<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the second quarterly
period ended June 30, 1996 or
/ / Transition report pursuant to Section 13 of 15(d) of the
Securities Exchange Act of 1934 for the transition period from
________________ to _______________.
COMMISSION FILE NUMBER: 0-26834
PETE'S BREWING COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0110743
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
514 HIGH STREET, PALO ALTO, CALIFORNIA 94301
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (415) 328-7383
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
--- ---
As of July 31, 1996, registrant had outstanding 10,684,917 shares of
Common Stock.
<PAGE> 2
PETE'S BREWING COMPANY
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1996
INDEX
<TABLE>
<S> <C> <C>
Facing Sheet .................................................. 1
Index ......................................................... 2
Part I. Financial Information .........................................
Item 1. a) Consolidated balance sheets at June 30, 1996
and December 31, 1995 .................................. 3
b) Consolidated statements of operations for the three
month period ended June 30, 1996 and 1995 .............. 4
c) Consolidated statements of operations for the six
month period ended June 30, 1996 and 1995 .............. 5
d) Consolidated statements of cash flows for the six
month period ended June 30, 1996 and 1995 .............. 6
e) Notes to consolidated financial statements ............. 7
Item 2. Management's discussion and analysis of financial
condition and results of operations ........................... 9
Item 4. Submission of matters to a vote of security holders ........... 15
Signature ..................................................... 16
Item 6. a) Exhibits
11.01 Computation of net income per share ..................... 17
b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during
the quarter ended June 30, 1996.
</TABLE>
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<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 (1)
---- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $16,965 $42,960
Available for sale securities ............................ 18,706 --
Trade accounts receivable, net ........................... 6,156 3,184
Inventories .............................................. 3,915 2,244
Prepaid expenses and other current assets ................ 5,460 521
------- -------
Total current assets ............................... 51,202 48,909
Property and equipment, net ................................. 2,008 1,568
Other assets ................................................ 3,727 3,773
------- -------
............................................... $56,937 $54,250
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable and accrued expenses .............. $ 6,100 $ 5,227
Total current liabilities .......................... 6,100 5,227
------- -------
Total liabilities ............................... 6,100 5,227
------- -------
SHAREHOLDERS' EQUITY
Preferred Shares:
Preferred, no par value: Authorized 5,000 shares;
issued and outstanding: none .......................... -- --
Common shares, no par value:
Authorized: 50,000 shares; Issued and outstanding:
10,671 at June 30, 1996 and 10,621 at December 31, 1995... 48,187 47,957
Unrealized gain on securities available for sale ............ 237 --
Retained earnings ........................................... 2,413 1,066
------- -------
Total shareholders' equity ......................... 50,837 49,023
------- -------
$56,937 $54,250
======= =======
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of December 31, 1995.
The accompanying notes are an integral part of these consolidate financial
statements.
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<PAGE> 4
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
June 30,
1996 1995
---- ----
<S> <C> <C>
Sales ...................................... $19,354 $14,567
Less excise taxes .......................... 1,903 1,227
------- -------
Net sales ............................... 17,451 13,340
Cost of goods sold ......................... 8,644 6,709
------- -------
Gross profit ............................ 8,807 6,631
------- -------
Selling, advertising and
promotional expenses .................... 6,613 5,377
General and administrative expenses ........ 1,270 1,154
------- -------
Total operating expense ................. 7,883 6,531
------- -------
Income from operations .................. 924 100
------- -------
Interest income ............................ 334 --
Interest expense ........................... (2) (57)
------- -------
Income before income taxes .............. 1,256 43
Income tax provision ....................... 375 18
------- -------
Net income .............................. $ 881 $ 25
======= =======
Net income per share ....................... $ 0.08 $ 0.00
======= =======
Shares used in per share calculation ....... 11,055 8,054
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidate financial
statements.
-4-
<PAGE> 5
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1996 1995
---- ----
<S> <C> <C>
Sales ...................................... $35,365 $26,336
Less excise taxes .......................... 3,481 2,380
------- -------
Net sales ............................... 31,884 23,956
Cost of goods sold ......................... 15,811 11,940
------- -------
Gross profit ............................ 16,073 12,016
------- -------
Selling, advertising and
promotional expenses .................... 12,327 9,354
General and administrative expenses ........ 2,427 2,164
------- -------
Total operating expense ................. 14,754 11,518
------- -------
Income from operations .................. 1,319 498
------- -------
Interest income ............................ 705 --
Interest expense ........................... (2) (97)
------- -------
Income before income taxes .............. 2,022 401
Income tax provision ....................... 675 164
------- -------
Net income .............................. $ 1,347 $ 237
======= =======
Net income per share ....................... $ 0.12 $ 0.03
======= =======
Shares used in per share calculation ....... 11,018 8,054
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidate financial
statements.
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<PAGE> 6
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended
June 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 1,347 $ 237
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ......................... 499 331
Changes in operating assets and liabilities:
Trade accounts receivable .......................... (2,972) (1,215)
Inventories ........................................ (1,671) (1,043)
Prepaid expenses and other current assets .......... (4,939) (483)
Trade accounts payable and accrued liabilities ..... 873 1,548
-------- -------
Net cash used in operations ..................... (6,863) (625)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ...................... (686) (530)
Purchase of available for sale securities ................ (18,469) --
Additions to other assets ................................ (207) (598)
-------- -------
Net cash used in investing activities ........... (19,362) (1,128)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to a shareholder .............. -- --
Revolving credit agreement with bank, net ................ -- 672
Issuance of common shares pursuant to option plans ....... 230 7
-------- -------
Net cash provided by financing activities ....... 230 679
-------- -------
Net (decrease) increase in cash and
cash equivalents .............................. (25,995) (1,074)
CASH AND CASH EQUIVALENTS:
Beginning of period ...................................... 42,960 1,090
-------- -------
End of period ............................................ $ 16,965 $ 16
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidate financial
statements.
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<PAGE> 7
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 specialty
brewer. The Company currently markets ten distinctive full bodied beers in 49
states, the District of Columbia and the United Kingdom.
The following is summary of the Company's significant accounting policies:
INTERIM FINANCIAL DATA (UNAUDITED):
The unaudited financial statements for the three and six month periods
ended June 30, 1995 and 1996 have been prepared on the same basis as the
December 31, 1995 audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations in accordance with generally accepted
accounting principles.
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.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially expose the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents and trade
accounts receivable.
The Company's customer base includes primarily beer and 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, if any. The Company has not experienced any losses on such accounts.
AVAILABLE FOR SALE SECURITIES:
Available for sale securities consist of U.S., and municipal government
obligations and corporate securities with maturities of more than nintey
days. These available for sale securities are carried at market value. The
available for sale securities are held in the Company's name and maintained
with two large institutions.
ALLOWANCE FOR CREDIT NOTES:
The Company records a provision for the estimated costs related to
promotional programs for its distributors. Such costs primarily include
incentive discounts and allowances.
INVENTORIES:
Inventories consist of beer in progress, finished goods and promotional
materials and are stated at the lower of first-in, first-out cost or market.
-7-
<PAGE> 8
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 reported period. Actual results could differ from those
estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which
requires the Company to establish one of two methods for accounting for
stock transactions with employees and established the criteria for stock
transactions with third parties. The Company is studying the implications
of the statement, and, based on its initial evaluation, does not expect it
to have a material impact on the Company's financial condition or results
from operations.
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. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Trade accounts receivable ............... $12,025 $7,315
Less wholesaler deposits ................ 4,015 2,327
Less allowance for credit notes ......... 1,817 1,767
Less allowance for doubtful accounts .... 37 37
------- ------
$ 6,156 $3,184
======= ======
</TABLE>
3. INVENTORIES:
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Finished goods ................... $1,110 $ 184
Beer in progress ................. 858 430
Promotional material ............. 1,947 1,630
------ ------
$3,915 $2,244
====== ======
</TABLE>
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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. Although the Company has established
distribution in 49 states, it has concentrated selling, advertising and
promotional efforts in a limited number of key markets. Seven states are "Core
Markets" and accounted for approximately 50% of the Company's sales in the
second quarter 1996. Accordingly, the Company believes that there is a
significant opportunity for growth on a national basis. The Company intends to
devote significant selling, advertising and promotional expenses to increase its
market share in the other geographic regions of the United States.
Since inception, the Company has made an 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 a centrally located independent brewery to custom brew its
beers, under the Company's on-site supervision and pursuant to the Company's
proprietary recipes, would be 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 alternates the St. Paul, Minnesota and
Winston-Salem, North Carolina breweries with 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.
In 1995, the Company determined that the volume sales in California justified
the construction of a new brewery. The Company plans to use most of the proceeds
of its initial public offering to construct and equip a new brewery in
California. The Company currently expects to achieve commercial production by
mid-1998. Management, along with its architect, mechanical engineer, and general
contractor, is currently in the process of completing a final feasibility study
to be approved by the Company's Board of Directors, prior to the acquisition of
land.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty and support expansion of sales and distribution efforts. The Company
believes that this brand investment has resulted in better recognition of the
Company and its products, better placement on store shelves and increased
distribution of the Company's beers. The Company intends to continue to devote
substantial resources toward selling, advertising and promotional activities,
particularly as it focuses on new geographic regions and introduces new
products. The Company's profitability is significantly impacted by the timing
and level of expenditures related to selling, advertising and promotion. Since
the Company has historically experienced higher sales in the third and fourth
quarters, such expenditures in addition to the recognition of Stroh volume
discounts upon reaching the volume discount level may reduce the Company's
profitability in the first and second quarters as a percentage of the entire
year when compared to previous years.
-9-
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .............................. 110.9% 109.2% 110.9% 109.9%
Less excise taxes .................. 10.9 9.2 10.9 9.9
----- ----- ----- -----
Net sales ........................ 100.0 100.0 100.0 100.0
Cost of goods sold ................. 49.5 50.3 49.6 49.8
----- ----- ----- -----
Gross profit ................... 50.5 49.7 50.4 50.2
----- ----- ----- -----
Selling, advertising and promotional
expenses .......................... 37.9 40.3 38.7 39.1
General and administrative
expenses .......................... 7.3 8.7 7.6. 9.0
----- ----- ----- -----
Total operational expenses ..... 45.2 49.0 46.3 48.1
----- ----- ----- -----
Income from operations ....... 5.3 0.7 4.1 2.1
Interest income (expense), net ..... 1.9 (0.4) 2.2 (0.4)
----- ----- ----- -----
Income before income taxes ... 7.2 0.3 6.3 1.7
Income tax provision ............... 2.1 0.1 2.1 0.7
----- ----- ----- -----
Net income ................. 5.1% 0.2% 4.2% 1.0%
===== ===== ===== =====
</TABLE>
The following tables sets forth certain items from the Company's consolidated
statements of operations on a per barrel sold basis for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales .............................. $179.20 $184.63 $180.88 $183.98
Less excise taxes .................. 17.62 15.55 17.80 16.63
------ ------ ------- ------
Net sales ........................ 161.58 169.08 163.08 167.35
Cost of goods sold ................. 80.04 85.03 80.87 83.41
------ ------ ------- -------
Gross profit ................... 81.54 84.05 82.21 83.94
------ ------ ------- -------
Selling, advertising and promotional
expenses .......................... 61.23 68.15 63.05 65.35
General and administrative
expenses .......................... 11.76 14.63 12.41 15.12
------ ------ ------ -------
Total operational expenses ..... 72.99 82.78 75.46 80.47
------ ------ ------ -------
Income from operations ....... 8.55 1.27 6.75 3.47
Interest income (expense), net ..... 3.08 (0.72) 3.60 (0.68)
------ ------ ------ -------
Income before income taxes ... 11.63 0.55 10.35 2.79
Income tax provision ............... 3.47 0.23 3.45 1.15
------ ------ ------ -------
Net income ................. $ 8.16 $ 0.32 $ 6.90 $ 1.64
====== ====== ====== =======
</TABLE>
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<PAGE> 11
Some of the following forward-looking statements are based on current
expectations; and actual results may differ materially:
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
SALES. Sales increased by 32.0% from $14.6 million in the three months ended
June 30, 1995 ("the Second Quarter of 1995") to $19.3 million in the three
months ended June 30, 1996 ("the Second Quarter of 1996"). Sales volume
increased 36.9% from 78,900 barrels sold in the Second Quarter of 1995 to
108,000 barrels sold in the Second Quarter of 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 seasonal beer Pete's Wicked Summer Brew, offset by decreased sales of
Pete's Wicked Red and Pete's Wicked Lager in anticipation of the repackaging and
repositioning of these two brands in the beginning of the third quarter of 1996.
Sales per barrel decreased from $184.63 in the Second Quarter of 1995 to $179.20
in the Second Quarter of 1996. Net sales for the second quarter were below the
Company's expectations. A significant portion of the shortfall, or $1.9 million,
was due primarily to an unanticipated problem in the introduction of the newly
designed packaging that surfaced in late June. Although the second quarter was a
record shipment quarter for the Company, depletions in some of the Company's
markets were lower than expected, also contributing to the shortfall in net
sales and adding to an inventory build at wholesale. The decrease in depletion
rates and the inventory build will reduce shipments in the second half of 1996.
The Company expects barrel shipments to increase between 8% and 14% for each of
the third and fourth quarters of 1996 when compared to the Second Quarter of
1996. Sales per barrel is expected to range between $176 and $180 per barrel for
these same periods, provided there is no significant change in the sales mix
between bottled and keg beer for the third and fourth quarters of 1996.
EXCISE TAXES. Federal and state excise taxes increased by 55.1% from $1.2
million in the Second Quarter of 1995 to $1.9 million in the Second Quarter of
1996. Excise taxes as a percentage of net sales increased from 9.2% to 10.9% for
the Second Quarter of 1996. Excise taxes per barrel sold increased from $15.55
in the Second Quarter of 1995 to $17.62 in the Second Quarter of 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 surpasses
60,000 barrels. The Company uses an intra period method to allocate excise taxes
based on the Company's estimate of sales volume for 1996, and as such, changes
in the excise tax rate per barrel will be caused by changes in the Company's
estimate of sales volume for 1996 and to a lessor extent, changes in state
excise tax rates.
COST OF GOODS SOLD. Cost of goods sold increased 28.8% from $6.7 million in the
second quarter of 1995 to $8.6 million in the Second Quarter of 1996 reflecting
the increase in volume of beer sold. Cost of goods sold as a percentage of net
sales decreased from 50.3% in the Second Quarter of 1995 to 49.5% in the Second
Quarter of 1996. Cost of goods sold per barrel sold decreased from $85.03 in the
Second Quarter of 1995 to $80.04 in the Second Quarter of 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 manufacturing services fees charged under the
Company's Agreement with Stroh, partially offset by an increase in
transportation expenses due to higher cost of shipping keg beer and an increase
in malt prices. Transportation expenses are a significant component of cost of
goods sold. Transportation expenses increased 38.7% from $1.2 million in the
Second Quarter of 1995 to $1.7 million in 1996. Transportation expenses as a
percentage of net sales increased from 9.1% in the Second Quarter of 1995 to
9.6% in the Second Quarter of 1996. Transportation expenses per barrel sold
increased from $15.38 per barrel in the Second Quarter of 1995 to $15.60 per
barrel in the Second Quarter of 1996.
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<PAGE> 12
The Company expects cost of sales per barrel to increase slightly in the third
and fourth quarters of 1996 when compared to the second quarter, due to changes
in product mix and the higher cost of production associated with the seasonal
beers scheduled for production in the third and fourth quarters. The Company
anticipates that these higher costs of production will be offset by volume
discounts from Stroh thus, resulting in only slight per barrel cost increases.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 23.0% from $5.4 million in the Second Quarter
of 1995 to $6.6 million in the Second Quarter of 1996. Selling, advertising and
promotional expenses as percentage of net sales decreased from 40.3% in the
Second Quarter of 1995 to 37.9% in the Second Quarter of 1996. Selling,
advertising and promotional expenses per barrel sold decreased from $68.15 in
the Second Quarter of 1995 to $61.23 in the Second Quarter of 1996. The
decreases were attributable to lower advertising costs, lower discounts per
barrel due to lower than expected depletions, partially offset by increased
headcount and payroll and point-of-sale material expenditures.
The Company expects to increase selling, advertising and promotional expenses
(Brand Investment) to between $65 and $70 per barrel during the third and fourth
quarters of 1996 to increase depletion growth rates.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 12.7% from $1.2 million in the Second Quarter of 1995 to $1.3 million
in the Second Quarter of 1996. General and administrative expenses as a
percentage of net sales decreased from 8.7% in the Second Quarter of 1995 to
7.3% in the Second Quarter of 1996. General and administrative expenses per
barrel sold decreased from $14.63 in the Second Quarter of 1995 to $11.76 in the
Second Quarter of 1996. The increase in general and administrative expenses
resulted primarily from increased professional service fees associated with the
Company's status as a publicly traded entity. The Company expects general and
administrative expenses for the remaining quarters of 1996 to be fixed at
slightly higher levels than those experienced in the Second Quarter of 1996.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, increased
$389,000 from a net interest expense of $57,000 in the Second Quarter of 1995 to
a net interest income of $332,000 in the Second Quarter of 1996. The increase
reflected earnings from investment of the net proceeds of the Company's November
1995 public offering. The Company anticipates interest earnings to remain at
these levels throughout 1996.
INCOME TAX PROVISION The Company accounts for income taxes using the deferral
method of accounting for tax assets and liabilities. The income tax provision
takes into account the effects of state income taxes, offset by the utilization
of net operating loss carryforwards. Income taxes in the Second Quarter of 1996
were below the federal statutory rate (34%) as a result of non-taxable income in
the Second Quarter of 1996 and were offset by state taxes and non-deductible
expenses in the second quarters of 1996 and 1995.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
SALES. Sales increased by 34.3% from $26.3 million for the six months ended June
30, 1995 ("the First Half of 1995") to $35.4 million for the six months ended
June 30, 1996 ("the First Half of 1996"). Sales volume increased 36.6% from
143,100 barrels sold in the First Half of 1995 to 195,500 barrels sold in the
First Half of 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 seasonal beers Pete's Wicked
Winter Brew and Pete's Wicked Summer Brew, offset by decreased sales of Pete's
Wicked Red and Pete's Wicked Lager in anticipation of the repackaging and
repositioning of these two brands in the beginning of the third
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<PAGE> 13
quarter of 1996. Sales per barrel decreased from $183.98 in the First Half of
1995 to $180.88 in the First Half of 1996.
EXCISE TAXES. Federal and state excise taxes increased by 46.3% from $2.4
million in the First Half of 1995 to $3.5 million in the First Half of 1996.
Excise taxes as a percentage of net sales increased from 9.9% for the First Half
of 1995 to 10.9% for the First Half of 1996. Excise taxes per barrel sold
increased from $16.63 in the First Half of 1995 to $17.80 in the First Half of
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 surpasses 60,000 barrels. The Company uses an intra period method to
allocate excise taxes based on the Company's estimate of sales volume for 1996,
and as such, changes in the excise tax rate per barrel will be caused by changes
in the Company's estimate of sales volume for 1996 and to a lessor extent,
changes in state excise tax rates.
COST OF GOODS SOLD. Cost of goods sold increased 32.4% from $11.9 million in the
First Half of 1995 to $15.8 million in the First Half of 1996 reflecting the
increase in volume of beer sold. Cost of goods sold as a percentage of net sales
decreased from 49.8% in the First Half of 1995 to 49.6% in the First Half of
1996. Cost of goods sold per barrel sold decreased from $83.41 in the First Half
of 1995 to $80.87 in the First Half of 1996.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 30.9% from $9.4 million in the First Half of
1995 to $12.3 million in the First Half of 1996. Selling, advertising and
promotional expenses as percentage of net sales decreased from 39.1% in the
First Half of 1995 to 38.7% in the First Half of 1996. Selling, advertising and
promotional expenses per barrel sold decreased from $65.35 in the First Half of
1995 to $63.05 in the First Half of 1996.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 9.1% from $2.2 million in the First Half of 1995 to $2.4 million in
the First Half of 1996. General and administrative expenses as a percentage of
net sales decreased from 9.0% in the First Half of 1995 to 7.6% in the First
Half of 1996. General and administrative expenses per barrel sold decreased from
$15.12 in the First Half of 1995 to $12.41 in the First Half of 1996.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, increased
$800,000 from a net interest expense of $97,000 in the First Half of 1995 to a
net interest income of $703,000 in the First Half of 1996. The increase
reflected earnings from 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
takes into account the effects of state income taxes, offset by the non-taxable
income. Income taxes in the First Half of 1996 were below the federal statutory
rate (34%) as a result of state taxes and non-deductible expenses offset by
non-taxable interest income and above the federal statutory rate (34%) in the
First Half of 1995 due to non-deductible expenses and state taxes.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly operating results have varied significantly in the past,
and may do so in the future, depending on factors such as 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, increased competition, 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
-13-
<PAGE> 14
variations in shipping and transportation costs. The Company's expense levels
are based, in part, on its expectations of future sales levels. If sales levels
are below expectations, operating results are likely to be materially adversely
affected. In particular, net income, if any, may be disproportionately affected
by a reduction in sales because certain of the Company's operating expenses are
fixed in the short-term. The Company's profitability has been significantly
impacted by the timing and level of expenditures related to selling, advertising
and promotional expenses. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $26.0 million in the First
Half of 1996 as compared to a decrease of $1.1 million in the First Half of
1995. The Company used $6.9 million in cash from operations in the First Half of
1996 as compared to a use of $625,000 for the First Half of 1995. The increase
of the uses of cash from operations resulted primarily from the $5 million
increase in prepaid expenses and other current assets. During the first six
months of 1996 the Company deposited with Stroh $4 million to earn purchase
discounts on packaging and other raw materials used in the production of the
Company's products. Earnings from these discounts are credited to cost of goods
sold. These funds, recorded in prepaid expenses and other current assets, will
be returned to the Company at its request.
The Company's principal investing activities consisted of purchases of available
for sale securities in the First Half of 1996. The Company has capital
commitments of approximately $2.0 million dollars for new kegs. Management,
along with its architect, mechanical engineer, and general contractor, is
currently in the process of completing a final feasibility study to be approved
by the Company's Board of Directors, prior to the acquisition of land.
The only significant financing activity in the first half 1996 was the issuance
of common stock to employees of the Company under the Company's employee stock
purchase plan which provided $230,000 of cash flow. In the First Half of 1995,
the principal financing activities included net proceeds from the revolving
credit agreement of $672,000.
As of June 30, 1996, working capital was $45.1 million as compared with a
working capital deficit of $1.5 million as of June 30, 1995. The increase was
primarily due to the proceeds from the Company's initial public offering
invested in cash and cash equivalents and available for sale securities and an
increase in accounts receivable related to continued profitable operations. The
Company anticipates that its current cash and available for sale securities and
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements for at least the next twelve months.
RISKS IN ACHIEVING FORWARD-LOOKING STATEMENTS
The above Management's Discussion and Analysis contained certain forward-looking
statements that involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: dependence on Stroh to custom brew the
Company's beers, competition within the specialty segment, successful expansion
of business to non-Core Markets, development of new products and management of
new product introduction, and changes in government regulations.
-14-
<PAGE> 15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 28, 1996 the Company held its Annual Meeting of Shareholders for which it
solicited votes by proxy. The following is a brief description of the matters
voted upon at the meeting and a statement of the number of votes cast for and
against, and, if applicable, the number of abstentions as to each matter. There
were no broker non-votes with respect to any matter.
1. To elect six directors to serve until the next Annual Meeting of
Shareholders and until their successors are elected.
<TABLE>
<CAPTION>
Director For Withheld
- ----------------------- --------- --------
<S> <C> <C>
Mark F. Bozzini 8,607,795 21,243
Mark J. Bronder 8,607,895 21,143
Audrey MacLean 8,607,995 21,043
Kevin O'Rourke 8,608,095 20,943
Pete S. Slosberg 8,607,895 21,143
Christopher T. Sortwell 8,608,095 20,943
</TABLE>
2. To ratify the appointment of Coopers & Lybrand LLP as independent
auditors of the Company for the year ending December 31, 1996.
<TABLE>
<CAPTION>
FOR: AGAINST: ABSTAIN:
<S> <C> <C> <C>
8,601,070 6,075 21,893
</TABLE>
-15-
<PAGE> 16
SIGNATURE
Pursuant to the requirements of the Securities 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
Dated: August 5, 1996 By /s/ James E. Collins
----------------------------------------
James E. Collins, Chief Financial Officer
(Principal Financial and Accounting Officer)
-16-
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
- ---------------------------------------------------------------
<S> <C>
11.1 Computation of per share earnings
27.1 Financial Data Schedule
</TABLE>
-17-
<PAGE> 1
Exhibit 11.1
PETE'S BREWING COMPANY AND SUBSIDIARY
COMPUTATION OF NET INCOME PER SHARE
IN ACCORDANCE WITH INTERPRETIVE RELEASE NO. 34-9083
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
For the three For the six
months ended months ended
June 30, June 30,
------------------ ------------------
1996 1995 1996 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period.................... 10,665 4,200 10,647 4,158
Preferred stock................................... -- 3,304 -- 3,304
Common equivalent shares assuming
conversion of stock options and
warrants under the treasury stock
method........................................ 390 550 371 592
------- ------ ------- ------
Shares used in per share calculation.............. 11,055 8,054 11,018 8,054
======= ====== ======= ======
Net income........................................ $ 881 $ 25 $ 1,347 $ 237
======= ====== ======= ======
Net income per share.............................. $ 0.08 $ 0.00 $ 0.12 $ 0.03
======= ====== ======= ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) PETE'S
BREWING COMPANY'S FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1996 AS
SHOWN IN THE 10-Q FILING, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,965
<SECURITIES> 18,706
<RECEIVABLES> 6,193
<ALLOWANCES> 37
<INVENTORY> 3,915
<CURRENT-ASSETS> 51,202
<PP&E> 2,008
<DEPRECIATION> 0
<TOTAL-ASSETS> 56,937
<CURRENT-LIABILITIES> 6,100
<BONDS> 0
0
0
<COMMON> 48,187
<OTHER-SE> 2,650
<TOTAL-LIABILITY-AND-EQUITY> 56,937
<SALES> 31,884
<TOTAL-REVENUES> 31,884
<CGS> 15,811
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,754
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2)
<INCOME-PRETAX> 2,022
<INCOME-TAX> 675
<INCOME-CONTINUING> 1,347
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,347
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
