<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
Pete's Brewing Company
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
PETE'S BREWING COMPANY
514 HIGH STREET
PALO ALTO, CALIFORNIA 94301
June 24, 1998
DEAR SHAREHOLDER:
You are cordially invited to attend a Special Meeting of Shareholders (the
"Special Meeting") of Pete's Brewing Company, a California corporation ("Pete's"
or the "Company"), to be held on Tuesday, July 21, 1998, at 10:00 a.m., local
time, at the Sheraton Palo Alto (formerly the Holiday Inn Palo Alto), 625 El
Camino Real, Palo Alto, California 94301.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger dated as of May
22, 1998 (the "Merger Plan") among PBC Holdings, Inc., a Texas corporation
("Parent"), PBC Acquisition Corp., a Texas corporation and wholly-owned
subsidiary of Parent ("Merger Sub"), The Gambrinus Company, a Texas corporation,
and the Company and a related Agreement of Merger between Parent, Merger Sub and
the Company (the "Merger Agreement" and, collectively with the Merger Plan, the
"Merger Agreements"), and to approve consummation of the merger of Merger Sub
with and into the Company (the "Merger"), pursuant to which (a) the Company will
be the surviving corporation and will become a wholly-owned subsidiary of Parent
and (b) each outstanding share of Common Stock, no par value per share, of the
Company and the accompanying preferred share purchase right issued pursuant to
the terms of the Preferred Shares Rights Agreement dated as of November 25, 1996
between the Company and Norwest Bank Minnesota, N.A. as Rights Agent, as
amended, will be converted into the right to receive $6.375 in cash, without
interest (the "Merger Consideration"). If the Merger is consummated, the
Company's shareholders would no longer hold any interest in the Company
following the Merger. Consummation of the Merger is conditioned upon, among
other things, the affirmative vote of the holders of a majority of the
outstanding shares of the Company's Common Stock entitled to vote at the Special
Meeting.
The foregoing items of business are more fully described in the Proxy
Statement and Notice of Special Meeting of Shareholders accompanying this
letter. Details of the Merger Agreements, the Merger and other important
information concerning the Company appear in the accompanying Proxy Statement.
Please give this material your careful attention.
THE BOARD OF DIRECTORS OF THE COMPANY HAS CAREFULLY REVIEWED AND CONSIDERED
THE TERMS AND CONDITIONS OF THE MERGER AGREEMENTS AND THE TRANSACTIONS
CONTEMPLATED THEREBY, HAS APPROVED THE MERGER AGREEMENTS AND CONSUMMATION OF THE
MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENTS AND THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS.
THEREFORE, THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE BY THE
SHAREHOLDERS OF THE COMPANY FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENTS
AND APPROVAL OF CONSUMMATION OF THE MERGER.
The Company's Board of Directors has received an opinion of Morgan Stanley
& Co. Incorporated, the Company's financial advisor, that, as of the date of
such opinion, the Merger Consideration to be received by the holders of the
Company's Common Stock pursuant to the Merger Agreements is fair from a
financial point of view to such holders. A copy of this opinion is included as
Appendix C to the enclosed Proxy Statement.
<PAGE> 3
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying Proxy Card and return it in the enclosed
postage-prepaid envelope. You may revoke your Proxy in the manner described in
the accompanying Proxy Statement at any time before it has been voted at the
Special Meeting. If you attend the Special Meeting, you may vote in person even
if you have previously returned your Proxy Card. Your prompt cooperation will be
greatly appreciated.
Sincerely,
/s/ Jeffrey A. Atkins
---------------------
JEFFREY A. ATKINS
Secretary
Palo Alto, California
June 24, 1998
<PAGE> 4
PETE'S BREWING COMPANY
514 HIGH STREET
PALO ALTO, CALIFORNIA 94301
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JULY 21, 1998
To the Shareholders of
PETE'S BREWING COMPANY:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of PETE'S BREWING COMPANY, a California corporation ("Pete's" or the
"Company"), will be held on Tuesday, July 21, 1998 at 10:00 a.m., local time, at
the Sheraton Palo Alto (formerly the Holiday Inn Palo Alto), 625 El Camino Real,
Palo Alto, California 94301, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of May 22, 1998 (the "Merger Plan"),
among PBC Holdings, Inc., a Texas corporation ("Parent"), PBC Acquisition
Corp., a Texas corporation and wholly-owned subsidiary of Parent ("Merger
Sub"), The Gambrinus Company, a Texas Corporation, and the Company, and a
related Agreement of Merger between Parent, Merger Sub and the Company (the
"Merger Agreement" and, collectively with the Merger Plan, the "Merger
Agreements"), and to approve consummation of the merger of Merger Sub with
and into the Company (the "Merger"), pursuant to which (a) the Company will
be the surviving corporation and will become a wholly-owned subsidiary of
Parent and (b) each outstanding share of Common Stock, no par value per
share, of the Company and the accompanying preferred share purchase right
issued pursuant to the terms of the Preferred Shares Rights Agreement dated
as of November 25, 1996 between the Company and Norwest Bank Minnesota,
N.A. as Rights Agent, as amended, will be converted into the right to
receive $6.375 in cash, without interest. If the Merger is consummated, the
Company's shareholders would on longer hold any interest in the Company
following the Merger.
2. To transact such other business as may properly come before the
Special Meeting, including any motion to adjourn to a later date to permit
further solicitation of proxies if necessary, or before any adjournments
thereof.
The foregoing items of business are more fully described in the Proxy
Statement and the appendices thereto, including the Merger Agreements,
accompanying this Notice. Any action may be taken on any of the foregoing
proposals at the Special Meeting on the date specified above or any date to
which the Special Meeting may be properly adjourned.
Only shareholders of record at the close of business on June 12, 1998 are
entitled to notice of and to vote at the Special Meeting or any adjournment
thereof. Approval and adoption of the Merger Agreements and approval of the
consummation of the Merger will require the affirmative vote of the holders of a
majority of the outstanding shares of the Company's Common Stock entitled to
vote at the Special Meeting.
In the event that there are not sufficient votes to approve and adopt the
Merger Agreements and approve the consummation of the Merger, it is expected
that the Special Meeting will be adjourned in order to permit further
solicitation of proxies by the Company.
All shareholders are cordially invited to attend the Special Meeting in
person. However, to ensure your representation at the Special Meeting you are
urged to mark, sign, date and return the enclosed Proxy Card as promptly as
possible in the postage prepaid envelope enclosed for that purpose. If the
accompanying Proxy Card is properly executed and returned to the Company in time
to be voted at the Special Meeting and not revoked, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked proxies will be voted FOR approval and adoption of the
Merger Agreements and approval of consummation of the Merger.
<PAGE> 5
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by: (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company before the taking of the vote at
the Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of a proxy). See the section of the Proxy Statement entitled
"Information Concerning the Special Meeting -- Revocation of Proxies."
Sincerely,
/s/ Jeffrey A. Atkins
---------------------
JEFFREY A. ATKINS
Secretary
Palo Alto, California
June 24, 1998
TO ENSURE THAT YOUR SHARES ARE REPRESENTED AT THE SPECIAL MEETING, YOU ARE URGED
TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE
POSTAGE PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL
MEETING IN PERSON. YOUR PROXY CAN BE WITHDRAWN BY YOU AT ANY TIME BEFORE IT IS
VOTED.
<PAGE> 6
PETE'S BREWING COMPANY
514 HIGH STREET
PALO ALTO, CALIFORNIA 94301
------------------------
PROXY STATEMENT
------------------------
This Proxy Statement is being furnished in connection with the solicitation
of proxies by the Board of Directors (the "Pete's Board") of Pete's Brewing
Company, a California corporation (together with its subsidiary, "Pete's" or the
"Company") to be used at the Special Meeting of Shareholders (the "Special
Meeting") to be held on Tuesday, July 21, 1998, at 10:00 a.m., local time, and
at any adjournment or postponement thereof, at the Sheraton Palo Alto (formerly
the Holiday Inn Palo Alto), 625 El Camino Real, Palo Alto, California 94301.
The purposes of the Special Meeting are: (i) to consider and vote upon a
proposal to approve and adopt the Agreement and Plan of Merger dated as of May
22, 1998 (the "Merger Plan"), among PBC Holdings, Inc., a Texas corporation
("Parent"), PBC Acquisition Corp., a Texas corporation and wholly-owned
subsidiary of Parent ("Merger Sub"), The Gambrinus Company, a Texas corporation
("Gambrinus"), and the Company and a related Agreement of Merger between Parent,
Merger Sub and the Company (the "Merger Agreement" and, collectively with the
Merger Plan, the "Merger Agreements"), and to approve consummation of the merger
of Merger Sub with and into the Company (the "Merger") and (ii) to transact such
other business as may properly come before the Special Meeting, including any
motion to adjourn to a later date to permit further solicitation of proxies if
necessary, or before any adjournments thereof. See "Information Concerning the
Special Meeting -- Purpose of Special Meeting."
Pursuant to the Merger Agreements, copies of which are attached to this
Proxy Statement as Appendix A and Appendix B, Merger Sub will merge with and
into the Company, with the Company remaining as the surviving corporation (the
"Surviving Corporation"). As more fully described herein under "The Merger and
Related Transactions," the result of the Merger will be that the Company will be
acquired by, and become a wholly-owned subsidiary of, Parent and each issued and
outstanding share of common stock, no par value per share, of the Company (the
"Pete's Common Stock") and the accompanying preferred share purchase right
issued pursuant to the terms of the Preferred Shares Rights Agreement dated as
of November 25, 1996, between the Company and Norwest Bank Minnesota, N.A. as
Rights Agent, as amended (a "Pete's Right" issued pursuant to the "Rights
Plan"), will be converted into the right to receive six dollars and thirty-seven
and one-half cents ($6.375) in cash, without interest (the "Merger
Consideration"). If the Merger is consummated, the Company's shareholders would
no longer hold any interest in the Company following the Merger. Parent intends
to finance the Merger from borrowings under credit facilities for which it
(through its affiliate Gambrinus) has obtained commitments. The obligations of
Parent and Merger Sub to consummate the Merger are subject to certain
conditions. See "The Merger and Related Transactions."
THE BOARD OF DIRECTORS OF THE COMPANY HAS CAREFULLY REVIEWED AND CONSIDERED
THE TERMS AND CONDITIONS OF THE MERGER AGREEMENTS AND THE TRANSACTIONS
CONTEMPLATED THEREBY, HAS APPROVED THE MERGER AGREEMENTS AND CONSUMMATION OF THE
MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENTS AND THE MERGER ARE
FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS SHAREHOLDERS.
THEREFORE, THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE BY THE
SHAREHOLDERS OF THE COMPANY FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENTS
AND APPROVAL OF CONSUMMATION OF THE MERGER. SEE "THE MERGER AND RELATED
TRANSACTIONS -- BOARD RECOMMENDATION."
The affirmative vote of the holders of a majority of the shares of Pete's
Common Stock outstanding on June 12, 1998 (the "Record Date") is required for
approval and adoption of the Merger Agreements and approval of consummation of
the Merger (the "Company Shareholder Approval"). See "The Merger and Related
Transactions -- Conditions to the Merger." Only holders of record of shares of
Pete's Common Stock on the Record Date are entitled to notice of and to vote at
the Special Meeting or at any adjournment thereof. Certain of the directors and
the executive officers of Pete's have agreed to vote all shares of Pete's Common
Stock over which such director or executive officer has voting control in favor
of approval and adoption of the
<PAGE> 7
Merger Agreements and approval of consummation of the Merger and have executed
irrevocable proxies in connection therewith. As of the Record Date, such
directors and executive officers and their affiliates owned approximately 20.6%
of the outstanding shares of Pete's Common Stock (approximately 21.5% assuming
the exercise of all vested options held by such persons and approximately 20.7%
assuming exercise of only such vested options that have exercise prices per
share less than or equal to the Merger Consideration). See "Information
Concerning the Special Meeting -- Vote Required and Certain Voting Information,"
"-- Record Date; Outstanding Shares; and Principal Shareholders" and "The Merger
and Related Transactions -- Voting Agreements."
To ensure your representation at the Special Meeting, please sign and date
the accompanying Proxy Card and promptly return it to the Company in the
enclosed postage-prepaid, addressed envelope, even if you plan to attend the
Special Meeting. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT
THE SPECIAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PROPOSAL TO
APPROVE AND ADOPT THE MERGER AGREEMENTS AND APPROVE CONSUMMATION OF THE MERGER.
See "Information Concerning the Special Meeting -- Quorum; Abstentions and
Broker Non-Votes."
Holders of Pete's Common Stock who vote against the proposal to approve and
adopt the Merger Agreements and consummation of the Merger may, under certain
circumstances and by following procedures prescribed by the California General
Corporation Law, exercise dissenters' rights. The failure of a dissenting Pete's
shareholder to follow the appropriate procedures, including voting against the
proposal to approve and adopt the Merger Agreements and approve consummation of
the Merger, may result in the termination or waiver of such rights. A copy of
the California General Corporation Law relating to dissenters' rights is
attached to this Proxy Statement as Appendix D. See "The Merger and Related
Transactions -- Rights of Dissenting Shareholders."
The enclosed Proxy Card, the accompanying Notice of Special Meeting of
Shareholders and this Proxy Statement are first being mailed to shareholders of
the Company on or about June 24, 1998.
The date of this Proxy Statement is June 24, 1998
2
<PAGE> 8
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 5
SUMMARY..................................................... 6
Parties to the Merger.................................. 6
The Proposed Merger.................................... 7
Information Concerning the Special Meeting............. 7
Reasons for the Merger and Recommendation of the Board 8
of Directors..........................................
Opinion of Financial Advisor........................... 9
The Merger and Related Transactions.................... 9
Stock Price Information................................ 15
INFORMATION CONCERNING THE SPECIAL MEETING.................. 16
Time, Date and Place................................... 16
Purpose of the Special Meeting......................... 16
Record Date; Outstanding Shares; and Principal 16
Shareholders..........................................
Quorum; Abstentions and Broker Non-Votes............... 19
Vote Required and Certain Voting Information........... 19
Proxies................................................ 19
Revocation of Proxies.................................. 20
Proxy Solicitation..................................... 20
THE MERGER AND RELATED TRANSACTIONS......................... 21
General................................................ 21
Conversion of Shares, Options and Warrants............. 21
Amendment of Rights Agreement.......................... 22
Background of the Merger............................... 22
Reasons for the Merger................................. 26
Board Recommendation................................... 28
Opinion of Financial Advisor........................... 28
Conditions to the Merger............................... 30
Closing................................................ 31
Representations, Warranties and Covenants.............. 31
Limitations on Negotiations............................ 32
Termination, Amendments and Waivers.................... 33
Fees and Expenses; Termination Fee..................... 34
Voting Agreements...................................... 35
Interests of Certain Persons in the Merger............. 36
Regulatory Matters..................................... 38
Certain Federal Income Tax Considerations.............. 38
Accounting Treatment................................... 39
Rights of Dissenting Shareholders...................... 39
Surrender of Pete's Common Stock Certificates.......... 40
CERTAIN INFORMATION REGARDING GAMBRINUS, PARENT AND MERGER 41
SUB.......................................................
PBC Holdings, Inc. ("Parent").......................... 41
PBC Acquisition Corp. ("Merger Sub")................... 41
The Gambrinus Company ("Gambrinus").................... 42
</TABLE>
3
<PAGE> 9
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN INFORMATION REGARDING PETE'S........................ 42
Business............................................... 42
Selected Consolidated Financial Data................... 54
Management's Discussion and Analysis of Financial 55
Condition and Results of Operations...................
Consolidated Financial Statements (see page F-1)
SHAREHOLDER PROPOSALS....................................... 65
OTHER MATTERS............................................... 65
ADJOURNMENT OF THE SPECIAL MEETING.......................... 65
EXPERTS..................................................... 65
PETE'S BREWING COMPANY CONSOLIDATED FINANCIAL STATEMENTS.... F-1
Appendix A Agreement and Plan of Merger dated as of May 22,
1998 by and among PBC Holdings, Inc., PBC
Acquisition Corp., The Gambrinus Company and
Pete's Brewing Company
Appendix B Form of Agreement of Merger by and among PBC
Holdings, Inc., PBC Acquisition Corp. and Pete's
Brewing Company
Appendix C Opinion of Morgan Stanley & Co. Incorporated
Appendix D Excerpt From California General Corporation Law
Relating to Dissenters Rights
</TABLE>
4
<PAGE> 10
AVAILABLE INFORMATION
Pete's is subject to the informational requirements of the Securities and
Exchange Commission (the "Commission") and in accordance therewith files
reports, proxy statements, and other information in accordance with the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). These
materials can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices at Seven World Trade
Center, 13th Floor, New York, New York 10048 and Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549 at prescribed rates. The Commission also
maintains a web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission at the address "http://www.sec.gov." In addition, the Pete's Common
Stock is listed on the Nasdaq National Market ("Nasdaq") and material filed by
Pete's can be inspected at the offices of The Nasdaq Stock Market, Reports
Section, 1735 K Street N.W., Washington, D.C. 20006.
All information contained in this Proxy Statement relating to Gambrinus,
Parent, Merger Sub and their affiliates has been supplied by Gambrinus, and all
information in this Proxy Statement relating to Pete's and its affiliates has
been supplied by Pete's.
5
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and the Appendices hereto and is qualified in its entirety
by the more detailed information and consolidated financial statements contained
in this Proxy Statement and the Appendices hereto. Shareholders of Pete's are
urged to read this Proxy Statement and the accompanying Appendices in their
entirety.
This Proxy Statement includes "forward looking statements" within the
meaning of Section 21E of the Exchange Act. All of the statements contained in
this Proxy Statement, other than statements of historical fact, should be
considered forward looking statements. There can be no assurance that
expectations expressed in these forward looking statements will prove to have
been correct. Certain important factors that could cause actual results to
differ materially from the Company's expectations (the "Cautionary Statements")
are disclosed in this Proxy Statement, including, without limitation, in
"Certain Information Regarding Pete's -- Management's Discussion and Analysis of
Financial Condition and Result of Operations -- Factors Affecting Future
Results." All subsequent written and oral forward looking statements by or
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such Cautionary Statements. The Company
undertakes no obligation to publicly release any revisions to these forward
looking statements to reflect events or circumstances after the date hereof.
PARTIES TO THE MERGER
Pete's Brewing Company (together with its subsidiary, "Pete's" or the
"Company"). Pete's is the second largest major domestic craft brewer in the
United States. The Company currently markets its nine 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. In 1997, Pete's completed its calendar
of seasonal offerings with the introduction of Pete's Springfest to provide a
seasonal bridge between Pete's Summer Brew and Pete's Winter Brew. In addition,
in response to varying consumer preferences, the Company has diversified its
product line by introducing and marketing a new beer, Pete's ESP Lager, in March
1998. Since inception, Pete's 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. Pursuant to such strategy, the
Company custom brews all of its beers at the breweries of The Stroh Brewery
Company ("Stroh").
Pete's was incorporated in California in April 1986. The Company's
executive offices are located at 514 High Street, Palo Alto, California 94301,
and its telephone number at that location is (650) 328-7383. See "Certain
Information Regarding Pete's."
PBC Holdings, Inc. ("Parent"). Parent is a Texas corporation wholly-owned
by Carlos Alvarez, the sole shareholder of The Gambrinus Company. Parent was
recently organized for the purpose of effecting the Merger. It has no material
assets and has not engaged in any activities except in connection with the
proposed Merger. Parent's executive offices are located at 14800 San Pedro Ave.,
Suite 300, San Antonio, TX 78232 and its telephone number at that location is
(210) 490-9128.
PBC Acquisition Corp. ("Merger Sub"). Merger Sub is a Texas corporation and
a wholly-owned subsidiary of Parent recently organized by Parent for the purpose
of effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the proposed Merger. Merger Sub's executive
offices are located at 14800 San Pedro Ave., Suite 300, San Antonio, TX 78232
and its telephone number at that location is (210) 490-9128.
The Gambrinus Company ("Gambrinus"). Gambrinus is a Texas corporation which
was formed in 1986 and, like Parent, is wholly owned by Carlos Alvarez.
Gambrinus is engaged in the business of importing, brewing, marketing and
selling various beers. Gambrinus had gross revenues in 1997 in excess of $340
million. It is the exclusive importer of Corona Extra and other beer products
brewed by Cerveceria Modelo S.A. de C.V. of Mexico for a territory including
Texas, plus 24 other states and the District of Columbia in the eastern
6
<PAGE> 12
half of the United States. Recently, Corona has become the top-selling imported
beer in the United States, surpassing Heineken. In addition, Gambrinus is the
exclusive importer in the United States for Moosehead Lager beer which is brewed
in Canada. Gambrinus owns the Spoetzl Brewery located in Shiner, Texas where it
brews a number of craft-brewed Shiner brand beer products, including Shiner
Bock. An affiliate of Gambrinus owns the Bridgeport Brewing Co. of Portland,
Oregon. Gambrinus is a party to the Merger Plan for the purpose of assuring
performance by Parent and Merger Sub. The executive offices of Gambrinus are
located at 14800 San Pedro Avenue, Suite 300, San Antonio, Texas 78232 and its
telephone number at that location is (210) 490-9128.
THE PROPOSED MERGER
Parent, Merger Sub, Gambrinus and Pete's have entered into the Merger Plan,
whereby Merger Sub will be merged with and into Pete's, resulting in Pete's
becoming a wholly-owned subsidiary of Parent. See "The Merger and Related
Transactions." Upon consummation of the Merger, each then outstanding share of
Pete's Common Stock and the accompanying preferred share purchase right issued
pursuant to the terms of the Preferred Shares Rights Agreement dated as of
November 25, 1996, between Pete's and Norwest Bank Minnesota, N.A. as Rights
Agent, as amended (the "Rights Agreement", and the purchase rights, the "Pete's
Rights"), will be automatically converted into the right to receive the $6.375
in cash, without interest thereon (the "Merger Consideration"). If the merger is
consummated, the Company's shareholders will no longer hold any interest in
Pete's. Parent intends to finance the Merger from borrowings under credit
facilities for which it (through its affiliate Gambrinus) has obtained
commitments.
In addition, each outstanding option under the Company's 1986 Stock Option
Plan, 1995 Stock Option Plan, 1995 Director Option Plan and all other
stock-based incentive plans or arrangements of the Company other than the
Company's 1995 Employee Stock Purchase Plan (the "Option Plans") will, in
connection with the Merger, automatically vest and become exercisable in full.
Upon consummation of the Merger, each then outstanding option under the Option
Plans will be canceled, and the holder of each such canceled option will be
entitled to receive a cash sum per vested share of Pete's Common Stock equal to
the Merger Consideration less the exercise price per share under that option.
The Option Plans will terminate upon consummation of the Merger. As of the
Record Date, options to purchase an aggregate of 2,017,152 shares of Pete's
Common Stock under the Stock Option Plans were outstanding, of which, options to
purchase an aggregate of 374,487 shares of Pete's Common Stock had exercise
prices per share less than or equal to the Merger Consideration.
Each warrant outstanding at the Effective Time to purchase shares of Pete's
Common Stock will be canceled at the Effective Time.
The Rights Agreement has been amended so that it is inapplicable to the
Merger Plan and the Merger and it expires immediately prior to the consummation
of the Merger.
Following the Merger, Pete's will continue its operations as a wholly-owned
subsidiary of Parent and the shares of Pete's Common Stock will cease to be
registered under the Exchange Act and will cease to be publicly traded. See "The
Merger and Related Transactions -- Operations Following the Merger -- General"
and "-- Conversion of Shares; Options and Warrants."
INFORMATION CONCERNING THE SPECIAL MEETING
Date, Time and Place of Special Meeting. A Special Meeting of the
shareholders of Pete's will be held on Tuesday, July 21, 1998, at 10:00 a.m.,
local time, at the Sheraton Palo Alto (formerly the Holiday Inn Palo Alto), 625
El Camino Real, Palo Alto, California 94301. See "Information Concerning the
Special Meeting -- Time, Date and Place."
Purpose of Special Meeting. The purpose of the Special Meeting is: (i) to
consider and vote upon a proposal to approve and adopt the Merger Agreements and
to approve consummation of the Merger, and (ii) to transact such other business
as may properly come before the Special Meeting, including any motion to adjourn
to a later date to permit further solicitation of proxies if necessary, or
before any adjournments thereof. See "Information Concerning the Special
Meeting -- Purpose of the Special Meeting."
7
<PAGE> 13
Record Date; Shares Entitled to Vote. Only shareholders of record as of the
close of business on June 12, 1998 (the "Record Date") will be entitled to
notice of, and to vote at, the Special Meeting. As of the Record Date, there
were 10,840,149 shares of Pete's Common Stock outstanding and entitled to vote,
which were held by approximately 494 holders of record. See "Information
Concerning the Special Meeting -- Record Date; Outstanding Shares; and Principal
Shareholders."
Quorum; Abstentions and Broker Non-Votes. The required quorum for the
transaction of business at the Special Meeting is a majority of the shares of
Pete's Common Stock outstanding as of the Record Date. Abstentions and broker
non-votes each will be included in determining the number of shares present and
voting at the meeting for the purpose of determining the presence of a quorum.
Because approval and adoption of the Merger Agreements and consummation of the
Merger require the affirmative vote of the holders of a majority of the
outstanding shares of Pete's Common Stock entitled to vote at the Special
Meeting, abstentions and broker non-votes will have the same effect as votes
against approval and adoption of the Merger Agreements and approval of
consummation of the Merger. See "Information Concerning the Special
Meeting -- Quorum; Abstentions and Broker Non-Votes."
THE ACTIONS PROPOSED IN THIS PROXY STATEMENT ARE NOT MATTERS THAT CAN BE
VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS'
SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF PETE'S COMMON STOCK
ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR VOTES.
Vote Required and Certain Voting Information. Approval and adoption of the
Merger Agreements and approval of consummation of the Merger will require the
affirmative vote of the holders of a majority of the outstanding shares of
Pete's Common Stock entitled to vote at the Special Meeting. See "Information
Concerning the Special Meeting -- Vote Required and Certain Voting Information."
As of the Record Date, directors and executive officers of the Company and
their affiliates owned approximately 20.6% of the outstanding shares of Pete's
Common Stock (29.6% assuming exercise of all options held by such persons which
are presently exercisable or will become exercisable within 60 days of the
Record Date and 21.1% assuming exercise of only such options as have exercise
prices per share less than or equal to the Merger Consideration). See "Record
Date; Outstanding Shares; and Principal Shareholders." Certain directors and
executive officers have entered into Stockholder Agreements with Parent,
pursuant to which each such holder has agreed to vote his or her shares in favor
of approval of the Merger Agreements, the Merger, any other actions contemplated
by the Merger Agreements and any matter that could reasonably be expected to
facilitate the Merger. In addition, each such holder has, pursuant to the
Stockholder Agreements, granted an irrevocable proxy to the President and the
Secretary of Parent (and their successors) to vote such shares as aforesaid. The
outstanding shares of Pete's Common Stock subject to the Shareholder Agreements
represent 20.6% of the votes entitled to be cast by holders of shares of Pete's
Common Stock as of the Record Date, 21.5% assuming exercise of all options held
by parties to the Stockholder Agreements which are presently exercisable or will
become exercisable within 60 days of the Record Date and 20.7% assuming exercise
of only such options as have exercise prices per share less than or equal to the
Merger Consideration. See "The Merger and Related Transactions -- Voting
Agreements."
REASONS FOR THE MERGER AND RECOMMENDATION OF THE BOARD OF DIRECTORS
Reasons for the Merger. The Pete's Board's decision to approve the Merger
Agreements and the Merger was based, in large part, on its assessment that
Pete's is engaged in an extremely competitive business. The Pete's Board
believed that the craft beer segment in which the Company competes was in a
period of minimal growth as a result of brand proliferation within the industry.
The Pete's Board recognized that the Company's ability to execute its business
plan, achieve sales growth and return to profitability in the craft beer segment
may depend upon the Company's ability to achieve a greater scale through
acquisition of other craft beer companies, or forming joint venture or other
strategic distribution alliances. The Company's management, based upon
discussions with other companies since August 1997, concluded that it was
unlikely that the
8
<PAGE> 14
Company would be able to achieve the desired scale through acquiring other craft
beer companies or through the formation of a joint venture or other strategic
distribution arrangement.
The Board also recognized that in the absence of such a strategic
acquisition or other arrangement, the Company may be required to downsize the
Company's overhead structure to better match the anticipated reduced sales
levels. However, management advised the Pete's Board that reducing the
infrastructure of the Company could adversely impact the value of the Company
from the perspective of a potential acquiror. In addition, Morgan Stanley's
discounted cash flow analyses of Pete's based upon projections and assumptions
provided by Pete's management, showed a range of present values per Pete's share
of $5.59 to $6.88, with a present value at the midpoint of the discount rate and
multiple ranges of $6.21, subject to the considerable risks associated with
participating in a highly competitive industry.
In addition, Pete's management, based upon discussions with other companies
since November 1997 regarding a possible acquisition of Pete's and the efforts
of Morgan Stanley to solicit interest of third parties in acquiring the Company,
concluded that it was unlikely that in the near term any purchaser would be
willing to pay a higher price than that to be received in the Merger and
communicated this to the Pete's Board.
Recommendation of the Board of Directors. The Pete's Board has approved the
Merger Agreements and consummation of the Merger by the unanimous vote of all
directors who considered and voted upon the Merger Agreements and the Merger and
believes that the terms of the Merger Agreements and the Merger are fair to, and
in the best interests of, Pete's and its shareholders. Therefore, the Pete's
Board recommends a vote by the shareholders of the Company FOR approval and
adoption of the Merger Agreements and approval of consummation of the Merger.
Christopher T. Sortwell recused himself from discussions and votes by the Pete's
Board with respect to the Merger due to a possible conflict of interest
resulting from his position as an executive officer of The Stroh Brewery Company
("Stroh"), which brews all of the Company's beers. See "The Merger and Related
Transactions -- Recommendation of the Board of Directors."
OPINION OF FINANCIAL ADVISOR
Morgan Stanley & Co. Incorporated ("Morgan Stanley") has delivered to the
Pete's Board its opinion dated May 22, 1998 (the "Morgan Stanley Opinion") to
the effect that, as of the date of such opinion, the Merger Consideration to be
received by holders of Pete's Common Stock pursuant to the Merger is fair from a
financial point of view to such holders. The full text of the Morgan Stanley
Opinion, describing the assumptions made, matters considered and limitations on
review undertaken in connection with such opinion, is attached to this Proxy
Statement as Appendix C. SHAREHOLDERS ARE URGED TO READ SUCH OPINION CAREFULLY
IN ITS ENTIRETY. See "The Merger and Related Transactions -- Opinion of
Financial Advisor."
THE MERGER AND RELATED TRANSACTIONS
Conditions to the Merger
In addition to the requirement that the requisite approval of Pete's
shareholders be received, consummation of the Merger is subject to a number of
other conditions that, if not satisfied or waived, may cause the Merger not to
be consummated and the Merger Agreement to be terminated. Each party's
obligation to consummate the Merger is conditioned on, among other things: the
Company Shareholder Approval having been obtained; the expiration or termination
of any applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the accuracy of the other
party's representations; the other party's performance of its covenants; and
receipt from the other party of certain certificates, an opinion of the other
party's counsel and such other documents as each may reasonably request; and the
absence of legal action preventing consummation of the Merger. Parent's and the
Merger Sub's obligations to consummate the Merger are also conditioned upon no
more than 20% of the outstanding shares of Pete's Common Stock demanding
appraisal rights; the Pete's Board not withdrawing or materially modifying its
recommendation of adoption of the Merger and the Merger Agreements or approving
or recommending any Takeover Proposal (as defined below under "Limitations on
Negotiations"); and there having been no events which have caused or are
reasonably likely to cause a Material Adverse Effect (as defined in "The Merger
and Related Transactions -- Conditions to
9
<PAGE> 15
the Merger") on the Company, which event or effect has not been cured. At any
time prior to the Merger, either party may waive compliance with any of the
agreements or satisfaction of any of the conditions in the Merger Agreements.
See "The Merger and Related Transactions -- Conditions to the Merger."
Closing
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreements, Merger Sub and Pete's will file
the Merger Agreement with the Secretary of State of California. The Merger will
become effective upon such filing (the "Effective Time"). It is anticipated
that, assuming all conditions are met, the Merger will occur and a closing will
be held on July 21, 1998 (the "Closing Date"). See "The Merger and Related
Transactions -- Closing."
Following consummation of the Merger, a letter of transmittal with
instructions for completion thereof will be mailed to each holder of record of
Pete's Common Stock for use in exchanging Pete's Common Stock certificates and
Vested Option Agreements for the Merger Consideration. HOLDERS OF PETE'S COMMON
STOCK SHOULD NOT SUBMIT THEIR STOCK CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE
RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS. See "The Merger and Related
Transactions -- Surrender of Pete's Common Stock Certificates."
Representations, Warranties and Covenants
The Merger Plan contains various representations and warranties of the
parties, including representations by Parent, Pete's and Merger Sub as to their
respective organization and corporate power and their authority to enter into
the Merger Agreements and to consummate the Merger. Pete's has covenanted that,
until the termination of the Merger Plan or consummation of the Merger, it will
carry on its business in the ordinary course and not take certain actions
without Parent's consent. The Company also agreed to, as soon as practicable,
hold a meeting of its shareholders for the purpose of obtaining shareholder
approval of the Merger Agreements and the Merger, to recommend such approval to
its shareholders, to solicit proxies from its shareholders for such approval at
such meeting and to prepare and file with the Commission a proxy statement in
respect of such solicitation. The Company has also agreed to allow Parent
reasonable access between the date of the Merger Plan and the Effective Time to
the Company's properties, books and records, securities and tax reports,
schedules and filings and other financial and operating information. The
Company, Parent and Merger Sub have agreed to notify one another of facts which
would be likely to cause a material breach of a representation or warranty of
the Merger Plan or the failure of a condition to the consummation of the Merger.
The Company, Parent, Merger Sub and Gambrinus have agreed to use all
commercially reasonable efforts necessary, proper or advisable to consummate the
Merger and the other transactions contemplated by the Merger Plan. See "The
Merger and Related Transactions -- Representations, Warranties and Covenants."
Limitations on Negotiations
The Merger Plan provides that, from the date of the Merger Plan until the
earlier of termination of the Merger Agreement or the Effective Time, the
Company will not and will not authorize or permit any of its officers,
directors, employees or agents or advisors to, solicit, initiate, knowingly
encourage, participate in or take any actions reasonably likely to facilitate
any Takeover Proposal (as defined below). The Pete's Board may, if its fiduciary
duties to Pete's shareholders require and subject to a duty to notify Parent,
furnish information concerning the Company and participate in discussions and
negotiations regarding a Takeover Proposal that was not solicited after the date
of the Merger Plan. "Takeover Proposal" is defined as any inquiry, proposal or
offer from any person relating to any direct or indirect acquisition or purchase
of a substantial amount of assets of the Company and its subsidiaries taken as a
whole (other than inventory in the ordinary course of business) or more than a
20% interest in the total voting securities of the Company, or any tender or
exchange offer that if consummated would result in any person beneficially
owning 20% or more of any class of equity securities of the Company, or any
merger, consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving the
Company, other than the transactions contemplated in the Merger Plan.
10
<PAGE> 16
The Merger Plan also provides that the Pete's Board may not withdraw or
modify (or publicly propose to) its approval or recommendation of the Merger and
the Merger Agreements, approve or recommend (or publicly propose to) any
Takeover Proposal or cause the Company to enter into any agreement in respect of
a Takeover Proposal. The Pete's Board may, in respect of a Superior Proposal (as
defined below), do any of the forgoing if the Pete's Board's fiduciary duties to
Pete's shareholders so require and the Company complies with specified notice
and waiting period requirements. A "Superior Proposal" is any bona fide Takeover
Proposal made by a third party (i) on terms which the Pete's Board determines in
its good faith judgement (based upon consultation with a nationally recognized
investment banking firm) to be more favorable to the Company's shareholders than
the Merger and (ii) for which any required financing is then committed or which,
in the good faith judgement of the Pete's Board, is capable of being readily
obtained by the third party. See "The Merger and Related
Transactions -- Limitations on Negotiations."
Termination; Fees and Expenses; Breakup Fees
Termination. The Merger Plan may be terminated at any time prior to the
Effective Time by the mutual written consent of Parent and Pete's. Either Parent
or Pete's may terminate the Merger Plan if the Merger has not been consummated
by September 30, 1998 (the "Cut-Off Date"); provided, that no party may rely on
this termination provision if the delay was caused by such party's failure to
perform its obligations under, or its wilful breach of a representation or
warranty under, the Merger Plan; and provided further, that if the delay is
caused solely due to the waiting period under the HSR Act, not having expired or
been terminated or due to action of the Department of Justice or the United
States Federal Trade Commission (the "FTC"), then such date shall be extended to
December 31, 1998. Either party may terminate the Merger Plan if any Federal,
state or local government or any court, administrative agency or commission or
other governmental authority or agency, domestic or foreign (a "Governmental
Entity") enjoins, restrains or otherwise prohibits the Merger. Parent, in the
case of a breach by the Company, and the Company in case of a breach by
Gambrinus, Parent or Merger Sub, may terminate the Merger Plan prior to the
Effective Time if the other party breaches a representation, warranty or
covenant of the Merger Plan which results in a failure of a condition to
nonbreaching party's obligation to close the Merger and the breach is not
reasonably capable of being cured prior to the earlier of 15 days after giving
notice to the breaching party of the breach or two business days prior to the
Cut-Off Date. Parent or Merger Sub may terminate the Merger Plan if the Company
fails to secure approval of the Merger from its shareholders. The Company may
terminate the Merger Plan in accordance with the provisions regarding Takeover
Proposals. See "The Merger and Related Transactions -- Termination, Amendments
and Waivers."
Fees and Expenses. All fees and expenses incurred in connection with the
Merger Plan, the Merger and the transactions contemplated by the Merger Plan
will be paid by the party incurring such fees or expenses, whether or not the
Merger is consummated. See "The Merger and Related Transactions -- Fees and
Expenses; Breakup Fees."
Breakup Fees. The Company must pay a breakup fee of 2% of the aggregate
Merger Consideration (the "Termination Fee") in certain circumstances. The
Company must pay the Termination Fee if the Company terminates the Merger Plan
pursuant to the No Solicitation provisions of the Merger Plan. The Company must
also pay the Termination Fee if the Company enters into an Acquisition Agreement
(as defined in "The Merger and Related Transactions -- Limitations on
Negotiations") or recommends to its shareholders that they accept a tender offer
or exchange offer within six months of termination of the Merger Plan under the
following circumstances: (a) Parent or Merger Sub terminates the Merger Plan
because the Company fails to obtain shareholder approval for the Merger or (b)
at the time of any termination for failure to consummate the Merger by the
Cut-Off Date or the Company's breach of a representation, warranty or covenant
under the Merger Plan, there has been a public announcement of a proposal to
effect a Company Acquisition (as defined in "The Merger and Related
Transactions -- Fees and Expenses; Termination Fee"). Additionally, if the
Merger Plan is terminated because of a breach of a representation, warranty or
covenant in the Merger Plan, the breaching party shall pay all of the expenses
paid to third parties by the nonbreaching party in connection with the
transaction, up to $500,000, if the breach has arisen out of the action or
inaction of the breaching party. In the case of such a breach by the Company,
the payment of these expenses will be credited to any Termination Fee owed. See
"The Merger and Related Transactions -- Fees and Expenses; Breakup Fees."
11
<PAGE> 17
Voting Agreements
On May 22, 1998, Parent entered into Stockholder Agreements with Pete S.
Slosberg, Jeffrey A. Atkins, Stephen L. Cooke, Philip A. Marineau, Audrey
MacLean, O' Rourke Investment Corporation and Hunter Hastings (the "Stockholder
Agreements," with the "Insiders"). Pursuant to the Stockholder Agreements, each
of the Insiders agreed to vote or consent his or her shares in favor of the
Merger, the Merger Agreements and each of the other actions contemplated by the
Merger Plan and against any action or agreement that would result in a breach of
any covenant, representation or warranty or any other obligation or agreement of
the Company under the Merger Plan or the Stockholder Agreements. The Insiders
have also agreed in the Stockholder Agreements to vote against any extraordinary
corporate transaction, material asset sale, reorganization, recapitalization,
dissolution, liquidation or any other material change in the Company's corporate
structure or business or other action which is intended, or could reasonable be
expected, to interfere with, delay or otherwise materially adversely affect the
Merger and the transactions contemplated by the Stockholder Agreements and the
Merger Plan. The Insiders irrevocably granted proxies to the Vice President and
Secretary of Parent (and their successors) to vote the Insiders' shares in order
to effectuate the forgoing and agreed not to grant any other proxies or powers
of attorney, deposit shares into a voting trust or enter into voting agreements
with respect to their shares of Pete's Common Stock.
The Insiders also agreed in the Stockholder Agreements not to directly or
indirectly solicit, initiate, facilitate, knowingly encourage, participate in
discussions or negotiations regarding, or furnish any nonpublic information with
respect to the Company for any Takeover Proposal; to cease any existing
activities, discussions or negotiations with respect to any Takeover Proposal;
and to notify Parent of any request for non-public information concerning the
Company (except in the Ordinary Course of Business and not in connection with a
possible Takeover Proposal) or of any Takeover Proposal. The Insiders further
agreed that they will not: (a) directly or indirectly assign, transfer or
otherwise dispose of, or offer, consent or agree to, or request the Company to
register, a transfer of shares of Pete's Common Stock with respect to any of the
foregoing prohibited activities or (b) take any action that would make any
representation or warranty in the Stockholder Agreement untrue or incorrect or
result in a breach by the Insider of its obligations under the Stockholder
Agreement or a breach by the Company of its obligations under the Merger Plan.
The Insiders waived any rights of appraisal or rights to dissent from the
Merger. The covenants and agreements contained in the Stockholder Agreements
terminate upon the earlier to occur of the Effective Time or the termination of
the Merger Plan in accordance with its terms. See "The Merger and Related
Transactions -- Voting Agreements."
Interests of Certain Persons in the Merger
Change of Control/Severance Arrangements
Change of Control Bonuses: On April 22, 1998, the Pete's Board granted
bonuses to Jeffrey A. Atkins, Scott Barnum, Donald W. Quigley and Omer Malchin
in the amounts of $100,000, $67,500, $68,750 and $37,500, respectively, to
provide an incentive for them to remain at the Company despite the likelihood of
a business combination. The bonuses are payable upon the earlier of (i)
September 30, 1998 or (ii) the consummation of a business combination involving
the Company. The Board authorized an additional bonus of $50,000 for Mr. Atkins,
payable on December 31, 1998 if, as of such date, Mr. Atkins is an employee of
the Company. See "The Merger and Related Transactions -- Interests of Certain
Persons in the Merger -- Change of Control/Severance Arrangements."
Severance Plan: The Company maintains a Severance Plan that contains a
standard severance component and a change of control component. Under the
standard severance component, regular full-time employees who are involuntarily
terminated for reduction in force or inability to perform are entitled to
receive severance pay benefits determined based upon the employee's base salary
(not including bonuses, incentives, awards, overtime or other miscellaneous pay)
and length of service, with officers being entitled to a minimum benefit of
eight week's salary. Under the change of control component, if certain change of
control events occur and after any of such events an employee is terminated,
forced to relocate more than 50 miles or is reclassified as an hourly employee,
such employee is entitled to a severance benefit. The severance benefit is
determined according to the same formula as the standard component, except that
with bonuses and sales
12
<PAGE> 18
incentives are included in salary for purposes of calculating the benefit and
there are minimum benefits of 1 year's pay for officers, six month's pay for
directors and 3 month's pay for regular full time employees. The Merger will
trigger the change of control component under this plan. See "The Merger and
Related Transactions -- Interests of Certain Persons in the Merger -- Change of
Control/Severance Arrangements."
Forgivable Loans: The Company loaned Donald W. Quigley, Jr. and Omer
Malchin $75,000 and $9,142.05, respectively, pursuant to promissory notes dated
April 1, 1997 and January 21, 1997, respectively. The promissory notes were made
to compensate Mr. Quigley for losses on the sale of a home and to compensate Mr.
Malchin for loss of certain incentive benefits when they each joined the
Company. The promissory notes provide that the loans are forgivable as to 25% of
the principal amount on each of the first four anniversary dates of the making
of such notes. In addition, the notes will become fully forgiven at the
Effective Time. See "The Merger and Related Transactions -- Interests of Certain
Persons in the Merger -- Change of Control/Severance Arrangements."
Indemnification and Insurance. The Merger Plan provides that Gambrinus and
Parent will cause the Surviving Corporation to honor the obligations of the
Company with respect to indemnification agreements in effect at the Effective
Time and the indemnification provisions of the Company's Articles of
Incorporation or Bylaws in effect on the date of the Merger Plan. The Merger
Plan also provides that Gambrinus, Parent or the Surviving Corporation shall
maintain or extend the Company's existing officers' and directors' liability
insurance ("D&O Insurance"), or other insurance with substantially equivalent
coverage and amounts, for a period of not less than six years after the
Effective Time; provided, that this obligation to continue D&O Insurance shall
be satisfied by providing as much such insurance as can be obtained for an
annual premium not exceeding 150% of the Company's average annual premium for
such insurance for the years 1995, 1996 and 1997. See "The Merger and Related
Transactions -- Interests of Certain Persons in the Merger -- Indemnification
and Insurance."
Pete Slosberg Agreements. The Company and Mr. Slosberg entered into an
Independent Contractor Agreement, dated May 22, 1998 (the "Contractor
Agreement"), and effective automatically at the Effective Time. The term of the
Contractor Agreement is two years from the Effective Time and Mr. Slosberg will
be paid $250,000 and $262,500 for the first and second years of service
thereunder, respectively. Pursuant to the Contractor Agreement, Mr. Slosberg
agreed to provide to Pete's, during each 12 month period during the term of the
Contractor Agreement, 120 days of service in connection advertising and
promotional activities. Mr. Slosberg has also agreed pursuant to the Contractor
Agreement not to, with certain exceptions: (a) provide services for others if it
interferes with his work for Pete's; (b) participate in any other services of
any kind for any product or entity without the prior written consent of Pete's;
(c) engage in certain competitive activities; (d) interfere with relationships
between Pete's and other persons or entities; or (e) disparage Pete's or its
employees, customers, products and affiliates. Effective May 22, 1998, Mr.
Slosberg and the Company entered into an Assignment of Intellectual Property and
Nondisclosure Agreement (the "Assignment Agreement"). Pursuant to the Assignment
Agreement, Mr. Slosberg assigned to Pete's all of his rights in and to all
intellectual property used by Pete's in its business, which was created or
authored by Mr. Slosberg or which uses Mr. Slosberg's name, signature, voice or
likeness. Mr. Slosberg also agreed to keep confidential all trade secrets that
he has learned as a result of his association with Pete's and which Pete's deems
to be confidential. See "The Merger and Related Transactions -- Interests of
Certain Persons in the Merger -- Pete Slosberg Agreements."
Interests in Pete's Common Stock and Options. As of the Record Date, the
officers and directors of Pete's and their affiliates owned an aggregate of
2,232,204 shares of Pete's Common Stock and will be entitled to receive the
Merger Consideration with respect to such shares. In addition, certain of the
Company's officers and directors hold options to purchase shares of Pete's
Common Stock and will be entitled to receive the Merger Consideration less the
exercise price of the option for each share of Common Stock covered by the
options. Of such options, options to purchase an aggregate of 67,923 shares of
Pete's Common Stock have exercise prices less than or equal to the Merger
Consideration. See "Information Concerning the Special Meeting -- Record Date;
Outstanding Shares; and Principal Shareholders." Such persons will receive the
same Merger Consideration per share as all other shareholders and, other than
the benefits described above in "Change of Control/Severance Arrangements,"
"Indemnification and Insurance" and "Pete Slosberg Agree-
13
<PAGE> 19
ments," will not receive any special or additional consideration for their
shares of Pete's Common Stock or options. See "The Merger and Related
Transactions -- Interests of Certain Persons in the Merger -- Interests in
Pete's Common Stock and Options."
Regulatory Approvals
Pete's is not aware of any federal, state or foreign regulatory approvals
that must be obtained in order to consummate the Merger, except that the Merger
is reportable by Pete's and Parent under the HSR Act, and the rules promulgated
thereunder by the FTC. The Merger may not be consummated until notifications
have been given and certain information furnished to the FTC and the Antitrust
Division of the United States Justice Department (the "Antitrust Division"), and
specified waiting period requirements have been satisfied or waived. Pete's and
Parent filed their respective Notification and Report Forms required under the
HSR Act with the FTC and the Antitrust Division on June 5, 1998 and the
applicable waiting period under the HSR Act was terminated early by the FTC on
June 16, 1998. See "The Merger and Related Transactions -- Regulatory Matters."
Certain Federal Income Tax Considerations
As a result of the Merger, holders of shares of Pete's Common Stock
generally will recognize capital gain or loss equal to the difference between
the amount of cash received in the Merger or pursuant to the exercise of
dissenter's rights and the adjusted tax basis of the shares of Pete's Common
Stock exchanged therefor. Different tax rates may apply to certain shareholders
depending on their holding period. PETE'S SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER,
INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO
THEM OF THE MERGER. See "The Merger and Related Transactions -- Certain Federal
Income Tax Considerations."
Accounting Treatment
The Merger is expected to be accounted for under the purchase method of
accounting, with Parent as the acquiring party, in accordance with generally
accepted accounting principles. See "The Merger and Related
Transactions -- Accounting Treatment."
Rights of Dissenting Shareholders
Holders of Pete's Common Stock who vote against the proposal to approve and
adopt the Merger Agreements and consummation of the Merger may, under certain
circumstances and by following procedures prescribed by the California General
Corporation Law, exercise dissenters' rights and receive cash for their shares
of Pete's Common Stock. The failure of a dissenting Pete's shareholder to follow
the appropriate procedures, including voting against the proposal to approve and
adopt the Merger Agreements and approve consummation of the Merger may result in
the termination or waiver of such rights. A copy of the California General
Corporation Law relating to Appraisal Rights is attached to this Proxy Statement
as Appendix D. See "The Merger and Related Transactions -- Rights of Dissenting
Shareholders."
14
<PAGE> 20
STOCK PRICE INFORMATION
The Common Stock of the Company is traded on the Nasdaq National Market
under the symbol "WIKD." The following table sets forth for the periods
indicated, the high and low sale prices of the Pete's Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
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
FISCAL YEAR ENDING DECEMBER 31, 1998
First Quarter............................................. $ 4.75 $ 3.44
Second Quarter (through June 19, 1998).................... 6.13 3.75
</TABLE>
On May 21, 1998, the last trading day before the public announcement of the
execution of the Merger Agreement, the last reported sale price per share of the
Pete's Common Stock on the Nasdaq National Market was $6.00. On June 19, 1998,
the latest practicable trading day before the printing of this Proxy Statement
for which information was obtainable, the last reported sale price per share of
the Pete's Common Stock on the Nasdaq National Market was $5.75 per share.
Pete's shareholders are urged to obtain current market quotations for the Pete's
Common Stock. As of the Record Date, there were 494 shareholders of record of
Pete's Common Stock.
The Company has never paid cash dividends on its capital stock. Pursuant to
the Merger Agreement, the Company has agreed not to pay cash dividends pending
the consummation of the Merger, without the written consent of Parent. Subject
to completion of the Merger, the Company currently intends to 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.
15
<PAGE> 21
INFORMATION CONCERNING THE SPECIAL MEETING
TIME, DATE AND PLACE
This Proxy Statement is being furnished to holders of the Pete's Common
Stock in connection with the solicitation of proxies by the Pete's Board for use
at the Special Meeting to be held at the Sheraton Palo Alto (formerly the
Holiday Inn Palo Alto), 625 El Camino Real, Palo Alto, California 94301, on
Tuesday, July 21, 1998, at 10:00 a.m., local time, or at any adjournments or
postponements thereof, for the purposes set forth herein and in the accompanying
Notice of Special Meeting of Shareholders. This Proxy Statement, the
accompanying Notice of Special Meeting of Shareholders and the enclosed Proxy
Card are first being mailed to holders of Pete's Common Stock on or about June
24, 1998.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, shareholders of record of the Company as of the
close of business on the Record Date, will be asked: (i) to consider and vote
upon a proposal to approve and adopt the Merger Agreements and to approve
consummation of the Merger and (ii) to transact such other business as may
properly come before the Special Meeting, including any motion to adjourn to a
later date to permit further solicitation of proxies if necessary, or before any
adjournments thereof.
RECORD DATE; OUTSTANDING SHARES; AND PRINCIPAL SHAREHOLDERS
The Pete's Board has fixed June 12, 1998 as the Record Date for the
determination of the shareholders of the Company entitled to notice of and to
vote at the Special Meeting. Only holders of record of Pete's Common Stock on
the Record Date will be entitled to notice of and to vote at the Special
Meeting. As of the Record Date, there were 10,840,149 shares of Pete's Common
Stock outstanding and entitled to vote, which were held by approximately 494
holders of record. Each record holder of Pete's Common Stock on the Record Date
is entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
shareholders of the Company at the Special Meeting.
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of the Record Date as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each person who served as the Chief Executive Officer of the Company and each of
the next four most highly compensated executive officers during the fiscal year
ended December 31, 1997 and (iv) all current directors and executive officers as
a group.
<TABLE>
<CAPTION>
FIVE PERCENT SHAREHOLDERS, DIRECTORS COMMON STOCK APPROXIMATE
AND CERTAIN EXECUTIVE OFFICERS BENEFICIALLY OWNED PERCENTAGE OWNED (1)
------------------------------------ ------------------ --------------------
<S> <C> <C>
The Stroh Brewery Company(2)............................. 1,157,055 9.6%
100 River Place
Detroit, MI 48207
Christopher T. Sortwell(2)............................... 1,157,055 9.6
100 River Place
Detroit, MI 48207
DDJ Capital Management, LLC(3)........................... 917,570 8.5
141 Linden Street, Suite 4
Wellesley, MA 02181
Audrey MacLean(4)........................................ 862,995 8.0
21100 Saratoga Hills Road
Saratoga, CA 95070
O'Rourke Investment Corporation(5)....................... 774,055 7.1
12930 Saratoga Ave., Suite B-7
Saratoga, CA 95070
Kevin O'Rourke(5)........................................ 774,055 7.1
12930 Saratoga Ave., Suite B-7
Saratoga, CA 95070
</TABLE>
16
<PAGE> 22
<TABLE>
<CAPTION>
FIVE PERCENT SHAREHOLDERS, DIRECTORS COMMON STOCK APPROXIMATE
AND CERTAIN EXECUTIVE OFFICERS BENEFICIALLY OWNED PERCENTAGE OWNED (1)
------------------------------------ ------------------ --------------------
<S> <C> <C>
Pete S. Slosberg(6)...................................... 596,100 5.5
514 High Street
Palo Alto, CA 94301
Mark F. Bozzini(7)....................................... 528,532 4.9
James E. Collins(8)...................................... 403,300 3.7
Jeffrey A. Atkins(9)..................................... 76,375 *
Don W. Quigley, Jr.(10).................................. 41,667 *
Scott Barnum(11)......................................... 31,250 *
Philip A. Marineau(12)................................... 20,750 *
Omer Malchin(14)......................................... 18,750 *
Patrick Couteaux(13)..................................... 18,591 *
Hunter Hastings.......................................... 1,000 *
All current directors and officers as a group (12
persons)(15)........................................... 3,624,188 29.6
</TABLE>
- ---------------
* Less than 1%
(1) Applicable percentage of ownership is based on 10,840,149 shares of Common
Stock outstanding as of the Record Date, together with applicable options
and warrants for such shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options and warrants currently exercisable or
exercisable within 60 days after the Record Date are deemed outstanding for
computing the percentage ownership of the person holding such options, but
are not deemed outstanding for computing the percentage of any other
person.
(2) Includes 1,140,284 shares of Common Stock which may be acquired upon
exercise of a warrant held by Stroh of which Mr. Sortwell is Executive Vice
President and Chief Financial Officer, and for which he may be deemed to
have voting and investment power, and 14,271 shares of Common Stock which
may be acquired by Mr. Sortwell upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the
Record Date, of which 1,250 shares may be acquired at exercise prices less
than or equal to the Merger Consideration.
(3) Reflects ownership as reported on Schedule 13D/A dated June 16, 1998 filed
with the Securities and Exchange Commission by DDJ Capital Management, LLC
("DDJ"). Represents shares beneficially owned by: (i) DDJ Overseas Corp.,
of which DDJ Galileo, owns all of the voting securities, and for which DDJ
serves as investment manager; (ii) The Galileo Fund, L.P., of which DDJ
Galileo, LLC is the general partner and for which DDJ serves as investment
manager; (iii) The Copernicus Fund, L.P. of which DDJ Copernicus, LLC is
the general partner and for which DDJ serves as investment manager; and
(iv) Kepler Overseas Corp., for which DDJ serves as investment manager. DDJ
Overseas Corp. owns, and DDJ Galileo, LLC and DDJ beneficially own as
majority shareholder and investment manager, respectively, of DDJ Overseas
Corp., 679,610 shares of Common Stock. The Galileo Fund, L.P. owns, and DDJ
Galileo, LLC and DDJ beneficially own as the general partner and investment
manager, respectively, of The Galileo Fund, L.P., 68,850 shares of Common
Stock. The Copernicus Fund, L.P. owns, and DDJ Copernicus, LLC and DDJ
beneficially own, as general partner and investment manager, respectively,
of The Copernicus Fund, L.P., 122,320 shares of Common Stock. Kepler
Overseas Corp. owns, and DDJ, as investment manager for Kepler Overseas
Corp. beneficially owns 46,790 shares of Common Stock. DDJ, as investment
manager for DDJ Overseas Corp., The Galileo Fund, L.P., The Copernicus
Fund, L.P. and Kepler Overseas Corp. may be deemed to beneficially own
917,570 shares of Common Stock.
(4) Includes 848,724 shares held in trust over which Ms. MacLean may be deemed
to have voting and investment power and 14,271 shares of Common Stock which
may be acquired by Ms. MacLean upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the
Record Date, of which 1,250 shares may be acquired at exercise prices less
than or equal to the Merger Consideration.
17
<PAGE> 23
(5) Includes 759,784 shares of Common Stock owned by O'Rourke Investment
Corporation of which Mr. O'Rourke is Chief Financial Officer and for which
he may be deemed to have voting and investment power and 14,271 shares of
Common Stock which may be acquired by Mr. O'Rourke upon exercise of stock
options which are presently exercisable or will become exercisable within
60 days of the Record Date, of which 1,250 shares may be acquired at
exercise prices less than or equal to the Merger Consideration.
(6) Includes 576,100 shares held in trust over which Mr. Slosberg may be deemed
to have voting and investment power and 20,000 shares of Common Stock which
may be acquired by Mr. Slosberg upon exercise of stock options which are
presently exercisable or will become exercisable within 60 days of the
Record Date, none of which shares may be acquired at exercise prices less
than or equal to the Merger Consideration.
(7) Mr. Mark Bozzini retired as an executive officer of the Company effective
February 28, 1997. Based on information as of April 13, 1998 received from
Mr. Bozzini. The Company does not have information regarding Mr. Bozzini's
beneficial ownership of Pete's Common Stock as of the Record Date.
(8) Represents 403,300 shares held in trust over which Mr. Collins may be
deemed to have voting and investment power. Mr. Collins resigned as an
executive officer of the Company effective September 15, 1997. Based on
information as of April 13, 1998 received from Mr. Collins. The Company
does not have information regarding Mr. Collins' beneficial ownership of
Pete's Common Stock as of the Record Date.
(9) Includes 17,000 shares of Common Stock owned by Mr. Atkins and 59,375
shares of Common Stock which may be acquired by Mr. Atkins upon exercise of
stock options which are presently exercisable or will become exercisable
within 60 days of the Record Date, none of which shares may be acquired at
exercise prices less than or equal to the Merger Consideration.
(10) Represents 41,667 shares of Common Stock which may be acquired by Mr.
Quigley upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of the Record Date, none of which
shares may be acquired at exercise prices less than or equal to the Merger
Consideration..
(11) Represents 31,250 shares of Common Stock which may be acquired by Mr.
Barnum upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of the Record Date, all of which
shares may be acquired at exercise prices less than or equal to the Merger
Consideration.
(12) Represents 20,750 shares of Common Stock which may be acquired by Mr.
Marineau upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of the Record Date, of which 13,250
shares may be acquired at exercise prices less than or equal to the Merger
Consideration.
(13) Represents 18,750 shares of Common Stock which may be acquired by Mr.
Malchin upon exercise of stock options which are presently exercisable or
will become exercisable within 60 days of the Record Date, all of which
shares may be acquired at exercise prices less than or equal to the Merger
Consideration.
(14) Includes 1,496 shares of Common Stock owned by Mr. Couteaux and 17,095
shares of Common Stock which may be acquired by Mr. Couteaux upon exercise
of stock options which are presently exercisable or which will become
exercisable within 60 days of the Record Date, of which 923 shares may be
acquired at exercise prices less that or equal to the Merger Consideration.
(15) Includes 251,700 shares of Common Stock which may be acquired upon exercise
of stock options which are presently exercisable or will become exercisable
within 60 days of the Record Date and 1,140,284 shares of Common Stock
which may be acquired upon exercise of a presently exercisable warrant. Of
such shares which may be acquired upon exercise of stock options or
warrants, 67,923 may be acquired at exercise prices less than or equal to
the Merger Consideration.
18
<PAGE> 24
QUORUM; ABSTENTIONS AND BROKER NON-VOTES
The representation in person or by proxy of at least a majority of the
outstanding shares of Pete's Common Stock entitled to vote at the Special
Meeting is necessary to constitute a quorum for the transaction of business.
Abstentions and broker non-votes each will be included in determining the number
of shares present and voting at the meeting for the purpose of determining the
presence of a quorum. A "non-vote" occurs when a nominee holding shares for a
beneficial owner does not vote on a proposal because, in respect of such
proposal, the nominee does not have discretionary voting power and has not
received instructions from the beneficial owner. Because approval of the Merger
Agreements and consummation of the Merger requires the affirmative vote of the
holders of a majority of the outstanding shares of Pete's Common Stock entitled
to vote at the Special Meeting, abstentions and broker non-votes on such
proposal will have the same effect as votes against the Merger Agreements and
consummation of the Merger.
THE ACTIONS PROPOSED IN THIS PROXY STATEMENT ARE NOT MATTERS THAT CAN BE
VOTED ON BY BROKERS HOLDING SHARES FOR BENEFICIAL OWNERS WITHOUT THE OWNERS'
SPECIFIC INSTRUCTIONS. ACCORDINGLY, ALL BENEFICIAL OWNERS OF PETE'S COMMON STOCK
ARE URGED TO RETURN THE ENCLOSED PROXY CARD MARKED TO INDICATE THEIR VOTES.
Norwest Bank Minnesota, N.A., the Company's transfer agent, will serve as
the Inspector of Elections and will count all votes and ballots.
VOTE REQUIRED AND CERTAIN VOTING INFORMATION
The affirmative vote of the holders of a majority of the outstanding shares
of Pete's Common Stock entitled to vote at the Special Meeting is required to
approve and adopt the Merger Agreements and to approve consummation of the
Merger. See "The Merger and Related Transactions -- Conditions to the Merger."
As of the Record Date, directors and executive officers of the Company and
their affiliates owned approximately 20.6% of the outstanding shares of Pete's
Common Stock (29.6% assuming exercise of all options held by such persons which
are presently exercisable or will become exercisable within 60 days of the
Record Date and 21.1% assuming exercise of only such options as have exercise
prices per share less than or equal to the Merger Consideration). See "Record
Date; Outstanding Shares; and Principal Shareholders." Certain directors and
executive officers have entered into Stockholder Agreements with Parent,
pursuant to which each such holder has agreed to vote his or her shares in favor
of approval of the Merger Agreements, the Merger, any other actions contemplated
by the Merger Agreements and the Stockholder Agreements and any matter that
could reasonably be expected to facilitate the Merger. In addition, each such
holder has, pursuant to the Stockholder Agreements, granted an irrevocable proxy
to the President and the Secretary of Parent (and their successors) to vote such
shares as aforesaid. The outstanding shares of Pete's Common Stock subject to
the Stockholder Agreements represent 20.6% of the votes entitled to be cast by
holders of shares of Pete's Common Stock as of the Record Date, 21.5% assuming
exercise of all options held by parties to the Stockholder Agreements which are
presently exercisable or will become exercisable within 60 days of the Record
Date and 20.7% assuming exercise of only such options as have exercise prices
per share of less than or equal to the Merger Consideration. See "The Merger and
Related Transactions -- Voting Agreements."
THE PETE'S BOARD RECOMMENDS A VOTE BY THE SHAREHOLDERS OF THE COMPANY FOR
APPROVAL AND ADOPTION OF THE MERGER AGREEMENTS AND APPROVAL OF CONSUMMATION OF
THE MERGER.
PROXIES
This Proxy Statement is being furnished to holders of Pete's Common Stock
in connection with the solicitation of proxies by and on behalf of the Pete's
Board for use at the Special Meeting.
All shares of Pete's Common Stock that are entitled to vote and are
represented at the Special Meeting by properly executed proxies received prior
to or at the Special Meeting and not duly and timely revoked, will
19
<PAGE> 25
be voted at the Special Meeting as directed by the shareholders executing such
proxies in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such proxies will be voted FOR the proposal to
approve and adopt the Merger Agreements and to approve consummation of the
Merger.
IF ANY OTHER MATTERS PROPERLY COME BEFORE THE SPECIAL MEETING (OR BEFORE
ANY ADJOURNMENTS THEREOF), INCLUDING, AMONG OTHER THINGS, CONSIDERATION OF A
MOTION TO ADJOURN THE SPECIAL MEETING TO ANOTHER TIME AND/OR PLACE (INCLUDING
WITHOUT LIMITATION, FOR THE PURPOSE OF SOLICITING ADDITIONAL VOTES FOR APPROVAL
AND ADOPTION OF THE MERGER AGREEMENTS AND APPROVAL OF CONSUMMATION OF THE
MERGER), THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY AND VOTING THEREUNDER
WILL HAVE DISCRETION TO VOTE ON SUCH MATTERS IN ACCORDANCE WITH THE INSTRUCTIONS
OF THE PETE'S BOARD.
REVOCATION OF PROXIES
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by: (i) filing
with the Secretary of the Company at or before the taking of the vote at the
Special Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company before taking the vote at the
Special Meeting, or (iii) attending the Special Meeting and voting in person
(although attendance at the Special Meeting will not in and of itself constitute
a revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to: Pete's Brewing Company, 514 High
Street, Palo Alto, California 94301, Attention: Secretary, or hand-delivered to
the Secretary of the Company at or before taking the vote at the Special
Meeting.
PROXY SOLICITATION
All costs of solicitation of proxies will be borne by the Company. In
addition to solicitation by use of the mails, proxies may be solicited by
directors, officers and employees of the Company in person or by telephone,
telegram or other means of communication. Such directors, officers and employees
will not be additionally compensated, but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. Arrangements will
also be made with custodians, nominees and fiduciaries for forwarding proxy
solicitation materials to beneficial owners of shares held of record by such
custodians, nominees and fiduciaries, and the Company will reimburse such
custodians, nominees and fiduciaries for reasonable expenses incurred in
connection therewith. The Company has retained D.F. King & Co., Inc., New York,
New York to assist in the solicitation of proxies at a cost currently estimated
at $5,000 plus reasonable out of pocket expenses.
20
<PAGE> 26
THE MERGER AND RELATED TRANSACTIONS
GENERAL
This section of the Proxy Statement describes certain aspects of the
proposed Merger and the Merger Agreements. Although all material terms and
conditions of the Merger Agreements are described below, the following
description does not purport to be complete and the discussion in this Proxy
Statement of the Merger and the description of the principal terms and
conditions of the Merger Agreements are subject to and qualified in their
entirety by reference to the Merger Agreements, copies of which are attached to
this Proxy Statement as Appendices A and B and are incorporated herein by
reference. Shareholders are urged to read the Merger Agreements in their
entirety.
The Merger Agreements provide for the merger of a newly formed,
wholly-owned subsidiary of Parent with and into Pete's, with Pete's to be the
surviving corporation of the Merger becoming a wholly-owned subsidiary of
Parent. Following the Merger, Pete's will continue its operations as a
wholly-owned subsidiary of Parent. Consequently, if the Merger is consummated,
the Company's shareholders would no longer hold any interest in the Company
following the Merger. Following consummation of the Merger there will be no
public trading market for the Pete's Common Stock, and the Pete's Common Stock
will be deregistered under the Exchange Act. Parent intends to finance the
Merger from borrowings under credit facilities for which it (through its
affiliate Gambrinus) has obtained commitments.
Upon consummation of the Merger, the Articles of Incorporation of the
Company as in effect immediately prior to consummation of the Merger, shall be
the Articles of Incorporation of the Surviving Corporation, provided that the
Articles of Incorporation of the Surviving Corporation shall be amended to
change the authorized capital stock of the Surviving Corporation to 1,000 shares
of Common Stock, no par value per share. Further, the Bylaws of the Company, as
in effect immediately prior to consummation of the Merger, shall be the Bylaws
of the Surviving Corporation. Upon consummation of the Merger, the members of
Merger Sub's board of directors will be the initial directors of the Surviving
Corporation. The membership of the Board of Directors of Parent will remain
unchanged as a result of the Merger.
CONVERSION OF SHARES, OPTIONS AND WARRANTS
Upon consummation of the Merger, each then outstanding share of Pete's
Common Stock (other than shares of Pete's Common Stock held by shareholders who
properly exercise dissenters' rights under the California General Corporation
Law, if any) and the accompanying Pete's Right will be canceled and extinguished
and be automatically converted into the right to receive $6.375 per share in
cash, without interest (the "Merger Consideration"). Upon consummation of the
Merger, the certificates currently representing Pete's Common Stock will no
longer represent Pete's Common Stock and will represent only the right to
receive the Merger Consideration. As a result, current Pete's shareholders will
cease to have any continuing interest in Pete's, other than the right to payment
of the Merger Consideration in accordance with the terms of the Merger
Agreements.
Pursuant to the terms of the Option Plans, in connection with the Merger
each outstanding option to purchase Pete's Common Stock will automatically vest
and become exercisable as to all shares thereunder. The Merger Agreements
provide that upon consummation of the Merger, each then outstanding option under
the Option Plans shall, to the extent exercisable at such time for vested shares
of Pete's Common Stock (including any shares which vest on an accelerated basis
in connection with the Merger), be canceled, and the holder of each such
canceled option shall be entitled to receive a cash sum per vested share of
Pete's Common Stock subject to the canceled option equal to the Merger
Consideration less the exercise price per share of Pete's Common Stock in effect
under that option immediately prior to consummation of the Merger. The Option
Plans will terminate upon consummation of the Merger. (See Merger
Plan -- Section 2.16.) As of the Record Date, options to purchase an aggregate
of 2,017,152 shares of Pete's Common Stock under the Option Plans were
outstanding, of which options to purchase 374,487 shares of Pete's Common Stock
have exercise prices less than or equal to the Merger Consideration.
21
<PAGE> 27
At the Effective Time, each warrant to purchase Pete's Common Stock
outstanding at the Effective Time will be canceled. As of the Record Date, one
warrant to purchase 1,140,284 shares of Pete's Common Stock was outstanding,
with a per share exercise price of $14.00.
At or immediately prior to consummation of the Merger, each then
outstanding option under the Stock Purchase Plan will automatically be exercised
and, in lieu of the issuance of Pete's Common Stock, each participant will
receive an amount in cash (subject to any applicable withholding tax) equal to
the product of (x) the number of shares of Pete's Common Stock otherwise
issuable upon such exercise and (y) the Merger Consideration. Following the date
of the Merger Plan, no new offering period under the Stock Purchase Plan will
commence and the Company will not permit any participant to increase his or her
rate of contributions under the Stock Purchase Plan. Upon consummation of the
Merger, the Stock Purchase Plan will terminate and no holder of options under
the Stock Purchase Plan will have any right to receive shares of Pete's Common
Stock upon exercise of any such option. See Merger Plan -- Section 2.16. The
purchase price of the current offering period under the Stock Purchase Plan,
which began on May 1, 1998, is $3.51 per share. As of the Record Date, $9,865 of
payroll deductions had been withheld under the Stock Purchase Plan.
AMENDMENT OF RIGHTS AGREEMENT
The Rights Agreement has been amended to (1) render the Rights Agreement
inapplicable to the Merger and the Merger Plan and (2) ensure that: (a) none of
Parent, the Purchaser or any of their respective affiliates is an Acquiring
Person (as defined in the Rights Agreement) pursuant to the Rights Agreement
solely by virtue of the execution of the Merger Agreements and the consummation
of the Merger; (b) a Distribution Date or a Shares Acquisition Date (as defined
in the Rights Agreement) does not occur by reason of the Merger, the execution
of the Merger Agreements or the consummation of the Merger; and (c) provide that
the Final Expiration Date (as defined in the Rights Agreement) will occur
immediately prior to the Effective Time.
BACKGROUND OF THE MERGER
From 1994 through 1996, Pete's achieved significant growth in net sales,
with net sales increasing 478% from $12.2 million in 1993 to $70.6 million in
1996. In addition, Pete's was profitable in each of 1994, 1995 and 1996, with
income from operations of $603,000, $2.5 million and $1.1 million in 1994, 1995
and 1996, respectively. The Company's growth during this period reflected the
rapid growth of the craft beer segment of the domestic beer industry as well as
increasing levels of market acceptance of the Company's beers. As net sales
grew, the Company built a management team and sales and marketing and support
organizations sized for continuing significant growth. However, the Company's
sales growth began to slow in the fourth quarter of 1996, and in 1997 the
Company's net sales decreased 17% to $58.3 million from the $70.6 million posted
in 1996. The reduction in net sales, combined with the Company's relatively
fixed operating expenses and certain write offs, resulted in the Company
recording losses from operations in the fourth quarter of 1996 and in each of
the fiscal quarters of 1997. The loss from operations for all of 1997 totaled
$11.0 million.
The major factor leading to the Company's reduced sales was competition.
The rapid growth of the craft beer segment resulted in a tremendous number of
new entrants. This flood of new entrants created a significantly more intense
competitive market throughout 1997, as wholesale and retail outlets were
inundated with new products. At the same time, the growth of the craft beer
market began to slow from the growth rate in excess of 30% for the 6 year period
from 1990 to 1996 to growth of just 8% in 1997. In addition, in the fourth
quarter of 1997, volume in the craft beer market declined 5%.
As the disappointing sales trends were experienced during 1997, the
Company's management explored the Company's strategic alternatives. The
Company's management and the Pete's Board believed that the lower growth rates
of sales in the craft beer segment would require the Company to achieve a
greater scale in order to achieve profitability and provide appropriate levels
of sales and marketing support for the Pete's brand. As a result, the strategic
alternatives explored included growing the Company's sales through acquisition
of other craft beer companies or the formation of joint venture or other
strategic distribution alliances. In addition, the Company investigated the
possibility of resizing the Company's overhead structure
22
<PAGE> 28
to better match anticipated sales levels in the event that an acquisition, joint
venture or other strategic distribution alliance was not possible. Finally, the
Company explored the possibility of selling the Company. Beginning in August
1997, the Company's management sought discussions with third parties regarding
potential acquisitions and joint venture or other strategic distribution
relationships. In addition, in November 1997 the Company engaged the services of
Morgan Stanley as financial advisor to assist the Company in analyzing the
strategic alternatives available to the Company. On December 3, 1997, Pete's
executed an engagement letter pursuant to which Morgan Stanley was formally
retained. In November 1997, Morgan Stanley began to actively solicit third
parties to ascertain interest in acquiring Pete's.
On January 30, 1998, the Pete's Board received a report from management and
Morgan Stanley regarding the results of their efforts to investigate various
forms of strategic transactions with third parties.
On February 17, 1998, at a regularly scheduled meeting of the Pete's Board,
management again reported to the Pete's Board regarding the status of ongoing
discussions with third parties regarding various forms of strategic
transactions. Mr. Atkins also presented to the Board a preliminary plan for
downsizing the Company if the Company were to remain an independent entity.
Later on February 17, 1998, in order to widely disseminate the Company's desire
to discuss strategic transactions with third parties and to improve the
likelihood that all indications of interest would be received, the Company
issued a press release announcing that it had retained Morgan Stanley to advise
the Board on various alternatives for maximizing shareholder value.
Between November 1997 and May 1998, Morgan Stanley contacted or was
contacted by 28 potential strategic and financial buyers. One such potential
buyer was Gambrinus. On February 24, 1998, a representative of Morgan Stanley
contacted James J. Bolz, Finance Director and Treasurer of Gambrinus, to inquire
whether Gambrinus had an interest in a possible business combination with the
Company. Shortly thereafter, Mr. Bolz communicated to Morgan Stanley that
Gambrinus was interested in exploring in more detail the possibility of an
acquisition of the Company. On February 26, 1998, Pete's and Gambrinus entered
into a confidentiality agreement, which provided for, among other things, the
parties' exchange on a confidential basis of certain non-public information
regarding the Company. Thereafter, during late February and early March 1998,
the Company initiated the exchange of information and Gambrinus reviewed certain
confidential information regarding Pete's and performed other due diligence
regarding the Company's business.
On March 13, 1998, Carlos Alvarez, President and Chief Executive Officer of
Gambrinus, Mr. Bolz and other representatives of Gambrinus met with Jeffrey A.
Atkins, Chief Executive Officer and Chief Financial Officer of Pete's, and other
members of Pete's senior management to conduct management interviews and review
certain confidential information concerning the Company.
On March 31, 1998, in a letter addressed to Morgan Stanley, Gambrinus made
a preliminary, non-binding proposal to acquire 100% of the Company's outstanding
Common Stock in an all cash transaction. The letter expressed the interest of
Gambrinus in exploring a transaction at between $6.00 and $6.50 per share, with
a reduction in the purchase price based upon changes in the Company's working
capital subsequent to December 31, 1997. Gambrinus' preliminary proposal
contemplated a period of extensive due diligence investigations, including
review of legal, financial and other documents. The preliminary proposal was
also subject to negotiation and execution of a mutually agreeable definitive
merger agreement. Gambrinus did not request that Pete's agree, pending the
execution of a definitive agreement, to negotiate exclusively with Gambrinus and
refrain from soliciting other bids for the Company. A representative of Morgan
Stanley indicated to Mr. Bolz that management would inform the Pete's Board of
the preliminary proposal and that Pete's management and financial and legal
advisors would study the Gambrinus proposal and inform Gambrinus of whether
Pete's was interested in pursuing a possible transaction.
On April 7, 1998, the Pete's Board convened a telephonic meeting with
Pete's management and financial and legal advisors regarding Gambrinus'
preliminary proposal. The Pete's Board also received a report from Morgan
Stanley regarding the status of all ongoing discussions with other third parties
regarding a potential transaction with the Company. The Pete's Board authorized
the Company's advisors to undertake negotiations with Gambrinus regarding the
proposal in order to determine whether acceptable terms could be reached. The
23
<PAGE> 29
Pete's Board also instructed the Company's advisors to continue ongoing
information exchanges and discussions with other third parties and to step up
solicitation efforts to ensure that all indications of interest were received.
Christopher T. Sortwell, one of the Company's directors, did not participate in
the discussion of matters relating to a possible Gambrinus transaction due to a
potential conflict of interest resulting from his position as an executive
officer of Stroh, which brews all of the Company's beers. Mr. Sortwell continued
to recuse himself from meetings of the Pete's Board and discussions regarding
the possible Gambrinus transaction and did not participate in the vote by the
Pete's Board to approve the Merger.
Following the meeting of the Pete's Board, Mr. Atkins advised Mr. Bolz that
Pete's was interested in pursuing the transaction proposed by Gambrinus but that
certain of the terms and conditions would require improvement.
On April 8, 1998, representatives of Pete's, its outside legal counsel and
Morgan Stanley had a telephone conversation with outside legal counsel for
Gambrinus to discuss procedures for due diligence and information exchange.
On April 13, 1998, legal counsel to Pete's distributed a proposed agreement
and plan of merger calling for an all cash tender offer by Gambrinus for 100% of
the outstanding shares of Pete's Common Stock.
On April 13, 1998, Pete's and Gambrinus amended the confidential
nondisclosure agreement between the parties to add certain provisions regarding
non-solicitation of Pete's employees. From April 13 to April 17, 1998, outside
legal counsel and independent auditors for Gambrinus met at the offices of
outside legal counsel to Pete's to conduct a due diligence review of legal,
financial and other information regarding Pete's. On April 14, 1998, Mr. Atkins
and other representatives of Pete's met with the Gambrinus legal counsel and
independent auditors to answer due diligence questions. In addition, on April 16
and 17, 1998 Mr. Atkins met with Mr. Bolz and representatives of Gambrinus'
outside legal counsel, independent auditors and financial advisors to exchange
information regarding the Company and to answer questions regarding Pete's. The
parties also briefly discussed the legal and structural alternatives for a
possible business combination between the parties. During the rest of the month
of April, representatives of Gambrinus and its financial and legal advisors
conducted due diligence, made additional information inquiries and received
additional information from Pete's and its financial and legal advisors. In
addition, legal counsel to Gambrinus and legal counsel to Pete's discussed the
legal and structural alternatives for a possible business combination between
the parties.
On April 22, 1998, at a regularly scheduled meeting of the Pete's Board,
Pete's management and financial and legal advisors updated the Board regarding
the ongoing discussions with Gambrinus. The representative of Morgan Stanley
also reported to the Board on the status of ongoing discussions and information
exchanges with other third parties regarding a business combination with the
Company. The Board also received a report from Mr. Atkins regarding various
strategic alternatives that could be pursued by the Company in lieu of a
business combination with Gambrinus or another third party. The Pete's Board
authorized management to continue negotiations with Gambrinus to determine
whether acceptable terms could be reached.
On April 27, 1998, the Company announced its results for the first quarter
of 1998 ended March 31, 1998. The Company's net sales of $9.8 million for the
quarter represented a decrease in net sales of 19.7% from the $12.2 million
realized in the three months ended March 31, 1997 and a decrease of
approximately 35% from the $15.1 million realized in the immediately preceding
quarter ended December 31, 1997. In addition, the Company reported a loss from
operations for the three months ended March 31, 1998 of $3.1 million.
On May 5, 1998, Gambrinus, through a marked up version of the proposed
agreement and plan of merger, submitted a revised proposal to acquire all of the
outstanding shares of Pete's Common Stock for cash at a price of $6.25 per
share. The proposed transaction would be structured as a merger of a subsidiary
of a newly established corporation 100% owned by Mr. Alvarez, the sole
stockholder of Gambrinus, and would require approval by a vote of the
shareholders of Pete's. The Gambrinus proposal also contemplated a special
timing bonus of $0.25 per share to be added to the purchase price if the parties
could execute a mutually agreeable definitive merger agreement by May 15, 1998.
The Gambrinus proposal contemplated additional due diligence, including a
meeting with representatives of Stroh and facilities tours, prior to the
execution of a definitive merger agreement. The Gambrinus proposal also
specified that the proposed merger would be
24
<PAGE> 30
conditioned upon the Company having obtained from Pete Slosberg, Co-Founder and
a director of Pete's, satisfactory agreements regarding the continued use of his
name, likeness, signature and related intellectual property after the proposed
merger. On May 5 and May 6, 1998, the Company's management and financial and
legal advisors studied the Gambrinus proposal.
On May 7, 1998, Mr. Atkins, Mr. Bolz and representatives of Gambrinus' and
the Company's financial and legal advisors met by telephone to discuss the
valuation of the Company, the terms of the merger agreement and how to proceed
with a possible acquisition of the Company by Parent. No agreement as to value
was reached. The parties also tentatively scheduled additional due diligence
meetings, including a meeting with executives of Stroh. On the call, the
Company's representatives expressed the Company's preference that any agreements
with Mr. Slosberg be negotiated and entered into prior to the execution of a
definitive merger agreement. On May 8, 1998, counsel to Pete's submitted
proposed changes to the draft agreement and plan of merger to counsel for
Gambrinus.
Beginning on May 11, 1998 and continuing to May 14, 1998, representatives
of Gambrinus and its counsel met with representatives of Pete's to exchange
information, tour the Pete's facilities and conduct additional due diligence.
During this same period, on May 11, 1998, Mr. Bolz and Mr. Atkins met with Mr.
Sortwell to discuss the Company's relationship with Stroh and the terms of the
Company's Manufacturing Agreement with Stroh. On May 13 and 14, 1998, Mr. Bolz
met with Mr. Atkins to discuss the terms of the draft agreement and plan of
merger generally, certain due diligence questions regarding the Company and
other matters related to the proposed acquisition. Mr. Bolz and Mr. Atkins also
met with Mr. Slosberg on May 14, 1998 to discuss the terms of potential
agreements with Mr. Slosberg concerning the Company's continued use of his
likeliness and a continuing relationship with the Company after the proposed
merger.
On May 18 and 19, 1998, counsel for each of Pete's and Gambrinus held
telephonic negotiations regarding the terms of the definitive Merger Plan.
On May 20 and 21, 1998, representatives of Gambrinus, its legal counsel and
financial advisors met with representatives of Pete's and its legal counsel to
negotiate the definitive Merger Plan. As a result of arms'-length negotiations
between the two companies, on May 21, 1998, Gambrinus made a revised proposal to
purchase all of the outstanding shares of Pete's Common Stock for a cash price
of $6.375 per share. During this period, representatives of Gambrinus also
negotiated with Mr. Slosberg and his independent legal counsel, the terms of the
agreements by which the Company would retain the right to continue to use his
likeness and by which Mr. Slosberg would serve as a consultant to the Company
after the Merger.
At a special meeting of the Pete's Board held on May 21, 1998, counsel to
the Company reported to the Pete's Board that the parties had negotiated nearly
final drafts of the Merger Plan and reviewed the terms of the Merger Agreements
with the Pete's Board. Morgan Stanley discussed various analyses relating to the
Merger and answered questions regarding such analyses. Morgan Stanley indicated
to the Pete's Board that the opportunity to invest in or acquire Pete's had been
broadly communicated and seriously examined within the industry. Morgan Stanley
and representatives of Pete's management again reviewed with the Pete's Board
the discussions that had taken place with other companies since the engagement
of Morgan Stanley in November 1997 regarding the possible sale of Pete's. Morgan
Stanley advised the Pete's Board that only one formal written offer had been
made by such other companies and that such offer, other non-written offers and
other indications of interest had all involved discussions at prices below the
Merger Consideration. At the May 21 meeting, the Pete's Board received the oral
opinion of Morgan Stanley that, as of such date and subject to review of the
definitive Merger Plan, the Merger Consideration pursuant to the draft Merger
Plan is fair from a financial point of view to the holders of shares of Pete's
Common Stock. The Pete's Board then approved the Merger and draft of the Merger
Plan subject to finalization by the Company's management and advisors, and to
the receipt of the opinion of Morgan Stanley in written form.
Thereafter, on May 22, 1998, Morgan Stanley delivered its written opinion
that, as of such date, the Merger Consideration pursuant to the Merger Plan is
fair from a financial point of view to the holders of shares of Pete's Common
Stock. Also on May 22, 1998, the boards of directors of each of Parent, Merger
Sub and Gambrinus approved the Merger and the Merger Agreements by unanimous
written consent. Parent,
25
<PAGE> 31
Merger Sub, Gambrinus and Pete's entered into the Merger Plan and the execution
of the agreement was announced in a joint press release on May 22, 1998.
REASONS FOR THE MERGER
The Pete's Board has approved the Merger Agreements and the transactions
contemplated thereby, has determined that the terms of the Merger Agreements and
the Merger are fair to, and in the best interests of, Pete's and its
shareholders and recommends that holders of shares of Pete's Common Stock vote
FOR approval and adoption of the Merger Agreements and consummation of the
Merger.
The Pete's Board's decision to approve the Merger Agreements and the Merger
was based, in large part, on its assessment that Pete's is engaged in an
extremely competitive business. The Pete's Board believed that the craft beer
segment in which the Company competes was in a period of minimal growth as a
result of brand proliferation within the industry. The Pete's Board recognized
that the Company's ability to execute its business plan, achieve sales growth
and return to profitability in the craft beer segment may depend upon the
Company's ability to achieve a greater scale through acquisition of other craft
beer companies, or forming joint venture or other strategic distribution
alliances. The Company's management, based upon discussions with other companies
since August 1997, concluded that it was unlikely that the Company would be able
to achieve the desired scale through acquiring other craft beer companies or
through the formation of a joint venture or other strategic distribution
arrangement.
The Board also recognized that in the absence of such a strategic
acquisition or other arrangement, the Company may be required to downsize the
Company's overhead structure to better match the anticipated reduced sales
levels. However, management advised the Pete's Board that reducing the
infrastructure of the Company could adversely impact the value of the Company
from the perspective of a potential acquiror. In addition, Morgan Stanley's
discounted cash flow analyses of Pete's based upon projections and assumptions
provided by Pete's management, showed a range of present values per Pete's share
of $5.59 to $6.88, with a present value at the midpoint of the discount rate and
multiple ranges of $6.21, subject to the considerable risks associated with
participating in a highly competitive industry.
In addition, Pete's management, based upon discussions with other companies
since November 1997 regarding a possible acquisition of Pete's and the efforts
of Morgan Stanley to solicit interest of third parties in acquiring the Company,
concluded that it was unlikely that in the near term any purchaser would be
willing to pay a higher price than that to be received in the Merger and
communicated this to the Pete's Board.
In reaching its decision to approve the Merger Agreement and to recommend
the shareholders of Pete's vote to approve the Merger Agreement and the Merger,
the Pete's Board considered a number of factors, including without limitation,
the following factors, both positive and potentially negative:
(i) The Pete's Board considered historical information concerning the
Company's business, prospects, financial performance and condition,
operations, management and competitive position, noting in
particular that the Company had experienced declining sales, with
net sales in 1997 lower than net sales in each of 1996 and 1995, and
with net sales in the first three months of fiscal 1998 lower than
net sales in the fourth quarter of fiscal 1997, that the Company had
recorded losses from operations in each of the last six fiscal
quarters and that working capital, especially cash, cash equivalents
and available for sale securities, had declined significantly since
the Company's initial public offering in November 1995;
(ii) The Pete's Board considered the belief of the Company's management
and the Pete's Board that trends in the craft beer industry are
adversely affecting the Company's sales, profitability and ability
to compete effectively, including the increasing competition and
proliferation of craft beers in the market place and the resulting
trend toward lower pricing of craft beer products;
(iii) The Pete's Board considered a review of the possible strategic
alternatives to the Merger, including the possibility of acquiring
other craft beer companies or forming joint venture or other
strategic distribution alliances or of continuing to operate the
Company as an independent entity executing a scaled back stand-alone
business plan, the possible benefits to the Company's
26
<PAGE> 32
shareholders of such alternatives and the timing and the likelihood
of the Company actually accomplishing any of such alternatives;
(iv) The Pete's Board considered the written opinion of Morgan Stanley to
the effect that, as of the date of such opinion, the Merger
Consideration to be received by the holders of shares of Pete's
Common Stock pursuant to the Merger is fair from a financial point
of view to such holders (see "-- Opinion of Financial Advisor"). The
full text of the Morgan Stanley Opinion dated May 22, 1998,
describing the assumptions made, matters considered and limitations
on review undertaken in connection with such opinion, is attached
hereto as Appendix C. SHAREHOLDERS ARE URGED TO READ SUCH OPINION
CAREFULLY IN ITS ENTIRETY;
(v) The Pete's Board considered the all-cash consideration to be received
by the shareholders in the Merger and the fact that the Merger
Consideration represented a significant premium over the price range
of the Pete's Common Stock (the Merger Consideration represented a
premium of 49.7% over the average closing price of Pete's Common
Stock over the three months prior to May 18, 1998.);
(vi) The Pete's Board considered the current financial market conditions
for craft beer company stocks generally and the historical market
price, volatility and related trading information with respect to
the Pete's Common Stock;
(vii) The Pete's Board considered the fact that, although the Company had
issued a press release in February 1998 announcing the retention of
Morgan Stanley to investigate alternatives for maximizing
shareholder value, and that since November 1997 Morgan Stanley had
actively solicited third parties regarding a business combination
with the Company, Pete's management and Morgan Stanley both advised
the Pete's Board that they had received only one formal written
offer from third parties for alternative business combination
transactions and that such offer, other non-written offers and other
indications of interest other had all involved discussions at prices
below the Merger Consideration;
(viii) The Pete's Board considered the potential for other third parties to
acquire the Company;
(ix) The Pete's Board considered the fact that pursuant to the Merger
Agreement, the Company is not prohibited from responding to an
unsolicited Superior Proposal (as defined in 'Summary -- The Merger
and Related Transactions -- Limitations on Negotiations") to acquire
the Company and that the Company may terminate the Merger Agreements
and accept such Superior Proposal subject to the Company's
obligation to pay the termination fee in the amount and in the
manner described in the Merger Plan;
(x) The Pete's Board considered the terms and conditions of the Merger
Agreement, including the termination fees, non-solicitation
provisions, representations and warranties, conditions to closing and
termination provisions, which were arrived at through extensive
arms'-length negotiations;
(xi) The Pete's Board considered the fact that upon consummation of the
Merger, shareholders of the Company will cease to have any
continuing interest in the Company, other than the right to payment
of the Merger Consideration in accordance with the terms of the
Merger Agreements, and, accordingly, after consummation of the
Merger, will have no opportunity to participate in any appreciation
in the value of Pete's Common Stock;
(xii) The Pete's Board considered that consummation of the Merger is
conditioned upon approval by the holders of the majority of the
outstanding shares of the Pete's Common Stock of the Merger
Agreements;
(xiii) The Pete's Board considered the risk that key sales and marketing,
management and other personnel might be lost prior to the
consummation of the Merger;
27
<PAGE> 33
(xiv) The Pete's Board considered the adverse effects on the Company's
business, operations and financial condition should it not be
possible to consummate the Merger following public announcement that
the Merger Plan had been entered into;
(xv) The Pete's Board considered the level of review that was likely to be
given to the Merger by United States antitrust authorities;
(xvi) The Pete's Board considered the availability of dissenter's rights in
the Merger under California law; and
(xvii) The Pete's Board considered the process involved in obtaining
shareholder approval and the possibility of delays in consummating
the Merger due to regulatory and other requirements and the concern
that such delays could have a significant adverse effect on the
Company's sales and marketing efforts, employee base, distribution
relationships and future financial results if not managed properly.
The foregoing discussion of the information and factors considered by the
Pete's Board is not intended to be exhaustive but is believed to include all
material factors considered by the Pete's Board. In view of the variety of
factors considered in connection with its evaluation of the Merger, the Pete's
Board did not find it practicable to and did not quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination. In addition, individual members of the Pete's Board may have
given different weights to different factors. In the course of its
deliberations, the Pete's Board did not establish a range of value for Pete's;
however, based on the factors outlined above and on the advice of its financial
advisor, Morgan Stanley, the Pete's Board determined that the Merger is
advisable and fair and in the best interests of Pete's and its shareholders. The
directors voting on the Merger, who did not include Mr. Sortwell who recused
himself due to the conflict of interest described above, voted unanimously to
recommend to the holders of Pete's Common Stock that the Merger Agreements be
approved. For a discussion of the interests of certain members of Pete's
management and the Pete's Board in the Merger, see "-- Interests of Certain
Persons in the Merger."
BOARD RECOMMENDATION
THE PETE'S BOARD HAS APPROVED THE MERGER AGREEMENT AND THE MERGER AND
BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND THAT THE MERGER
IS IN THE BEST INTERESTS OF, PETE'S AND ITS SHAREHOLDERS AND THEREFORE
RECOMMENDS THAT THE HOLDERS OF PETE'S COMMON STOCK VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENTS AND APPROVAL OF CONSUMMATION OF THE MERGER.
OPINION OF FINANCIAL ADVISOR
Morgan Stanley has delivered its opinion dated May 22, 1998 to the Pete's
Board to the effect that, as of the date of such opinion, the consideration to
be received by holders of Pete's Common Stock pursuant to the Merger is fair
from a financial point of view to such holders. The full text of the Morgan
Stanley Opinion is attached to this Proxy Statement as Appendix C. For purposes
of the Morgan Stanley Opinion, Morgan Stanley, among other things: (i) analyzed
certain publicly available financial statements and other information relating
to Pete's; (ii) analyzed certain internal financial statements and other
financial and operating data concerning Pete's prepared by the management of
Pete's; (iii) analyzed certain financial projections prepared by the management
of Pete's; (iv) discussed the past and current operations and financial
condition and the prospects of Pete's with senior executives of Pete's; (v)
reviewed the reported prices and trading activity for the Pete's Common Stock;
(vi) compared the financial performance of Pete's and the prices and trading
activity of the Pete's Common Stock with that of certain other comparable
publicly-traded companies and their securities; (vii) reviewed the financial
terms, to the extent publicly available, of certain comparable acquisition
transactions; (viii) participated in discussions and negotiations among
representatives of Pete's, Gambrinus and certain other parties and their
financial and legal advisors; (ix) reviewed the Merger Plan, the
28
<PAGE> 34
Stockholder Agreements and certain related documents; and (x) performed such
other analyses as Morgan Stanley deemed appropriate.
In rendering the Morgan Stanley Opinion, Morgan Stanley assumed and relied
upon, without independent verification, the accuracy and completeness of the
information reviewed by Morgan Stanley for the purposes of its opinion. With
respect to the financial projections, Morgan Stanley assumed that such
information has been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of Pete's.
Morgan Stanley did not make any independent valuation or appraisal of the assets
or liabilities of Pete's nor was Morgan Stanley provided with such appraisals.
The Morgan Stanley Opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to Morgan Stanley
as of such date.
At the meeting of the Pete's Board held on May 21, 1998, Morgan Stanley
presented certain financial analyses accompanied with written materials in
connection with the delivery of the Morgan Stanley Opinion. The following is a
summary of the material financial and comparative analyses performed by Morgan
Stanley in arriving at its May 22, 1998 opinion.
Stock Trading History. Morgan Stanley reviewed the historical trading
prices for the Pete's Common Stock since its initial public offering which
became effective on November 6, 1995 and over the year leading up to the date of
the opinion and noted that Pete's Common Stock was down 23.4% for the year from
May 18, 1997 to May 18, 1998 with a high of $6.88 and a low of $3.48.
Morgan Stanley reviewed the premium obtained by computing the percentage
excess of the sale price of $6.375 over the closing price on May 18, 1998 and
the average closing price of the three months prior to that date. These premiums
were 29.1% and 49.7%, respectively.
Discounted Cash Flow. Morgan Stanley performed discounted cash flow
analyses of Pete's based upon projections and assumptions provided by Pete's
management, using discount rates reflecting an expected equity total return of
12.0% to 14.0% and terminal multiples as of 2002.
Applying a 6.0x to 8.0x multiple to the estimated earnings before interest,
taxes, depreciation and amortization (EBITDA), the range of present values per
Pete's share was $5.59 to $6.88, with a present value at the midpoint of the
discount rate and multiple ranges of $6.21. Such projections incorporated
several assumptions, including a reversal in the trend of declining revenues in
Pete's core brands, the successful introduction of a new core brand, ESP Lager,
and a rationalization of expenses at Pete's.
Analyses of Selected Comparable Publicly Traded Companies. Morgan Stanley
reviewed the trading statistics of selected comparable publicly traded beer
companies. For Pete's, comparable companies selected consisted of Anheuser
Busch, Coors, Boston Beer, Pyramid Breweries and Redhook Ale Brewery. Based on
May 18, 1998 closing share prices, the trading multiples of aggregate value to
last twelve months sales was 0.6x to 2.0x. Morgan Stanley selected a range of
multiples of 0.5x to 0.7x noting that Pete's multiple was declining and the
Company was operating at a loss. Applying this range of multiples to Pete's 1998
sales forecast and considering free cash balances of approximately $27.0 million
resulted in a range of values per share of $5.48 to $6.46.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of Pete's and Parent, Merger
Sub or Gambrinus. The analyses performed by Morgan Stanley are not necessarily
indicative of actual value, which may be significantly more or less favorable
than suggested by such analyses. Such analyses were prepared solely as a part of
Morgan Stanley's analysis of whether the consideration to be received by the
holders of Pete's Common Stock pursuant to the Merger is fair from a financial
point of view to such holders, and were conducted in connection with the
delivery of the Morgan Stanley Opinion. The analyses do not purport to be
appraisals of, or to reflect the price at which Pete's might actually be sold.
Because such estimates are inherently subject to uncertainty, neither Pete's,
Morgan Stanley, nor any other person assumes responsibility for the accuracy of
such estimates. The Morgan Stanley analyses described above should not be viewed
as determinative of the opinion of the Pete's Board or the management of Pete's
with respect to the value of Pete's or of whether Morgan Stanley would have
rendered an opinion of
29
<PAGE> 35
fairness with respect to, or the Pete's Board or the management of Pete's would
have been willing to agree to, any consideration other than the consideration to
be received by Pete's shareholders pursuant to the Merger.
The Pete's Board of Directors retained Morgan Stanley based upon its
experience and expertise. Morgan Stanley is an internationally recognized
investment banking and advisory firm. As part of its investment banking
business, Morgan Stanley is regularly engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuation for estate, corporate and
other purposes. In the ordinary course of business, Morgan Stanley and its
affiliates may actively trade the equity securities of Pete's for their own
account and for the accounts of customers and, accordingly, may at any time hold
long or short positions in such securities.
Pursuant to the terms of a December 3, 1997 letter agreement, as amended,
Morgan Stanley is entitled to total fees for representation of Pete's in the
Merger of approximately $1.5 million, which is contingent and payable upon
consummation of the Merger, as well as to reimbursement of Morgan Stanley for
reasonable expenses. In addition, Pete's has agreed to indemnify Morgan Stanley
and certain related persons against certain liabilities arising out of or in
conjunction with its rendering of services under its engagement, including
liabilities under federal securities laws.
CONDITIONS TO THE MERGER
The Merger Plan provides that the Company's, Parent's and Merger Sub's
respective obligations to effect the Merger are subject to, among other things,
the satisfaction of the following conditions: (a) the Company Shareholder
Approval shall have been obtained; (b) the applicable waiting period under the
HSR Act shall have expired or been terminated and the parties shall have
received all other authorizations, consents and approvals, if any, of any
Governmental Entity; (c) the absence of any suit, action or proceeding
instituted or pending before any Governmental Entity seeking to (i) restrain or
prohibit the consummation of the Merger, (ii) prohibit or materially limit the
ownership or operation by the Company, Parent or any of Parent's subsidiaries of
(or seeking to compel disposal or separate ownership of) a material portion of
the business or the assets of the Company or Parent and its Subsidiaries, taken
as a whole or (iii) impose material limitations on the ability of Parent or
Merger Sub to acquire or hold, or exercise full rights of ownership of, any
shares of Pete's Common Stock; and (d) the absence of any statute, rule,
regulation, judgment, order or injunction or any other action by any
Governmental Entity or court, other than applicable waiting periods under the
HSR Act, that is likely to result in any of the consequences referred to in
clauses (i) through (iii) of clause (c) above.
The obligations of Parent and Merger Sub to effect the Merger are further
conditioned upon (a) the number of shares of Pete's Common Stock for which
appraisal rights have been demanded not exceeding 20% of the number of
outstanding shares of Pete's Common Stock; (b) the Pete's Board or any committee
thereof not having withdrawn or materially modified in a manner adverse to
Parent or Merger Sub the Pete's Board's recommendation of the Merger or its
adoption of the Merger Plan, or approved or recommended any Takeover Proposal;
(c) the representations and warranties of Pete's set forth in the Merger Plan
being true and correct as of the Closing Date, as though made on and as of the
Closing Date, except for such inaccuracies as individually or in the aggregate
would not have a Material Adverse Effect on Pete's (as defined below); (d) the
Company having performed in all material respects any material obligation or
complied in all material respects with any material agreement or material
covenant under the Merger Plan; (e) there not having occurred any one or more
events which shall have caused or be reasonably likely to cause a Material
Adverse Effect on the Company, which event or change has not been cured; and (f)
receipt of (i) certain certificates with respect to (A) the Company's
representations, warranties, agreements and covenants; (B) the Company's
Articles of Incorporation and Bylaws; (C) the approvals of the Merger by the
Pete's Board and shareholders; (D) the incumbency of certain officers; and (E)
the Company's existence, qualification and authorization to do business and be
in good standing in certain jurisdictions; (ii) an opinion of counsel containing
opinions and qualifications usual and customary in a transaction of the type
contemplated by the Merger Agreements; and (iii) such other documents reasonably
requested by Parent and Merger Sub. For purposes of the Merger Plan, "Material
Adverse Effect" is defined as any one or more effects that are
30
<PAGE> 36
materially adverse to the business, properties, assets, liabilities, financial
condition, results of operations or value of the Company and its subsidiaries,
taken as a whole; but other than changes or effects which are or result from (i)
occurrences relating to the economy in general or the Company's industry in
general and not specifically relating to such entity, (ii) the delay or
cancellation of orders for the Company's products attributable to the
announcement of the Merger Plan, (iii) the delay or cancellation of production
or shipment of the Company's products by the Company's contract manufacturer
attributable to the execution or announcement of the Merger Plan, or (iv)
shareholder litigation brought or threatened against the Company or any member
of the Pete's Board attributable to the announcement of the Merger Plan,
including all costs and expenses in connection with the transactions
contemplated by the Merger Plan.
The obligations of Pete's to effect the Merger are further conditioned upon
(a) the representations and warranties of Parent and Merger Sub set forth in the
Merger Plan being true and correct in all material respects as of the Closing
Date; (b) Parent and Merger Sub having performed in all material respects any
material obligation or complied in all material respects with any material
agreement or material covenant under the Merger Plan; and (c) receipt of (i)
certain certificates with respect to (A) Parent's and Merger Sub's
representations, warranties, agreements and covenants; (B) Parent's and Merger
Sub's Articles of Incorporation and Bylaws; (C) the approvals of the Merger by
the board of directors and shareholders of each of Parent and Merger Sub; (D)
the incumbency of certain officers; and (E) Parent's and Merger Sub's existence,
qualification and authorization to do business and be in good standing in
certain jurisdictions; (ii) an opinion of counsel containing opinions and
qualifications usual and customary in a transaction of the type contemplated by
the Merger Agreements; and (iii) such other documents reasonably requested by
Pete's.
CLOSING
As promptly as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreements, Merger Sub and Pete's will file
the Merger Agreement with the Secretary of State of California. The Merger will
become effective upon such filing. It is anticipated that, assuming all
conditions are met, the Merger will occur and a closing will be held on July 21,
1998. See Merger Plan -- Section 2.3.
REPRESENTATIONS, WARRANTIES AND COVENANTS
The Merger Plan contains various representations and warranties of the
parties, including representations by Parent, Pete's, Merger Sub and Gambrinus
as to their organization and corporate power and authority to enter into the
Merger Plan and to consummate the Merger; the absence of conflicts under
certificates of incorporation or bylaws, required consents or approvals and
violations of any instruments or law; and the accuracy of information supplied
in connection with the preparation of this Proxy Statement. In addition, the
Merger Plan contains various additional representations and warranties of
Pete's, including representations as to capital structure, the filing of
documents with the Commission and the accuracy of information therein, financial
statements, undisclosed liabilities, litigation, compliance with laws and the
absence of certain material undisclosed liabilities and changes in its business.
Such representations and warranties will not survive consummation of the Merger.
See Merger Plan -- Article III and Article IV.
Under the terms of the Merger Plan, Pete's has covenanted, for the period
from the date of the Merger Plan and continuing until the earlier of the
termination of the Merger Plan or the Effective Time, that it shall not, and
shall not permit any of its subsidiaries to, engage in any practice, take any
action, or enter into any transactions other than (i) in the ordinary course of
business consistent with past custom and practice (including with respect to
quantity and frequency) (the "Ordinary Course of Business"), (ii) as otherwise
contemplated by the Merger Plan or (iii) as agreed in writing by Parent. Without
limiting the foregoing, the Company has agreed not to, and to not permit its
subsidiaries to: (a) declare, set aside or pay any dividends or other
distributions in respect of any of its capital stock, (b) split, combine or
reclassify any of its capital stock; (c) issue, deliver, sell, pledge or
otherwise encumber any shares of its capital stock or other securities (other
than pursuant to the Rights Agreement, exercise of options outstanding on the
date of the Merger Plan or the Stock Purchase Plan); (d) purchase, redeem or
otherwise acquire any shares of capital stock or other securities of the Company
or any of its subsidiaries; (e) amend its Restated Articles of Incorporation,
Bylaws or other comparable charter or organizational documents; (f) except in
the Ordinary Course of Business, in
31
<PAGE> 37
any material respect, modify, amend or terminate any note, license, contract,
agreement or other instrument; (g) acquire or agree to acquire any business,
including through the acquisition of any interest in any entity or other
business organization or division thereof; or (h) sell, lease, license, mortgage
or otherwise encumber or dispose of any of its properties or assets, other than
selling its inventory and trade receivables in the Ordinary Course of Business.
The Company has also agreed, from the date of the Merger Plan until the
earlier of the Effective Time or termination of the Merger Plan, not to: (a)
incur or guarantee any liability other than trade payables or short-term bank
financing in the Ordinary Course of Business; (b) make or agree to make one or
more new financial payments or commitments, other than payments or commitments
(individually not in excess of $100,000) made pursuant to the execution by the
Company in the Ordinary Course of Business of a mutually agreeable 1998 revised
budget; (c) except as required to comply with applicable law or agreements,
plans or arrangements existing on the date hereof, make any changes to any
compensation or other benefit plans or arrangements; (d) enter into any Contract
of a nature that would be required to be filed as an exhibit to Form 10-K under
the Exchange Act; (e) except as required by GAAP, make any material change in
accounting methods, principles or practices; (f) make any material tax election
or enter into any settlement or compromise with respect to any material income
tax liability; or (g) hire any new employees. The Company has further agreed
that, during the period from the signing of the Merger Plan until the earlier of
termination of the Merger Plan or the Effective Time, it will not authorize any
of, or commit or agree to take any of, the foregoing actions. See Merger
Plan -- Section 5.1.
The Merger Plan also provides that: (i) the Company shall in accordance
with applicable law, as soon as practicable, duly call, give notice of, convene
and hold a meeting of its shareholders (the "Shareholders Meeting") for the
purpose of obtaining the Company Shareholder Approval and, use its commercially
reasonable efforts to solicit from shareholders of the Company proxies in favor
of the Merger and take all other action necessary or advisable to secure any
vote or consent of shareholders required by the California General Corporation
Law to effect the Merger; (ii) subject to fiduciary obligations, the Pete's
Board shall recommend to its shareholders that the Company Shareholder Approval
be given; and (iii) the Company shall, and shall cause each of its subsidiaries
to, afford Parent and the officers, employees, accountants, counsel and other
representatives of Parent reasonable access, during normal business hours, upon
reasonable notice and during the period prior to the Effective Time, to all
properties, books and records and other financial and operating information and
all other information concerning the business, properties and personnel of
Pete's as Parent may reasonably request.
The Company, Parent and Merger Sub have further agreed, pursuant to the
Merger Plan, that the Company shall give prompt notice to Parent and Merger Sub
and Parent and Merger Sub shall give prompt notice to the Company, of: (a) facts
which would be likely to cause any representation or warranty contained in the
Merger Plan to be untrue or inaccurate in any material respect or any condition
to consummation of the Merger to be unsatisfied in any material respect and (b)
any material failure of the Company, Merger Sub or Parent, as the case may be,
or any officer, director, employee or agent thereof, to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
under the Merger Plan. The Company, Parent, Merger Sub and Gambrinus have agreed
to use all commercially reasonable efforts to take, or cause to be taken
(including Gambrinus causing Parent or Merger Sub to take), all actions, and to
do, or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Merger and the other
transactions contemplated by the Merger Plan.
LIMITATIONS ON NEGOTIATIONS
The Merger Plan provides that, from the date of the Merger Plan until the
earlier of termination of the Merger Plan or the Effective Time, the Company
will not, nor will it permit or authorize any of it subsidiaries, officers,
directors or employees or any investment banker, financial advisor, attorney,
accountant or other representative or agent retained by it to, directly or
indirectly, (a) solicit, initiate or knowingly encourage any Takeover Proposal
or (b) participate in any discussions or negotiations regarding, or furnish to
any person any nonpublic information with respect to, or take any other action
designed or reasonably likely to facilitate any
32
<PAGE> 38
inquiries or the making of any proposal that constitutes, a Takeover Proposal.
The Company may, if the Pete's Board determines in good faith, after
consultation with outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to the Company's shareholders under applicable
law, in response to a Takeover Proposal which was not solicited subsequent to
the date of the Merger Plan, furnish information with respect to the Company to
any person pursuant to a confidentiality agreement and participate in
discussions and negotiations regarding such Takeover Proposal; provided, that
certain notification requirements are satisfied.
The Merger Plan provides further that, unless the Pete's Board has
terminated the Merger Plan as described below, neither the Pete's Board nor any
committee thereof may: (a) withdraw or modify, or propose to withdraw or modify,
in a manner adverse to Parent, the approval or recommendation by such Board or
such committee of the Merger or the Merger Plan; (b) approve or recommend, or
propose publicly to approve or recommend, any Takeover Proposal; or (c) cause
the Company to enter into any letter of intent, agreement in principle,
acquisition agreement or other similar agreement (each, an "Acquisition
Agreement") related to any Takeover Proposal. Notwithstanding the foregoing, in
the event that prior to the Effective Time the Pete's Board determines in good
faith, after consultation with outside counsel, that it is necessary to do so in
order to comply with its fiduciary duties to the Company's shareholders under
applicable law, the Pete's Board may, in certain circumstances, in response to
an unsolicited Superior Proposal, (1) withdraw or modify or propose publicly to
withdraw or modify its approval or recommendation of the Merger or the Merger
Plan, (2) approve or recommend any such Superior Proposal or (3) cause the
Company to enter into an Acquisition Agreement related to any Superior Proposal.
In addition to the obligations of the Company set forth in the preceding
paragraphs, the Merger Plan provides that the Company must promptly advise
Parent orally and in writing of any request for nonpublic information (except in
the Ordinary Course of Business and not in connection with a possible Takeover
Proposal) or of any Takeover Proposal known to it, the material terms and
conditions of such request or Takeover Proposal and the identity of the person
making such request or Takeover Proposal. The Company must promptly inform
Parent of any change in the material terms and conditions (including amendments
or proposed amendments) of any such request or Takeover Proposal.
The Merger Plan further provides that nothing contained therein will
prohibit the Company or the Pete's Board from (a) taking and disclosing to the
Company's shareholders a position with respect to a tender or exchange offer by
a third party pursuant to Rule 14d-9 or Rule 14e-2 promulgated under the
Exchange Act or (b) making such disclosure to the Company's shareholders as, in
the good faith judgment of the Pete's Board, after consultation with outside
counsel, is necessary for the Pete's Board to comply with its fiduciary duties
under applicable law.
The Company also agreed that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted prior to the date of the Merger Plan with respect to any Takeover
Proposal. See Merger Plan -- Section 5.2.
TERMINATION, AMENDMENTS AND WAIVERS
The Merger Plan may be terminated and the transactions thereunder abandoned
at any time prior to the Effective Time, whether before or after approval by the
shareholders of the Company: (a) by mutual written consent of Parent and the
Company; (b) by either Parent or the Company (1) if the Merger has not been
consummated prior to September 30, 1998 (the "Cut-Off Date"); provided, however,
that if the Merger shall not have been consummated solely due to the waiting
period (or any extension thereof) under the HSR Act not having expired or been
terminated, or due to an action having been instituted by the Department of
Justice or FTC challenging or seeking to enjoin the consummation of the Merger,
then such date shall be extended to December 31, 1998; and provided, further,
however that the right to terminate the Merger Plan pursuant to this provision
shall not be available to any party whose failure to perform any of its
obligations under, or whose willful breach of a representation or warranty
under, the Merger Plan results in the failure of such condition, or (2) if any
court of competent jurisdiction or any other Governmental Entity shall have
issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the acceptance
33
<PAGE> 39
for payment of, or payment for, shares of Pete's Common Stock pursuant to the
Merger and such order, decree or ruling or other action shall have become final
and nonappealable; (c) by Parent prior to the Effective Time in the event of a
breach or failure to perform by Pete's of any representation, warranty, covenant
or other agreement contained in the Merger Plan which breach or failure to
perform (i) results in the failure of a condition to closing regarding truth and
correctness of representations and warranties and performance of obligations,
agreements and covenants and (ii) is not reasonably capable of being cured prior
to the earlier of 15 days after the giving of written notice two business days
prior to the Cut-Off Date; (d) by parent or Merger Sub at any time after the
Special Meeting in the event the Merger Plan and the Merger fail to receive
Company Shareholder Approval; (e) by the Company in accordance with the terms of
the Merger Plan described above in "-- Limitation on Negotiations," provided
that it has complied with all provisions thereof, including notice provisions,
and paid any required Termination Fee; and (f) by the Company prior to the
Effective Time in the event of a breach or failure to perform by Parent or
Merger Sub of any representation, warranty, covenant or other agreement
contained in the Merger Plan which breach or failure to perform (i) results in
the failure of a condition to closing regarding truth and correctness of
representations and warranties and performance of obligations, agreements and
covenants and (ii) is not reasonably capable of being cured prior to the earlier
of 15 days after the giving of written notice or two business days prior to the
Cut-Off Date.
Subject to the fees and expenses described below under the caption "-- Fees
and Expenses; Termination Fee," in the event of termination of the Merger Plan,
the Merger Plan shall become void and there shall be no liability or obligation
on the part of Parent, Merger Sub or Pete's or their respective officers,
directors, shareholders or affiliates, except to the extent that such
termination results from the breach by a party hereto of any of its
representations, warranties or covenants set forth in the Merger Plan; provided,
that the provisions of the Merger Plan pertaining to confidentiality, expenses
and termination fees shall remain in full force and effect and survive any such
termination. See Merger Plan -- Section 8.2.
The Merger Plan may be amended at any time before or after the Company
Shareholder Approval is obtained, but, after the Company Shareholder Approval,
no amendment may be made which by law requires further approval by such
shareholders without obtaining such further approval. The Merger Plan may be
amended only by an instrument in writing signed on behalf of each of the parties
thereto by the parties thereto. See Merger Plan -- Section 8.3.
At any time prior to the Effective Time, the parties to the Merger Plan
may, to the extent legally allowed, by execution of an instrument in writing
signed on behalf of such party: (i) extend the time for the performance of any
of the obligations or acts of the other party set forth in the Merger Plan; (ii)
waive any inaccuracies in the representations and warranties made to such party
in the Merger Plan or in any document delivered pursuant to the Merger Plan; and
(iii) waive compliance with any of the agreements or conditions for the benefit
of such party under the Merger Plan. See Merger Plan -- Section 8.4.
FEES AND EXPENSES; TERMINATION FEE
The Merger Plan provides that except as provided below, all fees and
expenses incurred in connection with the Merger, the Merger Plan and the
transactions contemplated by the Merger Plan will be paid by the party incurring
such fees or expenses, whether or not the Merger is consummated. The Merger Plan
further provides that the Company will pay, or cause to be paid, in same day
funds to Parent a Termination Fee of 2% of the aggregate Merger Consideration
under the circumstances and at the times set forth as follows: (1) if the
Company terminates the Merger Plan in accordance with the provisions of the
Merger Plan described in "Limitations on Negotiations," the Company must pay the
Termination Fee simultaneously with such termination; (2) if Parent or Merger
Sub terminates the Merger Plan because Pete's fails to receive the Company
Shareholder Approval and in addition, if within six months after such
termination the Company enters into an Acquisition Agreement providing for a
Company Acquisition (as defined below) or within such six months the Company
recommends to its shareholders that they accept a Company Acquisition of the
type referred to in clause 3 of the definition of Company Acquisition described
below, the Company must pay the Termination Fee simultaneously with the entering
into of such Acquisition Agreement or making of such recommendation; and (3) if,
at the time of any termination of the Merger Plan for failure to consummate the
34
<PAGE> 40
Merger prior to the Cut-Off Date as a result of a failure to obtain the Company
Shareholder Approval or because of the Company's breach of a representation,
warranty, covenant or agreement in the Merger Plan, any person shall have
publicly announced a proposal to effect a Company Acquisition and if, within six
months after such termination, the Company shall enter into an Acquisition
Agreement providing for a Company Acquisition or the Company shall recommend to
its shareholders that they accept a Company Acquisition of the type referred to
in clause 3 of the definition of Company Acquisition described below, the
Company must pay the Termination Fee simultaneously with the entering into of
such Acquisition Agreement or making of such recommendation. See Merger
Plan -- Sections 6.5(a) and (b).
The Merger Plan also provides that if the Merger Plan is terminated for
breach or failure of representation, warranty or covenant, then, the breaching
party shall pay to the nonbreaching party all of the nonbreaching party's (and
its affiliates) reasonably documented out-of-pocket expenses paid to third
parties in connection with the transaction, up to an aggregate of $500,000. The
payment of expenses pursuant to this provision shall be made only in the event a
breach arises out of the action or inaction of the breaching party, as opposed
to a breach or nonperformance which arises out of the action or inaction of some
other party. Payment by the Company of expenses under this provision shall be
credited against the Termination Fee if and when any shall become due under
clause 3 of the preceding paragraph. See Merger Plan -- Section 6.5(c).
The Merger Plan defines a "Company Acquisition" as any of the following
transactions: (1) a merger, consolidation, business combination or a
recapitalization pursuant to which the shareholders of the Company immediately
preceding such transaction hold less than 50% of the equity interests in the
surviving or resulting entity of such transaction (other than the transactions
contemplated by the Merger Plan); (2) a sale by the Company of assets (excluding
the sale of the Company's products in the Ordinary Course of Business)
representing in excess of 50% of the fair market value of the Company
immediately prior to such sale or the issuance by the Company to any person or
group of shares representing in excess of 40% of the then outstanding shares of
capital stock of the Company (other than in connection with an underwritten
public offering); or (3) the acquisition by any person or group, by way of a
tender offer, exchange offer, or by way of open market purchases, of beneficial
ownership of 50% or more of the then outstanding shares of capital stock of the
Company. See Merger Plan -- Section 6.5(d).
VOTING AGREEMENTS
On May 22, 1998, Parent entered into Stockholder Agreements with Pete S.
Slosberg, Jeffrey A. Atkins, Stephen L. Cooke, Philip A. Marineau, Audrey
MacLean, O' Rourke Investment Corporation and Hunter Hastings (the "Stockholder
Agreements," with the "Insiders"). Pursuant to the Stockholder Agreements each
of the Insiders agreed to vote or consent his or her shares of Pete's Common
Stock in favor of the Merger, the Merger Plan and each of the other actions
contemplated by the Merger Plan, and against any action or agreement that would
result in a breach of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Merger Plan or the Stockholder
Agreements. The Insiders also agreed to vote against any: (a) extraordinary
corporate transaction; (b) sale or transfer of a material amount of assets of
the Company; (c) reorganization, recapitalization, dissolution or liquidation of
the Company; (d) change in the capitalization of the Company or any amendment of
the Company's Articles of Incorporation or bylaws; (e) change in the majority of
the persons who constitute the Pete's Board; (f) other material change in the
Company's corporate structure or business; or (g) other action which is
intended, or could reasonably be expected, to interfere with, delay or otherwise
materially adversely affect the Merger and the transactions contemplated by the
Stockholder Agreements and the Merger Plan. The Insiders irrevocably granted
proxies to the Vice President and Secretary of Parent (and their successors) to
vote the Insiders' shares in favor of the various transactions contemplated by
the Merger Plan and against any proposal for a Company Acquisition.
The Insiders agreed that they will not, and will not authorize or permit
their affiliates, the Company or any of its officers, directors, or employees or
advisors or other representatives or agents to directly or indirectly solicit,
initiate, facilitate, knowingly encourage, participate in discussions or
negotiations regarding, or furnish any nonpublic information with respect to the
Company for any Takeover Proposal. The Insiders also agreed
35
<PAGE> 41
to cease any existing activities, discussions or negotiations with respect to
any Takeover Proposal and to notify Parent of any request for non-public
information (except in the Ordinary Course of Business and not in connection
with a possible Takeover Proposal) or of any Takeover Proposal.
The Insiders further agreed that they will not: (i) directly or indirectly
assign, transfer or otherwise dispose of, or offer to, consent to, enter into
any agreement or other arrangement or understanding with respect to shares of
Pete's Common Stock or request the Company to register a transfer of shares of
Pete's Common Stock with respect to any of the foregoing prohibited activities;
(ii) grant any proxies or powers of attorney, deposit shares into a voting trust
or enter into a voting agreement with respect to their shares of Pete's Common
Stock; or (iii) take any action that would make any representation or warranty
in the Stockholder Agreement untrue or incorrect or result in a breach by the
Stockholder of its obligations under the Stockholder Agreement or a breach by
the Company of its obligations under the Merger Plan. The Insiders waived any
rights of appraisal or rights to dissent from the Merger.
The covenants and agreements contained in the Stockholder Agreements
terminate upon the earlier to occur of the Effective Time or the termination of
the Merger Plan in accordance with its terms.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Pete's Board with respect to the
Merger, shareholders of Pete's should be aware that certain officers and
directors of Pete's have interests in the Merger, including those referred to
below, that presented them with potential conflicts of interests. The Pete's
Board was aware of these potential conflicts and considered them along with the
other matters described in "The Merger and Related Transactions -- Reasons for
the Merger."
Change of Control/Severance Arrangements
On April 22, 1998, the Pete's Board granted bonuses to Jeffrey A. Atkins,
Scott Barnum, Donald W. Quigley and Omer Malchin in the amounts of $100,000,
$67,500, $68,750 and $37,500, respectively, as an incentive for them to remain
at the Company despite the probability of a business combination involving the
Company. The bonuses are payable upon the earlier of (i) September 30, 1998 or
(ii) the consummation of a business combination involving the Company. The
Merger would qualify as such a business combination. The Board authorized an
additional bonus of $50,000 for Mr. Atkins, payable on December 31, 1998 if, as
of such date, Mr. Atkins is an employee of the Company.
The Company maintains a Severance Plan that contains a standard severance
component and a change of control component. Under the standard severance
component, regular full-time employees who are involuntarily terminated for
reduction in force or inability to perform are entitled to receive severance pay
benefits determined based upon the employee's base salary (not including
bonuses, incentives, awards, overtime or other miscellaneous pay), and length of
service, with officers being entitled to a minimum benefit of 8 week's salary.
Under the change of control component, if after the Merger (X) an employee's
employment is terminated due to a reduction in work force, inability to perform,
or resignation following a reduction in compensation, (Y) an employee is forced
to relocate beyond 50 miles or (Z) an employee is reclassified as an hourly
employee, such employee is entitled to a severance benefit determined according
to the same formula as is applicable under the standard severance component
described above, but with bonuses and sales incentives included in salary and
minimum benefits of one year's pay for officers.
Donald W. Quigley, Jr. and Omer Malchin received employment offer letters
from the Company in which they were promised certain benefits, including, in
part, a base salary, a bonus, a car allowance, stock options and moving
expenses. Additionally, the Company loaned Mr. Quigley and Mr. Malchin $75,000
and $9,142, respectively, pursuant to promissory notes dated April 1, 1997 and
January 21, 1997, respectively. The loans were made to compensate Mr. Quigley
for the loss on sale of a house and to compensate Mr. Malchin for loss of
certain incentive benefits when each joined the Company. The promissory notes
provide that the loans are forgivable as to 25% of the principal amount on each
of the four anniversary dates of such notes following the making of such notes.
Upon each forgiveness, the Company makes a payment to the makers to cover any
taxes owed by the note makers in respect of the forgiveness. The notes will
become fully forgiven upon the consummation of the Merger.
36
<PAGE> 42
Indemnification and Insurance
The Merger Plan provides that, from and after the Effective Time, Gambrinus
and Parent will, and will cause the Surviving Corporation (or any successor to
the Surviving Corporation) to, fulfill and honor the obligations of the Company
pursuant to (i) indemnification agreements in effect at the Effective Time
between the Company and each person who is or was a director or officer of the
Company at or any time prior to the Effective Time and (ii) any indemnification
provisions under the Company's Restated Articles of Incorporation or Bylaws in
effect on the date of the Merger Plan. The Articles of Incorporation and Bylaws
of the Surviving Corporation will contain the provisions with respect to
indemnification and exculpation from liability set forth in the Company's
Articles of Incorporation and Bylaws on the date of the Merger Plan, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years after the Effective Time in any manner that would adversely affect the
rights thereunder of any Indemnified Party. See Merger Plan -- Section 6.6.
The Merger Plan also provides that Gambrinus, Parent or the Surviving
Corporation shall maintain or extend the Company's existing D&O Insurance for a
period of not less than six years after the Effective Time; provided, that
Parent may replace such policies with policies of substantially equivalent
coverage and amounts. If the existing D&O Insurance expires, is terminated or
canceled during such period, Parent or the Surviving Corporation will use all
reasonable efforts to obtain substantially similar D&O Insurance coverage;
provided, that Parent will not be required to pay aggregate premiums for
insurance in excess of 150% of the average of the aggregate premiums paid by the
Company in 1995, 1996 and 1997 on an annualized basis (the "Average Premium").
If Parent or the Surviving Corporation is unable to obtain the amount of
insurance required, Gambrinus, Parent or the Surviving Corporation shall obtain
as much insurance as can be obtained for an annual premium not in excess of 150%
of the Average Premium. See Merger Plan -- Section 6.6.
These indemnification and insurance provisions will survive the
consummation of the Merger.
Pete S. Slosberg Agreements
Assignment of Intellectual Property and Non-Disclosure Agreement. Effective
May 22, 1998, Mr. Slosberg and the Company entered into an Assignment of
Intellectual Property and Nondisclosure Agreement (the "Assignment Agreement"),
pursuant to which Mr. Slosberg released, assigned, transferred and conveyed to
Pete's all of his rights, title and interests throughout the world in and to all
of the following (collectively, the "Rights"): (i) all trademarks, copyrights
and other intellectual proprietary rights ("Intellectual Property") which are or
have been used by the Company in its business; (ii) all other Intellectual
Property that uses or have used the name, signature, voice, likeness, picture
and other indicia of the identity of Mr. Slosberg and (iii) all ideas,
inventions, trade secrets and knowhow, including without limitation, recipes,
techniques and formulae for making beverages relating to Pete's business as to
which Mr. Slosberg is or has been an inventor, co-inventor, author, or
contributor during the period of his association with Pete's. Mr. Slosberg also
granted to Pete's a worldwide, perpetual, exclusive license for past and future
use of his Image in connection with Pete's business. Mr. Slosberg also assigned
to Pete's all Rights that Mr. Slosberg may own related to Pete's business and
arising during Mr. Slosberg's future employment by, or provision of services to,
Pete's or a related entity. Mr. Slosberg also agreed to keep secret and hold in
confidence, by not disclosing them to any person or entity, trade secrets that
he has learned as a result of his association with Pete's and which Pete's deems
to be confidential.
Independent Contractor Agreement. The Company and Mr. Slosberg also entered
into an Independent Contractor Agreement, dated May 22, 1998 (the "Contractor
Agreement"), and effective automatically at the Effective Time under the Merger
Agreement. The term of the Contractor Agreement is two years from the Effective
Time and Mr. Slosberg will be paid $250,000 and $262,500 for the first and
second years of service thereunder, respectively. Pursuant to the Contractor
Agreement, Mr. Slosberg has agreed to provide to Pete's, during each 12 month
period during the term of the Contractor Agreement, 120 days of service in
connection with advertising and promotional activities. Mr. Slosberg agreed not
to provide services for others if it interferes with his work for Pete's. Mr.
Slosberg also agreed, with certain exceptions, not to participate in any other
services, advertisements or promotional activity of any kind for any product or
entity without the prior
37
<PAGE> 43
written consent of Pete's and, during the term of the Contractor Agreement and
for a period of five years after the Effective Time (the "Non-Competition
Period"), not to have an ownership, management, employment, consulting, vendor
or other relationship or affiliation with any business engaged in the alcoholic
beverage industry (other than owning 2% or less of the outstanding voting stock
of a publicly traded corporation). Mr. Slosberg further agreed not to, during
the Non-Competition Period, engage in or participate in any effort to solicit
Pete's or its affiliates' customers, distributors, suppliers, service vendors,
associates or employees to cease doing business or their association or
employment with Pete's or to otherwise interfere in the contractual employment
relationship between Pete's and such individuals or entities.
Interests in Pete's Common Stock and Options
As of the Record Date, the officers and directors of Pete's and their
affiliates owned an aggregate of 2,232,204 shares of Pete's Common Stock and
will be entitled to receive the Merger Consideration with respect to such
shares. In addition, certain of the Company's officers and directors hold
options to purchase shares of Pete's Common Stock and will be entitled to
receive the Merger Consideration less the exercise price of the option for each
share of Common Stock covered by the options. Of such options, options to
purchase an aggregate of 67,923 shares of Pete's Common Stock have exercise
prices less than or equal to the Merger Consideration. See "Information
Concerning the Special Meeting -- Record Date; Outstanding Shares; and Principal
Shareholders." Such persons will receive the same Merger Consideration per share
as all other shareholders and, other than the acceleration of certain options
described above, will not receive any special or additional consideration for
their shares of Pete's Common Stock or options.
REGULATORY MATTERS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Each of Parent and
Pete's originally filed their respective Notification and Report Forms required
under the HSR Act with the FTC and the Antitrust Division on June 5, 1998 and
applicable waiting period under the HSR Act was terminated early by the FTC on
June 16, 1998. At any time before or after consummation of the Merger, the FTC,
the Antitrust Division, the state attorneys general or others could take action
under the antitrust laws with respect to the Merger, including seeking to enjoin
consummation of the Merger or seeking divestiture of substantial assets of
Parent, Gambrinus or Pete's.
Based on information available to them, Parent and Pete's believe that the
Merger will not violate federal or state antitrust laws. However, there can be
no assurance that a challenge to consummation of the Merger on antitrust grounds
will not be made or that, if such a challenge were made, Parent and Pete's would
prevail or would not be required to accept certain conditions, possibly
including certain divestitures or hold-separate arrangements, in order to
consummate the Merger.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The receipt of cash for shares of Pete's Common Stock pursuant to the
Merger will be a taxable transaction for Federal income tax purposes and also
may be a taxable transaction under state, local or foreign tax laws. In general,
a shareholder who receives cash in exchange for shares of Pete's Common Stock in
the Merger will recognize gain or loss for Federal income tax purposes equal to
the difference between the amount of cash received and the shareholder's tax
basis in the shares sold. Gain or loss will be determined separately for each
block of shares (i.e., shares acquired at the same time and price) exchanged
pursuant to the Merger. Such gain or loss generally will be capital gain or loss
if the shares disposed of were held as capital assets by the shareholder. Any
net capital gain (i.e., generally, capital gain in excess of capital loss)
recognized by an individual upon a disposition of the shares pursuant to the
Merger that have been held for more than 18 months will generally be subject to
tax at a rate not to exceed 20%. Net capital gain recognized by an individual
upon such a disposition of shares of Pete's Common Stock that have been held for
more than 12 months but for not more than 18 months will be subject to tax at a
rate not to exceed 28% and net capital gain recognized upon the sale of shares
that have been held for 12 months or less will be subject to tax at ordinary
38
<PAGE> 44
income tax rates. In addition, any net capital gain recognized by a corporation
upon a disposition of shares pursuant to the Merger will be subject to tax at
ordinary income tax rates.
The foregoing summary constitutes a general description of certain Federal
income tax consequences of the Merger without regard to the particular facts and
circumstances of each shareholder of the Company and is based on the provisions
of the Internal Revenue Code of 1986, as amended, Treasury Department
Regulations issued pursuant thereto and published rulings and court decisions in
effect as of the date hereof, all of which are subject to change, possibly with
retroactive effect. Special tax consequences not described herein may be
applicable to certain shareholders subject to special tax treatment (including,
but not limited to, insurance companies, tax-exempt organizations, financial
institutions or broker dealers, foreign shareholders and shareholders who have
acquired their shares of Pete's Common Stock pursuant to the exercise of
employee stock options or otherwise as compensation). ALL SHAREHOLDERS ARE URGED
TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO SPECIFIC TAX EFFECTS OF THE MERGER
APPLICABLE TO THEM, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
AND FOREIGN TAX LAWS.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for under the purchase method of
accounting, with Parent as the acquiring party, in accordance with generally
accepted accounting principles.
RIGHTS OF DISSENTING SHAREHOLDERS
If the proposed Merger is approved by the required vote of Pete's
shareholders and is not abandoned or terminated, each holder of Pete's Common
Stock who votes against the proposal to approve and adopt the Merger Agreements
and approve consummation of the Merger may, by complying with Sections 1300
through 1312 of the California General Corporation Law ("California Law"), be
entitled to dissenters' rights as described therein, provided that: (i) such
holder's shares of Pete's Common Stock are subject to restriction on transfer
imposed by Pete's or by law or regulation or (ii) demands for payment pursuant
to such dissenters' rights are filed with respect to 5% or more of the
outstanding shares of Pete's Common Stock on or before the date of the Special
Meeting. The record holders of the shares of Pete's Common Stock which are
eligible to, and do, exercise their dissenters' rights with respect to the
Merger are referred to herein as "Dissenting Shareholders," and the shares with
respect to which they may exercise dissenters' rights are referred to herein as
"Dissenting Shares." If a Pete's shareholder has a beneficial interest in shares
of Pete's Common Stock that are held of record in the name of another person,
such as a broker or nominee, and such shareholder desires to perfect whatever
dissenters' rights such beneficial shareholder may have, such beneficial
shareholder must act promptly to cause the holder of record to timely and
properly follow the steps summarized below.
The following discussion is not a complete statement of the California Law
relating to dissenters' rights, and is qualified in its entirety by reference to
Sections 1300 through 1312 of the California Law attached to this Proxy
Statement as Appendix D and incorporated herein by reference. This discussion
and Section 1300 through 1312 of the California Law should be reviewed carefully
by any shareholder who wishes to exercise statutory dissenters' rights or wishes
to preserve the right to do so, since failure to comply with the required
procedures will result in the loss of such rights.
Shares of Pete's Common Stock must satisfy each of the following
requirements to qualify as Dissenting Shares under the California Law: (i) such
shares of Pete's Common Stock must have been outstanding on the Record Date for
the determination of the holders of Pete's Common Stock entitled to voted at the
Special Meeting; (ii) such shares of Pete's Common Stock must have been voted
against the proposal to approve the Merger Agreements and consummation of the
Merger; (iii) the holders of such shares of Pete's Common Stock must make a
written demand that Pete's repurchase shares of Pete's Common Stock at fair
market value and such demand must be received by either Pete's or Pete's's
transfer agent no later than the date of the Special Meeting; and (iv) the
holder of such shares of Pete's Common Stock must submit certificates for
endorsement (as described below). A vote by proxy or in person against the
proposal to approve and adopt the Merger Agreements and approve consummation of
the Merger does not in and of itself constitute a demand
39
<PAGE> 45
for appraisal under the California Law. In addition, in order for such shares of
Pete's Common Stock to qualify as Dissenting Shares, (i) demands for payment
must have been filed with respect to 5% or more of the outstanding shares of
Pete's Common Stock on or before the Special Meeting or (ii) such shares of
Pete's Common Stock must be subject to a restriction on transfer imposed by
Pete's or by any law or regulation.
Pursuant to Sections 1300 through 1312 of the California Law, Dissenting
Shareholders may require Pete's to repurchase their Dissenting Shares at a price
equal to the fair market value of such shares determined as of the day before
the first announcement of the terms of the proposed Merger, excluding any
appreciation or depreciation in consequence of the proposed Merger, but adjusted
for any stock split, reverse stock split or stock dividend which becomes
effective thereafter. On May 21, 1998 the last full day of trading prior to the
public announcement relating to the proposed Merger, the closing price per share
of Pete's Common Stock was $6.00.
The demand of a Dissenting Shareholder must be made in writing upon Pete's
no later than the date of the Special Meeting and is required by law to state
the number and class of Dissenting Shares held of record by the Dissenting
Shareholder which the Dissenting Shareholder demands that Pete's purchase, and
to contain a statement of what the Dissenting Shareholder claims to be the fair
market value of the Dissenting Shares as of the day before the first
announcement of the proposed Merger. The statement of fair market value in such
demand by the Dissenting Shareholder constitutes an offer by the Dissenting
Shareholder to sell the Dissenting Shares at such price.
If there are any Dissenting Shareholders, then within 10 days following
approval of the proposed Merger by Pete's Shareholders, Pete's is required to
mail to each holder of Dissenting Shares a notice of the approval of the
proposed Merger, a statement of the price determined by Pete's to represent the
fair market value of Dissenting Shares (which shall constitute an offer by
Pete's to purchase such Dissenting Shares at such stated price), and a
description of the procedures to be followed for such shareholders to exercise
their rights as Dissenting Shareholders.
Within thirty (30) days after the date on which the notice of the approval
of the proposed Merger by the outstanding shares was mailed to a Dissenting
Shareholder, that shareholder who wishes to be paid the full value of his or her
Dissenting Shares must submit to Pete's or its transfer agent certificates
representing any Dissenting Shares which the Dissenting Shareholder demands
Pete's purchase, so that such Dissenting Shares may either be stamped or
endorsed with the statement that the shares are Dissenting Shares or exchanged
for certificates of appropriate denomination so stamped or endorsed.
If, upon a Dissenting Shareholder's surrender of the certificates
representing that Dissenting Shareholder's Dissenting Shares, Pete's and the
Dissenting Shareholder agree that such shares are Dissenting Shares and agree
upon the price to be paid for such shares, then the agreed price is required by
law to be paid to the Dissenting Shareholder within the later of 30 days after
the date of such agreement or thirty (30) days after any statutory or
contractual conditions to consummation of the Merger are satisfied, unless
provided otherwise by agreement.
If the Company and a Dissenting Shareholder disagree as to whether such
Dissenting Shareholder's proposed Dissenting Shares are entitled to be
classified as Dissenting Shares or as to the fair market value of such shares,
then such Dissenting Shareholder has the right to bring an action in California
Superior Court, within six (6) months after the date on which the notice of the
approval of the proposed Merger by Pete's shareholders was mailed to the
Dissenting Shareholder, to resolve such dispute. In such action, the court will
determine whether the shares of Pete's Common Stock held by such Dissenting
Shareholder are Dissenting Shares, the fair market value of such shares, or
both. California Law provides, among other things, that a Dissenting Shareholder
may not withdraw a demand for payment of the fair market value of Dissenting
Shares unless Pete's consents to such request for withdrawal.
SURRENDER OF PETE'S COMMON STOCK CERTIFICATES
As of the Effective Time, Parent or Merger Sub shall deposit with Norwest
Bank Minnesota, N.A. (the "Paying Agent"), for the benefit of Pete's
shareholders (other than shareholders who properly exercise
40
<PAGE> 46
dissenters' rights under California Law, if any), the aggregate Merger
Consideration (the "Exchange Fund") to be paid to shareholders in exchange for
their outstanding shares of Pete's Common Stock. See Merger Plan -- Section
2.12.
As soon as practicable after the Effective Time, a letter of transmittal
with instructions for use in effecting the surrender of certificates in exchange
for the Merger Consideration will be mailed to each Pete's shareholder (other
than shareholders who properly exercise dissenters' rights under California Law,
if any) for use in exchanging Pete's Common Stock certificates for cash. Upon
surrender of a Pete's Common Stock certificate for cancellation to the Paying
Agent in connection with the Merger, together with such letter of transmittal,
duly completed and validly executed in accordance with the instructions thereto,
and such other documents as may be reasonably required by the Paying Agent, the
holder of such certificate will be entitled to receive in exchange therefor the
Merger Consideration. If payment for the surrender of any Pete's Common Stock
certificate is to be made to a name other than that in which the Pete's Common
Stock certificate surrendered in exchange therefor is registered, it will be a
condition of the payment thereof that the Pete's Common Stock certificate so
surrendered be properly endorsed and otherwise in proper form for transfer and
that the person requesting such payment have paid to the Surviving Corporation
any transfer or other taxes required by reason of the payment of such cash to
any name other than that of the registered holder of the Pete's Common Stock
certificate surrendered, or established to the satisfaction of the Surviving
Corporation that such tax has been paid or is not payable. Immediately after the
Effective Time, each outstanding Pete's Common Stock certificate will be deemed
for all corporate purposes (other than the payment of dividends with respect to
a Pete's Common Stock certificate) to represent only the right to receive, upon
surrender as contemplated by the Merger Agreement, the Merger Consideration. See
Merger Plan -- Section 2.12.
Any portion of the Exchange Fund which remains undistributed to the holders
of Pete's Common Stock one year after the Effective Time will be delivered to
the Surviving Corporation, upon demand, and any holders of Pete's Common Stock
or vested Pete's options (other than shareholders who properly exercise
dissenter's rights under California Law, if any) who have not theretofore
complied with the exchange procedure must thereafter look only to the Surviving
Corporation only as general creditors thereof for the Merger Consideration.
Neither the Surviving Corporation nor the Paying Agent will be liable to
any holder of Pete's Common Stock for any Merger Consideration delivered to a
public official pursuant to any abandoned property, escheat or similar law. See
Merger Plan -- Section 2.12.
The Paying Agent will pay in exchange for any lost, stolen or destroyed
certificates of Pete's Common Stock upon the making of an affidavit of that fact
by the holder thereof with such assurances as the Paying Agent, in its
discretion, may reasonably require, the Merger Consideration. See Merger
Plan -- Section 2.15.
HOLDERS OF PETE'S COMMON STOCK CERTIFICATES SHOULD NOT SUBMIT THEIR
CERTIFICATES FOR EXCHANGE UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL AND
INSTRUCTIONS REFERRED TO ABOVE.
CERTAIN INFORMATION REGARDING GAMBRINUS, PARENT AND MERGER SUB
PBC HOLDINGS, INC. ("PARENT")
Parent is a Texas corporation wholly-owned by Carlos Alvarez, the sole
shareholder of The Gambrinus Company. Parent was recently organized for the
purpose of effecting the Merger. It has no material assets and has not engaged
in any activities except in connection with the proposed Merger. Parent's
executive offices are located at 14800 San Pedro Ave., Suite 300, San Antonio,
TX 78232 and its telephone number at that location is (210) 490-9128.
PBC ACQUISITION CORP. ("MERGER SUB")
Merger Sub is a Texas corporation and a wholly-owned subsidiary of Parent
recently organized by Parent for the purpose of effecting the Merger. It has no
material assets and has not engaged in any activities except
41
<PAGE> 47
in connection with the proposed Merger. Merger Sub's executive offices are
located at 14800 San Pedro Ave., Suite 300, San Antonio, TX 78232 and its
telephone number at that location is (210) 490-9128.
THE GAMBRINUS COMPANY ("GAMBRINUS")
Gambrinus is a Texas corporation which was formed in 1986 and, like Parent,
is wholly owned by Carlos Alvarez. Gambrinus is engaged in the business of
importing, brewing, marketing and selling various beers. Gambrinus had gross
revenues in 1997 in excess of $340 million. It is the exclusive importer of
Corona Extra and other beer products brewed by Cerveceria Modelo S.A. de C.V. of
Mexico for a territory including Texas plus 24 other states and the District of
Columbia in the eastern half of the United States. Recently, Corona has become
the top-selling imported beer in the United States, surpassing Heineken. In
addition, Gambrinus is the exclusive importer in the United States for Moosehead
Lager beer which is brewed in Canada. Gambrinus owns the Spoetzl Brewery located
in Shiner, Texas where it brews a number of craft-brewed Shiner brand beer
products, including Shiner Bock. An affiliate of Gambrinus owns the Bridgeport
Brewing Co. of Portland, Oregon. Gambrinus is a party to the Merger Plan for the
purpose of assuring performance by Parent and Merger Sub. The executive offices
of Gambrinus are located at 14800 San Pedro Avenue, Suite 300, San Antonio,
Texas 78232 and its telephone number at that location is (210) 490-9128.
CERTAIN INFORMATION REGARDING PETE'S
This section of the Proxy Statement contains certain financial or other
information concerning the business and operations of Pete's, without taking
into consideration the execution of the Merger Plan and its impact on the
business and operation of Pete's.
BUSINESS
Pete's 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, Pete's Strawberry Blonde
and Pete's Oktoberfest. In 1997, Pete's completed its calendar of seasonal
offerings with the introduction of Pete's Springfest to provide a seasonal
bridge between Pete's Summer Brew and Pete's Winter Brew. In addition, in
response to varying consumer preferences, the Company has diversified 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 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.
42
<PAGE> 48
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 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 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 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 has been 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 has devoted 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
43
<PAGE> 49
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 the flagship beer "Pete's Wicked Ale" and, therefore, brand
positioning adjusted during 1998 on the Company's other beers 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) achieve 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 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 has been 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.
44
<PAGE> 50
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.
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.
45
<PAGE> 51
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 was 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.
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:
<TABLE>
<S> <C>
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
Great American Beer Festival(R) "People's
1992 1ST PLACE 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
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
</TABLE>
46
<PAGE> 52
<TABLE>
<S> <C>
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
</TABLE>
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. Mr. Couteaux
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, 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.
47
<PAGE> 53
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 innovations have succeeded in increasing the visibility of the
Pete's brand, 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 No. 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.
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 and the National Beer Wholesalers Association Conference,
as
48
<PAGE> 54
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) 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 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
49
<PAGE> 55
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 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 beers 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 its beers 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. 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 assurance that the Company will achieve such minimum levels. The
Company did achieve such minimum levels in 1996 but did not achieve the minimum
levels in 1997 and does not expect to achieve the minimum levels in 1998. Stroh
may terminate the agreement only on the limited grounds of the Company's breach
or insolvency.
50
<PAGE> 56
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 beers 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.
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
51
<PAGE> 57
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 are now being 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 the decision 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 the Company's beers 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 beers 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. Currently, only Pete's Wicked Ale still utilizes the
Pete's Wicked trademark. 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 its beer recipes to be of considerable value
and critical to its business. 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 has adjusted 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 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
52
<PAGE> 58
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 craft beer 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. de C.V. (brewer of
Corona Extra), Guinness PLC, Cerveceria Moctezuma, S.A. de C.V. (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., 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.
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.
53
<PAGE> 59
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 March 31, 1998, the Company had 110 employees, including 79 in sales
and marketing and 31 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.
PROPERTY
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.
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.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto set
forth elsewhere in this Proxy Statement. The consolidated
54
<PAGE> 60
statement of operations data for the years ended December 31, 1997, 1996 and
1995 and the consolidated balance sheet data as of December 31, 1997 and 1996
are derived from Consolidated Financial Statements of the Company that have been
audited by Coopers & Lybrand LLP and that are included elsewhere herein. The
consolidated statement of operations data for the years ended December 31, 1994
and 1993 and the consolidated balance sheet data as of December 31, 1995, 1994
and 1993 are derived from audited consolidated financial statements of the
Company that are not included herein. The consolidated statement of operations
data for the three months ended March 31, 1998 and 1997 and the consolidated
balance sheet data as of March 31, 1998 are derived from unaudited financial
statements of the Company that are included elsewhere herein and which have been
prepared on the same basis as the audited Consolidated Financial Statements and
in the opinion of management include all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for the unaudited interim
periods. The statement of operations data for the interim periods are not
necessarily indicative of results that may be expected for any other interim
period or for the year as a whole.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
----------------- ------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- -------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE, PER BARREL AND EMPLOYEE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net sales...................... $ 9,789 $12,204 $ 58,336 $70,634 $59,176 $30,837 $12,236
Gross profit................... 4,441 5,971 27,653 35,873 29,517 13,939 5,733
Income (loss) from
operations................... (3,109) (4,512) (11,016) 1,078 2,536 603 166
Net income (loss).............. $(1,777) $(2,820) $ (6,094) $ 1,683 $ 1,538 $ 551 $ 131
Net income (loss) per share,
basic........................ $ (0.16) $ (0.26) $ (0.57) $ 0.16 $ 0.19 $ 0.15 $ 0.06
Net income (loss) per share,
diluted...................... $ (0.16) $ (0.26) $ (0.57) $ 0.16 $ 0.18 $ 0.07 $ 0.02
Barrels sold................... 61.1 75.3 361.1 425.6 347.8 180.2 69.3
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
MARCH 31, ------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- ------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and
available for sale
securities.................... $27,333 $31,199 $39,234 $42,960 $1,090 $ 171
Working capital (deficit)....... 33,138 35,993 42,914 44,425 (807) (211)
Total assets.................... 48,509 49,756 66,088 54,250 5,918 3,118
Total shareholders' equity...... 43,675 45,472 51,311 49,023 1,040 414
</TABLE>
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 fourth paragraph of "Overview" concerning the period of time
through which available brewery capacity will be sufficient to meet the
Company's needs, the statements in the sixth paragraph of "Overview," 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.
55
<PAGE> 61
OVERVIEW
Pete's 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 the nine-year Agreement with 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 along with 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 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 net losses during the three months ended March 31, 1998 and
December 31, 1997 of $1.8 million and $1.4 million, respectively. The Company
currently expects that its net sales will decline in the three month period
ending June 30, 1998 when compared to the three months ended June 30, 1997.
Thereafter, the Company expects that net sales for the remaining six months of
1998 will increase when compared to the comparable six-month period of 1997. The
Company expects to operate at a small loss for the second quarter and to return
to profitability during the third quarter of 1998. These projections are
significantly dependent on the success of the Company's new product, Pete's ESP
Lager, which was launched at the beginning of the second quarter of 1998.
56
<PAGE> 62
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>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales............................ 111.2% 110.9% 111.1% 110.6% 110.1%
Less excise taxes 11.2 10.9 11.1 10.6 10.1
------- ------- ------- ------- -------
Net sales...................... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold 54.6 51.1 52.6 49.2 50.1
------- ------- ------- ------- -------
Gross profit................... 45.4 48.9 47.4 50.8 49.9
Selling, advertising and 59.2 62.7 51.7 42.0 36.4
promotional expenses...........
General and administrative 17.9 17.4 13.4 7.2 7.2
expenses.......................
Write-off of brewery start-up.... 0.0 5.8 1.2 0.0 0.0
Brewery transition charges....... 0.0 0.0 0.0 0.0 2.0
------- ------- ------- ------- -------
Total operational expenses..... 77.1 85.9 66.3 49.2 45.6
------- ------- ------- ------- -------
Income (loss) from (31.7) (37.0) (18.9) 1.6 4.3
operations..................
Interest income net.............. 3.5 2.6 1.9 1.9 0.1
------- ------- ------- ------- -------
Income (loss) before income (28.2) (34.4) (17.0) 3.5 4.4
taxes.......................
Income tax benefit (provision)... 10.2 11.3 6.6 (1.1) (1.8)
------- ------- ------- ------- -------
Net income (loss).............. (18.0)% (23.1)% (10.4)% 2.4% 2.6%
======= ======= ======= ======= =======
</TABLE>
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>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------ -----------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Sales............................ $178.18 $179.69 $179.52 $183.48 $187.35
Less excise taxes................ 17.97 17.62 17.97 17.52 17.21
------- ------- ------- ------- -------
Net sales...................... 160.21 162.07 161.55 165.96 170.14
Cost of goods sold............... 87.53 82.78 84.97 81.67 85.27
------- ------- ------- ------- -------
Gross profit................... 72.68 79.29 76.58 84.29 84.87
Selling, advertising and 94.86 101.55 83.56 69.80 61.90
promotional expenses...........
General and administrative 28.71 28.19 21.55 11.96 12.24
expenses.......................
Write-off of brewery start-up.... 0.00 9.47 1.98 -- --
Brewery transition charges....... 0.0 0.0 -- -- 3.44
------- ------- ------- ------- -------
Total operational expenses..... 123.57 139.21 107.09 81.76 77.58
------- ------- ------- ------- -------
Income (loss) from (50.89) (59.92) (30.51) 2.53 7.29
operations..................
Interest income.................. 5.53 4.28 3.02 3.20 0.14
------- ------- ------- ------- -------
Income (loss) before income (45.36) (55.64) (27.49) 5.73 7.43
taxes.......................
Income tax benefit (provision)... 16.27 18.19 10.61 (1.78) (3.01)
------- ------- ------- ------- -------
Net income (loss).............. $(29.09) $(37.45) (16.88) 3.95 4.42
======= ======= ======= ======= =======
Barrels sold (in thousands)...... 61.1 75.3 361.1 425.6 347.8
======= ======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Sales. Sales decreased by 19.5% from $13.5 million in the three months
ended March 31, 1997 ("the First Quarter of 1997") to $10.9 million in the three
months ended March 31, 1998 ("the First Quarter of
57
<PAGE> 63
1998"). Sales volume decreased 18.9% from 75,300 barrels sold in the First
Quarter of 1997 to 61,100 barrels sold in the First Quarter of 1998. The
decrease in sales was primarily attributable to decreased sales volume in
existing markets as a result of a decline in depletions, which are wholesaler
reported shipments from wholesale to retail. Sales per barrel decreased from
$179.69 in the First Quarter of 1997 to $178.18 in the First Quarter of 1998.
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 the First
Quarter of 1998 when compared to the First Quarter of 1997.
Excise Taxes. Federal and state excise taxes decreased by 17.3% from $1.3
million in the First Quarter of 1997 to $1.1 million in the First Quarter of
1998. Excise taxes as a percentage of net sales increased from 10.9% to 11.2%.
Excise taxes per barrel sold increased from $17.62 in the First Quarter of 1997
to $17.97 in the First Quarter of 1998. 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 Company uses an intra period method to allocate
excise taxes based on the Company's estimate of sales volume for 1998 and as
such, changes in the excise tax rate per barrel will be caused by changes in the
Company's estimate of sales volume for 1998 and to a lessor extent, changes in
the sales mix between states and state excise tax rates.
Cost of Goods Sold. Cost of goods sold decreased 14.2% from $6.2 million in
the First Quarter of 1997 to $5.3 million in the First Quarter of 1998
reflecting the decrease in volume of beer sold. Cost of goods sold as a
percentage of net sales increased from 51.1% in the First Quarter of 1997 to
54.6% in the First Quarter of 1998. Cost of goods sold per barrel sold increased
from $82.78 in the First Quarter of 1997 to $87.53 in the First Quarter of 1998.
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. Transportation expenses decreased 15.3% from $1.3
million in the First Quarter of 1997 to $1.1 million in the First Quarter of
1998. Transportation expenses as a percentage of net sales increased from 10.5%
in the First Quarter of 1997 to 10.8% in the First Quarter of 1998.
Transportation expenses per barrel sold increased from $17.07 per barrel in the
First Quarter of 1997 to $17.35 per barrel in the First Quarter of 1998. The
increases in transportation expenses as a percentage of net sales and on a per
barrel basis were primarily due to changes in the sales mix between states
during the First Quarter of 1998 when compared to the First Quarter of 1997.
Selling, Advertising and Promotional Expenses. Selling, advertising and
promotional expenses decreased by 24.2% from $7.6 million in the First Quarter
of 1997 to $5.8 million in the First Quarter of 1998. The decrease is primarily
due to reduced advertising costs and lower discounts to wholesalers resulting
from lower depletions. Selling, advertising and promotional expenses as
percentage of net sales decreased from 62.7% in the First Quarter of 1997 to
59.2% in the First Quarter of 1998. Selling, advertising and promotional
expenses per barrel sold decreased from $101.55 in the First Quarter of 1997 to
$94.86 in the First Quarter of 1998.
General and Administrative Expenses. General and administrative expenses
decreased 17.4% from $2.1 million in the First Quarter of 1997 to $1.8 million
in the First Quarter of 1998. General and administrative expenses as a
percentage of net sales increased from 17.4% in the First Quarter of 1997 to
17.9% in the First Quarter of 1998. General and administrative expenses per
barrel sold increased from $28.19 in the First Quarter of 1997 to $28.71 in the
First Quarter of 1998. The decrease in general and administrative expenses
resulted primarily from decreased professional service fees and bad debt expense
and reductions in corporate meeting expenses.
Interest Income. Interest income, increased $16,000 from $322,000 in the
First Quarter of 1997 to $338,000 in the First Quarter of 1998. This increase
reflected increased earnings from investment due to a change in the Company's
investment strategy during the First Quarter of 1998.
Income Tax Benefit. The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
benefit takes into account the effects of state income taxes, and non-deductible
expenses offset by non-taxable income. The income tax benefit during the First
Quarter of 1998 was above the federal statutory rate (34%) as a result of state
taxes and non-deductible expenses and was below the federal statutory rate (34%)
during the First Quarter of 1997 as a result of state taxes and non-deductible
expenses offset by non-taxable income.
58
<PAGE> 64
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 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.
59
<PAGE> 65
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 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
60
<PAGE> 66
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 various factors, including 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 degree of market acceptance of new products,
particularly Pete's ESP lager, 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 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.
61
<PAGE> 67
During November 1997, Stroh closed its brewery in St. Paul, Minnesota, where the
Company produced a significant portion of its beer. The Company and Stroh are
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 the Company's 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 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.
62
<PAGE> 68
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 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.
63
<PAGE> 69
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. As of March 31, 1998, working capital was $33.1
million as compared with working capital of $41.3 million as of March 31, 1997.
The decrease was primarily due to the decrease in available for sale securities
inventory, accounts receivable, and an increase in accounts payable.
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 cash and cash equivalents increased by $209,000 in the First
Quarter of 1998 as compared to a decrease of $5.3 million in the First Quarter
of 1997. The Company used $3.5 million in cash from operations in the First
Three Months of 1998 as compared to a use of $8.4 million for the First Quarter
of 1997. The decrease in the uses of cash from operations from the First Quarter
of 1997 resulted primarily from the reduced net loss recognized during the First
Quarter of 1998 versus 1997 and the payment of unusually high accounts payables
and accrued expenses during the First Quarter of 1997. The unusually high
balances of accounts payables and accrued expenses at December 31,1997 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
Company's principal investing activities consisted of the purchase and sale of
available for sale securities in the First Quarters of 1998 and 1997.
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. 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 only significant financing activities in the First Quarter of 1998 and
1997 was the issuance of Common Stock to employees of the Company under the
Company's employee stock purchase plan which provided $4,000 of cash flow in
1997 and $8,000 in 1998.
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.
64
<PAGE> 70
SHAREHOLDER PROPOSALS
It is currently anticipated that the Company's next Annual Meeting of
Shareholders will occur after the Effective Time and accordingly the Company's
existing shareholders will not be entitled to participate in such meeting unless
the Merger is not consummated. If the Merger is not consummated, proposals of
shareholders intended to be presented at the next Annual Meeting of Shareholders
must be received at the Company's executive offices not later than December 16,
1998.
OTHER MATTERS
Under the Bylaws, as amended, of the Company, only such business may be
conducted at a special meeting of shareholders as has been brought before the
meeting pursuant to the Company's notice of meeting. The Pete's Board does not
intend to bring any matters before the Special Meeting other than those
specifically set forth in the Notice of Special Meeting. If any incidental
matters should properly come before the Special Meeting, it is the intention of
the persons named in the accompanying proxy to vote such proxy in accordance
with the direction of the Pete's Board.
ADJOURNMENT OF THE SPECIAL MEETING
In the event that there are not sufficient votes to approve and adopt the
Merger Agreements at the time of the Special Meeting, such proposal could not be
approved unless the Special Meeting were adjourned in order to permit further
solicitation of proxies from Pete's shareholders. Proxies that are being
solicited by the Pete's Board grant the discretionary authority to vote for any
such adjournment, if necessary. If it is necessary to adjourn the Special
Meeting and the adjournment is for a period of 45 days or less and no new record
date is fixed, no notice of the time and place of the adjourned meeting is
required to be given to shareholders other than an announcement of such time and
place at the Special Meeting. A majority of the voting power represented and
voting at the Special Meeting is required to approve any such adjournment.
EXPERTS
The Consolidated Financial Statements of the Company included in this Proxy
Statement have been so included in reliance on the report of Coopers & Lybrand
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting. It is expected that a member of Coopers & Lybrand LLP
will be present at the meeting with the opportunity to make a statement if so
desired and will be available to respond to appropriate questions.
65
<PAGE> 71
PETE'S BREWING COMPANY AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1996...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Shareholders' Equity as of
December 31, 1997 and 1996................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Balance Sheets (unaudited) as of March 31, 1998
and December 31, 1997..................................... F-17
Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1998 and 1997................ F-18
Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1998 and 1997................ F-19
Notes to Consolidated Financial Statements (unaudited)...... F-20
</TABLE>
F-1
<PAGE> 72
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.
/s/ Coopers & Lybrand L.L.P.
San Jose, California
February 18, 1998
F-2
<PAGE> 73
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.
F-3
<PAGE> 74
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.
F-4
<PAGE> 75
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.
F-5
<PAGE> 76
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.
F-6
<PAGE> 77
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
F-7
<PAGE> 78
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
F-8
<PAGE> 79
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>
F-9
<PAGE> 80
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.
F-10
<PAGE> 81
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>
F-11
<PAGE> 82
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.
F-12
<PAGE> 83
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>
F-13
<PAGE> 84
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.
F-14
<PAGE> 85
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.
F-15
<PAGE> 86
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.
F-16
<PAGE> 87
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $19,050 $18,841
Available for sale securities............................. 8,283 12,358
Trade accounts receivable, net............................ 2,928 1,396
Inventories............................................... 2,295 2,617
Prepaid expenses and other current assets................. 1,540 1,189
Tax refund receivable..................................... 2,074 2,074
Deferred taxes............................................ 1,140 1,140
------- -------
Total current assets.............................. 37,310 39,615
Property and equipment, net................................. 4,351 4,056
Deferred taxes.............................................. 4,120 3,125
Other assets................................................ 2,728 2,960
------- -------
$48,509 $49,756
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable.................................... $ 1,826 $ 1,433
Accrued expenses.......................................... 2,346 2,189
------- -------
Total current liabilities......................... 4,172 3,622
Deferred taxes............................................ 662 662
------- -------
Total liabilities................................. 4,834 4,284
------- -------
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:
10,817 at March 31, 1998 and 10,815 at December 31,
1997................................................... 48,811 48,803
Unrealized gain (loss) on available for sale securities..... (14) 14
Accumulated deficit......................................... (5,122) (3,345)
------- -------
Total shareholders' equity........................ 43,675 45,472
------- -------
$48,509 $49,756
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-17
<PAGE> 88
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Sales....................................................... $10,887 $13,531
Less excise taxes........................................... 1,098 1,327
------- -------
Net sales......................................... 9,789 12,204
Cost of goods sold.......................................... 5,348 6,233
------- -------
Gross profit...................................... 4,441 5,971
------- -------
Selling, advertising and promotional expenses............... 5,796 7,647
General and administrative expenses......................... 1,754 2,123
Write-off of brewery start-up expenses...................... -- 713
------- -------
Total operating expense........................... 7,550 10,483
------- -------
Loss from operations.............................. (3,109) (4,512)
Interest income............................................. 338 322
------- -------
Loss before income taxes.......................... (2,771) (4,190)
Income tax benefit.......................................... 994 1,370
------- -------
Net loss.......................................... $(1,777) $(2,820)
======= =======
Net loss per share, basic................................... $ (0.16) $ (0.26)
======= =======
Net loss per share, diluted................................. $ (0.16) $ (0.26)
======= =======
Shares used in per share calculation, basic................. 10,817 10,742
======= =======
Shares used in per share calculation, diluted............... 10,817 10,742
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
<PAGE> 89
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,777) $(2,820)
Adjustments to reconcile net loss to net cash used by
operations:
Depreciation and amortization.......................... 264 1,488
Deferred taxes......................................... (995) (1,370)
Changes in operating assets and liabilities:
Trade accounts receivable............................ (1,532) 3,246
Inventories.......................................... 322 (366)
Prepaid expenses and other current assets............ (351) (3,011)
Accounts payable and accrued expenses................ 550 (5,615)
------- -------
Net cash used by operations....................... (3,519) (8,448)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (439) (263)
Purchases of available for sale securities................ (24,692) (1,477)
Proceeds from sale of available for sale securities....... 28,739 4,940
Additions to other assets................................. 112 (38)
------- -------
Net cash provided by investing activities......... 3,720 3,162
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares................................. 8 4
------- -------
Net cash provided by financing activities.............. 8 4
------- -------
Net increase (decrease) in cash and cash equivalents... 209 (5,282)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 18,841 19,814
------- -------
End of period............................................. $19,050 $14,532
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 90
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 8 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:
Interim Financial Data:
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information or footnote disclosure normally
included in the financial statements prepared in accordance with the generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The unaudited financial statements in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position and
results of operations in accordance with generally accepted accounting
principles. These financial statements should be read in conjunction with the
Company's audited consolidated financial statements as included in the Company's
Annual Reports on Form 10-K for the year ended December 31, 1997 as filed with
the Securities and Exchange Commission. The interim results presented herein are
not necessarily indicative of the results of operations that may be expected for
the full fiscal year ending December 31, 1998 or any future periods.
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.
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 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 relationship with Stroh is therefore critical to the Company's
business, operating results and financial condition. The Company's dependance 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.
F-20
<PAGE> 91
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Available for Sale Securities:
Available for sale securities consist of U.S. and municipal government
obligations and corporate securities with maturities of more than thirty days.
These available for sale securities are carried at market value. The available
for sale securities are held in the Company's name and maintained with two large
institutions.
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.
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:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements. Comprehensive
income is defined as net income plus revenues, expenses, gains and losses that,
under generally accepted accounting principles, are excluded from net income.
The components of comprehensive income which are excluded from net income are
not significant, individually or in aggregate, and therefore, no separate
statement of comprehensive income has been presented.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." ("SFAS 131"), which supercedes Statement of
Financial Accounting Standards, "Financial Reporting for Segments of a Business
Enterprise" ("SFAS 14"). SFAS 131 changes current practice under SFAS 14 by
establishing a new framework on which to base segment reporting and also
requires interim reporting of segment information. This statement is effective
for fiscal years beginning after December 15, 1997. The statement's interim
reporting disclosures are not required until the first quarter immediately
subsequent to the fiscal year in which SFAS 131 is effective.
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.
F-21
<PAGE> 92
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Trade accounts receivable............................ $4,939 $3,679
Less allowance for credit notes...................... 1,874 2,099
Less allowance for doubtful accounts................. 137 184
------ ------
$2,928 $1,396
====== ======
</TABLE>
3. INVENTORIES:
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Finished goods....................................... $ 369 $ 651
Beer in progress..................................... 660 407
Promotional material................................. 1,266 1,559
------ ------
$2,295 $2,617
====== ======
</TABLE>
F-22
<PAGE> 93
================================================================================
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
PBC HOLDINGS, INC.
PBC ACQUISITION CORP.
THE GAMBRINUS COMPANY
AND
PETE'S BREWING COMPANY
DATED AS OF MAY 22, 1998
================================================================================
<PAGE> 94
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I -- DEFINITIONS............................................... A-2
1.1 Certain Defined Terms....................................... A-2
1.2 Interpretation.............................................. A-3
ARTICLE II -- THE MERGER............................................... A-3
2.1 The Merger.................................................. A-3
2.2 Company Actions and Fairness Opinion........................ A-4
2.3 Effective Time.............................................. A-4
2.4 Closing..................................................... A-4
2.5 Effects of the Merger....................................... A-4
2.6 Articles of Incorporation................................... A-4
2.7 Bylaws...................................................... A-4
2.8 Directors................................................... A-4
2.9 Officers.................................................... A-5
Conversion of Shares........................................ A-5
2.10
Dissenting Shares........................................... A-5
2.11
Payment For Shares.......................................... A-5
2.12
No Further Rights or Transfers.............................. A-6
2.13
Supplementary Action........................................ A-7
2.14
Lost, Stolen or Destroyed Certificates...................... A-7
2.15
Company Stock Options....................................... A-7
2.16
Company Warrants............................................ A-8
2.17
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF THE COMPANY........... A-8
3.1 Organization, Standing and Corporate Power.................. A-8
3.2 Subsidiaries................................................ A-8
3.3 Capital Structure........................................... A-8
3.4 Authority; Noncontravention................................. A-9
3.5 SEC Documents; Financial Statements......................... A-10
3.6 Absence of Certain Changes or Events........................ A-10
3.7 No Undisclosed Liabilities.................................. A-11
3.8 Litigation.................................................. A-11
3.9 Compliance with Laws........................................ A-11
Absence of Changes in Benefit Plans; Labor Relations........ A-11
3.10
ERISA Compliance............................................ A-11
3.11
Taxes....................................................... A-12
3.12
Parachute Payments.......................................... A-13
3.13
Information in Proxy Statement.............................. A-13
3.14
State Takeover Statutes..................................... A-13
3.15
Rights Agreement............................................ A-13
3.16
Brokers..................................................... A-13
3.17
Title to Assets............................................. A-14
3.18
Product Liability........................................... A-14
3.19
Material Contracts.......................................... A-14
3.20
Title to Intellectual Property.............................. A-14
3.21
Distributors and Distributorship Agreements................. A-15
3.22
Real Property............................................... A-15
3.23
</TABLE>
i
<PAGE> 95
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Insurance................................................... A-15
3.24
Customers, Suppliers........................................ A-16
3.25
ARTICLE IV -- REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER...
A-16
4.1 Organization, Standing and Corporate Power.................. A-16
4.2 Authority: Noncontravention................................. A-16
4.3 Information in Proxy Statement.............................. A-17
4.4 Interim Operations of Purchaser............................. A-17
4.5 Brokers..................................................... A-17
4.6 Financing................................................... A-17
4.7 Share Ownership............................................. A-17
ARTICLE V -- CONDUCT OF BUSINESS PENDING THE MERGER.................... A-17
5.1 Interim Operations of the Company........................... A-17
5.2 No Solicitation............................................. A-19
ARTICLE VI -- ADDITIONAL AGREEMENTS.................................... A-20
6.1 Shareholder Approval; Preparation of Proxy Statement........ A-20
6.2 Access to Information; Confidentiality...................... A-21
6.3 Commercially Reasonable Efforts............................. A-21
6.4 Notification of Certain Matters............................. A-21
6.5 Fees and Expenses........................................... A-22
6.6 Indemnification and Directors' and Officers' Insurance...... A-23
6.7 Certain Litigation.......................................... A-23
6.8 Purchaser Compliance........................................ A-23
6.9 Shareholder Agreement....................................... A-23
Interim Financial Statements................................ A-24
6.10
Stop Transfer Instruction................................... A-24
6.11
ARTICLE VII -- CONDITIONS.............................................. A-24
7.1 Conditions to Parent and Purchaser's Obligation to Effect
the Merger.................................................. A-24
7.2 Conditions to Company's Obligation to Effect the Merger..... A-26
ARTICLE VIII -- TERMINATION AND AMENDMENT.............................. A-27
8.1 Termination................................................. A-27
8.2 Effect of Termination....................................... A-28
8.3 Amendment................................................... A-28
8.4 Extension; Waiver........................................... A-28
ARTICLE IX -- MISCELLANEOUS............................................ A-28
9.1 Nonsurvival of Representations, Warranties and Agreements... A-28
9.2 Notices..................................................... A-28
9.3 Counterparts................................................ A-29
9.4 Entire Agreement; No Third Party Beneficiaries.............. A-29
9.5 Governing Law............................................... A-29
9.6 Publicity................................................... A-29
9.7 Assignment.................................................. A-29
9.8 Enforcement................................................. A-30
9.9 Severability................................................ A-30
EXHIBIT A -- STOCKHOLDER AGREEMENT..................................... A-31
</TABLE>
ii
<PAGE> 96
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made and entered
into as of this 22nd day of May, 1998, by and among PBC Holdings, Inc., a Texas
corporation ("Parent"), PBC Acquisition Corp., a Texas corporation and a
wholly-owned subsidiary of Parent ("Purchaser"), Pete's Brewing Company, a
California corporation (the "Company"), and, for the limited purposes set forth
herein, The Gambrinus Company, a Texas corporation ("Gambrinus").
RECITALS
WHEREAS, the Board of Directors of each of Gambrinus, Parent, Purchaser and
the Company has approved, and deems it advisable and in the best interests of
its respective shareholders to consummate, the acquisition of the Company by
Parent upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance thereof, it is proposed that Purchaser acquire all
shares (the "Shares") of the issued and outstanding common stock, no par value,
of the Company (the "Company Common Stock"), for $6.375 per share, net to the
seller in cash (such price per Share as may be paid in the Merger (as defined in
Section 2.1), being referred to herein as the "Merger Consideration") through a
reverse subsidiary merger of the Purchaser with and into the Company;
WHEREAS, also in furtherance of such acquisition, the Board of Directors of
each of Gambrinus, Parent, Purchaser and the Company has approved the Merger in
accordance with the General Corporation Law of the State of California (the
"GCL") and upon the terms and subject to the conditions set forth herein,
whereby each issued and outstanding Share will be converted into the right to
receive an amount equal to the Merger Consideration in cash;
WHEREAS, the Board of Directors of the Company (the "Company Board of
Directors") has determined that the consideration to be paid for each Share in
the Merger is fair to the holders of such Shares and has resolved to recommend
that the holders of such Shares approve this Agreement and each of the
transactions contemplated hereby upon the terms and subject to the conditions
set forth herein;
WHEREAS, the Company, Parent, Purchaser and Gambrinus desire to make
certain representations, warranties, covenants and agreements in connection with
the Merger and also to prescribe certain various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
A-1
<PAGE> 97
ARTICLE I
DEFINITIONS
1.1 Certain Defined Terms. As used in the Agreement, each of the following
initially capitalized terms still have the respective meaning set forth below:
"Affiliate" means, with respect to any Person, any other person that,
directly or indirectly through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person. "Control" or
"controls" for purposes hereof means that a Person has the power, direct or
indirect, to conduct or govern the policies of another Person.
"Business" means the business conducted by the Company as of the date of
the Agreement and including, without limitation, the manufacture, distribution,
marketing and sale of various craft brewed beer products.
"Business Day" refers to a day other than a Saturday, Sunday or a holiday
on which commercial banks are required or authorized to close in San Antonio,
Texas.
"Contracts" refers to, collectively, all oral or written contracts,
agreements, leases, subleases, licenses, sublicenses, commitments, instruments,
guaranties, bids and proposals to which the Company is a party as of the date
specified, all unfilled orders outstanding as of the Closing Date for the
purchase of raw materials, goods or services, and all unfilled orders
outstanding as of the Closing Date for the sale of raw materials, goods or
services.
"GAAP" refers to generally accepted accounting principles in the United
States of America as in effect as of the date hereof.
"Indebtedness" means any liability, whether or not contingent, (i) in
respect of borrowed money or evidenced by bonds, notes, debentures, or similar
instruments, (ii) representing the balance deferred and unpaid of the purchase
price of any property (including pursuant to capital leases) but excluding trade
payables, if and to the extent any of the foregoing indebtedness would appear as
a liability upon a balance sheet prepared on a consolidated basis in accordance
with GAAP, (iii) guaranties, direct or indirect, in any manner, of all or any
part of any Indebtedness of any Person.
"Intellectual Property" means all intellectual property used in the
Business or otherwise necessary for the ownership and use of the assets and the
conduct of the Business of the Company, including without limitation, all (1)
trademarks, trade names, trade dress, service marks, and Internet domain names
together with all of the goodwill of the foregoing items; (2) copyrights
(including without limitation in and to the Company's Internet website(s)) and
all related and equivalent rights, including moral rights; (3) licenses,
registrations, applications for, and applications to register, any of the
foregoing; and (4) trade secrets, patents, processes, recipes and formulae.
"Knowledge" as applied to either the Company, a Subsidiary, Parent or
Purchaser, refers to the actual knowledge, of its respective executive officers,
its human resources officer or its directors.
"Material Adverse Change" or "Material Adverse Effect" means, when used in
connection with the Company, any one or more changes or effects that are
materially adverse to the Business, properties, assets, liabilities, financial
condition, results of operations or value of the Company and its Subsidiaries,
taken as a whole; but other than changes or effects which are or result from (i)
occurrences relating to the economy in general or the Company's industry in
general and not specifically relating to such entity, (ii) the delay or
cancellation of orders for the Company's products attributable to the
announcement of this Agreement, (iii) the delay or cancellation of production or
shipment of the Company's products by the Company's contract manufacturer
attributable to the execution or announcement of this Agreement, or (iv)
shareholder litigation brought or threatened against the Company or any member
of the Company Board of Directors attributable to the announcement of this
Agreement or the Merger, including all costs and expenses in connection
therewith and other fees and expenses incurred by the Company in connection with
the transactions contemplated hereby.
A-2
<PAGE> 98
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Person" refers to any individual, partnership, corporation, trust,
association, limited liability company, Government Entity or any department or
agency thereof, or any other entity.
"SEC" means the Securities and Exchange Commission.
"Stroh Agreement" means the Second Amendment and Restatement of
Manufacturing Services Agreement, dated as of October 1, 1995, by and between
The Stroh Brewing Company, an Arizona corporation, and the Company, as amended.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership, association, trust, or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association, trust, or other business entity a
majority of the partnership or other similar ownership or beneficial interest
thereof is at the time owned or controlled, directly or indirectly, by any
Person or one or more Subsidiaries of that Person or a combination thereof. For
purposes hereof, a Person or Persons shall be deemed to have a majority
ownership interest in a limited liability company, partnership, association,
trust or other business entity if such Person or Persons shall be allocated a
majority of limited liability company, partnership, association, trust or other
business entity gains or losses, distributions or other economic interests or
shall be or control any managing director, manager, general partner or trustee
of such limited liability company, partnership, association trust or other
business entity.
"Tax" refers to all federal, state, local and foreign taxes, charges, fees,
levies, penalties, duties or other assessments, including, without limitation,
income, gross receipts, excise, employment, sales, use, transfer, payroll,
franchise, severance, stamp, occupation, windfall profits, withholding, social
security, disability, real property, personal property, ad valorem or other tax
or governmental fee of any kind whatsoever imposed or required to be withheld by
any Governmental Entity, whether disputed or not.
"Tax Return" means any tax return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
1.2 Interpretation. When a reference is made in this Agreement to an
Article or a Section, such reference shall be to an Article or a Section of this
Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". The phrase "made
available" in this Agreement shall mean that the information referred to has
been made available if requested by the party to whom such information is to be
made available.
ARTICLE II
THE MERGER
2.1 The Merger. Upon the terms and subject to the satisfaction or waiver
of the conditions hereof and in accordance with the applicable provisions of
this Agreement and the GCL, the Company and Purchaser shall consummate a merger
(the "Merger") pursuant to which Purchaser shall be merged with and into the
Company at the Effective Time (as defined in Section 2.3). Following the
Effective Time, (i) the Company shall continue as the surviving corporation (the
"Surviving Corporation") in the Merger and shall continue to be governed by the
laws of the State of California, (ii) the separate corporate existence of the
Company with all of its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger, except as set forth in this Article II,
and (iii) the separate corporate existence of Purchaser shall cease. At the
election of Parent, to the extent that any such action would not cause a failure
of a condition to the Merger,
A-3
<PAGE> 99
any direct or indirect wholly-owned subsidiary of Parent may be substituted for
and assume all of the rights and obligations of Purchaser as a constituent
corporation in the Merger. In such event, the parties agree to execute an
appropriate amendment to this Agreement in order to reflect the foregoing.
2.2 Company Actions and Fairness Opinion. The Company hereby represents
and warrants that (i) the Company Board of Directors has adopted resolutions (A)
determining that, as of the date of such resolutions, the terms of the Merger
are fair to, and in the best interests of, the holders of the Shares, (B)
approving and adopting this Agreement and the transactions contemplated hereby,
(C) approving the Merger, and (D) recommending that the shareholders of the
Company approve the Merger, this Agreement and the transactions contemplated
hereby (provided, however, that subject to the provisions of Section 5.2 such
recommendation may be withdrawn, modified or amended in connection with a
Superior Proposal (as defined in Section 5.2)) and (ii) Morgan Stanley & Co.
Incorporated ("Morgan Stanley") has rendered to the Company Board of Directors
its written opinion, to the effect that the consideration to be received by the
holders of Shares pursuant to the Merger is fair to the holders of Shares. The
Company has obtained the consent of Morgan Stanley to the inclusion in the Proxy
Statement of a copy of the written opinion referred to in clause (ii) above.
2.3 Effective Time. As soon as practicable after the satisfaction or
waiver of the conditions set forth in Article VII hereof, Parent, Purchaser and
the Company shall cause to be executed and filed on the Closing Date (as
hereinafter defined) (or on such other date as Parent and the Company may agree)
with the Secretary of State of the State of California (the "Secretary of
State") in the manner required by the GCL an agreement of merger together with
an officer's certificate of the Company and Purchaser, and the parties shall
take such other and further actions as may be required by law to make the Merger
effective. The time the Merger becomes effective in accordance with applicable
law is hereinafter referred to as the "Effective Time."
2.4 Closing. The closing of the Merger (the "Closing") shall take place at
10:00 a.m. on a date to be specified by the parties, which shall be no later
than the third Business Day after satisfaction or waiver of all of the
conditions set forth in Article VII hereof (the "Closing Date"), at the offices
of Jackson Walker L.L.P., 112 East Pecan Street, Suite 2100, San Antonio, Texas
78205, unless another date, time or place is agreed to in writing by the parties
hereto.
2.5 Effects of the Merger. The Merger shall have the effects set forth in
Section 1107 of the GCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time all the property, rights, privileges,
powers and franchises of the Company and Purchaser shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Purchaser
shall become the debts, liabilities and duties of the Surviving Corporation.
2.6 Articles of Incorporation. The Articles of Incorporation of the
Company as in effect immediately prior to the Effective Time shall be amended as
of the Effective Time so that Article III thereof shall read in its entirety as
follows:
"III
This corporation is authorized to issue 1,000 shares of Common
Stock, no par value per share."
As so amended, such Articles of Incorporation shall be the Articles of
Incorporation of the Surviving Corporation, until thereafter changed or amended,
subject to Section 6.6 hereof, as provided therein or by applicable law.
2.7 Bylaws. The Bylaws of Company, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation, until
thereafter duly amended, subject to Section 6.6 hereof, in accordance with
applicable law, the Articles of Incorporation of the Surviving Corporation or
such Bylaws.
2.8 Directors. The directors of Purchaser immediately prior to the
Effective Time shall be the initial directors of the Surviving Corporation and
will hold office from the Effective Time until their respective successors are
duly elected or appointed and qualified in the manner provided in the Articles
of Incorporation
A-4
<PAGE> 100
and Bylaws of the Surviving Corporation, as such instruments may be amended from
time to time, either before or after the Effective Time, or as otherwise
provided by law.
2.9 Officers. The officers of the Purchaser immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation and
will hold office from the Effective Time until their respective successors are
duly elected or appointed and qualified in the manner provided in the Articles
of Incorporation and Bylaws of the Surviving Corporation, as such instruments
may be amended from time to time, either before or after the Effective Time, or
as otherwise provided by law.
2.10 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of Parent, Purchaser, the Company or the
holders of the Shares:
(a) Each Share issued and outstanding immediately prior to the
Effective Time (other than Shares held, directly or indirectly, by Parent,
Purchaser, Gambrinus, the Company or any of their majority-owned
Subsidiaries, and any Dissenting Shares (as defined in Section 2.11)) shall
automatically be canceled and extinguished and be converted into the right
to receive from the surviving corporation in cash the Merger Consideration,
without interest thereon. Each holder (other than holders referred to in
Section 2.10(b)) of a certificate representing any Shares shall after the
Effective Time cease to have any rights with respect to such Shares, except
either to receive the Merger Consideration upon surrender of such
certificate, or to exercise such holder's dissenter's rights as provided in
Section 2.11 and the GCL.
(b) Each Share issued and outstanding immediately prior to the
Effective Time which is owned or held, directly or indirectly, by Parent,
Purchaser, Gambrinus, the Company or any of their majority-owned
Subsidiaries shall be canceled and extinguished and cease to exist, without
any conversion thereof, and no payment shall be made with respect thereto.
(c) Each share of Common Stock of Purchaser issued and outstanding
immediately prior to the Effective Time shall be converted into and
thereafter represent one validly issued, fully paid and nonassessable share
of Common Stock, no par value, of the Surviving Corporation.
2.11 Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, Shares which are outstanding immediately prior to the Effective Time
and which are held by a holder who has not voted in favor of the Merger or
consented thereto in writing and who has demanded appraisal for such Shares in
accordance with Section 1300 of the GCL, if Section 1300 provides for appraisal
rights for such Shares in the Merger ("Dissenting Shares"), shall not be
converted into the right to receive the Merger Consideration pursuant to Section
2.10, unless and until such holder fails to perfect or withdraws or otherwise
loses the right to appraisal and payment under the GCL. If, after the Effective
Time, any such holder shall have failed to perfect or shall withdraw or lose
such holder's right of appraisal and payment under the GCL, such holder's Shares
shall be treated as if they had been converted as of the Effective Time into the
right to receive the Merger Consideration, without interest thereon, as provided
in Section 2.10, and such Shares shall no longer be Dissenting Shares. The
Company shall give Parent and Purchaser prompt notice of any demands received by
the Company for appraisal of Shares, and of any withdrawals of demands for
appraisal, or of any other instruments served pursuant to Section 1300 of the
GCL and received by the Company. Prior to the Effective Time, Parent and
Purchaser shall have the right to participate in all negotiations and
proceedings with respect to such demands for appraisal. Prior to the Effective
Time, the Company shall not, except with the prior written consent of Parent and
Purchaser, make any payment with respect to, or settle or offer to settle, any
such demands. Each holder of Dissenting Shares shall have only such rights and
remedies as are granted to such holder under Section 1300 of the GCL.
2.12 Payment For Shares.
(a) Prior to the Effective Time, Purchaser shall select and appoint a bank
or trust company reasonably acceptable to the Company to act as agent for the
holders of Shares (the "Paying Agent") to receive and disburse the Merger
Consideration to which holders of Shares shall become entitled pursuant to
Section 2.10. At the Effective Time, Purchaser or Parent shall, and Gambrinus
shall cause Purchaser or Parent to, deposit in trust with the Paying Agent for
the benefit of holders of Shares the aggregate consideration to which such
holders shall be entitled at the Effective Time pursuant to Section 2.10. Such
funds shall be invested as
A-5
<PAGE> 101
directed by Parent or the Surviving Corporation pending payment thereof by the
Paying Agent to holders of the Shares. Earnings from such investments shall be
the sole and exclusive property of Purchaser and the Surviving Corporation and
no part thereof shall accrue to the benefit of the holders of the Shares. If for
any reason (including losses) such funds are inadequate to pay the amounts to
which holders of Shares shall be entitled under Section 2.10, Parent shall in
any event be liable for payment thereof. Such funds deposited with the Paying
Agent pursuant to this Section 2.12 shall not be used for any purpose except as
expressly provided in this Agreement. From time to time at or after the
Effective Time, Parent shall take all lawful action necessary to make the
appropriate cash payments, if any, to holders of Dissenting Shares.
(b) As soon as practicable after the Effective Time, Purchaser or Parent
shall cause the Paying Agent to mail to each record holder a certificate or
certificates representing Shares which as of the Effective Time represents the
right to receive the Merger Consideration (the "Certificates"), a form of letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender to the Paying
Agent of a Certificate, together with such letter of transmittal duly executed
and completed in accordance with the instructions thereto, and such other
documents as may be reasonably required by the Paying Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration and such Certificate shall forthwith be canceled. No interest
shall be paid or accrued on the Merger Consideration upon the surrender of the
Certificates. Until surrendered in accordance with the provisions of this
Section 2.12(b), each Certificate shall be deemed for all purposes to evidence
only the right to receive the Merger Consideration (without interest thereon),
and shall, subject to Section 2.11, have no other right.
(c) If the Merger Consideration (or any portion thereof) is to be delivered
to a person other than the person in whose name the Certificates surrendered in
exchange therefor are registered, it shall be a condition to the payment that
the Certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person requesting such payment or delivery
shall pay any transfer or other taxes payable by reason of the payment of the
Merger Consideration to a person other than the person in whose name the
Certificates are registered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Notwithstanding
the foregoing, neither the Paying Agent nor any party hereto shall be liable to
a holder of Shares for any Merger Consideration delivered to a public official
pursuant to any applicable abandoned property, escheat and similar laws.
(d) Promptly following the date that is one year after the Effective Time,
the Paying Agent shall return to the Surviving Corporation all Merger
Consideration and other cash, property and instruments in its possession
relating to the transactions described in this Agreement, and the Paying Agent's
duties shall terminate. Thereafter, such holders shall be entitled to look to
the Surviving Corporation (subject to abandoned property, escheat or similar
laws) only as general creditors thereof with respect to the Merger Consideration
payable upon due surrender of their Certificates, without any interest thereon.
Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying
Agent shall be liable to any holder of a Certificate for Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
2.13 No Further Rights or Transfers. All cash paid upon surrender of
Certificates in accordance with the terms of this Article II shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Shares
theretofore represented by such Certificate. At and after the Effective Time the
holders of Certificates to be exchanged for the Merger Consideration pursuant to
this Agreement shall cease to have any rights as shareholders of the Company
except for the right to surrender such holder's Certificates in exchange for
payment of the Merger Consideration, and after the Effective Time there shall be
no transfers on the stock transfer books of the Surviving Corporation of the
Shares which were outstanding immediately prior to the Effective Time. Any
Certificates formerly representing Shares presented to the Surviving Corporation
or Paying Agent shall be canceled and exchanged for the Merger Consideration, as
provided in this Article II, subject to applicable law in the case of Dissenting
Shares.
A-6
<PAGE> 102
2.14 Supplementary Action. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of either the Company or
Purchaser, or otherwise to carry out the provisions of this Agreement, the
officers and directors of the Surviving Corporation are hereby authorized and
empowered, in the name of and on behalf of the Company and Purchaser, to execute
and deliver any and all things necessary or proper to vest or to perfect or
confirm title to such property or rights in the Surviving Corporation, and
otherwise to carry out the purposes and provisions of this Agreement.
2.15 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing Shares shall have been lost, stolen or destroyed, the Paying Agent
shall pay to such holder the Merger Consideration required pursuant to Section
2.10, in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof with such assurances
as the Paying Agent, in its discretion and as a condition precedent to the
payment of the Merger Consideration, may reasonably require of the holder of
such lost, stolen or destroyed Certificates.
2.16 Company Stock Options.
(a) The Company shall take all commercially reasonable actions, if any,
necessary to provide that at the Effective Time, (i) each option outstanding at
the Effective Time to purchase Shares (an "Option") granted under (A) the
Company's 1986 Stock Option Plan, 1995 Stock Option Plan or 1995 Director Option
Plan or (B) any other stock-based incentive plan or arrangement of the Company,
excluding any options granted under the Company's 1995 Employee Stock Purchase
Plan (the "Stock Option Plans"), shall be canceled and (ii) in consideration of
such cancellation, each holder of an Option shall receive in consideration
thereof an amount (subject to any applicable withholding tax) in cash equal to
the product of (x) the excess, if any, of the Merger Consideration over the per
Share exercise price of such Option and (y) the number of Shares subject to such
Option. The Company shall use all commercially reasonable efforts to effectuate
the foregoing, including, if necessary, amending the Stock Plans and obtaining
any necessary consents from holders of Options.
(b) Except as may be otherwise agreed to by Parent or Purchaser and the
Company or as otherwise contemplated or required to effectuate this Section
2.16, the Stock Plans shall terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company or
any of its Subsidiaries shall be deleted as of the Effective Time. The Company
shall take all actions necessary to provide that as of the Effective Time no
holder of Options under the Stock Plans will have any right to receive shares of
common stock of the Surviving Corporation upon exercise of any such Option.
(c) The Company shall take all commercially reasonable actions, if any,
necessary to provide that at or immediately prior to the Effective Time, (i)
each then outstanding option under the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan") shall automatically be exercised and (ii) in
lieu of the issuance of Certificates, each participant shall receive an amount
in cash (subject to any applicable withholding tax) equal to the product of (x)
the number of Shares otherwise issuable upon such exercise and (y) the Merger
Consideration. The Company shall use all commercially reasonable efforts to
effectuate the foregoing, including without limitation amending the Stock
Purchase Plan and obtaining any necessary consents from participants in the
Stock Purchase Plan. The Company (i) shall not permit the commencement of any
new offering period under the Stock Purchase Plan following the date hereof,
(ii) shall not permit any participant to increase his or her rate of
contributions under the Stock Purchase Plan following the date hereof, (iii)
shall terminate the Stock Purchase Plan as of the Effective Time, and (iv) shall
take any other actions necessary to provide that as of the Effective Time no
holder of options under the Stock Purchase Plan will have any right to receive
shares of common stock of the Surviving Corporation upon exercise of any such
option.
(d) In the event that an employee of the Company who is a holder of Options
is terminated by the Company after the date of this Agreement but prior to the
Effective Time, such employee shall receive at the Effective Time with respect
to all Options held by such employee as of the date of such termination of
A-7
<PAGE> 103
employment the cash payment determined in accordance with Section 2.16(a) that
such employee would have received had such employee been employed as of the
Effective Time.
2.17 Company Warrants. The Company shall take all commercially reasonable
actions, if any, necessary to provide that at the Effective Time, each warrant
outstanding at the Effective Time to purchase Shares (a "Warrant") shall be
canceled. The Company shall take all commercially reasonable efforts to
effectuate the foregoing, including, if necessary, amending a Warrant and
obtaining any necessary consents from holders of Warrants.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the disclosure schedule delivered by the Company to
Parent prior to the execution of this Agreement (the "Company Disclosure
Schedule"), the Company represents and warrants to Parent and Purchaser as
follows:
3.1 Organization, Standing and Corporate Power. Each of the Company and
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is organized and, except
as would not have a Material Adverse Effect, has all requisite corporate power
and authority to carry on its Business as now being conducted. Each of the
Company and its Subsidiaries is duly qualified or licensed to do business and is
in good standing in each jurisdiction in which the nature of its Business or the
ownership, leasing or operation of its properties makes such qualification or
licensing necessary, other than in such jurisdictions where the failure to be so
qualified or licensed or to be in good standing would not have a Material
Adverse Effect on the Company. The Company has delivered or made available to
Parent complete and correct copies of its Restated Articles of Incorporation and
Bylaws, in each case as amended to the date hereof.
3.2 Subsidiaries. The Company Disclosure Schedule sets forth in Section
3.2 a complete list of the Company's Subsidiaries. All the outstanding shares of
capital stock of, or other equity interests in, each such subsidiary have been
validly issued and are fully paid and nonassessable and are owned directly by
the Company, free and clear of all pledges, claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever (collectively, "Liens")
and free of any other restriction (including any restriction on the right to
vote, sell or otherwise dispose of such capital stock or other ownership
interests). Except as set forth in Section 3.2 of the Company Disclosure
Schedule, the Company does not own any significant equity interest in any
corporation or other entity.
3.3 Capital Structure.
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock and 5,000,000 shares of preferred stock, no par
value per share ("Preferred Stock"). At the close of business on May 20, 1998,
(i) 10,838,982 shares of Company Common Stock and no shares of Preferred Stock
were issued and outstanding, (ii) no shares of Company Common Stock were held by
the Company in its treasury, (iii) 2,041,482 shares of Company Common Stock were
reserved for issuance pursuant to outstanding Options under the Stock Option
Plans and 352,197 shares of Company Common Stock were reserved for issuance
pursuant to options available for grant under the Stock Option Plans, (iv)
309,397 shares of Company Common Stock were reserved for issuance pursuant to
the Stock Purchase Plan, (v) 1,140,284 shares of the Company Common Stock were
reserved for issuance upon exercise of an outstanding Warrant and (vi) 50,000
shares of Series A Participating Preferred Stock, no par value per share, were
reserved for issuance in connection with the Company's Preferred Shares Rights
Agreement dated November 25, 1996 (the "Rights Agreement"). Except as set forth
above, at the close of business on May 20, 1998, no shares of capital stock or
other voting securities of the Company were issued, reserved for issuance or
outstanding. All outstanding shares of capital stock of the Company are, and all
shares which may be issued pursuant to the Stock Option Plans and the Stock
Purchase Plan will be, when issued in accordance with the terms thereof, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. There are no bonds, debentures, notes or other indebtedness
of the Company having the right to vote
A-8
<PAGE> 104
(or convertible into securities having the right to vote) on any matters on
which shareholders of the Company may vote. Except as set forth above, there are
no securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any of its
Subsidiaries is a party, or by which the Company or any of its Subsidiaries is
bound, obligating the Company or any of its Subsidiaries to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of capital
stock or other voting securities of the Company or any of its Subsidiaries or
obligating the Company or any of its Subsidiaries to issue, grant, extend or
enter into any such security, option, warrant, call, right, commitment,
agreement, arrangement or undertaking. The Company is not a party to any voting
agreement with respect to the voting of any of its securities. There are not any
outstanding contractual obligations of the Company or any of its Subsidiaries to
repurchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries.
(b) Section 3.3 of the Company Disclosure Schedule sets forth a complete
and accurate list, as of the date hereof, of: (i) all Options outstanding under
the Stock Option Plans (ii) all Warrants outstanding for the purchase of Shares,
(iii) the per Share exercise price of all such Options and Warrants, as adjusted
pursuant to the provisions of the respective Stock Option Plans and Warrant, and
(iv) the number of Shares subject to issuance upon exercise of all such Options
and Warrants, as adjusted pursuant to the provisions of the respective Stock
Option Plans and Warrant. The Company has not reduced the per Share exercise
price of the Options or Warrant, due to a reduction in the fair market value of
the Shares or otherwise, or established an option exchange program with respect
to any Stock Option Plan or Warrant.
3.4 Authority; Noncontravention. The Company has all requisite corporate
power and authority to enter into this Agreement and, subject to the approval of
the Merger and the adoption of this Agreement by the affirmative vote of the
holders of a majority of the Shares (the "Company Shareholder Approval"), to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement by the Company and the consummation by the Company of
the transactions contemplated by this Agreement have been duly authorized by all
necessary corporate action on the part of the Company, subject, in the case of
this Agreement, to the Company Shareholder Approval. This Agreement has been
duly executed and delivered by the Company and, assuming due and valid
authorization, execution and delivery hereof by Gambrinus, Parent and Purchaser,
constitutes a valid and binding obligation of the Company, enforceable against
the Company in accordance with its terms, except that (i) such enforcement may
be subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceedings therefor may be brought. The execution and delivery of this
Agreement do not, and the consummation by the Company of the transactions
contemplated by this Agreement and compliance by the Company with the provisions
of this Agreement will not, conflict with, or result in any violation of, or
default (with or without notice or lapse of time, or both) under, or give rise
to a right of termination, cancellation or acceleration of any material
obligation or to loss of a material benefit under, or result in the creation of
any material Liens in or upon any of the properties or assets of the Company or
any of its Subsidiaries under, any provision of (i) the Restated Articles of
Incorporation or Bylaws of the Company or the comparable organizational
documents of any of its Subsidiaries, (ii) any loan or credit agreement, note,
bond, mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to the Company or any of its
Subsidiaries or any of their respective properties or assets or (iii) subject to
the governmental filings and other matters referred to in the following
sentence, any (A) statute, law, ordinance, rule or regulation or (B) judgment,
order or decree applicable to the Company or any of its Subsidiaries or any of
their respective properties or assets, other than, in the case of clause (iii),
any such conflicts, violations, defaults, rights, losses or Liens that would not
have a Material Adverse Effect on the Company. No consent, approval, order or
authorization of, or registration, declaration or filing with, any Federal,
state or local government or any court, administrative agency or commission or
other governmental authority or agency, domestic or foreign (a "Governmental
Entity"), is required by or with respect to the Company or any of its
Subsidiaries in connection with the execution and delivery of this Agreement by
the Company or the consummation by the Company of the transactions contemplated
by this Agreement, except for (1) filings, permits, authorizations, consents and
approvals as may be required under the Hart Scott-Rodino Antitrust Improvements
Act of 1976, as amended
A-9
<PAGE> 105
(the "HSR Act"), (2) the filing with the SEC and the NASDAQ Stock Market, Inc.
of (A) a proxy statement relating to the Company Shareholder Approval (as
amended or supplemented from time to time, the "Proxy Statement") and (B) such
reports under the Securities Exchange Act of 1934 ("Exchange Act") as may be
required in connection with this Agreement and the transactions contemplated by
this Agreement, (3) the filing of an agreement of merger with the Secretary of
State pursuant to the GCL and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(4) such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws, (5) compliance with any applicable
requirements of the Exchange Act and (6) such other consents, approvals, orders,
authorizations, registrations, declarations and filings the failure of which to
be obtained or made would not have a Material Adverse Effect on the Company.
3.5 SEC Documents; Financial Statements.
(a) The Company has timely filed all required reports, schedules, forms,
statements and other documents with the SEC and any exchange on which the
Company Common Stock is listed since January 1, 1996 (the "SEC Documents"). As
of their respective dates, or if amended, as of the date of the last such
amendment, the SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or the Exchange Act, as the case may be, the rules and regulations of the SEC
promulgated thereunder applicable to such SEC Documents, and the rules and
regulations of any such exchange, and none of the SEC Documents contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(b) The Company has delivered to Parent true, correct and complete copies
of (i) the Company's audited financial statements set forth in Section 3.5(b) to
the Company Disclosure Schedule (the "Audited Financial Statements"), and (ii)
the Company's unaudited financial statements set forth in Section 3.5(b) to the
Company Disclosure Schedule (the "Unaudited Financial Statements"), certified,
on behalf of the Company, by the Company's chief financial officer. The Audited
Financial Statements and the Unaudited Financial Statements shall together be
referred to herein as the "Financial Statements." The Financial Statements
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by Form 10-Q of the Exchange Act) applied on
a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and fairly presented the financial position of the Company
and its consolidated Subsidiaries as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
Unaudited Financial Statements, to normal year-end audit adjustments and the
absence of footnotes).
3.6 Absence of Certain Changes or Events. Except as disclosed in the SEC
Documents filed and publicly available prior to the date of this Agreement (the
"Filed SEC Documents"), since the date of the most recent Financial Statements
and until the date hereof, the Company and its Subsidiaries have conducted their
respective businesses only in the Ordinary Course of Business, and there has not
been (i) any event, change or effect having a Material Adverse Effect on the
Company, (ii) any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to any of the
Company's capital stock, (iii) any split, combination or reclassification of any
of its capital stock or any issuance or the authorization of any issuance of any
capital stock, warrant, option or any other securities in respect of, in lieu of
or in substitution for shares of its capital stock, (iv) (a) any granting by the
Company or any of its Subsidiaries to any director or officer of the Company or
its Subsidiaries of any increase in compensation, except in the Ordinary Course
of Business or as was required under employment agreements in effect as of the
date of the most recent Financial Statements, (b) any granting by the Company or
any of its Subsidiaries to any officer of any increase in severance or
termination pay, except as was required under any employment, severance or
termination agreements, plans or arrangements in effect as of the date of the
most recent Financial Statements or (c) any entry by the Company or any of its
Subsidiaries into any employment, severance or termination agreement with any
officer; (v) any material damage, destruction or loss, whether or not covered by
insurance; (vi) any Indebtedness created, incurred, assumed or guaranteed,
involving more than $50,000 in the aggregate; (vii) any postponement or delay
(outside the Ordinary Course of Business) in
A-10
<PAGE> 106
any material respect of, the payment of accounts payable and other liabilities
or obligations; (viii) any cancellation, compromise, waiver or release of any
right or claim (or series of related rights or claims) involving more than
$50,000 in the aggregate; (ix) any action taken expressly prohibited by Section
5.1; (x) any acceleration, termination, modification, amendment, or cancellation
of any material Contract (or series of Contracts), including the Stroh Agreement
or any Contract with a distributor, to which the Company is a party or to which
it is bound; and (xi) the Company has not committed to do any of the foregoing.
3.7 No Undisclosed Liabilities. Except (a) as recognized or disclosed in
the Filed SEC Documents and (b) for liabilities and obligations (i) incurred in
the Ordinary Course of Business since the date of the most recent Financial
Statements, or (ii) pursuant to the terms of this Agreement, neither the Company
nor any of its Subsidiaries has incurred any material liabilities or obligations
of any nature, whether or not accrued, contingent or otherwise required by GAAP
to be recognized or disclosed on a consolidated balance sheet of the Company and
its Subsidiaries or in the notes thereto.
3.8 Litigation. There is no suit, action or proceeding pending or, to the
Knowledge of the Company, threatened against or affecting the Company or any of
its Subsidiaries, nor is there any judgment, decree, injunction, rule or order
of any Governmental Entity or arbitrator outstanding against, or, to the
Knowledge of the Company, investigation by any Governmental Entity involving,
the Company or any of its Subsidiaries.
3.9 Compliance with Laws. Each of the Company and its Subsidiaries is in
compliance with all applicable statutes, laws, ordinances, regulations, rules,
judgments, decrees and orders of any Governmental Entity (collectively, "Legal
Provisions") applicable to their business or operations, except for instances of
possible noncompliance that would not have a Material Adverse Effect on the
Company. Each of the Company and its Subsidiaries has in effect all Federal,
state, local and foreign governmental approvals, authorizations, certificates,
filings, franchises, licenses, notices, permits and rights, ("Permits"),
necessary for it to own, lease or operate its properties and assets and to carry
on its Business as now conducted, and there has occurred no default under, or
violation of, any such Permit, except for the lack of Permits and for defaults
under, or violations of, Permits, which lack, default or violation would not
have a Material Adverse Effect on the Company.
3.10 Absence of Changes in Benefit Plans; Labor Relations. Except as
disclosed in the Filed SEC Documents, since the date of the most recent
Financial Statements until the date hereof, there has not been any adoption or
amendment (or any agreement to adopt or amend) in any material respect by the
Company or any of its Subsidiaries of any material employment contract, material
collective bargaining agreement or any material bonus, pension, profit sharing,
deferred compensation, incentive compensation, stock ownership, stock purchase,
stock option, phantom stock retirement, vacation, severance, disability, death
benefit, hospitalization, medical or other material plan, arrangement or
understanding (whether or not legally binding) providing material benefits to
any current or former employee, officer or director of the Company or any
subsidiary (collectively, "Benefit Plans"). Except as disclosed in the Filed SEC
Documents, there exist, as of the date hereof, no material employment,
consulting or indemnification agreements, arrangements or understandings between
the Company or any of its Subsidiaries, and any current or former employee,
officer or director of the Company. Except as set forth in the Employee Handbook
of the Company, a complete and accurate copy of which has been provided to
Parent, there are no severance, termination or change of control plans,
agreements, arrangements or understandings between the Company or any of its
Subsidiaries, and any current or former employee, officer or director of the
Company. There are no collective bargaining or other labor union agreements to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound. Since January 1, 1996, neither the Company
nor any of its Subsidiaries has encountered any labor union organizing activity,
nor had any actual or threatened employee strikes, work stoppages, slowdowns or
lockouts.
3.11 ERISA Compliance.
(a) Section 4.12(i) to the Company Disclosure Schedule contains a list and
brief description of all material "employee pension benefit plans" (as defined
in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) (sometimes referred to herein as "Pension Plans"), material
"employee welfare benefit plans' (as defined in Section 3 (1) of ERISA) and all
other Benefit Plans
A-11
<PAGE> 107
maintained, or contributed to, by the Company or any of its Subsidiaries or any
person or entity that, together with the Company and its Subsidiaries, is
treated as a single employer under Section 414(b), (c), (m) or (o) of the
Internal Revenue Code of 1986, as amended (the "Code") (the Company and each
such other person or entity, (a "Commonly Controlled Entity") for the benefit of
any current or former employees, officers or directors of the Company or any of
its Subsidiaries. The Company has made available to Parent true, complete and
correct copies of (1) each Benefit Plan (or, in the case of any unwritten
Benefit Plans, descriptions thereof), (2) the most recent annual report on Form
5500 filed with the Internal Revenue Service with respect to each Benefit Plan
(if any such report was required), (3) the most recent summary plan description
for each Benefit Plan for which such summary plan description is required and
(4) each trust agreement and group annuity contract relating to any Benefit
Plan. Each Benefit Plan has been administered in all material respects in
accordance with its terms. Except as would not have a Material Adverse Effect on
the Company, the Company, each of its Subsidiaries and all the Benefit Plans are
in compliance with applicable provisions of ERISA and the Code.
(b) Except as would not have a Material Adverse Effect on the Company, all
Pension Plans have been the subject of determination letters from the Internal
Revenue Service to the effect that such Pension Plans are qualified and exempt
from Federal income taxes under Sections 401(a) and 501(a), respectively, of the
Code, and no such determination letter has been revoked nor has any event
occurred since the date of its most recent determination letter or application
therefor that would adversely affect its qualification or materially increase
its costs.
(c) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity has maintained, contributed or been obligated to contribute to
any Benefit Plan that is subject to Title IV of ERISA.
(d) Except as provided by this Agreement, no employee of the Company or any
of its Subsidiaries will be entitled to any additional compensation or benefits
or any acceleration of the time of payment or vesting of any compensation or
benefits under any Benefit Plan as a result of the transactions contemplated by
this Agreement.
3.12 Taxes.
(a) Except to the extent the failure to do so would not have a Material
Adverse Effect, all Tax Returns (including, for purposes of this Section 3.12,
all related reports, notices, declarations and information reports and returns)
required to have been filed by the Company and each of its Subsidiaries have
been timely filed (taking into account duly granted extensions) and are true,
correct and complete in all material respects. Except as disclosed in Section
3.12(a) of the Company Disclosure Schedule, (i) neither the Company nor any of
its Subsidiaries is currently the beneficiary of any extension of time within
which to file any tax return, and (ii) no claim is pending by any governmental
authority in a jurisdiction where the Company or any of its Subsidiaries does
not file Tax Returns that the Company or any of its Subsidiaries is or may be
subject to taxation by that jurisdiction.
(b) All Taxes of the Company or any of its Subsidiaries which have become
due (without regard to any extension of the time for payment and whether or not
shown on any tax return) have been paid, or adequate reserves therefor have been
established. Except to the extent the failure to do so would not have a Material
Adverse Effect, the Company and each of its Subsidiaries has withheld and paid
over all taxes required to have been withheld and paid over and has complied
with all information reporting and back-up withholding requirements relating to
Taxes. There are no liens with respect to taxes on any of the assets of the
Company or any of its Subsidiaries, other than liens for Taxes not yet due and
payable.
(c) No deficiencies exist or have been asserted (verbally or in writing)
with respect to Taxes of the Company or any of its Subsidiaries and neither the
Company nor any of its Subsidiaries has received notice (verbally or in writing)
that it has not filed a Tax Return or paid any Taxes required to be filed or
paid by it. No audit, examination, investigation, action, suit, claim or
proceeding relating to the determination, assessment or collection of any Tax of
the Company or any of its Subsidiaries is currently in process, pending or
threatened (verbally or in writing). Except as disclosed in Section 3.12(e) of
the Company Disclosure
A-12
<PAGE> 108
Schedule, no waiver or extension of any statute of limitations relating to the
assessment or collection of any Tax of the Company or any of its Subsidiaries is
in effect. There are no outstanding requests for rulings with any tax authority
relating to Taxes of the Company or any of its Subsidiaries.
(d) Neither the Company nor any of its Subsidiaries is or ever has been (i)
a party to any Tax sharing agreement or arrangement (formal or informal, verbal
or in writing), or (ii) a member of an affiliated group of corporations (within
the meaning of Code Section 1504) filing a consolidated federal income Tax
Return, or any similar group under analogous provisions of other law, other than
the affiliated group of which the Company is the common parent. Neither the
Company nor any of its Subsidiaries is liable for the Taxes of any other person
pursuant to Treasury regulations Section 1.1502-6 or other law, as a transferee
or successor, by contract or otherwise, other than for the Taxes of another
member of the affiliated group of which the Company is presently the common
parent.
(e) Neither the Company nor any of its Subsidiaries (i) has filed and
pending (nor will they have filed prior to the Closing, except with the prior
written consent of Parent) any claim for refund of any Taxes attributable to any
net operating or other loss or credit carryover or carryback, or (ii) has made
or prior to the Closing Date will make any election under Code Section
172(b)(3).
3.13 Parachute Payments. Neither the Company nor any of its Subsidiaries
has made any payments, obligated itself to make any payments or become a party
to any agreement that under any circumstance could obligate it or any successor
or assignee of it to make any payments that are not or will not be deductible
under Code Section 280G, or that would be subject to excise tax under Code
Section 4999. As a result of any of the transactions contemplated by this
Agreement, no employee, independent contractor, officer or director of the
Company or any of its Subsidiaries is or will become entitled to receive any
additional payment from the Company or any of its Subsidiaries, the Surviving
Corporation or any other person (a "Parachute Gross-Up Payment") in the event
that the excise tax of Section 4999(a) of the Code is imposed on such person.
The Company has not granted to any officer, director, independent contractor, or
employee of the Company any right to receive any Parachute Gross-Up Payment.
3.14 Information in Proxy Statement. The Proxy Statement (or any amendment
thereof or supplement thereto), at the date mailed to Company shareholders and
at the time of the meeting of Company shareholders to be held in connection with
the Merger, will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading, except that no representation is made by the Company with
respect to statements made therein based on information supplied in writing by
Parent or Purchaser expressly for inclusion in the Proxy Statement. The Proxy
Statement will comply in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder.
3.15 State Takeover Statutes. No California takeover statute or similar
statute applies or purports to apply to the Merger, or to this Agreement, or the
transactions contemplated hereby.
3.16 Rights Agreement. The Company Board of Directors has adopted
resolutions providing that the Rights Agreement shall be amended, and the Rights
Agreement shall be so amended, within two Business Days following the date
hereof, to (i) render the Rights Agreement inapplicable to the Merger and this
Agreement, (ii) ensure that (y) none of Parent, Purchaser or any of their
respective affiliates is an Acquiring Person (as defined in the Rights
Agreement) pursuant to the Rights Agreement solely by virtue of the execution of
this Agreement and the consummation of the Merger and (z) a Distribution Date or
a Shares Acquisition Date (as such terms are defined in the Rights Agreement)
does not occur by reason of the Merger, the execution of this Agreement, or the
consummation of the Merger and (iii) provide that the Final Expiration Date (as
defined in the Rights Agreement) shall occur immediately prior to the Effective
Time, and such amendment will not be further amended by the Company without the
prior consent of Parent in its sole discretion.
3.17 Brokers. No broker, investment banker, financial advisor or other
person, other than Morgan Stanley, the fees and expenses of which will be paid
by the Company, is entitled to any broker's, finder's,
A-13
<PAGE> 109
financial advisor's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company. The Company has furnished to Parent true and complete
copies of all agreements under which any such fees or expenses are payable and
all indemnification and other agreements related to the engagement of the
persons to whom such fees are payable.
3.18 Title to Assets. The Company and its Subsidiaries have good and
marketable title to, or a valid leasehold interest in, the properties and assets
used by them, in the Business, or shown on the most recent Financial Statements
provided to the Parent or acquired after the date thereof, free and clear of any
and all Liens, except for such Liens as would not have a Material Adverse Effect
and taxes not yet due.
3.19 Product Liability. With respect to the Company or its Subsidiary, (i)
there is no written notice, demand, claim, inquiry, hearing, proceeding, written
notice of violation or investigation of a civil, criminal or administrative
nature by or before any Governmental Entity against or involving any product,
substance or material manufactured, produced or distributed or sold by or on
behalf of the Company (collectively, a "Product") which is pending or, to the
Knowledge of the Company, threatened, resulting from a defect or alleged defect
in design, manufacture, materials or workmanship of any Product, or any failure
or alleged failure to warn, or from any breach or alleged breach of implied
warranties or representations, except for such notices, demands, claims,
inquiries, hearings or proceedings that would not have a Material Adverse
Effect.
3.20 Material Contracts. The Company Disclosure Schedule sets forth in
Section 3.20 a true and correct list of all material Contracts of the Company as
of the date of this Agreement, and identifies those material Contracts entered
into since the date of the Financial Statements. With respect to each such
Contract, including the Stroh Agreement: (a) the Contract is legal, valid,
binding, enforceable and in full force and effect; (b) the consummation of the
transactions contemplated hereby will in no way cause the Contract to no longer
be legal, valid, binding, enforceable, and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (c) to
the Knowledge of the Company, no party is in material breach or default, and no
event has occurred which with notice or lapse of time would constitute a
material breach or default, or permit termination, modification, or
acceleration, under the Contract; (d) to the Knowledge of Company, no party has
repudiated any material provision of the Contract; (e) the Company has not
received notice of any plan or intention of any other party to any Contract to
exercise any right to cancel or terminate any such Contract, and the Company
does not have any Knowledge of any condition or state of facts which would
justify the exercise of any such right; and (f) the Company does not currently
contemplate, or have any Knowledge that any other Person currently contemplates,
any material amendment or change to any material Contract.
3.21 Title to Intellectual Property.
(a) Intellectual Property. As of the date hereof, the Intellectual Property
of the Company includes without limitation the registered trademarks and service
marks, the common law trademarks and service marks, the reserved trade names and
the registered copyrights listed in Section 3.21 of the Company Disclosure
Schedule.
(b) Ownership. The Company (i) is the sole owner and holder of, or has the
legal right to use, all Intellectual Property, or can obtain such right on
commercially reasonable terms which will not have a Material Adverse Effect;
(ii) has full and unrestricted legal and equitable title to the Intellectual
Property, free and clear of any material liens, pledges, claims and encumbrances
or can obtain such title or rights on commercially reasonable terms which will
not have a Material Adverse Effect. All such rights of the Company in the
Intellectual Property are valid, subsisting and enforceable. Section 3.21 of the
Company Disclosure Schedule lists all registered trademarks and service marks,
all common law trademarks and service marks, all reserved trade names and all
registered copyrights, which are used in the Business of the Company or which
are otherwise necessary for the conduct of the Business as presently conducted.
(c) Trade Secret Protection. To the Company's Knowledge, trade secrets of
the Company, including recipes for its malt beverage Products, (i) have at all
times been maintained in confidence and (ii) have been disclosed by the Company
only to employees, contractors and consultants having "a need to know" the
A-14
<PAGE> 110
contents thereof in connection with the performance of their duties to the
Company, except for such failures to maintain in confidence or disclosures that
would not have a Material Adverse Effect.
(d) Personnel Agreements. All personnel, including employees, agents,
consultants, and contractors have executed, upon their employment or association
with the Company, a nondisclosure agreement providing that such employee shall
keep confidential all confidential information of the Company.
(e) Absence of Claims. No claim or litigation has been asserted and the
Company has not received notice of any threatened claim or litigation by any
person or entity contesting the right of the Company to use, or the validity or
enforceability of the Intellectual Property or challenging or questioning the
validity or effectiveness of any license or agreement pertaining thereto or
asserting misuse thereof, and to the Company's Knowledge, use of such
Intellectual Property by the Company does not materially infringe on the rights
of any person or entity or violate any license or other agreement applicable
thereto by any person or entity to the use of the Intellectual Property, and the
Company has no Knowledge of any valid basis for any such claim. The Company has
not asserted any claim or litigation concerning infringement of Intellectual
Property by third parties, and the Company has no Knowledge of any infringement
of Intellectual Property by third parties.
(f) Third-Party Interests. The Company has not granted, transferred, or
assigned any right or interest in the Intellectual Property to any person or
entity. Other than those entered into in the Ordinary Course of Business, there
are no contracts, agreements, licenses, or other commitments or arrangements in
effect with respect to the marketing, distribution, licensing, or promotion of
the Intellectual Property by any independent person, distributor, sublicensor,
or other remarketer or sales organization.
3.22 Distributors and Distributorship Agreements. The Company has
identified in Section 3.22 of the Company Disclosure Schedule all the
distributors of its Products ("Distributor") and the name and address of each.
There is a written agreement for each such Distributor except as set forth on
the Company Disclosure Schedule. Upon the execution hereof by Company, Company
shall furnish Purchaser with a copy of each written Contract with any
Distributor. With respect to each such Contract with a distributor: (a) the
Contract is legal, valid, binding, enforceable and in full force and effect; (b)
the consummation of the transactions contemplated hereby will in no way cause
the Contract to no longer be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (c) to the Knowledge of the Company, no party
is in material breach or default, and no event has occurred which with notice or
lapse of time would constitute a material breach or default, or permit
termination, modification or acceleration, under the Contract; (d) to the
Knowledge of Company, no party has repudiated any material provision of the
Contract; (e) the Company has not received notice of any plan or intention of
any other party to any Contract to exercise any right to cancel or terminate any
such Contract, and the Company does not have any Knowledge of any condition or
state of facts which would justify the exercise of any such right; and (f) the
Company does not currently contemplate, or have any Knowledge that any other
Person currently contemplates, any material amendment or change to any such
material Contract.
3.23 Real Property.
(a) Neither the Company nor any of its Subsidiaries owns any real property.
Schedule 3.23 of the Company Disclosure Schedule accurately lists and correctly
describes all material real properties of which the Company or any of its
Subsidiaries is the lessee and, for each of those properties, the address
thereof, the type and square footage of each structure located thereon the
Company or a Subsidiary is leasing and the expiration date of its lease and the
use thereof in the Business of the Company and the Subsidiaries.
(b) The Company has provided Parent with true, correct and complete copies
of all leases under which the Company or a Subsidiary is leasing each of the
properties listed in Section 3.23 of the Company Disclosure Schedule as being
leased and, except as accurately set forth in Section 3.23 of the Disclosure
Schedule, (i) each of those leases is, to the Knowledge of the Company, valid
and binding on the lessor party thereto, and (ii) the lessee party thereto has
not sublet any of the leased space to any Person.
3.24 Insurance. The Company has provided Parent with: (i) an accurate list
of all insurance policies carried by each of the Company and its Subsidiaries;
and (ii) true, complete and correct copies of all insurance policies carried by
each of the Company and its Subsidiaries which are in effect, all of which
A-15
<PAGE> 111
currently are in full force and effect. No insurance carried by the Company or
any of its Subsidiaries has been canceled by the insurer during the past five
years.
3.25 Customers, Suppliers. As of the date of this Agreement, to the
Company's Knowledge, all suppliers material to the Company will continue to sell
the products and services currently sold to it, and all customers that are
material to the Company will continue purchasing, without significant
reductions, Products from the Company.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND PURCHASER
Parent, Purchaser and Gambrinus, jointly and severally, represent and
warrant to the Company as follows:
4.1 Organization, Standing and Corporate Power. Each of Parent, Purchaser
and Gambrinus is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it is incorporated and has
all requisite corporate power and authority to carry on its business as now
being conducted except where the failure to be so organized, existing and in
good standing or to have such power and authority would not have a material
adverse effect on Parent, Purchaser or Gambrinus. Each of Parent, Purchaser and
Gambrinus is duly qualified or licensed to do business and is in good standing
in each jurisdiction in which the nature of its business or the ownership,
leasing or operation of its properties makes such qualification or licensing
necessary, other than in such jurisdictions where the failure to be so qualified
or licensed or to be in good standing would not have a material adverse effect
on Parent, Purchaser or Gambrinus. Parent has delivered or made available to the
Company complete and correct copies of its Certificate of Incorporation and
By-Laws and the Certificate of Incorporation and Bylaws of Purchaser, in each
case as amended to the date hereof.
4.2 Authority: Noncontravention. Parent, Purchaser and Gambrinus have all
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation by Parent, Purchaser and
Gambrinus of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of Parent, Purchaser
and Gambrinus. This Agreement has been duly executed and delivered by Parent,
Purchaser and Gambrinus and assuming due and valid authorization, execution and
delivery hereof of the Company, constitutes a valid and binding obligation of
each such party, enforceable against each such party in accordance with its
terms, except that (i) such enforcement may be subject to applicable bankruptcy,
insolvency or other similar laws, now or hereafter in effect, affecting
creditors' rights generally, and (ii) the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought. The execution and delivery of this Agreement do not,
and the consummation by Parent, Purchaser and Gambrinus of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not, conflict with, or result in any violation of, or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to loss
of a material benefit under, or result in the creation of any Liens in or upon
any of the properties or assets of Parent, Purchaser or Gambrinus under, any
provision of (i) the Certificate of Incorporation or Bylaws of Parent, Purchaser
or Gambrinus, (ii) any loan or credit agreement, note, bond, mortgage,
indenture, lease or other agreement, instrument, permit, concession, franchise
or license applicable to Parent, Purchaser or Gambrinus or their respective
properties or assets or (iii) subject to the governmental filings and other
matters referred to in the following sentence, any (A) statute, law, ordinance,
rule or regulation or (B) judgment, order or decree applicable to Parent,
Purchaser or Gambrinus or any of their respective properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts, violations,
defaults, rights or Liens that would not have a material adverse effect on
Parent. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent, Purchaser or Gambrinus in connection with the execution and
delivery of this Agreement by Parent,
A-16
<PAGE> 112
Purchaser or Gambrinus or the consummation by Parent and Purchaser of the
transactions contemplated by this Agreement, except for (1) filings, permits,
authorizations, consents and approvals as may be required under the HSR Act, (2)
the filing with the SEC of such reports under the Exchange Act as may be
required in connection with this Agreement and the transactions contemplated by
this Agreement, (3) the filing of an agreement of merger with the Secretary of
State pursuant to the GCL and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(4) such filings and approvals as may be required by any applicable state
securities, "blue sky" or takeover laws, (5) compliance with any applicable
requirements of the Exchange Act and (6) such other consents, approvals, orders,
authorizations, registrations, declarations and filings, the failure of which to
be obtained or made would not have a material adverse effect on Parent.
4.3 Information in Proxy Statement. None of the information supplied by
Parent, Purchaser or Gambrinus in writing expressly for inclusion or
incorporation by reference in the Proxy Statement (or any amendment thereof or
supplement thereto) will, at the date mailed to shareholders and at the time of
the meeting of shareholders to be held in connection with the Merger, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
4.4 Interim Operations of Purchaser. Purchaser was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
4.5 Brokers. No broker, investment banker, financial advisor or other
person, other than Chase Securities Inc., the fees of which shall be paid by the
Parent or Purchaser, is entitled to any broker's, finder's, financial advisor's
or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent, Purchaser or Gambrinus.
4.6 Financing. At the Effective Time, Parent, Purchaser and Gambrinus will
have available all the funds necessary to perform their respective obligations
under this Agreement, including without limitation payment in full for all
Shares outstanding at the Effective Time and the payment of all expenses in
connection herewith. Parent and Purchaser have received, and have furnished to
the Company, true and complete copies of the written commitment from a third
Person (the "Financing Commitment") with respect to the financing of the Merger
(the "Financing"). The aggregate proceeds of the Financing, together with
internal corporate funds of Parent, Purchaser or Gambrinus, are sufficient to
acquire all of the Shares in the Merger and to pay anticipated expenses in
connection therewith. The Financing Commitment is valid, binding and enforceable
in accordance with their terms and have not been revoked as of the date hereof.
Nothing has come to the attention of Parent, Purchaser or Gambrinus which would
cause either Parent or Purchaser to believe that the proceeds of the Financing
will not be available to them at the Effective Time. Parent will not enter into
any amendments or supplements to the Financing Commitment that would materially
reduce the likelihood of obtaining the Financing.
4.7 Share Ownership. Neither Parent, Purchaser nor Gambrinus are the
beneficial owner of any shares of capital stock of the Company.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1 Interim Operations of the Company. After the date hereof and until the
earlier of (x) termination of this Agreement in accordance with Article VIII
hereof or (y) consummation of the Merger, the Company shall not, and shall not
permit any of its Subsidiaries to, engage in any practice, take any action, or
enter into any transactions other than (i) in the Ordinary Course of Business,
(ii) as otherwise contemplated by this Agreement or (iii) as agreed in writing
by Parent. Without limiting the generality of the foregoing, the Company shall
not, and shall not permit any of its Subsidiaries to:
(a) other than dividends and distributions by a wholly owned
subsidiary of the Company to its parent (or pursuant to the Rights
Agreement) (x) declare, set aside or pay any dividends on, or make any
A-17
<PAGE> 113
other distributions (whether in cash, stock or property), in respect of,
any of its capital stock, (y) split, combine or reclassify any of its
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its capital stock
(other than (i) the issuance of shares of Company Common Stock upon the
exercise of Options outstanding on the date of this Agreement and in
accordance with their present terms or (ii) the issuance of shares of
Company Common Stock in accordance with the Stock Purchase Plan) or (z)
purchase, redeem or otherwise acquire any shares of capital stock of the
Company or any of its Subsidiaries or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of
its capital stock, any other voting securities or any securities
convertible into, or any rights, warrants or options to acquire, any such
shares, voting securities or convertible securities (other than (i)
pursuant to the Rights Agreement or (ii) the issuance of shares of Company
Common Stock upon the exercise of Options outstanding on the date of this
Agreement and in accordance with their present terms or (iii) the issuance
of shares of Company Common Stock in accordance with the Stock Purchase
Plan);
(c) amend its Restated Articles of Incorporation, Bylaws or other
comparable charter or organizational documents;
(d) except in the Ordinary Course of Business, in any material
respect, modify, amend or terminate any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument to which the
Company or any of its Subsidiaries is a party or by which any of them or
any of their properties or assets may be bound, including the Stroh
Agreement or any Contract with any transporter, distributor or purchaser of
Products;
(e) acquire or agree to acquire (including, without limitation, by
merger, consolidation or acquisition of stock or assets) any business,
including through the acquisition of any interest in any corporation,
partnership, joint venture, association or other business organization or
division thereof;
(f) sell, lease, license, mortgage or otherwise encumber or otherwise
dispose of any of its properties or assets, other than selling its
inventory and trade receivables in the Ordinary Course of Business;
(g) (y) incur any Indebtedness or guarantee any such Indebtedness of
another person, issue or sell any debt securities or warrants or other
rights to acquire any debt securities of the Company or any of its
Subsidiaries, or guarantee any debt securities of another person, other
than short-term bank financing in the Ordinary Course of Business or (z)
make any loans, advances or capital contributions to, or investments in,
any other Person;
(h) make or agree to make one or more new financial payments or
commitments, whether for capital expenditures, marketing or otherwise,
other than payments or commitments (individually not in excess of $100,000)
made pursuant to the execution by the Company in the Ordinary Course of
Business of a mutually agreeable 1998 revised budget to be prepared by the
Company promptly following the execution of this Agreement and other than
the payment of the fees and expenses of counsel and financial advisors
relating to this Agreement and the transactions contemplated hereby;
(i) except as required to comply with applicable law or agreements,
plans or arrangements existing on the date hereof, (A) adopt, enter into,
terminate or amend in any material respect any employment contract,
collective bargaining agreement or Benefit Plan, (B) increase in any manner
the compensation or fringe benefits of, or pay any bonus to, any director,
officer or employee (except for normal increases of cash compensation or
cash bonuses in the Ordinary Course of Business consistent with past
practice), (C) pay any benefit not provided for under any Benefit Plan or
any other benefit plan or arrangement of the Company or its Subsidiaries,
(D) increase in any manner the severance or termination pay of any officer
or employee, (E) except as permitted in clause (B), grant any awards under
any bonus, incentive, performance or other compensation plan or arrangement
or Benefit Plan (including the grant of stock options, stock appreciation
rights, stock based or stock related awards, performance units or
restricted stock or the removal of existing restrictions in any Benefit
Plans or agreements or awards made thereunder), (F) take any action to fund
or in any other way secure the payment of compensation or
A-18
<PAGE> 114
benefits under any employee plan, agreement, contract or arrangement or
Benefit Plan, or (G) take any action to accelerate the vesting of, or cash
out rights associated with, any Options;
(j) enter into any Contract of a nature that would be required to be
filed as an exhibit to Form 10-K under the Exchange Act;
(k) except as required by GAAP, make any material change in accounting
methods, principles or practices;
(l) make any material Tax election or enter into any settlement or
compromise with respect to any material income Tax liability;
(m) hire any new employees; or
(n) authorize any of, or commit or agree to take any of, the foregoing
actions.
5.2 No Solicitation.
(a) From the date of this Agreement until the earlier of termination of
this Agreement or the Effective Time, the Company shall not, nor shall it
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it to, directly or indirectly, (i) solicit,
initiate or knowingly encourage the submission of any Takeover Proposal (as
defined below) or (ii) participate in any discussions or negotiations regarding,
or furnish to any person any nonpublic information with respect to, or take any
other action designed or reasonably likely to facilitate any inquiries or the
making of any proposal that constitutes a Takeover Proposal; provided, however,
that if, at any time prior to the Effective Time, the Company Board of Directors
determines in good faith, after consultation with outside counsel, that it is
necessary to do so in order to comply with its fiduciary duties to the Company's
shareholders under applicable law, the Company may, in response to a Takeover
Proposal which was not solicited subsequent to the date hereof, and subject to
compliance with Section 5.2(c), (x) furnish information with respect to the
Company to any person pursuant to a confidentiality agreement with terms no more
favorable to such person than the terms of the Confidentiality Agreement (as
hereinafter defined) and (y) participate in discussions and negotiations
regarding such Takeover Proposal. For purposes of this Agreement, "Takeover
Proposal" means any inquiry, proposal or offer from any person relating to any
direct or indirect acquisition or purchase of a substantial amount of assets of
the Company and its Subsidiaries taken as a whole (other than inventory in the
Ordinary Course of Business), or more than a 20% interest in the total voting
securities of the Company or any tender offer or exchange offer that if
consummated would result in any person beneficially owning 20% or more of any
class of equity securities of the Company or any merger, consolidation, business
combination, sale of substantially all assets, recapitalization, liquidation,
dissolution or similar transaction involving the Company, other than the
transactions contemplated by this Agreement.
(b) Except as set forth in this Section 5.2, neither the Company Board of
Directors nor any committee thereof shall (i) withdraw or modify, or propose
publicly to withdraw or modify, in a manner adverse to Parent, the approval or
recommendation by such Company Board of Directors or such committee of the
Merger or this Agreement, (ii) approve or recommend, or propose publicly to
approve or recommend, any Takeover Proposal or (iii) cause the Company to enter
into any letter of intent, agreement in principle, acquisition agreement or
other similar agreement (each, an "Acquisition Agreement") related to any
Takeover Proposal. Notwithstanding the foregoing, in the event that prior to the
Effective Time, the Company Board of Directors determines in good faith, after
consultation with outside counsel, that it is necessary to do so in order to
comply with its fiduciary duties to the Company's shareholders under applicable
law, the Company Board of Directors may, in response to an unsolicited Superior
Proposal (as defined below) (subject to the following proviso), (x) withdraw or
modify or propose publicly to withdraw or modify its approval or recommendation
of the Merger or this Agreement, (y) approve or recommend any such Superior
Proposal if concurrently with such approval or recommendation the Company
terminates this Agreement or (z) cause the Company to enter into an Acquisition
Agreement related to any Superior Proposal if concurrently with the execution of
such Acquisition Agreement the Company terminates this Agreement; provided, that
in the case of clauses (y) and (z), only at a time that is after the later of
(i) the second Business Day following Parent's receipt of written notice
advising Parent that the Company Board of Directors has received a Superior
Proposal,
A-19
<PAGE> 115
specifying the material terms and conditions of such Superior Proposal and
identifying the person making such Superior Proposal and (ii) in the event of
any amendment to the price or any material term of a Superior Proposal, one
Business Day following Parent's receipt of written notice containing the
material terms and conditions of such amendment (it being understood that each
further amendment to any material terms or conditions of a Superior Proposal
shall necessitate an additional written notice to Parent and an additional one
Business Day period prior to which the Company can take the actions set forth in
clauses (y) and (z) above). For purposes of this Agreement, a "Superior
Proposal" means any bona fide Takeover Proposal made by a third party (i) that
is on terms which the Company Board of Directors determines in its good faith
judgment (based on consultation with a nationally recognized investment banking
firm) to be more favorable to the Company's shareholders than the Merger and
(ii) for which financing, to the extent required, is then committed, or which,
in the good faith judgment of the Company Board of Directors, is capable of
being readily obtained by such third party.
(c) In addition to the obligations of the Company set forth in paragraphs
(a) and (b) of this Section 5.2, the Company shall promptly advise Parent orally
and in writing of any request for nonpublic information (except in the Ordinary
Course of Business and not in connection with a possible Takeover Proposal) or
of any Takeover Proposal known to it, the material terms and conditions of such
request or Takeover Proposal and the identity of the person making such request
or Takeover Proposal. The Company will promptly inform Parent of any change in
the material terms and conditions (including amendments or proposed amendments)
of any such request or Takeover Proposal.
(d) Nothing contained in this Section 5.2 or in any other provision of this
Agreement shall prohibit the Company or the Company Board of Directors from (i)
taking and disclosing to the Company's shareholders a position with respect to a
tender or exchange offer by a third party pursuant to Rule 14d-9 or Rule 14e-2
promulgated under the Exchange Act or (ii) making such disclosure to the
Company's shareholders as, in the good faith judgment of the Company Board of
Directors, after consultation with outside counsel, is necessary for the Company
Board of Directors to comply with its fiduciary duties under applicable law.
(e) The Company agrees that it will immediately cease and cause to be
terminated any existing activities, discussions or negotiations with any parties
conducted prior to the date of this Agreement with respect to any Takeover
Proposal.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Shareholder Approval; Preparation of Proxy Statement.
(a) The Company shall in accordance with applicable law, as soon as
practicable, duly call, give notice of, convene and hold a meeting of its
shareholders (the "Shareholders Meeting") for the purpose of obtaining the
Company Shareholder Approval. At the Shareholders Meeting the Company shall use
its commercially reasonable efforts to solicit from shareholders of the Company
proxies in favor of the Merger and shall take all other action necessary or, in
the reasonable opinion of Purchaser, advisable to secure any vote or consent of
shareholders required by the GCL to effect the Merger. Subject to the fiduciary
obligations of the Company Board of Directors under applicable law, the Company
shall, through the Company Board of Directors, recommend to its shareholders
that the Company Shareholder Approval be given.
(b) The Company shall, as soon as practicable, but in no event later than
15 Business Days after the date of this Agreement, prepare and file a
preliminary Proxy Statement with the SEC and shall use its best efforts to
respond to any comments of the SEC or its staff and to cause the Proxy Statement
to be mailed to the Company's shareholders as promptly as practicable after
responding to all such comments to the satisfaction of the staff. The Company
shall notify Parent promptly of the receipt of any comments from the SEC or its
staff and of any request by the SEC or its staff for amendments or supplements
to the Proxy Statement or for additional information and will supply Parent with
copies of all correspondence between the Company or any of its representatives,
on the one hand, and the SEC or its staff, on the other hand, with respect to
the Proxy Statement or the Merger. If at any time prior to the Shareholders
Meeting there shall occur any event that
A-20
<PAGE> 116
should be set forth in an amendment or supplement to the Proxy Statement, the
Company shall promptly prepare and mail to its shareholders such an amendment or
supplement.
(c) Parent shall provide the Company with the information concerning
Gambrinus, Parent and Purchaser required by applicable securities laws to be
included in the Proxy Statement.
6.2 Access to Information; Confidentiality. The Company shall, and shall
cause each of its Subsidiaries to, afford to Parent and to the officers,
employees, accountants, counsel and other representatives of Parent reasonable
access, during normal business hours, upon reasonable notice and during the
period prior to the Effective Time, to all their properties, books, contracts,
commitments and records and, during such period, the Company shall, and shall
cause each of its Subsidiaries to, make available promptly to Parent upon
request (a) a copy of each report, schedule, registration statement and other
document filed or received by it during such period pursuant to the requirements
of the federal or state securities laws or the federal Tax laws, or state, local
or foreign Tax laws and (b) all other information concerning its Business,
properties and personnel as Parent may reasonably request. Except as otherwise
agreed to by the Company, and notwithstanding termination of this Agreement, the
terms of the Confidentiality Agreement dated February 26, 1998, between
Gambrinus and the Company, as amended (the "Confidentiality Agreement") shall
apply to all information about the Company which has been furnished under this
Agreement by the Company to Gambrinus, Parent or Purchaser. In the event this
Agreement is terminated for any reason, Gambrinus and Parent shall, in
accordance with the provisions of the Confidentiality Agreement, promptly return
or destroy all information about the Company which has been furnished under this
Agreement.
6.3 Commercially Reasonable Efforts. Upon the terms and subject to the
conditions set forth in this Agreement, each of the parties agrees to use all
commercially reasonable efforts to take, or cause to be taken (including
Gambrinus causing Parent or Purchaser to take), all actions, and to do, or cause
to be done, and to assist and cooperate with the other parties in doing, all
things necessary, proper or advisable to consummate and make effective, in the
most expeditious manner practicable, the Merger and the other transactions
contemplated by this Agreement, including using commercially reasonable efforts
to take the following actions: (i) the taking of all reasonable acts necessary
to cause the conditions to the Merger to be satisfied, (ii) the obtaining of all
necessary actions or nonactions, waivers, consents and approvals from
Governmental Entities and the making of all necessary registrations and filings
(including filings with Governmental Entities, if any) and the taking of all
reasonable steps as may be necessary to avoid an action or proceeding by any
Governmental Entity, (iii) the obtaining of all necessary consents, approvals or
waivers from third parties, (iv) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, including seeking to
have any stay or temporary restraining order entered by any court or other
Governmental Entity vacated or reversed, and (v) the execution and delivery of
any additional instruments necessary to consummate the transactions contemplated
by, and to fully carry out the purposes of, this Agreement. Each of the Company,
Gambrinus, Purchaser and Parent shall take all reasonable actions necessary to
file, as soon as practicable, notifications under the HSR Act, or under
comparable merger notification laws of non-U.S. jurisdictions and to respond as
promptly as practicable to any inquiries received from the Federal Trade
Commission and the Antitrust Division of the Department of Justice or the
authorities of such other jurisdiction for additional information or
documentation and to respond as promptly as practicable to all inquiries and
requests received from any State Attorney General or other Governmental Entity
in connection with antitrust matters. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, the proper officers and directors of the Company, Gambrinus,
Parent and Purchaser shall use all reasonable efforts to take, or cause to be
taken, all such necessary actions.
6.4 Notification of Certain Matters. The Company shall give prompt notice
to Parent and Purchaser and Parent and Purchaser shall give prompt notice to the
Company, of (i) the occurrence or non-occurrence of any event whose occurrence
or non-occurrence would be likely to cause either (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Effective Time or (y) any
condition to Closing set forth in Article VII to be unsatisfied in any material
respect at any time from the date hereof to the Effective Time (except to the
extent it refers to a specific date) and (ii) any material failure of the
Company, Purchaser or Parent, as the case may be, or any
A-21
<PAGE> 117
officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 6.4 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice or the representations or warranties of the
parties or the conditions to the obligations of the parties hereto.
6.5 Fees and Expenses.
(a) Except as expressly provided below in this Section 6.5, all fees, costs
and expenses incurred in connection with the Merger, this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such fees, costs or expenses, whether or not the Merger is consummated.
(b) The Company shall pay, or cause to be paid, in same day funds to Parent
the amount of 2% of the aggregate Merger Consideration (the "Termination Fee")
under the circumstances and at the times set forth as follows:
(i) if the Company terminates this Agreement under Section 8.1(e), the
Company shall pay the Termination Fee simultaneously with such termination;
(ii) if Parent or Purchaser terminates this Agreement under Section
8.1(d) and in addition, if within six months after such termination the
Company shall enter into an Acquisition Agreement providing for a Company
Acquisition or the Company shall within such six months recommend to its
shareholder that they accept a Company Acquisition of the type referred to
in Section 6.5(d)(iii), the Company shall pay the Termination Fee
simultaneously with the entering into of such Acquisition Agreement or
making of such recommendation;
(iii) if, at the time of any termination of this Agreement pursuant to
Section 8.1(b)(i) (as a result of a failure to obtain Company Shareholder
Approval), or Section 8.1 (c), any person shall have publicly announced a
proposal to effect a Company Acquisition and if, within six months after
such termination, the Company shall enter into an Acquisition Agreement
providing for a Company Acquisition or the Company shall recommend to its
shareholders that they accept a Company Acquisition of the type referred to
in Section 6.5(d)(iii), the Company shall pay the Termination Fee
simultaneously with the entering into of such Acquisition Agreement or
making of such recommendation; and
(c) If this Agreement is terminated pursuant to Section 8.1(c) (i.e. breach
or failure by Company of representation, warranty or covenant), ("Company
Breach") then promptly, but in no event later than two Business Days after the
date of such termination, the Company shall pay to the Parent all of Parent's
(and its affiliates) reasonably documented out-of-pocket expenses paid to third
parties, up to an aggregate of $500,000, in connection with the transaction,
which amount when paid shall be credited against the Termination Fee if and when
any shall become due under Section 6.5(b)(iii) above; provided, however, the
payment of expenses pursuant to this Section 6.5(c) shall be made only in the
event a Company Breach arises out of the action or inaction of the Company, as
opposed to a Company Breach which arises out of the action or inaction of a
third party in respect to the Company.
(d) For purposes of this Agreement a "Company Acquisition" shall mean any
of the following transactions (i) a merger, consolidation, business combination
or a recapitalization pursuant to which the shareholders of the Company
immediately preceding such transaction hold less than 50% of the equity
interests in the surviving or resulting entity of such transaction (other than
the transactions contemplated by this Agreement); (ii) a sale by the Company of
assets (excluding the sale of the Company's products in the Ordinary Course of
Business) representing in excess of 50% of the fair market value of the Company
immediately prior to such sale or the issuance by the Company to any person or
group of shares representing in excess of 50% of the then outstanding shares of
capital stock of the Company (other than in connection with an underwritten
public offering); or (iii) the acquisition by any person or group, by way of a
tender offer, exchange offer, or by way of open market purchases of beneficial
ownership of 50% or more of the then outstanding shares of capital stock of the
Company.
A-22
<PAGE> 118
(e) If this Agreement is terminated pursuant to Section 8.1(f) (i.e. breach
or failure by Parent of representation, warranty or covenant) ("Parent Breach"),
then promptly, but in no event later than two Business Days after the date of
such termination, Parent or Gambrinus, shall pay to the Company all the
Company's reasonably documented out-of-pocket expenses paid to third parties, up
to an aggregate of $500,000, in connection with the transaction; provided,
however, the payment of expenses pursuant to this Section 6.5(e) shall be made
only in the event a Parent Breach arises out of the action or inaction of the
Parent, Purchaser or Gambrinus, as opposed to a Parent Breach which arises out
of the action or inaction of a third party in respect to the Parent, Purchaser
or Gambrinus.
6.6 Indemnification and Directors' and Officers' Insurance.
(a) From and after the consummation of the Offer, Gambrinus and Parent
will, and will cause the Surviving Corporation (or any successor to the
Surviving Corporation) to, fulfill and honor in all respects the obligations of
the Company pursuant to (i) each indemnification agreement in effect at such
time between the Company and each person who is or was a director or officer of
the Company at or any time prior to the Effective Time and (ii) any
indemnification provisions under the Company's Restated Articles of
Incorporation or Bylaws as each is in effect on the date of this Agreement (the
persons to be indemnified pursuant to the agreements or provisions referred to
in clauses (i) and (ii) of this Section 6.6(a) shall be referred to as,
collectively, the "Indemnified Parties"). The Articles of Incorporation and
Bylaws of the Surviving Corporation shall contain the provisions with respect to
indemnification and exculpation from liability set forth in the Company's
Articles of Incorporation and Bylaws on the date of this Agreement, which
provisions shall not be amended, repealed or otherwise modified for a period of
six years after the Effective Time in any manner that would adversely affect the
rights thereunder of any Indemnified Party.
(b) Gambrinus, Parent or the Surviving Corporation shall maintain or extend
the Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of not less than six years after the Effective Time;
provided, that Parent may substitute therefor policies of substantially
equivalent coverage and amounts, including extension or tail coverage policies,
containing terms substantially as favorable to such former directors or
officers; provided, further, that if the existing D&O Insurance expires, is
terminated or canceled during such period, Parent or the Surviving Corporation
will use all reasonable efforts to obtain substantially similar D&O Insurance
coverage; provided, further, however, that in no event shall Parent be required
to pay aggregate premiums for insurance under this Section 6.6(b) in excess of
150% of the average of the aggregate premiums paid by the Company in 1995, 1996
and 1997 on an annualized basis for such purpose (the "Average Premium"), which
true and correct amounts are set forth in Section 6.6(b) of the Company
Disclosure Schedule; and provided, further, that if Parent or the Surviving
Corporation is unable to obtain the amount of insurance required by this Section
6.6(b) for such aggregate premium, Gambrinus, Parent or the Surviving
Corporation shall obtain as much insurance as can be obtained for an annual
premium not in excess of 150% of the Average Premium.
(c) This Section 6.6 will survive the consummation of the Merger at the
Effective Time, is intended to be for the benefit of, and enforceable by, the
Company, Parent, the Surviving Corporation and each Indemnified Party and such
Indemnified Party's heirs and representatives, and shall be binding on all
successors and assigns of Parent and the Surviving Corporation.
6.7 Certain Litigation. The Company agrees that it shall not settle any
litigation commenced after the date hereof against the Company or any of its
directors by any shareholder of the Company relating to the Merger or this
Agreement without the prior written consent of Parent, which consent shall not
to be unreasonably withheld.
6.8 Purchaser Compliance. Gambrinus shall cause Parent and Purchaser to
comply with all of their respective obligations under this Agreement.
6.9 Shareholder Agreement. Each of the Persons identified in Section 6.9
of the Company Disclosure Schedule shall, contemporaneously with the execution
of this Agreement, enter into a Stockholder Agreement (the "Stockholder
Agreement") with the Parent and the Company, substantially in the form of
Exhibit "A" attached hereto.
A-23
<PAGE> 119
6.10 Interim Financial Statements. From the date of this Agreement until
the Effective Date, the Company shall prepare and submit to Parent within 15
Business Days after the end of each month, updated monthly or quarterly, as the
case may be, financial statements of the Company ("Interim Financial
Statements") certified in each case, on behalf of the Company, by the Company's
chief financial officer. The quarterly Interim Financial Statements shall comply
as to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto, shall have
been prepared in accordance with GAAP (except as permitted by Form 10-Q of the
Exchange Act) applied on a consistent basis during the periods involved (except
as may be indicated in the notes thereto), and the monthly Interim Financial
Statements shall be prepared by the Company consistent with past practices and
in each case the Interim Financial Statements shall fairly present the financial
position of the Company and its consolidated Subsidiaries as of the dates
thereof and the results of its operations and cash flows for the periods then
ended (subject to normal year-end audit adjustments and the absence of
footnotes).
6.11 Stop Transfer Instruction. Promptly following the execution of this
Agreement, the Company shall give instructions to the transfer agent of the
Company Common Stock in order to implement the restrictions on transfer set
forth in Section 5 of Stockholder Agreements.
ARTICLE VII
CONDITIONS
7.1 Conditions to Parent and Purchaser's Obligation to Effect the
Merger. The respective obligation of each of Parent and Purchaser to effect the
Merger shall be subject to the satisfaction or waiver on or prior to the Closing
Date of the following conditions:
(a) the Company Shareholder Approval shall have been obtained; and the
number of Dissenting Shares shall not exceed 20% of the number of
outstanding shares of Company Common Stock;
(b) the applicable waiting period under the HSR Act shall have expired
or been terminated and the parties shall have received all other
authorizations, consents and approvals, if any, of any Governmental Entity;
(c) no suit, action or proceeding shall be instituted or pending
before any Governmental Entity (i) seeking to restrain or prohibit the
consummation of the Merger, (ii) seeking to prohibit or materially limit
the ownership or operation by the Company, Parent or any of Parent's
Subsidiaries of a material portion of the Business or assets of the Company
or Parent and its Subsidiaries, taken as a whole, or to compel the Company
or Parent to dispose of or hold separate any material portion of the
Business or assets of the Company or Parent and its Subsidiaries, taken as
a whole, in each case as a result of Merger or (iii) seeking to impose
material limitations on the ability of Parent or Purchaser to acquire or
hold, or exercise full rights of ownership of, any Shares to be accepted
for payment pursuant to the Merger; provided, however, that each of the
parties shall have used reasonable efforts to resolve any such suit, action
or proceeding as promptly as practicable without resulting in any of the
consequences referred to in clause (i) through (iii) above;
(d) there shall be no statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated or deemed applicable
(pursuant to an authoritative interpretation by or on behalf of a
Governmental Entity) to the Merger, or any other action by any Governmental
Entity or court, other than the application to the Merger of applicable
waiting periods under the HSR Act, that is likely to result in any of the
consequences referred to in clauses (i) through (iii) of paragraph (c)
above; provided, however, that each of the parties shall have used
reasonable efforts to prevent the entry of any such judgments, injunctions,
or orders and to appeal as promptly as practicable any injunction or other
order that may be entered;
(e) the Company Board of Directors or any committee thereof shall not
have withdrawn or materially modified in a manner adverse to Parent or
Purchaser its recommendation of the Merger or its adoption of this
Agreement, or approved or recommended any Takeover Proposal;
A-24
<PAGE> 120
(f) the representations and warranties of the Company set forth in
this Agreement shall be true and correct (determined without regard to any
materiality qualifiers, including without limitation Material Adverse
Effect) as of the Closing Date, as though made on and as of the Closing
Date (provided that any such representation and warranty made as of a
specific date shall be true and correct as of such specific date), except
for such inaccuracies as individually or in the aggregate would not have a
Material Adverse Effect on the Company;
(g) the Company shall have performed in all material respects any
material obligation or complied in all material respects with any material
agreement or material covenant of the Company to be performed or complied
with by it under this Agreement;
(h) there shall not have occurred any one or more events which shall
have caused or are reasonably likely to cause a Material Adverse Effect on
the Company and such event or change has not been cured; and
(i) the Parent and Purchaser shall have received, in form and
substance reasonably satisfactory to the Parent and Purchaser, from the
Company:
(i) an officer's certificate to the effect set forth in Section
7.1(f) and (g) with respect to the representations, warranties,
agreements and covenants of the Company;
(ii) a certificate of the secretary of the Company respecting, and
to which is attached, (A) the Articles of Incorporation of the Company
and its Subsidiaries (certified by the Secretary of State of the State
of California), (B) the Bylaws of the Company and its Subsidiaries, and
(C) the resolutions of the board of directors and shareholders of the
Company approving this Agreement and the transactions contemplated
hereby;
(iii) a certificate of the secretary of the Company respecting the
incumbency and true signatures of the authorized officers who execute
this Agreement and any other closing documents on behalf of the Company;
(iv) for each of the Company and its Subsidiaries, a certificate,
dated as of a date not more than 10 days prior to the Effective Time,
duly issued by the appropriate Governmental Entity of the state of its
incorporation and, unless waived by the Parent and Purchaser, in each
other jurisdiction in which the Company and its Subsidiaries has
qualified to do business as a foreign corporation, showing it to be in
existence, good standing (if available in such state) and authorized to
do business in such jurisdiction, and that all state franchise and/or
income tax returns and taxes due by it for all periods prior to the
Effective Time have been filed and paid;
(v) an opinion dated as of the Effective Time, of Wilson Sonsini
Goodrich & Rosati, counsel for the Company containing opinions and
qualifications usual and customary in a transaction of the type
contemplated by this Agreement and in form and substance reasonably
satisfactory to Parent; and
(vi) such other documents reasonably requested by the Parent and
Purchaser.
The foregoing conditions are for the sole benefit of Parent and Purchaser
and may, subject to the terms of this Agreement, be waived by, Parent and
Purchaser in whole or in part at any time and from time to time in their sole
discretion. The failure by Parent or Purchaser at any time to exercise any of
the foregoing rights shall not be deemed a waiver of any such right, the waiver
of any such right with respect to particular facts and circumstances shall not
be deemed a waiver with respect to any other facts and circumstances and each
such right shall be deemed an ongoing right that may be asserted at any time and
from time to time.
A-25
<PAGE> 121
7.2 Conditions to Company's Obligation to Effect the Merger. The
obligation of the Company to effect the Merger shall be subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) the Company Shareholder Approval shall have been obtained;
(b) the applicable waiting period under the HSR Act shall have expired
or been terminated and the parties shall have received all other
authorizations, consents and approvals, if any, of any Governmental Entity;
(c) no suit, action or proceeding shall be instituted or pending
before any Governmental Entity (i) seeking to restrain or prohibit the
consummation of the Merger, (ii) seeking to prohibit or materially limit
the ownership or operation by the Company, Parent or any of Parent's
Subsidiaries of a material portion of the Business or assets of the Company
or Parent and its Subsidiaries, taken as a whole, or to compel the Company
or Parent to dispose of or hold separate any material portion of the
Business or assets of the Company or Parent and its Subsidiaries, taken as
a whole, in each case as a result of Merger or (iii) seeking to impose
material limitations on the ability of Parent or Purchaser to acquire or
hold, or exercise full rights of ownership of, any Shares to be accepted
for payment pursuant to the Merger; provided, however, that each of the
parties shall have used reasonable efforts to resolve any such suit, action
or proceeding as promptly as practicable without resulting in any of the
consequences referred to in clause (i) through (iii) above;
(d) there shall be no statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated or deemed applicable
(pursuant to an authoritative interpretation by or on behalf of a
Governmental Entity) to the Merger, or any other action by any Governmental
Entity or court, other than the application to the Merger of applicable
waiting periods under the HSR Act, that is likely to result in any of the
consequences referred to in clauses (i) through (iii) of paragraph (c)
above; provided, however, that each of the parties shall have used
reasonable efforts to prevent the entry of any such judgments, injunctions,
or orders and to appeal as promptly as practicable any injunction or other
order that may be entered;
(e) the representations and warranties of the Parent or Purchaser set
forth in this Agreement that are not qualified as to materiality or by
reference to a material adverse effect shall be true and correct in all
material respects and any other representations or warranties shall be true
and correct in all respects, as of the date of this Agreement and as of the
Closing Date;
(f) the Parent and Purchaser, respectively, shall have performed in
all material respects any material obligation or complied in all material
respects with any material agreement or material covenant of the Parent or
Purchaser to be performed or complied with by it under this Agreement; and
(g) the Company shall have received, in form and substance reasonably
satisfactory to the Company, from each of the Parent and Purchaser:
(i) an officer's certificate to the effect set forth in Section
7.2(e) and (f) with respect to the representations, warranties,
agreements and covenants of the Parent and Purchaser;
(ii) a certificate of the secretary of the Parent and Purchaser
respecting, and to which is attached, (A) the Articles of Incorporation
of the Parent and Purchaser (certified by the Secretary of State of the
State of Texas or California, as appropriate), (B) the Bylaws of the
Parent and Purchaser, and (C) the resolutions of the board of directors
of the Parent and Purchaser approving this Agreement and the
transactions contemplated hereby;
(iii) a certificate of the secretary of the Parent and Purchaser
respecting the incumbency and true signatures of the authorized officers
who execute this Agreement and any other closing documents on behalf of
the Parent or Purchaser;
(iv) for each of the Parent and Purchaser, a certificate, dated as
of a date not more than 10 days prior to the Effective Time, duly issued
by the appropriate Governmental Entity of the state
A-26
<PAGE> 122
of its incorporation and, unless waived by the Company, in each other
jurisdiction in which the Parent or Purchaser is required to be
qualified to do business as a foreign corporation, showing it to be in
existence, good standing (if available in such state) and authorized to
do business in such jurisdiction, and that all state franchise and/or
income tax returns and taxes due by it for all periods prior to the
Effective Time have been filed and paid;
(v) an opinion dated as of the Effective Time, of Jackson Walker
LLP, counsel for the Parent and Purchaser, containing opinions and
qualifications usual and customary in a transaction of the type
contemplated by this Agreement and in form and substance reasonably
satisfactory to the Company; and
(vi) such other documents reasonably requested by the Company.
The foregoing conditions are for the sole benefit of the Company and may,
subject to the terms of this Agreement, be waived by the Company in whole or in
part at any time and from time to time in their sole discretion. The failure by
the Company at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right, the waiver of any such right with respect to
particular facts and circumstances shall not be deemed a waiver with respect to
any other facts and circumstances and each such right shall be deemed an ongoing
right that may be asserted at any time and from time to time.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated and the transactions
contemplated herein may be abandoned at any time prior to the Effective Time,
whether before or after approval of the terms of this Agreement by the
shareholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company:
(i) if the Merger has not been consummated prior to September 30,
1998 ("Cut-Off Date"); provided, however, that if the Merger shall not
have been consummated solely due to the waiting period (or any extension
thereof) under the HSR Act not having expired or been terminated, or due
to an action having been instituted by the Department of Justice or
Federal Trade Commission challenging or seeking to enjoin the
consummation of the Merger, then such date shall be extended to December
31, 1998; and provided, further, however that the right to terminate
this Agreement pursuant to this Section 8.1(b)(i) shall not be available
to any party whose failure to perform any of its obligations under this
Agreement results in the failure of such condition or if the failure of
such condition results from facts or circumstances that constitute a
willful breach of representation or warranty under this Agreement by
such party; or
(ii) if a court of competent jurisdiction or any other Governmental
Entity shall have issued an order, decree or ruling or taken any other
action permanently enjoining, restraining or otherwise prohibiting the
acceptance for payment of, or payment for, Shares pursuant to the Merger
and such order, decree or ruling or other action shall have become final
and nonappealable;
(c) by Parent prior to the Effective Time in the event of a breach or
failure to perform by the Company of any representation, warranty, covenant
or other agreement contained in this Agreement which breach or failure to
perform (i) results in the failure of a condition set forth in Section
7.1(f) or (g) above and (ii) is not reasonably capable of being cured prior
to the earlier of: (a) within 15 Business Days after the giving of written
notice thereof, or (b) 2 Business Days prior to the Cut-Off Date;
(d) by Parent or Purchaser at any time after the Shareholders' Meeting
in the event this Agreement and the Merger fail to receive Company
Shareholder Approval;
A-27
<PAGE> 123
(e) by the Company in accordance with Section 5.2, provided that it
has complied with all provisions thereof, including the notice provisions
therein, and that it complies with applicable requirements relating to the
payment (including the timing of any payment) of the Termination Fee as
provided in Section 6.5; or
(f) by the Company prior to the Effective Time in the event of a
breach or failure to perform in any material respect by Gambrinus, Parent
or Purchaser of any representation, warranty, covenant or other agreement
contained in this Agreement which breach or failure to perform (i) results
in the failure of a condition set forth in Section 7.2 (e) or (f) above and
(ii) is not reasonably capable of being cured prior to the earlier of: (a)
within 15 Business Days after the giving of written notice thereof or (b) 2
Business Days prior the Cut-Off Date.
8.2 Effect of Termination. In the event of a termination of this Agreement
by either the Company or Parent or Purchaser as provided in Section 8.1, this
Agreement shall forthwith become null and void and there shall be no liability
or obligation on the part of Parent, Purchaser or the Company or their
respective officers or directors, except with respect to the last sentence of
Section 6.2,. Section 6.5, this Section 8.2 and Article IX; provided, however,
that nothing herein shall relieve any party for liability for any wilful breach
hereof.
8.3 Amendment. This Agreement may be amended by the parties hereto, by
duly authorized action taken, at any time before or after obtaining the Company
Shareholder Approval, but after the Company Shareholder Approval, no amendment
shall be made which by law requires further approval by such shareholders
without obtaining such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Boards of
Directors, may, to the extent legally allowed, subject to Section 8.3, (i)
extend the time for the performance of any of the obligations or other acts of
the other parties hereto, (ii) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto or
(iii) waive compliance with any of the agreements or conditions contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in a written instrument signed on behalf
of such party. The failure of any party to this Agreement to assert any of its
rights under this Agreement or otherwise shall not constitute a waiver of those
rights.
ARTICLE IX
MISCELLANEOUS
9.1 Nonsurvival of Representations, Warranties and Agreements. None of the
representations and warranties in this Agreement or in any instrument, schedule
or other document delivered pursuant to this Agreement shall survive the
Effective Time. This Section 9.1 shall not limit any covenant or agreement of
the parties which by its terms contemplates performance after the Effective
Time, including Section 6.6.
9.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed), sent by overnight courier (providing proof of delivery) or mailed by
registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent, Purchaser or Gambrinus, to
14800 San Pedro Ave., Suite 300
San Antonio, TX 78232
Attention: Mr. Carlos Alvarez
Telecopy No.: (210) 490-4687
A-28
<PAGE> 124
with a copy to:
Jackson Walker L.L.P.
112 East Pecan Street, Suite 2100
San Antonio, TX 78205
Attention: Patrick B. Tobin, Esq.
Telecopy No.: (210) 978-7790
and
(b) if to the Company, to
Pete's Brewing Company
514 High Street
Palo Alto, California 94301
Attention: Jeffrey A. Atkins
Telecopy No.: (650) 462-2646
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attention: Robert P. Latta, Esq.
Chris F. Fennell, Esq.
Telecopy No.: (650) 493-6811
9.3 Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each of
the parties and delivered to the other parties, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; No Third Party Beneficiaries. This Agreement and the
Confidentiality Agreement (a) constitute the entire agreement among the parties
with respect to the subject matter hereof and thereof and supersede all other
prior agreements and understandings, both written and oral, among the parties or
any of them with respect to the subject matter hereof and thereof (provided that
the provisions of this Agreement shall supersede any conflicting provisions of
the Confidentiality Agreement), and (b) except as provided in Section 6.6
hereof, are not intended to confer upon any person other than the parties hereto
any rights or remedies hereunder.
9.5 Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without regard to any
applicable principles of conflicts of law thereof.
9.6 Publicity. The initial press release with respect to the execution of
this Agreement shall be a joint press release acceptable to Parent and the
Company. Except as otherwise required by law, court process or the listing
agreement or listing rules of the NASDAQ National Market or as contemplated or
provided elsewhere herein, for so long as this Agreement is in effect, neither
the Company nor Parent shall, or shall permit any of its Subsidiaries to, issue
or cause the publication of any press release or other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld.
9.7 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties, except that Purchaser may assign, in its sole discretion, any or all of
its rights, interests and obligations hereunder to Parent or to any direct or
indirect wholly owned subsidiary of Parent. Subject to the preceding sentence
but without relieving any party hereof of any obligation hereunder, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
A-29
<PAGE> 125
9.8 Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of California or in any California state court, this being
in addition to any other remedy to which they are entitled at law or in equity.
In addition, each of the parties hereto (a) consents to submit itself to the
personal jurisdiction of any court of the United States located in the State of
California or of any California state court in the event any dispute arises out
of this Agreement or the transactions contemplated by this Agreement, (b) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court and (c) agrees that it will not
bring any action relating to this Agreement or the transactions contemplated by
this Agreement in any court other than a court of the United States located in
the State of California or a California state court.
9.9 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the economic or legal substance of
the transactions contemplated hereby is not affected in any manner adverse to
any party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto shall negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible to the fullest extent permitted by applicable law
in an acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
IN WITNESS WHEREOF, Parent, Purchaser, Gambrinus and the Company have
caused this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
PBC HOLDINGS, INC.
By: /s/ JAMES J. BOLZ
------------------------------------
Name: James J. Bolz
Title: Vice President
PBC ACQUISITION CORP.
By: /s/ JAMES J. BOLZ
------------------------------------
Name: James J. Bolz
Title: Vice President
THE GAMBRINUS COMPANY
By: /s/ JAMES J. BOLZ
------------------------------------
Name: James J. Bolz
Title: Finance Director, Treasurer
PETE'S BREWING COMPANY
By: /s/ JEFFREY A. ATKINS
------------------------------------
Name: Jeffrey A. Atkins
Title: Chief Executive Officer
A-30
<PAGE> 126
EXHIBIT A
STOCKHOLDER AGREEMENT
AGREEMENT dated as of May 22, 1998 between PBC Holdings, Inc., a Texas
corporation ("Parent") and (the "Stockholder").
WITNESSETH:
WHEREAS, immediately prior to the execution of this Agreement, Parent,
Pete's Brewing Company, a California corporation (the "Company"), and PBC
Acquisition Corp., a California corporation and wholly-owned subsidiary of
Parent ("Merger Subsidiary"), have entered into an Agreement and Plan of Merger
(as such agreement may hereafter be amended from time to time, the "Merger
Agreement"), pursuant to which Merger Subsidiary will be merged with and into
the Company (the "Merger"); and
WHEREAS, as an inducement and a condition to entering into the Merger
Agreement, Parent has requested that the Stockholder agree, and the Stockholder
has agreed, to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
SECTION 1. Certain Definitions. Capitalized terms used and not defined
herein have the respective meanings ascribed to them in the Merger Agreement.
For purposes of this Agreement:
(a) "Affiliate" shall mean, when used with respect to any Person, any
other Person directly or indirectly controlling, controlled by or under
common control with such Person( and with respect to any individual Person
shall include such individual's spouse, parents or siblings). As used in
this definition, the term "control" means possession, directly or
indirectly, of the power to direct or control the direction of management
or policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Beneficially Owned" or "Beneficial Ownership" with respect to any
securities shall mean having "beneficial ownership" of such securities (as
determined pursuant to Rule 13d-3 under the Exchange Act), including
pursuant to any agreement, arrangement or understanding, whether or not in
writing. Without duplicative counting of the same securities by the same
holder, securities Beneficially Owned by a Person shall include securities
Beneficially Owned by all other Persons with whom such Person would
constitute a "group" within the meaning of Section 13(d) of the Exchange
Act with respect to securities of the same issuer.
(c) "Company Common Stock" shall mean at any time the common stock, no
par value, of the Company.
(d) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(e) "Existing Shares" shall mean the shares of Company Common Stock
Beneficially Owned by the Stockholder on the date hereof.
(f) "HSR Act" shall mean the Hart Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
(g) "Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity.
(h) "Purchaser" shall mean PBC Acquisition Corp., a Texas corporation
and a wholly-owned subsidiary of Parent.
(i) "Representatives" shall have the meaning set forth in Section 3(f)
hereof.
(j) "Securities Act" shall mean the Securities Act of 1933, as
amended.
A-31
<PAGE> 127
(k) "Shares" shall mean the Existing Shares and any shares of Company
Common Stock and/or other equity securities of the Company acquired by the
Stockholder in any capacity after the date hereof and prior to the
termination of this Agreement, whether upon the exercise of options,
warrants or rights, the conversion or exchange of convertible or
exchangeable securities, or by means of purchase, dividend, distribution,
split-up, recapitalization, combination, exchange of shares or the like,
gift, bequest, inheritance or as a successor in interest in any capacity or
otherwise Beneficially Owned by the Stockholder.
(l) "Takeover Proposal" shall mean any inquiry, proposal or offer from
any person relating to any direct or indirect acquisition or purchase of a
substantial amount of assets of the Company and its Subsidiaries taken as a
whole (other than inventory in the Ordinary Course of Business), or more
than a 20% interest in the total voting securities of the Company or any
tender offer or exchange offer that if consummated would result in any
person beneficially owning 20% or more of any class of equity securities of
the Company or any merger, consolidation, business combination, sale of
substantially all assets, recapitalization, liquidation, dissolution or
similar transaction involving the Company, other than the transactions
contemplated by this Agreement.
SECTION 2. Provisions Concerning Company Common Stock.
(a) Voting of Company Common Stock. The Stockholder hereby agrees that
during the period commencing on the date hereof and continuing until the
termination of this Agreement, at any meeting (whether annual or special and
whether or not an adjourned or postponed meeting) of the holders of Company
Common Stock, however called, or in connection with any written consent of the
holders of Company Common Stock, the Stockholder will appear at the meeting or
otherwise cause the Shares to be counted as present thereat for purposes of
establishing a quorum and the Stockholder shall vote or consent (or cause to be
voted or consented) the Shares held of record or Beneficially Owned by the
Stockholder, whether issued, heretofore owned or hereafter acquired, (i) in
favor of the Merger, the execution and delivery by the Company of the Merger
Agreement and the approval and adoption of the terms thereof and each of the
other actions contemplated by the Merger Agreement and this Agreement and any
actions required in furtherance thereof and hereof; (ii) against any action or
agreement that would result in a breach in any respect of any covenant,
representation or warranty or any other obligation or agreement of the Company
under the Merger Agreement or this Agreement (after giving effect to any
materiality or similar qualifications contained therein); and (iii) except as
otherwise agreed to in writing in advance by Parent, against the following
actions (other than the Merger and the transactions contemplated by the Merger
Agreement): (A) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving the Company or its
subsidiaries; (B) a sale, lease or transfer of a material amount of assets of
the Company or its subsidiaries, or a reorganization, recapitalization,
dissolution or liquidation of the Company or its subsidiaries; (C) (1) any
change in a majority of the persons who constitute the Board of Directors of the
Company; (2) any change in the present capitalization of the Company or any
amendment of the Company's articles of incorporation or bylaws; (3) any other
material change in the Company's corporate structure or business; or (4) any
other action involving the Company or its subsidiaries which is intended, or
could reasonably be expected, to impede, interfere with, delay, postpone, or
materially adversely affect the Merger and the transactions contemplated by this
Agreement and the Merger Agreement. Such Stockholder shall not enter into any
agreement or understanding with any Person or entity the effect of which would
be inconsistent with or in violation of the provisions and agreements contained
in this Section 2.
(b) Grant of Irrevocable Proxy; Appointment of Proxy.
(i) Subject to Section 7, the Stockholder hereby irrevocably grants to
and appoints James J. Bolz (as Vice President) and Russell Cunningham (as
Secretary) or either of them, in their respective capacities of officers of
Parent, and any individual who shall hereafter succeed to any of such
office of Parent, and each of them individually, such Stockholder's proxy
and attorney-in-fact (with full power of substitution), for and in the
name, place and stead of such Stockholder, to vote such Stockholder's
Shares, or grant a consent or approval in respect of the Shares in favor of
the various transactions contemplated by the Merger Agreement and against
any proposal for Company Acquisition.
A-32
<PAGE> 128
(ii) Subject to Section 7, the Stockholder represents that any proxies
heretofore given in respect of such Stockholder's Shares are not
irrevocable, and that any such proxies are hereby revoked.
(iii) The Stockholder understands and acknowledges that Parent is
entering into the Merger Agreement in reliance upon the Stockholder's
execution and delivery of this Agreement. The Stockholder hereby affirms
that the irrevocable proxy set forth in this Section 2(b) is given in
connection with the execution of the Merger Agreement and that such
irrevocable proxy is given to secure the performance of the duties of the
Stockholder under this Agreement. The Stockholder hereby further affirms
that the irrevocable proxy is coupled with an interest and, except as
provided under Section 7, may under no circumstances be revoked. The
Stockholder hereby ratifies and confirms all that such irrevocable proxy
may lawfully do and caused to be done in accordance with the terms of this
Agreement prior to termination of this Agreement.
(c) Options. In the event the Stockholder holds Options or Warrants to
acquire shares of Company Common Stock, the Stockholder shall, if requested by
the Company, consent to the cancellation of such Options or Warrants in exchange
for a cash payment in accordance with the terms of the Merger Agreement and
shall execute all appropriate documentation in connection with such
cancellation.
SECTION 3. Representations and Warranties of the Stockholder. The
Stockholder hereby represents and warrants to Parent as follows:
(a) Ownership of Shares. The Stockholder is the record and Beneficial
Owner of Existing Shares consisting of shares of Company
Common Stock. On the date hereof, the Existing Shares constitute all of the
Shares owned of record or Beneficially Owned by the Stockholder. The
Stockholder has sole voting power and sole power to issue instructions with
respect to the matters set forth in Section 2 hereof, sole power of
disposition, sole power of conversion, sole power to demand appraisal
rights and sole power to agree to all of the matters set forth in this
Agreement, in each case with respect to all of the Existing Shares with no
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement. Upon
consummation of the Merger, the Stockholder will have sole voting power and
sole power to issue instructions with to the matters set forth in Section 4
hereof, sole power of disposition, sole power of conversion, sole power to
demand appraisal rights and sole power to agree to all of the matters set
forth in this Agreement, in each case with respect to all of the shares of
Company Common Stock it holds of record or Beneficially Owns with no
limitations, qualifications or restrictions on such rights, subject to
applicable securities laws and the terms of this Agreement.
(b) Corporate Authorization. The Stockholder has the legal capacity,
power and authority to enter into and perform all of the Stockholder's
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by the Stockholder and constitutes a valid and
binding agreement enforceable against the Stockholder in accordance with
its terms except to the extent (i) such enforcement may be limited by
applicable bankruptcy, insolvency or similar laws affecting creditors
rights and (ii) the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may be
brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act, and the
Securities Act, (i) no filing with, and no permit, authorization, consent
or approval of, any state or federal governmental body or authority is
necessary for the execution and delivery of this Agreement by the
Stockholder and the consummation by the Stockholder of the transactions
contemplated hereby and (ii) none of the execution and delivery of this
Agreement by the Stockholder, the consummation by the Stockholder of the
transactions contemplated hereby or compliance by the Stockholder with any
of the provisions hereof shall (A) if Stockholder is a corporation, limited
liability company, limited partnership or other entity, conflict with or
result in any breach of the organizational documents of the Stockholder,
(B) result in a violation or breach of, or constitute (with or without
notice or lapse of time or both) a default (or give rise to any third party
right of termination, cancellation, material modification or acceleration)
under any of the terms, conditions or
A-33
<PAGE> 129
provisions of any note, loan agreement, bond, mortgage, indenture, license,
voting agreement, shareholder agreement, voting trust, contract,
commitment, arrangement, understanding, agreement or other instrument of
obligation of any kind to which the Stockholder is a party or by which the
Stockholder of any of its properties or assets may be bound, or (C) violate
any order, writ, injunction, decree, judgment, statute, law, rule or
regulation applicable to the Stockholder or any of its properties or
assets.
(d) No Encumbrances. Except as applicable in connection with the
transactions contemplated hereby, the Shares and the certificates
representing such Shares are now, and at all times during the term hereof,
will be, held by the Stockholder, or by a nominee or custodian for the
benefit of the Stockholder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever, except for any such
encumbrances or proxies arising hereunder.
(e) No Finder's Fees. Other than as contemplated by the Merger
Agreement with respect to fees payable by the Company, no broker,
investment banker, financial advisor or other Person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated hereby based upon
arrangements made by or on behalf of the Stockholder.
(f) Reliance by Parent. The Stockholder understands and acknowledges
that Parent is entering into the Merger Agreement in reliance upon the
Stockholder's execution and delivery of this Agreement.
SECTION 4. Representations and Warranties of Parent. Parent hereby
represents and warrants to the Stockholder as follows:
(a) Organization. Parent is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas, has all
requisite corporate power and authority to execute and deliver this
Agreement and perform its obligations hereunder. The execution and delivery
by Parent of this Agreement and the performance by Parent of its
obligations hereunder have been duly and validly authorized by the Board of
Directors of Parent and no other corporate proceedings on the part of
Parent are necessary to authorize the execution, delivery or performance of
this Agreement or the consummation of the transactions contemplated hereby.
(b) Corporate Authorization. This Agreement has been duly and validly
executed and delivered by Parent and constitutes a valid and binding
agreement of Parent enforceable against Parent in accordance with its terms
except to the extent (i) such enforcement may be limited by applicable
bankruptcy, insolvency or similar laws affecting creditors rights and (ii)
the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(c) No Conflicts. Except for filings, authorizations, consents and
approvals as may be required under the HSR Act, the Exchange Act and the
Securities Act, (i) no filing with, and no permit, authorization, consent
or approval of, any state or federal governmental body or authority is
necessary for the execution and delivery of this Agreement by Parent and
the consummation by Parent of the transactions contemplated hereby and (ii)
none of the execution and delivery of this Agreement by Parent, the
consummation by Parent of the transactions contemplated hereby or
compliance by Parent with any of the provisions hereof shall (A) conflict
with or result in any breach of the certificate of incorporation or by-laws
of Parent, (B) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third-party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
loan agreement, bond, mortgage, indenture, license, contract, commitment,
arrangement, understanding, agreement or other instrument or obligation of
any kind to which Parent is a party or its properties or assets may be
bound, or (C) violate any order, writ, injunction, decree, judgment,
statute, law, rule or regulation applicable to Parent or any of its
properties or assets.
(d) No Finder's Fee. Except for Chase Securities Inc. whose fees will
be paid by Parent, no broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's
A-34
<PAGE> 130
or other similar fee or commission in connection with the transactions
contemplated hereby based upon arrangements made by or on behalf of Parent.
SECTION 5. Covenants of the Stockholder. The Stockholder hereby represents
and warrants to Parent as follows:
(a) No Solicitation.
(i) From the date of this Agreement until the earlier of
termination of this Agreement or the Effective Time, the Stockholder
shall not, nor shall it authorize or permit its Affiliates, the Company
or any of its officers, directors or employees or any investment banker,
financial advisor, attorney, accountant or other representative or agent
(herein collectively referred to as "Representatives") to, directly or
indirectly, (i) solicit, initiate or knowingly encourage the submission
of any Takeover Proposal (as defined below) or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any
nonpublic information with respect to the Company, or take any other
action designed or reasonably likely to facilitate any inquiries or the
making of any proposal that constitutes a Takeover Proposal.
(ii) The Stockholder shall, or shall cause the Company to, promptly
advise Parent orally and in writing of any request for nonpublic
information (except in the Ordinary Course of Business and not in
connection with a possible Takeover Proposal) or of any Takeover
Proposal known to it, the material terms and conditions of such request
or Takeover Proposal and the identity of the person making such request
or Takeover Proposal. The Company will promptly inform Parent of any
change in the material terms and conditions (including amendments or
proposed amendments) of any such request or Takeover Proposal.
(iii) The Stockholder shall, and shall cause its Representatives
to, immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted prior
to the date of this Agreement with respect to any Takeover Proposal.
(iv) Notwithstanding the restrictions set forth in this Section
5(a), each of the Company or any person who is an officer or director of
the Company may take any action consistent with the terms of the Merger
Agreement.
(b) Restriction on Transfer, Proxies; Non-Interference. The
Stockholder shall not, directly or indirectly: (i) offer for sale, sell,
transfer, tender, pledge, encumber (other than by operation of law), assign
or otherwise dispose of, or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, any or all of the Shares or any interest therein; (ii)
except as contemplated by this Agreement, grant any proxies or powers of
attorney, deposit the Shares into a voting trust or enter into a voting
agreement with respect to the Shares; or (iii) take any action that would
make any representation or warranty of the Stockholder contained herein
untrue or incorrect or would result in a breach by the Stockholder of its
obligations under this Agreement or a breach by the Company of its
obligations under the Merger Agreement or the effect of which would be
inconsistent or violative of any provision or agreement contained in this
Agreement.
(c) Waiver of Appraisal Rights. The Stockholder hereby waives any
rights of appraisal or rights to dissent from the Merger that the
Stockholder may have.
SECTION 6. Stop Transfer; Legend.
(a) The Stockholder agrees with, and covenants to, Parent that the
Stockholder shall not request that the Company register the transfer (book-entry
or otherwise) of any certificate or uncertificated interest representing any of
the Shares unless such transfer is made in compliance with this Agreement.
(b) In the event of a stock dividend or distribution, or any change in the
Company Common Stock by reason of any stock dividend, split-up,
recapitalization, combination, exchange of shares or the like other than
pursuant to the Merger, the term "Shares" shall be deemed to refer to and
include the shares of Company
A-35
<PAGE> 131
Common Stock as well as all such stock dividends and distributions and any
shares into which or for which any or all of the Shares may be changed or
exchanged and appropriate adjustments shall be made to the terms and provisions
of this Agreement.
(c) In the event the Company shall not have issued a stop transfer order
with respect to the transfer of the Shares within 5 days from the date hereof,
the Stockholder shall promptly surrender to the Company all certificates
representing the Shares, and the Company shall place the following legend on
such certificates:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO A STOCKHOLDER AGREEMENT DATED AS OF MAY 22, 1998 BY AND
BETWEEN PBC HOLDINGS, INC. AND WHICH AMONG
OTHER THINGS RESTRICTS THE TRANSFER AND VOTING THEREOF.
SECTION 7. Termination. The covenants and agreements contained in this
Agreement with respect to the Shares, including but not limited to the grant of
the irrevocable proxy set forth in Section 2(b) hereof, shall terminate upon the
earlier to occur of (i) the Effective Time and (ii) the termination of the
Merger Agreement in accordance with its terms.
SECTION 8. Confidentiality. The Stockholder recognizes that successful
consummation of the transactions contemplated by this Agreement may be dependent
upon confidentiality with respect to the matters referred to herein. In this
connection, pending public disclosure thereof, the Stockholder hereby agrees not
to disclose or discuss such matters with anyone not a party to this Agreement
(other than to the Company and to its and the Company's counsel and advisors)
without the prior written consent of Parent, except for filings required
pursuant to the HSR Act, the Exchange Act and the Securities Act and the rules
and regulations thereunder or disclosures its counsel advises are necessary in
order to fulfill its obligations imposed by law, in which event the Stockholder
shall give prior notice of such disclosure to Parent as promptly as practicable
so as to enable Parent to seek a protective order from a court of competent
jurisdiction with respect thereto.
SECTION 9. Disclosure. The Stockholder hereby agrees to permit Parent,
Merger Subsidiary and the Company to publish and disclose in the Proxy Statement
(including all documents, exhibits and schedules filed with the SEC), and any
press release or other disclosure documents which counsel of Parent, Merger
Subsidiary or the Company advises are necessary in connection with the Merger
and any transactions related thereto, the Stockholder's identity and ownership
of Company Common Stock or shares of Company Common Stock, as the case may be,
and the nature of its commitments, arrangements and understandings under this
Agreement.
SECTION 10. Miscellaneous.
(a) Entire Agreement. This Agreement and the Merger Agreement referred to
therein constitute the entire agreement between the parties with respect to the
subject matter hereof and thereof and supersedes all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof.
(b) Binding Agreement. The Stockholder agrees that this Agreement and the
obligations hereunder shall attach to the Shares and shall be binding upon any
person to which legal or Beneficial Ownership of such Shares shall pass, whether
by operation of law or otherwise, including, without limitation, the
Stockholder's heirs, distributees, guardians, administrators, executors, legal
representatives, or successors, partners or other transferees (for value or
otherwise) and any other successors in interest. Notwithstanding any transfer of
Shares, the transferor shall remain liable for the performance of all
obligations under this Agreement of the transferor. Nothing in this clause (b)
shall permit any transfer of Shares otherwise prohibited by the provisions of
this Agreement.
(c) Assignment. No party may assign any of its rights or obligations
hereunder, by operation of law or otherwise, without the prior written consent
of the other party; provided that Parent may assign, in its sole discretion, its
rights and obligations hereunder to any direct or indirect wholly owned
subsidiary of Parent, but
A-36
<PAGE> 132
no such assignment shall relieve Parent of its obligations hereunder if such
assignee does not perform such obligations.
(d) Amendments, Waivers, Etc. This Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated, except upon the
execution and delivery of a written agreement executed by the parties hereto.
(e) Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if given) by hand delivery or telecopy (with a
confirmation copy sent for next-day delivery via courier service, such as
Federal Express), or by any courier service, such as Federal Express, providing
proof of delivery. All communications hereunder shall be delivered to the
respective parties at the following addresses:
If to Stockholder:
Attention:
Telephone:
Telecopy No.:
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: Robert P. Latta, Esq.
Telephone: (650) 493-9300
Telecopy No.: (650) 493-6811
If to Parent:
PBC Holdings, Inc.
14800 San Pedro Ave., Suite 300
San Antonio, Texas 78232
Attention: Carlos Alvarez
Telephone: Separately supplied
Telecopy No.:
with a copy to:
Jackson Walker, L.L.P.
112 E. Pecan, Suite 2100
San Antonio, Texas 78205
Attention: Patrick B. Tobin
Telephone: (210) 978-7785
Telecopy No.: (210) 978-7790
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(f) Severability. Whenever possible, each provision or portion of any
provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of any
provision of this Agreement is held to be invalid, illegal or unenforceable in
any respect under any applicable law or rule in any jurisdiction, such
invalidity, illegality or unenforceability will not affect any other provision
or portion of any provision in such jurisdiction, and this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision or portion of any provision had never been
contained herein.
(g) Specific Performance. Each of the parties hereto recognizes and
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it would
not have an adequate remedy at law for money damages, and therefore each of the
parties
A-37
<PAGE> 133
hereto agrees that in the event of any such breach the aggrieved party shall be
entitled to the remedy of specific performance of such covenants and agreements
and injunctive and other equitable relief in addition to any other remedy to
which it may be entitled, at law or in equity.
(h) Remedies Cumulative. All rights, powers and remedies provided under
this Agreement or otherwise available in respect hereof at law or in equity
shall be cumulative and not alternative, and the exercise of any thereof by any
party shall not preclude the simultaneous or later exercise of any such right,
power or remedy by such party.
(i) No Waiver. The failure of any party hereto to exercise any right, power
or remedy provided under this Agreement or otherwise available in respect hereof
at law or in equity, or to insist upon compliance by any other party hereto with
its obligations hereunder, and any custom or practice of the parties at variance
with the terms hereof, shall not constitute a waiver by such party of its right
to exercise any such or other right, power or remedy or to demand such
compliance.
(j) Third-Party Beneficiaries. The Company shall be a third party
beneficiary of, and entitled to enforce, the provisions contained in Section
3(i) and Section 9 of this Agreement. Except for such Sections 3(i) and 9
hereof, this Agreement is not intended to be for the benefit of, and shall not
be enforceable by, any Person who or which is not a party hereto.
(k) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California, without giving effect to
the principles of conflicts of law thereof.
(l) Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in any court of the United States
located in the State of California or in any California state court, this being
in addition to any other remedy to which they are entitled at law or in equity.
In addition, each party (a) consents to submit itself to the personal
jurisdiction of any court of the United States or any California state court
located in Santa Clara County, California in the event any dispute arises out of
this Agreement or the transactions contemplated by this Agreement, (b) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court and (c) agrees that it will not
bring any action relating to this Agreement or the transactions contemplated by
this Agreement in any court other than a court of the United States located in
Santa Clara County, California.
(m) Stockholder Capacity. No person executing this Agreement who is or
becomes during the term hereof a director of the Company makes any agreement or
understanding herein in his or her capacity as such director.
(n) Further Assurances. From time to time, at the other party's request and
without further consideration, each party hereto shall execute and deliver such
additional documents and take all such further lawful action as may be necessary
or desirable to consummate and make effective, in the most expeditious manner
practicable, the transactions contemplated by this Agreement.
(o) Descriptive Headings. The descriptive headings used herein are inserted
for convenience of reference only and are not intended to be part of or to
affect the meaning or interpretation of this Agreement.
(p) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, but all of which, taken together, shall
constitute one and the same Agreement.
A-38
<PAGE> 134
IN WITNESS WHEREOF, Parent and the Stockholder have caused this Agreement
to be duly executed as of the day and year first above written.
PBC HOLDINGS, INC.
By:
----------------------------------
Name: James J. Bolz
Title: Vice President
STOCKHOLDER
By:
----------------------------------
Name:
A-39
<PAGE> 135
AGREEMENT OF MERGER
OF
PBC HOLDINGS, INC.,
PBC ACQUISITION CORP.
AND
PETE'S BREWING COMPANY
This Agreement of Merger (this "Agreement") is entered into as of August
, 1998 between PBC HOLDINGS, INC., a Texas corporation ("Parent"), PETE'S
BREWING COMPANY, a California corporation (the "Company"), and PBC ACQUISITION
CORP., a Texas corporation ("Purchaser"), a wholly-owned subsidiary of Parent.
RECITALS
A. The Company, The Gambrinus Company ("Gambrinus"), Parent and Purchaser
have entered into an Agreement and Plan of Merger, dated as of May 22, 1998 (the
"Plan"), providing for, among other things, the execution and filing of this
Agreement and the merger of Purchaser, with and into the Company (the "Merger"),
such that the Company will be the surviving corporation of the Merger, in
accordance with the California General Corporation Law (the "GCL").
B. The Boards of Directors of Company, Parent and Purchaser, respectively,
have determined the Merger to be advisable and in the respective interests of
the Company, Parent and Purchaser and their respective shareholders.
C. The Plan, this Agreement and the Merger have been approved by Parent as
the sole shareholder of Purchaser and by the shareholders of the Company.
D. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive cash.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and subject to the terms and conditions set forth herein and
in the Plan, the parties agree as follows:
I THE CONSTITUENT CORPORATIONS
1.1 Purchaser.
(a). Purchaser was incorporated under the laws of the State of Texas on May
, 1998.
(b) At the date hereof, Purchaser is authorized to issue an aggregate of
shares of Common Stock ("Purchaser Common Stock").
(c) At the date hereof, an aggregate of 1,000 shares of Purchaser Common
Stock were issued and outstanding, all of which are owned by Parent.
1.2 The Company.
(a) The Company was incorporated under the laws of the State of California
on April 23, 1986.
(b) The Company is authorized to issue an aggregate of 50,000,000 shares of
Common Stock, and an aggregate of 5,000,000 shares of Preferred Stock.
(c) As of the date hereof, an aggregate of shares of Common
Stock of the Company ("Company Common Stock") were issued and outstanding, and
no shares of Preferred Stock of the Company ("Company Preferred Stock") were
issued and outstanding. The Company Common Stock and Company Preferred Stock
shall be collectively referred to as the "Company Capital Stock."
B-1
<PAGE> 136
II THE MERGER
2.1 The Merger. At the Effective Time (as defined in Section 2.4) and upon
the terms and subject to the satisfaction or waiver of the conditions of this
Agreement and in accordance with the applicable provisions of this Agreement and
the applicable provisions of the GCL, the Company and Purchaser shall consummate
a merger (the "Merger") pursuant to which Purchaser shall be merged with and
into the Company at the Effective Time. Following the Effective Time, (i) the
Company shall continue as the surviving corporation (the "Surviving
Corporation") in the Merger and shall continue to be governed by the laws of the
State of California, (ii) the separate corporate existence of the Company with
all of its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger, except as set forth in this Article II, and (iii) the
separate corporate existence of Purchaser shall cease.
2.2 Effects of the Merger. The Merger shall have the effects set forth in
Section 1107 of the GCL. Without limiting the generality of the foregoing, and
subject thereto, at the Effective Time all the property, rights, privileges,
powers and franchises of the Company and Purchaser shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Purchaser
shall become the debts, liabilities and duties of the Surviving Corporation.
2.3 Articles of Incorporation. The Articles of Incorporation of the
Company are amended so that Article III thereof shall read in its entirety as
follows:
"III
This corporation is authorized to issue 1,000 shares of Common
Stock, no par value per share."
2.4 Effective Time. The Merger shall become effective (the "Effective
Time") at the date that this Agreement and each of the certificates meeting the
requirements of Section 1103 of the GCL are filed with the Secretary of State of
the State of California, in accordance with Section 1103 of the GCL.
2.5 Conversion of Shares. At the Effective Time, upon the terms and
subject to the conditions set forth in this Agreement, by virtue of the Merger
and without any action on the part of Parent, Purchaser, the Company or the
holders of Company Common Stock:
(a) Each share of Company Common Stock (a "Share") issued and
outstanding immediately prior to the Effective Time (other than Shares
held, directly or indirectly, by Parent, Purchaser, Gambrinus, the Company
or any of their majority-owned subsidiaries, and any dissenting shares in
accordance with Chapter 13 of the GCL ("Dissenting Shares")) shall
automatically be canceled and extinguished and be converted into the right
to receive from the surviving corporation in cash $6.375, without interest
thereon (the "Merger Consideration"). Each holder (other than holders
referred to in Section 2.5(b)) of a certificate representing any Shares
shall after the Effective Time cease to have any rights with respect to
such Shares, except either to receive the Merger Consideration upon
surrender of such certificate, or to exercise such holder's dissenter's
rights as provided in the GCL.
(b) Each Share issued and outstanding immediately prior to the
Effective Time which is owned or held, directly or indirectly, by Parent,
Purchaser, Gambrinus, the Company or any of their majority-owned
subsidiaries shall be canceled and extinguished and cease to exist, without
any conversion thereof, and no payment shall be made with respect thereto.
(c) Each share of Common Stock of Purchaser issued and outstanding
immediately prior to the Effective Time shall be converted into and
thereafter represent one validly issued, fully paid and nonassessable share
of Common Stock, no par value, of the Surviving Corporation.
2.6 Payment For Shares.
(a) Prior to the Effective Time, Purchaser shall select and appoint a bank
or trust company reasonably acceptable to the Company to act as agent for the
holders of Shares (the "Paying Agent") to receive and disburse the Merger
Consideration to which holders of Shares shall become entitled pursuant to
Section 2.5.
B-2
<PAGE> 137
At the Effective Time, Purchaser or Parent shall, and Gambrinus shall cause
Purchaser or Parent to, deposit in trust with the Paying Agent for the benefit
of holders of Shares the aggregate consideration to which such holders shall be
entitled at the Effective Time pursuant to Section 2.5. Such funds shall be
invested as directed by Parent or the Surviving Corporation pending payment
thereof by the Paying Agent to holders of the Shares. Earnings from such
investments shall be the sole and exclusive property of Purchaser and the
Surviving Corporation and no part thereof shall accrue to the benefit of the
holders of the Shares. If for any reason (including losses) such funds are
inadequate to pay the amounts to which holders of Shares shall be entitled under
Section 2.5, Parent shall in any event be liable for payment thereof. Such funds
deposited with the Paying Agent pursuant to this Section 2.6 shall not be used
for any purpose except as expressly provided in this Agreement. From time to
time at or after the Effective Time, Parent shall take all lawful action
necessary to make the appropriate cash payments, if any, to holders of
Dissenting Shares.
(b) As soon as practicable after the Effective Time, Purchaser or Parent
shall cause the Paying Agent to mail to each record holder a certificate or
certificates representing Shares which as of the Effective Time represents the
right to receive the Merger Consideration (the "Certificates"), a form of letter
of transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Paying Agent) and instructions for use in effecting the
surrender of the Certificates for payment therefor. Upon surrender to the Paying
Agent of a Certificate, together with such letter of transmittal duly executed
and completed in accordance with the instructions thereto, and such other
documents as may be reasonably required by the Paying Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration and such Certificate shall forthwith be canceled. No interest
shall be paid or accrued on the Merger Consideration upon the surrender of the
Certificates. Until surrendered in accordance with the provisions of this
Section 2.6(b), each Certificate shall be deemed for all purposes to evidence
only the right to receive the Merger Consideration (without interest thereon),
and shall, subject to Section 2.5, have no other right.
(c) If the Merger Consideration (or any portion thereof) is to be delivered
to a person other than the person in whose name the Certificates surrendered in
exchange therefor are registered, it shall be a condition to the payment that
the Certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person requesting such payment or delivery
shall pay any transfer or other taxes payable by reason of the payment of the
Merger Consideration to a person other than the person in whose name the
Certificates are registered or establish to the satisfaction of the Surviving
Corporation that such tax has been paid or is not applicable. Notwithstanding
the foregoing, neither the Paying Agent nor any party hereto shall be liable to
a holder of Shares for any Merger Consideration delivered to a public official
pursuant to any applicable abandoned property, escheat and similar laws.
(d) Promptly following the date that is one year after the Effective Time,
the Paying Agent shall return to the Surviving Corporation all Merger
Consideration and other cash, property and instruments in its possession
relating to the transactions described in this Agreement, and the Paying Agent's
duties shall terminate. Thereafter, such holders shall be entitled to look to
the Surviving Corporation (subject to abandoned property, escheat or similar
laws) only as general creditors thereof with respect to the Merger Consideration
payable upon due surrender of their Certificates, without any interest thereon.
Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying
Agent shall be liable to any holder of a Certificate for Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.
2.7 No Further Rights or Transfers. All cash paid upon surrender of
Certificates in accordance with the terms of this Article II shall be deemed to
have been paid in full satisfaction of all rights pertaining to the Shares
theretofore represented by such Certificate. At and after the Effective Time the
holders of Certificates to be exchanged for the Merger Consideration pursuant to
this Agreement shall cease to have any rights as shareholders of the Company
except for the right to surrender such holder's Certificates in exchange for
payment of the Merger Consideration, and after the Effective Time there shall be
no transfers on the stock transfer books of the Surviving Corporation of the
Shares which were outstanding immediately prior to the Effective Time. Any
Certificates formerly representing Shares presented to the Surviving Corporation
or
B-3
<PAGE> 138
Paying Agent shall be canceled and exchanged for the Merger Consideration, as
provided in this Article II, subject to applicable law in the case of Dissenting
Shares.
2.8 Supplementary Action. If at any time after the Effective Time, any
further assignments or assurances in law or any other things are necessary or
desirable to vest or to perfect or confirm of record in the Surviving
Corporation the title to any property or rights of either the Company or
Purchaser, or otherwise to carry out the provisions of this Agreement, the
officers and directors of the Surviving Corporation are hereby authorized and
empowered, in the name of and on behalf of the Company and Purchaser, to execute
and deliver any and all things necessary or proper to vest or to perfect or
confirm title to such property or rights in the Surviving Corporation, and
otherwise to carry out the purposes and provisions of this Agreement.
2.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
evidencing Shares shall have been lost, stolen or destroyed, the Paying Agent
shall pay to such holder the Merger Consideration required pursuant to Section
2.5, in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof with such assurances
as the Paying Agent, in its discretion and as a condition precedent to the
payment of the Merger Consideration, may reasonably require of the holder of
such lost, stolen or destroyed Certificates.
2.10 Company Stock Options.
(a) The Company shall take all commercially reasonable actions, if any,
necessary to provide that at the Effective Time, (i) each option outstanding at
the Effective Time to purchase Shares (an "Option") granted under (A) the
Company's 1986 Stock Option Plan, 1995 Stock Option Plan or 1995 Director Option
Plan or (B) any other stock-based incentive plan or arrangement of the Company,
excluding any options granted under the Company's 1995 Employee Stock Purchase
Plan (the "Stock Option Plans"), shall be canceled and (ii) in consideration of
such cancellation, each holder of an Option shall receive in consideration
thereof an amount (subject to any applicable withholding tax) in cash equal to
the product of (x) the excess, if any, of the Merger Consideration over the per
Share exercise price of such Option and (y) the number of Shares subject to such
Option. The Company shall use all commercially reasonable efforts to effectuate
the foregoing, including, if necessary, amending the Stock Plans and obtaining
any necessary consents from holders of Options.
(b) Except as may be otherwise agreed to by Parent or Purchaser and the
Company or as otherwise contemplated or required to effectuate this Section
2.10, the Stock Plans shall terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company or
any of its subsidiaries shall be deleted as of the Effective Time. The Company
shall take all actions necessary to provide that as of the Effective Time no
holder of Options under the Stock Plans will have any right to receive shares of
common stock of the Surviving Corporation upon exercise of any such Option.
(c) The Company shall take all commercially reasonable actions, if any,
necessary to provide that at or immediately prior to the Effective Time, (i)
each then outstanding option under the Company's 1995 Employee Stock Purchase
Plan (the "Stock Purchase Plan") shall automatically be exercised and (ii) in
lieu of the issuance of Certificates, each participant shall receive an amount
in cash (subject to any applicable withholding tax) equal to the product of (x)
the number of Shares otherwise issuable upon such exercise and (y) the Merger
Consideration. The Company shall use all commercially reasonable efforts to
effectuate the foregoing, including without limitation amending the Stock
Purchase Plan and obtaining any necessary consents from participants in the
Stock Purchase Plan. The Company (i) shall not permit the commencement of any
new offering period under the Stock Purchase Plan following the date hereof,
(ii) shall not permit any participant to increase his or her rate of
contributions under the Stock Purchase Plan following the date hereof, (iii)
shall terminate the Stock Purchase Plan as of the Effective Time, and (iv) shall
take any other actions necessary to provide that as of the Effective Time no
holder of options under the Stock Purchase Plan will have any right to receive
shares of common stock of the Surviving Corporation upon exercise of any such
option.
B-4
<PAGE> 139
(d) In the event that an employee of the Company who is a holder of Options
is terminated by the Company after the date of this Agreement but prior to the
Effective Time, such employee shall receive at the Effective Time with respect
to all Options held by such employee as of the date of such termination of
employment the cash payment determined in accordance with Section 2.10(a) that
such employee would have received had such employee been employed as of the
Effective Time.
2.11 Company Warrants. The Company shall take all commercially reasonable
actions, if any, necessary to provide that at the Effective Time, each warrant
outstanding at the Effective Time to purchase Shares (a "Warrant") shall be
canceled. The Company shall take all commercially reasonable efforts to
effectuate the foregoing, including, if necessary, amending a Warrant and
obtaining any necessary consents from holders of Warrants.
III MISCELLANEOUS
3.1 Plan. The Plan and this Agreement are intended to be construed
together in order to effectuate their purposes.
3.2 Termination. Notwithstanding the approval of this Agreement by the
shareholders of the Company and Purchaser, this Agreement may be terminated at
any time prior to the Effective Time by the mutual written agreement of the
Company and Purchaser. Notwithstanding the approval of this Agreement by the
shareholders of the Company and Purchaser, this Agreement will terminate
forthwith in the event that the Plan is terminated in accordance with its terms.
In the event of the termination of this Agreement as provided above, this
Agreement will forthwith become void and there will be no liability on the part
of either the Company, Parent, or Purchaser or their respective officers and
directors, except as otherwise provided in the Plan.
3.3 Amendment. This Agreement may be amended by the parties hereto at any
time before or after approval by the shareholders of the Company and Purchaser
but, after such approval, no amendment will be made which, by applicable law,
requires the further approval of shareholders without obtaining such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
3.4 Assignment; Binding Upon Successors and Assigns. No party may assign
any of its rights or obligations under this Agreement without the prior written
consent of the other parties hereto. This Agreement will be binding upon and
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
3.5 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California (without regard to
its choice of law principles).
[THE REST OF THIS PAGE IS INTENTIONALLY BLANK]
B-5
<PAGE> 140
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date and year first above written.
PBC HOLDINGS, INC.
By:
------------------------------------
James J. Bolz, Vice President
By:
------------------------------------
, Secretary
PBC ACQUISITION CORP.
By:
------------------------------------
James J. Bolz, Vice President
By:
------------------------------------
, Secretary
PETE'S BREWING COMPANY
By:
------------------------------------
Jeffrey A. Atkins, Chief Executive
Officer
and Secretary
B-6
<PAGE> 141
PETE'S BREWING COMPANY
(SURVIVING CORPORATION)
OFFICERS' CERTIFICATE
Jeffrey A. Atkins hereby certifies that:
1. He is the duly elected, acting and qualified Chief Executive Officer and
Secretary of PETE'S BREWING COMPANY, a California corporation (the "Company").
2. The corporation has authorized two classes of stock designated "Common
Stock" and "Preferred Stock." There are authorized 50,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock.
3. There were shares of Common Stock, and no shares of
Preferred Stock outstanding and entitled to vote on the Agreement of Merger
attached hereto (the "Merger Agreement").
4. The principal terms of the Merger Agreement in the form attached hereto
were approved by the Board of Directors of the Company and by the required vote
of the shareholders, which required vote is a majority of the outstanding shares
of Common Stock.
5. Jeffrey A. Atkins further declares under penalty of perjury under the
laws of the State of California that he has read the foregoing certificate and
knows the contents thereof and that the same is true of his own knowledge.
Executed in Palo Alto, California on August , 1998.
--------------------------------------
Jeffrey A. Atkins, Chief Executive
Officer
and Secretary
B-7
<PAGE> 142
PBC ACQUISITION CORP.
(A TEXAS CORPORATION)
OFFICERS' CERTIFICATE
James J. Bolz and hereby certify that:
1. They are the Vice President and Secretary of PBC ACQUISITION CORP., a
California corporation (the "Company").
2. The corporation has authorized one class of stock designated "Common
Stock." There are authorized shares of Common Stock.
3. There were shares of Common Stock outstanding and
entitled to vote on the Agreement of Merger attached hereto (the "Merger
Agreement").
4. The principal terms of the Merger Agreement in the form attached hereto
were approved by the Board of Directors and by the required vote of the
shareholders, which was of the outstanding shares of Common Stock
of the Company.
5. The principal terms of the Merger Agreement in the form attached hereto
were approved by the Board of Directors of PBC Holdings, Inc., the parent of PBC
ACQUISITION CORP.
6. James J. Bolz and further declare under penalty of
perjury under the laws of the State of California that each has read the
foregoing certificate and knows the contents thereof and that the same is true
of their own knowledge.
Executed in San Antonio, Texas on August , 1998.
--------------------------------------
James J. Bolz, Vice President
--------------------------------------
, Secretary
B-8
<PAGE> 143
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
May 22, 1998
Board of Directors
Pete's Brewing Company
514 High Street
Palo Alto, CA 94301
Members of the Board:
We understand that Pete's Brewing Company (the "Company"), The Gambrinus
Company, PBC Holdings, Inc. (the "Buyer") and PBC Acquisition Corp., a wholly
owned subsidiary of Buyer ("Acquisition Sub") have entered into an Agreement and
Plan of Merger, dated as of May 22, 1998 (the "Merger Agreement"), which
provides, among other things, for the merger (the "Merger") of Acquisition Sub
with and into the Company. Pursuant to the Merger, the Company will become a
wholly owned subsidiary of the Buyer and each outstanding share of common stock,
no par value (the "Common Stock") of the Company, other than shares held in
treasury or held by the Buyer or any affiliate of the Company or the Buyer or as
to which dissenters' rights have been perfected, will be converted into the
right to receive $6.375 per share in cash. The terms and conditions of the
Merger are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of the Company Common Stock pursuant to the
Merger Agreement is fair from a financial point of view to such holders (other
than the Buyer and its affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning the Company prepared by the management
of the Company;
(iii) analyzed certain financial projections prepared by the management of
the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the reported prices and trading activity for the Company
Common Stock;
(vi) compared the financial performance of the Company and the prices and
trading activity of the Company Common Stock with that of certain
other comparable publicly-traded companies and their securities;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(viii) participated in discussions and negotiations among representatives
of the Company, Buyer and certain other parties and their financial
and legal advisors;
(ix) reviewed the Merger Agreement, the Stockholder Agreement, dated as of
May 22, 1998 between the Buyer and certain holders of the Company
Common Stock and certain related documents; and
(x) performed such other analyses as we have deemed appropriate.
C-1
<PAGE> 144
MORGAN STANLEY
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company. We have not made any independent valuation or appraisal of the assets
or liabilities of the Company, nor have we been furnished with any such
appraisals. Our opinion is necessarily based on economic, market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
We have acted as financial advisor to the Board of Directors of the Company
in connection with this transaction and will receive a fee for our services. In
the past, Morgan Stanley & Co. Incorporated and its affiliates have provided
financial advisory and financing services for the Company and have received fees
for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of the Company and may not be used for any other purpose without our
prior written consent except that this opinion may be included in its entirety
in any filing made by the Company in respect of the transaction with the
Securities and Exchange Commission.
Based on the foregoing, we are of the opinion on the date hereof that the
consideration to be received by the holders of shares of the Company Common
Stock pursuant to the Merger Agreement is fair from a financial point of view to
such holders (other than the Buyer and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
/s/ ROBERT P. LEE
--------------------------------------
By: Robert P. Lee, Managing Director
C-2
<PAGE> 145
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
1300. RIGHT TO REQUIRE PURCHASE -- "DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (o) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes the provisions of
this section and Sections 1301, 1302, 1303 and 1304; provided, however,
that this provision does not apply to any shares with respect to which
there exists any restriction on transfer imposed by the corporation or by
any law or regulation; and provided, further, that this provision does not
apply to any class of shares described in subparagraph (A) or (B) if
demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
D-1
<PAGE> 146
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
1302. ENDORSEMENT OF SHARES. Within 30 days after the date on which notice
of the approval by the outstanding shares or the notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder, the shareholder shall submit
to the corporation at its principal office or at the office of any transfer
agent thereof, (a) if the shares are certificated securities, the shareholder's
certificates representing any shares which the shareholder demands that the
corporation purchase, to be stamped or endorsed with a statement that the shares
are dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder demands
that the corporation purchase. Upon subsequent transfers of the dissenting
shares on the books of the corporation, the new certificates, initial
transaction statement, and other written statements issued therefor shall bear a
like statement, together with the name of the original dissenting holder of the
shares.
1303. AGREED PRICE -- TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
D-2
<PAGE> 147
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. APPRAISERS' REPORT -- PAYMENT -- COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more then 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR. To the extent that the
provisions of Chapter 5 prevent the payment to any holders of dissenting shares
of their fair market value, they shall become creditors of the corporation for
the amount thereof together with interest at the legal rate on judgments until
the date of payment, but subordinate to all other creditors in any liquidation
proceeding, such debt to be payable when permissible under the provisions of
Chapter 5.
1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT. Cash dividends declared and
paid by the corporation upon the dissenting shares after the date of approval of
the reorganization by the outstanding shares (Section 152) and prior to payment
for the shares by the corporation shall be credited against the total amount to
be paid by the corporation therefor.
1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS. Except
as expressly limited in this chapter, holders of dissenting shares continue to
have all the rights and privileges incident to their shares, until the fair
market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS. Dissenting shares lose
their status as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of
the reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for
endorsement in accordance with Section 1302 or are surrendered for
conversion into shares of another class in accordance with the articles.
D-3
<PAGE> 148
(c) The dissenting shareholder and the corporation do not agree upon
the status of the shares as dissenting shares or upon the purchase price of
the shares, and neither files a complaint or intervenes in a pending action
as provided in Section 1304, within six months after the date on which
notice of the approval by the outstanding shares or notice pursuant to
subdivision (i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION. If
litigation is instituted to test the sufficiency or regularity of the votes of
the shareholders in authorizing a reorganization, any proceedings under Section
1304 and 1305 shall be suspended until final determination of such litigation.
1311. EXEMPT SHARES. This chapter, except Section 1312, does not apply to
classes of shares whose terms and provisions specifically set forth the amount
to be paid in respect to such shares in the event of a reorganization or merger.
1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
D-4
<PAGE> 149
PETE'S BREWING COMPANY
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS TO BE HELD, TUESDAY, JULY 21, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of PETE'S BREWING COMPANY, a California
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement, each dated June 24, 1998, and hereby appoints
Jeffrey A. Atkins and Philip A. Marineau, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf and in the
name of the undersigned, to represent the undersigned at the Special Meeting of
Shareholders of PETE'S BREWING COMPANY (the "Company") to be held on Tuesday,
July 21, 1998 at 10:00 a.m. local time, at the Sheraton Palo Alto (formerly the
Holiday Inn Palo Alto), 625 El Camino Real, Palo Alto, California 94301 and at
any adjournment or adjournments thereof, and to vote all shares of Common Stock
which the undersigned would be entitled to vote if then and there personally
present, on the matters set forth below:
1. Proposal to approve and adopt the Agreement and Plan of Merger dated as
of May 22, 1998 (the "Merger Plan"), among PBC Holdings, Inc., a Texas
corporation ("Parent"), PBC Acquisition Corp., a Texas corporation and
wholly-owned subsidiary of Parent ("Merger Sub"), The Gambrinus Company,
a Texas Corporation, and the Company, and a related Agreement of Merger
between Parent, Merger Sub and the Company (the "Merger Agreement" and,
collectively with the Merger Plan, the "Merger Agreements"), and to
approve consummation of the merger of Merger Sub with and into the
Company (the "Merger"), pursuant to which (a) the Company will be the
surviving corporation and will become a wholly-owned subsidiary of Parent
and (b) each outstanding share of Common Stock, no par value per share,
of the Company and the accompanying Right will be converted into the
right to receive $6.375 in cash, without interest.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
and, in their discretion, upon such other matter or matters which may properly
come before the meeting or any adjournment or adjournments thereof.
(continued, and to be signed and dated, on the other side)
<PAGE> 150
(continued from other side)
THIS PROXY WILL BE VOTED AS DIRECTED OR, IF NO CONTRARY DIRECTION IS
INDICATED, WILL BE VOTED FOR THE PROPOSAL LISTED AND AS SAID PROXIES DEEM
ADVISABLE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING,
INCLUDING, AMONG OTHER THINGS, CONSIDERATION OF ANY MOTION MADE FOR ADJOURNMENT
OF THE MEETING (INCLUDING, WITHOUT LIMITATION, FOR PURPOSES OF SOLICITING
ADDITIONAL VOTES TO APPROVE AND ADOPT THE MERGER AGREEMENTS AND APPROVE THE
MERGER).
(This Proxy should be marked,
dated and signed by the
shareholder(s) exactly as his or
her name appears hereon, and
returned promptly in the enclosed
envelope. Persons signing in a
fiduciary capacity should so
indicate. If shares are held by
joint tenants or as community
property, both should sign.)
[ ] I plan to attend the meeting
[ ] I do not plan to attend the
meeting
[ ] Change of Address/comments on
reverse side
Dated: , 1998
----------------------------------
Signature
----------------------------------
Signature
