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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-22857
SCHEID VINEYARDS INC.
(Name of small business issuer in its charter)
DELAWARE 77-0461833
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
13470 WASHINGTON BLVD.
MARINA DEL REY, CALIFORNIA 90292
(Address of principal executive offices) (Zip Code)
(310) 301-1555
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Class A Common
Stock, $.001 Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year: $17,473,000
Aggregate market value of the voting stock held by non-affiliates computed by
reference to the closing price at which the Class A Common Stock was sold on
the Nasdaq Stock Market National Market System on March 15, 1999:
$15,243,000. The voting stock held by non-affiliates on that date consisted
of 2,740,250 shares of Class A Common Stock.
Number of shares outstanding of each of the issuer's classes of common stock at
March 15, 1999:
Class A 2,740,250 Class B 3,374,100
Portions of the registrant's Proxy Statement for its May 13, 1999 Annual
Stockholders Meeting, which has not been filed as of the date of this filing,
are incorporated by reference into Part III of this Report.
Transitional Small Business Disclosure Format (check one) Yes No X
----- -----
1
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FORM 10-KSB INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
Note Concerning Forward-Looking Statements 3
PART I
Item 1. Business. 3
Item 2. Description of Properties. 21
Item 3. Legal Proceedings. 21
Item 4. Submission of Matters to a Vote of Security Holders. 21
PART II
Item 5. Market for Common Equity and Related Stockholder 22
Matters.
Item 6. Management's Discussion and Analysis or Plan of 22
Operation.
Item 7. Financial Statements. 29
Item 8. Changes In and Disagreements With Accountants on 30
Accounting and Financial Disclosures.
PART III
Item 9. Directors, Executive Officers, Promoters and Control 30
Persons; Compliance With Section 16(a) of the
Exchange Act.
Item 10. Executive Compensation. 30
Item 11. Security Ownership of Certain Beneficial Owners and 30
Management.
Item 12. Certain Relationships and Related Transactions. 30
Item 13. Exhibits and Reports on Form 8-K. 31
Signatures 35
</TABLE>
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NOTE CONCERNING FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements, including the
plans and objectives of management for the business, operations, and economic
performance of the Company. These forward-looking statements generally can
be identified by the context of the statement or the use of words such as the
Company or its management "believes," "anticipates," "intends," "expects,"
"plans" or words of similar meaning. Similarly, statements that describe the
Company's future operating performance, financial results, plans, objectives,
strategies, or goals are forward-looking statements. Although management
believes that the assumptions underlying the forward-looking statements are
reasonable, these assumptions and the forward-looking statements are subject
to various factors, risks and uncertainties, many of which are beyond the
control of the Company. Accordingly, actual results could differ materially
from those contemplated by the forward-looking statements. In addition to
the other cautionary statements relating to certain forward-looking
statements throughout this Report, attention is directed to "Business -
Cautionary Information Regarding Forward-Looking Statements" below for
discussion of some of the factors, risks and uncertainties that could affect
the outcome of future results contemplated by forward-looking statements.
PART 1
ITEM 1. BUSINESS
OVERVIEW
Scheid Vineyards Inc., a Delaware corporation ("SVI" or the "Company"),
is a leading independent (I.E., not winery controlled) producer of premium
varietal wine grapes. The Company currently operates approximately 6,000
acres of wine grape vineyards. Of this total, approximately 4,400 acres are
operated for the Company's own account, and 1,600 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 13 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon 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 Brands, Inc. ("Canandaigua") and
United Distillers and Vintners North America, a subsidiary of Diageo plc
("UDV"), the second and eighth largest U.S. wineries in terms of 1998 case
shipments, respectively. These customers' labels include GLEN ELLEN, BEAULIEU
VINEYARD, BV COASTAL, BLOSSOM HILL, PAUL MASSON, ALMADEN, DEER VALLEY,
DUNNEWOOD, and MYSTIC CLIFFS. Grape purchase contracts with UDV cover 56% of
the Company's acreage and accounted for approximately 74% and 81% of the
Company's 1998 and 1997 total revenues, respectively.
The Company also has long-term grape purchase agreements with other
well-known producers of ultra premium wines, including Beringer Wine Estates,
Chalone Wine Group, The Hess Collection Winery, David Bruce Winery and
Gundlach-Bundschu Winery. The terms of the Company's long-term grape purchase
contracts extend to between 2001 and 2014, 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.
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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. Similar productivity
improvements generally are anticipated in connection with vineyards that may
be acquired in the future.
The Company's executive offices are located at 13470 Washington Blvd.,
Marina del Rey, California 90292, telephone number (310) 301-1555, and its
vineyard headquarters compound is located at 1972 Hobson Avenue, Greenfield,
California 93927.
The Company's business is conducted through a wholly owned subsidiary,
Scheid Vineyards California Inc., a California corporation ("SVI-Cal").
References in this Report to "SVI-Del" refer only to Scheid Vineyards Inc.,
the parent holding company. Unless otherwise required by the context,
references in this Report to "SVI" and the "Company" include SVI-Del and
SVI-Cal on a consolidated basis.
RECENT DEVELOPMENTS
Fiscal 1998 was a difficult farming year for California wine grape
growers, including SVI. Unseasonably cool and cloudy weather from late May
through July caused delayed vine growth and crop development industry-wide.
These poor growing conditions resulted in reduced crop yields and a decrease
in tons produced by SVI, from 15,600 tons in the record high crop year of
1997 to 10,900 tons in 1998, a decrease of 30%. As a result, total revenues
decreased from $19,870,000 in 1997 to $17,473,000 in 1998, a decrease of 12%.
The decrease in yields from 1997 to 1998 was partially offset by the sale in
1998 of bulk wine and an approximately 12% increase in the average price per
ton that the Company received for its grapes in 1998 over 1997 prices. Based
on the Final Grape Crush Report published by the California Department of
Food and Agriculture covering the 1998 harvest (from which the Company's 1999
grape prices are primarily determined), the Company anticipates that wine
grape prices for the varieties it produces will be flat to moderately
increased from prices received for the same varieties in 1998.
In December 1998, the Company signed a long-term lease for approximately
740 acres of undeveloped land suitable for wine grape vineyards in
Greenfield, a few miles from the Company's vineyard headquarters. The lease
is for a term of up to 34 years. The Company is planting the entire acreage
in 1999, with the first harvest expected in 2001.
In June 1998, the Company entered into a long-term grape purchase
contract with UDV covering approximately 325 acres located on one of the
Company's vineyards in Hames Valley. The contract runs until 2014 with an
"evergreen" renewal provision requiring two years' prior written notice of
termination. The Company will begin delivering grapes under the contract on
approximately one-half of the acres in 1999 and the balance in 2000.
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In addition in 1998, the Company entered into several other long-term
grape purchase contracts with winery clients, including Beringer Wine
Estates, Chalone Wine Group and David Bruce Winery covering approximately 200
acres of vineyards. These contracts, which began in 1998, run through at
least 2004 and contain "evergreen" provisions which provide for automatic
extensions beyond the initial terms under certain conditions.
In July 1998, the Company entered into a long-term line of credit
agreement with its principal bank which expires in June 2008 and provides for
maximum borrowings totaling $3,600,000, which diminish annually through the
expiration date. Borrowings on the facility bear interest at the bank's
"reference" or "cost of funds" rate, and are collateralized by a first deed
of trust on the Company's 370-acre Riverview Vineyard. In addition, the
Company renewed its "crop" line of credit with its bank in June 1998. The
current crop loan has maximum credit available of $10,500,000 and expires in
June 2000. There are currently no amounts outstanding under either of the
above credit facilities.
In October 1998, the Company instituted a new stock repurchase program
in which the Company may spend up to $2.5 million in open market transactions
to purchase outstanding shares of its Class A Common Stock at such times, in
such amounts or blocks and at such prices as deemed appropriate. This
repurchase program will expire on September 30, 1999. Through March 15,
1999, the Company had repurchased 380,050 shares under this program for
approximately $1,711,000. In connection with the adoption of the new stock
repurchase program, the Company terminated a prior stock repurchase program
that authorized the purchase of up to 200,000 shares of Class A Common Stock.
Under the prior repurchase program, the Company repurchased 102,600 shares
of Class A Common Stock for an aggregate purchase price of $542,000 from July
to October 1998. The Company also made other repurchases earlier in 1998 of
103,000 shares of Class A Common Stock at an aggregate purchase price of
approximately $708,000.
In May 1998, a principal stockholder of the Company sold 1,000,000
shares of Class A Common Stock in an underwritten public offering, which
shares were converted from an equal number of shares of Class B Common Stock
in connection with the sale. The Company received no proceeds from the sale
of these shares.
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."
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CONTINUE LONG-TERM RELATIONSHIPS WITH LEADING WINE PRODUCERS. The Company
has had grape purchase contracts with UDV and its predecessors since 1972
and with Canandaigua and its predecessors since 1979. More recently, SVI
has been contracting for grape sales with additional wineries with
reputations for producing excellent wines such as Beringer Wine Estates,
Chalone Wine Group 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.
MAXIMIZE REVENUES AND PROFITABILITY PER ACRE. The Company 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
on approximately 2,500 acres since 1993, 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".
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, improve and
operate vineyards, SVI believes that there may be significant opportunities
to purchase or lease undeveloped land suitable for wine grape vineyards and
acquire existing vineyards. The Company plans to capitalize on the
experience and reputation of its senior management to pursue this strategy
in Monterey County and other regions in California. The Company's
criteria for land and vineyard acquisitions emphasize value concepts
intended to maintain long-term rates of return within certain ranges,
although no assurances can be given regarding the profitability of any
vineyard development or acquisition. As a result, the Company continually
evaluates growth opportunities, but it only pursues those selected
transactions that satisfy the Company's investment criteria. See "--New
Vineyards and Redevelopment of Existing Vineyards".
CALIFORNIA WINE AND GRAPE INDUSTRY
The market for California premium varietal table wines has grown
significantly over the last 19 years. Since 1980, California premium wine
revenues have increased at an average 18% compound annual rate to
approximately $3.8 billion, or approximately 79% of total California table
wine revenues of approximately $4.9 billion in 1998, according to Gomberg,
Fredrikson & Associates. This growth in California premium wine revenue
reflects, among other things, an increase in U.S. per capita spending on
premium California table wines from $1.82 in 1980 to $28.29 in 1998, and an
increase in U.S. per capita consumption of premium California table wines
during the same time period, from 0.07 gallons in 1980 to 0.66 gallons in
1998. In addition, exports of California wine have grown
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significantly, increasing over 200% in the last 10 years, from 16 million
gallons in 1989 to 49 million gallons in 1998.
Notwithstanding the growth in table wine sales and per capita
consumption, a 1996 report prepared by the Wine Market Council indicated that
approximately 88% of all table wine sold in the U.S. is 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, particularly premium wines.
THE COMPANY'S GRAPE PRODUCTION OPERATIONS
VINEYARD OPERATIONS
SVI currently owns or manages approximately 6,000 acres of wine grape
vineyards in Monterey and San Benito Counties. These properties consist of
approximately 4,400 acres in Monterey County operated for the Company's own
account and approximately 1,600 acres operated under management contracts for
others. Of the Company's approximately 4,080 net vine acres of wine grapes,
approximately 2,290 net vine acres, or 56%, have been contracted for sale to
UDV under long-term grape purchase contracts, approximately 570 net vine
acres have been contracted for sale to other winery clients, approximately
230 net vine acres represent newly redeveloped acreage planted by the Company
in 1997 and 1998 which is not subject to grape purchase contracts, and
approximately 990 acres are newly leased land for which development began in
1997, 1998 and 1999. See "--New Vineyards and Redevelopment of Existing
Vineyards".
GRAPE PRODUCTION
SVI's tons per acre and overall yields of higher value varieties (E.G.,
Chardonnay, Cabernet Sauvignon 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 rootstock. This
planned decline in grape production, caused grape sales revenues for 1993 and
1994 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. The following table shows SVI's net vine acres
by variety from 1994 to 1999, total tons produced from 1994 to 1998, and tons
produced by variety for 1998.
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NET VINE ACRES OWNED BY SVI AND TONS PRODUCED
<TABLE>
<CAPTION>
Net Vine Acres Tons
-------------- ----
VARIETY 1994 1995 1996 1997 1998 1999 1998
- ------- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Chardonnay . . . . . . . 574 656 756 901 881 1,002 3,553
Merlot . . . . . . . . . 150 307 454 506 555 555 2,807
Cabernet Sauvignon . . . 286 286 274 296 297 441 1,533
Sauvignon Blanc . . . . . 133 133 133 133 122 238 1,005
Pinot Noir . . . . . . . - - - 102 104 133 321
Gewurztraminer . . . . . 103 103 103 103 82 82 263
White Riesling . . . . . 124 103 83 87 87 58 440
Chenin Blanc . . . . . . 302 228 187 84 84 - 372
Zinfandel . . . . . . . . 107 107 83 83 83 86 256
Syrah . . . . . . . . . . - - - - 26 64 83
Napa Gamay . . . . . . . 39 39 39 39 20 20 137
Grenache(1) . . . . . . . 49 28 28 28 28 2 136
Souzao . . . . . . . . . - - - 10 11 11 26
Semillon . . . . . . . . - - - 26 - 3 -
Others . . . . . . . . . 13 13 -- -- - 31 --
Replants/Grafts(2) . . . 436 313 164 255 328 294 --
New Acreage(3) . . . . . -- -- 54 374 632 1,060 -
------ ------ ------ ------ ------ ------
Total Net Vine Acres. . 2,316 2,316 2,358 3,027 3,340 4,080
====== ====== ====== ====== ====== ====== ------
Total Tons Produced . . 11,177 8,390 11,241 15,610 - 10,932
====== ====== ====== ====== ======
- -------
</TABLE>
(1) Includes 28 acres leased to Joseph Phelps Vineyards through December
31, 1998 and operated by the Company for the account of Joseph Phelps
Vineyards.
(2) 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.
(3) New acreage represents newly acquired bare ground which is in the
development stage. The development stage is the first three years of
the vineyard's life, when the Company expects little or no production.
GRAPE SALES
PRIMARY CUSTOMERS. The wine grape tonnage harvested from the
Company's approximately 2,726 net vine acres in production (I.E., excluding
vineyards under development or redevelopment) is largely subject to grape
purchase contracts with a small number of well-known wine producing
companies. The largest set of these contracts, representing approximately 84%
of the Company's 1998 grape sales revenues and 74% of the Company's 1998
total revenues, is with UDV. UDV is a unit of Diageo plc, one of the world's
largest wine and spirits sales companies, which is headquartered in the
United Kingdom. In 1998, UDV was California's eighth largest wine producing
company with sales of approximately 5.8 million cases of wine. The Company's
contractual relationship with UDV'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 UDV. The Company has sales contracts for
substantially all of the balance of its wine grape production with other wine
producers, including Canandaigua, Beringer Wine Estates, Chalone Wine Group
and The Hess Collection Winery. The Company also manages, as a contract
vineyard operator, an aggregate of
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approximately 1,533 acres of wine grapes for UDV and Canandaigua,
representing 95% of the total acres managed by the Company. 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 for specified districts as reported in the Final Grape Crush
Report published by the California Department of Food and Agriculture
("CDFA"). See "--Pricing." The contracts generally 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 2014. Contracts covering most of SVI's acreage extend to
2006 and have "evergreen" renewal provisions whereby the contracts continue
until either party gives a two or three years' 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.
See "-Cautionary Information Regarding Forward-Looking Statements -
Dependence on Major Customers; Renewal of Grape Purchase Agreements."
The Company has enjoyed excellent relationships with its customers that
have been built over many years of satisfying their 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 UDV 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 UDV and Canandaigua contracts, the majority of which will
expire in 2006, and any purchase agreements covering new vineyards will have
different terms. Among other potential contract terms, the Company intends
to consider entering into long-term grape purchase contracts with generally
fixed maximum and minimum prices per acre instead of prices per ton that are
subject to annual variation. It is anticipated that such acreage contracts
would provide for the customer to bear more of the crop risk than is
typically borne by the Company under a tonnage contract.
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 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 1999 harvest that
are subject to these contracts will be sold at prices based on the actual
prices for the 1998 harvest reported in the Final Grape Crush Report
published March 10, 1999. This enables both the Company and its customers to
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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. Some recent agreements use pricing
formulas that are based more heavily on Monterey County data, which may also
be the case for the renewal or replacement of the UDV and Canandaigua
agreements and additional agreements covering new or replanted vineyards. The
chart below shows the weighted average prices SVI has received, or expects to
receive, per ton of grapes for the primary varieties it has produced since
1995 based on the pricing formulas of its various contracts.
WEIGHTED AVERAGE PRICES PER TON RECEIVED BY SVI (1)
<TABLE>
<CAPTION>
VARIETY 1995 1996 1997 1998 1999(2)
- ------- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Chardonnay . . . . . . . . . . . . $1,060 $1,188 $1,444 $1,577 $1,587
Cabernet Sauvignon . . . . . . . . 1,097 1,193 1,425 1,571 1,623
Pinot Noir . . . . . . . . . . . . -- -- 1,371 1,555 1,695
Merlot . . . . . . . . . . . . . . 1,098 1,184 1,432 1,532 1,539
Zinfandel . . . . . . . . . . . . . 623 790 971 1,096 1,217
Sauvignon Blanc . . . . . . . . . . 682 742 902 1,027 1,098
Gewurztraminer . . . . . . . . . . 589 663 825 908 960
Napa Gamay . . . . . . . . . . . . 555 603 717 885 859
White Riesling . . . . . . . . . . 514 624 803 832 850
- -----------
</TABLE>
(1) 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) Based upon existing contracts, Company production estimates, and the
1998 Final Grape Crush Report released March 10, 1999.
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 or employed by SVI
over the past ten years have included new grafting methods, interplanting,
new trellis designs and improved machine harvesting technology and practices.
In addition, the Company has experimented with increased vine densities in
order to improve productivity.
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,
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
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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 currently range from
$2,000 to $2,800 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.
CAPITAL INVESTMENT REQUIREMENT FOR ACQUISITION, DEVELOPMENT AND IMPROVEMENT OF
VINEYARDS
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's strategy is to expand its
operations and grape production through the development of bare land into
vineyards, the acquisition of existing vineyards, and the redevelopment of the
Company's older vineyards. As discussed below, the Company has implemented this
strategy through the lease in 1998 of approximately 740 acres of bare land it is
developing into vineyards near the Company's vineyard headquarters, the 1997
acquisition of the 370-acre Riverview Vineyard, the lease in 1997 of
approximately 520 acres of bare land in Hames Valley it is developing into
vineyards and the redevelopment of the Company's existing vineyards begun in
1993. The Company plans to expand its operations further, subject to the
availability of capital and additional suitable properties on terms acceptable
to the Company.
Generally, significant amounts of fruit are not produced for three years
from newly planted vines and for two years from vines which are grafted to a new
variety. 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 begin to
produce grapes in sufficient quantities to cover production costs and contribute
to gross profit, subject to some variation due to the effects of factors such as
geographic location, variety of grape grown, vine density, quality and type of
soil, water quality and weather conditions.
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 4,400 acres is approximately $47 to $56 million, before cost of
land and ignoring the amount of time necessary to produce grapes economically.
The costs of redeveloping existing vineyards vary depending upon the condition
of the vineyard and the scope of the redevelopment plan.
Due to the acquisition and development of new vineyards and the
redevelopment of existing vineyards, 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 under
development or redevelopment represents significant potential for revenue
growth. The following table shows recent and anticipated maturity of the
Company's vineyards.
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MATURITY LEVELS OF SVI'S NET VINE ACRES (1)
<TABLE>
<CAPTION>
CROP YEAR
------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Acres five or more years old (at or
near full production) . . . . . . . . 2,093 2,100 2,260 2,755 3,225 4,080
Acres three and four years old
(partial production) . . . . . . . . . 287 655 965 1,325 855 --
Acres one and two years old (not in
production) . . . . . . . . . . . . . 960 1,325 855 -- -- --
----- ----- ----- ----- ----- -----
Total Acres . . . . . . . . . . . . 3,340 4,080 4,080 4,080 4,080 4,080
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</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.
If the Company's vineyards under development mature consistently with
historical experience and no significant problems are encountered, they should
be at or near their full productive capacity in or about 2003. Therefore,
acquisitions of producing vineyards will be required prior to 2003 to achieve
production increases in excess of those anticipated from the Company's existing
vineyards. In addition, acquisitions of producing vineyards or open land
suitable for vineyard development will be required to sustain productivity
increases after 2003 and moderate any productivity losses from the Company's
existing vineyards due to grafting to new varieties and various other factors
that take vineyards out of production from time to time. See "-Uncertainty of
Revenue Growth," "-Capital Requirements," and "-Risks Associated with Business
Expansion and Acquisition Strategy" under "-Cautionary Information Regarding
Forward-Looking Statements" below.
NEW VINEYARDS AND REDEVELOPMENT OF EXISTING VINEYARDS
GREENFIELD. In December 1998, the Company entered into a lease for a
term of 24 years of approximately 740 acres of undeveloped land suitable for
wine grape vineyards located near the Company's vineyard headquarters. The
Company has two options to extend the term of the lease for successive
five-year terms (for a total of ten years). The Company is planting the
entire 740 acres in 1999, with the first harvest expected in 2001. The
Company intends to seek long-term grape purchase contracts for the grape
production from this new vineyard.
HAMES VALLEY. In 1997, the Company acquired an option to lease, for a
term of up to 50 years, approximately 520 acres of undeveloped land suitable
for wine grape vineyards in Hames Valley, which is located approximately 45
miles south of the Company's vineyard headquarters. The Company exercised its
option and began development on approximately 200 acres in 1997 and, in the
first quarter of 1998, exercised its option and began development on the
remaining approximately 320 acres. This acquisition has allowed 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 is currently in the process of seeking 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 grape purchase
contracts for newly developed or acquired vineyards, including those under
development in Greenfield and Hames Valley.
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<PAGE>
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 management contract with Canandaigua, in 1997 SVI began to manage and
develop this acreage into vineyards. 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 are provided by Canandaigua.
RIVERVIEW VINEYARD. In June 1997, the Company acquired the 370-acre
Riverview Vineyard located approximately 12 miles north of SVI's vineyard
headquarters. The purchase price was approximately $5.5 million. The vineyard is
planted with several varieties, including approximately 175 acres of Chardonnay
and 130 acres of Pinot Noir. In 1998, the Company secured long-term grape
purchase contracts for the majority of the grape production from this vineyard.
REDEVELOPMENT OF EXISTING VINEYARDS. In 1993, SVI began a major
improvement and refurbishment program at its vineyards in order to increase
production and to upgrade its variety mix to those grapes that were expected to
be in greater demand and sell at higher prices. From 1993 through 1998, the
Company made capital expenditures on its vineyards of over $20 million, and the
improvement and refurbishment program is continuing. From 1993 through 1998,
the Company replanted or regrafted approximately 1,190 acres to higher value
varieties and interplanted an additional 1,200 acres. In 1999, the Company is
replanting approximately 120 acres. See "-Net Vine Acres Owned by SVI and Tons
Produced."
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 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 all of 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 1980's. See "-Cautionary Information
Regarding Forward-Looking Statements - Water."
VINEYARD MANAGEMENT CONTRACTS
The Company manages, as a contract vineyard operator, approximately
1,600 acres in Monterey and San Benito Counties for four vineyard owners,
including approximately 1,533 acres managed for UDV 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.
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<PAGE>
WINE PRODUCTION AND SALES
SVI began limited production of its own ultra premium varietal wines under
the SCHEID VINEYARDS and SAN LUCAS VINEYARD labels in 1991. The Company has
contracted for its wine production with Storrs Winery, a small producer of award
winning wines located in Santa Cruz, California, approximately 50 miles from the
Company's vineyard headquarters compound. The Company currently subleases space
in a 1,600 square foot building from Storrs Winery, including certain space
dedicated 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. SVI produced approximately
4,000 cases in each of 1997 and 1998 of ultra premium varietal wines, including
Chardonnay, Cabernet Sauvignon, Merlot, Pinot Noir and White Riesling, using
Company-grown 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 1999. As it increases wine production, the
Company intends to distribute directly through its tasting room, restaurants,
clubs and a few selected retailers. In 1997 and 1998, the Company offered a
"wine dividend" to holders of at least 100 shares of its Class A Common Stock,
whereby such shareholders were entitled to a $0.50 per share credit for use in
making purchases of the Company's wine at up to a 50% discount from the retail
price. The Company intends to offer another "wine dividend" in 1999. 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. The
top eight wineries account for approximately 78% of sales based on total
California wine shipments in 1998. In addition, there are many sources of supply
of wine grapes in California and in countries outside the United States. At the
end of 1997, approximately 407,000 acres were planted to wine grapes in
California according to the California Agricultural Statistics Service, 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
Kendall-Jackson and 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
14
<PAGE>
marketers to purchase wine from foreign sources. Most imports are bottled
wines; however, some wineries have imported bulk table wine in large tanks
for bottling and sale in the United States. Imports to California for these
purposes decreased from approximately 20.3 million gallons in 1997 to
approximately 8 million gallons in 1998.
ENVIRONMENTAL ISSUES
SVI currently maintains 23 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.
TRADEMARKS AND LABELS
The Company has registered a trademark relating to a specific slogan which
the Company uses on souvenirs and paraphernalia sold at the Company's
wine-tasting room. The Company also has wine labels approved by the Bureau of
Alcohol, Tobacco and Firearms ("BATF"), including the SCHEID VINEYARDS and SAN
LUCAS VINEYARD brand names.
EMPLOYEES AND LABOR RELATIONS
The Company has approximately 75 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 400 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.
The United Farm Workers, AFL-CIO ("UFW") has represented the Company's farm
workers since 1993. In 1998, the Company completed the negotiation of a new
four-year contract with the UFW that will expire at the end of 2001. 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. See "Cautionary Information Regarding Forward-Looking
Statements - Labor Regulations and Union Contract."
15
<PAGE>
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
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. 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 70 miles, north to south, close to Highway 101 in
Monterey County. Accordingly, adverse weather in the future could 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 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 4,080 net vine acres (I.E., excluding acreage devoted to roads,
storage areas, equipment yards or uses other than vineyards) of wine grapes,
approximately 3,940 net vine acres, or 97%, are planted or interplanted with
phylloxera-resistant rootstock. The remaining approximately 140 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.
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
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<PAGE>
time, will have the potential to subject the vineyards to severe damage.
DEPENDENCE ON MAJOR CUSTOMERS; RENEWAL OF GRAPE PURCHASE AGREEMENTS
The majority of SVI's current grape production is contracted for sale to
UDV which accounted for approximately 74% of the Company's total revenues in
1998. The terms of the long-term grape purchase contracts with UDV extend to
between 2001 and 2014. The majority of the contracts extend to 2006 and have an
"evergreen" renewal 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, it is possible that they could 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 UDV as
significant a purchaser 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 UDV could have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF REVENUE GROWTH
Approximately 51% 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 initial development,
replanting, regrafting and various other factors. 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, develop and operate more vineyard properties. 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. Revenues are also
substantially dependent on grape yields and prices, both of which are subject to
variation as discussed elsewhere in this section and can have an effect on
revenue growth unrelated to the number of acres in full production.
FIXED COSTS AND REVENUE FLUCTUATIONS; UNCERTAINTY OF PROFITABILITY
The Company incurs annual farming costs currently averaging approximately
$2,000 to $2,800 per acre in production. These costs are incurred throughout
the year preceding harvest and are relatively fixed. Revenues from grape sales
are not 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. Historically, the Company has relied heavily on short-term
credit to finance its working capital requirements. Working capital
requirements are expected to increase 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
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<PAGE>
to adequate lines of credit or other capital sources 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. 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. 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 will 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 through (i) new development of
undeveloped properties suitable for premium varietal vineyards and (ii)
acquisitions of developed vineyard properties. There can be no assurance that
the Company will be able to locate suitable properties to buy or lease at viable
prices, and any undeveloped properties acquired by the Company will require
significant capital investment and several years of development before becoming
productive. The Company does not expect to receive the full benefit from any
newly planted vineyards for at least four to five years after planting due to
the time required for the vines to mature and produce economic yields. In
addition, the Company's ability to increase profits through acquisitions depends
to a significant degree upon the prices at which properties can be purchased or
leased. Furthermore, increased acreage under management will create additional
demands on Company management and may require the Company to hire and integrate
more employees. Accordingly, the Company's strategies are long-term strategies
designed to increase the Company's production capacity and expand the Company's
business. As a result, the full economic impact in terms of projected earnings
and other beneficial effects of the Company's expansion program will not be
fully realized for several years, if at all.
WINE GRAPE SUPPLY AND DEMAND; PRICING
Prices for premium California wine grapes are at historically high levels
due to (i) a shortage of grapes due to a variety of factors and (ii) an increase
in demand. Recent plantings of new vineyards, yield enhancements through
technological advances, foreign competition and other factors are expected to
increase supply. Furthermore, there can be no assurance that demand 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.
Some declines in prices received by the Company should be expected, and these
declines may be significant.
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. 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 and
abroad.
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POSSIBLE TERMINATION OF VINEYARD MANAGEMENT AGREEMENTS
Substantially all of the Company's vineyard management agreements may be
terminated in the event that Alfred G. Scheid, Kurt J. Gollnick and certain
members of their families cease to maintain specified shareholdings in the
Company. Sales to the public by members of the Scheid or Gollnick families 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 and a body of court decisions
has developed. SVI is subject to many of these regulations, laws and
precedents.
The UFW is the major union representing farm labor and has represented
SVI's farm workers since 1993. In 1998, the Company completed the negotiation
of a new four-year contract with the UFW that will expire at the end of 2001.
Although the Company historically has had satisfactory labor relations, it has
been picketed from time to time during the initial organization of its employees
and during contract negotiations. No assurance can be given that the Company's
satisfactory labor relations will continue or that the UFW will not engage in,
picketing, walk-outs, sit-downs, slow-downs or strikes or the threat of these
actions. The Company's business is heavily dependent upon farm labor, and the
failure of the Company to maintain adequate labor relations on terms acceptable
to the Company could have a material adverse effect upon the Company's business,
financial condition and results of operations.
DEPENDENCE ON CONSUMER DEMAND
Trends in consumer spending and changes in consumer tastes have a
substantial impact on the wine industry and the Company's business. To the
extent that wine purchases are negatively impacted by economic and other
factors, or wine consumers reduce consumption of wine in favor of other
beverages, demand for wine grapes could decrease.
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, 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.
Wine production and sales are subject to extensive regulation by the
Federal Bureau of Alcohol, Tobacco and Firearms, 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.
Increases in excise taxes on wine, if enacted, could reduce demand for wine and
wine grapes, which could materially and adversely effect the Company's business,
financial condition and results of
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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. There can be no assurance that
the key persons will remain in their management positions with the Company, and
the loss of the services of any of the key persons could have a material adverse
effect on the Company's business, financial condition and results of operations.
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. See "-Enviromental Issues."
WATER
The Company is dependent upon wells located on or near its vineyards for
water to irrigate the vineyards, which wells are supplied by aquifers fed by the
Salinas River and reservoirs operated by Monterey County. Although historically
the quality of water from these wells has been good and the wells have
consistently supplied a plentiful and reliable source of water, even during the
drought years of the late 1980's, and the Company believes its sources of water
will be available for the foreseeable future, it is possible that the Company's
water supplies could be impaired in the future due to drought, contamination or
other circumstances. An impairment in the Company's water supplies could
adversely affect the business, financial condition and results of operations of
the Company.
YEAR 2000
The Year 2000 issue is the result of computer systems, including
information technology ("IT") and non-IT systems, which have the inability to
process date sensitive information with respect to the Year 2000 and thereafter.
Computers or other equipment with date-sensitive software may recognize "00" as
1900 rather than 2000. If not corrected, many computer systems could fail or
produce erroneous results. If the Company, or its significant customers,
suppliers, lenders, or other third parties fail to correct Year 2000 issues, the
Company's ability to operate its business could be materially affected.
The Company is currently in the process of upgrading its accounting and
financial software, and, in conjunction with the upgrade, any known Year 2000
issues will be corrected. This upgrade is anticipated to be completed by
mid-1999. In the event that this upgrade is not completed by December 31,
1999, the most likely worst-case scenario would be that the majority of the
Company's accounting functions would have to be performed manually.
The Company is also evaluating its non-IT systems with respect to the Year
2000 issue. These non-IT systems include phones and security systems. The cost
to the Company of evaluating its own systems is not expected to be material.
20
<PAGE>
In addition, there are also risks associated with key suppliers,
including utility companies and financial institutions, and customers over
which the Company has little or no control. The Company has begun making
inquiries of certain of its principal suppliers and customers with respect to
their Year 2000 readiness and its potential effects on the Company. However,
the Company does not yet know the status of Year 2000 compliance of major
vendors that are integral to the Company's business and the Company is
therefore not able to currently assess the risk to the Company of third party
failures.
Although no assurances can be given, the Company currently believes that
through its ongoing upgrade of its accounting and financial systems and its
evaluation of non-IT systems, as well as ongoing correspondence with
suppliers and customers, the Year 2000 issue will not materially impair the
Company's ability to conduct business. In addition, in addressing the Year
2000 issue, the Company has thus far not expended a material amount, and does
not anticipate future expenditures regarding this issue to be material. To
the extent the Company is not able to address any of its Year 2000 issues,
the Company believes that it could revert to manual processes previously
employed with minimal costs.
ITEM 2. DESCRIPTION OF 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. Each
of these members of the Scheid family is a principal stockholder of the Company.
See the information incorporated by reference under "Item 12 - Certain
Relationships and Related Transactions." The lease expires in June 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 1,800 acres of land
and leases approximately 2,600 acres of land underlying its vineyards, all of
which are located in Monterey County, California. The five leases to which the
Company is a party were entered into in 1973, 1979, 1996, 1997 and 1998,
respectively, and each of the land leases has an initial term of 24 to 30 years
and options to extend for up to an additional 10 to 20 years. Substantially all
of the Company's property, plant and equipment serves as collateral for
long-term debt.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
Company's fourth quarter ended December 31, 1998.
21
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET FOR CLASS A COMMON STOCK; RELATED INFORMATION
The Company's Class A Common Stock is traded on the Nasdaq National Market
System under the symbol "SVIN". The following table sets forth, for the fiscal
quarter indicated, the high and low per share sales prices for the Class A
Common Stock, as reported by Nasdaq:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
Third quarter (commencing July 25, 1997) . . . $11.875 $10.000
Fourth quarter . . . . . . . . . . . . . . . . $11.500 $ 8.125
1998
First quarter . . . . . . . . . . . . . . . . $11.500 $ 6.750
Second quarter . . . . . . . . . . . . . . . . $12.000 $ 6.750
Third quarter . . . . . . . . . . . . . . . . $ 7.438 $ 3.938
Fourth quarter . . . . . . . . . . . . . . . . $ 5.938 $ 3.938
</TABLE>
On March 15, 1999, there were 52 holders of record of the Company's
Class A Common Stock and 14 holders of record of the Company's Class B Common
Stock. On that date, the Company believes that the number of beneficial
owners of its Class A Common Stock was 1,130. For information concerning
historical dividends and the Company's dividend policy, see "Item 6 -
Management's Discussion and Analysis or Plan of Operation - Dividends and
Distributions."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
FINANCIAL STATEMENTS, INCLUDING THE RELATED NOTES THERETO, AND OTHER FINANCIAL
INFORMATION INCLUDED HEREIN. THE INFORMATION IN THIS REPORT INCLUDES
FORWARD-LOOKING STATEMENTS. IN ADDITION, PAST OPERATING RESULTS ARE NOT
NECESSARILY INDICATIVE OF THE RESULTS TO BE EXPECTED FOR FUTURE PERIODS. SEE
"NOTE CONCERNING FORWARD-LOOKING STATEMENTS" AND "ITEM 1 - BUSINESS - CAUTIONARY
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS".
22
<PAGE>
OVERVIEW
Scheid Vineyards Inc. is a leading independent (I.E., not winery
controlled) producer of premium varietal wine grapes. The Company currently
operates approximately 6,000 acres of wine grape vineyards. Of this total,
approximately 4,400 acres are operated for the Company's own account, and 1,600
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 13 varieties of premium wine grapes,
primarily Chardonnay, Merlot, Cabernet Sauvignon and Sauvignon Blanc.
Substantially all of the Company's current wine grape production is contracted
at least through the harvest of 2001, and the majority is contracted at least
through the harvest of 2006. The Company's two largest winery customers are
United Distillers and Vintners North America ("UDV"), a subsidiary of Diageo plc
and the eighth largest U.S. winery in terms of 1998 case shipments, and
Canandaigua Brands, Inc. ("Canandaigua"), the second largest U.S. winery. Grape
purchase contracts with UDV covered 56% of the Company's acreage as of December
31, 1998 and accounted for approximately 74% and 81% of the Company's 1998 and
1997 total revenues, respectively. Thus, the Company is substantially dependent
on UDV, and termination of these contracts could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company has had grape purchase contracts with UDV and its predecessors since
1972.
Fiscal 1998 was a difficult farming year for California wine grape
growers, including SVI. Unseasonably cool and cloudy weather from late May
through July caused delayed vine growth and crop development industry-wide.
These poor growing conditions resulted in reduced crop yields and a decrease
in tons produced by SVI, from 15,600 tons in the record high crop year of
1997 to 10,900 tons in 1998, a decrease of 30%. In 1998, the Company
completed its planting of 965 acres of wine grape vineyards in Hames Valley,
which is located approximately 45 miles south of the Company's vineyard
headquarters. Approximately 445 acres of the Hames Valley development is
farmed under a vineyard management contract for a winery client. The first
harvest from a portion of this vineyard is expected in 1999, and the first
harvest from the remainder of this vineyard is expected in 2000. In
addition, the Company entered into several long-term grape purchase contracts
in 1998 with winery clients, including UDV, Beringer Wine Estates, Chalone
Wine Group and David Bruce Winery, covering approximately 525 acres, or 13%
of the Company's net vine acreage. In December 1998, the Company signed a
long-term lease for approximately 740 acres of undeveloped land suitable for
wine grape vineyards in Greenfield, a few miles from the Company's vineyard
headquarters. The lease is for a term of up to 34 years. The Company
is planting the entire acreage in 1999, with the first harvest expected
in 2001.
SEASONALITY
The wine grape business is extremely seasonal. Similar to most
nondiversified agricultural crop producers, the Company recognizes substantially
all of its crop sales revenues at the time of its annual harvest in September
and October. Because success of the Company's operations is dependent upon the
results of the Company's annual harvest, the first two quarters have
historically resulted in a loss and quarterly results are not considered
indicative of those to be expected for a full year. Profits, if any, are
recognized in the last two fiscal quarters of the year when revenues from grape
sales are recognized. In addition, the timing of the annual harvest varies each
year based primarily on seasonal growing conditions, resulting in timing
differences in the portion of grape revenues recognized in the
23
<PAGE>
third and fourth quarters of any one year. This is a significant factor in
comparing quarterly operating results for 1997 and 1998. From time to time,
the Company has in the past, and may in the future, convert grapes into bulk
wine for sale in years subsequent to the harvest year, which may impact
quarterly results.
RESULTS OF OPERATIONS - YEARS ENDED DECEMBER 31, 1998 AND 1997
The following table sets forth certain statement of operations data for the
years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1998 1997
---- ----
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Sales . . . . . . . . . . . . . . . . . . . . . . . . $16,436 $18,683
Vineyard management, services and other fees . . . . 1,037 1,187
------- -------
17,473 19,870
Cost of sales . . . . . . . . . . . . . . . . . . . . . 7,911 6,222
------- -------
Gross profit . . . . . . . . . . . . . . . . . . . . . 9,562 13,648
General and administrative expenses . . . . . . . . . . 4,274 4,215
------- -------
Operating income . . . . . . . . . . . . . . . . . . . 5,288 9,433
Reversal of deferred compensation . . . . . . . . . . . (706) --
Interest expense (income), net . . . . . . . . . . . . (46) 700
------- -------
Income before provision for income taxes . . . . . . . 6,040 8,733
Provision for income taxes . . . . . . . . . . . . . . 2,421 3,887
------- -------
Income before deferred tax adjustment . . . . . . . . 3,619 4,846
Deferred income taxes from reorganization to C
Corporation . . . . . . . . . . . . . . . . . . . . . -- 1,390
------- -------
Net income . . . . . . . . . . . . . . . . . . . . . . $3,619 $3,456
------- -------
------- -------
Pro Forma Amounts:
Income before income taxes as reported $8,733
Pro forma income tax provision 3,493
-------
Pro forma net income $5,240
-------
-------
</TABLE>
REVENUES. SVI derives its revenues from four sources: (i) sales of wine
grapes; (ii) sales of bulk wine; (iii) vineyard management and services
revenues consisting primarily of management and harvest fees and equipment
rentals for services provided to owners of vineyards; and (iv) sales of wine
and wine-related merchandise sold primarily through the Company's tasting room
which opened in April 1997. Sales (which is comprised of revenue from sales of
wine grapes, bulk wine, and wine and wine-related merchandise) decreased to
$16,436,000 in the year ended December 31, 1998 from $18,683,000 in the 1997
period, a decrease of $2,247,000 or 12%.
Revenue from grape sales decreased by 18% to $15,260,000 for the year ended
December 31, 1998 from $18,585,000 in 1997, a decrease of $3,325,000. The
decrease was primarily due to unseasonably cool and cloudy weather in 1998,
resulting in delayed vine growth and crop development industry-wide. These poor
growing conditions caused reduced crop yields and an approximately 30%
24
<PAGE>
decrease in tons produced for the year ended December 31, 1998 as compared to
the 1997 period. This decrease in tonnage is partially offset by an
approximately 12% increase in the average price paid by the Company's
customers.
Revenue from sales of bulk wine totaled $982,000 for the year ended
December 31, 1998. There were no sales of bulk wine in 1997.
Revenue from the sale of wine and wine-related merchandise increased by 98%
to $194,000 for the year ended December 31, 1998 from $98,000 in the 1997
period, an increase of $96,000. The tasting room opened in April 1997.
Revenue from vineyard management, services and other fees decreased by 13%
to $1,037,000 for the year ended December 31, 1998 from $1,187,000 in the 1997
period, a decrease of $150,000. The decrease was primarily due to a one-time
development fee received under a new management agreement entered into in the
first quarter of 1997.
GROSS PROFIT. Gross profit for the year ended December 31, 1998 was
$9,562,000 compared to $13,648,000 for the year ended December 31, 1997, a
decrease of $4,086,000 or 30%. This decrease resulted primarily from the
decrease in grape sales and vineyard management, services and other fees
discussed above, as well as an increase in farming expenses, and is partially
offset by the sale of bulk wine in 1998.
Gross margin on grape sales decreased to 52% in 1998 as compared to 67% in
1997. The decrease in gross margin on grape sales is primarily the result of
lower yields per acre in 1998 than in 1997 and increased farming expenses,
partially offset by an increase in the prices received by the Company from 1997
to 1998. The increase in farming expenses was due to the unfavorable weather
conditions which caused mildew and other problems, delaying vine growth and crop
development industry-wide. Controlling these problems in the Company's
vineyards necessitated leaf removal, thinning, spraying and other activities
which resulted in higher than expected farming expenses.
Costs associated with the provision of management services are reimbursed
by the Company's clients, therefore, no cost of sales is deducted in determining
gross profit on these services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by 1% to $4,274,000 for the year ended December 31, 1998 from
$4,215,000 in the 1997 period, an increase of $59,000. Vineyard write-downs
increased to $555,000 in 1998 from $328,000 in 1997, an increase of $227,000.
The increases in general and administrative expenses were partially offset by
reductions in management bonuses in the amount of $164,000 and reductions in
other general corporate expenses.
REVERSAL OF DEFERRED COMPENSATION. During the year ended December 31,
1998, the Company reversed an accrual of deferred compensation in the amount of
$706,000. The deferred compensation liability was due to an arrangement whereby
the Company would make annual payments to a certain employee commencing upon his
retirement. The employee passed away in August 1998 negating the need for the
provision.
25
<PAGE>
INTEREST EXPENSE (INCOME), NET. Net interest expense (income) was
($46,000) for the year ended December 31, 1998 and $700,000 in the 1997 period,
a decrease of $746,000, and is comprised of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest expense . . . . . . . . . . . . . . . . . $ 977,000 $1,277,000
Less capitalized interest . . . . . . . . . . . . . (641,000) (294,000)
--------- ----------
Interest expense, net of amount capitalized . . 336,000 983,000
Interest income . . . . . . . . . . . . . . . . . . (382,000) (283,000)
--------- ----------
Interest expense (income), net . . . . . . . . . $ (46,000) $ 700,000
--------- ----------
--------- ----------
</TABLE>
Total interest expense decreased primarily as a result of lower interest
rates in the 1998 period and the absence of borrowings in 1998 under the
Company's crop line of credit. Capitalized interest increased in the 1998 period
due to increased expenditures for vineyard acreage being improved or developed.
The increase in interest income in 1998 was due to the increase in cash holdings
of the Company from 1997 to 1998, primarily as the result of funds received in
the Company's initial public offering in July 1997, and cash received from an
above-average harvest in 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
$2,421,000 for the year ended December 31, 1998 from $3,887,000 in 1997. The
Company was an S Corporation for income tax purposes prior to the initial public
offering in July 1997. The S Corporation election was terminated in connection
with the public offering, upon which the Company became taxable as a C
Corporation. As a result of the Company's prior S Corporation status, the
Company's losses for the first seven months of 1997 were allocated to the
Company's sole stockholder and were not available to offset the Company's income
for the last five months of the year. This resulted in an effective tax rate
for 1997 of 44.5%. The effective tax rate for 1998 was 40.1%.
INCOME BEFORE DEFERRED TAX ADJUSTMENT. Due to the above factors, the
Company had income before deferred tax adjustment for the year ended December
31, 1998 of $3,619,000 as compared to $4,846,000 in the 1997 period.
DEFERRED TAXES FROM REORGANIZATION TO C CORPORATION. In July 1997, the
Company incurred a one-time noncash charge to earnings in the amount of
$1,390,000 to record the deferred tax liability arising from the reorganization
of the Company's business from an S Corporation and partnerships to a taxable C
Corporation in connection with the Company's initial public offering.
NET INCOME. The Company had net income for the year ended December 31,
1998 of $3,619,000 as compared to $3,456,000 in the 1997 period. On a pro forma
basis, net income for the year ended December 31, 1997 was $5,240,000. Pro
forma net income is derived by providing an income tax provision as if the
Company had been a C Corporation for the year ended December 31, 1997.
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 acquire and develop new acreage, and the Company intends to
26
<PAGE>
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. Working
capital at December 31, 1998 was $3,883,000 as compared to $15,665,000 at
December 31, 1997, a decrease of $11,782,000. The reduction in working
capital from 1997 to 1998 was primarily due to the expenditures of current
working capital to fund vineyard development, repay balances of certain
long-term revolving credit facilities and repurchase shares of the Company's
Class A Common Stock.
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 early
November. Due to the three to four week delay in the start of the 1998 harvest,
the crop was delivered in October and November, and the majority of cash from
grape sales was received in late November. In order to bridge the gap between
incurrence of expenditures and receipt of 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. This crop line was renewed in June 1998 and expires June 5, 2000. There
were no amounts outstanding under this line at December 31, 1998. The crop line
of credit is secured by crops and other assets of the Company.
SVI also has long-term credit facilities which expire through July 2008 and
provide for maximum borrowings totaling $10,885,000, which diminish annually
through the expiration dates to a maximum allowable commitment of $5,412,000.
At December 31, 1998, there were no amounts outstanding under these facilities.
The interest rate on each of these lines is based on the bank's "reference" or
"cost of funds" rate which at December 31, 1998 was 7.37%. These credit lines
are secured by deeds of trust on underlying vineyard properties.
The Company also has other long-term notes payable which, as of December
31, 1998, totaled approximately $6,265,000. The interest rate on these notes is
based on the bank's "reference" or "cost of funds" rate. At December 31, 1998,
the weighted average per annum interest rate was 7.37%. These notes are secured
by deeds of trust on underlying vineyard properties.
The Company also has a $7,500,000 bank line of credit, the proceeds of
which are being used to develop a vineyard owned by a major client and managed
under a long-term contract by the Company. At December 31, 1998, the
outstanding balance on this line of credit was $5,572,000. This line bears
interest at the bank's reference rate (6.06% at December 31, 1998) and is
repayable in six annual installments beginning January 2000. The note is
secured by a letter of credit provided by the client and by the Company's
management contract. The management contract provides for the Company's client
to make payment of the annual principal installments under this line as and when
they become due.
The Company's principal credit facilities and notes payable bind the
Company to a number of affirmative and negative covenants, including
requirements to maintain certain financial ratios within certain parameters and
to satisfy certain other financial tests. At December 31, 1998, the Company was
in compliance with these covenants.
27
<PAGE>
Although no assurances can be given, management believes that the
Company's anticipated working capital levels and short-term and long-term
borrowing capabilities will be adequate to meet the Company's currently
anticipated liquidity needs during the fiscal year ending December 31, 1999.
At December 31, 1998, the Company had $20,571,000 in borrowing availability
under its long-term revolving credit facilities and crop line.
Management expects that capital requirements will expand significantly to
support expected future growth and that this will result in the expenditure of
the Company's available cash and additional borrowing under credit lines and/or
new arrangements for term debt. The Company's planned new vineyard developments
are expected to require approximately $16 million in capital investment over the
next three years, and continued improvements and redevelopments of existing
vineyards are expected to require approximately $7 million. In addition, the
Company expects to invest approximately $3 million in equipment purchases.
Management believes it should be able to obtain long-term funds from its present
principal lender, but there can be no assurance that the Company will be able to
obtain financing when required or that such financings will be available on
reasonable terms.
Cash provided by operating activities was $8,021,000 for the year ended
December 31, 1998, compared to $4,685,000 for the same period in 1997, an
increase of $3,336,000. The increase was primarily due to a $2,480,000 increase
in income taxes payable due to the timing of current year estimated tax payments
and a net decrease in the amount of $1,509,000 for expenditures for inventories
and supplies.
Cash used in investing activities was $8,419,000 for the year ended
December 31, 1998, compared to $15,400,000 for the same period in 1997, a
decrease of $6,981,000. The decrease was principally the result of reductions
in additions to property, plant and equipment, and reductions in the additions
to a long-term receivable. The additions to property and equipment in 1998 were
primarily due to the improvements of the Company's existing vineyards, and
ongoing development of approximately 330 acres of new vineyards. In 1997, the
additions were due to the acquisition of the Company's Riverview Vineyard in
June 1997, the improvement of existing vineyards, and the development of new
vineyards. The decrease in the additions to long-term receivables was due to
the repayment of a portion of the costs incurred for the development of certain
vineyards owned by a major client of the Company who has provided a letter of
credit to secure repayment.
Cash used in financing activities was $9,054,000 for the year ended
December 31, 1998, compared to cash provided by financing activities of
$21,174,000 for the same period in 1997. During the year ended December 31,
1998, the credit line and related receivable from a major client were reduced by
$997,000, as described above. There were no such repayments for the same period
in 1997. In addition, in 1998, the Company repurchased 452,950 shares of its
Common Stock for $2,380,000. In July 1997, the Company received proceeds from
its initial public offering in the amount of $20,700,000 and made distributions
to partners and shareholders in connection with the offering in the amount of
$3,582,000.
YEAR 2000
The Year 2000 issue is the result of computer systems, including
information technology ("IT") and non-IT systems, which have the inability to
process date sensitive information with respect to the Year 2000 and thereafter.
Computers or other equipment with date-sensitive software may recognize "00" as
1900 rather than 2000. If not corrected, many computer systems could fail or
produce erroneous results. If the Company, or its significant customers,
suppliers, lenders, or other third
28
<PAGE>
parties fail to correct Year 2000 issues, the Company's ability to operate
its business could be materially affected.
The Company is currently in the process of upgrading its accounting and
financial software, and, in conjunction with the upgrade, any known Year 2000
issues will be corrected. This upgrade is anticipated to be completed by
mid-1999. In the event that this upgrade is not completed by December 31,
1999, the most likely worst-case scenario would be that the majority of the
Company's accounting functions would have to be performed manually.
The Company is also evaluating its non-IT systems with respect to the Year
2000 issue. These non-IT systems include phones and security systems. The cost
to the Company of evaluating its own systems is not expected to be material.
In addition, there are also risks associated with key suppliers,
including utility companies and financial institutions, and customers over
which the Company has little or no control. The Company has begun making
inquiries of certain of its principal suppliers and customers with respect to
their Year 2000 readiness and its potential effects on the Company. However,
the Company does not yet know the status of Year 2000 compliance of major
vendors that are integral to the Company's business and the Company is
therefore not able to currently assess the risk to the Company of third party
failures.
Although no assurances can be given, the Company currently believes that
through its ongoing upgrade of its accounting and financial systems and its
evaluation of non-IT systems, as well as ongoing correspondence with
suppliers and customers, the Year 2000 issue will not materially impair the
Company's ability to conduct business. In addition, in addressing the Year
2000 issue, the Company has thus far not expended a material amount, and does
not anticipate future expenditures regarding this issue to be material. To
the extent the Company is not able to address any of its Year 2000 issues,
the Company believes that it could revert to manual processes previously
employed with minimal costs.
DIVIDENDS AND DISTRIBUTIONS
The Company intends to retain its future earnings, if any, to fund the
development and growth of its business and does not anticipate paying cash
dividends on either class of its Common Stock in the foreseeable future. In
addition, the Company's principal bank credit facilities prohibit the payment of
cash dividends without the consent of the lender.
In connection with the Company's initial public offering, the Company was
reorganized from an S Corporation and partnerships to a C Corporation. During
the fiscal year ended December 31, 1997 (prior to the reorganization), the
Company and these partnerships made cash stockholder and partner distributions
totaling $3,582,000. The distributions were made at the time of the
reorganization in respect of cumulative S Corporation earnings and income tax
liabilities on partnership income. No distributions were made in 1998.
ITEM 7. FINANCIAL STATEMENTS
The audited financial statements of the Company are set forth in this
Report beginning on page F-1.
29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by this Item is set forth under the captions
"Proposal No. 1 - Election of Directors - Information Concerning the Nominees"
and " - Directors and Executive Officers" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission and is
incorporated herein by this reference as if set forth in full.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item is set forth under the caption
"Executive Compensation" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission and is incorporated herein by this
reference as if set forth in full.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission and is incorporated herein by this reference as if set forth
in full.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is set forth under the caption
"Certain Transactions" in the Company's definitive Proxy Statement to be filed
with the Securities and Exchange Commission and is incorporated herein by this
reference as if set forth in full.
30
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
2.1 Exchange and Contribution Agreement, dated as of July 29, 1997, among
Registrant and certain affiliated entities and stockholders of
Registrant (incorporated by reference to Exhibit number 2.1 to
Registrant's Report on Form 10-KSB for the fiscal year ended December
31, 1997 filed March 30, 1998).
3.1a* Certificate of Incorporation.
3.1b* Certificate of Amendment of Certificate of Incorporation.
3.2* Amended and Restated Bylaws.
4.1 Warrant Agreement, dated as of July 30, 1997, by and among the
Company, Cruttenden Roth Incorporated, Laidlaw Equities, Inc. and
Rodman & Renshaw, Inc (incorporated by reference to Exhibit number 4.1
to Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1997 filed March 30, 1998).
4.2 Form of Certificate Evidencing Ownership of Class A Common Stock of
Scheid Vineyards Inc (incorporated by reference to Exhibit number 4.2
to Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1997 filed March 30, 1998).
4.3 Form of Certificate Evidencing Ownership of Class B Common Stock of
Scheid Vineyards Inc. (incorporated by reference to Exhibit number
4.3 to Amendment No. 1 to Registrant's Registration Statement on Form
SB-2 filed July 3, 1997).
10.1 1997 Stock Option/Stock Issuance Plan, as amended and restated through
March 10, 1998 (incorporated by reference to Exhibit number 10.1 to
Registrant's Report on Form 10-KSB for the fiscal year ended December
31, 1997 filed March 30, 1998).(2)
10.2 Lease, dated as of January 1, 1997, by and among Sam Avila and
Margaret J. Avila, as trustees under declaration of trust dated
August 16, 1989, and Margaret J. Avila and Valarie Bassetti successor
co-trustees of the testamentary trust of Joseph Laberere, and Sam
Avila, and Margaret J. Avila, and Scheid Vineyards and Management Co.
(incorporated by reference to Exhibit number 10.3 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.3 Lease, dated as of January 1, 1996, by and between Echenique Ranch and
Scheid Vineyards and Management Co., as amended by a Letter Agreement
dated March 27, 1996 (incorporated by reference to Exhibit number 10.4
to Registrant's Registration Statement on Form SB-2 filed May 28,
1997).(1)
10.4 Land Lease by and between William McHenry Bland and Monterey Farming
Corporation and Addendum to Land Lease, dated September 26, 1973, by
and between William McHenry Bland and Monterey Farming Corporation
(incorporated by reference to Exhibit number 10.5 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.5 Lease, dated September 27, 1979, by and among Luis Echenique, Francis
D. Echenique, Ricardo Echenique and Monterey Farming Corporation, as
amended by (i) a Memorandum of Lease, dated September 27, 1979, (ii)
an Amendment to Memorandum of Lease, dated September 4, 1987, (iii) a
First Amendment to Lease, dated September 4, 1987, and (iv) a Second
Amendment of Lease, dated September 4, 1987 (incorporated by reference
to Exhibit number 10.6 to Registrant's Registration Statement on Form
SB-2 filed May 28, 1997).(1)
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
10.6 + Vineyard Management Agreement, dated as of January 1, 1997, by and
among Scheid Vineyards and Management Co., Canandaigua West, Inc. and
Canandaigua Wine Company, Inc. (incorporated by reference to Exhibit
number 10.7 to Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)
10.7 + Vineyard Management Agreement, dated as of January 1, 1996, by and
among Scheid Vineyards and Management Co., Canandaigua West, Inc. and
Canandaigua Wine Company, Inc. (incorporated by reference to Exhibit
number 10.8 to Registrant's Registration Statement on Form SB-2 filed
May 28, 1997).(1)
10.8+ Grape Purchase Agreement, dated April 15, 1998, between Scheid
Vineyards California Inc. and International Distillers and Vintners
North America, Inc. (incorporated by reference to Exhibit numbers 10.1
and 99 to Registrant's Report on Form 10-QSB for the quarterly period
ended June 30, 1998 filed August 13, 1998).
10.9 Collective Bargaining Agreement, for the period April 9, 1998 to
December 31, 2001, between Scheid Vineyards Inc. and The United Farm
Workers of America, AFL-CIO. (incorporated by reference to Exhibit
number 10.23a to Amendment No. 1 to Registrant's Registration
Statement on Form SB-2 (File No. 333-51055) filed May 8, 1998).
10.10a+ Vineyard Development and Management Agreement, dated as of December 1,
1995, by and between Heublein, Inc. and Scheid Vineyards and
Management Co. (incorporated by reference to Exhibit number 10.12 to
Registrant's Registration Statement on Form SB-2 filed May 28,
1997).(1)
10.10b Amendment No. 1 to Vineyard Development and Management Agreement,
dated as of March 28, 1997, by and between Heublein, Inc. and Scheid
Vineyards and Management Co. (incorporated by reference to Exhibit
number 10.11b to Registrant's Report on Form 10-KSB for the fiscal
year ended December 31, 1997 filed March 30, 1998).(1)
10.11 Agricultural Credit Agreement (General Term Loan), dated October 6,
1994, between Vineyard Investors 1972 and Sanwa Bank California
(incorporated by reference to Exhibit number 10.15 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.12 Business Loan Agreement, dated as of March 28, 1997, between Scheid
Vineyards and Management Co. and Bank of America National Trust and
Savings Association (incorporated by reference to Exhibit number 10.20
to Registrant's Registration Statement on Form SB-2 filed May 28,
1997).(1)
10.13+ Long Term Grape Purchase Contract, dated February 12, 1973, between
Monterey Farming Corporation and Almaden Vineyards, Inc., as amended
by (i) a Memorandum of Understanding, dated August 6, 1987, (ii) a
Letter Agreement, dated May 14, 1990, and (iii) an Amendment to Long
Term Grape Purchase Contract, dated as of March 12, 1993, between
Scheid Vineyards and Management Co. and Heublein, Inc. (incorporated
by reference to Exhibit number 10.21 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.14+ Long Term Grape Purchase Contract, dated December 21, 1972, between
Vineyard Investors 1972 and Almaden Vineyards, Inc., as amended by
(i) a Memorandum of Understanding, dated August 6, 1987, (ii) an
Amendment to Long Term Grape Purchase Contract, dated April 19, 1988,
between Vineyard Investors 1972 and Heublein, Inc., (iii) a Second
Amendment to Long Term Grape Purchase Contract, dated June 2, 1988,
(iv) a Third Amendment to Long Term Grape Purchase Contract, dated as
of March 12, 1993 and (v) a letter agreement, dated April 6, 1990
(incorporated by reference to Exhibit number 10.22 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
</TABLE>
32
<PAGE>
<TABLE>
<S> <C>
10.15+ Long Term Grape Purchase Contract, dated February 12, 1973, between
Monterey Farming Corporation, as General Partner on behalf of Vineyard
405, and Almaden Vineyards, Inc., as amended by (i) a certain
Memorandum of Understanding, dated August 6, 1987, and (ii)
an Amendment to Long Term Grape Purchase Contract, dated as of
March 12, 1993, between Vineyard 405 and Heublein, Inc. (incorporated
by reference to Exhibit number 10.23 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.16+ Long Term Wine Grape Purchase Agreement, dated as of March 12, 1993,
by and between Scheid Vineyards and Management Co. and Heublein, Inc.
(incorporated by reference to Exhibit number 10.24 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.17+ Grape Purchase Agreement, dated as of April 1, 1996, by and between
Scheid Vineyards and Management Co. and The Hess Collection Winery
(incorporated by reference to Exhibit number 10.25 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.18+ Grape Purchase Agreement, dated July 1, 1996, by and among Scheid
Vineyards and Management Co., Stephen Dooley Wine Co., Inc. and The
Chalone Wine Group, Ltd. (incorporated by reference to Exhibit number
10.26 to Registrant's Registration Statement on Form SB-2 filed May
28, 1997).(1)
10.19 Alternating Winery Agreement, dated November 30, 1995, by and between
Scheid Vineyards and Management Co. and Storrs Winery (incorporated by
reference to Exhibit number 10.27 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.20 Winery Services Agreement, dated January 1, 1996, by and between
Scheid Vineyards and Management Co. and Storrs Winery (incorporated by
reference to Exhibit number 10.28 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.21 Standard Office Lease, dated July 1, 1994, by and between Scheid
Vineyards and Management Co. and Tesh Partners, L.P. (incorporated by
reference to Exhibit number 10.29 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.22+* Lease, dated as of October 18, 1998 between Scheid Vineyards
California Inc. and California Orchard Company.
10.23 Amended and Restated Buy-Sell Agreement, dated as of December 31,
1997, by and among Scheid Vineyards Inc. and holders of Class B Common
Stock (incorporated by reference to Exhibit number 10.24 to
Registrant's Report on Form 10-KSB for the fiscal year ended December
31, 1997 filed March 30, 1998).
10.24 Joint Agreement, dated as of November 7, 1997, by and among Samuel R.
Avila (also known as Sam Avila) and Margaret J. Avila, individually
and as trustees under declaration of trust dated August 19, 1989, and
Margaret J. Avila and Valarie Bassetti (also known as Valerie
Bassetti), as successor co-trustees of the testamentary trust of
Joseph Labarere, deceased, Central Coast Federal Land Bank
Association, FLCA, Scheid Vineyards and Management Co., Canandaigua
Wine Company, a New York corporation, successor by merger to
Canandaigua Wine Company, Inc., a Delaware corporation, and
Canandaigua West, Inc. (incorporated by reference to Exhibit numbers
10.27a and 99.1 to Amendment No. 1 to Registrant's Registration
Statement on Form SB-2 (File No. 333-51055) filed May 8, 1998).(1)
10.25 Water Supply Agreement, dated as of January 1, 1997, by Scheid
Vineyards and Management Co. and Canandaigua West, Inc. (incorporated
by reference to Exhibit number 10.36 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.26 Agreement Regarding Water, dated as of January 1, 1996, by Luis
Echenique, Ricardo Echenique and Margaret Echenique, Executrix of the
Estate of Francis D. Echenique, in favor of each of Scheid Vineyards
and Management Co. and Canandaigua West, Inc. (incorporated by
reference to Exhibit number 10.37 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
</TABLE>
33
<PAGE>
<TABLE>
<S> <C>
10.27 Easement Agreement, dated January 1, 1997, by Sam Avila and Margaret
J. Avila, as trustees under declaration of trust dated August 16,
1989, and Margaret J. Avila and Valarie Bassetti successor co-trustees
of the testamentary trust of Joseph Labarere and Sam Avila and
Margaret J. Avila and Scheid Vineyards and Management Co., in favor of
Canandaigua West, Inc. (incorporated by reference to Exhibit number
10.38 to Registrant's Registration Statement on Form SB-2 filed May
28, 1997).(1)
10.28a Agricultural Credit Agreement, dated June 4, 1997, between Scheid
Vineyards Inc. and Sanwa Bank (incorporated by reference to Exhibit
number 10.31 to the Registrant's Report on Form 10-KSB for the
fiscal year ended December 31, 1997 filed March 31, 1998).(1)
10.28b* Amendment to Agricultural Credit Agreement, dated June 25, 1997 by
and between Sanwa Bank California and Scheid Vineyards Inc.(1)
10.28c* Amendment to Agricultural Credit Agreement, dated August 22, 1997
by and between Sanwa Bank California and Scheid Vineyards
California Inc. FKA Scheid Vineyards Inc.
10.28d Third Amendment to Agricultural Credit Agreement, dated June 5, 1998,
between Sanwa Bank California and Scheid Vineyards California Inc.
(incorporated by reference to Exhibit number 10.2 to Registrant's
Report on Form 10-QSB for the quarterly period ended June 30, 1998
filed August 13, 1998).
10.29+ Grape Purchase Agreement, dated as of May 9, 1997, by and between
Scheid Vineyards Inc. and The Hess Collection Winery (incorporated by
reference to Exhibit number 10.42 to Registrant's Registration
Statement on Form SB-2 filed May 28, 1997).(1)
10.30+ Grape Purchase Agreement, dated as of April 1, 1997, by and between
Vineyard Investors 1972 and Stephen Dooley Wine Co., Inc.
(incorporated by reference to Exhibit number 10.43 to Registrant's
Registration Statement on Form SB-2 filed May 28, 1997).(1)
10.31 Employment Agreement, dated as of July 19, 1997, by and between Scheid
Vineyards Inc. and Alfred G. Scheid (incorporated by reference to
Exhibit number 10.44 to Amendment No. 2 to Registrant's Registration
Statement on Form SB-2 filed July 21, 1997).(2)
10.32 Employment Agreement, dated as of July 19, 1997, by and between Scheid
Vineyards Inc. and Scott D. Scheid (incorporated by reference to
Exhibit number 10.45 to Amendment No. 2 to Registrant's Registration
Statement on Form SB-2 filed July 21, 1997).(2)
10.33 Employment Agreement, dated as of July 19, 1997, by and between Scheid
Vineyards Inc. and Heidi M. Scheid (incorporated by reference to
Exhibit number 10.46 to Amendment No. 2 to Registrant's Registration
Statement on Form SB-2 filed July 21, 1997).(2)
10.34 Employment Agreement, dated as of July 19, 1997, by and between Scheid
Vineyards Inc. and Kurt J. Gollnick (incorporated by reference to
Exhibit number 10.47 to Amendment No. 2 to Registrant's Registration
Statement on Form SB-2 filed July 21, 1997).(2)
10.35 Form of Indemnification Agreement (incorporated by reference to
Exhibit number 10.48 to Amendment No. 1 to Registrant's Registration
Statement on Form SB-2 filed July 3, 1997).(2)
21.1 List of Subsidiaries (incorporated by reference to Exhibit number 21.1
to Amendment No. 1 to Registrant's Registration Statement on Form SB-2
filed July 3, 1997).
23.1* Independent Auditors' Consent.
27* Financial Data Schedule.
</TABLE>
--------------
* Electronically filed herewith.
+ Portions of this Exhibit have been deleted pursuant to the
Registrant's requests for confidential treatment pursuant to Rule 406
promulgated under the Securities Act or Rule 24b-2 promulgated under
the Securities Exchange Act.
(1) The contracting party is a predecessor in interest to Scheid Vineyards
California Inc., Registrant's wholly owned subsidiary.
(2) Indicates a management contract or compensating plan or arrangement
required to be filed as an exhibit to this Form 10-KSB.
34
<PAGE>
(b) Current Reports on Form 8-K
None.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Scheid Vineyards Inc.
By: /s/ ALFRED G. SCHEID
------------------------
Alfred G. Scheid
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ALFRED G. SCHEID Chairman of the Board and Chief
----------------------- Executive Officer (Principal
Alfred G. Scheid Executive Officer) March 22, 1999
/s/ HEIDI M. SCHEID Vice President Finance, Chief March 22, 1999
----------------------- Financial Officer, Secretary,
Heidi M. Scheid Treasurer and Director (Principal
Financial Officer)
/s/ SCOTT D. SCHEID Vice President, Chief Operating March 22, 1999
----------------------- Officer and Director
Scott D. Scheid
/s/ JOHN L. CRARY Director March 22, 1999
-----------------------
John L. Crary
/s/ ROBERT P. HARTZELL Director March 22, 1999
-----------------------
Robert P. Hartzell
</TABLE>
35
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report........................................... F-2
Balance Sheets......................................................... F-3
Statements of Operations............................................... F-4
Statements of Cash Flows............................................... F-5
Statements of Stockholders' Equity..................................... F-6
Notes to Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Scheid Vineyards Inc.:
We have audited the accompanying balance sheets of Scheid
Vineyards Inc. and subsidiary (the "Company") as of December 31, 1998 and
1997, and the related statements of operations, cash flows, and stockholders'
equity for the years then ended. 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 audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
February 19, 1999
F-2
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY
BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Notes 1998 1997
----- ---- ----
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... 2 $ 5,031 $ 14,483
Accounts receivable, trade.................................................. 728 349
Accounts receivable, other.................................................. 398 412
Inventories................................................................. 3 742 1,102
Supplies, prepaid expenses and other current assets......................... 614 813
Deferred income taxes....................................................... 8 38 --
---------------- ----------------
Total current assets................................................... 7,551 17,159
PROPERTY, PLANT AND EQUIPMENT, NET............................................. 4,7 32,937 27,795
LONG-TERM RECEIVABLE........................................................... 5 5,572 4,679
OTHER ASSETS, NET.............................................................. 472 236
---------------- ---------------
$ 46,532 $ 49,869
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt........................................... 7 $ 275 $ 660
Accounts payable and accrued liabilities.................................... 716 519
Accrued interest payable.................................................... 197 315
Income taxes payable........................................................ 8 2,480 --
---------------- ---------------
Total current liabilities.............................................. 3,668 1,494
LONG-TERM DEBT, NET OF CURRENT PORTION......................................... 7 11,562 17,851
DEFERRED COMPENSATION.......................................................... 9 -- 662
DEFERRED INCOME TAXES.......................................................... 8 867 741
---------------- ---------------
Total liabilities..................................................... 16,097 20,748
---------------- ---------------
COMMITMENTS AND CONTINGENCIES ................................................. 10
STOCKHOLDERS' EQUITY:.......................................................... 6,11,12
Preferred stock, $.001 par value; 2,000,000 shares authorized; no
shares issued and outstanding............................................. -- --
Common stock,
Class A, $.001 par value; 20,000,000 shares authorized;
3,325,000 and 2,300,000 shares issued in 1998 and 1997, respectively;
2,872,950 and 2,300,000 shares outstanding in 1998 and 1997, respectively
Class B, $.001 par value; 10,000,000 shares authorized;
3,374,100 and 4,400,000 shares issued and outstanding in 1998
and 1997, respectively................................................. 7 7
Additional paid-in capital.................................................. 21,868 21,797
Retained earnings........................................................... 10,936 7,317
Less: treasury stock; 452,050 Class A Common Stock at cost in
1998, none in 1997....................................................... (2,376) --
---------------- ---------------
Total stockholders' equity............................................ 30,435 29,121
---------------- ---------------
$ 46,532 $ 49,869
================ ================
</TABLE>
See accompanying Notes to Financial Statements.
F-3
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
NOTES 1998 1997
----- ---- ----
<S> <C> <C> <C>
REVENUES:
Sales........................................................................... $ 16,436 $ 18,683
Vineyard management, services and other fees.................................... 1,037 1,187
------------ ------------
Total revenues............................................................ 17,473 19,870
COST OF SALES...................................................................... 7,911 6,222
------------ ------------
GROSS PROFIT....................................................................... 9,562 13,648
General and administrative expenses............................................. 4,274 4,215
Reversal of deferred compensation............................................... 9 (706) --
Interest expense (income) (net of interest income of $382 in 1998
and $283 in 1997)............................................................ (46) 700
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES........................................... 6,040 8,733
PROVISION FOR INCOME TAXES ........................................................ 8 2,421 3,887
------------ ------------
INCOME BEFORE DEFERRED TAX ADJUSTMENT.............................................. 3,619 4,846
DEFERRED INCOME TAXES FROM
REORGANIZATION TO C CORPORATION.................................................. 2 -- 1,390
------------ ------------
NET INCOME......................................................................... $ 3,619 $ 3,456
============ ============
BASIC AND DILUTED EARNINGS PER SHARE .............................................. 2 $ 0.55 $ 0.65
============ ============
PRO FORMA AMOUNTS: 2
INCOME BEFORE INCOME TAXES AS REPORTED............................................. $ 8,733
PRO FORMA INCOME TAX PROVISION..................................................... 3,493
------------
PRO FORMA NET INCOME............................................................... $ 5,240
============
PRO FORMA NET INCOME PER SHARE..................................................... $ 0.98
============
WEIGHTED AVERAGE SHARES OUTSTANDING................................................ 2 6,611,000 5,344,000
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-4
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................................................ $ 3,619 $ 3,456
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, amortization and abandonments........................................ 2,148 1,711
Deferred compensation.............................................................. (662) 78
Noncash compensation............................................................... 75
Deferred income taxes.............................................................. 88 (649)
Deferred taxes arising from reorganization......................................... -- 1,390
Changes in operating assets and liabilities:
Accounts receivable, trade............................................................. (379) (75)
Accounts receivable, other............................................................. 14 (409)
Inventories............................................................................ 360 (956)
Supplies, prepaid expenses and other current assets.................................... 199 6
Accounts payable and accrued liabilities............................................... 79 133
Income taxes payable.................................................................. 2,480 --
------------ ------------
Net cash provided by operating activities............................................ 8,021 4,685
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term receivable...................................................................... (893) (2,446)
Proceeds from sale of property, plant and equipment....................................... 710 --
Additions to property, plant and equipment................................................ (8,000) (12,994)
Other assets.............................................................................. (236) 40
------------ ------------
Net cash used in investing activities................................................ (8,419) (15,400)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in long-term debt................................................................ 4,440 22,589
Repayment of long-term debt............................................................... (11,114) (15,994)
Repayment of notes payable, affiliates.................................................... -- (807)
Repayment of note payable, stockholder.................................................... -- (1,000)
Proceeds from issuance of common stock.................................................... -- 20,700
Stock offering costs...................................................................... -- (732)
Repurchase of common stock................................................................ (2,380) --
Subchapter S distributions................................................................ -- (3,102)
Partnership distributions................................................................. -- (480)
------------ ------------
Net cash (used in) provided by financing activities.................................. (9,054) 21,174
------------ ------------
(Decrease) increase in cash and cash equivalents..................................... (9,452) 10,459
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................................. 14,483 4,024
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR....................................................... $ 5,031 $ 14,483
============ ============
</TABLE>
See accompanying Notes to Financial Statements.
F-5
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ISSUED RETAINED
------------------------------- EARNINGS
NUMBER OF NUMBER OF ADDITIONAL AND
CLASS A CLASS B PAID-IN PARTNERS' TREASURY
SHARES SHARES AMOUNT CAPITAL CAPITAL SHARES
---------- --------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997..................... -- 97,413 $ 2 $ 124 $ 8,935 --
Recapitalization as Delaware
corporation and contribution of
partnership interests................... -- 4,302,587 3 1,707 (1,492) --
Subchapter S distribution................. -- -- -- -- (3,102) --
Partnership distributions................. -- -- -- -- (480) --
Issuance of common stock, net of
costs................................... 2,300,000 -- 2 19,966 -- --
Net income................................ -- -- -- -- 3,456 --
---------- ----------- ------ -------- -----------
BALANCE, DECEMBER 31, 1997 .................. 2,300,000 4,400,000 7 21,797 7,317 --
Conversion of Class B shares to
Class A shares (Note 11)............... 1,025,000 (1,025,000) -- -- -- --
Repurchase of common stock
(Note 11).............................. -- -- -- -- -- $ (2,380)
Shares canceled ......................... -- (900) -- (4) -- 4
Stock issued for compensation............ -- -- -- 75 -- --
Net income............................... -- -- -- -- 3,619 --
---------- ----------- ------ -------- ----------- ----------
BALANCE, DECEMBER 31, 1998 .................. 3,325,000 3,374,100 $ 7 $ 21,868 $ 10,936 $ (2,376)
========== =========== ====== ======== =========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-6
<PAGE>
SCHEID VINEYARDS INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
ORGANIZATION - The principal business of the Company is the
production of premium varietal wine grapes. The Company currently operates
approximately 6,000 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 current grape production. These contracts generally expire no
earlier than the completion of harvest in years ranging from 2001 to 2014 and
are extended if neither party cancels two or three years before the
expiration date. The largest set of these winery contracts with a single
customer covers approximately 56% of the Company's acreage at December 31,
1998 and accounted for approximately 74% and 81% of the Company's total
revenues in 1998 and 1997, respectively.
BASIS OF PRESENTATION - In connection with the Company's initial
public stock offering as described below, the Company formed Scheid
Vineyards Inc., a Delaware corporation ("SVI-Del"). SVI-Del conducts all of
its business through its wholly owned subsidiary, Scheid Vineyards
California Inc., a California corporation ("SVI-Cal").
In July 1997, SVI-Del completed its initial public offering of
2,000,000 shares of Class A Common Stock, par value $.001 per share. In
September 1997, the underwriters of the Company's public offering exercised
their over-allotment option to purchase 300,000 additional shares of Class A
Common Stock. The increase in stockholders' equity due to the public offering
totaled approximately $19,968,000, after deduction of offering-related
expenses.
The Company reported its operations through the date of the Exchange
Transaction described below on a combined basis. Since the date of the
Exchange Transaction, the Company reports its operations on a consolidated
basis. All significant intercompany balances have been eliminated in the
combination and consolidation.
EXCHANGE OF PARTNERSHIP UNITS AND LIMITED LIABILITY COMPANY
INTERESTS FOR CLASS B COMMON STOCK Immediately prior to the date of the
Company's initial public stock offering, SVI-Cal was the general partner of
two California limited partnerships, Vineyard Investors 1972 ("VI-1972") and
Vineyard 405 ("V-405") and a member of a California limited liability
company, Quadra Partners LLC ("Quadra Partners"). SVI-Cal and VI-1972 were
the only limited partners of V-405. In connection with the Company's public
offering, SVI- Del was formed to act as a holding company for SVI-Cal. The
capital stock of SVI-Cal held by its sole stockholder, the membership
interests held by all members (other than SVI-Cal) of Quadra Partners, and
the limited partnership units held by all limited partners (other than SVI-Cal)
in VI-1972 were contributed to SVI- Del in exchange for (i) 4,400,000 shares
of Class B Common Stock of SVI-Del (the "Exchange Transaction") and (ii) a
commitment by SVI-Cal to make the distributions described below. SVI-Del, as
part of the Exchange Transaction, simultaneously contributed such limited
partnership units in VI-1972 and such membership interests in Quadra Partners
to SVI-Cal. As a result, each of VI-1972, V-405 and Quadra Partners was
terminated and dissolved, and SVI-Cal succeeded to their respective assets
and liabilities.
F-7
<PAGE>
1. ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
For periods prior to the Exchange Transaction, the term "Company"
refers collectively to SVI-Cal, VI-1972, V-405 and Quadra Partners on a
combined basis, and for periods following the Exchange Transaction, the term
"Company" refers collectively to SVI-Del and SVI-Cal on a consolidated basis.
Prior to the Exchange Transaction, the financial statements were
based upon the historical cost of assets and liabilities except that assets
related to limited partnership interests purchased from unrelated partners
were recorded at the cost of acquisition.
DISTRIBUTIONS - Immediately prior to the offering, SVI-Cal's
cumulative S Corporation earnings in the amount of $3,102,000 were distributed
to its stockholder. In addition, a distribution of approximately $480,000 was
made to the limited partners of VI-1972 (immediately prior to the Exchange
Transaction) to pay income taxes on income from the partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents. At December 31, 1998 and 1997, substantially all cash
balances were on deposit with the Company's major bank. At December 31, 1997,
cash invested in short-term commercial paper with one large corporation
totaled $12,000,000.
INVENTORIES - Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market. Cost includes the cost of grown grapes, harvesting,
production, aging and bottling, and tasting room merchandise. Wine inventories
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 and reduces such inventories
to market if required.
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 25 to 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. The Company capitalized interest
totaling $641,000 and $294,000 in 1998 and 1997, respectively.
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. Vineyard management and other services are recognized as provided.
All revenues of the Company are derived from customers within the United
States.
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, market driven, interest
rates.
F-8
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF - 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" 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.
For the years ended December 31, 1998 and 1997, the Company has written down
vineyard acres it intends to remove and redevelop by $555,000 and $328,000,
respectively. The write-downs of the acres being redeveloped were based upon
a comparison of net book values to total estimated revenues less estimated
operating costs of the acres prior to removal.
INCOME TAXES - Prior to the date of the Exchange Transaction,
SVI-Cal 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-Cal was included in the income tax returns of the stockholder.
Consequently, no federal income tax provision has been recorded in the
accompanying financial statements through the date of the Exchange Transaction.
However, under California state law, a franchise tax equal to 11/2% of
taxable income is imposed upon S Corporations and is provided for in the
accompanying financial statements through the date of the Exchange Transaction.
VI-1972, V-405 and Quadra Partners were treated as partnerships for federal
and state income tax purposes such that their income or loss was included in
the taxable income of the partners.
The Exchange Transaction resulted in the termination of SVI-Cal's
S Corporation status. As a result, the Company currently pays income taxes at
the corporate level. The pro forma income tax provision in the statement of
operations for the year ended December 31, 1997 is based upon an assumed 40%
federal and state income tax rate.
In connection with the conversion of SVI-Cal's S Corporation status
to C Corporation status, the Company was required by SFAS No. 109, "Accounting
for Income Taxes" to record deferred tax liabilities and deferred tax assets.
Such change resulted in a net charge to earnings of $1,390,000 upon the
conversion to C Corporation status. 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.
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.
EARNINGS PER SHARE AND CLASSES OF COMMON STOCK - The weighted
average shares outstanding in the statements of operations through the
effective date of the Exchange Transaction are based upon the 4,400,000
shares of Class B Common Stock outstanding after giving pro forma effect to
the Exchange Transaction. The weighted average shares outstanding since the
date of the Exchange Transaction are based on the actual weighted average
shares of Class A and Class B Common Stock outstanding since the date of the
Exchange Transaction. The effect of outstanding stock options and warrants on
the weighted average shares was immaterial for the periods presented.
F-9
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Bulk and bottled wine.................................................... $339,000 $ 612,000
Deferred crop costs...................................................... 376,000 458,000
Tasting room merchandise................................................. 27,000 32,000
-------- ----------
Total.............................................................. $742,000 $1,102,000
-------- ----------
-------- ----------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land and buildings...................................................... $ 5,843,000 $ 6,515,000
Vineyard improvements................................................... 15,452,000 16,972,000
Vineyard improvements under development................................. 16,201,000 8,396,000
Machinery and equipment................................................. 4,030,000 3,598,000
----------- -----------
Total............................................................. 41,526,000 35,481,000
Less accumulated depreciation and amortization.......................... 8,589,000 7,686,000
----------- -----------
Property, plant and equipment - net..................................... $32,937,000 $27,795,000
----------- -----------
----------- -----------
</TABLE>
5. LONG-TERM RECEIVABLE
The Company has a contract to redevelop certain vineyards owned or
controlled by a major client. The current contract calls for the expenditure
of approximately $7,500,000 over a three-year period. The funds for this
project are being borrowed, as an accommodation to the client, by the Company
under a line of credit (see Note 7). The interest rate and payment terms of
this receivable are the same as the related note payable. The note payable to
the bank is secured by a letter of credit provided by the client and by the
management contract. The contract calls for the payment of this receivable by
the client's payment of the six annual principal installments under the line,
beginning January 5, 2000. Under the contract, the client is responsible on
an annual basis for determining the nature and amount of budgeted expenditures
for the year. The client is obligated to advance the budgeted costs to the
Company on a monthly basis, which are funded out of draws under the line of
credit.
6. CROP LINE OF CREDIT
The Company has a crop line of credit with a bank which currently
provides for maximum borrowings of $10,500,000 through June 5, 2000. Borrowings
are secured by crops and other assets with interest due quarterly at the
bank's reference rate. No amounts were outstanding under this agreement at
December 31, 1998 and 1997.
F-10
<PAGE>
6. CROP LINE OF CREDIT (CONTINUED)
The crop line prohibits the payment of dividends without the consent
of the lender and contains various financial covenants, including minimum
tangible net worth amounts, and current and total debt to net worth ratios.
The Company was in compliance with all financial provisions of the agreement
at December 31, 1998 and 1997.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
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 June 5, 2005. The line of credit is secured by a
leasehold interest in 707 vineyard acres. Interest is payable
quarterly at the lower of a bank-quoted fixed rate or 3/4% over
the bank's reference rate (7.34% at December 31, 1998)................... $ -- $2,572,000
Revolving/Declining Line of Credit Agreement with a bank which
provides for a maximum borrowing of $2,835,000 diminishing
annually to a maximum allowable commitment of $1,775,000,
which is due on June 5, 2007. The line of credit is secured by a
deed of trust on 405 vineyard acres. Interest is payable quarterly
at the lower of a bank-quoted fixed rate or 1/4% over the bank's
reference rate (7.34% at December 31, 1998).............................. -- 2,835,000
Revolving/Declining Line of Credit Agreement with a bank which
provides for a maximum borrowing of $1,450,000 diminishing
annually to a maximum allowable commitment of $586,000,
which is due on June 5, 2007. The line of credit is secured by a
leasehold interest in 352 vineyard acres. Interest is payable
quarterly at the lower of a bank-quoted fixed rate or 1/4% over
the bank's reference rate (7.37% at December 31, 1998)................... -- 1,450,000
Revolving/Declining Line of Credit Agreement with a bank which
provides for a maximum borrowing of $3,600,000 diminishing
annually to a maximum allowable commitment of $1,980,000,
which is due on June 5, 2008. The line of credit is secured by a
deed of trust on 370 vineyard acres. Interest is payable
quarterly at the lower of a bank-quoted fixed rate or the bank's
reference rate (7.37% at December 31, 1998).............................. -- --
Note payable to bank, with interest at the lower of a bank-quoted
fixed rate or the bank's reference rate plus 3/4% (7.37% at
December 31, 1998), principal due in annual installments
through July 5, 2005, secured by trust deed on 707 vineyard
acres.................................................................... 1,275,000 1,350,000
Note payable to bank, with interest at the lower of a bank-quoted
fixed rate or the bank's reference rate plus 3/4% (7.37% at
December 31, 1998), principal due in annual installments
through October 5, 2004, secured by first deed of trust on 1,063
acres of real property................................................... 4,850,000 5,050,000
F-11
<PAGE>
7. LONG-TERM DEBT (CONTINUED)
Note secured by business residential real property ......................... -- 435,000
Note payable, with interest at 1 % over a bank's reference rate,
secured by deeds of trust................................................ 140,000 140,000
Note payable to bank represents borrowings on a $7,500,000 line
of credit, which bears interest at the bank's reference rate
(6.06% at December 31, 1998). The note is secured by a letter
of credit provided by a major client, and is used for costs
incurred for the development of certain vineyards owned by the
client (see Note 5). Principal due in six annual installments
beginning January 5, 2000................................................ 5,572,000 4,679,000
----------- -----------
Total................................................................. 11,837,000 18,511,000
Less current maturities..................................................... 275,000 660,000
----------- -----------
Long-term portion........................................................... $11,562,000 $17,851,000
----------- -----------
----------- -----------
</TABLE>
Principal payments required on long-term debt for each of the next
five years ending December 31 are as follows:
<TABLE>
<S> <C>
1999........................................... $ 275,000
2000........................................... 972,000
2001........................................... 920,000
2002........................................... 920,000
2003........................................... 920,000
Thereafter..................................... 7,830,000
-----------
Total.......................................... $11,837,000
-----------
-----------
</TABLE>
Substantially all of the Company's property, plant and equipment
serves as collateral for long-term debt. In addition, the credit facilities
and notes contain various financial covenants, including minimum tangible net
worth amounts, and current and total debt to net worth ratios. The Company was
in compliance with all financial provisions of the agreements at December 31,
1998 and 1997.
8. INCOME TAXES
Significant components of the Company's net deferred income tax
assets and liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current deferred income tax assets:
State income taxes........................................ $ 169,000 $ --
Miscellaneous reserves.................................... 86,000 --
Current deferred income tax liabilities:
Prepaid expenses.......................................... (217,000) --
--------- ----------
Net current deferred income tax asset........................ $ 38,000 $ --
--------- ----------
--------- ----------
</TABLE>
F-12
<PAGE>
8. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Long-term deferred income tax assets:
Deferred compensation...................................... $ -- $ 284,000
State income taxes......................................... 73,000 403,000
Other...................................................... -- 86,000
Long-term deferred income tax liabilities:
Depreciation............................................... (940,000) (1,514,000)
--------- -----------
Net long-term deferred income tax liability.................. $(867,000) $ (741,000)
--------- -----------
--------- -----------
</TABLE>
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current:
Federal.................................................... $1,797,000 $3,600,000
State...................................................... 536,000 936,000
---------- ----------
Total........................................................ 2,333,000 4,536,000
---------- ----------
Deferred:
Federal.................................................... 87,000 (576,000)
State...................................................... 1,000 (73,000)
---------- ----------
Total........................................................ 88,000 (649,000)
---------- ----------
Total provision for income taxes............................. $2,421,000 $3,887,000
---------- ----------
---------- ----------
</TABLE>
The Company's effective income tax rate differs from the federal
statutory income tax rate due to the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Federal statutory rate................................ 34.0 % 34.0 %
Losses allocated to Subchapter
S Corporation shareholder........................... -- 4.0
State taxes, net of federal benefit................... 5.9 6.5
Other................................................. 0.2 --
------ ------
Total................................................. 40.1 % 44.5 %
------ ------
------ ------
</TABLE>
9. DEFERRED COMPENSATION
The Company had a non-qualified deferred compensation arrangement
with an employee. The arrangement provided for annual payments of $100,000
commencing upon the employee's retirement. The deferred compensation
liability included in the accompanying balance sheet at December 31, 1997
represented the net present value at 7% of the expected future payments. The
employee passed away in August 1998 negating the need for the accrued
liability of $706,000. Compensation expense related to the arrangement was
$44,000 and $78,000 for the years ended December 31, 1998 and 1997,
respectively.
F-13
<PAGE>
10. 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 June 1999. The rent is currently
$102,000 annually.
Farm land leases cover approximately 2,133 acres with initial terms
ranging from 7 to 30 years. The land leases provide for options to renew
ranging from 10 to 20 years and contain provisions for rent adjustments based
upon the prevailing market rate, Consumer Price Index, or revenue generated
by the property, and also provide for payments of taxes, insurance and
maintenance costs.
Aggregate minimum rental payments for each of the next five years
ending December 31 are as follows:
<TABLE>
<S> <C>
1999............................................ $ 771,000
2000............................................ 752,000
2001............................................ 765,000
2002............................................ 765,000
2003............................................ 652,000
Thereafter...................................... 10,527,000
</TABLE>
Rent charged to operations was $569,000 and $485,000 for the years
ended December 31, 1998 and 1997, respectively.
PENSION 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, subject to the limitations imposed by the
Internal Revenue Code. The Company's contribution to the union employees'
plan amounted to $62,000 and $50,000 for the years ended December 31, 1998
and 1997, respectively.
The second plan covers the Company'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
employee contributions up to 6% of their annual salaries, subject to the
limitations imposed by the Internal Revenue Code. The Company's contribution
to this plan amounted to $36,000 and $31,000 for the years ended December 31,
1998 and 1997, respectively.
OTHER - The Company was committed to the purchase of vineyard
materials at December 31, 1998 in the amount of $1,316,000.
F-14
<PAGE>
11. COMMON STOCK
In connection with the stock offering (see Note 1), the Company sold
2,300,000 shares of Class A Common Stock. 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. 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. Except for the differing voting rights, the shares of
Class A and Class B common stock have substantially identical rights,
preferences and privileges. In 1998, the Company's Chairman/Chief Executive
Officer and his wife sold and gifted a total of 1,025,000 shares of Class B
Common Stock which were automatically converted to an equal number of shares
of Class A Common Stock at the time of gift or transfer.
The Company granted the representative of the underwriters of the
offering warrants to purchase 200,000 shares of common stock. The warrants
are exercisable at $14.00 per share any time between July 24, 1998 and July
24, 2002.
On October 27, 1998, the Company announced that it had instituted a
stock repurchase program in which the Company may spend up to $2.5 million in
open market transactions to purchase outstanding shares of its Class A Common
Stock at such times, in such amounts or blocks and at such prices as deemed
appropriate. This repurchase program will expire on September 30, 1999.
Through December 31, 1998, the Company had repurchased 247,350 shares under
this program for approximately $1,130,000.
In connection with the adoption of the new stock repurchase program,
the Company terminated its prior stock repurchase program adopted in July
1998. This program would have expired on January 31, 1999 and authorized the
purchase of up to 200,000 shares of Class A Common Stock. Under the prior
repurchase program, the Company repurchased 102,600 shares of Class A Common
Stock. The Company also made other repurchases earlier in 1998 of 103,000
shares of Class A Common Stock. The aggregate purchase price for these
205,600 shares was approximately $1,250,000.
12. STOCK OPTION PLAN
In 1997, the Board of Directors of the Company adopted the 1997
Stock Option/Stock Issuance Plan authorizing the issuance of qualified or
non-qualified stock options to directors, officers, employees, consultants
and others to purchase up to 200,000 shares of the Company's Class A Common
Stock at prices equal to the fair value of the Company's stock at the date of
grant. In July and November 1997, options to purchase a total of 162,000
shares were granted at an exercise price of $10.00 per share. Such options
vest one-quarter each year, beginning one year after the grant date or a
specified vesting commencement date and expire ten years after the earlier of
the grant date and the vesting commencement date.
On October 8, 1998, the Board of Directors approved the cancellation
of 71,000 options, and regranted such options at $4.00 per share, the then
fair market value of the Class A Common Stock of the Company. All other terms
of the options remained identical.
F-15
<PAGE>
12. STOCK OPTION PLAN (CONTINUED)
In May 1998, the Company granted options to purchase a total of
5,000 shares to non-employee members of the Company's Board of Directors.
These options vest one year from grant date.
The following summarizes stock option activity for the periods
presented:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICES
------ ---------------
<S> <C> <C>
Outstanding, January 1, 1997..................... -- --
Granted ........................................ 162,000 $10.00
------------- ---------------
Outstanding, December 31, 1997................... 162,000 $10.00
Granted......................................... 76,000 $4.29
Canceled........................................ (102,000) $10.00
------------- ---------------
Outstanding, December 31, 1998................... 136,000 $6.81
============= ===============
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Range of exercise prices......................... $4.00-$10.00 $10.00
Options exercisable.............................. 46,000 None
Weighted average exercise price of options
exercisable.................................. $6.53 --
Weighted average fair value of options granted... $4.89 $3.69
Weighted average remaining contractual life...... 8.6 years 9.6 years
</TABLE>
The Company accounts for its stock-based awards using the
intrinsic value method in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized in
the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation", requires
the disclosure of pro forma net income and net income per share. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
through the use of options pricing models, even though such models were
developed to estimate the fair value of freely-tradable, fully transferable
options without vesting restrictions, which significantly differ from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, 5 years following
vesting; 62% and 29% stock price volatility in 1998 and 1997, respectively;
weighted average risk free rate of return of 6.0%; and no dividends during
the expected term. Forfeitures are recognized as they occur. If the computed
fair values of the Company's stock option awards had been amortized to
expense over the vesting period of the awards, net income for the years ended
December 31, 1998 and 1997 would have been reduced to the pro forma amounts
indicated below. There were no grants prior to 1997.
F-16
<PAGE>
12. STOCK OPTION PLAN (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income:
As reported................................ $ 3,619,000 $ 3,456,000
Pro forma.................................. $ 3,466,000 $ 3,394,000
Net income per share:
As reported................................ $ 0.55 $ 0.65
Pro forma.................................. $ 0.52 $ 0.64
</TABLE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures to the statements of cash flows are as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest paid (net of amount capitalized).... $ 454,000 $ 872,000
Income taxes paid............................ $ -- $ 4,550,000
</TABLE>
F-17
<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.
<PAGE>
(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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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>
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "SCHEID VINEYARDS INC.", FILED IN THIS OFFICE ON THE
TWENTY-THIRD OF NOVEMBER, A.D. 1998, AT 9:30 O'CLOCK A.M.
A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS.
/s/ EDWARD J. FREEL
-----------------------------------
Edward J. Freel, Secretary of State
AUTHENTICATION: 9421068
DATE: 11-23-98
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
SCHEID VINEYARDS INC.
Scheid Vineyards Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "corporation"), does
hereby certify:
The amendment to this corporation's Certificate of Incorporation (the
"Certificate") set forth below was approved and duly adopted by this
corporation's Board of Directors and stockholders in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware:
RESOLVED, that the following Article XIII to the Certificate be, and it
hereby is, adopted and approved:
ARTICLE XIII
To the extent that the laws of California govern the affairs of the
corporation at any time and from time to time by virtue of the application of
Section 2115 of the California General Corporation Law, the following
provisions shall be applicable:
A. The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B.1. The corporation is authorized to provide indemnification of agents,
as that term is defined in Section 317 of the California General Corporation
Law, for breach of duty to the corporation and its stockholders, in excess of
that expressly permitted by said Section 317, under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise, to the fullest
extent such indemnification may be authorized hereby, subject to the limits
on such excess indemnification set forth in Section 204 of the California
General Corporation Law. In the event that any indemnification obligation
provided for in any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, whether currently in effect or hereafter adopted,
exceeds the limits on excess indemnification set forth in Section 204 of the
California General Corporation Law, such indemnification obligation shall be
construed, and shall be deemed to be limited and modified, to the extent, but
only to the extent, necessary to prevent such indemnification obligation from
exceeding such limits on excess indemnification.
2. The corporation is further authorized to provide insurance for
agents as set forth in Section 317 of the California General Corporation Law,
provided that, in cases where the corporation owns all or a portion of the
shares of the company issuing the insurance policy, the company and/or the
policy must meet one of the two sets of conditions set forth in Section 317.
3. Any repeal or modification of the foregoing provisions of this
Paragraph B of this Article XIII by the stockholders of this corporation
shall not adversely affect any right or protection of an agent of the
corporation existing at the time of such repeal or modification.
IN WITNESS WHEREOF, Scheid Vineyards Inc. has caused this Certificate of
Amendment to be signed by its duly authorized officer this 5th day of
November 1998.
SCHEID VINEYARDS INC.
By: /s/ Alfred G. Scheid
------------------------------
Alfred G. Scheid,
Chairman of the Board and
Chief Executive Officer
-2-
<PAGE>
AMENDED AND RESTATED
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.
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.
<PAGE>
(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 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:
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<PAGE>
(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.
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
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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.
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.
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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.
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.
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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.
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
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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 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
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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.
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.
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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.
SECTION 2. This Section shall apply to any time and from time to time
only to the extent that the laws of California govern the affairs of the
corporation by virtue of the application of Section 2115 of the California
General Corporation Law.
(a) For purposes of this Section: "agent" means any person
who is or was a director, officer, employee or other agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, employee or agent of a foreign or domestic corporation
that was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation; and "proceeding"
means any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative.
(b) The corporation shall indemnify each of its directors
and officers, acting in any capacity as an agent of the corporation, to the
fullest extent permissible under the California General Corporation Law, as
now in effect or as hereafter amended, including those circumstances in which
indemnification would otherwise be discretionary, against any and all costs,
charges, expenses, liabilities and losses (including, without limitation,
attorneys' fees, judgments, fines, amounts paid in settlement and ERISA
excise taxes or penalties, and including attorneys' fees and any expenses of
establishing a right to indemnification under this subsection (b)) reasonably
incurred or suffered by such person in connection with any proceedings,
whether brought by or in the right of the corporation or otherwise, in which
such person may be involved, as a party or otherwise, by reason of such
person being or having been an agent of the corporation, and such right of
indemnification shall inure to the benefit of such person's heirs, executors,
personal representatives and estate.
Expenses incurred in defending any proceeding shall be advanced by the
corporation before the final disposition of the proceeding upon receipt of a
written undertaking by or on behalf of an agent covered by this subsection
(b) to repay the amount of the advance if it shall be determined ultimately
that the agent is not entitled to be indemnified as authorized by these
Bylaws, law, the Certificate of Incorporation or agreement.
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere shall not, of itself, create a
presumption that a person is not entitled to indemnification hereunder.
The corporation shall determine whether a person is entitled to
indemnification under this subsection (b) by any of the following: (i) a
majority vote of a quorum consisting of directors who are not parties to the
involved proceeding, (ii) if such quorum of directors is not obtainable, by
independent legal counsel, selected by the mutual agreement of the
corporation and the person seeking indemnification, in a written opinion, or
(iii) approval by the affirmative vote of the holders of shares representing
a majority of the voting power of the corporation represented at a duly held
meeting at which a quorum is present; provided, that, for purposes of
determining the required quorum of any meeting of stockholders called to
approve indemnification of such person and the vote, the shares owned by the
person to be indemnified shall not be considered outstanding and shall not be
entitled to vote thereon.
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The rights of a person covered by this subsection (b) to
bring suit against the corporation shall include the following:
(i) In the case of a director, if there has been no
determination by the corporation, or if the corporation
determines, that the director substantively would not be permitted
to be indemnified in whole or in part under the California General
Corporation Law, such director shall have the right to bring suit
seeking an initial determination by the court or challenging any
such determination by the corporation or any aspect thereof, and
the corporation, by this subsection (b), consents to service of
process and to appear in any such proceeding. Any determination
by the corporation otherwise shall be conclusive and binding on
the corporation and such director.
(ii) If a claim for advances under this subsection (b) is
not paid in full by the corporation within 30 days after a written
claim and appropriate undertaking have been received by the
corporation, such person may at any time thereafter bring suit
against the corporation to recover the unpaid amount. If
successful, in whole or in part, such person shall be entitled to
be paid also the expenses of prosecuting such claim.
In any action brought by a person to enforce a right of
indemnification hereunder, or by the corporation to recover payments by the
corporation of expenses incurred by such person in connection with a
proceeding in advance of its final disposition, the burden of proving that
such person is not entitled to be indemnified under this subsection (b) or
otherwise shall be on the corporation. Neither the failure of the
corporation to have made a determination prior to the commencement of a
proceeding that indemnification of a person covered by this subsection (b) is
proper in the circumstances because such person has met the applicable
standard of conduct under the California General Corporation Law, nor an
actual determination by the corporation that such person has not met such
applicable standard of conduct, shall create a presumption that such person
has not met the applicable standard of conduct or, in the case of an action
brought by such person, be a defense to the action.
(c) The corporation shall have the power, but except as
provided in subsection (b) above shall not be obligated, to indemnify each of
its agents to the fullest extent permissible under the California General
Corporation Law, as now in effect or as hereafter amended, including those
circumstances in which indemnification would otherwise be discretionary,
against any and all costs, charges, expenses, liabilities and losses
(including, without limitation, attorneys' fees, judgments, fines and ERISA
excise taxes or penalties) reasonably incurred or suffered by such person in
connection with any proceedings, whether brought by or in the right of the
corporation or otherwise, in which such person may be involved, as a party or
otherwise, by reason of such person being or having been an agent of the
corporation, and any such indemnification shall inure to the benefit of such
person's heirs, executors, personal representatives and estate.
Expenses incurred in defending any proceeding may, in the
discretion of the corporation, be advanced by the corporation before the
final disposition of the proceeding upon receipt of a written undertaking by
or on behalf of an agent covered by this subsection (c) to repay the amount
of the advance if it shall be determined ultimately that the agent is not
entitled to be indemnified as authorized by these Bylaws, law, the
Certificate of Incorporation or agreement.
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The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere, shall not, of
itself, create a presumption that a person is not eligible to be indemnified
hereunder.
The corporation shall determine whether a person seeking
indemnification under this subsection (c) is eligible to be so indemnified
and whether the corporation shall indemnify such person or shall provide
advances to such person by any of the following at the corporation's sole
option: (i) a majority vote of a quorum consisting of directors who are not
parties to the involved proceeding, (ii) if such a quorum is not obtainable,
by independent legal counsel selected by the corporation in a written
opinion, or (iii) approval by the affirmative vote of the holders of shares
representing a majority of the voting power of the corporation represented at
a duly held meeting at which a quorum is present; provided, that, for
purposes of determining the required quorum of any meeting of stockholders
called to approve indemnification of such person and the vote, the shares
owned by the person to be indemnified shall not be considered outstanding and
shall not be entitled to vote thereon. Any such determination by the
corporation shall be conclusive and binding on the corporation and such
person.
(d) The indemnification provided for in this Section 2 shall
not be deemed exclusive of any other rights to indemnification which any
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation or Bylaws, agreement, vote of stockholders or
disinterested directors or otherwise. The right of indemnification under
subsection (b) above shall be deemed to create contractual rights in favor of
persons entitled to indemnification thereunder. The provisions of this
Section 2 shall be applicable to claims commenced after the adoption hereof,
whether arising from acts or omissions occurring before or after the adoption
hereof.
(e) Neither the amendment nor repeal of this Section 2, nor
the adoption of any provision of the Certificate of Incorporation or Bylaws
or of any statute inconsistent with this Section 2, shall adversely affect
any right or protection of a director, officer or agent of the corporation
existing at the time of such amendment, repeal or adoption of such a
provision.
(f) Upon and in the event of a determination by the Board of
Directors of the corporation to purchase such insurance, the corporation
shall purchase and maintain insurance on behalf of any agent of the
corporation against any liability asserted against or incurred by the agent
in such capacity or arising out of the agent's status as such whether or not
the corporation would have the power to indemnify the agent against such
liability under the provisions of this Section 2.
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
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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.
As amended through May 28, 1998
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CERTAIN PORTIONS OF THIS DOCUMENT FOR WHICH CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED HAVE BEEN REDACTED. REDACTIONS ARE INDICATED BY A SINGLE PAIR OF
EMPTY BRACKETS ("[]").
<PAGE>
LEASE
THIS LEASE ("Lease") is made as of December 18, 1998 by and between SCHEID
VINEYARDS CALIFORNIA INC., a California corporation ("Lessee") and CALIFORNIA
ORCHARD COMPANY, a California corporation ("Lessor").
Lessor hereby leases to Lessee, and Lessee hereby takes and hires from Lessor,
the amount of acres deemed to be plantable, approximately seven hundred (700)
acres (the "Plantable Acres"), as determined by a survey to be completed within
sixty (60) days of the date of this Lease (the "Survey") of the real property,
located in Monterey County, California and more specifically described on
EXHIBIT A attached hereto and made a part hereof. Said land is hereinafter
referred to as the "Property" and the portion of the Property leased as
determined by the Survey and all fixtures, structures, buildings and
improvements located or to be located on the Property are hereinafter referred
to as the "Premises."
The terms and conditions of this Lease are as follows:
1. TERM. The term (as extended from time to time, the "Term") of this
Lease shall commence on the date hereof and shall end on December 31, 2022,
subject to the options to extend referred to in Paragraph 19 below. The twelve
(12) month period from the 1st day of December to the 30th day of November shall
be the "Lease Year".
2. USE. The Premises shall be used for the planting, growing and
harvesting of wine grapes and uses related thereto. All farming operations of
Lessee shall be conducted in accordance with the methods practiced in the
vicinity, including the taking of necessary precautions to prevent erosion or
other damage to the Premises, so that at the termination of this Lease, said
Premises will be returned to Lessor in the same condition as when received at
the beginning of this Lease or as improved pursuant to the terms of this Lease,
reasonable use, wear and damage by the elements excepted.
3. RENT. As and for the rental of the Premises during the Term, Lessee
agrees to pay to Lessor the following sums:
(a) Base Rent. The annual sum of [ ] per Plantable Acre,
payable in advance without deduction or offset, shall be paid as base rent in
equal semi-annual installments on the 1st day of December and the 1st day of
June of each Lease Year of the Term. Upon commencement of this Lease, the
Lessee shall cause a surveyor to commence preparation of the Survey setting
forth the number of Plantable Acres and the parties shall reasonably agree on
the number thereof; and the base rent thereafter shall be based on the number of
such Plantable Acres. Until such Survey is completed, Lessee shall pay base
rent for seven hundred (700) Plantable Acres; and if it is determined that there
are more or fewer than seven hundred (700) Plantable Acres, any deficiency or
any excess payments of base rent theretofore made to Lessor shall be added to or
deducted from, as applicable, the next
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installment of base rent. The base rent for the period from the date of
mutual execution of this Lease through May 31, 1999 shall be payable by
Lessee concurrently with the mutual execution of this Lease.
(b) [ ] Rent.
(i) In addition to the base rent payable under Paragraph
3(a), Lessee shall pay to Lessor additional [ ] rent based on
[ ] (as defined below) for each calendar year of the Term, in
accordance with the following schedule:
[ ]
(ii) [ ] rent for each calendar year of the Term will
be due and payable within ten (10) business days after [ ].
([ ]) In addition, on or before December 31st of each year
during the Term, Lessee shall provide in writing to Lessor
[ ] for such year based on information then known to
Lessee. Lessor shall have the right, not more often than once per year, to
inspect the books and records of Lessee with respect to [ ]
for the purpose of verifying the accounting provided by Lessee. Any such
inspection right shall be exercised during normal business hours at the
office of Lessee where such records are normally maintained upon at least
five (5) business days prior written notice.
(iii) As used in this Paragraph, the term [ ].
(A) Except as provided in Paragraphs 3(b)(iii)(B) and (C)
below, [ ].
(B) [ ].
(C) [ ].
(iv) [ ].
(c) LATE CHARGE. If Lessee fails to make full payment of rent on
the date on which said rent is due, Lessor shall be entitled to receive and
collect a late payment charge equal to twelve percent (12%) per annum of the
rental payment which is not paid on such date, which charge is imposed to
cover the expenses and damages to Lessor from failure to pay when due.
4. TAXES AND ASSESSMENTS: LAND CONSERVATION AGREEMENTS. Lessee shall
pay, prior to delinquency, all real and personal property taxes and assessments
levied on or assessed against the Premises, including any future fees or
assessments for water usage on the Property, and against improvements now or
hereafter located on the Premises, the installments of which are due and payable
during the Term of this Lease. Any such payment for a tax period which is
partially within and partially not within the Term shall be prorated based upon
a 365-day
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year. Lessee shall have the right at Lessee's sole expense, to protest or
contest the validity or amount of any such taxes or assessment. If Lessee
protests or contests any such tax or assessment, Lessee may withhold or defer
payment thereof, but shall protect Lessor and the Premises from any lien by
adequate surety bond or other appropriate security acceptable to Lessor.
Lessor hereby appoints Lessee as Lessor's attorney-in-fact solely for the
purpose of making all payments to taxing authorities and for the purpose of
protesting or contesting any tax or assessment payable by Lessee. Lessor
shall, at Lessee's expense, cooperate with Lessee in the contest or
adjustment of taxes payable by Lessee. If Lessor does not renew any land
conservation agreement (executed under the California Land Conservation Act
of 1965) or agrees with the County of Monterey to mutually cancel same,
Lessor shall promptly notify Lessee in writing and Lessor shall pay any
increased taxes on the Premises thereafter.
5. REPRESENTATION AND WARRANTIES.
(a) Lessor represents and warrants to Lessee as follows: (i)
Lessor owns good title to the Property; and (ii) no agreement and no zoning
or other governmental laws, ordinances, rules or regulations prohibit or
restrict the use of the Property by Lessee as contemplated by this Lease.
(b) Each party hereto represents and warrants to the other party
as follows: (i) such party has full power and authority to execute and
deliver, and to perform the obligations of such party under, this Lease; and
(ii) the execution, delivery and performance of this Lease by such party does
not and will not constitute a breach or default under any material agreement,
lease or instrument to which such person is a party or by which such person
or the Property is bound.
(c) (i) Lessor represents and warrants that, as of the date of
this Lease, there is water of sufficient quantity and quality owned by Lessor
on the Property to properly irrigate vineyards which Lessee intends to place
on the Premises or to otherwise use the Property in the manner contemplated
herein. Furthermore, Lessor represents, warrants and covenants that there are
adequate mainlines in place on the Property to transport the water from each
well site throughout the Premises.
(ii) Lessor is the owner of various wells, pumping plants,
pipelines and reservoirs (the "Water System"), which are used for the
purposes of furnishing water for irrigation upon the Premises and Lessor
agrees that such Water System shall be used to supply Lessee with water for
the Premises for irrigation purposes.
(iii) Lessor grants to Lessee the exclusive use of wells 4
and 5 throughout the term of this Lease. Lessee will be responsible for the
maintenance, repair and, if needed, replacement of the well pumps and motors
for wells 4 and 5, as well as all attachments to such pumps and motors for
wells 4 and 5, such as mainlines, lateral lines and drip irrigation lines,
which comprise Lessee's irrigation system. Lessor will be responsible for
the maintenance of wells 4 and 5.
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(iv) If there is a failure of well 4 and/or 5, or if well 4
and/or 5 is not producing water of adequate quality or quantity to properly
irrigate the vineyards which Lessee intends to place on the Premises, Lessor
will grant to Lessee access to the other wells in its Water System for
Lessee's non-exclusive use in order to enable Lessee to properly irrigate the
vineyards which Lessee intends to place on the Premises. In such event,
Lessor grants to Lessee the non-exclusive use of water supplied on and from
the Premises and all water rights appurtenant thereto. Lessor agrees to
deliver and make available to the Premises from wells other than wells 4 and
5 the quality and quantity of water needed for Lessee's development and use
of the Premises as permitted by Section 2 (Use) above and subject to the
utility and maintenance charges in Section 8 (Utilities and Services) below.
Any transfer of the Premises, Lessor's property, Lessor's interest in the
Lease or an interest in Lessor shall not adversely affect such right to water
by Lessee.
Lessor shall, at Lessor's sole cost and expense, keep,
maintain and, as needed, replace the Water System (other than the well motors
and pumps for wells 4 and 5), including all wells and mainlines, now or
hereafter installed on the Premises, or located off the Premises but which
could be expected to be used to irrigate the Premises, in good order and
condition at all times during the Lease Term (as extended). Lessee shall not
be called upon to make repairs, replacements or improvements whatsoever upon
the said water delivery system, or any part thereof (other than the well
motors and pumps for wells 4 and 5).
(v) If Lessee reasonably determines that the water supplied
to the Premises from the Water System is inadequate, Lessee shall have the
right, at its sole cost, but only with prior notice to Lessor, to drill wells
within the Premises and/or create reservoirs or to otherwise develop the
water supply available to the Premises, in order to allow Lessee to pursue
the permitted use of the Premises. Any such activity shall be consistent
with all applicable legal rights, and governmental licensing or permitting
requirements. If Lessor fails to deliver the required water to Lessee and
Lessee undertakes such activity or incurs reasonable expenses therewith,
Lessee may present Lessor with a claim for reimbursement of such expenses (or
claim for payment in the case of payments owed to third parties) and, if
Lessor has not made such payments within thirty (30) days of such claim,
Lessee may offset all such expenses or costs against any rent or other
amounts owing to Lessor under this Lease. Such right granted to Lessee shall
not relieve Lessor of its responsibility to deliver the water required by
this Section. Lessor shall use reasonable efforts to assist Lessee to obtain
any permits necessary to develop the water sources and/or reservoirs, as
permitted by this Lease. This Lease shall not create any rights of Lessee to
water use on or for the Premises except as explicitly stated in this Lease.
No rights to water use shall be created, even inadvertently, beyond the term
of this Lease. Upon termination of the Lease all rights to such water shall
be assigned to Lessor and Lessee shall cooperate in such assignment.
Lessor shall not be responsible or liable for any damage
occasioned by lack of quantity or quality of water, or damage by reason of
lack or shortage of electrical power or energy for the Water System or for
any breakdown or damage in the irrigation system unless Lessor has not
performed its obligations under this Lease. Lessor shall maintain the Water
System (other than the well motors and pumps for wells 4 and 5) in good
working
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order and repair the Water System so as to continuously provide the water to
which Lessee is entitled pursuant to this Lease. In the event that Lessee
becomes entitled to use wells other than wells 4 and 5 and if Lessor and/or
third parties are also entitled to use the water from the Water System,
neither Lessor nor such third parties shall have any greater rights or claims
than Lessee has to the use of such water.
(d) Lessor represents and warrants that Lessor has previously
informed Lessee in writing of any agreements and adverse conditions on the
Property of which Lessor has knowledge and which would adversely affect
Lessee's use of the Property as a vineyard.
6. REPAIRS. Subject to the terms of Paragraph 5(c), Lessee shall, at
Lessee's sole cost and expense, keep and maintain the Premises, including
improvements now or hereafter installed thereon while the same are reasonably
needed for agricultural purposes, in good order and condition at all times.
Except as provided in Paragraph 5(c), Lessor shall not be called upon to make
any repairs, replacements or improvements whatsoever upon the said Premises,
or any part thereof. Notwithstanding the foregoing, Lessee shall not be
responsible for, and Lessor shall indemnify and hold Lessee harmless from,
any environmental or other condition existing prior to the commencement of
this Lease, affecting the Premises which constitutes a violation of any
applicable law, regulation, rule or order; provided, however, that Lessor
shall not be required to indemnify and hold Lessee harmless from any such
condition that is caused by Lessee or its employees, agents or contractors
after the commencement of this Lease.
7. IMPROVEMENTS. This Lease is executed with the understanding and
agreement that the Lessee is not obligated to make any improvements to the
Property other than those contemplated by this Lease, but that if Lessee
elects to do so, said improvements shall relate to the use of the Premises.
Except as provided in Paragraph 5(c), the full cost of said improvements
shall be borne and paid by Lessee, without any contribution whatsoever by
Lessor. The construction and installation of improvements made to the
Property by the Lessee shall be subject to the following conditions:
(a) At least ten (10) days, but not more than thirty (30) days
before commencement of any construction on or improvement to the Property
which will cost in excess of Ten Thousand Dollars ($10,000), excluding
vineyard related improvements, Lessee shall notify Lessor of Lessee's
intention to commence said work. The notice shall specify the approximate
location and nature of the intended improvements and shall state the
approximate date on or after which work is to commence. Lessor shall have
the right to post and maintain on the Property any notices of
nonresponsibility provided for under applicable law.
(b) Lessee shall not suffer or permit to be enforced against the
Property or any part thereof any mechanic's, materialman's, contractor's, or
subcontractor's lien arising from any work of improvement made by Lessee, how
ever it may arise. However, Lessee may, in good faith and at Lessee's own
expense, contest the validity of any such asserted lien, provided Lessee has
furnished the bond required in Civil Code Section 3143 (or any comparable
statute hereafter enacted for providing a bond or other assurance freeing the
Property from the effect of such a lien claim.)
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(c) Lessee shall indemnify Lessor against all liability and loss
of any type arising out of work performed on the Property by or for Lessee,
together with reasonable attorneys' fees and all costs and expenses incurred
by Lessor in negotiating, settling, defending, or otherwise protecting
against such claim should Lessee fail to do so.
(d) If Lessee does not cause to be recorded the bond described in
Civil Code Section 3143 or otherwise protect the Property under any
alternative or successor statute, and if a final judgment is rendered against
Lessee by a court of competent jurisdiction for the foreclosure of a
mechanic's, materialman's, contractor's or subcontractor's lien claim, and if
Lessee fails to stay an execution of the judgment by lawful means or to pay
the judgment, Lessor shall have the right, but not the duty, to pay or
otherwise discharge, stay, or prevent the execution of any such judgment or
lien or both. Lessee shall reimburse Lessor for all sums paid by Lessor
under this subparagraph (d), together with all Lessor's reasonable attorneys'
fees and costs, plus interest on those sums, fees, and costs at the highest
legal rate allowed, under the laws of California from the date of payment
until the date of reimbursement.
(e) All improvements constructed or installed on the Property by
Lessee shall be owned by Lessee during the Term. At the conclusion of the
Term, or upon any earlier termination of this Lease however occurring, Lessee
shall, at the option of Lessor, (i) surrender the Premises and improvements,
if any, to Lessor and as of said date said improvements shall become part of
the real property and shall belong solely to Lessor, or (ii) remove all
improvements located on the Premises, including vines, at Lessee's sole cost
and expense; provided that, in the event of a Water Deficiency Termination,
at the option of Lessee, Lessee shall be entitled to retain ownership of and
remove all improvements, including vines, constructed or installed on the
Property by Lessee. Lessor shall notify Lessee at least ninety (90) days
prior to the conclusion or expiration of the Term as to whether Lessor elects
(i) or (ii); in the absence of such notice from Lessor, the Lease shall
terminate pursuant to clause (i).
8. UTILITIES AND SERVICES. Lessee shall be responsible for the
payment of all utility charges for electrical energy and service charges or
comparable energy charges attributable to wells 4 and 5 of the Water System.
In addition, if Lessee uses wells in the Water System other than wells 4 and
5, Lessee shall pay its pro rata share of all utility charges for electrical
energy and service charges or comparable energy charges attributable to its
use of the Water System other than wells 4 and 5 and shall also pay ten
percent (10%) of such utility charges or comparable energy charges to Lessor
with respect to its use of the Water System other than wells 4 and 5 in
consideration for Lessor's maintenance and replacement as needed of the Water
System. Such 10% maintenance charge may be subject to increase or decrease
based upon Lessor's and Lessee's reasonable assessment of disproportionate
changes in Lessor's maintenance costs in relationship to energy charges.
9. INSURANCE.
A. WAIVER OF SUBROGATION. Each party shall not be liable for any
damage or loss for which the other has insured against, and each party agrees
that it will look solely to its insurer for recovery of any damage or loss
which it may have insured against. Each party
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hereby waives the right of subrogation against the other on behalf of its
insurer and agrees to obtain such insurer's written waiver.
B. LIABILITY INSURANCE. Lessee shall maintain public liability
insurance for protection against liability to the public arising as an
incident to the use of, or any interest in, the Property leased hereunder.
The limits of liability under this insurance shall not be less than Three
Million Dollars ($3,000,000) for liability and property damage. Lessee
agrees to cause Lessor to be named as an additional insured in such policy of
insurance and Lessor shall be furnished with a current certificate of
insurance. The amount of insurance carried by Lessee shall be re-evaluated
every five (5) years by agreement of Lessor and Lessee to reflect reasonable
increases in insurance coverage in accordance with industry standards.
C. WORKER'S COMPENSATION INSURANCE. Lessee shall carry adequate
worker's compensation insurance for all employees.
D. CERTIFICATE OF INSURANCE. Should Lessee fail to maintain such
insurance, Lessor shall so notify Lessee and may obtain same on behalf of Lessee
and the cost thereof shall be paid by Lessee, upon demand. All such insurance
policies shall be delivered to and held by Lessor, or a certificate of such
insurance shall be provided to Lessor evidencing compliance with the foregoing.
All such insurance companies shall be obligated to notify Lessor at ten (10)
days prior to any change or cancellation thereof.
10. ENTRY, INSPECTION AND USE BY LESSOR. Lessee shall permit Lessor, and
Lessor's agents and assigns, upon reasonable advance notice by calling Lessee's
vineyard office at (831) 385-4801, to enter the Premises and to use the roads
established on the Premises now or in the future for the purpose of inspection,
the posting of notices, the exercise of any right given to or retained by Lessor
under the provisions of this Lease, or any other lawful purpose. Lessor's entry
onto the Premises as set forth in this paragraph is expressly conditioned on
Lessor's compliance with Lessee's phylloxera prevention and other precautionary
programs. Notwithstanding the foregoing, Lessor may enter the Property without
notice in the event of an emergency to correct the emergency so long as Lessee
is not in the process of correcting such emergency and so long as Lessor informs
Lessee of same as soon thereafter as possible.
11. OIL AND GAS LEASES. Notwithstanding anything to the contrary
contained in this Lease, Lessor reserves unto itself and its successors and
assigns the exclusive right at any time or from time to time to execute mineral
leases for the extraction of oil, gas and other minerals with respect to the
Premises for the mining, development, removal and marketing of such oil, gas and
other minerals. With respect to any such oil, gas or mineral lease: (i) all
oil, gas or mineral leases hereafter executed by Lessor with respect to the
Premises shall contain a provision making Lessor and the lessee therein jointly
and severally liable to Lessee for all damages to Lessee's livestock, crops,
vines, trees, fences, roads, ditches, buildings, irrigation systems, and other
improvements on the Premises, caused by said lessee's operations on or under the
Premises; (ii) the Base Rent shall be appropriately reduced for acreage
adversely affected by such activities; (iii) Lessor shall pay to Lessee the fair
market value of any improvements, vines, acreage, irrigation systems and other
improvements injured, destroyed, or
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made largely unusable by such activities; and (iv) such activities will not
adversely affect adjacent acreage. Lessor hereby agrees to indemnify and
hold harmless Lessee from and against all such damages.
12. NUISANCE: COMPLIANCE WITH LAWS. Lessee shall not knowingly do, or
permit to be done, or knowingly keep, or permit to be kept, in or about the
Premises, anything which shall be a nuisance or which shall be in violation of
any law, ordinance, rule or regulation of any governmental authority. With
regard to injection of fertilizer into the irrigation system, Lessee will
utilize the necessary back flow devices to prevent chemical contamination of
wells and water supplies and comply with all rules and regulations pertaining to
such procedures. With regard to on-site storage of fuels, fertilizers,
insecticides or herbicides, such storage shall comply with all applicable rules
and regulations and such storage facilities shall incorporate secondary
containment features to prevent spillage in the event that the primary
containment fails. With regard to hazardous materials. Lessee shall use, store
and dispose of any hazardous, toxic and other contaminated or polluting
materials in accordance with all federal, state and local laws, ordinances and
regulations relating to industrial hygiene, environmental protection and the
use, analysis, generation, application, storage and disposal of said hazardous
materials. Except as to conditions existing prior to the date of this Lease,
Lessee shall at its sole cost and expense, promptly comply with all laws,
statutes, ordinances and governmental rules, regulations or requirements now in
force or which may hereafter be in force, and with the requirements of any board
of fire insurance underwriters or other similar bodies now or hereafter
constituted, relating to, or affecting the condition, use or occupancy of the
Premises, excluding structural changes or toxic waste conditions not related to
or affected by Lessee's improvements or use.
13. CONDEMNATION. If during the Term, all or any portion of the Premises
is condemned, or conveyed under threat of condemnation, for public use, the
parties hereto agree as follows:
If all or any part of the Premises shall be taken, condemned or
appropriated by a public or quasi-public authority under power of eminent domain
or under any other lawful power, leaving the portion of the Premises remaining
unsuitable for the purposes hereinabove set forth in the opinion of Lessee,
Lessee shall have the right, at Lessee's option, to terminate this Lease. In
the event of a total condemnation of the Premises, either Lessor or Lessee may
terminate this Lease. In the event this Lease shall continue after any
appropriation or condemnation, the rent shall be equitably reduced on a pro rata
basis. If a part or all of the Premises is taken or condemned, all compensation
awarded upon such condemnation or taking shall go to Lessor, and Lessee shall
have no claim thereto and Lessee hereby irrevocably assigns and transfers to
Lessor any right to compensation or damages to which Lessee may become entitled
during the term hereof by reason of the condemning of all or part of the
Premises. Lessee shall, however, be entitled to any damages awarded for, or
reasonably allocable or applicable to, loss of grapes, vines and its interest in
improvements installed by it.
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14. LESSEE'S BORROWING. Lessee shall have the right from time to time
to subject its interests in this Lease (but not Lessor's fee) to a Deed of
Trust, as defined in subparagraph (e) below, and to assign this Lease as
collateral security for a loan. Lessor agrees that:
(a) There shall be no termination or amendment of this Lease
without the written consent of the Beneficiary (as defined in subparagraph
(e) below) except as provided in Paragraph 16 below.
(b) Lessor agrees simultaneously to serve a copy of any notice of
default upon the Beneficiary. The Beneficiary shall have sixty (60) days to
cure any monetary default and one hundred eighty (180) days to cure any
non-monetary default, and Lessor agrees to accept such cure. Beneficiary and
its agents may enter the Premises to effect a cure. In the event the nature
of a non-monetary default requires possession of the Premises to effectuate a
cure, then the grace period for such cure shall be tolled for up to eight
months so long as Beneficiary is diligently attempting to obtain possession
of the Premises. Nothing herein contained shall require the Beneficiary to
cure any default of Lessee.
(c) The name of the Beneficiary may be added to the "Loss Payable
Endorsement" of any casualty insurance required to be carried by Lessee.
(d) In the event of any defaults under the Deed of Trust, Beneficiary
may foreclose on its Deed of Trust, and the purchaser thereunder may assume this
Lease or may elect to have Lessor enter into an identical lease with such
purchaser provided Beneficiary or such purchaser has cured all monetary defaults
and has agreed to cure nonmonetary defaults.
(e) The term "Deed of Trust," whenever used herein, shall include
whatever security instruments are used, such as mortgages, financing statements,
security agreements and other documentation. The term "Beneficiary" shall
include any mortgagee, secured party and other assignee of the Leasehold
interest as security for a loan.
(f) This Lease may be assigned in lieu of foreclosure or pursuant to
a foreclosure or power of sale and may be further assigned once by the assignee
or purchaser without the prior consent of the Lessor provided the assignee
assumes the Lessee's future obligations under this Lease and provided further
that the Beneficiary shall be liable for obligations under the Lease only for so
long as it is the tenant thereunder.
(g) Lessor agrees to enter into agreements with Lessee's prospective
lenders to confirm the foregoing clauses (a) - (f) and to give such prospective
lenders reasonable assurances as such lenders may request which assurances are
customarily given to lenders, but in no event shall Lessor be required to
mortgage its fee or to become liable on Lessee's loan.
15. EVENTS OF DEFAULT. Any of the following events shall constitute a
default (an "Event of Default") under the terms of this Lease:
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(a) The nonpayment of rent or any other sum to be paid by Lessee
to Lessor under the terms of this Lease, and the failure of Lessee to make such
payment within ten (10) business days after receipt of written notice to do so
is given to Lessee and to any lender then holding a security interest in the
leased land or in the leasehold estate of Lessee pursuant to the provisions of
Paragraph 14 above.
(b) Default by Lessee in the performance of or compliance
with any other covenant, condition or restriction contained in this Lease,
and the failure of Lessee to perform or comply with the same within thirty
(30) days after receipt of written notice to do so is given to the Lessee and
to any lender then holding a security interest in the Premises or in the
leasehold estate of Lessee pursuant to the provision of Paragraph 14 above;
provided, however, that if the nature of Lessee's default is such that more
than thirty (30) days are reasonably required for its cure, then no Event of
Default shall be deemed to have occurred if Lessee commences the cure within
that thirty (30)-day period and thereafter diligently prosecutes the cure to
completion.
(c) Abandonment or surrender of the Premises or of the leasehold
estate by Lessee.
(d) The subjection of any material right or interest of Lessee
hereunder to attachment, execution or other levy, or to seizure under legal
process (except a foreclosure of security given by Lessee to a lender pursuant
to the provisions of Paragraph 14 above), if not released within thirty (30)
days after receipt of written notice thereof.
(e) The filing by Lessee of a petition in bankruptcy or
insolvency, or for an arrangement or reorganization, or the making of an
assignment for the benefit of creditors.
(f) The filing against Lessee of a petition in bankruptcy or
insolvency, or for reorganization, or for the appointment of a receiver to take
possession of the Premises or improvements thereon or of Lessee's interest in
the leasehold or of Lessee's operations on the Premises for any reason (other
than a receivership pursuant to any security given by Lessee to any lender
referred to in Paragraph 14 above), if not dismissed within ninety (90) days.
(g) Any default by Lessee in the payment of any loan or other
monetary obligation secured by a mortgage or other security instrument given to
secure an obligation to any lender referred to in Paragraph 14 above provided
that Lessee's default shall have continued beyond any grace or cure period
allowed by the applicable loan document.
16. REMEDIES OF LESSOR ON DEFAULT. Upon the occurrence and during the
continuance of any Event of Default, but subject to the requirements of
Paragraph 14, Lessor shall have the following remedies in addition to all
other rights and remedies, provided by law or equity, to which Lessor may
resort cumulatively or in the alternative:
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(a) Lessor may at Lessor's election terminate this Lease by giving
written notice of termination. On the giving of the notice, all Lessee's
rights in the Premises shall terminate. Promptly after notice of
termination, Lessee shall surrender and vacate the Premises and all
improvements thereon, and Lessor may reenter and take possession of the
Premises and improvements and eject all parties in possession. Termination
under this subparagraph shall not relieve Lessee from any claim for damages
previously accrued or then accruing against Lessee. Said damages shall
include the worth at the time of award of the amount by which the unpaid rent
for the balance of the term after the award exceeds the amount of such rental
loss for the same period that Lessee proves could be reasonably avoided.
(b) Lessor may at Lessor's election reenter the Premises and, without
terminating this Lease, at any time and from time to time relet said Premises
and improvements or any part or parts of them for the account and in the name of
Lessee or otherwise. Any reletting may be for the remainder of the Term or for
a longer or shorter period. Lessor may execute any leases made under this
provision either in Lessor's name or in Lessee's name and shall be entitled to
all rents from the use, operation, or occupancy of the Premises and
improvements. Lessee shall nevertheless pay to Lessor on the due dates
specified in this Lease, the equivalent of all sums required of Lessee under the
terms of this Lease, plus Lessor's expenses, less the net amount realized by
Lessor upon any such reletting. No act by or on behalf of Lessor under this
provision shall constitute a termination of this Lease unless Lessor gives
Lessee written notice of termination.
(c) Lessor shall be entitled at Lessor's election to each installment
of rent or to any combination of installments for any period before termination,
plus interest on delinquent installments at the highest interest rate then
allowable under the laws of the State of California.
(d) Upon any reentry of the Premises by Lessor, pursuant to the
provisions of subparagraphs (a) or (b) above, Lessor may, at Lessor's election,
take possession of all crops on the Premises, harvested and unharvested, and
shall thereupon become the owner of the same, without any obligation to
compensate Lessee or any other person therefor, except that Lessor shall pay to
Lessee all moneys received from the sale of said crops, less all reasonable
costs and expenses incurred or expended by Lessor in cultivating, harvesting,
processing, handling and selling said crops, less all sums which may then be due
to Lessor from Lessee under the terms of this Lease.
The waiver by Lessor of any Event of Default shall not be deemed or held to
be a waiver of any subsequent or other Event of Default.
17. SURRENDER AND REMOVAL BY LESSEE; QUITCLAIM. Upon the expiration of
the Term or any earlier termination thereof, Lessee shall surrender to Lessor
the possession of the Premises and all improvements located thereon in
accordance with Paragraph 7(e). If no Event of Default shall have occurred
and be continuing at the time of such termination, Lessee may remove or cause
to be removed all of its machinery, equipment, trade fixtures and other
personal property located upon the Premises and then owned by Lessee; any of
said property not so removed within thirty (30) days after the date of
termination shall be considered to have
- 11 -
<PAGE>
been abandoned and thereafter shall belong to Lessor without the payment of
any consideration. Upon such expiration or earlier termination of this
Lease, the Lessee agrees to execute, acknowledge and deliver to Lessor in
recordable form, a proper instrument releasing and quitclaiming to Lessor all
right, title and interest of Lessee in and to the Premises and all
improvements located thereon. No holding over of the possession of the
Premises by Lessee beyond the Term shall be deemed an extension of the Term
or create the right to an additional term in the absence of a written
agreement executed by Lessor.
18. LESSOR'S ENCUMBRANCES. Lessor may encumber the Premises so long as
the lender, prior to or concurrently with such encumbrance, enters into a
non-disturbance agreement in form and substance reasonably satisfactory to
Lessee, agreeing that so long as Lessee continues to perform its obligations
under this Lease, that said lender (and its successors and assigns and any
purchaser at a foreclosure sale) will honor Lessee's interest in this Lease
and in the Premises, will not disturb Lessee's use and peaceful and quiet
enjoyment of the Premises, will not seek payment from Lessee of any amounts
paid by Lessee to Lessor pursuant to the terms of this Lease, and agreeing to
such other matters as may be customarily set forth in non-disturbance
agreements.
19. OPTIONS TO EXTEND. So long as no Event of Default shall have occurred
for which Lessor has sent notice to Lessee and is then continuing, Lessee shall
have two options, each such option to extend the Term of this Lease for one five
(5)-year term (for a total of ten (10) years) upon giving to Lessor written
notice of Lessee's election to exercise the option to extend the term at least
one hundred eighty (180) days prior to the expiration of the then existing term
hereof. Such renewal shall be upon the same terms and conditions as are herein
stated. References in this Lease to the Term shall, to the extent exercised,
include the two (2) successive five (5)-year options provided for above.
20. RIGHTS TO NEGOTIATE.
(a) It is agreed that during the Term of this Lease, should Lessor
wish to sell any interest in the Premises, Lessor shall, during the ninety (90)
day period commencing with written notice from Lessor of Lessor's intent to
sell, negotiate in good faith with Lessee if Lessee wishes to acquire such
interest.
(b) At any time after December 31, 2016, Lessor shall, upon written
request from Lessee, enter into and carry on good faith negotiations with Lessee
with respect to this Lease and/or the terms hereunder and/or extension of the
Lease Term.
21. ASSIGNMENT AND SUBLETTING. Lessee shall not assign this Lease or any
interest herein, or sublet the Premises or any part thereof, either voluntarily
or involuntarily without the prior written consent of Lessor, which shall not be
unreasonably withheld, conditioned or delayed. Except with Lessor's consent as
set forth in the preceding sentence, neither this Lease nor any interest therein
shall be assignable whether by the act of Lessee or by operation of law. In no
event may the Lessee assign less than its entire leasehold interest. No
assignment or subletting under the provisions of this Paragraph 21 shall be
effective until there has been
- 12 -
<PAGE>
delivered to Lessor a written statement executed by Lessee stating the name
and address of the assignee or sublessee, as the case may be, and the date of
transfer, accompanied by the written agreement of the assignee or sublessee,
as the case may be, expressly assuming and agreeing to keep and perform all
of the obligations under this Lease to the extent of the assignment or
subletting. Notwithstanding the foregoing, any time after November 30, 2001
Lessor's consent will not be required for any of the following: (i) any
assignment of this Lease (which includes an assignment of all vines and
related personal property on the Premises owned by Lessee) or subletting of
the Premises to a person or entity that is an affiliate of Lessee; or (ii)
any subletting of the Premises to any person or entity so long as Lessee or
an affiliate of Lessee manages such sublet portion of the Premises on behalf
of the sublessee. In all cases of assignment and subletting, Lessor's
reasonable consent shall be based upon reasonable credit worthiness and
reasonable experience of the proposed assignee or sublessee. Any permitted
assignment shall permit the assignor to be relieved of further liability
under this Lease.
22. TIME OF THE ESSENCE. Time and specific performance are of the essence
of this agreement and of every provision hereof.
23. SUCCESSORS AND ASSIGNS. Subject to the restriction on assignment
hereinabove set forth, this Lease and all of the provisions hereof shall inure
to the benefit of and shall be binding upon the heirs, legal representatives,
successors and assigns of the respective parties hereto.
24. ATTORNEYS' FEES. In case either party shall bring suit against the
other party or otherwise commence any proceeding to compel the performance
of, or to recover for the breach of, any covenant, agreement or condition
herein written, or, in the case of Lessor, to recover possession of the
Premises or to remove from the record this Lease or any lien or encumbrance
thereon created by Lessee, the prevailing party shall be entitled to
reasonable attorneys' fee, to be fixed by the court or arbitrator, as
applicable, and made a part of any judgment or decision rendered thereby.
25. NOTICES. Any notice given under the terms of this Lease shall be in
writing, addressed as set forth below to the party to whom the notice is to be
given, and shall be either (i) delivered personally (including by commercial
courier), (ii) sent by United States registered or certified mail, postage
prepaid, return receipt requested or (iii) transmitted by facsimile the receipt
of which is confirmed in writing. Notices delivered by mail shall be deemed
given three business days after the date of mailing, notices delivered
personally shall be deemed given upon receipt, and notices by facsimile shall be
deemed given upon written acknowledgment of receipt by the recipient to the
party giving the notice. The address of the parties for notice purposes are:
LESSOR LESSEE
California Orchard Company Scheid Vineyards California Inc.
If sent by UPS, FED EX: 13470 Washington Blvd., Suite 300
63 North Ash Street Marina del Rey, CA 90292
- 13 -
<PAGE>
Ventura, CA 93001 Contact: Heidi Scheid
If sent by US Mail: Phone: 310-301-1555
P. O. Box 25010 Fax: 310-301-1569
Ventura, CA 93002
Contact: Gregory H. Smith
Phone: 805-648-3363
Fax: 805-648-4603
WITH A COPY TO: WITH A COPY TO:
California Orchard Company Scheid Vineyards California Inc.
If sent by UPS, FED EX 1972 Hobson Avenue
44557 Teague Avenue Greenfield, CA 93927
Greenfield, CA 93927 Contact: Kurt Gollnick
If sent by US Mail Phone: 831-385-4801
P. O. Box 686 Fax: 831-385-0136
King City, CA 93930-0686
Contact: Lawrence Porter
Phone: 831-385-3858
Fax: 831-385-5909
Either party may change its address for notices hereunder by notice given
in accordance with this paragraph.
26. MEMORANDUM OF LEASE. The parties agree to execute and have
acknowledged a memorandum of lease for purposes of recording in Monterey County,
California, which said memorandum shall describe the Premises as being subject
to the rights, covenants and restrictions herein contained. Said memorandum of
lease shall be recorded in the Office of the County Recorder of Monterey County,
California.
27. ESTOPPEL CERTIFICATE.
(a) Each party to this Lease shall, at any time upon not less than
fifteen (15) days prior written notice from the other party (the "Requesting
Party"), execute, acknowledge and deliver to the Requesting Party a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect or, if modified, stating the nature of the modification and certifying
that this Lease, as modified, is in full force and effect, and
(ii) acknowledging that there are not, to such party's knowledge, any uncured
defaults on the part of the Requesting Party, or specifying the defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises or of the Requesting
Party's interest therein.
(b) Such party's failure to deliver such statement within the time
specified shall be conclusive upon such party (i) that this Lease is in full
force and effect, without modification except as may be represented by the
Requesting Party, (ii) that there are no
- 14 -
<PAGE>
uncured defaults in the Requesting Party's performance, and (iii) that not
more than one (1) semi-annual installment of rent has been paid in advance.
28. SEVERABILITY. If any term, covenant, condition or provision of this
Lease or the application thereof to any person or circumstances shall, at any
time or to any extent, be invalid or unenforceable, the remainder of this Lease,
or the application of such term or provision to persons or circumstances other
than those as to which such term or provision is held invalid or unenforceable,
shall not be affected thereby, and shall continue to be valid and to be enforced
to the fullest extent permitted by law.
29. INTERPRETATION. This Lease shall be construed in accordance with the
internal laws of the State of California without application of the conflicts of
laws provisions thereof. Whenever the contents of any provision shall require,
the singular number shall be deemed to include the plural number, and vice
versa, and the reference to any gender shall be deemed to include reference to
all other genders. For purposes of interpretation or construction in the event
of ambiguity, this Lease shall be deemed drafted by both parties. The captions
and headings of the paragraphs of this Lease are solely for convenience and
shall not be deemed to be a part of this Lease for the purpose of construing the
meaning hereof or for any other purpose.
30. ENTIRE AGREEMENT. This Lease contains the entire agreement of the
parties hereto with respect to the letting and hiring of the Premises described
above and this Lease may not be amended, modified, released or discharged, in
whole or in part, except by an instrument in writing signed by the parties
hereto or their respective successors or assigns.
31. COUNTERPARTS. This Lease may be executed in any number of
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
32. QUIET ENJOYMENT. Lessor covenants and agrees with Lessee that, so
long as no Event of Default shall have occurred and be continuing, Lessee may
peaceably and quietly have, hold, occupy and enjoy the Premises hereby demised,
for the Term of this Lease.
33. CONFIDENTIALITY. Each party to this Lease acknowledges and agrees
that, except to the extent set forth in the memorandum of lease recorded
pursuant to Paragraph 26 above, the material terms and provisions of this
Lease are confidential and shall not be disclosed by such party without the
prior written consent of the other party, except that either party may
disclose such matters (a) to such party's immediate family members,
shareholders, directors, partners or members, and to professional
representatives (who shall be informed of and bound by this confidentiality
provision), and (b) to the extent compelled to do so by law or, in the
judgment of such party's counsel, by required securities disclosures. Any
other disclosure may only include a general description of the Lease terms
but shall not include specifics such as [ ].
- 15 -
<PAGE>
34. LESSOR'S REPRESENTATIVE. Lessor hereby designates Lawrence Porter
as its representative ("Lessor's Representative"). Lessor's Representative
is hereby authorized to act individually on behalf of Lessor, and Lessee is
entitled to rely upon the actions of Lessor's Representative on behalf of
Lessor. Actions within the scope of the authority of Lessor's Representative
include decisions relating to farming, repairs, maintenance, water issues,
and other farming and property-related issues as may arise. Lessor agrees
that actions requiring the approval of Lessor's Board of Directors shall be
made promptly, so as not to affect Lessee's ability to conduct its business.
Actions requiring the consent of Lessor's Board of Directors include any
Lease amendments, waivers or other modifications of terms of this Lease.
Lessor shall notify Lessee in writing if it appoints a Lessor's
Representative other than Lawrence Porter.
35. SOLE AGRICULTURAL EMPLOYER. Lessee acknowledges and agrees that
Lessee is the sole agricultural employer of persons engaged to carry out
Lessee's farming operations. Lessee shall not do anything, either by act or
omission, to lead its employees to believe that Lessor has anything to do
with their employment relationship. In carrying out its farming operations,
Lessee shall direct the operation of its labor and equipment in all respects
and shall determine the method, means and manner of its performance. The
parties acknowledge that their relationship is solely that of Lessor and
Lessee and they have no other relationship between each other as to the
leased Premises. The parties acknowledge that Lessor is not a party to any
labor contract between Lessee and Lessee's employees or between Lessee and
any labor union to which Lessee's employees belong, and any such contract
shall in no way be attributable to Lessor nor shall any such contract be
considered to attach to or run with the land comprised of the leased Premises.
36. SURFACE, FLOOD DRAINS AND NATURAL DISASTERS. Lessee assumes the risk
of any damage to crops on said Premises from surface and/or flood waters or
other natural disasters, and any such damage shall not be a basis for
termination of this Lease by Lessee. Lessor assumes the risk of any damage to
the Premises by flood waters or other natural disasters. Provided, however,
that in the event that a part of all of the Premises are destroyed or rendered
unfarmable as a result of the effects of flooding or other natural disaster and
the cost of repair or restoration is economically unfeasible, then Lessee may
terminate this Lease as to the portion of the Premises destroyed or rendered
unfarmable. In the event of a partial termination of the Lease, the rent shall
be equitably adjusted to reflect such partial termination.
37. ADJACENT RESIDENTIAL PROPERTY. Lessor owns and operates property
adjacent to a section of the Premises, and such adjacent property is
currently used principally as housing for agricultural laborers (the
"Adjacent Property"). Lessor acknowledges that the Adjacent Property is not a
part of this Lease or a part of the Premises and that Lessee has no duties or
obligations of whatsoever nature with respect to the occupants of the
Adjacent Property or with respect to the repair, maintenance or condition of
the Adjacent Property or the improvements thereon. Lessor agrees to build
and maintain during the term of this Lease a boundary fence at least seven
feet (7') high, post it for No Trespassing and use reasonable efforts in the
protection of Lessee's leasehold interest and against personal injury.
Lessor agrees to indemnify and hold Lessee (and Lessee's successors, assigns,
officers, directors and employees) harmless from any
- 16 -
<PAGE>
loss, costs, claims and liabilities (and the costs of defense thereof) with
respect to the Adjacent Property and its occupants.
- 17 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
date first above set forth.
LESSOR: LESSEE:
CALIFORNIA ORCHARD COMPANY, SCHEID VINEYARDS CALIFORNIA
a California corporation INC., a California corporation
By: /s/ Gregory H. Smith By: /s/ Scott D. Scheid
------------------------------- -----------------------------
Gregory H. Smith Scott D. Scheid
Its: Secretary Its: Vice President
By: /s/ Alan M. Teague By: /s/ Heidi M. Scheid
------------------------------- -----------------------------
Alan M. Teague Heidi M. Scheid
Its: President Its: Vice President Finance
- 18 -
<PAGE>
EXHIBIT A
[Description of real property subject to the Lease]
- 19 -
<PAGE>
AMENDMENT OF AGRICULTURAL CREDIT AGREEMENT
This Amendment of Agricultural Credit Agreement ("Amendment") is made and
entered into this 25th day of June, 1997 by and between SANWA BANK CALIFORNIA
(the "Bank") and SCHEID VINEYARDS INC. (the "Borrower") with respect to the
following:
This Amendment shall be deemed to be a part of and subject to that certain
agricultural credit agreement between the parties hereto and dated as of June
4, 1997, as it may have been or be amended from time to time, and any and all
addenda, riders, exhibits and schedules thereto (collectively, the
"Agreement"). Unless otherwise defined herein, all terms used in this
Amendment shall have the same meanings as in the Agreement. To the extent
that any of the terms or provisions of this Amendment conflict with those
contained in the Agreement, the terms and provisions contained herein shall
control.
WHEREAS, the Borrower and the Bank mutually desire to extend, amend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and
the Bank agree as follows:
1. REVISED ASSUMPTION AGREEMENT. The dollar amount contained in section
6.17 of the Agreement, which is currently $1,560,000.00, is hereby modified
and changed to be $2,835,000.00.
2. INCORPORATION INTO AGREEMENT. On and after the effective date of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Agreement shall
mean and be referenced to the Agreement as amended by this Amendment.
3. NO WAIVER. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the
Bank under, the Agreement.
4. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically
provided in this Amendment, all other terms, conditions and covenants of the
Agreement which are unaffected by this Amendment shall remain unchanged and
shall continue in full force and effect and the Borrower hereby covenants and
agrees to perform and observe all terms, covenants and agreements provided
for in the Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA SCHEID VINEYARDS CALIFORNIA INC.
FKA SCHEID VINEYARDS INC.
By: /s/ Steven R. Edmonston By: /s/ Alfred G. Scheid
--------------------------------------- ---------------------------
Steven R. Edmonston, Authorized Officer Alfred G. Scheid, President
By: /s/ Ernest M. Brown
---------------------------
Ernest M. Brown, Secretary
<PAGE>
AMENDMENT OF AGRICULTURAL CREDIT AGREEMENT
This Amendment of Agricultural Credit Agreement ("Amendment") is made and
entered into this 22nd day of August, 1997 by and between SANWA BANK
CALIFORNIA (the "Bank") and SCHEID VINEYARDS CALIFORNIA INC. FKA SCHEID
VINEYARDS INC. (the "Borrower") with respect to the following:
This Amendment shall be deemed to be a part of and subject to that certain
agricultural credit agreement between the parties hereto and dated as of June
4, 1997, as it may have been or be amended from time to time, and any and all
addenda, riders, exhibits and schedules thereto (collectively, the
"Agreement"). Unless otherwise defined herein, all terms used in this
Amendment shall have the same meanings as in the Agreement. To the extent
that any of the terms or provisions of this Amendment conflict with those
contained in the Agreement, the terms and provisions contained herein shall
control.
WHEREAS, the Borrower and the Bank mutually desire to extend, amend and/or
modify the Agreement
NOW THEREFORE, for value received and hereby acknowledged, the Borrower and
the Bank agree as follows:
1. REVISED REPORTING REQUIREMENTS - ANNUAL STATEMENTS. The number of days
provided for in section 6.09 A. of the Agreement, which is currently 120
days, is hereby modified and changed to be 90 days.
2. REVISED REPORTING REQUIREMENTS - INTERIM STATEMENTS. A new section 6.09
C. is added to the Agreement which reads as follows: 6.09 C. Interim
Statements. Not later than 45 days after the end of each fiscal quarter, the
Borrower's financial statement as of the end of such fiscal quarter.
3. REVISED FINANCIAL CONDITION - NEW WORTH. Section 6.15 A. of the
Agreement is hereby amended to read as follows: 6.15 A. Net Worth. A
minimum Effective Tangible Net Worth of not less than $20,000,000.00 to be
measured quarterly.
4. REVISED FINANCIAL CONDITION - CURRENT RATIO. Section 6.15 B. of the
Agreement is hereby amended to read as follows: 6.15 B. Current Ratio. A
ratio of current assets to current liabilities of not less than 2.00 to 1.00
to be measured quarterly.
5. REVISED FINANCIAL CONDITION - DEBT TO NET WORTH RATIO. A new section
6.15 D. is added to the Agreement which reads as follows: 6.15 D. Debt to
Net Worth Ratio. A Debt to Effective Tangible Net Worth ratio of not more
than 1.75 to 1.00 to be measured quarterly.
6. INCORPORATION INTO AGREEMENT. On and after the effective date of this
Amendment, each reference in the Agreement to "this Agreement", "hereunder",
"hereof", "herein", or words of like import referring to the Agreement shall
mean and be referenced to the Agreement as amended by this Amendment.
7. NO WAIVER. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of the
Bank under, the Agreement.
8. CONFIRMATION OF OTHER TERMS AND CONDITIONS. Except as specifically
provided in this Amendment, all other terms, conditions and covenants of the
Agreement which are unaffected by this Amendment shall remain unchanged and
shall continue in full force and effect and the Borrower hereby covenants and
agrees to perform and observe all terms, covenants and agreements provided
for in the Agreement, as hereby amended.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as
of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA SCHEID VINEYARDS CALIFORNIA INC.
FKA SCHEID VINEYARDS INC.
By:/s/Steven R. Edmonston By:/s/ Alfred G. Scheid
---------------------- ---------------------------------
Steven R. Edmonston, Alfred G. Scheid, President
Authorized Officer
By:/s/ Ernest M. Brown
----------------------------------
Ernest M. Brown, Secretary
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-47485 of Scheid Vineyards Inc. on Form S-8 of our report dated February
19, 1999 appearing in this Annual Report on Form 10-KSB of Scheid Vineyards
Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Los Angeles, California
March 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001039213
<NAME> SCHEID VINEYARDS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 5,031
<SECURITIES> 0
<RECEIVABLES> 728
<ALLOWANCES> 0
<INVENTORY> 742
<CURRENT-ASSETS> 7,551
<PP&E> 32,937
<DEPRECIATION> 0
<TOTAL-ASSETS> 46,532
<CURRENT-LIABILITIES> 3,668
<BONDS> 11,562
0
0
<COMMON> 7
<OTHER-SE> (2,376)
<TOTAL-LIABILITY-AND-EQUITY> 46,532
<SALES> 16,436
<TOTAL-REVENUES> 17,473
<CGS> 7,911
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (46)
<INCOME-PRETAX> 6,040
<INCOME-TAX> 2,421
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,619
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
