1
Exhibit 13.1
SELECTED
FINANCIAL DATA
For the years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(amounts in thousands except per share and employee data) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
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
(1) As of December 31,
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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
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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:
Years ended December 31,
- -----------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------
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%
------------------------------
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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:
Years ended December 31,
--------------------------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------------
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.
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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.
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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.
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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,
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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
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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.
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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.
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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.
12
page 30
CONSOLIDATED
BALANCE SHEETS
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
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
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
13
page 31
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data) 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
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
========================================================
The accompanying notes are an integral part of these consolidated financial
statements.
14
page 32
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
Series A and B Preferred Shares Common Shares
-------------------------------- -------------
(in thousands) Shares Amount Shares
- ------------------------------------------------------------------------------------------------------------------------
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
--------------------------------------------------
Unrealized Gain Retained
Common Shares Notes on Available for Earnings
(in thousands) Amount Receivable Sale Securities (Deficit) Total
- ------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
15
page 33
CONSOLIDATED STATEMENTS OF
CASH FLOWS
Years ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
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
----------------------------------------
The accompanying notes are an integral part of these consolidated financial
statements.
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.
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:
Fair Market Cost Unrealized
(in thousands) Value Basis Gain
- ---------------------------------------------------------------------------------------------
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
-----------------------------------------------
18
page 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. TRADE ACCOUNTS RECEIVABLE. Trade accounts receivable are as follows:
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
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
==============================
Amortization of intangible costs and package design costs were $886,000,
$363,000, and $151,000 in 1996, 1995 and 1994, respectively.
19
page 37
NOTE 7. ACCRUED EXPENSES. Accrued expenses are as follows:
December 31,
- ------------------------------------------------------------------------------------
(in thousands) 1996 1995
- ------------------------------------------------------------------------------------
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
===========================
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:
December 31,
- --------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------
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)
====================================================
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:
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
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)%
--------------------------------------------------
The tax effect of temporary differences that rise to significant portions of the
deferred tax asset are as follows:
December 31,
- -------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
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
-------------------------
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.
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:
Options Outstanding
- -------------------------------------------------------------------------------------------------------------
Shares Price
(in thousands, except per share data) Available Shares Per Share
- -------------------------------------------------------------------------------------------------------------
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
-------------------------------------------
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:
Options Outstanding
---------------------------------------------------------------------------------------
Exercise Number Outstanding Weighted Average Weighted Average
Price (in thousands) Remaining Contractual Life Exercise Price
---------------------------------------------------------------------------------------
$ 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
Options Currently Exercisable
- -------------------------------------------------------
Number Exercisable Weighted Average
(in thousands) Exercise Price
- -------------------------------------------------------
10 $ 0.10
31 $ 0.14
27 $ 1.25
8 $ 2.50
0 --
0 --
0 --
0 --
108 $18.00
0 --
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:
December 31,
- -------------------------------------------------------------------------------------------
(in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
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
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:
Risk-free interest rate 6.20%
Expected life in years 4.19
Expected dividends None
Expected volatility 0.8598
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.
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:
December 31,
- ---------------------------------------------------------------------------------------------------------------------
(in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
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 -- --
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.
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
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.
- --------------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------------
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
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.