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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
---------------.
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: (650) 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 [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The Aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 27, 1998 as reported on the Nasdaq National Market, was approximately
$34,641,245. Shares of Common Stock held by each officer and director and by
each person known to the Company who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
As of February 27, 1998, registrant had 10,815,273 outstanding shares of
Common Stock.
The Registrant has incorporated by reference into Part III of this Form
10-K portions of its Proxy Statement for the Annual Meeting of Shareholders to
be held June 8, 1998.
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PETE'S BREWING COMPANY
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
INDEX
PAGE
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PART I.
Item 1. Business.................................................... 1
Employees................................................... 13
Item 2. Properties.................................................. 13
Item 3. Legal Proceedings........................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......... 13
Executive Officers of the Registrant........................ 14
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 15
Item 6. Selected Financial Data..................................... 16
Item 7. Managements Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 8. Financial Statements and Supplementary Data................. 26
PART III.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 41
Item 10. Directors and Executive Officers of the Registrant.......... 41
Item 11. Executive Compensation...................................... 41
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 41
Item 13. Certain Relationships and Related Transactions.............. 41
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 41
Signatures.................................................. 43
Consent of Independent Accountants..........................
Report of Independent Accountants on Financial Statement
Schedule.................................................... 44
Valuation and Qualifying Accounts........................... 45
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PART I
The information contained in this Report includes forward-looking
statements, based on current expectations, that involve risks and uncertainties,
which could cause actual results to differ materially from those, expressed in
the forward-looking statements. Various important factors known to Pete's
Brewing Company that could cause such material differences are identified below
in Part I, Item 1 of this report and in the "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
ITEM 1. BUSINESS
Pete's Brewing Company ("Pete's" or the "Company") is the second largest
major domestic craft brewer in the United States. The Company currently markets
its 9 distinctive full-bodied beers in 49 states, the District of Columbia and
the United Kingdom under the "Pete's" brand name. Pete's Wicked Ale, the
Company's flagship beer, has won 22 awards for excellence since it was
introduced in 1986. In addition, Pete's currently markets Pete's Signature
Pilsner, Pete's Honey Wheat, and Pete's Strawberry Blonde and Pete's
Oktoberfest. By year end 1997, Pete's completed its calendar of seasonal
offerings with the introduction of Pete's Springfest to provide a seasonal
bridge between the number-one selling craft beers in their respective seasons,
Pete's Summer Brew and Pete's Winter Brew. In response to varying consumer
preferences, the Company will diversify its product line by introducing and
marketing a new beer, Pete's ESP Lager, in March 1998.
INDUSTRY BACKGROUND
The Company participates in the domestic craft beer segment of the
estimated $50 billion domestic beer market. This segment represented
approximately 4.5% of total domestic, retail beer sales in 1997. In general,
three types of brewers produce beers that compete with the Company's beers:
major domestic brewers, import beer companies and domestic craft brewers.
There are approximately 1,300 brewers in the United States. The industry is
both highly concentrated, with the top five domestic brewers, Anheuser-Busch
Companies, Inc., Miller Brewing Company, Inc., Adolph Coors Co., Stroh Brewery
Co., and Pabst Brewing Co., accounting for nearly 90% of U.S. beer volume
shipments in 1997, and fragmented within the nearly 1,300 domestic craft
brewers. The large domestic beer producers generally offer a homogenous
selection of beer choices designed for broad mass appeal. These beers,
principally light-bodied lagers and pilsners, are brewed for low flavor and
aroma, using mass production techniques for low cost.
The brewers of import beers from Holland, Germany, Canada and Mexico were
the first, in recent decades, to provide beers to address and benefit from
shifting consumer preferences toward more full-bodied, more flavorful beers.
Imported beers often reflect the style preferences of their country of origin
and frequently carry a premium image with U.S. consumers. As a result, imports
are frequently priced at a premium to most domestic mainstream brands.
Domestic craft brewers generally brew their beers according to traditional
German or English recipes and tend to be more full bodied and more bitter in
taste than mass produced domestic beers. As a result, these amber lagers and
ales, stouts, porters, bocks, and German-style wheat beers and seasonal beers
tend to be more flavorful and fresher tasting. Craft brewers have convincingly
promoted the concept that beers made in smaller batch sizes than the mainstream
brewers and from "all natural ingredients" produce a better beer. This has been
particularly relevant, as consumers have shown an increasing interest in the
process of beer making, alternative styles of beer, and the history surrounding
beer. This increased demand for craft beers has allowed a price premium relative
to mass produced domestic beers and higher margins throughout the distribution
channel, motivating distributors and retailers to carry and promote these
products.
Despite the rapid growth of craft beers and imports in recent years, growth
in the total domestic beer market has been less than 1% per annum since 1984.
Adult per capita consumption of beer in the United States has also declined
slightly. The Company believes that these trends can be attributed to a variety
of factors, including increased concerns over the health consequences of
consuming alcoholic beverages; safety
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concerns about drinking and driving; a trend toward a diet of lighter, lower
calorie beverages; the increased activity of anti-alcohol consumer protection
groups; an increase in the minimum drinking age from 18 to 21 years in all
states; the general aging of the population; and increases in federal and state
excise taxes.
After several years of dramatic growth, the domestic craft beer market grew
at an annual rate of approximately 8% for the year ended December 31, 1997. This
growth rate was significantly below the rates of the past five years, and the
Company believes that deceleration of growth by the craft segment will continue
in 1998. The Company estimates that the segment was flat to slightly down during
the fourth quarter of 1997. The success of the craft segment has attracted
significant numbers of entrants to the category, based on the relatively low
barriers to entry. This has, in turn, led to significant over-proliferation of
brewers and brands in the marketplace. Consumers, previously stimulated to
experiment with an increasing array of choice, appear to be moving toward safer,
more reliable brand choices among the premium, "better beer" alternatives to
mainstream domestic beers. Consumer research conducted by the Company during
1997 suggests that there is significant interaction between craft brands and
import brands when consumers are seeking a "better beer". Import brands have
effectively marketed their premium image and heritage to attract consumers from
the craft segment during the past year. The Company believes that future success
of its brand will depend on providing adequate and relevant brand communication
to consumers who are seeking "better beers".
Domestic craft brewers fall into four main categories: brewpubs,
microbrewers, regional brewers and custom brewers. Brewpubs, consisting of bars
and restaurants, produce at least 50% of their product for on-site consumption.
Microbrewers, defined within the industry as brewers of less than 15,000 barrels
of beer annually, generally have limited distribution and tend to serve a very
local market. Regional brewers typically own and operate their own breweries to
produce between 15,000 and 2,000,000 barrels of beer annually. While regional
brewers generally have a strong presence in their geographic regions, they tend
to have less distribution and market share outside of their home region. Such
brewers typically invest their resources in constructing and maintaining
breweries, leaving little to invest in selling infrastructure and marketing
activities. Word of mouth and occasional media attention are relied upon to
promote growth. Custom brewers utilize excess industry brewing capacity to
produce their beers according to their own proprietary recipes. Custom brewers
devote their resources toward advertising and promotion of their craft beers,
rather than a capital intensive brewing operation.
STRATEGY
The Company's objective is to become the leading brewer of high quality
craft beers in the United States. Key elements of the Company's business
strategy to increase market share and profitability include the following:
Brand Investment. The Company devotes significant financial resources to
innovative selling, advertising and promotional activities designed to build
brand awareness and a high level of consumer loyalty. Through participation in
trade shows, other beer industry events and founder Pete Slosberg's beer
education seminars, the Company seeks to educate distributors, retailers and
consumers about the craft beer industry and the Company's beers. In 1997, 1996
and 1995, selling, advertising and promotional expenses represented 51.7%, 42.0%
and 36.4%, respectively, of the Company's net sales.
Beginning in 1998, the Company will market all of its beers under the
"Pete's" trademark. Research conducted by the Company during 1997 indicated that
consumers in the Company's target market are attracted to the "Pete's" brand
name and associate both quality and fun with the brand. In addition, the
"Pete's" brand is versatile, amenable to brand expansion and is not constrained
by regional or provincial connotations.
Through ongoing consumer research, the Company seeks to gain further
understanding of the craft beer category as it exists today and changes over
time, in particular with respect to the "Pete's" brand and advertising
awareness, consumption patterns and craft beer consumer demographics. Current
consumer research indicates that beer lovers are attracted to the "Pete's" brand
in large part because Pete Slosberg is a real person, who is passionate about
making better beer and his company -- Pete's Brewing Company -- makes great
beer. This research also determined that the "Pete's Wicked" image was uniquely
associated with
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the flagship beer "Pete's Wicked Ale" and, therefore, brand positioning will be
adjusted during 1998 on the Company's other products to maintain this
distinction. The repositioning of the brand resulted in the removal of the
"Wicked" name from all of the Company's products except for "Pete's Wicked Ale".
The Company intends to continue to expend significant resources on selling,
advertising and promoting these concepts to increase its market share in key
geographic regions in the United States. The Company's advertising and
promotional activities promote the Company's image as an innovative brewer, with
a personal and inviting character behind the label, a unique brand name and high
quality beers.
Cost Efficient, High Quality Brewing. Since inception, the Company has
taken advantage of the excess capacity in the domestic brewing industry by
utilizing breweries of independent companies to custom brew the Company's beers
under the Company's on-site supervision and pursuant to the Company's
proprietary recipes. The Company assures the quality of its beers by selecting
specialty malts and hops, controlling the custom brewing operations and by
following advanced brewing industry guidelines for in-process and finished
product quality assurance. In general, the custom brewing strategy allows the
Company to (i) devote significant financial resources to sales, promotion and
advertising activities, (ii) maintain strong sales growth with a relatively lean
brewing infrastructure and (iii) secure access to the brewing capacity required
to efficiently distribute its beers nationally, while maintaining high quality
across its product offerings.
The Company has a strategic alliance with The Stroh Brewery Company
("Stroh") pursuant to which the Company custom brews all of its beers at the
breweries of Stroh. In August 1995, the Company began shipping products brewed
at the St. Paul, Minnesota Stroh brewery. In March 1996, the Company began
shipping products brewed at the Winston-Salem, North Carolina Stroh brewery and
in late 1997 began to qualify products for brewing at the Seattle, Washington
Stroh brewery when Stroh closed its St. Paul brewery. Under the Company's
long-term brewing agreement with Stroh (the "Stroh Agreement"), the Company has
reduced its production costs. The Company will have the ability to strategically
utilize multiple brewing sites in different geographic regions of the United
States to reduce transportation costs and delivery times to distributors. The
Company believes that utilizing multiple breweries of a single brewer provides
advantages over utilizing facilities of several different brewers, including
ease of management of operations, uniformity of product quality and ability to
use a single management information system. In connection with the Stroh
Agreement, the Company issued a warrant to Stroh to purchase 1,140,284 shares of
the Company's Common Stock and an executive officer of Stroh joined the
Company's Board of Directors.
National Distribution Network. The Company's strategy is to expand market
share in key markets of the United States by leveraging its established national
distribution network to increase retail account distribution. The Company has
invested significant resources to educate distributors and retailers about
promoting and selling the Company's beers and the craft beer segment in general.
The Company chooses distributors in each market that will devote significant
attention and resources to the promotion and sale of the Company's beers. These
distributors may be wine and spirits distributors or traditional beer
wholesalers.
Product Diversity and Quality. The Company intends to continue to update
its product line with beers designed to appeal to varying consumer preferences.
The Company currently markets 9 distinctive full flavored craft beers,
consisting of five year-round products and four seasonal brews. The Company's
beers, ranging from brown to amber to gold colors, all bear the "Pete's" brand
name and allow the Company to appeal to a broad range of consumers. The Company
intends to establish a selection of year-round and seasonal beers that will
attract consumers to craft beers and allow them to explore new tastes. The
company brews its beers using only water, malt, hops, yeast and natural spices
and flavors.
PETE'S BREWS
The Company positions all of its products as full-bodied beers of the
highest quality. The Company's products are made only from high quality natural
ingredients. The Company brews its beer using only water, malt, hops, yeast and
natural spices and flavors. The Company's beers have won numerous awards for
excellence. The Company's net sales and barrels of beer sold have grown rapidly
from $2.5 million and 14,700 barrels, respectively, in 1991 to $58.3 million and
361,100 barrels, respectively, in 1997, which are lower than 1996 levels of
$70.6 million in net sales and 425,600 barrels.
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Brands
The Company offers or plans to offer in the near future the following
Pete's brews:
Pete's Wicked Ale. Introduced in 1986, the Company's flagship beer, Pete's
Wicked Ale, is widely recognized as the original American brown ale, with a
roasted malt sweetness, strong hop flavor and aroma, and medium body. Pale,
chocolate and caramel malts and a complex blend of Cascade and rare Brewer's
Gold hops have contributed to the numerous awards for brewing excellence that
this beer has received since 1986.
Pete's Signature Pilsner. Introduced in 1992 as Pete's Wicked Lager, and
repositioned as Pete's Wicked Bohemian Pilsner in 1996, Pete's Signature Pilsner
is an authentic Czech pilsner. A medium-bodied lager, it has a malty sweetness
with assertive bitterness and strong hoppy aroma from the use of imported Saaz
hops.
Pete's Winter Brew. Introduced in the winter of 1993, Pete's Winter Brew,
formerly Pete's Wicked Winter Brew, is a medium bodied amber ale with a
raspberry aroma and taste. This holiday offering is available annually from the
Fall through the Winter.
Pete's Summer Brew. Introduced in April 1995, Pete's Summer Brew, formerly
Pete's Wicked Summer Brew, is a light, refreshing golden pale ale made with pale
and wheat malt, Tettanger hops, and a delicate hint of natural lemon flavor.
This summer offering is available annually from April to August. The Company
believes that Pete's Wicked Summer Brew was the number one selling craft summer
seasonal beer in the United States in 1997, 1996, and 1995.
Pete's Honey Wheat. Introduced in July 1995, Pete's Honey Wheat, formerly
Pete's Wicked Honey Wheat, is an ambered colored, delicately malted wheat beer
that is distinguished by its use of caramel malt in addition to wheat malt. The
honey flavor naturally enhances the depth of the malt and hop flavors for a
rich, smooth taste. Late-kettled hopping with a blend of Tettanger and Cascade
hops adds a slightly fruity aroma. The beer is unfiltered to retain the
distinctive honey-flavored finish.
Pete's Strawberry Blonde. Introduced in July 1996, Pete's Strawberry
Blonde, formerly Pete's Wicked Strawberry Blonde, is a golden ale with a soft
malty finish, and a distinct strawberry aroma.
Pete's Oktoberfest. Introduced in August 1996, Pete's Oktoberfest, formerly
Pete's Wicked Oktoberfest, is a traditional Bavarian amber lager brewed in the
classic Marzen style. This copper colored, medium-bodied brew has a sweet,
caramel nutty flavor arising from the use of caramel malts, with the balancing
bitterness of a blend of Cascade, Yakima Cluster and Tettanger hops. This fall
seasonal is available in September and October.
Pete's Springfest. Introduced in December 1997, Pete's Springfest, formerly
Pete's Wicked Springfest, is a hearty, full-bodied, amber brew designed in the
tradition of spring celebration seasonal bock beers. Its rich malty flavor
derives from the brewmaster's use of caramel, wheat, munich, and pale malts
balanced by a variety of hops. This spring seasonal is available in February and
March.
Pete's ESP Lager. Created in late 1997 for early 1998 introduction, Pete's
ESP Lager is made in the style of European export lagers. Its golden color,
combined with a refreshing craft character and crisp finish, make it a relevant
alternative to more full-bodied styles. Crafted with the use of pale and wheat
malts and Yakima Cluster and Tettanger hops, this new style will be introduced
in March 1998.
In January 1998, the Company announced its plan to realign its portfolio of
brands and discontinue Pete's Wicked Multigrain, Pete's Wicked Maple Porter,
Pete's Wicked Amber Ale, and Pete's Wicked Pale Ale.
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Awards for Excellence
The Company's beers have won numerous awards for excellence. The following
table lists certain awards and distinctions achieved by the Company's beers:
PETE'S WICKED ALE
1997 SILVER MEDAL: Ale Category World Beer Championship
1997 GOLD MEDAL: Brown Ale Category Cheers One World Festival, Florida
1997 1ST PLACE Norwalk, CT Consumer Preference Poll
1996 GOLD MEDAL: Brown Ale Category World Beer Championships
1996 SILVER MEDAL: Brown Ale Category All American Beer Festival, Houston
1995 BRONZE MEDAL: American Brown Ale Great American Beer Festival(R), Denver
1995 SILVER MEDAL: Brown Ale Category World Beer Championships
1994 SILVER MEDAL: Brown Ale Category World Beer Championships
1994 GOLD AWARD Karnival of Beers, Fullerton
1994 4TH PLACE: Brown Ales Great International Beer Tasting, Denver
1993 4TH PLACE: Brown Ales Great International Beer Tasting, Denver
1992 GOLD MEDAL: American Brown Ale Great American Beer Festival(R), Denver
1992 1ST PLACE Great American Beer Festival(R)
"People's Choice"
1992 BEST ALE Atlanta Tribune Tasting, Atlanta
1991 1ST PLACE BROWN ALES Twin Cities Reader Poll, Minneapolis
1991 2ND PLACE ALL STYLES Los Angeles Times Tasting, LA
1990 BEST BROWN ALE Great American Beer Tasting, New York
1990 2ND PLACE ALE Milwaukee Beer Festival, Milwaukee
1988 SILVER MEDAL KPBS International Beer Festival, San
Diego
1988 SILVER MEDAL: Brown Ale Category Great American Beer Festival(R), Denver
1987 SILVER MEDAL: Ale Category Great American Beer Festival(R), Denver
1987 1ST PLACE ALL STYLES Bay Guardian Competition, San Francisco
PETE'S SIGNATURE PILSNER
1997 SILVER: Lager Category World Beer Championships
1997 SILVER: Pilsner Category Cheers One World Festival, Florida
1996 GOLD MEDAL: Pilsner Category World Beer Championships
1996 BRONZE MEDAL: Lager Category All American Beer Festival, Houston
1995 GOLD MEDAL: Pilsner Category World Beer Championships
1995 SILVER MEDAL: Traditional Pilsen California Beer Festival
1994 GOLD MEDAL: Pilsner Category World Beer Championships
1994 GOLD AWARD: Karnival of Beers, Fullerton
1994 1ST PLACE: Great International Beer Tasting, Denver
1993 GOLD MEDAL Great International Beer Tasting, Denver
PETE'S HONEY WHEAT
1997 BRONZE MEDAL: Wheat Category All American Beer Festival, Houston
1997 GOLD MEDAL: Flavored Wheat Category Cheers One World Beer Festival, Florida
1996 SILVER MEDAL: Flavored Wheat Category World Beer Championships
1996 SILVER MEDAL: Wheat Category All American Beer Festival. Houston
1996 BEST HONEY BEER World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: Herb & Spice Category World Beer Championships
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PETE'S STRAWBERRY BLONDE
1997 SILVER MEDAL: Fruit Beer Category World Beer Championship
1997 1ST PLACE: Ale Category Chicago Beer Affair
1997 BRONZE MEDAL: Fruit Beer Category All American Beer Festival, Houston
1996 SILVER MEDAL: Fruit Beer Category World Beer Championship
PETE'S SUMMER BREW
1996 BEST PALE ALE World Expo of Beer "People's Choice", MI
1995 SILVER MEDAL: Fruit Beer Category World Beer Championships
PETE'S OKTOBERFEST
1997 1ST PLACE: Seasonal Category Chicago Beer Affair
1996 SILVER MEDAL: Oktoberfest Category World Beer Championship
PETE'S WINTER BREW
1997 SILVER MEDAL: Winter Ale Category World Beer Championships
1995 SILVER MEDAL: Fruit Flavored Category California Beer Festival
1993 NINKASI AWARD Based on one of the homebrew recipes by
the 1993 National Homebrew Grand
Champion
Packaging
The label imagery on the Pete's bottle and the other graphics on the
packaging containers are the primary communication with the consumer at the
point of sale. For this reason the Company has invested and continues to invest
significant resources to design, develop and protect the product package designs
and artwork. All of the Company's bottles include visually appealing labels and
a descriptive message from Pete. In 1990, the distinctive packaging for Pete's
Wicked Ale won a Clio Award for the Best International Beer Packaging. In
October 1997, the Company initiated a uniform packaging re-design of the
"Pete's" brand to focus on Pete Slosberg and the "Pete's" brand, allowing the
"Pete's Wicked" image to represent the flagship beer "Pete's Wicked Ale" alone.
In January 1998, the Company announced the planned April 1998 release of new
packaging to support the new brand positioning and emphasis on Pete's founder,
Pete Slosberg. The Company packages its beers in bottles, cans, or kegs and
sells to distributors in four packaging formats. Six packs contain six 12-ounce
bottles in an open-top, logo emblazoned pressboard carrier. Twelve packs contain
12 12-ounce bottles in a sealed, logo emblazoned corrugated container. In 1997,
the Company introduced cans in select retail markets such as commercial
airlines. For distribution to pubs, bars and restaurants, the Company packages
draught beer in kegs. One keg holds one half barrel or 15.5 gallons.
Research and Product Development
Research and product development activities are on-going. Opportunities
identified by the Company are formulated and developed by the Company's
Brewmaster, Pat Couteaux. Mr. Couteaux has 16 years of experience in the brewing
industry, most recently with G. Heileman Brewing Co., and holds a master's
degree in Brewing Science from the Technical University of Munich at
Weihenstephan, Germany. He is in charge of establishing quality control limits,
developing new beers, managing raw material selection, optimizing efficiency and
educating Company personnel regarding taste and other qualities and oversees all
elements of the brewing of the Company's beers. Since most beer types fall into
major categories or subcategories, an extensive development process is not
required to bring a new product to market.
The sale of a limited number of beers has accounted for substantially all
of the Company's sales since inception. The Company believes that the sale of
its currently offered beers will continue to account for a significant portion
of sales for the foreseeable future. Therefore, the Company's future operating
results, particularly in the near term, are significantly dependent upon the
continued market acceptance of these beers. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for the Company's beers as a result of competition, changes in consumer
tastes and preferences, government regulation or other factors would have a
material adverse effect on the Company's business,
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operating results and financial condition. In addition, there can be no
assurance that the Company will be successful in developing, introducing and
marketing additional new beers that will sustain sales growth in the future.
ADVERTISING AND PROMOTION
The Company's marketing programs emphasize the "Pete's" brand name and are
generally designed to promote brand recognition and trial of the Company's
products. The Company targets its marketing efforts at adults, ages 21 to 39,
which the Company believes form the most significant group contributing to the
growth of the craft beer industry. The Company's advertising and promotion
activities focus on the passion and knowledge of its founder, Pete Slosberg and,
the high quality of its beers. The Company has successfully maintained its
microbrewery heritage while expanding distribution and sales.
The Company uses a combination of educational and promotional programs
aimed at distributors, retailers and consumers, radio and print advertising,
public relations activities, attendance at trade shows and other craft beer
industry events and consumer communications to market its products.
The Company has undertaken a number of marketing initiatives that have
strengthened its franchise and role as an industry innovator. By promoting Pete
Slosberg as a beer enthusiast and Company Founder, the Company has the only
national brand identified with an individual deemed to be a true "beer folk
hero." Additional innovations, such as a (1-800) line, further differentiate the
label from other brands and help to keep the Company close to the consumer. In
addition, the Company will continue to use advertising of various mediums in key
markets. In 1997, the Company updated its seasonal line of beers with the
introduction of Pete's Springfest. Pete's Springfest is available between the
Pete's Wicked Winter Brew and Pete's Wicked Summer Brew selling seasons. All of
these marketing tools have succeeded in increasing the brand's visibility, with
the Company's distributors, retailers and consumers since its initial
introduction.
Educational and Promotional Programs. The Company's sales force actively
educates and trains distributors and retailers about the brewing process, the
craft beer segment in general and the Company's beers in particular. The
Company's sales force provides a high level of support to distributors,
assisting in regular planning of marketing and promotional programs and
providing consumer and distributor training and education. Pete Slosberg's beer
education seminars are additive to the Company's education activities. Through
these efforts, the Company seeks to obtain a competitive advantage by
encouraging more attention to its beers and a more effective resale effort from
distributors and retailers.
At the retail level, the Company provides creative point of sale display
materials and theme promotions designed to encourage trial and repeat purchases
of the Company's beers. The Company's recent point of sale promotional
activities included (i) a fall/winter promotion entitled "Seek the Peak"
encouraging wholesaler execution objectives and (ii) a "Tarot Card" Halloween
theme promoting the natural connection between the "Pete's Wicked Ale" brand
name and Halloween. The Company's bottle labeling and package artwork also
enhances the Company's visibility at the point of sale.
Advertising. The Company's advertising activities feature Pete Slosberg,
the Company's founder and spokesperson, as an everyday guy and the ultimate beer
enthusiast. In 1994, the Company became the first national, domestic craft beer
producer to utilize television advertising to promote its products. In May 1996,
the Company initiated radio advertising in several markets across the United
States. In 1997 the Company's radio campaign was focused on the #1 selling
seasonal "Pete's Summer Brew". The Company will continue to advertise in various
mediums and to monitor the effectiveness of its advertising among beer consumers
and to identify effective long-term communications strategies in order to build
loyalty among the Company's target consumer group.
The Company also utilizes print advertising to develop its image and create
demand for its beers. The Company concentrates its print advertising efforts on
prominent trade magazines, including Beer -- The Magazine, All About Beer and
American Brewer. The Company also seeks to identify and encourage editorial and
third party testimonial publicity to promote the Company and its products.
Recent articles in Modern Brewery Age and Impact magazine featured viewpoints
from senior Pete's Brewing Company executives.
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Trade Shows and Other Events. The Company participates in trade shows,
national and international beer-tasting events and other craft beer industry
events. The Company participated in trade shows in 1997, including the Great
American Beer Festival(R) and the National Beer Wholesalers Association
Conference, as well as numerous regional restaurant and hotel expositions. Many
of these events provide a forum for Pete to promote the Company's image and
further strengthen the "Pete's" brand name.
Consumer Communications. The Company encourages direct communication with
consumers by maintaining a consumer hotline and printing the number
(1-800-877-PETE) on each bottle of beer it sells. The hotline allows consumers
to obtain additional information regarding the Company and its beers and allows
craft beer enthusiasts to express their opinions to the Company. During business
hours, a Company representative personally answers every phone call.
DISTRIBUTION AND SALES
The Company sells its beers to independent beverage distributors for resale
to retailers who sell the beers to the consumer. The Company currently has
approximately 400 distributors and its beers are sold in 49 states, the District
of Columbia and the United Kingdom in supermarkets, liquor stores, bars, pubs,
restaurants, drug stores, warehouse club stores and convenience stores. The
Company chooses distributors in each market that will devote attention and
resources to the promotion and sale of the Company's beers, which may be either
wine and spirits distributors or beer wholesalers.
Independent wholesale distributors of "Pete's brews" (all of whom carry
other beverage products that compete with the Company's beers) of "Pete's" brews
are formally appointed in a variety of ways throughout the 49 states in which
the Company does business. In most cases, variations in appointment procedures
are directly attributable to state alcoholic beverage laws mandating territorial
appointment (some exclusive and some non-exclusive), restricting in various ways
the Company's ability to terminate or not renew the services of wholesale
distributors and providing varying periods and methods of resolving contractual
disputes. Generally, these state laws vary from a requirement that good cause be
shown for the action taken to a requirement that compensation be paid to the
terminated distributor for the fair market value of the lost business. In most
states, the Company uses appointment letters accompanied by a standard terms and
conditions agreement committing the wholesale distributor to an investment in
the promotion of the Company's beers.
The Company supports its distributor network with a sales force that is
organized by region with the Senior Vice President Sales overseeing the various
regions. The Company seeks to create and maintain a prominent position with its
distributors through the strength of its brand name, product diversity,
sophisticated selling support, customer service and attractive profit margins
throughout the distribution channel.
During the second half of 1996, the Company transitioned to a new wholesale
distribution network in California, Colorado and Washington, D.C. Previously,
the Company had relied on a single or limited number of distributors in these
key markets. The transition of the Company's distribution from a single or
limited number of distributors to in excess of 30 new distributors adversely
impacted the Company's level of revenues and profitability in the fourth quarter
of 1996 and in 1997, is expected to continue to impact the Company's results of
operations in the near term.
The Company is dependent upon its distributors to sell the Company's
products and to assist the Company in promoting market acceptance of, and
creating demand for, the Company's products. There can be no assurance that the
Company's distributors will devote the resources necessary to provide effective
sales and promotion support to the Company. During 1997 and 1996, the Company's
ten largest distributors accounted for approximately 34.1% and 39.2%,
respectively, of the Company's sales. Sales to Premium Coastal, the Company's
distributor covering the Commonwealth of Massachusetts, represented
approximately 9.1%, 9.4% and 10.7%, of the Company's sales in 1997, 1996 and
1995, respectively. Sales to Southern Wine and Spirits, the Company's former
California distributor, represented approximately 10.7% and 20.7% of the
Company's sales in 1996 and 1995, respectively. No other distributor accounted
for 10% or more of the Company's sales during such periods. The Company expects
sales to its ten largest distributors to continue to represent a significant
portion of sales. The Company believes that its future growth and success will
continue
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to depend in large part upon these significant distributors. If one or more of
these significant distributors were to discontinue selling, or decrease the
level of orders for the Company's products, the Company's business would be
adversely affected in the areas serviced by such distributors until the Company
retained replacements. There can be no assurance however that the Company would
be able to replace a significant distributor in a timely manner or at all in the
event it were to discontinue selling the Company's products. In addition, there
is always a risk that the Company's distributors will give higher priority to
the products of other beverage companies, including products directly
competitive with the Company's beers, thus reducing their efforts to sell the
Company's products. This risk is exacerbated by the fact that many of the
Company's distributors are reliant on the beers of one of the major beer
producers for a large percentage of their revenues and, therefore, may be
influenced by such a producer.
The Company's strategy for increasing market share involves establishing a
network of distributors in a market, educating the distributors and retailers
and finally building sales volume through aggressive promotion and advertising
campaigns. To date, the Company has applied significant selling, advertising and
promotional resources to only a limited number of key markets. The Company
intends to focus on those key markets where the increasing population base,
historically high level of beer consumption and relative lack of competition
from other craft beers provides the greatest opportunities for growth.
CUSTOM BREWING
Since inception, the Company has followed a strategy of utilizing breweries
with excess capacity to brew the Pete's brews pursuant to the Company's
proprietary recipes. The Company believes that there is high quality excess
brewing capacity available in the domestic beer industry to meet its needs for
the foreseeable future. The Company's custom brewing strategy allows it to
forego the substantial investment of financial resources required to purchase,
or build, and maintain a brewery, and results in lower capital and overhead
costs per barrel of beer sold. From June 1992 through May 1995, the Company
produced and packaged all of its beers at the St. Paul, Minnesota brewery of
Minnesota Brewing Company ("MBC"). In May 1995, the Company began transitioning
production of its beers from MBC to the Stroh brewery, also in St. Paul,
Minnesota. The transition to the Stroh brewery in St. Paul was completed in
November 1995. The Company began shipping beer from the Stroh Brewery in
Winston-Salem, North Carolina in March 1996. In November 1997, Stroh closed its
St. Paul brewery and currently, all of the Company's beers are produced at the
Stroh brewery in Winston-Salem, North Carolina.
Custom Brewing Agreement with Stroh. The Company has a strategic alliance
with Stroh pursuant to which the Company custom brews its beers at the breweries
of Stroh. The Company believes that Stroh is one of the most knowledgeable,
experienced and skilled brewers of beer in the United States. The Company has
chosen Stroh as its custom brewing partner because of Stroh's ability to support
the brewing of the Company's craft beers according to traditional European
brewing styles and methods and to ensure high quality throughout the brewing
process. The Company will begin shipping beer from the Stroh brewery in Seattle,
Washington in 1998. Additionally, the Company also has access to the Stroh
brewery in Longview, Texas. The alliance with Stroh allows the Company to custom
brew Pete's Wicked brews in multiple geographic locations, which offers the
opportunity for more efficient national distribution and shortened delivery
times. Production at multiple breweries also reduces or eliminates the risks
associated with brewing all of the Company's beers at a single brewery. Under
the Stroh alliance, Stroh purchases all of the ingredients used in producing the
Company's beers in compliance with rigorous quality assurance requirements,
guidelines and specifications established by the Company. The Company believes
that Stroh is able to achieve volume purchase pricing discounts that may not be
available to the Company. The annual brewing capacity available to the Company
at the three Stroh breweries is over three times greater than the total volume
of beer sold by the Company in 1997. The Stroh Agreement expires May 31, 2004.
Pursuant to the Stroh Agreement, the Company is obligated, with certain limited
exceptions, to brew all of its beers at the Stroh breweries.
The Company has agreed to pay Stroh a manufacturing services price equal to
the aggregate of a contractually specified brewing fee for contract services
performed, and the cost of materials for all beer shipped. In addition, the
Company is eligible for certain volume discounts through 1998 if the shipments
exceed certain minimum levels and do not exceed certain maximum levels, although
there can be no
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assurance that the Company will achieve such minimum levels. The Company did
achieve such minimum levels in 1996 however did not in 1997 and does not expect
to in 1998. Stroh may terminate the agreement only on the limited grounds of the
Company's breach or insolvency.
Pete's is responsible for all capital improvements or modifications
required to produce the company's beers at the additional Stroh breweries in
either Longview or Seattle. In the event that either party terminates the
brewing agreement according to its terms, the Company must reimburse Stroh for
the unamortized costs of any such improvements or modifications. Should Stroh
elect to terminate brewing operations at any one of its breweries, Stroh will
shift production of the Company's beers to another of the Stroh breweries and
will pay all costs associated with such move, except for incremental freight
costs incurred by the Company or its distributors as a result of the move.
The Company is required to provide Stroh with annual and periodic barrel
production forecasts. The Company is required to produce a certain minimum
barrelage at the Stroh breweries each year, which amount is significantly less
than the volume of beer sold by the Company in 1997. However, in the event that
the minimum barrelage is not produced, the Company must make certain payments to
Stroh. Stroh retains a security interest in all beer produced under the brewing
agreement until the Company has paid the specified price or until such beer is
shipped. Payment is due to Stroh upon shipment. Under the terms of the Stroh
brewing agreement, delivery of all "Pete's" brews by Stroh to the Company or its
distributors is at the dock of the subject Stroh brewery. The Company is
responsible for securing and paying for carrier services for its beers from
Stroh's breweries.
The Company assures the quality of its beers by controlling the custom
brewing operations and by following the most advanced brewing industry
guidelines for in-process and finished product testing. The Company's brewmaster
works in Winston-Salem and oversees brewing in all locations. The Company has
access to Stroh's technical breweries and pilot plant to conduct tests and
developmental work with respect to existing flavors and proposed malt beverages.
In connection with the Stroh Agreement, the Company issued a warrant to
Stroh to purchase 1,140,284 shares of the Company's Common Stock at an exercise
price of $14.00 per share. In addition, Christopher T. Sortwell, Senior Vice
President and Chief Financial Officer of Stroh, joined the Company's Board of
Directors in October 1995.
The Company relies upon Stroh at all phases of the production of its beers,
for access to contracted facilities, and the performance of services under the
manufacturing services agreement, including sourcing and purchasing the
ingredients used to make the Company's beers, scheduling production to meet
delivery requirements, brewing and packaging the Company's beers, performing
quality control and assurance, invoicing distributors upon shipment, and
collecting and remitting payments to the Company. The Company's relationship
with Stroh is therefore critical to the Company's business, operating results
and financial condition. The Company's dependence on Stroh entails a number of
significant risks. The Company's business, results of operations and financial
condition would be materially adversely affected if Stroh were unable, for any
reason, to provide contracted access to capacity or fail to perform according to
the provisions of its manufacturing services agreement. In the event that the
Company were unable to continue to custom brew its beers in required volumes at
the Stroh breweries, the Company would have to identify, qualify and transition
production to an acceptable alternative brewery. This identification,
qualification and transition process could take two years or longer, and no
assurance can be given that an alternative brewery would be available to the
Company or be in a position to satisfy the Company's production requirements on
a timely and cost-effective basis. Accordingly, if the Company's ability to
obtain product from the Stroh breweries were interrupted or impaired for any
reason, the Company would not be able to establish an alternative production
source, nor would the Company be able to develop its own production
capabilities, without substantial disruption to the Company's operations. Any
inability to obtain adequate production of the Company's beers on a timely basis
or any other circumstances that would require the Company to seek alternative
sources of supply would delay shipments of the Company's products, which could
damage relationships with its current and prospective distributors and
retailers, provide an advantage to the Company's competitors and have a material
adverse effect on the Company's business, financial condition and operating
results.
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Construction of Brewery. After a review of a brewery construction
feasibility study prepared by the Company in conjunction with its architect,
mechanical engineer and general contractor, and a review of available capacity
under the Stroh Agreement and other factors, the Company determined not to go
forward with previously disclosed plans to construct and equip a new brewery in
California. Although the Company believes that the brewing capacity available to
the Company under the Stroh Agreement is adequate to meet its needs for the
foreseeable future, the Company will continue to monitor long-term capacity
availability in light of its business plan. The financial resources previously
earmarked to finance capital expenditures in connection with the construction of
the brewery will now be used for general corporate purposes, including to meet
working capital needs, pending the analysis, currently underway, of the
alternative uses available to the Company. During the first quarter of 1997,
based on a decision made at its February 1997 Board of Directors meeting to
indefinitely delay construction of a brewery, the Company took a charge to
earnings of $713,000 for the write-off of previously capitalized costs in
connection with the brewery project. Such write-off adversely impacted the
Company's earnings in the first quarter of 1997.
Ingredients and Packaging Materials. The Company or Stroh has established
relationships with the several suppliers of water, malt, hops and yeast used in
the brewing of "Pete's" brews. "Pete's" brews do not contain fillers such as
corn, rice or sugar which are typically found in mass-produced beers and which
tend to diminish a beer's true character. All ingredients purchased by Stroh
under the brewing agreement must comply with the Company's established quality
assurance requirements, procedures, guidelines and specifications. The Brewer's
Gold hops used in the production of Pete's Wicked Ale are specially grown for
the Company in the Willamette Valley in Oregon. In order to secure adequate
amounts of these rare Brewer's Gold hops, the Company must make certain advance
purchase commitments. These hops are not otherwise grown in quantities
sufficient to satisfy the Company's requirements for the production of Pete's
Wicked Ale. If the Company were unable to obtain sufficient quantities of the
Brewer's Gold hops it would be required to use alternative hops which would
change the character of Pete's Wicked Ale.
Under the terms of the brewing agreement, the Company will, with certain
exceptions, purchase packaging for the "Pete's" brews brewed through Stroh. All
such packaging must comply with the Company's quality assurance specifications.
The Company will reimburse Stroh for the purchase or modification of any
equipment necessary to properly assemble the packaging.
Quality Assurance Program. In order to control the quality of finished
products, Pete's has established acceptable inventory shelf lives of 180 days
for pasteurized bottled products and 60 days for refrigerated draft products.
Each of the Company's beers has a code date that is monitored by the Company's
sales personnel, distributors and retailers to ensure product freshness. The
Company conducts standard testing according to the specifications and
methodology set forth by the American Society of Brewing Chemists and the
European Brewing Convention. The Company's quality assurance program encompasses
the entire final aged product to ensure that the Company's rigorous
specifications have been met.
TRADEMARKS, COPYRIGHTS AND BEER RECIPES
The Company owns all of the "Pete's Wicked" product names and has
registered or filed applications to register each in the United States Patent
and Trademark Office. The Company utilizes a number of recipes in the production
of its beers and protects these recipes as trade secrets. In addition, product
package, advertising and promotion design and artwork are important to the
Company's success, and such materials are protected by copyright. The Company
considers the "Pete's Wicked" trademarks and its beer recipes to be of
considerable value and critical to its business. The Company's rights to the
"Pete's Wicked" trademarks in the United States will last indefinitely so long
as the Company continues to use and police the trademarks and to renew filings
with applicable governmental agencies. No challenges to the Company's rights to
use the "Pete's Wicked" trademark in the United States are pending and the
Company has no reason to believe that any such challenges will arise in the
future. Current consumer research indicates that the "Pete's Wicked" image is
uniquely associated with the Company's flagship beer "Pete's Wicked Ale." The
Company will adjust its brand positioning in 1998 to maintain this distinction.
The Company has filed applications and has obtained registrations for certain of
its trademarks in various foreign countries. The Company will continue to take
appropriate measures, such as entering into confidentiality agreements with its
custom brewing partners, to maintain the secrecy and proprietary nature of its
beer recipes. In addition, the Company intends to take action to protect against
imitation
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of its products and packages and to protect its trademarks and copyrights as
necessary. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that the
Company regards as proprietary. There can be no assurance that the steps taken
by the Company to protect its proprietary information will prevent
misappropriation of such information and such protections may not preclude
competitors from developing confusingly similar brand names or promotional
materials or developing products with taste and other qualities similar to the
Company's beers.
COMPETITION
The Company competes in the craft beer segment of the domestic beer market.
The Company believes that its products compete with those domestic and imported
beers that generally sell for retail prices in excess of $5.99 per six pack. The
principal competitive factors affecting the market for the Company's products
include product quality and taste, packaging, price, brand recognition and
distribution capabilities. The Company believes that it currently competes
favorably overall with respect to these factors. The Company also believes that
increased sales volume from the Company's current levels offers some competitive
edge and is seeking various ways to achieve a larger scale operation. There can
be no assurance however that the Company will be able to compete successfully
against current and future competitors based on these and other factors.
The domestic craft beer market has historically been one of the fastest
growing segments of the domestic beer market; however, 1997 saw a significant
decline in the growth trend over the last 5 years and the Company expects a
generally flat growth trend for the category in 1998. The Company competes with
a variety of domestic and international brewers, many of whom have significantly
greater financial, production, distribution and marketing resources and a higher
level of brand recognition than the Company. As a result of the increased demand
for craft beers, the Company competes with and anticipates competition from
several of the major national brewers, such as Anheuser-Busch, Miller Brewing
Co. and Adolph Coors Co., each of which has introduced and is marketing fuller
flavored beers designed to compete directly in the craft beer segment. For
example, Anheuser-Busch, Miller Brewing Co. and Adolph Coors have introduced and
marketed Elk Mountain Ale, Leinenkeugel and Killian's Red, respectively. In
addition, the Company expects that certain of the major national brewers, with
their superior financial resources and established distribution networks, may
seek further participation in the continuing growth of the craft beer market
through the investment in, or the formation of, distribution alliances with
smaller craft brewers. The increased participation of the major national brewers
will likely increase competition for market share and heighten price sensitivity
within the craft beer market.
The Company believes that significant competition comes from producers of
imported beers such as Bass PLC, Cerveceria Modelo, S.A. (brewer of Corona
Extra), Guinness PLC, Cerveceria Moctezuma, S.A. (brewer of Dos Equis) and
Heineken N.V. which currently produce premium, generally fully-flavored beers.
Imported beer accounts for a greater share of the domestic beer market than
craft beers. The Company expects continued competition from imported beer
brewers, many of whom have greater financial and marketing resources, as well as
greater brand name recognition, than the Company.
The Company also anticipates increased competition in the craft beer market
from existing craft brewers such as The Boston Beer Company, Inc., Redhook Ale
Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co. and Anchor Brewing
Co. and new market entrants. In particular, the Company believes that
competition has intensified recently as a result of the decline in the segment's
growth rate, and proliferation of small local craft brewers that have introduced
and are marketing significant numbers of products. The Company also competes
with other beer and beverage companies not only for consumer acceptance and
loyalty but also for shelf and tap space in retail establishments and for
marketing focus by the Company's distributors and their customers, all of which
also distribute and sell other beers and alcoholic beverage products. Increased
competition could result in price reductions, reduced margins and loss of market
share, all of which could have a material adverse effect on the Company.
Although the demand for craft beers has increased dramatically over the past
decade, there can be no assurance that this demand will continue, or, even if
such demand continues to increase, that consumers will choose the Company's
products.
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GOVERNMENT REGULATION
The Company's business is highly regulated by federal, state and local laws
and regulations. Federal and state laws and regulations govern licensing
requirements, trade and pricing practices, permitted and required labeling,
advertising, promotion and marketing practices, relationships with distributors
and related matters. For example, federal and state regulators require warning
labels and signage on the Company's products. The Company believes that it has
obtained all regulatory permits and licenses necessary to operate its business
in the states where the Company's products are currently being distributed.
Failure on the part of the Company to comply with federal, state or local
regulations could result in the loss or revocation or suspension of the
Company's licenses, permits or approvals and accordingly could have a material
adverse effect on the Company's business. Governmental entities also levy
various taxes, license fees and other similar charges and may require bonds to
ensure compliance with applicable laws and regulations. The Company must also
comply with numerous federal, state and local environmental protection laws. The
Company is operating within existing laws and regulations or is taking action
aimed at assuring compliance therewith. The Company does not expect compliance
with such laws and regulations to materially affect the Company's capital
expenditures, earnings or competitive position as a whole, though it could in
particular markets.
The State of Missouri has recently enacted a law requiring inclusion on the
label of the owner of the brewery assets. The Company has filed a lawsuit, in
combination with several other brewers, to contest the constitutionality of the
law. The Company believes that it will prevail, but an adverse determination
could have a material impact on the Company's business in the State of Missouri,
though would not have a material impact to the Company's overall business.
Certain states, including California, Connecticut, Delaware, Iowa, Maine,
Massachusetts, Michigan, New York, Oklahoma, Oregon and Vermont, and a small
number of local jurisdictions, have adopted restrictive beverage packaging laws
and regulations that require deposits on beverage containers. Congress and a
number of additional state or local jurisdictions may adopt similar legislation
in the future, and in such event, the Company may be required to incur
significant expenditures in order to comply with such legislation. Changes to
federal and state excise taxes on beer production, federal and state
environmental regulations, including laws relating to packaging and waste
discharge, or any other federal and state laws or regulations which affect the
Company's products could materially adversely affect the Company's results of
operations.
EMPLOYEES
As of December 31, 1997 the Company had 115 employees, including 85 in
sales and marketing and 30 in administration. The Company's future success will
depend, in part, on its ability to continue to attract, retain and motivate
highly qualified marketing and managerial personnel. None of the Company's
employees are represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations with
its employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing and product
development facilities are located in two buildings of approximately 7,091
square feet and 8,279 square feet, respectively, in Palo Alto, California
pursuant to leases which expire March 2001 and February 2002. In addition, the
Company leases sales offices in Boston, Philadelphia, Atlanta, St. Paul,
Seattle, Dallas, Chicago, and New Rochelle. The Company believes that its
existing facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions, at this time the Company
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
---- --- --------
Jeffrey Atkins 49 Chief Executive Officer and Chief Financial Officer
Scott Barnum 42 President and Chief Operating Officer
Stephen Cooke 40 Vice President Finance and Administration
Donald Quigley 43 Senior Vice President Sales
Omer Malchin 35 Vice President Marketing
Patrick Couteaux 39 Vice President Brewing and Brewmaster
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any executive officers of the Company.
Jeffrey Atkins. Jeffrey Atkins joined the Company in December 1996 as
Senior Vice President and Chief Financial Officer. In June 1997, Mr. Atkins also
became Chief Executive Officer. Prior to joining the Company, from 1977 to
December 1996, Mr. Atkins served in various senior financial and operating
positions for The Quaker Oats Company, a diversified manufacturer of packaged
foods and beverages, most recently as Vice President Corporate Planning. From
1972 to 1977, he was with The Union Oil Company (Unocal).
Scott Barnum. Scott Barnum joined Pete's Brewing Company as President and
Chief Operating Officer on August 1, 1997. Mr. Barnum is responsible for the
execution of the company's marketing, operations, and brewing strategies. In
addition, Mr. Barnum also directs the administration of human resources. Mr.
Barnum was formerly the general manager of the American Specialty & Craft Beer
Co., an independent subsidiary of Miller Brewing Company from February 1995
until joining the Company in August 1997. While there he was responsible for the
operational management of three regional breweries, representing 23 brands.
Prior to this, Mr. Barnum directed Miller's low-calorie and premium brands in
1993 and 1994, respectively.
Stephen Cooke. Stephen Cooke joined the Company in October 1992 as
Controller, became Director of Financial Planning and Administration in January
1994 and Vice President, Planning and Administration in January 1995. Mr. Cooke
left the Company in June 1996 and worked as an independent financial consultant
for a variety of companies until July 1997 when he was contracted as a
consultant for the Company. In January 1998, Mr. Cooke rejoined the Company as
Vice President Finance and Administration.
Donald Quigley. Donald Quigley joined the Company in October 1996 as Senior
Vice President Sales. Prior to joining the Company, Mr. Quigley was Vice
President, Sales of Ernest & Julio Gallo Winery ("Gallo") from March 1996 to
October 1996. From May 1993 to March 1996, he served as Vice President, National
Chain Accounts at Gallo. Prior to that, Mr. Quigley served in various state,
division, region and senior sales management positions with Gallo.
Omer Malchin. Omer Malchin joined the Company in January 1997 as Vice
President Marketing. Prior to joining the Company, Mr. Malchin was Group Product
Director -- Cordials with The Paddington Corporation, a distilled spirits
importing and marketing company, and a subsidiary of Grand Metropolitan PLC,
from November 1996 to December 1996. From December 1994 to November 1996, he
served as Brand Manager -- Baileys and Baileys Light at The Paddington
Corporation. From August 1992 to November 1994, Mr. Malchin was with Heublein,
Inc., most recently as marketing Manager -- Black Velvet and McMaster's Canadian
Whiskies.
Patrick Couteaux. Patrick Couteaux joined the Company in November 1993 as
Brewmaster. In January 1997, Mr. Couteaux became Vice President, Brewing. Prior
to joining the Company, he held various positions at G. Heileman Brewing Company
including First Assistant Brewmaster at the Blitz-Weinhard plant in Portland,
Oregon for 1986 to November 1993.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock: The Common Stock of the Company has been
traded on the Nasdaq National Market under the symbol WIKD since the Company's
initial public offering on November 7, 1995. Prior to that time there was no
public market for the Company's Common Stock. The following table sets forth for
the periods indicates high and low closing sale prices of the Common Stock.
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
Fiscal Year Ended December 31, 1997
First Quarter............................................ $ 7.75 $ 5.02
Second Quarter........................................... $ 6.88 $ 5.02
Third Quarter............................................ $ 6.88 $ 4.82
Fourth Quarter........................................... $ 5.88 $ 3.94
As of February 27, 1997, the Company's record date, there were 489
shareholders of record of Common Stock. The Company has never paid cash
dividends on its capital stock. The Company currently expects that it will
retain its future earnings for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
With respect to the requirements of Item 701(f) of Regulation S-K regarding
the reporting of use of proceeds, pursuant to the information required to be
reported by Item 701(f)(4)(vii), since its report on Form 10-Q for the period
ended September 30, 1997, the Company used net proceeds in the amounts noted for
the following purposes: Purchase and installation of machinery and equipment
$280,000; working capital $706,000; and temporary investments in liquid
instruments such as municipal bonds and notes and market rate preferreds
$24,989,000. There were no direct or indirect payments to directors or officers
of the Company or to any other person or entity. The Registration Statement on
Form S-1 filed by the Company in connection with its initial public offering
stated that the Company intended to use part of the net proceeds for the
construction of a brewery in California. After review of a brewery construction
feasibility study prepared by the Company in conjunction with its architect,
mechanical engineer and general contractor, and a review of available capacity
under the Stroh Agreement and other factors, the Company determined not to go
forward with the construction of the brewery in California. The Company now
intends to use such net proceeds for general corporate purposes, including to
meet working capital needs pending the analysis, currently underway, of the
alternative uses available to the Company. In addition, a portion of those net
proceeds may be used for the acquisition of businesses, products and
technologies that are complimentary to those of the Company.
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ITEM 6. SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE, PER BARREL AND EMPLOYEE DATA)
Net sales............................... $ 58,336 $70,634 $59,176 $30,837 $12,236
Gross profit............................ 27,653 35,873 29,517 13,939 5,733
Income (loss) from operations........... (11,016) 1,078 2,536 603 166
Net income (loss)....................... $ (6,094) $ 1,683 $ 1,538 $ 551 $ 131
Net income (loss) per share, basic...... $ (0.57) $ 0.16 $ 0.19 $ 0.15 $ 0.06
Net income (loss) per share diluted..... $ (0.57) $ 0.16 $ 0.18 $ 0.07 $ 0.02
Barrels sold............................ 361.1 425.6 347.8 180.2 69.3
Cash, cash equivalents, and available
for sale securities................... $ 31,199 $39,234 $42,960 $ 1,090 $ 171
Working Capital (deficit)............... 35,993 42,914 44,425 (807) (211)
Total Assets............................ 49,756 66,088 54,250 5,918 3,118
Total shareholders' equity.............. 45,472 51,311 49,023 1,040 414
Total number of employees............... 115 126 86 67 37
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in the Management's Discussion and Analysis of Financial
Condition and Results of Operations are forward-looking statements. These
forward-looking statements are based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in such forward-looking statements. Such risks and
uncertainties are set forth below under "Factors Affecting Future Operating
Results." These forward-looking statements include, but are not limited to, the
statement in the sixth paragraph of "Overview" concerning the period of time
through which available brewery capacity will be sufficient to meet the
Company's needs, the statements under "Factors Affecting Future Operating
Results," and the statement in the last paragraph under "Liquidity and Capital
Resources" regarding the sufficiency of the Company's available resources to
meet working capital and capital expenditure requirements.
OVERVIEW
Pete's Brewing Company ("the Company") was incorporated in California in
1986. The Company markets its beers in 49 states, the District of Columbia and
the United Kingdom through independent beverage distributors that sell to retail
establishments that sell to consumers.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty. The Company intends to continue to devote substantial resources toward
selling, advertising and promotional activities, particularly as it focuses on
expanding retail distribution. The Company's profitability is significantly
impacted by the timing and level of expenditures related to selling, advertising
and promotion.
Since its inception, the Company has made an ongoing analysis of the most
cost-effective method to produce its beers. Given the geographic dispersion of
sales throughout the United States, the Company has determined that a strategy
of utilizing excess capacity of strategically located independent breweries to
custom brew its beers, under the Company's on-site supervision and pursuant to
the Company's proprietary recipes, is the most cost-effective.
In 1995, the Company entered into a nine-year Manufacturing Services
Agreement ("Agreement") with the Stroh Brewery Company ("Stroh") of Detroit,
Michigan. Under the Agreement, the Company utilizes the St. Paul, Minnesota and
Winston-Salem, North Carolina breweries of Stroh. Although Stroh owns the
brewery, the Company supervises the brewing, testing, bottling and kegging of
its beers in accordance with the Company's written specifications and
proprietary recipes. All costs relating to the Agreement are charged to cost of
goods sold. As an alternating brewer, the Company is liable for the payment of
excise taxes to various federal and state agencies upon shipment of beer from
the breweries. The Company takes title to all beer in process and finished
goods, and pays Stroh a manufacturing services fee, equal to the aggregate of a
specific brewing fee and the cost of packaging and raw materials, upon shipment
to distributors.
On September 25, 1997, Stroh announced its intention to close its brewery
in St. Paul Minnesota, where the Company produced a significant portion of its
beer. The closure of this production facility was effective late November 1997.
The Company's management along with the management of Stroh is implementing a
plan to transition the production of the Company's beer to other Stroh
breweries. In addition, the Company is currently working with Stroh to develop a
long term, multi-plant sourcing plan to provide cost effective production of its
beers.
After review of a brewery construction feasibility study prepared by the
Company in conjunction with its architect, mechanical engineer and general
contractor, and a review of available capacity under the Stroh Agreement and
other factors, the Company determined not to go forward with previously
disclosed plans to construct and equip a brewery in California. Although the
Company believes that the brewing capacity available to the Company under the
Stroh Agreement is adequate to meet its needs for the foreseeable future, the
Company will continue to monitor long term capacity availability in light of its
business plan. The financial resources previously earmarked to finance capital
expenditures in connection with the construction of the brewery will now be used
for general corporate purposes, including to meet working capital needs pending
the
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analysis, currently underway, of the alternative uses available to the Company.
See "Liquidity and Capital Resources." During 1997, the Company recorded a
charge to earnings for the write-off of previously capitalized costs in
connection with the brewery project. This write-off adversely impacted the
Company's 1997 earnings.
During 1997, the Company recognized the write-off of promotional
inventories of $2.1 million. The value of these inventories was evaluated in
light of the Company's revised strategic marketing plans. Those items determined
to be either excess or obsolete were written off.
As a result of competitive market factors, efforts to reduce wholesale
inventories and other factors described under "Results of Operations," the
Company realized a net loss during the three months ended December 31, 1997 of
$1,415,000.
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations as a percentage of net sales for the
periods indicated:
YEARS ENDED DECEMBER 31,
--------------------------
1997 1996 1995
------ ------ ------
Sales............................................... 111.1% 110.6% 110.1%
Less excise taxes................................... 11.1 10.6 10.1
----- ----- -----
Net sales......................................... 100.0 100.0 100.0
Cost of goods sold.................................. 52.6 49.2 50.1
----- ----- -----
Gross profit...................................... 47.4 50.8 49.9
----- ----- -----
Selling, advertising and promotional expenses....... 51.7 42.0 36.4
General and administrative expenses................. 13.4 7.2 7.2
Write-off of brewery start-up....................... 1.2 0.0 0.0
Brewery transition charges.......................... 0.0 0.0 2.0
----- ----- -----
Total operational expenses........................ 66.3 49.2 45.6
----- ----- -----
Income (loss) from operations..................... (18.9) 1.6 4.3
Interest income net................................. 1.9 1.9 0.1
----- ----- -----
Income (loss) before income taxes................. (17.0) 3.5 4.4
Income tax benefit (provision)...................... 6.6 (1.1) (1.8)
----- ----- -----
Net income (loss)................................. (10.4)% 2.4% 2.6%
===== ===== =====
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The following table sets forth certain items from the Company's
consolidated statements of operations on a per barrel sold basis for the periods
indicated:
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
Sales......................................... $179.52 $183.48 $187.35
Less excise taxes............................. 17.97 17.52 17.21
------- ------- -------
Net sales................................... 161.55 165.96 170.14
Cost of goods sold............................ 84.97 81.67 85.27
------- ------- -------
Gross profit................................ 76.58 84.29 84.87
------- ------- -------
Selling, advertising and promotional
expenses.................................... 83.56 69.80 61.90
General and administrative expenses........... 21.55 11.96 12.24
Write-off of brewery start-up................. 1.98 -- --
Brewery Transition Changes.................... -- -- 3.44
------- ------- -------
Total operational expenses.................. 107.09 81.76 77.58
------- ------- -------
Income (loss) from operations............... (30.51) 2.53 7.29
Interest income............................... 3.02 3.20 0.14
------- ------- -------
Income (loss) before income taxes........... (27.49) 5.73 7.43
Income tax benefit (provision)................ 10.61 (1.78) (3.01)
------- ------- -------
Net income (loss)........................... $(16.88) $ 3.95 $ 4.42
======= ======= =======
Barrels sold (in thousands)................... 361.1 425.6 347.8
======= ======= =======
YEARS ENDED DECEMBER 31, 1997 AND 1996
Sales. Sales decreased by 17.0% from $78.1 million in 1996 to $64.8 million
in 1997. Sales volume decreased 15.2% from 425,600 barrels sold in 1996 to
361,100 barrels sold in 1997. The decrease in sales was primarily attributable
to decreased sales volume in existing markets as a result of reduced wholesaler
inventories, and a decline in depletions, which are wholesaler reported
shipments from wholesale to retail. Sales per barrel decreased from $183.48 in
1996 to $179.52 in 1997. The decrease in sales per barrel was due to changes in
the sales mix between keg and bottled beer and changes in the sales mix between
states during 1997 when compared to 1996.
Excise Taxes. Federal and state excise taxes decreased by 13.3% from $7.5
million in 1996 to $6.5 million in 1997. Excise taxes as a percentage of net
sales increased from 10.6% to 11.1%. Excise taxes per barrel sold increased from
$17.52 in 1996 to $17.97 in 1997. The overall decrease in excise taxes was
attributable to the decrease in sales volume, since the excise tax is assessed
on a per barrel basis. The increase in excise taxes on a per barrel basis and as
a percentage of net sales was due to the change in mix between states during
1997 when compared to 1996. Excise taxes vary from state to state and as such
will vary as the mix between states changes.
Cost of Goods Sold. Cost of goods sold decreased 11.7% from $34.8 million
in 1996 to $30.7 million in 1997 reflecting the decrease in volume of beer sold.
Cost of goods sold as a percentage of net sales increased from 49.2% in 1996 to
52.6% in 1997. Cost of goods sold per barrel increased from $81.67 in 1996 to
$84.97 in 1997. The increases in cost of goods sold as a percentage of net sales
and per barrel sold were primarily attributable to increased costs of production
and increased transportation expenses. The increased production costs were
primarily due to a reduction in contractually agreed discounts during 1997, due
to the reduced production volumes in 1997. Transportation expenses decreased
10.4% from $6.7 million in 1996 to $6.0 million in 1997. Transportation expenses
as a percentage of net sales increased from 9.5% in 1996 to 10.3% in 1997.
Transportation expenses per barrel sold increased from $15.74 per barrel in 1996
to $16.66 per barrel in 1997. The increase in transportation expenses as a
percentage of net sales and on a per barrel basis were primarily due to the
increased costs associated with the restructuring of the Company's distribution
network in California. As a result of expanding its distributor network from a
limited number of distributors to
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in excess of 30, during the fourth quarter of 1996, the Company has continued to
experience increased transportation costs in this key market.
Selling, Advertising and Promotional Expenses. Selling, advertising and
promotional expenses increased by 1.6% from $29.7 million in 1996 to $30.2
million in 1997. Selling, advertising and promotional expenses as a percentage
of net sales increased from 42.0% in 1996 to 51.7% in 1997. Selling, advertising
and promotional expenses per barrel sold increased from $69.80 in 1996 to $83.56
in 1997. The increase in selling advertising and promotional expenses are
primarily due to the write-off of excess and obsolete point of sales advertising
material inventories, increased product packing design costs, increased consumer
research expenses, increased distributor incentives and increased personnel
costs, offset by reduced advertising and promotional expenditures.
General and Administrative Expenses. General and administrative expenses
increased 52.9% from $5.1 million in 1996 to $7.8 million in 1997. General and
administrative expenses as a percentage of net sales increased from 7.2% in 1996
to 13.4% in 1997. General and administrative expenses per barrel sold increased
from $11.96 in 1996 to $21.55 in 1997. The increase in general and
administrative expenses resulted primarily from increased personnel costs and
professional fees.
Write-off of Brewery Start-up Costs. During 1997, based on a decision made
at its February 1997 Board Meeting to indefinitely delay construction of a
California brewery, the Company recorded a charge to earnings of $713,000 for
the write-off of previously capitalized costs in connection with the California
brewery project.
Interest Income (Expense), Net. Interest income (expense), net, decreased
$0.3 million from $1.4 million in 1996 to $1.1 million in 1997. This decrease
reflected decreased earnings from investments due to a reduction in the amount
of cash and cash equivalents and available for sale securities when compared to
1996.
Income Tax Benefit (Provision). The Company accounts for income taxes using
the deferral method of accounting for tax assets and liabilities. The 1997
income tax benefit of $3.8 million takes into account the effects of state
income taxes, non-deductible expenses and non-taxable income. The income tax
benefit (provision) during 1997 was above the federal statutory rate (34%) as a
result of non-taxable income offset by state taxes and non-deductible expenses
in 1997. The 1996 income tax provision of $754,000 was below the federal
statutory rate (34%) as a result of non-taxable income offset by state taxes and
non-deductible expenses in 1996.
YEARS ENDED DECEMBER 31, 1996 AND 1995
Sales. Sales increased by 19.8% from $65.2 million in 1995 to $78.1 million
in 1996. Sales volume increased 22.4% from 347,800 barrels sold in 1995 to
425,600 barrels sold in 1996. The increase in sales was primarily attributable
to growth in sales volume in existing markets and, to a lesser extent, increased
sales volume resulting from expansion into new geographic markets. The increased
sales volume reflected increased sales of the Company's new products; Pete's
Wicked Pale Ale, Pete's Wicked Strawberry Blonde, Pete's Wicked Multi Grain and
Pete's Wicked Maple Porter, which were introduced in late June of 1996,
partially offset by reduced sales of the Company's other year-round products.
Sales per barrel decreased from $187.35 in 1995 to $183.48 in 1996 primarily as
a result of price reductions in select markets.
Excise Taxes. Federal and state excise taxes increased by 24.6% from $6.0
million in 1995 to $7.5 million in 1996. Excise taxes as a percentage of net
sales increased from 10.1% in 1995 to 10.6% in 1996. Excise taxes per barrel
sold increased from $17.21 in 1995 to $17.52 in 1996. The increase in excise
taxes was attributable to the increase in sales volume, since the excise tax is
assessed on a per barrel basis, and to the increased per barrel excise tax
burden as the Company's sales volume for the year surpassed 60,000 barrels.
Cost of Goods Sold. Cost of goods sold increased 17.2% from $29.7 million
in 1995 to $34.8 million in 1996 reflecting the increase in volume of beer sold.
Cost of goods sold as a percentage of net sales decreased from 50.1% in 1995 to
49.2% in 1996. Cost of goods sold per barrel decreased from $85.27 in 1995 to
$81.67 in 1996. The decreases in cost of goods sold as a percentage of net sales
and per barrel sold were primarily attributable to reduced packaging material
costs due to purchasing economies of scale and reduced brewing processing fees
resulting from contractually agreed discounts with Stroh. Transportation
expenses are a
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significant component of cost of goods sold. Transportation expenses increased
28.8% from $5.2 million in 1995 to $6.7 million in 1996. Transportation expenses
as a percentage of net sales increased from 8.9% in 1995 to 9.5% in 1996.
Transportation expenses per barrel sold increased from $14.95 per barrel in 1995
to $15.74 per barrel in 1996. The increase in transportation expenses as a
percentage of net sales and per barrel sold were primarily due to increased
warehousing and transportation costs associated with the restructuring of the
Company's distribution network in California during the three months ended
December 31, 1996, and increased freight costs attributable to backhauling of
empty kegs from wholesalers' warehouses to the brewery. These increases were
partially offset by the cost savings realized by shipping beer to ease coast
distributors from the Winston-Salem brewery during 1996. Cost of goods sold in
the fourth quarter of 1996 was adversely impacted by the Company's transition to
a new distribution network, as the Company incurred incremental costs to
establish and support the new distributors, and by the reduced sales volume in
the fourth quarter.
Selling, Advertising and Promotional Expenses. Selling, advertising and
promotional expenses increased by 38.1% from $21.5 million in 1995 to $29.7
million in 1996. Selling, advertising and promotional expenses as a percentage
of net sales increased from 36.4% in 1995 to 42.0% in 1996. Selling, advertising
and promotional expenses per barrel sold increased from $61.90 in 1995 to $69.80
in 1996. The percentage and per barrel increases from 1995 were attributable to
higher advertising costs associated with the Company's radio campaign initiated
in June 1996 and increased payroll costs associated with the increased headcount
in the sales force during 1996.
General and Administrative Expenses. General and administrative expenses
increased 18.6% from $4.3 million in 1995 to $5.1 million in 1996. General and
administrative expenses as a percentage of net sales remained consistent with
1995 at 7.2%. General and administrative expenses per barrel sold decreased from
$12.24 in 1995 to $11.96 in 1996. The absolute increase in general and
administrative expenses resulted primarily from increased legal fees associated
with distributor transitions, professional fees associated with being a publicly
traded entity and increased rental and office expenses due to expansion of the
Company's office space during 1996.
Brewery Transition Charges. In 1995, the Company transitioned all of the
production of its beers to Stroh and incurred $1.2 million of brewery transition
charges, including payments to Minnesota Brewing Company ("MBC") in connection
with the termination of the Company's brewery agreement with MBC, and
abandonment of assets. There were no brewery transition charges incurred during
1996 and 1997.
Interest Income (Expense), Net. Interest income (expense), net, increased
$1,310,000 from $49,000 in 1995 to $1,359,000 in 1996. The increase reflected
earning from investment of the net proceeds of the Company's November 1995
public offering.
Income Tax Provision. The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
provision for 1996 was below the federal statutory rate (34%) as a result of
non-taxable income earned during 1996 offset by state taxes and non-deductible
expenses in the third quarters of 1996 and 1995. The income tax provision for
1995 was above the federal statutory rate (34%) as a result of state taxes and
non-deductible expenses partially offset by non-taxable income during 1995.
FACTORS AFFECTING FUTURE RESULTS
Quarterly Operating Results Fluctuate. The Company's quarterly operating
results have varied significantly in the past, and may do so in the future,
depending on factors such as increased competition, the transition to new
distributors in key markets, fluctuations in sales volume which result in
variations in costs of goods sold, the timing of new product announcements by
the Company or its competitors, the timing of significant advertising and
promotional campaigns by the Company, changes in mix between kegs and bottles,
the impact of an increasing average federal excise tax rate as sales volume
changes, fluctuations in the price of packaging and raw materials, seasonality
of sales of the Company's beers, general economic factors, trends in consumer
preferences, regulatory developments including changes in excise tax and other
tax rates, changes in average selling prices or market acceptance of the
Company's beers, increases in production costs associated with initial
production of new products and fluctuations in volume of sales and variations in
shipping and
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transportation costs. The Company's expense levels are based, in part, on its
expectations of future sales levels. If sales levels are below expectations,
operating results are likely to be materially adversely affected. In particular,
net income, if any, may be disproportionately affected by a reduction in sales
because certain of the Company's operating expenses are fixed in the short-term.
The Company's profitability has been significantly impacted by the timing and
level of expenditures related to selling, advertising and promotional expenses.
For example, in September 1997, the Company recorded a $1.4 million charge to
earnings for the write-off of obsolete promotional materials. In addition, the
Company's decision to undertake a significant media advertising campaign could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
The Company believes that quarterly sales and operating results are likely to
vary significantly in the future and that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. In addition, historical growth rates
should not be considered indicative of future sales growth, if any, or of future
operating results. There can be no assurance that the Company's sales will grow
or be sustained in future periods or that the Company will remain profitable in
any future period.
Dependence on Stroh. The Company relies upon Stroh at all phases of the
production of its beers, for access to contracted facilities, and the
performance of services under the manufacturing services agreement, including
sourcing and purchasing the ingredients used to make the Company's beer,
scheduling production to meet delivery requirements, brewing and packaging the
Company's beers, performing quality control and assurance, invoicing
distributors upon shipment, collecting and remitting payments to the Company and
performing regulatory compliance. The Company's business, results of operations
and financial condition would be materially adversely affected if Stroh were
unable, for any reason, to meet the Company's delivery commitments or if beer
brewed at Stroh breweries failed to satisfy the Company's quality requirements.
During November 1997, Stroh closed its brewery in St. Paul, Minnesota, where the
Company produced a significant portion of its beer. The Company's management
along with the management of Stroh is implementing a plan to transition the
production of the Company's beer to other Stroh breweries. In addition, the
Company is currently working with Stroh to develop a long term, multi-plant
sourcing plan to provide cost effective production of its beers. If the
Company's ability to obtain product from the Stroh breweries were interrupted or
impaired for any reason, the Company would not be able to establish an
alternative production source, nor would the Company be able to develop its own
production capabilities, without substantial disruption to the Company's
operations. Any inability to obtain adequate production of the Company's beers
on a timely basis or any other circumstance that would require the Company to
seek alternative sources of supply would delay shipments of the Company's
product, which could damage relationships with the Company's current and
prospective distributors and retailers, provide an advantage to the Company's
competitors and have a material adverse effect on the Company's business,
financial condition and operating results.
Competition. The Company competes with a variety of domestic and
international brewers, many of whom have significantly greater financial,
production, distribution and marketing resources and a higher level of brand
recognition than the Company. The Company competes with and anticipates
competition from several of the major national brewers, such as Anheuser-Busch,
Miller Brewing Co., and Adolph Coors Co., each of whom has introduced and is
marketing fuller flavored beers designed to compete directly in the craft beer
segment of the domestic beer market in which the Company competes. In addition,
the Company expects that certain of the major national brewers, with their
superior financial resources and established distribution networks, may seek
further participation in the growth of the craft beer market through investment
in, or the formation of, distribution alliances with smaller craft brewers. The
increased participation of the major national brewers will likely increase
competition for market share and heighten price sensitivity within the craft
beer market. In addition, the Company expects continued competition from
imported beer brewers, many of whom have greater financial and marketing
resources, as well as greater brand name recognition, than the Company. The
Company also anticipates increased competition in the craft beer market from
existing craft brewers such as The Boston Beer Company, Inc., Redhook Ale
Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co., Anchor Brewing
Co. and new market entrants. In particular, the Company believes that
competition has intensified recently as a result of the proliferation of small
local craft brewers that have introduced and are marketing significant numbers
of products. The Company also competes with
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other beer and beverage companies not only for consumer acceptance and loyalty
but also for shelf and tap space in retail establishments and for marketing
focus by the Company's distributors and their customers, all of which also
distribute and sell other beers and alcoholic beverage products. Increased
competition has in the past and could in the future result in price reductions,
reduced margins and loss of market share, all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Dependence on Distributors. The Company is dependent upon its distributors
to sell the Company's products and to assist the Company in promoting market
acceptance of, and creating demand for, the Company's products. During the
second half of 1996, the Company transitioned to a new wholesale distribution
network in California, Colorado, and Washington, D.C. Previously, the Company
had relied on a single or limited number of distributors in these key markets.
The transition of the Company's distribution from a single or limited number of
distributors to in excess of 30 new distributors adversely impacted the
Company's level of revenues and profitability in the Fourth Quarter of 1996 and
in 1997. The Company expects that the transition of the distribution network in
these key markets will continue to impact the Company's business, financial
condition and results of operations in the near term. In addition, there is
always a risk that the Company's distributors will give higher priority to the
products of other beverage companies, including products directly competitive
with the Company's beers, thus reducing their efforts to sell the Company's
products. In addition, there can be no assurance that the Company's distributors
will devote the resources necessary to provide effective sales and promotion
support to the Company. If one or more of the Company's significant distributors
were to discontinue selling, or decrease the level of orders for the Company's
products, the Company's business would be adversely affected in the areas
serviced by such distributors until the Company retained replacements. There can
be no assurance that the Company would be able to replace a significant
distributor in a timely manner or at all in the event a distributor were to
discontinue selling the Company's products.
Product Concentration. The sale of a limited number of beers has accounted
for substantially all of the Company's sales since inception. The Company
announced in January 1998 the discontinuation of four current products and the
planned 1998 introduction of one new product. The Company believes that the sale
of the remaining beers will continue to account for a significant portion of
sales for the foreseeable future. Therefore, the Company's future operating
results, particularly in the near term, are significantly dependent upon the
continued market acceptance of these beers. There can be no assurance that the
Company's beers will continue to achieve market acceptance. A decline in the
demand for any of the Company's beers as a result of competition, changes in
consumer tastes and preferences, government regulation or other factors would
have a material adverse effect on the Company's business, operating results and
financial condition.
Development of New Products. The craft beer market is highly competitive
and characterized by changing consumer preferences and continuous introduction
of new products. The Company believes that its future growth will depend, in
part, on its ability to anticipate changes in consumer preferences and develop
and introduce, in a timely manner, new beers that adequately address such
changes. There can be no assurance that the Company will be successful in
developing, introducing and marketing new products on a timely and regular
basis. If the Company is unable to introduce new products or if the Company's
new products are not successful, the Company's sales may be adversely affected
as customers seek competitive products.
Government Regulations. The Company's business is highly regulated by
federal, state and local laws and regulations. Such laws and regulations govern
licensing requirements, trade and pricing practices, permitted and required
labeling, advertising, promotion and marketing practices, relationships with
distributors and related matters. Failure on the part of the Company to comply
with federal, state and local regulations could result in the loss or revocation
or suspension of the Company's licenses, permits or approvals and accordingly
could have a material adverse effect on the Company's business. The federal
government and each of the states levy excise taxes on alcoholic beverages,
including beer. Increases in excise taxes on beer, if enacted, could materially
and adversely affect the Company's financial condition and results of
operations. Certain states and local jurisdictions have adopted restrictive
beverage packaging laws and regulations that require deposits on beverage
containers. Congress and a number of additional state and local jurisdictions
may adopt similar legislation in the future, and in such event, the Company may
be required to incur significant expenditures in order to comply with such
legislation. Changes to federal and state excise taxes on beer
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production, or any other federal and state laws or regulations which affect the
Company's products could materially adversely affect the Company's business,
financial condition and results of operations.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continuing contributions of, and on its ability to attract and
retain, qualified management, sales, production and marketing personnel. The
competition for qualified personnel is intense and the loss of any such persons
as well as the failure to recruit additional key personnel in a timely manner,
could adversely affect the Company. There can be no assurance that the Company
will be able to continue to attract and retain qualified management and sales
personnel for the development of its business. Failure to attract and retain key
personnel could have a material adverse affect on the Company's business,
operating results and financial condition. In addition, the Company has recently
hired several key executive officers to supplement its management team. The
Company's future success will depend, in part, on the ability of its executive
officers to operate effectively, both independently and as a group.
Year 2000 Issues. The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The Company presently believes that, with
modifications to existing software and converting to new software, the Year 2000
problem will not pose significant operational problems for the Company's
computer systems as so modified and converted. However, if such modifications
and conversions are not completed timely, or if significant Year 2000 problems
are not timely detected, the Year 2000 problem may have a material impact on the
operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES.
Since its inception, the Company has funded its operations primarily
through cash generated from operations, private sales of preferred stock, bank
and other debt, and capital equipment leases. In addition the Company received
net proceeds of approximately $43.5 million from its initial public offering
completed in November 1995. As of December 31, 1997, the Company had $36.0
million in working capital, including $18.8 million in cash and cash equivalents
and $12.4 million in available for sale securities, as compared to working
capital of $42.9 million as of December 31, 1996. The decrease was primarily due
to cash used by operations.
The Company's cash and cash equivalents decreased by $1.0 million in 1997
as compared to a decrease of $23.1 million in 1996 and an increase of $41.9
million in 1995. The Company used $6.9 million in cash from operations in 1997
as compared to $1.4 million provided by operations in 1996 and $0.5 million in
1995. The increase in the uses of cash from operations in 1997 resulted
primarily from the $6.1 million net loss recognized during 1997 and the payment
of unusually high accounts payable and accrued expenses outstanding at December
31, 1996, offset by the reduction in accounts receivable and prepaid expenses.
The unusually high balances of accounts payable and accrued expenses at December
31, 1996 consisted primarily of accruals for 1996 income taxes and advertising
expenses.
The Company's principal investing activities consisted of the purchase and
sale of available for sale securities in 1997 of $19.2 million and $26.3
million, respectively. During 1996, the principal investing activity was the
purchase of available for sale securities of $28.9 million and the purchase of
$4.1 million of capital equipment. The Company's principal investing activities
during 1995 consisted of additions to property and equipment of $867,000.
The only significant financing activities in both 1997 and 1996 was the
issuance of Common Stock to employees of the Company under the Company's
employee stock purchase plan and incentive stock option plans, which provided
$252,000 of cash flow in 1996 and $378,000 in 1997. The Company's principal
investing activity during 1995 was the sale of common stock in the Company's
initial public offering providing $43.5 million of cash flow.
24
27
As described in "Overview," the Company determined during February 1997 not
to go forward with previously disclosed plans to construct and equip a new
brewery in California. The financial resources previously earmarked to finance
capital expenditures in connection with the construction of the brewery will be
used for general corporate purposes, including to meet working capital needs,
pending the Company's analysis, currently underway, of the alternative uses
available to the Company.
The Company anticipates that its current cash and available for sale
securities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months.
25
28
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
------------------
1997 1996
------- -------
Current assets:
Cash and cash equivalents................................. $18,841 $19,814
Available for sale securities............................. 12,358 19,420
Trade accounts receivable, net............................ 1,396 7,664
Inventories............................................... 2,617 4,431
Prepaid expenses and other current assets................. 1,189 4,046
Tax refund receivable..................................... 2,074 --
Deferred taxes............................................ 1,140 2,088
------- -------
Total current assets.............................. 39,615 57,463
Property and equipment, net................................. 4,056 5,112
Deferred taxes.............................................. 3,125 --
------- -------
Other assets................................................ 2,960 3,513
------- -------
$49,756 $66,088
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable.................................... $ 1,433 $ 5,299
Accrued expenses.......................................... 2,189 9,250
------- -------
Total current liabilities................................. 3,622 14,549
Deferred taxes............................................ 662 228
------- -------
Total liabilities......................................... 4,284 14,777
------- -------
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY
Preferred shares, no par value:
Authorized 5,000 shares; issued and outstanding: none..... -- --
Common shares, no par value:
Authorized: 50,000 shares; issued and outstanding: 10,815
December 31, 1997 and 10,733 December 31, 1996......... 48,803 48,551
Unrealized gain on available for sale securities............ 14 11
Retained earnings (deficit)................................. (3,345) 2,749
------- -------
Total shareholders' equity........................ 45,472 51,311
------- -------
$49,756 $66,088
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
26
29
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Sales....................................................... $64,825 $78,089 $65,160
Less excise taxes........................................... 6,489 7,455 5,984
------- ------- -------
Net sales................................................. 58,336 70,634 59,176
Cost of goods sold.......................................... 30,683 34,761 29,659
------- ------- -------
Gross profit.............................................. 27,653 35,873 29,517
------- ------- -------
Selling, advertising and promotional expenses............... 30,173 29,705 21,525
General and administrative expenses......................... 7,783 5,090 4,258
Write-off of brewery start-up costs......................... 713 -- --
Brewery transition charges.................................. -- -- 1,198
------- ------- -------
Total operating expense................................... 38,669 34,795 26,981
------- ------- -------
Income (loss) from operations............................. (11,016) 1,078 2,536
Interest expense............................................ -- (3) (198)
Interest income............................................. 1,091 1,362 247
------- ------- -------
Income (loss) before income taxes......................... (9,925) 2,437 2,585
Income tax benefit (provision).............................. 3,831 (754) (1,047)
------- ------- -------
Net income (loss)......................................... $(6,094) $ 1,683 $ 1,538
======= ======= =======
Net income (loss) per share, basic.......................... $ (0.57) $ 0.16 $ 0.19
======= ======= =======
Shares used in per share calculation, basic................. 10,778 10,682 8,157
======= ======= =======
Net income (loss) per share, diluted........................ $ (0.57) $ 0.16 $ 0.18
======= ======= =======
Shares used in per share calculation, diluted............... 10,778 10,819 8,463
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
27
30
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNREALIZED
SERIES A AND B GAIN
PREFERRED SHARES COMMON SHARES ON AVAILABLE RETAINED
---------------- ---------------- NOTES FOR SALE EARNINGS
SHARES AMOUNT SHARES AMOUNT RECEIVABLE SECURITIES (DEFICIT) TOTAL
------ ------- ------ ------- ---------- ------------ --------- -------
Balances, January 1, 1995................. 3,305 $ 1,221 3,691 $ 373 $(82) $-- $ (472) $ 1,040
Common share options exercised
($0.10-$1.25 per share)............... -- -- 925 106 -- -- -- 106
Issuance of common shares from IPO, net
of issuance costs of $1,733........... -- -- 2,700 43,465 -- -- -- 43,465
Conversion of preferred shares to common
shares at close of IPO................ (3,305) (1,221) 3,305 1,221 -- -- -- --
Repayment of notes receivable........... -- -- -- -- 82 -- -- 82
Issuance of warrant..................... -- -- -- 2,790 -- -- -- 2,790
Tax benefit associated with exercise of
options............................... -- -- -- 2 -- -- -- 2
Net income.............................. -- -- -- -- -- -- 1,538 1,538
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1995............... -- -- 10,621 47,957 -- -- 1,066 49,023
Common share options exercised
($0.10-$2.50 per share)............... -- -- 76 34 -- -- -- 34
Issuance of shares from employee stock
purchase plan......................... -- -- 36 344 -- -- -- 344
Tax benefit associated with exercise of
options............................... -- -- -- 216 -- -- -- 216
Unrealized gain on available for sale
securities............................ -- -- -- -- -- 11 -- 11
Net income.............................. -- -- -- -- -- -- 1,683 1,683
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1996............... -- -- 10,733 48,551 -- 11 2,749 51,311
Common share options exercised ($0.10 -
$18.00 per share)..................... -- -- 46 39 -- -- -- 39
Issuance of shares from employee stock
purchase plan......................... -- -- 36 162 -- -- -- 162
Options granted below fair market
value................................. -- -- -- 51 -- -- -- 51
Unrealized gain on available for sale
securities............................ -- -- -- -- -- 3 -- 3
Net loss................................ -- -- -- -- -- -- (6,094) (6,094)
------ ------- ------ ------- ---- --- ------- -------
Balances, December 31, 1997............... -- $ -- 10,815 $48,803 $ -- $14 $(3,345) $45,472
====== ======= ====== ======= ==== === ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
28
31
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (6,094) $ 1,683 $ 1,538
Adjustments to reconcile net income (loss) to net cash
(used) provided by operations:
Depreciation and amortization.......................... 3,021 1,471 807
Deferred taxes......................................... (1,743) (1,745) 98
Loss on disposal of property and equipment............. -- -- 93
Changes in operating assets and liabilities:
Trade accounts receivable.............................. 6,268 (4,480) (2,234)
Inventories............................................ 1,814 (2,187) (663)
Prepaid expenses and other current assets.............. 2,857 (2,914) (559)
Tax refund receivable.................................. (2,074) -- --
Accounts payable and accrued expenses.................. (10,927) 9,538 1,461
-------- -------- -------
Net cash (used) provided by operations............ (6,878) 1,366 541
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (387) (4,112) (867)
Purchases of available for sale securities................ (19,191) (28,885) --
Proceeds from sale of available for sale securities....... 26,256 9,476 --
Additions to other assets................................. (1,025) (1,369) (257)
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... 5,653 (24,890) (1,124)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common shares, net.................. -- -- 43,465
Collection of notes receivable............................ -- -- 82
Proceeds from short term note payable to shareholder...... -- -- 1,100
Repayment of short term note payable to shareholder....... -- -- (1,300)
Net borrowings from revolving credit agreement with
bank................................................... -- -- (1,000)
Proceeds from issuance of common shares pursuant to
exercise of stock options and warrants................. 252 378 106
-------- -------- -------
Net cash provided by financing activities......... 252 378 42,453
-------- -------- -------
Net (decrease) increase in cash and cash
equivalents..................................... (973) (23,146) 41,870
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 19,814 42,960 1,090
-------- -------- -------
End of period............................................. $ 18,841 $ 19,814 $42,960
======== ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
29
32
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pete's Brewing Company (the Company) was incorporated in April 1986 under
the laws of the State of California. The Company is a major domestic craft
brewer. The Company currently markets 12 distinctive full bodied beers in 49
states, the District of Columbia and the United Kingdom.
The following is a summary of the Company's significant accounting
policies:
Principles of Consolidation. The consolidated financial statements include
the accounts of Pete's Brewing Company and its sole subsidiary Wicked Ware, Inc.
(collectively referred to as the Company). All significant intercompany accounts
and transactions have been eliminated.
Cash Equivalents. Cash equivalents include all highly liquid investments
with original or remaining maturities of three months or less, at the date of
purchase.
Brewing Operations. In July 1992, the Company entered into a three-year
agreement with Minnesota Brewing Company of St. Paul, Minnesota. This Agreement
was terminated in 1995 upon the execution of the Alternating Premise Transition
Agreement as discussed in Note 8.
In 1995, the Company entered into a nine year Manufacturing Services
Agreement ("Agreement"), with the Stroh Brewery Company ("Stroh") of Detroit,
Michigan. Under the Agreement the Company will alternate the use of the brewery
with Stroh and will supervise the brewing, testing, bottling and kegging done on
the Company's behalf. Stroh is responsible for purchasing all packaging and raw
material necessary for the Company to produce its beers. All costs relating to
the Agreement are charged to cost of goods sold. The Company is liable for the
payment of excise taxes to various federal and state agencies upon shipment of
malt beverages from the breweries. The Company takes title to all beer in
process and finished goods and pays Stroh upon shipment to distributors.
Certain Risks. Financial instruments which potentially expose the Company
to concentrations of credit risk consist primarily of trade accounts receivable
and cash and cash equivalents. The Company's customer base includes primarily
beer, wine and spirits distributors throughout the United States. The Company
does not generally require collateral for its trade accounts receivable and
maintains an allowance for doubtful accounts. The Company maintains cash
equivalent investments with a brokerage firm and its cash in bank deposit
accounts with a bank. At times, the balances in these accounts may exceed
federally insured limits. The Company has not experienced any losses on such
accounts.
The Company relies upon Stroh at all phases of the production of its beers,
for access to contracted facilities, and the performance of services under the
manufacturing services agreement, including sourcing and purchasing the
ingredients used to make the Company's beers, scheduling production to meet
delivery requirements, brewing and packaging the Company's beers, performing
quality control and assurance, invoicing distributors upon shipment, and
collecting and remitting payments to the Company. The Company's relationship
with Stroh is therefore critical to the Company's business, operating results
and financial condition. The Company's dependence on Stroh entails a number of
significant risks. The Company's business, results of operations and financial
condition would be materially adversely affected if Stroh were unable, for any
reason, to provide contracted access to capacity or fail to perform according to
the provisions of its manufacturing services agreement.
Allowance for Credit Notes. The Company records a provision for the
estimated costs related to promotional programs for its distributors. Such costs
primarily include incentive discounts and allowances.
Inventories. Inventories consist of beer in progress, finished goods and
promotional materials and are stated at the lower of first-in, first-out cost or
market.
Depreciation and Amortization. Kegs, machinery and equipment, and office
furniture and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful life of five to twenty
30
33
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years. Leasehold improvements are recorded at cost and amortized using the
straight-line method over the shorter of the useful life of the improvements or
the related lease term. Capital leases are recorded at the lower of fair market
value or the present value of future minimum lease payments. Assets under
capital leases are amortized using the straight-line method over the shorter of
the related lease term or the useful life of the assets.
Revenue Recognition. The Company recognizes revenue upon shipment of
product and passage of title to the customer.
Advertising. The Company expenses the production costs of advertising the
first time the advertising takes place, except for promotional agency fees which
are capitalized and amortized over their expected periods of future benefit.
Promotional agency fees consists of creative development costs associated with
future promotional campaigns. The capitalized costs are amortized over a six
month period.
At December 31, 1997 and 1996, $786,000 and $657,000 of advertising was
reported in prepaid expenses, respectively. Advertising expense was $2,588,000,
$5,246,000 and $2,224,000 in 1997, 1996 and 1995, respectively.
Income Taxes. The Company accounts for income taxes under the liability
method which requires that deferred taxes be computed annually on an asset and
liability method and adjusted when new tax laws or rates are enacted. Deferred
tax assets and liabilities are determined based on the differences between the
financial report and tax bases of assets and liabilities and are measured using
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Net Income (Loss) Per Share. The Company has adopted Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share;" which supersedes
APB Opinion No. 15 (APB No. 15), "Earnings per Share," and which is effective
for all periods ending after December 15, 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) for complex capital
structures on the face of the Statements of Operations. Basic EPS is computed by
dividing net income by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of other securities into common stock. For the year ended December
31, 1997, the effects of the exercise or conversion of other securities were
excluded from the calculation of diluted EPS because their effect was
antidilutive.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 130 (SFAS
130), "Reporting Comprehensive Income". This statement establishes requirements
for disclosure of comprehensive income and becomes effective for the Company for
fiscal years beginning after December 15, 1997, with reclassification of earlier
financial statements for comparative purposes. Comprehensive income generally
represents all changes in shareholders' equity except those resulting from
investments or contributions by shareholders. The Company is evaluating
alternative formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's result of operations.
In June 1997, The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for disclosure about operating segments in annual financial statements and
selected information in interim financial reports. It also establishes standards
for related disclosures about
31
34
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
products and services, geographic areas and major customers. This statement
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." The new standard becomes
effective for fiscal years beginning after December 15, 1997, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard. The Company is evaluating the requirements of
SFAS 131 and the effects, if any, on the Company's current reporting and
disclosures.
Reclassifications. Certain amounts in the consolidated financial statements
have been reclassified to conform with the current year's presentation. These
reclassifications had no impact on previously reported income from operations or
net income.
2. AVAILABLE FOR SALE SECURITIES
At December 31, 1997 and 1996, available for sale securities are stated at
estimated fair value and consist of municipal bonds and notes, market auction
preferreds, preferred stock, commercial paper, auction rate receipts and
treasury notes. Available for sales securities are as follows (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------ ------------------------------
COST UNREALIZED COST UNREALIZED
FAIR MARKET --------------- FAIR MARKET ---------------
VALUE BASIS GAIN VALUE BASIS GAIN
----------- ------- ---- ----------- ------- ----
Municipal Bonds and
Notes.................. $10,354 $10,340 $14 $11,969 $11,958 $11
Market Auction
Preferreds............. 2,004 2,004 -- -- -- --
Preferred Stock.......... -- -- -- 3,109 3,109 --
Commercial Paper......... -- -- -- 1,936 1,936 --
Auction Rate Receipts.... -- -- -- 1,412 1,412 --
Treasury Notes........... -- -- -- 994 994 --
------- ------- --- ------- ------- ---
$12,358 $12,344 $14 $19,420 $19,409 $11
======= ======= === ======= ======= ===
3. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
DECEMBER 31,
----------------
1997 1996
------ ------
Trade accounts receivable.......................... $3,679 $9,918
Less allowance for credit notes.................... 2,099 2,115
Less allowance for doubtful accounts............... 184 139
------ ------
$1,396 $7,664
====== ======
4. INVENTORIES:
Inventories are as follows (in thousands):
DECEMBER 31,
----------------
1997 1996
------ ------
Finished goods..................................... $ 651 $ 972
Beer in progress................................... 407 799
Promotional material............................... 1,559 2,660
------ ------
$2,617 $4,431
====== ======
32
35
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment are as follows (in thousands):
DECEMBER 31,
----------------
1997 1996
------ ------
Kegs, machinery and equipment...................... $4,135 $4,353
Office furniture and equipment..................... 1,550 1,115
Leasehold improvements............................. 278 285
Construction in progress........................... -- 591
------ ------
5,963 6,344
Less accumulated depreciation and amortization..... 1,907 1,232
------ ------
$4,056 $5,112
====== ======
Depreciation and amortization of property and equipment charged to
operations was $1,443,000, $568,000, and $391,000, for 1997, 1996, and 1995,
respectively.
6. OTHER ASSETS:
Other assets are as follows (in thousands):
DECEMBER 31,
-----------------
1997 1996
------- ------
Intangible costs associated with warrant.......... $ 2,789 $2,789
Less accumulated amortization..................... (672) (362)
------- ------
2,117 2,427
------- ------
Package design costs.............................. 1,606 1,426
Less accumulated amortization..................... (1,598) (575)
------- ------
8 851
------- ------
Other assets...................................... 269 235
------- ------
Long term notes receivable........................ 566 --
------- ------
$ 2,960 $3,513
======= ======
Amortization of intangible costs and package design costs were $1,578,000,
$886,000, and $363,000 in 1997, 1996 and 1995, respectively.
33
36
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ACCRUED EXPENSES:
DECEMBER 31,
----------------
1997 1996
------ ------
Accrued distribution liabilities................. $ -- $5,111
Accrued expenses................................. 730 934
Accrued freight.................................. 389 757
Accrued income and excise taxes.................. 22 1,881
Accrued bonuses.................................. 303 304
Accrued merchandise purchases.................... 745 263
------ ------
$2,189 $9,250
====== ======
Stroh currently manufactures the Company's products under the Company's
supervision. The Company paid approximately $28.6 million in 1997 and 1996 and
$7.6 million in 1995 to Stroh for charges under the Agreement and had a payable
of approximately $1.2 million and $2.0 million at December 31, 1997 and 1996,
respectively.
8. BREWERY TRANSITION CHARGES
In September 1995, the Company entered into an Alternating Premises
Transition Agreement with Minnesota Brewing Company of St. Paul, Minnesota,
terminating the existing Brewing Agreement. As a result of this transition, the
Company recorded a charge of $1,198,000 in 1995. The charge is comprised of
$890,000 of payments made to Minnesota Brewing Company under the agreement,
$93,000 loss on abandoned property and equipment and $215,000 of scrapped
materials and other transition costs.
9. WRITE-OFF OF BREWERY START UP COSTS
After review of a brewery construction feasibility study prepared by the
Company in conjunction with its architect, mechanical engineer and general
contractor, and a review of available capacity under the Stroh Agreement and
other factors, the Company determined not to go forward with previously
disclosed plans to construct and equip a brewery in California. As a result of
this determination the Company recorded a charge to earnings of $713,000 in
1997. This was comprised primarily of pre-construction architectural,
engineering and contractor fees.
10. INCOME TAXES
The provision for (benefit from) income taxes is as follows for the years
ended December 31, 1997, 1996, and 1995 (in thousands):
1997 1996 1995
------- ------- ------
Current:
Federal...................................... $(2,090) $ 2,005 $ 723
State........................................ 2 586 226
------- ------- ------
(2,088) 2,591 949
Deferred:
Federal...................................... (1,278) (1,475) 80
State........................................ (465) (362) 18
------- ------- ------
(1,743) (1,837) 98
------- ------- ------
$(3,831) $ 754 $1,047
======= ======= ======
34
37
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The principal items accounting for the difference between income taxes
computed at the United States statutory rate and the provision for income taxes
reflected in the statements of operations are as follows, for the years ended
December 31, 1997, 1996 and 1995:
1997 1996 1995
----- ----- -----
United States statutory rate...................... (34.0%) 34.0% 34.0%
States taxes (net of federal benefit)............. (3.1) 6.1 5.6
Nontaxable dividends and interest................. (3.7) (16.3) (3.0)
Non-deductible expenses........................... 1.1 4.6 3.9
Other............................................. 1.1 2.5 --
----- ----- -----
(38.6%) 30.9% 40.5
===== ===== =====
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset are as follows (in thousands):
DECEMBER 31,
----------------
1997 1996
------ ------
Deferred tax assets:
Allowance for doubtful accounts.......................... $ 76 $ 59
Allowance for credit notes............................... 4 562
Accrued distribution liabilities......................... -- 1,171
Net operating loss carry forward......................... 2,939 --
Vacation and bonus....................................... 196 167
Reserves and other....................................... 1,330 185
------ ------
Total............................................ 4,545 2,144
------ ------
Deferred tax liabilities:
Depreciation and amortization............................ 662 228
State income taxes....................................... 280 21
Other.................................................... -- 35
------ ------
Total............................................ 942 284
------ ------
Net deferred taxes......................................... $3,603 $1,860
====== ======
11. SHAREHOLDERS' EQUITY
Capital Stock. In August 1995, the Company's Board of Directors approved a
4 for 1 split and increased the authorized common shares to 50,000,000.
In November 1995, the Company completed the initial public offering of its
common stock. The Company sold approximately 2,700,000 shares for net proceeds
of $43,465,000. Concurrent with the closing of the initial public offering, the
Company's Board of Directors authorized 5,000,000 preferred shares. In addition,
the holders of Series A and Series B convertible preferred shares received
common shares pursuant to an automatic, share-for-share conversion, resulting in
the issuance of 3,305,000 common shares.
Warrant. In October 1995 the Company issued a warrant, expiring in five
years, to Stroh to purchase 1,140,284 of the Company's common shares at an
exercise price of $14.00 per share in exchange for Stroh granting the Company
certain cost reductions and other benefits in an amended manufacturing
agreement. The $2,790,000 intangible cost, as determined by an independent
appraisal, is amortized to cost of goods sold over the nine year term of the
amended manufacturing agreement.
35
38
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans: In 1986, the Company adopted a combined nonstatutory
and incentive stock option plan scheduled to expire in 1996 (the 1986 Plan).
Under the Plan, a total of 1,932,000 of the Company's common shares have been
reserved for issuance to officers, directors, and employees of and consultants
to the Company. This plan was canceled by the Board of Directors during 1995.
In September 1995, the Company adopted the 1995 Employee Stock Option Plan
(the "1995 Plan"). Under the plan, a total of 1,000,000 of the Company's common
shares have been reserved for issuance to officers, employees and consultants of
the Company. Options to purchase the Company's common shares may be granted at
the closing price on the date of grant. The options vest 25% after the first
year of service and 1/48 for each month thereafter. The term of the options
granted under the 1995 Plan is ten years from the date of grant.
In September 1995, the Company adopted the 1995 Director Option Plan (the
"Director Plan") and has reserved 200,000 common shares for issuance under this
plan. The Director Plan provides for an initial grant of 15,000 options to each
director upon the effective date of the initial public offering at a per share
price equal to the initial public offering price, an initial grant of 15,000
option to each new director upon their appointment to the Board, at the closing
price on the date of the grant, and annual grants of 5,000 options for each
director upon their reappointment to the Board of Directors at the closing price
on the date of the grant. The options vest 25% after the first year of service
and 1/48 for each month thereafter.
In July 1997, the Company granted 12,000 shares of the Company's common
stock to the Chairman of the Board of Directors of the Company, at $1.25 per
share, under a nonstatutory stock option. The excess of the fair market value of
the option over the grant price was charged to operations over the vesting
period. The option becomes fully vested in February 1998 and expires in July
2007.
Information regarding these Plans follows (in thousands, except per share
data):
OPTIONS WEIGHTED
OUTSTANDING AVERAGE
SHARES PRICE EXERCISE
AVAILABLE SHARES PER SHARE TOTAL PRICE
---------- ------- -------------- ------- ---------
Balances, January 1, 1995............ 18 1,099 $0.06 - $ 1.25 $ 189 $ 0.17
Authorized......................... 1,200 -- -- -- --
Granted............................ (452) 452 $2.50 - $18.00 7,734 $17.11
Canceled........................... 22 (22) $0.14 - $ 1.25 (10) $ 0.44
Exercised.......................... -- (925) $0.10 - $ 1.25 (106) $ 0.11
Additional shares of 1986 plan
canceled........................ (14) -- -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1995.......... 774 604 $0.10 - $18.00 7,807 $12.93
Granted............................ (430) 430 $6.50 - $18.75 3,438 $ 7.99
Canceled........................... 34 (34) $0.14 - $18.75 (568) $16.72
Exercised.......................... -- (76) $0.10 - $ 2.50 (34) $ 0.44
Additional shares of 1986 plan
canceled........................ (3) -- -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1996.......... 375 924 $0.10 - $18.00 10,643 $12.93
Authorized......................... 12 -- -- -- --
Granted............................ (327) 327 $1.25 - $ 6.25 1,854 $ 5.66
Canceled........................... 291 (291) $1.25 - $18.00 (4,794) $16.47
Exercised.......................... -- (46) $0.10 - $18.00 (39) $ 0.86
Additional shares of 1986 plan
canceled........................ (4) -- -- --
----- ----- -------------- ------- ------
Balances, December 31, 1997.......... 347 914 $0.14 - $18.75 $ 7,664 $ 8.39
===== ===== =======
36
39
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The option outstanding and currently exercisable by exercise price at
December 31, 1997 are as follows (in thousands, except per share data):
OPTIONS OUTSTANDING
----------------------------------- OPTIONS CURRENTLY EXERCISABLE
WEIGHTED ---------------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICE (IN THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
- --------------- --------------- ----------------- ---------------- --------------- ---------------
$ 0.14 19 0.97 years $ 0.14 19 $ 0.14
$ 1.25 - $ 2.50 41 3.96 years $ 1.59 38 $ 1.58
$ 4.94 - $ 5.91 127 9.68 years $ 5.35
$ 6.13 - $ 8.88 553 8.76 years $ 6.84 98 $ 7.27
$18.00 - $18.75 174 7.92 years $18.03 94 $18.02
--- ---
$ 0.14 - $18.75 914 8.35 years $ 8.39 249 $ 9.92
=== ===
The weighted average fair value of those options granted in 1997, 1996 and
1995 was $4.21, $5.33, and $11.38, respectively.
Employee Stock Purchase Plan. In September 1995, the Company adopted the
1995 Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan has
one year offering periods. The Employee Stock Purchase Plan permits eligible
employees to purchase shares of the Company's common stock at 85% of the lesser
of fair market value of the common stock on the first day of the offering period
of the last day of the purchase period. The Company has reserved 400,000 shares
of its common stock for issuance under the Purchase Plan. As of December 31,
1997, 72,000 shares have been issued under the plan.
Pro Forma Compensation Expense. The Company has adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123).
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for the Plans (including the Employee Stock Purchase Plan). Had
compensation cost for the Plans been determined based on the fair value at the
grant date for awards in 1997, 1996 and 1995 consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and net income (loss) per share
would have been reduced to the pro forma amounts indicated below:
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------- ------ ------
Net income (loss) as reported......................... $(6,094) $1,683 $1,538
Net income (loss) pro forma........................... $(7,497) $ 208 $1,308
Net income (loss) per share-basic..................... $ (0.57) $ 0.16 $ 0.19
Net income (loss) per share-basic pro forma........... $ (0.70) $ 0.02 $ 0.16
Net income (loss) per share diluted................... $ (0.57) $ 0.16 $ 0.18
Net income (loss) per share diluted pro forma......... $ (0.70) $ 0.02 $ 0.15
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:
1997 1996 1995
------ ------ ------
Risk-free interest rate.......................... 6.05% 6.20% 6.20%
Expected life in years........................... 3.48 4.19 4.19
Expected dividends............................... None None None
Expected volatility.............................. 0.9774 .8598 .8598
The weighted average expected life was calculated based on the vesting
period and exercise behavior. The risk-free interest rate was calculated in
accordance with the grant date and expected life calculated for each subgroup.
37
40
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMPUTATION OF NET (LOSS) INCOME PER SHARE
Basic and diluted earnings per share are calculated as follows for the
years ended December 31, 1997, 1996 and 1995 (in thousands except per share
amounts):
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------- ------- ------
Basic:
Weighted average shares.............................. 10,778 10,682 8,157
======= ======= ======
Net (loss) income.................................... $(6,094) $ 1,683 $1,538
======= ======= ======
Net (loss) income per share.......................... $ (0.57) $ 0.16 $ 0.19
======= ======= ======
Diluted:
Weighted average shares.............................. 10,778 10,682 8,157
Common equivalent shares from stock options and
warrants.......................................... -- 137 306
------- ------- ------
Shares used in per share calculation................. 10,778 10,819 8,463
======= ======= ======
Net (loss) income.................................... $(6,094) $ 1,683 $1,538
======= ======= ======
Net (loss) income per share.......................... $ (0.57) $ 0.16 $ 0.18
======= ======= ======
13. BENEFIT PLAN
In April 1995, the Company adopted the Pete's Brewing Company 401(k)
Savings Plan (the "401(k) Plan"), which is intended to qualify under Section 401
of the Internal Revenue Code. All employees meeting minimum age requirements are
eligible to participate in the 401(k) Plan. Employee contributions are limited
to 15% of compensation. The Company may make contributions to fund the 401(k)
Plan. The Company has not made any contributions to the 401(k) Plan.
14. COMMITMENTS AND CONTINGENCIES
The Company is engaged in certain legal and administrative proceedings
incidental to its normal business activities. While it is not possible to
determine the ultimate outcome of these actions, at this time management
believes that any liabilities resulting from such proceedings, or claims which
are pending or known to be threatened, will not have a material adverse effect
on the Company's consolidated financial position or results of operations.
The Company has commitments under operating leases for office space and
equipment which expire through 2002. Under the terms of the leases for office
space, the Company is responsible for certain utilities and maintenance
expenses, including taxes, insurance and other operating expenses. The Company
has the option to renew certain of these operating leases. Future minimum rental
payments required under the operating leases that have initial or remaining
non-cancelable lease terms in excess of one year at December 31, 1997 are
$697,000 in 1998, $664,000 in 1999, $639,000 in 2000, $453,000 in 2001 and
$65,000 in 2002.
Rental expense was approximately $608,000, $489,000 and $286,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
38
41
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information for the years ended December 31, 1997,
1996 and 1995 is summarized as follows (in thousands):
1997 1996 1995
------ ------ ------
Cash paid during the period for:
Excise taxes......................................... $7,011 $7,449 $5,889
Interest............................................. -- 3 201
Income taxes......................................... 1,947 1,448 140
Noncash investing and financing activities:
Intangible costs associated with issuance of
warrants........................................... -- -- 2,790
Tax benefit associated with exercise of options...... -- 216 --
Unrealized gain on investments....................... 14 11 --
16. SIGNIFICANT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company has no operations outside of the United States and operates in
one industry segment. No one customer accounted for more than 10% of 1997 sales.
One customer accounted for 14% of 1996 sales. Two customers accounted for 24%
and 11% of sales in 1995. To date export sales have not been significant.
39
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Pete's Brewing Company and Subsidiary
We have audited the accompanying consolidated balance sheets of Pete's
Brewing Company and Subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Pete's Brewing Company and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 18, 1998
40
43
PART III
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Shareholders to be held June 8, 1998, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
fiscal year pursuant to General Instruction G(3) of Form 10-K (the "Proxy
Statement"). The information required by this item concerning executive officers
is set forth in Part I of this Report. The information required by this item
concerning compliance with Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned "Compliance with Section 16(a) of the
Exchange Act" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
section captioned "Executive Compensation and Other Matters" contained in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "Record Date and Principal Share Ownership" contained in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Compensation Committee Interlocks and Insider Participation"
and "Certain Transactions With Management" contained in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENT SCHEDULES
S-1 -- Report of Independent Accountants on Financial Statement Schedule
S-2 -- Valuation and Qualifying Accounts
Additional schedules are not required under the related schedule
instructions or are inapplicable, and therefore have been omitted.
41
44
(a)(2) 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.
10.13 Lease between Registrant and Utah State Retirement
Investment Fund dated July 15, 1997.
10.14 Lease between Registrant and 1300 Iroquois Venture dated
September 29, 1997.
10.15 Lease between Registrant and Rotterdam Ventures, Inc., dated
September 1997.
10.16(4) Nonstatutory Stock Option Agreement by and between the
Company and Philip Marineau, Chairman of the Board of
Directors dated July 22, 1997.
22.1(1) List of subsidiaries of the Registrant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (See Page 42).
27.1 Financial Data Schedule.
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement of Form S-1 (Reg. No. 33-97264) as declared effective by the
Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A as filed with the Securities and Exchange Commission
on November 27, 1996.
(4) Incorporated by reference to Registrant's Form S-8 filed October 15, 1997.
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.
(c) EXHIBITS
See Item 14(a)(2) above.
(d) FINANCIAL STATEMENT SCHEDULES
See Item 14(a)(1) above.
42
45
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PETE'S BREWING COMPANY
By: /s/ JEFFREY ATKINS
------------------------------------
Jeffrey Atkins
Chief Executive Officer and
Chief Financial Officer
Date: March 27, 1998
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Jeffrey Atkins, as his or her true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, to sign any and all amendments (including post-effective
amendments) to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
NAME TITLE DATE
---- ----- ----
/s/ JEFFREY ATKINS Chief Executive Officer and March 27, 1998
- ----------------------------------------------------- Chief Financial Officer
Jeffrey Atkins
/s/ HUNTER HASTINGS Director March 27, 1998
- -----------------------------------------------------
Hunter Hastings
/s/ AUDREY MACLEAN Director March 27, 1998
- -----------------------------------------------------
Audrey Maclean
/s/ KEVIN O'ROURKE Director March 27, 1998
- -----------------------------------------------------
Kevin O'Rourke
/s/ PETE SLOSBERG Director March 27, 1998
- -----------------------------------------------------
Pete Slosberg
/s/ CHRISTOPHER SORTWELL Director March 27, 1998
- -----------------------------------------------------
Christopher Sortwell
/s/ PHILIP MARINEAU Director and Chairman of March 27, 1998
- ----------------------------------------------------- the Board of Directors
Philip Marineau
43
46
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the consolidated financial statements of
Pete's Brewing Company and Subsidiary as of December 31, 1997 and 1996 and for
each of the three years in the period ended December 31, 1997, which financial
statements are included in the Annual Report on Form 10-K, we have also audited
the financial statement schedule listed in Item 14(a)(1) herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 18, 1998
44
47
PETE'S BREWING COMPANY AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
BALANCES AT CHARGED TO
BEGINNING OF COSTS AND WRITE-OFF BALANCE AT
DESCRIPTION PERIOD EXPENSES OF ACCOUNTS END OF PERIOD
----------- ------------ ---------- ----------- -------------
(IN THOUSANDS)
Year ended December 31,
1995
Allowance for doubtful
accounts.............. $ 37 $ -- $ -- $ 37
Year ended December 31,
1996
Allowance for doubtful
accounts.............. $ 37 $102 $ -- $139
Year ended December 31,
1997
Allowance for doubtful
accounts.............. $139 $202 $157 $184
45
48
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1(2) Restated Articles of Incorporation of the Registrant
3.2(1) Bylaws of the Registrant
4.1(3) Preferred Shares Rights Plan
10.13 Lease between Registrant and Utah State Retirement
Investment Fund dated July 15, 1997
10.14 Lease between Registrant and 1300 Iroquois Venture dated
September 29, 1997
10.15 Lease between Registrant and Rotterdam Ventures, Inc., dated
September 1997
10.16(4) Nonstatutory Stock Option Agreement by and between the
Company and Philip Marineau, Chairman of the Board of
Directors dated July 22, 1997
22.1(1) List of subsidiaries of the Registrant
23.1 Consent of Independent Accountants
24.1 Power of Attorney (See Page 42)
27.1 Financial Data Schedule
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement of Form S-1 (Reg. No. 33-97264) as declared effective by the
Commission on November 6, 1996.
(2) Incorporated by reference to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
(3) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A as filed with the Securities and Exchange Commission
on November 27, 1996.
(4) Incorporated by reference to Registrant's Form S-8 filed October 15, 1997.
46