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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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COMMISSION FILE NUMBER: 0-26834
PETE'S BREWING COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 77-0110743
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
514 HIGH STREET, PALO ALTO, CALIFORNIA 94301
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 328-7383
SECURITIES REGISTERED PURSUANT TO Section 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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SECURITIES REGISTERED PURSUANT TO Section 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
The Aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 27, 1998 as reported on the Nasdaq National Market, was approximately
$34,641,245. Shares of Common Stock held by each officer and director and by
each person known to the Company who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 27, 1998, registrant had 10,815,273 outstanding shares of
Common Stock.
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Shareholders to
be held June 8, 1998.
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PETE'S BREWING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX
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PART I.
Item 1. Business.................................................... 1
Employees................................................... 13
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
Executive Officers of the Registrant........................ 14
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 8. Financial Statements and Supplementary Data................. 26
PART III.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 41
Signatures.................................................. 43
Consent of Independent Accountants..........................
Report of Independent Accountants on Financial Statement
Schedule.................................................... 44
Valuation and Qualifying Accounts........................... 45
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PART I
The information contained in this Report includes forward-looking
statements, based on current expectations, that involve risks and uncertainties,
which could cause actual results to differ materially from those, expressed in
the forward-looking statements. Various important factors known to Pete's
Brewing Company that could cause such material differences are identified below
in Part I, Item 1 of this report and in the "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
ITEM 1. BUSINESS
Pete's Brewing Company ("Pete's" or the "Company") is the second largest
major domestic craft brewer in the United States. The Company currently markets
its 9 distinctive full-bodied beers in 49 states, the District of Columbia and
the United Kingdom under the "Pete's" brand name. Pete's Wicked Ale, the
Company's flagship beer, has won 22 awards for excellence since it was
introduced in 1986. In addition, Pete's currently markets Pete's Signature
Pilsner, Pete's Honey Wheat, and Pete's Strawberry Blonde and Pete's
Oktoberfest. By year end 1997, Pete's completed its calendar of seasonal
offerings with the introduction of Pete's Springfest to provide a seasonal
bridge between the number-one selling craft beers in their respective seasons,
Pete's Summer Brew and Pete's Winter Brew. In response to varying consumer
preferences, the Company will diversify its product line by introducing and
marketing a new beer, Pete's ESP Lager, in March 1998.
INDUSTRY BACKGROUND
The Company participates in the domestic craft beer segment of the
estimated $50 billion domestic beer market. This segment represented
approximately 4.5% of total domestic, retail beer sales in 1997. In general,
three types of brewers produce beers that compete with the Company's beers:
major domestic brewers, import beer companies and domestic craft brewers.
There are approximately 1,300 brewers in the United States. The industry is
both highly concentrated, with the top five domestic brewers, Anheuser-Busch
Companies, Inc., Miller Brewing Company, Inc., Adolph Coors Co., Stroh Brewery
Co., and Pabst Brewing Co., accounting for nearly 90% of U.S. beer volume
shipments in 1997, and fragmented within the nearly 1,300 domestic craft
brewers. The large domestic beer producers generally offer a homogenous
selection of beer choices designed for broad mass appeal. These beers,
principally light-bodied lagers and pilsners, are brewed for low flavor and
aroma, using mass production techniques for low cost.
The brewers of import beers from Holland, Germany, Canada and Mexico were
the first, in recent decades, to provide beers to address and benefit from
shifting consumer preferences toward more full-bodied, more flavorful beers.
Imported beers often reflect the style preferences of their country of origin
and frequently carry a premium image with U.S. consumers. As a result, imports
are frequently priced at a premium to most domestic mainstream brands.
Domestic craft brewers generally brew their beers according to traditional
German or English recipes and tend to be more full bodied and more bitter in
taste than mass produced domestic beers. As a result, these amber lagers and
ales, stouts, porters, bocks, and German-style wheat beers and seasonal beers
tend to be more flavorful and fresher tasting. Craft brewers have convincingly
promoted the concept that beers made in smaller batch sizes than the mainstream
brewers and from "all natural ingredients" produce a better beer. This has been
particularly relevant, as consumers have shown an increasing interest in the
process of beer making, alternative styles of beer, and the history surrounding
beer. This increased demand for craft beers has allowed a price premium relative
to mass produced domestic beers and higher margins throughout the distribution
channel, motivating distributors and retailers to carry and promote these
products.
Despite the rapid growth of craft beers and imports in recent years, growth
in the total domestic beer market has been less than 1% per annum since 1984.
Adult per capita consumption of beer in the United States has also declined
slightly. The Company believes that these trends can be attributed to a variety
of factors, including increased concerns over the health consequences of
consuming alcoholic beverages; safety
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concerns about drinking and driving; a trend toward a diet of lighter, lower
calorie beverages; the increased activity of anti-alcohol consumer protection
groups; an increase in the minimum drinking age from 18 to 21 years in all
states; the general aging of the population; and increases in federal and state
excise taxes.
After several years of dramatic growth, the domestic craft beer market grew
at an annual rate of approximately 8% for the year ended December 31, 1997. This
growth rate was significantly below the rates of the past five years, and the
Company believes that deceleration of growth by the craft segment will continue
in 1998. The Company estimates that the segment was flat to slightly down during
the fourth quarter of 1997. The success of the craft segment has attracted
significant numbers of entrants to the category, based on the relatively low
barriers to entry. This has, in turn, led to significant over-proliferation of
brewers and brands in the marketplace. Consumers, previously stimulated to
experiment with an increasing array of choice, appear to be moving toward safer,
more reliable brand choices among the premium, "better beer" alternatives to
mainstream domestic beers. Consumer research conducted by the Company during
1997 suggests that there is significant interaction between craft brands and
import brands when consumers are seeking a "better beer". Import brands have
effectively marketed their premium image and heritage to attract consumers from
the craft segment during the past year. The Company believes that future success
of its brand will depend on providing adequate and relevant brand communication
to consumers who are seeking "better beers".
Domestic craft brewers fall into four main categories: brewpubs,
microbrewers, regional brewers and custom brewers. Brewpubs, consisting of bars
and restaurants, produce at least 50% of their product for on-site consumption.
Microbrewers, defined within the industry as brewers of less than 15,000 barrels
of beer annually, generally have limited distribution and tend to serve a very
local market. Regional brewers typically own and operate their own breweries to
produce between 15,000 and 2,000,000 barrels of beer annually. While regional
brewers generally have a strong presence in their geographic regions, they tend
to have less distribution and market share outside of their home region. Such
brewers typically invest their resources in constructing and maintaining
breweries, leaving little to invest in selling infrastructure and marketing
activities. Word of mouth and occasional media attention are relied upon to
promote growth. Custom brewers utilize excess industry brewing capacity to
produce their beers according to their own proprietary recipes. Custom brewers
devote their resources toward advertising and promotion of their craft beers,
rather than a capital intensive brewing operation.
STRATEGY
The Company's objective is to become the leading brewer of high quality
craft beers in the United States. Key elements of the Company's business
strategy to increase market share and profitability include the following:
Brand Investment. The Company devotes significant financial resources to
innovative selling, advertising and promotional activities designed to build
brand awareness and a high level of consumer loyalty. Through participation in
trade shows, other beer industry events and founder Pete Slosberg's beer
education seminars, the Company seeks to educate distributors, retailers and
consumers about the craft beer industry and the Company's beers. In 1997, 1996
and 1995, selling, advertising and promotional expenses represented 51.7%, 42.0%
and 36.4%, respectively, of the Company's net sales.
Beginning in 1998, the Company will market all of its beers under the
"Pete's" trademark. Research conducted by the Company during 1997 indicated that
consumers in the Company's target market are attracted to the "Pete's" brand
name and associate both quality and fun with the brand. In addition, the
"Pete's" brand is versatile, amenable to brand expansion and is not constrained
by regional or provincial connotations.
Through ongoing consumer research, the Company seeks to gain further
understanding of the craft beer category as it exists today and changes over
time, in particular with respect to the "Pete's" brand and advertising
awareness, consumption patterns and craft beer consumer demographics. Current
consumer research indicates that beer lovers are attracted to the "Pete's" brand
in large part because Pete Slosberg is a real person, who is passionate about
making better beer and his company -- Pete's Brewing Company -- makes great
beer. This research also determined that the "Pete's Wicked" image was uniquely
associated with
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the flagship beer "Pete's Wicked Ale" and, therefore, brand positioning will be
adjusted during 1998 on the Company's other products to maintain this
distinction. The repositioning of the brand resulted in the removal of the
"Wicked" name from all of the Company's products except for "Pete's Wicked Ale".
The Company intends to continue to expend significant resources on selling,
advertising and promoting these concepts to increase its market share in key
geographic regions in the United States. The Company's advertising and
promotional activities promote the Company's image as an innovative brewer, with
a personal and inviting character behind the label, a unique brand name and high
quality beers.
Cost Efficient, High Quality Brewing. Since inception, the Company has
taken advantage of the excess capacity in the domestic brewing industry by
utilizing breweries of independent companies to custom brew the Company's beers
under the Company's on-site supervision and pursuant to the Company's
proprietary recipes. The Company assures the quality of its beers by selecting
specialty malts and hops, controlling the custom brewing operations and by
following advanced brewing industry guidelines for in-process and finished
product quality assurance. In general, the custom brewing strategy allows the
Company to (i) devote significant financial resources to sales, promotion and
advertising activities, (ii) maintain strong sales growth with a relatively lean
brewing infrastructure and (iii) secure access to the brewing capacity required
to efficiently distribute its beers nationally, while maintaining high quality
across its product offerings.
The Company has a strategic alliance with The Stroh Brewery Company
("Stroh") pursuant to which the Company custom brews all of its beers at the
breweries of Stroh. In August 1995, the Company began shipping products brewed
at the St. Paul, Minnesota Stroh brewery. In March 1996, the Company began
shipping products brewed at the Winston-Salem, North Carolina Stroh brewery and
in late 1997 began to qualify products for brewing at the Seattle, Washington
Stroh brewery when Stroh closed its St. Paul brewery. Under the Company's
long-term brewing agreement with Stroh (the "Stroh Agreement"), the Company has
reduced its production costs. The Company will have the ability to strategically
utilize multiple brewing sites in different geographic regions of the United
States to reduce transportation costs and delivery times to distributors. The
Company believes that utilizing multiple breweries of a single brewer provides
advantages over utilizing facilities of several different brewers, including
ease of management of operations, uniformity of product quality and ability to
use a single management information system. In connection with the Stroh
Agreement, the Company issued a warrant to Stroh to purchase 1,140,284 shares of
the Company's Common Stock and an executive officer of Stroh joined the
Company's Board of Directors.
National Distribution Network. The Company's strategy is to expand market
share in key markets of the United States by leveraging its established national
distribution network to increase retail account distribution. The Company has
invested significant resources to educate distributors and retailers about
promoting and selling the Company's beers and the craft beer segment in general.
The Company chooses distributors in each market that will devote significant
attention and resources to the promotion and sale of the Company's beers. These
distributors may be wine and spirits distributors or traditional beer
wholesalers.
Product Diversity and Quality. The Company intends to continue to update
its product line with beers designed to appeal to varying consumer preferences.
The Company currently markets 9 distinctive full flavored craft beers,
consisting of five year-round products and four seasonal brews. The Company's
beers, ranging from brown to amber to gold colors, all bear the "Pete's" brand
name and allow the Company to appeal to a broad range of consumers. The Company
intends to establish a selection of year-round and seasonal beers that will
attract consumers to craft beers and allow them to explore new tastes. The
company brews its beers using only water, malt, hops, yeast and natural spices
and flavors.
PETE'S BREWS
The Company positions all of its products as full-bodied beers of the
highest quality. The Company's products are made only from high quality natural
ingredients. The Company brews its beer using only water, malt, hops, yeast and
natural spices and flavors. The Company's beers have won numerous awards for
excellence. The Company's net sales and barrels of beer sold have grown rapidly
from $2.5 million and 14,700 barrels, respectively, in 1991 to $58.3 million and
361,100 barrels, respectively, in 1997, which are lower than 1996 levels of
$70.6 million in net sales and 425,600 barrels.
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Brands
The Company offers or plans to offer in the near future the following
Pete's brews:
Pete's Wicked Ale. Introduced in 1986, the Company's flagship beer, Pete's
Wicked Ale, is widely recognized as the original American brown ale, with a
roasted malt sweetness, strong hop flavor and aroma, and medium body. Pale,
chocolate and caramel malts and a complex blend of Cascade and rare Brewer's
Gold hops have contributed to the numerous awards for brewing excellence that
this beer has received since 1986.
Pete's Signature Pilsner. Introduced in 1992 as Pete's Wicked Lager, and
repositioned as Pete's Wicked Bohemian Pilsner in 1996, Pete's Signature Pilsner
is an authentic Czech pilsner. A medium-bodied lager, it has a malty sweetness
with assertive bitterness and strong hoppy aroma from the use of imported Saaz
hops.
Pete's Winter Brew. Introduced in the winter of 1993, Pete's Winter Brew,
formerly Pete's Wicked Winter Brew, is a medium bodied amber ale with a
raspberry aroma and taste. This holiday offering is available annually from the
Fall through the Winter.
Pete's Summer Brew. Introduced in April 1995, Pete's Summer Brew, formerly
Pete's Wicked Summer Brew, is a light, refreshing golden pale ale made with pale
and wheat malt, Tettanger hops, and a delicate hint of natural lemon flavor.
This summer offering is available annually from April to August. The Company
believes that Pete's Wicked Summer Brew was the number one selling craft summer
seasonal beer in the United States in 1997, 1996, and 1995.
Pete's Honey Wheat. Introduced in July 1995, Pete's Honey Wheat, formerly
Pete's Wicked Honey Wheat, is an ambered colored, delicately malted wheat beer
that is distinguished by its use of caramel malt in addition to wheat malt. The
honey flavor naturally enhances the depth of the malt and hop flavors for a
rich, smooth taste. Late-kettled hopping with a blend of Tettanger and Cascade
hops adds a slightly fruity aroma. The beer is unfiltered to retain the
distinctive honey-flavored finish.
Pete's Strawberry Blonde. Introduced in July 1996, Pete's Strawberry
Blonde, formerly Pete's Wicked Strawberry Blonde, is a golden ale with a soft
malty finish, and a distinct strawberry aroma.
Pete's Oktoberfest. Introduced in August 1996, Pete's Oktoberfest, formerly
Pete's Wicked Oktoberfest, is a traditional Bavarian amber lager brewed in the
classic Marzen style. This copper colored, medium-bodied brew has a sweet,
caramel nutty flavor arising from the use of caramel malts, with the balancing
bitterness of a blend of Cascade, Yakima Cluster and Tettanger hops. This fall
seasonal is available in September and October.
Pete's Springfest. Introduced in December 1997, Pete's Springfest, formerly
Pete's Wicked Springfest, is a hearty, full-bodied, amber brew designed in the
tradition of spring celebration seasonal bock beers. Its rich malty flavor
derives from the brewmaster's use of caramel, wheat, munich, and pale malts
balanced by a variety of hops. This spring seasonal is available in February and
March.
Pete's ESP Lager. Created in late 1997 for early 1998 introduction, Pete's
ESP Lager is made in the style of European export lagers. Its golden color,
combined with a refreshing craft character and crisp finish, make it a relevant
alternative to more full-bodied styles. Crafted with the use of pale and wheat
malts and Yakima Cluster and Tettanger hops, this new style will be introduced
in March 1998.
In January 1998, the Company announced its plan to realign its portfolio of
brands and discontinue Pete's Wicked Multigrain, Pete's Wicked Maple Porter,
Pete's Wicked Amber Ale, and Pete's Wicked Pale Ale.
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Awards for Excellence
The Company's beers have won numerous awards for excellence. The following
table lists certain awards and distinctions achieved by the Company's beers:
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PETE'S WICKED ALE
1997 SILVER MEDAL: Ale Category World Beer Championship
1997 GOLD MEDAL: Brown Ale Category Cheers One World Festival, Florida
1997 1ST PLACE Norwalk, CT Consumer Preference Poll
1996 GOLD MEDAL: Brown Ale Category World Beer Championships
1996 SILVER MEDAL: Brown Ale Category All American Beer Festival, Houston
1995 BRONZE MEDAL: American Brown Ale Great American Beer Festival(R), Denver
1995 SILVER MEDAL: Brown Ale Category World Beer Championships
1994 SILVER MEDAL: Brown Ale Category World Beer Championships
1994 GOLD AWARD Karnival of Beers, Fullerton
1994 4TH PLACE: Brown Ales Great International Beer Tasting, Denver
1993 4TH PLACE: Brown Ales Great International Beer Tasting, Denver
1992 GOLD MEDAL: American Brown Ale Great American Beer Festival(R), Denver
1992 1ST PLACE Great American Beer Festival(R)
"People's Choice"
1992 BEST ALE Atlanta Tribune Tasting, Atlanta
1991 1ST PLACE BROWN ALES Twin Cities Reader Poll, Minneapolis
1991 2ND PLACE ALL STYLES Los Angeles Times Tasting, LA
1990 BEST BROWN ALE Great American Beer Tasting, New York
1990 2ND PLACE ALE Milwaukee Beer Festival, Milwaukee
1988 SILVER MEDAL KPBS International Beer Festival, San
Diego
1988 SILVER MEDAL: Brown Ale Category Great American Beer Festival(R), Denver
1987 SILVER MEDAL: Ale Category Great American Beer Festival(R), Denver
1987 1ST PLACE ALL STYLES Bay Guardian Competition, San Francisco
PETE'S SIGNATURE PILSNER
1997 SILVER: Lager Category World Beer Championships
1997 SILVER: Pilsner Category Cheers One World Festival, Florida
1996 GOLD MEDAL: Pilsner Category World Beer Championships
1996 BRONZE MEDAL: Lager Category All American Beer Festival, Houston
1995 GOLD MEDAL: Pilsner Category World Beer Championships
1995 SILVER MEDAL: Traditional Pilsen California Beer Festival
1994 GOLD MEDAL: Pilsner Category World Beer Championships
1994 GOLD AWARD: Karnival of Beers, Fullerton
1994 1ST PLACE: Great International Beer Tasting, Denver
1993 GOLD MEDAL Great International Beer Tasting, Denver
PETE'S HONEY WHEAT
1997 BRONZE MEDAL: Wheat Category All American Beer Festival, Houston
1997 GOLD MEDAL: Flavored Wheat Category Cheers One World Beer Festival, Florida
1996 SILVER MEDAL: Flavored Wheat Category World Beer Championships
1996 SILVER MEDAL: Wheat Category All American Beer Festival. Houston
1996 BEST HONEY BEER World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: Herb & Spice Category World Beer Championships
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PETE'S STRAWBERRY BLONDE
1997 SILVER MEDAL: Fruit Beer Category World Beer Championship
1997 1ST PLACE: Ale Category Chicago Beer Affair
1997 BRONZE MEDAL: Fruit Beer Category All American Beer Festival, Houston
1996 SILVER MEDAL: Fruit Beer Category World Beer Championship
PETE'S SUMMER BREW
1996 BEST PALE ALE World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: Fruit Beer Category World Beer Championships
PETE'S OKTOBERFEST
1997 1ST PLACE: Seasonal Category Chicago Beer Affair
1996 SILVER MEDAL: Oktoberfest Category World Beer Championship
PETE'S WINTER BREW
1997 SILVER MEDAL: Winter Ale Category World Beer Championships
1995 SILVER MEDAL: Fruit Flavored Category California Beer Festival
1993 NINKASI AWARD Based on one of the homebrew recipes by
the 1993 National Homebrew Grand
Champion
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Packaging
The label imagery on the Pete's bottle and the other graphics on the
packaging containers are the primary communication with the consumer at the
point of sale. For this reason the Company has invested and continues to invest
significant resources to design, develop and protect the product package designs
and artwork. All of the Company's bottles include visually appealing labels and
a descriptive message from Pete. In 1990, the distinctive packaging for Pete's
Wicked Ale won a Clio Award for the Best International Beer Packaging. In
October 1997, the Company initiated a uniform packaging re-design of the
"Pete's" brand to focus on Pete Slosberg and the "Pete's" brand, allowing the
"Pete's Wicked" image to represent the flagship beer "Pete's Wicked Ale" alone.
In January 1998, the Company announced the planned April 1998 release of new
packaging to support the new brand positioning and emphasis on Pete's founder,
Pete Slosberg. The Company packages its beers in bottles, cans, or kegs and
sells to distributors in four packaging formats. Six packs contain six 12-ounce
bottles in an open-top, logo emblazoned pressboard carrier. Twelve packs contain
12 12-ounce bottles in a sealed, logo emblazoned corrugated container. In 1997,
the Company introduced cans in select retail markets such as commercial
airlines. For distribution to pubs, bars and restaurants, the Company packages
draught beer in kegs. One keg holds one half barrel or 15.5 gallons.
Research and Product Development
Research and product development activities are on-going. Opportunities
identified by the Company are formulated and developed by the Company's
Brewmaster, Pat Couteaux. Mr. Couteaux has 16 years of experience in the brewing
industry, most recently with G. Heileman Brewing Co., and holds a master's
degree in Brewing Science from the Technical University of Munich at
Weihenstephan, Germany. He is in charge of establishing quality control limits,
developing new beers, managing raw material selection, optimizing efficiency and
educating Company personnel regarding taste and other qualities and oversees all
elements of the brewing of the Company's beers. Since most beer types fall into
major categories or subcategories, an extensive development process is not
required to bring a new product to market.
The sale of a limited number of beers has accounted for substantially all
of the Company's sales since inception. The Company believes that the sale of
its currently offered beers will continue to account for a significant portion
of sales for the foreseeable future. Therefore, the Company's future operating
results, particularly in the near term, are significantly dependent upon the
continued market acceptance of these beers. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for the Company's beers as a result of competition, changes in consumer
tastes and preferences, government regulation or other factors would have a
material adverse effect on the Company's business,
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operating results and financial condition. In addition, there can be no
assurance that the Company will be successful in developing, introducing and
marketing additional new beers that will sustain sales growth in the future.
ADVERTISING AND PROMOTION
The Company's marketing programs emphasize the "Pete's" brand name and are
generally designed to promote brand recognition and trial of the Company's
products. The Company targets its marketing efforts at adults, ages 21 to 39,
which the Company believes form the most significant group contributing to the
growth of the craft beer industry. The Company's advertising and promotion
activities focus on the passion and knowledge of its founder, Pete Slosberg and,
the high quality of its beers. The Company has successfully maintained its
microbrewery heritage while expanding distribution and sales.
The Company uses a combination of educational and promotional programs
aimed at distributors, retailers and consumers, radio and print advertising,
public relations activities, attendance at trade shows and other craft beer
industry events and consumer communications to market its products.
The Company has undertaken a number of marketing initiatives that have
strengthened its franchise and role as an industry innovator. By promoting Pete
Slosberg as a beer enthusiast and Company Founder, the Company has the only
national brand identified with an individual deemed to be a true "beer folk
hero." Additional innovations, such as a (1-800) line, further differentiate the
label from other brands and help to keep the Company close to the consumer. In
addition, the Company will continue to use advertising of various mediums in key
markets. In 1997, the Company updated its seasonal line of beers with the
introduction of Pete's Springfest. Pete's Springfest is available between the
Pete's Wicked Winter Brew and Pete's Wicked Summer Brew selling seasons. All of
these marketing tools have succeeded in increasing the brand's visibility, with
the Company's distributors, retailers and consumers since its initial
introduction.
Educational and Promotional Programs. The Company's sales force actively
educates and trains distributors and retailers about the brewing process, the
craft beer segment in general and the Company's beers in particular. The
Company's sales force provides a high level of support to distributors,
assisting in regular planning of marketing and promotional programs and
providing consumer and distributor training and education. Pete Slosberg's beer
education seminars are additive to the Company's education activities. Through
these efforts, the Company seeks to obtain a competitive advantage by
encouraging more attention to its beers and a more effective resale effort from
distributors and retailers.
At the retail level, the Company provides creative point of sale display
materials and theme promotions designed to encourage trial and repeat purchases
of the Company's beers. The Company's recent point of sale promotional
activities included (i) a fall/winter promotion entitled "Seek the Peak"
encouraging wholesaler execution objectives and (ii) a "Tarot Card" Halloween
theme promoting the natural connection between the "Pete's Wicked Ale" brand
name and Halloween. The Company's bottle labeling and package artwork also
enhances the Company's visibility at the point of sale.
Advertising. The Company's advertising activities feature Pete Slosberg,
the Company's founder and spokesperson, as an everyday guy and the ultimate beer
enthusiast. In 1994, the Company became the first national, domestic craft beer
producer to utilize television advertising to promote its products. In May 1996,
the Company initiated radio advertising in several markets across the United
States. In 1997 the Company's radio campaign was focused on the #1 selling
seasonal "Pete's Summer Brew". The Company will continue to advertise in various
mediums and to monitor the effectiveness of its advertising among beer consumers
and to identify effective long-term communications strategies in order to build
loyalty among the Company's target consumer group.
The Company also utilizes print advertising to develop its image and create
demand for its beers. The Company concentrates its print advertising efforts on
prominent trade magazines, including Beer -- The Magazine, All About Beer and
American Brewer. The Company also seeks to identify and encourage editorial and
third party testimonial publicity to promote the Company and its products.
Recent articles in Modern Brewery Age and Impact magazine featured viewpoints
from senior Pete's Brewing Company executives.
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Trade Shows and Other Events. The Company participates in trade shows,
national and international beer-tasting events and other craft beer industry
events. The Company participated in trade shows in 1997, including the Great
American Beer Festival(R) and the National Beer Wholesalers Association
Conference, as well as numerous regional restaurant and hotel expositions. Many
of these events provide a forum for Pete to promote the Company's image and
further strengthen the "Pete's" brand name.
Consumer Communications. The Company encourages direct communication with
consumers by maintaining a consumer hotline and printing the number
(1-800-877-PETE) on each bottle of beer it sells. The hotline allows consumers
to obtain additional information regarding the Company and its beers and allows
craft beer enthusiasts to express their opinions to the Company. During business
hours, a Company representative personally answers every phone call.
DISTRIBUTION AND SALES
The Company sells its beers to independent beverage distributors for resale
to retailers who sell the beers to the consumer. The Company currently has
approximately 400 distributors and its beers are sold in 49 states, the District
of Columbia and the United Kingdom in supermarkets, liquor stores, bars, pubs,
restaurants, drug stores, warehouse club stores and convenience stores. The
Company chooses distributors in each market that will devote attention and
resources to the promotion and sale of the Company's beers, which may be either
wine and spirits distributors or beer wholesalers.
Independent wholesale distributors of "Pete's brews" (all of whom carry
other beverage products that compete with the Company's beers) of "Pete's" brews
are formally appointed in a variety of ways throughout the 49 states in which
the Company does business. In most cases, variations in appointment procedures
are directly attributable to state alcoholic beverage laws mandating territorial
appointment (some exclusive and some non-exclusive), restricting in various ways
the Company's ability to terminate or not renew the services of wholesale
distributors and providing varying periods and methods of resolving contractual
disputes. Generally, these state laws vary from a requirement that good cause be
shown for the action taken to a requirement that compensation be paid to the
terminated distributor for the fair market value of the lost business. In most
states, the Company uses appointment letters accompanied by a standard terms and
conditions agreement committing the wholesale distributor to an investment in
the promotion of the Company's beers.
The Company supports its distributor network with a sales force that is
organized by region with the Senior Vice President Sales overseeing the various
regions. The Company seeks to create and maintain a prominent position with its
distributors through the strength of its brand name, product diversity,
sophisticated selling support, customer service and attractive profit margins
throughout the distribution channel.
During the second half of 1996, the Company transitioned to a new wholesale
distribution network in California, Colorado and Washington, D.C. Previously,
the Company had relied on a single or limited number of distributors in these
key markets. The transition of the Company's distribution from a single or
limited number of distributors to in excess of 30 new distributors adversely
impacted the Company's level of revenues and profitability in the fourth quarter
of 1996 and in 1997, is expected to continue to impact the Company's results of
operations in the near term.
The Company is dependent upon its distributors to sell the Company's
products and to assist the Company in promoting market acceptance of, and
creating demand for, the Company's products. There can be no assurance that the
Company's distributors will devote the resources necessary to provide effective
sales and promotion support to the Company. During 1997 and 1996, the Company's
ten largest distributors accounted for approximately 34.1% and 39.2%,
respectively, of the Company's sales. Sales to Premium Coastal, the Company's
distributor covering the Commonwealth of Massachusetts, represented
approximately 9.1%, 9.4% and 10.7%, of the Company's sales in 1997, 1996 and
1995, respectively. Sales to Southern Wine and Spirits, the Company's former
California distributor, represented approximately 10.7% and 20.7% of the
Company's sales in 1996 and 1995, respectively. No other distributor accounted
for 10% or more of the Company's sales during such periods. The Company expects
sales to its ten largest distributors to continue to represent a significant
portion of sales. The Company believes that its future growth and success will
continue
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<PAGE> 11
to depend in large part upon these significant distributors. If one or more of
these significant distributors were to discontinue selling, or decrease the
level of orders for the Company's products, the Company's business would be
adversely affected in the areas serviced by such distributors until the Company
retained replacements. There can be no assurance however that the Company would
be able to replace a significant distributor in a timely manner or at all in the
event it were to discontinue selling the Company's products. In addition, there
is always a risk that the Company's distributors will give higher priority to
the products of other beverage companies, including products directly
competitive with the Company's beers, thus reducing their efforts to sell the
Company's products. This risk is exacerbated by the fact that many of the
Company's distributors are reliant on the beers of one of the major beer
producers for a large percentage of their revenues and, therefore, may be
influenced by such a producer.
The Company's strategy for increasing market share involves establishing a
network of distributors in a market, educating the distributors and retailers
and finally building sales volume through aggressive promotion and advertising
campaigns. To date, the Company has applied significant selling, advertising and
promotional resources to only a limited number of key markets. The Company
intends to focus on those key markets where the increasing population base,
historically high level of beer consumption and relative lack of competition
from other craft beers provides the greatest opportunities for growth.
CUSTOM BREWING
Since inception, the Company has followed a strategy of utilizing breweries
with excess capacity to brew the Pete's brews pursuant to the Company's
proprietary recipes. The Company believes that there is high quality excess
brewing capacity available in the domestic beer industry to meet its needs for
the foreseeable future. The Company's custom brewing strategy allows it to
forego the substantial investment of financial resources required to purchase,
or build, and maintain a brewery, and results in lower capital and overhead
costs per barrel of beer sold. From June 1992 through May 1995, the Company
produced and packaged all of its beers at the St. Paul, Minnesota brewery of
Minnesota Brewing Company ("MBC"). In May 1995, the Company began transitioning
production of its beers from MBC to the Stroh brewery, also in St. Paul,
Minnesota. The transition to the Stroh brewery in St. Paul was completed in
November 1995. The Company began shipping beer from the Stroh Brewery in
Winston-Salem, North Carolina in March 1996. In November 1997, Stroh closed its
St. Paul brewery and currently, all of the Company's beers are produced at the
Stroh brewery in Winston-Salem, North Carolina.
Custom Brewing Agreement with Stroh. The Company has a strategic alliance
with Stroh pursuant to which the Company custom brews its beers at the breweries
of Stroh. The Company believes that Stroh is one of the most knowledgeable,
experienced and skilled brewers of beer in the United States. The Company has
chosen Stroh as its custom brewing partner because of Stroh's ability to support
the brewing of the Company's craft beers according to traditional European
brewing styles and methods and to ensure high quality throughout the brewing
process. The Company will begin shipping beer from the Stroh brewery in Seattle,
Washington in 1998. Additionally, the Company also has access to the Stroh
brewery in Longview, Texas. The alliance with Stroh allows the Company to custom
brew Pete's Wicked brews in multiple geographic locations, which offers the
opportunity for more efficient national distribution and shortened delivery
times. Production at multiple breweries also reduces or eliminates the risks
associated with brewing all of the Company's beers at a single brewery. Under
the Stroh alliance, Stroh purchases all of the ingredients used in producing the
Company's beers in compliance with rigorous quality assurance requirements,
guidelines and specifications established by the Company. The Company believes
that Stroh is able to achieve volume purchase pricing discounts that may not be
available to the Company. The annual brewing capacity available to the Company
at the three Stroh breweries is over three times greater than the total volume
of beer sold by the Company in 1997. The Stroh Agreement expires May 31, 2004.
Pursuant to the Stroh Agreement, the Company is obligated, with certain limited
exceptions, to brew all of its beers at the Stroh breweries.
The Company has agreed to pay Stroh a manufacturing services price equal to
the aggregate of a contractually specified brewing fee for contract services
performed, and the cost of materials for all beer shipped. In addition, the
Company is eligible for certain volume discounts through 1998 if the shipments
exceed certain minimum levels and do not exceed certain maximum levels, although
there can be no
9
<PAGE> 12
assurance that the Company will achieve such minimum levels. The Company did
achieve such minimum levels in 1996 however did not in 1997 and does not expect
to in 1998. Stroh may terminate the agreement only on the limited grounds of the
Company's breach or insolvency.
Pete's is responsible for all capital improvements or modifications
required to produce the company's beers at the additional Stroh breweries in
either Longview or Seattle. In the event that either party terminates the
brewing agreement according to its terms, the Company must reimburse Stroh for
the unamortized costs of any such improvements or modifications. Should Stroh
elect to terminate brewing operations at any one of its breweries, Stroh will
shift production of the Company's beers to another of the Stroh breweries and
will pay all costs associated with such move, except for incremental freight
costs incurred by the Company or its distributors as a result of the move.
The Company is required to provide Stroh with annual and periodic barrel
production forecasts. The Company is required to produce a certain minimum
barrelage at the Stroh breweries each year, which amount is significantly less
than the volume of beer sold by the Company in 1997. However, in the event that
the minimum barrelage is not produced, the Company must make certain payments to
Stroh. Stroh retains a security interest in all beer produced under the brewing
agreement until the Company has paid the specified price or until such beer is
shipped. Payment is due to Stroh upon shipment. Under the terms of the Stroh
brewing agreement, delivery of all "Pete's" brews by Stroh to the Company or its
distributors is at the dock of the subject Stroh brewery. The Company is
responsible for securing and paying for carrier services for its beers from
Stroh's breweries.
The Company assures the quality of its beers by controlling the custom
brewing operations and by following the most advanced brewing industry
guidelines for in-process and finished product testing. The Company's brewmaster
works in Winston-Salem and oversees brewing in all locations. The Company has
access to Stroh's technical breweries and pilot plant to conduct tests and
developmental work with respect to existing flavors and proposed malt beverages.
In connection with the Stroh Agreement, the Company issued a warrant to
Stroh to purchase 1,140,284 shares of the Company's Common Stock at an exercise
price of $14.00 per share. In addition, Christopher T. Sortwell, Senior Vice
President and Chief Financial Officer of Stroh, joined the Company's Board of
Directors in October 1995.
The Company relies upon Stroh at all phases of the production of its beers,
for access to contracted facilities, and the performance of services under the
manufacturing services agreement, including sourcing and purchasing the
ingredients used to make the Company's beers, scheduling production to meet
delivery requirements, brewing and packaging the Company's beers, performing
quality control and assurance, invoicing distributors upon shipment, and
collecting and remitting payments to the Company. The Company's relationship
with Stroh is therefore critical to the Company's business, operating results
and financial condition. The Company's dependence on Stroh entails a number of
significant risks. The Company's business, results of operations and financial
condition would be materially adversely affected if Stroh were unable, for any
reason, to provide contracted access to capacity or fail to perform according to
the provisions of its manufacturing services agreement. In the event that the
Company were unable to continue to custom brew its beers in required volumes at
the Stroh breweries, the Company would have to identify, qualify and transition
production to an acceptable alternative brewery. This identification,
qualification and transition process could take two years or longer, and no
assurance can be given that an alternative brewery would be available to the
Company or be in a position to satisfy the Company's production requirements on
a timely and cost-effective basis. Accordingly, if the Company's ability to
obtain product from the Stroh breweries were interrupted or impaired for any
reason, the Company would not be able to establish an alternative production
source, nor would the Company be able to develop its own production
capabilities, without substantial disruption to the Company's operations. Any
inability to obtain adequate production of the Company's beers on a timely basis
or any other circumstances that would require the Company to seek alternative
sources of supply would delay shipments of the Company's products, which could
damage relationships with its current and prospective distributors and
retailers, provide an advantage to the Company's competitors and have a material
adverse effect on the Company's business, financial condition and operating
results.
10
<PAGE> 13
Construction of Brewery. After a review of a brewery construction
feasibility study prepared by the Company in conjunction with its architect,
mechanical engineer and general contractor, and a review of available capacity
under the Stroh Agreement and other factors, the Company determined not to go
forward with previously disclosed plans to construct and equip a new brewery in
California. Although the Company believes that the brewing capacity available to
the Company under the Stroh Agreement is adequate to meet its needs for the
foreseeable future, the Company will continue to monitor long-term capacity
availability in light of its business plan. The financial resources previously
earmarked to finance capital expenditures in connection with the construction of
the brewery will now be used for general corporate purposes, including to meet
working capital needs, pending the analysis, currently underway, of the
alternative uses available to the Company. During the first quarter of 1997,
based on a decision made at its February 1997 Board of Directors meeting to
indefinitely delay construction of a brewery, the Company took a charge to
earnings of $713,000 for the write-off of previously capitalized costs in
connection with the brewery project. Such write-off adversely impacted the
Company's earnings in the first quarter of 1997.
Ingredients and Packaging Materials. The Company or Stroh has established
relationships with the several suppliers of water, malt, hops and yeast used in
the brewing of "Pete's" brews. "Pete's" brews do not contain fillers such as
corn, rice or sugar which are typically found in mass-produced beers and which
tend to diminish a beer's true character. All ingredients purchased by Stroh
under the brewing agreement must comply with the Company's established quality
assurance requirements, procedures, guidelines and specifications. The Brewer's
Gold hops used in the production of Pete's Wicked Ale are specially grown for
the Company in the Willamette Valley in Oregon. In order to secure adequate
amounts of these rare Brewer's Gold hops, the Company must make certain advance
purchase commitments. These hops are not otherwise grown in quantities
sufficient to satisfy the Company's requirements for the production of Pete's
Wicked Ale. If the Company were unable to obtain sufficient quantities of the
Brewer's Gold hops it would be required to use alternative hops which would
change the character of Pete's Wicked Ale.
Under the terms of the brewing agreement, the Company will, with certain
exceptions, purchase packaging for the "Pete's" brews brewed through Stroh. All
such packaging must comply with the Company's quality assurance specifications.
The Company will reimburse Stroh for the purchase or modification of any
equipment necessary to properly assemble the packaging.
Quality Assurance Program. In order to control the quality of finished
products, Pete's has established acceptable inventory shelf lives of 180 days
for pasteurized bottled products and 60 days for refrigerated draft products.
Each of the Company's beers has a code date that is monitored by the Company's
sales personnel, distributors and retailers to ensure product freshness. The
Company conducts standard testing according to the specifications and
methodology set forth by the American Society of Brewing Chemists and the
European Brewing Convention. The Company's quality assurance program encompasses
the entire final aged product to ensure that the Company's rigorous
specifications have been met.
TRADEMARKS, COPYRIGHTS AND BEER RECIPES
The Company owns all of the "Pete's Wicked" product names and has
registered or filed applications to register each in the United States Patent
and Trademark Office. The Company utilizes a number of recipes in the production
of its beers and protects these recipes as trade secrets. In addition, product
package, advertising and promotion design and artwork are important to the
Company's success, and such materials are protected by copyright. The Company
considers the "Pete's Wicked" trademarks and its beer recipes to be of
considerable value and critical to its business. The Company's rights to the
"Pete's Wicked" trademarks in the United States will last indefinitely so long
as the Company continues to use and police the trademarks and to renew filings
with applicable governmental agencies. No challenges to the Company's rights to
use the "Pete's Wicked" trademark in the United States are pending and the
Company has no reason to believe that any such challenges will arise in the
future. Current consumer research indicates that the "Pete's Wicked" image is
uniquely associated with the Company's flagship beer "Pete's Wicked Ale." The
Company will adjust its brand positioning in 1998 to maintain this distinction.
The Company has filed applications and has obtained registrations for certain of
its trademarks in various foreign countries. The Company will continue to take
appropriate measures, such as entering into confidentiality agreements with its
custom brewing partners, to maintain the secrecy and proprietary nature of its
beer recipes. In addition, the Company intends to take action to protect against
imitation
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<PAGE> 14
of its products and packages and to protect its trademarks and copyrights as
necessary. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary information will prevent
misappropriation of such information and such protections may not preclude
competitors from developing confusingly similar brand names or promotional
materials or developing products with taste and other qualities similar to the
Company's beers.
COMPETITION
The Company competes in the craft beer segment of the domestic beer market.
The Company believes that its products compete with those domestic and imported
beers that generally sell for retail prices in excess of $5.99 per six pack. The
principal competitive factors affecting the market for the Company's products
include product quality and taste, packaging, price, brand recognition and
distribution capabilities. The Company believes that it currently competes
favorably overall with respect to these factors. The Company also believes that
increased sales volume from the Company's current levels offers some competitive
edge and is seeking various ways to achieve a larger scale operation. There can
be no assurance however that the Company will be able to compete successfully
against current and future competitors based on these and other factors.
The domestic craft beer market has historically been one of the fastest
growing segments of the domestic beer market; however, 1997 saw a significant
decline in the growth trend over the last 5 years and the Company expects a
generally flat growth trend for the category in 1998. The Company competes with
a variety of domestic and international brewers, many of whom have significantly
greater financial, production, distribution and marketing resources and a higher
level of brand recognition than the Company. As a result of the increased demand
for craft beers, the Company competes with and anticipates competition from
several of the major national brewers, such as Anheuser-Busch, Miller Brewing
Co. and Adolph Coors Co., each of which has introduced and is marketing fuller
flavored beers designed to compete directly in the craft beer segment. For
example, Anheuser-Busch, Miller Brewing Co. and Adolph Coors have introduced and
marketed Elk Mountain Ale, Leinenkeugel and Killian's Red, respectively. In
addition, the Company expects that certain of the major national brewers, with
their superior financial resources and established distribution networks, may
seek further participation in the continuing growth of the craft beer market
through the investment in, or the formation of, distribution alliances with
smaller craft brewers. The increased participation of the major national brewers
will likely increase competition for market share and heighten price sensitivity
within the craft beer market.
The Company believes that significant competition comes from producers of
imported beers such as Bass PLC, Cerveceria Modelo, S.A. (brewer of Corona
Extra), Guinness PLC, Cerveceria Moctezuma, S.A. (brewer of Dos Equis) and
Heineken N.V. which currently produce premium, generally fully-flavored beers.
Imported beer accounts for a greater share of the domestic beer market than
craft beers. The Company expects continued competition from imported beer
brewers, many of whom have greater financial and marketing resources, as well as
greater brand name recognition, than the Company.
The Company also anticipates increased competition in the craft beer market
from existing craft brewers such as The Boston Beer Company, Inc., Redhook Ale
Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co. and Anchor Brewing
Co. and new market entrants. In particular, the Company believes that
competition has intensified recently as a result of the decline in the segment's
growth rate, and proliferation of small local craft brewers that have introduced
and are marketing significant numbers of products. The Company also competes
with other beer and beverage companies not only for consumer acceptance and
loyalty but also for shelf and tap space in retail establishments and for
marketing focus by the Company's distributors and their customers, all of which
also distribute and sell other beers and alcoholic beverage products. Increased
competition could result in price reductions, reduced margins and loss of market
share, all of which could have a material adverse effect on the Company.
Although the demand for craft beers has increased dramatically over the past
decade, there can be no assurance that this demand will continue, or, even if
such demand continues to increase, that consumers will choose the Company's
products.
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<PAGE> 15
GOVERNMENT REGULATION
The Company's business is highly regulated by federal, state and local laws
and regulations. Federal and state laws and regulations govern licensing
requirements, trade and pricing practices, permitted and required labeling,
advertising, promotion and marketing practices, relationships with distributors
and related matters. For example, federal and state regulators require warning
labels and signage on the Company's products. The Company believes that it has
obtained all regulatory permits and licenses necessary to operate its business
in the states where the Company's products are currently being distributed.
Failure on the part of the Company to comply with federal, state or local
regulations could result in the loss or revocation or suspension of the
Company's licenses, permits or approvals and accordingly could have a material
adverse effect on the Company's business. Governmental entities also levy
various taxes, license fees and other similar charges and may require bonds to
ensure compliance with applicable laws and regulations. The Company must also
comply with numerous federal, state and local environmental protection laws. The
Company is operating within existing laws and regulations or is taking action
aimed at assuring compliance therewith. The Company does not expect compliance
with such laws and regulations to materially affect the Company's capital
expenditures, earnings or competitive position as a whole, though it could in
particular markets.
The State of Missouri has recently enacted a law requiring inclusion on the
label of the owner of the brewery assets. The Company has filed a lawsuit, in
combination with several other brewers, to contest the constitutionality of the
law. The Company believes that it will prevail, but an adverse determination
could have a material impact on the Company's business in the State of Missouri,
though would not have a material impact to the Company's overall business.
Certain states, including California, Connecticut, Delaware, Iowa, Maine,
Massachusetts, Michigan, New York, Oklahoma, Oregon and Vermont, and a small
number of local jurisdictions, have adopted restrictive beverage packaging laws
and regulations that require deposits on beverage containers. Congress and a
number of additional state or local jurisdictions may adopt similar legislation
in the future, and in such event, the Company may be required to incur
significant expenditures in order to comply with such legislation. Changes to
federal and state excise taxes on beer production, federal and state
environmental regulations, including laws relating to packaging and waste
discharge, or any other federal and state laws or regulations which affect the
Company's products could materially adversely affect the Company's results of
operations.
EMPLOYEES
As of December 31, 1997 the Company had 115 employees, including 85 in
sales and marketing and 30 in administration. The Company's future success will
depend, in part, on its ability to continue to attract, retain and motivate
highly qualified marketing and managerial personnel. None of the Company's
employees are represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing and product
development facilities are located in two buildings of approximately 7,091
square feet and 8,279 square feet, respectively, in Palo Alto, California
pursuant to leases which expire March 2001 and February 2002. In addition, the
Company leases sales offices in Boston, Philadelphia, Atlanta, St. Paul,
Seattle, Dallas, Chicago, and New Rochelle. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions, at this time the Company
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey Atkins 49 Chief Executive Officer and Chief Financial Officer
Scott Barnum 42 President and Chief Operating Officer
Stephen Cooke 40 Vice President Finance and Administration
Donald Quigley 43 Senior Vice President Sales
Omer Malchin 35 Vice President Marketing
Patrick Couteaux 39 Vice President Brewing and Brewmaster
</TABLE>
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any executive officers of the Company.
Jeffrey Atkins. Jeffrey Atkins joined the Company in December 1996 as
Senior Vice President and Chief Financial Officer. In June 1997, Mr. Atkins also
became Chief Executive Officer. Prior to joining the Company, from 1977 to
December 1996, Mr. Atkins served in various senior financial and operating
positions for The Quaker Oats Company, a diversified manufacturer of packaged
foods and beverages, most recently as Vice President Corporate Planning. From
1972 to 1977, he was with The Union Oil Company (Unocal).
Scott Barnum. Scott Barnum joined Pete's Brewing Company as President and
Chief Operating Officer on August 1, 1997. Mr. Barnum is responsible for the
execution of the company's marketing, operations, and brewing strategies. In
addition, Mr. Barnum also directs the administration of human resources. Mr.
Barnum was formerly the general manager of the American Specialty & Craft Beer
Co., an independent subsidiary of Miller Brewing Company from February 1995
until joining the Company in August 1997. While there he was responsible for the
operational management of three regional breweries, representing 23 brands.
Prior to this, Mr. Barnum directed Miller's low-calorie and premium brands in
1993 and 1994, respectively.
Stephen Cooke. Stephen Cooke joined the Company in October 1992 as
Controller, became Director of Financial Planning and Administration in January
1994 and Vice President, Planning and Administration in January 1995. Mr. Cooke
left the Company in June 1996 and worked as an independent financial consultant
for a variety of companies until July 1997 when he was contracted as a
consultant for the Company. In January 1998, Mr. Cooke rejoined the Company as
Vice President Finance and Administration.
Donald Quigley. Donald Quigley joined the Company in October 1996 as Senior
Vice President Sales. Prior to joining the Company, Mr. Quigley was Vice
President, Sales of Ernest & Julio Gallo Winery ("Gallo") from March 1996 to
October 1996. From May 1993 to March 1996, he served as Vice President, National
Chain Accounts at Gallo. Prior to that, Mr. Quigley served in various state,
division, region and senior sales management positions with Gallo.
Omer Malchin. Omer Malchin joined the Company in January 1997 as Vice
President Marketing. Prior to joining the Company, Mr. Malchin was Group Product
Director -- Cordials with The Paddington Corporation, a distilled spirits
importing and marketing company, and a subsidiary of Grand Metropolitan PLC,
from November 1996 to December 1996. From December 1994 to November 1996, he
served as Brand Manager -- Baileys and Baileys Light at The Paddington
Corporation. From August 1992 to November 1994, Mr. Malchin was with Heublein,
Inc., most recently as marketing Manager -- Black Velvet and McMaster's Canadian
Whiskies.
Patrick Couteaux. Patrick Couteaux joined the Company in November 1993 as
Brewmaster. In January 1997, Mr. Couteaux became Vice President, Brewing. Prior
to joining the Company, he held various positions at G. Heileman Brewing Company
including First Assistant Brewmaster at the Blitz-Weinhard plant in Portland,
Oregon for 1986 to November 1993.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock: The Common Stock of the Company has been
traded on the Nasdaq National Market under the symbol WIKD since the Company's
initial public offering on November 7, 1995. Prior to that time there was no
public market for the Company's Common Stock. The following table sets forth for
the periods indicates high and low closing sale prices of the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1995
Fourth Quarter (from November 7, 1995)................... $26.50 $13.50
Fiscal Year Ended December 31, 1996
First Quarter............................................ $20.00 $15.50
Second Quarter........................................... $21.00 $14.50
Third Quarter............................................ $15.25 $ 7.00
Fourth Quarter........................................... $ 9.00 $ 6.13
Fiscal Year Ended December 31, 1997
First Quarter............................................ $ 7.75 $ 5.02
Second Quarter........................................... $ 6.88 $ 5.02
Third Quarter............................................ $ 6.88 $ 4.82
Fourth Quarter........................................... $ 5.88 $ 3.94
</TABLE>
As of February 27, 1997, the Company's record date, there were 489
shareholders of record of Common Stock. The Company has never paid cash
dividends on its capital stock. The Company currently expects that it will
retain its future earnings for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
With respect to the requirements of Item 701(f) of Regulation S-K regarding
the reporting of use of proceeds, pursuant to the information required to be
reported by Item 701(f)(4)(vii), since its report on Form 10-Q for the period
ended September 30, 1997, the Company used net proceeds in the amounts noted for
the following purposes: Purchase and installation of machinery and equipment
$280,000; working capital $706,000; and temporary investments in liquid
instruments such as municipal bonds and notes and market rate preferreds
$24,989,000. There were no direct or indirect payments to directors or officers
of the Company or to any other person or entity. The Registration Statement on
Form S-1 filed by the Company in connection with its initial public offering
stated that the Company intended to use part of the net proceeds for the
construction of a brewery in California. After review of a brewery construction
feasibility study prepared by the Company in conjunction with its architect,
mechanical engineer and general contractor, and a review of available capacity
under the Stroh Agreement and other factors, the Company determined not to go
forward with the construction of the brewery in California. The Company now
intends to use such net proceeds for general corporate purposes, including to
meet working capital needs pending the analysis, currently underway, of the
alternative uses available to the Company. In addition, a portion of those net
proceeds may be used for the acquisition of businesses, products and
technologies that are complimentary to those of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, PER BARREL AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 58,336 $70,634 $59,176 $30,837 $12,236
Gross profit............................ 27,653 35,873 29,517 13,939 5,733
Income (loss) from operations........... (11,016) 1,078 2,536 603 166
Net income (loss)....................... $ (6,094) $ 1,683 $ 1,538 $ 551 $ 131
Net income (loss) per share, basic...... $ (0.57) $ 0.16 $ 0.19 $ 0.15 $ 0.06
Net income (loss) per share diluted..... $ (0.57) $ 0.16 $ 0.18 $ 0.07 $ 0.02
Barrels sold............................ 361.1 425.6 347.8 180.2 69.3
Cash, cash equivalents, and available
for sale securities................... $ 31,199 $39,234 $42,960 $ 1,090 $ 171
Working Capital (deficit)............... 35,993 42,914 44,425 (807) (211)
Total Assets............................ 49,756 66,088 54,250 5,918 3,118
Total shareholders' equity.............. 45,472 51,311 49,023 1,040 414
Total number of employees............... 115 126 86 67 37
</TABLE>
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements. These
forward-looking statements are based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Factors Affecting Future Operating
Results." These forward-looking statements include, but are not limited to, the
statement in the sixth paragraph of "Overview" concerning the period of time
through which available brewery capacity will be sufficient to meet the
Company's needs, the statements under "Factors Affecting Future Operating
Results," and the statement in the last paragraph under "Liquidity and Capital
Resources" regarding the sufficiency of the Company's available resources to
meet working capital and capital expenditure requirements.
OVERVIEW
Pete's Brewing Company ("the Company") was incorporated in California in
1986. The Company markets its beers in 49 states, the District of Columbia and
the United Kingdom through independent beverage distributors that sell to retail
establishments that sell to consumers.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty. The Company intends to continue to devote substantial resources toward
selling, advertising and promotional activities, particularly as it focuses on
expanding retail distribution. The Company's profitability is significantly
impacted by the timing and level of expenditures related to selling, advertising
and promotion.
Since its inception, the Company has made an ongoing analysis of the most
cost-effective method to produce its beers. Given the geographic dispersion of
sales throughout the United States, the Company has determined that a strategy
of utilizing excess capacity of strategically located independent breweries to
custom brew its beers, under the Company's on-site supervision and pursuant to
the Company's proprietary recipes, is the most cost-effective.
In 1995, the Company entered into a nine-year Manufacturing Services
Agreement ("Agreement") with the Stroh Brewery Company ("Stroh") of Detroit,
Michigan. Under the Agreement, the Company utilizes the St. Paul, Minnesota and
Winston-Salem, North Carolina breweries of Stroh. Although Stroh owns the
brewery, the Company supervises the brewing, testing, bottling and kegging of
its beers in accordance with the Company's written specifications and
proprietary recipes. All costs relating to the Agreement are charged to cost of
goods sold. As an alternating brewer, the Company is liable for the payment of
excise taxes to various federal and state agencies upon shipment of beer from
the breweries. The Company takes title to all beer in process and finished
goods, and pays Stroh a manufacturing services fee, equal to the aggregate of a
specific brewing fee and the cost of packaging and raw materials, upon shipment
to distributors.
On September 25, 1997, Stroh announced its intention to close its brewery
in St. Paul Minnesota, where the Company produced a significant portion of its
beer. The closure of this production facility was effective late November 1997.
The Company's management along with the management of Stroh is implementing a
plan to transition the production of the Company's beer to other Stroh
breweries. In addition, the Company is currently working with Stroh to develop a
long term, multi-plant sourcing plan to provide cost effective production of its
beers.
After review of a brewery construction feasibility study prepared by the
Company in conjunction with its architect, mechanical engineer and general
contractor, and a review of available capacity under the Stroh Agreement and
other factors, the Company determined not to go forward with previously
disclosed plans to construct and equip a brewery in California. Although the
Company believes that the brewing capacity available to the Company under the
Stroh Agreement is adequate to meet its needs for the foreseeable future, the
Company will continue to monitor long term capacity availability in light of its
business plan. The financial resources previously earmarked to finance capital
expenditures in connection with the construction of the brewery will now be used
for general corporate purposes, including to meet working capital needs pending
the
17
<PAGE> 20
analysis, currently underway, of the alternative uses available to the Company.
See "Liquidity and Capital Resources." During 1997, the Company recorded a
charge to earnings for the write-off of previously capitalized costs in
connection with the brewery project. This write-off adversely impacted the
Company's 1997 earnings.
During 1997, the Company recognized the write-off of promotional
inventories of $2.1 million. The value of these inventories was evaluated in
light of the Company's revised strategic marketing plans. Those items determined
to be either excess or obsolete were written off.
As a result of competitive market factors, efforts to reduce wholesale
inventories and other factors described under "Results of Operations," the
Company realized a net loss during the three months ended December 31, 1997 of
$1,415,000.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales............................................... 111.1% 110.6% 110.1%
Less excise taxes................................... 11.1 10.6 10.1
----- ----- -----
Net sales......................................... 100.0 100.0 100.0
Cost of goods sold.................................. 52.6 49.2 50.1
----- ----- -----
Gross profit...................................... 47.4 50.8 49.9
----- ----- -----
Selling, advertising and promotional expenses....... 51.7 42.0 36.4
General and administrative expenses................. 13.4 7.2 7.2
Write-off of brewery start-up....................... 1.2 0.0 0.0
Brewery transition charges.......................... 0.0 0.0 2.0
----- ----- -----
Total operational expenses........................ 66.3 49.2 45.6
----- ----- -----
Income (loss) from operations..................... (18.9) 1.6 4.3
Interest income net................................. 1.9 1.9 0.1
----- ----- -----
Income (loss) before income taxes................. (17.0) 3.5 4.4
Income tax benefit (provision)...................... 6.6 (1.1) (1.8)
----- ----- -----
Net income (loss)................................. (10.4)% 2.4% 2.6%
===== ===== =====
</TABLE>
18
<PAGE> 21
The following table sets forth certain items from the Company's
consolidated statements of operations on a per barrel sold basis for the periods
indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Sales......................................... $179.52 $183.48 $187.35
Less excise taxes............................. 17.97 17.52 17.21
------- ------- -------
Net sales................................... 161.55 165.96 170.14
Cost of goods sold............................ 84.97 81.67 85.27
------- ------- -------
Gross profit................................ 76.58 84.29 84.87
------- ------- -------
Selling, advertising and promotional
expenses.................................... 83.56 69.80 61.90
General and administrative expenses........... 21.55 11.96 12.24
Write-off of brewery start-up................. 1.98 -- --
Brewery Transition Changes.................... -- -- 3.44
------- ------- -------
Total operational expenses.................. 107.09 81.76 77.58
------- ------- -------
Income (loss) from operations............... (30.51) 2.53 7.29
Interest income............................... 3.02 3.20 0.14
------- ------- -------
Income (loss) before income taxes........... (27.49) 5.73 7.43
Income tax benefit (provision)................ 10.61 (1.78) (3.01)
------- ------- -------
Net income (loss)........................... $(16.88) $ 3.95 $ 4.42
======= ======= =======
Barrels sold (in thousands)................... 361.1 425.6 347.8
======= ======= =======
</TABLE>
YEARS ENDED DECEMBER 31, 1997 AND 1996
Sales. Sales decreased by 17.0% from $78.1 million in 1996 to $64.8 million
in 1997. Sales volume decreased 15.2% from 425,600 barrels sold in 1996 to
361,100 barrels sold in 1997. The decrease in sales was primarily attributable
to decreased sales volume in existing markets as a result of reduced wholesaler
inventories, and a decline in depletions, which are wholesaler reported
shipments from wholesale to retail. Sales per barrel decreased from $183.48 in
1996 to $179.52 in 1997. The decrease in sales per barrel was due to changes in
the sales mix between keg and bottled beer and changes in the sales mix between
states during 1997 when compared to 1996.
Excise Taxes. Federal and state excise taxes decreased by 13.3% from $7.5
million in 1996 to $6.5 million in 1997. Excise taxes as a percentage of net
sales increased from 10.6% to 11.1%. Excise taxes per barrel sold increased from
$17.52 in 1996 to $17.97 in 1997. The overall decrease in excise taxes was
attributable to the decrease in sales volume, since the excise tax is assessed
on a per barrel basis. The increase in excise taxes on a per barrel basis and as
a percentage of net sales was due to the change in mix between states during
1997 when compared to 1996. Excise taxes vary from state to state and as such
will vary as the mix between states changes.
Cost of Goods Sold. Cost of goods sold decreased 11.7% from $34.8 million
in 1996 to $30.7 million in 1997 reflecting the decrease in volume of beer sold.
Cost of goods sold as a percentage of net sales increased from 49.2% in 1996 to
52.6% in 1997. Cost of goods sold per barrel increased from $81.67 in 1996 to
$84.97 in 1997. The increases in cost of goods sold as a percentage of net sales
and per barrel sold were primarily attributable to increased costs of production
and increased transportation expenses. The increased production costs were
primarily due to a reduction in contractually agreed discounts during 1997, due
to the reduced production volumes in 1997. Transportation expenses decreased
10.4% from $6.7 million in 1996 to $6.0 million in 1997. Transportation expenses
as a percentage of net sales increased from 9.5% in 1996 to 10.3% in 1997.
Transportation expenses per barrel sold increased from $15.74 per barrel in 1996
to $16.66 per barrel in 1997. The increase in transportation expenses as a
percentage of net sales and on a per barrel basis were primarily due to the
increased costs associated with the restructuring of the Company's distribution
network in California. As a result of expanding its distributor network from a
limited number of distributors to
19
<PAGE> 22
in excess of 30, during the fourth quarter of 1996, the Company has continued to
experience increased transportation costs in this key market.
Selling, Advertising and Promotional Expenses. Selling, advertising and
promotional expenses increased by 1.6% from $29.7 million in 1996 to $30.2
million in 1997. Selling, advertising and promotional expenses as a percentage
of net sales increased from 42.0% in 1996 to 51.7% in 1997. Selling, advertising
and promotional expenses per barrel sold increased from $69.80 in 1996 to $83.56
in 1997. The increase in selling advertising and promotional expenses are
primarily due to the write-off of excess and obsolete point of sales advertising
material inventories, increased product packing design costs, increased consumer
research expenses, increased distributor incentives and increased personnel
costs, offset by reduced advertising and promotional expenditures.
General and Administrative Expenses. General and administrative expenses
increased 52.9% from $5.1 million in 1996 to $7.8 million in 1997. General and
administrative expenses as a percentage of net sales increased from 7.2% in 1996
to 13.4% in 1997. General and administrative expenses per barrel sold increased
from $11.96 in 1996 to $21.55 in 1997. The increase in general and
administrative expenses resulted primarily from increased personnel costs and
professional fees.
Write-off of Brewery Start-up Costs. During 1997, based on a decision made
at its February 1997 Board Meeting to indefinitely delay construction of a
California brewery, the Company recorded a charge to earnings of $713,000 for
the write-off of previously capitalized costs in connection with the California
brewery project.
Interest Income (Expense), Net. Interest income (expense), net, decreased
$0.3 million from $1.4 million in 1996 to $1.1 million in 1997. This decrease
reflected decreased earnings from investments due to a reduction in the amount
of cash and cash equivalents and available for sale securities when compared to
1996.
Income Tax Benefit (Provision). The Company accounts for income taxes using
the deferral method of accounting for tax assets and liabilities. The 1997
income tax benefit of $3.8 million takes into account the effects of state
income taxes, non-deductible expenses and non-taxable income. The income tax
benefit (provision) during 1997 was above the federal statutory rate (34%) as a
result of non-taxable income offset by state taxes and non-deductible expenses
in 1997. The 1996 income tax provision of $754,000 was below the federal
statutory rate (34%) as a result of non-taxable income offset by state taxes and
non-deductible expenses in 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Sales. Sales increased by 19.8% from $65.2 million in 1995 to $78.1 million
in 1996. Sales volume increased 22.4% from 347,800 barrels sold in 1995 to
425,600 barrels sold in 1996. The increase in sales was primarily attributable
to growth in sales volume in existing markets and, to a lesser extent, increased
sales volume resulting from expansion into new geographic markets. The increased
sales volume reflected increased sales of the Company's new products; Pete's
Wicked Pale Ale, Pete's Wicked Strawberry Blonde, Pete's Wicked Multi Grain and
Pete's Wicked Maple Porter, which were introduced in late June of 1996,
partially offset by reduced sales of the Company's other year-round products.
Sales per barrel decreased from $187.35 in 1995 to $183.48 in 1996 primarily as
a result of price reductions in select markets.
Excise Taxes. Federal and state excise taxes increased by 24.6% from $6.0
million in 1995 to $7.5 million in 1996. Excise taxes as a percentage of net
sales increased from 10.1% in 1995 to 10.6% in 1996. Excise taxes per barrel
sold increased from $17.21 in 1995 to $17.52 in 1996. The increase in excise
taxes was attributable to the increase in sales volume, since the excise tax is
assessed on a per barrel basis, and to the increased per barrel excise tax
burden as the Company's sales volume for the year surpassed 60,000 barrels.
Cost of Goods Sold. Cost of goods sold increased 17.2% from $29.7 million
in 1995 to $34.8 million in 1996 reflecting the increase in volume of beer sold.
Cost of goods sold as a percentage of net sales decreased from 50.1% in 1995 to
49.2% in 1996. Cost of goods sold per barrel decreased from $85.27 in 1995 to
$81.67 in 1996. The decreases in cost of goods sold as a percentage of net sales
and per barrel sold were primarily attributable to reduced packaging material
costs due to purchasing economies of scale and reduced brewing processing fees
resulting from contractually agreed discounts with Stroh. Transportation
expenses are a
20
<PAGE> 23
significant component of cost of goods sold. Transportation expenses increased
28.8% from $5.2 million in 1995 to $6.7 million in 1996. Transportation expenses
as a percentage of net sales increased from 8.9% in 1995 to 9.5% in 1996.
Transportation expenses per barrel sold increased from $14.95 per barrel in 1995
to $15.74 per barrel in 1996. The increase in transportation expenses as a
percentage of net sales and per barrel sold were primarily due to increased
warehousing and transportation costs associated with the restructuring of the
Company's distribution network in California during the three months ended
December 31, 1996, and increased freight costs attributable to backhauling of
empty kegs from wholesalers' warehouses to the brewery. These increases were
partially offset by the cost savings realized by shipping beer to ease coast
distributors from the Winston-Salem brewery during 1996. Cost of goods sold in
the fourth quarter of 1996 was adversely impacted by the Company's transition to
a new distribution network, as the Company incurred incremental costs to
establish and support the new distributors, and by the reduced sales volume in
the fourth quarter.
Selling, Advertising and Promotional Expenses. Selling, advertising and
promotional expenses increased by 38.1% from $21.5 million in 1995 to $29.7
million in 1996. Selling, advertising and promotional expenses as a percentage
of net sales increased from 36.4% in 1995 to 42.0% in 1996. Selling, advertising
and promotional expenses per barrel sold increased from $61.90 in 1995 to $69.80
in 1996. The percentage and per barrel increases from 1995 were attributable to
higher advertising costs associated with the Company's radio campaign initiated
in June 1996 and increased payroll costs associated with the increased headcount
in the sales force during 1996.
General and Administrative Expenses. General and administrative expenses
increased 18.6% from $4.3 million in 1995 to $5.1 million in 1996. General and
administrative expenses as a percentage of net sales remained consistent with
1995 at 7.2%. General and administrative expenses per barrel sold decreased from
$12.24 in 1995 to $11.96 in 1996. The absolute increase in general and
administrative expenses resulted primarily from increased legal fees associated
with distributor transitions, professional fees associated with being a publicly
traded entity and increased rental and office expenses due to expansion of the
Company's office space during 1996.
Brewery Transition Charges. In 1995, the Company transitioned all of the
production of its beers to Stroh and incurred $1.2 million of brewery transition
charges, including payments to Minnesota Brewing Company ("MBC") in connection
with the termination of the Company's brewery agreement with MBC, and
abandonment of assets. There were no brewery transition charges incurred during
1996 and 1997.
Interest Income (Expense), Net. Interest income (expense), net, increased
$1,310,000 from $49,000 in 1995 to $1,359,000 in 1996. The increase reflected
earning from investment of the net proceeds of the Company's November 1995
public offering.
Income Tax Provision. The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
provision for 1996 was below the federal statutory rate (34%) as a result of
non-taxable income earned during 1996 offset by state taxes and non-deductible
expenses in the third quarters of 1996 and 1995. The income tax provision for
1995 was above the federal statutory rate (34%) as a result of state taxes and
non-deductible expenses partially offset by non-taxable income during 1995.
FACTORS AFFECTING FUTURE RESULTS
Quarterly Operating Results Fluctuate. The Company's quarterly operating
results have varied significantly in the past, and may do so in the future,
depending on factors such as increased competition, the transition to new
distributors in key markets, fluctuations in sales volume which result in
variations in costs of goods sold, the timing of new product announcements by
the Company or its competitors, the timing of significant advertising and
promotional campaigns by the Company, changes in mix between kegs and bottles,
the impact of an increasing average federal excise tax rate as sales volume
changes, fluctuations in the price of packaging and raw materials, seasonality
of sales of the Company's beers, general economic factors, trends in consumer
preferences, regulatory developments including changes in excise tax and other
tax rates, changes in average selling prices or market acceptance of the
Company's beers, increases in production costs associated with initial
production of new products and fluctuations in volume of sales and variations in
shipping and
21
<PAGE> 24
transportation costs. The Company's expense levels are based, in part, on its
expectations of future sales levels. If sales levels are below expectations,
operating results are likely to be materially adversely affected. In particular,
net income, if any, may be disproportionately affected by a reduction in sales
because certain of the Company's operating expenses are fixed in the short-term.
The Company's profitability has been significantly impacted by the timing and
level of expenditures related to selling, advertising and promotional expenses.
For example, in September 1997, the Company recorded a $1.4 million charge to
earnings for the write-off of obsolete promotional materials. In addition, the
Company's decision to undertake a significant media advertising campaign could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
The Company believes that quarterly sales and operating results are likely to
vary significantly in the future and that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. In addition, historical growth rates
should not be considered indicative of future sales growth, if any, or of future
operating results. There can be no assurance that the Company's sales will grow
or be sustained in future periods or that the Company will remain profitable in
any future period.
Dependence on Stroh. The Company relies upon Stroh at all phases of the
production of its beers, for access to contracted facilities, and the
performance of services under the manufacturing services agreement, including
sourcing and purchasing the ingredients used to make the Company's beer,
scheduling production to meet delivery requirements, brewing and packaging the
Company's beers, performing quality control and assurance, invoicing
distributors upon shipment, collecting and remitting payments to the Company and
performing regulatory compliance. The Company's business, results of operations
and financial condition would be materially adversely affected if Stroh were
unable, for any reason, to meet the Company's delivery commitments or if beer
brewed at Stroh breweries failed to satisfy the Company's quality requirements.
During November 1997, Stroh closed its brewery in St. Paul, Minnesota, where the
Company produced a significant portion of its beer. The Company's management
along with the management of Stroh is implementing a plan to transition the
production of the Company's beer to other Stroh breweries. In addition, the
Company is currently working with Stroh to develop a long term, multi-plant
sourcing plan to provide cost effective production of its beers. If the
Company's ability to obtain product from the Stroh breweries were interrupted or
impaired for any reason, the Company would not be able to establish an
alternative production source, nor would the Company be able to develop its own
production capabilities, without substantial disruption to the Company's
operations. Any inability to obtain adequate production of the Company's beers
on a timely basis or any other circumstance that would require the Company to
seek alternative sources of supply would delay shipments of the Company's
product, which could damage relationships with the Company's current and
prospective distributors and retailers, provide an advantage to the Company's
competitors and have a material adverse effect on the Company's business,
financial condition and operating results.
Competition. The Company competes with a variety of domestic and
international brewers, many of whom have significantly greater financial,
production, distribution and marketing resources and a higher level of brand
recognition than the Company. The Company competes with and anticipates
competition from several of the major national brewers, such as Anheuser-Busch,
Miller Brewing Co., and Adolph Coors Co., each of whom has introduced and is
marketing fuller flavored beers designed to compete directly in the craft beer
segment of the domestic beer market in which the Company competes. In addition,
the Company expects that certain of the major national brewers, with their
superior financial resources and established distribution networks, may seek
further participation in the growth of the craft beer market through investment
in, or the formation of, distribution alliances with smaller craft brewers. The
increased participation of the major national brewers will likely increase
competition for market share and heighten price sensitivity within the craft
beer market. In addition, the Company expects continued competition from
imported beer brewers, many of whom have greater financial and marketing
resources, as well as greater brand name recognition, than the Company. The
Company also anticipates increased competition in the craft beer market from
existing craft brewers such as The Boston Beer Company, Inc., Redhook Ale
Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co., Anchor Brewing
Co. and new market entrants. In particular, the Company believes that
competition has intensified recently as a result of the proliferation of small
local craft brewers that have introduced and are marketing significant numbers
of products. The Company also competes with
22
<PAGE> 25
other beer and beverage companies not only for consumer acceptance and loyalty
but also for shelf and tap space in retail establishments and for marketing
focus by the Company's distributors and their customers, all of which also
distribute and sell other beers and alcoholic beverage products. Increased
competition has in the past and could in the future result in price reductions,
reduced margins and loss of market share, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Distributors. The Company is dependent upon its distributors
to sell the Company's products and to assist the Company in promoting market
acceptance of, and creating demand for, the Company's products. During the
second half of 1996, the Company transitioned to a new wholesale distribution
network in California, Colorado, and Washington, D.C. Previously, the Company
had relied on a single or limited number of distributors in these key markets.
The transition of the Company's distribution from a single or limited number of
distributors to in excess of 30 new distributors adversely impacted the
Company's level of revenues and profitability in the Fourth Quarter of 1996 and
in 1997. The Company expects that the transition of the distribution network in
these key markets will continue to impact the Company's business, financial
condition and results of operations in the near term. In addition, there is
always a risk that the Company's distributors will give higher priority to the
products of other beverage companies, including products directly competitive
with the Company's beers, thus reducing their efforts to sell the Company's
products. In addition, there can be no assurance that the Company's distributors
will devote the resources necessary to provide effective sales and promotion
support to the Company. If one or more of the Company's significant distributors
were to discontinue selling, or decrease the level of orders for the Company's
products, the Company's business would be adversely affected in the areas
serviced by such distributors until the Company retained replacements. There can
be no assurance that the Company would be able to replace a significant
distributor in a timely manner or at all in the event a distributor were to
discontinue selling the Company's products.
Product Concentration. The sale of a limited number of beers has accounted
for substantially all of the Company's sales since inception. The Company
announced in January 1998 the discontinuation of four current products and the
planned 1998 introduction of one new product. The Company believes that the sale
of the remaining beers will continue to account for a significant portion of
sales for the foreseeable future. Therefore, the Company's future operating
results, particularly in the near term, are significantly dependent upon the
continued market acceptance of these beers. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for any of the Company's beers as a result of competition, changes in
consumer tastes and preferences, government regulation or other factors would
have a material adverse effect on the Company's business, operating results and
financial condition.
Development of New Products. The craft beer market is highly competitive
and characterized by changing consumer preferences and continuous introduction
of new products. The Company believes that its future growth will depend, in
part, on its ability to anticipate changes in consumer preferences and develop
and introduce, in a timely manner, new beers that adequately address such
changes. There can be no assurance that the Company will be successful in
developing, introducing and marketing new products on a timely and regular
basis. If the Company is unable to introduce new products or if the Company's
new products are not successful, the Company's sales may be adversely affected
as customers seek competitive products.
Government Regulations. The Company's business is highly regulated by
federal, state and local laws and regulations. Such laws and regulations govern
licensing requirements, trade and pricing practices, permitted and required
labeling, advertising, promotion and marketing practices, relationships with
distributors and related matters. Failure on the part of the Company to comply
with federal, state and local regulations could result in the loss or revocation
or suspension of the Company's licenses, permits or approvals and accordingly
could have a material adverse effect on the Company's business. The federal
government and each of the states levy excise taxes on alcoholic beverages,
including beer. Increases in excise taxes on beer, if enacted, could materially
and adversely affect the Company's financial condition and results of
operations. Certain states and local jurisdictions have adopted restrictive
beverage packaging laws and regulations that require deposits on beverage
containers. Congress and a number of additional state and local jurisdictions
may adopt similar legislation in the future, and in such event, the Company may
be required to incur significant expenditures in order to comply with such
legislation. Changes to federal and state excise taxes on beer
23
<PAGE> 26
production, or any other federal and state laws or regulations which affect the
Company's products could materially adversely affect the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continuing contributions of, and on its ability to attract and
retain, qualified management, sales, production and marketing personnel. The
competition for qualified personnel is intense and the loss of any such persons
as well as the failure to recruit additional key personnel in a timely manner,
could adversely affect the Company. There can be no assurance that the Company
will be able to continue to attract and retain qualified management and sales
personnel for the development of its business. Failure to attract and retain key
personnel could have a material adverse affect on the Company's business,
operating results and financial condition. In addition, the Company has recently
hired several key executive officers to supplement its management team. The
Company's future success will depend, in part, on the ability of its executive
officers to operate effectively, both independently and as a group.
Year 2000 Issues. The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, or if significant Year 2000 problems
are not timely detected, the Year 2000 problem may have a material impact on the
operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES.
Since its inception, the Company has funded its operations primarily
through cash generated from operations, private sales of preferred stock, bank
and other debt, and capital equipment leases. In addition the Company received
net proceeds of approximately $43.5 million from its initial public offering
completed in November 1995. As of December 31, 1997, the Company had $36.0
million in working capital, including $18.8 million in cash and cash equivalents
and $12.4 million in available for sale securities, as compared to working
capital of $42.9 million as of December 31, 1996. The decrease was primarily due
to cash used by operations.
The Company's cash and cash equivalents decreased by $1.0 million in 1997
as compared to a decrease of $23.1 million in 1996 and an increase of $41.9
million in 1995. The Company used $6.9 million in cash from operations in 1997
as compared to $1.4 million provided by operations in 1996 and $0.5 million in
1995. The increase in the uses of cash from operations in 1997 resulted
primarily from the $6.1 million net loss recognized during 1997 and the payment
of unusually high accounts payable and accrued expenses outstanding at December
31, 1996, offset by the reduction in accounts receivable and prepaid expenses.
The unusually high balances of accounts payable and accrued expenses at December
31, 1996 consisted primarily of accruals for 1996 income taxes and advertising
expenses.
The Company's principal investing activities consisted of the purchase and
sale of available for sale securities in 1997 of $19.2 million and $26.3
million, respectively. During 1996, the principal investing activity was the
purchase of available for sale securities of $28.9 million and the purchase of
$4.1 million of capital equipment. The Company's principal investing activities
during 1995 consisted of additions to property and equipment of $867,000.
The only significant financing activities in both 1997 and 1996 was the
issuance of Common Stock to employees of the Company under the Company's
employee stock purchase plan and incentive stock option plans, which provided
$252,000 of cash flow in 1996 and $378,000 in 1997. The Company's principal
investing activity during 1995 was the sale of common stock in the Company's
initial public offering providing $43.5 million of cash flow.
24
<PAGE> 27
As described in "Overview," the Company determined during February 1997 not
to go forward with previously disclosed plans to construct and equip a new
brewery in California. The financial resources previously earmarked to finance
capital expenditures in connection with the construction of the brewery will be
used for general corporate purposes, including to meet working capital needs,
pending the Company's analysis, currently underway, of the alternative uses
available to the Company.
The Company anticipates that its current cash and available for sale
securities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months.
25
<PAGE> 28
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $18,841 $19,814
Available for sale securities............................. 12,358 19,420
Trade accounts receivable, net............................ 1,396 7,664
Inventories............................................... 2,617 4,431
Prepaid expenses and other current assets................. 1,189 4,046
Tax refund receivable..................................... 2,074 --
Deferred taxes............................................ 1,140 2,088
------- -------
Total current assets.............................. 39,615 57,463
Property and equipment, net................................. 4,056 5,112
Deferred taxes.............................................. 3,125 --
------- -------
Other assets................................................ 2,960 3,513
------- -------
$49,756 $66,088
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable.................................... $ 1,433 $ 5,299
Accrued expenses.......................................... 2,189 9,250
------- -------
Total current liabilities................................. 3,622 14,549
Deferred taxes............................................ 662 228
------- -------
Total liabilities......................................... 4,284 14,777
------- -------
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY
Preferred shares, no par value:
Authorized 5,000 shares; issued and outstanding: none..... -- --
Common shares, no par value:
Authorized: 50,000 shares; issued and outstanding: 10,815
December 31, 1997 and 10,733 December 31, 1996......... 48,803 48,551
Unrealized gain on available for sale securities............ 14 11
Retained earnings (deficit)................................. (3,345) 2,749
------- -------
Total shareholders' equity........................ 45,472 51,311
------- -------
$49,756 $66,088
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales....................................................... $64,825 $78,089 $65,160
Less excise taxes........................................... 6,489 7,455 5,984
------- ------- -------
Net sales................................................. 58,336 70,634 59,176
Cost of goods sold.......................................... 30,683 34,761 29,659
------- ------- -------
Gross profit.............................................. 27,653 35,873 29,517
------- ------- -------
Selling, advertising and promotional expenses............... 30,173 29,705 21,525
General and administrative expenses......................... 7,783 5,090 4,258
Write-off of brewery start-up costs......................... 713 -- --
Brewery transition charges.................................. -- -- 1,198
------- ------- -------
Total operating expense................................... 38,669 34,795 26,981
------- ------- -------
Income (loss) from operations............................. (11,016) 1,078 2,536
Interest expense............................................ -- (3) (198)
Interest income............................................. 1,091 1,362 247
------- ------- -------
Income (loss) before income taxes......................... (9,925) 2,437 2,585
Income tax benefit (provision).............................. 3,831 (754) (1,047)
------- ------- -------
Net income (loss)......................................... $(6,094) $ 1,683 $ 1,538
======= ======= =======
Net income (loss) per share, basic.......................... $ (0.57) $ 0.16 $ 0.19
======= ======= =======
Shares used in per share calculation, basic................. 10,778 10,682 8,157
======= ======= =======
Net income (loss) per share, diluted........................ $ (0.57) $ 0.16 $ 0.18
======= ======= =======
Shares used in per share calculation, diluted............... 10,778 10,819 8,463
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE> 30
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
SERIES A AND B GAIN
PREFERRED SHARES COMMON SHARES ON AVAILABLE RETAINED
---------------- ---------------- NOTES FOR SALE EARNINGS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SECURITIES (DEFICIT) TOTAL
------ ------- ------ ------- ---------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1995................. 3,305 $ 1,221 3,691 $ 373 $(82) $-- $ (472) $ 1,040
Common share options exercised
($0.10-$1.25 per share)............... -- -- 925 106 -- -- -- 106
Issuance of common shares from IPO, net
of issuance costs of $1,733........... -- -- 2,700 43,465 -- -- -- 43,465
Conversion of preferred shares to common
shares at close of IPO................ (3,305) (1,221) 3,305 1,221 -- -- -- --
Repayment of notes receivable........... -- -- -- -- 82 -- -- 82
Issuance of warrant..................... -- -- -- 2,790 -- -- -- 2,790
Tax benefit associated with exercise of
options............................... -- -- -- 2 -- -- -- 2
Net income.............................. -- -- -- -- -- -- 1,538 1,538
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1995............... -- -- 10,621 47,957 -- -- 1,066 49,023
Common share options exercised
($0.10-$2.50 per share)............... -- -- 76 34 -- -- -- 34
Issuance of shares from employee stock
purchase plan......................... -- -- 36 344 -- -- -- 344
Tax benefit associated with exercise of
options............................... -- -- -- 216 -- -- -- 216
Unrealized gain on available for sale
securities............................ -- -- -- -- -- 11 -- 11
Net income.............................. -- -- -- -- -- -- 1,683 1,683
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1996............... -- -- 10,733 48,551 -- 11 2,749 51,311
Common share options exercised ($0.10 -
$18.00 per share)..................... -- -- 46 39 -- -- -- 39
Issuance of shares from employee stock
purchase plan......................... -- -- 36 162 -- -- -- 162
Options granted below fair market
value................................. -- -- -- 51 -- -- -- 51
Unrealized gain on available for sale
securities............................ -- -- -- -- -- 3 -- 3
Net loss................................ -- -- -- -- -- -- (6,094) (6,094)
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1997............... -- $ -- 10,815 $48,803 $ -- $14 $(3,345) $45,472
====== ======= ====== ======= ==== === ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE> 31
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (6,094) $ 1,683 $ 1,538
Adjustments to reconcile net income (loss) to net cash
(used) provided by operations:
Depreciation and amortization.......................... 3,021 1,471 807
Deferred taxes......................................... (1,743) (1,745) 98
Loss on disposal of property and equipment............. -- -- 93
Changes in operating assets and liabilities:
Trade accounts receivable.............................. 6,268 (4,480) (2,234)
Inventories............................................ 1,814 (2,187) (663)
Prepaid expenses and other current assets.............. 2,857 (2,914) (559)
Tax refund receivable.................................. (2,074) -- --
Accounts payable and accrued expenses.................. (10,927) 9,538 1,461
-------- -------- -------
Net cash (used) provided by operations............ (6,878) 1,366 541
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (387) (4,112) (867)
Purchases of available for sale securities................ (19,191) (28,885) --
Proceeds from sale of available for sale securities....... 26,256 9,476 --
Additions to other assets................................. (1,025) (1,369) (257)
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... 5,653 (24,890) (1,124)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common shares, net.................. -- -- 43,465
Collection of notes receivable............................ -- -- 82
Proceeds from short term note payable to shareholder...... -- -- 1,100
Repayment of short term note payable to shareholder....... -- -- (1,300)
Net borrowings from revolving credit agreement with
bank................................................... -- -- (1,000)
Proceeds from issuance of common shares pursuant to
exercise of stock options and warrants................. 252 378 106
-------- -------- -------
Net cash provided by financing activities......... 252 378 42,453
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents..................................... (973) (23,146) 41,870
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 19,814 42,960 1,090
-------- -------- -------
End of period............................................. $ 18,841 $ 19,814 $42,960
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE> 32
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pete's Brewing Company (the Company) was incorporated in April 1986 under
the laws of the State of California. The Company is a major domestic craft
brewer. The Company currently markets 12 distinctive full bodied beers in 49
states, the District of Columbia and the United Kingdom.
The following is a summary of the Company's significant accounting
policies:
Principles of Consolidation. The consolidated financial statements include
the accounts of Pete's Brewing Company and its sole subsidiary Wicked Ware, Inc.
(collectively referred to as the Company). All significant intercompany accounts
and transactions have been eliminated.
Cash Equivalents. Cash equivalents include all highly liquid investments
with original or remaining maturities of three months or less, at the date of
purchase.
Brewing Operations. In July 1992, the Company entered into a three-year
agreement with Minnesota Brewing Company of St. Paul, Minnesota. This Agreement
was terminated in 1995 upon the execution of the Alternating Premise Transition
Agreement as discussed in Note 8.
In 1995, the Company entered into a nine year Manufacturing Services
Agreement ("Agreement"), with the Stroh Brewery Company ("Stroh") of Detroit,
Michigan. Under the Agreement the Company will alternate the use of the brewery
with Stroh and will supervise the brewing, testing, bottling and kegging done on
the Company's behalf. Stroh is responsible for purchasing all packaging and raw
material necessary for the Company to produce its beers. All costs relating to
the Agreement are charged to cost of goods sold. The Company is liable for the
payment of excise taxes to various federal and state agencies upon shipment of
malt beverages from the breweries. The Company takes title to all beer in
process and finished goods and pays Stroh upon shipment to distributors.
Certain Risks. Financial instruments which potentially expose the Company
to concentrations of credit risk consist primarily of trade accounts receivable
and cash and cash equivalents. The Company's customer base includes primarily
beer, wine and spirits distributors throughout the United States. The Company
does not generally require collateral for its trade accounts receivable and
maintains an allowance for doubtful accounts. The Company maintains cash
equivalent investments with a brokerage firm and its cash in bank deposit
accounts with a bank. At times, the balances in these accounts may exceed
federally insured limits. The Company has not experienced any losses on such
accounts.
The Company relies upon Stroh at all phases of the production of its beers,
for access to contracted facilities, and the performance of services under the
manufacturing services agreement, including sourcing and purchasing the
ingredients used to make the Company's beers, scheduling production to meet
delivery requirements, brewing and packaging the Company's beers, performing
quality control and assurance, invoicing distributors upon shipment, and
collecting and remitting payments to the Company. The Company's relationship
with Stroh is therefore critical to the Company's business, operating results
and financial condition. The Company's dependence on Stroh entails a number of
significant risks. The Company's business, results of operations and financial
condition would be materially adversely affected if Stroh were unable, for any
reason, to provide contracted access to capacity or fail to perform according to
the provisions of its manufacturing services agreement.
Allowance for Credit Notes. The Company records a provision for the
estimated costs related to promotional programs for its distributors. Such costs
primarily include incentive discounts and allowances.
Inventories. Inventories consist of beer in progress, finished goods and
promotional materials and are stated at the lower of first-in, first-out cost or
market.
Depreciation and Amortization. Kegs, machinery and equipment, and office
furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of five to twenty
30
<PAGE> 33
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years. Leasehold improvements are recorded at cost and amortized using the
straight-line method over the shorter of the useful life of the improvements or
the related lease term. Capital leases are recorded at the lower of fair market
value or the present value of future minimum lease payments. Assets under
capital leases are amortized using the straight-line method over the shorter of
the related lease term or the useful life of the assets.
Revenue Recognition. The Company recognizes revenue upon shipment of
product and passage of title to the customer.
Advertising. The Company expenses the production costs of advertising the
first time the advertising takes place, except for promotional agency fees which
are capitalized and amortized over their expected periods of future benefit.
Promotional agency fees consists of creative development costs associated with
future promotional campaigns. The capitalized costs are amortized over a six
month period.
At December 31, 1997 and 1996, $786,000 and $657,000 of advertising was
reported in prepaid expenses, respectively. Advertising expense was $2,588,000,
$5,246,000 and $2,224,000 in 1997, 1996 and 1995, respectively.
Income Taxes. The Company accounts for income taxes under the liability
method which requires that deferred taxes be computed annually on an asset and
liability method and adjusted when new tax laws or rates are enacted. Deferred
tax assets and liabilities are determined based on the differences between the
financial report and tax bases of assets and liabilities and are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Income (Loss) Per Share. The Company has adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share;" which supersedes
APB Opinion No. 15 (APB No. 15), "Earnings per Share," and which is effective
for all periods ending after December 15, 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) for complex capital
structures on the face of the Statements of Operations. Basic EPS is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of other securities into common stock. For the year ended December
31, 1997, the effects of the exercise or conversion of other securities were
excluded from the calculation of diluted EPS because their effect was
antidilutive.
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 amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income". This statement establishes requirements
for disclosure of comprehensive income and becomes effective for the Company for
fiscal years beginning after December 15, 1997, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments or contributions by shareholders. The Company is evaluating
alternative formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's result of operations.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about
31
<PAGE> 34
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
products and services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." The new standard becomes
effective for fiscal years beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
Reclassifications. Certain amounts in the consolidated financial statements
have been reclassified to conform with the current year's presentation. These
reclassifications had no impact on previously reported income from operations or
net income.
2. AVAILABLE FOR SALE SECURITIES
At December 31, 1997 and 1996, available for sale securities are stated at
estimated fair value and consist of municipal bonds and notes, market auction
preferreds, preferred stock, commercial paper, auction rate receipts and
treasury notes. Available for sales securities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
COST UNREALIZED COST UNREALIZED
FAIR MARKET --------------- FAIR MARKET ---------------
VALUE BASIS GAIN VALUE BASIS GAIN
----------- ------- ---- ----------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds and
Notes.................. $10,354 $10,340 $14 $11,969 $11,958 $11
Market Auction
Preferreds............. 2,004 2,004 -- -- -- --
Preferred Stock.......... -- -- -- 3,109 3,109 --
Commercial Paper......... -- -- -- 1,936 1,936 --
Auction Rate Receipts.... -- -- -- 1,412 1,412 --
Treasury Notes........... -- -- -- 994 994 --
------- ------- --- ------- ------- ---
$12,358 $12,344 $14 $19,420 $19,409 $11
======= ======= === ======= ======= ===
</TABLE>
3. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Trade accounts receivable.......................... $3,679 $9,918
Less allowance for credit notes.................... 2,099 2,115
Less allowance for doubtful accounts............... 184 139
------ ------
$1,396 $7,664
====== ======
</TABLE>
4. INVENTORIES:
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Finished goods..................................... $ 651 $ 972
Beer in progress................................... 407 799
Promotional material............................... 1,559 2,660
------ ------
$2,617 $4,431
====== ======
</TABLE>
32
<PAGE> 35
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Kegs, machinery and equipment...................... $4,135 $4,353
Office furniture and equipment..................... 1,550 1,115
Leasehold improvements............................. 278 285
Construction in progress........................... -- 591
------ ------
5,963 6,344
Less accumulated depreciation and amortization..... 1,907 1,232
------ ------
$4,056 $5,112
====== ======
</TABLE>
Depreciation and amortization of property and equipment charged to
operations was $1,443,000, $568,000, and $391,000, for 1997, 1996, and 1995,
respectively.
6. OTHER ASSETS:
Other assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
------- ------
<S> <C> <C>
Intangible costs associated with warrant.......... $ 2,789 $2,789
Less accumulated amortization..................... (672) (362)
------- ------
2,117 2,427
------- ------
Package design costs.............................. 1,606 1,426
Less accumulated amortization..................... (1,598) (575)
------- ------
8 851
------- ------
Other assets...................................... 269 235
------- ------
Long term notes receivable........................ 566 --
------- ------
$ 2,960 $3,513
======= ======
</TABLE>
Amortization of intangible costs and package design costs were $1,578,000,
$886,000, and $363,000 in 1997, 1996 and 1995, respectively.
33
<PAGE> 36
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Accrued distribution liabilities................. $ -- $5,111
Accrued expenses................................. 730 934
Accrued freight.................................. 389 757
Accrued income and excise taxes.................. 22 1,881
Accrued bonuses.................................. 303 304
Accrued merchandise purchases.................... 745 263
------ ------
$2,189 $9,250
====== ======
</TABLE>
Stroh currently manufactures the Company's products under the Company's
supervision. The Company paid approximately $28.6 million in 1997 and 1996 and
$7.6 million in 1995 to Stroh for charges under the Agreement and had a payable
of approximately $1.2 million and $2.0 million at December 31, 1997 and 1996,
respectively.
8. BREWERY TRANSITION CHARGES
In September 1995, the Company entered into an Alternating Premises
Transition Agreement with Minnesota Brewing Company of St. Paul, Minnesota,
terminating the existing Brewing Agreement. As a result of this transition, the
Company recorded a charge of $1,198,000 in 1995. The charge is comprised of
$890,000 of payments made to Minnesota Brewing Company under the agreement,
$93,000 loss on abandoned property and equipment and $215,000 of scrapped
materials and other transition costs.
9. WRITE-OFF OF BREWERY START UP COSTS
After review of a brewery construction feasibility study prepared by the
Company in conjunction with its architect, mechanical engineer and general
contractor, and a review of available capacity under the Stroh Agreement and
other factors, the Company determined not to go forward with previously
disclosed plans to construct and equip a brewery in California. As a result of
this determination the Company recorded a charge to earnings of $713,000 in
1997. This was comprised primarily of pre-construction architectural,
engineering and contractor fees.
10. INCOME TAXES
The provision for (benefit from) income taxes is as follows for the years
ended December 31, 1997, 1996, and 1995 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Current:
Federal...................................... $(2,090) $ 2,005 $ 723
State........................................ 2 586 226
------- ------- ------
(2,088) 2,591 949
Deferred:
Federal...................................... (1,278) (1,475) 80
State........................................ (465) (362) 18
------- ------- ------
(1,743) (1,837) 98
------- ------- ------
$(3,831) $ 754 $1,047
======= ======= ======
</TABLE>
34
<PAGE> 37
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal items accounting for the difference between income taxes
computed at the United States statutory rate and the provision for income taxes
reflected in the statements of operations are as follows, for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
United States statutory rate...................... (34.0%) 34.0% 34.0%
States taxes (net of federal benefit)............. (3.1) 6.1 5.6
Nontaxable dividends and interest................. (3.7) (16.3) (3.0)
Non-deductible expenses........................... 1.1 4.6 3.9
Other............................................. 1.1 2.5 --
----- ----- -----
(38.6%) 30.9% 40.5
===== ===== =====
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 76 $ 59
Allowance for credit notes............................... 4 562
Accrued distribution liabilities......................... -- 1,171
Net operating loss carry forward......................... 2,939 --
Vacation and bonus....................................... 196 167
Reserves and other....................................... 1,330 185
------ ------
Total............................................ 4,545 2,144
------ ------
Deferred tax liabilities:
Depreciation and amortization............................ 662 228
State income taxes....................................... 280 21
Other.................................................... -- 35
------ ------
Total............................................ 942 284
------ ------
Net deferred taxes......................................... $3,603 $1,860
====== ======
</TABLE>
11. SHAREHOLDERS' EQUITY
Capital Stock. In August 1995, the Company's Board of Directors approved a
4 for 1 split and increased the authorized common shares to 50,000,000.
In November 1995, the Company completed the initial public offering of its
common stock. The Company sold approximately 2,700,000 shares for net proceeds
of $43,465,000. Concurrent with the closing of the initial public offering, the
Company's Board of Directors authorized 5,000,000 preferred shares. In addition,
the holders of Series A and Series B convertible preferred shares received
common shares pursuant to an automatic, share-for-share conversion, resulting in
the issuance of 3,305,000 common shares.
Warrant. In October 1995 the Company issued a warrant, expiring in five
years, to Stroh to purchase 1,140,284 of the Company's common shares at an
exercise price of $14.00 per share in exchange for Stroh granting the Company
certain cost reductions and other benefits in an amended manufacturing
agreement. The $2,790,000 intangible cost, as determined by an independent
appraisal, is amortized to cost of goods sold over the nine year term of the
amended manufacturing agreement.
35
<PAGE> 38
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans: In 1986, the Company adopted a combined nonstatutory
and incentive stock option plan scheduled to expire in 1996 (the 1986 Plan).
Under the Plan, a total of 1,932,000 of the Company's common shares have been
reserved for issuance to officers, directors, and employees of and consultants
to the Company. This plan was canceled by the Board of Directors during 1995.
In September 1995, the Company adopted the 1995 Employee Stock Option Plan
(the "1995 Plan"). Under the plan, a total of 1,000,000 of the Company's common
shares have been reserved for issuance to officers, employees and consultants of
the Company. Options to purchase the Company's common shares may be granted at
the closing price on the date of grant. The options vest 25% after the first
year of service and 1/48 for each month thereafter. The term of the options
granted under the 1995 Plan is ten years from the date of grant.
In September 1995, the Company adopted the 1995 Director Option Plan (the
"Director Plan") and has reserved 200,000 common shares for issuance under this
plan. The Director Plan provides for an initial grant of 15,000 options to each
director upon the effective date of the initial public offering at a per share
price equal to the initial public offering price, an initial grant of 15,000
option to each new director upon their appointment to the Board, at the closing
price on the date of the grant, and annual grants of 5,000 options for each
director upon their reappointment to the Board of Directors at the closing price
on the date of the grant. The options vest 25% after the first year of service
and 1/48 for each month thereafter.
In July 1997, the Company granted 12,000 shares of the Company's common
stock to the Chairman of the Board of Directors of the Company, at $1.25 per
share, under a nonstatutory stock option. The excess of the fair market value of
the option over the grant price was charged to operations over the vesting
period. The option becomes fully vested in February 1998 and expires in July
2007.
Information regarding these Plans follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
OUTSTANDING AVERAGE
SHARES PRICE EXERCISE
AVAILABLE SHARES PER SHARE TOTAL PRICE
---------- ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1995............ 18 1,099 $0.06 - $ 1.25 $ 189 $ 0.17
Authorized......................... 1,200 -- -- -- --
Granted............................ (452) 452 $2.50 - $18.00 7,734 $17.11
Canceled........................... 22 (22) $0.14 - $ 1.25 (10) $ 0.44
Exercised.......................... -- (925) $0.10 - $ 1.25 (106) $ 0.11
Additional shares of 1986 plan
canceled........................ (14) -- -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1995.......... 774 604 $0.10 - $18.00 7,807 $12.93
Granted............................ (430) 430 $6.50 - $18.75 3,438 $ 7.99
Canceled........................... 34 (34) $0.14 - $18.75 (568) $16.72
Exercised.......................... -- (76) $0.10 - $ 2.50 (34) $ 0.44
Additional shares of 1986 plan
canceled........................ (3) -- -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1996.......... 375 924 $0.10 - $18.00 10,643 $12.93
Authorized......................... 12 -- -- -- --
Granted............................ (327) 327 $1.25 - $ 6.25 1,854 $ 5.66
Canceled........................... 291 (291) $1.25 - $18.00 (4,794) $16.47
Exercised.......................... -- (46) $0.10 - $18.00 (39) $ 0.86
Additional shares of 1986 plan
canceled........................ (4) -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1997.......... 347 914 $0.14 - $18.75 $ 7,664 $ 8.39
===== ===== =======
</TABLE>
36
<PAGE> 39
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The option outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------- OPTIONS CURRENTLY EXERCISABLE
WEIGHTED ---------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE (IN THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- --------------- --------------- ----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.14 19 0.97 years $ 0.14 19 $ 0.14
$ 1.25 - $ 2.50 41 3.96 years $ 1.59 38 $ 1.58
$ 4.94 - $ 5.91 127 9.68 years $ 5.35
$ 6.13 - $ 8.88 553 8.76 years $ 6.84 98 $ 7.27
$18.00 - $18.75 174 7.92 years $18.03 94 $18.02
--- ---
$ 0.14 - $18.75 914 8.35 years $ 8.39 249 $ 9.92
=== ===
</TABLE>
The weighted average fair value of those options granted in 1997, 1996 and
1995 was $4.21, $5.33, and $11.38, respectively.
Employee Stock Purchase Plan. In September 1995, the Company adopted the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan has
one year offering periods. The Employee Stock Purchase Plan permits eligible
employees to purchase shares of the Company's common stock at 85% of the lesser
of fair market value of the common stock on the first day of the offering period
of the last day of the purchase period. The Company has reserved 400,000 shares
of its common stock for issuance under the Purchase Plan. As of December 31,
1997, 72,000 shares have been issued under the plan.
Pro Forma Compensation Expense. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123).
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Plans (including the Employee Stock Purchase Plan). Had
compensation cost for the Plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Net income (loss) as reported......................... $(6,094) $1,683 $1,538
Net income (loss) pro forma........................... $(7,497) $ 208 $1,308
Net income (loss) per share-basic..................... $ (0.57) $ 0.16 $ 0.19
Net income (loss) per share-basic pro forma........... $ (0.70) $ 0.02 $ 0.16
Net income (loss) per share diluted................... $ (0.57) $ 0.16 $ 0.18
Net income (loss) per share diluted pro forma......... $ (0.70) $ 0.02 $ 0.15
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes method with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Risk-free interest rate.......................... 6.05% 6.20% 6.20%
Expected life in years........................... 3.48 4.19 4.19
Expected dividends............................... None None None
Expected volatility.............................. 0.9774 .8598 .8598
</TABLE>
The weighted average expected life was calculated based on the vesting
period and exercise behavior. The risk-free interest rate was calculated in
accordance with the grant date and expected life calculated for each subgroup.
37
<PAGE> 40
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMPUTATION OF NET (LOSS) INCOME PER SHARE
Basic and diluted earnings per share are calculated as follows for the
years ended December 31, 1997, 1996 and 1995 (in thousands except per share
amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Basic:
Weighted average shares.............................. 10,778 10,682 8,157
======= ======= ======
Net (loss) income.................................... $(6,094) $ 1,683 $1,538
======= ======= ======
Net (loss) income per share.......................... $ (0.57) $ 0.16 $ 0.19
======= ======= ======
Diluted:
Weighted average shares.............................. 10,778 10,682 8,157
Common equivalent shares from stock options and
warrants.......................................... -- 137 306
------- ------- ------
Shares used in per share calculation................. 10,778 10,819 8,463
======= ======= ======
Net (loss) income.................................... $(6,094) $ 1,683 $1,538
======= ======= ======
Net (loss) income per share.......................... $ (0.57) $ 0.16 $ 0.18
======= ======= ======
</TABLE>
13. BENEFIT PLAN
In April 1995, the Company adopted the Pete's Brewing Company 401(k)
Savings Plan (the "401(k) Plan"), which is intended to qualify under Section 401
of the Internal Revenue Code. All employees meeting minimum age requirements are
eligible to participate in the 401(k) Plan. Employee contributions are limited
to 15% of compensation. The Company may make contributions to fund the 401(k)
Plan. The Company has not made any contributions to the 401(k) Plan.
14. COMMITMENTS AND CONTINGENCIES
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions, at this time management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
The Company has commitments under operating leases for office space and
equipment which expire through 2002. Under the terms of the leases for office
space, the Company is responsible for certain utilities and maintenance
expenses, including taxes, insurance and other operating expenses. The Company
has the option to renew certain of these operating leases. Future minimum rental
payments required under the operating leases that have initial or remaining
non-cancelable lease terms in excess of one year at December 31, 1997 are
$697,000 in 1998, $664,000 in 1999, $639,000 in 2000, $453,000 in 2001 and
$65,000 in 2002.
Rental expense was approximately $608,000, $489,000 and $286,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
38
<PAGE> 41
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1997,
1996 and 1995 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash paid during the period for:
Excise taxes......................................... $7,011 $7,449 $5,889
Interest............................................. -- 3 201
Income taxes......................................... 1,947 1,448 140
Noncash investing and financing activities:
Intangible costs associated with issuance of
warrants........................................... -- -- 2,790
Tax benefit associated with exercise of options...... -- 216 --
Unrealized gain on investments....................... 14 11 --
</TABLE>
16. SIGNIFICANT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company has no operations outside of the United States and operates in
one industry segment. No one customer accounted for more than 10% of 1997 sales.
One customer accounted for 14% of 1996 sales. Two customers accounted for 24%
and 11% of sales in 1995. To date export sales have not been significant.
39
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Pete's Brewing Company and Subsidiary
We have audited the accompanying consolidated balance sheets of Pete's
Brewing Company and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pete's Brewing Company and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 18, 1998
40
<PAGE> 43
PART III
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held June 8, 1998, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Record Date and Principal Share Ownership" contained in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions With Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENT SCHEDULES
S-1 -- Report of Independent Accountants on Financial Statement Schedule
S-2 -- Valuation and Qualifying Accounts
Additional schedules are not required under the related schedule
instructions or are inapplicable, and therefore have been omitted.
41
<PAGE> 44
(a)(2) EXHIBITS
<TABLE>
<S> <C>
3.1(2) Restated Articles of Incorporation of the Registrant.
3.2(1) Bylaws of the Registrant.
4.1(3) Preferred Shares Rights Plan.
10.13 Lease between Registrant and Utah State Retirement
Investment Fund dated July 15, 1997.
10.14 Lease between Registrant and 1300 Iroquois Venture dated
September 29, 1997.
10.15 Lease between Registrant and Rotterdam Ventures, Inc., dated
September 1997.
10.16(4) Nonstatutory Stock Option Agreement by and between the
Company and Philip Marineau, Chairman of the Board of
Directors dated July 22, 1997.
22.1(1) List of subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See Page 42).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement of Form S-1 (Reg. No. 33-97264) as declared effective by the
Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A as filed with the Securities and Exchange Commission
on November 27, 1996.
(4) Incorporated by reference to Registrant's Form S-8 filed October 15, 1997.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
(c) EXHIBITS
See Item 14(a)(2) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(1) above.
42
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETE'S BREWING COMPANY
By: /s/ JEFFREY ATKINS
------------------------------------
Jeffrey Atkins
Chief Executive Officer and
Chief Financial Officer
Date: March 27, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey Atkins, as his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, to sign any and all amendments (including post-effective
amendments) to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, 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>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ JEFFREY ATKINS Chief Executive Officer and March 27, 1998
- ----------------------------------------------------- Chief Financial Officer
Jeffrey Atkins
/s/ HUNTER HASTINGS Director March 27, 1998
- -----------------------------------------------------
Hunter Hastings
/s/ AUDREY MACLEAN Director March 27, 1998
- -----------------------------------------------------
Audrey Maclean
/s/ KEVIN O'ROURKE Director March 27, 1998
- -----------------------------------------------------
Kevin O'Rourke
/s/ PETE SLOSBERG Director March 27, 1998
- -----------------------------------------------------
Pete Slosberg
/s/ CHRISTOPHER SORTWELL Director March 27, 1998
- -----------------------------------------------------
Christopher Sortwell
/s/ PHILIP MARINEAU Director and Chairman of March 27, 1998
- ----------------------------------------------------- the Board of Directors
Philip Marineau
</TABLE>
43
<PAGE> 46
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Pete's Brewing Company and Subsidiary as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, which financial
statements are included in the Annual Report on Form 10-K, we have also audited
the financial statement schedule listed in Item 14(a)(1) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 18, 1998
44
<PAGE> 47
PETE'S BREWING COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND WRITE-OFF BALANCE AT
DESCRIPTION PERIOD EXPENSES OF ACCOUNTS END OF PERIOD
----------- ------------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31,
1995
Allowance for doubtful
accounts.............. $ 37 $ -- $ -- $ 37
Year ended December 31,
1996
Allowance for doubtful
accounts.............. $ 37 $102 $ -- $139
Year ended December 31,
1997
Allowance for doubtful
accounts.............. $139 $202 $157 $184
</TABLE>
45
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1(2) Restated Articles of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(3) Preferred Shares Rights Plan
10.13 Lease between Registrant and Utah State Retirement
Investment Fund dated July 15, 1997
10.14 Lease between Registrant and 1300 Iroquois Venture dated
September 29, 1997
10.15 Lease between Registrant and Rotterdam Ventures, Inc., dated
September 1997
10.16(4) Nonstatutory Stock Option Agreement by and between the
Company and Philip Marineau, Chairman of the Board of
Directors dated July 22, 1997
22.1(1) List of subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 42)
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement of Form S-1 (Reg. No. 33-97264) as declared effective by the
Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A as filed with the Securities and Exchange Commission
on November 27, 1996.
(4) Incorporated by reference to Registrant's Form S-8 filed October 15, 1997.
46
<PAGE> 1
EXHIBIT 10.13
LEASE AGREEMENT BETWEEN
UTAH STATE RETIREMENT INVESTMENT FUND, AS LANDLORD, AND
PETE'S BREWING COMPANY, A CALIFORNIA CORPORATION, AS TENANT
SUITE 1010
DATED JULY 15,1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS ...........................................................1
2. PREMISES ..............................................................1
3. TERM ..................................................................1
4. USE ...................................................................1
5. RENT ..................................................................1
5.1 Base Rent.....................................................1
5.2 Base Rent Adjustment..........................................1
5.3 Additional Rent...............................................1
5.4 Parking Charge................................................2
5.5 Payment of Rent...............................................2
5.6 Delinquent Payments and Handling Charge.......................2
5.7 Prepaid Rent and Security Deposit.............................2
6. CONSTRUCTION OF IMPROVEMENTS ..........................................2
6.1 General.......................................................2
6.2 Access by Tenant Prior to Commencement of Term................2
6.3 Commencement Date; Adjustments to Commencement Date...........2
7. SERVICES TO BE FURNISHED BY LANDLORD ..................................3
7.1 General.......................................................3
7.2 Keys..........................................................3
7.3 Tenant Identity...............................................3
7.4 Charges.......................................................3
7.5 Operating Hours...............................................4
8. REPAIR AND MAINTENANCE.................................................4
8.1 By Landlord...................................................4
8.2 By Tenant.....................................................4
9. TAXES ON TENANTS PROPERTY..............................................4
10. TRANSFER BY TENANT.....................................................4
10.1 General.......................................................4
10.2 Conditions....................................................4
10.3 Liens.........................................................5
11. ALTERATIONS............................................................5
12. SPECIFICALLY PROHIBITED USES...........................................5
13. ACCESS BY LANDLORD.....................................................5
14. CONDEMNATION...........................................................5
15. CASUALTY...............................................................6
15.1 General ......................................................6
15.2 Acts of Tenant ...............................................6
16. SUBORDINATION AND ATTORNMENT ..........................................6
16.1 General ......................................................6
16.2 Attornment ...................................................6
17. INSURANCE .............................................................6
17.1 General.......................................................6
17.2 Waiver of Subrogation.........................................7
18. TENANT'S INDEMNITY.....................................................7
19. THIRD PARTIES; ACTS OF FORCE MAJEURE...................................7
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
20. SECURITY INTEREST.......................................................7
21. CONTROL OF COMMON AREAS.................................................7
22. RIGHT TO RELOCATE.......................................................7
23. QUIET ENJOYMENT.........................................................8
24. DEFAULT BY TENANT.......................................................8
24.1 Events of Default.............................................8
24.2 Remedies of Landlord..........................................8
24.3 Payment by Tenant.............................................8
24.4 Reletting.....................................................9
24.5 Landlords Right to Pay or Perform.............................9
24.6 No Waiver; No Implied Surrender...............................9
25. DEFAULTS BY LANDLORD....................................................9
26. RIGHT OF REENTRY........................................................9
27. MISCELLANEOUS...........................................................9
27.1 Independent Obligations; No Offset.............................9
27.2 Time of Essence...............................................10
27.3 Applicable Law................................................10
27.4 Assignment by Landlord........................................10
27.5 Commencement Date and Estoppel Certificates...................10
27.6 Signs, Building Name and Building Address.....................10
27.7 Notices.......................................................10
27.8 Entire Agreement, Amendment and Binding Effect................10
27.9 Severability..................................................10
27.10 Number and Gender, Captions and References....................10
27.11 Attorneys' Fees...............................................11
27.12 Brokers.......................................................11
27.13 Interest on Tenant's Obligations..............................11
27.14 Authority.....................................................11
27.15 Recording.....................................................11
27.16 Exhibits......................................................11
27.17 Multiple Counterparts.........................................11
Signature Page ...............................................12
</TABLE>
<PAGE> 4
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "LEASE") is entered as of July 15, 1997 ,
between UTAH STATE RETIREMENT INVESTMENT FUND ("LANDLORD") and PETE'S BREWING
COMPANY, A CALIFORNIA CORPORATION ("TENANT").
1. DEFINITIONS. The definitions of certain of the capitalized terms used in this
Lease are set forth in the Glossary of Defined Terms attached as EXHIBIT A.
2. PREMISES. Subject to the provisions of this Lease, Landlord hereby leases to
Tenant, and Tenant hereby leases from Landlord, approximately 821 rentable
square feet of space in the Building, which space is outlined on the floor plan
attached hereto as Exhibit B (the "PREMISES"). In connection with such demise,
Landlord hereby grants to Tenant the non-exclusive right to use during the Term
all Common Areas designed for the use of all tenants in the Building, in common
with all tenants in the Building and their invitees, for the purposes for which
designed and in accordance with all Legal Requirements. By occupying the
Premises, Tenant accepts the Premises as being suitable for Tenant's intended
use of the Premises.
3. TERM. The Term of this Lease shall commence on the Commencement Date (which
is scheduled to be August 15, 1997) and shall expire at 5:00 pm. August 31, 2000
unless earlier terminated as provided herein (the "TERM").
4. USE. Tenant shall occupy and use the Premises solely for lawful, general
business office purposes in strict compliance with the Building Rules and
Regulations from time to time in effect and all other Legal Requirements.
5. RENT.
5.1 BASE RENT. In consideration of Landlord's leasing the Premises to
Tenant, Tenant shall pay to Landlord as follows:
<TABLE>
<CAPTION>
Monthly
Term Amount
---- ------
<S> <C>
September 1, 1997 - August 31, 1998 $1,461.38
September 1, 1998 - August 31, 1999 $1,529.79
September 1, 1999 - August 31, 2000 $1,598.21
</TABLE>
The Base Rent set forth in this Section 5.1 is a negotiated figure and
shall govern whether or not the actual gross rentable square footage of the
Premises is the same as set forth in Section 2 hereof or changes pursuant to the
standards set in the definition of Net Rentable Area. Tenant shall have no right
to withhold, deduct or offset any amount of the monthly Base Rent or any other
sum due hereunder even if the actual gross rentable square footage of the
premises is less than that set forth in Section 2 hereof or changes pursuant to
the standards set forth in the definition of Net Rentable Area.
5.3 Additional Rent. For purposes of this Lease, Tenant's "ADDITIONAL
RENT" for any Fiscal Year (or portion thereof) shall mean the product of (a) Net
Rentable Area of the Premises multiplied by (b) the difference between (i) the
Operating Expenses divided by the Net Rentable Area of the Building minus (ii)
the Expense Stop, all as applicable for the period in question. By the
Commencement Date, Landlord shall estimate the Additional Rent to be due by
Tenant for the balance of the Fiscal Year in which the Commencement Date occurs.
Thereafter, unless Landlord delivers to Tenant a revision of the estimated
Additional Rent, Tenant shall pay to Landlord, coincident with Tenant's payment
of Base Rent, an amount equal to the estimated Additional Rent for the remainder
of such year divided by the number of months remaining in such year. From time
to time during any Fiscal Year, Landlord may estimate and re-estimate the
Additional Rent to be due by Tenant for that Fiscal Year and deliver a copy of
the estimate or re-estimate to Tenant. Thereafter, the monthly installments of
Additional Rent payable by Tenant shall be appropriately adjusted in accordance
with the estimation so that, by the end of the Fiscal Year, Tenant shall have
paid all of the Additional Rent as estimated by Landlord. After the conclusion
of each Fiscal Year during the Term, and after the termination or expiration of
the Term, Landlord shall deliver to Tenant a statement of actual Additional Rent
due by Tenant for the Fiscal Year (or, with respect to termination or
expiration, the portion
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of the Fiscal Year) just ended. Within 30 days thereafter, Tenant shall pay to
Landlord or Landlord shall credit against the next installment of Additional
Rent due by Tenant (or Landlord shall refund to Tenant, if the Term has expired
and ail payments due by Tenant to Landlord have been paid in full) the
difference between the actual Additional Rent due for such year and the
estimated Additional Rent paid by Tenant during such year. Tenant may review, at
Tenant's expense and after giving 20-days' prior written notice to Landlord,
Landlord's records relating to Operating Expenses for any periods within two
Fiscal Years prior to the review; provided, however, no review shall extend to
periods of time preceding the Commencement Date. In lieu of allowing Tenant to
review Landlord's records under this Section 5.3, Landlord may deliver to Tenant
a report of the Operating Expenses prepared by a certified public accountant,
which report shall be conclusive for purposes of this Lease.
5.4 PARKING CHARGES. Tenant shall at all times during the Term lease from
Landlord three (3) unassigned automobile parking spaces in the Parking Facility
at no extra charge.
5.5 PAYMENT OF RENT. Except as otherwise expressly provided in this Lease,
all Rent shall be due in advance monthly installments on the first day of each
calendar month during the Term. Rent shall be paid to Landlord at its address
recited in Section 27.7 or to such other person or at such other address as
Landlord may from time to time designate in writing. Rent shall be paid without
notice, demand, abatement, deduction or offset in legal tender of the United
States of America. If the Term commences or ends on other than the first or the
last day of a calendar month, the Rent for the partial month shall be prorated
on the basis of the number of days during the month for which the Term was in
effect. If the Term commences or ends on other then the first or the last day of
a Fiscal Year, the Additional Rent for the partial Fiscal Year shall be prorated
on the basis of the number of days during the Fiscal Year for which the Term was
in effect.
5.6 DELINQUENT PAYMENTS AND HANDLING CHARGE. All Rent and other payments
required of Tenant hereunder shall bear interest from the date due until the
date paid at the rate of interest specified in Section 27.13. Alternatively,
Landlord may charge Tenant, as additional Rent hereunder, a fee equal to five
percent of the delinquent payment to reimburse Landlord for its cost and
inconvenience incurred as a consequence of Tenant's delinquency. In no event,
however, shall the charges permitted under this Section 5.6 or elsewhere in this
Lease, to the extent the same are considered to be interest under applicable
law, exceed the maximum rate of interest allowable under applicable law.
5.7 PREPAID RENT AND SECURITY DEPOSIT. Landlord hereby acknowledges
receipt of $ 2,368.85, representing (a) the first monthly installment of Base
Rent paid in advance, to be applied to the Rent for the first PARTIAL month of
the Term when due, and (b) the Security Deposit as security for the full and
timely payment and performance by Tenant of its obligations under this Lease.
Landlord may apply any or all of the Security Deposit toward the payment of any
sum or the performance of any obligation which Tenant was obligated, but failed,
to pay or perform hereunder. The Security Deposit shall not be considered an
advance payment of Rent by Tenant or a measure of or a limit to Landlord's
damages upon an Event of Default. TENANT SHALL PAY TO LANDLORD A DEPOSIT OF
$15.00 FOR EACH ACCESS CARD REQUESTED TO GAIN ACCESS TO THE BUILDING,
6. CONSTRUCTION OF IMPROVEMENTS.
6.1 GENERAL. Subject to events of Force Majeure, Landlord shall install,
furnish, perform and apply, at its expense, the Landlord's Work as specified in
the Work Letter. Performance of the Landlord's Work shall constitute Landlord's
sole construction obligation to Tenant under this Lease.
6.2 ACCESS BY TENANT PRIOR TO COMMENCEMENT OF TERM. Provided that Tenant
obtains and delivers to Landlord the certificates or policies of insurance
called for in Section 17.1, Landlord, in its sole discretion, may permit Tenant
and its employees, agents, contractors and suppliers to enter the Premises
before the Commencement Date (and such entry, alone, shall not constitute
Tenant's taking possession of the Premises for the purpose of Section 6.3(c)) to
prepare the Premises for Tenant's occupancy. Tenant and each other person or
firm who or which enters the Premises before the Commencement Date shall conduct
itself so as to not interfere with Landlord or other occupants of the Building.
Landlord may withdraw any permission granted under this Section 6.2 upon
24-hours' notice to Tenant if Landlord, in its sole discretion, determines that
any such interference has been or may be caused. Any prior entry shall be under
all of the terms of this Lease (other than the obligation to pay Base Rent and
Additional Rent) and at Tenant's sole risk. Landlord shall not be liable in any
way for personal injury, death or property damage (including damage to any
personal property which Tenant May bring into, or any work which Tenant may
perform in, the Premises) which may occur in or about the Complex by Tenant or
such other person or firm as a result of any prior entry.
6.3 COMMENCEMENT DATE: ADJUSTMENTS TO COMMENCEMENT DATE. For purposes of
this Lease, the "COMMENCEMENT DATE" shall mean the earliest of: (a) the date on
which Landlord substantially completes the Landlord's Work and tenders
possession of the Premises to Tenant; (b) the date on which Landlord would have
substantially completed the Landlords Work and tendered possession of the
Premises to Tenant but for (i) the delay or failure of Tenant to furnish
information or other matters required in the Work Letter, (ii) Tenants request
for changes in the Plans or non-Building Standard Items or (iii) any other
action or inaction of Tenant, or any person or firm employed or retained by
Tenant or (1) the date on which Tenant takes possession of the Premises. If by
the scheduled Commencement Date specified in Section 3 the Landlord's Work has
not been substantially completed, and such failure to substantially complete
renders the Premises untenable for their intended purpose, all as reasonably
determined by Landlord, or Landlord is unable to tender possession of the
Premises to Tenant, then the
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Commencement Date (and the commencement of payment of Base Rent and Additional
Rent) shall be postponed until the Landlord's Work is substantially completed as
reasonably determined by Landlord or until possession of the Premises is
tendered to Tenant, as the case may be. Such postponement shall extend the
scheduled expiration of the Term for a number of days equal to the postponement.
The postponement of the payment of Base Rent and Additional Rent under this
Section 6.3 shall be Tenant's exclusive remedy for Landlord's delay in
completing the Landlord's Work or tendering possession of the Premises to
Tenant.
7. SERVICES TO BE FURNISHED BY LANDLORD.
7.1 GENERAL. Subject to applicable Legal Requirements and Tenant's
performance of its obligations hereunder, Landlord shall use all reasonable
efforts to furnish the following services:
(a) Air-conditioning and heating to the Premises during Building
Operating Hours, at such temperatures and in such amounts as are
considered by Landlord to be suitable and standard (thus excluding
air-conditioning or heating for electronic data processing or other
specialized equipment);
(b) Hot and cold water at those points of supply common to all
floors for lavatory and drinking purposes only;
(c) Janitor service and periodic window washing in and about the
Building and the Premises;
(d) Elevator service, if necessary, to provide access to and egress
from the Premises;
(e) Electric current during Building Operating Hours for normal
office machines and other machines of low electrical consumption (which
shall exclude electric current for electronic data processing equipment,
lighting in excess of Building Standard or any other item of electrical
equipment which singly consumes more than 0.5 kilowatts per hour at
rated capacity or requires a voltage other than 120 volts single phase);
and
(f) Replacement of fluorescent lamps in Building Standard light
fixtures installed by Landlord and of incandescent bulbs or fluorescent
lamps in all public restrooms, stairwells and other common areas in the
Building.
if any of the services described above or elsewhere in this Lease are
interrupted, Landlord shall use reasonable diligence to promptly restore same.
However, neither the interruption or cessation of such services nor the failure
of Landlord to restore same shall render Landlord liable for damages to person
or property, or be construed as an eviction of Tenant, or work an abatement of
Rent or relieve Tenant from fulfilling any of its other obligations hereunder.
7.2 KEYS. Landlord shall furnish Tenant, at Landlords expense, with three
(3) keys, and at Tenant's expense with such additional keys as Tenant may
request, to unlock each corridor door entering the Premises. Tenant shall not
install, or permit to be installed, any additional lock on any door into or in
the Premises or make, or permit to be made, any duplicates of keys to the
Premises. Landlord shall be entitled at all times to possession of a duplicate
of all keys to all doors to or inside of the Premises. All keys referred to in
this Section 7.2 shall remain the property of Landlord. Upon the expiration or
termination of the Term, Tenant shall surrender all such keys to Landlord and
shall deliver to Landlord the combination to all locks on all safes, cabinets
and vaults which will remain in the Premises. Landlord shall be entitled to
install, operate and maintain security systems in or about the Premises and the
Complex which monitor, by closed circuit television or otherwise, all persons
leaving or entering the Complex, the Building and the Premises.
7.3 TENANT IDENTITY. Landlord shall provide and install, in Building
Standard graphics, letters or numerals identifying Tenant's name and suite
number on entrance doors to the Premises. Without Landlord's prior written
consent, no other signs, numerals, letters, graphics, symbols or marks
identifying Tenant shall be placed on the exterior, or on the interior if they
are visible from the exterior, of the Premises. Landlord shall install up to one
(1) directory strip(s) for each 821 net rentable square feet in the Premises,
listing the names and suite numbers of Tenant on the Building directory board to
be placed in the main lobby of the Building.
7.4 CHARGES. Tenant shall pay to Landlord, monthly as billed, as
additional Rent, such charges as may be separately metered or as Landlord may
compute for the following:
(a) any utility services utilized by Tenant for computers, data processing
equipment or other electrical equipment in excess of that agreed to be
furnished by Landlord pursuant to Section 7.1(e),
(b) lighting installed in the Premises in excess of Building Standard
lighting, or provided at times other than Building Standard Hours;
(c) air-conditioning, heating and other services in excess of that stated
in Section 7.1(a) or provided at times other than Building Operating
Hours; and
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HVAC and lighting utilized at times other than Building Standard Hours
will be furnished only upon the request of Tenant, provided that Tenant shall
pay to the Landlord for the actual costs of such additional services monthly,
upon receipt of a bill therefor, the sum equal to the amount charged to Landlord
by the applicable utilities authority plus a $5.00 monthly service charge for
such metering recording device. Tenant acknowledges that such service and
temperature may be subject to change by local, county, state or federal
regulation. Whenever machines or equipment that generate abnormal heat are used
in the Leased Premises which affect the temperature otherwise maintained by the
air conditioning system, Landlord shall have the right to install supplemental
air conditioning in the Leased Premises, and the cost thereof, including the
cost of installation, operating, use and maintenance, shall be paid by Tenant to
Landlord as additional rental upon demand.
With respect to any other Non-Building Standard services provided to
Tenant, Landlord may elect to estimate the charges to be paid by Tenant under
this Section 7.4 and bill such charges to Tenant monthly in advance, in which
event Tenant shall promptly pay the estimated charges. When the actual charges
are determined by Landlord an appropriate cash adjustment shall be made between
Landlord and Tenant to account for any underpayment or overpayment by Tenant.
7.5 OPERATING HOURS. Subject to Building Rules and Regulations and such
security standards as Landlord may from time to time adopt, the Building shall
be open to the public during the Building Operating Hours and the Premises shall
be open to Tenant during hours other then Building Operating Hours.
8. REPAIR AND MAINTENANCE.
8.1 BY LANDLORD. Landlord shall maintain the Building (excluding leasehold
improvements which become fixtures thereto) in a good and operable condition,
and shall make such repairs and replacements as may be required to maintain the
Building in such condition. This Section 8.1 shall not apply to damage
resulting from a Taking (as to which Section 14 shall apply), or damage
resulting from a casualty (as to which Section 15.1 shall apply) or to damage
for which Tenant is otherwise responsible under this Lease.
8.2 BY TENANT. Tenant shall maintain the Premises in a clean, safe,
operable, attractive condition, and will not commit or allow to remain any waste
or damage to any portion of the Premises. Tenant shall repair or replace,
subject to Landlord's direction and supervision, any damage to the Complex
caused by Tenant or Tenant's agents, contractors or invitees. If Tenant fails to
make such repairs or replacements, Landlord may make same at Tenant's cost. Such
cost shall be payable to Landlord by Tenant on demand as additional Rent. All
contractors, workmen, artisans and other persons which or who Tenant proposes to
retain to perform Work in the Premises (or the Complex, pursuant to the second
sentence of this Section 8.2) pursuant to this Section 8.2 or Section 11 shall
be approved by Landlord prior to the commencement of any such work.
9. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for and shall pay, before
their becoming delinquent, all taxes and assessments levied against any personal
property placed by Tenant in the Premises (even if same becomes a fixture by
operation of law or the property of Landlord by operation of this Lease),
including any additional Impositions which may be assessed, levied, charged or
imposed against Landlord or the Building by reason of Non-Building Standard
Items in the Premises. Tenant may withhold payments of any taxes and assessments
described in this Section 9 so long as Tenant contests its obligation to pay in
accordance with applicable law and the non-payment thereof does not pose a
threat of loss or seizure of the Building or any interest of Landlord therein.
10. TRANSFER BY TENANT.
10.1 GENERAL. Without the prior written consent of Landlord, Tenant shall
not effect or suffer any Transfer. Any attempted Transfer without such consent
shall be void. If Tenant desires to effect a Transfer, it shall deliver to
Landlord written notice thereof in advance of the date on which Tenant proposes
to make the Transfer, together with all of the terms of the proposed Transfer
and the identity of the proposed Transferee. Landlord shall have 30 days
following receipt of the notice and information within which to notify Tenant in
writing whether Landlord elects (a) to refuse to consent to the Transfer and to
terminate this Lease as to the space proposed to be Transferred as of the date
so specified by Tenant, in which event Tenant will be relieved of all further
obligations hereunder as to such space, (b) to refuse to consent to the Transfer
and to continue this Lease in full force as to the entire Premises or (c) to
permit Tenant to effect the proposed Transfer. If Landlord fails to notify
Tenant of its election within said 30 day period, Landlord shall be deemed to
have elected option (b). The consent by Landlord to a particular Transfer shall
not be deemed a consent to any other Transfer. If a Transfer occurs without the
prior written consent of Landlord as provided herein, Landlord may nevertheless
collect rent from the Transferee and apply the net amount collected to the Rent
payable hereunder, but such collection and application shall not constitute a
waiver of the provisions hereof or a release of Tenant from the further
performance of its obligations hereunder.
10.2 CONDITIONS. The following conditions shall automatically apply to
each Transfer, without the necessity of same being stated in or referred to in
Landlord's written consent:
(a) Tenant shall execute, have acknowledged and deliver to
Landlord, and cause the Transferee to execute, have acknowledged and
deliver to Landlord, an instrument in form and substance acceptable to
Landlord in which (i) the Transferee adopts this Lease and agrees to
perform, jointly and severally with
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Tenant, all of the obligations of Tenant hereunder, as to the space
transferred to it, (ii) the Transferee grants Landlord an express first
and prior security interest in its personal property brought into the
transferred space to secure its obligations to Landlord hereunder, (iii)
Tenant subordinates to Landlord's statutory lien and security interest
any liens, security interests or other rights which Tenant may claim
with respect to any property of the Transferee, (iv) Tenant agrees with
Landlord that, if the rent or other consideration due by the Transferee
exceeds the Rent for the transferred space, then Tenant shall pay
Landlord as additional Rent hereunder all such excess rent and other
consideration immediately upon Tenant's receipt thereof, (v) Tenant and
the Transferee agree to provide to Landlord, at their expense, direct
access from a public corridor in the Building to the transferred space,
(vi) the Transferee agrees to use and occupy the transferred space
solely for the purpose specified in Section 4 and otherwise in strict
accordance with this Lease and (vii) Tenant acknowledges that,
notwithstanding the Transfer, Tenant remains directly and primarily
liable for the performance of all the obligations of Tenant hereunder
(including, without limitation, the obligation to pay all Rent), and
Landlord shall be permitted to enforce this Lease against Tenant or the
Transferee, or both, without prior demand upon or proceeding in any way
against any other persons, and
(b) Tenant shall deliver to Landlord a counterpart of all
instruments relative to the Transfer executed by all parties to such
transaction (except Landlord).
10.3 LIENS. Without in any way limiting the generality of the foregoing,
Tenant shall not grant, place or suffer, or permit to be granted, placed or
suffered, against the Complex or any portion thereof, any lien, security
interest, pledge, conditional sale contract, claim, charge or encumbrance
(whether constitutional, contractual or otherwise) and if any of the aforesaid
does arise or is asserted, Tenant will, promptly upon demand by Landlord and at
Tenant's expense, cause same to be released.
11. ALTERATIONS. Tenant shall not make, or permit to be made, any alteration,
improvement or addition to, or install, or permit to be installed, any fixture
or equipment (other than desk top electrical equipment) in, the Premises without
the prior written consent of Landlord. All such alterations, improvements and
additions (including all articles attached to the floor, wall or ceiling of the
Premises) shall become the property of Landlord and shall, at Landlord's
election, be (a) surrendered with the Premises as part thereof at the
termination or expiration of the Term, without any payment, reimbursement or
compensation therefor, or (b) removed by Tenant, at Tenant's expense, with all
damage caused by such removal repaired by Tenant. Tenant may remove Tenant's
trade fixtures, office supplies, movable office furniture and equipment not
attached to the Building provided such removal is made within five days after
the expiration of the Term, no uncured Event of Default has occurred and Tenant
promptly repairs all damage caused by such removal.
12. SPECIFICALLY PROHIBITED USES. Tenant will not (a) use, occupy or permit the
use or occupancy of the Premises for any purpose or in any manner which is or
may be, directly or indirectly, violative of any Legal Requirement, or dangerous
to life or property, or a public or private nuisance or disruptive or
obstructive of any other tenant of the Building, (b) keep, or permit to be kept,
any substance in or conduct, or permit to be conducted, any operation from the
Premises which might emit offensive odors or conditions into other portions of
the Building, or make undue noise or create undue vibrations, (c) commit or
permit to remain any waste to the Premises, (d) install or permit to remain any
improvements to the Premises (other than window coverings which have first been
approved by Landlord) which are visible from the outside of the Premises, or
exceed the structural loads of floors or walls of the Building, or adversely
affect the mechanical, plumbing or electrical systems of the Building or affect
the structural integrity of the Building in any way, (e) install any food, soft
drink or other vending machine (other than those for the exclusive,
non-commercial use of Tenant and its business invitees) in the Premises or (f)
commit, or permit to be committed, any action or circumstance in or about the
Building which, directly or indirectly, would or might justify any insurance
carrier in cancelling or increasing the premium on the fire and extended
coverage insurance policy maintained by Landlord on the Building or contents,
and if any increase results from any act of Tenant, then Tenant shall pay such
increase promptly upon demand therefor by Landlord.
13. ACCESS BY LANDLORD. Landlord, its employees, contractors, agents and
representatives, shall have the right (and Landlord, for itself and such persons
and firms, hereby reserves the right) to enter the Premises at all hours (a) to
inspect, clean, maintain, repair, replace or alter the Premises or the Building,
(b) to show the Premises to prospective purchasers (or, during the last 12
months of the Term, to prospective tenants), (c) to determine whether Tenant is
performing its obligations hereunder and, if it is not, to perform same at
Landlord's option and Tenant's expense or (d) for any other purpose deemed
reasonable by Landlord. In an emergency, Landlord (and such persons and firms)
may use any means to open any door into or in the Premises without any liability
therefor. Entry into the Premises by Landlord or any other person or firm named
in the first sentence of this Section 13 for any purpose permitted herein shall
not constitute a trespass or an eviction (constructive or otherwise), or entitle
Tenant to any abatement or reduction of Rent, or constitute grounds for any
claim (and Tenant hereby waives any claim) for damages for any injury to or
interference with Tenant's business, for loss of occupancy or quiet enjoyment or
for consequential damages.
14. CONDEMNATION. If all of the Complex is Taken, or if so much of the Complex
is Taken that, in Landlord's opinion, the remainder cannot be restored to an
economically viable, quality office building, or if the awards payable to
Landlord as a result of any Taking are, in Landlords opinion, inadequate to
restore the remainder to an economically viable, quality office building,
Landlord may, at its election, exercisable by the giving of written notice to
Tenant within 60 days after the date of the Taking, terminate this Lease as of
the date of the Taking or the
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date Tenant is deprived of possession of the Premises (whichever is later). If
this Lease is not terminated as result of a Taking, Landlord shall restore the
Premises remaining after the Taking to a Building Standard condition. During the
period of restoration, Base Rent shall be abated to the extent the Premises are
rendered untenantable and, after the period of restoration, Base Rent and
Tenant's Share shall be reduced in the proportion that the area of the Premises
Taken or otherwise rendered untenantable bears to the area of the Premises just
prior to the Taking. If any portion of Base Rent is abated under this Section
14, Landlord may elect to extend the expiration date of the Term for the period
of the abatement. All awards, proceeds, compensation or other payments from or
with respect to any Taking of the Complex or any portion thereof shall belong to
Landlord, Tenant hereby assigning to Landlord all of its right, title, interest
and claim to same. Tenant may assert a claim for and recover from the condemning
authority, but not from Landlord, such compensation as may be awarded on account
of Tenant's moving and relocation expenses, and depreciation to and loss of
Tenant's moveable personal property.
15. CASUALTY.
15.1 GENERAL. TENANT shall give prompt written notice to Landlord of any
casualty to the Complex of which Tenant is aware and any casualty to the
Premises. If the Complex or the Premises are totally destroyed, or if the
Complex or the Premises are partially destroyed but in Landlord's opinion, they
cannot be restored to an economically viable, quality office building, or if the
insurance proceeds payable to Landlord as a result of any casualty are, in
Landlord's opinion, inadequate to restore the portion remaining to an
economically viable and quality office building, Landlord may, at its election
exercisable by the giving of written notice to Tenant within 60 days after the
casualty, terminate this Lease as of the date of the casualty or the date Tenant
is deprived of possession of the Premises (whichever is later). If this Lease is
not terminated as a result of a casualty, Landlord shall (subject to Section
15.2) restore the Premises to a Building Standard condition. During the period
of restoration, Base Rent shall be abated to the extent the Premises are
rendered untenantable and, after the period of restoration, Base Rent and
Tenant's Share shall be reduced in the proportion that the area of the Premises
remaining tenantable after the casualty bears to the area of the Premises just
prior to the casualty. If any portion of Base Rent is abated under this Section
15. 1, Landlord may elect to extend the expiration date of the Term for the
period of the abatement.
15.2 ACTS OF TENANT. Notwithstanding any provisions of this Lease to the
contrary, if the Premises or the Complex are damaged or destroyed as a result of
a casualty arising from the acts or omissions of Tenant, or any of Tenant's
officers, directors, shareholders, partners, employees, contractors, agents,
invitees or representatives, (a) Tenant's obligation to pay Rent and to perform
its other obligations under this Lease shall not be abated, reduced or altered
in any manner, (b) Landlord shall not be obligated to repair or restore the
Premises or the Complex and (c) subject to Section 17.2, Tenant shall be
obligated, at Tenant's cost, to repair and restore the Premises or the Complex
to the condition they were in just prior to the damage or destruction under the
direction and supervision of, and to the satisfaction of, Landlord and any
Landlord Mortgagee.
16. SUBORDINATION AND ATTORNMENT.
16.1 GENERAL. This Lease, Tenant's leasehold estate created hereby and
all of Tenant's rights, titles and interests hereunder and in and to the
Premises are subject and subordinate to any Mortgage presently existing or
hereafter placed upon all or any portion of the Complex. However, Landlord and
Landlord's Mortgagee may, at any time upon the giving of written notice to
Tenant and without any compensation or consideration being payable to Tenant,
make this Lease, and the aforesaid leasehold estate and rights, titles and
interests, superior to any Mortgage. Upon the written request by Landlord or by
Landlord's Mortgagee to Tenant, and within five (5) days of the date of such
request, and without any compensation or consideration being payable to Tenant,
Tenant shall execute, have acknowledged and deliver a recordable instrument
confirming that this Lease, Tenant's leasehold estate in the Premises and all of
Tenant's rights, titles and interests hereunder are subject and subordinate (or,
at the election of Landlord or Landlord's Mortgagee, superior) to the Mortgage
benefiting Landlord's Mortgagee.
16.2 ATTORNMENT. Upon the written request of any person or party
succeeding to the interest of Landlord under this Lease, Tenant shall
automatically become the tenant of and attorn to such successor in interest
without any change in any of the terms of this Lease. No successor in interest
shall be (a) bound by any payment of Rent for more than one month in advance,
except payments of security for the performance by Tenant of Tenant's
obligations under this Lease, (b) subject to any offset, defense or damages
arising out of a default or any obligations of any preceding Landlord or (c)
bound by any amendment of this Lease entered into after Tenant has been given
written notice of the name and address of Landlord's Mortgagee and without the
written consent of Landlord's Mortgagee or such successor in interest. The
subordination, attornment and mortgage protection clauses of this Section 16
shall be self-operative and no further instruments of subordination, attornment
or mortgagee protection need be required by any Mortgagee or successor in
interest thereto. Nevertheless upon the written request therefor and without any
compensation or consideration being payable to Tenant, Tenant agrees to execute,
have acknowledged and deliver such instruments as may be requested to confirm
the same.
17. INSURANCE.
17.1 GENERAL. Tenant shall obtain and maintain throughout the Term the
following policies of insurance:
(a) fire and all risk insurance, with vandalism, malicious mischief
and sprinkler leakage endorsements, on all of Tenant's personal property
located in, and on all Non-Building Standard Items to, the Premises in
an amount not less than eighty percent of the replacement cost thereof;
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(b) comprehensive general and contractual liability insurance
against claims for personal injury, bodily injury, death and property
damage occurring in or about the Premises, such insurance to afford
protection to the limits of (i) not less than $1,000,000 per occurrence;
(c) insurance required hereunder shall be written by companies
licensed to do business in the State of Texas and shall have a minimum
rating of A:X by Best's Key Rating Guide.
(d) such other policy or policies of insurance as Landlord may
reasonably require or as Landlord is then requiring from one or more
other tenants in the Building.
Tenant shall deliver to Landlord, prior to the Commencement Date, certificates
of such insurance and shall, at all times during the Term, deliver to Landlord
upon request true copies of such insurance policies. The policy described in
clause (b) shall (i) name Landlord as an addition insured, (ii) provide that it
will not be cancelled, reduced or nonrenewed without 30-days' prior written
notice to Landlord, (iii) insure performance of the indemnities of Tenant
contained in Section 18 and elsewhere in this Lease and (iv) be primary
coverage, so that any insurance coverage obtained by Landlord shall be in excess
thereto. Tenant shall deliver to Landlord certificates of renewal at least 30
days before the expiration date of each such policy and copies of new policies
at least 30 days before terminating any such policies. All policies of insurance
required to be obtained and maintained by Tenant shall be subject to the
approval of Landlord as to terms, coverage, deductibles and issuer.
17.2 WAIVER OF SUBROGATION. Landlord and Tenant hereby waive all claims,
rights of recovery and causes of action that either party or any party claiming
by, through or under such party may now or hereafter have by subrogation or
otherwise against the other party or against any of the other party's officers,
directors, shareholders, partners or employees for any loss or damage that may
occur to the Complex, the Premises, Tenant's improvements or any of the contents
of any of the foregoing by reason of fire or other casualty, or by reason of any
other cause except gross negligence or willful misconduct (thus including simple
negligence of the parties hereto or their officers, directors, shareholders,
partners or employees), that could have been insured against under the terms of
(a) in the case of Landlord, the standard fire and extended coverage insurance
policies available in the state where the Complex is located at the time of the
casualty and (b) in the cue of Tenant, the fire and extended coverage insurance
policy required to be obtained and maintained under Section 17.1; provided,
however, that the waiver set forth in this Section 17.2 shall not apply to any
deductibles on insurance policies carried by Landlord or to any coinsurance
penalty which Landlord might sustain. Landlord and Tenant shall cause an
endorsement to be issued to their respective insurance policies recognizing this
waiver of subrogation.
18. TENANT'S INDEMNITY. Subject to Section 17.2, Tenant shall defend, indemnify
and hold harmless Landlord and Landlord's officers, directors, shareholders,
partners and employees from and against, all liabilities, obligations, losses,
damages, penalties, claims, actions, suits, costs, expenses and disbursements
(including court costs and reasonable attorneys' fees) resulting from any
injuries to or death of any person or damage to any property occurring during
the Term in or about the Premises.
19. THIRD PARTIES: ACTS OF FORCE MAJEURE. Landlord shall have no liability to
Tenant, or to Tenant's officers, directors, shareholders, partners, employees,
agents, contractors or invitees, for bodily injury, death, property damage,
business interruption, loss of profits, loss of trade secrets or other direct or
consequential damages occasioned by (a) the acts or omissions of any other
tenant or such other tenant's officers, directors, shareholders, partners,
employees, agents, contractors or other invitees within the Complex, (b) Force
Majeure, (c) vandalism, theft, burglary and other criminal acts (other than
those committed by Landlord and its employees), (d) water leakage or (e) the
repair, replacement, maintenance, damage, destruction or relocation of the
Premises.
20. SECURITY INTEREST. As security for Tenant's payment of Rent and performance
of all of its other obligations under this Lease, Tenant hereby grants to
Landlord a security interest in all property of Tenant now or hereafter placed
in the Premises. Landlord, as secured party, shall be entitled to all of the
rights, remedies and recourses afforded to a secured party under the Texas
Uniform Commercial Code, which rights, remedies and recourses shall be
cumulative of all other rights, remedies, recourses, liens and security
interests afforded Landlord by law, equity or this Lease. Contemporaneously with
the execution of this Lease, Tenant shall execute and deliver, as debtor,
promptly upon request and without any compensation or consideration being
payable to Tenant, such additional financing statement or statements as Landlord
may request. However, Landlord may at any time file a copy of this Lease as a
financing statement.
21. CONTROL OF COMMON AREAS. Landlord shall have the exclusive control over the
Common Areas. Landlord may, from time to time, create different Common Areas,
close or otherwise modify the Common Areas, and modify and the Building Rules
and Regulations with respect thereto.
22. RIGHT TO RELOCATE. Landlord retains the right and power, to be exercised
reasonably and at Landlord's expense, to relocate Tenant within the Building in
space which is comparable in size to the Premises and is suited to Tenant's use.
Instances when the exercise of Landlord's right and power to relocate Tenant
shall be deemed reasonable include, but shall not be limited to, instances where
Landlord desires to consolidate the rentable area in the Building to provide
Landlord's services more efficiently, or to provide contiguous vacant space for
a prospective tenant. Landlord shall not be liable to Tenant for any claims
arising in connection with a relocation permitted under this Section 22.
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23. QUIET ENJOYMENT. Provided Tenant has performed all its obligations under
this Lease, Tenant shall and may peaceably and quietly have, hold, occupy, use
and enjoy the Premises during the Term subject to the provisions of this Lease.
Landlord shall warrant and forever defend Tenant's right to occupancy of the
Premises against the claims of any and all persons whomsoever lawfully claiming
the same or any part thereof, by, through or under Landlord, but not otherwise,
subject to the provisions of this Lease.
24. DEFAULT BY TENANT.
24.1 EVENTS OF DEFAULT. Each of the following occurrences shall constitute
an Event of Default (herein so called):
(a) The failure of Tenant to pay Rent as and when due hereunder and
the continuance of such failure for a period of three days after written
notice from Landlord to Tenant specifying the failure; provided,
however, after Landlord has given Tenant written notice pursuant to this
clause (a) on two separate occasions Landlord shall not be required to
give Tenant any further notice under this clause (a);
(b) The failure of Tenant to perform, comply with or observe any
other agreement, obligation or undertaking of Tenant, or any other term,
condition or provision, in this Lease, and the continuance of such
failure for a period of ten days after written notice from Landlord to
Tenant specifying the failure;
(c) The abandonment of the Premises by Tenant or the failure of
Tenant to occupy the Premises or any significant portion thereof,
(d) The filing of a petition by or against Tenant (the term
"Tenant" also meaning, for the purpose of this clause (d), any guarantor
of the named Tenants obligations hereunder) (i) in any bankruptcy or
other insolvency proceeding, (ii) seeking any relief under the
Bankruptcy Code or any similar debtor relief law, (iii) for the
appointment of a liquidator or receiver for all or substantially all of
Tenant's property or for Tenant's interest in this Lease or (iv) to
reorganize or modify Tenant's capital structure; and
(e) The admission by Tenant in writing that it cannot meet its
obligations as they become due or the making by Tenant of an assignment
for the benefit of its creditors.
24.2 REMEDIES OF LANDLORD. Upon any Event of Default, Landlord may, at
Landlord's option and in addition to all other rights, remedies and recourses
afforded Landlord hereunder or by law or equity, do any one or more of the
following:
(a) Terminate this Lease by the giving of written notice to Tenant,
in which event Tenant shall pay to Landlord the sum of (i) all Rent and
other amounts accrued hereunder to the date of termination, (ii) all
amounts due under Section 24.3 and (iii) liquidated damages in an amount
equal to (A) the total Rent that Tenant would have been required to pay
for the reminder of the Term discounted to present value at the prime
lending rate (or equivalent rate, however denominated) in effect on the
date of termination at the largest national bank in the state where the
Complex is located minus (B) the then present fair rental value of the
Premises for such period, similarly discounted.
(b) Terminate Tenant's right to possession of the Premises without
terminating this Lease by the giving of written notice to Tenant, in
which event Tenant shall pay to Landlord (i) all Rent and other amounts
accrued hereunder to the date of termination of possession, (ii) all
amounts due from time to time under Section 24.3 and (iii) all Rent and
other sums required hereunder to be paid by Tenant during the remainder
of the Term, diminished by any net sums thereafter received by Landlord
through reletting the Premises during said period. Reentry by Landlord
in the Premises will not affect the obligations of Tenant hereunder for
the unexpired Term. Landlord may bring action against Tenant to collect
amounts due by Tenant on one or more occasions, without the necessity of
Landlords waiting until expiration of the Term. If Landlord elects to
proceed under this Section 24.2(b), it may at any time elect to
terminate this Lease pursuant to Section 24.2(a).
(c) Without notice, alter any and all locks and other security
devices at the Premises without being obligated to deliver new keys to
the Premises, unless Tenant has cured all Events of Default before
Landlord has terminated this Lease under Section 24.2(a) or has entered
into a lease to relet all or a portion of the Premises.
(d) If an Event of Default specified in Section 24.1(c) occurs,
Landlord may remove and store any property that remains on the Premises,
and, if Tenant does not claim such property within ten days after
Landlord has delivered to Tenant notice of such storage, Landlord may
appropriate, sell, destroy, or otherwise dispose of the property in
question without notice to Tenant or any other person and without any
obligation to account for such Property.
24.3 PAYMENT BY TENANT. Upon any Event of Default, Tenant shall also pay
to Landlord all costs and expenses incurred by Landlord, including court costs
and reasonable attorneys' fees, in (a) retaking or otherwise obtaining
possession of the Premises, (b) removing and storing Tenant's or any other
occupant's property, (c)
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repairing, restoring, altering, remodeling or otherwise putting the Premises
into condition acceptable to a new tenant or tenants, (d) reletting all or any
part of the Premises, (e) paying or performing the underlying obligation which
Tenant failed to pay or perform and (f) enforcing any of Landlord's rights,
remedies or recourses arising as a consequence of the Event of Default.
24.4 RELETTING. Upon termination of this Lease or upon termination of
Tenant's right to possession of the Premises, Landlord shall use reasonable
efforts to relet the Premises on such terms and conditions as Landlord in its
sole discretion may determine (including a term different then the Term, rental
concessions, and alterations to, and improvements of, the Premises); however,
Landlord shall not be obligated to relet the Premises before leasing other
portions of the Building. Landlord shall not be liable, nor shall Tenant's
obligations hereunder be diminished because of, Landlord's failure to relet the
Premises or collect rent due in respect of such reletting. Tenant shall not be
entitled to the excess of any rent obtained by reletting over the Rent herein
reserved.
24.5 LANDLORD'S RIGHT TO PAY OR PERFORM. Upon an Event of Default,
Landlord may, but without obligation to do so and without thereby waiving or
curing such Event of Default, pay or perform the underlying obligation for the
account of Tenant, and enter the Premises and expend the Security Deposit for
such purpose.
24.6 NO WAIVER, NO IMPLIED SURRENDER, Provisions of this Lease may only be
waived by the party entitled to the benefit of the provision evidencing the
waiver in writing. Thus, neither the acceptance of Rent by Landlord following an
Event of Default (whether known to Landlord or not), nor any other custom or
practice followed in connection with this Lease, shall constitute a waiver by
Landlord of such Event of Default or any other Event of Default. Further, the
failure by Landlord to complain of any action or inaction by Tenant, or to
assert that any action or inaction by Tenant constitutes (or would constitute,
with the giving of notice and the passage of time) an Event of Default,
regardless of how long such failure continues, shall not extinguish, waive or in
any way diminish the rights, remedies and recourses of Landlord with respect to
such action or inaction. No waiver by Landlord of any provision of this Lease or
of any breach by Tenant of any obligation of Tenant hereunder shall be deemed to
be a waiver of any other provision hereof, or of any subsequent breach by Tenant
of the same or any other provision hereof. Landlord's consent to any act by
Tenant requiring Landlord's consent shall not be deemed to render unnecessary
the obtaining of Landlord's consent to any subsequent act of Tenant. No act or
omission by Landlord (other than Landlord's execution of a document
acknowledging such surrender) or Landlord's agents, including the delivery of
the keys to the Premises, shall constitute an acceptance of a surrender of the
Premises.
25. DEFAULTS BY LANDLORD. Landlord shall not be in default under this Lease, and
Tenant shall not be entitled to exercise any right, remedy or recourse against
Landlord or otherwise as a consequence of any alleged default by Landlord under
this Lease, unless Landlord fails to perform any of its obligations hereunder
and said failure continues for a period of 30 days after Tenant gives Landlord
and (provided that Tenant shall have been given the name and address of
Landlord's Mortgagee) Landlord's Mortgagee written notice thereof specifying,
with reasonable particularity, the nature of Landlord's failure. If, however,
the failure cannot reasonably be cured within the 30-day period, Landlord shall
not be in default hereunder if Landlord or Landlord's Mortgagee commences to
cure the failure within the 30 days and thereafter pursues the curing of same
diligently to completion. If Tenant recovers a money judgment against Landlord
for Landlord's default of its obligations hereunder or otherwise, the judgment
shall be limited to Tenant's actual direct, but not consequential, damages
therefor and shall be satisfied only out of the interest of Landlord in the
Complex as the same may then be encumbered, and Landlord shall not otherwise be
liable for any deficiency. In no event shall Tenant have the right to levy
execution against any property of Landlord other than its interest in the
Complex. The foregoing shall not limit any right that Tenant might have to
obtain specific performance of Landlord's obligations hereunder.
26. RIGHT OF REENTRY. Upon the expiration or termination of the Term for
whatever cause, or upon the exercise by Landlord of its right to re-enter the
Premises without terminating this Lease, Tenant shall immediately, quietly and
peaceably surrender to Landlord possession of the Premises in "broom clean" and
good order, condition and repair, except only for ordinary wear and tear, damage
by casualty not covered by Section 15.2 and repairs to be made by Landlord
pursuant to Section 15.1. If Tenant fails to surrender possession as herein
required, Landlord may, without giving Tenant prior notice to vacate the
Premises or any other notice, initiate any and all legal action as Landlord may
elect to dispossess Tenant and all of its property, and all persons or firms
claiming by, through or under Tenant and all of their property, from the
Premises, and may remove from the Premises and store (without any liability for
loss, theft, damage or destruction thereto) any such property at Tenant's cost.
While Tenant remains in possession of the Premises after such expiration,
termination or exercise by Landlord of its re-entry right, Tenant shall be
deemed to be occupying the Premises as a tenant-at-sufferance, subject to all of
the obligations of Tenant under this Lease, except that the daily Rent shall be
twice the per day Rent in effect immediately before such expiration, termination
or exercise by Landlord. No such holding over shall extend the Term. If Tenant
fails to surrender possession of the Premises in the condition herein required,
Landlord may, at Tenants expense, restore the Premises to such condition.
27. MISCELLANEOUS.
27.1 INDEPENDENT OBLIGATIONS; NO OFFSET. The obligations of Tenant to pay
Rent and to perform the other undertakings of Tenant hereunder constitute
independent unconditional obligations to be performed at the times specified
hereunder, regardless of any breach or default by Landlord hereunder. Tenant
shall have no right, and Tenant hereby waives and relinquishes all rights which
Tenant might otherwise have, to claim any nature of lien
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specified hereunder, regardless of any breach or default by Landlord hereunder.
Tenant shall have no right, and Tenant hereby waives and relinquishes all rights
which Tenant might otherwise have, to claim any nature of lien against the
Complex or to withhold, deduct from or offset against any Rent or other sums to
be paid to Landlord by Tenant.
27.2 TIME OF ESSENCE. Time is of the essence with respect to each date or
time specified in this Lease by which an event is to occur.
27.3 APPLICABLE-LAW. This Lease shall be governed by, and construed in
accordance with, the laws of the State of Texas. All monetary and other
obligations of Landlord and Tenant are performable in the county where the
Complex is located.
27.4 ASSIGNMENT BY LANDLORD. Landlord shall have the right to assign, in
whole or in part, any or all of its rights, titles or interests in and to the
Complex or this Lease and, upon any such assignment, Landlord shall be relieved
of all unaccrued liabilities and obligations hereunder to the extent of the
interest so assigned.
27.5 COMMENCEMENT DATE AND ESTOPPEL CERTIFICATES. From time to time at the
request of Landlord or Landlord's Mortgagee, Tenant will promptly and without
compensation or consideration execute, have acknowledged and deliver a
certificate stating (a) the Commencement Date and the date of expiration of the
Term, (b) the rights (if any) of Tenant to extend the Term or to expand the
Premises, (c) the Rent (or any components of the Rent) currently payable
hereunder, (d) whether this Lease has been amended in any respect and, if so,
submitting copies of or otherwise identifying the amendments, (e) whether,
within the knowledge of Tenant, there are any existing breaches or defaults by
Landlord hereunder and, if so, swing the defaults with reasonable particularity
and (f) such other information pertaining to this Lease as Landlord or
Landlord's Mortgagee may reasonably request.
27.6 SIGNS, BUILDING NAME AND BUILDING ADDRESS. Landlord may, from time to
time at its discretion, maintain any and all signs anywhere in the Complex, and
to change the name and street address of the Complex. Tenant shall not use the
name of the Building for any purpose other than as the address of the business
to be conducted by Tenant from the Premises.
27.7 NOTICES. All notices and other communications given pursuant to this
Lease shall be in writing and shall either be mailed by first class United
States mail, postage prepaid, registered or certified with return receipt
requested, and addressed as set forth in this Section 27.7, or delivered in
person to the intended addressee, or sent by prepaid telegram, cable or telex
followed by a confirmatory letter. Notice mailed in the aforesaid manner shall
become effective three business days after deposit; notice given in any other
manner, and any notice given to Landlord, shall be effective only upon receipt
by the intended addressee. Each party shall have the continuing right to change
its address for notice hereunder by the giving of 15 days' prior written notice
to the other party in accordance with this Section 27.7. ALL PAYMENTS SHOULD BE
MADE PAYABLE TO "THE MADISON OFFICE BUILDING" AND DELIVERED TO THE PROPERTY
MANAGER'S OFFICE.
Landlord: Tenant:
State of Utah Retirement Investment Fund Pete's Brewing Company
c/o Cottonwood Partners 15851 Dallas Parkway, Suite 1010
7557 Rambler Rd., Suite 932 Dallas, TX 75248
Dallas, Texas 75231
cc: Attn: Property Manager cc: Attn: Jennifer Torrance Funk
Cottonwood Management Services Pete's Brewing Company
15851 Dallas Parkway, Suite 950 514 High Street
Dallas, TX 75248 Palo Alto, CA 94301
27.8 ENTIRE AGREEMENT, AMENDMENT AND BINDING EFFECT. This Lease
constitutes the entire agreement between Landlord and Tenant relating to the
subject matter hereof and all prior agreements relative hereto which are not
contained herein are terminated. This Lease may be amended only by a written
document duly executed by Landlord and Tenant (and, if a Mortgage is then in
effect, by the Landlord's Mortgagee entitled to the benefits thereof), and any
alleged amendment which is not so documented shall not be effective as to either
party. The provisions of this Lease shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
successors and assigns; provided, however, that this Section 27.8 shall not
negate, diminish or alter the restrictions on Transfers applicable to Tenant set
forth elsewhere in this Lease.
27.9 SEVERABILITY. This Lease is intended to be performed in accordance
with and only to the extent permitted by all Legal Requirements. If any
provision of this Lease or the application thereof to any person or circumstance
shall, for any reason and to any extent, be invalid or unenforceable, but the
extent of the invalidity or unenforceability does not destroy the basis of the
bargain between the parties as contained herein, the remainder of this Lease and
the application of such provision to other persons or circumstances shall not be
affected thereby, but rather shall be enforced to the greatest extent permitted
by law.
27.10 NUMBER AND GENDER, CAPTIONS AND REFERENCES. As the context of this
Lease may require, pronouns shall include natural persons and legal entities of
every kind and character, the singular number shall
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section hereof. Whenever the terms "hereof," "hereby," "herein", "hereunder" or
words of similar import are used in this Lease, they shall be construed as
referring to this Lease in its entirety rather than to a particular section or
provision, unless the context specifically indicates to the contrary. Any
reference to a particular "Section" shall be construed as referring to the
indicated section of this Lease.
27.11 ATTORNEYS' FEES. If either party hereto initiates any litigation
against the other party relating to this Lease, the prevailing party shall be
entitled to recover, in addition to all damages allowed by law and other relief,
all court costs and reasonable attorneys' fees incurred in connection with such
litigation.
27.12 BROKERS. Tenant and Landlord hereby wan-ant and represent unto the
other that it has not incurred or authorized any brokerage commission, finder's,
fees or similar payments in connection with this Lease, other than that which is
due to Fults Associates and Cottonwood Partners, which payment(s) shall be paid
by Landlord. Each party shall defend, indemnify and hold the other harmless
from and against any claim for brokerage commission, finder's fees or similar
payment arising by virtue of authorization of such party, or any Affiliate of
such party, in connection with this Lease.
27.13 INTEREST ON TENANT'S OBLIGATIONS. Any amount due from Tenant to
Landlord which is not paid when due shall bear interest at the maximum rate
allowed by law from the date such payment is due until paid, but the payment of
such interest shall not excuse or cure the default in payment.
27.14 AUTHORITY. The person executing this Lease on behalf of Tenant
personally warrants and represents to Landlord that (a) Tenant is a duly
organized and existing legal entity, in good standing in the State of Texas; (b)
Tenant has full right and authority to execute, deliver and perform this Lease;
(c) the person executing this Lease on behalf of Tenant was authorized to do so;
and (d) upon request of Landlord, such person will deliver to Landlord
satisfactory evidence of his or her authority to execute this Lease on behalf of
Tenant.
27.15 RECORDING. Neither this Lease (including any Exhibit hereto) nor any
memorandum hereof shall be recorded without the prior written consent of
Landlord.
27.16 EXHIBITS. All Exhibits and written addenda hereto are incorporated
herein for any and all purposes.
27.17 MULTIPLE COUNTERPARTS. This Lease may be executed in two or more
counterparts, each of which shall be an original, but all of which shall
constitute but one instrument.
[INTENTIONALLY LEFT BLANK]
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EXECUTED as of the date and year above first written.
TENANT ACKNOWLEDGES THAT LANDLORD HAS MADE NO WARRANTIES TO TENANT AS TO THE
CONDITION OF THE PREMISES, EITHER EXPRESS OR IMPLIED, AND LANDLORD AND TENANT
EXPRESSLY DISCLAIM ANY IMPLIED WARRANTY THAT THE PREMISES ARE SUITABLE FOR
TENANT'S INTENDED COMMERCIAL PURPOSE, AND TENANT'S OBLIGATION TO PAY RENT
HEREUNDER IS NOT DEPENDENT UPON THE CONDITION OF THE PREMISES OR THE PERFORMANCE
BY LANDLORD OF ITS OBLIGATIONS HEREUNDER, AND TENANT SHALL CONTINUE TO PAY THE
RENT, WITHOUT ABATEMENT (EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN), SET
OFF, DEDUCTION, NOTWITHSTANDING ANY BREACH BY LANDLORD OF ITS DUTIES OR
OBLIGATIONS HEREUNDER, WHETHER EXPRESS OR IMPLIED.
TENANT: PETE'S BREWING COMPANY, a California corporation
By: /s/ JEFFREY A. ATKINS
-------------------------------
Name: Jeffrey A. Atkins
-------------------------------
Title: CEO
-------------------------------
Date:8/14/97
-------------------------------
LANDLORD: UTAH STATE RETIREMENT INVESTMENT FUND,
an independent agency of the State of Utah
BY: Wallace Realty Advisors, Ltd.,
A Texas limited partnership
BY: Wallace Realty Advisors I, Inc.,
A Texas corporation, its general partner
By: ROBERT J. AXLEY
-------------------------------
Name: Robert J. Axley
------------------------------
Title: Chairman
-----------------------------
By: JOHN L. WEST
-------------------------------
Name: John L. West
------------------------------
Title: President
-----------------------------
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EXHIBIT INDEX
EXHIBIT A: Glossary
EXHIBIT B: Description of Premises
EXHIBIT C: Rules and Regulations
EXHIBIT D: Work Letter
EXHIBIT E: Property Legal Description
<PAGE> 17
EXHIBIT A
GLOSSARY OF DEFINED TERMS
1. "ADDENDUM" shall mean the Addendum, if any, attached to this Lease.
2. "AFFILIATE" shall mean a person or party who or which controls, is
controlled by or is under common control with another person or party.
3. "BUILDING" shall mean that certain 12 floor office building and garage
structure constructed on the Land, the street address of which is 15851 Dallas
Parkway, Addison, Texas, and is more particularly described in the deed recorded
in Volume 85021, Page 1686 of the Deed Records of Dallas County, Texas. The term
"Building" shall include all fixtures and appurtenances in and to the aforesaid
structure, including specifically but without limitation all above grade
walkways and all electrical, mechanical, plumbing, security, elevator, boiler,
HVAC, telephone, water, gas, storm sewer, sanitary sewer and all other utility
system and connections, all life support systems, sprinklers, smoke detection
and other fire protection systems, and all equipment, machinery, shafts, flues,
piping, wiring, ducts, duct work, panels, instrumentation and other
appurtenances relating thereto.
4. "BUILDING OPERATING HOURS" shall mean 7:00 a.m. to 7:00 p.m. Monday
through Friday and Saturday 8:00 a.m. to 1:00 p.m., exclusive of Sundays and
Holidays.
5. "BUILDING RULES AND REGULATIONS" shall mean the rules and regulations
governing the Complex promulgated by Landlord from time to time. The current
Building Rules and Regulations maintained by Landlord are attached as Exhibit C
hereto.
6. "BUILDING STANDARD", when applied to an item, shall mean such item as
has been designated by Landlord (orally or in writing) as generally applicable
throughout the leased portions of the Building.
7. "COMMENCEMENT DATE" shall mean the date of the commencement of the Term
as determined pursuant to Section 6.3.
8. "COMMON AREAS" shall mean all areas and facilities within the Complex
which have been constructed and are being maintained by Landlord for the common,
general, non-exclusive use of all tenants in the Building, and shall include
restrooms, lobbies, corridors, service areas, elevators, stairs and stairwells,
the Parking Facility, driveways, loading areas, ramps, walkways and landscaped
areas.
9. "COMPLEX" shall mean the Land and all improvements thereon, including
the Building and the Parking Facility.
10. "EXPENSE STOP" shall mean that portion of the Operating Expenses,
expressed in terms of dollars per square foot of Net Rentable Area per Fiscal
Year, which will be excluded from the computation of Additional Rent. Unless
changed by mutual agreement of the parties, the "Expense Stop" shall equal the
actual operating expenses for calendar year 1997.
11. "FISCAL YEAR" shall mean the fiscal year (or portion thereof) of
Landlord as elapses during the Term. The Fiscal Year currently commences on
January 1; however, Landlord may change the Fiscal Year at any time or times.
12. "FORCE MAJEURE" shall mean the occurrence of any event which hinders,
prevents or delays the performance by Landlord of any of its obligations
hereunder and which is beyond the reasonable control of Landlord.
13. "HOLIDAYS" shall mean (a) Now Year's Day, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day, (b) other days on which
national or state banks located in the state where the Complex is located must
or may close for ordinary operations and (c) other days which are commonly
observed as holidays by the majority of tenants of the Building. If the Holiday
occurs on a Saturday or Sunday, the Friday preceding or the Monday following
may, at Landlords discretion, be observed as a Holiday.
14. "HVAC" shall mean the heating, ventilation and air conditioning
systems in the Building.
15. "IMPOSITIONS" shall mean (a) all real estate, personal property,
rental, water, sewer, transit, use, occupancy and other taxes, assessments,
charges, excises and levies (including any interest, costs or penalties with
respect thereto), general and special, ordinary and extraordinary, foreseen and
unforeseen of any kind and nature whatsoever which are assessed, levied, charged
or imposed upon or with respect to the Complex, or any portion thereof, or the
sidewalks, streets or alley ways adjacent thereto, or the ownership, use,
occupancy or enjoyment thereof (including but not limited to mortgage taxes and
other taxes and assessments passed on to Landlord by Landlord's Mortgagee) and
(b) all charges for any easement, license, permit or agreement maintained for
the benefit of the Complex. "Impositions" shall not include income taxes, estate
and inheritance taxes, excess profit taxes, franchise taxes, taxes imposed on or
measured by the income of Landlord from the operation of the Complex, and taxes
imposed on account of the transfer of ownership of the Complex or the Land. If
any or all of the Impositions
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<PAGE> 18
be discontinued and, in substitution therefor, taxes, assessments, charges,
excises or impositions be assessed, levied, charged or imposed wholly or
partially on the Rents received or payable hereunder (a "SUBSTITUTE
IMPOSITION"), then the Substitute Imposition shall be deemed to be included
within the term "Impositions".
17. "LAND" shall mean the real property on which the Building is
constructed and which is further described in Exhibit E hereto.
18. "LANDLORD'S MORTGAGEE" shall mean the mortagee of any mortgage, the
beneficiary of any deed of trust, the pledgee of any pledge, the secured party
of any security interest. the assignee of any assignment and the transfer of any
other instrument of transfer (including the ground lessor of any ground lease on
the Land) now or hereafter in existence on all of any portion of the Complex,
and their successors, assigns and purchasers. "MORTGAGE" shall mean any such
mortgage, deed of trust, pledge, security agreement, assignment or transfer
instrument, including all renewals, extensions and rearrangements thereof and of
all debts secured thereby.
19. "LANDLORD'S WORK" shall mean all improvements, components, assemblies,
installations, finish, labor, materials and services that Landlord is required
to furnish, install, perform, provide or apply to the Premises as specified in
the Work Letter.
20. "PREMISES" shall mean the area leased by Tenant pursuant to this Lease
as outlined on the floor plan drawing attached as Exhibit B hereto and all other
space added to the Premises pursuant to the terms of this Lease. The Premises
includes the space between the top surface of the floor slab of the outlined
area and the finished surface of the coiling immediately above.
21. "LEGAL REQUIREMENTS" shall mean any and all (a) judicial decisions,
orders, injunctions, writs, statutes, rulings, rules, regulations,
promulgations, directives, permits, certificates or ordinances of any
governmental authority in any way applicable to Tenant or the Complex, including
but not limited to the Building Rules and Regulations, zoning, environmental and
utility conservation matters, (b) requirements imposed on Landlord by any
Landlord's Mortgagee, (c) insurance requirements and (d) other documents,
instruments or agreements (written or oral) relating to the Complex or to which
the Complex may be bound or encumbered.
22. "NET RENTABLE AREA" whether of the Premises or the Complex shall mean
the area determined pursuant to the American National Standard Method for
measuring floor space in office buildings, as set forth in American National
Standard's Institute publication Z65.1-1980 and as, from time to time, revised.
Landlord and Tenant hereby stipulate that, unless and until revised by virtue of
the application of the standards set forth in said publication or in a revised
publication, the Net Rentable Area of the Premises shall be 821. square feet and
the Net Rentable Area of the Building shall be 278,367 square feet.
23. "OPERATING EXPENSES" shall mean all costs and expenses which Landlord
pays or accrues by virtue of the ownership, use, management, leasing,
maintenance, service, operation, insurance or condition of the Complex during a
particular Fiscal Year or portion thereof as determined by Landlord or its
certified public accountants in accordance with generally accepted accounting
principles plus (in instances where the Building was not fully occupied for the
entire period in question) all additional costs and expenses which Landlord or
such accountant reasonably determines Landlord would have paid or accrued during
such period if the Building has been fully occupied (defined as 95% occupied).
"Operating Expenses" shall include, but shall not be limited to, the following
to the extent they relate to the Complex:
(a) all Impositions and other governmental charges;
(b) all insurance premiums charged for policies obtained by
Landlord, which may include without limitation, at Landlord's election,
(i) fire and extended coverage insurance including earthquake,
windstorm, hail, explosion, riot, strike, civil commotion, aircraft,
vehicle and smoke insurance, (ii) public liability and property damage
insurance, (iii) elevator insurance, (iv) workmen's compensation
insurance for the employees covered by clause (h), (v) boiler,
machinery, sprinkler, water damage, legal liability, burglary, hold-up,
fidelity and pilferage insurance, (vi) rental loss insurance and (vii)
such other insurance as Landlord may elect to obtain;
(c) all deductible amounts incurred in any Fiscal Year relating to
an insurable loss;
(d) all maintenance, repair, replacement and painting costs;
A-2
<PAGE> 19
(e) all janitorial, custodial, cleaning, washing, landscaping,
landscape maintenance, trash removal and pest control costs;
(f) all security costs;
(g) all electrical, energy monitoring, water, water treatment, gas,
sewer, telephone and other utility and utility related charges;
(h) all wages, salaries, salary burdens, employee benefits,
payroll taxes, social security and insurance for all persons engaged by
Landlord or an Affiliate of Landlord;
(i) all costs of leasing or purchasing supplies, tools, equipment
and materials;
(j) all management fees and other charges for management services
(including, without limitation, travel and related expenses), whether
provided by an independent management company, by Landlord or by an
Affiliate of Landlord;
(k) all few and other charges paid under all maintenance and
service agreements, including but not limited to window cleaning,
elevator and HVAC maintenance;
(l) all legal, accounting and auditing fees and expense; and
(m) amortization of the cost of acquiring, financing and installing
capital items which are intended to reduce (or avoid increases in)
operating expenses or which are required by a governmental authority.
Such costs shall be amortized over the reasonable life of the items in
accordance with generally accepted accounting principles, but not beyond
the reasonable life the Building.
"Operating Expenses" shall not include (i) expenditures classified as capital
expenditures for federal income tax purposes except as set forth in clause (m),
(ii) costs for which Landlord is entitled to specific reimbursement by Tenant,
by any other tenant of the Building or by any other third party, (iii)
allowances specified in the Work Letter for expenses incurred by Landlord for
improvements to the Premises, (iv) leasing commissions, and all non-cash
expenses (including depreciation), except for the amortized costs specified in
clause (m), (v) land or ground rent, if applicable, and (vi) debt service on any
indebtedness secured by the Complex (except debt service on indebtedness to
purchase or pay for items specified as permissible "Operating Expenses" under
clause (a) through (m).
24. "PARKING FACILITY" shall mean (a) any parking garage and any other
parking lot or facility adjacent to or in the Complex servicing the Building and
(b) any parking area, open or covered, leased by Landlord to service the
Building.
25. "RENT" shall mean Base Rent, Additional Rent, the parking charge
called for in Section 5.4 and all other amounts provided for under this Lease to
be paid by Tenant, whether as additional rent or otherwise. "BASE RATE" shall
mean the base rent specified in Section 5.1 as adjusted in accordance with
Section 5.2. "BASE RENT ADJUSTMENT" shall mean the increase in the annual Base
Rent as set forth in Section 5.2. "ADDITIONAL RENT" shall mean the additional
rent specified in Section 5.3.
26. "SECURITY DEPOSIT" shall mean $1,519.53 paid by Tenant as security for
the full and faithful performance of the obligations of Tenant under this Lease.
27. "TAKING" or "TAKEN" shall mean the actual or constructive
condemnation, or the actual or constructive acquisition by or under threat of
condensation, eminent domain or similar proceeding, by or at the direction of
any governmental authority or agency.
28. "TENANT'S SHARE" shall mean the proportion by which the Net Rentable
Area of the Premises beats to the Net Rentable Area of the Building. "Tenant's
Share" shall be adjusted by Landlord from time to time to reflect adjustments to
the then current Net Rentable Area of the Building or the Premises. "Tenant's
Share" shall initially mean 821 rentable square fed + 278,367 rentable square
feet = 0.2949 %.
29. "TRANSFER" shall mean (a) an assignment (direct or indirect, absolute
or conditional, by operation of law or otherwise) by Tenant of all or any
portion of Tenant's interest in this Lease or the leasehold estate created
hereby, (b) a sublease of all or any portion of the Promises or (c) the grant or
conveyance by Tenant of any concession or license within the Premises. If Tenant
is a corporation then any transfer of this Least by merger, consolidation or
dissolution, or by any change in ownership or power to vote a majority of the
voting stock (being the shares of stock regularly entitled to vote for the
election of directors) in Tenant outstanding at the time of execution of this
Lease shall constitute a Transfer. If Tenant is a partnership having one or more
corporations as general partners, the preceding sentence shall apply to each
corporation as if the corporation alone had been the Tenant hereunder. If Tenant
is a general or limited partnership, joint venture or other form of association,
the transfer of a majority of the ownership interests therein shall constitute a
Transfer. "TRANSFEREE" shall mean the assignee, sublessee, pledgee,
concessionee, licensee or other transferee of all or any portion of Tenant's
interest in this Lease, the leasehold estate created hereby or the Premises.
A-3
<PAGE> 20
30. "WORK LETTER" shall mew the agreement, if any, attached as Exhibit D hereto
between Landlord and Tenant for the construction of improvements in the
Premises.
A-4
<PAGE> 21
EXHIBIT B
PREMISES
Suite 1010
(Approximately 821 Rentable Square Feet)
[FLOOR PLAN]
THE MADISON 10TH FLOOR
<PAGE> 22
EXHIBIT C
RULES AND REGULATIONS
1. Landlord may from time to time adopt appropriate system and procedures
for the security or safety of the Building, any persons occupying, using, or
entering the Building, or any equipment, finishings, or contents of the
Building, and each tenant shall comply with such systems and procedures.
2. Tenant's employees, visitors, and licensees shall not loiter in or
interfere with the use of the Parking Facility or the Complex's driveway or
parking areas nor consume alcohol in the common areas of the Complex or the
Parking Facility. The sidewalks, halls, passages, exits, entrances, elevators,
escalators, and stairways of the Building will not be obstructed by any tenants
or used by any of them for any purpose other than for ingress to and egress from
their respective premises. The halls, passages, exits, entrances, elevators,
escalators, and stairways am not for the general public, and Landlord may
control and prevent access to them by all persons whose presence, in the
reasonable judgment of Landlord, would be prejudicial to the safety, character,
reputation and interests of the Building and its tenants; in determining whether
access will be denied, Landlord may consider attire worn by a person and its
appropriateness for an office building, whether shoes are being worn, use of
profanity, either verbally or on clothing, actions of a person (including,
without limitation, spitting, verbal abusiveness, and the like), and such other
matters as Landlord may reasonably consider appropriate.
3 . No sign, placard, picture, name, advertisement, or notice visible from
the exterior of any tenant's premises shall be inscribed, painted, affixed, or
otherwise displayed by any tenant on any part of the Building without the prior
written consent of Landlord. All approved signs or lettering on doors will be
printed, painted, affixed, or inscribed at the expense of the tenant desiring
such by a person approved by Landlord. Material visible from outside the
Building will not be permitted. Landlord may remove such material without any
liability, and my charge the expense incurred by such removal to the tenant in
question.
4. No curtains, draperies, blinds, shutters, shades, screens, or other
coverings, hangings, or decorations will be attached to, hung, or placed in, or
used in connection with any window of the Building or the Premises.
5. The sashes, sash doors, skylights, windows, heating, ventilating, and
air conditioning vents and doors that reflect or admit light and air into the
halls, passageways, or other public places in the Building shall not be covered
or obstructed by any tenant, nor will any bottles, parcels, or other articles be
placed on any window sills.
6. No showcases or other articles will be put in front of or affixed to
any part of the exterior of the Building, nor placed in the public halls,
corridors, or vestibules without the prior written consent of Landlord.
7. No tenant will permit its Premises to be used for lodging or sleeping.
No cooking will be done or permitted by any tenant on its premises, except in
areas of the premises which are specially constructed for cooking, so long as
such use is in accordance with all applicable federal, state, and city laws,
codes, ordinances, rules, and regulations.
8. No tenant will employ any person or persons other than the cleaning
service of Landlord for the purpose of cleaning the premises, unless otherwise
agreed by Landlord in writing. If any tenant's actions result in any increased
expense for any required cleaning, Landlord may assess such tenant for such
expenses. Janitorial service will not be furnished on nights to offices which
are occupied after business hours on those nights unless, by prior written
agreement of Landlord, service is extended to a later hour for specifically
designated offices.
9. The toilets, urinals, wash bowls, and other plumbing fixtures will not
be used for any purposes other than those for which they were constructed, and
no sweepings, rubbish, rags, or other foreign substances will be thrown in them.
All damages resulting from any misuse of the fixtures will be borne by the
tenant who, or whose servants, employees, agents, visitors, or licensees, have
caused the damage.
10. No tenant will deface any part of the premises or the Building.
Without the prior written consent of Landlord, no tenant will lay linoleum, or
other similar floor covering, so that it comes in direct contact with the floor
of such tenant's premises. If linoleum or other similar floor covering is to be
used, an interlining of builder's deadening felt will be first affixed to the
floor, by a paste or other material, soluble in water. The use of cement or
other similar adhesive material is expressly prohibited.
11. No tenant will alter, change, replace, or rekey any lock or install a
new lock or a knocker on any door of the premises. Landlord, its agent or
employee, will retain a master key to all door locks on the premises. Any new
door locks required by a tenant or any change in keying of existing locks will
be installed or changed by Landlord following such tenant's written request to
Landlord and will be at such tenant's expense. All new locks and rekeyed locks
will remain operable by Landlord's master key. Landlord will furnish to each
tenant, free of charge, two (2) keys to each door lock on its premises. Landlord
will have the right to collect a reasonable charge for additional keys and cards
requested by any tenant. Each tenant, upon termination of its tenancy, will
deliver to Landlord all keys and access cards for the premises and Building
which have been furnished to such tenant.
12. The elevator designated for freight by Landlord will be available for
use by all tenants in the Building during the hours and pursuant to such
procedures as Landlord may determine from time to time. The persons employed to
move tenant's equipment, Material, furniture, or other property in or out of the
Building must be acceptable to Landlord; such
C-1
<PAGE> 23
persons must be a locally recognized professional mover, whose primary business
is the performing of relocation services, and must be bonded and fully insured.
A certificate or other verification of such insurance must be received and
approved by Landlord prior to the start of any moving operations. Insurance must
be sufficient, in Landlord's sole opinion, to cover all personal liability,
theft, or damage to the Building, including without limitation floor coverings,
doors, walls, elevators, stairs, foliage, and landscaping. All moving operations
will be conducted at such times and in such a manner as Landlord may direct, and
all moving will take place during nonbusiness hours unless Landlord otherwise
agrees in writing. The moving tenant shall be responsible for the provision of
Building security during all moving operations, and shall be liable for all
losses and damages sustained by any party as a result of the failure to supply
adequate security. Landlord may prescribe the weight, size, and position of all
equipment, materials, furniture, or other property brought into the Buildings.
Heavy objects will, if considered necessary by Landlord, stand on wood strips of
such thickness as is necessary to distribute the weight properly. Landlord will
not be responsible for loss of or damage to any such property from any cause,
and all damage done to the Building by moving or maintaining such property will
be repaired at the expense of the moving tenant. Landlord may inspect all such
property to be brought into the Building and to exclude from the Building all
such property which violates any of these rules and regulations or the lease of
which these rules and regulations are a part. Supplies, goods, materials,
packages, furniture, and all other items of every kind delivered to or taken
from the premises will be delivered or removed through the entrance and route
designated by Landlord.
13. No tenant will use or keep in the premises or the Building any
kerosene, gasoline, or inflammable or combustible or explosive fluid or material
or chemical substance other then limited quantities of them reasonably necessary
for the operation or maintenance of office equipment or limited quantities of
cleaning fluids and solvents required in normal operation of the premises.
Without Landlord's prior written approval, no tenant will use any method of
heating or air conditioning other than that supplied by Landlord. No tenant will
keep any firearms within the Premises. No tenant will use or keep or permit to
be used or kept any foul or noxious gas or substance in the premises, or permit
of suffer the premises to be occupied or used in an manner offensive or
objectionable to Landlord or other occupants of the Building by reason of noise,
odors, or vibrations, or interfere in any way with other tenants or those having
business in the Building.
14. Landlord may without notice and without liability to any tenant,
change the name and street address of the Building.
15. Landlord will have the right to prohibit any advertising by tenant,
mentioning the Building, which, in Landlord's reasonable opinion, tends to
impair the reputation of the Building or its desirability as a Building for
offices, and upon written notice from Landlord, tenant will discontinue such
advertising.
16. Tenant will not bring any animals or birds into the Building, and will
not permit bicycles or other vehicles inside or on the sidewalks outside the
Building except in areas designated from time to time by Landlord for such
purposes.
17. All persons entering or leaving the Building at any time other than
the Building's business hours shall comply with such off-hour regulations as
Landlord may establish and modify from time to time. Landlord may limit or
restrict access to the Building during such periods.
18. Each tenant will store all its trash and garbage within its premise.
No material will be placed in the trash boxes or receptacles if such material is
of such nature that it may not be disposed of in the ordinary and customary
manner of removing and disposing of trash and garbage without being in violation
of any law or ordinance governing such disposal. All garbage and refuse disposal
will be made only through entryways and elevators provided for such purposes and
at such times as Landlord may designate. No furniture, appliances, equipment, or
flammable products of any type may be disposed of in the Building trash
receptacles.
19. Canvassing, peddling, soliciting, and distribution of handbills or any
other written materials in the Building are prohibited, and each tenant will
cooperate to prevent same.
20. Each tenant shall keep the doors of the premises closed and locked and
shall shut off all water faucets, water apparatus, and utilities before tenant
or tenants employees leave the premises, so as to prevent waste or damage, and
for any default or carelessness in this regard tenant shall be liable for all
injuries sustained by other tenants or occupants of the Building or Landlord. On
multiple-tenancy floors, all tenants will keep the doors to the Building
corridors closed at all times except for ingress and egress.
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<PAGE> 24
EXHIBIT D
WORKLETTER
Landlord agrees, at its sole expense (not to exceed $4,708.00), to make
the following leasehold improvements:
- Repair base in breakroom.
- Clean carpet throughout.
- Clean damaged drape in breakroom.
- Repaint existing adjustable shelves and breakroom walls.
- Install 4' base cabinet with sink, and "insta-hot".
- Install 4' of upper cabinets in breakroom.
- Install duplex wall outlet above cabinet in breakroom capable of
handling both microwave and coffee machine.
In all other respects, Tenant accepts the Premises "As-built".
D-1
<PAGE> 25
EXHIBIT E
LEGAL DESCRIPTION OF PROPERTY
BEING a tract or parcel of land out of the D.W. FISHER SURVEY, Abstract No. 482,
Dallas County, Texas, said tract being all of that tract recorded as the 15851
DALLAS NORTH PARKWAY ADDITION, an Addition to the City of Addison, as recorded
in Volume 85021, Page 1686, Map Records, Dallas County, Texas, except that
portion thereof conveyed by The Young Companies IV to the Texas Turnpike
Authority for right of way for the Dallas North Tollway as recorded in Volume
86134, Page 435, Deed Records, Dallas County, Texas, said 4.022 acre tract of
land being more particularly described as follows:
BEGINNING at a 1/2 inch iron rod with cap set in the south right of way line of
Airport Parkway (55 feet wide) said point being at the intersection of said line
of Airport Parkway with the west right of way line of the Dallas North Tollway
as defined by said conveyance by The Young Companies IV to the Texas Turnpike
Authority, said point being North 89 degrees 37 minutes 15 seconds West, a
distance of 92.70 feet along said line of Airport Parkway from the northeast
comer of said 15851 Dallas North Parkway Addition;
THENCE South 40 degrees 26 minutes 12 seconds East, with said west right of way
line of the Dallas North Tollway (a Variable width right of way), a distance of
23.50 feet to a 1/2 inch iron rod with cap set at an angle point;
THENCE South 08 degrees 41 minutes 31 seconds West, continuing with said line of
the Dallas North Tollway, a distance of 53.20 feet to a 1/2 inch iron rod with
cap set at the beginning of a curve to the left, the center of which bears South
81 degrees 18 minutes 29 seconds East, a distance of 1283.24 feet from said
point;
THENCE in a southerly direction continuing with said line of said Dallas North
Tollway, through a central angle of 07 degrees 42 minutes 30 seconds, an arc
distance of 172.64 feet to a 1/2 inch iron rod with cap set at the end of said
curve;
THENCE South 00 degrees 59 minutes 01 seconds West, continuing with said line of
the Dallas North Tollway a distance of II 7.56 feet to a 1/2 inch iron rod with
cap set in the south line of said 15851 Dallas North Parkway Addition;
THENCE North 89 degrees 37 minutes 15 seconds West, with the south line of said
15851 Dallas North Parkway Addition and with the north line of a tract of land
conveyed to Opubco Resources, Inc. by deed recorded in Volume 78070, Page 3638,
Deed Records, Dallas County, Texas, a distance of 477.99 feet to a 1/2 inch iron
rod with cap found for comer, said point being the southeast comer of a tract of
land conveyed to Chaney and Hope, Inc., by deed recorded in Volume 78194, Page
1741, Deed Records, Dallas County, Texas;
THENCE North 00 degrees 19 minutes 15 seconds West, with the west line of said
15851 Dallas North Parkway Addition, and with the east line of said Chaney and
Hope, Inc. tract, a distance of 360.00 feet to a 1/2 inch iron rod with cap
found for comer in the south line of Airport Parkway;
THENCE South 89 degrees 37 minutes 15 seconds East, with said line of Airport
Parkway a distance of 489.38 feet to the POINT OF BEGINNING and CONTAINING
175,196 square feet or 4.022 acres of land, more or less.
E-1
<PAGE> 26
ADDENDUM TO LEASE
THIS FIRST ADDENDUM TO LEASE (this "Addendum") is made between UTAH STATE
RETIREMENT INVESTMENT FUND ("Landlord"), and PETE'S BREWING COMPANY ("Tenant"),
to be a part of that certain Lease Agreement between Landlord and Tenant of even
date herewith (the "Lease"). Landlord and Tenant agree that, notwithstanding
anything to the contrary in the Lease, the Lease is hereby modified and
supplemented as follows:
1. Assignment and Subletting.
A. Landlord shall not unreasonably withhold its consent to a
proposed Transfer.
B. With prior written notice to Landlord. Tenant may, without
Landlord's prior written consent and without being subject to Landlord's right
to terminate the Lease or otherwise recapture the Premises, Transfer the
Premises to: (i) a subsidiary, affiliate, division or corporation, controlling,
controlled by or under common control with Tenant; (ii) a successor corporation
related to Tenant by merger or consolidation, or (iii) a purchaser of all or
substantially all of Tenant's assets. For the purpose of this Lease, the sale
or transfer of Tenant's capital stock, including without limitation, a transfer
in connection with the merger or consolidation of Tenant and any sale through
any public exchange, shall not be deemed a Transfer.
2. Alterations. Landlord's consent to any alterations proposed by Tenant
shall not be unreasonably withheld.
3. Access by Landlord: Except in the case of an emergency, Landlord shall
give Tenant reasonable notice prior to entering the Premises for the purposes
stated in Sections 13(b) through 13(d) of the Lease. Landlord shall only have
the right to show the Premises to prospective tenants during the last six (6)
months of the Term.
4. Casualty.
A. The last sentence of Section 15.1 is deleted.
B. Section 15.2 is modified as follows: (i) by adding the following
at the end of clause (a): "; provided however, that Tenant shall be entitled
to rental statement in the amount provided in Section 15.1 hereof, but not to
exceed the amount of rental abatement proceeds which Landlord receives under
insurance policies carried by Landlord"; and (ii) clause (b) is deleted.
5. Insurance. The last sentence of Section 17.1 is modified by adding
the following at the end thereof: "which approval shall not be unreasonably
withheld".
6. Indemnity. Section 18 is modified by deleting "about the Premises" and
replacing it with the following: "on the Premises or from any injuries to or
death of any person or damage to any property arising from the act or omission
of Tenant, or its employees, agents, contractors, and/or invitees."
1
<PAGE> 27
8. Right to Relocate. The following is added to Section 22. If Landlord
elects to relocate Tenant the new space shall be comparable in size and
configuration to the Premises and with comparable leasehold improvements.
Tenant shall not be required to pay any increase in Base Rent or Additional
Rent as a result of the relocation, unless Tenant requests larger space.
9. Default by Tenant. The following is added at the end of Subsection
24.1(b): "or such longer time as may reasonably be required to cure the default
so long as Tenant commences to cure such failure within such ten (10)-day
period and diligently prosecutes such cure to completion provided however,
that in no event shall such additional time exceed sixty (60) days."
10. Condition of Premises. Landlord represents that as of the Commencement
Date the Premises will be in good condition and repair and free of defects and
the electrical, mechanical, HVAC, plumbing, elevator (if any), fire safety,
security and other systems serving the Premises and the Building will be in
good condition and repair consistent with similar grade buildings in the far
North Dallas submarket.
11. Operating Expenses. Operating Expenses shall not include costs
related to the remediation and cleanup of groundwater and/or soils
contamination from hazardous substances in, on, or under the Premises or the
Complex except to the extent resulting from (i) the release, disposal, emission
or discharge of hazardous substances by Tenant, or (ii) minor occurrences
resulting from the daily operation of the Building.
12. Effect of Addendum: All terms with initial capital letters used
herein as defined terms shall have the meanings ascribed to them in the Lease
unless specifically defined herein. In the event of any inconsistency between
the Lease and this the terms of this Addendum shall prevail.
<TABLE>
<CAPTION>
<S> <C>
LANDLORD: TENANT:
UTAH STATE RETIREMENT INC. INVESTMENT FUND PETE'S BREWING COMPANY
By: WALLACE REALTY ADVISORS, LTD. By: /s/ JEFFREY A. ATKINS
---------------------------- ---------------------
Wallace Realty Advisors I, Inc. Its: CEO
------------------------------- --------------------
/s/ ROBERT J. AXLEY
-------------------------------- Date: 8/22/97
Robert J. Axley --------------------
Chairman
By: /s/ JOHN L. WEST
--------------------------------
John L. West
President
</TABLE>
2
<PAGE> 1
EXHIBIT 10.14
Building: IROQUOIS COMMONS OFFICE PARK
Address: 1300 Iroquois Drive, Naperville, Illinois
LEASE
LANDLORD: 1300 Iroquois Venture, an Illinois Limited Partnership
TENANT: Pete's Brewing Company
PREMISES: Suite 245
DATE OF LEASE: September 29, 1997
<PAGE> 2
TABLE OF CONTENTS
Page
LANDLORD-TENANT ......................................... 1
DEMISED PREMISES ........................................ 1
RENT .................................................... 1
SERVICE ................................................. 1
COMMENCEMENT DATE ....................................... 2
CONDITION OF PREMISES ................................... 3
FAILURE TO GIVE POSSESSION .............................. 3
USE OF PREMISES ......................................... 4
CARE AND MAINTENANCE .................................... 6
ALTERATIONS ............................................. 6
ACCESS TO PREMISES ...................................... 7
UNTENANTABILITY ......................................... 8
SUBROGATION ............................................. 8
EMINENT DOMAIN .......................................... 8
ASSIGNMENT - SUBLETTING ................................. 9
WAIVER OF CLAIMS AND INDEMNITY .......................... 10
MORTGAGE - GROUND LEASE ................................. 10
CERTAIN RIGHTS RESERVED TO THE LANDLORD ................. 11
HOLDING OVER ............................................ 12
LANDLORD'S REMEDIES ..................................... 12
DEFAULT UNDER OTHER LEASE ............................... 14
SURRENDER OF POSSESSION ................................. 14
NOTICES ................................................. 15
SECURITY DEPOSIT ........................................ 15
MISCELLANEOUS ........................................... 16
<PAGE> 3
THIS LEASE, made as of this 29th day of September, 1997 between 1300
Iroquois Venture, an Illinois Limited Partnership (hereinafter known as
"Landlord"), and Pete's Brewing Company (hereinafter known as "Tenant");
WITNESSETH:
THAT Landlord hereby leases to Tenant, and Tenant accepts the demised
premises hereinafter known as "demised premises" or "Premises"), described in
the plan attached hereto as Exhibit "A" in the building (hereinafter known as
"Building"), known as 1300 Iroquois Drive, Naperville, IL 60563, for the term of
48 months unless sooner terminated as provided herein, commencing on the
Commencement Date (as hereinafter defined) and ending forty-eight (48) months
thereafter, to be occupied and used by the Tenant for general offices, sales,
marketing and other legally related uses and no other purpose, subject to the
agreements herein contained.
IN CONSIDERATION THEREOF, THE PARTIES COVENANT AND AGREE:
1. RENT. The Tenant shall pay as Rent to Landlord or to such other
person or at such other place as Landlord may direct in writing in accordance
with the following schedule, in advance on or before the first day of each month
of the term, except that the Tenant shall pay the first such monthly installment
on the execution hereof:
MONTHS GROSS RENT*
------ -----------
1 through 12 $1,894.67/mo.
13 through 24 $1,970.46/mo
25 through 36 $2,049.28/mo.
37 through 48 $2,131.25/mo.
All such Rent shall be paid without any set-off or deduction whatsoever. Unpaid
Rent shall bear interest at the rate of nine percent (9%) per annum from the
date due until paid. Time is of the essence of this Lease. Tenant agrees to do
and perform each and every covenant, agreement and obligation to be performed by
Tenant hereunder. (*Gross rent includes all common area maintenance and real
estate taxes. Tenant to pay individual utilities as provided in Section 3,
TENANT, paragraph a.)
2. INTENTIONALLY DELETED.
3. SERVICE. The Landlord, shall furnish:
(a) Window washing of all windows in the demised premises, both inside
and out, at such times as shall be required in the Landlord's sole judgement;
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(b) A parking area as shown on the site plan of the Building to be used
by Tenant, in common with Landlord and other Tenants in the Building, for
passenger vehicles. The parking area will be maintained and repaired by the
Landlord.
(c) Maintenance of exterior landscaping.
(d) Scavenger and garbage removal service.
(e) Snow removal from sidewalks and parking lot.
(f) Maintenance and repair of sidewalks.
(g) Maintenance and repair of exterior walls and roof of Building, and
structural portions not repaired and maintained by Tenant pursuant to Section 8
of this Lease.
(h) Janitorial services for the Building and demised premises.
TENANT shall have the responsibility for paying for the following services at
it's expense:
(a) Electricity shall be paid by Tenant from billings received directly
from the utility company.
(b) Tenant agrees to purchase from Landlord or its agents all lamps,
bulbs, ballast and starters used in the Demised Premises after the installation
thereof
(c) Tenant shall be responsible for the maintenance and repair of the
demised premises as provided in Section 8 herein.
The Landlord does not warrant that any of the services referred to in this
Section 3 will be free from interruptions caused by war, insurrection, civil
commotion, riots, acts of God or the enemy, governmental action, repairs,
renewals, improvements, alterations, strikes, lockouts, picketing, whether legal
or illegal, accidents, inability of the Landlord to obtain fuel or supplies or
any other cause or causes beyond the reasonable control of the Landlord. Any
such interruption of service shall never be deemed an eviction or disturbance of
the Tenant's use and possession of the premises or any part thereof, or render
the Landlord liable to the Tenant for damages, or relieve the Tenant from
performance of the Tenant's obligations under this Lease.
4. COMMENCEMENT DATE. The Tenant acknowledges that Landlord is
undertaking extensive reconstruction of the Building necessary to create
Tenant's Premises in accordance with attached Exhibit A. As soon as Landlord
shall deliver the Premises to Tenant and, upon such delivery, the lease term
will commence hereunder (herein referred to as "Commencement Date") and Tenant
is free to take possession of the Premises depicted on Exhibit A. Both Landlord
and Tenant agree to execute a letter to memorialize said Commencement Date. In
the event Landlord is unsuccessful in obtaining a building permit from the City
of Napervil
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("building permit") on or before December 31, 1997, this Lease will terminate
without further action of the parties unless the parties hereto agree, in
writing, to an extension. Landlord agrees to deliver said Premises to Tenant
within sixty (60) days of the issuance of the building permit and it shall be
Landlord's sole obligation to build out the Premises in accordance with the
attached Exhibit A.
5. CONDITIONS OF PREMISES. The Tenant's taking possession shall be
conclusive evidence as against the Tenant that the demised premises were in good
order and satisfactory condition when the Tenant took possession. No promise of
the Landlord to alter, remodel, decorate, clean or improve the demised premises
or the Building and no representation respecting the condition of the demised
premises or the Building have been made by the Landlord to the Tenant, unless
the same is contained herein, or made a part hereof, or in a written document
signed by Landlord or its Agent. The Premises shall be improved according to
the attached Exhibit "A". Said improvements shall include professionally
painting all walls within the Premises and new building standard carpeting
throughout the Premises. This Lease does not grant any rights to air over
property.
6. FAILURE TO GIVE POSSESSION. If the Landlord shall be unable to give
possession of the demised premises on the date of the commencement of the term
hereof by reason of any of the following:
(i) the Building has not been sufficiently completed to make the demised
premises ready for occupancy,
(ii) the Landlord has not completed its preparation of the demised
premises,
(iii) the Landlord is unable to give possession of the demised premises by
reason of the holding over to retention of possession by any tenant,
tenants, or occupants, or;
(iv) for any other reason,
Landlord shall not be subject to any liability for the failure to give
possession on said date. Under such circumstances the Rent reserved and
covenanted to be paid herein shall not commence until the demised premises are
available for occupancy by Tenant, and no such failure to give possession on the
date of commencement of the term hereof shall affect the validity of this Lease
or the obligations of the Tenant hereunder, nor shall the same be construed to
extend the term of this Lease. If the demised premises are ready for occupancy
prior to the date of commencement of the term hereof and Tenant occupies the
premises prior to said date, Tenant shall pay rental for the period of occupancy
prior to the date of commencement of the term hereof at the proportionate rental
to the rent reserved herein. The said demised premises shall not be deemed to be
unready for Tenant's occupancy or incomplete if only minor or insubstantial
details of construction, decoration or mechanical adjustments remain to be done
in the demised premises or any part thereof, or if the delay in the
availability of the demised premises for occupancy shall be due to special work,
changes, alterations or additions required or made by Tenant in the layout or
finish of the demised premises or any part thereof or shall be caused in whole
or in part by Tenant through the delay of Tenant in submitting plans, supplying
information, approving plans specifications or estimates, giving authorizations
or otherwise or shall be caused in whole or in part by delay and/or default on
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the part of Tenant and/or its subtenant or subtenants. In the event of any
dispute as to whether the premises are ready for Tenant's occupancy, the
decision of Landlord's architect shall be final and binding on the parties.
7. USE OF PREMISES. The Tenant shall occupy and use the demised
premises during the full term for the purpose above specified and none other;
(a) the Tenant will not make or permit to be made any use of the demised
premises which, directly or indirectly is forbidden by public law, ordinance or
governmental regulation or which may be dangerous to persons or property, or
which may invalidate or increase the premium cost of any policy of insurance
carried on the Building or covering its operations; the Tenant shall not do, or
permit to be done, any act or thing upon the demised premises which will be in
conflict with fire insurance policies governing the Building of which the
demised premises form a part. The Tenant, at its sole expense shall comply with
all rules, regulations or requirements of the local Inspection and Rating
Bureau, or any other similar body, and shall not do, or permit anything to be
done upon said premises, or bring or keep anything thereon in violation of
rules, regulations or requirements of the Fire Department, local inspection and
Rating Bureau, Fire Insurance Rating Organization or other authority having
jurisdiction and then only in such quantity and manner of storage as not to
increase the rate of fire insurance applicable to the Building;
(b) any sign installed in the demised premises shall be installed by
Landlord at Tenant's cost and in such manner, character and style as Landlord
may approve in writing;
(c) the Tenant shall not advertise the business, profession or
activities of the Tenant conducted in the Building in any manner which violates
the letter or spirit of any code of ethics adopted by any recognized association
or organization pertaining to such business, profession or activities, and shall
not use the name of the Building for any purpose other than that of business
address of the Tenant, and shall never use any picture or likeness of the
Building in any circulars, notices, advertisements, or correspondence without
the Landlord's express consent in writing;
(d) the Tenant shall not obstruct, or use for storage, or for any
purpose other than ingress and egress, the sidewalks, entrances, passages,
courts, corridors, vestibules, halls, elevators, and stairways of the Building;
(e) no bicycles or other vehicle and no dog or other animal or bird
shall be brought or permitted to be in the Building or any part thereof;
(f) the Tenant shall not make or permit any noise or odor that is
objectionable to the other occupants of the Building to emanate from the demised
premises, and shall not create or maintain a nuisance thereon, and shall not
disturb, solicit or canvass any occupant of the Building, and shall not do any
act tending to injure the reputation of the Building;
(g) the Tenant shall not install any musical instrument or equipment in
the Building, or any antennas, aerial wires or other equipment inside or outside
the Building, without, in each and every instance, prior approval in writing by
the Landlord. The use thereof, if permitted, shall be
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subject to control by the Landlord to the end that others shall not be disturbed
or annoyed;
(h) the Tenant shall not waste water by tying, wedging or otherwise
fastening open any faucet;
(i) no additional locks or similar devices shall be attached to any
door. No keys for any door other than those provided by the Landlord shall be
made. If more than two keys for one lock are desired by the Tenant, the Landlord
may provide the same upon payment by the Tenant. Upon termination of this Lease
or of Tenant's possession, the Tenant shall surrender all keys of the demised
premises and shall make known to the Landlord the explanation of all combination
locks on safes, cabinets and vaults;
(j) the Tenant shall be responsible for the locking of doors in and to
the demised premises. Any damage resulting from neglect of this clause shall be
paid for by the Tenant;
(k) if the Tenant desires telegraphic, telephonic, burglar alarm or
signal service, the Landlord will, upon request, direct where and how
connections and all wiring for such service shall be introduced and run. Without
such directions, no boring, cutting or installation of wires or cables is
permitted;
(1) shades, draperies or other forms of inside window covering must be
of such shape, color and material as approved by the Landlord;
(m) the Tenant shall not overload any floor. Safes, furniture and all
large articles shall be brought through the Building and into the demised
premises at such times and in such manner as the Landlord shall direct and at
the Tenant's sole risk and responsibility. The Tenant shall list all furniture,
equipment and similar articles to be removed from the Building, and the list
must be approved at the Office of the Building or by a designated person before
building employees will permit any article to be removed;
(n) unless the Landlord gives advance written consent in each and every
instance, the Tenant shall not install or operate any steam or internal
combustion engine, boiler, machinery, refrigerating or heating device or
air-conditioning apparatus in or about the demised premises, or carry on any
mechanical business therein, or use the demised premises for housing
accommodations or lodging or sleeping purposes, or do any cooking therein or
install or permit the installation of any vending machines, or use any
illumination other than electric light, or use or permit to be brought into the
Building and inflammable oils or fluids such as gasoline, kerosene, naphtha and
benzene, or any explosive or other articles hazardous to persons or property;
(o) the Tenant shall not place or allow anything to be against or near
the glass of partitions, doors or windows of the demised premises which may
diminish the light in, or be unsightly from the exterior of the Building, public
halls or corridors;
(p) the Tenant shall not install in the demised premises any equipment
which uses a substantial amount of electricity without the advance written
consent of the Landlord. The Tenant shall ascertain from the Landlord the
maximum amount of electrical current which can safely be
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used in the demised premises, taking into account the capacity of the electrical
wiring in the Building and the demised premises and the needs of other tenants
in the Building and shall not use more than such safe capacity. The Landlord's
consent to the installation of electric equipment shall not relieve the Tenant
from the obligation not to use more electricity than such safe capacity;
(q) the Tenant may not install carpet padding or carpet by means of a
mastic, glue or cement. Such installation shall be by tackless strip or
double-face tape only;
(r) in addition to all other liabilities for breach of any covenant of
this Section 6, the Tenants shall pay to the Landlord all damages caused by such
breach and shall also pay to the Landlord as additional rent an amount equal to
any increase in insurance premium or insurance premiums caused by such breach.
Any violation of this Section 6 may be restrained by injunction. The Tenant
shall be liable to the Landlord for all damages resulting from violation of any
of the provisions of this Section 6. The Landlord shall have the right to make
such reasonable rules and regulations as the Landlord or its agent may from time
to time adopt on such reasonable notice to be given as the Landlord may elect.
Nothing in this Lease shall be construed to impose upon the Landlord any duty or
obligation to enforce provisions of this Section 6 or any rules and regulations
hereafter adopted, or the terms, covenants or conditions of any other lease as
against any other tenant, and the Landlord shall not be liable to the Tenant for
violation of the same by any other tenant, its servants, employees, agents,
visitors, or licensees.
8. CARE AND MAINTENANCE BY TENANT. Subject to the provisions of section
10, Tenant shall at Tenant's own expense keep the demised premises, including
the walls, floors, ceiling, plumbing and electric fixtures and outlets, in good
order, condition and repair during the term. If Tenant does not make repairs
promptly and adequately, the Landlord may, but need not, make repairs, and the
Tenant shall promptly pay the cost thereof. Landlord shall furnish and pay for a
heating, ventilating and air conditioning maintenance contract.
9. ALTERATIONS. The Tenant shall not do any painting or decorating, or
erect any partitions, make any alterations in or additions to the demised
premises or do any nailing, boring or screwing into the ceilings, walls or
floors, without the Landlord's prior written consent in each and every instance.
Unless otherwise agreed by Landlord and Tenant in writing, all such work shall
be performed either by or under the direction of Landlord, but at the cost of
Tenant. The Landlord's decision to refuse such consent shall be conclusive. If
the Landlord consents to such alterations or additions, before commencement of
the work or delivery of any materials onto the demised premises or into the
Building, the Tenant shall furnish the Landlord for approval:
(a) plans and specifications;
(b) names and addresses of contractors;
(c) copies of contracts;
(d) necessary permits;
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(e) indemnification in form and amount satisfactory to Landlord and
certificates of insurance from all contractors performing labor or furnishing
materials, insuring against any and all claims, costs, damages, liabilities and
expenses which may arise in connection with the alterations or additions.
Whether the Tenant furnishes the Landlord with the foregoing or not, the
Tenant hereby agrees to hold the Landlord, its beneficiaries, Owner and Owner's
partners and their respective agents and employees harmless from any and all
liabilities of every kind and description which may arise out of or be connected
in any way with said alterations or additions. Any mechanic's lien filed against
the demised premises, or the Building of which the same form a part, for work
claimed to have been furnished to the Tenant shall be discharged of record by
the Tenant within ten (10) days thereafter, at the Tenant's expense. Upon
completing any alterations or additions, the Tenant shall furnish the Landlord
with contractors' affidavits and full and final waivers of lien and receipted
bills covering all labor and materials expended and used. All alterations and
additions shall comply with all insurance requirements and with all ordinances
and regulations of any pertinent governmental authority. All alterations and
additions shall be constructed in a good and workmanlike manner and good grades
of materials shall be used.
All additions, decorations, fixtures, hardware, non-trade fixtures and all
improvements, temporary or permanent, in or upon the demised premises, whether
placed there by the Tenant or by the Landlord, shall, unless the Landlord
requests their removal, become the Landlord's property and shall remain upon the
demised premises at the termination of the Lease by lapse of time or otherwise
without compensation or allowance or credit to the Tenant. If, upon the
Landlord's request, the Tenant does not remove said additions, decorations,
fixtures, hardware, non-trade fixtures and improvements, the Landlord may remove
the same and the Tenant shall pay the cost of such removal to the Landlord upon
demand.
10. ACCESS TO PREMISES. The Tenant shall permit the Landlord to erect,
use and maintain pipes, ducts, wiring and conduits in and through the demised
premises. The Landlord or Landlord's agents shall have the right to enter upon
the premises, to inspect the same, to perform janitorial and cleaning services
and to make such decorations, repairs, alterations, improvements or additions to
the premises or the Building as the Landlord may deem necessary or desirable,
and the Landlord shall be allowed to take all material into and upon said
demised premises that may be required therefore without the same constituting an
eviction of the Tenant in whole or in part and the rent reserved shall in no
wise abate (except as provided in Section 10) while said decorations, repairs,
alterations, improvements, or additions are being made, by reason of loss or
interruption of business of the Tenant, or otherwise. If the Tenant shall not be
personally present to open and permit an entry into said demised premises, at
any time, when for any reason an entry therein shall be necessary and
permissible, the Landlord or Landlord's agents may enter the same by a master
key, or may forcibly enter the same, without rendering the Landlord or such
agents liable therefor (if during such entry Landlord or Landlord's agents shall
accord reasonable care to Tenant's property), and without in any manner
affecting the obligations and covenants of this Lease. Nothing herein contained,
however, shall be deemed or construed to impose upon the Landlord any
obligations, responsibility or liability whatsoever, for the care, supervision
or repair of the Building
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or any part thereof, other than as herein provided. The Landlord shall also have
the right, at any time, without the same constituting an actual or constructive
eviction and without incurring any liability to the Tenant therefor, to change
the arrangement and/or location of entrances or passageways, doors and doorways,
and corridors, elevators, stairs, toilets or public parts of the Building, and
to close entrances, doors, corridors, elevators or other facilities. The
landlord shall not be liable to the Tenant for any expense, injury, loss or
damage resulting from work done in or upon, or the use of, any adjacent or
nearby building, land, street or alley.
11. UNTENANTABILITY. If the demised premises or the Building are made
untenantable by fire or other casualty, Landlord may elect:
(a) to terminate this Lease as of the date of the fire or casualty by
notice to the Tenant within sixty (60) days after that date, or
(b) to proceed with all due diligence to repair, restore or rehabilitate
the Building or the demised premises at Landlord's expense, in which latter
event this Lease shall not terminate.
In the event the Lease is not terminated pursuant to this provision, rent
shall abate on a per diem basis during the period of untenantability. In the
event of termination of this Lease pursuant to this section, rent shall be
apportioned on a per diem basis and paid to the date of the fire or casualty. In
the event that the demised premises are partially damaged by fire or other
casualty but are not made wholly untenantable, then Landlord shall, except
during the last year of the term hereof, proceed with all due diligence to
repair and restore the demised premises and the rent shall abate in proportion
to the non-usability of the demised premises during the period of
untenantability. If a portion of the demised premises are made untenantable as
aforesaid during the last year of the term hereof, Landlord shall have the right
to terminate this Lease as of the date of the fire or other casualty by giving
written notice thereof to Tenant within thirty (30) days after the date of fire
or other casualty, in which event the rent shall be apportioned on a per diem
basis and paid to the date of such fire or other casualty.
12. SUBROGATION. Landlord and Tenant agree to use good faith efforts to
have any and all fire, extended coverage, or any and all material damage
insurance which may be carried endorsed with the following subrogation clause:
"This insurance shall not be invalidated should the insured waive in writing,
prior to a loss, any or all right of recovery against any party for loss
occurring to the property described herein". Both Landlord and Tenant hereto
hereby waive all claims for recovery against the other for damage, injury to, or
loss of any of the property of either Landlord or Tenant, insured under valid
and collectible insurance policies to the extent of any recovery collectible
under that insurance. This waiver is subject to the limitation that it shall
apply only when it is permitted or, by the use of such good faith efforts could
have been so permitted by the applicable policies of insurance, of both Landlord
and Tenant.
13. EMINENT DOMAIN. If the Building, or a substantial part of the
demised premises shall be lawfully taken or condemned for any public or
quasi-public use or purpose, or
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conveyed under threat of such condemnation, the term of this Lease shall end
upon, and not before, the date of the taking of possession by the condemning
authority, and without apportionment of the award. Tenant hereby assigns to the
Landlord Tenant's interest in such award, if any. Current rent shall be
apportioned as of the date of such termination. If any part of the Building,
other than the demised premises or any part of the building not constituting a
substantial part of the demised premises, shall be so taken or condemned, or if
the grade of any street or alley adjacent to the Building is changed by any
competent authority and such taking or change of grade makes it necessary or
desirable to substantially remodel or restore the Building, the Landlord shall
have the right to cancel this lease upon not less than ninety (90) days prior
notice to the date of cancellation designated in the notice. No money or other
consideration shall be payable by the Landlord to the Tenant for the right of
cancellation, and the Tenant shall have no right to share in the condemnation
award or in any judgement for damages caused by the change of grade.
14. ASSIGNMENT - SUBLETTING. Tenant shall not, without Landlord's prior
written consent:
(a) Assign, hypothecate, mortgage, encumber, or convey this Lease or any
interest under it;
(b) Allow any transfer thereof or any lien upon Tenant's interest by
operation of law.
Tenant covenants not to sublet to demised premises in whole or in part
without the prior written consent of Landlord. Landlord hereby grants its
consent to subletting of the whole of the demised premises under the following
conditions, and each of them, and no other subletting, in whole or in part shall
be made without Landlord's prior written consent, as aforesaid, namely:
(a) Prior to making any sublease, Tenant shall first notify Landlord in
writing of its election in that regard and submit to Landlord a fully executed
copy of said Sublease. Any time within sixty (60) days after service of said
notice and copy of said sublease, Landlord may notify Tenant that it elects to
cancel and terminate this lease and enter into a new lease with the proposed
subtenant. If said notice is served by Landlord, then this Lease shall terminate
and come to an end on a day thirty (30) days following the date of service of
said Landlord's notice as if said date were herein originally set forth as the
expiration date of the term providing that said new lease is executed by and
between the proposed subtenant and Landlord. If Landlord shall not serve said
notice, then Tenant may sublet the demised premises at any time after the
expiration of said initial sixty (60) day period;
(b) The use for which the Premises may be sublet shall be only for
lawful office use in keeping with the general character of the Building and
which is not extra-hazardous on account of fire;
(c) Unless new lease is executed by and between the proposed subtenant
and Landlord, the granting of such right and any assignment or subletting shall
not release Tenant of liability under this lease or permit any subsequent
prohibited act, unless specifically provided in such consent;
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Any document purporting to sublet the demised premises shall not have any
force or effect unless the same shall bear the consent of Landlord.
15. WAIVER OF CLAIMS AND INDEMNITY. To the extent permitted by law, the
Tenant releases the Landlord, its beneficiaries, Owner and Owner's partners and
their respective agents and servants from, and waives all claims for, damage to
person or property sustained by the Tenant or any occupant of the Building or
premises resulting from the Building or premises or any part of either or any
equipment or appurtenant becoming out of repair, or resulting from any accident
in or about the Building, or resulting directly or indirectly from any act or
neglect of any tenant or occupant of the Building or of any other person,
including Landlord's agents and servants. This Section 14 shall apply
especially, but not exclusively, to the flooding of basements or other
subsurface areas, and to damage caused by refrigerators, sprinkling devices,
air-conditioning apparatus, water, snow, frost, steam, excessive heat or cold,
falling plaster, broken glass, sewage, gas, odors or noise, or the bursting or
leaking of pipes or plumbing fixtures, and shall apply equally whether any
damage results from the act or neglect of the Landlord or of other tenants,
occupants or servants in the Building or of any other person, and whether such
damage be caused or result from any thing or circumstance above mentioned or
referred to, or any other thing or circumstance whether of a like nature or of a
wholly different nature. If any such damage, whether to the demised premises or
to the Building or any part thereof, or whether to the Landlord or to other
tenants in the Building, results from any act or neglect of the Tenant, its
employees, agents, invitees and customers, the Tenant shall be liable therefor
and the Landlord may, at the Landlord's option, repair such damage and the
Tenant shall, upon demand by the Landlord, reimburse the Landlord forthwith for
the total cost of such repairs. The Tenant shall not be liable for any damage
caused by its act or neglect if the Landlord or a tenant has recovered the full
amount of damage from insurance and the insurance company has waived its right
of subrogation against the Tenant. All property belonging to the Tenant or any
occupant of the premise that is in the Building or the premises shall be there
at the risk of the Tenant or other person only, and the Landlord shall not be
liable for damage thereto or theft or misappropriation thereof
Tenant agrees to indemnify and save the Landlord, its beneficiaries, Owner
and Owner's partners and their respective agents and employees harmless against
any and all claims, demands, costs and expenses, including reasonable attorney's
fees for the defense thereof, arising from Tenant's occupation of the demised
premises or from any breach or default on the part of Tenant in the performance
of any covenant or agreement on the part of Tenant to be performed pursuant to
the terms of this Lease, or from any act or negligence of Tenant, its agents,
servants, employees or invitees, in or about the demised premises. In case of
any action or proceeding brought against Landlord, its beneficiaries, Owner and
Owner's partners or their respective agents or employees by reason of any such
claim, upon notice from Landlord, Tenant covenants to defend such action or
proceeding by counsel reasonably satisfactory to Landlord.
16. MORTGAGE - GROUND LEASE. Landlord may execute and deliver a mortgage
or trust deed in the nature of a mortgage, both sometimes hereinafter referred
to as "Mortgage" against the Building, the Real Property or any interest
thereon, and may sell and lease back the underlying land on which the Building
is situated. This lease and the rights of Tenant
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hereunder shall be and are hereby made expressly subject and subordinate at all
times to any such Mortgage and/or ground lease, now or hereafter, existing and
all amendments, modifications and renewals thereof and extensions,
consolidations or replacements thereof, and to all advance made or hereafter to
be made upon the security thereof. Tenant agrees to execute and deliver such
further instruments subordinating this Lease to said Mortgage or ground lease as
may be requested in writing by Landlord from time to time. Tenant hereby
appoints Landlord as attorney-in-fact for Tenant with full power and authority
to execute and deliver in the name of the Tenant any such instrument in the
event Tenant fails to do so.
Should any Mortgage affecting the Building or the Real Property be
foreclosed or if any ground or underlying lease be terminated:
(a) The liability of the mortgage, trustee or purchaser at such
foreclosure sale or the liability of a subsequent owner designated as Landlord
under this Lease shall exist only so long as such trustee, mortgagee, purchaser
or owner is the owner of the Building or Real Property and such liability shall
not continue or survive after further transfer of ownership.
(b) Upon request of the mortgagee or trustee, Tenant will attorn, as
Tenant under this Lease, to the purchaser at any foreclosure sale thereunder, or
if any ground or underlying lease be terminated for any reason, Tenant will
attorn as tenant under this Lease to the ground Lessor under the ground lease
and will execute such instruments as may be necessary or appropriate to evidence
such attornment.
17. CERTAIN RIGHTS RESERVED TO THE LANDLORD. The Landlord reserves and
may exercise the following rights without affecting Tenant's obligations
hereunder:
(a) to change the name or street address of the Building;
(b) to install and maintain a sign or signs on the interior or exterior
of the Building;
(c) to have access for the Landlord and the other tenants of the
Building to any mail chutes located on the demised premises according to the
rules of the United States Post Office;
(d) to designate all sources furnishing sign painting and lettering,
ice, drinking water, towels, coffee cart service and toilet supplies, lamps and
bulbs used on the demised premises;
(e) to decorate, remodel, repair, alter or otherwise prepare the demised
premises for reoccupancy if Tenant vacates the demised premises prior to the
expiration of the term;
(f) to retain at all times pass keys to the demised premises;
(g) to grant to anyone the exclusive right to conduct any particular
business or undertaking in the Building;
11
<PAGE> 14
(h) to exhibit the demised premises to others and to display "For Rent"
signs on the demised premises;
(i) to approve the weight, size and location of safes and other heavy
equipment or articles, which articles may be moved in, about, or out of the
Building or premises only at such times and in such manner as Landlord shall
direct and in all events, however, at Tenant's sole risk and responsibility;
(j) to take any and all measures, including inspections, repairs,
alterations, decorations, additions and improvements to the premises or to the
Building, as may be necessary or desirable for the safety, protection or
preservation of the premises or the Building or the Landlord's interests, or as
may be necessary or desirable in the operation of the Building.
The Landlord may enter upon the demised premises and may exercise any or
all of the foregoing rights hereby reserved without being deemed guilty of an
eviction or disturbance of the Tenant's use or possession and without being
liable in any manner to the Tenant and without abatement of rent or affecting
any of the Tenant's obligations hereunder.
18. HOLDING OVER. If the Tenant retains possession of the demised
premises or any part thereof after the termination of the term or any extension
thereof, by lapse of time or otherwise, the Tenant shall pay the Landlord the
monthly rent, at double the rate payable for the month immediately preceding
said holding over (including increases for Expenses and Taxes which Landlord may
reasonably estimate), computed on a per-month basis, for each month or part
thereof (without reduction for any such partial month) that the Tenant thus
remains in possession, and in addition thereto, Tenant shall pay the Landlord
all damages, consequential as well as direct, sustained by reason for the
Tenant's retention of possession. Alternatively, at the election of Landlord
expressed in a written notice to the Tenant and not otherwise, such retention of
possession shall constitute a renewal of this Lease for one (1) year. The
provisions of this paragraph do not exclude the Landlord's right of re-entry or
any other right hereunder.
19. LANDLORD'S REMEDIES. All rights and remedies of the Landlord herein
enumerated shall be cumulative, and none shall exclude any other right or remedy
allowed by law.
(a) If any involuntary action or proceeding under any section or
sections of any bankruptcy act in any court or tribunal shall adjudge or declare
Tenant insolvent or unable to pay Tenant's debts, or if any voluntary petition
or similar proceeding under any section or sections of any bankruptcy act shall
be filed by Tenant in any court or tribunal to declare Tenant insolvent or
unable to pay Tenant's debts, then and in any such event Landlord may, if
Landlord so elects but not otherwise, and with or without notice of such
election, and with or without entry or other action by Landlord, forthwith
terminate this Lease, and notwithstanding any other provision of this Lease,
Landlord shall forthwith upon such termination be entitled to cover damages in
an amount equal to the then present value of the rent specified in Section I of
this Lease, as adjusted, pursuant to paragraph 2, for the residue of the stated
term hereof, less the fair rental value of the premises for the residue of the
stated term.
12
<PAGE> 15
(b) If the Tenant defaults in the payment of Rent, and the Tenant does
not correct the default within five (5) days after demand for payment of such
rent or if the Tenant defaults in the prompt and full performance of any other
provisions of this Lease; and the Tenant does not cure the default within twenty
(20) days after written demand by the Landlord that the default be cured (unless
the default involves a hazardous condition, which shall be cured forthwith) or
if the leasehold interest of the Tenant be levied upon under execution or be
attached by process of law, or if the Tenant makes an assignment for the benefit
of creditors or admits its inability to pay its debts, or if a receiver be
appointed for any property of the Tenant, or if the Tenant abandons the
premises, then and in any such event the Landlord may, if the Landlord so elects
but not otherwise, and with or without notice of such election, and with or
without any demand whatsoever, either forthwith terminate this Lease and the
Tenant's right to possession of the premises, or, without terminating this
Lease, forthwith terminate the Tenant's right to possession of the premises.
(c) Upon any termination of this Lease, whether by lapse of time or
otherwise, or upon any termination of the Tenant's right to possession without
termination of the Lease, the Tenant shall surrender possession and vacate the
premises immediately, and deliver possession thereof to the Landlord, and hereby
grants to the Landlord full and free license to enter into and upon the premises
in such event with or without process of law and to repossess the Landlord of
the premises as of the Landlord's former estate and to expel or remove the
Tenant and any others who may be occupying or be within the premises and to
remove any and all property therefrom, using such force as may be necessary,
without being deemed in any manner guilty of trespass, eviction or forcible
entry or detainer, and without relinquishing the Landlord's rights to rent or
any other right given to the Landlord hereunder or by operation of law.
(d) If the Tenant vacates or abandons the premises or otherwise entitles
the Landlord so to elect, and the Landlord elects to terminate the Tenant's
right to possession only, without terminating the Lease, the Landlord may at the
Landlord's option, enter into the premises, remove the Tenant's sign and other
evidences of tenancy, and take and hold possession thereof as in Paragraph (c)
of this Section 18 provided, without such entry and possession terminating the
Lease or releasing the Tenant, in whole or in part, from the Tenant's obligation
to pay the Rent hereunder for the full term, and in any such case the Tenant
shall pay forthwith to the Landlord, if the Landlord so elects, a sum equal to
the entire amount of the rent specified in Section 1 of this Lease for the
residue of the stated term plus any other sums then due hereunder. Upon and
after entry into possession without termination of the lease, the Landlord may,
but need not, relet the premises or any part thereof for the account of the
Tenant to any person, firm or corporation other than the Tenant for such rent,
for such time and upon such terms as the Landlord in the Landlord's sole
discretion shall determine, and the Landlord shall not be required to accept any
tenant offered by the Tenant or to observe any instructions given by the Tenant
about such reletting. In any such case, the Landlord may make repairs,
alterations and additions in or to the premises, and redecorate the same to the
extent deemed by the Landlord necessary or desirable, and the Tenant shall, upon
demand, pay the costs thereof, together with the Landlord's expenses of the
reletting. If the consideration collected by the Landlord upon any such
reletting for the Tenant's account is not sufficient to pay monthly the full
amount of the rent reserved in this Lease, together with the costs of repairs,
alterations, additions, redecorating and the Landlord's expenses, the Tenant
shall pay to the Landlord the amount of each monthly deficiency upon demand.
13
<PAGE> 16
(e) Any and all property which may be removed from the premises by the
Landlord pursuant to the authority of the Lease or of law, to which the Tenant
is or may be entitled, may be handled, removed or stored by the Landlord at the
risk, cost and expense of the Tenant, and the Landlord shall in no event be
responsible for the value, preservation or safekeeping thereof. The Tenant shall
pay to the Landlord, upon demand, any and all expenses incurred in such removal
and all storage charges against such property so long as the same shall be in
the Landlord's possession or under the Landlord's control. Any such property of
the Tenant not retaken from storage by the Tenant within thirty (30) days after
the end of the term, however terminated, shall be conclusively presumed to have
been conveyed by the Tenant to the Landlord under this Lease as a bill of sale
without further payment or credit by the Landlord to the Tenant.
(f) Tenant hereby grants to Landlord a first lien upon the interest of
Tenant under this Lease to secure the payment of moneys due under this Lease,
which lien may be enforced in equity; and Landlord shall be entitled as a matter
of right to have a receiver appointed to take possession of the demised premises
and relet the same under order of court.
(g) The Tenant shall pay upon demand all the Landlord's costs, charges
and expenses, including fees of counsel, agents and others retained by the
Landlord, incurred in enforcing the Tenant's obligations hereunder or incurred
by the Landlord in any litigation, negotiation or transaction in which the
Tenant causes the Landlord, without the Landlord's fault, to become involved or
concerned.
20. DEFAULT UNDER OTHER LEASE. If the term of any lease, other than this
lease, made by the Tenant for any demised premises in the Building shall be
terminated or terminable after the making of this Lease because of any default
by the Tenant under such other lease, such fact shall empower the Landlord, at
the Landlord's sole option, to terminate this Lease by notice to the Tenant.
21. SURRENDER OF POSSESSION. Upon the expiration or other termination of
the term of this Lease, Tenant shall quit and surrender to Landlord the
Premises, broom clean, in good order and condition, ordinary wear, casualty and
condemnation and hazardous substances not caused by Tenant excepted, and Tenant
shall remove all of its property including all wires and cables installed in
premises by Tenant, with the exception of wires and cables installed for
telephone service.
If the Tenant does not remove its property of every kind and
description from demised premises prior to the end of the term, however ended,
the Tenant shall be conclusively presumed to have conveyed the same to the
Landlord under this Lease as a bill of sale without further payment or credit by
the Landlord to the Tenant and the Landlord may remove the same and the Tenant
shall pay the cost of such removal to the Landlord upon demand.
Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of the term of this lease.
14
<PAGE> 17
22. NOTICES. Notices shall be in writing.
(a) Notices shall be effectively served by Landlord upon Tenant in any
one of the following manners.
(i) By delivery to Tenant, or representative of Tenant; or
(ii) By forwarding through Certified or Registered Mail, postage
prepaid, to Tenant at the premises, in which case the time of mailing shall be
the time of notice; or
(iii) By leaving a copy at the premises; or
(iv) By affixing a copy to any door leading into the demised
premises.
(b) Notices shall be effectively served by Tenant upon Landlord when
addressed to Landlord and served either:
(i) Upon an officer of Landlord; or
(ii) Upon an authorized person in the office of the Building; or
(iii) By forwarding through Certified Mail or Registered Mail,
postage prepaid, to Landlord at Building or if notified of another address by
Landlord, at such latter address.
23. SECURITY DEPOSIT. Tenant agrees to deposit with Landlord, upon the
execution of this Lease, the sum of $3,800.00 as security for the full and
faithful performance by Tenant of each and every term, provision, covenant, and
condition of this Lease. If Tenant defaults in respect to any of the terms,
provisions, covenants and conditions of this Lease including, but not limited
to, payment of the Rent and additional rent, Landlord may use, apply, or retain
the whole or any part of the security so deposited for the payment of any such
rent in default, or for any other sum which the Landlord may expend or be
required to expend by reason of Tenant's default including, without limitation,
any damages or deficiency in the reletting of the demised premises, whether such
damages or deficiency shall have accrued before or after any re-entry by
Landlord. If any of the security shall be so used, applied or retained by
Landlord at any time or from time to time, Tenant shall promptly, in each such
instance, on written demand therefor by Landlord, pay to the Landlord such
additional sum as may be necessary to restore the security to the original
amount set forth in the first sentence of this paragraph. If Tenant shall fully
and faithfully comply with all the terms, provisions, covenants, and conditions
of this Lease, the security deposit, or any balance thereof, shall be returned
to Tenant after the following:
(a) the time fixed as the expiration of the term of this Lease;
(b) the removal of tenant from the demised premises;
15
<PAGE> 18
(c) the surrender of the demised premises by Tenant to Landlord in
accordance with this Lease; and
(d) the time required for the escalation charges due pursuant to the
Lease to have been computed by Landlord and paid by Tenant.
Except as otherwise required by law, Tenant shall not be entitled to any
interest on the aforesaid security. In the absence of evidence satisfactory to
Landlord of an assignment of the right to receive the security or the remaining
balance thereof, Landlord may return the security to the original Tenant,
regardless of one or more assignments of this Lease.
24. MISCELLANEOUS.
(a) No receipt of money by the Landlord from the Tenant after the
termination of this Lease or after the service of any notice or after the
commencement of any suit, or after final judgement for possession of the demised
premises shall reinstate, continue or extend the term of this Lease or affect
any such notice, demand or suit.
(b) No waiver or any default of the Tenant hereunder shall be implied
from any omission by the Landlord to take any action on account of such default
if such default persists or be repeated, and no express waiver shall affect any
default other than the default specified in the express waiver and that only for
the time and to the extent therein stated.
(c) The words "Landlord" and "Tenant" wherever used in this Lease shall
be construed to mean plural where necessary, and the necessary grammatical
changes required to make the provisions hereof apply either to corporations or
individuals, men or women, shall in all cases be assumed as though in each case
fully expressed.
(d) Each provision hereof shall extend to and shall, as the case may
require, bind and inure to the benefit of the Landlord and the Tenant and their
respective heirs, legal representatives, successors and assigns in the event
this Lease has been assigned with the express written consent of the Landlord.
(e) Submission of this instrument for examination does not constitute a
reservation of or option for the premises. The instrument does not become
effective as a lease or otherwise until executed and delivered by both Landlord
and Tenant.
(f) All amounts (unless otherwise provided herein, and other than the
Rent, which shall be due as hereinbefore provided) owed by the Tenant to the
Landlord hereunder shall be deemed additional rent and be paid within five (5)
days after the date the Landlord renders statements of account therefor. In
regard to Rent, Tenant agrees to pay a late charge of 5.0% of the amount of Rent
then due if Rent is not paid within five days of the date due hereunder. Such
late charges shall be in addition to Landlord's other rights upon default by
Tenant. Whenever rent is referred to in this Lease, it shall include Rent.
16
<PAGE> 19
(g) All riders attached to this Lease and initialed by the Landlord and
the Tenant are hereby made a part of this Lease as though inserted in this
Lease.
(h) The headings of sections are for convenience only and do not limit
or construe the contents of the sections.
(i) If the Tenant shall occupy the premises prior to the beginning of
the term of this Lease with the Landlord's consent, all the provisions of this
Lease shall be in full force and effect as soon as the Tenant occupies the
premises.
(j) Should any mortgage, leasehold or otherwise, require a modification
or modifications of this Lease, which modification or modifications will not
bring about any increased cost or expense to Tenant or in any other way
substantially change the rights and obligations of Tenant hereunder, then and in
such event, Tenant agrees that this Lease may be modified.
(k) The Tenant represents at the Tenant has dealt directly with and only
with McWilliams & Associates, Inc. and Cornish and Cary Commerical as broker in
connection with this Lease and that insofar as the Tenant knows no other
broker negotiated this Lease or is entitled to any commission in connection
therewith. Tenant indemnifies and holds Landlord, its beneficiaries, Owner and
Owner's partners and their respective agents and employees harmless from all
claims of any broker or any other brokers in connection with this Lease.
(1) The Tenant agrees that from time to time upon not less than ten (1O)
days prior to request by the Landlord, the Tenant will deliver to the Landlord a
statement in writing certifying (a) that this Lease is unmodified and in full
force and effect (or if there have been modifications that the same is in full
force and effect as modified and identifying the modifications), (b) the dates
to which the rent and other charges have been paid, and (c) that so far as the
person making the certificate knows, the Landlord is not in default under any
provision of this Lease.
(m) The Landlord's or Owner's title is and always shall be paramount to
the title of the Tenant, and nothing herein contained shall empower the Tenant
to do any act which can, shall or may encumber such title.
(n) The laws of the State in which the demised premises are located
shall govern the validity, performance and enforcement of this Lease.
(o) If any term, covenant or condition of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term,
covenant or condition to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby and each
term, covenant or condition of this Lease shall be valid and be enforced to the
fullest extent permitted by law.
(p) The term "Owner," as used in this Lease, means the Partnership, if
any, which owns title to the Real Property and any liability or obligation of
said partnership under this Lease shall be
17
<PAGE> 20
limited to its partnership assets and no partner of said partnership shall be
individually or personally liable for any claim arising out of this Lease. A
deficit capital account of any such partner shall not be deemed an asset or
property of said partnership.
(q) If Landlord is a bank as trustee, this Lease is executed by the
undersigned trustee, not personally but solely as trustee and it is expressly
understood and agreed by the parties hereto, anything contained herein to the
contrary notwithstanding, that each and all of the covenants, undertakings,
representations and agreements herein made are intended, not as personal
covenants, undertakings, representations and agreements of the trustee,
individually or for the purpose of binding it personally, but this Lease is
executed and delivered by the trustee, solely in the exercise of powers
conferred upon it as such trustee under said trust agreement and no personal
liability or personal responsibility is assumed by, nor shall at any time be
asserted or enforced against said bank on account hereof, or on account of any
covenant, undertaking, representation, warranty or agreement herein contained,
either expressed or implied, all such personal liability, if any, being hereby
expressly waived and released by the parties hereto or holder hereof, and by all
persons claiming by or under said parties or holder hereof. Such trustee, hereby
confirms that its beneficiary has the authority to manage the Building and has
designated McWilliams & Associates, Inc. as Agent for the Beneficiary in
connection with the management of the Building.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the date
first above written.
LANDLORD:
1300 Iroquois Venture, an Illinois
Limited Partnership
By O'Brien Development Company
Its General Partner
By: /s/ WALTER J. O'BRIEN
----------------------------------------
Walter J. O'Brien II
Its President
TENANT:
Pete's Brewing Company
By: /s/ [SIG]
----------------------------------------
Its CEO
----------------------------------------
18
<PAGE> 21
FIRST ADDENDUM TO LEASE
THIS FIRST ADDENDUM TO LEASE (this "Addendum") is made by and between 1300
Iroquois Venture, an Illinois Limited Partnership Company ("Landlord"), and
Pete's Brewing Company, a California corporation ("Tenant"), to be a part of
that certain Lease of even date herewith between Landlord and Tenant (the
"Lease") concerning approximately 1421 rentable square feet of space, located at
1300 Iroquois Drive (the "Building"), Suite 245, Naperville, Illinois (the
"Premises"). Landlord and Tenant agree that, notwithstanding anything to the
contrary in the Lease, the Lease is hereby modified and supplemented as set
forth below.
1. FAILURE TO GIVE POSSESSION. If Landlord shall be unable to give
possession of the Premises for any reason whatsoever on or before sixty days
after the issuance of the building permit, then, Tenant may terminate the Lease
by written notice to Landlord, whereupon any monies previously paid by Tenant to
Landlord shall be reimbursed to Tenant.
2. TENANT IMPROVEMENTS. The improvements set forth in Section 4 of the
Lease and Exhibit A shall be constructed in accordance with all applicable laws,
in a good and workmanlike manner, free of defects and using new materials and
equipment of good quality. Tenant shall have the right to submit a written
"punch list" to Landlord, setting forth any defective item of construction, and
Landlord shall promptly cause such items to be corrected. Tenant's acceptance of
the Premises or submission of a "punch list" shall not be deemed a waiver of
Tenant's right to have defects in the improvements or the Premises repaired at
no cost to Tenant.
3. ORDINANCES AND STATUTES. Tenant shall not be required to comply with
or cause the Premises to comply with any laws, rules or regulations requiring
alterations or improvements to the Premises unless the compliance with any of
the foregoing is necessitated solely due to Tenant's particular use of the
Premises.
4. WAIVER OF CLAIMS AND INDEMNITY. Landlord shall not be released or
indemnified from any losses, damages, liabilities, judgments, actions, claims,
attorneys' fees, consultants' fees, payments, costs and expenses arising from
the negligence or willful misconduct of Landlord or its agents, contractors,
licensees or invitees, Landlord's violation of any law, order or regulation, or
a breach of Landlord's obligations or representations under the Lease.
5. WAIVER OF SUBROGATION. Notwithstanding anything to the contrary in
the Lease or this Addendum, the parties hereto release each other and their
respective agents, employees, successors, assignees and subtenants from all
liability for damage to any property that is caused by or results from a risk
which is actually insured against, which is required to be insured against under
this Lease, or which would normally be covered by all risk property insurance,
without regard to the negligence or willful misconduct of the entity so
released. Each party shall use its best efforts to cause each insurance policy
it obtains to provide that the insurer thereunder waives all right of recovery
by way of subrogation as required herein in connection with any injury or damage
covered by the policy. If such insurance policy cannot be obtained with such
waiver of subrogation, or if such waiver of subrogation is only available at
additional cost and the party for
<PAGE> 22
whose benefit the waiver is not obtained does not pay such additional cost, then
the party obtaining such insurance shall immediately notify the other party of
that fact.
6. REPAIRS AND MAINTENANCE. Subject to the provisions of Section 8 of
the Lease, Landlord shall perform and construct, and Tenant shall have no
responsibility to perform or construct, any repair, maintenance or improvements
(a) required as a consequence of any violation of any laws or construction
defects in the Premises or the Building as of the Commencement Date, (b) for
which Landlord has a right of reimbursement from others, (c) which could be
treated as a "capital expenditure" related to the Building as a whole under
generally accepted accounting principles, and (f) to any portion of the Building
outside of the demising walls of the Premises.
7. UNTENANTABILITY. If the Premises are condemned or damaged by any
peril and Landlord does not elect to terminate the Lease or is not entitled to
terminate the Lease pursuant to its terms, then Tenant shall have the option to
terminate the Lease if the Premises cannot be, or are not in fact, fully
restored by Landlord to their prior condition within ninety (90) days after the
condemnation or damage. Landlord shall not have the right to terminate the Lease
if the damage to the Building is relatively minor (e.g., repair or restoration
would cost less than ten percent (10%) of the replacement cost of the Building).
8. ASSIGNMENT AND SUBLETTING. Tenant may, without Landlord's prior
written consent, sublet the Premises or assign the Lease to (a) a subsidiary,
affiliate, division or corporation controlling, controlled by or under common
control with Tenant, (b) a successor corporation related to Tenant by merger,
consolidation, nonbankruptcy reorganization, or government action, or (c) a
purchaser of substantially all of Tenant's assets located in the Premises. A
sale or transfer of Tenant's capital stock shall not be deemed an assignment,
subletting or any other transfer of the Lease or the Premises.
9. EFFECT OF ADDENDUM. All terms with initial capital letters used
herein as defined terms shall have the meanings ascribed to them in the Lease
unless specifically defined herein. In the event of any inconsistency between
this Addendum and the Lease, the terms of this Addendum shall prevail.
In Witness Whereof, said parties hereunto subscribe their names.
LANDLORD: TENANT:
1300 IROQUOIS VENTURE, PETE'S BREWING COMPANY,
an Illinois Limited Partnership a California Corporation
By O'Brien Development Company,
Its General Partner
By /s/ WALTER J. O'BRIEN II By: /s/ JEFFREY A. ATKINS
----------------------------- --------------------------------
Walter J, O'Brien II Name: Jeffrey A. Atkins
Its President --------------------------
Its: CEO
---------------------------
2
<PAGE> 23
EXHIBIT "A" TO LEASE BETWEEN 1300 IROQUOIS VENTURE (LANDLORD) AND PETE'S BREWING
COMPANY (TENANT) DATED SEPT. 29, 1997
[FLOORPLAN DIAGRAM]
<PAGE> 1
EXHIBIT 10.15
LEASE
dated as of September __, 1997
between
ROTTERDAM VENTURES, INC.
D/B/A GALESI ENTERPRISES
as Lessor
and
PETE'S BREWING COMPANY
as Lessee
Affecting a portion of the premises commonly known 145 Huguenot Street New
Rochelle, New York
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PARAGRAPH & TITLE PAGE
----
<S> <C>
1. TERM .................................................................... 4
1A. OPTION TO RENEW ......................................................... 4
2. RENTAL SCHEDULE ......................................................... 5
3. USE OF PREMISES ......................................................... 5
4. TAXES & ASSESSMENTS-UTILITY CHARGES & OPERATING SERVICES................. 6
5. ELECTRICAL SYSTEM & SERVICE ............................................. 9
6. HEATING, VENTILATING & AIR CONDITIONING SYSTEM & SERVICE................ 10
7. INSURANCE - INDEMNITY ...................................................11
8. PREPARATION OF THE LEASED PREMISES ......................................13
9. OTHER LEASEHOLD IMPROVEMENTS BY LESSEE ..................................13
10. OCCUPANCY/COMMENCEMENT DATE .............................................15
11. MAINTENANCE AND REPAIRS .................................................15
12. CLEANING/JANITORIAL SERVICES ............................................17
13. DAMAGE TO OR DESTRUCTION OF LEASED PREMISES .............................17
14. ACTION OF PUBLIC AUTHORITIES ............................................17
15. DEFAULT .................................................................18
16. ACCELERATION OF RENT UPON DEFAULT .......................................18
17. SUBORDINATION ...........................................................19
18. SUBLETTING AND ASSIGNMENT ...............................................19
19. RECORDATION .............................................................20
20. SURRENDERS AND WAIVERS ..................................................20
21. NOTICE ..................................................................21
22. BROKERAGE ...............................................................22
23. ENTIRE AGGEEMENT ........................................................22
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
PARAGRAPH & TITLE PAGE
----
<S> <C>
24. CHANGES, MODIFICATIONS OR AMENDMENTS ................................... 22
25. SEVERABILITY ........................................................... 22
26. COVENANTS TO BIND RESPECTIVE PARTIES ................................... 22
27. BUILDING NAME .......................................................... 22
28. CERTIFICATE ............................................................ 22
29. LESSEE'S REPRESENTATIONS ............................................... 22
30. LESSEE'S REMEDIES ...................................................... 23
31. SECURITY ............................................................... 23
32. GOVERNING LAW .......................................................... 23
EXHIBIT A - RENTAL SCHEDULE ............................................ 26
EXHIBIT B - DRAWING .................................................... 27
EXHIBIT C - WORK LETTER ................................................ 28
EXHIBIT D - RULES AND REGULATIONS ...................................... 29
EXHIBIT E - CLEANING/JANITORIAL SPECIFICATIONS ......................... 31
</TABLE>
3
<PAGE> 4
LEASE AGREEMENT
THIS LEASE AGREEMENT, made this day of September, 1997 between
ROTTERDAM VENTURES, INC. D/B/A/ GALESI ENTERPRISES, having a place of business
at 145 Huguenot Street, New Rochelle, New York 10801 (Lessor) and PETE'S BREWING
COMPANY, a California corporation having its principal office at 514 High
Street, Palo Alto, California 94301 (Lessee).
W I T N E S S E T H
WHEREAS, Lessor is the owner of that certain tract of land with building
and improvements thereon erected commonly known as 145 Huguenot Street
(hereinafter referred to as the "Premises") New Rochelle, New York; and
WHEREAS, Lessee desires to rent a portion of the Premises for the
conduct-of its business;
NOW THEREFORE, in consideration of the payment by Lessee of the rent
hereinafter reserved and the mutual performance of the covenants and conditions
hereinafter set forth, Lessor does hereby let and demise unto Lessee and Lessee
does hereby take and hire from Lessor, a certain portion of the Lessor's
premises (hereinafter referred to as the "Leased Premises"), located on the
first floor of the Premises, Suite 101, comprising approximately 1,320 square
feet of rentable space as more particularly described on Exhibit B attached
hereto and made a part hereof. Lessor shall perform the construction required
for the Leased Premises as set forth in Exhibit C.
1. TERM: This Lease Agreement is for a term of three (3) years, commencing on
the later of September 1, 1997 or the date by which the Leased Premises are
outfitted and ready for occupancy by Lessee (as defined in Paragraph 10 thereof)
(the "Commencement Date") and expiring on August 31, 2000 unless renewed or
shall end on such earlier date or be canceled or terminated pursuant to the
provisions of this Lease Agreement or pursuant to law (the "Lease Term"). If the
Commencement Date has not occurred for any reason whatsoever not related to the
acts or omissions of Lessee, or any of its employees, contractors, agents or
representatives, on or before December 1, 1997, then, in addition to Lessee's
other rights or remedies, Lessee may terminate this Lease Agreement by written
notice to Lessor given on or before December 10, 1997, whereupon any monies
previously paid by Lessee to Lessor shall be reimbursed to Lessee.
1A. OPTION TO RENEW Lessee shall have the option to renew this Lease Agreement
for three (3) years upon one hundred twenty (120) days prior written notice to
Lessor provided that Lessee is not in default (beyond any applicable cure
periods), under this Lease Agreement. During the renewal period all terms and
conditions of this Lease Agreement shall remain in full force and effect except
that the fixed rent shall be $23,760.00 per annum payable in equal monthly
installments of $1,980.00.
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2. RENTAL SCHEDULE:
A) The fixed rental for the Leased Premises is $21,120.00 per annum,
payable in monthly installments, on the first day of each calendar month
in increments of $1,760.00, for years one, two and three ; (the "Fixed
Rent") all based on there being 1,320 square feet in the Leased Premises
and subject to correction if there are fewer or greater square feet in
the Leased Premises. These rates do not include electric, or air
conditioning. The Lessee shall pay a late charge of two (2%) percent per
month in the event any rental payment is made more than five (5) days
after the first day of each month, of any installment of rental (Fixed
minimum, or other as may be construed as rent) if said rental payment is
made after its due date (the "Late Charge").
B) The rentable area set forth above has been determined from the plans
of the Leased Premises, If Lessee should expand its area of actual
occupancy such that there should be any variance between said plans and
the actual rentable area occupied by Lessee, then promptly upon notice
by Lessor to Lessee of such variance, the parties shall enter into a
recordable agreement to reflect such change and the Fixed Rent shall be
adjusted in accordance therewith.
C) The Lessor reserves the sole right upon ninety (90) days notice, to
relocate the Lessee to other space in the Premises, which space shall be
comparable in size, location and configuration to the presently Leased
Premises and the decor of the "New" Premises shall be at least equal to
or superior to the presently Leased Premises under this Lease Agreement.
This request shall be in writing and does not require Lessee's written
approval. All relocation costs, moving costs, remodeling, etc., shall be
borne by the Lessor and all terms and covenants of this Lease Agreement
shall remain unchanged and in full effect except as noted below. Lessor
agrees to relocate Lessee after 5:00 p.m. on Friday and have Lessee open
for business by 9:00 a.m. on Monday. Depending upon the term of the
Lease Agreement, the parties reserve the right with mutual assent to
enter renegotiation discussions regarding the Lease Term of the Lease
Agreement.
D) The monthly fixed rental payments shall be paid in advance, without
notice, on or before the first day of each calendar month following the
Commencement Date and each month thereafter during the term of this
Lease Agreement or any renewal thereof Lessee covenants that the Fixed
Rent shall be paid promptly to Lessor, at Lessee's option by mail or in
person either at the offices of Lessor at 145 Huguenot Street, New
Rochelle, New York or to such other person or at such other place as
Lessor may designate, in lawful money of the United States, without
notice, demand or abatement (except an abatement expressly provided for
in this Lease Agreement) and without any setoff or deduction whatsoever.
Lessee further covenants that any Additional Rent (as hereinafter
defined) hereinafter provided for shall be paid to Lessor in the same
manner and subject to the same conditions, covenants and requirements as
provided for the payment of the Fixed Rent, on or before the first day
of the first calendar month or within ten (10) day grace period
following demand therefor (unless otherwise specifically provided in
this Lease Agreement).
3 USE OF PREMISES: Lessee will use and occupy the Leased Premises as
executive, office, conference center and general office activities for
its lawful business purposes. Lessee will comply with any and all laws,
ordinances rules, orders and regulations of any governmental authority
which are applicable to the conduct of Lessee's business on the Leased
Premises.
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The parties agree not to hinder the operational activities of either
party within such common areas as the Plaza entrance and Lobby,
elevators, fire access lanes, driveways, turn-around areas, parking,
loading, unloading and shall mutually observe the restricted areas of
either party or other tenants on the Premises.
Notwithstanding the foregoing, Lessee shall not be required to comply
with or cause the Leased Premises to comply with any laws, rules or
regulations requiring alterations or improvements to the Leased Premises
unless the compliance with any of the foregoing is necessitated solely
due to Lessee's particular use of the Leased Premises.
4. TAXES & ASSESSMENT - UTILITY CHARGES & OPERATING SERVICES:
A) During the term of this Lease Agreement Lessee shall pay as
Additional Rent (as hereinafter defined) its pro rata share of any real
estate tax ("Tax") which is in excess of the real estate tax imposed or
assessed on the same for the base tax year ("Additional Rent"). The base
tax year shall be calendar year 1998.
1) Lessee's share of any increased Tax shall be due and payable
thirty (30) days after presentation of appropriate Tax statements
showing that such Tax is due and substantiating Tax receipts by
Lessor.
2) The Lessee's proportionate share of any Tax increase shall be
.48%. In the event that the amount of space rented by Lessee
shall increase or decrease, the share of Tax paid by Lessee shall
be proportionately increased or decreased.
3) The terms "Tax" or "Taxes" shall mean the total of all real
estate taxes and special assessments levied or imposed against
the Premises, together with any franchise, income, profit or
other tax, however designated, which is, due to a future change
in the method of taxation, substituted in full or in part for or
in lieu of such real estate tax but not including interest or
penalties, including but not limited to any new tax of a nature
not presently in effect but which may be hereinafter levied,
assessed or imposed on the Lessor, or the Premises, if such Tax
shall be based or arise out of the ownership, use or operation of
the premises. Under no circumstances, however, shall "Tax" or
"Taxes" include income tax or franchise tax due in respect of
Lessor's business.
4) Notwithstanding anything herein to the contrary, if any act of
the Lessee results in the increase of real estate taxes payable
by the Lessor, the full amount of such increase shall be charged
to the Lessee and paid as Additional Rent hereunder.
B) During the term of this Lease Agreement or any renewal or extension
thereof, Lessee shall pay for the following utilities required for its
operations:
1) All telephone equipment, installation and usage to be billed
direct to the account of the Lessee by the utility.
2) Lessor shall cause hot and cold water for ordinary lavatory,
cleaning, drinking and toilet facility purposes to be furnished
at no expense to Lessee.
3) Lessor shall provide Lessee with electric energy. Lessor
shall install (at Lessor's own expense) an electric submeter
coveting the Leased Premises and Lessee shall pay
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Lessor for Lessee's actual electrical usage based on the
electric utility's actual charges to Lessor therefor. If a
sub-meter is not possible, then the parties will enter into an
agreement amending this Lease Agreement which will provide for
Lessee to pay for electric energy on a rent inclusion basis with
the Additional Rent inclusion factor being two ($2.00) dollars
per square foot per annum and with electric energy charges to be
adjusted by means of electrical survey and also to accommodate
changes in utility charges.
C) Lessee agrees to pay as Additional Rent .48% cost of any increases to
the "Operating Costs" that may be incurred during every calendar year or
part thereof during the term of this Lease Agreement which shall be in
excess of the operating costs for the calendar year 1998 based on full
occupancy of the Premises (hereinafter referred to as the "Operating
Base Year"). In the event that the amount of space rented by Lessee
shall increase or decrease, the share of maintenance costs paid by
Lessee shall be proportionately increased or decreased. "Operating
Costs" shall include Lessor's reasonable costs or contribution to costs
incurred in good faith for:
1) Wages and salaries paid by or contributed to by Lessor, and
contract costs paid to independent contractors utilized by
Lessor for the normal operation, maintenance and repair of the
Premises, including Social Security taxes, Unemployment
Insurance taxes, worker's compensation payments, payments
required by any union rule or regulation, and other provisions
imposed by law, together with any employee "fringe benefits"
incurred by Lessor;
2) Management charges provided same are not in excess of such
charges customarily charged in similar buildings in Westchester
County;
3) Uniforms of employees specified in subparagraph (1) above and
the cleaning and pressing thereof;
4) Repairs to, replacement of and physical maintenance of the
Premises and its equipment and appurtenances; and additions and
improvements required by law; and the cost of supplies and
equipment used in connection therewith; and the cost of painting
in public and common areas;
5) Premiums and other charges by Lessor with respect to
insurance of all kinds for the Premises which are customarily
maintained by lessors of similar buildings in the Westchester
County which Lessor determines to be reasonably necessary at its
sole discretion and which Lessor in good faith pays and incurs;
6) Costs incurred for fuel or other energy for heating the
premises and operating the air conditioning system, for
electricity, steam, or other power required in connection with
the operation of the Premises; it being understood that this
shall not include costs for which Lessor is reimbursed by other
tenants (including electric energy paid for by rent inclusion);
7) Costs incurred in connection with inspection and servicing of
the Premises, its appurtenances and equipment;
8) Water and sewer charges, except as specified in Paragraph
4(B, 2) above;
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9) Any other tax or expense, direct or indirect, incurred by
Lessor in connection with the operation, maintenance and repair
of the Premises, its appurtenances and equipment.
10) Attorneys' and auditing fees necessarily incurred in
connection with the maintenance and operation of the Premises,
and accounting fees incurred in connection with the preparation
of Expense Control Statements (as hereinafter defined), as well
as expenses incurred (including attorneys' fees) with respect to
efforts to obtain a reduction in the annual assessed valuation
of the Premises, but with attorneys' fees therefor not in excess
of the amount of the resulting decrease in Taxes;
11) Operating costs shall be "net" only, and for that purpose
shall be deemed reduced by the amounts of any insurance
reimbursement, other reimbursement, recoupment payment,
discount, credit, reduction, allowance, or the like, received by
Lessor in connection with such operating costs.
12) Notwithstanding anything contained herein and without
limiting the generality of the foregoing, the following costs
shall not be including in operating costs:
a) The cost of painting, repainting, decorating or
redecorating for any Lessee of the Premises or of
providing for any such Lessee special cleaning services;
b) Any renting commissions or collection expense;
c) The cost of making any installations, changes or
alterations for existing or incoming leases;
d) Expenditures for improvements and replacements which
under generally accepted accounting principles and
practice should be classified as capital expenditure
except that there shall be included:
i) any capital expenditure for improvements the
purpose of which is to realize savings of costs
in the maintenance and operation of the
Premises; such expenses shall be included in the
operation costs, amortized on a straight line
basis over the period of time reasonably
anticipated to result in a saving in operating
costs, equal to the amount of such expenditure;
and
ii) periodic capital expenditures which under
generally accepted accounting principles and
practice are regarded as normal building
operating expenses in major office buildings;
iii) if, by reason of installation of labor
saving devices or otherwise, any items which are
included in Lessor's Operating Base year shall
be eliminated in any later year, then for the
purpose of computing Operating Costs for such
later year such items shall be deemed to be
eliminated during the Operating Base Year.
(e) costs occasioned by casualty or by the exercise of
the power of eminent domain.
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13) The Lessor's "Expense Control Statement" shall set forth the
amount of the above items of operating costs for the Operating
Base Year and for each year of increased costs and shall be in
sufficient detail to substantiate the amount of the increase
and the amount to be paid by Lessee. The Lessor or its Certified
Public Accountants shall attest to the applicable increased
costs and the increase to be paid by the Lessee. If Lessor shall
not have delivered to Lessee the statement mentioned herein for
any year, Lessee shall continue to pay Lessor the sums payable
for the immediately preceding calendar year until the statement
for the then current calendar year shall have been delivered, at
which time the monthly payments by Lessee shall be adjusted
retroactively. Lessor shall permit Lessee to audit and verify
the same on reasonable request by Lessee, allow Lessee's
representatives to examine the records and receipts pertaining
to the costs referred to in the Expense Control Statement and
shall confer with Lessee in an effort to in good faith resolve
any disputes. Notwithstanding any other provision in this Lease
Agreement, only one Expense Control Statement shall be issued in
respect of any one year and it shall be issued within six (6)
months after the end of the year to which it pertains.
14) All such increased payments shall be prorated for any
partial calendar years during the term of this Lease Agreement.
D) The amounts due under Section 4, Paragraphs (A), (B), and (C) hereof
shall be paid by Lessee and collectible as Additional Rent without
setoff or deduction and shall be paid within thirty (30) days after
written demand by Lessor accompanied by the documentation required by
this Lease Agreement except that at Lessor's option, Lessee shall pay
the Lessor, on demand, in advance, a sum equal to one-twelfth (1/12) of
any amounts due by reason hereof multiplied by the number of months of
the calendar year then elapsed, and one-twelfth (1/12) of such in
respect of the then current month, and thereafter one-twelfth (1/1 2) in
respect of each succeeding month in the applicable year on each monthly
rent day, and Lessee shall be entitled to a credit for the amount so
paid in advance against the escalation shown due at the end of each such
year.
E) Lessor's failure during the Lease Term to prepare and deliver any of
the foregoing tax bills, statements or bills, or Lessor's failure to
make a demand, shall not in any way result in or cause Lessor to
forfeit or surrender its rights to collect any of the foregoing items of
Additional Rent which may have become due during the term of this Lease
Agreement.
F) Lessee's liability for the amounts due under this Paragraph shall
survive the expiration of the Lease Term. In no event shall any rent
adjustment hereunder result in a decrease in the Fixed Annual Rent.
5. ELECTRICAL SYSTEM & SERVICE:
A) The Lessor shall provide to the Lessee the installed or connected
electrical system and related equipment for the Leased Premises. Any
relocation, addition or alteration of the system beyond the building
standard, done at the request of Lessee after the Leased Premises are
outfitted as provided by this Lease Agreement, shall be at the Lessee's
expense.
B) Lessor shall not be liable to Lessee at any time for any loss,
damage, or expense resulting from any change in the quantity or
character of the electrical service furnished to the Premises by the
electric utility; by the cessation or interruption of the supply of
current by the electric;
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nor shall any such loss, damage or expense, or non-suitability,
non-availability, cessation or interruption in the supply of electric
service or current by the electric utility in any way affect the tenancy
or in any way relieve Lessee of any obligation arising under the terms
of the Lease Agreement.
C) In order that the personal safety and property of the occupants and
owner of the Premises may not be imperiled by the over-taxing of the
capacity of the existing electrical distribution system, Lessee agrees
not to make any alterations or additions to the electrical equipment,
appliances, fixtures or other machinery utilizing electric power (other
than lamps, lighting, typewriters, word processing equipment, document
reproduction equipment, telephone, facsimile and communications
equipment, refrigerator, microwave, television and VCR, personal
computers, IBM or similar computer equipment, and other normal or small
office machines) without obtaining the prior written consent of Lessor
in each instance. Lessor shall provide feeders and wiring necessary for
Lessee's equipment as provided by this lease and Lessee covenants and
agrees that at all times its use of electric current shall never exceed
the capacity of such existing feeders or any wiring installation in the
Leased Premises.
D) Replacement lamps/starters for all lighting fixtures shall be for the
Lessor's account.
6. HEATING, VENTILATING & AIR CONDITIONING SYSTEM & SERVICE:
A) Lessor shall provide heating, air conditioning, and year round
ventilating System into the interior areas, temperature conditions of
68 degrees F. dry bulb when the outside is 0 degrees F., and 75 degrees
F. dry bulb when the outside temperature is 95 degrees F. Any change in
location of diffusers or peripheral system units, control valves,
thermostats and openings in the demising wall to the slave to allow
for the transfer of return air within the plenum, done at the request of
Lessee after the Leased Premises are outfitted as provided by this Lease
Agreement, shall be for the account of the Lessee.
B) Lessor shall provide the above levels of HVAC throughout the year, in
accordance with the Regular Business Hours of the premises (which shall
be Monday through Friday, 7: 00 a.m. to 6:00 p.m.). For any usage beyond
the above time for HVAC equipment not included in Lessee's submeter,
the Lessee shall compensate the Lessor for the actual cost of Lessee's
actual usage at the Lessor's then current hourly rate; such charges to
be billed by the Lessor and paid by Lessee monthly as Additional Rent.
Lessee shall give notice prior to 4:00 p.m. in the case of service oil
working days and prior to 4:00 p.m. on Fridays (or the preceding working
day, in the case of holidays) in the case of such service on days other
than working days.
C) Lessee agrees to keep and cause to be kept closed all windows in the
Leased Premises and to close the blinds when necessary because of the
sun's position, and Lessee agrees at all times to cooperate fully with
the Lessor's energy conservation measures and to abide by all reasonable
regulations and requirements which lessor may prescribe for the proper
functioning and protection of the HVAC system.
D) Lessee agrees that in the event its occupancy level or electrical
load or both shall exceed the design capacity, the cost to Lessor of
providing the necessary additional HVAC capacity, including but not
limited to any necessary equipment, duct work or the like together with
the cost of operation thereof, shall be for the account of Lessee and
shall be payable by Lessee
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to Lessor, based upon the capacity of such additional equipment or the
cost of otherwise providing such additional capacity. Lessor shall
furnish Lessee in writing with an estimate of the cost of any such
additional HVAC equipment together with the additional monthly amount
for operating any additional capacity, and shall receive Lessee's
written approval thereof prior to providing such additional HVAC
capacity.
E) Lessor, through the term of this Lease Agreement, shall have free and
unrestricted access to any and all HVAC equipment in the Leased Premises
upon reasonable notice. Lessor reserves the right to interrupt, curtail,
stop or suspend such HVAC equipment when necessary by reason of
accident, or repairs, alterations or improvements that are in the
judgment of Lessor to be desirable or necessary to be made. No
diminution or abatement of rent or other compensation shall or will be
claimed by Lessee, nor shall the Lease Agreement or any of the
obligations of Lessee be affected or reduced by reason of interruption
or curtailment of such HVAC, when such interruption or curtailment or
stoppage or suspension shall be due to failure of electric power or
accident, or to repairs, alterations or improvements that are in the
reasonable judgment of Lessor desirable or necessary to be made, or to
difficulty or inability in securing supplies or labor, or to strikes, or
to any other cause beyond the reasonable control of Lessor, whether such
other cause be similar or dissimilar to those herein before specifically
mentioned.
F) Lessor shall not be required to furnish, and Lessee shall not be
entitled to receive, any HVAC service after regular business hours
during any period wherein Lessee shall be in default beyond the
applicable notice period in the payment of rent as specified in the
Lease Agreement.
7. INSURANCE - INDEMNITY:
(A) Lessor shall procure and maintain property insurance covering the
full insurable value of the Premises and all other insurance which it
deems necessary for its protection against loss or damage to the Leased
Premises or any other property of Lessor situated thereon.
B) Nothing contained in this Lease Agreement shall be construed to
require either party to repair, replace, reconstruct, or pay for any
property of the other party which may be damaged or destroyed by fire,
flood, windstorm, earthquake, strikes, riots, civil commotions, acts of
public enemy, act of God, or other casualty, and each party hereby
waives all claims against the other for all loss or damage arising out
of perils normally insured against by standard fire and extended
coverage insurance. Notwithstanding anything to the contrary in this
Lease Agreement, the parties hereto release each other and their
respective agents, employees, successors, assignees and subtenants from
all liability for damage to any property that is caused by or results
from a risk which is actually insured against, which is required to be
insured against under this Lease Agreement, or which would normally be
covered by all risk property insurance, without regard to the negligence
or willful misconduct of the entity so released. Each party shall use
its reasonable good faith efforts to cause each insurance policy it
obtains to provide that the insurer thereunder waives all right of
recovery by way of subrogation as required herein in connection with any
injury or damage covered by the policy. If such insurance policy cannot
be obtained with such waiver of subrogation, or if such waiver of
subrogation is only available at additional cost and the party for whose
benefit the waiver is not obtained does not pay such additional cost,
then the party obtaining such insurance shall immediately notify the
other party of that fact.
C) Neither party nor any agent or employee of either party shall be
liable for:
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1) Loss of or damage to any property of the other party, or of
any entity within the other party's control, or injury to any
entity (if a person) within the other party's control, from any
cause whatsoever, unless caused by or due to the party's gross
negligence or willful misconduct;
2) Any damage referred to in (1) above caused by other occupants
or persons in the premises or by construction of any private,
public or quasi-public work; or
3)Any latent defect in the Leased Premises or the Premises and
Lessee shall not be entitled to any compensation therefor or for
abatement of Rent or to any release of any of Lessee's
obligations under this Lease Agreement so long as such defect
remains latent; nor shall the same constitute an eviction.
D) Lessee and Lessor shall indemnify each other, defend and hold the
other party harmless against and from all liability referred to in (a)
above arising out of any action brought by any entity within the party's
control, which, for purposes of this Paragraph, shall include the
party's agents, employees, contractors and invitees.
E) Lessee shall reimburse and compensate Lessor as Additional Rent,
within five (5) days after rendition of a statement for all expenditures
(except attorneys' fees) made by, or damages or fines sustained or
incurred due to non-performance of or non-compliance with or breach by
or failure to observe any term, covenant or condition of this Lease upon
such party's part to be kept, observed, performed or complied with.
F) Except to the extent of Lessor's gross negligence or willful
misconduct, Lessee shall save Lessor harmless and indemnify it from and
against all injury, loss, claims or damage (except attorneys' fees) to
any person or property while on the Premises arising out of use or
occupancy of the Leased Premises by the party or its employees,
suppliers, contractors or agents and from and against all injury, loss,
claim or damage to any person or property anywhere occasioned by any
act, neglect or default of the party or its employees, suppliers,
contractors or agents. Lessee covenants and agrees that during the term
of this Lease Agreement it will provide and keep in force general
public liability insurance protecting and indemnifying persons and
property in or about the Leased Premises and in the Premises throughout
and the connecting corridors thereof to the limit of not less than one
million ($1,000,000.00) dollars in respect of any one occurrence and
three million ($3,000,000.00) dollars for bodily injury or death to any
number of persons in any one occurrence and to the limit of not less
than one million ($1,000,000.00) dollars for property damage. Lessee
shall provide, or cause to be provided, Worker's Compensation Insurance
covering all persons employed in connection with the performance of work
upon, in or about the Leased Premises and the Premises throughout and
the connecting corridors thereof (exclusive of work being done by Lessee
as provided by this Lease Agreement). All such insurance shall be
effected in standard form under valid, enforceable policies issued by
insurers of recognized responsibility and licensed to do business in the
State of New York and shall, except in the case of Worker's Compensation
Insurance, name Lessee as insured and include Lessor as additional
insured. Certificates of such insurance shall be delivered to Lessor
from time to time during the term of this Lease Agreement at least ten
(10) days prior to the expiration date of the previous policy together
with certificates evidencing the renewal of such policy with
satisfactory evidence of payment of the premium on such policy. To the
extent obtainable, all such policies shall contain agreements by the
insurers that (i) such polices shall
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not be canceled except upon ten (10) days prior written notice to each
named insured and (ii) the coverage afforded thereby shall not be
affected by the performance of any work upon, in or about the Leased
Premises.
G) If by reason of the negligence or willful misconduct of Lessee there
shall be an increase in the insurance premiums applicable to the
Premises. Lessee shall pay such increase or expense to the Lessor on the
first day of the month immediately following the submission of a bill or
statement by Lessor to the Lessee for the same.
8. PREPARATION OF THE LEASED PREMISES:
A) The Lessor shall provide and install in the Leased Premises those
items as specified in Exhibit C (Work Letter) (the "Tenant
Improvements").
B) The Lessor's agreement to do the work in the Leased Premises as set
forth in the "Work Letter" shall not require it to incur overtime costs
and expenses and shall be subject to unavoidable delays due to acts of
God, governmental restrictions, strikes, labor disturbances, shortages
of materials and supplies and for any other causes or events beyond
Lessor's reasonable control. Lessor has made, and makes, no
representation as to the date when the Leased Premises will be ready for
Lessee's occupancy.
C) The Tenant Improvements shall be constructed in accordance with
applicable laws, in a good and workmanlike manner, free of defects and
using new materials and equipment of good quality. Lessee shall have the
right to submit a written "punch list" to Lessor, setting forth any
defective items of construction, and Lessor shall promptly cause such
items to be corrected. Lessee's acceptance of the Leased Premises or
submission of a "punch list" shall not be deemed a waiver of Lessee's
right to have defects in the Tenant Improvements or the Leased Premises
repaired at no cost to Lessee. Lessee shall give notice to Lessor
whenever any such defect becomes reasonably apparent, and Lessor shall
repair such defect as soon as practicable.
9. OTHER LEASEHOLD IMPROVEMENTS BY LESSEE:
A) Lessee shall have the right, with the prior written consent of Lessor
(except that decorative improvements including painting, wall coverings,
carpeting and non-structural work shall require only prior notice to
Lessor), and at Lessee's sole expense, to make alterations or
improvements in or to the Leased Premises as it shall consider necessary
or desirable for the conduct of its business, provided that all such
work shall be done in a good and workmanlike manner, that the structural
integrity of the Premises shall not be impaired, and no liens shall
attach to the Leased Premises by reason thereof and provided also that
all requirements of governmental authorities be complied with.
B) With respect to other improvements by the Lessee requiring Lessor's
written consent, Lessee shall prepare at its expense the outline
drawings and specifications indicating the alterations, modifications
or any other improvements to be made to the Leased Premises by the
Lessee. All such plans shall conform to the conditions outlined herein
and as may be reasonably established by Lessor.
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C) The Lessee shall submit the plans and specifications to the Lessor
for review and approval prior to the start of any work. The Lessor's
approval or conditioned acceptance of the improvements shall be within
ten (10) days after receipt.
D) With respect to other improvements by the Lessee requiring Lessor's
written consent, the Lessee, at the expense of the Lessee, shall file
the appropriate plan with the appropriate municipal building department
and obtain approval and an occupancy or other permits for the Lessee. No
work shall commence until the above approvals have been received.
E) With respect to other improvements by the Lessee requiring Lessor's
written consent, Lessee shall furnish a copy to Lessor of any
construction contracts with contractors who will perform the Lessee's
improvements to the Leased Premises. The Lessor shall have the right to
inspect and to insure:
1) That the work will be done in accordance with the approved
plans and specifications and the consents, authorizations and
licenses obtained:
2) That the contractor or other persons performing the work and
furnishing materials will look solely to Lessee for payment and
will hold Lessor and the Leased Premises and the Premises
containing the Leased Premises free from all liens and claims of
all persons furnishing labor or materials therefor, or both;
3) That qualified and skilled tradesmen only shall be used in
the performance of Lessee's leasehold improvement.
4) Any mechanic's lien filed against the Leased Premises or the
Premises for work claimed to have been done or materials
furnished to Lessee shall be discharged by Lessee, at its
expense, within fifteen (15) days after notice from Lessor to
such effect. For the purposes hereof, the bonding of such lien
by a reputable casualty insurance company shall be deemed the
equivalent of a discharge of such mechanic's lien. Should Lessee
fail to comply with the provisions of this Paragraph, Lessor
will procure the discharge of such mechanic's lien and charge
the expense thereof (including attorneys' fees) to Lessee as
Additional Rent.
5) Contractors doing Lessee's work shall employ only such labor
as will not result in jurisdictional disputes or strikes or
otherwise cause labor discord with respect to the Premises.
F) Lessee or its employees, suppliers, contractors or agents agree to
indemnify and save Lessor harmless against any and all bills for labor
performed and equipment, fixtures and materials installed on the
Premises containing the same and from and against all losses, damages,
costs, expenses, suits and claims whatsoever in connection with the
access to the Premises and to the Lessee's leasehold improvements in
the Leased Premises. The cost of Lessee's leasehold improvements shall
be paid for in cash or its equivalent, so that the leased premises and
the Premises containing the same shall at all times be free of liens for
labor and materials supplied or claimed to have been supplied.
G) Except as hereinafter provided, upon the termination of this Lease
Agreement, the improvements and any other alterations, additions or
improvements (other than trade fixtures) shall, become the property of
Lessor and shall be surrendered with the Leased Premises, and
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Lessee shall have no obligation to remove such alterations, additions or
improvements. Notwithstanding the foregoing, Lessor, by written notice
to Lessee within ten (10) days after the date on which Lessee provides
Lessor notice of any alterations, additions, or improvements to be
performed by Lessee, shall have the right to require Lessee to remove
any such alterations, additions or improvements upon the termination of
this Lease Agreement, and, any part of the Leased Premises affected by
such removal shall be restored to its original condition, reasonable
wear and tear, casualty, and hazardous substances not caused by Lessee
excepted.
10. OCCUPANCY/COMMENCEMENT DATE:
A) In the event this Lease Agreement pertains to the initial occupancy
by any Lessee of the Leased Premises, the Leased Premises shall be
deemed ready for occupancy on the earliest date on which both of the
following conditions have been met.
1) The improvements described herein to be performed by Lessor
have been substantially completed, including the erection and
painting or covering (as required) of the walls, the
installation of the doors and hardware and locks therefore, the
installation of lighting, electrical outlets and switches such
that they are operational, the installation of telephone outlets
(but not of telephone equipment, provided reasonable notice has
been given to Lessee such that the telephone equipment vendor
could reasonably have installed such equipment) and the issuance
of such governmental approvals as may be required for occupancy.
2) Adequate means of access have been provided, and the use
without material interference of the facilities necessary to
Lessee's occupancy of the Leased Premises, including corridors,
elevators, stairways, heating, ventilating, air conditioning,
sanitary, water and electrical lighting and power facilities,
are available to Lessee in accordance with Lessor's obligations
under the Lease Agreement.
B) Lessor shall give written notice to Lessee designating the
Commencement Date for the term of the Lease Agreement in respect of the
Leased Premises, which shall be not fewer than ten (10) business days
notice.
11. MAINTENANCE AND REPAIRS:
A) Lessee shall keep the Leased Premises in good condition, reasonable
wear and tear excepted, and shall, in the use and occupancy of the
Leased Premises, conform to all laws, orders and regulations of the
Federal, State and municipal governments, or any of their departments,
and regulations of the New York Board of Fire Underwriters, applicable
to the Premises. Notwithstanding the foregoing, Lessee shall not be
required to comply with or cause the Leased Premises to comply with any
laws, rules or regulations requiring alterations or improvements to the
Leased Premises unless the compliance with any of the foregoing is
necessitated solely due to Lessee's particular use of the Leased
Premises. Lessee shall not be required to perform any maintenance,
repairs or replacements necessitated by the negligence of Lessor, its
servants, agents, or employees, or structural defects or deficiencies in
any building, or by fire, or other casualty. Notwithstanding the
foregoing, Lessor shall perform and construct, and Lessee shall have no
responsibility to perform or construct, any repair, maintenance or
improvements (i) for which Lessor has a right of reimbursement from
others, (ii) to the heating, ventilating, air conditioning, electrical,
water, sewer, and plumbing systems serving the Leased Premises and the
Premises and (iii) to any portion of the Premises
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<PAGE> 16
outside of the demising walls of the Leased Premises. Notwithstanding
the foregoing, Lessee shall pay for its share of the repairs described
in subsections (ii)-(iii) to the extent such costs are properly included
in Operating Costs.
B) Except for such maintenance, repairs, and replacements as are
required by (A) above to be made by Lessee, Lessor shall perform any and
all structural alterations, maintenance, repairs and equipment
replacements which may be necessary to maintain the Premises in good,
safe and tenantable condition.
C) Lessee shall permit the Lessor to erect, use and maintain pipes and
conduits in and through the Leased Premises, provided the same are
installed and concealed behind walls and ceiling of the Leased Premises
and it does not result in any noticeable loss of Lessee's space. All
work necessary in connection with the foregoing shall to the extent
possible, be done outside of Lessee's regular business hours. The Lessor
or its agents shall have the right to enter the Leased Premises to make
such repairs or alterations as the Lessor reasonably deems desirable for
the proper operation of the Premises and shall have the right to enter
the Leased Premises at any time on reasonable advance notice to Lessee
to examine them or when necessary for the protection of the Leased
Premises or the Premises. The Lessor, provided it proceeds with due
diligence, shall be allowed to take all material into and upon the
Leased Premises that may be required for such repairs or in part and
without any abatement or diminution of rent. In the making of such
repairs or alterations, the Lessor, to the extent practicable and
consistent with efficiency and economy, shall exercise reasonable
diligence so as to minimize the disturbance of or interference with the
business of Lessee. Nothing herein contained, however, shall be deemed
or construed to impose upon the Lessor any obligation, responsibility or
liability whatsoever for the care, supervision, or repair of the
Premises or any part thereof, other than as herein provided. The Lessor
shall also have the right at any time, without the same constituting an
actual or constructive eviction and without incurring any liability to
Lessee, therefore, to change the arrangement or location of entrances or
passageways, doors and doorways and corridors, stairs, toilets, or other
public parts of the Premises, provided that no changes shall be made
without Lessee's consent where such changes would adversely affect
Lessee's ingress and egress to and from the Leased Premises from the
street floor or from the lobby of the Premises or from the hallway or
lobby of the Premises.
D) Lessee shall at all times during the term of this Lease Agreement,
and any extensions thereof, permit inspection of the Leased Premises
during business hours, by the Lessor and its agents or representatives,
or by or on behalf of prospective lessees. Except in the case of
emergency, any such inspection will be done on at least twenty-four (24)
hours' notice. Such inspection will be done in a manner so as not to
unreasonably interfere with Lessee in the conduct of its business.
E) Damages resulting from the negligence or willful misconduct of the
Lessee or its employees, contractors, agents, licensees or invitee shall
be repaired by the Lessee, if repaired by the Lessor, all costs shall
be charged to the account of the Lessee.
F) All repairs or replacements by Lessee or Lessor shall be of first
quality and done in good and workmanlike manner. If Lessee is charged
with making such repairs, restorations and replacements, the contractor
chosen by Lessee to do such repairs, restorations or replacements shall
be subject to Lessor's approval and further, if Lessee shall fail within
fifteen (15) days' written request from Lessor to commence the making
of such repairs, restorations and
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replacements and complete the work with reasonable diligence, they may
be made and completed by Lessor but at the expense of Lessee.
12. CLEANING/JANITORIAL SEVICES: Lessor shall provide cleaning/janitorial
services at its own expense, as outlined in Exhibit F.
13. DAMAGE TO OR DESTRUCTION OF LEASED PREMISES: If during the term of the
lease, the Leased Premises are damaged by fire, flood, windstorm, strikes,
riots, civil commotions, acts of God, or other casualty so that the same are
rendered wholly unfit for occupancy, and if said Leased Premises cannot be
repaired within one hundred twenty (120) days from the time of such damage, then
this Lease Agreement, at the option of the Lessor or Lessee, may be terminated
as of the date of such damage. In the event that the Lessor elects to terminate
this Lease Agreement, the Lessee shall pay the rent apportioned to the time of
damage and shall immediately as practicable surrender the Leased Premises to the
Lessor who may enter upon and repossess the same and Lessee shall be relieved
from any further liability hereunder. If the parties elect not to terminate the
Lease Agreement or if any damage by any of the above casualties, rendering the
Leased Premises wholly unfit, can be repaired within one hundred twenty (120)
days thereafter, Lessor agrees to repair such damage promptly within such period
and this Lease Agreement shall not be affected in any manner except that the
Rent shall be suspended and shall not accrue from the date of such damage until
such repairs have been completed. If said Leased Premises shall be so slightly
damaged by any of the above casualties as not to be rendered wholly unfit for
occupancy, Lessor shall repair the Leased Premises promptly and to Lessee's
satisfaction and during the period from the date of such damage until the
repairs are completed the Rent shall be apportioned so that the Lessee shall pay
as rent an amount which bears the same ratio to the entire monthly rent as the
portion of the Leased Premises which Lessee is able to occupy without
disturbance during such period bears to the entire Leased Premises. If the
damage by any of the above casualties is so slight that Lessee is not disturbed
in its possession and enjoyment of the Leased Premises, then Lessor shall repair
the same promptly and in that case the rent accrued or accruing shall not abate.
Notwithstanding, anything herein contained to the contrary, if the cost of
repair or restoration exceeds thirty (30%) percent of the replacement value,
less foundation, of the Premises, then Lessor shall have the option, exercisable
on written notice to Lessee within sixty (60) days of such damage, not to repair
and restore the Premises in which event this Lease Agreement shall terminate as
of the date of the damage.
Lessee hereby expressly waives the provisions of Section 227 of the Real
Property Law or any other law or statute hereafter enacted of similar import and
agrees that the foregoing provisions of this Paragraph shall govern and
control in lieu thereof.
14. ACTION OF PUBLIC AUTHORITIES: In the event that any exercise of the power of
eminent domain by any governmental authority, Federal, State, County, or
municipal, or by any other party vested by law with such power shall at any time
materially affect Lessee's use and enjoyment of the Leased Premises by Lessee
for the purposes set forth in Paragraph 3, Lessor and Lessee shall each have the
right thereupon to terminate this Lease Agreement. In the event of the
termination of this Lease Agreement in accordance with the provisions of this
Paragraph 14, the Fixed Rent and the Additional Rent shall be apportioned and
prorated accordingly. Lessee shall not be entitled to claim or receive any part
of any award in any condemnation proceeding or as result of such condemnation or
taking, or to any damages against Lessor whether the same be for the value of
the unexpired term of this Lease Agreement or otherwise. Nothing herein
contained, however, shall be deemed to
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preclude Lessee from making any claim against the condemnor for the value of any
of Lessee's fixtures or improvements or for Lessee's moving expenses provided
the award for such claim or claims is not in diminution of the award made to the
Lessor (who shall not claim such items as his own).
15. DEFAULT: If Lessee shall fail to pay any Fixed or Additional Rent to Lessor
when the same is due and payable under the terms of this Lease Agreement and
such default shall continue for a period of ten (10) days after written notice
thereof has been given to Lessee By Lessor, or if the Lessee shall materially
fail to perform any of the covenants or conditions hereof or any other duty or
obligation imposed upon it by this Lease Agreement and such default shall
continue for a period of thirty (30) days after written notice thereof has been
given to Lessee by Lessor, or if the Lessee shall be adjudged bankrupt, either
voluntarily or involuntarily, or shall make a general assignment for the benefit
of its creditors, or a receiver of any property of Lessee in or upon the Leased
Premises be appointed in any action, suit, or proceeding by or against Lessee
and such appointment shall not be vacated or annulled within sixty (60) days, or
if Lessee enters into any type of reorganization under the United States
Bankruptcy Act, as the same may from time to time be amended, or if the interest
of Lessee in the Leased Premises shall be sold under execution of other legal
process, then and in any such events Lessor, in its sole discretion, may at any
time thereafter terminate this lease and the term thereof upon giving to the
Lessee five (5) days notice in writing of its intention to do so and upon the
giving of such notice, this Lease Agreement and the term thereof shall
terminate, and Lessor shall again have, repossess and enjoy the same as if this
Lease Agreement had not been made, and thereupon this Lease Agreement shall
terminate without prejudice, however, to the right of Lessor to recover from
Lessee all rent due and unpaid up to the time of such re-entry together with all
damages and expenses, including attorneys' fees, incurred by Lessor due to
Lessee's default. In the event of any such default and re-entry, Lessor shall
have the right, but not the obligation to relet the Leased Premises for the
remainder of the then existing term whether such term be the initial term of
this Lease Agreement or any renewed or extended term, for the highest rent then
obtainable, and to recover from Lessee, as damages, the difference between the
rent reserved by this Lease Agreement and the amount obtained through such
reletting, less the costs and expenses reasonably incurred by Lessor in such
reletting (including reasonable attorneys' fees). In the event that the amount
obtained through such reletting, less the reasonable costs and expenses thereof,
including reasonable attorney's fees, shall exceed the rent herein reserved,
Lessee shall have no right to such excess. Any such notice shall specifically
refer to this Paragraph 15 and shall specify the default claimed.
Lessor's remedies as specified in this Lease Agreement are cumulative and are
not intended to preclude any other remedies or means of redress to which Lessor
may lawfully be entitled at any time, and Lessor may invoke any remedy allowed
at law or in equity as if specified remedies were not provided for in this Lease
Agreement.
16. ACCELERATIQN OF RENT UPON DEFAULT: It is hereby mutually agreed, that not
withstanding anything to the contrary herein contained, the said Leased Premises
are demised for rental of $63,360.00 for the entire said term of three (3) years
payable at the time of the making of this Lease Agreement, and that the
provisions therein contained for the payment of said Rent in installments are
for the convenience of Lessee only, and that, upon default in payment of the
rent in installments, as herein allowed for more than thirty (30) days, then the
whole of the Rent hereby reserved for the whole of the said Lease Term and then
remaining unpaid shall at once become due and payable, without notice or demand.
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17. SUBORDINATION: A) This Lease Agreement is subject and subordinate to any
mortgages now or hereafter affecting or covering the Leased Premises and all or
any part of the Premises, and to any and all renewals, modifications,
consolidations, replacements and extensions of such leases and mortgages. This
clause shall be self-operative and no further instrument of subordination shall
be required. In confirmation of such subordination, Lessee agrees to execute any
instrument which may be deemed necessary or desirable by Lessor and reasonably
acceptable to Lessee to effectuate the subordination of this Lease Agreement to
any such mortgage.
B) Lessee shall attorn to and recognize a successor Lessor, whether
through possession or foreclosure action or sale, as Lessee's landlord under
this Lease Agreement and shall promptly execute and deliver any instrument,
reasonably acceptable to Lessee, that such successor Lessor may reasonably
request to evidence such "non-disturbance agreement" under which Lessee's use
and occupancy of the Leased Premises and Lessee's rights under this Lease
Agreement will not be disturbed so long as Lessee observes and performs the
terms and conditions on Lessee's part to be performed under this Lease
Agreement.
18. SUBLETTING AND ASSIGNMENT:
A) Lessee shall not have the right to sublet or assign the Leased Premises
except on the following terms and conditions:
1) Such subletting or assignment shall not relieve the Lessee
from its duty to perform fully all of the agreements, covenants
and conditions set forth in this Lease Agreement or any
Guarantor from the obligations of any Guaranty executed and
delivered in connection with this Lease Agreement.
2) The Lessee shall first obtain the Lessor's written consent to
the subletting or assignment in each instance.
3) The Lessee shall provide the name of the proposed sublessee
or assignee, the terms and conditions of the proposed subletting
or assignment, the nature and character of the businness of the
proposed sublessee or assignee, and the banking, financial and
other credit information relating to the proposed sublessee
reasonably sufficient to enable Lessor to determine the
financial responsibility of said proposed sublessee or assignee.
4) Upon the receipt of such request from Lessee, Lessor shall
have an option, to be exercised in writing within forty-five
(45) days thereafter, to terminate this Lease Agreement
effective on a date set forth in Lessor's notice of termination,
which shall not be less than thirty (30) days nor more than one
hundred twenty (120) days following the service upon Lessee of
Lessor's notice of termination (the "Termination Date").
5) In the event Lessor shall exercise such option to terminate
this Lease Agreement, this Lease Agreement shall expire on the
Termination Date as if that date had been originally fixed as
the expiration date of the term herein granted and Lessee shall
surrender possession of the entire Leased Premises on the
Termination Date in accordance with the provisions of this Lease
Agreement.
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B) If Lessor shall not exercise its option within the period aforesaid,
then Lessor's consent to such request shall not be unreasonably withheld
but will be given only in the following conditions acknowledged by
Lessee to be reasonable and proper:
1) That the subletting or assignment is for part of or the
entire Leased Premises only;
2) That the subletting or assignment shall be to a sublessee
whose occupancy will be in keeping with the dignity and
character of the then use and occupancy of the Premises by
other lessees and whose occupancy will not be more objectionable
or more hazardous than that of Lessee herein. In no event shall
any subletting or assignment be permitted to a school of any
kind or an employment or placement agency; or governmental or
quasi-governmental agency;
3) That the subletting or assignment shall not be to any lessee,
sublessee or assignee of any leased space in the Premises of
which the Leased Premises form a part;
4) That the subletting or assignment shall not be advertised at
a lower rental rate than that being charged by Lessor at the
time for similar space in the Premises;
5) That the sublease or assignment will expressly prohibit
assignment of the Lease Agreement or further subletting by the
sublessee without Lessor's written consent.
6) If this Lease Agreement shall be assigned, or if the Leased
Premises or any part thereof, be sublet or occupied by any
person or persons other than Lessee, Lessor may, after default
by Lessee, collect Rent from the assignee, subtenant or
occupant, and apply the net amount collected to the rent herein
reserved, but no such assignment, subletting, occupancy or
collection of Rent shall be deemed a waiver of the covenants
contained in this Lease Agreement, nor shall it be deemed
acceptance of the assignee, subtenant or occupant as a tenant or
a release of Lessee from the full performance by Lessee of all
of the terms, conditions and covenants of this Lease Agreement.
C) Notwithstanding the foregoing, Lessee may, without Lessor's
prior written consent, but with at least ten (10) days prior
written notice and without being subject to Lessor's termination
rights under subsections 18(A)(4) and 18(A)(5) of this Lease
Agreement, sublet the Leased Premises or assign this Lease
Agreement to (i) a subsidiary, affiliate, division or
corporation controlling, controlled by or under common control
with Lessee, (ii) a successor corporation related to Lessee by
merger, consolidation, nonbankruptcy reorganization, or
governmental action, or (iii) a purchaser of substantially all
of Lessee's assets. A sale or transfer of Lessee's capital stock
shall not be deemed an assignment, subletting or any other
transfer of the Lease Agreement or the Leased Premises.
19. RECORDATION: Lessee and Lessor agree that they will not record this Lease
Agreement nor any memorandum thereof
20. SURRENDERS AND WAIVERS: When this Lease Agreement shall terminate in
accordance with the terms thereof, Lessee shall quietly and peaceably deliver up
possession to Lessor without notice from Lessor other than as may be
specifically required by any provision of this Lease Agreement. Lessee expressly
waives the benefit of all laws now or hereafter in force requiring notice
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<PAGE> 21
from Lessor with respect to termination. Lessee shall deliver up possession of
the Leased Premises in as good order, repair, and condition as the same are in
at the beginning of the term of this lease Agreement except for reasonable wear
and tear, casualty, condemnation and hazardous substances not caused by Lessee.
The cost of repairing any damage to the Leased Premises arising from the removal
of Lessee's property, shall be paid by Lessee. Lessee's obligation to observe or
perform this provision shall survive the expiration or other termination of the
term of this Lease Agreement. All property of Lessee not removed by it shall be
deemed abandoned.
The Lessee, for itself and on behalf of any person claiming through or under it,
including creditors of all kinds, does hereby waive and surrender all rights and
privileges which it might have under or by reason of any present or future law
to redeem the Leased Premises or to have a continuance of this Lease Agreement
for the Lease Term thereof after being dispossessed or ejected therefrom by
process of law or under the provisions of this Lease Agreement or after any
termination of this lease as herein provided. Lessee also waives the provisions
of any law relating to notice or delay in levy of execution in case of an
eviction or dispossession of Lessee for non-payment of rental or of any other
law of like import now or hereafter in effect.
Lessee shall not interpose any counterclaim or claim of set-off of any nature or
description whatsoever, except for any mandatory counterclaims in any action or
summary proceeding for the non-payment of the Fixed Rent or Additional Rent.
Except for an action, proceeding or counterclaim brought by either Lessor or
Lessee against the other for personal injury or property damage, Lessor and
Lessee hereby waive trial by jury in any action or proceeding or counterclaim
brought by either against the other on any matter whatsoever arising out of or
in any way connected with this lease, the relationship of Lessor and Lessee, or
Lessee's use or occupancy of the Leased Premises, including any emergency or
other statutory remedy with respect thereto.
21. NOTICE: All notices of any nature referred to in this Lease Agreement shall
be in writing and shall be deemed to have been given (i) when presented
personally, (ii) three (3) business days after being deposited in a regularly
maintained receptacle for the United States Postal Services, postage prepaid,
registered or certified, return receipt requested or (iii) the next business day
after delivery by any reputable overnight delivery service (ie., Federal
Express, Airborne, etc.) to the respective addresses set forth below or to such
other address as the respective parties hereto may designate in writing:
To the Lessor:
Rotterdam Ventures, Inc. d/b/a Galesi Enterprises
c/o Galesi Management Corporation
100 State Street
Albany, New York, 12207
With a copy to:
Rotterdam Ventures, Inc.
Rotterdam Industrial Park, Building 6
Schenectady, New York 12306
Attn: General Counsel
or to such other address as Lessor may hereafter designate by notice to Lessee.
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To the Lessee:
Pete's Brewing Company
514 High Street
Palo Alto, California 94301
Attn: Human Resources
or to such other address as Lessee may hereafter designate by notice to Lessor.
22. BROKERAGE: Lessee hereby warrants and represents that Quadrelle Realty and
Newmark Real Estate Company are the sole brokers concerned with this Lease
Agreement. Lessor agrees that it will pay the commission of said brokers in
accordance with separate agreements. Lessee shall indemnify and hold Lessor
harmless against and from any and all claims for any brokerage commissions or
other loss, damages, costs, expenses and liabilities, including, without
limitation, attorneys' fees arising out of any misrepresentation or alleged
misrepresentation of the foregoing representation.
23. ENTIRE AGREEMENT: The whole and entire agreement of the parties is set forth
in this Lease Agreement and the parties are not bound by any agreements,
understandings or conditions otherwise than as expressly set forth and
stipulated hereunder.
24. CHANGES, MODIFICATIONS OR AMENDMENTS: This Lease Agreement may not be
changed, modified, discharged or terminated orally or in any other manner than
by an agreement signed by the parties hereto or their respective successors and
assigns.
25. SEVERABILITY. If any provision of this Lease Agreement or its application to
any situation, shall be invalid or unenforceable to any extent, the remainder of
this Lease Agreement, or the application thereof to situations other than that
as to which it is invalid or unenforceable, shall not be affected thereby, and
every provision of this Lease Agreement shall be valid and enforceable to the
fullest extent permitted by law.
26. COVENANTS TO BIND RESPECTIVE PARTIES: The covenants, agreements, conditions
and provisions of this Lease Agreement shall be binding upon and inure to the
benefit of Lessor and Lessee and their respective heirs, distributors,
executors, administrators, successors and permitted assigns, except that no
assignment or subletting in violation of the provisions of Paragraph 18 shall
operate to vest any rights in any successor assignee or subtenant.
27. BUILDING NAME: The Lessor, for itself and its successors and assigns
reserves the right to change the name of the Premises, now generally known as
145 Huguenot Street, or the address of the Premises or to designate additional
addresses therefore, on Notice to Lessee. Lessee shall not use such name, or any
similar name, on its letterhead or any advertising material.
28. CERTIFICATE: Lessee and Lessor agree, at any time and from time to time,
upon not less than ten (10) days prior request by one party to the other, to
execute, acknowledge and deliver a statement in writing certifying that this
Lease Agreement is unmodified and is in full force and effect (or if there have
been modifications, that the same is in full force and effect as modified and
stating the modifications), the commencement date of this Lease Agreement, of
any other existing status of the Lease Agreement, and the dates to which the
rent and other charges have been paid in advance, if any, it being intended that
any such statement delivered pursuant to this Paragraph may be relied upon by a
prospective purchaser or mortgagee of the Leased Premises.
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29. LESSEES REPRESENTATIONS: Lessee represents to Lessor that it has made a
thorough examination and inspection of the Leased Premises and is familiar with
the condition of every part thereof. Lessee agrees that it enters into this
Lease Agreement without any representations or warranties by Lessor or any of
its agents, representatives, employees or servants or by any other person as to
the condition of the Leased Premises, and Lessee agrees to accept the Leased
Premises on the commencement date "as is" in its then condition, without any
alterations, improvements, repairs or decorations to be made by Lessor, except
as hereinabove otherwise provided.
30. LESSE'S REMEDIES: Lessee shall look only to Lessor's estate and property in
the Premises of which the Leased Premises are a part (or the proceeds thereof)
for the satisfaction of Lessee's remedies for the collection of a judgment (or
other judicial process) requiring the payment of money by Lessor in the event of
any default by Lessor hereunder, and no other property or assets of Lessor or
its partners or principals, disclosed or undisclosed, shall be subject to levy,
execution, or other enforcement procedure for the satisfaction of Lessee's
remedies under or with respect to this Lease Agreement, the relationship of
Lessor and Lessee hereunder or Lessee's use and occupancy of the Leased
Premises.
31. SECURITY: Lessee has deposited with Lessor the sum of $3,520.00 as security
for the full and faithful performance and observance by Lessee of Lessee's
obligations under this Lease Agreement upon execution of said Lease Agreement,
beyond any applicable notice and cure periods. If Lessee defaults in the full
and prompt payment and performance of any of Lessee's obligations under this
Lease Agreement including, without limitation, the payment of Fixed Rent and
Additional Rent, Lessor may use or apply the whole or any part of the security
so deposited to the extent required for the payment of any Fixed Rent and
Additional Rent or any other sum as to which Lessee is in default, beyond any
applicable notice and cure periods or for any sum which Lessor may expend or
may be required to expend by reason of Lessee's defaults, beyond any applicable
notice and cure periods. If Lessor shall so use or apply the whole or any part
of the security, Lessee shall, upon demand, immediately deposit with Lessor a
sum equal to the amount so used, or applied as security aforesaid. If Lessee
shall fully and faithfully comply with all of Lessee's obligations under this
lease, the security or any balance thereof shall be returned to Lessee upon the
termination of the lease and after delivery to the Lessor of entire possession
of the Leased Premises. In the event of any sale of Lessor's interest in the
Premises, Lessor shall have the right to transfer the security to the vendee
and Lessor shall thereupon be released by Lessee from all liability for the
return of such security. The security deposit shall be deposited by Lessor in an
interest bearing account and interest earned by the security deposit is for the
account of the Lessee.
32. GOVERNING LAW: The terms and conditions of this lease shall be construed and
interpreted under the laws of the State of New York.
23
<PAGE> 24
IN WITNESS WHEREOF, the undersigned have executed this Lease Agreement
as of the date first above written.
ROTTERDAM VENTURES, INC.
d/b/a GALESI ENTERPRISES
LESSOR
BY:___________________________
Name:_________________________
Title:________________________
PETE'S BREWING COMPANY
LESSEE
BY:/s/ JEFFREY A. ATKINS
---------------------------
Name:Jeffrey A. Atkins
---------------------------
Title:CEO
---------------------------
24
<PAGE> 25
ACKNOWLEDGEMENTS
STATE OF NEW YORK )
) SS.:
COUNTY OF )
On this _____ day of ________, 1997, before me personally came
_____________________, to me known, and known to me to be the
______________________ of Rotterdam Ventures, Inc., the corporation described in
and which executed the within instrument, who being by me duly sworn did depose
and say that the said ______________________ resides at __________________, and
the he/she signed his/her name thereto by order of the Board of Directors of
said corporation.
-------------------------------
Notary Public
STATE OF NEW YORK )
) SS.:
COUNTY OF )
On this ____ day of ________________, 1997, before me personally came
_________________________, to me known, and known to me to be the
_____________________ of _______________________, the ___________________
described in and which executed the within instrument, who being by me duly
sworn did depose and say that the said ___________________ resides at
______________________, and the he/she signed his/her name thereto by order of
the _________________________ of said _______________________.
-------------------------------
Notary Public
25
<PAGE> 26
EXHIBIT A - RENTAL SCHEDULE
1320 square feet - 145 Huguenot Street
Tenant: Pete's Brewing Company
Contact: Bill Brennen
Lease Term: Three (3) Years
Lease Rates: Year 1-3 $16.00 per square foot
$2.00 per square foot per year
electrical
for
Parking: One (1) permanent on-site space and One (1)
temporary on-site space. Lessor may terminate
the temporary on-site space upon sixty (60) days
notice to Lessee.
PREPARED July 25,1997
26
<PAGE> 27
EXHIBIT B - DRAWING
[FLOOR PLAN]
27
<PAGE> 28
EXHIBIT C - WORK LETTER
WORK LETTER
145 Huguenot Street
New Rochelle, New York, 10801
1 Lessor will install interior wall partitions (5/8 inch sheetrock) as per
drawing.
2. Lessor will paint entire Leased Premises two (2) coats, eggshell
finish. Color to be chosen by Lessee.
3 Lessor will carpet entire Leased Premises with 20 oz. level loop
carpeting. Color to be chosen by Lessee.
4. Lessor will replace any discolored or broken ceiling tiles.
5. Lessor will replace all burnt out bulbs.
6. Lessor will change all locks.
28
<PAGE> 29
EXHIBIT D
RULES AND REGULATIONS
1. The sidewalks, entrances, passages, courts or halls shall not be
obstructed by Lessee or used for any purpose other than ingress and egress to
and from the demised premises. Nothing shall be thrown out of windows or doors
or down passages of Premises.
2. Movement of goods in or out of the Premises shall only be effected
through the rear entrance. No hand trucks, carts, etc., shall be used in the
Premises unless equipped with rubber tires and side guards.
3. The skylights, windows, and doors that reflect or admit light and air
into the halls, or other public places in the Premises shall not be covered or
obstructed by Lessee, nor shall anything be placed on the window sills.
4. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
rubbish, rags or other substances shall be thrown therein. All damages resulting
from any misuse of the fixtures shall be borne by the Lessee who, or whose
employees, agents, visitors or licensees, shall have caused the same.
5. No Lessee shall make, paint, drill into, or in any way deface any
part of the demised premises or the Premises of which they form a part. No
boring, cutting or stringing of wires shall be permitted, except with the prior
written consent of the Lessor, and as the Lessor may direct.
6. No Lessee shall make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with occupants of this or neighboring
premises or buildings.
7. No Lessee or any of Lessee's employees, agents or visitors or
licensees, shall bring or keep upon the demised premises any inflammable,
combustible or explosive fluid, chemical or substance, other than those used in
the normal course of business, or allow any unusual or objectionable odors to be
produced upon the demised premises, or permit animals or birds to be brought or
kept on the premises.
8. No machine may be operated on the premises without the written
consent of the Lessor, except for normal business machines. Machinery shall be
placed in approved settings to absorb or prevent any noise or annoyance.
9. No Lessee shall place a load upon any floor of the Premises exceeding
the floor load per square foot area which such floor was designed to carry, and
all floor loads shall be evenly distributed. All removals or deliveries of any
safes, freight, furniture or bulky matter of any description must take place
during the hours which the Lessor or Lessor's agent may determine from time to
time, The Lessor reserves the right to prescribe the weight and position of all
safes, which must be placed so as to distribute the weight. The Lessor reserves
the right to inspect all freight to be brought into the Premises and to exclude
from the Premises all freight which violates any of the Rules and Regulations.
l0. Canvassing, soliciting and peddling in the Premises are prohibited
and each Lessee shall cooperate to prevent the same.
11. No air conditioning unit or system, portable electric heater or
similar apparatus shall be installed or used by any Lessee without the written
consent of the Lessor.
12. Unless specifically designated within the Premises by the Lessor,
the Premises , Leased Premises and common areas have been designated by Lessor
as non-smoking areas. No smoking will be permitted in the Premises , unless
Lessor has designated a specific smoking area.
13. Lessee shall not permit its employees, agents, visitors or licensees
to loiter within the Premises or on the adjoining sidewalks.
14. Lessor reserves the right to change, amend or otherwise revise the
Premises Standard rules and regulations as Lessor deems reasonable and
necessary.
29
<PAGE> 30
15. SORTING AND SEPARATION OF REFUSE AND TRASH
(a) Compliance by Lessee. Lessee covenants and agrees, at its
sole cost and expense, to comply with all applicable present and future laws,
orders, and regulations of all state, federal, municipal, and local
governments, departments, commissions, and boards regarding the collection,
sorting, separation, and recycling of waste products, garbage, refuse, and
trash. Lessee shall sort and separate such waste products, garbage, refuse, and
trash into such categories as provided by law. Each separately sorted category
of waste products, garbage, refuse, and trash shall be placed in separate
receptacles reasonably approved by Lessor. Such separate receptacles may, at
Lessor's option, be removed from the Leased Premises in accordance with a
collection schedule prescribed by law.
(b) Lessor's Rights in Event of Noncompliance. Lessor reserves
the right to refuse to collect or accept from Lessee any waste products,
garbage, refuse, or trash that is not separated and sorted as required by law,
and to require Lessee to arrange for such collection at Lessee's sole cost and
expense, utilizing a contractor satisfactory to Lessor. Lessee shall pay all
costs, expenses, fines, penalties, or damages that may be imposed on Lessor or
Lessee by reason of Lessee's failure to comply with the provisions of this
Paragraph, and, at Lessee's sole cost and expense, shall indemnify, defend, and
hold Lessor harmless (including legal fees and expenses) from and against any
actions, claims, and suits arising from such noncompliance, utilizing counsel
reasonably satisfactory to Lessor.
30
<PAGE> 31
EXHIBIT E
CLEANING/JANITORIAL SPECIFICATIONS
145 Huguenot Street
New Rochelle, New York
A. GENERAL - DAILY (MONDAY THROUGH FRIDAY EXCEPT HOLIDAYS)
1. Common Area:
a. Wash all entrance door and all adjacent glass
(interior/exterior).
b. Vacuum mats, sweep/mop floors, maintain walls, cigarette
urns, interior surfaces of lobby, elevators, and
corridors (including entry from parking lot).
c. Clean and wipe all water coolers.
d. Lavatory floors swept and mopped; all basins, bowls,
urinals, and toilet seats to be cleaned with
disinfectant; all mirrors to be washed; and wash all
tile walls, dividing partitions and doors.
e. Empty and clean all waste receptacles; fill all
dispensers with supplies (to be furnished by Lessor).
f. Maintain all storage/janitor rooms in clean or orderly
condition.
g. Collect all rubbish and place in designated area for
disposal.
2. Leased Premises:
a. Tile floors swept and dust mopped.
b. Dust all office furniture and furnishings.
c. Clean ashtrays and waste receptacles.
d. Clean entrance doors, doorways and wall areas adjoining
switches/outlets.
e. Vacuum all carpet as required.
f. Collect all rubbish and place in designated area for
disposal.
B. SPECIAL - FREQUENCY AS NOTED
1. Common Area:
a. Tile floors swept and dust-mopped.
b. Weekly, high dust all walls, partitions, doorways,
moldings, HVAC louvres, and wall fixtures.
c. Weekly, low dust window sills and baseboards.
2. Leased Premises:
a. Weekly, high dust all walls, partitions, doorways,
moldings, HVAC louvers, wall hangings, and light
fixtures.
b. Weekly, low dust all window sills and baseboards.
c. Bi-annually, wash all perimeter windows, inside and
outside.
d. Annually, machine scrub all tile floors and apply high-
gloss, no-skid, water- resistant polish.
e. Annually, hot water extract all carpeting.
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Pete's Brewing Company and Subsidiary on Form S-8 (File No. 333-1308) of our
report dated February 18, 1998, on our audits of the financial statements and
financial statement schedule of Pete's Brewing Company and Subsidiary as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995 which reports are included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PETE'S
BREWING COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997, AS
SHOWN IN THE 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,841
<SECURITIES> 12,358
<RECEIVABLES> 1,396
<ALLOWANCES> 184
<INVENTORY> 2,617
<CURRENT-ASSETS> 39,615
<PP&E> 4,056
<DEPRECIATION> 0
<TOTAL-ASSETS> 49,094
<CURRENT-LIABILITIES> 3,622
<BONDS> 0
0
0
<COMMON> 48,803
<OTHER-SE> 14
<TOTAL-LIABILITY-AND-EQUITY> 49,094
<SALES> 58,336
<TOTAL-REVENUES> 58,336
<CGS> 30,683
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 38,669
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,925)
<INCOME-TAX> 3,831
<INCOME-CONTINUING> (6,094)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,094)
<EPS-PRIMARY> (.57)
<EPS-DILUTED> (.57)
</TABLE>
