the Executive's employment by the Company
other than for Death, Disability or Cause in a Notice of Termination
delivered by the Company to the Executive. The Executive acknowledges and
agrees that the Executive's employment hereunder is "at will" and that the
Company may terminate the Executive's employment at any time for any or no
reason, with or without Cause.
(b) NOTICE OF TERMINATION. Any termination of the Executive's
employment hereunder (other than termination as a result of Death) by the
Company or by the Executive shall be communicated by a Notice of Termination to
the other party hereto given in accordance with the provisions of SECTION 11(b)
below. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, and (ii) if applicable, sets forth the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment.
8. PAYMENT UPON TERMINATION OF EMPLOYMENT. If the Executive's
employment is terminated for any reason, then, without limiting any other rights
or remedies available to the Company at law or in equity, the Company shall pay
or provide to the Executive, his legal representatives, heirs, eligible
dependents, if any, or permitted assigns, as applicable, (i) within ten (10)
days after the Termination Date, all Base Compensation earned but unpaid as of
the Termination Date; and (ii) all benefits to which such persons may be
entitled under any of the Benefit Plans which provide for benefits after
termination of employment, in accordance with the terms thereof.
9. LIMITATION ON PAYMENTS. If any payments provided for under this
Agreement, either alone or together with other payments which the Executive
would have the right to receive from the Company, will constitute a "parachute
payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the
"CODE") as in effect at the time of payment, such payment shall be reduced to
the largest amount which will result in no portion
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being subject to the excise tax imposed by Section 4999 of the Code or the
disallowance of a deduction by the Company pursuant to Section 280G(a) of the
Code. The determination of the amount of any reduction under this SECTION 9 and
the payments to which such reduction shall apply, shall be made in good faith by
the Executive and such determination shall be binding on the Company.
10. EXECUTIVE COVENANTS.
(a) UNAUTHORIZED DISCLOSURE. The Executive agrees and
understands that due to the Executive's position with the Company, both prior
to, if applicable, and subsequent to the date of this Agreement, the Executive
has been and will be exposed to, and has received and will receive confidential
and proprietary information of the Company or relating to the Company's business
or affairs (collectively, the "TRADE SECRETS"), including but not limited to
technical information, computer software (including source and object code data
and related documentation), research and development, know-how, product
information, formulae, processes, business and marketing plans, strategies,
customer information, other information concerning the Company's products,
promotions, development, financing, expansion plans, business policies and
practices and other forms of information considered by the Company to be
proprietary and confidential and in the nature of trade secrets. Except to the
extent that the proper performance of the Executive's duties and
responsibilities hereunder may require disclosure, and except as such
information (i) was known to the Executive prior to his employment by the
Company or (ii) was or becomes generally available to the public other than as a
result of a disclosure by the Executive in violation of the provisions of this
SECTION 10(a), the Executive agrees that during the Term and at all times
thereafter the Executive will keep such Trade Secrets confidential and will not
disclose such information, either directly or indirectly, to any third person or
entity without the prior written consent of the Company. This confidentiality
covenant has no temporal, geographical or territorial restriction. On the
Termination Date, the Executive promptly will supply to the Company all
property, keys, notes, memoranda, writings, lists, files, reports, customer
lists, correspondence, tapes, disks, cards, surveys, maps, logs, machines,
technical data, formulae or any other tangible product or document which have
been produced by, received by or otherwise submitted to the Executive in the
course of his employment with the Company, including the period during and prior
to the Term. Any material breach of the terms of this SECTION 10(a) shall be
considered Cause.
(b) INVENTIONS. The Executive agrees that any and all
inventions, discoveries, improvements, processes, formulae, business application
software patents, copyrights and trademarks made, developed, discovered or
acquired by him during his employment by the Company, including the Term, solely
or jointly with others or otherwise, which relate to the business of the
Company, and all knowledge possessed by the Executive relating thereto
(collectively, the "INVENTIONS"), shall be fully and promptly disclosed to the
Board and to such person or persons as the Board shall direct, and shall be the
sole and absolute property of the Company and the Company shall be the sole and
absolute owner thereof. The Executive agrees that he will at all times keep all
Inventions secret from everyone except the Company and such persons as the Board
may from time to time direct. The Executive shall, as requested by the Company
at any time and from time to time, whether prior to or after the expiration of
the Term, execute and deliver to the Company any instruments deemed necessary by
the Company to effect disclosure and assignment of the Inventions to the Company
or its
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designees and any patent applications (United States or foreign) and renewals
with respect thereto, including any other instruments deemed necessary by the
Company for the prosecution of patent applications or the acquisition of letters
patent. Reference is hereby made to APPENDIX A to this Agreement, which
reprints the text of Sections 2870 through 2872 of the California Labor Code.
Execution of this Agreement by the Executive shall confirm that the Executive
has received and read such APPENDIX A. The provisions of this SECTION 10(b)
shall not apply to any invention which qualifies fully under the provisions of
Section 2870 of the California Labor Code.
(c) PROHIBITED AND COMPETITIVE ACTIVITIES. The Executive and
the Company recognize that due to the nature of the Executive's engagement
hereunder and the relationship of the Executive to the Company, both prior and
subsequent to the date of this Agreement, the Executive has had and will have
access to, has had and will acquire, and has assisted and may continue to assist
in developing, confidential and proprietary information relating to the business
and operations of the Company and its affiliates, including Trade Secrets. The
Executive acknowledges that such information has been and will be of central
importance to the business of the Company and its affiliates and that disclosure
of it to, or its use by, others (including, without limitation, the Executive
(other than with respect to the Company's business and affairs)) could cause
substantial loss to the Company. The Executive and the Company also recognize
that an important part of the Executive's duties and responsibilities will be to
develop good will for the Company and its affiliates through his personal
contact with "Clients" (as defined below), employees and others having business
relationships with the Company, and that there is a danger that this good will,
a proprietary asset of the Company, may follow the Executive if and when his
relationship with the Company is terminated. The Executive accordingly agrees
as follows:
(i) PROHIBITED ACTIVITIES. The Executive will not at any
time during the Term and for two (2) years thereafter: (A) other than in
the course of his employment, disclose or furnish to any other person or,
directly or indirectly, use for his own account or the account of any other
person, any Trade Secrets, no matter from where or in what manner he may
have acquired such Trade Secrets, and he shall retain all such Trade
Secrets in trust for the benefit of the Company, its affiliates and the
successors and assigns of any of them; (B) directly or through one or more
intermediaries, solicit for employment any person who, at the time of such
solicitation, is employed by the Company or any affiliate thereof;
(C) directly or indirectly, whether for his own account or for the account
of any other person, solicit, divert or endeavor to entice away from the
Company or any entity controlled by the Company, or otherwise engage in any
activity intended to terminate, disrupt or interfere with, the Company's or
any of its affiliate's relationship with, Clients, or otherwise adversely
affect the Company's or any of its affiliate's relationship with Clients or
other business relationships of the Company or any affiliate thereof; or
(D) publish or make any statement critical of the Company or any
shareholder or affiliate of the Company, or in any way adversely affect or
otherwise malign the business or reputation of any of the foregoing persons
(any activity described in CLAUSE (A), (B), (C) OR (D) of this SECTION
10(c)(i) being herein referred to as a "PROHIBITED ACTIVITY"); PROVIDED,
HOWEVER, that if in the written opinion of counsel, the Executive is
legally compelled to disclose Trade Secrets to any tribunal or else stand
liable for contempt or suffer other similar censure
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or penalty, then the disclosure to such tribunal of those Trade Secrets
which such counsel advises in writing legally are required to be disclosed
shall not constitute a Prohibited Activity, PROVIDED that the Executive
shall give the Company as much advance notice of such disclosure as is
reasonably practicable. For purposes of this Agreement, "CLIENTS" shall
mean those persons who, at any time during the Executive's course of
employment with the Company (including, without limitation, prior to the
date of this Agreement) are or were clients or customers of the Company or
any affiliate thereof or any predecessor of any of the foregoing.
(ii) NON-COMPETITION. By and in consideration of the
Company's entering into this Agreement and providing the compensation and
benefits to be provided by the Company to the Executive, and further in
consideration of the Executive's continued exposure to the confidential and
proprietary information of the Company (including, without limitation, the
Trade Secrets), the Executive agrees that the Executive will not, during
the Term and for two (2) years thereafter, engage in any "Competitive
Activity" (as defined below). For purposes of this Agreement, the term
"COMPETITIVE ACTIVITY" shall mean engaging in any of the following
activities: (A) serving as a director of any "Competitor" (as defined
below); (B) directly or indirectly through one or more intermediaries,
either (x) controlling any Competitor or (y) owning any equity or debt
interests in any Competitor (other than equity or debt interests which are
publicly traded and, at the time of any acquisition, do not exceed 5% of
the particular class of interests outstanding) (it being understood that,
if interests in any Competitor are owned by an investment vehicle or other
entity in which the Executive owns an equity interest, a portion of the
interests in such Competitor owned by such entity shall be attributed to
the Executive, such portion determined by applying the percentage of the
equity interest in such entity owned by the Executive to the interests in
such Competitor owned by such entity); (C) employment by (including,
without limitation, serving as an officer or partner of), providing
consulting services to (including, without limitation, as an independent
contractor), or managing or operating the business or affairs of, any
Competitor; or (D) participating in the ownership, management, operation or
control of or being connected in any manner with any Competitor. For
purposes of this Agreement, the term "COMPETITOR" shall mean any person
(other than the Company or any affiliate thereof) that competes, either
directly or indirectly, at the time of determination, in any "Restricted
Area" (as defined below) with any of the business conducted by the Company
or any affiliate thereof. For purposes of this Agreement, the term
"RESTRICTED AREA" shall mean any state or territory of the United States in
which the Company or any affiliate thereof conducts business or any state
or similar subdivision of any foreign country.
(iii) REMEDIES. The Executive agrees that any breach of the
terms of this SECTION 10 would result in irreparable injury and damage to
the Company for which the Company would have no adequate remedy at law.
The Executive therefore also agrees that in the event of any such breach or
any threat of such breach, the Company shall be entitled to an immediate
injunction and restraining order to prevent such breach and/or threatened
breach and/or continued breach by the Executive and/or any and all persons
and/or entities acting for and/or with the Executive, without having to
prove damages, in addition to any other remedies to which the Company may
be
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entitled at law or in equity. The terms of this SECTION 10 shall not
prevent the Company from pursuing any other available remedies for any
breach or threatened breach hereof, including but not limited to the
recovery of damages from the Executive.
The provisions of this SECTION 10 shall survive any termination of
this Agreement. The existence of any claim or cause of action by the Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of the covenants and
agreements set forth in this SECTION 10.
11. MISCELLANEOUS.
(a) BINDING EFFECT; ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
heirs, executors, representatives, estates, successors and assigns, including
any successor or assign to all or substantially all of the business and/or
assets of the Company, whether direct or indirect, by purchase, merger,
consolidation, acquisition of stock or otherwise; PROVIDED, HOWEVER, that the
Executive, or any beneficiary or legal representative of the Executive, shall
not assign all or any portion of the Executive's rights or obligations under
this Agreement without the prior written consent of the Company.
(b) NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been given on
the day delivered if delivered personally, within three (3) "Business Days" (as
defined below) after being sent if sent by registered or certified mail (postage
prepaid, return receipt requested), the next day after being sent if sent by
overnight courier (prepaid) or the next day after being sent if sent by
telecopier to either party at the following address:
IF TO THE COMPANY:
Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
WITH A COPY TO:
Brobeck, Phleger & Harrison LLP
550 South Hope Street, 24th Floor
Los Angeles, CA 90071
Attention: V. Joseph Stubbs, Esq.
Telephone: (213) 239-1253
Telecopier: (213) 239-1324
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IF TO THE EXECUTIVE:
Kurt J. Gollnick
c/o Scheid Vineyards Inc.
13470 Washington Blvd.
Marina del Rey, CA 90292
Telephone: (310) 301-1555
Telecopier: (310) 301-1569
or to such other address as either party shall have specified for itself or
himself from time to time to the other party in writing. For purposes of this
Agreement, the term "BUSINESS DAY" shall mean any day other than a Saturday, a
Sunday or any day on which commercial banks in Los Angeles, California, are
authorized or required by law to close.
(c) ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto with respect to the subject matter hereof,
and supersedes all prior agreements and understandings, oral or written, between
them as to such subject matter.
(d) AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
(e) HEADINGS. The headings contained in this Agreement are
inserted for convenience or reference only, and do not constitute a part of this
Agreement.
(f) NO THIRD PARTY BENEFICIARIES. This Agreement is not
intended to confer any rights or remedies on any person not a party to this
Agreement.
(g) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
(h) INVALIDITY; SEVERABILITY. In the event that any provision
of this Agreement shall be deemed contrary to law or invalid or unenforceable in
any respect by a court of competent jurisdiction, the remaining provisions shall
remain in full force and effect to the extent that such provisions reasonably
can still be given effect in accordance with the intentions of the parties, and
the invalid and unenforceable provisions shall be deemed, without further action
on the part of the parties, modified, amended and limited solely to the extent
necessary to render the same valid and enforceable.
(i) GOVERNING LAW. The validity and interpretation of this
Agreement shall be governed by the laws of the State of California, without
reference to the conflict of laws principles thereof.
(j) MEDIATION AND ARBITRATION. Any dispute which may arise
between the parties hereto as to the construction, interpretation or effect of
this Agreement which is not resolved by mutual agreement between the parties,
shall first be submitted to nonbinding mediation on terms and conditions to be
mutually agreed upon by the parties. In the event that
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a dispute is not resolved by nonbinding mediation, the disputing party may give
the other party notice of such party's intention to cause the same to be
submitted to arbitration. After fifteen (15) days have elapsed from the giving
of such notice, but not before such time, the party who gave such notice may
cause any such dispute which then remains unresolved to be submitted to
arbitration by submitting the same to the Los Angeles, California office of the
American Arbitration Association (the "AAA") (or any successor thereto, but if
no organization is then performing a function reasonably similar to the AAA,
then to a court of competent jurisdiction in accordance with the rules of such
court) with a request for arbitration to be conducted in accordance with the
rules thereof by one (1) arbitrator to be jointly selected by the parties. The
prevailing party's expenses, including without limitation attorneys' fees, in
connection with such arbitration shall be borne by the losing party; PROVIDED,
HOWEVER, that if liability is allocated by the arbitrator between the parties,
the expenses of such arbitration, including without limitation the parties'
attorneys' fees, shall be borne by the parties in proportion to their respective
percentages or proportions of liability assessed by the arbitrator. The
decision of the arbitrator as to all matters properly submitted to such
arbitrator and as to the apportionment of expenses of arbitration shall be
conclusive and binding upon the parties and judgment upon any award may be
entered in any court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SCHEID VINEYARDS INC.,
a Delaware corporation
By: /s/ Alfred G. Scheid
---------------------------------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
"COMPANY"
/s/ Kurt J. Gollnick
---------------------------------------------
KURT J. GOLLNICK
"EXECUTIVE"
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Appendix A
NOTIFICATION TO EMPLOYEE
Set forth below is the text of Sections 2870, 2871 and 2872 of the
California Labor Code, as published in West's Ann. Cal. Labor Code (1989) and
West's Ann. Cal. Labor Code (1994 Supp.):
Section 2870. EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of the
invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer; or
(2) Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
Section 2871. CONDITIONS OF EMPLOYMENT OR CONTINUED EMPLOYMENT; DISCLOSURE OF
INVENTIONS
No employer shall require a provision made void and unenforceable by
Section 2870 as a condition of employment or continued employment. Nothing in
this article shall be construed to forbid or restrict the right of an employer
to provide in contracts of employment for disclosure, provided that any such
disclosures be received in confidence, of all of the employee's inventions made
solely or jointly with others during the term of his or her employment, a review
process by the employer to determine such issues as may arise, and for full
title to certain patents and inventions to be in the United States, as required
by contracts between the employer and the United States or any of its agencies.
Section 2872. NOTICE TO EMPLOYEE; BURDEN OF PROOF
If an employee agreement entered into after January 1, 1980, contains a
provision requiring the employee to assign or offer to assign any of his or her
rights in any invention to his or her employer, the employer must also, at the
time the agreement is made, provide a written notification to the employee that
the agreement does not apply to an invention which qualifies fully under the
provisions of Section 2870. In any suit or action arising thereunder, the
burden of proof shall be on the employee claiming the benefits of its
provisions.
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INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT, dated as of __________________ by and
between Scheid Vineyards Inc., a Delaware corporation (the "COMPANY"), and the
director and/or officer of the Company whose name appears on the signature page
of this Agreement ("INDEMNITEE").
RECITALS
A. Highly competent persons are becoming more reluctant to serve
publicly-held corporations as directors or officers or in other capacities
unless they are provided with reasonable protection through insurance or
indemnification against risks of claims and actions against them arising out of
their service to and activities on behalf of the corporations.
B. The Board of Directors of the Company (the "BOARD") has determined
that the Company should act to assure its directors and officers that there will
be increased certainty of such protection in the future.
C. It is reasonable, prudent and necessary for the Company contractually
to obligate itself to indemnify such persons to the fullest extent permitted by
applicable law so that they will serve or continue to serve the Company free
from undue concern that they will not be so indemnified.
D. Indemnitee is willing to serve, to continue to serve and to take on
additional service for or on behalf of the Company on the condition that
Indemnitee be so indemnified.
AGREEMENT
In consideration of the premises and the covenants contained herein,
the Company and Indemnitee do hereby covenant and agree as follows:
1. DEFINITIONS. For purposes of this Agreement:
(a) "AFFILIATE" shall mean any corporation, partnership, joint
venture, trust or other enterprise in respect of which the Indemnitee is or was
serving as a director, officer, advisory director or Board Committee member at
the request of the Company, and including, but not limited to, any employee
benefit plan of the Company or any of the foregoing.
(b) "DISINTERESTED DIRECTOR" shall mean a director of the
Company who is not or was not a party to the Proceeding in respect of which
indemnification is being sought by Indemnitee.
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(c) "EXPENSES" shall include all attorneys' fees and costs,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees and all other disbursements or expenses incurred
in connection with asserting or defending claims.
(d) "INDEPENDENT COUNSEL" shall mean a law firm or lawyer that
neither is presently nor in the past five (5) years has been retained to
represent: (i) the Company or Indemnitee in any matter material to any such
party or (ii) any other party to the Proceeding giving rise to a claim for
indemnification hereunder. Notwithstanding the foregoing, the term "INDEPENDENT
COUNSEL" shall not include any firm or person who, under the applicable
standards of professional conduct then prevailing, would have a conflict of
interest in representing either the Company or Indemnitee in an action to
determine Indemnitee's right to indemnification under this Agreement. All
Expenses of the Independent Counsel incurred in connection with acting pursuant
to this Agreement shall be borne by the Company.
(e) "LOSSES" shall mean all losses, claims, liabilities,
judgments, fines and amounts paid in settlement in connection with any
Proceeding.
(f) "PROCEEDING" includes any action, suit, arbitration,
alternate dispute resolution mechanism, investigation, administrative hearing or
any other proceeding whether civil, criminal, administrative or investigative;
PROVIDED, HOWEVER, that the term "PROCEEDING" shall include any action
instituted by an Indemnitee (other than an action to enforce indemnification
rights under this Agreement) only if such action is authorized by the Board of
Directors.
2. SERVICE BY INDEMNITEE. Indemnitee agrees to begin or continue to
serve the Company or other corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise affiliated with the Company (all of
which are collectively referred to as an "AFFILIATE") as a director and/or
officer. Notwithstanding anything contained herein, this Agreement shall not
create a contract of employment between the Company and Indemnitee, and the
termination of Indemnitee's relationship with the Company or an Affiliate by
either party hereto shall not be restricted by this Agreement.
3. INDEMNIFICATION. The Company agrees to indemnify Indemnitee for,
and hold Indemnitee harmless from and against, any Losses or Expenses at any
time incurred by or assessed against Indemnitee arising out of or in connection
with the service of Indemnitee as a director, advisory director, Board Committee
member or officer of the Company or of an Affiliate (collectively referred to as
an "OFFICER OR DIRECTOR OF THE COMPANY") to the fullest extent permitted by the
laws of the State of Delaware in effect on the date hereof or as such laws may
from time to time hereafter be amended to increase the scope of such permitted
indemnification. Without diminishing the scope of the indemnification provided
by this SECTION 3, the rights of indemnification of Indemnitee provided
hereunder shall include but shall not be limited to those rights set forth
hereinafter.
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4. ACTION OR PROCEEDING OTHER THAN AN ACTION BY OR IN THE RIGHT OF
THE COMPANY. Indemnitee shall be entitled to the indemnification rights
provided herein if Indemnitee is a person who was or is made a party or is
threatened to be made a party to any contemplated, pending or completed
Proceeding, other than an action by or in the right of the Company by reason of
(a) the fact that Indemnitee is or was an Officer or Director of the Company or
any other entity which Indemnitee is or was serving at the request of the
Company, as the case may be, or (b) anything done or not done by Indemnitee in
any such capacity. Pursuant to this SECTION 4, Indemnitee shall be indemnified
against Losses or Expenses incurred by Indemnitee or on Indemnitee's behalf in
connection with any Proceeding, if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, as the case may be, and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was unlawful.
5. ACTIONS BY OR IN THE RIGHT OF THE COMPANY. Indemnitee shall be
entitled to the indemnification rights provided herein if Indemnitee is a person
who was or is made a party or is threatened to be made a party to any pending,
completed or threatened Proceeding brought by or in the right of the Company to
procure a judgment in its favor by reason of (a) the fact that Indemnitee is or
was an Officer or Director of the Company or any other entity which Indemnitee
is or was serving at the request of the Company, as the case may be, or (b)
anything done or not done by Indemnitee in any such capacity. Pursuant to this
SECTION 5, Indemnitee shall be indemnified against Losses or Expenses incurred
by Indemnitee or on Indemnitee's behalf in connection with any Proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in or not opposed to the best interests of the Company. Notwithstanding the
foregoing provisions of this SECTION 5, no such indemnification shall be made in
respect of any claim, issue or matter as to which Delaware law expressly
prohibits such indemnification by reason of an adjudication of liability of
Indemnitee to the Company; PROVIDED, HOWEVER, that in such event such
indemnification shall nevertheless be made by the Company, or both, to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine equitable under the
circumstances.
6. INDEMNIFICATION FOR LOSSES AND EXPENSES OF PARTY WHO IS WHOLLY OR
PARTLY SUCCESSFUL. Notwithstanding any provision of this Agreement, to the
extent that Indemnitee has been wholly successful on the merits or otherwise
absolved in any Proceeding on any claim, issue or matter, Indemnitee shall be
indemnified against all Losses or Expenses incurred by Indemnitee or on
Indemnitee's behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise, as
to one or more but less than all claims, issues or matters in such Proceeding,
the Company agrees to indemnify Indemnitee to the maximum extent permitted by
law, against all Losses and Expenses incurred by Indemnitee in connection with
each successfully resolved claim, issue or matter. In any review or Proceeding
to determine the extent of indemnification, the Company shall bear the burden of
proving any lack of success and which amounts sought in indemnity are allocable
to claims, issues or matters which were not successfully resolved. For purposes
of this SECTION 6
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and without limitation, the termination of any such claim, issue or matter by
dismissal with or without prejudice shall be deemed to be a successful
resolution as to such claim, issue or matter.
7. PAYMENT FOR EXPENSES OF A WITNESS. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is, by reason of the
fact that Indemnitee is or was an Officer or Director of the Company or any
other entity which Indemnitee is or was serving at the request of the Company,
as the case may be, a witness in any Proceeding, the Company agrees to pay to
Indemnitee all Expenses actually and reasonably incurred by Indemnitee or on
Indemnitee's behalf in connection therewith.
8. ADVANCEMENT OF EXPENSES AND COSTS. All Expenses incurred by or
on behalf of Indemnitee (or reasonably expected by Indemnitee to be incurred by
Indemnitee within three (3) months) in connection with any Proceeding shall be
paid by the Company in advance of the final disposition of such Proceeding
within twenty (20) days after the receipt by the Company of a statement or
statements from Indemnitee requesting from time to time such advance or
advances, whether or not a determination to indemnify has been made under
SECTION 9. Indemnitee's entitlement to such advancement of Expenses shall
include those incurred in connection with any Proceeding by Indemnitee seeking
an adjudication or award in arbitration pursuant to this Agreement. Such
statement or statements shall evidence such expenses incurred (or reasonably
expected to be incurred) by Indemnitee in connection therewith and shall include
or be accompanied by a written undertaking by or on behalf of Indemnitee to
repay such amount if it shall ultimately be determined that Indemnitee is not
entitled to be indemnified therefor pursuant to the terms of this Agreement. The
financial ability of an Indemnitee to repay an advance shall not be a
prerequisite to the making of such an advance.
9. PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION.
(a) When seeking indemnification under this Agreement (which
shall not include in any case the right of Indemnitee to receive payments
pursuant to SECTION 7 and SECTION 8 hereof, which shall not be subject to this
SECTION 9), Indemnitee shall submit a written request for indemnification to the
Company. Such request shall include documentation or information which is
reasonably necessary for the Company to make a determination of Indemnitee's
entitlement to indemnification hereunder and which is reasonably available to
Indemnitee. Determination of Indemnitee's entitlement to indemnification shall
be made promptly, but in no event later than thirty (30) days after receipt by
the Company of Indemnitee's written request for indemnification. The Secretary
of the Company shall, promptly upon receipt of Indemnitee's request for
indemnification, advise the Board that Indemnitee has made such request for
indemnification.
(b) The entitlement of Indemnitee to indemnification under this
Agreement shall be determined in the specific case (i) by a majority vote of the
Disinterested Directors, even though less than a quorum, or (ii) if there are no
Disinterested Directors, of if such Disinterested Directors so direct, by
Independent Counsel in a written opinion, or (iii) by the stockholders.
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(c) In the event the determination of entitlement is to be made
by Independent Counsel, such Independent Counsel shall be selected by the Board
and approved by Indemnitee. Upon failure of the Board to so select such
Independent Counsel or upon failure of Indemnitee to so approve, such
Independent Counsel shall be selected by the American Arbitration Association in
Los Angeles, California or such other person as such Association shall designate
to make such selection.
(d) If the determination made pursuant to SECTION 9(b) is that
Indemnitee is not entitled to indemnification to the full extent of Indemnitee's
request, Indemnitee shall have the right to seek entitlement to indemnification
in accordance with the procedures set forth in SECTION 10 hereof.
(e) If the person or persons empowered pursuant to SECTION 9(b)
hereof to make a determination with respect to entitlement to indemnification
shall have failed to make the requested determination within ninety (90) days
after receipt by the Company of such request, the requisite determination of
entitlement to indemnification shall be deemed to have been made and Indemnitee
shall be absolutely entitled to such indemnification, absent (i)
misrepresentation by Indemnitee of a material fact in the request for
indemnification or (ii) a final judicial determination that all or any part of
such indemnification is expressly prohibited by law.
(f) The termination of any Proceeding by judgment, order,
settlement or conviction, or upon a plea of NOLO CONTENDERE or its equivalent,
shall not, of itself, adversely affect the rights of Indemnitee to
indemnification hereunder except as may be specifically provided herein, or
create a presumption that Indemnitee did not act in good faith and in a manner
which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, as the case may be, or create a presumption that (with
respect to any criminal action or proceeding) Indemnitee had reasonable cause to
believe that Indemnitee's conduct was unlawful.
(g) For purposes of any determination of good faith hereunder,
Indemnitee shall be deemed to have acted in good faith if in taking such action
Indemnitee relied on the records or books of account of the Company or an
Affiliate, including financial statements, or on information supplied to
Indemnitee by the officers of the Company or an Affiliate in the course of their
duties, or on the advice of legal counsel for the Company or an Affiliate or on
information or records given or reports made to the Company or an Affiliate by
an independent certified public accountant or by an appraiser or other expert
selected with reasonable care by the Company or an Affiliate. The Company shall
have the burden of establishing the absence of good faith. The provisions of
this SECTION 9(g) shall not be deemed to be exclusive or to limit in any way the
other circumstances in which the Indemnitee may be deemed to have met the
applicable standard of conduct set forth in this Agreement.
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(h) The knowledge and/or actions, or failure to act, of any
director, officer, agent or employee of the Company or an Affiliate shall not be
imputed to Indemnitee for purposes of determining the right to indemnification
under this Agreement.
10. REMEDIES IN CASES OF DETERMINATION NOT TO INDEMNIFY OR TO ADVANCE
EXPENSES.
(a) In the event that (i) a determination is made that
Indemnitee is not entitled to indemnification hereunder, (ii) advances are not
made pursuant to SECTION 8 hereof or (iii) payment has not been timely made
following a determination of entitlement to indemnification pursuant to
SECTION 9 hereof, Indemnitee shall be entitled to seek a final adjudication in
an appropriate court of the State of Delaware or any other court of competent
jurisdiction of Indemnitee's entitlement to such indemnification or advance.
(b) In the event a determination has been made in accordance
with the procedures set forth in SECTION 9 hereof, in whole or in part, that
Indemnitee is not entitled to indemnification, any such judicial proceeding
shall be made DE NOVO and Indemnitee shall not be prejudiced by reason of any
such prior determination that Indemnitee is not entitled to indemnification, and
the Company shall bear the burdens of proof specified in SECTIONS 6 AND 9 hereof
in such proceeding.
(c) If a determination is made or deemed to have been made
pursuant to the terms of SECTION 9 OR 10 hereof that Indemnitee is entitled to
indemnification, the Company shall be bound by such determination in any
judicial proceeding or arbitration in the absence of (i) a misrepresentation of
a material fact by Indemnitee or (ii) a final judicial determination that all or
any part of such indemnification is expressly prohibited by law.
(d) The Company and Indemnitee agree that they shall be
precluded from asserting that the procedures and presumptions of this Agreement
are not valid, binding and enforceable. The Company and Indemnitee further
agree to stipulate in any such court that the Company and Indemnitee are bound
by all of the provisions of this Agreement and are precluded from making any
assertion to the contrary.
(e) To the extent deemed appropriate by the court, interest
shall be paid by the Company to Indemnitee at a reasonable interest rate for
amounts which the Company, indemnifies or is obliged to indemnify the Indemnitee
for the period commencing with the date on which Indemnitee requested
indemnification (or reimbursement or advance of an Expense) and ending with the
date on which such payment is made to Indemnitee by the Company.
11. EXPENSES INCURRED BY INDEMNITEE TO ENFORCE THIS AGREEMENT. All
Expenses incurred by Indemnitee in connection with the preparation and
submission of Indemnitee's request for indemnification hereunder shall be borne
by the Company. In the event that Indemnitee is a party to or intervenes in any
proceeding in which the validity or enforceability of this Agreement is at issue
or seeks an adjudication to enforce Indemnitee's rights under, or
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to recover damages for breach of, this Agreement, Indemnitee, if Indemnitee
prevails in whole in such action, shall be entitled to recover from the Company,
and shall be indemnified by the Company against, any Expenses incurred by
Indemnitee. If it is determined that Indemnitee is entitled to indemnification
for part (but not all) of the indemnification so requested, Expenses incurred in
seeking enforcement of such partial indemnification shall be reasonably prorated
among the claims, issues or matters for which the Indemnitee is entitled to
indemnification and for claims, issues or matters for which the Indemnitee is
not so entitled.
12. NON-EXCLUSIVITY. The rights of indemnification and to receive
advances as provided by this Agreement shall not be deemed exclusive of any
other rights to which Indemnitee may at any time be entitled under applicable
law, a certificate of incorporation, by-laws, any agreement, a vote of
stockholders or a resolution of directors or otherwise. No amendment,
alteration, rescission or replacement of this Agreement or any provision hereof
shall be effective as to Indemnitee with respect to any action taken or omitted
by such Indemnitee in Indemnitee's position with the Company or an Affiliate or
any other entity which Indemnitee is or was serving at the request of the
Company prior to such amendment, alteration, rescission or replacement.
13. DURATION OF AGREEMENT. This Agreement shall apply to any claim
asserted and any Expenses incurred in connection with any claim asserted on or
after the effective date of this Agreement and shall continue until and
terminate upon the later of: (a) ten (10) years after Indemnitee has ceased to
occupy any of the positions or have any of the relationships described in
SECTIONS 3, 4 OR 5 of this Agreement; or (b) one (1) year after the final
termination of all pending or threatened Proceedings of the kind described
herein with respect to Indemnitee. This Agreement shall be binding upon the
Company and its respective successors and assigns and shall inure to the benefit
of Indemnitee and Indemnitee's spouse, assigns, heirs, devisee, executors,
administrators or other legal representatives.
14. MAINTENANCE OF D&O INSURANCE.
(a) The Company hereby covenants and agrees with Indemnitee
that, so long as Indemnitee shall continue to serve as an Officer or Director of
the Company and thereafter so long as Indemnitee shall be subject to any
possible claim or threatened, pending or completed Proceeding, whether civil,
criminal or investigative, by reason of the fact that Indemnitee was an Officer
or Director of the Company or any other entity which Indemnitee was serving at
the request of the Company, the Company shall maintain in full force and effect
(i) the directors' and officers' liability insurance issued by the insurer and
having the policy amount and deductible as currently in effect with respect to
directors and officers of the Company or any of its subsidiaries and (ii) any
replacement or substitute policies issued by one (1) or more reputable insurers
providing in all respects coverage at least comparable to and in the same amount
as that currently provided under such existing policy (collectively, "D&O
INSURANCE").
(b) In all policies of D&O Insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits, subject to the
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same limitations, as are accorded to the Company's directors or officers most
favorably insured by such policy.
(c) Notwithstanding anything to the contrary set forth in (a)
above, the Company shall have no obligation to maintain D&O Insurance if the
Company determines in good faith that such insurance is not reasonably
available, the premium costs for such insurance is disproportionate to the
amount of coverage provided or the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit.
15. SEVERABILITY. Should any part, term or condition hereof be
declared illegal or unenforceable or in conflict with any other law, the
validity of the remaining portions or provisions of this Agreement shall not be
affected thereby, and the illegal or unenforceable portions of the Agreement
shall be and hereby are redrafted to conform with applicable law, while leaving
the remaining portions of this Agreement intact.
16. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
17. HEADINGS. Section headings are for convenience only and do not
control or affect meaning or interpretation of any terms or provisions of this
Agreement.
18. MODIFICATION AND WAIVER. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by each
of the parties hereto.
19. NO DUPLICATIVE PAYMENT. The Company shall not be liable under
this Agreement to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that Indemnitee has otherwise actually received such
payment (net of expenses incurred in collecting such payment) under this
Agreement, any insurance policy, contract, agreement or otherwise.
20. NOTICES. All notices, requests, demands and other communications
provided for by this Agreement shall be in writing (including telecopier or
similar writing) and shall be deemed to have been given at the time when mailed
in a registered or certified postpaid envelope in any general or branch office
of the United States Postal Service, or sent by Federal Express or other similar
overnight courier service, addressed to the address of the parties stated below
or to such changed address as such party may have fixed by notice or, if given
by telecopier, when such telecopy is transmitted and the appropriate answerback
is received.
(a) If to Indemnitee, to the address appearing on the signature
page hereof.
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(b) If to the Company to:
Scheid Vineyards Inc.
13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
Telecopier: (310) 301-1569
Attention: Alfred G. Scheid, Chief Executive Officer
with a copy to:
Brobeck, Phleger & Harrison
550 South Hope Street, 21st Floor
Los Angeles, California 90071
Telecopier: (213) 239-1324
Attention: V. Joseph Stubbs, Esq.
21. GOVERNING LAW. The parties agree that this Agreement shall be
governed by, and construed and enforced in accordance with, the internal laws of
the State of Delaware without giving effect to the conflicts of laws principles
thereof.
22. ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding between the parties and supersedes all proposals, commitments,
writings, negotiations and understandings, oral and written, and all other
communications between the parties relating to the subject matter of this
Agreement. This Agreement may not be amended or otherwise modified except in
writing duly executed by all of the parties. A waiver by any party of any
breach or violation of this Agreement shall not be deemed or construed as a
waiver of any subsequent breach or violation thereof.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
SCHEID VINEYARDS INC.
By
---------------------------
Name:
Title:
INDEMNITEE:
By
---------------------------
Name:
Address:
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[LOGO]
SECURITY AND PLEDGEHOLDER AGREEMENT
This SECURITY AND PLEDGEHOLDER AGREEMENT (the "AGREEMENT") is made and
entered into as of this 23rd day of June, 1997 by and between SANWA BANK
CALIFORNIA (the "BANK"), ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G. SCHEID
REVOCABLE TRUST (the "PLEDGOR"), and SANWA BANK CALIFORNIA TRUST DIVISION (the
"PLEDGEHOLDER") with respect to the matters that follow:
1. SECURITY INTEREST. As security for the payment of certain debts,
obligations and liabilities (hereinafter collectively referred to as the
"INDEBTEDNESS") now or hereafter owed and to be owed to the Bank by SCHEID
VINEYARDS, INC. ("BORROWER"), the Pledgor hereby grants to the Bank a security
interest in and to, among other items, all property now or hereafter held by the
Pledgeholder for the account of the Pledgor including but not limited to that
property held in account No. 65L012005 (the "CUSTODY ACCOUNT") including but not
limited to (i) all certificated and uncertificated, and negotiable and
non-negotiable shares of stock, bonds, indentures, securities and instruments,
together with all warrants, options, stock rights, rights to subscribe,
liquidating dividends, cash dividends, payments, dividends paid in stock, new
securities or other property derived therefrom or to which the Pledgor may
become entitled to receive on account thereof and (ii) all cash, deposit
accounts, and investment accounts (including but not limited to "automatic sweep
service accounts") (collectively, the "COLLATERAL").
2. APPOINTMENT AS BANK'S AGENT. In order to perfect the security
interest of the Bank in and to the Collateral, the Bank hereby appoints the
Pledgeholder, the Pledgor hereby acknowledges and irrevocably authorizes the
appointment of the Pledgeholder, and the Pledgeholder irrevocably accepts its
appointment, as agent for and under the instructions of the Bank, to hold any
and all Collateral which is now or shall hereafter be in the possession or under
the control of the Pledgeholder. Notwithstanding any other agreement between
the Pledgor and the Pledgeholder, THE APPOINTMENT OF THE PLEDGEHOLDER AS THE
BANK'S AGENT, BEING COUPLED WITH AN INTEREST, IS IRREVOCABLE.
3. PERIODIC REPORTS. At the Bank's request, but not later than five days
thereafter, the Pledgeholder agrees to provide the Bank with a written report
(the "HOLDINGS REPORT") of the assets being held in the Custody Account. Such
report shall include, but not be limited to:
(1) The name and maturity, if any, of each security.
(2) The price at which each security was offered to be
purchased/sold at the close of trading on the previous Business Day.
(3) The amount, maturity and depository for each deposit account
and certificate of deposit.
4. PURCHASE, SALE OR OTHER TRANSFER OF COLLATERAL. Except to the extent
that the Pledgeholder is authorized or permitted by the Bank or under this
Agreement or is required by court order, writ or other legal process, the
Collateral or any portion thereof shall not be released
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by or withdrawn from the possession or control of the Pledgeholder without the
express written consent of the Bank. Notwithstanding the foregoing:
(a) The Pledgeholder may sell, exchange or release the Collateral, or
any portion thereof, in accordance with the instructions of the Pledgor
provided that after such sale, release or exchange the fair market value of
the Collateral remaining in the Custody Account is equal to or greater than
$2,400,000 and is of a character satisfactory to the Bank.
(b) In the event the fair market value of the Collateral is less than
$2,400,000,
(1) to the extent that the Collateral or any portion thereof
consists of cash or one or more certificates of deposit or similar
term depository account or instrument, such item or items of the
Collateral shall, at maturity, be renewed or substituted for by (1)
one or more certificates of deposit or similar term depository
accounts or instruments, each with a maturity and at an interest rate
actually or constructively designated by the Pledgor, provided that
the aggregate face value of the renewed or substituted certificates of
deposit or similar term depository accounts or instruments shall be in
an amount not less than the face value of the matured certificate of
deposit or similar term depository account or instrument plus accrued
interest thereunder or (2) Collateral of the type described in (b)
below.
(2) to the extent that the Collateral or any portion thereof
consists of stock, bonds, indentures, warrants, options, stock rights,
or other negotiable or non-negotiable securities, such item or items
of the Collateral may, at the option and direction of the Pledgor, be
sold or otherwise disposed of provided that the proceeds therefrom are
reinvested in other securities which are held by the Pledgeholder in
the Account and are of a character and value acceptable to the Bank
and provided further that, prior to and following such sale or
disposition and such reinvestment, the then current market value of
such securities held by the Pledgeholder in the Account shall not be
less than the market value of such securities immediately prior to
such sale or disposition or the amount designated from time to time by
the Bank to the Pledgeholder, which ever is less.
5. COLLATERAL VALUE. The Borrower covenants and agrees that to maintain
with the Pledgeholder Collateral having a fair market value of not less than
$2,400,000.
6. DELIVERY TO BANK. Upon such instructions as may be given by the Bank
to the Pledgeholder, the Pledgeholder shall (as directed by the Bank) either
deliver the Collateral or such portions thereof (together with, as applicable,
all stock powers executed by the Pledgor, the Pledgeholder and others) to the
Bank or liquidate, sell or otherwise dispose of the Collateral or such portions
thereof and remit the proceeds therefrom to the Bank at the address set forth
herein or in the instructions given by the Bank to the Pledgeholder.
7. INSTRUCTIONS FROM BANK. The Pledgeholder is hereby authorized to
comply with the terms and conditions of this Agreement and the instructions
given to the Pledgeholder pursuant hereto, and the Pledgor hereby releases and
discharges the Pledgeholder from any and all duties and obligations which the
Pledgeholder may otherwise have to the Pledgor under any prior instructions or
agreements which conflict with the matters contained in this Agreement. The
Pledgor hereby agrees to and shall indemnify and defend the Pledgeholder and
shall hold the Pledgeholder harmless from and against any and all claims,
demands, costs and expenses (including court costs and attorneys' fees) arising
from any litigation or proceeding which may be
<PAGE>
commenced with respect to the Collateral, the Account or the obligations of the
Pledgeholder hereunder or which may be incurred by reason of following any
instruction given to the Pledgeholder pursuant to this Agreement.
8. OTHER AGREEMENTS SUPERSEDED. To the extent inconsistent, all other
agreements between the Pledgeholder and the Pledgor, are superseded hereby.
Notwithstanding the terms of the Other Agreements, Pledgor and Pledgeholder
expressly agree that the Other Agreements may not be terminated or modified
without the Bank's express written consent and any modification or termination
without such consent shall be wholly inoperative.
9. RIGHT TO AMEND OR MODIFY THE INDEBTEDNESS (AND OTHER RIGHTS). The
Pledgor authorizes the Bank, in its sole and absolute discretion, with or
without notice and without affecting the Bank's security interest in or to the
Collateral or the Bank's rights and remedies against the Collateral under this
Agreement, and from time to time, to:
(a) change the time or manner of payment of any Indebtedness by
renewal, extension, modification, acceleration or otherwise;
(b) alter or change any provision of any Indebtedness, including, but
not limited to, the rate of interest thereon, or any provision of any
document, instrument or agreement (other than this Agreement) evidencing,
guarantying, securing or related to any Indebtedness;
(c) release, discharge, exonerate, substitute or add one or more of
the parties liable on any Indebtedness or one or more endorsers, cosigners,
or guarantors for any Indebtedness;
(d) obtain any other or additional collateral for the payment of any
Indebtedness or any guaranty thereof;
(e) release existing or after-acquired other or additional collateral
on such terms as the Bank, in its sole and absolute discretion, shall
determine;
(f) apply any sums received from the Borrower, any endorser,
cosigner, guarantor or other person liable on the Indebtedness or from the
sale or collection of any other or additional collateral or its proceeds
securing any Indebtedness or any guaranty thereof to any indebtedness
whatsoever owed or to be owed to the Bank by the Borrowers in any order or
amount and regardless of whether or not any portion of such sum is applied
to the Indebtedness secured hereunder or regardless of whether or not any
such indebtedness is due and payable; and
(g) apply any sums received from the Pledgor or from the sale or
collection of the Collateral or its proceeds to any Indebtedness in any
order or amount regardless of whether or not any such Indebtedness is due
and payable.
10. CONTINUING NATURE OF THIS AGREEMENT. This Agreement shall be
continuing and shall not be discharged, impaired or affected by:
(a) the insolvency of Borrower or the payment in full of all of the
Indebtedness at any time or from time to time prior to termination of the
Bank's obligations with respect thereto;
(b) the power or lack thereof of Borrower to incur the Indebtedness;
(c) the validity or invalidity of any of the documents evidencing or
securing the Indebtedness;
<PAGE>
(d) the existence or non-existence of any Borrower as a legal entity;
(e) any transfer by Borrower of all or any part of any collateral in
which the Bank has been granted a lien or security interest pursuant to any
of the documents evidencing or securing the Indebtedness;
(f) any statute of limitations affecting the liability of the Pledgor
under this Agreement or the documents evidencing the Indebtedness or the
ability of the Bank to enforce this Agreement or any provision of such
documents; or
(g) any right of offset, counterclaim or defense of any Pledgor,
including, without limitation, those which have been waived by each Pledgor
pursuant to this Agreement.
11. IRREVOCABILITY. Pledgor hereby further waives all rights to revoke
this Agreement at any time, and all rights to revoke any agreement executed by
such Pledgor at any time to secure the payment and performance of such Pledgor's
obligations under this Agreement. Without limiting the generality of this
paragraph, each Pledgor hereby specifically waives the provisions of California
Civil Code Section 2815, and any successor section, with respect to this
Agreement and all security for the obligations of each such Pledgor hereunder.
12. DEFINED TERMS. "BUSINESS DAY" shall mean a day, other than a Saturday
or Sunday, on which the Bank is open for business in Los Angeles , California.
Terms not otherwise defined in this Agreement shall have the meanings attributed
to such terms in the California Uniform Commercial Code.
13. ATTORNEY'S FEES. In the event of any action in relation to this
Agreement, the prevailing party, in addition to all other sums to which it may
be entitled, shall be entitled to reasonable attorneys' fees.
14. NOTICES. All notices, payments, requests, information and demands
which any party hereto may desire or be required to give or make to any other
party shall be given or made to such party by hand delivery or express mail or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, or by telex, addressed to the address set forth below such party's
signature to this Agreement or to such other address as may be specified from
time to time in writing by any party to the other parties.
15. DELAY BY BANK. Neither the failure nor delay by the Bank in
exercising any right hereunder or under any document, instrument or agreement
mentioned herein shall operate as a waiver thereof, nor shall any single or
partial exercise of any right hereunder or under any other document, instrument
or agreement mentioned herein preclude other or further exercise thereof or the
exercise of any other right.
16. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns.
17. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS OF THE PARTIES HEREUNDER
TO AND CONCERNING THE COLLATERAL, AND ANY DOCUMENTS, INSTRUMENTS OR AGREEMENTS
MENTIONED OR REFERRED TO HEREIN, SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO
THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICT OF LAW
PRINCIPLES, TO THE JURISDICTION OF WHOSE COURTS THE PARTIES HEREBY SUBMIT.
18. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original.
<PAGE>
19. HEADINGS. The headings set forth herein are solely for the purpose of
identification and have no legal significance.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first hereinabove written.
BANK: PLEDGOR:
SANWA BANK CALIFORNIA
By:
- ---------------------------------------- -----------------------------------
Steven R. Edmonston, Vice President ALFRED G. SCHEID, TRUSTEE OF THE
ALFRED G. SCHEID REVOCABLE TRUST
Address: 2035 Fresno Street Address: 13470 Washington Blvd.
Fresno, CA 93721 Suite 300
Marina Del Rey, CA 90292
PLEDGEHOLDER:
SANWA BANK CALIFORNIA,
TRUST DIVISION
By:
- ------------------------------------
Don Silva, Vice President
Address: 601 S. Figueroa Street
Los Angeles, CA 90017
<PAGE>
[LOGO]
ADDENDUM TO SECURITY AND PLEDGEHOLDER AGREEMENT
LENT COLLATERAL
This Addendum is made and entered into this 23rd day of June, 1997 by and
between SANWA BANK CALIFORNIA (the "Bank"),SCHEID VINEYARD, INC. (the
"Borrower"), and ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G. SCHEID REVOCABLE
TRUST dated October 8, 1992 (the "Owner ").
1. This Addendum shall be deemed to be a part of and subject to that
certain Security and Pledgeholder Agreement between the Bank and the Owner (who
is referred to in the Security and Pledgeholder Agreement as the "Pledgor ")
dated as of June 23, 1997, as it may be amended from time to time and any and
all addenda, exhibits and riders thereto (collectively the "Security and
Pledgeholder Agreement"). Unless otherwise defined herein, all terms used in
this Addendum shall have the same meanings as in the Security and Pledgeholder
Agreement. To the extent that any of the terms or provisions of this Addendum
conflict with those contained in the Security and Pledgeholder Agreement, the
terms and provisions contained herein shall control.
2. INDEBTEDNESS. The Indebtedness referenced in the Security and
Pledgeholder Agreement is that owed or to be owing by the Borrower to the Bank.
The security interest granted in the Security and Pledgeholder Agreement to
secure the Indebtedness is in and to the Collateral described in the Security
and Pledgeholder Agreement, which collateral is now owned or hereafter acquired
by the Owner. The Owner hereby acknowledges and agrees that the security
interest in the Collateral is granted to the Bank in consideration of the
Indebtedness incurred by the Borrower from the Bank or the benefits to the Owner
derived therefrom. The Borrower, as evidenced by its execution of this
Addendum, hereby grants to the Bank a security interest in and to the Collateral
in accordance with and subject to the terms and provisions of the Security and
Pledgeholder Agreement. Any and all interests or rights which the Borrower may
have in or to the Collateral shall be, at all times, inferior, subordinate, and
subject to the security interests of the Bank therein or thereto and shall be
extinguished or terminated following, or as a result of, the Bank's exercise of
its rights and remedies under the Security and Pledgeholder Agreement.
3. RIGHT TO AMEND OR MODIFY THE INDEBTEDNESS (AND OTHER RIGHTS). The
Owner authorizes the Bank, in its sole and absolute discretion, with or without
notice and without affecting the Bank's security interest in or to the
Collateral or the Bank's rights and remedies against the Collateral under the
Security and Pledgeholder Agreement, and from time to time, to: (i) change the
time or manner of payment of any Indebtedness by renewal, extension,
modification, acceleration or otherwise; (ii) alter or change any provision of
any Indebtedness, including, but not limited to, the rate of interest thereon,
or any provision of any document, instrument or agreement (other than the
Security and Pledgeholder Agreement and this Addendum) evidencing, guarantying,
securing or related to any Indebtedness; (iii) release, discharge, exonerate,
substitute or add one or more of the parties liable on any Indebtedness or one
or more endorsers, cosigners, or guarantors for any Indebtedness; (iv) obtain
any other or additional collateral for the payment of any Indebtedness or any
guaranty thereof; (v) release existing or after-acquired other or additional
collateral on such terms as the Bank, in its sole and absolute discretion, shall
determine; (vi) apply any sums received from the Borrower, any endorser,
cosigner, guarantor or other person liable on the Indebtedness or from the sale
or collection of any other or additional collateral or its proceeds securing any
Indebtedness or any guaranty thereof to any indebtedness whatsoever owed or to
be owed to the Bank by the Borrower in any order or amount and regardless of
whether or not any portion of such sum is applied to the Indebtedness secured
hereunder or regardless of whether or not any such indebtedness is due and
payable; and (vii) apply any sums received from the Owner or from the sale or
collection of the Collateral or its proceeds to any Indebtedness in any order or
amount regardless of whether or not any such Indebtedness is due and payable.
4. OWNER'S WAIVERS. The Owner hereby unconditionally and irrevocably
acknowledges and agrees to the matters set forth below:
a. DEFICIENCY. In the event that any Indebtedness is now or
hereafter secured by a deed of trust, the Owner waives any defense and all
rights and benefits of those laws purporting to state that no deficiency
judgment may be recovered
<PAGE>
on certain real property purchase money obligations (as presently contained in
Section 580b of the California Code of Civil Procedure and as it may be amended
or superseded in the future) and those laws purporting to state that no
deficiency judgment may be recovered after a trustee's sale under a deed of
trust (as presently contained in Section 580d of the California Code of Civil
Procedure and as it may be amended or superseded in the future).
THE OWNER ACKNOWLEDGES THAT A FORECLOSURE BY A TRUSTEE'S SALE UNDER A
DEED OF TRUST MAY RESULT IN THE DESTRUCTION OF THE GUARANTOR'S SUBROGATION
RIGHTS THAT MAY OTHERWISE EXIST AND THAT A DESTRUCTION OF THOSE RIGHTS MAY
CREATE A DEFENSE TO A DEFICIENCY JUDGMENT AGAINST THE DEBTOR AND/OR THE OWNER.
THE OWNER WAIVES ALL RIGHTS AND DEFENSES THAT OWNER MAY HAVE
BECAUSE THE INDEBTEDNESS OR ANY PORTION THEREOF IS SECURED BY REAL PROPERTY.
THIS MEANS, AMONG OTHER THINGS,
(i) BANK MAY COLLECT FROM THE OWNER WITHOUT FIRST FORECLOSING ON ANY
REAL OR PERSON PROPERTY PLEDGED BY THE BORROWER.
(ii) IF THE BANK FORECLOSES ON ANY REAL PROPERTY COLLATERAL PLEDGED BY
THE BORROWER,
(x) THE AMOUNT OF THE INDEBTEDNESS MAY BE REDUCED ONLY BY THE
PRICE FOR WHICH THAT COLLATERAL IS SOLD AT THE FORECLOSURE SALE, EVEN IF THE
COLLATERAL IS WORTH MORE THAN THE SALE PRICE.
(y) BANK MAY COLLECT FROM THE OWNER EVEN IF THE CREDITOR, BY
FORECLOSING ON THE REAL PROPERTY COLLATERAL, HAS DESTROYED ANY RIGHT THE OWNER
MAY HAVE TO COLLECT FROM THE BORROWER.
THIS IS AN UNCONDITIONAL AND IRREVOCABLE WAIVER OF ANY RIGHTS AND DEFENSES
THE OWNER MAY HAVE BECAUSE THE INDEBTEDNESS IS SECURED BY REAL PROPERTY. THESE
RIGHTS AND DEFENSES INCLUDE, BUT ARE NOT LIMITED TO, ANY RIGHTS AND DEFENSES
BASED ON SECTION 580a, 580b, 580D, OR 726 OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE.
b. ELECTION OF REMEDIES. The Owner waives any defense based upon the
Owner's loss of a right against the Borrower arising from the Bank's election of
a remedy on any Indebtedness under bankruptcy or other debtor relief laws or
under any other laws, including, but not limited to, those purporting to reduce
the Bank's rights against the Collateral in proportion to the principal
obligation of any Indebtedness (as presently contained in Section 2809 of the
California Civil Code and as it may be amended or superseded in the future).
Without limiting the generality of the foregoing, Owner waives all
rights and defenses arising out of an election of remedies by the Bank, even
though that election of remedies, such as a nonjudicial foreclosure with respect
to security for a guaranteed obligation, has destroyed the Owner's rights of
subrogation and reimbursement against the Borrower by operation of Section 580d
of the Code of Civil Procedure or otherwise.
c. STATUTE OF LIMITATIONS. The Owner waives the benefit of the
statute of limitations affecting the Owner's liability hereunder or the
enforcement hereof.
d. BORROWER'S DEFENSES. The Owner waives any defense arising by
reason of any disability or other defense of the Borrower, the Borrower's
successor or any endorser, cosigner, guarantor or other person liable on any
Indebtedness. Until all Indebtedness has been paid in full, the Owner shall not
have any right of subrogation against the Borrower, any endorser, cosigner,
guarantor or other person liable on any Indebtedness and the Owner waives any
benefit of and any right to participate in any other or additional collateral
securing any Indebtedness or any guaranty thereof in which the Bank now or
hereafter has or acquires a security interest. The Owner waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, notices of acceptance with respect to
any Indebtedness and all notices of sale with respect to any other or additional
collateral securing any Indebtedness or any guaranty thereof.
<PAGE>
e. BORROWER'S FINANCIAL CONDITION. The Owner hereby recognizes,
acknowledges and agrees that advances may be made from time to time with respect
to any Indebtedness without authorization from or notice to the Owner even
though the financial condition of the Borrower, any endorser, cosigner,
guarantor or other person liable on any Indebtedness may have deteriorated since
the date of this Addendum. The Owner waives all right to require the Bank to
disclose any information with respect to: (i) any Indebtedness; (ii) the
financial condition, credit or character of the Borrower, any endorser,
cosigner, guarantor or other person liable on any Indebtedness; (iii) any other
or additional collateral securing any Indebtedness or any guaranty thereof; or
(iv) any action or inaction on the part of the Bank, the Borrower or any
endorser, cosigner, guarantor or other person liable on any Indebtedness. The
Owner hereby assumes the responsibility for being informed of the financial
condition, credit and character of the Borrower and of all circumstances bearing
upon the risk of non-payment of any Indebtedness which diligent inquiry would
reveal.
5. BORROWER'S AND OWNER'S WAIVERS. The Owner and the Borrower each waive
all rights to require the Bank to: (i) proceed against the Borrower, any
endorser, cosigner, guarantor or other person liable on any Indebtedness; (ii)
proceed against the Collateral, any particular item of the Collateral or any
other or additional collateral securing any Indebtedness or any guaranty
thereof; or (iii) pursue or refrain from pursuing any other remedy in the Bank's
power whatsoever against any Collateral or on any Indebtedness.
6. RIGHT OF FORECLOSURE. The Bank may foreclose, either by judicial
foreclosure or by exercise of power of sale, any deed of trust securing any
Indebtedness even though such foreclosure may destroy or diminish the Owner's
rights against the Borrower. The Borrower shall be liable to the Bank for any
part of any Indebtedness remaining unpaid after any such foreclosure whether or
not such foreclosure was for fair market value.
7. SUBORDINATION. Any indebtedness of the Borrower or any endorser,
cosigner, guarantor or other person liable on any Indebtedness now or hereafter
owed to the Owner is hereby subordinated to the Indebtedness. Such indebtedness
owed to the Owner shall, if the Bank so requests, be collected, enforced and
received by the Owner as trustee for the Bank and be paid over to the Bank on
account of the Indebtedness but without reducing or affecting in any manner the
matters contained in the Security and Pledgeholder Agreement and this Addendum.
Should the Owner fail to collect the proceeds of any such indebtedness owed to
it and pay such proceeds to the Bank, the Bank, as the Owner's attorney-in-fact,
may do such acts and sign such documents in the Owner's name as the Bank
considers necessary to effect such collection.
8. INVALID, FRAUDULENT OR PREFERENTIAL PAYMENTS. The Owner agrees that,
to the extent the Borrower or any endorser, cosigner, guarantor or other person
liable on any Indebtedness makes a payment or payments on any Indebtedness, or
is credited for any payment or payments made for or on behalf of any
Indebtedness, which payment or payments, or any part thereof, is subsequently
invalidated, determined to be fraudulent or preferential, set aside or required
to be repaid to any trustee, receiver, assignee or any other party whether under
any bankruptcy, state or federal law or under any common law or equitable cause
or otherwise, then, to the extent thereof, the obligation or part thereof
intended to be satisfied thereby shall be revived, reinstated and continued in
full force and effect as if such payment or payments had not originally been
made or credited.
9. COLLATERAL IN BORROWER'S POSSESSION; BORROWER'S COVENANTS. To the
extent that any item of the Collateral is in the possession of the Borrower, the
covenants of the Owner (as set forth in Paragraph 4 of the Security and
Pledgeholder Agreement) pertaining to such item of the Collateral shall be those
of the Borrower or, with respect to covenants concerning the maintenance of such
item of the Collateral, inspection rights, reporting requirements, any transfer
of such items of the Collateral and notices, those of both the Borrower and the
Owner.
10. SEVERABILITY. Should any one or more provisions of this Addendum be
determined to be illegal or unenforceable, all other provisions shall remain
effective.
11. CALIFORNIA LAW. This Addendum shall be governed by and construed
according to the laws of the State of California, to the jurisdiction of whose
courts the Owner and the Borrower hereby submit.
12. Except as specifically provided in this Addendum, all other terms,
conditions and covenants contained in the Security and Pledgeholder Agreement
shall remain unchanged and shall continue in full force and effect.
<PAGE>
[PAGE 3 ENDS HERE. SIGNATURES APPEAR ON PAGE 4]
<PAGE>
IN WITNESS WHEREOF, this Addendum has been executed by the parties hereto
as of the date first hereinabove written.
BANK: OWNER:
SANWA BANK CALIFORNIA
By:
---------------------------- --------------------------------------------
Steve R. Edmonston, ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G.
Vice President SCHEID REVOCABLE TRUST dated October 8, 1992
Address: 2035 Fresno Street
Fresno, CA 93721 Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
BORROWER:
SCHEID VINEYARDS, INC.
By:
-----------------------------------
Alfred G. Scheid, President
By:
-----------------------------------
Ernest M. Brown, Secretary
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
<PAGE>
[LOGO]
SECURITY AGREEMENT
DEPOSIT ACCOUNTS AND INVESTMENT PROPERTY
This Security Agreement is made and entered into this 23 day of June, 1997
by and between SANWA BANK CALIFORNIA (the "Bank") and ALFRED G. SCHEID, TRUSTEE
OF THE ALFRED G. SCHEID REVOCABLE TRUST dated October 8, 1992 (the "Debtor").
1. GRANT OF SECURITY INTEREST. The Debtor hereby grants to the Bank a
security interest in and to all of the following property (hereinafter
collectively referred to as the "Collateral"):
(a) INVESTMENT PROPERTY. Those shares of stock, bonds, indentures,
negotiable and non-negotiable securities and instruments listed on the attached
Exhibit "A" and on any additional and supplemental exhibits to this Security
Agreement, together with all warrants, options, stock rights, rights to
subscribe, liquidating dividends, cash dividends, payments, dividends paid in
stock, new securities or other property derived therefrom or to which the Debtor
may become entitled to receive on account thereof.
(b) MONIES AND OTHER PROPERTY. All monies and property of the Debtor
now or hereafter in the possession of the Bank or the Bank's agents, or any one
of them, including, but not limited to, all deposit accounts, certificates of
deposit, stocks, bonds, indentures, warrants, options and other negotiable and
non-negotiable securities and instruments together with all stock rights, rights
to subscribe, liquidating dividends, cash dividends, payments, dividends paid in
stock, new securities or other property to which the Debtor may become entitled
to receive on account of such property.
The Bank's security interest in the Collateral shall be a continuing lien
and shall include all proceeds thereof.
2. THE INDEBTEDNESS. The Collateral secures payment of all indebtedness
of SCHEID VINEYARDS, INC. owed to the Bank together with any and all
modifications, extensions and renewals of such indebtedness (hereinafter
collectively referred to as the "Indebtedness") and performance of all the
terms, covenants and agreements contained in this Security Agreement and in any
other document, instrument or agreement evidencing or related to the
Indebtedness or the Collateral.
The Indebtedness secured hereby shall not include any indebtedness of the
Debtor incurred for personal, family or household purposes except to the extent
any disclosure required under any consumer protection law (including but not
limited to the Truth in Lending Act) or any regulation thereto, as now existing
or hereafter amended, is or has been given.
3. DEBTOR'S REPRESENTATIONS AND WARRANTIES. The Debtor hereby makes the
following representations and warranties to the Bank, which representations and
warranties are continuing:
(a) STATUS: The Debtor is a revocable trust duly organized and
validly existing under the laws of the State of California and is properly
licensed and is qualified to do business and in good standing in, and, where
necessary to maintain the Debtor's rights and privileges, has complied with the
fictitious name statute of every jurisdiction in which the Debtor is doing
business.
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 1
<PAGE>
(b) AUTHORITY: The execution, delivery and performance by the Debtor
of this Agreement and any instrument, document or agreement required hereunder
have been duly authorized and do not and will not: (i) violate any provision of
any law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award presently in effect having application to the Debtor; or
(ii) result in a breach of or constitute a default under any material indenture
or loan or credit agreement or other material agreement, lease or instrument to
which the Debtor is a party or by which it or its properties may be bound or
affected.
(c) LEGAL EFFECT. This Security Agreement constitutes, and any
document, instrument or agreement required hereunder when delivered will
constitute, legal, valid and binding obligations of the Debtor enforceable
against the Debtor in accordance with their respective terms.
(d) FICTITIOUS TRADE STYLES: There are no fictitious trade styles
used by the Debtor in connection with its business operations. The Debtor shall
notify the Bank not less than 30 days prior to effecting any change in the
matters described herein or prior to using any other fictitious trade style at
any future date, indicating the trade style and state(s) of its use.
(e) TITLE TO COLLATERAL; PERMITTED LIENS. The Debtor has good and
marketable title to the Collateral and the same is not now and shall not become
subject to any security interest, encumbrance, lien or claim of any third person
other than: (i) liens and security interests to secure the Indebtedness or
other indebtedness owed to the Bank; (ii) liens for taxes, assessments or
similar charges either not yet due or being duly contested in good faith; (iii)
liens of mechanics, materialmen, warehousemen or other like liens arising in the
ordinary course of business and securing obligations which are not yet
delinquent; (iv) liens and security interests which, as of the date hereof, have
been disclosed to and approved by the Bank in writing; (v) purchase money liens
or purchase money security interests upon or in any property acquired or held by
the Debtor in the ordinary course of business to secure indebtedness outstanding
on the date hereof or permitted to be incurred hereunder; and (vi) those liens
and security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of the Debtor's
assets (collectively "Permitted Liens").
(f) FINANCIAL STATEMENTS. All financial statements, information and
other data now or hereafter submitted to the Bank in connection with the
transaction with respect to which this Security Agreement is entered into are
true, accurate and correct and have been or will be prepared in accordance with
generally accepted accounting principles consistently applied. Since the most
recent submission of any such financial statement, information or other data to
the Bank, the Debtor represents and warrants that no material adverse change in
the financial condition or operations as disclosed therein or thereby has
occurred which has not been fully disclosed to the Bank in writing.
(g) LITIGATION. Except as have been disclosed to the Bank in
writing, there are no actions, suits or proceedings pending or, to the knowledge
of the Debtor, threatened against or affecting the Debtor or the Debtor's
properties before any court or administrative agency which, if determined
adversely to the Debtor, would have a material adverse effect on the Debtor's
financial condition or operations or on the Collateral.
(h) TAXES. The Debtor has filed all tax returns required to be filed
and paid all taxes shown thereon to be due, including interest and penalties,
other than taxes which are currently payable without penalty or interest or
those which are being duly contested in good faith.
(i) ENVIRONMENTAL COMPLIANCE. The operations of the Debtor comply,
and during the term of this Security Agreement will at all times comply, in all
respects with all Environmental Laws; the Debtor has obtained all licenses,
permits, authorizations and registrations required under any Environmental Law
("ENVIRONMENTAL PERMITS") and necessary for its ordinary course operations, all
such Environmental Permits are in good standing, and the Debtor is in compliance
with all material terms and conditions of such Environmental
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 2
<PAGE>
Permits; neither the Debtor nor any of its present property or operations is
subject to any outstanding written order from or agreement with any governmental
authority nor subject to any judicial or docketed administrative proceeding,
respecting any Environmental Law, Environmental Claim or Hazardous Material;
there are no Hazardous Materials or other conditions or circumstances existing,
or arising from operations prior to the date of this Agreement, with respect to
any property of the Debtor that would reasonably be expected to give rise to
Environmental Claims; PROVIDED, however, that with respect to property leased
from an unrelated third party, the foregoing representation is made to the best
knowledge of the Debtor. In addition, (i) the Debtor does not have any
underground storage tanks (x) that are not properly registered or permitted
under applicable Environmental Laws, or (y) that are leaking or disposing of
Hazardous Materials off-site, and (ii) the Debtor has notified all of their
employees of the existence, if any, of any health hazard arising from the
conditions of their employment and have met all notification requirements under
Title III of CERCLA and all other Environmental Laws.
For the purposes hereof:
(1) "Environmental Claims" shall mean all claims, however
asserted, by any governmental authority or other person alleging potential
liability or responsibility for violation of any Environmental Law or for
release or injury to the environment or threat to public health, personal injury
(including sickness, disease or death), property damage, natural resources
damage, or otherwise alleging liability or responsibility for damages (punitive
or otherwise), cleanup, removal, remedial or response costs, restitution, civil
or criminal penalties, injunctive relief, or other type of relief, resulting
from or based upon (a) the presence, placement, discharge, emission or release
(including intentional and unintentional, negligent and non-negligent, sudden or
non-sudden, accidental or non-accidental placement, spills, leaks, discharges,
emissions or releases) of any Hazardous Material at, in, or from property,
whether or not owned by the Debtor, or (b) any other circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law.
(2) "Environmental Laws" shall mean all federal, state or local
laws, statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any governmental
authorities, in each case relating to environmental, health, safety and land use
matters; including the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA), the Clean Air Act, the Federal Water Pollution
Control Act of 1972, the Solid Waste Disposal Act, the Federal Resource
Conservation and Recovery Act, the Toxic Substances Control Act, the Emergency
Planning and Community Right-to-Know Act, the California Hazardous Waste Control
Law, the California Solid Waste Management, Resource, Recovery and Recycling
Act, the California Water Code and the California Health and Safety Code.
(3) "Hazardous Materials" means all those substances which are
regulated by, or which may form the basis of liability under, any Environmental
Law, including all substances identified under any Environmental Law as a
pollutant, contaminant, hazardous waste, hazardous constituent, special waste,
hazardous substance, hazardous material, or toxic substance, or petroleum or
petroleum derived substance or waste.
(j) ERISA: If the Debtor has a pension, profit sharing or retirement
plan subject to Employee Retirement Income Security Act of 1974 ("ERISA"), such
plan has been and will continue to be funded in accordance with its terms and
otherwise complies with and continues to comply with the requirements of ERISA.
4. DEBTOR'S COVENANTS. Unless the Bank otherwise consents in writing, the
Debtor covenants and agrees that:
(a) MAINTENANCE OF COLLATERAL.
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 3
<PAGE>
(1) The Collateral shall at all times be of a character and
value acceptable to the Bank, as determined by the Bank in its sole and absolute
judgment.
(2) The Debtor shall not withdraw or seek to withdraw any of the
Collateral now or hereafter in the possession of the Bank or the Bank's agents,
or any one of them.
(3) The Debtor shall make timely payments of all taxes, charges,
liens and assessments against the Collateral.
(4) Except for Permitted Liens, the Debtor shall keep and
maintain the Collateral free and clear of all levies, liens, encumbrances and
other security interests (including, but not limited to, any lien of attachment,
judgment or execution) and defend the Collateral against any such levy, lien,
encumbrance or security interest; comply with all laws, statutes and regulations
pertaining to the Collateral; execute, file and record such statements, notices
and agreements, take such actions and obtain such certificates and other
documents as necessary to perfect, evidence and continue the Bank's security
interest in the Collateral and the priority thereof; maintain accurate and
complete records of the Collateral
(b) REPORTING REQUIREMENTS. Promptly upon the Bank's request, the
Debtor shall deliver or cause to be delivered to the Bank such information
pertaining to the Debtor, the Collateral or such other matters as the Bank may
reasonably request.
(c) PAYMENT OF OBLIGATIONS. Pay all of its liabilities and
obligations when due.
(d) VALUE OF COLLATERAL/COLLATERAL-TO-LOAN RATIO. The Debtor
additionally covenants and agrees that so long as all or any part of the
Indebtedness shall remain outstanding, the value of the Collateral at its then
current market value (as determined by the Bank) shall at all times not be less
than $2,400,000 (the "Collateral Value"). To the extent that such Collateral
Value is not maintained, the Debtor shall promptly, upon the Bank's request,
assign and pledge to the Bank such additional assets of a character satisfactory
to the Bank and having a market value sufficient to reinstate and maintain such
Collateral Value.
(e) COMPENSATION OF EMPLOYEES. The Debtor shall compensate its
employees for services rendered at an hourly rate at least equal to the minimum
hourly rate prescribed by any applicable federal or state law or regulation.
(j) NOTICE: Give the Bank prompt written notice of any and all (i)
Events of Default; (ii) litigation, arbitration or administrative proceedings to
which the Borrower is a party and in which the claim or liability exceeds
$100,000 or which affects the Collateral; (iii) other matters which have
resulted in, or might result in a material adverse change in the Collateral or
the financial condition or business operations of the Borrower (iv) any
enforcement, cleanup, removal or other governmental or regulatory actions
instituted, completed or threatened against the Borrower or any of its
properties.
5. BANK'S RIGHTS WITHOUT DEFAULT. At its option and without any
obligation to do so, the Bank may, either in the name of the Bank, the Bank's
nominee or the Debtor:
(a) Collect, endorse and receive all sums, including, but not limited
to, dividends and interest, now or hereafter payable upon or on account of the
Collateral.
(b) Enter into any agreement relating to or affecting the Collateral
and, in connection therewith, the Bank may surrender control of any such
Collateral, accept other property in exchange for such Collateral, and do and
perform such acts as it deems proper. Any money or property received in
exchange for any such Collateral shall be subject to and held by the Bank
pursuant to the terms of this Security Agreement.
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 4
<PAGE>
(c) Make any compromise or settlement with respect to the Collateral
that the Bank, in its sole and absolute discretion, deems proper.
(d) Insure and do such other acts as the Bank deems necessary, in its
sole discretion, to preserve or protect the Collateral.
(e) Cause the Collateral to be transferred to the Bank's name or the
name of the Bank's nominee.
(f) With respect to the Collateral, exercise all rights, powers and
remedies of an owner but excluding any voting rights.
6. EVENTS OF DEFAULT. Any one or more of the following described events
shall constitute an event of default ("Event of Default") hereunder:
(a) NON-PAYMENT: The Debtor shall fail to pay the principal amount
of any Indebtedness when due or interest on the Indebtedness within 5 days of
when due.
(b) PERFORMANCE UNDER THIS AGREEMENT: The Debtor shall fail in any
material respect to perform or observe any term, covenant or agreement contained
in this Security Agreement or in any document, instrument or agreement relating
to this Agreement and any such failure shall continue unremedied for more than
30 days after the occurrence thereof.
(c) REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS: Any
representation or warranty made by the Debtor under or in connection with this
Security Agreement or any financial statement given by the Debtor or any
guarantor shall prove to have been incorrect in any material respect when made
or given or when deemed to have been made or given.
(d) OTHER AGREEMENTS: If there is a default under any agreement to
which Debtor is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness.
(e) INSOLVENCY: The Debtor or any guarantor shall: (i) become
insolvent or be unable to pay its debts as they mature; (ii) make an assignment
for the benefit of creditors or to an agent authorized to liquidate any
substantial amount of its properties and assets; (iii) file a voluntary petition
in bankruptcy or seeking reorganization or to effect a plan or other arrangement
with creditors; (iv) file an answer admitting the material allegations of an
involuntary petition relating to bankruptcy or reorganization or join in any
such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or
consent to the appointment of, or consent that an order be made, appointing any
receiver, custodian or trustee, for itself or any of its properties, assets or
businesses; or (vii) any receiver, custodian or trustee shall have been
appointed for all or substantial part of its properties, assets or businesses
and shall not be discharged within 30 days after the date of such appointment.
(f) EXECUTION: Any writ of execution or attachment or any judgment
lien shall be issued against any property of the Debtor and shall not be
discharged or bonded against or released within 30 days after the issuance or
attachment of such writ or lien.
(g) REVOCATION OR LIMITATION OF GUARANTY: Any guaranty shall be
revoked or limited or its enforceability or validity shall be contested by any
guarantor, by operation of law, legal proceeding or otherwise or any guarantor
who is a natural person shall die.
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 5
<PAGE>
(h) REVOCATION OR LIMITATION OF SUBORDINATION AGREEMENT: Any
subordination agreement shall be revoked or limited or its enforceability or
validity shall be contested by any creditor signatory thereto, by operation of
law, legal proceeding or otherwise.
(i) SUSPENSION: The Debtor shall voluntarily suspend the transaction
of business or allow to be suspended, terminated, revoked or expired any permit,
license or approval of any governmental body necessary to conduct the Debtor's
business as now conducted.
(j) MATERIAL ADVERSE CHANGE: If there occurs a material adverse
change in the Debtor's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Indebtedness or there is a material impairment of the value or priority of the
Bank's security interest in the Collateral.
(k) IMPAIRMENT OF COLLATERAL. There shall occur any deterioration or
impairment of all or any part of the Collateral or any decline or depreciation
in the value or market price of the Collateral which causes the Collateral, in
the sole and absolute judgment of the Bank, to become unacceptable as to
character or value.
7. BANK'S RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any
Event of Default, the Bank may, at its sole and absolute election, without
demand and only upon such notice as may be required by law:
(a) ACCELERATION. Declare the Indebtedness and any or all other
indebtedness owing to the Bank by the Debtor or any obligor on the Indebtedness
(however such indebtedness may be evidenced or secured) immediately due and
payable, whether or not otherwise due and payable.
(b) CEASE EXTENDING CREDIT. Cease extending credit to or for the
account of the Debtor or any obligor on the Indebtedness under any agreement now
existing or hereafter entered into with the Bank.
(c) TERMINATION. Terminate any agreement as to any future obligation
of the Bank without affecting the Debtor's obligations to the Bank or the Bank's
rights and remedies under this Security Agreement or under any other document,
instrument or agreement.
(d) FORECLOSURE. Apply, set off, collect or sell, only upon such
demands or notices as are required by law, the whole or any part of the
Collateral, in such order and manner as the Bank may elect. Any such sale may
be made by way of one or more sales and may be made at a public or private sale
at the Bank's place of business, at any broker's board or securities exchange,
or elsewhere. Any such sale may be for cash or upon credit or for future
delivery as such price as the Bank may deem to be commercially reasonable. The
Bank may be the purchaser of any or all of the Collateral at any sale and shall
thereafter own such Collateral in its own right, free of any claim of the Debtor
or right of redemption. Any deficiency which exists after the disposition or
liquidation of the Collateral shall be a continuing liability of any obligor or
guarantor of the Indebtedness and shall be immediately paid to the Bank.
(e) NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's
rights set forth herein or seek such other rights or pursue such other remedies
as may be provided by law, in equity or in any other agreement now existing or
hereafter entered into between the Bank and the Debtor or any obligor on or
guarantor of the Indebtedness, or otherwise.
(f) APPLICATION OF PROCEEDS. All amounts received by the Bank as
proceeds from the disposition or liquidation of the Collateral shall be applied
as follows: first, to prepayment penalties, if any; next, to the costs and
expenses of collection, including court costs and reasonable attorneys' fees,
whether or not suit is commenced by the Bank; next, to those costs and expenses
incurred by the Bank in protecting, preserving, enforcing, collecting, selling
or disposing of the Collateral; next, to the payment of accrued and unpaid
interest on
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 6
<PAGE>
all of the Indebtedness; next, to the payment of the outstanding principal
balance of the Indebtedness; and last, to the payment of any other indebtedness
owed by the Debtor to the Bank. Any excess Collateral or excess proceeds
existing after the disposition or liquidation of the Collateral will be returned
or paid by the Bank to the Debtor.
8. MISCELLANEOUS.
(a) AMOUNTS PAYABLE UNDER THIS SECURITY AGREEMENT. If the Debtor
fails to pay on demand the amount of any obligations referred to in this
Security Agreement, the Bank may pay such amount at its option and without any
obligation to do so and without waiving any default occasioned by the Debtor's
failure to pay such amount. All amounts so paid by the Bank, together with
reasonable attorneys' fees and all other costs, charges and expenses relating to
the Indebtedness, shall be a part of the Indebtedness and shall bear interest at
the highest rate chargeable on any Indebtedness until paid in full.
(b) OTHER TERMS. Terms not otherwise defined in this Security
Agreement shall have the meanings attributed to such terms in the California
Uniform Commercial Code.
(c) RELIANCE. Each warranty, representation, covenant and agreement
contained in this Security Agreement shall be conclusively presumed to have been
relied upon by the Bank regardless of any investigation made or information
possessed by the Bank and shall be cumulative and in addition to any other
warranties, representations, covenants or agreements which the Debtor shall now
or hereafter give, or cause to be given, to the Bank.
(d) ATTORNEYS' FEES. Debtor shall pay to the Bank all costs and
expenses, including but not limited to reasonable attorneys fees, incurred by
Bank in connection with the administration, enforcement, including any
bankruptcy, appeal or the enforcement of any judgment or any refinancing or
restructuring of this Security Agreement or any document, instrument or
agreement executed with respect to, evidencing or securing the Indebtedness
hereunder.
(e) NOTICES. All notices, payments, requests, information and
demands which either party hereto may desire, or be required to give or make to
the other party, shall be given or made to such party by hand delivery or
through deposit in the United States mail, postage prepaid, or by Western Union
telegram, addressed to the address set forth below such party's signature to
this Security Agreement or to such other address as may be specified from time
to time in writing by either party to the other.
(f) WAIVER. Neither the failure nor delay by the Bank in exercising
any right hereunder or under any document, instrument or agreement mentioned
herein shall operate as a waiver thereof, nor shall any single or partial
exercise of any right hereunder or under any other document, instrument or
agreement mentioned herein preclude other or further exercise thereof or the
exercise of any other right; nor shall any waiver of any right or default
hereunder or under any other document, instrument or agreement mentioned herein
constitute a waiver of any other right or default or constitute a waiver of any
other default of the same or any other term or provision.
(g) ASSIGNMENT. This Security Agreement shall be binding upon and
inure to the benefit of the Debtor and the Bank and their respective successors
and assigns, except that the Debtor shall not have the right to assign its
rights hereunder or any interest herein without the Bank's prior written
consent. The Bank may sell or assign all or any portion of its rights and
benefits hereunder and, in connection therewith, may deliver to such prospective
buyer or assignee financial statements and other relevant information pertaining
to the Debtor or any obligor on the Indebtedness.
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 7
<PAGE>
(h) JURISDICTION. This Security Agreement and the rights of the
parties hereunder to and concerning the Collateral, and any documents,
instruments or agreements mentioned or referred to herein, shall be governed by
and construed according to the laws of the State of California, to the
jurisdiction of whose courts the parties hereby submit.
(i) DISPUTE RESOLUTION. It is understood and agreed that upon the
request of any party to this agreement any dispute, claim, or controversy of any
kind, whether in contract or in tort, statutory or common law, legal or
equitable now existing or hereinafter arising between the parties in any way
arising out of, pertaining to or in connection with: (1) this Agreement, or
any related agreements, documents, or instruments, (2) all past and present
loans, credits, accounts, deposit accounts (whether demand deposits or time
deposits), safe deposit boxes, safekeeping agreements, guarantees, letters of
credit, goods or services, or other transactions, contracts or agreements of any
kind, (3) any incidents, omissions, acts, practices, or occurrences causing
injury to either party whereby the other party or its agents, employees or
representatives may be liable, in whole or in part, or (4) any aspect of the
past or present relationships of the parties, shall be resolved through a
two-step dispute resolution process administered by Judicial Arbitration &
Mediation Services, Inc. ("J-A-M-S") as follows:
(1) STEP I - MEDIATION: At the request of any party to the
dispute, claim or controversy of the matter shall be referred to the nearest
office of J-A-M-S for mediation, that is, an informal, non-binding conference or
conferences between the parties in which a retired judge or justice for the
J-A-M-S panel will seek to guide the parties to a resolution of the case.
(2) STEP II - UNSECURED CONTRACTS - ARBITRATION: Should any
dispute, claim or controversy remain unresolved at the conclusion of the Step I
Mediation Phase then all such remaining matters shall be resolved by final and
binding arbitration before a different judicial panelist, unless the parties
shall agree to have the mediator panelist act as arbitrator. The hearing shall
be conducted at a location determined by the arbitrator in Los Angeles County
and shall be administered by and in accordance with the then existing Rules of
Practice and Procedure of Judicial Arbitration & Mediation Services, Inc., and
judgment upon any award rendered by the arbitrator may be entered by any State
or Federal Court having jurisdiction thereof. The arbitrator shall determine
which is the prevailing party and shall include in the award that party's
reasonable attorneys fees and costs. This subparagraph (b) shall apply only if,
at the time of the submission of the matter to J-A-M-S, the dispute(s) or
issue(s) do(es) not arise out of a transaction(s) which is/are secured by real
property collateral or, if so secured, all parties consent to such submission.
As soon as practicable after selection of the arbitrator, the
arbitrator or his/her designated representative shall determine a reasonable
estimate of anticipated fees and costs of the Arbitrator, and render a statement
to each party setting forth that party's pro-rata share of said fees and costs.
Thereafter each party shall, within 10 days of receipt of said statement,
deposit said sum with the Arbitrator. Failure of any party to make such a
deposit shall result in a forfeiture by the non-depositing party of the right to
prosecute or defend the claim which is the subject of the arbitration, but shall
not otherwise serve to abate, stay or suspend the arbitration proceedings.
(3) STEP II - CONTRACTS SECURED BY REAL ESTATE - TRIAL BY COURT
REFERENCE [SECTION 638 (1)] CODE OF CIVIL PROCEDURE): If the dispute, claim or
controversy is not one required or agreed to be submitted to arbitration as
provided by subparagraph (b) and has not been resolved by Step I mediation, them
any remaining dispute, claim or controversy shall be submitted for determination
by a trial on Order of Reference conducted by a retired judge or justice from
the panel of J-A-M-S appointed pursuant to the provisions of California Code of
Civil Procedure Section 638(1) or any amendment, addition or successor section
thereto to hear the case and report a statement of decision thereon. The
parties intend this general reference agreement to be specifically enforceable
in accordance with said section. If this parties are unable to agree upon a
member of the J-A-M-S panel to act as referee then one shall be appointed by the
Presiding Judge of the county wherein the hearing is to be held. The parties
shall pay in advance, to the referee, the estimated reasonable fees and costs of
the reference, as may be
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 8
<PAGE>
specified in advance by the referee. The parties shall initially share equally,
by paying their proportionate amount of the estimated fees and costs of the
reference. Failure of any party to make such a fee deposit shall result in a
forfeiture by the non-depositing party of the right to prosecute or defend the
cause(s) of action which is(are) the subject of the reference, but shall not
otherwise serve to abate, stay or suspend the reference proceeding.
(4) PROVISIONAL REMEDIES, SELF HELP AND FORECLOSURE: No
provision of, or the exercise of any right(s) under subparagraph (b), nor any
other provision of this Dispute Resolution Provision, shall limit the right of
any party to exercise self help remedies such as set off, to foreclose against
any real or personal property collateral, or obtain provisional or ancillary
remedies such as injunctive relief or the appointment of a receiver from any
court having jurisdiction before, during or after the pendency of any
arbitration. At Bank's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of power of sale under the deed of trust
or mortgage, or by judicial foreclosure. The institution and maintenance of an
action for provisional remedies pursuit of provisional or ancillary remedies or
exercise of self help remedies shall not constitute a waiver of the right of any
party, including the plaintiff, to submit the controversy or claim to
arbitration. In any arbitration proceeding subject to these provisions, the
arbitrator is specifically empowered to decide (by documents only, or with a
hearing, at the arbitrator's sole discretion) pre-hearing motions which are
substantially similar to motions for summary judgment and for summary
adjudication.
(j) WAIVER OF JURY TRIAL: THE DEBTOR AND THE BANK EACH WAIVE THEIR
RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON
OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE DEBTOR AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL
BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
[PAGE 9 ENDS HERE. SIGNATURES APPEAR ON PAGE 10]
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement
to be executed as of the date first hereinabove written.
<TABLE>
<CAPTION>
BANK: DEBTOR:
SANWA BANK CALIFORNIA
<S> <C>
By:
- --------------------------------------------- ---------------------------------------------
Steve R. Edmonston, Vice President ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G.
SCHEID REVOCABLE TRUST dated October 8, 1992
Address: 2035 Fresno Street
Fresno, CA 93721 Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
</TABLE>
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 10
<PAGE>
EXHIBIT "A"
DESCRIPTION OF SECURITIES AND INSTRUMENTS
SECURITY AGREEMENT --DEPOSIT ACCOUNTS AND INVESTMENT PROPERTY
The securities and instruments described below are subject to the terms and
conditions of a certain Security Agreement-- Deposit Accounts and Investment
Property dated as of June 23, 1997 between SANWA BANK CALIFORNIA (the "Bank")
and ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G. SCHEID REVOCABLE TRUST (the
"Debtor") and are a part of the Collateral described therein:
All municipal bonds issued by the cities of San Diego and San Leandro,
California, and held in custody by the Bank's trust department.
This exhibit and the matters contained herein are acknowledged and agreed
to as of this 23rd day of June 1997.
<TABLE>
<CAPTION>
BANK: DEBTOR:
SANWA BANK CALIFORNIA
<S> <C>
By:
- --------------------------------------------- ---------------------------------------------
Steve R. Edmonston, Vice President ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G.
SCHEID REVOCABLE TRUST dated October 8, 1992
Address: 2035 Fresno Street
Fresno, CA 93721 Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
</TABLE>
SECURITY AGREEMENT - DDA & INVESTMENT PROPERTY - PG 11
<PAGE>
[LOGO]
ADDENDUM TO SECURITY AGREEMENT
LENT COLLATERAL
This Addendum is made and entered into this 23rd day of June, 1997 by and
between SANWA BANK CALIFORNIA (the "Bank"),SCHEID VINEYARD, INC. (the
"Borrower"), and ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G. SCHEID REVOCABLE
TRUST dated October 8, 1992 (the "Owner").
1. This Addendum shall be deemed to be a part of and subject to that
certain Security Agreement between the Bank and the Owner (who is referred to in
the Security Agreement as the "Debtor") dated as of June 23, 1997, as it may be
amended from time to time and any and all addenda, exhibits and riders thereto
(collectively the "Security Agreement"). Unless otherwise defined herein, all
terms used in this Addendum shall have the same meanings as in the Security
Agreement. To the extent that any of the terms or provisions of this Addendum
conflict with those contained in the Security Agreement, the terms and
provisions contained herein shall control.
2. INDEBTEDNESS. The Indebtedness referenced in the Security Agreement is
that owed or to be owing by the Borrower to the Bank. The security interest
granted in the Security Agreement to secure the Indebtedness is in and to the
Collateral described in the Security Agreement, which collateral is now owned or
hereafter acquired by the Owner. The Owner hereby acknowledges and agrees that
the security interest in the Collateral is granted to the Bank in consideration
of the Indebtedness incurred by the Borrower from the Bank or the benefits to
the Owner derived therefrom. The Borrower, as evidenced by its execution of
this Addendum, hereby grants to the Bank a security interest in and to the
Collateral in accordance with and subject to the terms and provisions of the
Security Agreement. Any and all interests or rights which the Borrower may have
in or to the Collateral shall be, at all times, inferior, subordinate, and
subject to the security interests of the Bank therein or thereto and shall be
extinguished or terminated following, or as a result of, the Bank's exercise of
its rights and remedies under the Security Agreement.
3. RIGHT TO AMEND OR MODIFY THE INDEBTEDNESS (AND OTHER RIGHTS). The
Owner authorizes the Bank, in its sole and absolute discretion, with or without
notice and without affecting the Bank's security interest in or to the
Collateral or the Bank's rights and remedies against the Collateral under the
Security Agreement, and from time to time, to: (i) change the time or manner of
payment of any Indebtedness by renewal, extension, modification, acceleration or
otherwise; (ii) alter or change any provision of any Indebtedness, including,
but not limited to, the rate of interest thereon, or any provision of any
document, instrument or agreement (other than the Security Agreement and this
Addendum) evidencing, guarantying, securing or related to any Indebtedness;
(iii) release, discharge, exonerate, substitute or add one or more of the
parties liable on any Indebtedness or one or more endorsers, cosigners, or
guarantors for any Indebtedness; (iv) obtain any other or additional collateral
for the payment of any Indebtedness or any guaranty thereof; (v) release
existing or after-acquired other or additional collateral on such terms as the
Bank, in its sole and absolute discretion, shall determine; (vi) apply any sums
received from the Borrower, any endorser, cosigner, guarantor or other person
liable on the Indebtedness or from the sale or collection of any other or
additional collateral or its proceeds securing any Indebtedness or any guaranty
thereof to any indebtedness whatsoever owed or to be owed to the Bank by the
Borrower in any order or amount and regardless of whether or not any portion of
such sum is applied to the Indebtedness secured hereunder or regardless of
whether or not any such indebtedness is due and payable; and (vii) apply any
sums received from the Owner or from the sale or collection of the Collateral or
its proceeds to any Indebtedness in any order or amount regardless of whether or
not any such Indebtedness is due and payable.
4. OWNER'S WAIVERS. The Owner hereby unconditionally and irrevocably
acknowledges and agrees to the matters set forth below:
a. DEFICIENCY. In the event that any Indebtedness is now or
hereafter secured by a deed of trust, the Owner waives any defense and all
rights and benefits of those laws purporting to state that no deficiency
judgment may be recovered on certain real property purchase money obligations
(as presently contained in Section 580b of the California Code of Civil
ADDENDUM TO SECURITY AGREEMENT - LENT COLLATERAL - PG1
<PAGE>
Procedure and as it may be amended or superseded in the future) and those laws
purporting to state that no deficiency judgment may be recovered after a
trustee's sale under a deed of trust (as presently contained in Section 580d of
the California Code of Civil Procedure and as it may be amended or superseded in
the future).
THE OWNER ACKNOWLEDGES THAT A FORECLOSURE BY A TRUSTEE'S SALE UNDER A
DEED OF TRUST MAY RESULT IN THE DESTRUCTION OF THE GUARANTOR'S SUBROGATION
RIGHTS THAT MAY OTHERWISE EXIST AND THAT A DESTRUCTION OF THOSE RIGHTS MAY
CREATE A DEFENSE TO A DEFICIENCY JUDGMENT AGAINST THE DEBTOR AND/OR THE OWNER .
THE OWNER WAIVES ALL RIGHTS AND DEFENSES THAT OWNER MAY HAVE
BECAUSE THE INDEBTEDNESS OR ANY PORTION THEREOF IS SECURED BY REAL PROPERTY.
THIS MEANS, AMONG OTHER THINGS,
(i) BANK MAY COLLECT FROM THE OWNER WITHOUT FIRST FORECLOSING ON ANY
REAL OR PERSON PROPERTY PLEDGED BY THE BORROWER.
(ii) IF THE BANK FORECLOSES ON ANY REAL PROPERTY COLLATERAL PLEDGED BY
THE BORROWER,
(x) THE AMOUNT OF THE INDEBTEDNESS MAY BE REDUCED ONLY BY THE
PRICE FOR WHICH THAT COLLATERAL IS SOLD AT THE FORECLOSURE SALE, EVEN IF THE
COLLATERAL IS WORTH MORE THAN THE SALE PRICE.
(y) BANK MAY COLLECT FROM THE OWNER EVEN IF THE CREDITOR, BY
FORECLOSING ON THE REAL PROPERTY COLLATERAL, HAS DESTROYED ANY RIGHT THE OWNER
MAY HAVE TO COLLECT FROM THE BORROWER.
THIS IS AN UNCONDITIONAL AND IRREVOCABLE WAIVER OF ANY RIGHTS AND DEFENSES
THE OWNER MAY HAVE BECAUSE THE INDEBTEDNESS IS SECURED BY REAL PROPERTY. THESE
RIGHTS AND DEFENSES INCLUDE, BUT ARE NOT LIMITED TO, ANY RIGHTS AND DEFENSES
BASED ON SECTION 580a, 580b, 580D, OR 726 OF THE CALIFORNIA CODE OF CIVIL
PROCEDURE.
b. ELECTION OF REMEDIES. The Owner waives any defense based upon the
Owner's loss of a right against the Borrower arising from the Bank's election of
a remedy on any Indebtedness under bankruptcy or other debtor relief laws or
under any other laws, including, but not limited to, those purporting to reduce
the Bank's rights against the Collateral in proportion to the principal
obligation of any Indebtedness (as presently contained in Section 2809 of the
California Civil Code and as it may be amended or superseded in the future).
Without limiting the generality of the foregoing, Owner waives all
rights and defenses arising out of an election of remedies by the Bank, even
though that election of remedies, such as a nonjudicial foreclosure with respect
to security for a guaranteed obligation, has destroyed the Owner's rights of
subrogation and reimbursement against the Borrower by operation of Section 580d
of the Code of Civil Procedure or otherwise.
c. STATUTE OF LIMITATIONS. The Owner waives the benefit of the
statute of limitations affecting the Owner's liability hereunder or the
enforcement hereof.
d. BORROWER'S DEFENSES. The Owner waives any defense arising by
reason of any disability or other defense of the Borrower, the Borrower's
successor or any endorser, cosigner, guarantor or other person liable on any
Indebtedness. Until all Indebtedness has been paid in full, the Owner shall not
have any right of subrogation against the Borrower, any endorser, cosigner,
guarantor or other person liable on any Indebtedness and the Owner waives any
benefit of and any right to participate in any other or additional collateral
securing any Indebtedness or any guaranty thereof in which the Bank now or
hereafter has or acquires a security interest. The Owner waives all
presentments, demands for performance, notices of nonperformance, protests,
notices of protest, notices of dishonor, notices of acceptance with respect to
any Indebtedness and all notices of sale with respect to any other or additional
collateral securing any Indebtedness or any guaranty thereof.
ADDENDUM TO SECURITY AGREEMENT - LENT COLLATERAL - PG2
<PAGE>
e. BORROWER'S FINANCIAL CONDITION. The Owner hereby recognizes,
acknowledges and agrees that advances may be made from time to time with respect
to any Indebtedness without authorization from or notice to the Owner even
though the financial condition of the Borrower, any endorser, cosigner,
guarantor or other person liable on any Indebtedness may have deteriorated since
the date of this Addendum. The Owner waives all right to require the Bank to
disclose any information with respect to: (i) any Indebtedness; (ii) the
financial condition, credit or character of the Borrower, any endorser,
cosigner, guarantor or other person liable on any Indebtedness; (iii) any other
or additional collateral securing any Indebtedness or any guaranty thereof; or
(iv) any action or inaction on the part of the Bank, the Borrower or any
endorser, cosigner, guarantor or other person liable on any Indebtedness. The
Owner hereby assumes the responsibility for being informed of the financial
condition, credit and character of the Borrower and of all circumstances bearing
upon the risk of non-payment of any Indebtedness which diligent inquiry would
reveal.
5. BORROWER'S AND OWNER'S WAIVERS. The Owner and the Borrower each waive
all rights to require the Bank to: (i) proceed against the Borrower, any
endorser, cosigner, guarantor or other person liable on any Indebtedness; (ii)
proceed against the Collateral, any particular item of the Collateral or any
other or additional collateral securing any Indebtedness or any guaranty
thereof; or (iii) pursue or refrain from pursuing any other remedy in the Bank's
power whatsoever against any Collateral or on any Indebtedness.
6. RIGHT OF FORECLOSURE. The Bank may foreclose, either by judicial
foreclosure or by exercise of power of sale, any deed of trust securing any
Indebtedness even though such foreclosure may destroy or diminish the Owner's
rights against the Borrower. The Borrower shall be liable to the Bank for any
part of any Indebtedness remaining unpaid after any such foreclosure whether or
not such foreclosure was for fair market value.
7. SUBORDINATION. Any indebtedness of the Borrower or any endorser,
cosigner, guarantor or other person liable on any Indebtedness now or hereafter
owed to the Owner is hereby subordinated to the Indebtedness. Such indebtedness
owed to the Owner shall, if the Bank so requests, be collected, enforced and
received by the Owner as trustee for the Bank and be paid over to the Bank on
account of the Indebtedness but without reducing or affecting in any manner the
matters contained in the Security Agreement and this Addendum. Should the Owner
fail to collect the proceeds of any such indebtedness owed to it and pay such
proceeds to the Bank, the Bank, as the Owner's attorney-in-fact, may do such
acts and sign such documents in the Owner's name as the Bank considers necessary
to effect such collection.
8. INVALID, FRAUDULENT OR PREFERENTIAL PAYMENTS. The Owner agrees that,
to the extent the Borrower or any endorser, cosigner, guarantor or other person
liable on any Indebtedness makes a payment or payments on any Indebtedness, or
is credited for any payment or payments made for or on behalf of any
Indebtedness, which payment or payments, or any part thereof, is subsequently
invalidated, determined to be fraudulent or preferential, set aside or required
to be repaid to any trustee, receiver, assignee or any other party whether under
any bankruptcy, state or federal law or under any common law or equitable cause
or otherwise, then, to the extent thereof, the obligation or part thereof
intended to be satisfied thereby shall be revived, reinstated and continued in
full force and effect as if such payment or payments had not originally been
made or credited.
9. COLLATERAL IN BORROWER'S POSSESSION; BORROWER'S COVENANTS. To the
extent that any item of the Collateral is in the possession of the Borrower, the
covenants of the Owner (as set forth in Paragraph 4 of the Security Agreement)
pertaining to such item of the Collateral shall be those of the Borrower or,
with respect to covenants concerning the maintenance of such item of the
Collateral, inspection rights, reporting requirements, any transfer of such
items of the Collateral and notices, those of both the Borrower and the Owner.
10. SEVERABILITY. Should any one or more provisions of this Addendum be
determined to be illegal or unenforceable, all other provisions shall remain
effective.
11. CALIFORNIA LAW. This Addendum shall be governed by and construed
according to the laws of the State of California, to the jurisdiction of whose
courts the Owner and the Borrower hereby submit.
12. Except as specifically provided in this Addendum, all other terms,
conditions and covenants contained in the Security Agreement shall remain
unchanged and shall continue in full force and effect.
[PAGE 3 ENDS HERE. SIGNATURES APPEAR ON PAGE 4]
ADDENDUM TO SECURITY AGREEMENT - LENT COLLATERAL - PG3
<PAGE>
IN WITNESS WHEREOF, this Addendum has been executed by the parties hereto
as of the date first hereinabove written.
<TABLE>
<CAPTION>
BANK: OWNER:
SANWA BANK CALIFORNIA
<S> <C>
By:
- --------------------------------------------- ---------------------------------------------
Steve R. Edmonston, Vice President ALFRED G. SCHEID, TRUSTEE OF THE ALFRED G.
SCHEID REVOCABLE TRUST dated October 8, 1992
Address: 2035 Fresno Street
Fresno, CA 93721 Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
BORROWER:
SCHEID VINEYARDS, INC.
By: -------------------------------------------
Alfred G. Scheid, President
By: -------------------------------------------
Ernest M. Brown, Secretary
Address: 13470 Washington Blvd., Suite 300
Marina Del Rey, CA 90292
</TABLE>
ADDENDUM TO SECURITY AGREEMENT - LENT COLLATERAL - PG4
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Scheid Vineyards California Inc., a California corporation
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-27871 of Scheid
Vineyards Inc. on Form SB-2 of our report dated April 18, 1997 appearing in
the prospectus and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
Los Angeles, CA
July 2, 1997
