<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1997
REGISTRATION NO. 333-27871
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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 77-0461833
(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 21, 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, and no assurances regarding the ultimate production or
profitability of Riverview Vineyard can be given. 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
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prices at which properties can be purchased or leased. Market factors have
contributed to high prices 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.
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Gollnick (an officer of the Company who is not related to the Scheid family),
Emanty Limited Liability 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. 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 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, 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 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, or
appointed to replace directors who were elected by the holders of Class A Common
Stock or their appointed successors, 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 or issuances of Class B Common Stock in private offerings. 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
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Stock after this offering. See "Underwriting." Trading activity in the Class A
Common Stock and any 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 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.
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. The Company's acquisition of Riverview Vineyard was based upon
analysis of a number of factors affecting the potential value of the vineyard to
the Company including, among other things, location, varietal mix and production
history as well as the Company's ability to implement its own viticultural
techniques at the vineyard and the potential to enter into long-term grape
purchase contracts for the vineyard's production. While no assurances regarding
the ultimate production or profitability of Riverview Vineyard can be given, the
acquisition was based upon the Company's expectation that Riverview Vineyard's
contribution to the
22
<PAGE>
Company's profitability will be consistent with the Company's other vineyards
with comparable varietal mixes. The Company intends to secure long-term grape
purchase contracts for the grape production from Riverview Vineyard, but there
can be no assurance that the Company will be successful in finding a winery or
wineries which will agree to such contracts. Pending entering into long-term
grape purchase contracts for the vineyard, the Company may store some or all of
the vineyard's production in the form of bulk wine for sale in later periods,
which would affect the timing of Riverview Vineyard's contribution to the
Company's revenues.
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 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
23
<PAGE>
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>
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.
24
<PAGE>
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.
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."
25
<PAGE>
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. Based on current discussions with its bank, the Company expects to
be able to refinance the short-term note prior to its due date with a long-term
note secured by Riverview Vineyard.
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%.
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.
33
<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 11,177 8,390 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.................................................................. 1,098 1,098 1,184 1,436
Cabernet Sauvignon...................................................... 1,117 1,097 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.
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<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. The
Company intends to secure long-term grape purchase contracts for the grape
production from this new vineyard. 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.
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.
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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.
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
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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.
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
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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 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-
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tasting room. The Company also has wine labels approved by BATF, including the
SCHEID VINEYARDS and SAN LUCAS VINEYARD brand names.
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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<PAGE>
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
(unless such acceleration is precluded by the terms of the grant), 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 or such acceleration is precluded by
the terms of the grant. 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 whether or not 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.
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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 and (ii) a commitment by SVI-Cal to make
the distributions described above.
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<PAGE>
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 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
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<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 all
directors elected by the holders of Class A Common Stock, or appointed to
replace directors who were elected by the holders of Class A Common Stock or
their appointed successors, 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 other than (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 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 interests of which
are owned
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<PAGE>
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, on a per share basis, 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 all directors elected
by the holders of Class A Common Stock, or appointed to replace directors who
were elected by the holders of Class A Common Stock or their appointed
successors, 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.
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<PAGE>
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 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 25% of the voting power of any class entitled to vote 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
59
<PAGE>
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 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
60
<PAGE>
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 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>
<S> <C>
SEC registration fee............................................. $ 7,698
NASD filing fee.................................................. 2,800
Nasdaq National Market listing fee............................... 16,000
Blue sky fees and expenses....................................... 10,000
Accounting fees and expenses..................................... 50,000
Legal fees and expenses of the Company........................... 275,000
Printing and engraving........................................... 75,000
Transfer agent and registrar fees and expenses................... 3,500
Miscellaneous.................................................... 60,002
---------
Total........................................................ $ 500,000
---------
---------
</TABLE>
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
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<S> <C>
1.1 Form of Underwriting Agreement.(2)
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.(2)
4.3 Form of Certificate Evidencing Ownership of Class B Common Stock of Scheid Vineyards Inc.(2)
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)(3)
10.4 Lease, dated January 1, 1996, by and between Echenique Ranch and Scheid Vineyards and Management
Co.(1)(3)
10.5 Land Lease, dated September 26, 1973, by and between William McHenry Bland and Monterey Farming
Corporation.(1)(3)
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)(3)
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)(3)
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)(3)
10.9 + Grenache Vineyard Management Agreement, dated April 1, 1995, by and between Scheid Vineyards and
Management Co. and Joseph Phelps Vineyards.(1)(3)
10.10+ Vineyard Management Agreement, dated April 1, 1995, by and between Scheid Vineyards and Management Co.
and Joseph Phelps Vineyards.(1)(3)
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)(3)
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)(3)
</TABLE>
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<TABLE>
<S> <C>
10.13 Line of Credit Term Loan Agreement, dated June 25, 1997, between Vineyard 405 and Sanwa Bank
California.(2)
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.(2)
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)(3)
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)(3)
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)(3)
10.24+ Long Term Grape Purchase Agreement, dated March 12, 1993, by and between Scheid Vineyards and
Management Co. and Heublein, Inc.(1)(3)
10.25+ Grape Purchase Agreement, dated April 1, 1996, by and between Scheid Vineyards and Management Co. and
The Hess Collection Winery.(1)(3)
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)(3)
10.27 Alternating Winery Agreement, dated November 30, 1995, by and between Scheid Vineyards and Management
Co. and Storrs Winery.(1)(3)
10.28 Winery Services Agreement, dated January 1, 1996, by and between Scheid Vineyards and Management Co.
and Storrs Winery.(1)(3)
10.29 Standard Office Lease, dated July 1, 1994, by and between Scheid Vineyards and Management Co. and Tesh
Partners, L.P.(1)(3)
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)(3)
</TABLE>
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<TABLE>
<S> <C>
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)(3)
10.33 Promissory Note, dated June 23, 1997, by Scheid Vineyards Inc. for the benefit of Sanwa Bank
California.(2)
10.34* Individual Retirement Agreement, dated May 1, 1997, by and between Scheid Vineyards Inc. and Ernest M.
Brown.(3)
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)(3)
10.36 Water Supply Agreement, dated as of January 1, 1997, by Scheid Vineyards and Management Co. and
Canandaigua West, Inc.(1)(3)
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)(3)
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)(3)
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)(3)
10.43+ Grape Purchase Agreement, dated April 1, 1997, by and between Vineyard Investors 1972 and Stephen
Dooley Wine Co., Inc.(1)(3)
10.44* Employment Agreement, dated July 19, 1997, by and between Scheid Vineyards Inc. and Alfred G. Scheid.
10.45* Employment Agreement, dated July 19, 1997, by and between Scheid Vineyards Inc. and Scott D. Scheid.
10.46* Employment Agreement, dated July 19, 1997, by and between Scheid Vineyards Inc. and Heidi M. Scheid.
10.47* Employment Agreement, dated July 19, 1997, by and between Scheid Vineyards Inc. and Kurt J. Gollnick.
10.48 Form of Indemnification Agreement.(2)
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.(2)
</TABLE>
II-5
<PAGE>
<TABLE>
<S> <C>
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.(2)
21.1 List of Subsidiaries.(2)
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>
- ------------------------------
* 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.
(2) Previously filed with the Securities and Exchange Commission as an exhibit
to Amendment No. 1 to the Company's Registration Statement on Form SB-2 as
filed on July 3, 1997 and incorporated herein by reference.
(3) The contracting party to this agreement is Scheid Vineyards California Inc.,
the Registrant's wholly-owned subsidiary.
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 21st day of July, 1997.
SCHEID VINEYARDS INC.
By: *
-----------------------------------------
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
* Chief Executive Officer
- ------------------------------ (Principal Executive July 21, 1997
Alfred G. Scheid Officer)
Vice President Finance,
/s/ HEIDI M. SCHEID Chief Financial Officer,
- ------------------------------ Treasurer and Director July 21, 1997
Heidi M. Scheid (Principal Financial and
Accounting Officer)
* Vice President, Chief
- ------------------------------ Operating Officer and July 21, 1997
Scott D. Scheid Director
*
- ------------------------------ Director July 21, 1997
John L. Crary
*
- ------------------------------ Director July 21, 1997
Robert P. Hartzell
* /s/ HEIDI M. SCHEID
- ------------------------------
Heidi M. Scheid
Attorney-in-fact
II-7
<PAGE>
CERTIFICATE OF INCORPORATION OF
SCHEID VINEYARDS INC.,
A DELAWARE CORPORATION
ARTICLE I
The name of this corporation is Scheid Vineyards Inc.
ARTICLE II
The address of the registered office of the corporation in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. CLASSES OF STOCK. The corporation is authorized to issue three
classes of shares designated "Class A Common Stock," "Class B Common Stock" and
"Preferred Stock," respectively. The total number of shares of all classes of
stock which the corporation shall have authority to issue is thirty-two million
(32,000,000) shares. The number of shares of Class A Common Stock which the
corporation is authorized to issue is twenty million (20,000,000) shares. The
number of shares of Class B Common Stock which the corporation is authorized to
issue is ten million (10,000,000) shares. The number of shares of Preferred
Stock which the corporation is authorized to issue is two million (2,000,000)
shares. Each of the Preferred Stock, the Class A Common Stock and the Class B
Common Stock shall have par value $.001 per share.
B. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS OF PREFERRED
STOCK. The Preferred Stock authorized by this Certificate of Incorporation may
be issued from time to time in one or more series. The Board of Directors of
the corporation is hereby authorized, within the limitations and restrictions
stated in this Certificate of Incorporation, to fix or alter, by resolution or
resolutions adopted by the Board of Directors, the powers, designations,
preferences and relative, participating, optional or other rights, if any, or
the qualifications, limitations or restrictions thereof (including dividend
rights, dividend rate, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), the redemption price or prices
and the liquidation preferences) granted to or imposed upon the Preferred Stock,
and the number of shares constituting any such series and the designation
thereof, or any of them. The Board of Directors is also authorized to increase
or decrease the number of shares of any series prior or subsequent to the
issuance of that series, but not below the number of shares of such series then
outstanding. In the event the number of shares of any series shall
<PAGE>
be so decreased, the shares constituting such decrease shall resume the status
which they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
C. CLASS A COMMON STOCK. The shares of Class A Common Stock and
shares of Class B Common Stock shall be identical in all respects and shall have
equal rights and privileges except as set forth in this paragraph C and in
paragraphs D, F and G of this Article IV. In the event of the liquidation,
dissolution or winding up of the corporation, after satisfaction of amounts
payable to creditors and distribution to the holders of outstanding shares of
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, on a per share basis, in the assets available for
distribution to the stockholders.
1. Dividends.
(a) Subject to the rights of holders of all classes of
stock at the time outstanding having prior rights, such dividends or
distributions as may be determined by the Board of Directors of the corporation
from time to time may be declared and paid or made upon the Class A Common Stock
out of any source at the time lawfully available for the payment of dividends.
Dividends other than dividends payable in Class A Common Stock or Class B Common
Stock may be declared and paid or made on the Class A Common Stock without an
identical or equivalent dividend being declared or made on the Class B Common
Stock. If dividends are declared and paid or made upon the Class B Common Stock
(subject to paragraph D.1 below), an identical dividend shall be declared and
paid or made simultaneously on the Class A Common Stock.
(b) No dividend may be declared and paid or made in Class A
Common Stock unless the dividend is payable only to holders of Class A Common
Stock and a dividend payable on the Class B Common Stock is declared and paid or
made simultaneously in respect of outstanding shares of Class B Common Stock in
the same number of shares of Class B Common Stock per outstanding share as is
paid or made per outstanding share of Class A Common Stock.
2. Voting. The holders of Class A Common Stock shall have the
voting rights set forth below:
(a) With respect to the election of the Board of Directors,
the holders of Class A Common Stock, voting as a separate class, shall be
entitled to elect that number of directors which constitutes twenty-five percent
(25%) of the total authorized membership of the Board of Directors, and if such
twenty-five percent (25%) is not a whole number, then the holders of Class A
Common Stock will be entitled to elect the next higher whole number of directors
which constitutes at least twenty-five percent (25%) of such membership. Such
election shall be from a slate of director nominees separate from a slate of
director nominees from which holders of Class B Common Stock shall elect
directors.
(b) The holders of Class A Common Stock will be entitled to
vote as a separate class on the removal, with or without cause, of any director
elected by the holders of Class A Common Stock or otherwise appointed to serve
in such capacity as a result
2.
<PAGE>
of a vacancy on the Board of Directors previously filled by a director elected
by the holders of Class A Common Stock, or otherwise appointed to serve in that
capacity; PROVIDED, HOWEVER, that, to the extent permitted by applicable law,
any director may be removed for cause by the Board of Directors.
(c) 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 in subparagraphs (a), (b) or (d) of this paragraph C.2. or
in subparagraphs (a) or (b) of paragraph D.2 or in paragraph F or G of this
Article IV, 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;
PROVIDED, HOWEVER, that the holders of Class A Common Stock shall have one (1)
vote per share and the holders of Class B Common Stock shall have five (5) votes
per share.
(d) Notwithstanding anything herein to the contrary, except
for matters where applicable law requires otherwise, the holders of Class A
Common Stock shall have exclusive voting power on all matters at any time when
no shares of Class B Common Stock or voting Preferred Stock are issued and
outstanding, and the holders of the Class B Common Stock shall have exclusive
voting power on all matters at any time when no shares of Class A Common Stock
or voting Preferred Stock are issued and outstanding.
D. CLASS B COMMON STOCK.
1. Dividends. Subject to the provisions of paragraph C.1. of
this Article IV, dividends and distributions may be declared and paid or made
upon the Class B Common Stock as may be permitted by applicable law; PROVIDED,
HOWEVER, that no dividend may be declared and paid or made in Class B Common
Stock unless the dividend is payable only to holders of Class B Common Stock and
a dividend payable in Class A Common Stock is declared and paid or made
simultaneously in respect of outstanding shares of Class A Common Stock in the
same number of shares of Class A Common Stock per outstanding share as is paid
or made per outstanding share of Class B Common Stock.
2. Voting. Subject to the provisions of paragraph C.2. of this
Article IV, the Class B Common Stock shall have five (5) votes per share on all
matters that may be submitted to a vote or consent of the holders of Class B
Common Stock. Without limiting the generality of the foregoing:
(a) With respect to the election of directors, the holders
of Class B Common Stock shall be entitled, voting as a separate class, to elect
the remaining directors not subject to the priority right of the holders of the
Class A Common Stock set forth in paragraph C.2.(a) of this Article IV; and
(b) The holders of Class B Common Stock will be entitled to
vote as a separate class on the removal, with or without cause, of any director
elected by the holders of Class B Common Stock or otherwise appointed to serve
in such capacity as a result of a vacancy on the Board of Directors previously
filled by a director elected by the holders of Class B Common Stock, or
otherwise appointed to serve in that capacity, provided that, to the
3.
<PAGE>
extent permitted by applicable law, any director may be removed for cause by the
Board of Directors.
3. Conversion.
(a) Each holder of record of Class B Common Stock may, in
such holder's sole discretion and at such holder's option, convert any whole
number or all of such holder's shares of Class B Common Stock into fully paid
and nonassessable shares of Class A Common Stock at the rate (subject to
adjustment as hereinafter provided) of one (1) share of Class A Common Stock for
each share of Class B Common Stock surrendered for conversion. Any such
conversion may be effected by any holder of Class B Common Stock by surrendering
such holder's certificate or certificates for the shares of Class B Common Stock
to be converted, duly endorsed, at the office of the corporation or any transfer
agent for the Class B Common Stock, together with a written notice to the
corporation at such office that such holder elects to convert all or a specified
number of shares of Class B Common Stock and stating the name or names in which
such holder desires the certificate or certificates for such shares of Class A
Common Stock to be issued. Promptly thereafter, the corporation shall issue and
deliver to such holder or such holder's nominee or nominees, a certificate or
certificates for the number of shares of Class A Common Stock to which such
holder shall be entitled as aforesaid. Such conversion shall be deemed to have
been made at the close of business on the day of such surrender and the person
or persons entitled to receive the shares of Class A Common Stock issuable on
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Class A Common Stock on that date.
(b) Each share of Class B Common Stock shall automatically
be converted into Class A Common Stock, at the conversion ratio set forth above,
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 is not (i) the corporation, (ii)
any of Alfred G. Scheid, Scott D. Scheid, Heidi M. Scheid, Tyler P. Scheid,
Emily K. Liberty, Kurt J. Gollnick (collectively, the "Permitted Transferees")
or Emanty Limited Liability Company, a California limited liability company;
(iii) a current spouse, former spouse or direct lineal descendant of any of the
Permitted Transferees, including adopted persons (if adopted during their
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) and (iii) above; or (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 or limited liability companies described in this
clause (v). A pledge of Class B Common Stock as security for an obligation of a
holder thereof under which the pledgor retains all voting and other rights of
ownership shall not be considered a transfer for purposes of this paragraph
D.3.(b), unless and until beneficial ownership of such Stock is transferred to
the pledgeholder. The conversion into Class A Common Stock shall be deemed to
have occurred (whether or not certificates representing such shares are
surrendered) as of the close of business on the date of transfer, and the person
or persons entitled to receive shares of Class A Common Stock issuable on such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Class A Common Stock on that date.
4.
<PAGE>
(c) Before any shares of Class A Common Stock shall be
delivered upon conversion, the holder of shares of Class B Common Stock whose
shares have been converted into Class A Common Stock shall deliver the
certificate(s) representing such shares to the corporation or its duly
authorized agent (or if such certificates have been lost stolen or destroyed,
such holder shall execute an agreement satisfactory to the corporation to
indemnify the corporation from any loss incurred by it in connection with such
conversion), specifying the place where the Common Stock issued in conversion
thereof shall be sent. The endorsement of the share certificate shall be in
form satisfactory to the corporation or such agent, as the case may be.
(d) The number of shares of Class A Common Stock into which
the shares of Class B Common Stock may be converted shall be subject to
adjustment from time to time in the event of any capital reorganization,
reclassification of stock of the corporation, consolidation or merger of the
corporation with another corporation or other entity or sale or conveyance of
all or substantially all of the assets of the corporation to another corporation
or other entity or person that does not provide for additional shares or rights
to the holders of Class B Common Stock such that their relative rights are not
impaired. Each share of Class B Common Stock shall thereafter be convertible
into such kind and amount of securities or other assets, or both, as are
issuable or distributable in respect of the number of shares of Class A Common
Stock into which each share of Class B Common Stock is convertible immediately
prior to such reorganization, reclassification, consolidation, merger, sale or
conveyance. In any such case, appropriate adjustments shall be made by the
Board of Directors of the corporation in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of Class B Common Stock to the end that the provisions set forth herein
(including provisions for adjustment of the conversion rate) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any securities or
other assets thereafter deliverable on conversion of the Class B Common Stock.
(e) The corporation shall, at all times, reserve and keep
available out of the authorized and unissued shares of Class A Common Stock,
solely for the purpose of effecting the conversion of the outstanding Class B
Common Stock, such number of shares of Class A Common Stock as shall from time
to time be sufficient to effect conversion of all outstanding Class B Common
Stock and if, at any time, the number of authorized and unissued shares of Class
A Common Stock shall not be sufficient to effect conversion of the then
outstanding Class B Common Stock, the corporation shall take such corporate
action as may be necessary to increase the number of authorized and unissued
shares of Class A Common Stock to such number as shall be sufficient for such
purposes.
(f) No fractional shares of Class A Common Stock shall be
issued upon conversion of shares of Class B Common Stock. If more than one
share of Class B Common Stock shall be surrendered for conversion at any one
time by the same holder, the number of shares of Class A Common Stock issuable
upon conversion thereof shall be computed on the basis of the aggregate number
of shares of the Class B Common Stock so surrendered. If, after the
aforementioned aggregation, the conversion would result in the issuance of a
fraction of a share of Class A Common Stock, the number of shares of Class A
Common Stock to be issued shall be rounded up or down to the nearest full share.
5.
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(g) The corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of Class
A Common Stock on conversion of Class B Common Stock pursuant hereto. The
corporation shall not, however, be required to pay any tax which may be payable
in respect of the issue of any Class A Common Stock in a name other than that in
which the Class B Common Stock so converted was registered, and no such issue or
delivery shall be made unless and until the person requesting such issue has
paid to the corporation the amount of any such tax, or has established, to the
satisfaction of the corporation, that such tax has been paid.
(h) If any shares of capital stock to be reserved for the
purpose of conversion of shares of Class B Common Stock require registration or
listing with, or approval of, any governmental authority, stock exchange or
other regulatory body under any federal or state law or regulation or otherwise
before such shares may be validly issued or delivered upon conversion, the
corporation will in good faith and as expeditiously as possible endeavor to
secure such registration, listing or approval, as the case may be.
(i) All shares of Class A Common Stock which may be issued
upon conversion of the shares of Class B Common Stock will upon issuance by the
corporation be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges with respect to the issuance thereof.
(j) All certificates representing Class B Common Stock
surrendered for conversion shall be appropriately canceled on the books of the
corporation, and the shares so converted represented by such certificates shall
be restored to the status of authorized but unissued Class B Common Stock of the
corporation.
E. NOTICE. In case:
1. the corporation shall take a record of the holders of its
Class A Common Stock for the purpose of entitling them to receive a dividend, or
any other distribution, payable otherwise than in cash; or
2. the corporation shall take a record of the holders of its
Class A Common Stock for the purpose of entitling them to subscribe for or
purchase any shares of stock of any class or to receive any other rights; or
3. of the voluntary or involuntary dissolution, liquidation or
winding up of the corporation;
then, and in any such case, the corporation shall cause to be mailed to the
holders of record of the outstanding Class B Common Stock, at least ten (10)
days prior to the date hereinafter specified, a notice stating the date on which
a record is to be taken for the purpose of such dividend, distribution or
rights.
6.
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F. ALTERATIONS OF RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
OF CLASS B COMMON STOCK.
1. So long as any shares of Class B Common Stock are
outstanding, the corporation shall not, without first obtaining the approval by
vote or written consent, in the manner provided by law, of the holders of a
majority of the total number of shares of Class B Common Stock outstanding,
voting separately as a class, (1) alter or change the rights, preferences,
privileges or restrictions of the Class B Common Stock; (2) amend any provision
of this paragraph F or paragraph D, E, G or H of this Article IV; or (3) effect
any reclassification or recapitalization of the corporation's outstanding
capital stock.
2. So long as any shares of Class A Common Stock are
outstanding, the corporation shall not, without first obtaining the approval, by
vote or written consent, in the manner provided by law, of the holders of a
majority of the total number of shares of Class A Common Stock outstanding,
voting separately as a class, (a) alter or change the rights, preferences,
privileges or restrictions of the Class A Common Stock or (b) amend any
provision of paragraph C, E, F, G or H of this Article IV.
G. RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS.
Notwithstanding any other provision of this Article IV to the contrary:
1. the corporation shall not alter or change the rights,
preferences, privileges or restrictions of either the Class A Common Stock or
the Class B Common Stock 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 or changed class
without first obtaining 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;
2. 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 first
obtaining 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 each such class
outstanding, each voting as a separate class; and
3. 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,
(a) no increase in the number of shares of outstanding Class B Common Stock
shall 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 (b) no increase in the number of shares
of outstanding Class B Common Stock shall 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 all directors elected by the holders of Class A Common Stock or appointed to
replace directors who were elected by the holders of Class A Common Stock or
7.
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their appointed successors, consisting of not less than two (2) persons, who are
not, directly or indirectly, beneficial owners of any shares of Class B Common
Stock and who have not been officers or employees of the corporation or any of
its subsidiaries within the three (3)-year period immediately preceding such
issuance.
H. QUORUM. Where a separate vote by class or series is required
with respect to any matter, the holders of shares entitled to cast a majority of
the votes which could be cast by all shares of such class or series entitled to
vote thereon shall constitute a quorum. With respect to any other matter, the
holders of shares entitled to cast a majority of the votes which could be voted
thereon shall constitute a quorum.
ARTICLE V
The name and mailing address of the incorporator is Heidi M. Scheid,
13470 Washington Boulevard, Suite 300, Marina del Rey, California 90292.
ARTICLE VI
Except as otherwise provided in this Certificate of Incorporation, in
furtherance and not in limitation of the powers conferred by statute, the Board
of Directors is expressly authorized to make, repeal, alter, amend and rescind
any or all of the Bylaws of the corporation.
ARTICLE VII
The number of directors of the corporation shall be fixed from time to
time by, or in the manner provided in, the Bylaws or amendment thereof duly
adopted by the Board of Directors or by the stockholders.
ARTICLE VIII
Elections of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the Delaware General Corporation Law)
outside the State of Delaware at such place or places as may be designated from
time to time by the Board of Directors or in the Bylaws of the corporation.
ARTICLE X
A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
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
8.
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violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors then the
liability of a director of the corporation shall be eliminated or limited to the
fullest extent permitted by the Delaware General Corporation Law as so amended.
Any repeal or modification of the foregoing provisions of this Article
X by the stockholders of the corporation shall not adversely affect any right or
protection of a director of the corporation existing at the time of such repeal
or modification.
ARTICLE XI
To the fullest extent permitted by applicable law, the corporation is
also authorized to provide indemnification of (and advancement of expenses to)
its directors and officers (and any other person to which Delaware law permits
the corporation to provide indemnification) through Bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors or otherwise, in excess of the indemnification and advancement
otherwise permitted by Section 145 of the Delaware General Corporation Law,
subject only to limits created by applicable Delaware law (statutory or
non-statutory), with respect to actions for breach of duty to the corporation,
its stockholders and others.
Any repeal or modification of any of the foregoing provisions of this
Article XI shall not adversely affect any right or protection of a director,
officer, agent or other person existing at the time of, or increase the
liability of any director of the corporation with respect to any acts or
omissions of such director, officer or agent occurring prior to such repeal or
modification.
ARTICLE XII
The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
9.
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IN WITNESS WHEREOF, the undersigned has signed this Certificate of
Incorporation this 30th day of July, 1997.
/s/ Heidi M. Scheid
------------------------------
Heidi M. Scheid, Incorporator
<PAGE>
BYLAWS
OF
SCHEID VINEYARDS INC.
ARTICLE I
OFFICES
Section 1. REGISTERED OFFICE. The registered office shall be in the City
of Wilmington, County of New Castle, State of Delaware.
Section 2. OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
CORPORATE SEAL
Section 1. CORPORATE SEAL. If the Board of Directors adopts a corporate
seal, such seal shall have inscribed thereon the name of the corporation and the
state and date of its incorporation. If and when a seal is adopted by the Board
of Directors, such seal may be engraved, lithographed, printed, stamped,
impressed upon or affixed to any contract, conveyance, certificate for shares or
other instrument executed by the corporation.
ARTICLE III
MEETINGS AND VOTING RIGHTS
Section 1. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors shall be held at such place, within or without the State
of Delaware, as shall be designated from time to time by the Board of Directors
and stated in the notice of the meeting. Meetings of stockholders for any other
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. ANNUAL MEETINGS. Annual meetings of stockholders shall be held
on such date and at such time as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which they shall
elect a board of directors, and transact such other business as may properly be
brought before the meeting.
<PAGE>
Section 3. SPECIAL MEETINGS.
(a) Special meetings of the stockholders, for any purpose or
purposes, may be called by a majority of the Board of Directors, the Chairman of
the Board of Directors, the Chief Executive Officer or the holders of shares
entitled to cast not less than twenty-five percent (25%) of the voting power of
any class of stock entitled to vote at the meeting. In calculating "voting
power" for purposes of these Bylaws, special voting rights set forth in the
corporation's Certificate of Incorporation shall be taken into account, giving
effect to separate class or series votes as applicable.
(b) Upon written request to the Chairman of the Board of Directors,
the Chief Executive Officer, any vice president or the Secretary of the
corporation by any person or persons (other than the Board of Directors)
entitled to call a special meeting of the stockholders, such officer forthwith
shall cause notice to be given to the stockholders entitled to vote, that a
meeting will be held at a time requested by the person or persons calling the
meeting, such time to be not less than thirty-five (35) nor more than sixty (60)
days after receipt of such request. If such notice is not given within twenty
(20) days after receipt of such request, the person or persons calling the
meeting may give notice thereof in the manner provided by law or in these
bylaws. Nothing contained in this Section 3 shall be construed as limiting,
fixing or affecting the time or date when a meeting of stockholders called by
action of the Board of Directors may be held.
(c) At a special meeting, notice of which has been given in
accordance with this Section 3, action may not be taken with respect to
business, the general nature of which has not been stated in such notice.
Section 4. NOTICE OF MEETINGS. Written notice of each meeting, stating the
place, date and hour of the meeting, shall be given to each stockholder entitled
to vote at such meeting not less than ten (10) nor more than sixty (60) days
before the date of the meeting. Notice of any meeting shall state in general
terms the purpose or purposes for which the meeting is called.
Section 5. QUORUM AND TRANSACTION OF BUSINESS.
(a) Where a separate vote by class or series is required with respect
to any matter pursuant to the corporation's Certificate of Incorporation, the
holders of shares entitled to cast a majority of the votes which would be cast
by all shares of such class or series entitled to vote thereon shall constitute
a quorum at any meeting of the stockholders. With respect to any other matter,
the holders of shares entitled to cast a majority of the votes which could be
voted thereon shall constitute a quorum. If a quorum is present, the
affirmative vote of the majority of the voting power represented at the meeting
on any matter shall be the act of the stockholders, except as otherwise required
by law or by the Certificate of Incorporation, and except as provided in
subsection (b) below.
(b) The stockholders present at a duly called or held meeting of the
stockholders at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum, provided that any action
2.
<PAGE>
taken (other than adjournment) is approved by at least a majority of the voting
power required to constitute a quorum.
(c) In the absence of a quorum, no business other than adjournment
may be transacted, except as described in subsection (b) above.
Section 6. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting of
stockholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary to give
notice of the time and place of such adjourned meeting pursuant to Sections 8
and 9 of these Bylaws; PROVIDED, HOWEVER, that if any of the following three
events occur, such notice must be given:
(a) announcement of the adjourned meeting's time and place is not
made at the original meeting which it continues or
(b) such meeting is adjourned for more than forty-five (45) days
from the date set for the original meeting or
(c) a new record date is fixed for the adjourned meeting.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting.
Section 7. VOTE; PROXY. When a quorum is present at any meeting, the vote
of the holders of a majority of the shares of stock having voting power present
in person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
Delaware General Corporation Law, the Certificate of Incorporation or these
Bylaws, a different vote is required, in which case such express provision shall
govern and control the decision of such question. Voting rights for each of the
Class A Common Stock and the Class B Common Stock shall be as set forth in the
Certificate of Incorporation. No proxy shall be voted on after three (3) years
from its date, unless the proxy provides for a longer period. All proxies must
be filed with the Secretary of the corporation at the beginning of each meeting
in order to be counted in any vote at the meeting.
Section 8. ACTION IN LIEU OF MEETING. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of stockholders of the corporation, or any action which may be
taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the 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. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
3.
<PAGE>
Section 9. STOCKHOLDERS RECORD. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order by class of stock, and
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
ARTICLE IV
DIRECTORS
Section 1. POWERS. The business of the corporation shall be managed by or
under the direction of its Board of Directors which may exercise all such powers
of the corporation and do all such lawful acts and things as are not by statute
or by the Certificate of Incorporation or by these Bylaws directed or required
to be exercised or done by the stockholders.
Section 2. NUMBER OF DIRECTORS. The number of directors which shall
constitute the whole Board of Directors shall be not less than three (3) nor
more than eleven (11). The first Board of Directors shall consist of five (5)
directors. The directors need not be stockholders. Except for the first Board
of Directors, the directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 3 of this Article, and each director
elected shall hold office until his or her successor is elected and qualified,
unless he or she shall resign, become disqualified, disabled or otherwise
removed.
Section 3. VACANCIES. Vacancies on the Board of Directors by reason of
death, resignation, retirement, disqualification, removal from office or
otherwise, and newly created directorships resulting from any increase in the
authorized number of directors may be filled by a majority of the directors then
in office, although less than a quorum, or by a sole remaining director. The
directors so chosen shall hold office until the next annual election of
directors and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole Board of Directors (as
constituted immediately prior to any such increase), the Court of Chancery may,
upon application of any stockholder or stockholders holding at least ten percent
(10%) of the total number of the shares at the time outstanding having the right
to vote for such directors, summarily order an election to be held to fill any
such vacancies or newly created directorships, or to replace the directors
chosen by the directors then in office.
4.
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Section 4. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 5. PLACE OF MEETINGS. The Board of Directors of the corporation
may hold meetings, both regular and special, either within or without the State
of Delaware.
Section 6. REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by the Board of Directors.
Section 7. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board of Directors or the Chief Executive
Officer on two (2) days' notice to each director, either personally or by mail
or by telegram. Special meetings shall be called by the Chief Executive Officer
or Secretary in like manner and on like notice on the written request of two (2)
directors unless the Board of Directors consists of only one (1) director, in
which case special meetings shall be called by the Chief Executive Officer or
Secretary in like manner and on like notice on the written request of the sole
director.
Section 8. QUORUM. At all meetings of the Board of Directors a majority
of the number of directors constituting the whole Board of Directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the Board of Directors, except as may be otherwise specifically provided by
statute, by the Certificate of Incorporation or by these Bylaws. If a quorum
shall not be present at any meeting of the Board of Directors the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present.
Section 9. ACTION IN LIEU OF MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting and without notice thereof, if all members of the
Board of Directors or such committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or such committee.
Section 10. CONFERENCE CALL MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, members of the Board of Directors,
or any committee designated by the Board of Directors, may participate in a
meeting of the Board of Directors, or any committee, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at the meeting.
5.
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Section 11. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors
may, by resolution passed by a majority of the whole Board of Directors,
designate one or more committees, each committee to consist of one or more of
the directors of the corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee.
In the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it, but no such committee shall have the power or
authority in reference to amending the Certificate of Incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the Bylaws of the corporation. Unless
the resolution creating such committee or the Certificate of Incorporation
expressly so provide, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock or to adopt a
certificate of ownership and merger. Such committee or committees shall have
such name or names as may be determined from time to time by resolution adopted
by the Board of Directors.
Section 12. MINUTES OF MEETINGS. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
ARTICLE V
OFFICERS
Section 1. GENERAL. The officers of the corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a Chief Executive
Officer, a Chief Operating Officer, a Secretary, a Chief Financial Officer and
such other officers as in its opinion are desirable for the conduct of the
business of the corporation. The Board of Directors may also choose a
Treasurer, one or more Vice Presidents, and one or more Assistant Secretaries
and Assistant Treasurers. Any number of offices may be held by the same person,
unless the Certificate of Incorporation or these Bylaws otherwise provide. The
Board of Directors may appoint such other officers and agents as it shall deem
necessary who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors.
6.
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Section 2. POWERS AND DUTIES. Each of the officers of the corporation
shall, unless otherwise ordered by the Board of Directors, have such powers and
duties as generally pertain to his or her respective office as well as such
powers and duties as from time to time may be conferred upon him by the Board of
Directors.
Section 3. SALARY. The salaries of all officers and agents of the
corporation shall be fixed by the Board of Directors or a committee thereof.
Section 4. TERM OF OFFICE; REMOVAL AND VACANCY. The officers of the
corporation shall hold office until their successors are chosen and qualify.
Any officer elected or appointed by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the corporation shall be filled by the Board
of Directors.
Section 5. POWER TO VOTE STOCK. Unless otherwise ordered by the Board of
Directors, each of the Chairman of the Board, Chief Executive Officer and Chief
Operating Officer of the corporation shall have the full power and authority on
behalf of the corporation to attend and to vote at any meeting of the
stockholders of any corporation in which the corporation may hold stock, and may
exercise on behalf of the corporation any and all of their rights and powers
incident to the ownership of such stock at any such meeting and shall have power
and authority to execute and deliver proxies, waivers and consents on behalf of
the corporation in connection with the exercise by the corporation of the rights
and powers incident to the ownership of such stock. The Board of Directors,
from time to time, may confer like powers upon any other person or persons.
ARTICLE VI
CAPITAL STOCK
Section 1. CERTIFICATES OF STOCK. The shares of the corporation shall be
represented by a certificate or shall be uncertificated. Certificates shall be
signed by, or in the name of the corporation by, the Chairman of the Board of
Directors, or the Chief Executive Officer or a Vice President, and by the
Treasurer or the Secretary of the corporation.
Section 2. FACSIMILE SIGNATURES. Any or all of the signatures on a
certificate may be facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. LEGENDS. If the corporation shall be authorized to issue more
than one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualification,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
corporation shall issue to represent such class or series of stock; PROVIDED,
HOWEVER, that, except as otherwise provided
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in section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate which the corporation shall issue to represent such class or series
of stock, a statement that the corporation will furnish 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.
Section 4. LOST, STOLEN OR DESTROYED CERTIFICATES. The Board of Directors
may direct a new certificate or certificates or uncertificated shares to be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates or uncertificated shares, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his or
her legal representative, to advertise the same in such manner as it shall
require and/or to give the corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Section 5. TRANSFER OF STOCK. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares such uncertificated shares shall
be canceled and issuance of new equivalent uncertificated shares or certificated
shares shall be made to the person entitled thereto and the transaction shall be
recorded upon the books of the corporation.
Section 6. FIXING RECORD DATE. In order that the corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; PROVIDED, HOWEVER, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 7. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of the State of Delaware.
8.
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ARTICLE VII
NOTICES
Section 1. NOTICE. Whenever, under the provisions of the statutes, the
Certificate of Incorporation or these Bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice,
but such notice may be given in writing, by mail, addressed to such director or
stockholder, at his or her address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram or by facsimile.
Section 2. WAIVER. Whenever any notice is required to be given under the
provisions of the statutes, the Certificate of Incorporation or these Bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE VIII
GENERAL PROVISIONS
Section 1. DIVIDENDS. Dividends upon the capital stock of the corporation
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, in rights or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
Section 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
Section 3. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
Section 4. SEAL. The corporate seal shall have inscribed thereon the name
of the corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
9.
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ARTICLE IX
INDEMNIFICATION
Section 1. To the fullest extent permitted by the Certificate of
Incorporation, the corporation shall indemnify its officers and directors and,
in the sole discretion of the Board of Directors, may indemnify its employees
and agents.
ARTICLE X
AMENDMENTS
Section 1. These Bylaws may be altered, amended or repealed or new bylaws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in the
notice of such special meeting; provided, however, that the corporation shall
not alter or change the rights, preferences, privileges or restrictions of
either the Class A Common Stock or the Class B Common Stock 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 or changed class without first obtaining 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. If the power to adopt, amend or repeal bylaws is conferred
upon the Board of Directors by the Certificate of Incorporation, it shall not
divest or limit the power of the stockholders to adopt, amend or repeal bylaws.
10.
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FORM OF WARRANT AGREEMENT
This WARRANT AGREEMENT (this "AGREEMENT") is entered into as of July ___,
1997 by and among Scheid Vineyards Inc., a Delaware corporation (the "COMPANY"),
and Cruttenden Roth Incorporated ("CRUTTENDEN"), Laidlaw Equities, Inc.
("LAIDLAW"), and Rodman & Renshaw, Inc. ("RODMAN" and together with Cruttenden
and Laidlaw, the "REPRESENTATIVES").
A. The Representatives have agreed to act as the Representatives of the
several underwriters in connection with the proposed public offering by the
Company pursuant to that certain Underwriting Agreement with the Company dated
July ___, 1997 (the "UNDERWRITING AGREEMENT") of up to ______ shares in the
aggregate of its Class A Common Stock, par value $0.001 per share (the "COMMON
STOCK"), including ______ of such shares covered by an over-allotment option
(the "PUBLIC OFFERING"); and
B. Pursuant to Section 4(p) of the Underwriting Agreement and as part of
the Representatives' compensation in connection with the Public Offering, the
Company has agreed to sell to the Representatives, at a price of $0.001 per
warrant, warrants (the "WARRANTS") to purchase, at a price of $_____ per share,
up to an aggregate of ______ shares of Common Stock (hereinafter, and as the
number thereof may be adjusted as set forth herein, the "WARRANT SHARES").
In consideration of the foregoing premises and the mutual agreements herein
and in the Underwriting Agreement and for other good and valuable consideration,
the parties hereto agree as follows:
1. ISSUANCE OF WARRANTS: FORM OF WARRANT CERTIFICATE. The Company shall
issue to each of the Representatives, on the Closing Date referred to in the
Underwriting Agreement, that number of Warrants set forth opposite such
Representative's name on SCHEDULE 1. Certificates representing the Warrants in
substantially the form of Exhibit A (the "WARRANT CERTIFICATES") shall be
executed on behalf of the Company by the manual or facsimile signature of the
present or any future Chairman of the Board, President or Vice President of the
Company, under its corporate seal, affixed or in facsimile, attested by the
manual or facsimile signature of the Secretary or an Assistant Secretary of the
Company, and delivered to the Representatives on the Closing Date referred to in
the Underwriting Agreement, and thereafter to successive registered Holders (as
defined below). Warrant Certificates bearing the manual or facsimile signatures
of individuals who were at any time the proper officers of the Company shall
bind the Company, notwithstanding that such individuals or any one of them shall
have ceased to hold such offices prior to the delivery of such Warrant
Certificates or did not hold such offices on the date of this Agreement.
Warrant Certificates shall be dated as of the date of execution thereof by the
Company either upon initial issuance or upon division, exchange, substitution or
transfer.
2. TERM AND EXERCISE OF WARRANTS.
2.1 Each Warrant entitles the registered owner thereof to purchase
one share of Common Stock (subject to adjustment as set forth herein) at any
time from 10:00 a.m.,
<PAGE>
California time, on [EFFECTIVE DATE], 1998 (the "INITIATION DATE") until 6:00
p.m., California time, on [EFFECTIVE DATE], 2002 (the "EXPIRATION DATE") at a
purchase price of $________, (subject to adjustment as set forth herein) (the
"WARRANT PRICE"). Subject to the provisions of this Agreement, each registered
Holder (as defined below) of Warrants shall have the right to exercise the
Warrants and purchase the underlying Warrant shares, either in their entirety or
from time to time, effective as of any date specified by the Holder from and
after the Initiation Date and on or before the Expiration Date in the manner set
forth in the Warrant Certificate. Payment of the aggregate Warrant Price for
all Warrant Shares for which Warrants are exercised shall be made, in the
discretion of the Holder, in cash or by certified or official bank check or by
net issuance, or a combination thereof. Exercise by net issuance shall be
effected without payment by the Holder of any cash or other consideration by the
Company's withholding from the Warrant Shares that would otherwise be issued
upon exercise if the exercise price were paid in cash, that number of Warrant
Shares which, when multiplied by the Closing Price for the day immediately
preceding the date of exercise, equals the aggregate Warrant Price for the
Warrants so exercised.
2.2 Notwithstanding the foregoing, if at 6:00 p.m., California time
on the Expiration Date, any Holder of Warrants has not exercised its Warrants
and has not notified the Company that it waives automatic issuance pursuant to
this SECTION 2.1, then all such unexercised Warrants shall be automatically
converted into a number of shares of Common Stock of the Company equal to: (A)
the number of shares of Common Stock then issuable upon exercise of all such
unexercised Warrants minus (B) a number of shares of Common Stock equal to the
quotient obtained by dividing the aggregate Warrant Price for all such
unexercised Warrants by the Closing Price (as defined in SECTION 11.1(c) below)
for the Common Stock on the Expiration Date.
2.3 Upon exercise of Warrants and payment of the applicable Warrant
Price, the Company shall issue and cause to be delivered with all reasonable
dispatch to or upon the written order of the registered Holder of such Warrants
and in such name or names as such registered Holder may designate, a certificate
or certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants (net of any Warrant Shares withheld in payment of the
Warrant Price, if paid by net issuance), together with cash, as provided in
SECTION 12, in respect of any fraction of a share otherwise issuable upon such
exercise and, if the number of Warrants represented by a Warrant Certificate
shall not be exercised in full, a new Warrant Certificate for the number of
Warrants represented by the Warrant Certificate surrendered but not exercised.
any person(s) designated by the exercising Holder as the holder of the Warrant
Shares issuable upon exercise shall be deemed to have become a holder of record
of such shares as of the date of the surrender of such Warrants and payment of
the Warrant Price, or such later date as the exercising Holder may specify,
notwithstanding that the stock transfer books of the Company may then be closed
or that certificates representing the Warrant Shares have not been delivered.
3. REGISTRATION. The Warrant Certificates shall be numbered and shall be
registered on the books of thE Company (the "WARRANT REGISTER") as they are
issued. The Company shall be entitled to treat the registered holder of any
Warrant Certificate (notwithstanding any notation of ownership or other writing
made on the Warrant Certificate made by anyone) on the Warrant Register (the
"HOLDER") as the owner in fact thereof and of the Warrants represented thereby
for all purposes and shall not be bound to recognize any equitable or other
claim to or interest in such Warrant Certificate or the Warrants represented
thereby on the part of any other person, and shall
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<PAGE>
not be liable for any registration or transfer of Warrants registered in the
name of a fiduciary or the nominee of a fiduciary . The Warrant Certificates
shall be registered initially in the names of each of the Representatives and in
the denominations set forth for each Representative on SCHEDULE 1, or in such
other denominations as any Representative may request in writing to the company
with respect to the Warrants to be issued to such Representative.
4. TRANSFERS.
4.1 Until __________, 1998, the Warrants will not be sold,
transferred, assigned or hypothecated except to (a) officers, partners, or
shareholders of the Representatives; (b) a successor to the Holder in a merger
or consolidation; (c) a purchaser of all or substantially all of the Holder's
assets; (d) any person receiving the Warrants from a permitted transferee at
death pursuant to will, trust or the laws of intestate succession; (e) any other
underwriter or selling group member that participated in the Public Offering; or
(f) any person by operation of law, provided that any such transfer shall be
contingent upon the transferee's agreement in writing to be bound by the terms
hereof.
4.2 The Warrants shall be transferable only on the Warrant Register
upon delivery thereof duly endorsed by the Holder or by the Holder's duly
authorized attorney or Representatives, or accompanied by proper evidence of
succession, assignment or authority to transfer. In all cases of transfer by an
attorney, the original power of attorney, duly approved, or an official copy
thereof, duly certified, shall be deposited with the Company. In case of
transfer by executors, administrators, guardians or other legal representatives,
duly authenticated evidence of their authority shall be produced and may be
required to be deposited with the Company in its discretion. Upon any
registration of transfer, the Company shall deliver a new Warrant Certificate or
Warrant Certificates to the person entitled thereto.
4.3 The Company shall not be required to recognize any transfer of
the Warrants or the Warrant Shares unless (a) such transfer is made pursuant to
an effective registration statement under the Securities Act of 1933, as amended
(the "ACT"), including a post-effective amendment to the Registration Statement,
or (b) counsel reasonably satisfactory to the Company provides an opinion that
the transfer may be made without registration pursuant to Rule 144 under the Act
or otherwise.
4.4 The Company may stop transfer of the Warrants and the Warrant
Shares to enforce the transfer restrictions set forth herein. The Warrant
Certificates shall bear the following legend:
TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS
DESCRIBED IN THE WARRANT AGREEMENT DESCRIBED HEREIN.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE CLASS A
COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO
THE REGISTRATION
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<PAGE>
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT
TO WHICH SUCH SECURITIES WERE ORIGINALLY REGISTERED IN CONNECTION
WITH ORIGINAL ISSUANCE OF THE WARRANTS REPRESENTED HEREBY, OR (ii) A
SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
The Warrant Shares or other securities issued upon exercise of the Warrants
shall bear the following legend, if applicable:
THE SHARES OR OTHER SECURITIES REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW. SAID SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT.
5. COMPLIANCE WITH GOVERNMENT REGULATIONS. If any shares of Common Stock
required to be reserved for purposes of exercise or conversion of Warrants
require, under any federal or state law or applicable governing rule or
regulation of any national securities exchange or market system, registration
with or approval of any governmental authority, or listing on any such national
securities exchange or market system before such shares may be issued upon
exercise, the Company will in good faith and as expeditiously as possible
endeavor to cause such shares to be duly registered, approved or listed. The
Company shall keep current in filing all reports, statements and other materials
required to be filed with the Securities and Exchange Commission to permit
Holders to sell the Warrants and the Warrant Shares under Rule 144.
6. PAYMENT OF TAXES. The Company shall pay any taxes due in connection
with the issuance or exercise of the Warrants other than transfer taxes payable
in connection with secondary transfers of any Warrants or issuance of Warrant
Shares to any person other than the registered Holder of such Warrants.
7. EXCHANGE OF WARRANT CERTIFICATES. Holders of Warrant Certificates may
exchange them for another certificate or certificates representing the right of
the Holder thereof to purchase a like aggregate number of Warrant Shares as the
Warrant Certificate or Certificates surrendered by delivering the Warrant
Certificates to be exchanged to the Company, properly endorsed or accompanied by
a properly executed instrument of transfer, together with a written request for
transfer, whereupon the Company shall execute and deliver to the person entitled
thereto a new Warrant Certificate or Certificates, as the case may be, as so
requested.
8. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any of the Warrant
Certificates shall be mutilated, lost, stolen or destroyed, the Company shall
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor
and representing an equivalent right or interest, subject to the provision to
the Company by the Holder thereof of evidence reasonably satisfactory to the
Company of such loss, theft or
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<PAGE>
destruction of such Warrant Certificate and, if requested, indemnity or bond
also reasonably satisfactory to the Company, provided that no such bond shall be
required from any of the initial Holders of the Warrants.
9. RESERVATION OF WARRANT SHARES; AUTHORIZATION AND VALID ISSUANCE. The
Company shall at all times reserve and keep available out of its authorized and
unissued shares of Common Stock a number of shares sufficient to provide for the
exercise of the rights of purchase represented by the Warrants, and the transfer
agent for the Common Stock or any other securities issuable upon the exercise of
any of the rights of purchase aforesaid ("TRANSFER AGENT") is hereby irrevocably
authorized and directed at all times until the Expiration Date to reserve such
number of authorized and unissued shares or other securities as shall be
required for such purpose. The Company will keep a copy of this Agreement on
file with the Transfer Agent and will supply such Transfer Agent with duly
executed stock certificates for such purposes and will itself provide or
otherwise make available any cash which may be issuable as provided in SECTION
12. The Company will furnish to such Transfer Agent a copy of all notices of
adjustments, and certificates related thereto, transmitted to each Holder
pursuant to SECTION 11.2. All Warrant Certificates surrendered in the exercise
of the rights thereby evidenced shall be cancelled. The Company represents that
the Warrant Shares are duly authorized and covenants that, upon receipt by the
Company of the full payment therefor, the Warrant Shares will be validly issued,
fully paid, nonassessable, and not issued in violation of any preemptive rights.
10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from time to time
take all action which may be necessary so that the Warrant Shares, immediately
upon their issuance upon the exercise of Warrants, will be listed and/or
included for trading on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed or included for trading.
11. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF WARRANT SHARES. For
purposes of this SECTION 11, "Common Stock" means shares now or hereafter
authorized of any class of Common Stock of the Company and any other stock of
the Company, however designated, that has the right (subject to any prior rights
of any class or series of preferred stock) to participate in any distribution of
the assets or earnings of the Company without limit as to per share amount.
11.1 MECHANICAL ADJUSTMENTS. The number and kind of securities
purchasable upon the exercise of each Warrant and the Warrant Price shall be
subject to adjustment from time to time as follows:
(a) In case the Company shall (i) pay a dividend in shares of Common
Stock or make a distribution in shares of Common Stock, (ii) subdivide its
outstanding shares of Common Stock, (iii) combine its outstanding shares of
Common Stock or (iv) issue by reclassification of its shares of Common Stock
other securities of the Company (including any such reclassification in
connection with a consolidation or merger in which the Company is the surviving
corporation), the number of Warrant Shares purchasable upon exercise of each
Warrant without giving effect thereto shall be adjusted so that the Holder of
each Warrant shall be entitled to receive the kind and number of Warrant Shares
or other securities of the Company which such Holder would have owned or would
have been entitled to receive after the happening of any of the events described
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<PAGE>
above, had such Warrants been exercised immediately prior to the happening of
such event or any record date with respect thereto. An adjustment made pursuant
to this paragraph (a) shall become effective immediately after the effective
date of such event retroactive to the record date, if any, for such event. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall distribute to all holders of its shares
of Common Stock (including any such distribution made in connection with a
consolidation or merger in which the Company is the surviving corporation)
evidences of its indebtedness or assets (excluding cash dividends or
distributions payable out of consolidated earnings or earned surplus and in
compliance with applicable law and dividends or distributions referred to in
paragraph (a) above or in the paragraph immediately following this paragraph),
or rights, options or warrants, or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock, then
in each case the number of Warrant Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of
Warrant Shares purchasable upon the exercise of each Warrant without giving
effect thereto by a fraction, the numerator of which shall be the current market
price per share of Common Stock (as defined in paragraph (c) below) as of the
record date for such distribution or, if there is no record date with respect
thereto then as of the date of such distribution, and the denominator of which
shall be the current market price per share of Common Stock as of such date,
less the fair value (as reasonably determined by the Board of Directors of the
Company) of the portion of the assets or evidences of indebtedness so
distributed or of such subscription rights, options or warrants, or of such
convertible or exchangeable securities applicable to one share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective on the date of distribution retroactive to the record date for
the determination of stockholders entitled to receive such distribution.
Notwithstanding the foregoing, however, no adjustment in the number of Warrant
Shares purchasable upon the exercise of each Warrant need be made under this
paragraph if the Company issues or distributes to each Holder of Warrants the
rights, options, warrants or convertible or exchangeable securities, or
evidences of indebtedness or assets referred to in those paragraphs which each
Holder of Warrants would have been entitled to receive had the Warrants been
exercised prior to the happening of such event or the record date with respect
thereto. No adjustment need be made for a change in the par value of the
Warrant Shares.
In the event of a distribution by the Company to all holders of its
shares of Common Stock or of the stock of a subsidiary of securities convertible
into or exercisable for such stock (other than as described in subparagraph
(a)(iv) above), then in lieu of an adjustment in the number of Warrant Shares
purchasable upon the exercise of each Warrant, the Holder of each Warrant, upon
the exercise thereof at any time after such distribution, shall be entitled to
receive from the Company, such subsidiary or both, as the Company shall
determine, the stock or other securities to which such Holder would have been
entitled if such Holder had exercised such Warrant immediately prior thereto,
all subject to further adjustment as provided in this SECTION 11.1; PROVIDED,
HOWEVER, that no adjustment in respect of dividends or interest on such stock or
other securities shall be made during the term of a Warrant or upon the exercise
of a Warrant.
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(c) For the purpose of any computation under paragraph (b) of this
Section, the current market price per share of Common Stock as of any date shall
be the average of the daily Closing Prices for 20 consecutive trading days
commencing 30 trading days before the date of such computation. The "CLOSING
PRICE" for any day shall be the last such reported sales price regular way for a
share of Common Stock on that day or, in case no such reported sale takes place
on such day, on the most recent trading day upon which such a sale took place,
in each case on the principal national securities exchange or national market
system on which the shares of Common Stock are listed or admitted to trading or,
if not so listed or admitted to trading, the average of the closing bid and
asked prices of the Common Stock in the over-the counter market or if not
approved for such trading, the average of the closing bid and asked prices as
furnished by two members of the National Association of Securities Dealers, Inc.
selected from time to time by the Company for that purpose.
(d) No adjustment in the number of Warrant Shares purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least one percent (1%) in the number of Warrant Shares
purchasable upon the exercise of each Warrant; provided, however, that any
adjustments which by reason of this paragraph (d) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one-thousandth of a share.
(e) Whenever the number of Warrant Shares purchasable upon the
exercise of each Warrant is adjusted, as herein provided, the Warrant Price per
share payable upon exercise of each Warrant shall be appropriately and
proportionately adjusted.
(f) If at any time, as a result of an adjustment made pursuant to
paragraph (a) above, the Holders shall become entitled to purchase any
securities of the Company other than shares of Common Stock, thereafter the
number of such other shares so purchasable upon exercise of each Warrant and the
Warrant Price of such shares shall be subject to adjustment from time to time in
a manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in this SECTION 11, and the other
provisions of this Agreement, with respect to the Warrant and Warrant Shares,
shall apply as nearly equivalent as practicable on like terms to such other
securities.
(g) Upon the expiration of any rights, options, warrants or
conversion or exchange privileges for which an adjustment was made hereunder, if
any thereof shall not have been exercised, the Warrant Price per share and the
number of shares of Common Stock purchasable upon the exercise of each Warrant
shall, upon such expiration, be readjusted and shall thereafter be such as they
would have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) as if (i) the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually issued
or sold upon the exercise of such rights, options, warrants or conversion or
exchange rights and (ii) such shares of Common Stock, if any, were issued or
sold for the consideration actually received by the Company upon such exercise
plus the aggregate consideration, if any, actually received by the Company for
the issuance, sale or grant of all such rights, options, warrants or conversion
or exchange rights whether or not exercised; provided, however, that no such
readjustment shall have the effect of increasing the Warrant Price per share or
decreasing the number of shares of Common Stock
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purchasable upon the exercise of each Warrant by an amount in excess of the
amount of the adjustment initially made in respect to the issuance, sale or
grant of such rights, options, warrants or conversion or exchange rights.
11.2 NOTICE OF ADJUSTMENT. Whenever the Company proposes any action
that would result in an adjustment of the number of Warrant Shares purchasable
upon the exercise of Warrants or the Warrant Price per share as herein provided,
the Company shall, at least 15 days prior to the date of such action or, if
earlier, the record date therefor, mail by first class, postage prepaid, to each
Holder notice of such adjustment or adjustments, the proposed date and, if
applicable, record date therefor, and a certificate of a firm of independent
public accountants selected by the board of directors of the Company (who may be
the regular accountants employed by the Company) setting forth the number of
Warrant Shares to be purchasable upon the exercise of each Warrant and the
Warrant Price per share after such adjustment, setting forth a brief statement
of the facts requiring such adjustment and setting forth the computation by
which such adjustment was made.
11.3 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in SECTION 11.1,
no adjustments in respect of any dividends shall be made during the term of a
Warrant or upon the exercise of a Warrant.
11.4 PRESERVATION OF PURCHASE RIGHTS UPON MERGER, CONSOLIDATION ETC.
In case of any consolidation of the Company with or merger of the Company into
another corporation or in case of any sale, transfer or lease to another
corporation of all or substantially all the property of the Company, the Company
or such successor or purchasing corporation, as the case may be, shall execute
with each Holder an agreement (and shall not effect any such transaction in the
absence of such an agreement) that each Holder shall have the right thereafter
upon payment of the Warrant Price in effect immediately prior to such action to
purchase upon exercise of each Warrant the kind and amount of shares and other
securities, cash and property which such Holder would have owned or would have
been entitled to receive in connection with the happening of such consolidation,
merger, sale, transfer or lease and as a result of subsequent transactions had
such Warrant been exercised immediately prior to such action and such
consideration been held until such exercise; provided, however, that no
adjustment in respect of dividends, interest or other income on or from such
shares or other securities, cash and property shall be made during the term of a
Warrant or upon the exercise of a Warrant. Such agreement shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this SECTION 11. The provisions of this SECTION
11.4 shall similarly apply to successive consolidations, mergers, sales transfer
or leases.
11.5 STATEMENTS ON WARRANTS. Irrespective of any adjustments in the
Warrant Price per share or the number or kind of shares purchasable upon the
exercise of the Warrants, Warrant Certificates theretofore or thereafter issued
may continue to express the same price and number and kind of shares as are
stated in the Warrants initially issuable pursuant to this Agreement.
12. FRACTIONAL INTERESTS. The Company shall not be required to issue
fractional Warrant Shares on the exercise of Warrants. If more than one Warrant
shall be exercised at the
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same time by the same holder, the number of full Warrant Shares which shall be
issuable upon the exercise thereof shall be computed on the basis of the
aggregate number of Warrant Shares purchasable on exercise of the Warrants so
exercised. If any fraction of a Warrant Share would, except for the provisions
of this SECTION 12, be issuable on the exercise of any Warrant (or specified
portion thereof), the Company shall pay the exercising Holder in lieu thereof an
amount in cash equal to the Closing Price for one share of the Common Stock, on
the day immediately preceding the exercise date of the Warrant, multiplied by
such faction.
13. REGISTRATION RIGHTS.
13.1 DEMAND REGISTRATION RIGHTS. Within 60 days after receipt of a
written request from the Representatives or from Holders of more than __% in
interest of the aggregate of Warrants and/or Warrant Shares that the
Representatives or such Holders of the Warrants and/or Warrant Shares desire and
intend to transfer more than 25% in interest of the aggregate number of the
Warrants and/or Warrant Shares under such circumstances that a public offering,
within the meaning of the Act, will be involved, the Company shall (subject to
the last sentence of this paragraph) notify all Holders of such request and file
a registration statement (and use its best efforts to cause such registration
statement to become effective under the Act) with respect to the offering and
sale or other disposition of the Warrants and/or Warrant Shares requested to be
included by the requesting Holders and any other Holders who request inclusion
of Warrants or Warrant Shares within 20 days after the Company has given them
notice of the registration (the "OFFERED SECURITIES"); PROVIDED, HOWEVER, that
the Company shall not be obligated to comply with the foregoing provisions of
this SECTION 13.1 if in the opinion of counsel to the Company reasonably
acceptable to the Holder or Holders from whom such written requests have been
received, registration under the Act is not required for the transfer of the
Offered Securities in the manner proposed by such person or persons, or a
post-effective amendment to an existing registration statement would be legally
sufficient for such transfer (in which latter event the Company shall promptly
file such post-effective amendment (and use its best efforts to cause such
amendment to become effective under the Act)). Notwithstanding the foregoing,
however ,the Company shall not be obligated to provide more than one effective
registration statement meeting the requirements hereof pursuant to this SECTION
13.1.
The Company may defer the preparation and filing of a registration
statement for up to 90 days after the request for registration is made if the
Company's board of directors determines in good faith that (i) such registration
or post-effective amendment would materially adversely affect or otherwise
materially interfere with a proposed or pending material transaction by the
Company, including without limitation a financing or a corporate reorganization,
or (ii) the Company is in possession of material inside information concerning
the Company or its securities, disclosure of which would be illegal or have a
material adverse effect upon the Company.
The Company shall not be obligated to honor any request to register Warrant
Shares pursuant to this SECTION 13.1 received later than six (6) years from the
effective date of the Company's Registration Statement on Form SB-2 (File No.
333-27871) (the "EFFECTIVE DATE"). The Company shall not be required (i) to
maintain the effectiveness of the registration statement beyond the earlier to
occur of 120 days after the effective date of the registration statement or the
date on which all of the Offered Securities have been sold (the "TERMINATION
DATE"); PROVIDED,
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HOWEVER, that if at the Termination Date the Offered Securities are covered by a
registration statement which also covers other securities and which is required
to remain in effect beyond the Termination Date, the Company shall maintain in
effect such registration statement as it relates to Offered Securities for so
long as such registration statement (or any substitute registration statement)
remains or is required to remain in effect for any such other securities, or
(ii) to cause any registration statement with respect to the Warrant Shares to
become effective prior to the Initiation Date. All expenses of registration
pursuant to this SECTION 13.1 shall be borne by the Company (excluding
underwriting discounts and commissions on securities not sold by the Company).
The Company shall be obligated pursuant to this SECTION 13.1 to include in
the registration statement Warrant Shares that have not yet been purchased by a
Holder of Warrants so long as such Holder of Warrants submits an undertaking to
the Company that such Holder intends to exercise Warrants representing the
number of Warrant Shares to be included in such registration statement prior to
the consummation of the public offering with respect to such Warrant Shares. In
addition, such Holder of Warrants is permitted to pay the Company the Warrant
Price for such Warrant Shares upon the consummation of the public offering with
respect to such Warrant Shares.
13.2 PIGGY-BACK REGISTRATION RIGHTS. In the event the Company
proposes to file (for its own offer and sale or offer and sale by selling
security holders) a registration statement under the Act at any time before the
Expiration Date with respect to any class of security (other than in connection
with an exchange offer, a non-cash offer or a registration statement on Form S-4
or Form S-8 or any successor registration statement form) which becomes or which
should be expected to become effective at any time after the Initiation Date
then the Company shall in each case give written notice of such proposed filing
to the Holders of Warrants and Warrant Shares at least 30 days before the
proposed filing date and such notice shall offer to such Holders the opportunity
to include in such registration statement such number of Warrant Shares as they
may request, unless, in the opinion of counsel to the Company reasonably
acceptable to any such holder of Warrants or Warrant Shares who wishes to have
Warrant Shares included in such registration statement, registration under the
Act is not required for the transfer of such Warrants and/or Warrant Shares in
the manner proposed by such Holders. The Company shall not be obligated to
honor any such request to register any such Warrant Shares if the request is
received later than six (6) years from the Effective Date, and the Company shall
not be obligated to honor any request to register any such Warrant Shares if the
Company is not notified in writing of any such request pursuant to this SECTION
13.2 within 20 days after the Company has given notice to the Holders of the
filing. The Company shall permit, or shall cause the managing underwriter of a
proposed offering to permit, the Holders of Warrant Shares requested to be
included in the registration (the "PIGGY-BACK SHARES") to include such
Piggy-back Shares in the proposed offering on the same terms and conditions as
applicable to securities of the Company included therein or as applicable to
securities of any person other than the Company and the Holders of Piggy-back
Shares if the securities of any such person are included therein.
Notwithstanding the foregoing, if any such managing underwriter shall advise the
Company in writing that it believes that the distribution of all or a portion of
the Piggy-back Shares requested to be included in the registration statement
concurrently with the securities being registered by the Company would
materially adversely affect the distribution of such securities by the Company
for its own account,
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then the Holders of such Piggy-back Shares shall delay their offering and sale
of Piggyback Shares (or the portion thereof so designated by such managing
underwriter) for such period, not to exceed 120 days, as the managing
underwriter shall request provided that no such delay shall be required as to
Piggy-back Shares if any securities of the Company are included in such
registration statement for the account of any person other than the Company and
the Holders of Piggy-back Shares. In the event of such delay, the Company shall
file such supplements, post-effective amendments or separate registration
statement, and take any such other steps as may be necessary to permit such
Holders to make their proposed offering and sale for a period of 90 days
immediately following the end of such period of delay ("PIGGY-BACK TERMINATION
DATE"); PROVIDED, HOWEVER, that if at the Piggy-back Termination Date the
Piggyback Shares are covered by a registration statement which is, or is
required to remain, in effect beyond the Piggy-back Termination Date, the
Company shall maintain in effect the registration statement as it relates to the
Piggy-back Shares for so long as such registration statement remains or is
required to remain in effect for any of such other securities.
The Company shall be obligated pursuant to this SECTION 13.2 to include in
the registration Warrant Shares that have not yet been purchased by a holder of
Warrants so long as such Holder of Warrants submits an undertaking to the
Company that such Holder intends to exercise Warrants representing the number of
Warrant Shares to be included in such registration prior to the consummation of
the offering made pursuant thereto. In addition, such Holder of Warrants is
permitted to pay the Company the Warrant Price for such Warrant Shares upon the
consummation of the public offering with respect to such Warrant Shares.
If the Company decides not to proceed with a registration and offering in
which Piggy-back Shares are included, the Company has no obligation to proceed
with the offering of the Piggy-back Shares, unless the Holders of the Warrants
and/or Warrant Shares otherwise comply with the provisions of SECTION 13.1
hereof (without regard to the 60 days' written request required thereby).
13.3 In connection with the registration of securities in accordance
with SECTIONS 13.1 and 13.2 above, the Company shall:
(a) Use its best efforts to register or qualify the securities for
offer or sale under the state securities or Blue Sky laws of such states which
the Holders of such Warrant Shares shall designate; provided, however, that in
no event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject it to general service of process in any jurisdiction where it is not
then so subject or to register or get a license as a broker or dealer in
securities in any jurisdiction where it is not so registered or licensed.
(b) Pay all costs, other than fees and disbursements of counsel for
the Holders and underwriting discounts and commissions, if any, in respect of
securities held by the Holders.
(c) Furnish to each Holder such number of copies of the registration
statement and of each amendment and supplement thereto (in each case, including
all exhibits), such reasonable number of copies of each prospectus contained in
such registration statement and each
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supplement or amendment thereto (including each preliminary prospectus), all of
which shall conform to the requirements of the Act and the rules and regulations
thereunder, and such other documents, as any Holder may reasonably request to
facilitate the disposition of the securities included in such registration.
(d) If an opinion of counsel for the Company is delivered to any
underwriter in connection with the registration, such opinion to each Holder
participating in the registration.
(e) Enter into a cross-indemnity agreement and a contribution
agreement, each in customary form, with each underwriter, if any, and, if
requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses and customary closing
conditions, including, without limitation, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any securities included
by a Holder in the registration.
13.4 (a) The Company shall indemnify and hold harmless each Holder
participating in any registration hereunder against any losses, claims, damages
or liabilities, joint or several, to which such Holder may become subject under
the Act, the Securities Exchange Act of 1934, as amended (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 any registration
statement filed by the Company 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 final prospectus included in any
registration statement filed by the Company 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 such Holder 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 any such registration statement, preliminary prospectus or
final prospectus, or any such amendment or supplement thereto, in reliance upon,
and in conformity with, written information relating to any Holder furnished to
the Company by such Holder specifically for use in the preparation thereof and,
PROVIDED FURTHER, that the indemnity agreement provided in this SECTION 13.4(a)
with respect to any preliminary prospectus shall not inure to the benefit of any
Holder 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 securities, if adequate copies of the applicable final prospectus in
which such untrue statement or alleged untrue statement or omission
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or alleged omission was corrected were provided by the Company to the Holder or
its representatives and the Holder or its representatives did not deliver such
final prospectus to such person.
The indemnity agreement in this SECTION 13.4(a) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Holder within the meaning of the Act or the Exchange Act
and each of the agents, employees, officers and directors of each Holder and
person who so controls any Holder. This indemnity agreement shall be in
addition to any liabilities which the Company may otherwise have.
(b) Each Holder, 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 Holder herein contained, (ii) any untrue statement
or alleged untrue statement of any material fact contained in any registration
statement filed by the Company 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 final 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 13.4(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 Holder 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 13.4(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed such 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 Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this SECTION
13.4 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 13.4, 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 13.4 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
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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 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
13.4(a) or 13.4(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) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to SECTION 13.4(a)
or 13.4(b) (subject to the limitations thereof) but it is found in a final
judicial determination, not subject to further appeal, that such indemnification
may not be enforced in such case, even though this Agreement expressly provides
for indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the affected Holders of the securities
included in such registration in the aggregate (including for this purpose any
contribution by or on behalf of an indemnified party), as a second entity, shall
contribute to the losses, liabilities, claims, damages and expenses whatsoever
to which any of them may be subject, on the basis of relevant equitable
considerations such as the relative fault of the Company and such Holders in
connection with the facts which resulted in such losses, liabilities, claims,
damages and expenses. The relative
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fault, in the case of an untrue statement, alleged untrue statement, omission or
alleged omission, shall be determined by, among other things, whether such
statement, alleged statement, omission or alleged omission relates to
information supplied by the Company or by such Holders, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement, alleged statement, omission or alleged omission. The
Company and the Holders agree that it would be unjust and inequitable if the
respective obligations of the Company and the Holders for contribution were
determined by pro rata or per capita allocation of the aggregate losses,
liabilities, claims, damages and expenses (even if the Holder and the other
indemnified parties were treated as one entity for such purpose) or by any other
method of allocation that does not reflect the equitable considerations referred
to in this SECTION 13.4(c). In no case shall any Holder be responsible for a
portion of the contribution obligation imposed on all Holders in excess of its
pro rata share based on the number of shares of Common Stock (or other successor
securities) owned (or which would be owned upon exercise of all Warrants) by it
and included in such registration as compared to the number of shares of Common
Stock (or other successor securities) owned (or which would be owned upon
exercise of all Warrants) by all Holders and included in such registration. 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. For purposes of this SECTION
13.4(c), each person, if any, who controls any Holder within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee, agent and counsel of each such Holder or control
person shall have the same rights to contribution as such Holder or control
person and each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the
Company who shall have signed any such registration statement, each director of
the Company and its or their respective counsel shall have the same rights to
contribution as the Company, subject in each case to the provisions of this
SECTION 13.4(c). Anything in this SECTION 13.4(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect to the
settlement of any claim or action effected without its written consent. This
SECTION 13.4(c) is intended to supersede any right to contribution under the
Act, the Exchange Act or otherwise.
14. NO RIGHTS AS STOCKHOLDER; NOTICES TO HOLDERS. Nothing contained in
this Agreement or in any of the Warrant Certificates shall be construed as
conferring upon the Holders or their transferee(s) the right to vote or to
receive dividends or to consent to or receive notice as stockholders in respect
of any meeting of stockholders for the election of directors of the Company or
any other matter or any rights whatsoever as stockholders of the Company. If,
however, at any time prior to the expiration of the Warrants and prior to their
exercise, any of the following events shall occur:
(a) the Company shall declare any dividend payable in any securities
upon its shares of Common Stock or make any distribution (other than a cash
dividend) to the holders of its shares of Common Stock; or
(b) the Company shall offer to the holders of its shares of Common
Stock any additional shares of Common Stock or securities convertible into
or exchangeable for shares of Common Stock or any right to subscribe to or
purchase any thereof; or
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(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation, merger, sale, transfer or lease of
all or substantially all of its property, assets and business as an
entirety) shall be proposed,
then in any one or more of said events the Company shall (i) give notice in
writing of such event to the Holders, as provided in SECTION 16 hereof and (ii)
if there are more than 100 Holders, cause notice of such event to be published
once in The Wall Street Journal (national edition), such giving of notice and
publication to be completed at least 20 days prior to the date fixed as a record
date or the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution or subscription rights, or
for the determination of stockholders entitled to vote on such proposed
dissolution, liquidation or winding up. Such notice shall specify such record
date or the date of closing the transfer books, as the case may be. Failure to
publish, mail or receive such notice or any defect therein or in the publication
or mailing thereof shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or such
proposed dissolution, liquidation or winding up.
15. ATTORNEY'S FEES. In the event of any action, suit, counterclaim,
appeal, arbitration, mediation, or other proceeding (an "ACTION") between any
Holder and the Company arising out of or in connection with this Agreement or
the Warrants, in addition to any damages and costs to which the prevailing party
would otherwise be entitled, the losing party in any such Action shall pay to
the prevailing party the attorneys' fees and costs incurred by the prevailing
party in connection with such Action and/or enforcing any judgment, order,
ruling, or award (collectively, a "DECISION") granted therein, all of which
shall be paid whether or not such Action is prosecuted to a Decision. Any
Decision entered in an Action shall contain a specific provision providing for
the recovery of attorneys' fees and costs incurred in enforcing such Decision.
Attorneys' fees shall include, but not be limited to, fees incurred in the
following: (1) post judgment motions and collection actions; (2) contempt
proceedings; (3) garnishment, levy, and debtor and third party examinations; (4)
discovery, and (5) bankruptcy. "Prevailing party" within the meaning of this
section includes, without limitation, a party who agrees to dismiss an Action on
the other party's payment of the sum allegedly due or performance of the
covenants allegedly breached, or who obtains substantially the relief sought.
If there are multiple claims, the prevailing party shall be determined with
respect to each claim separately. The prevailing party shall be the party who
has obtained the greater relief in connection with any particular claim,
although with respect to any claim, it may be determined by the court or
arbitrator before which the Action is brought that there is no prevailing party.
16. NOTICES. Any notice pursuant to this Agreement to be given or made by
the registered Holder of any Warrant to or on the Company shall be sufficiently
given or made if sent by first-class mail, postage prepaid, addressed as
follows:
Scheid Vineyards Inc.
13570 Washington Boulevard, Suite 300
Marina del Rey, CA 90292
Attn: President
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Notices or demands authorized by this Agreement to be given or made by the
Company to the registered Holder of any Warrant shall be sufficiently given or
made (except as otherwise provided in this Agreement) if sent by first-class
mail, postage prepaid, addressed to such Holder at the address of such Holder as
shown on the Warrant Register.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California without giving effect to
principles of conflicts of laws.
18. SUPPLEMENTS AND AMENDMENTS. The Company and the Representatives
owning at least a majority of the outstanding Warrants may from time to time
supplement or amend this Agreement in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Representatives may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrant Certificates and which shall not
adversely affect the interests of the Holders. This Agreement may also be
supplemented or amended from time to time by a writing executed by or on behalf
of the Company and all of the Holders.
19. SUCCESSOR. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Holders shall bind and inure to the
benefit of their respective successors and assigns hereunder. Assignments by
the Holders of their rights hereunder shall be made in accordance with SECTION
4.
20. MERGER OR CONSOLIDATION OF THE COMPANY. So long as Warrants remain
outstanding, the Company will not merge or consolidate with or into, or sell,
transfer or lease all or substantially all of its property to, any other
corporation unless the successor or purchasing corporation, as the case may be
(if not the Company), shall expressly assume, by supplemental agreement executed
and delivered to the Holders, the due and punctual performance and observance of
each and every covenant and condition of this Agreement to be performed and
observed by the Company.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Holders, any legal or equitable right, remedy or claim under this Agreement, but
this Agreement shall be for the sole and exclusive benefit of the Company and
the Holders of the Warrants and Warrant Shares.
22. CAPTIONS; REFERENCES. The captions of the sections and subsections of
this Agreement have been inserted for convenience only and shall have no
substantive effect. References herein to Sections, Schedules and Exhibits are,
unless otherwise specified, references to the referenced section, schedule or
exhibit hereof or hereto.
23. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when so executed shall be deemed to be an original;
but such counterparts together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
SCHEID VINEYARDS, INC. CRUTTENDEN ROTH INCORPORATED
By:_______________________________ By:_______________________________
Name:_____________________________ Name:_____________________________
Title:____________________________ Title:____________________________
LAIDLAW EQUITIES, INC. RODMAN & RENSHAW, INC.
By:_______________________________ By:_______________________________
Name:_____________________________ Name:_____________________________
Title:____________________________ Title:____________________________
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Schedule 1 to
Warrant Agreement
REPRESENTATIVE NUMBER OF WARRANTS
Cruttenden Roth Incorporated
Laidlaw Equities, Inc.
Rodman & Renshaw, Inc.
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Exhibit A to
Warrant Agreement
[Form of Warrant Certificate]
TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS RESTRICTED AS DESCRIBED IN
THE WARRANT AGREEMENT DESCRIBED HEREIN.
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE CLASS A COMMON STOCK
ISSUABLE UPON EXERCISE OF SUCH WARRANTS MAY NOT BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) A POST-EFFECTIVE AMENDMENT TO THE REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO WHICH SUCH SECURITIES WERE
ORIGINALLY REGISTERED IN CONNECTION WITH ORIGINAL ISSUANCE OF THE WARRANTS
REPRESENTED HEREBY, OR (ii) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR
(iii) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT.
EXERCISABLE ON OR BEFORE ___________, 2002
No. _______ Warrants
Warrant Certificate
SCHEID VINEYARDS, INC.
This Warrant Certificate certifies that [CRUTTENDEN ROTH INCORPORATED], or
registered assigns (the "HOLDER"), is the registered holder of __________
Warrants (the "WARRANTS") to purchase Class A Common Stock, $0.001 par value per
share (the "COMMON STOCK"), of Scheid Vineyards, Inc., a Delaware corporation
(the "COMPANY"). Each Warrant entitles the registered Holder thereof to
purchase one share of Common Stock (subject to adjustment as set forth in the
Warrant Agreement (as defined below), at any time from 10:00 a.m., California
time, on [EFFECTIVE DATE], 1998 (the "INITIATION DATE") until 6:00 p.m.,
California time, on [EFFECTIVE DATE], 2002 (the "EXPIRATION DATE") at a purchase
price of $________ (the "WARRANT PRICE").
Subject to the provisions of the Warrant Agreement, the Holder shall have
the right to exercise the Warrants and purchase the underlying Warrant Shares,
either in their entirety or from time to time, effective as of any date
specified by the Holder from and after the Initiation Date and on or before the
Expiration Date. Exercise shall be effected by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment of the Warrant Price or
designation of net issuance at the office of the Company designated for such
purpose. If upon any exercise of Warrants evidenced hereby the number of
Warrants exercised shall be less than the total number of Warrants evidenced
hereby, there shall be issued to the Holder or such Holder's assignee a new
Warrant Certificate
20
<PAGE>
evidencing the number of Warrants not exercised. No adjustment shall be made
for any dividends on any Common Stock issuable upon exercise of this Warrant.
Payment of the aggregate Warrant Price for all Warrant Shares for which
Warrants are exercised shall be made, in the discretion of the Holder, by
certified or official bank check or by net issuance, or a combination thereof.
Exercise by net issuance shall be effected without payment by the Holder of any
cash or other consideration by the Company's withholding from the Warrant Shares
that would otherwise be issued upon exercise if the exercise price were paid in
cash, that number of Warrant Shares which, when multiplied by the Closing Price
for the day immediately preceding the date of exercise, equals the aggregate
Warrant Price for the Warrants so exercised.
Notwithstanding the foregoing, if at 6:00 p.m., California time on the
Expiration Date, the Holder has not exercised its Warrants and has not notified
the Company that it waives automatic issuance, then all such unexercised
Warrants shall be automatically converted into a number of shares of Common
Stock of the Company equal to: (A) the number of shares of Common Stock then
issuable upon exercise of all such unexercised Warrants minus (B) a number of
shares of Common Stock equal to the quotient obtained by dividing the aggregate
Warrant Price for all such unexercised Warrants by the Closing Price (as defined
in SECTION 11.1(c) of the Warrant Agreement) for the Common Stock on the
Expiration Date.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to a Warrant Agreement, dated as of
__________, 1997 (the "WARRANT AGREEMENT"), duly executed and delivered by the
Company, which Warrant Agreement is hereby incorporated by reference in and made
a part of this instrument and is hereby referred to for a description of the
rights, limitation of rights, obligations, duties and immunities thereunder of
the Company and the holders of the Warrants. A copy of the Warrant Agreement
may be obtained by the Holder hereof upon written request to the Company.
The Warrant Price and number of Warrant Shares issuable upon exercise of
the Warrants are subject to adjustment upon the occurrence of certain events set
forth in the Warrant Agreement. No fractions of a share of Common Stock will be
issued upon the exercise of any Warrants but the Company will pay the cash value
thereof determined as provided in the Warrant Agreement.
The Holder is entitled to certain registration rights with respect to the
Common Stock purchasable upon exercise thereof as set forth in the Warrant
Agreement.
Warrant Certificates may be exchanged, in the manner and subject to the
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
21
<PAGE>
The Company may deem and treat the registered Holder of this Warrant
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone) as the owner in fact hereof and of the Warrants represented
hereby for all purposes, and the Company shall not be affected by any notice to
the contrary.
Neither the Warrants nor this Warrant Certificate entitles the Holder to
any rights of a stockholder of the Company.
This Warrant Certificate shall not be valid unless countersigned by the
Company.
IN WITNESS WHEREOF, Scheid Vineyards, Inc. has caused this Warrant
Certificate to be signed by its President and by its Secretary and has caused
its corporate seal to be affixed hereunto or imprinted hereon.
Dated: __________, 1997 SCHEID VINEYARDS, INC.
By:
Title:
22
<PAGE>
[Form of Election to Purchase]
(To be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects, effective as of [DATE], to
exercise the right, represented by this Warrant Certificate, to receive
___________ shares of Class A Common Stock, par value $0.001 per share, of
Scheid Vineyards, Inc. and elects to pay the Exercise Price as indicated below:
[ ] Payment in cash in the amount of $_______, per share, for a total
aggregate Exercise Price payment of $________; check payable to Scheid
Vineyards, Inc. in the amount of such aggregate Exercise Price.
[ ] Payment on a cashless, net issuance basis by foregoing receipt of that
number of shares of Class A Common Stock otherwise issuable upon this
exercise as has an aggregate value, at the Closing Price, equal to the
aggregate Exercise Price.
The undersigned requests that a certificate for such shares be registered
in the name of _____________________________, whose address is
___________________________________________________ and that such shares be
delivered to ____________________________ whose address is
________________________________. If said number of shares is less than all of
the shares of Class A Common Stock purchasable hereunder, the undersigned
requests that a new Warrant certificate representing the remaining balance of
such shares be registered in the name of ________________________________, whose
address is _________________________, and that such Warrant certificate be
delivered to _______________________, whose address is
_______________________________________.
Signature:
Date:
Signature Guaranteed:
23
<PAGE>
July 21, 1997
Scheid Vineyards Inc.
13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
Re: Registration Statement on Form SB-2
File No. 333-27871
------------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 (File No.
333-27871) originally filed by Scheid Vineyards Inc. (the "Company") with the
Securities and Exchange Commission (the "Commission") on May 28, 1997, as
amended by Amendment No. 1 thereto filed on July 1, 1997 and Amendment No. 2
thereto filed on July 21, 1997 (collectively, the "Registration Statement"),
in connection with the registration under the Securities Act of 1933, as
amended, of 2,300,000 shares (the "Shares") of the Company's Class A common
stock, par value $.001 per share (the "Class A Common Stock"). The Shares
include an over-allotment option granted to the Underwriters by the Company
to purchase an aggregate of 300,000 additional shares of the Company's Class
A Common Stock and are to be sold to the Underwriters as described in the
Registration Statement for resale to the public. As your counsel in
connection with this transaction, we have examined the proceedings taken and
are familiar with the proceedings proposed to be taken by you in connection
with the sale and issuance of the Shares.
It is our opinion that, upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be legally and validly
issued, fully paid and nonassessable.
<PAGE>
Scheid Vineyards Inc. July 21, 1997
Page 2
We consent to the reference to our firm under the caption "Legal
Matters" in the Registration Statement and to the filing of this opinion as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
<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
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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
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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.
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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 Board adopted the Plan on July 19, 1997 and the stockholders
approved the Plan in July 1997. The Plan became effective on the Underwriting
Date.
C. 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.
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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 stockholders of the Named
Subsidiary, private purchases from one or more of the stockholders of the
Named Subsidiary, one or more direct issuances 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.
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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.
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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.
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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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SCHEID VINEYARDS, INC.
LOCK-UP AGREEMENT
July _____, 1997
Cruttenden Roth Incorporated
Laidlaw Equities, Inc.
Rodman & Renshaw, Inc.
As Representatives of the Several Underwriters
c/o Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92714
Ladies and Gentlemen:
The undersigned understands that you, as Representatives of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement with Scheid Vineyards, Inc. (the "Company") providing for the public
offering (the "Public Offering") by the Underwriters, including yourselves, of
Class A Common Stock of the Company (the "Common Stock") pursuant to the
Company's Registration Statement on Form SB-2, Registration No. 333-27871, filed
with the Securities and Exchange Commission on May 28, 1997 (the "Registration
Statement").
In consideration of the Underwriters' agreement to purchase and make the
Public Offering of the Common Stock, and for other good and valuable
consideration, receipt of which is hereby acknowledged, the undersigned hereby
agrees, for a period beginning on the date of the final prospectus included in
the Registration Statement and ending on the first anniversary thereof (the
"Lock-Up Period"), not to offer to sell, contract to sell or otherwise sell,
transfer, dispose of, loan, pledge or grant any rights with respect to or
solicit any offer to buy (collectively a "Disposition") any shares of Common
Stock, any options or warrants to purchase any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock
(collectively, "Securities") now owned or hereafter acquired directly by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, otherwise than (i) exercise (on a cash or cashless
basis not resulting in any public sale of Class A Common Stock) of options to
purchase Class A Common Stock, provided that the shares of Class A Common Stock
received (net
<PAGE>
of any shares delivered to the Company in a traditional cashless exercise
thereof) shall be subject to the terms hereof; (ii) as a bona fide gift or gifts
or upon death by will or intestacy, provided each transferee thereof agrees to
be bound by this Lock-Up Agreement; (iii) as a distribution to limited partners
or shareholders or members of the undersigned, provided that the distributees
thereof agree in writing to be bound by the terms of this Lock-Up Agreement;
(iv) transfers of Class B Common Stock of the Company permitted pursuant to the
Buy-Sell Agreement among the holders of the Company's Class B Common Stock
(provided such transfers do not result in any public sale or distribution of any
Securities and the transferees agree in writing to hold such shares subject to
this Lock-Up Agreement); or (v) with the prior written consent of Cruttenden
Roth Incorporated. The foregoing restriction is expressly agreed to preclude
the holder of the Securities from engaging in any hedging, pledge or other
transaction which is designed to or reasonably expected to lead to or result in
any Disposition of any Securities during the Lock-Up Period even if such
Securities are owned by a person other than the undersigned and/or would be
disposed of by someone other than the undersigned. 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 be expected to 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 or derives any significant part of its value from Securities.
Furthermore, the undersigned hereby agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by the undersigned except in compliance with
this Lock-Up Agreement.
Very truly yours,
(Signature)
(Print Name)
<PAGE>
Accepted as of the _____ day of July, 1997:
Cruttenden Roth Incorporated
Laidlaw Equities, Inc.
Rodman & Renshaw, Inc.
As Representatives of the Several Underwriters
By: Cruttenden Roth Incorporated
By:
Title:
3
<PAGE>
BUY-SELL AGREEMENT
THIS BUY-SELL AGREEMENT (this "AGREEMENT") is made as of
______________, 1997, by and among SCHEID VINEYARDS INC., a Delaware corporation
(the "CORPORATION"), ALFRED G. SCHEID, AS TRUSTEE OF THE ALFRED G. SCHEID
REVOCABLE TRUST, DATED OCTOBER 8, 1992 ("AGS"), SCOTT D. SCHEID ("SDS"),
HEIDI M. SCHEID ("HMS"), KURT J. GOLLNICK ("KJG"), EMANTY LIMITED LIABILITY
COMPANY, a California limited liability company ("EMANTY"), and the additional
stockholders of the Corporation, if any, identified on Exhibit A attached hereto
and by this reference incorporated herein (the "ADDITIONAL STOCKHOLDERS" and,
together with SDS, HMS, Emanty and KJG the "MINORITY STOCKHOLDERS"). The
Minority Stockholders and AGS are collectively referred to herein as the
"STOCKHOLDERS."
RECITALS
WHEREAS, the Stockholders are the holders of all of the outstanding
shares (the "SHARES") of Class B Common Stock of the Corporation;
WHEREAS, AGS, Emily K. Liberty ("EKL") and Tyler P. Scheid ("TPS") are
the sole members of Emanty.
WHEREAS, the Corporation and the Stockholders have determined that it
is in the best interests of the Corporation and the Stockholders that the
transferability of the Shares of the Minority Stockholders be restricted as
provided herein; and
WHEREAS, the parties hereto (the "PARTIES") have each independently
concluded that the method of valuation of the Shares provided in this Agreement
is fair and equitable.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual agreements and covenants contained herein, the Parties agree as follows:
1. RESTRICTIONS ON TRANSFER. Except as expressly permitted or
required by this Agreement, no Minority Stockholder shall, voluntarily or
involuntarily (including, without limitation, by operation of law) transfer,
sell, exchange, give away, pledge, hypothecate or otherwise dispose of
("TRANSFER") all or any portion of the Shares or any rights therein. Any
Transfer or attempted Transfer in violation of the preceding sentence shall be
null and void and of no effect whatever. Each Party hereby acknowledges the
reasonableness of the restrictions on Transfer imposed by this Agreement in view
of the relationship of the Parties. Accordingly, the restrictions on Transfer
contained herein shall be specifically enforceable. Each Party hereby further
agrees to hold each other Party (and each other Party's successors and assigns)
wholly
<PAGE>
and completely harmless from any cost, liability or damage (including, without
limitation, liabilities for income taxes and costs of enforcing this indemnity)
incurred by any of such indemnified persons as a result of a Transfer or an
attempted Transfer in violation of this Agreement.
2. INSPECTION OF AGREEMENT. A copy of this Agreement duly executed
by each of the Parties shall be delivered to the Corporation, maintained by the
Corporation at its principal executive office, and made available for inspection
to any person requesting to see it.
3. PERMITTED TRANSFERS.
(a) GENERAL. Subject to the conditions and restrictions set
forth in this Section 3, each Minority Stockholder shall have the right to
Transfer all or any portion of such Minority Stockholder's Shares by means of a
Permitted Transfer.
(b) DEFINITION OF PERMITTED TRANSFER AND PERMITTED TRANSFEREES.
(i) A "PERMITTED TRANSFER" is any Transfer by any
Minority Stockholder of all or any portion of the Shares to a Permitted
Transferee, provided that such Transfer otherwise complies with the conditions
and restrictions of this Section 3.
(ii) A "PERMITTED TRANSFEREE" is any of the
following persons: (1) the Corporation, (2) any of AGS, SDS, HMS, Emanty, KJG,
EKL or TPS, (3) a current spouse, former spouse or direct lineal descendant of
any individual named in clause (2) above, including, without limitation, adopted
persons (if adopted during minority) and persons born out of wedlock, and
excluding foster children and stepchildren, (4) a trust under which all of the
beneficiaries are persons described in clauses (2) or (3) above, or (5) a
corporation, partnership or limited liability company all of the equity
interests of which are owned by the persons or entities specified in clauses
(1), (2), (3) and (4) above or corporations, partnerships or limited liability
companies described in this clause (5).
(c) CONDITION TO PERMITTED TRANSFERS. Each Permitted Transfer
must be preceded by a written notice given by the transferring Minority
Stockholder to the Corporation, and to each of AGS, SDS and HMS to the extent he
or she is not the transferring Minority Stockholder, at least ten (10) business
days prior to such Permitted Transfer. Each person or entity (other than the
Corporation and AGS) to whom or which Shares (or any right, title or interest
therein) are Transferred by means of a Permitted Transfer must, as a condition
precedent to the validity of such Transfer, acknowledge in writing to the
Corporation that such person or entity is bound by the provisions of this
Agreement and the transferred Shares (or any right, title or interest therein)
are subject to the covenants and restrictions set forth in this Agreement to the
same extent such Shares would be so subject if retained by the transferring
Minority Stockholder.
2
<PAGE>
4. RIGHT OF FIRST REFUSAL. Each Minority Stockholder shall have the
right, from time to time, to Transfer or to convert into Class A Common Stock of
the Corporation in accordance with the Certificate of Incorporation of the
Corporation ("CONVERT"), all or any portion of such Minority Stockholder's
Shares, subject to the following rights of the other Parties (the "RIGHT OF
FIRST REFUSAL"), pursuant to the following steps:
(a) SALE OR CONVERSION NOTICE. Such Minority Stockholder (the
"SELLING OR CONVERTING STOCKHOLDER") shall give written notice (the "SALE OR
CONVERSION NOTICE") to the Corporation, AGS, SDS and HMS of his, her or its
intention to Transfer or Convert Shares. The Sale or Conversion Notice shall
(i) identify the proposed transferee, if applicable, (ii) specify the portion of
the Shares to be transferred or converted, (iii) if applicable, specify the
price and the terms of payment (the "SALE TERMS"), and (iv) if applicable,
specify the Purchase Price and Payment Terms described in Section 7 below.
(b) OPTION TO THE CORPORATION. The Corporation shall have the
first option to purchase all or any part of the Shares referred to in the Sale
or Conversion Notice at the lesser of (i) the Sale Terms, if applicable, and
(ii) the Purchase Price and upon the Payment Terms. Within five (5) business
days after delivery of the Sale or Conversion Notice to the Corporation, the
Corporation shall give written notice to AGS, SDS and HMS regarding the portion
or all of the Shares to be purchased by the Corporation.
(c) OPTION TO AGS. If the Corporation does not elect to
purchase all of the Shares referred to in the Sale or Conversion Notice, AGS
shall have the option to purchase all of the Shares referred to in the Sale or
Conversion Notice (other than the Shares to be purchased by the Corporation) at
the lesser of (i) the Sale Terms, if applicable, and (ii) the Purchase Price and
upon the Payment Terms. Within ten (10) business days after delivery of the
Sale or Conversion Notice to AGS, AGS shall give written notice to the
Corporation, SDS and HMS regarding the portion or all of the Shares to be
purchased by AGS.
(d) OPTION TO SDS AND HMS. If the Corporation and/or AGS do not
elect to purchase all of the Shares referred to in the Sale or Conversion
Notice, (i) SDS and HMS (if neither SDS nor HMS is the Selling or Converting
Stockholder), jointly and (to the extent that each elects to exercise such
option) PRO RATA in proportion to the number of Shares held by each, (ii) SDS
(if HMS is the Selling or Converting Stockholder) or (iii) HMS (if SDS is the
Selling or Converting Stockholder), shall have the option to purchase all of the
Shares referred to in the Sale or Conversion Notice (other than the Shares to be
purchased by the Corporation and/or AGS) at the lesser of (A) the Sale Terms, if
applicable, and (B) the Purchase Price and upon the Payment Terms. Within
fifteen (15) business days after delivery of the Sale of Conversion Notice to
SDS and HMS, SDS and/or HMS, as applicable, shall give written notice the
Corporation, AGS and SDS or HMS, as applicable, regarding the portion or all of
the Shares to be purchased by SDS and/or HMS.
(e) EXERCISE OF OPTION RIGHTS. If the Corporation, AGS, SDS
and/or HMS elect to purchase all of the Shares set forth in the Sale or
Conversion Notice, the Corporation, AGS, SDS and/or HMS, as applicable, shall
purchase all such Shares at the lesser of (i) the Sale Terms, if applicable, and
(ii) the Purchase Price and upon the Payment Terms.
3
<PAGE>
(f) SALE TO PROPOSED TRANSFEREE. If the Corporation, AGS, SDS
and/or HMS do not elect to purchase all of the Shares set forth in the Sale or
Conversion Notice, such Shares, but not less than all of such Shares referred to
in the Sale or Conversion Notice, (i) in the case of a proposed Transfer may be
transferred at any time prior to the thirtieth (30th) business day after the
date of the Sale or Conversion Notice to the transferee identified in the Sale
Notice on the Sale Terms and (ii) in the case of a proposed conversion may be
converted into shares of Class A Common Stock of the Corporation in accordance
with the Certificate of Incorporation of the Corporation at any time prior to
the thirtieth (30th) business day after the date of the Sale or Conversion
Notice. No Transfer or conversion of the Shares shall be made after the end of
such thirty (30) business day period, nor shall any change in the terms and
conditions of Transfer or conversion be permitted, without the Selling or
Converting Stockholder first giving to the Corporation, AGS, SDS and HMS a new
Sale or Conversion Notice in compliance with the requirements of this Section.
(g) CONVERSION ON DIVORCE OR LEGAL SEPARATION. Notwithstanding
the foregoing provisions of this Section 4, if any Minority Stockholder who is
an individual should divorce or became legally separated (a "SEPARATING PARTY"),
the spouse of such Party (the "SPOUSE") shall, if such Spouse already is a
Party, or if such Spouse is not already a Party then, such Separating Party
shall cause the Spouse to, promptly give a Sale or Conversion Notice to the
Corporation, AGS, SDS and HMS indicating that all of the Shares owned by the
Spouse are proposed to be converted into Class A Common Stock of the Corporation
and thereby providing the Corporation, AGS, SDS and HMS with the options to
purchase such Shares in the manner specified herein. If the Corporation, AGS,
SDS and HMS do not elect to purchase all of the Shares set forth in the Spouse's
Sale or Conversion Notice, the Spouse shall, if such Spouse already is a Party,
or if such Spouse is not already a Party, then the Separating Party shall cause
the Spouse to, promptly convert all of the Shares owned by the Spouse into Class
A Common Stock of the Corporation in accordance with the Certificate of
Incorporation of the Corporation.
5. LIMITED SALES TO THIRD PARTIES. Notwithstanding the provisions
of Section 4, a Minority Stockholder shall have the right to Transfer all or
part of such Minority Stockholder's Shares, without compliance with the Right of
First Refusal, as follows:
(a) SALES BY SDS, HMS AND KJG. Each of SDS, HMS and KJG shall
be entitled to Transfer to persons other than Permitted Transferees: (i) on or
prior to December 31, 1998, an aggregate of 50,000 Shares (the "INITIAL AMOUNT")
and (ii) during 1999 and each calendar year thereafter, 40,600 Shares (the
"ANNUAL AMOUNT"); provided, however, in the event that such Minority Stockholder
Transfers less than the Initial Amount on or prior to December 31, 1998 and/or
less than the Annual Amount in 1999 or any calendar year thereafter, then such
Minority Stockholder shall be entitled, in 1999 or any subsequent calendar year,
to Transfer Shares in an amount up to the Annual Amount for such calendar year
PLUS any then unused Initial Amount PLUS any then unused Annual Amounts from
prior calendar years.
(b) SALES BY EMANTY. Emanty shall be entitled to Transfer to
persons other than Permitted Transferees: (i) on or prior to December 31, 1998,
an aggregate of 100,000 Shares (the "EMANTY INITIAL AMOUNT") and (ii) during
1999 and each calendar year thereafter, 81,200 Shares (the "EMANTY ANNUAL
AMOUNT"); provided, however, in the event that
4
<PAGE>
Emanty Transfers less than the Emanty Initial Amount on or prior to December 31,
1998 and/or less than the Emanty Annual Amount in 1999 or any calendar year
thereafter, then Emanty shall be entitled, in 1999 or any subsequent calendar
year, to Transfer Shares in an amount up to the Emanty Annual Amount for such
calendar year PLUS any then unused Emanty Initial Amount PLUS any then unused
Emanty Annual Amounts from prior calendar years.
(c) EFFECT OF TRANSFERS. All transferees of Shares pursuant to
this Section 5 shall take such Shares free and clear of the covenants and
restrictions set forth in this Agreement. Any legend with respect to this
Agreement set forth on any certificate evidencing Shares transferred pursuant to
this Section 5 shall be removed upon the consummation of such Transfer.
6. OPTION TO PURCHASE UPON CERTAIN EVENTS.
(a) SALE EVENTS. Upon the occurrence of any of the following
events (each a "SALE EVENT"), the Corporation, AGS, SDS and/or HMS shall have
the option to purchase all of the Shares of a Minority Stockholder (the
"AFFECTED STOCKHOLDER"), at the Purchase Price and upon the Payment Terms,
pursuant to the provisions of this Section 6:
(i) the death of the Affected Stockholder;
(ii) the entry of a judgment awarding all or any
part of the Shares of the Affected Stockholder to any person who is not a Party;
(iii) the filing or recording of any levy or
attachment against the Shares of the Affected Stockholder;
(iv) the occurrence, with respect to the Affected
Stockholder, of any of the following: (A) filing a voluntary petition in
bankruptcy or for reorganization or for the adoption of an arrangement under the
Federal Bankruptcy Code (as now or in the future amended) or an admission
seeking the relief therein provided; (B) making a general assignment for the
benefit of creditors; (C) consenting to the appointment of a receiver for all or
a substantial part of the Affected Stockholder's property; (D) in the case of
the filing of an involuntary petition in bankruptcy, an entry of an order for
relief; (E) the entry of a court order appointing a receiver or trustee for all
or a substantial part of the Affected Stockholder's property without his
consent; or (F) the assumption of custody or sequestration by a court of
competent jurisdiction of all or substantially all of the Affected Stockholder's
property; or
(v) in the event that KJG is the Affected
Stockholder, the termination of employment of such Affected Stockholder with the
Corporation, voluntarily or involuntarily, with or without cause.
5
<PAGE>
(b) OPTION TO THE CORPORATION. Upon the occurrence of a Sale
Event, the Corporation shall have the first option to purchase all of the Shares
of the Affected Stockholder. Within five (5) business days after the Sale
Event, the Corporation shall give written notice to AGS, SDS and HMS regarding
the portion or all of the Shares to be purchased by the Corporation.
(c) OPTION TO AGS. If the Corporation does not elect to
purchase all of the Shares of the Affected Stockholder, AGS shall have the
option to purchase all of such Shares (other than the portion of the Shares to
be purchased by the Corporation). Within ten (10) business days after the Sale
Event, AGS shall give written notice to the Corporation, SDS and HMS regarding
the portion or all of the Shares to be purchased by AGS.
(d) OPTION TO SDS AND HMS. If the Corporation and/or AGS do not
elect to purchase all of the Shares of the Affected Stockholder, (i) SDS and HMS
(if neither SDS nor HMS is the Affected Stockholder), jointly and (to the extent
that each elects to exercise such option) PRO RATA in proportion to the number
of Shares held by each, (ii) SDS (if HMS is the Affected Stockholder) or
(iii) HMS (if SDS is the Affected Stockholder), shall have the option to
purchase all of such Shares (other than the portion of the Shares to be
purchased by the Corporation and/or AGS). Within fifteen (15) business days
after the Sale Event, SDS and/or HMS, as applicable, shall give written notice
to the Corporation, AGS and SDS or HMS, as applicable, regarding the portion or
all of the Shares to be purchased by SDS and/or HMS.
(e) EXERCISE OF OPTION. If the Corporation, AGS, SDS and/or HMS
elect to purchase all of the Shares of the Affected Stockholder pursuant to this
Section 6, the Corporation, AGS, SDS and/or HMS, as applicable, shall purchase
all of such Shares at the Purchase Price and upon the Payment Terms.
(f) EFFECT OF FAILURE TO EXERCISE OPTION. If the Corporation,
AGS, SDS and/or HMS do not elect to purchase all of the Shares of the Affected
Stockholder following a Sale Event, no portion of the Shares shall be
transferred pursuant to this Section 6 on account of such Sale Event.
7. PURCHASE PRICE AND PAYMENT TERMS.
(a) PURCHASE PRICE. "PURCHASE PRICE" means:
(i) if the Selling or Converting Stockholder or the
Affected Stockholder is a Minority Stockholder other than KJG under the
circumstances described in clause (ii) below, a price per Share equal to the
weighted average trading price of a share of the Class A Common Stock of the
Corporation over the twenty (20) trading days on which such shares were actually
traded immediately preceding the date of the Sale Notice or the Sale Event, as
applicable (the "AVERAGE TRADING PRICE"); or
(ii) if KJG is the Affected Stockholder and the Sale Event
is the termination of KJG's employment with the Corporation, (A) if such
termination is a "Voluntary Termination" as such term is defined in Section
7(a)(iv) of the Employment Agreement between
6
<PAGE>
the Corporation and KJG (the "EMPLOYMENT AGREEMENT") which occurs prior to
July 1, 2004, or is for "Cause" as such term is defined in Section 7(a)(v) of
the Employment Agreement regardless of when such termination for Cause occurs, a
price per Share equal to the price per Share paid by KJG for such Shares and
(B) if such termination occurs for a reason or under circumstances other than as
described in subparagraph (A) above, a price per share equal to the Average
Trading Price.
(b) PAYMENT TERMS. The payment of the Purchase Price shall be
made on the following terms (the "PAYMENT TERMS"): (i) if the Purchase Price
for the Shares is $100,000 or less, the Purchase Price shall be paid in one lump
sum within seven (7) business days after the Sale Event or the Sale or
Conversion Notice, as applicable; and (ii) if the Purchase Price for the Shares
is more than $100,000, the Purchase Price shall be paid, at the option of the
Corporation, AGS, SDS and/or HMS, as applicable (x) in one lump sum within three
(3) months after the Sale Event or the Sale or Conversion Notice, as applicable;
or (y) by payment of not less than fifty percent (50%) of the Purchase Price
(the "DOWN PAYMENT") within three (3) months after the Sale Event or the Sale or
Conversion Notice, as applicable, and delivery of a promissory note evidencing
the balance of the Purchase Price, such promissory note to bear interest at the
prime rate in effect on the date of the Down Payment, to be payable in full one
(1) year after the date of the Down Payment and to be secured by the Shares
being purchased.
8. RESTRICTIVE LEGENDS. The stock certificates for the Shares shall
be endorsed with the following restrictive legends:
(1) "The shares represented by this certificate
have not been registered under the Securities Act of 1933.
The shares may not be sold or offered for sale in the
absence of (a) an effective registration statement for the
shares under such Act, (b) a 'no action' letter of the
Securities and Exchange Commission with respect to such sale
or offer or (c) satisfactory assurances to the Corporation
that registration under such Act is not required with
respect to such sale or offer."
(2) "The shares represented by this certificate
are subject to certain rights to purchase and rights of
first refusal granted to the Corporation and certain
stockholders of the Corporation and accordingly may not be
sold, assigned, transferred, encumbered, or in any manner
disposed of except in conformity with the terms of a certain
agreement between the Corporation, the registered holder of
the shares (or the predecessor in interest to the shares)
and certain other persons. A copy of such agreement is
maintained at the Corporation's principal corporate
offices."
7
<PAGE>
9. TERMINATION OF AGREEMENT. This Agreement shall terminate upon
the occurrence of any one of the following events:
(a) The written agreement of the Parties to that effect; or
(b) The dissolution of the Corporation.
10. ALTERATIONS OR AMENDMENTS. This Agreement may be altered or
amended in whole or in part at any time, by filing with this Agreement a written
instrument setting forth the changes signed by each of the Parties.
11. NOTICES. Any and all notices or other communications required or
permitted by this Agreement or by law to be served on, given to, or delivered to
any Party by any other Party shall be in writing and shall be deemed duly
served, given, or delivered when personally delivered to the Party or to an
officer of the Party, or in lieu of such personal delivery, on the third day
after deposit in the United States Mail, registered or certified, return receipt
requested, addressed to a Party at the address set forth below such Party's name
on the signature pages hereof, or such other address as shall have been provided
to the Parties in accordance with the provisions of this Section.
12. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the Parties and, except as restricted above with regard
to Transfers, each of their heirs, executors, administrators, successors and
assigns.
13. SEVERABILITY. Should any provisions or portion of this Agreement
be held unenforceable and invalid for any reason, the remaining provisions and
portions of this Agreement shall continue in full force and effect.
14. GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed by, the laws of the State of California.
15. ENFORCEMENT. In the event of any breach of any covenant in, or
any other default under, this Agreement, any Party may proceed to protect and
enforce his, her or its rights by suit in equity or action at law, whether for
the specific performance of any term contained in this Agreement or for an
injunction against the breach of any such term or in aid of the exercise of any
power granted in this Agreement, or to enforce any other legal or equitable
right of such Party, or to take any one or more of such actions. In the event a
Party brings such an action against another Party, the prevailing party in such
dispute shall be entitled to recover from the losing party all fees, costs and
expenses of enforcing any right of such prevailing party under or with respect
to this Agreement, including without limitation such reasonable fees and
expenses of attorneys and accountants. None of the rights, powers or remedies
conferred upon any Party shall be mutually exclusive, and each such right, power
or remedy shall be cumulative and in addition to every other right, power or
remedy, whether conferred hereby or now or hereafter available at law, in
equity, by statute or otherwise. Except as expressly provided in this
Agreement, no course of dealing between or among the Parties and no delay in
exercising any such right, power or remedy conferred hereby or now or hereafter
8
<PAGE>
existing at law, in equity, by statute or otherwise, shall operate as a waiver
of, or otherwise prejudice, any such right, power or remedy.
16. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties hereto respecting the transferability of the Shares and
correctly sets forth the rights, duties, and obligations of each to the other in
relation thereto as of its date. Any prior agreements, promises, negotiations,
or representations concerning its subject matter not expressly set forth or
referenced in this Agreement are of no force or effect.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and year first above set forth.
SCHEID VINEYARDS INC., a Delaware
corporation
By
------------------------------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
Address: 13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
---------------------------------------------
ALFRED G. SCHEID, AS TRUSTEE OF THE ALFRED G.
SCHEID REVOCABLE TRUST, DATED OCTOBER 8, 1992
Address: 13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
---------------------------------------------
SCOTT D. SCHEID
Address: 13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
9
<PAGE>
---------------------------------------------
HEIDI M. SCHEID
Address: 13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
EMANTY LIMITED LIABILITY COMPANY,
a California limited liability company
By:
-----------------------------------------
Name: Alfred G. Scheid, as Trustee
of the Alfred G. Scheid
Revocable Trust, Dated October
8, 1992
Title: Managing Member
Address: 13470 Washington Boulevard
Suite 300
Marina del Rey, California 90292
---------------------------------------------
KURT J. GOLLNICK
Address: 29 Paseo Hermosa
Salinas, California 93908
AGREED AND ACKNOWLEDGED:
- -----------------------------------
SHIRLEY GLADDEN SCHEID, AS
TRUSTEE UNDER DECLARATION OF
TRUST, DATED MARCH 12, 1997
- -----------------------------------
JOYCE C. PERRY
10
<PAGE>
- -----------------------------------
ARTHUR L. LIBERTY
- -----------------------------------
PETER J. PUGNALE
- -----------------------------------
NANCY B. SCHEID
- -----------------------------------
HEIDI M. SCHEID, AS
TRUSTEE OF THE SIENA C. PUGANLE
TRUST, DATED APRIL 4, 1993
- -----------------------------------
SCOTT D. SCHEID, AS
TRUSTEE OF THE SIENA C. PUGANLE
TRUST, DATED APRIL 4, 1993
- -----------------------------------
HEIDI M. SCHEID, AS
TRUSTEE OF THE COOPER J. PUGANLE
TRUST, DATED MAY 16, 1995
- -----------------------------------
SCOTT D. SCHEID, AS
TRUSTEE OF THE COOPER J. PUGANLE
TRUST, DATED MAY 16, 1995
11
<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 has
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,
<PAGE>
the Company's obligation to make the Individual Retirement Payments shall be
reduced by 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 Service by prepaid,
first class, certified mail, return receipt requested, at the time of receipt by
the intended recipient at his or 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 this Agreement are
inserted for convenience or reference 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.
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 19,
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:
2.
<PAGE>
(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.
<PAGE>
(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.
<PAGE>
(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.
<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 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.
<PAGE>
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 19,
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.
<PAGE>
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.
2.
<PAGE>
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.
3.
<PAGE>
(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.
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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
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/ Alfred G. Scheid
--------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
"COMPANY"
/s/ Scott D. Scheid
-------------------
SCOTT D. 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 19,
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.
<PAGE>
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.
<PAGE>
(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.
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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 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.
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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
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/ 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.
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT"), dated as of July 19,
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.
<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 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.
2.
<PAGE>
(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.
3.
<PAGE>
(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
4.
<PAGE>
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
5.
<PAGE>
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
6.
<PAGE>
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
7.
<PAGE>
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
8.
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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
9.
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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
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/ Alfred G. Scheid
---------------------------------------------
Name: Alfred G. Scheid
Title: Chief Executive Officer
"COMPANY"
/s/ Kurt J. Gollnick
---------------------------------------------
KURT J. GOLLNICK
"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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Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to the 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
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Deloitte & Touche LLP
Los Angeles, CA
July 18, 1997
