<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 third quarterly period ended
September 30, 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
incorporation or organization) Identification Number)
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 October 31, 1997, registrant had outstanding 10,813,473 shares of
Common Stock.
<PAGE> 2
PETE'S BREWING COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<S> <C> <C>
Facing Sheet................................................... 1
Index ........................................................ 2
Part I. Financial Information
Item 1. a) Consolidated balance sheets at September 30, 1997
and December 31, 1996................................... 3
b) Consolidated statements of operations for the three
month periods ended September 30, 1997 and 1996......... 4
c) Consolidated statement of operations for the nine
month periods ended September 30, 1997 and 1996......... 5
d) Consolidated statements of cash flows for the nine
month periods ended September 30, 1997 and 1996......... 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............ 18
Part II. Other Information
Item 2. Use of Proceeds................................................ 18
Item 6. a) Exhibits.................................................... 18
b) Reports on Form 8-K......................................... 18
Signature...................................................... 19
</TABLE>
-2-
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
----------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996(1)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 12,078 $ 19,814
Available for sale securities ........................ 14,453 19,420
Trade accounts receivable, net ....................... 3,840 7,664
Inventories .......................................... 4,083 4,431
Prepaid expenses and other current assets ............ 4,931 4,046
Deferred taxes ....................................... 5,333 2,088
-------- --------
Total current assets ............................. 44,718 57,463
Property and equipment, net ............................. 4,189 5,112
Other assets ............................................ 3,342 3,513
-------- --------
$ 52,249 $ 66,088
======== ========
LIABILITIES
Current liabilities:
Trade accounts payable ............................... $ 2,072 $ 5,299
Accrued expenses ..................................... 3,156 9,250
-------- --------
Total current liabilities .......................... 5,228 14,549
Deferred tax liability ............................... 228 228
-------- --------
Total liabilities ............................. 5,456 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:
10,796 September 30, 1997 and 10,733 December 31, 1996 48,711 48,551
Unrealized gain on securities available for sale ........ 12 11
Retained earnings (deficit) ............................. (1,930) 2,749
-------- --------
Total shareholders' equity ....................... 46,793 51,311
-------- --------
$ 52,249 $ 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.
-3-
<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
September 30,
1997 1996
-------- --------
<S> <C> <C>
Sales ...................................... $ 14,308 $ 21,709
Less excise taxes .......................... 1,472 2,040
-------- --------
Net sales ............................... 12,836 19,669
Cost of goods sold ......................... 6,396 9,349
-------- --------
Gross profit ............................ 6,440 10,320
-------- --------
Selling, advertising and
promotional expenses .................... 7,558 8,830
General and administrative expenses ........ 1,714 1,346
-------- --------
Total operating expense ................. 9,272 10,176
-------- --------
Income (loss) from operations ........... (2,832) 144
Interest income ............................ 250 350
-------- --------
Income (loss) before income taxes ....... (2,582) 494
Income tax benefit (provision) ............. 624 (164)
-------- --------
Net income (loss) ....................... $ (1,958) $ 330
======== ========
Net income (loss) per share ................ $ (0.18) $ 0.03
======== ========
Shares used in per share calculation ....... 10,790 10,787
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated 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 nine months ended
September 30,
1997 1996
-------- --------
<S> <C> <C>
Sales ...................................... $ 48,064 $ 57,074
Less excise taxes .......................... 4,847 5,521
-------- --------
Net sales ............................... 43,217 51,553
Cost of goods sold ......................... 22,323 25,160
-------- --------
Gross profit ............................ 20,894 26,393
-------- --------
Selling, advertising and
promotional expenses .................... 22,449 21,157
General and administrative expenses ........ 6,190 3,773
Write-off of brewery start up .............. 713 0
-------- --------
Total operating expense .................... 29,352 24,930
-------- --------
Income (loss) from operations ........... (8,458) 1,463
Interest income ............................ 838 1,053
-------- --------
Income (loss) before income taxes ....... (7,620) 2,516
Income tax benefit (provision) ............. 2,941 (839)
-------- --------
Net income (loss) ....................... $ (4,679) $ 1,677
======== ========
Net income (loss) per share ................ $ (0.43) $ 0.15
======== ========
Shares used in per share calculation ....... 10,767 10,856
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE> 6
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
----------
<TABLE>
<CAPTION>
For the nine months ended
September 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $ (4,679) $ 1,677
Adjustments to reconcile net income (loss) to net cash
used by operations:
Depreciation and amortization .......................... 2,721 893
Deferred taxes ......................................... (3,245) --
Changes in operating assets and liabilities:
Trade accounts receivable ........................... 3,824 (3,731)
Inventories ......................................... 348 (2,780)
Prepaid expenses and other current assets ........... (885) (4,461)
Accounts payable and accrued expenses ............... (9,321) 3,417
-------- --------
Net cash used by operations ....................... (11,237) (4,985)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ...................... (459) (2,454)
Purchases of available for sale securities ............... (10,599) (24,052)
Proceeds from sale of available for sale securities ...... 15,567 --
Additions to other assets ................................ (1,168) (757)
-------- --------
Net cash provided by (used in) investing activities 3,341 (27,263)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares ................................ 160 240
-------- --------
Net cash provided by financing activities ......... 160 240
-------- --------
Net decrease in cash and
cash equivalents ................................ (7,736) (32,008)
CASH AND CASH EQUIVALENTS:
Beginning of period ...................................... 19,814 42,960
-------- --------
End of period ............................................ $ 12,078 $ 10,952
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<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 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:
INTERIM FINANCIAL DATA:
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information or footnote
disclosure normally included in the financial statements prepared in
accordance with the generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. The unaudited
financial statements 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. These financial
statements should be read in conjunction with the Company's audited
consolidated financial statements as included in the Company's Annual
Reports on Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission. The interim results presented herein are
not necessarily indicative of the results of operations that may be expected
for the full fiscal year ending December 31, 1997 or any future periods.
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 were 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.
-7-
<PAGE> 8
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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.
-8-
<PAGE> 9
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. TRADE ACCOUNTS RECEIVABLE: Trade accounts receivable are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996(1)
------------- ------------
(unaudited)
<S> <C> <C>
Trade accounts receivable............... $5,312 $9,918
Less allowance for credit notes......... 1,301 2,115
Less allowance for doubtful accounts.... 171 139
------ ------
$3,840 $7,664
====== ======
</TABLE>
3. INVENTORIES:
Inventories are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996(1)
------------- ------------
(unaudited)
<S> <C> <C>
Finished goods........................ $ 532 $ 972
Beer in progress...................... 1217 799
Promotional material.................. 2,334 2,660
------ ------
$4,083 $4,431
====== ======
</TABLE>
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of December 31, 1996.
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 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
-9-
<PAGE> 10
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 produces a significant portion of its beer.
The closure of this production facility is expected to be 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
analysis, currently underway, of the alternative uses available to the Company.
See "Liquidity and Capital Resources." During the nine months ended September
30, 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
-10-
<PAGE> 11
Company's earnings in the nine months ended September 30, 1997.
During September 1997, the Company recognized the write-off of promotional
inventories of $1.4 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, continuing efforts to reduce
wholesale inventories and other factors described under "Results of Operations,"
the Company realized a net loss during the three months ended September 30, 1997
of $1,958,000.
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 Nine months ended
September 30, September 30,
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Sales....................................... 111.5% 110.4% 111.2% 110.7%
Less excise taxes........................... 11.5 10.4 11.2 10.7
----- ----- ----- -----
Net sales................................ 100.0 100.0 100.0 100.0
Cost of goods sold.......................... 49.8 47.5 51.7 48.8
----- ----- ----- -----
Gross profit............................. 50.2 52.5 48.3 51.2
----- ----- ----- -----
Selling, advertising and promotional expenses 58.9 44.9 51.9 41.0
General and administrative expenses......... 13.4 6.9 14.3 7.3
Write-off of brewery start-up............... 0.0 0.0 1.6 0.0
----- ----- ----- -----
Total operational expenses............... 72.3 51.8 67.8 48.3
----- ----- ----- -----
Income (loss) from operations............ (22.1) 0.7 (19.5) 2.9
Interest income............................. 1.9 1.8 1.9 2.0
----- ----- ----- -----
Income (loss) before income taxes........ (20.2) 2.5 (17.6) 4.9
Income tax benefit (provision).............. 4.9 (0.8) 6.8 (1.6)
----- ----- ----- -----
Net income (loss)........................ (15.3)% 1.7% (10.8%) 3.3%
===== ===== ===== =====
</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 Nine months ended
September 30, September 30
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales........................................ $181.80 $186.50 $179.81 $182.99
Less excise taxes............................ 18.70 17.53 18.13 17.70
------- ------- ------- -------
Net sales................................. 163.10 168.97 161.68 165.29
Cost of goods sold........................... 81.27 80.32 83.51 80.67
------- ------- ------- -------
Gross profit.............................. 81.83 88.65 78.17 84.62
------- ------- ------- -------
Selling, advertising and promotional expenses 96.03 75.86 83.98 67.83
General and administrative expenses.......... 21.78 11.56 23.16 12.10
Write-off of brewery start-up................ 0.00 0.00 2.67 0.00
------- ------- ------- -------
Total operational expenses................ 117.81 87.42 109.81 79.93
------- ------- ------- -------
Income (loss) from operations............. (35.98) 1.23 (31.64) 4.69
</TABLE>
-11-
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
Interest income.............................. 3.17 3.01 3.14 3.38
------- ------- ------- -------
Income (loss) before income taxes......... (32.81) 4.24 (28.50) 8.07
Income tax benefit (provision)............... 7.93 (1.41) 11.00 (2.69)
------- ------- ------- -------
Net income (loss)......................... $(24.88) $ 2.83 $(17.50) $ 5.38
======= ======= ======= =======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
SALES. Sales decreased by 34.1% from $21.7 million in the three months ended
September 30, 1996 ("the Third Quarter of 1996") to $14.3 million in the three
months ended September 30, 1997 ("the Third Quarter of 1997"). Sales volume
decreased 32.4% from 116,400 barrels sold in the Third Quarter of 1996 to 78,700
barrels sold in the Third Quarter of 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 $186.50 in the Third Quarter of 1996 to $181.80 in the Third
Quarter of 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 the Third Quarter of 1997 when compared to the Third Quarter of
1996.
EXCISE TAXES. Federal and state excise taxes decreased by 27.8% from $2.0
million in the Third Quarter of 1996 to 1.5 million in the Third Quarter of
1997. Excise taxes as a percentage of net sales increased from 10.4% to 11.5%.
Excise taxes per barrel sold increased from $17.53 in the Third Quarter of 1996
to $18.70 in the Third Quarter of 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 Company 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 31.6% from $9.3 million in the
Third Quarter of 1996 to $6.4 million in the Third Quarter of 1997 reflecting
the decrease in volume of beer sold. Cost of goods sold as a percentage of net
sales increased from 47.5% in the Third Quarter of 1996 to 49.8% in the Third
Quarter of 1997. Cost of goods sold per barrel sold increased from $80.32 in the
Third Quarter of 1996 to $81.27 in the Third 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 costs of production and increased
transportation expenses. Transportation expenses decreased 13.1% from $1.6
million in the Third Quarter of 1996 to $1.4 million in the Third Quarter of
1997. Transportation expenses as a percentage of net sales increased from 8.0%
in the Third Quarter of 1996 to 10.7% in the Third Quarter of 1997.
Transportation expenses per barrel sold increased from $13.55 per barrel in the
Third Quarter of 1996 to $17.40 per barrel in the Third Quarter of 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 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 decreased
-12-
<PAGE> 13
by 14.4% from $8.8 million in the Third Quarter of 1996 to $7.6 million in the
Third Quarter of 1997. The decrease is primarily due to reduced advertising
costs and lower discounts to wholesalers resulting from lower depletions, offset
by the write-off of excess and obsolete point of sale advertising material
inventories. Selling, advertising and promotional expenses as percentage of net
sales increased from 44.9% in the Third Quarter of 1996 to 58.9% in the Third
Quarter of 1997. Selling, advertising and promotional expenses per barrel sold
increased from $75.86 in the Third Quarter of 1996 to $96.03 in the Third
Quarter of 1997. The increases in expenses per barrel and as a percentage of
sales are due to the reduced sales volume and the relative fixed nature of a
significant portion of the selling, advertising and promotional expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 27.3% from $1.3 million in the Third Quarter of 1996 to $1.7 million
in the Third Quarter of 1997. General and administrative expenses as a
percentage of net sales increased from 6.9% in the Third Quarter of 1996 to
13.4% in the Third Quarter of 1997. General and administrative expenses per
barrel sold increased from $11.56 in the Third Quarter of 1996 to $21.78 in the
Third Quarter of 1997. The increase in general and administrative expenses
resulted primarily from increased headcount and payroll expenditures.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, decreased
$100,000 from $350,000 in the Third Quarter of 1996 to $250,000 in the Third
Quarter of 1997. This 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 Third Quarter of 1996.
INCOME TAX BENEFIT (PROVISION). The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
benefit (provision) takes into account the effects of state income taxes, offset
by non-taxable income. The income tax benefit (provision) during the Third
Quarter of 1997 and during the Third Quarter of 1996 was below the federal
statutory rate (34%) as a result of state taxes and non-deductible expenses
offset by non-taxable income in the Third Quarters of 1997 and 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
SALES. Sales decreased by 15.8% from $57.1 million for the nine months ended
September 30, 1996 (the "First Nine Months of 1996") to $48.1 million for the
nine months ended September 30, 1997 (the "First Nine Months of 1997"). Sales
volume decreased 14.3% from 312,000 barrels sold in the First Nine Months of
1996 to 267,000 barrels sold in the First Nine Months of 1997. The decrease in
sales was attributable to reduction in wholesale inventories, a decline in
depletions, which are wholesaler reported shipments from wholesale to retail,
and to competitive market factors as numerous competing products entered the
marketplace. Sales per barrel decreased from $182.99 in the First Nine Months of
1996 to $179.81 in the First Nine Months of 1997.
EXCISE TAXES. Federal and state excise taxes decreased by 12.2% from $5.5
million in the First Nine Months of 1996 to $4.8 million in the First Nine
Months of 1997. Excise taxes as a percentage of net sales increased from 10.7%
for the First Nine Months of 1996 to 11.2% for the First Nine Months of 1997.
Excise taxes per barrel sold increased from $17.70 in the First Nine Months of
1996 to $18.13 in the First Nine Months of 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 Company 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.
-13-
<PAGE> 14
COST OF GOODS SOLD. Cost of goods sold decreased 11.3% from $25.2 million in the
First Nine Months of 1996 to $22.3 million in the First Nine Months of 1997
primarily due to the decrease in volume of beer sold. Cost of goods sold as a
percentage of net sales increased from 48.8% in the First Nine Months of 1996 to
51.7% in the First Nine Months of 1997. Cost of goods sold per barrel sold
increased from $80.67 in the First Nine Months of 1996 to $83.51 in the First
Nine Months of 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.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 6.1% from $21.2 million in the First Nine
Months of 1996 to $22.4 million in the First Nine Months of 1997. Selling,
advertising and promotional expenses as a percentage of net sales increased from
41.0% in the First Nine Months of 1996 to 51.9% in the First Nine Months of
1997. Selling, advertising and promotional expenses per barrel sold increased
from $67.83 in the First Nine Months of 1996 to $83.98 in the First Nine Months
of 1997.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 64.1% from $3.8 million in the First Nine Months of 1996 to $6.2
million in the First Nine Months of 1997. General and administrative expenses as
a percentage of net sales increased from 7.3% in the First Nine Months of 1996
to 14.3% in the First Nine Months of 1997. General and administrative expenses
per barrel sold increased from $12.10 in the First Nine Months of 1996 to $23.16
in the First Nine Months of 1997.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, decreased
$215,000 from $1,053,000 in the First Nine Months of 1996 to $838,000 in the
First Nine Months of 1997.
INCOME TAX BENEFIT (PROVISION). The Company accounts for income taxes using the
deferral method of accounting for tax assets and liabilities. The income tax
benefit (provision) takes into account the effects of state income taxes, offset
by the non-taxable income. The income tax benefit (provision) during the First
Nine Months of 1997 was above and during the First Nine Months of 1996 was below
the federal statutory rate (34%) as a result of state taxes, non-deductible
expenses offset by non-taxable income in both the First Nine Months 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
-14-
<PAGE> 15
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, 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. On September 25, 1997, Stroh announced its
intention to close its brewery in St. Paul, Minnesota, where the Company
produces a significant portion of its beer. The closure of this production
facility is expected to be 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. 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,
-15-
<PAGE> 16
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.
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
-16-
<PAGE> 17
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. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $7.7 million in the First
Nine Months of 1997 as compared to a decrease of $32.0 million in the First Nine
Months of 1996. The Company used $11.2 million in cash from operations in the
First Nine Months of 1997 as compared to a use of $5.0 million for the First
Nine Months of 1996. The increase in the uses of cash from operations from the
First Nine Months of 1996 resulted primarily from the $4.7 million net loss
recognized during the First Nine Months of 1997 and the payment of unusually
high accounts payables and accrued expenses outstanding at December 31, 1996,
offset by the reduction in accounts receivable. The unusually high balances of
accounts payables 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 the First Nine Months of 1997. During the
First Nine Months of 1996, the principal investing activity was the purchase of
available for sale securities of $24.0 million and the purchase of $2.5 million
of capital equipment.
The only significant financing activities in the First Nine Months of 1997 and
1996 was the issuance of
-17-
<PAGE> 18
Common Stock to employees of the Company under the Company's employee stock
purchase plan which provided $240,000 of cash flow in 1996 and $160,000 in 1997.
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.
As of September 30, 1997, working capital was $39.5 million as compared with
working capital of $43.5 million as of September 30, 1996. The decrease was
primarily due to the decrease in cash and cash equivalents, available for sale
securities and accounts receivable, offset by an increase in the current
deferred tax asset and decreases in 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
-18-
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 2: USE OF PROCEEDS
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 SR for the
period ended August 6, 1997, the Company used net proceeds in the amounts noted
for the following purposes: Purchase and installation of machinery and equipment
$124,000; working capital $133,000; and temporary investments in liquid
instruments such as municipal bonds and notes and market rate preferreds
$25,975,000. 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.
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 SEPTEMBER 30, 1997.
<PAGE> 20
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: November 13, 1997 By: /s/ Jeffrey A. Atkins
----------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11.1 Computation of per share earnings
27.1 Financial data schedule
</TABLE>
<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 nine
months ended months ended
September 30, September 30,
----------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding for the period .............. 10,790 10,686 10,767 10,661
Common equivalent shares assuming
conversion of stock options and
warrants under the treasury stock
method .................................. -0- 101 -0- 195
-------- -------- -------- --------
Shares used in per share calculation 10,790 10,787 10,767 10,856
======== ======== ======== ========
Net income (loss)............................ $ (1,958) $ 330 $ (4,679) $ 1,677
======== ======== ======== ========
Net income (loss) per share ................. $ (0.18) $ 0.03 $ (0.43) $ 0.15
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PETE'S
BREWING COMPANY'S FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1997 AS SHOWN IN THE 10-Q FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH __________.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 12,078
<SECURITIES> 14,453
<RECEIVABLES> 3,840
<ALLOWANCES> 171
<INVENTORY> 4,083
<CURRENT-ASSETS> 44,718
<PP&E> 4,189
<DEPRECIATION> 0
<TOTAL-ASSETS> 52,249
<CURRENT-LIABILITIES> 5,228
<BONDS> 0
0
0
<COMMON> 48,711
<OTHER-SE> 12
<TOTAL-LIABILITY-AND-EQUITY> 52,249
<SALES> 43,217
<TOTAL-REVENUES> 43,217
<CGS> 22,323
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,352
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,620)
<INCOME-TAX> (2,941)
<INCOME-CONTINUING> (4,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,679)
<EPS-PRIMARY> (.43)
<EPS-DILUTED> (.43)
</TABLE>
