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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended
December 31, 1996 or
/ / Transition report pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934 for the transition period from
________________ to _______________.
COMMISSION FILE NUMBER: 0-26834
PETE'S BREWING COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0110743
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
514 HIGH STREET, PALO ALTO, CALIFORNIA 94301
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (415) 328-7383
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Name of each exchange
Title of each class on which registered
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None None
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, no par value
Preferred Share Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing sale price of the Common Stock on
February 28, 1997 as reported on the Nasdaq National Market, was approximately
$37,395,503. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 1997, registrant had outstanding 10,715,769 shares
of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Shareholders to
be held May 12, 1997. Portions of the Registrant's Annual Report to Shareholders
for the fiscal year ended December 31, 1996 are incorporated by reference into
Parts II and IV of this Form 10-K.
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PART I
The information contained in this Report includes forward-looking
statements, based on current expectations, that involve risks and uncertainties
which could cause actual results to differ materially from those expressed in
the forward-looking statements. Various important factors known to Pete's
Brewing Company that could cause such material differences are identified below
in Part I, Item 1 of this report and in the "Management's Discussion and
Analysis of Results of Operations and Financial Condition" included in the
Company's 1996 Annual Report to Shareholders, which is incorporated by reference
into Part II, Item 7 of this Report.
ITEM 1. BUSINESS
Pete's Brewing Company ("Pete's" or the "Company") is the second
largest major domestic craft brewer in the United States. The Company currently
markets its 12 distinctive full-bodied beers in 49 states, the District of
Columbia and the United Kingdom under the "Pete's Wicked" brand name. Pete's
Wicked Ale, the Company's flagship beer has won 17 awards for excellence since
it was introduced in 1986. In addition, Pete's currently markets Pete's Wicked
Bohemian Pilsner, Pete's Wicked Honey Wheat, Pete's Wicked Amber Ale, Pete's
Wicked Summer Brew and Pete's Wicked Winter Brew. In order to appeal to varying
consumer preferences, in July 1996 the Company diversified its product line by
introducing and marketing four new beers, Pete's Wicked Pale Ale, Pete's Wicked
Maple Porter, Pete's Wicked Strawberry Blonde and Pete's Wicked Multi Grain. By
year end, Pete's completed its calendar of seasonal offerings with the
introduction of Pete's Wicked Oktoberfest and Pete's Wicked Mardi Gras to
provide a seasonal bridge between the number-one selling craft beer in their
respective seasons, Pete's Wicked Summer Brew and Pete's Wicked Winter Brew.
INDUSTRY BACKGROUND
The Company participates in the craft beer segment of the estimated $50
billion domestic beer market. The domestic craft beer segment, which includes
brewpubs, microbreweries, regional breweries and custom brewers, represented
approximately 4% of total domestic beer retail sales in 1996. Craft beers are
generally brewed 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, German recipe
wheat beers and seasonal brews tend to be more flavorful and fresher tasting.
The domestic craft beer segment grew at an annual rate of approximately 36% for
the year ended December 31, 1996, while volume in the overall domestic beer
market has remained relatively flat. The Company believes that this growth in
the craft beer segment has resulted from several factors. Craft brewers produce
high quality, full-bodied, distinctive styles of beer and convincingly promote
the notion that beer "made in small batches" from "all natural ingredients" is
better than mass produced domestic and imported products, particularly powerful
in light of the trend among large brewers to minimize costs through the use of
lower cost adjuncts. The increased consumer demand for craft beers allows for a
price premium relative to mass produced beers. This price premium results in
higher profit margins throughout the distribution channel motivating
distributors and retailers to carry and promote products of the craft beer
segment. Finally, consumers' interest in beer making and brewing history has
flourished, as demonstrated by the growth of related industries such as
homebrewing, beer festivals, consumer publications devoted to beer and the
popularity of beer celebrities.
In general, three types of brewers produce beers that compete with the
Company's beers: the major domestic producers, the import beer companies and
craft brewers. The major domestic producers, seeking to capitalize on the growth
in the craft beer segment, have begun to produce and market fuller-bodied beers
designed to appeal to consumers of craft beers. The brewers of imported beers
from Holland, Germany, Canada and Mexico were the first to provide beers to
address and to benefit from shifting consumer preferences toward fuller-bodied,
better-tasting
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beers. There are approximately 1,200 craft brewers in the United States, falling
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, generally defined within
the industry as brewers of less than 15,000 barrels of beer annually, generally
have very limited distribution. Regional brewers typically own and operate their
own breweries to produce between 15,000 and 2,000,000 barrels of beer annually.
While the regional craft brewers have strong presences in their geographic
regions, they generally have less distribution and market share outside of their
home region and transportation costs and less-than-ideal locations are barriers
to achieving full scale national distribution. In addition, regional brewers
typically invest substantially all of their resources in building and
maintaining breweries, leaving little to invest in sales and marketing
activities. Such brewers rely primarily on word of mouth and occasional media
attention to promote their growth. Custom brewers utilize excess brewing
capacity within the industry to produce their beers according to proprietary
recipes. The custom brewers devote their resources toward advertising and
promotion of their craft beers, rather than a capital-intensive brewing
operation.
Large national brewers have long dominated the overall beer industry in
the United States, of which the craft beer segment forms only a small portion.
As a result of extensive consolidation, the United States beer industry is
highly concentrated, with five companies--Anheuser-Busch Companies, Inc., Miller
Brewing Company, Inc., Stroh Brewery Co., Adolf Coors Co. and Pabst Brewing
Co.--accounting for over 88% of domestic beer shipments in 1996. The large
domestic beer producers generally offer an homogeneous selection of beers
designed for mass appeal. These beers, principally light-bodied lagers and
pilsners, are brewed using low-cost mass production techniques, lower cost
adjuncts, such as rice and corn, and relatively less hops. In contrast to the
substantial growth in the craft beer segment in recent years, over the last 10
years, overall growth in the domestic beer market has been relatively low, with
volume growing at an annual rate of less than 1% since 1984. Adult per capita
annual beer consumption in the United States has also declined slightly. The
Company believes that this low growth rate and reduced beer consumption can be
attributed to a variety of factors, including increased concerns about the
health consequences of consuming alcoholic beverages; safety consciousness and
concerns about drinking and driving; a trend toward a diet including lighter,
lower calorie beverages such as diet soft drinks, juices and sparkling water
products; 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 increased federal and state excise taxes.
The growing consumer trend toward moderation in alcohol consumption has
benefitted craft beers by resulting in beer drinkers' selective consumption of
one or two better tasting beers per sitting.
STRATEGY
The Company's objective is to become the leading brewer of high quality
craft beers in the United States. Key elements of the Company's business
strategy to increase market share and profitability include the following:
Brand Investment. The Company devotes significant financial
resources to innovative selling, advertising and promotional
activities designed to build brand awareness and a high level of
consumer loyalty. Through participation in trade shows, other beer
industry events and co-founder Pete Slosberg's beer education
seminars, the Company seeks to educate distributors, retailers and
consumers about the craft beer industry and the Company's beers. In
1996, 1995 and 1994, selling, advertising and promotional expenses
represented 42.0%, 36.4% and 34.3%, respectively, of the Company's net
sales.
The Company markets all of its beers under the "Pete's Wicked"
trademarks in order to concentrate its marketing efforts behind a
single brand name. Research conducted by the Company indicates that
consumers in the Company's target market are attracted to the "Pete's
Wicked" brand name and associate both quality and fun with the brand.
In addition, the "Pete's Wicked" brand is versatile, amenable to brand
expansion and is not constrained by regional or provincial
connotations.
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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
Wicked" brand and advertising awareness, consumption patterns and
craft beer consumer demographics. In June 1996, the Company initiated
a radio advertising campaign in the United States. The Company's radio
advertising campaign featuring the Company's co-founder, Pete
Slosberg, concentrated on communicating the Company's variety of
products. The Company intends to continue to expend significant
resources on selling, advertising and promotion to increase its market
share in key geographic regions in the United States. The Company's
advertising and promotional activities which have promoted the
Company's image as a small and innovative brewer, with a personal and
inviting character behind the label, a unique brand name and high
quality beers will be subject to review in the Company's consumer
research in order to strengthen such advertising and promotional
activities.
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 testing. In general, the custom brewing strategy allows the
Company to (i) devote significant financial resources to sales,
promotion and advertising activities, (ii) maintain strong sales
growth with a relatively lean infrastructure and (iii) secure access
to the brewing capacity required to efficiently distribute its beers
nationally, while maintaining high quality across its product
offerings.
The Company has a strategic alliance with The Stroh Brewery
Company ("Stroh") pursuant to which the Company custom brews all of its
beers at the breweries of Stroh. In August 1995, the Company began
shipping products brewed at the St. Paul, Minnesota Stroh brewery. In
March 1996, the Company began shipping products brewed at the
Winston-Salem, North Carolina Stroh brewery. 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 several different brewers, including ease of management of
operations, uniformity of product quality and ability to use a single
management information system. In connection with the Stroh Agreement,
the Company issued a warrant to Stroh to purchase 1,140,284 shares of
the Company's Common Stock and an executive officer of Stroh joined the
Company's Board of Directors.
National Distribution Network. The Company's strategy is to
expand market share in key markets of the United States by leveraging
its established national distribution network to increase retail
account distribution. The Company has recently expanded its
distribution network to include 49 states, the District of Columbia
and the United Kingdom. The Company has invested significant resources
to educate distributors and retailers about promoting and selling the
Company's beers and the craft beer segment in general. The Company
chooses distributors in each market that will devote significant
attention and resources to the promotion and sale of the Company's
beers. These distributors may be wine and spirits distributors or
traditional beer wholesalers.
Product Diversity and Quality. The Company intends to continue
to expand its product line with additional beers designed to appeal to
varying consumer preferences. The Company has successfully formulated
and introduced six new beers in 1996. These new beers accounted for
22% of sales in 1996. The Company currently markets 12 distinctive
full-bodied craft beers, consisting of eight year-round
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products and four seasonal brews. The Company's beers, ranging from
brown to amber to gold colors, all bear the "Pete's Wicked" 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. The Company uses no
additives, adjuncts or preservatives in the brewing process.
PETE'S WICKED BREWS
The Company produces 12 distinctive beers under the "Pete's Wicked"
brand name. The Company introduced six new beers in 1996. The Company positions
all of its products as full-bodied beers of the highest quality. The Company's
products contain no artificial preservatives and are made only from high quality
natural ingredients. The Company brews its beer using only water, malt, hops,
yeast and natural spices and flavors and does not utilize additives or adjuncts
to extend the natural ingredients. The Company's beers have won numerous awards
for excellence. The Company's net sales and barrels of beer sold have grown
rapidly from $2.5 million and 14,700 barrels, respectively, in 1991 to $70.6
million and 425,600 barrels, respectively, in 1996, representing a compound
annual growth in net sales and in barrels of 95.1% and 96.0%, respectively.
Brands
The Company offers the following Pete's Wicked brews:
Pete's Wicked Ale. Introduced in 1986, the Company's flagship
beer, Pete's Wicked Ale, is a dark amber beer with a medium body, malt
richness and strong hop flavor. Pale, chocolate and caramel malts
provide the beer's distinctive roasted flavor and a complex blend of
Cascade and rare Brewer's Gold hops create a floral aroma.
Pete's Wicked Bohemian Pilsner. Introduced in 1992 as Pete's
Wicked Lager, Pete's Wicked Bohemian Pilsner is a pilsner beer brewed
with Saaz hops. A combination of pale and caramel malts enhances the
full body and rich color of Pete's Wicked Bohemian Pilsner, resulting
in a spicy, fruity pilsner with a hop bitterness.
Pete's Wicked Amber Ale. Introduced in August 1994 as Pete's
Wicked Red, Pete's Wicked Amber Ale is a full-bodied red amber ale. A
blend of pale, caramel and Munich malts contribute to the beer's nutty
malt character and rich red hue. Yakima Cluster and Cascade hops along
with late-kettled Tettanger hops provide the floral aroma of Pete's
Wicked Amber Ale.
Pete's Wicked Honey Wheat. Introduced in July 1995, Pete's
Wicked Honey Wheat is a richly colored, delicately malted wheat beer.
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 Wicked Winter Brew. Introduced in the winter of 1993,
Pete's Wicked Winter Brew is a seasonal amber ale with a raspberry
aroma and taste. This holiday offering is available annually from the
Fall through the Winter.
Pete's Wicked Summer Brew. Introduced in April 1995, Pete's
Wicked Summer Brew is made with pale and wheat malt to create a golden
color and all malt flavor. Tettanger hops deliver a crisp hop bite and
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light carbonation is added. A delicate hint of natural lemon flavor is
added. 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
1995 and 1996.
Pete's Wicked Pale Ale. Introduced in July 1996, Pete's Wicked
Pale Ale has a medium body and color and is initially sweet yet spicy
with a lingering bitter finish. Cascade and Cluster hops blended with
imported Czech Saaz hops deliver an intense bitter aroma and flavor.
Pete's Wicked Maple Porter. Introduced in July 1996, Pete's
Wicked Maple Porter has a sweet maple aroma and roasted malt character
that dominate the tall bodied dark porter. This brew is a new twist on
a favorite English beer style of the 1700s.
Pete's Wicked Multi Grain. Introduced in July 1996, Pete's
Wicked Multi Grain is an innovative blend of oats, rye, wheat and
barley with a copper color and subtle sweetness. The rye adds a unique
spicy note and the oats contribute to the smooth, balanced taste.
Pete's Wicked Strawberry Blonde. Introduced in July 1996,
Pete's Wicked Strawberry Blonde is a light bodied brew with a
refreshingly sweet strawberry aroma. The color is golden, but with a
reddish hue.
Pete's Wicked Mardi Gras. Introduced in December 1996, Pete's
Wicked Mardi Gras is a light-bodied brew enhanced with a hint of
ginger. This limited release beer offers a taste of the celebration
held annually in New Orleans, Louisiana.
Pete's Wicked Oktoberfest. Introduced in August 1996, Pete's
Wicked Oktoberfest is a traditional Bavarian celebration brew created
in the classic Marzen (Oktoberfest) style. This copper colored,
medium-bodied brew has a sweet, caramel nutty flavor with balancing
bitterness.
Awards for Excellence
The Company's beers have won numerous awards for excellence. In 1996,
the Company's beers won 12 different awards. The following table lists certain
awards and distinctions achieved by the Company's beers:
PETE'S WICKED ALE
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1997 SILVER MEDAL: Ale Category World Beer Championship
1997 GOLD MEDAL: Brown Ale Category Cheers One World Festival, Florida
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
1992 GOLD MEDAL: American Brown Ale Great American Beer Festival(R), Denver
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
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1988 SILVER MEDAL: Great American Beer Festival(R), Denver
Brown Ale Category
1987 SILVER MEDAL: Great American Beer Festival(R), Denver
Ale Category
1987 1ST PLACE ALL STYLES Bay Guardian Competition, San Francisco
PETE'S WICKED AMBER ALE
1997 SILVER MEDAL: World Beer Championships
Amber Ale Category
1996 SILVER MEDAL: World Beer Championships
Amber Ale Category
1995 SILVER MEDAL: World Beer Championships
Amber Ale Category
PETE'S WICKED BOHEMIAN PILSNER
1997 SILVER: Cheers One World Festival, Florida
Pilsner Category
1996 GOLD MEDAL: World Beer Championships
Pilsner Category
1996 BRONZE MEDAL: All American Beer Festival, Houston
Lager Category
1995 GOLD MEDAL: World Beer Championships
Pilsner Category
1995 SILVER MEDAL: California Beer Festival
Traditional Pilsen
1994 GOLD MEDAL: World Beer Championships
Pilsner Category
1993 GOLD MEDAL Great International Beer Tasting, Denver
PETE'S WICKED HONEY WHEAT
1997 GOLD MEDAL: Cheers One World Beer Festival, Florida
Flavored Wheat Category
1996 SILVER MEDAL: World Beer Championships
Flavored Wheat Category
1996 SILVER MEDAL: All American Beer Festival. Houston
Wheat Category
1996 BEST HONEY BEER World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: World Beer Championships
Herb & Spice Category
PETE'S WICKED STRAWBERRY BLONDE
1996 SILVER MEDAL: World Beer Championship
Fruit Beer Category
PETE'S WICKED MAPLE PORTER
1996 SILVER MEDAL: World Beer Championship
Herb-Spice Flavored Category
PETE'S WICKED PALE ALE
1997 SILVER MEDAL: World Beer Championships
Pale Ale Category
PETE'S WICKED SUMMER BREW
1996 BEST PALE ALE World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: World Beer Championships
Fruit Beer Category
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PETE'S WICKED OKTOBERFEST
1996 SILVER MEDAL: Oktoberfest Category World Beer Championship
PETE'S WICKED WINTER BREW
1997 SILVER MEDAL: Winter Ale Category World Beer Championships
1995 SILVER MEDAL: Fruit Flavored Category California Beer Festival
1993 NINKASI AWARD Based on one of the homebrew recipes by
the 1993 National Homebrew Grand Champion
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Packaging
The label imagery on the Pete's bottle and the other graphics on the
packaging containers are the primary communication with the consumer at the
point of sale. For this reason the Company has invested 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 July 1996, the Company
initiated a uniform packaging re-design of the "Pete's Wicked" brand. The
Company packages its beers in bottles 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 cardboard container. In March 1990, the Company
introduced 22-ounce "big bottles" sold individually at the retail level. The
oversized bottles have been popular trial packages with first-time purchasers
that are experimenting with several types and brands of craft beers. 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 15 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. 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.
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ADVERTISING AND PROMOTION
The Company's marketing programs emphasize the "Pete's Wicked" 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 Company's microbrewing origins 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, the Company has the only national brand
identified with an individual deemed to be a true "beer folk hero." Additional
innovations, such as an (800) line and catalog of Wicked Ware clothing, further
differentiate the label from other brands and help to keep the Company close to
the consumer. In addition, the Company initiated a radio advertising campaign in
the second half of 1996. In 1996, the Company completed its seasonal line of
beers with the introduction of Pete's Wicked Mardi Gras and Pete's Wicked
Oktoberfest which are available between the Pete's Wicked Summer Brew and Pete's
Wicked Winter Brew selling seasons. Also in 1996, the Company introduced a
direct mail and consumer membership program, VIPete's, which the Company
believes to be the first national loyalty program introduced by a craft brewer.
All of these marketing tools have succeeded in increasing the brand's
visibility, with the Company's distributors, retailers and consumers.
The Company believes that with the recent increased competition in the
craft beer industry, it is necessary to increase advertising spending in order
to increase brand loyalty among consumers. The Company intends to reduce
promotional point-of-purchase spending and reallocate those resources to
consumer advertising strategies.
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 point of sale promotional
activities in 1996 included (i) a newly re-designed line of "Pete's Wicked"
packaging (ii) a summer promotion entitled "Letus Gamus Beginus" encouraging
mass displays at retail outlets (iii) a "Get Wicked Tonight" Halloween theme
promoting the natural connection between the "Pete's Wicked" brand name and
Halloween and (iv) a holiday theme promotion featuring Pete's Wicked Winter Brew
in the fourth quarter. The Company's bottle labeling and package artwork also
enhance the Company's visibility at the point of sale.
Radio and Print Advertising. The Company's radio and print advertising
activities feature Pete Slosberg, the Company's co-founder and spokesperson, as
an everyday guy and the ultimate beer enthusiast. In 1994, the
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Company became the first national, domestic craft beer producer to utilize
television advertising to promote its products. In June 1996, the Company
initiated a radio advertising campaign in markets across the United States. The
advertising campaign, which ran in two flights in the third and fourth quarters
of 1996, consisted of three 60 second spots that aired on radio stations
targeted to adults, ages 21 to 39. The radio ads featured Pete, the person
behind the product, and concentrated on the Company's variety of products. The
Company continues to monitor the effectiveness of its radio advertising among
beer consumers and 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.
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 over 100 trade shows in 1996, including the
Great American Beer Festival(R) and the National Beer Wholesalers Association
Conference, as well as numerous regional restaurant and hotel expositions. Many
of these events provide a forum for Pete to promote the Company's image and
further strengthen the "Pete's Wicked" 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. To increase
consumer involvement and further differentiate the brand, the Company also sells
Wicked Ware, a line of T-Shirts, sweatshirts, jackets, hats and similar products
emblazoned with "Pete's Wicked" graphics. The Company also utilizes direct mail,
distributing full color merchandise catalogues and the Company's newsletter, The
Wicked Word. In addition to promoting the Company's products, the newsletter
includes information about the history of the Company, the craft beer industry
and the different styles and types of beer. In 1996, the Company introduced
VIPete's, a direct mail and consumer membership loyalty program.
As of December 31, 1996, the Company's sales and marketing group
consisted of 101 employees. During 1996, 1995 and 1994, selling, advertising and
promotion expenses were $29.7 million, $21.5 million and $10.6 million,
respectively, representing 42.0%, 36.4% and 34.3% of net sales, respectively.
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, 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 (all of whom carry other beverage
products that compete with the Company's beers) of "Pete's Wicked" brews are
formally appointed in a variety of ways throughout the 49 states in which the
Company does business. In most cases, variations in appointment procedures are
directly attributable to state alcoholic beverage laws mandating territorial
appointment (some exclusive and some non-exclusive), restricting in various ways
the Company's ability to terminate or not renew the services of wholesale
distributors and providing
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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. 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.
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 1996 and 1995, the Company's
ten largest distributors accounted for approximately 39.2% and 49.6%,
respectively, of the Company's sales. Sales to Southern Wine and Spirits, the
Company's former California distributor, represented approximately 10.7%, 20.7%
and 27.8% of the Company's sales in 1996, 1995, 1994, respectively. Sales to
Premium Coastal, the Company's distributor covering the Commonwealth of
Massachusetts, represented approximately 9.4%, 10.7% and 11.1%, of the Company's
sales in 1996, 1995 and 1994, 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 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 producer.
The Company's strategy for increasing market share involves
establishing a network of distributors in a market, educating the distributors
and retailers and finally building sales volume through aggressive promotion and
advertising campaigns. To date, the Company has applied significant selling,
advertising and promotional resources to only a limited number of key markets.
The Company intends to focus on those key markets where the increasing
population base, historically high level of beer consumption and relative lack
of competition from other craft beers provides the greatest opportunities for
growth.
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CUSTOM BREWING
Since inception, the Company has followed a strategy of utilizing
breweries with excess capacity to brew the Pete's Wicked brews pursuant to the
Company's proprietary recipes. The Company believes that there is high quality
excess brewing capacity available in the domestic beer industry to meet its
needs for the foreseeable future. The Company's custom brewing strategy allows
it to forego the substantial investment of financial resources required to
purchase, or build, and maintain a brewery and results in lower capital and
overhead costs per barrel of beer sold. From June 1992 through May 1995, the
Company produced and packaged all of its beers at the St. Paul, Minnesota
brewery of Minnesota Brewing Company ("MBC"). In May 1995, the Company began
transitioning production of its beers from MBC to the Stroh brewery, also in St.
Paul, Minnesota. The transition to Stroh was completed in November 1995.
Currently, all of the Company's beers are produced at the Stroh breweries in St.
Paul, Minnesota and 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.
Stroh or its predecessors, have brewed beer at the St. Paul brewery for over 136
years. The Company has chosen Stroh as its custom brewing partner because of
Stroh's ability to brew the Company's craft beers according to traditional
European brewing styles and methods and to ensure high quality throughout the
brewing process. The Company began shipping beer from the Stroh Brewery in
Winston-Salem in March 1996. The Company also has access to additional Stroh
breweries in Longview, Texas and Seattle, Washington, in addition to the St.
Paul, Minnesota and Winston-Salem, North Carolina breweries. The alliance with
Stroh therefore allows the Company to custom brew Pete's Wicked brews in
multiple geographic locations, which offers the opportunity for more efficient
national distribution and shortened delivery times. Production at multiple
breweries also reduces or eliminates the risks associated with brewing all of
the Company's beers at a single brewery. Under the Stroh alliance, Stroh
purchases all of the ingredients used in producing the Company's beers in
compliance with rigorous quality assurance requirements, guidelines and
specifications established by the Company. The Company believes that Stroh is
able to achieve volume purchase pricing discounts which may not be available to
the Company. The annual brewing capacity available to the Company at the St.
Paul brewery is nearly two times greater than the total volume of beer sold by
the Company in 1996, and the combined brewing capacity available to the Company
at the four Stroh breweries is almost four times greater than the total volume
of beer sold by the Company in 1996. 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. One such
exception to the agreement is that the Company may brew its beers at a brewery
owned and operated by the Company in California.
The Company has agreed to pay Stroh a manufacturing services price
equal to the aggregate of a contractually specified brewing fee 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. Stroh may terminate the agreement only on the limited
grounds of the Company's breach or insolvency.
Pete's is responsible for all capital improvements or modifications
required to produce the company's beers at the additional Stroh breweries in
either Longview or Seattle. In the event that either party terminates the
brewing agreement according to its terms, the Company must reimburse Stroh for
the unamortized costs of any such improvements or modifications. Should Stroh
elect to terminate brewing operations at any one of its breweries, Stroh
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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 1996. However,
in the event that the minimum barrelage is not produced, the Company must make
certain payments to Stroh. Stroh retains a security interest in all beer
produced under the brewing agreement until the Company has paid the specified
price or until such beer is shipped. Payment is due to Stroh upon shipment.
Under the terms of the Stroh brewing agreement, delivery of all "Pete's Wicked"
brews by Stroh to the Company or its distributors is at the dock of the subject
Stroh brewery. The Company is responsible for securing and paying for carrier
services for its beers from Stroh's breweries.
The Company assures the quality of its beers by controlling the custom
brewing operations and by following the most advanced brewing industry
guidelines for in-process and finished product testing. A staff of five
full-time Pete's employees, including the Company's brewmaster, works in St.
Paul and oversees brewing in all locations. The Company's on-site staff assists
in the brewing, purchasing, accounting, transportation, development and quality
control of the Company's products on a routine basis. 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, 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 meet the Company's
delivery commitments or if beer brewed at the Stroh brewery failed to satisfy
the Company's quality requirements. 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 has recently determined
not to go forward with previously disclosed plans to construct and equip a new
brewery in California. Although the Company believes that
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the brewing capacity available to the Company under the Stroh Agreement is
adequate to meet its needs for the foreseeable future, the Company will continue
to monitor long-term capacity availability in light of its business plan. The
financial resources previously earmarked to finance capital expenditures in
connection with the construction of the brewery will now be used for general
corporate purposes, including to meet working capital needs, pending the
analysis, currently underway, of the alternative uses available to the Company.
During the first quarter of 1997, based on a decision made at its February 1997
Board of Directors meeting to indefinitely delay construction of a brewery, the
Company will take a charge to earnings for the write-off of previously
capitalized costs in connection with the brewery project. Such write-off will
adversely impact the Company's earnings in the first quarter of 1997.
Ingredients and Packaging Materials. The Company or Stroh has
established relationships with the several suppliers of water, malt, hops and
yeast used in the brewing of "Pete's Wicked" brews. "Pete's Wicked" brews do not
contain fillers such as corn, rice or sugar which are typically found in mass
produced beers and which tend to diminish a beer's true character. All
ingredients purchased by Stroh under the brewing agreement must comply with the
Company's established quality assurance requirements, procedures, guidelines and
specifications. The Brewer's Gold hops used in the production of Pete's Wicked
Ale are specially grown for the Company in the Willamette Valley in Oregon. In
order to secure adequate amounts of these rare Brewer's Gold hops, the Company
must make certain advance purchase commitments. These hops are not otherwise
grown in quantities sufficient to satisfy the Company's requirements for the
production of Pete's Wicked Ale. If the Company were unable to obtain sufficient
quantities of the Brewer's Gold hops it would be required to use alternative
hops which would change the character of Pete's Wicked Ale.
Under the terms of the brewing agreement, the Company will, with
certain exceptions, purchase packaging for the "Pete's Wicked" brews brewed
through Stroh. All such packaging must comply with the Company's quality
assurance specifications. The Company will reimburse Stroh for the purchase or
modification of any equipment necessary to properly assemble the packaging.
Quality Assurance Program. In order to control the quality of finished
products, Pete's has established acceptable inventory shelf lives of 180 days
for pasteurized bottled products and 60 days for refrigerated draft products.
Each of the Company's beers has a code date that is managed 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
all of the final aged product to ensure that the Company's rigorous
specifications have been met.
TRADEMARKS, COPYRIGHTS AND BEER RECIPES
The Company owns all of the "Pete's Wicked" product names and has
registered or filed applications to register each in the United States Patent
and Trademark Office. The Company utilizes a number of recipes in the production
of its beers and protects these recipes as trade secrets. In addition, product
package, advertising and promotion design and artwork are important to the
Company's success, and such materials are protected by copyright. The Company
considers the "Pete's Wicked" trademarks and its beer recipes to be of
considerable value and critical to its business. The Company's rights to the
"Pete's Wicked" trademarks in the United States will last indefinitely so long
as the Company continues to use and police the trademarks and to renew filings
with applicable governmental agencies. No challenges to the Company's rights to
use the "Pete's Wicked" trademark in the United States are pending and the
Company has no reason to believe that any such challenges will arise in the
future. 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
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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 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. 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 is the fastest growing segment of the
domestic beer market. The Company competes with a variety of domestic and
international brewers, many of whom have significantly greater financial,
production, distribution and marketing resources and a higher level of brand
recognition than the Company. As a result of the increased demand for craft
beers, the Company competes with and anticipates competition from several of the
major national brewers, such as Anheuser-Busch, Miller Brewing Co. and Adolph
Coors Co., each of which has introduced and is marketing fuller flavored beers
designed to compete directly in the craft beer segment. For example,
Anheuser-Busch, Miller Brewing Co. and Adolph Coors have introduced and marketed
Elk Mountain Ale, Leinenkeugel and Killian's Red, respectively. In addition, the
Company expects that certain of the major national brewers, with their superior
financial resources and established distribution networks, may seek further
participation in the continuing growth of the craft beer market through the
investment in, or the formation of, distribution alliances with smaller craft
brewers. The increased participation of the major national brewers will likely
increase competition for market share and heighten price sensitivity within the
craft beer market.
The Company believes that significant competition comes from producers
of imported beers such as Bass PLC, Cerveceria Modelo, S.A. (brewer of Corona
Extra), Guinness PLC, Cerveceria Moctezuma, S.A. (brewer of Dos Equis) and
Heineken N.V. which currently produce premium fully-flavored beers. Imported
beer accounts for a greater share of the domestic beer market than craft beers.
The Company expects continued competition from imported beer brewers, many of
whom have greater financial and marketing resources, as well as greater brand
name recognition, than the Company.
The Company also anticipates increased competition in the craft beer
market from existing craft brewers such as The Boston Beer Company, Inc.,
Redhook Ale Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co. and
Anchor Brewing Co. and new market entrants. In particular, the Company believes
that competition has intensified recently as a result of the proliferation of
small local craft brewers that have introduced and are marketing significant
numbers of products. The Company also competes with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and
tap space in retail establishments and for marketing focus by the Company's
distributors and their customers, all of which also distribute and sell other
beers and alcoholic beverage products. Increased competition could result in
price reductions, reduced margins and loss of market share, all of which could
have a material adverse effect on the Company. Although the demand for craft
beers has increased dramatically over the past decade, there can be no assurance
that this demand will continue, or, even if such demand continues to increase,
that consumers will choose the Company's products.
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GOVERNMENT REGULATION
The Company's business is highly regulated by federal, state and local
laws and regulations. Federal and state laws and regulations govern licensing
requirements, trade and pricing practices, permitted and required labeling,
advertising, promotion and marketing practices, relationships with distributors
and related matters. For example, federal and state regulators require warning
labels and signage on the Company's products. The Company believes that it has
obtained all regulatory permits and licenses necessary to operate its business
in the states where the Company's products are currently being distributed.
Failure on the part of the Company to comply with federal, state or local
regulations could result in the loss or revocation or suspension of the
Company's licenses, permits or approvals and accordingly could have a material
adverse effect on the Company's business. Governmental entities also levy
various taxes, license fees and other similar charges and may require bonds to
ensure compliance with applicable laws and regulations. The Company must also
comply with numerous federal, state and local environmental protection laws. The
Company is operating within existing laws and regulations or is taking action
aimed at assuring compliance therewith. The Company does not expect compliance
with such laws and regulations to materially affect the Company's capital
expenditures, earnings or competitive position.
The federal government and each of the states levy excise taxes on
alcoholic beverages, including beer. The federal excise tax is currently $18.00
per barrel ($1.31 per case of 24-12 oz. containers) and the state excise taxes
range in rate from $1.86 per barrel to $6.30 per barrel. Federal excise taxes
are typically included in the price charged to the Company's distributors
whereas state excise taxes are typically included in the price charged to
retailers by the distributors. All excise taxes are ultimately passed on to the
consumer. It is possible that in the future the rate of excise taxation could be
increased by both the federal government and a number of state governments.
Further increases in excise taxes on beer, if enacted, could materially and
adversely affect the Company's financial condition and results of operations.
There is a small brewers federal excise tax credit that grants each brewing
company with production under 2,000,000 barrels a year an $11.00 credit per
barrel on its first 60,000 barrels produced annually. The Company is currently
able to take advantage of a $660,000 annual credit pursuant to this exemption.
Although the Company is not aware of any plans by the federal government to
reduce or eliminate this small brewer's credit or by federal or state
authorities to increase the excise tax rate, any such change could have a
material adverse effect on the Company.
Certain states, including California, Connecticut, Delaware, Iowa,
Maine, Massachusetts, Michigan, New York, 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.
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EMPLOYEES
As of December 31, 1996, the Company had 126 employees, including 101
in sales and marketing and 25 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.
In addition, the Company has recently hired several key executive
officers to supplement its management team. Moreover, the Company is currently
conducting a search to select a new Chief Executive Officer. The Company's
future success will depend, in part, on the ability of its current and future
executive officers to operate effectively, both independently and as a group.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing and product
development facilities are located in two buildings of approximately 7,091
square feet and 7,056 square feet, respectively, in Palo Alto, California
pursuant to leases which expire between February 1998 and June 2001. In
addition, the Company leases sales offices in Boston, Philadelphia, Atlanta and
St. Paul. The Company believes that its existing facilities are adequate to meet
its current needs and that suitable additional or alternative space will be
available in the future on commercially reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions, at this time the Company
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jeffrey Atkins 48 Senior Vice President, Chief Financial Officer and
Acting Chief Operating Officer
Donald Quigley 42 Senior Vice President Sales
Omer Malchin 34 Vice President Marketing
James Collins 38 Vice President Operations
Patrick Couteaux 38 Vice President Brewing and Brewmaster
</TABLE>
Officers serve at the discretion of the Board of Directors.
Jeffrey Atkins. Jeffrey Atkins joined the Company in December 1996 as
Senior Vice President and Chief Financial Officer. In addition to all areas of
finance, Mr. Atkins has responsibility for brewery management, operations and is
the Corporate Secretary. In February 1997, Mr. Atkins also became Acting Chief
Operating Officer, pending completion of the Company's search for a new Chief
Executive Officer. Prior to joining the Company, from 1977 to December 1996, Mr.
Atkins served in various senior financial and operating positions for The Quaker
Oats Company, a diversified manufacturer of packaged foods and beverages, most
recently as Vice President Corporate Planning. From 1972 to 1977, he was with
The Union Oil Company (Unocal).
Donald Quigley. Donald Quigley joined the Company in October 1996 as
Senior Vice President Sales. Prior to joining the Company, Mr. Quigley was Vice
President, Sales of Ernest & Julio Gallo Winery ("Gallo") from March 1996 to
October 1996. From May 1993 to March 1996, he served as Vice President, National
Chain Accounts at Gallo. Prior to that, Mr. Quigley served in various state,
division, region and senior sales management positions with Gallo.
Omer Malchin. Omer Malchin joined the Company in January 1997 as Vice
President Marketing. Prior to joining the Company, Mr. Malchin was Group Product
Director-Cordials with The Paddington Corporation, a distilled spirits importing
and marketing company, and a subsidiary of Grand Metropolitan PLC, from November
1996 to December 1996. From December 1994 to November 1996, he served as Brand
Manager - Baileys and Baileys Light at The Paddington Corporation. From August
1992 to November 1994, Mr. Malchin was with Heublein, Inc., most recently as as
Marketing Manager-Black Velvet and McMaster's Canadian Whiskies.
James Collins. James Collins rejoined the Company in March 1992 as the
Chief Financial Officer and Secretary. In December 1996, Mr. Collins became Vice
President Operations. From October 1990 to February 1992, he served as a manager
in the Business Investigation Services group at Coopers & Lybrand, a public
accounting firm. From 1989 until October 1990, Mr. Collins served as Chief
Financial Officer and Secretary of the Company. Prior to joining the Company, he
was with Coopers & Lybrand, from 1982, most recently as an Audit Manager.
Mr. Collins is a Certified Public Accountant.
Patrick Couteaux. Patrick Couteaux joined the Company in November 1993
as Brewmaster. In January 1997, Mr. Couteaux became Vice President, Brewing.
Prior to joining the Company, he held various positions at G. Heileman Brewing
Company including First Assistant Brewmaster at the Blitz-Weinhard plant in
Portland, Oregon from 1986 to November 1993.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to
page 43 (under the caption "Market and Stock Price Data") of the Company's 1996
Annual Report to Shareholders for the fiscal year ended December 31, 1996,
portions of which are filed as Exhibit 13.1 hereto (the "Annual Report to
Shareholders").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
page 19 of the Company's Annual Report to Shareholders.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
pages 20 to 29 of the Company's Annual Report to Shareholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to
pages 30 to 43 of the Company's Annual Report to Shareholders.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's
directors is incorporated by reference from the section captioned "Election of
Directors" contained in the Company's Proxy Statement related to the Annual
Meeting of Shareholders to be held May 12, 1997, to be filed by the Company with
the Securities and Exchange Commission within 120 days of the end of the
Company's fiscal year pursuant to General Instruction G(3) of Form 10-K (the
"Proxy Statement"). The information required by this item concerning executive
officers is set forth in Part I of this Report. The information required by this
item concerning compliance with Section 16(a) of the Exchange
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<PAGE> 20
Act is incorporated by reference from the section captioned "Compliance with
Section 16(a) of the Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from
the section captioned "Executive Compensation and Other Matters" contained in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from
the section captioned "Record Date and Principal Share Ownership" contained in
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from
the sections captioned "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions With Management" contained in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a)(1) Financial Statements
The following financial statements are incorporated by
reference in Item 8 of this Report:
Report of Independent Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
S-1 - Report of Independent Accountants on Financial Statement
Schedules
S-2 - Valuation and Qualifying Accounts
Additional schedules are not required under the related
schedule instructions or are inapplicable, and therefore have been omitted.
-20-
<PAGE> 21
(a)(3) Exhibits
3.1(2) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
4.1(3) Preferred Shares Rights Plan.
10.1(1) 1986 Stock Option Plan, and form of agreements
thereto.
10.2(1) 1995 Employee Stock Option Plan, and form of
agreements thereto.
10.3(1) 1995 Employee Stock Purchase Plan, and form of
agreement thereto.
10.4(1) 1995 Director Stock Option Plan, and form of
agreement thereto.
10.5(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.6(1)* Distribution Agreement between the Registrant
and Southern Wine and Spirits of America, Inc.,
dated as of January 1, 1994.
10.7(1)* Second Amendment and Restatement of
Manufacturing Services Agreement dated as of the
1st day of October 1995, between The Stroh
Brewery Company and the Registrant.
10.7.1(1) Form of Warrant to Purchase Stock between
Registrant and The Stroh Brewery Company.
10.8.1(1) Leases between Registrant and Herbert P.
McLaughlin dated May 13, 1994, November 4, 1994
and January 24, 1995.
10.8.2(2) Lease between Registrant and High Street Project
Limited Partnership dated January 12, 1996.
10.9(1) Amended and Restated Loan and Security Agreement
between the Registrant and Silicon Valley Bank
dated September 25, 1995.
10.10(1) Form of Registration Rights Agreement.
10.11 Nonstatutory Stock Option Agreement by and
between the Company and Jeffrey Atkins, the
Company's Senior Vice President, Chief Financial
Officer and Acting Chief Operating Officer dated
December 13, 1996.
10.12 Incentive Stock Option Agreement by and between
the Company and Jeffrey Atkins, the Company's
Senior Vice President, Chief Financial Officer
and Acting Chief Operating Officer dated
December 13, 1996.
11.1 Computation of net income per share.
13.1 Portions of Registrant's Annual Report to
Shareholders for the year ended December 31,
1996.
22.1(1) List of subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See Page 22).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-97264) as declared
effective by the Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on November 27, 1996.
(b) Reports on Form 8-K. The Company did not file any reports on
Form 8-K during the quarter ended December 31, 1996.
(c) Exhibits. See Item 14(a)(3) above.
(d) Financial Statement Schedules. See Item 14(a)(2) above.
-21-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PETE'S BREWING COMPANY
By: /s/ JEFFREY ATKINS
Jeffrey Atkins
Senior Vice President, Chief
Financial Officer and Acting
Chief Operating Officer
Date: March 31, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey Atkins, as his or her true and
lawful attorney-in-fact and agent,with full power of substitution and
resubstitution, to sign any and all amendments (including post-effective
amendments) to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ JEFFREY ATKINS Senior Vice President, March 31, 1997
- ------------------------- Chief Financial Officer and
Jeffrey Atkins Acting Chief Operating Officer
/s/ MARK BRONDER Director March 31, 1997
- -------------------------
Mark Bronder
</TABLE>
-22-
<PAGE> 23
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------- ---------------------------------- --------------
<S> <C> <C>
/s/ AUDREY MACLEAN Director March 31, 1997
- -------------------------
Audrey MacLean
/s/ KEVIN O'ROURKE Director March 31, 1997
- -------------------------
Kevin O'Rourke
/s/ PETE SLOSBERG Director March 31, 1997
- -------------------------
Pete Slosberg
/s/ CHRISTOPHER SORTWELL Director March 31, 1997
- -------------------------
Christopher Sortwell
/s/ PHILIP MARINEAU Director March 31, 1997
- -------------------------
Philip Marineau
</TABLE>
-23-
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements
of Pete's Brewing Company and Subsidiary as of December 31, 1996 and 1995, and
for each of the three years in the period ended December 31, 1996, which
financial statements are included in the Annual Report on Form 10-K, we have
also audited the financial statement schedule listed in Item 14(a)(2) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 14, 1997
S-1
<PAGE> 25
PETE'S BREWING COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND WRITE-OFF BALANCE AT
DESCRIPTION PERIOD EXPENSES OF ACCOUNTS END OF PERIOD
- ----------- ------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994
Allowance for doubtful accounts -- 50 13 37
Year ended December 31, 1995
Allowance for doubtful accounts 37 -- -- 37
Year Ended December 31, 1996
Allowance for doubtful accounts 37 102 -- 139
</TABLE>
S-2
<PAGE> 26
EXHIBIT INDEX
3.1(2) Restated Articles of Incorporation of the
Registrant.
3.2(1) Bylaws of the Registrant.
4.1(3) Preferred Shares Rights Plan.
10.1(1) 1986 Stock Option Plan, and form of agreements
thereto.
10.2(1) 1995 Employee Stock Option Plan, and form of
agreements thereto.
10.3(1) 1995 Employee Stock Purchase Plan, and form of
agreement thereto.
10.4(1) 1995 Director Stock Option Plan, and form of
agreement thereto.
10.5(1) Form of Indemnification Agreement between the
Registrant and its officers and directors.
10.6(1)* Distribution Agreement between the Registrant
and Southern Wine and Spirits of America, Inc.,
dated as of January 1, 1994.
10.7(1)* Second Amendment and Restatement of
Manufacturing Services Agreement dated as of the
1st day of October 1995, between The Stroh
Brewery Company and the Registrant.
10.7.1(1) Form of Warrant to Purchase Stock between
Registrant and The Stroh Brewery Company.
10.8.1(1) Leases between Registrant and Herbert P.
McLaughlin dated May 13, 1994, November 4, 1994
and January 24, 1995.
10.8.2(2) Lease between Registrant and High Street Project
Limited Partnership dated January 12, 1996.
10.9(1) Amended and Restated Loan and Security Agreement
between the Registrant and Silicon Valley Bank
dated September 25, 1995.
10.10(1) Form of Registration Rights Agreement.
10.11 Nonstatutory Stock Option Agreement by and
between the Company and Jeffrey Atkins, the
Company's Senior Vice President, Chief Financial
Officer and Acting Chief Operating Officer dated
December 13, 1996.
10.12 Incentive Stock Option Agreement by and between
the Company and Jeffrey Atkins, the Company's
Senior Vice President, Chief Financial Officer
and Acting Chief Operating Officer dated
December 13, 1996.
11.1 Computation of net income per share.
13.1 Portions of Registrant's Annual Report to
Shareholders for the year ended December 31,
1996.
22.1(1) List of subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See Page 22).
27.1 Financial Data Schedule.
- ------------------
* Confidential treatment has been granted with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (Reg. No. 33-97264) as declared
effective by the Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form 8-A as filed with the Securities and
Exchange Commission on November 27, 1996.
<PAGE> 1
Exhibit 10.11
PETE'S BREWING COMPANY
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1995 Stock Option Plan
(the "Plan") shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
JEFFREY A. ATKINS
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
<TABLE>
<S> <C>
Grant Number 150
Date of Grant December 13, 1996
Vesting Commencement Date December 13, 1996
Exercise Price per Share $6.50
Total Number of Shares Granted 89,000
Total Exercise Price $578,500
Type of Option: Incentive Stock Option
---
X Nonstatutory Stock Option
---
Term/Expiration Date: December 13, 2006
</TABLE>
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48th of the Shares subject to the Option
shall vest each month thereafter.
Dissolution, Merger, or Assets Sale
Notwithstanding the foregoing Vesting Schedule, in the event of a
Change in Control of the Company, the Optionee shall have the right to exercise
this Option as to all of the Shares, including Shares as to which it would not
otherwise be exercisable. "Change in Control" shall mean the occurrence of any
of the following events:
<PAGE> 2
(i) Any "person" or "group" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of the Company
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board of the Company with the
affirmative votes of at least a majority of the Incumbent Directors at the time
of such election with an actual or threatened proxy contest relating to the
election of directors to the Company); or
(iii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
Termination Period:
This Option may be exercised for three (3) months after termination of
the Optionee's employment or consulting relationship with the Company. Upon the
death or disability of the Optionee, this Option may be exercised for such
longer period as provided in the Plan. In the event of the Optionee's change in
status from Employee to Consultant or Consultant to Employee, this Option
Agreement shall remain in effect. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants to the
Optionee named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 14(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
2
<PAGE> 3
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term in
accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, Disability or other termination of Optionee's employment or
consulting relationship, the exercisability of the Option is governed by the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by U.S. mail to the Stock Plan
Administrator. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option shall be deemed
to be exercised upon receipt by the Company of such fully executed Exercise
Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
(a) check; or
(b) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(c) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
3
<PAGE> 4
4. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal and California tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may incur regular
federal income tax and California income tax liability upon exercise of a NSO.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Exercised Shares on the date of exercise over their aggregate Exercise
Price. If the Optionee is an Employee or a former Employee, the Company will be
required to withhold from his or her compensation or collect from Optionee and
pay to the applicable taxing authorities an amount in cash equal to a percentage
of this compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an
ISO, the Optionee will have no regular federal income tax or California income
tax liability upon its exercise, although the excess, if any, of the Fair Market
Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price will be treated as an adjustment to alternative minimum taxable
income for federal tax purposes and may subject the Optionee to alternative
minimum tax in the year of exercise. In the event that the Optionee undergoes a
change of status from Employee to Consultant, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive Stock
Option and will be treated for tax purposes as a Nonstatutory Stock Option on
the ninety-first (91st) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise AND two years after the grant date, any gain realized on
disposition of the Shares will be treated as
4
<PAGE> 5
long-term capital gain for federal income tax purposes. If the Optionee disposes
of ISO Shares within one year after exercise or two years after the grant date,
any gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the excess, if any, of the
lesser of (A) the difference between the Fair Market Value of the Shares
acquired on the date of exercise and the aggregate Exercise Price, or (B) the
difference between the sale price of such Shares and the aggregate Exercise
Price.
(c) Notice of Disqualifying Disposition of ISO Shares. If the Optionee
sells or otherwise disposes of any of the Shares acquired pursuant to an ISO on
or before the later of (i) two years after the grant date, or (ii) one year
after the exercise date, the Optionee shall immediately notify the Company in
writing of such disposition. The Optionee agrees that he or she may be subject
to income tax withholding by the Company on the compensation income recognized
from such early disposition of ISO Shares by payment in cash or out of the
current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
By your signature and the signature of the Company's representative below, you
and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the
5
<PAGE> 6
Administrator upon any questions relating to the Plan and Option Agreement.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE: PETE'S BREWING COMPANY
By:_______________________________ By: _________________________
Jeffrey A. Atkins Kevin O'Rourke
Director
Title:____________________________
__________________________________
Residence Address
__________________________________
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration of
the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
__________________________________
Spouse of Optionee
6
<PAGE> 7
EXHIBIT A
PETE'S BREWING COMPANY
EXERCISE NOTICE
Pete's Brewing Company
514 High Street
Palo Alto, CA 94301
Attention: Secretary
1. Exercise of Option. Effective as of today, _______, 199__, the
undersigned ("Purchaser") hereby elects to purchase ______________ shares (the
"Shares") of the Common Stock of Pete's Brewing Company (the "Company") under
and pursuant to the 1995 Stock Option Plan (the "Plan") and the Stock Option
Agreement dated December 13, 1996 (the "Option Agreement"). The purchase price
for the Shares shall be $6.50, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and agrees
to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 of the
Plan.
5. Tax Consultation. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition of
the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company for
any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser.
<PAGE> 8
This agreement is governed by California law except for that body of law
pertaining to conflict of laws.
Submitted by: Accepted by:
PURCHASER: PETE'S BREWING COMPANY
__________________________________ By: _________________________
Signature Jeffrey A. Atkins
Chief Financial Officer
__________________________________
Print Name
Address: Address:
__________________________ 514 High Street
__________________________ Palo Alto, CA 94301
2
<PAGE> 1
EXHIBIT 10.12
PETE'S BREWING COMPANY
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the 1995 Stock Option
Plan (the "Plan") shall have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
JEFFREY A. ATKINS
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number 149
Date of Grant December 13, 1996
Vesting Commencement Date December 13, 1996
Exercise Price per Share $6.50
Total Number of Shares Granted 61,000
Total Exercise Price $396,500
Type of Option: X Incentive Stock Option
---
Nonstatutory Stock Option
---
Term/Expiration Date: December 13, 2006
Vesting Schedule:
This Option may be exercised, in whole or in part, in accordance with
the following schedule:
25% of the Shares subject to the Option shall vest twelve months after
the Vesting Commencement Date, and 1/48th of the Shares subject to the Option
shall vest each month thereafter.
Dissolution, Merger, or Assets Sale
Notwithstanding the foregoing Vesting Schedule, in the event of a
Change of Control of the Company, the Optionee shall have the right to exercise
this Option as to all of the Shares, including Shares as to which it would not
otherwise be exercisable. "Change of Control" shall mean the occurrence of any
of the following events:
<PAGE> 2
(i) Any "person" or "group" (as such term is used in Section
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 50% or more
of the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of the Company
occurring within a two-year period, as a result of which fewer than a majority
of the directors are Incumbent Directors. "Incumbent Directors" shall mean
directors who either (A) are directors of the Company as of the date hereof, or
(B) are elected, or nominated for election, to the Board of the Company with
the affirmative votes of at least a majority of the Incumbent Directors at the
time of such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened proxy
contest relating to the election of directors to the Company); or
(iii) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the shareholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially
all of the Company's assets (other than to a subsidiary or subsidiaries).
Termination Period:
This Option may be exercised for three (3) months after termination of
the Optionee's employment or consulting relationship with the Company. Upon
the death or disability of the Optionee, this Option may be exercised for such
longer period as provided in the Plan. In the event of the Optionee's change in
status from Employee to Consultant or Consultant to Employee, this Option
Agreement shall remain in effect. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby grants
to the Optionee named in the Notice of Grant attached as Part I of this
Agreement (the "Optionee") an option (the "Option") to purchase the number of
Shares, as set forth in the Notice of Grant, at the exercise price per share
set forth in the Notice of Grant (the "Exercise Price"), subject to the terms
and conditions of the Plan, which is incorporated herein by reference. Subject
to Section 14(c) of the Plan, in the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option Agreement,
the terms and conditions of the
2
<PAGE> 3
Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an
Incentive Stock Option, to the extent that it exceeds the $100,000 rule of Code
Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and the
applicable provisions of the Plan and this Option Agreement. In the event of
Optionee's death, Disability or other termination of Optionee's employment or
consulting relationship, the exercisability of the Option is governed by the
applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed
by the Optionee and shall be delivered in person or by U.S. mail to the Stock
Plan Administrator. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be by
any of the following, or a combination thereof, at the election of the Optionee:
(a) check; or
(b) delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company
of the sale or loan proceeds required to pay the exercise price; or
(c) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
3
<PAGE> 4
4. Non-Transferability of Option. This Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by the Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only with the term set out
in the Notice of Grant, and may be exercised during such term only in accordance
with the Plan and the terms of this Option Agreement.
6. Tax Consequences. Some of the federal and California tax consequences
relating to this Option, as of the date of this Option, are set forth below.
THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING
THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonstatutory Stock Option. The Optionee may incur
regular federal income tax and California income tax liability upon exercise of
a NSO. The Optionee will be treated as having received compensation income
(taxable at ordinary income tax rates) equal to the excess, if any, of the Fair
Market Value of the Exercised Shares on the date of exercise over their
aggregate Exercise Price. If the Optionee is an Employee or a former Employee,
the Company will be required to withhold from his or her compensation or collect
from Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise, and
may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(ii) Incentive Stock Option. If this Option qualifies as an
ISO, the Optionee will have no regular federal income tax or California income
tax liability upon its exercise, although the excess, if any, of the Fair Market
Value of the Exercised Shares on the date of exercise over their aggregate
Exercise Price will be treated as an adjustment to alternative minimum taxable
income for federal tax purposes and may subject the Optionee to alternative
minimum tax in the year of exercise. In the event that the Optionee undergoes a
change of status from Employee to Consultant, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive Stock
Option and will be treated for tax purposes as a Nonstatutory Stock Option on
the ninety-first (91st) day following such change of status.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
4
<PAGE> 5
(ii) ISO. If the Optionee holds ISO Shares for at least one
year after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for federal
income tax purposes. If the Optionee disposes of ISO Shares within one year
after exercise or two years after the grant date, any gain realized on such
disposition will be treated as compensation income (taxable at ordinary income
rates) to the extent of the excess, if any, of the lesser of (A) the difference
between the Fair Market Value of the Shares acquired on the date of exercise and
the aggregate Exercise Price, or (B) the difference between the sale price of
such Shares and the aggregate Exercise Price.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant to
an ISO on or before the later of (i) two years after the grant date, or (ii) one
year after the exercise date, the Optionee shall immediately notify the Company
in writing of such disposition. The Optionee agrees that he or she may be
subject to income tax withholding by the Company on the compensation income
recognized from such early disposition of ISO Shares by payment in cash or out
of the current earnings paid to the Optionee.
7. Entire Agreement; Governing Law. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This agreement is governed by California law except for that body of
law pertaining to conflict of laws.
5
<PAGE> 6
By your signature and the signature of the Company's representative below, you
and the By Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Option Agreement. Optionee has
reviewed the Plan and this Option Agreement in their entirety, has had an
opportunity to obtain the advice of counsel prior to executing this Option
Agreement and fully understands all provisions of the Plan and Option Agreement.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Administrator upon any questions relating to the Plan
and Option Agreement. Optionee further agrees to notify the Company upon any
change in the residence address indicated below.
OPTIONEE: PETE'S BREWING COMPANY
By: By:
------------------------------ ---------------------------
Jeffrey A. Atkins Kevin O'Rourke
Director
Title:
---------------------------
- ---------------------------------
Residence Address
- ---------------------------------
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Option Agreement. In consideration
of the Company's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to
be irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
- ---------------------------------
Spouse of Optionee
6
<PAGE> 7
EXHIBIT A
PETE'S BREWING COMPANY
EXERCISE NOTICE
Pete's Brewing Company
514 High Street
Palo Alto, CA 94301
Attention: Secretary
1. Exercise of Option. Effective as of today___________, 199__,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of Pete's Brewing Company (the "Company")
under and pursuant to the 1995 Stock Option Plan (the "Plan") and the Stock
Option Agreement dated December 13, 1996 (the "Option Agreement"). The purchase
price for the Shares shall be $6.50, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the
Company the full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Option Agreement
and agrees to abide by and be bound by their terms and conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
5. Tax Consultation. Purchaser understands that Purchaser may
suffer adverse tax consequences as a result of Purchaser's purchase or
disposition of the Shares. Purchaser represents that Purchaser has consulted
with any tax consultants Purchaser deems advisable in connection with the
purchase or disposition of the Shares and that Purchaser is not relying on the
Company for any tax advice.
6. Entire Agreement: Governing Law. The Plan and Option Agreement
are incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and Purchaser with respect to the subject matter
hereof, and may not be modified adversely to the Purchaser's interest except by
means of a writing signed by the Company and Purchaser.
<PAGE> 8
This agreement is governed by California law except for that body of law
pertaining to conflict of laws.
Submitted by: Accepted by:
PUCHASER: PETE'S BREWING COMPANY
By:
- ------------------------------------ ----------------------------------
Signature Jeffrey A. Atkins
Chief Financial Officer
- ------------------------------------
Print Name
Address: Address:
- ------------------------------------ 514 High Street
- ------------------------------------ Palo Alto, CA 94301
<PAGE> 1
Exhibit 11.1
PETE'S BREWING COMPANY AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE (1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding for the period ....... 10,682 8,157 3,611
Common equivalent shares assuming conversion of convertible
Series A and Series B preferred stock .......................... -- -- 3,305
Common equivalent shares assuming conversion of stock options
and warrants under the treasury stock method .................. 137 306 948
------- ------ ------
Shares used in per share calculation ............................ 10,819 8,463 7,864
======= ====== ======
Net income ...................................................... $ 1,683 $1,538 $ 551
======= ====== ======
Net income per share ............................................ $ 0.16 $ 0.18 $ 0.07
======= ====== ======
</TABLE>
- -------------------------------
(1) There is no difference between primary and fully diluted net income per
share for all periods presented.
<PAGE> 1
Exhibit 13.1
SELECTED
FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands except per share and employee data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $70,634 $59,176 $ 30,837 $ 12,236 $ 5,519
Gross profit 35,873 29,517 13,939 5,733 2,164
Income from operations 1,078 2,536 603 166 46
Net income 1,683 1,538 551 131 21
Net income per share $ 0.16 $ 0.18 $ 0.07 $ 0.02 $ 0.00
Barrels sold 425.6 347.8 180.2 69.3 29.4
Cash, cash equivalents,
and available for sale securities $39,234 $42,960 $ 1,090 171 53
Working capital (deficit) 42,914 44,425 (807) (211) (151)
Total assets 66,088 54,250 5,918 3,118 1,178
Total shareholders' equity 51,311 49,023 1,040 414 223
Total number of employees(1) 126 86 67 37 17
</TABLE>
(1) As of December 31,
<PAGE> 2
page 20
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 fifth 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 and seventh paragraphs of
"Overview," the statements in the analysis of the years ended December 31, 1996
and 1995, under "Sales" regarding expectations for barrel shipments and sales
per barrel, under "Cost of Goods Sold" regarding the expectation of cost of
sales per barrel, under "Selling, Advertising and Promotional Expenses"
regarding the Company's expectations for selling, advertising and promotional
expenses, under "General and Administrative Expenses" regarding expectations,
under "Interest Income (Expense), Net" regarding expectations for interest
earnings, the statements under "Factors Affecting Future Operating Results," and
the statement in the last paragraph under "Liquidity and Capital Resources"
regarding the sufficiency of the Company's available resources to meet working
capital and capital expenditure requirements.
OVERVIEW. Pete's Brewing Company ("the Company") was incorporated in California
in 1986. The Company markets its beers in 49 states, the District of Columbia
and the United Kingdom, through independent beverage distributors that sell to
retail establishments that sell to consumers.
The Company has historically devoted substantial resources toward
selling, advertising and promotional activities to build consumer awareness and
brand loyalty and support expansion of sales and distribution efforts. The
Company believes that this brand investment has resulted in better recognition
of the Company and its products, better placement on store shelves and increased
distribution of the Company's beers. The Company intends to continue to devote
substantial resources toward selling, advertising and promotional activities,
particularly as it focuses on expanding retail distribution and introduces new
products. 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, would be the most cost effective.
In 1995, the Company entered into a nine-year Manufacturing Services
Agreement (the "Stroh Agreement") with The Stroh Brewery Company ("Stroh") of
Detroit, Michigan. Under the Stroh Agreement, the Company uses the St. Paul,
Minnesota and Winston-Salem, North Carolina Stroh breweries. Although Stroh owns
the breweries, 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 Stroh 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. The Company may also, upon agreement with Stroh
and the investment of necessary funds, have access to additional locations
within the Stroh system.
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 has recently determined not to go forward with
previously disclosed plans to construct and
<PAGE> 3
page 21
equip a new brewery in California. Although the Company believes that the
brewing capacity available to the Company under the Stroh Agreement is adequate
to meet its needs for the foreseeable future, the Company will continue to
monitor long term capacity availability in light of its business plan. The
financial resources previously earmarked to finance capital expenditures in
connection with the construction of the brewery will now be used for general
corporate purposes, including to meet working capital needs pending the
analysis, currently underway, of the alternative uses available to the Company.
See "Liquidity and Capital Resources." During the first quarter of 1997, based
on a decision made at its February 1997 Board meeting to indefinitely delay
construction of a brewery, the Company will take a charge to earnings for the
write-off of previously capitalized costs in connection with the brewery
project. Such write-off will adversely impact the Company's earnings in the
first quarter of 1997.
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. 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.
As a result of competitive market factors, the transition of the
distribution network in key markets and other factors described below under
"Results of Operations," the Company realized net income during the fourth
quarter of 1996 of approximately $6,000. In addition, the Company expects that
net sales in the first quarter of 1997 will decline when compared to the first
quarter of 1996. The Company also expects to record a net loss for the first
quarter of 1997, as a result of competitive market factors, the continuing
transition of the distribution network and other factors, together with the
write-off of brewery project costs and other write-offs to be incurred during
the quarter.
RESULTS OF OPERATIONS. The following table sets forth certain items from the
Company's consolidated statements of operations as a percentage of sales for the
periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
- -----------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales 110.6% 110.1% 109.0%
Less excise taxes 10.6 10.1 9.0
------------------------------
Net sales 100.0 100.0 100.0
Cost of goods sold 49.2 50.1 54.8
------------------------------
Gross profit 50.8 49.9 45.2
------------------------------
Selling, advertising and promotional expenses 42.0 36.4 34.3
General and administrative expenses 7.2 7.2 8.9
Brewery transition charges -- 2.0 --
------------------------------
Total operating expenses 49.2 45.6 43.2
------------------------------
Income from operations 1.6 4.3 2.0
Interest income (expense), net 1.9 0.1 (0.3)
------------------------------
Income before income taxes 3.5 4.4 1.7
Income tax (provision) benefit (1.1) (1.8) 0.1
------------------------------
Net income 2.4% 2.6% 1.8%
------------------------------
</TABLE>
<PAGE> 4
page 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth the number of barrels sold together with certain
items from the Company's consolidated statements of operations on a per barrel
sold basis for the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $183.48 $187.35 $186.55
Less excise taxes 17.52 17.21 15.42
--------------------------------------------------------
Net sales 165.96 170.14 171.13
Cost of goods sold 81.67 85.27 93.77
--------------------------------------------------------
Gross profit 84.29 84.87 77.36
--------------------------------------------------------
Selling, advertising and promotional expenses 69.80 61.90 58.71
General and administrative expenses 11.96 12.24 15.30
Brewery transition charges -- 3.44 --
--------------------------------------------------------
Total operating expenses 81.76 77.58 74.01
--------------------------------------------------------
Income from operations 2.53 7.29 3.35
Interest income (expense), net 3.20 0.14 (0.49)
--------------------------------------------------------
Income before income taxes 5.73 7.43 2.86
Income tax (provision) benefit (1.78) (3.01) 0.20
--------------------------------------------------------
Net income $ 3.95 $ 4.42 $ 3.06
--------------------------------------------------------
Barrels sold (in thousands) 425.6 347.8 180.2
--------------------------------------------------------
</TABLE>
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. Sales per barrel is expected to range
between $181.00 and $183.00 for 1997, assuming there is no significant change in
the sales mix between keg and bottled beer from 1996.
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. If
the Company successfully increases sales volume in future periods, excise taxes
will continue to increase as a percentage of net sales and per barrel sold, due
to the diminished impact of the small brewers excise tax credit.
<PAGE> 5
page 23
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 east 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.
The Company expects that cost of goods sold per barrel for 1997 will be
between $79.00 and $81.00 per barrel, due to anticipated lower raw material
costs associated with the purchase of malt ingredients and improved freight
costs.
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.
The Company expects selling, advertising and promotional expenses to be
between $64.00 and $67.00 per barrel during 1997 as the Company's business plan
for 1997 includes increased headcount in the sales force in 1997 and anticipated
increases in advertising, partially funded from a reduction of consumer point of
sale expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 18.6% from $4.3 million in 1995 to $5.1 million in 1996. General and
administrative expenses as a percentage of net sales remained consistent with
1995 at 7.2%. General and administrative expenses per barrel sold decreased from
$12.24 in 1995 to $11.96 in 1996. The absolute increase in general and
administrative expenses resulted primarily from increased legal fees associated
with distributor transitions, professional fees associated with being a publicly
traded entity and increased rental and office expenses due to expansion of the
Company's office space during 1996. The Company expects general and
administrative expenses to be between $13.00 and $15.00 per barrel during 1997
as the result of continued efforts to build the management infrastructure
through key headcount additions.
<PAGE> 6
page 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 none are expected in 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
earnings from investment of the net proceeds of the Company's November 1995
public offering. The Company anticipates interest earnings in 1997 approximately
equal to 1996.
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. The Company
anticipates an effective tax rate between 32% and 33% during 1997.
YEARS ENDED DECEMBER 31, 1995 AND 1994.
SALES. Sales increased by 93.8% from $33.6 million in 1994 to $65.2 million in
1995. Sales volume increased 93.0% from 180,200 barrels sold in 1994 to 347,800
barrels sold in 1995. 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 Pete's Wicked Ale, Pete's Wicked Winter Brew
and Pete's Wicked Red. Pete's Wicked Summer Brew and Pete's Wicked Honey Wheat
were introduced in 1995 and accounted for slightly less than half of the
Company's 1995 sales growth. Sales per barrel increased from $186.55 in 1994 to
$187.35 in 1995.
EXCISE TAXES. Federal and state excise taxes increased by 115.3% from $2.8
million in 1994 to $6.0 million in 1995. Excise taxes as a percentage of net
sales increased from 9.0% in 1994 to 10.1% in 1995. Excise taxes per barrel sold
increased from $15.42 in 1994 to $17.21 in 1995. 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 75.5% from $16.9 million in
1994 to $29.7 million in 1995 reflecting the increase in volume of beer sold.
Cost of goods sold as a percentage of net sales decreased from 54.8% in 1994 to
50.1% in 1995. Cost of goods sold per barrel decreased from $93.77 in 1994 to
$85.28 in 1995. The decreases in cost of goods sold as a percentage of net sales
and per barrel sold were primarily attributable to a decrease in packaging
material costs due to purchasing economies of scale and the production fees
charged under the Company's brewing agreements with MBC and Stroh.
Transportation is a significant component of cost of goods sold. Transportation
increased 87.0% from $2.8 million in 1994 to $5.2 million in 1995.
Transportation as a percentage of net sales decreased from 9.1% in 1994 to 8.9%
in 1995. Transportation per barrel sold decreased from $15.54 per barrel in 1994
to $15.06 per barrel in 1995.
<PAGE> 7
page 25
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 103.5% from $10.6 million in 1994 to $21.5
million in 1995. Selling, advertising and promotional expenses as a percentage
of net sales increased from 34.3% in 1994 to 36.4% in 1995. Selling, advertising
and promotional expenses per barrel sold increased from $58.71 in 1994 to $61.89
in 1995. The increases were primarily attributable to: (i) increased investment
in point of sale costs and advertising to support the growth in sales volume,
expansion into new markets and the introduction of Pete's Wicked Summer Brew and
Pete's Wicked Honey Wheat; (ii) increased distributor sales discounts and
incentives associated with increased sales; and (iii) increased employee
compensation associated with increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 54.4% from $2.8 million in 1994 to $4.3 million in 1995. General and
administrative expenses as a percentage of net sales decreased from 8.9% in 1994
to 7.2% in 1995. General and administrative expenses per barrel sold decreased
from $15.30 in 1994 to $12.24 in 1995. The increase in general and
administrative expenses resulted primarily from increased staffing and
associated expenses necessary to support the Company's growth.
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 MBC, in connection with the termination of the
Company's brewery agreement with MBC, moving expenses and abandonment of assets.
INTEREST INCOME (EXPENSES) NET. Interest income (expense), net increased
$140,000 from a net interest expense of $90,000 in 1994 to a net interest income
of $49,000 in 1995. The increase reflected earnings from the net proceeds from
the Company's November 1995 public offering in excess of borrowings prior to the
November offering.
INCOME TAX (PROVISION) BENEFIT. The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
(provision) benefit takes into account the effects of state income taxes. Income
tax provisions in 1994 and 1995 were above the federal statutory rate (34%) as a
result of state taxes, partially offset by the utilization of net operating loss
carryforwards and nondeductible expenses.
FACTORS AFFECTING FUTURE OPERATING RESULTS.
QUARTERLY OPERATING RESULTS FLUCTUATE. The Company's quarterly operating results
have varied significantly in the past, and may do so in the future, depending on
factors such as increased competition, the transition to new distributors in key
markets, fluctuations in sales volume which result in variations in cost of
goods sold, the timing of new product announcements by the Company or its
competitors, the timing of significant advertising and promotional campaigns by
the Company, changes in mix between kegs and bottles, the impact of an
increasing average federal excise tax rate as sales volume changes, fluctuations
in the price of packaging and raw materials, seasonality of sales of the
Company's beers, general economic factors, trends in consumer preferences,
regulatory developments including changes in excise tax and other tax rates,
changes in average selling prices or market acceptance of the Company's beers,
increases in production costs associated with initial production of new products
and fluctuations in volume of sales and variations in shipping and
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,
<PAGE> 8
page 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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, 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. 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
<PAGE> 9
page 27
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. 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 operation in the near term. In addition, there is always a risk that
the Company's distributors will give higher priority to the products of other
beverage companies, including products directly competitive with the Company's
beers, thus reducing their efforts to sell the Company's products. In addition,
there can be no assurance that the Company's distributors will devote the
resources necessary to provide effective sales and promotion support to the
Company. If one or more of the Company's significant distributors were to
discontinue selling, or decrease the level of orders for the Company's products,
the Company's business would be adversely affected in the areas serviced by such
distributors until the Company retained replacements. There can be no assurance
that the Company would be able to replace a significant distributor in a timely
manner or at all in the event a distributor were to discontinue selling the
Company's products.
PRODUCT CONCENTRATION. The sale of a limited number of beers has accounted for
substantially all of the Company's sales since inception. The Company 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 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.
<PAGE> 10
page 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 REGULATION. 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 of 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 effect 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. In addition, the Company is currently conducting a search to select a new
Chief Executive Officer. The Company's future success will depend, in part, on
the ability of its current and future executive officers to operate effectively,
both independently and as a group.
<PAGE> 11
page 29
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, 1996, the
Company had $42.9 million in working capital, including $19.8 million in cash
and cash equivalents and $19.4 million in available for sale securities, as
compared to working capital of $44.4 million as of December 31, 1995. The
decrease was primarily due to the Company's investment in property and equipment
offset by the cash provided from operations.
The Company's cash and cash equivalents decreased by $23.1 million in
1996 and increased by $41.9 million and $920,000 in 1995 and 1994, respectively.
The Company generated $1.4 million, $541,000 and $1.0 million in cash from
operating activities during those same periods. Cash from operations in 1996 was
generated primarily from net income and an increase to accounts payable and
accrued expenses which was offset by an increase in accounts receivable,
inventories and prepaid expenses. The Company's principal investing activities
during 1996 consisted of purchases of available for sale securities of $19.4
million and purchases of new Sankey kegs approximating $3.0 million. The
Company's principal investing activities in 1995 and 1994 were additions to
property and equipment of $867,000 and $752,000, respectively.
The only financing activity during 1996 was the issuance of common
stock to employees of the Company under the Company's employee stock purchase
and stock option plans, which provided $378,000 of cash flow. The Company's
primary investing activities in 1995 and 1994 were the sale of common stock in
the Company's initial public offering in 1995 and borrowing under the line of
credit in 1994 of $43.5 million and $700,000, respectively. As described under
"Overview," the Company has recently determined not to go forward with
previously disclosed plans to construct and equip a new brewery in California.
The financial resources previously earmarked to finance capital expenditures in
connection with the construction of the brewery will be used for general
corporate purposes, including to meet working capital needs, pending the
Company's analysis, currently underway, of the alternative uses available to the
Company.
The Company anticipates that its current cash available for sale
securities and cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements for the near term.
<PAGE> 12
page 30
CONSOLIDATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $19,814 $42,960
Available for sale securities 19,420 --
Trade accounts receivable, net 7,664 3,184
Inventories 4,431 2,244
Prepaid expenses and other current assets 4,046 1,149
Deferred taxes 2,088 115
------- -------
Total current assets 57,463 49,652
Property and equipment, net 5,112 1,568
Other assets 3,513 3,030
------- -------
$66,088 $54,250
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable $ 5,299 $ 1,474
Accrued expenses 9,250 3,753
------- -------
Total current liabilities 14,549 5,227
Deferred taxes 228 --
------- -------
Total liabilities 14,777 5,227
Commitments and Contingencies (Note 12)
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:
10,733 in 1996 and 10,621 in 1995 48,551 47,957
Unrealized gain on available for sale securities 11 --
Retained earnings 2,749 1,066
------- -------
Total shareholders' equity 51,311 49,023
------- -------
$66,088 $54,250
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 13
page 31
CONSOLIDATED STATEMENTS OF
OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 78,089 $ 65,160 $ 33,616
Less excise taxes 7,455 5,984 2,779
--------------------------------------------------------
Net sales 70,634 59,176 30,837
Cost of goods sold 34,761 29,659 16,898
--------------------------------------------------------
Gross profit 35,873 29,517 13,939
--------------------------------------------------------
Selling, advertising and promotional expenses 29,705 21,525 10,579
General and administrative expenses 5,090 4,258 2,757
Brewery transition charges -- 1,198 --
--------------------------------------------------------
Total operating expense 34,795 26,981 13,336
--------------------------------------------------------
Income from operations 1,078 2,536 603
Interest expense (3) (198) (89)
Interest income 1,362 247 --
--------------------------------------------------------
Income before income taxes 2,437 2,585 514
Income tax (provision) benefit (754) (1,047) 37
--------------------------------------------------------
Net income $ 1,683 $ 1,538 $ 551
========================================================
Net income per share $ 0.16 $ 0.18 $ 0.07
========================================================
Shares used in per share calculation 10,819 8,463 7,867
========================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 14
page 32
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A and B Preferred Shares Common Shares
-------------------------------- -------------
(in thousands) Shares Amount Shares
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, January 1, 1994 3,305 $ 1,221 3,147
Common share options exercised
($0.063-$0.138 per share) -- -- 354
Common share warrants exercised,
net of issuance costs -- -- 190
Net income -- -- --
--------------------------------------------------
Balances, December 31, 1994 3,305 1,221 3,691
Common share options exercised
($0.10-$1.25 per share) -- -- 925
Issuance of common shares
from IPO, net of
issuance costs of $1,733 -- -- 2,700
Conversion of preferred
shares to common
shares at close of IPO (3,305) (1,221) 3,305
Repayment of notes receivable -- -- --
Issuance of warrant -- -- --
Tax benefit associated with
exercise of options -- -- --
Net income -- -- --
--------------------------------------------------
Balances, December 31, 1995 -- -- 10,621
Common share options exercised
($0.10-$2.50 per share) -- -- 76
Issuance of shares from employee
stock purchase plan -- -- 36
Tax benefit associated with
exercise of options -- -- --
Unrealized gain on available
for sale securities -- -- --
Net income -- -- --
--------------------------------------------------
BALANCES, DECEMBER 31, 1996 -- $ -- 10,733
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Unrealized Gain Retained
Common Shares Notes on Available for Earnings
(in thousands) Amount Receivable Sale Securities (Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1994 $ 298 $(82) $-- $(1,023) $ 414
Common share options exercised
($0.063-$0.138 per share 28 -- -- -- 28
Common share warrants exercised,
net of issuance costs 47 -- -- -- 47
Net income -- -- -- 551 551
------------------------------------------------------------------
Balances, December 31, 1994 373 (82) -- (472) 1,040
Common share options exercised
($0.10-$1.25 per share) 106 -- -- -- 106
Issuance of common shares
from IPO, net of
issuance costs of $1,733 43,465 -- -- -- 43,465
Conversion of preferred
shares to common
shares at close of IPO 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 47,957 -- -- 1,066 49,023
Common share options exercised
($0.10-$2.50 per share) 34 -- -- -- 34
Issuance of shares from employee
stock purchase plan 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 $48,551 $ -- $11 $ 2,749 $51,311
------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 15
page 33
CONSOLIDATED STATEMENTS OF
CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,683 $ 1,538 $ 551
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,471 807 415
Deferred income tax (1,745) 98 (123)
Loss on disposal of property and equipment -- 93 --
Changes in operating assets and liabilities:
Trade accounts receivable (4,480) (2,234) (550)
Inventories (2,187) (663) (278)
Prepaid expenses and other current assets (2,914) (559) (428)
Trade accounts payable and accrued liabilities 9,538 1,461 1,430
----------------------------------------
Net cash provided by operations 1,366 541 1,017
----------------------------------------
Cash flows from investing activities:
Additions to property and equipment (4,112) (867) (752)
Purchases of available for sale securities (28,885) -- --
Proceeds from available for sale securities 9,476 -- --
Additions to other assets (1,369) (257) (120)
----------------------------------------
Net cash used in investing activities (24,890) (1,124) (872)
----------------------------------------
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 -- 1,100 400
Repayment of notes payable to shareholders -- (1,300) (400)
Net borrowings from revolving credit agreement with bank -- (1,000) 700
Proceeds from issuance of common shares
pursuant to exercise of stock options and warrants 378 106 75
----------------------------------------
Net cash provided by financing activities 378 42,453 775
----------------------------------------
Net increase (decrease) in cash and cash equivalents (23,146) 41,870 920
Cash and cash equivalents:
Beginning of year 42,960 1,090 170
----------------------------------------
End of year $ 19,814 $ 42,960 $ 1,090
----------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 16
page 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 its 12 distinctive full bodied beers in 49 states.
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 maturities of three months or less.
BREWING OPERATIONS. In July 1992, the Company entered into an agreement with
Minnesota Brewing Company of St. Paul, Minnesota. This Agreement was terminated
in 1995 upon the execution of the Alternating Premises 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. If the Agreement with Stroh was terminated, the Company believes that
alternative suppliers could be found, but that significant delays and costs
would be incurred which would materially effect the Company.
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 lives of five to twenty 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. Package design costs
are amortized over a twelve month term.
<PAGE> 17
page 35
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, 1996 and 1995, $657,000 and $742,000 of advertising was
included in prepaid expenses, respectively. Advertising expense was $5,246,000,
$2,224,000 and $1,468,000 in 1996, 1995 and 1994, 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 basis 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.
COMPUTATION OF NET INCOME PER SHARE. Net income per share is computed using the
weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of stock options
and warrants (using the treasury stock method for all periods presented) and
convertible Series A and Series B preferred shares.
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. During February 1997, the Financial Accounting
Standards Board issued Statement No. 128(SFAS 128), "Earnings per Share", which
specifies the computation, presentation and disclosure requirements for Earnings
per Share. SFAS 128 will become effective for the Company's 1997 fiscal year.
The Company's management is currently studying the implications of SFAS 128.
The impact of adopting SFAS 128 on the Company's financial statements has not
yet been determined.
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.
NOTE 2. AVAILABLE FOR SALE SECURITIES. At December 31, 1996, available for sale
securities are stated at estimated fair value and consist of bonds, preferred
stock, commercial paper, auction rate receipts and treasury notes.
Available for sale securities at December 31, 1996 are summarized below:
<TABLE>
<CAPTION>
Fair Market Cost Unrealized
(in thousands) Value Basis Gain
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $11,969 $11,958 $11
Preferred stock 3,109 3,109 0
Commercial paper 1,936 1,936 0
Auction rate receipts 1,412 1,412 0
Treasury notes 994 994 0
-----------------------------------------------
$19,420 $19,409 $11
-----------------------------------------------
</TABLE>
<PAGE> 18
page 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. TRADE ACCOUNTS RECEIVABLE. Trade accounts receivable are as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Trade accounts receivable $ 9,918 $ 4,988
Less allowance for credit notes 2,115 1,767
Less allowance for doubtful accounts 139 37
------------------------------
$ 7,664 $ 3,184
==============================
NOTE 4. INVENTORIES. Inventories are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 972 $ 184
Beer in progress 799 430
Promotional material 2,660 1,630
------------------------------
$ 4,431 $ 2,244
==============================
NOTE 5. PROPERTY AND EQUIPMENT. Property and equipment are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Kegs, machinery and equipment $ 4,353 $ 1,339
Office furniture and equipment 1,115 750
Leasehold improvements 285 136
Construction in progress 591 --
------------------------------
6,344 2,225
Less accumulated depreciation and amortization 1,232 657
------------------------------
$ 5,112 $ 1,568
==============================
Depreciation and amortization of property and equipment charged to
operations was $568,000, $391,00, and $242,000,
for fiscal years 1996, 1995 and 1994, respectively.
NOTE 6. OTHER ASSETS. Other assets are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Intangible costs associated with warrant $ 2,789 $ 2,789
Less accumulated amortization (362) (51)
------------------------------
2,427 2,738
Package design costs 1,426 347
Less accumulated amortization (575) (99)
------------------------------
851 248
Other assets 235 44
------------------------------
$ 3,513 $ 3,030
==============================
</TABLE>
Amortization of intangible costs and package design costs were $886,000,
$363,000, and $151,000 in 1996, 1995 and 1994, respectively.
<PAGE> 19
page 37
NOTE 7. ACCRUED EXPENSES. Accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
Accrued distribution liabilities $5,111 $ --
Accrued brewery charges -- 449
Accrued expenses 934 847
Accrued freight 757 343
Accrued income and excise taxes 1,881 1,093
Accrued bonuses 304 543
Accrued merchandise purchases 263 478
---------------------------
$9,250 $3,753
===========================
</TABLE>
Stroh currently manufactures the Company's products under the Company's
supervision. The Company paid approximately $28.6 million in 1996 and $7.6
million in 1995 to Stroh for charges under the Agreement and had a payable of
approximately $2.0 million and $1.5 million at December 31, 1996 and 1995,
respectively.
NOTE 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 required to be 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.
NOTE 9. INCOME TAXES. The provision for (benefit from) income taxes is as
follows for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
December 31,
- --------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,005 $ 723 $ --
State 586 226 86
----------------------------------------------------
2,591 949 86
Deferred:
Federal (1,475) 80 (116)
State (362) 18 (7)
----------------------------------------------------
(1,837) 98 (123)
----------------------------------------------------
$ 754 $1,047 $ (37)
====================================================
</TABLE>
<PAGE> 20
page 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1996, 1995 and 1994:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States statutory rate 34.0% 34.0% 34.0%
State taxes (net of federal benefit) 6.1 5.6 7.1
Utilization of net operating loss carryforwards -- -- (49.2)
Nontaxable dividends and interest (16.3) (3.0) --
Change in valuation allowance -- -- 0.8
Non-deductible expenses 4.6 3.9 --
Other 2.5 -- --
--------------------------------------------------
30.9% 40.5% (7.3)%
--------------------------------------------------
</TABLE>
The tax effect of temporary differences that rise to significant portions of the
deferred tax asset are as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 59 $ 15
Allowance for credit notes 562 --
Accrued distribution liabilities 1,171 --
Vacation and bonus 167 42
State income taxes -- 32
Reserves and other 185 26
-------------------------
Total 2,144 115
-------------------------
Deferred tax liabilities:
Depreciation and amortization 228 90
State income taxes 21 --
Other 35 --
-------------------------
Total 284 90
-------------------------
Net deferred taxes $1,860 $ 25
-------------------------
</TABLE>
NOTE 10. 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. The
consolidated financial statements have been retroactively adjusted to reflect
this change.
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 the 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, will be
amortized to cost of goods sold over the nine year term of the amended
manufacturing agreement.
<PAGE> 21
page 39
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 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 options to each new director upon their appointment to the Board, and
annual grants of 5,000 options for each director upon their reappointment to the
Board of Directors.
Information regarding these Plans follows:
<TABLE>
<CAPTION>
Options Outstanding
- -------------------------------------------------------------------------------------------------------------
Shares Price
(in thousands, except per share data) Available Shares Per Share
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, January 1, 1996 774 604 $0.100 - $ 18.00
Granted (430) 430 $6.500 - $ 18.75
Canceled 34 (34) $0.140 - $ 18.75
Exercised -- (76) $0.100 - $ 2.50
Additional shares of 1986 plan canceled (3)
-------------------------------------------
Balances, December 31, 1996 375 924 $0.100 - $ 18.00
-------------------------------------------
</TABLE>
At December 31, 1996, 184,000 shares were exercisable at an average price of
$10.89 per share under the Plan.
The options outstanding and currently exercisable by exercise price at December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------------
Exercise Number Outstanding Weighted Average Weighted Average
Price (in thousands) Remaining Contractual Life Exercise Price
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 0.10 10 .09 $ 0.10
$ 0.14 31 1.97 $ 0.14
$ 1.25 38 2.58 $ 1.25
$ 2.50 18 3.31 $ 2.50
$ 6.50 246 9.95 $ 6.50
$ 8.00 100 9.81 $ 8.00
$ 8.75 15 9.56 $ 8.75
$ 8.88 38 9.63 $ 8.88
$ 18.00 422 8.88 $18.00
$ 18.75 6 9.08 $18.75
</TABLE>
<TABLE>
<CAPTION>
Options Currently Exercisable
- -------------------------------------------------------
Number Exercisable Weighted Average
(in thousands) Exercise Price
- -------------------------------------------------------
<S> <C>
10 $ 0.10
31 $ 0.14
27 $ 1.25
8 $ 2.50
0 --
0 --
0 --
0 --
108 $18.00
0 --
</TABLE>
<PAGE> 22
page 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE STOCK PURCHASE PLAN. In September 1995, the Company adopted the 1995
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan allows
qualified employees to purchase shares of the Company's common stock at 85% of
the lower of the fair market value on the enrollment date or exercise date. The
Purchase Plan has one year offering periods. The Company has reserved 400,000
shares of its common stock for issuance under the Purchase Plan. As of December
31, 1996 36,000 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 1996 and 1995 consistent with the provisions of SFAS
No. 123, the Company's net income and net income per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net income- as reported $ 1,683 $ 1,538
Net income- pro forma $ 208 $ 1,308
Net income per share- as reported $ 0.16 $ 0.18
Net income per share- pro forma $ 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>
<S> <C>
Risk-free interest rate 6.20%
Expected life in years 4.19
Expected dividends None
Expected volatility 0.8598
</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.
NOTE 11. 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.
NOTE 12. 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.
<PAGE> 23
page 41
The Company has commitments under operating leases for office space and
equipment which expire through 2001. 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
noncancelable lease terms in excess of one year at December 31, 1996 are
$545,000 in 1997, $372,000 in 1998, $267,787 in 1999, $216,785 in 2000 and
$53,433 in 2001.
Rental expense was approximately $489,000, $286,000 and $152,000 for
the years ended December 31, 1996, 1995, and 1994, respectively.
NOTE 13. SUPPLEMENTAL CASH FLOW INFORMATION. Supplemental cash flow information
is summarized as follows:
<TABLE>
<CAPTION>
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid during the period for:
Excise taxes $7,449 $5,889 $2,779
Interest 3 201 97
Income taxes 1,448 140 26
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 11 -- --
</TABLE>
NOTE 14. SIGNIFICANT INFORMATION AND SIGNIFICANT CUSTOMERS. The Company has no
operations outside of the United States and operates in one industry segment.
One customer accounted for 14% of 1996 sales. Two customers accounted for 24%
and 11% and 31% and 11% of 1995 and 1994 sales, respectively. To date export
sales have not been significant.
<PAGE> 24
page 42
REPORT
OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Pete's Brewing Company and Subsidiary
We have audited the accompanying consolidated balance sheets of Pete's Brewing
Company and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand LLP
- ---------------------------
San Jose, California
February 14, 1997
<PAGE> 25
page 43
CORPORATE DIRECTORY
AND INFORMATION
DIRECTORS AND OFFICERS
Jeffrey A. Atkins
Senior Vice President, Chief Financial
Officer and Acting Chief Operating
Officer; Secretary
James E. Collins
Vice President Operations
Patrick Couteaux
Vice President Brewing and Brewmaster
Omer D. Malchin
Vice President Marketing
Don W. Quigley
Senior Vice President Sales
Pete S. Slosberg
Co-Founder; Director
Mark J. Bronder(1)
Private Investor; Co-Founder and Director
Audrey MacLean(2)
Private Investor; Director
Philip A. Marineau
President and Chief Operating Officer
of Dean Foods Company, a food pro-
cessing company; Chairman of the Board
Kevin O'Rourke(1)(2)
Chief Financial Officer and Director of
O'Rourke Investment Corporation, a
Venture Capital Investment Firm; Director
Christopher T. Sortwell(1)
Executive Vice President and Chief
Financial Officer of The Stroh Brewery
Company, a Brewery; Director
(1)Member of Audit Committee
(2)Member of Compensation Committee
ANNUAL MEETING
The Annual Meeting of Shareholders
will be held on May 12, 1997 at
1:00pm (PDT) at the Airport Hilton,
San Francisco International Airport, CA
REGISTRAR AND
TRANSFER AGENT
American Stock Transfer and Trust
Company
40 Wall Street
New York, NY 10005
(800) 937-5449
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Ten Almaden Boulevard
San Jose, CA 95113
PUBLICATIONS
Copies of the Company's Form 10-K or Form 10-Q reports filed with the Securities
and Exchange Commission are available without charge. To request a copy, please
call our Investor Relations line at 1-800-955-WIKD or write our Investor
Relations department at the Corporate Headquarters.
CORPORATE HEADQUARTERS
PETE'S BREWING COMPANY
514 High Street
Palo Alto, CA 94301
Telephone: (415) 328-PETE
Customer Info: (800) 877- PETE
VIPete's: (888)VIP-1058
Investor Relations: (800) 955-WIKD
Fax on Demand: (800) 955-WIKD
Investor Website: www.peteswicked.com
MARKET AND
STOCK PRICE DATA
Price Range of Common Stock: The Common
Stock of the Company has been traded on
the Nasdaq National Market under the
symbol WIKD since the Company's initial
public offering on November 7, 1995.
Prior to that time, there was no public
market for the Company's Common Stock.
The following table sets forth for the
periods indicating high and low sale
prices of the Common Stock.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------------
<S> <C> <C>
Fiscal Year Ended December 31, 1995
Fourth Quarter (from
November 7, 1995) $26.50 $13.50
Fiscal Year Ended December 31, 1996
First Quarter $20.00 $15.50
Second Quarter $21.00 $14.50
Third Quarter $15.25 $ 7.00
Fourth Quarter $ 9.00 $ 6.13
</TABLE>
As of March 21, 1997, the Company's record date, there were 474 shareholders of
record of Common Stock. The Company has never paid cash dividends on its capital
stock. The Company currently expects that it will retain its future earnings for
use in the operation and expansion of its business and does not anticipate
paying any cash dividends in the foreseeable future.
TRADEMARKS
Pete's Wicked Ale, Wicked Ale, Pete's & Design, Pete's Wicked Lager & Design,
and Wicked Ware are registered U.S. trademarks of Pete's Brewing Company. U.S.
Trademarks pending registration include Wicked Red, Wicked Winter Brew, Get
Wicked Tonight, Gettin' Wicked, Team Wicked, Time Files/Get Wicked, wick-id,
Wicked and peteswicked.com. Pete's Brewing Company also has exclusive use of the
Strawberry Blonde(R) and Mardi Gras(R) marks.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-1308) of our report dated February 14, 1997,
on our audits of the financial statements and financial statement schedule of
Pete's Brewing Company as of December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994 which report is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PETE'S
BREWING COMPANY'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AS
SHOWN IN THE 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 19,814
<SECURITIES> 19,420
<RECEIVABLES> 7,664
<ALLOWANCES> 139
<INVENTORY> 4,431
<CURRENT-ASSETS> 57,463
<PP&E> 5,112
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,088
<CURRENT-LIABILITIES> 14,549
<BONDS> 0
0
0
<COMMON> 48,551
<OTHER-SE> 2,760
<TOTAL-LIABILITY-AND-EQUITY> 66,088
<SALES> 70,634
<TOTAL-REVENUES> 70,634
<CGS> 34,761
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 34,795
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 2,437
<INCOME-TAX> 754
<INCOME-CONTINUING> 1,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,683
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
