<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 first quarterly period ended March 31,
1997 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 April 30, 1997, registrant had outstanding 10,751,987 shares of
Common Stock.
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PETE'S BREWING COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<S> <C> <C>
Facing Sheet................................................ 1
Index .................................................... 2
Part I. Financial Information
Item 1. a) Consolidated balance sheets at March 31, 1997
and December 31, 1996............................... 3
b) Consolidated statements of operations for the three
month period ended March 31, 1997 and 1996......... 4
d) Consolidated statements of cash flows for the three
month period ended March 31, 1997 and 1996......... 5
e) Notes to consolidated financial statements.......... 6
Item 2. Management's discussion and analysis of financial
condition and results of operations......................... 8
Part II. Other Information
Item 6. a) Exhibits................................................ 16
b) Reports on Form 8-K..................................... 16
Signature................................................... 17
</TABLE>
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996 (1)
------------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $14,532 $19,814
Available for sale securities...................................... 15,937 19,420
Trade accounts receivable, net..................................... 4,418 7,664
Inventories........................................................ 4,797 4,431
Prepaid expenses and other current assets.......................... 7,057 4,046
Deferred taxes..................................................... 3,458 2,088
------------------------
Total current assets.......................................... 50,199 57,463
------------------------
Property and equipment, net........................................... 4,471 5,112
Other assets.......................................................... 2,967 3,513
------------------------
$57,637 $66,088
========================
LIABILITIES
Current liabilities:
Trade accounts payable............................................ $ 1,044 $ 5,299
Accrued expenses.................................................. 7,890 9,250
------------------------
Total current liabilities....................................... 8,934 14,549
------------------------
Deferred tax liability............................................ 228 228
------------------------
Total liabilities.......................................... 9,162 14,777
------------------------
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:
10,746 at March 31, 1997 and 10,733 at December 31, 1996........... 48,555 48,551
Unrealized gain (loss) on securities available for sale............... (9) 11
Retained earnings (accumulated deficit)............................... (71) 2,749
------------------------
Total shareholders' equity.................................... 48,475 51,311
------------------------
$57,637 $66,088
========================
</TABLE>
(1)The information in this column was derived from the Company's audited
consolidated balance sheet as of December 31, 1996.
The accompanying notes are an integral part of these consolidated
financial statements.
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PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1997 1996
------------------------
<S> <C> <C>
Sales................................................................ $13,531 $16,011
Less excise taxes.................................................... 1,327 1,578
------------------------
Net sales......................................................... 12,204 14,433
Cost of goods sold................................................... 6,233 7,167
------------------------
Gross profit...................................................... 5,971 7,266
------------------------
Selling, advertising and promotional expenses........................ 7,647 5,734
General and administrative expenses.................................. 2,123 1,137
Write-off of brewery start-up....................................... 713 0
------------------------
Total operating expense........................................... 10,483 6,871
------------------------
Income (loss) from operations..................................... (4,512) 395
------------------------
Interest income...................................................... 322 371
------------------------
Income (loss) before income taxes................................. (4,190) 766
Income tax benefit (provision)....................................... 1,370 (300)
------------------------
Net income (loss)................................................. $(2,820) $ 466
========================
Net income (loss) per share.......................................... $ (0.26) $ 0.04
========================
Shares used in per share calculation................................. 10,742 11,025
========================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months ended
March 31,
1997 1996
------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (2,820) $ 466
Adjustments to reconcile net income (loss) to net cash
used by operations:
Depreciation and amortization.......................... 1,488 232
Deferred taxes......................................... (1,370) --
Changes in operating assets and liabilities:
Trade accounts receivable............................ 3,246 (5,469)
Inventories.......................................... (366) 54
Prepaid expenses and other current assets............ (3,011) (3,738)
Accounts payable and accrued expenses................ (5,615) 1,961
------------------------
Net cash used by operations........................ (8,448) (6,494)
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment....................... (263) (199)
Purchases of available for sale securities................ (1,477) (12,975)
Proceeds from sale of available for sale securities....... 4,940 --
Changes in other assets................................... (38) (121)
------------------------
Net cash provided by (used in) investing activities 3,162 (13,295)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares ............................... 4 7
------------------------
Net cash provided by financing activities.......... 4 7
------------------------
Net decrease in cash and
cash equivalents................................ (5,282) (19,782)
CASH AND CASH EQUIVALENTS:
Beginning of period....................................... 19,814 42,960
------------------------
End of period............................................. $ 14,532 $ 23,178
========================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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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 summary of the
Company's significant accounting policies:
INTERIM FINANCIAL DATA (UNAUDITED):
The unaudited financial statements for the three month periods ended March
31, 1997 and 1996 have been prepared on the same basis as the December 31,
1996 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.
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 The Stroh Brewery Company ("Stroh") at all phases of
the production of its beers. If the agreement with Stroh was terminated, the
Company believes that alternative suppliers could be found, but that
significant delays and costs would be incurred which would materially effect
the company.
AVAILABLE FOR SALE SECURITIES:
Available for sale securities consist of U.S. and municipal government
obligations and corporate securities with maturities of more than ninety
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.
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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
reporting period. Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
During February 1997, the Financial Accounting Standards Board issued
Statement No. 128 (SFAS 128), "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for Earnings per Share.
SFAS 128 will become effective for the Company's 1997 fiscal year. The
Company's management is currently studying the implications of SFAS 128. The
impact of adopting SFAS 128 on the Company's financial statements has not yet
been determined.
RECLASSIFICATIONS:
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no impact on previously reported income from operations
or net income.
2. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996(1)
---------------------------------
(unaudited)
<S> <C> <C>
Trade accounts receivable.................. $7,741 $9,918
Less allowance for credit notes............ 3,083 2,115
Less allowance for doubtful accounts....... 240 139
---------------------------------
$ 4,418 $7,664
=================================
</TABLE>
3. INVENTORIES:
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996(1)
---------------------------------
(unaudited)
<S> <C> <C>
Finished goods......................... $1,126 $ 972
Beer in progress....................... 964 799
Promotional material................... 2,707 2,660
---------------------------------
$ 4,797 $4,431
=================================
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of December 31, 1996.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements in the Management's Discussion and Analysis of
Financial Condition and Results of Operations are forward-looking statements.
These forward-looking statements are based on current expectations and entail
various risks and uncertainties that could cause actual results to differ
materially from those expressed in such forward-looking statements. Such risks
and uncertainties are set forth below under "Factors Affecting Future Operating
Results." These forward-looking statements include, but are not limited to, the
statement in the fifth paragraph of "Overview" concerning the period of time
through which available brewery capacity will be sufficient to meet the
Company's needs, the statements under "Factors Affecting Future Operating
Results," and the statement in the last paragraph under "Liquidity and Capital
Resources" regarding the sufficiency of the Company's available resources to
meet working capital and capital expenditure requirements.
OVERVIEW
Pete's Brewing Company ("the Company") was incorporated in California in 1986.
The Company markets its beers in 49 states, the District of Columbia and the
United Kingdom, through independent beverage distributors that sell to retail
establishments that sell to consumers.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty and support expansion of sales and distribution efforts. The Company
believes that this brand investment has resulted in better recognition of the
Company and its products, better placement on store shelves and increased
distribution of the Company's beers. The Company intends to continue to devote
substantial resources toward selling, advertising and promotional activities,
particularly as it focuses on expanding retail distribution and introduces new
products. The Company's profitability is significantly impacted by the timing
and level of expenditures related to selling, advertising and promotion.
Since its inception, the Company has made an ongoing analysis of the most
cost-effective method to produce its beers. Given the geographic dispersion of
sales throughout the United States, the Company has determined that a strategy
of utilizing excess capacity of strategically located independent breweries to
custom brew its beers, under the Company's on-site supervision and pursuant to
the Company's proprietary recipes, would be the most cost-effective.
In 1995, the Company entered into a nine-year Manufacturing Services Agreement
("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.
-8-
<PAGE> 9
After review of a brewery construction feasibility study prepared by the Company
in conjunction with its architect, mechanical engineer and general contractor,
and a review of available capacity under the Stroh Agreement and other factors,
the Company has recently determined not to go forward with previously disclosed
plans to construct and 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 analysis, currently underway, of the alternative uses available to the
Company. See "Liquidity and Capital Resources." During the First Quarter of
1997, based on a decision made at its February 1997 Board meeting to
indefinitely delay construction of a brewery, the Company 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 earnings in
the First Quarter of 1997.
As a result of competitive market factors, the continued transition of the
distribution network in key markets, lower than anticipated depletions, which
are wholesaler reported shipments from wholesale to retail, previously announced
efforts to reduce wholesale inventories, significant one-time, non-cash
write-offs and other factors described under "Results of Operations," the
Company realized a net loss during the First Quarter of 1997 of $2.8 million.
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
March 31,
1997 1996
------------------
<S> <C> <C>
Sales............................................................... 110.9% 110.9%
Less excise taxes .................................................. 10.9 10.9
------------------
Net sales......................................................... 100.0 100.0
Cost of goods sold.................................................. 51.1 49.7
------------------
Gross profit.................................................... 48.9 50.3
------------------
Selling, advertising and promotional expenses....................... 62.7 39.7
General and administrative expenses................................. 17.4 7.9
Write-off of brewery start-up....................................... 5.8 0.0
------------------
Total operational expenses...................................... 85.9 47.6
------------------
Income (loss) from operations................................. (37.0) 2.7
Interest income..................................................... 2.6 2.6
------------------
Income (loss) before income taxes............................. (34.4) 5.3
Income tax benefit (provision)...................................... 11.3 (2.1)
-------------------
Net income (loss)........................................... (23.1%) 3.2%
===================
</TABLE>
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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
March 31,
1997 1996
--------------------
<S> <C> <C>
Sales............................................................. $179.69 $182.73
Less excise taxes ................................................ 17.62 18.01
--------------------
Net sales....................................................... 162.07 164.72
Cost of goods sold................................................ 82.78 81.79
--------------------
Gross profit.................................................. 79.29 82.93
--------------------
Selling, advertising and promotional expenses..................... 101.55 65.44
General and administrative expenses............................... 28.19 12.98
Write-off of brewery start-up..................................... 9.47 0.00
--------------------
Total operational expenses.................................... 139.21 78.42
--------------------
Income (loss) from operations............................... (59.92) 4.51
Interest income................................................... 4.28 4.23
--------------------
Income (loss) before income taxes........................... (55.64) 8.74
Income tax benefit (provision).................................... 18.19 (3.42)
---------------------
Net income (loss) ........................................ ($ 37.45) $5.32
=====================
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
SALES. Sales decreased by 15.6% from $16.0 million in the three months ended
March 31, 1996 ("the First Quarter of 1996") to $13.5 million in the three
months ended March 31, 1997 ("the First Quarter of 1997"). Sales volume
decreased 14.0% from 87,600 barrels sold in the First Quarter of 1996 to 75,300
barrels sold in the First Quarter of 1997. The decrease in sales was primarily
attributable to a reduction in sales volume in existing markets. The reduced
sales volume in existing markets was due primarily to a planned reduction in
wholesale inventories during the First Quarter of 1997 and to competitive market
factors as numerous competing products entered the market. Sales per barrel
decreased from $182.73 in the First Quarter of 1996 to $179.69 in the First
Quarter of 1997. The decrease in sales per barrel was due to price reductions in
certain markets. During March, 1997, depletion rates, which are wholesaler
reported shipments from warehouse to retail, were below the Company's
expectations and the Company expects this shortfall in depletions to adversely
impact sales volumes for the quarter ending June 30, 1997.
EXCISE TAXES. Federal and state excise taxes decreased by 18.8% from $1.6
million in the First Quarter of 1996 to $1.3 million in the First Quarter of
1997. Excise taxes as a percentage of net sales remained constant at 10.9% for
the First Quarters of 1997 and 1996. Excise taxes per barrel sold decreased from
$18.01 in the First Quarter of 1996 to $17.62 in the First Quarter of 1997. The
decrease in excise taxes was attributable to the decease 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
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<PAGE> 11
uses an intra period method to allocate excise taxes based on the Company's
estimate of sales volume for 1997 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 1997 and to a lessor extent, changes in state excise tax rates.
COST OF GOODS SOLD. Cost of goods sold decreased 13.9% from $7.2 million in the
First Quarter of 1996 to $6.2 million in the First Quarter of 1997 reflecting
the decrease in volume of beer sold. Cost of goods sold as a percentage of net
sales increased from 49.7% in the First Quarter of 1996 to 51.1% in the First
Quarter of 1997. Cost of goods sold per barrel sold increased from $81.79 in the
First Quarter of 1996 to $82.78 in the First Quarter of 1997. The increases in
cost of goods sold as a percentage of net sales and per barrel sold were
primarily attributable to increased transportation expenses. While
transportation expenses remained constant at $1.3 million for the First Quarter
of 1996 and 1997, as a percentage of net sales they increased from 9.0% in the
First Quarter of 1996 to 10.5% in the First Quarter of 1997. Transportation
expenses per barrel sold increased from $15.05 per barrel in the First Quarter
of 1996 to $17.07 per barrel in the First Quarter of 1997. These increases on a
percentage of net sales and a per barrel basis were due to costs associated with
the restructuring of the Company's distribution network in California, which was
initiated during the quarter ended December 31, 1996 and continued during the
First Quarter of 1997.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 33.3% from $5.7 million in the First Quarter
of 1996 to $7.6 million in the First Quarter of 1997. Selling, advertising and
promotional expenses as percentage of net sales increased from 39.7% in the
First Quarter of 1996 to 62.7% in the First Quarter of 1997. Selling,
advertising and promotional expenses per barrel sold increased from $65.44 in
the First Quarter of 1996 to $101.55 in the First Quarter of 1997. The increases
were attributable to higher discounts and incentives to distributors, increased
headcount and payroll expenditures, partially offset by decreased point-of-sale
material and development expenditures.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 90.9% from $1.1 million in the First Quarter of 1996 to $2.1 million
in the First Quarter of 1997. General and administrative expenses as a
percentage of net sales increased from 7.9% in the First Quarter of 1996 to
17.4% in the First Quarter of 1997. General and administrative expenses per
barrel sold increased from $12.98 in the First Quarter of 1996 to $28.19 in the
First Quarter of 1997. The increase in general and administrative expenses
resulted primarily from increased professional service fees, increased headcount
and payroll expenditures, and the write-off of an uncollectable receivable from
a former supplier.
WRITE-OFF OF BREWERY START-UP. During the First Quarter of 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 brewery project. No such charges were incurred during the First Quarter
of 1996 and no additional charges are expected during the remainder of 1997.
INTEREST INCOME. Interest income decreased $49,000 from $371,000 in the First
Quarter of 1996 to $322,000 in the First Quarter of 1997. The decrease reflected
decreased earnings from investment due to a reduction in the amount of cash and
cash equivalents and available for sale securities when compared to the First
Quarter of 1996.
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<PAGE> 12
INCOME TAX PROVISION. The Company accounts for income taxes using the deferral
method of accounting for tax assets and liabilities. Income taxes in the First
Quarter of 1997 were below the federal statutory rate (34%) as a result of
non-taxable income offset by state taxes and non-deductible expenses in the
First Quarters of 1997 and 1996.
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
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. In addition,
historical growth rates should not be considered indicative of future sales
growth, if any, or of future operating results. There can be no assurance that
the Company's sales will grow or be sustained in future periods or that the
Company will remain profitable in any future period.
DEPENDENCE ON STROH. The Company relies upon Stroh at all phases of the
production of its beers, including sourcing and purchasing the ingredients used
to make the Company's beer, scheduling production to meet delivery requirements,
brewing and packaging the Company's beers, performing quality control and
assurance, invoicing distributors upon shipment, collecting and remitting
payments to the Company and performing regulatory compliance. The Company's
business, results of operations and financial condition would be materially
adversely affected if Stroh were unable, for any reason, to meet the Company's
delivery commitments or if beer brewed at Stroh breweries failed to satisfy the
Company's quality requirements. If the Company's ability to obtain product from
the Stroh breweries were interrupted or impaired for any reason, the Company
would not be able to establish an alternative production source, nor would the
Company be able to develop its own production capabilities, without substantial
disruption to the Company's operations. Any inability to obtain adequate
production of the Company's beers on a timely basis or any other circumstance
that would require the Company to seek alternative sources of supply would delay
shipments of the Company's product, which could damage relationships with the
Company's current and
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<PAGE> 13
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 other beer and beverage companies
not only for consumer acceptance and loyalty but also for shelf and tap space in
retail establishments and for marketing focus by the Company's distributors and
their customers, all of which also distribute and sell other beers and alcoholic
beverage products. Increased competition has in the past and could in the future
result in price reductions, reduced margins and loss of market share, all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON DISTRIBUTORS. The Company is dependent upon its distributors to
sell the Company's products and to assist the Company in promoting market
acceptance of, and creating demand for, the Company's products. During the
second half of 1996, the Company transitioned to a new wholesale distribution
network in California, Colorado, and Washington, D.C. Previously, the Company
had relied on a single or limited number of distributors in these key markets.
The transition of the Company's distribution from a single or limited number of
distributors to in excess of 30 new distributors adversely impacted the
Company's level of revenues and profitability in the Fourth Quarter of 1996. The
Company expects that the transition of the distribution network in these key
markets will continue to impact the Company's business, financial condition and
results of 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.
-13-
<PAGE> 14
PRODUCT CONCENTRATION. The sale of a limited number of beers has accounted for
substantially all of the Company's sales since inception. The Company believes
that the sale of its currently offered beers will continue to account for a
significant portion of sales for the foreseeable future. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of these beers.
There can be no assurance that the Company's beers will continue to achieve
market acceptance. A decline in the demand for any of the Company's beers as a
result of competition, changes in consumer tastes and preferences, government
regulation or other factors would have a material adverse effect on the
Company's business, operating results and financial condition.
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 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. In
addition, the Company is currently conducting a search to select a new Chief
Executive Officer. The Company's future success will depend, in part, on the
ability of its current and future executive officers to operate effectively,
both independently and as a group.
-14-
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $5.3 million in the First
Quarter of 1997 as compared to a decrease of $19.8 million in the First Quarter
of 1996. The Company used $8.4 million in cash from operations in the First
Quarter of 1997 as compared to a use of $6.5 million for the First Quarter of
1996. The increase in the uses of cash from operations from the First Quarter of
1996, resulted primarily from the $2.8 million net loss recognized during the
First Quarter of 1997.
The Company's principal investing activities consisted of the sale of available
for sale securities in the First Quarter of 1997. During the First Quarter of
1996, the principal investing activity was the purchase of available for sale
securities of $13.0 million.
The were no significant financing activities in the First Quarter of 1997 or
1996.
As described under "Overview," the Company has recently determined not to go
forward with previously disclosed plans to construct and equip a new brewery in
California. The financial resources previously earmarked to finance capital
expenditures in connection with the construction of the brewery will be used for
general corporate purposes, including to meet working capital needs, pending the
Company's analysis, currently underway, of the alternative uses available to the
Company.
As of March 31, 1997, working capital was $41.3 million as compared with a
working capital of $42.9 million as of March 31, 1996. The decrease was
primarily due to the decrease in cash and cash equivalents and available for
sale securities, offset by a reduction in trade accounts payable and accrued
expenses. 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.
-15-
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
11.1 COMPUTATION OF PER SHARE EARNINGS
27.1 FINANCIAL DATA SCHEDULE
(B) REPORTS ON FORM 8-K. NO REPORTS ON FORM 8-K WERE FILED
BY THE COMPANY DURING THE QUARTER ENDED MARCH 31, 1997.
-16-
<PAGE> 17
SIGNATURE
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
Dated: May 15, 1997 By /s/ Jeffrey Atkins
-----------------------------------------------
Jeffrey Atkins, Chief Financial Officer
(Principal Financial and Accounting Officer)
-17-
<PAGE> 18
EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.1 Computation of Net Income Per Share
27.1 Financial Data Schedule
<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
months ended
March 31,
-------------------
1997 1996
-------------------
<S> <C> <C>
Weighted average common shares
outstanding for the period............. 10,742 10,627
Common equivalent shares assuming
conversion of stock options and
warrants under the treasury stock
method................................. -0- 398
-------------------
Shares used in per share calculation....... 10,742 11,025
===================
Net income (loss).......................... $ (2,820) $ 466
===================
Net income (loss) per share.............. $ (0.26) $0.04
===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PETE'S
BREWING COMPANY'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED MARCH 31, 1997 AS
SHOWN IN THE 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 14,532
<SECURITIES> 15,937
<RECEIVABLES> 4,418
<ALLOWANCES> 240
<INVENTORY> 4,797
<CURRENT-ASSETS> 50,199
<PP&E> 4,471
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,637
<CURRENT-LIABILITIES> 8,934
<BONDS> 0
0
0
<COMMON> 48,555
<OTHER-SE> (80)
<TOTAL-LIABILITY-AND-EQUITY> 57,637
<SALES> 12,204
<TOTAL-REVENUES> 12,204
<CGS> 6,233
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 10,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,190)
<INCOME-TAX> (1,370)
<INCOME-CONTINUING> (2,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,820)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
