<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 quarterly period ended March 31, 1998 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)
<TABLE>
<S> <C>
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)
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Registrant's telephone number, including area code: (650) 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 27, 1998, registrant had outstanding 10,819,729 shares of
Common Stock.
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<TABLE>
PETE'S BREWING COMPANY
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<S> <C> <C>
Facing Sheet............................................. 1
Index .................................................. 2
Part I. Financial Information
Item 1. a) Consolidated balance sheets at March 31, 1998
and December 31, 1997............................. 3
b) Consolidated statements of operations for the three
month periods ended March 31, 1998 and 1997...... 4
c) Consolidated statements of cash flows for the three
month periods ended March 31, 1998 and 1997...... 5
e) Notes to consolidated financial statements........ 6
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 . . . . . . 16
Part II. Other Information
Item 2. Use of Proceeds.......................................... 16
Item 6. a) Exhibits.............................................. 16
b) Reports on Form 8-K................................... 16
Signature................................................ 17
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ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................................. $19,050 $18,841
Available for sale securities .......................................... 8,283 12,358
Trade accounts receivable, net ......................................... 2,928 1,396
Inventories ............................................................ 2,295 2,617
Prepaid expenses and other current assets .............................. 1,540 1,189
Tax refund receivable .................................................. 2,074 2,074
Deferred taxes ......................................................... 1,140 1,140
-------- --------
Total current assets ............................................... 37,310 39,615
Property and equipment, net ............................................... 4,351 4,056
Deferred taxes ............................................................ 4,120 3,125
Other assets .............................................................. 2,728 2,960
-------- --------
$48,509 $49,756
======== ========
LIABILITIES
Current liabilities:
Trade accounts payable ................................................. $1,826 $1,433
Accrued expenses ....................................................... 2,346 2,189
-------- --------
Total current liabilities ............................................ 4,172 3,622
Deferred taxes ......................................................... 662 662
-------- --------
Total liabilities ............................................... 4,834 4,284
-------- --------
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:
10,817 at March 31, 1998 and 10,815 at December 31, 1997 ............... 48,811 48,803
Unrealized gain (loss) on available for sale securities ................... (14) 14
Accumulated deficit ....................................................... (5,122) (3,345)
-------- --------
Total shareholders' equity ......................................... 43,675 45,472
-------- --------
$48,509 $49,756
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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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,
1998 1997
------- -------
<S> <C> <C>
Sales ................................................... $10,887 $13,531
Less excise taxes............................................ 1,098 1,327
------- -------
Net sales................................................. 9,789 12,204
Cost of goods sold........................................... 5,348 6,233
------- -------
Gross profit.............................................. 4,441 5,971
------- -------
Selling, advertising and
promotional expenses...................................... 5,796 7,647
General and administrative expenses.......................... 1,754 2,123
Write-off of brewery start-up expenses....................... -- 713
------- -------
Total operating expense................................... 7,550 10,483
------- -------
Loss from operations...................................... (3,109) (4,512)
Interest income.............................................. 338 322
------- -------
Loss before income taxes.................................. (2,771) (4,190)
Income tax benefit .......................................... 994 1,370
------- -------
Net loss.................................................. $(1,777) $(2,820)
======= =======
Net loss per share, basic.................................... $ (0.16) $ (0.26)
======= =======
Net loss per share, diluted.................................. $ (0.16) $ (0.26)
======= =======
Shares used in per share calculation, basic.................. 10,817 10,742
======= =======
Shares used in per share calculation, diluted................ 10,817 10,742
======= =======
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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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,
1998 1997
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $(1,777) $(2,820)
Adjustments to reconcile net loss to net cash
used by operations:
Depreciation and amortization ................... 264 1,488
Deferred taxes .................................. (995) (1,370)
Changes in operating assets and liabilities:
Trade accounts receivable .................... (1,532) 3,246
Inventories .................................. 322 (366)
Prepaid expenses and other current assets .... (351) (3,011)
Accounts payable and accrued expenses ........ 550 (5,615)
-------- --------
Net cash used by operations ................ (3,519) (8,448)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............... (439) (263)
Purchases of available for sale securities ........ (24,692) (1,477)
Proceeds from sale of available for sale securities 28,739 4,940
Additions to other assets ......................... 112 (38)
-------- --------
Net cash provided by investing activities .. 3,720 3,162
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common shares ......................... 8 4
-------- --------
Net cash provided by financing activities .. 8 4
-------- --------
Net increase (decrease) in cash and
cash equivalents ......................... 209 (5,282)
CASH AND CASH EQUIVALENTS:
Beginning of period ............................... 18,841 19,814
-------- --------
End of period ..................................... $19,050 $14,532
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
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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 8 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, 1997 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, 1998 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 Stroh at all phases of the production of its beers,
for access to contracted facilities, and the performance of services under
the manufacturing services agreement, including sourcing and purchasing the
ingredients used to make the Company's beer, scheduling production to meet
delivery requirements, brewing and packaging the Company's beers, performing
quality control and assurance, invoicing distributors upon shipment,
collecting and remitting payments to the Company and performing regulatory
compliance. The Company's relationship with Stroh is therefore
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PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
CERTAIN RISKS, CONTINUED:
critical to the Company's business, operating results and financial
condition. The Company's dependance on Stroh entails a number of significant
risks. The Company's business, results of operations and financial condition
would be materially adversely affected if Stroh were unable, for any reason,
to provide contracted access to capacity or fail to perform according to the
provisions of its manufacturing services agreement.
AVAILABLE FOR SALE SECURITIES:
Available for sale securities consist of U.S. and municipal government
obligations and corporate securities with maturities of more than thirty
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:
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1,
1998. This statement requires the disclosure of comprehensive income and its
components in a full set of general-purpose financial statements.
Comprehensive income is defined as net income plus revenues, expenses, gains
and losses that, under generally accepted accounting principles, are excluded
from net income. The components of comprehensive income which are excluded
from net income are not significant, individually or in aggregate, and
therefore, no separate statement of comprehensive income has been presented.
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PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS, CONTINUED:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." ("SFAS 131"), which supercedes Statement
of Financial Accounting Standards, "Financial Reporting for Segments of a
Business Enterprise" ("SFAS 14"). SFAS 131 changes current practice under
SFAS 14 by establishing a new framework on which to base segment reporting
and also requires interim reporting of segment information. This statement is
effective for fiscal years beginning after December 15, 1997. The statement's
interim reporting disclosures are not required until the first quarter
immediately subsequent to the fiscal year in which SFAS 131 is effective.
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):
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<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
Trade accounts receivable................ $ 4,939 $ 3,679
Less allowance for credit notes.......... 1,874 2,099
Less allowance for doubtful accounts..... 137 184
--------- --------
$ 2,928 $ 1,396
======= =======
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3. INVENTORIES:
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<CAPTION>
Inventories are as follows (in thousands): March 31, December 31,
1998 1997
-------- -----------
<S> <C> <C>
Finished goods....................... $ 369 $ 651
Beer in progress..................... 660 407
Promotional material................. 1,266 1,559
--------- -------
$ 2,295 $ 2,617
======== =======
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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
statements under "Factors Affecting Future Operating Results," and the statement
in the last paragraph under "Liquidity and Capital Resources" regarding the
sufficiency of the Company's available resources to meet working capital and
capital expenditure requirements.
OVERVIEW
Pete's Brewing Company ("the Company") was incorporated in California in 1986.
The Company markets its beers in 49 states, the District of Columbia and the
United Kingdom through independent beverage distributors that sell to retail
establishments that sell to consumers.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty. The Company intends to continue to devote substantial resources toward
selling, advertising and promotional activities, particularly as it focuses on
expanding retail distribution. The Company's profitability is significantly
impacted by the timing and level of expenditures related to selling, advertising
and promotion.
Since its inception, the Company has made an ongoing analysis of the most
cost-effective method to produce its beers. Given the geographic dispersion of
sales throughout the United States, the Company has determined that a strategy
of utilizing excess capacity of strategically located independent breweries to
custom brew its beers, under the Company's on-site supervision and pursuant to
the Company's proprietary recipes, is the most cost-effective.
In 1995, the Company entered into a nine-year Manufacturing Services Agreement
("Agreement") with the Stroh Brewery Company ("Stroh") of Detroit, Michigan.
Under the Agreement, the Company utilizes the Seattle, Washington 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.
As a result of competitive market factors and other factors described under
"Results of Operations," the Company realized a net loss during the three months
ended March 31, 1998 of $1,777,000. The Company currently expects that its net
sales will decline in the three month period ending June 30, 1998 when compared
to the three months ended June 30, 1997. Thereafter, the Company expects that
net sales for the remaining six months of 1998 will increase when compared to
the comparable six-month period of 1997. The Company expects to operate at a
small loss for the second quarter and to return to profitability during the
third quarter of 1998. These projections are significantly dependent on the
success of the Company's new product, Pete's ESP Lager, which was launched at
the beginning of the second quarter of 1998.
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<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
----- -----
<S> <C> <C>
Sales ................................... 111.2% 110.9%
Less excise taxes........................... 11.2 10.9
----- -----
Net sales................................ 100.0 100.0
Cost of goods sold.......................... 54.6 51.1
----- -----
Gross profit............................. 45.4 48.9
----- -----
Selling, advertising and promotional expenses 59.2 62.7
General and administrative expenses......... 17.9 17.4
Write-off of brewery start-up expenses...... 0.0 5.8
----- -----
Total operational expenses............... 77.1 85.9
----- -----
Loss from operations..................... (31.7) (37.0)
Interest income............................. 3.5 2.6
----- -----
Loss before income taxes................. (28.2) (34.4)
Income tax benefit ......................... 10.2 11.3
----- -----
Net loss................................. (18.0)% (23.1)%
===== =====
</TABLE>
The following table sets forth certain items from the Company's consolidated
statements of operations on a per barrel sold basis for the periods indicated:
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Sales........................................ $178.18 $179.69
Less excise taxes............................ 17.97 17.62
----- -----
Net sales................................. 160.21 162.07
Cost of goods sold........................... 87.53 82.78
----- -----
Gross profit.............................. 72.68 79.29
----- -----
Selling, advertising and promotional expenses 94.86 101.55
General and administrative expenses.......... 28.71 28.19
Write-off of brewery start-up expenses....... 0.00 9.47
---- ----
Total operational expenses................ 123.57 139.21
------ ------
Loss from operations...................... (50.89) (59.92)
Interest income.............................. 5.53 4.28
---- ----
Loss before income taxes.................. (45.36) (55.64)
Income tax benefit .......................... 16.27 18.19
----- -----
Net loss.................................. $ (29.09) $ (37.45)
======== ========
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THREE MONTHS ENDED MARCH 31, 1998 AND 1997
SALES. Sales decreased by 19.5% from $13.5 million in the three months ended
March 31, 1997 ("the First Quarter of 1997") to $10.9 million in the three
months ended March 31, 1998 ("the First Quarter of 1998"). Sales volume
decreased 18.9% from 75,300 barrels sold in the First Quarter of 1997 to 61,100
barrels sold in the First Quarter of 1998. The decrease in sales was primarily
attributable to decreased sales volume in existing markets as a result of a
decline in depletions, which are wholesaler reported shipments from wholesale to
retail. Sales per barrel decreased from $179.69 in the First Quarter of 1997 to
$178.18 in the First Quarter of 1998. 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 First Quarter of 1998 when compared to the
First Quarter of 1997.
EXCISE TAXES. Federal and state excise taxes decreased by 17.3% from $1.3
million in the First Quarter of 1997 to $1.1 million in the First Quarter of
1998. Excise taxes as a percentage of net sales increased from 10.9% to 11.2%.
Excise taxes per barrel sold increased from $17.62 in the First Quarter of 1997
to $17.97 in the First Quarter of 1998. 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 1998 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 1998 and to a lessor extent, changes in
the sales mix between states and state excise tax rates.
COST OF GOODS SOLD. Cost of goods sold decreased 14.2% from $6.2 million in the
First Quarter of 1997 to $5.3 million in the First Quarter of 1998 reflecting
the decrease in volume of beer sold. Cost of goods sold as a percentage of net
sales increased from 51.1% in the First Quarter of 1997 to 54.6% in the First
Quarter of 1998. Cost of goods sold per barrel sold increased from $82.78 in the
First Quarter of 1997 to $87.53 in the First Quarter of 1998. 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 15.3% from $1.3
million in the First Quarter of 1997 to $1.1 million in the First Quarter of
1998. Transportation expenses as a percentage of net sales increased from 10.5%
in the First Quarter of 1997 to 10.8% in the First Quarter of 1998.
Transportation expenses per barrel sold increased from $17.07 per barrel in the
First Quarter of 1997 to $17.35 per barrel in the First Quarter of 1998. The
increase in transportation expenses as a percentage of net sales and on a per
barrel basis were primarily due to changes in the sales mix between states
during the First Quarter of 1998 when compared to the First Quarter of 1997.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses decreased by 24.2% from $7.6 million in the First Quarter
of 1997 to $5.8 million in the First Quarter of 1998. The decrease is primarily
due to reduced advertising costs and lower discounts to wholesalers resulting
from lower depletions. Selling, advertising and promotional expenses as
percentage of net sales decreased from 62.7% in the First Quarter of 1997 to
59.2% in the First Quarter of 1998. Selling, advertising and promotional
expenses per barrel sold decreased from $101.55 in the First Quarter of 1997 to
$94.86 in the First Quarter of 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased 17.4% from $2.1 million in the First Quarter of 1997 to $1.8 million
in the First Quarter of 1998. General and administrative expenses as a
percentage of net sales increased from 17.4% in the First Quarter of 1997 to
17.9% in the First Quarter of 1998. General and administrative expenses per
barrel sold increased from $28.19 in the First Quarter of 1997 to $28.71 in the
First Quarter of 1998. The decrease in general and administrative expenses
resulted primarily from decreased professional service fees, bad debt expense
and reductions in corporate meeting expenses.
INTEREST INCOME. Interest income, increased $16,000 from $322,000 in the First
Quarter of 1997 to $338,000 in the First Quarter of 1998. This increase
reflected increased earnings from investment due to a change in the
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<PAGE> 12
Company's investment strategy during the First Quarter of 1998.
INCOME TAX BENEFIT. The Company accounts for income taxes using the deferral
method of accounting for tax assets and liabilities. The income tax benefit
takes into account the effects of state income taxes, and non-deductible
expenses offset by non-taxable income. The income tax benefit during the First
Quarter of 1998 was above the federal statutory rate (34%) as a result of state
taxes and non-deductible expenses and was below the federal statutory rate (34%)
during the First Quarter of 1997 as a result of state taxes and non-deductible
expenses offset by non-taxable income.
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.
For example, in September 1997, the Company recorded a $1.4 million charge to
earnings for the write-off of obsolete promotional materials. In addition, the
Company's decision to undertake a significant media advertising campaign could
substantially increase the Company's expenses in a particular quarter, while any
increase in sales from such advertising may be realized in subsequent periods.
The Company believes that quarterly sales and operating results are likely to
vary significantly in the future and that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as indicators of future performance. In addition, historical growth rates
should not be considered indicative of future sales growth, if any, or of future
operating results. There can be no assurance that the Company's sales will grow
or be sustained in future periods or that the Company will remain profitable in
any future period.
DEPENDENCE ON STROH. The Company relies upon Stroh at all phases of the
production of its beers, for access to contracted facilities, and the
performance of services under the manufacturing services agreement, including
sourcing and purchasing the ingredients used to make the Company's beer,
scheduling production to meet delivery requirements, brewing and packaging the
Company's beers, performing quality control and assurance, invoicing
distributors upon shipment, collecting and remitting payments to the Company and
performing regulatory compliance. The Company's business, results of operations
and financial condition would be materially adversely affected if Stroh were
unable, for any reason, to meet the Company's delivery commitments or if beer
brewed at Stroh breweries failed to satisfy the Company's quality requirements.
During November 1997 Stroh closed its brewery in St. Paul, Minnesota, where the
Company produced a significant portion of its beer. The Company's
management along with the management of Stroh is implementing a plan to
transition the production of the Company's beer to other Stroh breweries. In
addition, the Company is currently working with Stroh to develop
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<PAGE> 13
a long term, multi-plant sourcing plan to provide cost effective production of
its beers. If the Company's ability to obtain product from the Stroh breweries
were interrupted or impaired for any reason, the Company would not be able to
establish an alternative production source, nor would the Company be able to
develop its own production capabilities, without substantial disruption to the
Company's operations. Any inability to obtain adequate production of the
Company's beers on a timely basis or any other circumstance that would require
the Company to seek alternative sources of supply would delay shipments of the
Company's product, which could damage relationships with the Company's current
and prospective distributors and retailers, provide an advantage to the
Company's competitors and have a material adverse effect on the Company's
business, financial condition and operating results.
COMPETITION. The Company competes with a variety of domestic and international
brewers, many of whom have significantly greater financial, production,
distribution and marketing resources and a higher level of brand recognition
than the Company. The Company competes with and anticipates competition from
several of the major national brewers, such as Anheuser-Busch, Miller Brewing
Co., and Adolph Coors Co., each of whom has introduced and is marketing fuller
flavored beers designed to compete directly in the craft beer segment of the
domestic beer market in which the Company competes. In addition, the Company
expects that certain of the major national brewers, with their superior
financial resources and established distribution networks, may seek further
participation in the growth of the craft beer market through investment in, or
the formation of, distribution alliances with smaller craft brewers. The
increased participation of the major national brewers will likely increase
competition for market share and heighten price sensitivity within the craft
beer market. In addition, the Company expects continued competition from
imported beer brewers, many of whom have greater financial and marketing
resources, as well as greater brand name recognition, than the Company. The
Company also anticipates increased competition in the craft beer market from
existing craft brewers such as The Boston Beer Company, Inc., Redhook Ale
Brewery, Inc., Sierra Nevada Brewing Co., Pyramid Brewing Co., Anchor Brewing
Co. and new market entrants. In particular, the Company believes that
competition has intensified recently as a result of the proliferation of small
local craft brewers that have introduced and are marketing significant numbers
of products. The Company also competes with 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.
In addition, there is always a risk that the Company's distributors will give
higher priority to the products of other beverage companies, including products
directly competitive with the Company's beers, thus reducing their efforts to
sell the Company's products. In addition, there can be no assurance that the
Company's distributors will devote the resources necessary to provide effective
sales and promotion support to the Company. If one or more of the Company's
significant distributors were to discontinue selling, or decrease the level of
orders for the Company's products, the Company's business would be adversely
affected in the areas serviced by such distributors until the Company retained
replacements. There can be no assurance that the Company would be able to
replace a significant distributor in a timely manner or at all in the event a
distributor were to discontinue selling the Company's products.
PRODUCT CONCENTRATION. The sale of a limited number of beers has accounted for
substantially all of the Company's sales since inception. The Company announced
in January 1998 the discontinuation of four current
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<PAGE> 14
products and the planned 1998 introduction of one new product. The Company
believes that the sale of the remaining beers will continue to account for a
significant portion of sales for the foreseeable future. Therefore, the
Company's future operating results, particularly in the near term, are
significantly dependent upon the continued market acceptance of these beers.
There can be no assurance that the Company's beers will continue to achieve
market acceptance. A decline in the demand for any of the Company's beers as a
result of competition, changes in consumer tastes and preferences, government
regulation or other factors would have a material adverse effect on the
Company's business, operating results and financial condition.
DEVELOPMENT OF NEW PRODUCTS. The craft beer market is highly competitive and
characterized by changing consumer preferences and continuous introduction of
new products. The Company believes that its future growth will depend, in part,
on its ability to anticipate changes in consumer preferences and develop and
introduce, in a timely manner, new beers that adequately address such changes.
There can be no assurance that the Company will be successful in developing,
introducing and marketing new products on a timely and regular basis. If the
Company is unable to introduce new products or if the Company's new products are
not successful, the Company's sales may be adversely affected as customers seek
competitive products.
GOVERNMENT REGULATIONS. The Company's business is highly regulated by federal,
state and local laws and regulations. Such laws and regulations govern licensing
requirements, trade and pricing practices, permitted and required labeling,
advertising, promotion and marketing practices, relationships with distributors
and related matters. Failure on the part of the Company to comply with federal,
state and local regulations could result in the loss or revocation or suspension
of the Company's licenses, permits or approvals and accordingly could have a
material adverse effect on the Company's business. The federal government and
each of the states levy excise taxes on alcoholic beverages, including beer.
Increases in excise taxes on beer, if enacted, could materially and adversely
affect the Company's financial condition and results of operations. Certain
states and local jurisdictions have adopted restrictive beverage packaging laws
and regulations that require deposits on beverage containers. Congress and a
number of additional state and local jurisdictions may adopt similar legislation
in the future, and in such event, the Company may be required to incur
significant expenditures in order to comply with such legislation. Changes to
federal and state excise taxes on beer 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, during 1997 the Company
hired several key executive officers to supplement its management team. The
Company's future success will depend, in part, on the ability of its executive
officers to operate effectively, both independently and as a group.
YEAR 2000 ISSUES. The Company has conducted a comprehensive review of its
computer systems to identify the systems that could be affected by the "Year
2000" issue and is developing an implementation plan to resolve the issue. The
Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or
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<PAGE> 15
miscalculations. The Company presently believes that, with modifications to
existing software and converting to new software, the Year 2000 problem will not
pose significant operational problems for the Company's computer systems as so
modified and converted. However, if such modifications and conversions are not
completed timely, or significant Year 2000 problems are not timely detected, the
Year 2000 problem may have a material impact on the operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents increased by $209,000 in the First
Quarter of 1998 as compared to a decrease of $5.3 million in the First Quarter
of 1997. The Company used $3.5 million in cash from operations in the First
Three Months of 1998 as compared to a use of $8.4 million for the First Quarter
of 1997. The decrease in the uses of cash from operations from the First Quarter
of 1997 resulted primarily from the reduced net loss recognized during the First
Quarter of 1998 versus 1997 and the payment of unusually high accounts payables
and accrued expenses during the First Quarter of 1997. The unusually high
balances of accounts payables and accrued expenses at December 31,1997 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 Quarters of 1998 and 1997.
The only significant financing activities in the First Quarter of 1998 and 1997
was the issuance of Common Stock to employees of the Company under the Company's
employee stock purchase plan which provided $4,000 of cash flow in 1997 and
$8,000 in 1998.
As of March 31, 1998, working capital was $33.1 million as compared with working
capital of $41.3 million as of March 31, 1997. The decrease was primarily due to
the decrease in available for sale securities and accounts receivable, offset by
an increase in accounts receivable. 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.
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<PAGE> 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE.
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 10-K for the period
ended December 31, 1997, the Company used net proceeds in the amounts noted for
the following purposes: temporary investments in liquid instruments such as
auction rate receipts, treasury notes and market rate preferreds $25,299,000.
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 MARCH 31, 1998.
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<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 8, 1998 By: /s/ Jeffrey A. Atkins
----------------------
Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 18
EXHIBIT INDEX
11.1 Computation of Per Share Earnings
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,
-------------------
1998 1997
------ ------
<S> <C> <C>
Weighted average common shares
outstanding for the period........... 10,817 10,742
Common equivalent shares assuming
conversion of stock options and
warrants under the treasury stock
method............................... -0- -0-
Shares used in per share calculation..... 10,817 10,742
====== ======
Net loss ............................ $(1,777) $ (2,820)
======== =========
Net loss per share....................... $ (0.16) $ (0.26)
======== ========
</TABLE>
-18-
<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 1998 AS
SHOWN IN THE 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,050
<SECURITIES> 8,283
<RECEIVABLES> 2,928
<ALLOWANCES> 137
<INVENTORY> 2,295
<CURRENT-ASSETS> 37,310
<PP&E> 4,351
<DEPRECIATION> 0
<TOTAL-ASSETS> 48,509
<CURRENT-LIABILITIES> 4,172
<BONDS> 0
0
0
<COMMON> 48,811
<OTHER-SE> (14)
<TOTAL-LIABILITY-AND-EQUITY> 48,509
<SALES> 9,789
<TOTAL-REVENUES> 9,789
<CGS> 5,348
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,771)
<INCOME-TAX> 994
<INCOME-CONTINUING> (1,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,777)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
