1
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:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
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
----- -----
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.
2
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
-2-
3
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.
-3-
4
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
-4-
5
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
-5-
6
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
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
-6-
7
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
-7-
8
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
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.
-8-
9
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
-9-
10
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
-10-
11
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.
-11-
12
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
-12-
13
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
-13-
14
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
-14-
15
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.
-15-
16
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.
-16-
17
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.
-17-
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
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
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.
-18-
19
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
-19-
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-
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-
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:
SIGNATURE TITLE DATE
- ------------------------- ---------------------------------- --------------
/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
-22-
23
SIGNATURE TITLE DATE
- ------------------------- ---------------------------------- --------------
/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
-23-
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
25
PETE'S BREWING COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND WRITE-OFF BALANCE AT
DESCRIPTION PERIOD EXPENSES OF ACCOUNTS END OF PERIOD
- ----------- ------ -------- ----------- -------------
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
S-2
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.