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,
1996 or
/ / Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
.
COMMISSION FILE NUMBER: 0-26834
PETE'S BREWING COMPANY
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0110743
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
514 HIGH STREET, PALO ALTO, CALIFORNIA 94301
(Address of principal executive office) (zip code)
Registrant's telephone number, including area code: (415) 328-7383
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of October 31, 1996, registrant had outstanding 10,708,414 shares of
Common Stock.
2
PETE'S BREWING COMPANY
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996
INDEX
Facing Sheet.................................................. 1
Index ..................................................... 2
Part I. Financial Information.........................................
Item 1. a) Consolidated balance sheets at September 30, 1996
and December 31, 1995................................... 3
b) Consolidated statements of operations for the three
month period ended September 30, 1996 and 1995.......... 4
c) Consolidated statements of operations for the nine
month period ended September 30, 1996 and 1995.......... 5
d) Consolidated statements of cash flows for the nine
month period ended September 30, 1996 and 1995.......... 6
e) Notes to consolidated financial statements.............. 7
Item 2. Management's discussion and analysis of financial
condition and results of operations........................... 10
Signature..................................................... 17
Item 6. a) Exhibit 11.01, Computation of net income per share......... 19
Exhibit 27.01, Financial data schedule..................... 20
b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during
the quarter ended September 30, 1996.
-2-
3
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(in thousands)
(UNAUDITED)
September 30, December 31,
1996 1995 (1)
------- -------
ASSETS
Current assets:
Cash and cash equivalents .................................. $10,952 $42,960
Available for sale securities .............................. 24,287 --
Trade accounts receivable, net ............................. 6,915 3,184
Inventories ................................................ 5,024 2,244
Prepaid expenses and other current assets .................. 4,982 521
------- -------
Total current assets ................................. 52,160 48,909
Property and equipment, net ................................... 3,635 1,568
Other assets .................................................. 4,024 3,773
------- -------
$59,819 $54,250
======= =======
LIABILITIES
Current liabilities:
Trade accounts payable and accrued expenses ................ $ 8,644 $ 5,227
Total current liabilities ............................ 8,644 5,227
------- -------
Total liabilities ................................. $ 8,644 5,227
------- -------
SHAREHOLDERS' EQUITY
Preferred Shares:
Preferred, no par value: Authorized 5,000 shares;
issued and outstanding: none ............................ -- --
Common shares, no par value:
Authorized: 50,000 shares; Issued and outstanding:
10,695 at September 30, 1996 and 10,621 at December 31, 1995 48,197 47,957
Unrealized gain on securities available for sale .............. 235 --
Retained earnings ............................................. 2,743 1,066
------- -------
Total shareholders' equity ........................... 51,175 49,023
------- -------
$59,819 $54,250
======= =======
(1) The information in this column was derived from the Company's audited
consolidated balance sheet as of December 31, 1995.
The accompanying notes are an integral part of
these consolidated financial statements.
-3-
4
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
For the three months ended
September 30,
1996 1995
-------- --------
Sales .............................. $ 21,709 $ 19,808
Less excise taxes .................. 2,040 1,776
-------- --------
Net sales ....................... 19,669 18,032
Cost of goods sold ................. 9,349 9,199
-------- --------
Gross profit .................... 10,320 8,833
-------- --------
Selling, advertising and
promotional expenses ............ 8,830 5,438
General and administrative expenses 1,346 1,007
Brewery transition charges ......... -- 1,268
-------- --------
Total operating expenses ........ 10,176 7,713
-------- --------
Income from operations .......... 144 1,120
-------- --------
Interest income .................... 350 --
Interest expense ................... -- (52)
-------- --------
Income before income taxes ...... 494 1,068
Income tax provision ............... 164 461
-------- --------
Net income ...................... $ 330 $ 607
======== ========
Net income per share ............... $ 0.03 $ 0.08
======== ========
Shares used in per share calculation 10,787 8,051
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-4-
5
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(UNAUDITED)
For the nine months ended
September 30,
1996 1995
-------- --------
Sales .............................. $ 57,074 $ 46,144
Less excise taxes .................. 5,521 4,156
-------- --------
Net sales ....................... 51,553 41,988
Cost of goods sold ................. 25,160 21,139
-------- --------
Gross profit .................... 26,393 20,849
-------- --------
Selling, advertising and
promotional expenses ............ 21,157 14,792
General and administrative expenses 3,773 3,171
Brewery transition charges ......... -- 1,268
-------- --------
Total operating expenses ........ 24,930 19,231
-------- --------
Income from operations .......... 1,463 1,618
-------- --------
Interest income .................... 1,055 4
Interest expense ................... (2) (153)
-------- --------
Income before income taxes ...... 2,516 1,469
Income tax provision ............... 839 625
-------- --------
Net income ...................... $ 1,677 $ 844
======== ========
Net income per share ............... $ 0.15 $ 0.10
======== ========
Shares used in per share calculation 10,856 8,053
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-5-
6
PETE'S BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
For the nine months ended
September 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 1,677 $ 844
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ................... 893 528
Changes in operating assets and liabilities:
Trade accounts receivable .................... (3,731) (5,133)
Inventories .................................. (2,780) (1,650)
Prepaid expenses and other current assets .... (4,461) (410)
Trade accounts payable and accrued liabilities 3,417 5,029
-------- --------
Net cash used in operations ............... (4,985) (792)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................ (2,454) (529)
Purchase of available for sale securities .......... (24,052) --
Additions to other assets .......................... (757) (784)
-------- --------
Net cash used in investing activities ..... (27,263) (1,313)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable to a shareholder ........ -- --
Revolving credit agreement with bank, net .......... -- 1,089
Issuance of common shares pursuant to option plans . 240 103
-------- --------
Net cash provided by financing activities . 240 1,192
-------- --------
Net (decrease) increase in cash and
cash equivalents ........................ (32,008) (913)
CASH AND CASH EQUIVALENTS:
Beginning of period ................................ 42,960 1,090
-------- --------
End of period ...................................... $ 10,952 $ 177
======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-6-
7
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Pete's Brewing Company (the Company) was incorporated in April 1986 under the
laws of the State of California. The Company is a major domestic specialty
brewer. The Company currently markets ten distinctive full bodied beers in 49
states, the District of Columbia and the United Kingdom.
The following is summary of the Company's significant accounting policies:
INTERIM FINANCIAL DATA (UNAUDITED):
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulation of the
Securities and Exchange Commission. Certain information and footnote
disclosure normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The statements reflect all
adjustments consisting of normal recurring adjustments which are, in the
opinion of management, 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 Report on Form 10-K for the year ended
December 31, 1995. 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, 1996, or for any other 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.
CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially expose the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, available for
sale securities and trade accounts receivable.
The Company's customer base includes primarily beer and wine and spirits
distributors throughout the United States. The Company does not generally
require collateral for its trade accounts receivable and maintains an
allowance for doubtful accounts. The Company maintains cash-equivalent
investments with a brokerage firm and its cash in bank deposit accounts with
a bank. At times, the balances in these accounts may exceed federally insured
limits, if any. The Company has not experienced any losses on such accounts.
AVAILABLE FOR SALE SECURITIES:
Available for sale securities consist of U.S., and municipal government
obligations and corporate securities with maturities of more than 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.
-7-
8
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 reported period.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENTS:
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation," which requires
the Company to establish one of two methods for accounting for stock
transactions with employees and established the criteria for stock
transactions with third parties. The Company is studying the implications of
the statement, and, based on its initial evaluation, does not expect it to
have a material impact on the Company's financial condition or results from
operations.
RECLASSIFICATIONS:
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no impact on previously reported income from operations
or net income.
-8-
9
PETE'S BREWING COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable are as follows (in thousands):
September 30, December 31,
1996 1995
------- -------
Trade accounts receivable .......... $14,236 $ 7,315
Less wholesaler deposits ........... 4,904 2,327
Less allowance for credit notes .... 2,319 1,767
Less allowance for doubtful accounts 98 37
------- -------
$ 6,915 $ 3,184
======= =======
3. INVENTORIES:
Inventories are as follows (in thousands):
September 30, December 31,
1996 1995
------ ------
Finished goods ..................... $1,138 $ 184
Beer in progress ................... 1,022 430
Promotional material................ 2,864 1,630
------ ------
$5,024 $2,244
====== ======
-9-
10
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
last sentence of the first paragraph of "Overview," the sentence in the fourth
paragraph of "Overview" referencing the Company's expectation of achievement of
commercial production at the new brewery, the statements in the analysis of the
three months ended September 30, 1996 and 1995 under "Sales" regarding
expectations for barrel shipments in the fourth quarter and sales per barrel in
the fourth quarter, under "Cost of Goods Sold" regarding the expectation of cost
of sales per barrel in the fourth quarter, under "Selling, Advertising and
Promotional Expenses" regarding the Company's expectations for selling,
advertising and promotional expenses in the fourth quarter, under "General and
Administrative Expenses" regarding expectations for the remainder of 1996, under
"Interest Income (Expense), Net" regarding expectations for interest earnings
throughout 1996 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. Although the Company has established
distribution in 49 states, it has concentrated selling, advertising and
promotional efforts in a limited number of key markets. Seven states are "Core
Markets" and accounted for approximately 50% of the Company's sales in the third
quarter 1996. Accordingly, the Company believes that there is a significant
opportunity for growth on a national basis. The Company intends to devote
significant selling, advertising and promotional expenses to increase its market
share in the other geographic regions of the United States.
Since inception, the Company has made an analysis of the most cost-effective
method to produce its beers. Given the geographic dispersion of sales throughout
the United States, the Company has determined that a strategy of utilizing
excess capacity of a centrally located independent brewery to custom brew its
beers, under the Company's on-site supervision and pursuant to the Company's
proprietary recipes, would be most cost effective.
In 1995, the Company entered into a nine-year Manufacturing Services Agreement
("Agreement") with the Stroh Brewery Company ("Stroh") of Detroit, Michigan.
Under the Agreement, the Company alternates the St. Paul, Minnesota and
Winston-Salem, North Carolina breweries with Stroh. Although Stroh owns the
brewery, the Company supervises the brewing, testing, bottling and kegging of
its beers in accordance with the Company's written specifications and
proprietary recipes. All costs relating to the Agreement are charged to cost of
goods sold. As an alternating brewer, the Company is liable for the payment of
excise taxes to various federal and state agencies upon shipment of beer from
the breweries. The Company takes title to all beer in process and finished
goods, and pays Stroh a manufacturing services fee, equal to the aggregate of a
specific brewing fee and the cost of packaging and raw materials, upon shipment
to distributors.
-10-
11
In 1995, the Company determined that the volume of sales in California justified
the construction of a new brewery. The Company plans to use most of the proceeds
of its initial public offering to construct and equip a new brewery in
California. Management, along with its architect, mechanical engineer, and
general contractor, is currently in the process of completing a final
feasibility study to be approved by the Company's Board of Directors, prior to
the acquisition of land. The Company expects to achieve commerical production
approximately two years after acquiring land.
The Company has historically devoted substantial resources toward selling,
advertising and promotional activities to build consumer awareness and brand
loyalty and support expansion of sales and distribution efforts. The Company
believes that this brand investment has resulted in better recognition of the
Company and its products, better placement on store shelves and increased
distribution of the Company's beers. The Company intends to continue to devote
substantial resources toward selling, advertising and promotional activities,
particularly as it focuses on new geographic regions and introduces new
products. The Company's profitability is significantly impacted by the timing
and level of expenditures related to selling, advertising and promotion.
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:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ ------
Sales .............................. 110.4% 109.8% 110.7% 109.9%
Less excise taxes .................. 10.4 9.8 10.7 9.9
------ ------ ------ ------
Net sales ........................ 100.0 100.0 100.0 100.0
Cost of goods sold ................. 47.5 51.0 48.8 50.3
------ ------ ------ ------
Gross profit ................... 52.5 49.0 51.2 49.7
------ ------ ------ ------
Selling, advertising and promotional
expenses .......................... 44.9 30.2 41.0 35.2
General and administrative expenses 6.9 5.5 7.3 7.6
Brewery transition charges ......... -- 7.0 -- 3.0
------ ------ ------ ------
Total operational expenses ..... 51.8 42.7 48.3 45.8
------ ------ ------ ------
Income from operations ....... 0.7 6.3 2.9 3.9
Interest income (expense), net ..... 1.8 (0.3) 2.0 (0.4)
------ ------ ------ ------
Income before income taxes ... 2.5 6.0 4.9 3.5
Income tax provision ............... 0.8 2.5 1.6 1.5
------ ------ ------ ------
Net income ................. 1.7% 3.5% 3.3% 2.0%
====== ====== ====== ======
-11-
12
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:
Three months ended Nine months ended
September 30, September 30,
1996 1995 1996 1995
-------- -------- -------- --------
Sales .............................. $ 186.50 $ 191.94 $ 182.99 $ 187.35
Less excise taxes .................. 17.53 17.21 17.70 16.87
-------- -------- -------- --------
Net sales ........................ 168.97 174.73 165.29 170.48
Cost of goods sold ................. 80.32 89.14 80.67 85.83
-------- -------- -------- --------
Gross profit ................... 88.65 85.59 84.62 84.65
-------- -------- -------- --------
Selling, advertising and promotional
expenses .......................... 75.86 52.69 67.83 60.06
General and administrative expenses 11.56 9.76 12.10 12.88
Brewery transition charges ......... -- 12.29 -- 5.15
-------- -------- -------- --------
Total operational expenses ..... 87.42 74.74 79.93 78.09
-------- -------- -------- --------
Income from operations ....... 1.23 10.85 4.69 6.56
Interest income (expense), net ..... 3.01 (0.50) 3.38 (0.60)
-------- -------- -------- --------
Income before income taxes ... 4.24 10.35 8.07 5.96
Income tax provision ............... 1.41 4.47 2.69 2.54
-------- -------- -------- --------
Net income ................. $ 2.83 $ 5.88 $ 5.38 $ 3.42
======== ======== ======== ========
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
SALES. Sales increased by 9.6% from $19.8 million in the three months ended
September 30, 1995 ("the Third Quarter of 1995") to $21.7 million in the three
months ended September 30, 1996 ("the Third Quarter of 1996"). Sales volume
increased 12.8% from 103,200 barrels sold in the Third Quarter of 1995 to
116,400 barrels sold in the Third Quarter of 1996. The increase in sales was
primarily attributable to growth in sales volume in existing markets and, to a
lesser extent, increased sales volume resulting from expansion into new
geographic markets. The increased sales volume reflected increased sales of the
Company's new products; Pete's Wicked Pale Ale, Pete's Wicked Strawberry Blonde,
Pete's Wicked Multi Grain and Pete's Wicked Maple Porter, which were introduced
in late June of 1996, offset by the reduced sales of the Company's other
year-round products. The inventory build at wholesale discussed in the Company's
June 30, 1996 form 10-Q has been resolved and the Company expects barrel
shipments to increase between 3% and 5% for the fourth quarter. Sales per barrel
decreased from $191.94 in the Third Quarter of 1995 to $186.50 in the Third
Quarter of 1996. Sales per barrel was higher than expected at $186.50 due to
changes in the mix between bottled and keg beer from the quarter ended June 30,
1996. Sales per barrel is expected to range between $176 and $180 for the fourth
quarter, in anticipation of a higher keg to bottled beer ratio for the fourth
quarter of 1996.
EXCISE TAXES. Federal and state excise taxes increased by 14.9% from $1.8
million in the Third Quarter of 1995 to $2.0 million in the Third Quarter of
1996. Excise taxes as a percentage of net sales increased from 9.8% to 10.4% for
the Third Quarter of 1996. Excise taxes per barrel sold increased from $17.21 in
the Third Quarter of 1995 to $17.53 in the Third Quarter of 1996. The increase
in excise taxes was attributable to the increase in sales volume, since the
excise tax is assessed on a per barrel basis, and to the increased per barrel
excise tax burden as the Company's sales volume for the year surpasses 60,000
barrels. The Company uses an intra period method to allocate excise taxes based
on the Company's estimate of sales volume for 1996.
-12-
13
COST OF GOODS SOLD. Cost of goods sold increased 1.6% from $9.2 million in the
Third Quarter of 1995 to $9.3 million in the Third Quarter of 1996 reflecting
the increase in volume of beer sold. Cost of goods sold as a percentage of net
sales decreased from 51.0% in the Third Quarter of 1995 to 47.5% in the Third
Quarter of 1996. Cost of goods sold per barrel sold decreased from $89.14 in the
Third Quarter of 1995 to $80.32 in the Third Quarter of 1996. The decreases in
cost of goods sold as a percentage of net sales and per barrel sold were
primarily attributable to reduced packaging material costs due to purchasing
economies of scale and reduced manufacturing services fees charged under the
Company's Agreement with Stroh. Transportation expenses are a significant
component of cost of goods sold. Transportation expenses decreased 5.9% from
$1.7 million in the Third Quarter of 1995 to $1.6 million in 1996.
Transportation expenses as a percentage of net sales decreased from 9.3% in the
Third Quarter of 1995 to 8.0% in the Third Quarter of 1996. Transportation
expenses per barrel sold decreased from $16.21 per barrel in the Third Quarter
of 1995 to $13.55 per barrel in the Third Quarter of 1996. The decrease in
transportation expenses as a percentage of net sales and per barrel sold were
primarily due to cost savings realized by shipping beer to east coast
distributors from the Stroh Winston Salem, North Carolina brewery during the
Third Quarter of 1996. Additionally, lower shipment volume in California and a
lower keg to bottled beer ratio for the Third Quarter of 1996 when compared to
the same period in 1995 contributed to the decrease in transportation expenses
for the Third Quarter of 1996.
The Company expects that cost of sales per barrel for the fourth quarter will be
between $78 and $80 per barrel, due to volume discounts from Stroh offset by
higher production costs of the Company's seasonal beers scheduled for production
in the fourth quarter.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 62.4% from $5.4 million in the Third Quarter
of 1995 to $8.8 million in the Third Quarter of 1996. Selling, advertising and
promotional expenses as percentage of net sales increased from 30.2% in the
Third Quarter of 1995 to 44.9% in the Third Quarter of 1996. Selling,
advertising and promotional expenses per barrel sold increased from $52.69 in
the Third Quarter of 1995 to $75.86 in the Third Quarter of 1996. The increases
were attributable to higher advertising costs, increased headcount and payroll
and point-of-sale material expenditures and provisions made for disposal of
excess production of the Company's summer seasonal product.
As discussed in the Company's June 30, 1996 Form 10-Q, selling, advertising and
promotional expenses ("Brand Investment") were expected to be between $65 and
$70 per barrel for the third quarter. Selling, advertising and promotional
expenses were higher at $75.86 per barrel for the Third Quarter of 1996 due to
provisions made for disposal of excess production of the Company's summer
seasonal product. The Company expects selling, advertising and promotional
expenses to be between $65 and $70 per barrel during the fourth quarter.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 33.7% from $1.0 million in the Third Quarter of 1995 to $1.3 million
in the Third Quarter of 1996. General and administrative expenses as a
percentage of net sales increased from 5.5% in the Third Quarter of 1995 to 6.9%
in the Third Quarter of 1996. General and administrative expenses per barrel
sold increased from $9.76 in the Third Quarter of 1995 to $11.56 in the Third
Quarter of 1996. The increase in general and administrative expenses resulted
primarily from increased headcount and payroll costs, rental expense due to
expansion of office space, and increased professional fees associated with the
Company's status as a publicly traded entity. The Company expects general and
administrative expenses to be consistent with the levels experienced during the
Third Quarter of 1996, for the remainder of 1996.
-13-
14
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, increased
$402,000 from a net interest expense of $52,000 in the Third Quarter of 1995 to
a net interest income of $350,000 in the Third Quarter of 1996. The increase
reflected earnings from investment of the net proceeds of the Company's November
1995 public offering. The Company anticipates interest earnings to remain at
these levels throughout 1996.
INCOME TAX PROVISION The Company accounts for income taxes using the deferral
method of accounting for tax assets and liabilities. The income tax provision
takes into account the effects of state income taxes, offset by the utilization
of net operating loss carryforwards. Income taxes in the Third Quarter of 1996
were below the federal statutory rate (34%) as a result of non-taxable income in
the Third Quarter of 1996 and were offset by state taxes and non-deductible
expenses in the Third Quarters of 1996 and 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
SALES. Sales increased by 23.7% from $46.1 million for the nine months ended
September 30, 1995 ("the First Nine Months of 1995") to $57.1 million for the
nine months ended September 30, 1996 ("the First Nine Months of 1996"). Sales
volume increased 26.63% from 246,300 barrels sold in the First Nine Months of
1995 to 311,900 barrels sold in the First Nine Months of 1996. The increase in
sales was primarily attributable to growth in sales volume in existing markets
and, to a lesser extent, increased sales volume resulting from expansion into
new geographic markets. Sales per barrel decreased from $187.35 in the First
Nine Months of 1995 to $182.99 in the First Nine Months of 1996. The First Nine
Months' percentage and per barrel changes are consistent with those discussed in
the Three Months Ended September 30, 1996 and 1995 section of the Results of
Operations.
EXCISE TAXES. Federal and state excise taxes increased by 32.8% from $4.1
million in the First Nine Months of 1995 to $5.5 million in the First Nine
Months of 1996. Excise taxes as a percentage of net sales increased from 9.9%
for the First Nine Months of 1995 to 10.7% for the First Nine Months of 1996.
Excise taxes per barrel sold increased from $16.87 in the First Nine Months of
1995 to $17.70 in the First Nine Months of 1996. The increase in excise taxes
was attributable to the increase in sales volume, since the excise tax is
assessed on a per barrel basis, and to the increased per barrel excise tax
burden as the Company's sales volume for the year surpasses 60,000 barrels. The
Company uses an intra period method to allocate excise taxes based on the
Company's estimate of sales volume for 1996, and as such, changes in the excise
tax rate per barrel will be caused by changes in the Company's estimate of sales
volume for 1996 and to a lessor extent, changes in state excise tax rates.
COST OF GOODS SOLD. Cost of goods sold increased 19.0% from $21.1 million in the
First Nine Months of 1995 to $25.2 million in the First Nine Months of 1996
reflecting the increase in volume of beer sold. Cost of goods sold as a
percentage of net sales decreased from 50.3% in the First Nine Months of 1995 to
48.8% in the First Nine Months of 1996. Cost of goods sold per barrel sold
decreased from $85.83 in the First Nine Months of 1995 to $80.67 in the First
Nine Months of 1996. The First Nine Months' percentage and per barrel changes
are consistent with those discussed in the Three Months Ended September 30, 1996
and 1995 section of the Results of Operations.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSES. Selling, advertising and
promotional expenses increased by 43.0% from $14.8 million in the First Nine
Months of 1995 to $21.2 million in the First Nine Months of 1996. Selling,
advertising and promotional expenses as percentage of net sales increased from
35.2% in the First Nine Months of 1995 to 67.83% in the First Nine Months of
1996. Selling, advertising and promotional expenses per barrel sold increased
from $60.06 in the First Nine Months of 1995 to $67.83 in the First Nine Months
of 1996. The First Nine Months' percentage and per barrel changes are consistent
with those discussed in the Three Months Ended September 30, 1996 and 1995
section of the Results of Operations.
-14-
15
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 19.0% from $3.2 million in the First Nine Months of 1995 to $3.8
million in the First Nine Months of 1996. General and administrative expenses as
a percentage of net sales decreased from 7.6% in the First Nine Months of 1995
to 7.3% in the First Nine Months of 1996. General and administrative expenses
per barrel sold decreased from $12.88 in the First Nine Months of 1995 to $12.10
in the First Nine Months of 1996. General and administrative expenses decreased
as a percentage of sales and on a per barrel basis for the First Nine Months of
1996 when compared to the same period in 1995 due to sales and shipment growth
of 23.7% and 26.6% respectively, in excess of the absolute increase in general
and administrative expenses of only 19.0% for the same period.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net, increased $1.2
million from a net interest expense of $149,000 in the First Nine Months of 1995
to a net interest income of $1.1 million in the First Nine Months of 1996. The
increase reflected earnings from the net proceeds of the Company's November 1995
public offering.
INCOME TAX PROVISION The Company accounts for income taxes using the deferral
method of accounting for tax assets and liabilities. The income tax provision
takes into account the effects of state income taxes, offset by the non-taxable
income. Income taxes in the First Nine Months of 1996 were below the federal
statutory rate (34%) as a result of state taxes and non-deductible expenses
offset by non-taxable interest income and above the federal statutory rate (34%)
in the First Nine Months of 1995 due to non-deductible expenses and state taxes.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's quarterly operating results have varied significantly in the past,
and may do so in the future, depending on factors such as the timing of new
product announcements by the Company or its competitors, the timing of
significant advertising and promotional campaigns by the Company, changes in mix
between kegs and bottles, the impact of an increasing average federal excise tax
rate as sales volume changes, increased competition, fluctuations in the price
of packaging and raw materials, seasonality of sales of the Company's beers,
general economic factors, trends in consumer preferences, regulatory
developments including changes in excise tax and other tax rates, changes in
average selling prices or market acceptance of the Company's beers, increases in
production costs associated with initial production of new products and
variations in shipping and transportation costs. The Company's expense levels
are based, in part, on its expectations of future sales levels. If sales levels
are below expectations, operating results are likely to be materially adversely
affected. In particular, net income, if any, may be disproportionately affected
by a reduction in sales because certain of the Company's operating expenses are
fixed in the short-term. The Company's profitability has been significantly
impacted by the timing and level of expenditures related to selling, advertising
and promotional expenses. In addition, the Company's decision to undertake a
significant media advertising campaign could substantially increase the
Company's expenses in a particular quarter, while any increase in sales from
such advertising may be realized in subsequent periods. The Company believes
that quarterly sales and operating results are likely to vary significantly in
the future and that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indicators of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents decreased by $32.0 million in the First
Nine Months of 1996 as compared to a decrease of $913,000 in the First Nine
Months of 1995. The Company used $5.0 million in cash from operations in the
First Nine Months of 1996 as compared to a use of $792 ,000 for the First Nine
Months of 1995. The increase of the uses of cash from operations resulted
primarily from the $4 million increase in prepaid expenses and other current
assets. During the first six months of 1996 the Company
-15-
16
deposited with Stroh $4 million to earn purchase discounts on packaging and
other raw materials used in the production of the Company's products. Earnings
from these discounts are credited to cost of goods sold. These funds, recorded
in prepaid expenses and other current assets, will be returned to the Company at
its request.
The Company's investing activities consisted of purchases of available for sale
securities, purchases of new kegs approximating $1.8 million, and expenditures
in connection with the feasibility study for the Company's California Brewery
project. The expenditures made in connection with this project consist primarily
of professional fees. Management, along with it's architect, mechanical engineer
and general contractor is currently in the process of completing a final
feasability study to be approved by the Company's Board of Directors, prior to
the acquisition of land.
The only significant financing activity in the First Nine Months of 1996 was the
issuance of common stock to employees of the Company under the Company's
employee stock purchase plan which provided $230,000 of cash flow. In the First
Nine Months of 1995, the principal financing activities included net proceeds
from the revolving credit agreement of $1.1 million.
As of September 30, 1996, the Company had $43.5 million in working capital as
compared with a working capital deficit of $645,000 as of September 30, 1995.
The increase was primarily due to the proceeds from the Company's initial public
offering invested in cash and cash equivalents and available for sale securities
and an increase in accounts receivable related to continued profitable
operations. The Company anticipates that its current cash and available for sale
securities and cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements for at least the next twelve
months.
RISKS IN ACHIEVING FORWARD-LOOKING STATEMENTS
The Company relies upon Stroh at all phases of the production of its beers. The
Company's relationship with Stroh is therefore critical to the Company's
business, operating results and financial condition. The Company's dependence on
Stroh entails a number of significant risks. The Company's business, results of
operations and financial condition would be materially adversely affected if
Stroh were unable for any reason, to meet the Company's delivery commitments or
if beer brewed at the Stroh brewery failed to satisfy the Company's quality
requirements.
Competition in the specialty beer segment of the domestic beer market, in which
the Company competes, is intense. The principal competitive factors affecting
the market for the Company's beers include product quality and taste, packaging,
brand recognition, price and distribution capabilities. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors based on these and other factors. The Company competes
with a variety of domestic and international brewers, many of whom have
substantially greater financial, production, distribution, and marketing
resources and have achieved a higher level of brand recognition than the
Company. Increased competition could result in price reductions, reduce profit
margins and loss of market share, all of which would have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company is highly dependent on distributors to sell the Company's products
and to assist the Company in promoting market acceptance of, and creating demand
for, the Company's products. There can be no assurance that the Company's
distributors will devote the resources necessary to provide effective sales and
promotion support to the Company. The Company believes that its future growth
and success will continue to depend in large part upon its distributors. If one
or more 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.
-16-
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Pete's Brewing Company
Dated: November 14, 1996 By /s/ James E. Collins
-----------------------------------------
James E. Collins, Chief Financial Officer
(Principal Financial and Accounting Officer)
-17-
18
INDEX TO EXHIBITS
SEQUENTIALLY
NUMBERED
EXHIBIT PAGE
- --------------------------------------------------------------------------------
11.1 Computation of per share earnings 19
27.1 Financial data schedule 20
-18-