FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ............ to .............
Commission File No. 0-28282
THE LION BREWERY, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
PENNSYLVANIA 24-0645190
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
700 NORTH PENNSYLVANIA AVENUE, WILKES BARRE, PA 18703
(Address of Principal Executive Offices)
Registrant's telephone number, including area code (717) 823-8801
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 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
------ ------
Indicate by check if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
State the aggregate market value of the registrant's shares held by non-
affiliates at December 27, 1996: $9,209,755.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: December 27, 1996
3,885,052 shares outstanding
State issuer's revenues for its most recent fiscal year: $26,439,000
Transitional Small Business Disclosure Format (check one): Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement for the registrant's 1997 Annual Report, to
be filed with the Commission no later than 120 days after the close of the
registrant's fiscal year, has been incorporated by reference, in whole or
in part, for Part III of this Annual Report.
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PART I.
ITEM 1. BUSINESS:
GENERAL
The Lion Brewery, Inc. ("The Lion Brewery" or the "Company") is a
producer and bottler of brewed beverages, including malta, specialty beers
and specialty soft drinks. The Lion Brewery was incorporated in
Pennsylvania on April 5, 1933. The Company is the dominant producer of
malta in the continental United States. Specialty beers, generally known
as craft beers, are brewed by the Company both for sale under its own label
and on a contract basis. Craft beers are distinguishable from other
domestically produced beers by their fuller flavor and adherence to
traditional European brewing styles. In 1996, the Company produced a
flavored, alcoholic, malt based brew under contract. The Company also
produces specialty soft drinks, including all-natural brewed ginger
beverages, on a contract basis for third parties. The Lion Brewery also
brews beer for sale under traditional Company owned labels for the local
market at popular prices.
The Company's growth strategy is to rapidly expand its production and
marketing of specialty beers, while maintaining the growth in its non-
alcoholic beverages. By owning and operating its own brewery and with its
significant brewing and packaging experience, the Company believes it is
well positioned to optimize the quality and consistency of its products as
well as to formulate new products. The Company plans to increase sales of
its specialty beer labels through increased penetration of these brands in
its existing markets, expansion into contiguous regional markets, new
product introductions, increased marketing efforts and additions to brewing
and bottling capacity.
The Company's original specialty beers - 1857 Premium Lager,
Liebotschaner Cream Ale and Stegmaier Porter - are reminiscent of the
Company's rich beer brewing heritage. Since the brewhouse was built at the
turn of the century in Wilkes-Barre, Pennsylvania, The Lion Brewery is the
beneficiary of a long brewing tradition. The Company's flagship line of
distinctive full-flavored beers are marketed under the Brewery Hill name.
The Company currently produces seven styles of beer under the Brewery Hill
label, two of which are seasonal flavors. Brewery Hill PennCenntenial Lager
was recently introduced in November 1996 along with our winter seasonal,
Brewery Hill Caramel Porter.
The Company established its reputation as a quality leader in the
rapidly growing craft beer market by winning three Gold Medals at the Great
American Beer Festival. The Lion Brewery's 1857 Premium Lager was voted
Best American Premium Lager in 1994 and Liebotschaner Cream Ale won back to
back gold medals in the American Lager Cream Ale Category in 1994 and 1995.
In 1996, the Company has also received the following awards at the World
Beer Championships:
Brewery Hill Black and Tan 1st Place World Champion
Brewery Hill Cherry Wheat 1st Place World Champion
Brewery Hill Honey Amber Silver Medal
Brewery Hill Raspberry Red Silver Medal
1857 Premium Lager Silver Medal
Stegmaier Gold Medal Beer Silver Medal
Stegmaier Porter Bronze Medal
In addition, craft beers and specialty soft drinks brewed by the
Company under contract have won several awards.
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COMPANY HISTORY AND INDUSTRY BACKGROUND
The brewhouse in which the Company continues to brew its products was
built at the turn of the century in Wilkes-Barre, Pennsylvania. At that
time, the U.S. brewing industry comprised nearly 2,000 breweries, most of
which were small operations that produced distinctive beers for local
markets. The Company was incorporated as The Lion, Inc. in April 1933 to
operate the brewery, which was one of the fewer than 1,000 breweries to
reopen following Prohibition. Over the ensuing decades, lighter, less
distinctively flavored beers appealing to broad segments of the population
and supported by national advertising programs became prevalent. These
beers use lower cost ingredients and are mass produced to take advantage of
economies of scale. This shift toward mass produced beers coincided with
extreme consolidation in the beer industry. In keeping with this
consolidation trend, the Company purchased other labels including the
Stegmaier brands, which had been produced on Brewery Hill in Wilkes-Barre
since 1857. Of the more than 60 breweries existing in eastern Pennsylvania
50 years ago, only two, including the Lion Brewery, remain. Today,
according to industry sources, approximately 90% of all domestic beer
shipments come from the four largest domestic brewers.
Beginning in the mid 1980s and continuing in the 1990s, a number of
domestic craft brewers began selling higher quality, more full-flavored
beers, usually in local markets, as a growing number of consumers began to
migrate away from less flavorful mass-marketed beers towards greater taste
and broader variety, mirroring similar trends in other beverage and food
categories. As an established regional specialty brewer, the Lion Brewery
believes it is well-positioned to benefit from this shift in consumer
preferences. In 1995, according to industry sources, the craft beer
segment increased to approximately 3.8 million barrels, representing
approximately 2.1% of the 180 million barrel, $50 billion retail domestic
beer market. Over the five year period ended December 31, 1995, craft beer
shipments increased at a compound annual rate of approximately 40%, while
shipments in the total U.S. beer industry remained relatively flat.
Industry analysts have attributed this flat over-all beer consumption to a
variety of factors, including increased concerns about the health
consequences of consuming alcoholic beverages, safety consciousness and
concerns about drinking and driving; a trend toward a diet including
lighter, lower calorie beverages such as diet soft drinks, juices and
sparkling water products; the increased activity of anti-alcohol consumer
protection groups; an increase in the minimum drinking age from 18 to 21
years in all states; the general aging of the population; and increased
federal and state excise taxes. Today the top three national brewers have
entered into this fast growing craft segment by introducing their own
specialty beers and/or by acquiring or investing in smaller regional craft
brewers.
Before the emergence of the market opportunity in specialty beer, the
Lion Brewery diversified into other products to sustain operations and
continue to utilize its brewhouse and bottling facility. The Company's
strategic entry into malta production in 1982 has resulted in the Company
becoming the dominant producer of malta in the continental United States.
Malta was originally developed many years ago by German brewers operating
in the Caribbean area. The brewers developed malta by blending the excess
molasses production from sugar with grain mash. Malta is still popular
throughout the Caribbean and South America. In addition to malta The
Company also diversified into producing premium soft drinks in 1991.
BUSINESS STRATEGY
The Company intends to enhance its position as a leading producer of
specialty brewed beverages by rapidly expanding production and marketing of
craft beers and other malt based premium products; while maintaining the
growth of its nonalcoholic brewed beverages. Key elements of the Company's
business strategy are to:
Produce High Quality Brewed Beverages. The Company is committed
to producing a variety of full-flavored brewed beverages. The Company
employs a Head Brewmaster, an assistant brewmaster and a brewing
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assistant and retains a world recognized brewing authority to ensure
the high quality and consistency of its products. To monitor the
quality of its products, the Company maintains its own quality control
laboratory staffed with two full-time quality control technicians and
submits its products for analysis to the Seibel Institute of
Technology, an independent laboratory, on a continuous basis. To
monitor freshness, the Company dates each bottle and case with the
date and time of its bottling. The Company brews its craft beers
according to traditional styles and methods, selecting and using only
high quality ingredients.
Brew Products in Company-Owned and Operated Facilities. The
Company owns and operates its own brewing facility, which enables the
Company to optimize the quality and consistency of its products, to
achieve the greatest control over its production costs and to
formulate new brewed products. The Company believes that its ability
to engage in new product development through onsite experimentation in
its brewhouse and to continuously monitor and control product quality
in its own facilities are competitive advantages.
Expand Distribution of Craft Beers. The Company distributes
craft beer under its own labels through a network of wholesale
distributor relationships. Currently the Company distributes its
products in twelve states, although the majority of its sales remain
concentrated in Pennsylvania. The Company intends its penetration in
existing markets and to enter new markets by increasing the size of
its sales force and its marketing efforts. The Company chooses
wholesaler distributors that the Company believes will best promote
and sell the brands. The Company, through on site tours and
presentations, actively educates its distributors in the total brewing
process and the growing craft beer industry.
Introduce New Products. The Company is committed to developing
and introducing new products to appeal to the strong consumer interest
in full-flavored craft beers. The Company's diversified product mix
and brewing expertise enhance its ability to create successful new
products. The Company believes that new product introductions have
helped the Company gain consumer awareness in its existing markets.
Currently, the Company markets seven craft beers under the Brewery
Hill label. In 1996, the Company introduced Brewery Hill Pale Ale in
March, Brewery Hill Cherry Wheat; its summer seasonal, in May, Brewery
Hill PennCenntenial Lager and Brewery Hill Caramel Porter; a winter
seasonal, in November. The Company is also is developing new soft
drink products for its contract customers.
Increase Production Capacity and Efficiency. The Company is in
the process of increasing its annual production capacity from 340,000
to 400,000 barrels based upon its anticipated product mix. This
expansion will modify its existing seven ounce bottling line to also
accommodate 12 oz. bottles, the bottle size for most of the Company's
products. In addition, The Company has increased its fermentation and
lagering capacity with the relining of nine storage tanks. The Company
also completed an upgrade of a boiler and is in the process of adding
a malt storage and elevation system.
Provide a High Level of Customer Service. The Company, through
its high quality brewing standards and timely availability of product,
believes it provides a high level of customer service to its malta,
contract craft beer and specialty soft drink customers. The Company
believes its emphasis on customer service has enabled the Company to
increase sales to these customers.
PRODUCTS
The Lion Brewery's diversified product portfolio consists of a variety
of styles of malta, craft beers and specialty brewed beverages and soft
drinks, including all-natural brewed ginger beverages, and popularly priced
beer sold under traditional Company-owned labels. The Company distributes
its products in glass bottles and kegs and its products are dated to
monitor freshness.
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Malta. Malta is a non-alcoholic brewed beverage popular with the
Caribbean and certain other segments of the Hispanic population, which the
Company produces for distribution by major Hispanic food distribution
companies primarily in the eastern United States. The leading malta brands
have varying taste characteristics based on different formulations provided
to the Lion Brewery by the distribution companies under whose labels the
product is sold.
The principal ingredients of malta are malt (a germinated form of
barley grain), several types of fructose syrup, caramel coloring and hops
in modest quantities. Significant variations made by the Company involve
the addition of molasses for one customer and production with lower malt
quantities and higher levels of fructose sweetener for another. The
Company also brews an alcoholic form of malta called Extracto which
resembles standard malta but also includes some roasted malt and hops
extract to add bitterness. The Company developed for Goya Foods a malta
light product using Nutrasweet. In fiscal 1996 and 1995, malta constituted
approximately 68% and 73%, respectively, of the Company's annual barrel
shipments and 66% and 75%, respectively, of net sales. The Lion Brewery is
the dominant producer of malta in the continental United States. Malta
requires substantially less production time than beer or ale. The product
remains in aging tanks for only a few days, compared to up to 50 days in
fermentation and lagering tanks for beer. Malta is bottled in seven ounce
and 12 oz. sizes.
Craft Beers. The Company currently produces ten distinctive, full-
flavored craft beers and continually engages in the research and
development of new specialty beers. The Company brews its craft beers using
high quality hops, malted barley, and other natural ingredients. The
Company utilizes both a lager and ale yeast in the fermentation of its
beers and ales. The company distributes its craft beers only in glass
bottles and kegs. All of the glass bottles are date coded for freshness
and are pasteurized.
1857 Premium Lager. This award winning lager is brewed with
three different types of malt and four different types of hops. The
hops are imported German Hallertau Hersbrucker, English East Kent
Golding and Czech Saaz, as well as domestic U.S. Mt. Hood. This lager
is distinguished by its clean, well balanced and full taste and rich
golden color. 1857 Premium Lager won the Gold Medal in the American
Premium Lager category at the 1994 Great American Beer Festival.
Liebotschaner Cream Ale. Cream ale is brewed with a lager yeast
at higher fermentation temperature than typical lager, creating an
ale-like taste. "Lieb" has a full creamy flavor balanced by spicy,
fruity characteristics from the hop finish. Lieb utilizes two
different varieties of pale malt and three different varieties of
hops, including imported Czech Saaz. Liebotschaner Cream Ale won
consecutive Gold Medals in the American Lager Cream Ale category at
the Great American Beer Festival in 1994 and 1995.
Stegmaier Porter. This porter, or dark beer, is brewed from four
different varieties of malt, including two types of roasted malt.
Stegmaier Porter is brewed with the Company's ale yeast and bittered
and finished with English East Kent Goldings and other hops to give a
balanced flavor and excellent drinkability for a dark beer. Stegmaier
Porter won a Bronze medal at the World Beer Championships in 1996.
Brewery Hill Black and Tan. This mixture of the Lion Brewery's
award winning 1857 Premium Lager and Stegmaier Porter creates a rich,
full flavored beer. Brewery hill Black & Tan won first place World
Champion in 1996 at the World Beer Championships.
Brewery Hill Honey Amber. This amber beer is brewed with three
different malts and utilizes English East Kent Goldings hops. It is
finished with pure, locally harvested clover honey to give a balance
of flavor. The result is a rich amber color and malty bouquet.
Brewery Hill Honey Amber won a Sliver medal at the World Beer
Championships in 1996.
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Brewery Hill Raspberry Red. This award winning ale is blended
with pure and natural raspberry juices and flavors to create a
balanced flavor that is a delicate blend of the sweetness and tartness
of raspberries. Brewery Hill Raspberry Red placed third at the 1995
Bohager's Brew Review, People's Choice Award and won a Silver medal at
the World Beer Championships in 1996.
Brewery Hill Pale Ale. This American pale ale is brewed with two
different malts and three different types of hops: English East Kent
Golding, Cascade and domestic U.S. Mt. Hood. This ale is brewed with
the Company's ale yeast and is kettle hopped. After a seven day
fermentation period the ale then undergoes dry hopping. Unboiled hop
roots are added to give this ale additional hop aroma. When finished,
the pale ale has a clean malty fullness, an intense hop bitterness and
a highly aromatic hop character.
Brewery Hill Cherry Wheat. This ale is brewed using three
different malts, including a generous dose of wheat malt. Brewery
Hill Cherry Wheat is blended with pure and natural cherry juice and
flavors to give this brew a delicate cherry flavor. Brewery Hill
Cherry Wheat won first place World Champion at the World Beer
Championships in 1996.
Brewery Hill PennCentennial Lager. This handcrafted full bodied
lager features four different barley malts (including Roasted Barley)
and is kettled hopped with three hop varieties (including imported
Hallertau Hersbrucker and Czech Saaz). PennCentennial is then dry
hopped with Czech Sazz and allowed to slow age to impart an incredible
balance of malt and hops and a wonderful hop aroma and flavor. Brewery
Hill PennCentennial is a new world of old world brewing traditions.
Brewery Hill Caramel Porter. This flavorful beer uses a top-
fermenting ale yeast. Caramel Porter uses four different malts,
including an extra generous portion of Caramel and Chocolate malts to
give Caramel Porter a very pleasant caramel and chocolate flavor and
aroma. Brewery Hill Caramel Porter is a winter seasonal brew.
The Company also brews many distinctive craft beers and other
specialty malt beverages under contract for other labels. Some of these
customers are microbreweries and brewpubs that need additional brewing
capacity to meet their production requirements and which typically provide
their own recipes. In other instances, the Company formulates beer and
specialty malt beverages for customers marketing their own labels. Most of
these contract brewing customers provide their own packaging and labels.
The Company arranges shipment to distributors F.O.B. the Company's
warehouse and handles invoicing as a service to these customers. Among the
Company's larger craft beer and specialty malt contract customers are:
Stoudt Brewing Company. This microbrewery and restaurant is
located in Adamstown, Pennsylvania. The Lion Brewery produces
Stoudt's Golden Lager, Fest, Honey Double Bock, Mai-Bock and Scarlet
Lady in bottles pursuant to Stoudt's recipes and as a supplement to
Stoudt's own production. Stoudt's beers have won five awards in the
last five years, four at the Great American Beer Festival and one at
the World Beer Championships.
Neuweiler Brewing Company. This craft beer marketing company is
located in Allentown, Pennsylvania and sells four different styles of
beer, all of which were formulated by and are brewed at the Lion
Brewery. The Neuweiler Black and Tan won a Bronze Medal, Dark Lager
Category, at the 1992 Great American Beer Festival.
Tun Tavern. This company's name refers to the tavern in
Philadelphia where the Marines were formed in 1775. The Lion Brewery
is the sole producer for Tun Tavern. Tun Tavern premium lager is now
sold in several states.
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Blue Hen Ltd. This marketer of craft beers located in Delaware
sells three styles of beer formulated and produced by the Lion
Brewery. The Blue Hen Lager won the Silver Medal at the World Beer
Championships in both 1994 and 1995 and the Blue Hen Black and Tan won
the Bronze Medal, Dark Lager category, at the 1995 World Beer
Championships. In 1996, the Company began producing Blue Hen
Chocolate Porter.
Better Beverage Importers. This marketer of specialty malt
beverages located in Delaware sells an alcoholic malt based lemon brew
called One-Eyed Jack, which is distributed in over 30 states.
The Lion Brewery craft beer and specialty malt beverages produced for
sale under its own labels and under contract for others accounted for
approximately 14% and 10% of its annual barrel shipments and 19% and 12% of
its net sales in fiscal 1996 and 1995, respectively.
SPECIALTY SOFT DRINKS. The Lion Brewery first began blending and
bottling specialty soft drinks in 1987. The Company currently produces
specialty soft drinks under contract for five customers including:
Reed's. In June 1991, the Lion Brewery began producing for this
customer Reed's All Natural Ginger Beer, a soft drink based on brewed
ginger root. The Lion is currently the sole brewer of beverages sold
under the Reed's label. Sales of this product line grew 48% and 44%
in fiscal 1996 and 1995, respectively. This product was originally
developed and produced in a small microbrewery in Colorado and the
Company believes that Reed's is the leading brewed soft drink in
health food stores. Ginger roots are processed in the Lion Brewery's
brew kettle to yield this all natural brewed product. The Reed's
portfolio consists of five all natural flavors of real brewed ginger
products: Original, Extra, Premium, Spiced Apple and Raspberry.
Reed's Original Ginger Brew was named Best Imported Food Product-
Canadian Fancy Food Association and the 1991 Outstanding Beverage
Finalist-National Association for the Specialty Food Trade. Reed's
Spiced Apple Brew won the 1994 Outstanding Beverage Finalist-National
Association for the Specialty Food Trade.
Mad River. The Company produces eleven varieties of premium all
natural blended soft drinks for Mad River. The product is sold to
consumers primarily in resort locations and in upscale specialty food
stores.
The Company also produces specialty soft drinks for Goya Foods,
Vitarroz and Virgil's. Specialty soft drinks accounted for approximately
12% and 10% of the Lion Brewery's barrel shipments and 9% and 8% of its net
sales in fiscal 1996 and 1995, respectively.
POPULAR PRICED BEER. The Company brews beer for sale at popular prices in
local markets under several traditional Company-owned brands. A majority
of this beer is bottled in 16 oz. returnable bottles. The Company is
intentionally reducing its production of popular priced beer in conjunction
with a general decline in market demand for lower priced beer marketed in
16 oz. returnable bottles and in recognition of the significantly greater
profitability for the Company using its production capacity for craft beer.
Popular priced beer accounted for approximately 6% and 7% of barrel
shipments and 4% and 5% of net sales in fiscal 1996 and 1995, respectively.
BREWING OPERATIONS
Beer is made primarily from four natural ingredients: malted grain,
hops, yeast and water. Malt suppliers prepare malt from barley grain by
soaking it in water to initiate germination and then drying (kilning) the
germinated grain with varying amounts of heat to vary the final
characteristics of the malt (for example, more heat yields "roasted" malt).
Hops grow in many varieties and impart bitterness or other distinctive
flavors to the beer. Yeasts are either top-fermenting, used in ale
production, or bottom fermenting, which produce lager style beers. The
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components of malta are primarily malted grain, water and supplemental
sweeteners. Since malta is not fermented, yeast is not used.
THE LION BREWERY
BREWHOUSE
(Diagram)
Brewing Process. The process of brewing beer consists of extracting
fermentable sugar from the malt, brewing the liquid containing these sugars
(wort) in combination with hops and other natural flavorings, fermenting
the brewed liquid and then finishing (maturing) the beer in tanks for
periods ranging from ten to 40 days depending upon the beer style. The
brewing process for malta is substantially similar to that for beer except
that fermentation is not involved. Malta's sweetness relative to beer is
partly attributable to the malt sugars in the beverage which would be
transformed to alcohol if the beverage was fermented. The brewed ginger ale
made by the Company uses ginger root rather than malt as the principal
ingredient. The entire brewing process for the Company's products varies
from two days to 50 days, depending on the type of products brewed.
Extracting the fermentable sugars begins with milling the dried malt.
Milling consists of crushing (not grinding) the malt between pairs of
rollers in the malt mill. This causes a separation of the husk from the
body and also breaks the body and exposes the internal components of the
barley malt for the mashing process.
The crushed malt is then combined with specially treated brewing water
at a specific temperature in the mash tub to create the mash. The Company
uses the traditional upward infusion mashing system that uses three
precisely controlled temperature and time plateaus to create the resultant
sugar liquid called "wort." The completed mash is then filtered by gravity
in the lauter tub. The filtration media is the crushed grain itself. The
wort is collected and transferred to the brew kettle.
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The wort is boiled in the brew kettle for 90 to 120 minutes. During
this boiling process, the precise amount of the hop varietals are added at
specified time intervals to create the desired bitterness and aroma. The
boiled wort is then transferred to the hot wort tank (whirlpool) where the
proteins from the malt and the tannins from the hops are allowed to settle
out and are removed. The wort is then rapidly cooled to the desired
temperature and infused with air.
The aerated wort is then transferred to fermentation tanks to which a
precisely monitored amount of yeast of a specific type at a specific
temperature is added. Air in the wort allows the yeast to remain flexible
and enables it to begin a rapid and complete fermentation. After several
hours, the air is depleted and the fermentation continues in an anaerobic
(without air) process. The Company uses two types of yeast, a lager yeast
(bottom fermenting) and an ale yeast (top fermenting). Fermentation takes
seven days, and during this time the yeast will multiply dramatically. At
the end of the fermentation, the yeast will be recovered for a new
fermentation and the beer is transferred to a storage (lager/ruh) tank.
The storing of beer at cold temperatures is called "lagering" and/or
"ruh." The amount of time that the beer is allowed to lager varies with the
type of beer, with ales having a shorter lager period than lagers. This
storage period allows for the reduction of harsh flavors created during the
fermentation process. It also allows for the clarification and maturing of
the fine beer flavor. After lagering, the beer is filtered to remove any
yeast and other insoluble materials. The beer's carbonation results from a
combination of natural absorption of carbon dioxide byproduct from the
fermentation process and carbonation after filtering.
Bottling and Kegging. The Company packages its products in bottles
and in the case of beer, and to a limited extent, ginger beer, in kegs.
The bottling house has two automated bottling lines, each containing bottle
filling and sealing machines, pasteurizing lines, bottle labeling
equipment, bottle casing and uncasing machines and packing equipment. One
line also contains capacity for bottle soaking and washing and a Majonnier
flow mixer for soft drinks. Areas are set aside for packaging supplies and
short term holding of finished cases pending shipment to the warehouse.
Currently one bottling line handles 16 oz. and 12 oz. bottling and the
other line handles seven ounce bottling for malta. The Company estimates
that its current annual 12 oz. bottling capacity is approximately 3.7
million cases (270,000 barrels) and its current seven ounce bottling annual
capacity is approximately 4.0 million cases (174,000 barrels).
For most of the Company's output of 12 oz. bottled products, the
Company uses recycled bottles from states that impose a bottle deposit at
purchase, principally New York and Massachusetts. The inability of the
Company to continue to obtain a sufficient supply of recycled bottles could
have an adverse affect on the Company's results of operations. This type
of glass is used for both the Lion Brewery's own labels and for contract
packaged production. All seven ounce bottles are purchased new. The
Company's 16 oz. returnable bottles are subject to deposit and return
arrangements at the brewery.
Quality Assurance. The Lion Brewery employs a Head Brewmaster, an
assistant brewmaster and a brewing supervisor and retains the services of a
world recognized brewing authority to ensure the high quality and
consistency of its products. To monitor the quality of its products, the
Company maintains its own quality assurance lab, employs three full-time
quality assurance technicians and submits its products for analysis to the
Seibel Institute of Technology, an independent laboratory, on a continuous
basis. The Company brews it craft beers according to traditional styles
and methods, and precisely maintains and assures the highest quality and
consistency within each brewing step. In order to maintain product quality
for the consumer, the Company pasteurizes its bottled products. To monitor
freshness, the Company dates each bottle and case with the date and time
of bottling. Product is brewed in small batches which allows for a
thorough analysis of each step. Each brew is carefully monitored and
tasted to ensure the highest quality to the consumer. This high quality
standard has allowed the Company to win three Gold Medals at the Great
American Beer Festival and numerous medals at World Beer Championships.
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PRODUCT DISTRIBUTION
The distribution of products which the Company makes under contract,
including malta, specialty beers sold under other craft beer labels and
brewed and blended soft drinks, is managed entirely by the contracting
customer. In the case of malta and soft drinks, the customer typically
distributes the product to supermarkets, specialty food markets, food
service establishments and other retailers through independent or company
employed sales personnel with occasional involvement of wholesalers or
distributors as middlemen.
The Company distributes its beers and ales marketed under its own
brands through a network of independent distributors whose principal
business is the distribution of beer and other alcoholic beverages. The
Company's contract beer customers are likely to employ this independent
distributor channel as well. These independent distributors resell the
products to retailers which sell the beers to the consumer. Currently the
Company's craft and traditional beer products are primarily being
distributed through fifty-three independent distributors in twelve eastern
states: Connecticut, Delaware, Georgia, Maryland, Massachusetts, New
Jersey, New York, North Carolina, Ohio, Pennsylvania, Virginia and
Washington, D.C. The Company selects distributors in each market that it
believes will devote attention and resources to the promotion and sales of
its products. The Company believes that there are sufficient numbers of
suitable independent distributors in each state to serve the Company's
needs. Most of its distributors also represent a national beer brand and
have established significant retail penetration in their territory to make
that brand widely available. These distributors carry other brands to
broaden their product offerings and in particular are increasingly seeking
craft beer brands to satisfy the rising consumer demand for these types of
products. Management believes that both the brewing of beer in Company-
owned facilities and a corresponding regional identity are viewed
positively by independent distributors in deciding whether to carry the
Lion Brewery's products. The appointment of distributors is also governed
by beverage laws in some states which stipulate a specific territory for
each distributor. The Company has developed these distributor
relationships primarily in the last 18-24 months.
SALES AND MARKETING
The Lion Brewery's four largest malta customers, Goya Foods, Vitarroz,
Cerveceria India and 7-Up/RC Puerto Rico, accounted for 95% of the
Company's total malta sales for fiscal 1996 and 1996. Mr. Lawson, the
Company's Chief Executive Officer, is primarily responsible for selling and
marketing these and the Company's other contract accounts. The Head
Brewmaster and the Vice President of Logistics are also actively involved
with these customer relationships in discussing product recipes, new
product formulations, production scheduling and delivery.
The Company's craft and traditional beers are sold to independent
distributors by five full-time salespeople. The Company is primarily
focused on building relationships through personal contact with its
existing and new distributors to broaden the market presence of the
Company's craft beer. Since the Company's beers are only a portion
of its distributors' expanding portfolio of product offerings and
compete with other beers, it is becoming more important for the Company to
elevate its brand awareness with each distributor. This is accomplished by
on-site training of distributors' staff and, in some cases, offering
educational tours of the brewery. Several of the Company's largest
distributors and their sales forces have visited the brewery to enhance
their knowledge of the Company's products. The Company's sales
representatives also arrange taste testings of Company beers for its
distributors and supply informational literature for circulation among
distributors' retail customers. To further promote its product sales, the
Company periodically offers price discounts to distributors in certain
markets. Distributors often participate in these price discounts. The
Company anticipates that it may in the future offer such promotions in
response to competitive conditions.
The Company believes that in order to stimulate consumer demand it
must educate not only its distributors but also the retailer and consumer
about the freshness and quality of its products. The Lion Brewery sales
force travels with distributor sales personnel to retail accounts to
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familiarize new accounts with Company products and to increase sales at
existing accounts. The Company has participated in on-premise marketing
such as product sampling and beer dinners. In addition, on premise
marketing is also supported with point of sale material such as tap
handles, table tents and, in some cases, neon signs.
The Company's strategy is to increase its penetration into its
existing markets while expanding to other markets. This strategy will be
implemented by further developing the existing distributor relationships
and establishing new distributors in target markets. The Company
anticipates significantly increasing its sales and marketing efforts by
hiring additional sales personnel and increasing public brand name exposure
through print, outdoor and electronic advertising on a selective basis.
COMPETITION
The Company competes with other breweries in the production and
marketing of malta and beer. Management believes that the Company is the
dominant brewer of malta in the continental United States because of the
high quality of its products, customer service and location in the eastern
United States where the consumption of malta is concentrated. Although
foreign competition has recently entered the malta market, the Company's
customer service and proximity to the market has enabled it to maintain its
customer base.
In the craft beer market, the Company competes against such contract
brewers as The Boston Beer Company, Inc. and Pete's Brewing Company, and
other regional breweries such as Redhook Ale Brewery, Inc., Hart Brewing,
Inc., Genesee Brewing Company, Inc., Pittsburgh Brewing Company, Latrobe
Brewing, F. X. Matt Brewing Company and D. G. Yuengling and Son, Inc. as
well the companies for which the Company performs contract brewing. The
Company also faces competition from import specialty beer companies such as
Bass PLC, Cerveceria Modelo, S.A. (brewer of Corona Extra), Cerveceria
Moctezuma, S.A. (brewer of Dos Equis) and Heineken N.V., which currently
produce premium beer. Imported beer accounts for a greater share of the
domestic beer market than craft beers. The Company also competes with
niche beers produced by affiliates of certain major domestic brewers as
well as with craft beers produced for its contract brewing customers. For
example, Anheuser-Busch, Miller Brewing Co. and Adolph Coors market Elk
Mountain Ale, Leinenkeugel and Killian's Red, respectively. In addition,
the Company expects that the major national brewers, with their superior
financial resources and established distribution networks, will seek
further participation in the continuing growth of the specialty beer market
through the investment in, or formation of distribution alliances with,
smaller specialty 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. The Company also
expects competition to increase as new craft brewers emerge and existing
craft brewers expand their capacity. The specialty beer market in the
United States is the fastest growing segment in the domestic beer market.
Access to capital and other resources is a prerequisite to increasing sales
and production in order to benefit from this market opportunity. Many of
the Lion Brewery's competitors have significantly greater financial,
production, product distribution and marketing resources than the Company.
The Company's products also compete generally with other alcoholic
beverages, including products offered in other segments of the beer
industry and low alcohol products. The Company 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
distribute and sell other beer and alcoholic beverage products.
As an element of its craft beer business, the Company currently
produces and will continue to produce specialty beer products under
contract for certain breweries and marketers of craft beer. The Company's
competition for this segment are breweries with excess capacity.
Management expects the rapid growth in the craft beer segment to continue
and the number of craft beer marketers seeking contract production to
increase, although there can be no assurance it will do so. The Company
believes its contract packaging experience and the quality of its product
enhance its ability to attract additional craft beer marketers as
customers.
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The Company's soft drinks are produced under contract for niche
marketers. Specialty soft drinks using natural ingredients require
pasteurization. The Company believes its principal competitors for this
business are bottlers with specialized equipment such as pasteurizers not
generally used in mass market soft drink production.
CUSTOMER CONTRACTS
The Company's contracts with its malta and contract brewing customers
vary; however, they generally provide for initial terms of two to five
years, subject to renewal, exclusive rights for the Lion Brewery to produce
the product, price and payment terms and brewing and packaging
specifications. The contracts may be terminated by either party under
certain circumstances, including the failure to reach minimum annual
purchase levels in the case of its contract beer customers, and generally
provide for no minimum purchases.
The Company's contracts with its beer distributors provide for
assigned territories and the products to be distributed. Delivery terms
are F.O.B. the Company's brewery or warehouse. In some states, the terms
of the Company's contracts with its distributors may be affected by laws
that restrict enforceability for some contracts terms, especially those
related to the Company's right to terminate the services of its
distributors.
REGULATION
The Company's beer business is highly regulated at federal, state and
local levels. Various permits, licenses and approvals necessary to the
Company's brewery and the sale of alcoholic beverages are required from
various agencies, including the U.S. Treasury Department, Bureau of
Alcohol, Tobacco and Firearms (the "BATF"); the United States Department of
Agriculture; the United States Food and Drug Administration; state alcohol
beverage regulatory agencies in the states in which the Company sells its
products; and state and local health, sanitation, safety, fire and
environmental agencies. In addition, the beer industry is subject to
substantial federal excise taxes, although the Company benefits from
favorable treatment granted to brewers producing less than two million
barrels per year.
Management believes that the Company currently has all licenses,
permits and approvals necessary for its current operations. However,
existing permits or licenses could be revoked if the Company were to fail
to comply with the terms of such permits or licenses, and additional
permits could in the future be required for the Company's existing or
expanded operations. If licenses, permits or approvals necessary for the
Company's operations were unavailable or unduly delayed, or of any such
permits or licenses were revoked, the Company's ability to conduct its
business could be substantially and adversely affected.
Alcoholic Beverage Regulation and Taxation. The Company is subject to
licensing and regulation by a number of governmental authorities. The
Company operates its brewery under federal licensing requirements imposed
by the BATF. Commercial breweries are required to file an amended Brewer's
Notice with the BATF and certain states every time there is a material
change in the brewing process or brewing equipment, change in the brewery's
location, change in the brewery's management or a material change in the
brewery's ownership. The Company's operations are subject to audit and
inspection by the BATF at any time.
In addition to the regulations imposed by the BATF, the Company is
subject to various regulations concerning deliveries and selling practices
in states in which the Company sells its products. Failure by the Company
to comply with applicable federal or state regulations could result in
limitations on the Company's ability to conduct is business. The BATF's
permits can be revoked for failure to pay taxes, to keep proper accounts,
to pay fees, to bond premises, and to abide by federal alcoholic beverage
production and distribution regulations, or if holders of 10% or more of
the Company's equity securities are found to be of questionable character.
Permits from state regulatory agencies can be revoked for many of the same
reasons.
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The U.S. federal government currently imposes an excise tax of $18.00
per barrel on every barrel of beer produced for consumption in the United
States. However, any domestic brewer with production under two million
barrels per year pays a federal excise tax in the amount of $7.00 per
barrel on the first 60,000 barrels it produces annually. While the Company
is not aware of any plans by the federal government to reduce or eliminate
this benefit to small brewers, any such reduction in a material amount
could have an adverse effect on the Company. Individual states also impose
excise taxes on alcoholic beverages in varying amounts, which are also been
subject to change. It is possible that excise taxes will be increased in
the future by both the federal and state governments. In addition,
increased excise taxes on alcoholic beverages have been considered in
connection with various governmental budget-balancing or funding proposals.
Any such increases in excise taxes, if enacted, could adversely affect the
Company's results of operations.
State and Federal Environmental Regulation. The Company's operations
are subject to environmental regulations and local permitting requirements
regarding, among other things, air emissions, water discharges and the
handling and disposal of wastes. While the Company has no reason to
believe its operation violates any such regulation or requirements, if such
a violation were to occur, the Company's business may be adversely
affected. In addition, if environmental regulations were to become more
stringent in the future, the Company could be adversely affected.
TRADEMARKS
The Company considers its trademarks, particularly the "Brewery Hill"
brand name, beer recipes and product package, advertising and promotion
design and artwork to be of considerable value to its business. The
Company relies on a combination of trade secret, copyright and trademark
laws and nondisclosure and other arrangements to protect its proprietary
rights. Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy or obtain and use information that
the Company regards as proprietary. There can be no assurance that the
steps taken by the Company to protect its proprietary information will
prevent misappropriation of such information and such projections may not
preclude competitors from developing confusingly similar brand names or
promotional materials or developing products with taste and other qualities
similar to the Company's beers. While the Company believes that its
trademarks, copyrights and recipes do not infringe upon the proprietary
rights of third parties, there can be no assurance that the Company will
not receive future communications from third parties asserting that the
Company's trademarks, copyrights and recipes infringe, or may infringe, the
proprietary rights of third parties. The potential for such claims will
increase as the Company introduces new beers, increases distribution in
recently entered geographic areas or enters new geographic regions. Any
such claims, with or without merit, could be time consuming, result in
costly litigation and diversion of management personnel, cause product
distribution delays or require the Company to enter into royalty or
licensing agreements. Such royalty or licensing agreements, if required,
may not be available on terms acceptable to the Company or at all. In the
event of a successful claim of infringement against the Company and failure
or inability of the Company to license the infringed or similar proprietary
information, the Company's business, operating results and financial
condition could be materially adversely affected.
EMPLOYEES
At September 30, 1996, the Company had 130 full time employees, including
10 in production, 5 in sales and marketing, and 11 in administration. Of
these, 104 are represented by a labor union. The collective bargaining
agreement with the union expires on May 31, 2000. The Company believes its
relations with its employees to be good.
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ITEM 2. PROPERTIES
BREWING FACILITY
The Lion Brewery produces and packages its beverages in its own
brewing and bottling facility. By owning and operating its own brewery,
the Lion Brewery is able to precisely monitor and control each step of the
brewing process. The brewery is a complex of brick buildings housing a
boiler room, an engine room, a brew house, three storage cellars and keg
filling lines. Adjacent to the brew house is the bottling house, which
contains the bottle washing equipment, two complete bottling lines
including pasteurizers and warehousing for packaging materials. The
Company leases two warehouses near the brewery aggregating approximately
150,000 square feet. One warehouse stores glass bottles which will be used
in bottling and the other warehouse stores finished product and packaging
materials. The warehouse leases expire in February 1999 and June 2001,
respectively. The Company also leases a third warehouse on an as needed,
temporary basis. The Company believes that its current brewing facilities
are adequate to meet its currently anticipated needs. The Company can
expand its facilities, if required, to meet increased production
requirements.
The brewery has one series of vats and tanks that are used to produce
the Company's brewed products. The Company's brew kettle is a 390 barrel
copper Schock-Gusmer. The Lion Brewery's products are brewed in small 330
barrel batches. Another major piece of brewing equipment is a 21 foot
diameter Schock-Gusmer combination mash and lauter tub with knives and
rakes. Also located in the brewing area is a quality control laboratory and
various refrigerated rooms for storing special brewing ingredients.
Located in the basement of the brewery are special stainless steel tanks
and equipment that allow the Lion Brewery to mix syrups and flavorings for
a wide range of products. Blended beverages are transported from these
tanks directly to the bottling house through connecting lines. The
brewery's estimated annual brewing capacity based upon the current product
mix is approximately 340,000 barrels (31 gallons or 13.8 cases of 24 twelve
oz. bottles equal one barrel) of product per year, assuming two seven-hour
shifts, six days a week. Capacity is a function of the product being
produced because of the varying storage times for the different types of
products. Since beer requires as much as 50 days in tanks to allow for
fermentation and finishing as contrasted with only two days for non-
alcoholic brewed beverages such as malta, anticipated increases in the
percentage of total output represented by beer production will require
capital outlays for additional tanks. In fiscal 1996 and 1995, the Company
shipped 329,000 barrels and 325,000 barrels of beverages, of which 68% and
73% were malta, 20% and 17% were beer and 12% and 10% were soft drinks,
respectively.
The Lion Brewery is located on approximately 5.9 acres of Company
owned land in Wilkes-Barre, Pennsylvania. The property is served by the
Luzerne & Susquehanna Railway Company and carloads of grains used in
brewery production are usually on site.
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company is not currently involved in any material pending legal
proceedings and is not aware of any material legal proceedings threatened
against it.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the year ended September 30, 1996.
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PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the Nasdaq National Market
System under the symbol "MALT". There were approximately 27 holders of
record of the Company's common stock at December 27, 1996 although the
Company believes that there are in excess of 300 beneficial holders. As of
such date, the closing sales price per share for the Company's common stock
was $4-1/8.
Securities of the Company were first publicly traded in the third quarter
of fiscal 1996. The high and low closing sale prices reflect inter-dealer
prices, without mark-up, mark-down or commission and may not necessarily
reflect actual transactions. The following table sets forth the high and
low closing sales per share for the Company's common stock for the third
and fourth quarters of fiscal 1996 and for the two months ended November
30, 1996 as reported by Nasdaq:
Quarter ended High Low
---------------- -------- ------
June 30, 1996 6 5-1/8
September 30, 1996 5-7/8 5
Two months ended
-----------------
November 30, 1996 5-3/8 3-3/4
There were no cash dividends declared on the common stock of the Company
during the fiscal year ended September 30, 1996.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Company's Financial Statements and related Notes thereto. All
references to fiscal years are references to the Company's fiscal year
ended September 30.
OVERVIEW
The Lion Brewery is a producer and bottler of brewed beverages for
several markets in which it believes its ability to formulate, brew and
package quality products in a consistent manner in a Company owned and
operated facility affords it a competitive advantage. The Company is the
dominant producer of malta in the continental United States. Malta, a
brewed non-alcoholic beverage popular in the Caribbean and South America,
is sold to food and beverage distribution companies marketing to these
population segments in the United States. Malta sales have increased from
$8.7 million, representing 73% of the Company's net sales in 1991, to $17.9
million, representing 68% of net sales in fiscal 1996.
While the Lion Brewery has been engaged in the production of beer
since repeal of Prohibition in 1933 in facilities in which beer was first
produced at the turn of the century, the Company has reemphasized its
production of full-flavored craft beers for sale under its own labels in
the last three years. This emphasis complements the Company's production
of craft beers on a contract basis for other breweries and marketers of
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craft beer which commenced nine years ago. Since 1991, craft beer and
specialty malt beverage sales under Company labels or pursuant to contract
for other breweries or marketers have increased from $479,000, representing
3% of net sales, to $5.0 million, representing 19% of net sales, in fiscal
1996.
The Company also brews and blends specialty soft drinks for beverage
marketers and for some of its malta customers. In 1991 soft drink sales
totaled $724,000, representing 5% of net sales, increasing to $2.5 million,
representing 9% of net sales, in fiscal 1996. The Company still brews beer
sold at popular prices in local markets and predominantly packaged in 16
oz. returnable bottles. The Company is intentionally reducing its
production of popular priced beers in conjunction with a general decline in
market demand for lower priced beer marketed in 16 oz. returnable bottles
and in recognition of the significantly greater profitability for the
Company of using its production capacity for craft beer
The Company obtains the highest net sales dollar per barrel from the
sale of craft beer under its own labels, which had an average net selling
price of approximately $127 in fiscal 1996, increasing 15.5% from $110 per
barrel in fiscal 1995. The Company's average selling price per barrel for
craft beer produced under contract is lower than for the Company's own
brands, but most contract customers bear the cost of labels and packaging
so that gross margins remain favorable.
The Company's gross margin has historically been, and is anticipated
to be, affected by several factors, including product mix, sales prices,
cost of ingredients, bottles and other packaging materials, labor
productivity, overhead utilization and equipment utilization. Due to its
reliance on a Company-owned production facility, a significant portion of
the Company's overhead is not susceptible to short term adjustment in
response to sales below management's expectations, and an excess of
production capacity could therefore have a significant negative impact on
the Company's operating results. A variety of other factors may also lead
to significant fluctuations in the Company's quarterly results of
operations, including timing of new product introductions, seasonality of
demand, changes in consumer preferences and general economic conditions.
In general, the Company obtains the highest gross margin on its sale of
craft beers sold under its own label.
The Company sells approximately 85% of its beer in bottles and the
remainder in kegs. All other products are sold in bottles except for
Reed's premium brewed soft drinks, which are also available in kegs. Malta
is packaged in 12 oz. and seven ounce bottles, craft beer and soft drinks
are packaged in 12 oz. bottles and popular priced beer is packaged in both
12 oz. bottles and 16 oz. returnable bottles. A substantial portion of the
Company's bottled products are bottled in recycled bottles which have a
lower cost than new bottles.
The Company brews five days per week, 24 hours per day and packages
production five days per week in two seven-hour shifts. During peak
demand, the Company lengthens each packaging shift by two hours per shift.
At its present capacity and product mix (approximately 68% malta, 23% beer
and 9% specialty soft drinks), the Company believes it could produce and
package approximately 370,000 barrels per year. The Company is in the
process of increasing its annual production capacity to 400,000 barrels,
based upon its anticipated product mix.
The Company's strategy is to rapidly expand its production and
marketing of craft beer, while maintaining the growth of its non-alcoholic
brewed beverages. To achieve these growth objectives, the Company plans to
significantly increase its sales and marketing expenditures, which the
Company anticipates will adversely affect the Company's operating margin,
at least until sales increase to match such increase in sales and marketing
expenditures, of which there can be no assurance.
On October 4, 1993, Lion Partners Company, L.P., in a series of
related transactions, acquired 81% of the Company's Common Stock. The
Company accounted for these transactions as a purchase, writing up the
assets acquired by $1.8 million. The excess of the purchase price over the
fair value of the net assets acquired of approximately $6.5 million has
been recorded as goodwill and is being amortized over 40 years. In
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connection with these transactions, the Company changed its fiscal year end
from December 31 to September 30.
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RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain
income statement data expressed as a percentage of net sales, and certain
operating data expressed as a percentage of net sales and net sales per
barrel.
Income Statement Data
Year Ended September 30,
-------------------------
1996 1995 1994
------ ----- -----
Gross sales 102.1% 101.5% 101.5%
Less excise taxes 2.1 1.5 1.5
----- ------ -----
Net sales 100.0 100.0 100.0
Cost of sales 75.4 76.0 80.1
----- ------ -----
Gross profit 24.6 24.0 19.9
----- ------ -----
Operating expenses:
Delivery 3.1 3.3 3.5
Selling, advertising and 4.7 3.2 2.7
promotional
General and administrative 5.2 5.4 6.1
----- ----- -----
Total operating 13.0 11.9 12.3
expenses ----- ----- -----
Operating income 11.6 12.1 7.6
Interest expense 2.0 4.2 5.3
----- ----- -----
Income before provision of 9.6 7.9 2.3
income taxes
and extraordinary item
Provision for income taxes 4.3 3.7 1.1
----- ----- -----
Income before extraordinary item 5.3 4.2 1.2
Extraordinary item 1.2 0.0 0.0
----- ----- -----
Net income 4.1% 4.2% 1.2%
===== ===== =====
Operating Data
Year Ended September 30,
----------------------------------------------
Percent of Net Sales Net Sales Per Barrel
-------------------- ---------------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Malta 67.8% 75.0% 78.6% $ 80 $ 78 $ 73
Beer:
Craft:
Company label 6.7 4.9 1.2 127 110 83
Contract 12.4 7.4 6.7 99 84 74
---- ---- ----
19.1 12.3 7.9
Popular priced 3.7 5.0 6.8 55 55 54
---- ---- ----
Total beer 22.8 17.3 14.7
---- ---- -----
Specialty soft 9.4 7.7 6.7 64 62 59
drinks ---- ---- ----
100.0% 100.0% 100.0% $ 80 $ 76 $ 71
====== ====== ======
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YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Gross Sales and Excise Taxes
The Company's gross sales increased 7.2% to $27.0 million in fiscal
1996 from $25.2 million in fiscal 1995. Gross sales of craft beer and
specialty malt beverages increased 63.6% to $5.4 million in fiscal 1996
from $3.3 million in fiscal 1995. Gross sales of craft beer and specialty
malt beverages represented 19.1% of gross sales in fiscal 1996 as compared
to 13.1% of gross sales in fiscal 1995. Gross sales of popular priced beer
decreased 21.4% to $1.1 million in fiscal 1996 from $1.4 million in fiscal
1995.
The Company is required to pay federal and state excise taxes on sales
of its beer. The federal excise tax increases from $7.00 to $18.00 per
barrel on production over 60,000 barrels. Total excise taxes increased
42.4% to $544,000 in fiscal 1996 from $382,000 in fiscal 1995. Excise taxes
as a percentage of sales increased in fiscal 1996 due to the greater
percentage of beer sales in the Company's product mix and because excise
taxes were accrued at an effective annual rate above $7.00 per barrel in
the expectation that beer production for calendar 1996 will exceed 60,000
barrels. As the Company increases its beer production above 60,000
barrels, federal excise taxes will continue to increase as a percentage of
sales. During fiscal 1996 and 1995, the Company sold 64,797 barrels and
55,554 barrels of beer respectively. The Company records excise tax
expense based on anticipated barrel shipments.
Net Sales
The Company's net sales increased 6.6% to $26.4 million in fiscal 1996
from $24.8 million in fiscal 1995. Malta sales decreased 3.8% to $17.9
million in fiscal 1996 from $18.6 million in fiscal 1995. Malta sales
decreased as a percentage of net sales to 67.8% in fiscal 1996 from 75.0%
in fiscal 1995. This decrease resulted from the decrease in Malta sales,
but more importantly the rapid growth in net sales of craft beer and
specialty malt beverages and, to a lesser extent, the growth in sales of
soft drinks. Craft beer and specialty malt beverage sales increased 65.1%
to $5.0 million and soft drink sales increased 30.6% to $2.5 million.
Gross Margin
The Company's gross margin (the Company's gross profit as a percentage
of net sales) was 24.6% in fiscal 1996, compared to 24.0% in fiscal 1995.
The increase in gross margin was primarily the result of a 65.1% increase
in craft beer and specialty malt beverage net sales (both under its own
labels and under contract for third parties) and a 30.6% increase in soft
drink net sales, both of which have significantly higher margins than its
malta and popular priced beers. The growth in gross margin was
significantly offset by lower paper recycling income and higher malt
prices.
Delivery Expense
Delivery expense as a percentage of net sales decreased to 3.1% or
$824,000 in fiscal 1996 from 3.3% or $827,000 in fiscal 1995. This
reduction primarily relates to the decrease in malta sales and higher
percentage of beer sales. Substantially all beer sales are shipped F.O.B.
shipping point. Malta products are shipped common carrier at the Company's
expense.
Selling, Advertising and Promotional Expenses
Selling, advertising and promotional expenses increased 58.6% to $1.2
million in fiscal 1996 from $782,000 in fiscal 1995. This increase in
selling, advertising and promotional expenses occurred as the Company began
to gear up its Company label craft beer packaging and sales and marketing
efforts. This increase results from an increase in promotional activities,
advertising, point of sale materials and package design. The Company
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introduced the Classic Collection in late November 1995, Brewery Hill Pale
Ale in March 1996 and Brewery Hill Cherry Wheat in late May 1996. A
significant portion of the Company's sales and marketing efforts are
dedicated to the introduction of its new labels and the implementation of
promotional and advertising programs. In March 1996, the Company hired a
Vice President of Sales and Marketing to spearhead the growth of the
Company label craft beer sales by further developing the Company's
distribution system in the states it currently services and in the
additional states the Company is expanding into. During fiscal 1996, the
Company increased its distribution area from nine to twelve states, adding
Connecticut, Ohio and Washington, D.C. The Company plans to significantly
increase its selling, advertising and promotional programs on Company label
craft beers.
General and Administrative Expenses
General and administrative expenses decreased as a percentage of net
sales to 5.2% in fiscal 1996 from 5.4% in fiscal 1995, as a result of
controlling growth in salaries, professional fees and general overhead
costs.
Operating Income
Operating income increased 1.6% to $3.1 million, or 11.6% of net
sales, in fiscal 1996 from $3.0 million, or 12.1% of net sales, in fiscal
1995. This decrease, as a percentage of net sales, is attributable to the
58.6% increase in selling advertising and promotional expenses. The
Company plans to continue increasing its selling, advertising and
promotional expenses to further its strategy of expanding its craft beer
sales.
Interest Expense
Interest expense decreased 50.1% to $520,000 in fiscal 1996 from $1.0
million in fiscal 1995. This decrease interest expense resulted primarily
from the repayment of the debt outstanding with the proceeds of the initial
public offering.
Provision for Income Taxes
The effective income tax rate was 45% in fiscal 1996 and 47% in fiscal
1995. State income taxes and nondeductible goodwill amortization impact
the effective tax rates.
Extraordinary Item
The extraordinary item recorded in 1996 consists of prepayment
penalties of $160,000, unamortized debt discounts of $213,000 and the
write-off of unamortized deferred financing costs of $177,000 related to
the early extinguishment of debt, net of an income tax benefit of $228,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded operations primarily through cash
generated from operations and bank and other debt. On May 2, 1996, the
Company completed an initial public offering of equity securities. The
proceeds of the initial public offering, including the partial exercise of
the over-allotment option, net of the underwriting commissions and expenses
totaled $9,466,000. A portion of these proceeds were used to repay
indebtedness of the Company of $7,948,000 and to retire 132,696 shares of
Common Stock, in connection with the termination of a loan agreement, at a
cost of $950,000. The repayment of the indebtedness included the Company's
working capital line of credit, which had an outstanding balance of
$920,000. In the process of repaying the debt outstanding with the proceeds
of the offering, the Company incurred extraordinary charges of $550,000,
before income tax benefit. The charges consisted of prepayment penalties
of $160,000, unamortized debt discounts of $213,000 and the write-off of
unamortized deferred financing costs of $177,000 related to the early
extinguishment of debt.
20
<PAGE>
The Company is currently negotiating and has a loan agreement for
review from a lending institution which provides for a $5,000,000 revolving
line of credit and a $2,500,000 revolving equipment line of credit. Both
facilities would be unsecured and interest will be paid monthly based upon
either the Bank's prime rate minus 1/2%, LIBOR plus 75 basis points or the
Bank's offered rate. These lines of credit would mature in 3 years and the
Company, at its option, may convert the principal outstanding on the
revolving equipment line to a term loan of either 3 or 5 years at the same
rates or at a fixed rate to be determined by the lending institution. The
Company believes that these facilities will be obtained, although there is
no assurance in this regard.
Cash flows provided from operations were $2.7 million and $2.5 million
in fiscal 1996 and 1995, respectively. The cash flows from operations have
been affected by collections of accounts receivable, inventory levels
and income taxes payable. In fiscal 1995 and 1996, the Company made
several changes to its credit and collections policies, which resulted in
faster collection periods. As a result, accounts receivable decreased by
$463,000 to $2.0 million at September 30, 1996 as compared to $2.5 million
at September 30, 1995. The increased cash flow from operations and the
repayment of the long-term debt with the proceeds of the initial public
offering enabled the Company to take advantage of vendor discounts and
reduce the accounts payable outstanding. Inventory levels increased by
$200,000 in fiscal 1996 and $212,000 in fiscal 1995 due to increased
packaging supplies, primarily recycled bottles. Income taxes payable
decreased by $152,000 in fiscal 1996. Although the Company's income before
extraordinary items and income taxes increased 29.0% in fiscal 1996 as
compared to the previous year, income taxes payable decreased primarily as
a result of the tax benefit of $228,000 generated by the extraordinary
charge. In fiscal 1996, the cash provided from operations was used to
purchase equipment and pay costs related to the initial public offering. A
portion of the proceeds from the initial public offering were used to repay
the Company's working capital line of credit borrowings outstanding.
During fiscal 1996, the Company expended $908,000 on capital
improvements. The Company is in the process of increasing its annual
production capacity from 340,000 to 400,000 barrels based upon its
anticipated product mix. This expansion will modify its existing seven
ounce bottling line to also accommodate 12 oz. bottles, the bottle size for
most of the Company products. In addition, the Company has increased its
fermentation and lagering capacity with the relining of nine storage tanks.
The Company also completed an upgrade of a boiler and is in the process
of adding a malt storage and elevation system.
The Company believes that the net proceeds from the initial public
offering, together with cash flow from operations and the anticipated
borrowing availability under revolving credit facilities, will be
sufficient to support the Company's capital expenditure and working capital
requirements through the end of fiscal 1997. There can be no assurance
that additional financing will be available on favorable terms or at all.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This report contains forward looking statements based on current
expectations that involve a number of risks and uncertainties. The factors
that could cause actual results to differ materially include the following:
general economic conditions and growth rates in the malt beverage, soft
drink and related industries, competitive factors and pricing pressures,
changes in the Company's product mix, the timely development and acceptance
of new products, inventory risks due to shifts in market demands, supply
constraints and shortages, and the ramp-up and expansion of manufacturing
capacity.
ITEM 7. FINANCIAL STATEMENTS
The response to this item is submitted in a separate section of this
report commencing on Page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In November 1995, the Company's Board of Directors retained Arthur
Andersen LLP as its independent public accountants and replaced the
Company's former auditors, Richard A. Eisner & Company LLP. There were no
21
<PAGE>
disagreements with the former auditors on any matter of accounting
principles or practices, financial statements for the fiscal year ended
September 30, 1994 or up through the time of replacement which, if not
resolved to the former auditors' satisfaction, would have caused them to
make reference to the subject matter of the disagreement in connection with
their report. Prior to retaining Arthur Andersen LLP, the Company had not
consulted with Arthur Andersen LLP regarding accounting principles.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTIONS 16(C) OF THE EXCHANGE ACT.
Information regarding the Company's directors and executive officers
is incorporated by reference from the Company's definitive proxy statement
for its 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement")
under the captions "Board of Directors" or "Executive Compensation."
ITEM 10. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by
reference from the 1996 Proxy Statement under the caption "Executive
Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners
and management is incorporated by reference from the 1996 Proxy Statement
under the caption "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
is incorporated by reference from the 1996 Proxy Statement under the
caption "Certain Relationships and Related Transactions."
PART IV.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report:
1. Financial Statements and Financial Statement Schedules. See Index to
Financial Statements at Item 7 on pages F 1 through F 15 of this
report. All other financial statement schedules are omitted because
they are not required or the required information is included in the
Financial Statement or Notes thereto.
22
<PAGE>
Index to Exhibits:
Exhibit
No. Description
---- -------------------------------------------------------------
1.1 Underwriting Agreement*
3.1 Amendment and Restated Articles of Incorporation filed with
the Secretary of the Commonwealth of Pennsylvania on January
23, 1996*
3.2 By-Laws of the Company*
4.1 Specimen Stock Certificate*
10.1 Employment Agreement, dated as of January 3, 1996, between the
Company and Charles Lawson*
10.2 Employment Agreement, dated as of October 3, 1994, between the
Company and Patrick Belardi*
10.3 Lease dated March 1999 between the Company and Mericle
Development Corporation*
10.4 1996 Stock Option Plan*
10.5 Form of 1996 Stock Option Agreement*
10.6 Agreement dated as of January 3, 1996 between the Company and
The Marlborough Capital Investment Fund, L.P.*
10.7 Agreement dated as of January 3, 1996 between the Company and
Weston Preidio Offshore Capital C.V.*
10.8 Credit and Security Agreement dated as of October 6, 1993
between the Company and Norwest Bank Minnesota, National
Association*
10.9 Mortgage and Security Agreement dated as of October 6, 1993
between the Company and William J. Smulowitz*
10.10 Mortgage and Security Agreement dated as of October 6, 1993
between the Company and Norwest Bank Minnesota, National
Association*
10.11 Mortgage and Security Agreement dated as of October 6, 1993
between the Marlborough Capital Investment Fund, L.P. and
Weston Presidio Offshore Capital C.V.*
10.12 Securities Purchase Agreement dated as of October 6, 1993*
10.13 Letter Agreement dated as of March 29, 1996 between the
Company and Lester Smulowitz and Lynn Muchnick*
16 Letter on Change in certifying accountant*
----------------------
* Incorporated by reference to the Registrant's registration statement
on Form SB-2 (Registration No. 333-01644).
2. No reports on Form 8-K were filed during the fourth quarter of the
fiscal year ended September 30, 1996.
23
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE LION BREWERY, INC.
INDEX TO FINANCIAL STATEMENTS
Page No.
--------
Report of Independent Public Accountants F-2
Financial Statements:
Balance Sheets September 30, 1996 and 1995 F-3
Statements of Income for the Years Ended September 30, 1996
and 1995 F-4
Statements of Shareholders' Equity for the Years Ended
September 30, 1996 and 1995 F-5
Statements of Cash Flows for the Years Ended
September 30, 1996 and 1995 F-6
Notes to Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
The Lion Brewery, Inc.:
We have audited the accompanying balance sheets of The Lion Brewery, Inc.
(a Pennsylvania corporation) as of September 30, 1996 and 1995, and the
related statements of income, shareholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Lion Brewery, Inc.
as of September 30, 1996 and 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
New York, New York
November 21, 1996
F-2
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
1996 1995
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents $1,992,000 $ 0
Accounts receivable, less allowance
for doubtful accounts of $157,000
and $129,000 at September 30, 1996
and 1995, respectively 2,001,000 2,476,000
Inventories 2,128,000 2,003,000
Prepaid expenses and other assets 190,000 277,000
------------ -----------
Total current assets 6,311,000 4,756,000
Property, plant & equipment, net of
accumulated depreciation of $1,684,000
and $1,122,000 at September 30, 1996
and 1995, respectively 3,600,000 3,254,000
Goodwill, net of accumulated
amortization of $475,000 and
$311,000 at September 30, 1996
and 1995, respectively 6,039,000 6,203,000
Deferred financing costs and other
assets, net of accumulated
amortization of $144,000 4,000 228,000
at September 30, 1995 ---------- -----------
$15,954,000 $14,441,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 0 $ 1,745,000
Accounts payable 1,663,000 1,978,000
Accrued expenses 839,000 478,000
Refundable deposits 205,000 171,000
Income taxes payable 178,000 330,000
----------- -----------
Total current liabilities 2,885,000 4,702,000
Long-term debt, less current portion 0 6,131,000
Net pension liability 243,000 218,000
Deferred income taxes 206,000 351,000
----------- -----------
Total liabilities 3,334,000 11,402,000
----------- ------------
Warrants 0 722,000
----------- ------------
Shareholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
3,885,052 and 1,851,183 shares
issued and outstanding at September
30, 1996 and 1995, respectively 39,000 19,000
Additional paid-in capital 10,612,000 1,304,000
Adjustment to reflect minimum
pension liability, net of
deferred income taxes (42,000) (10,000)
Retained earnings 2,011,000 1,004,000
----------- ------------
Total shareholders' equity 12,620,000 2,317,000
----------- ------------
Total liabilities and $ 15,954,000 $ 14,441,000
shareholders' equity ============ ============
The accompanying notes to financial statements are an integral part of
these balance sheets.
F-3
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Year ended September 30,
------------------------
1996 1995
--------- ---------
Gross sales $26,983,000 $25,175,000
Less excise taxes 544,000 382,000
---------- -----------
Net sales 26,439,000 24,793,000
Cost of sales 19,939,000 18,834,000
----------- -----------
Gross profit 6,500,000 5,959,000
----------- -----------
Operating expenses:
Delivery 824,000 827,000
Selling, advertising and
promotional expenses 1,240,000 782,000
General and administrative 1,373,000 1,336,000
----------- -----------
3,437,000 2,945,000
----------- -----------
Operating income 3,063,000 3,014,000
Interest expense and amortization 520,000 1,042,000
of debt discount, net ----------- -----------
Income before provision for income
taxes and extraordinary item 2,543,000 1,972,000
Provision for income taxes 1,125,000 921,000
----------- -----------
Income before extraordinary
item 1,418,000 1,051,000
Extraordinary item, net of income (322,000) ( 0)
tax benefit of $228,000 ----------- -----------
Net income 1,096,000 1,051,000
Warrant accretion 89,000 300,000
----------- -----------
Net income available to common $ 1,007,000 $ 751,000
shareholders =========== ===========
Income per share before extraordinary
item $ 0.47 $ 0.40
Extraordinary item - loss per share (0.11) (0.00)
----------- -----------
Net income per share $ 0.36 $ 0.40
=========== ===========
Shares used in per share calculation 2,835,000 1,898,000
=========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-4
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Common Stock
-----------------------------------
Shares Amount
--------- --------------
Balance, September 30, 1994..... 1,851,183 $ 19,000
Accretion of warrants..........
Adjustment to reflect
minimum pension liability,
net of deferred taxes........
Net income.....................
--------- ---------
Balance, September 30, 1995..... 1,851,183 19,000
Accretion of warrants..........
Conversion of warrants......... 291,565 3,000
Proceeds of Initial Public
Offering, net of costs....... 1,875,000 18,000
Repurchase of common stock..... (132,696) (1,000)
Adjustment to reflect
minimum pension liability,
net of deferred taxes........
Net income.....................
--------- ---------
Balance, September 30, 1996..... 3,885,052 $ 39,000
========= =========
Additional
Paid-in Pension
Capital Liability
----------- -----------
Balance, September 30, 1994..... $ 1,304,000 $ (54,000)
Accretion of warrants.........
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. 44,000
Net income....................
----------- ---------
Balance, September 30, 1995..... 1,304,000 (10,000)
Accretion of warrants.........
Conversion of warrants........ 809,000
Proceeds of Initial Public
Offering, net of costs...... 9,448,000
Repurchase of common stock.... (949,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes............. (32,000)
Net income...................
----------- ---------
Balance, September 30, 1996.... $10,612,000 $ (42,000)
=========== =========
Retained
Earnings Total
----------- -----------
Balance, September 30, 1994..... $ 253,000 $ 1,522,000
Accretion of warrants......... (300,000) (300,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. 44,000
Net income.................... 1,051,000 1,051,000
----------- -----------
Balance, September 30, 1995..... 1,004,000 2,317,000
Accretion of warrants......... (89,000) (89,000)
Conversion of warrants........ 812,000
Proceeds of Initial Public
Offering, net of costs...... 9,466,000
Repurchase of common stock.... (950,000)
Adjustment to reflect minimum
pension liability, net of
deferred taxes.............. (32,000)
Net income.................... 1,096,000 1,096,000
----------- -----------
Balance, September 30, 1996..... $ 2,011,000 $12,620,000
=========== ===========
The accompanying notes to financial statements are an integral part of
these statements.
F-5
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Year ended September 30,
-------------------------
1996 1995
---------- -----------
Cash flows from operating activities:
Net income.............................. $1,096,000 $1,051,000
Adjustments to reconcile net income
to net cash provided by operating
activities
Extraordinary item.................... 550,000 0
Depreciation and amortization......... 830,000 947,000
Bad debt expense...................... 12,000 36,000
Provision for inventory reserve....... 75,000 45,000
Benefit for deferred income taxes..... (145,000) (132,000)
Loss on disposal of equipment......... 0 2,000
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable................. 463,000 153,000
Inventories......................... (200,000) (212,000)
Prepaid expenses and other assets... 87,000 23,000
Increase (decrease) in:
Accounts payable, accrued expenses and
refundable deposits................ 80,000 248,000
Income taxes payable................ (152,000) 330,000
Pension liability................... (7,000) (16,000)
---------- ----------
Net cash provided by operating 2,689,000 2,475,000
activities.......................... ---------- ----------
Cash flows from investing activities:
Proceeds from sale of equipment....... 0 12,000
Purchase of equipment................. (908,000) (319,000)
---------- ----------
Net cash used in investing activities (908,000) (307,000)
---------- ----------
Cash flows from financing activities:
Net proceeds from sale of common stock 9,466,000 0
Repurchase of common stock............ (950,000) 0
Deferred financing costs.............. 0 (25,000)
Issuance of long term debt............ 0 500,000
Net reductions in line of credit...... (721,000) (1,860,000)
Repayment of long term debt........... (7,584,000) (924,000)
---------- ----------
Net cash provided by (used in) financing
activities.......................... 211,000 (2,309,000)
---------- ----------
Net increase (decrease) in cash and cash
equivalents......................... 1,992,000 (141,000)
Cash and cash equivalents. beginning of
year.................................. 0 141,000
---------- ----------
Cash and cash equivalents, end of year.. $1,992,000 $ 0
========== ==========
Supplementary disclosure of cash flow information:
Cash paid for:
Interest............................ $ 516,000 $ 951,000
========== ==========
Income taxes........................ $1,183,000 $ 672,000
========== ==========
The accompanying notes to financial statements are an integral part of
these statements.
F-6
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF THE BUSINESS
The Lion Brewery, Inc. (the Company), formerly The Lion, Inc., is a brewer
and bottler of brewed beverages, including malta, specialty beers and
specialty soft drinks. Malta is a non-alcoholic brewed beverage which the
Company produces for major Hispanic food distribution companies primarily
for sale in the eastern United States. Specialty beers, generally known as
craft beers, are brewed by the Company both for sale under its own labels
and on a contract basis for other marketers of craft beer brands. Craft
beers are distinguishable from other domestically produced beers by their
fuller flavor and adherence to traditional European brewing styles. The
Company also produces specialty soft drinks, including all-natural brewed
ginger beverages, on a contract basis for third parties. The Lion Brewery
also brews beer for sale under traditional Company-owned labels for the
local market at popular prices.
The Company was incorporated in Pennsylvania on April 5, 1933. On October
4, 1993, Lion Partners Company, L.P. (the Partnership) acquired shares of
common stock of the Company for $2,100,000. Prior to this transaction, the
Partnership had no affiliation with the Company. The Company then redeemed
shares of common stock for $6,983,000 (of which $2,500,000 was payable in a
note), including $1,008,000 of direct acquisition costs. After these
transactions, the Partnership owned 81% of the common stock of the Company.
The Company accounted for these transactions as a purchase by the
Partnership whereby the cost of acquiring 81% of the Company was pushed
down to establish a new accounting basis which is reflected in the
accompanying financial statements. The Company allocated the cost of the
acquisition of 81% of the Company to the assets acquired and liabilities
assumed based on their fair values and carried over 19% of the historical
cost at the date of the acquisition. The purchase price was $8,677,000 and
was allocated to tangible assets ($8,782,000) and liabilities ($6,619,000).
The excess of the purchase price over net assets acquired of $6,514,000 was
assigned to goodwill.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 recorded amounts of 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.
Revenue Recognition
Revenue is generally recognized upon shipment. For products brewed under
beer and soft drink contracts, revenue is generally recognized upon
completion of production.
Cash and cash equivalents
The Company considers all highly liquid investments with maturities at the
date purchase of three months or less to be cash equivalents. The carrying
amount of cash equivalents approximates fair value.
Inventories
Inventories are stated at the lower of cost or market determined on a
first-in, first-out method (FIFO).
F-7
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and are depreciated
using the straight-line method over the useful lives of the assets. All
significant additions and improvements are capitalized and repairs and
maintenance charges are expensed as incurred. The new accounting
pronouncement on impairment of long lived assets had no impact on the
Company's financial statements. Estimated useful lives for the assets are
as follows:
Years
-----
Buildings 20
Machinery and equipment 3-10
Kegs and bottles 3-7
Income taxes
The Company recognizes deferred tax assets and liabilities for the
estimated future tax effects of events based on temporary differences
between financial statement and tax basis of assets and liabilities using
enacted tax rates in effect in the years the differences are expected to be
reversed. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. Income tax
expense is comprised of current taxes payable and the change in deferred
tax assets and liabilities during the year.
Intangible Assets
The excess of the cost of the acquired assets over their fair values is
being amortized using the straight-line method over forty years. The
Company continually evaluates the remaining estimated useful lives and the
recoverability of its intangible assets utilizing the undiscounted cash
flow method.
Product and Customer Concentrations
The sale of malta, beer and soft drinks has accounted for all of the
Company's sales, with malta accounting for 68% and 75% for the years ended
September 30, 1996 and 1995. The Company's top three customers accounted
for 60% and 68% of sales in fiscal 1996 and 1995. Accounts receivable from
these three customers totaled $1,712,000 and $1,831,000 at September 30,
1996 and 1995. The Company's largest customer accounted for 27% and 30% of
sales in fiscal 1996 and 1995. The Company does maintain contracts with
several of its top customers; however there are no minimum purchase
requirements. The Company does not have a contract with its largest
customer. The length of such contracts range from two to four years. The
decision by a major customer to switch production of its contract beverages
from the Company to another brewer, or to build facilities to brew its own
product, could have a materially adverse effect on the Company's financial
results.
Excise Taxes
The U.S. federal government currently imposes an excise tax of $18 per
barrel on every barrel of beer produced for consumption in the United
States. However, any brewer with production under 2 million barrels per
year pays a federal excise tax of $7 per barrel on the first 60,000 barrels
it produces annually. Individual states also impose excise taxes on
alcoholic beverages in varying amounts. The Company records the excise tax
as a reduction of gross sales in the accompanying financial statements.
F-8
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of stock options and warrants (using the
treasury stock method for all periods presented). Accretion relating to
the Company's warrants (see Note 11) is deducted in computing income
applicable to common stock.
Stock spilt
In January 1996, the Company's Board of Directors amended the Company's
Articles of Incorporation to effect a 3,091.33 for 1 stock split. All
common shares and per share amounts in the accompanying financial
statements have been adjusted retroactively to give effect to the stock
split.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables. The fair value of accounts
receivable approximates carrying value.
Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation," which requires
companies to measure employee stock compensation plans based on the fair
value method using an option pricing model or to continue to apply APB No.
25, "Accounting for Stock Issued to Employees," and provide pro forma
footnote disclosures under the fair value method. The Company continues to
apply APB No. 25 and will provide the pro forma footnote disclosures.
3. INVENTORIES
Inventories consist of the following:
1996 1995
---------- ----------
Raw materials $163,000 $ 176,000
Finished goods 673,000 663,000
Supplies 1,292,000 1,164,000
----------- ----------
$2,128,000 $2,003,000
========== ==========
F-9
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1996 1995
--------- ----------
Land and building $ 1,024,000 $ 1,014,000
Machinery and equipment 4,038,000 3,167,000
Kegs and bottles 222,000 195,000
----------- ----------
5,284,000 4,376,000
Less accumulated 1,684,000 1,122,000
depreciation ----------- ----------
$ 3,600,000 $3,254,000
=========== ==========
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
1996 1995
---------- ---------
Payroll and related accruals $ 427,000 $ 346,000
Other accruals 412,000 132,000
---------- --------
$ 839,000 $ 478,000
========= =========
6. INCOME TAXES
The provision for income taxes is as follows:
1996 1995
--------- ----------
Current: $ 786,000 $ 755,000
Federal 256,000 298,000
---------- ----------
State 1,042,000 1,053,000
---------- ----------
Deferred:
Federal (105,000) (102,000)
State (40,000) (30,000)
---------- ----------
(145,000) (132,000)
---------- ----------
$ 897,000 $ 921,000
========== ==========
F-10
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
6. INCOME TAXES (CONTINUED)
The principal items accounting for the difference between income taxes
computed at the statutory rate and the provision for income taxes reflected
in the statements of income are as follows:
1996 1995
---- -----
United States statutory rate 35% 35%
State taxes (net of federal tax 7 9
benefit)
Nondeductible expenses - goodwill 3 3
amortization --- ---
45% 47%
=== ===
Components of the Company's deferred tax balances are as follows:
1996 1995
--------- ---------
Deferred tax assets:
Benefit accruals $ 235,00 $ 160,000
Accounts receivable 71,000 53,000
Inventories 96,000 46,000
Other - 18,000
--------- --------
402,000 277,000
--------- --------
Deferred tax liabilities:
Property, plant and 559,000 628,000
equipment
Other 49,000 -
-------- ----------
608,000 628,000
-------- ----------
$ 206,000 $ 351,000
========== ==========
7. DEBT
Debt at September 30, 1995 consists of the following:
1995
----------
Revolving credit loan $ 721,000
Term loan 1,019,000
Senior subordinate notes 3,631,000
Junior subordinate notes 2,500,000
Other 5,000
---------
7,876,000
Current portion 1,745,000
----------
$6,131,000
==========
F-11
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
7. DEBT (CONTINUED)
On May 2, 1996, the Company completed an initial public offering of equity
securities. A portion of the proceeds were used to repay indebtedness of
the Company (See Note 12). The extraordinary item recorded in 1996
consists of prepayment penalties of $160,000, unamortized debt discounts of
$213,000 and the write-off of unamortized deferred financing costs of
$177,000 related to the early extinguishment of debt, net of an income tax
benefit of $228,000.
The Company is currently negotiating a $5,000,000 revolving line of credit
and a $2,500,000 revolving equipment line of credit. Both facilities would
be unsecured and interest will be paid monthly based upon either the Bank's
prime rate minus 1/2%, LIBOR plus 75 basis points or the Bank's offered
rate. There can be no assurance that such agreement will be finalized.
8. PENSION PLANS
The Company maintains a noncontributory defined benefit pension plan
covering nonunion employees. The plan provides benefits based on years of
service and compensation levels. The Company's funding policy for these
plans is predicted on allowable limits for federal income tax purposes.
The components of net periodic pension cost for the defined benefit plan
are as follows:
1996 1995
-------- --------
Service cost - benefits earned $ 30,000 $ 24,000
during the period
Interest cost on projected 36,000 36,000
benefit obligation
Actual return on plan assets (23,000) (39,000)
Net amortization and deferral 19,000 38,000
Effect of settlement - 15,000
--------- --------
Net pension expense $ 62,000 $ 74,000
========= ========
Assumptions used in the accounting for the defined benefit plan are as
follows as of September 30, 1996 and 1995:
Weighted average discount rate 8.5%
Expected long-term rate of
return on assets 9.0
Average salary increase 5.0
F-12
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
8. PENSION PLANS (CONTINUED)
The following table sets forth the funded status and the net pension
liability included in the balance sheet for the defined benefit plan:
1996 1995
--------- ---------
Actuarial present value of benefit
obligation:
Accumulated benefit
obligation (including
vested benefits of $392,000
and $327,000) $ 403,000 $ 340,000
Projected benefit obligation 438,000 413,000
Plan assets at fair value 160,000 122,000
--------- ---------
Projected benefit obligation
in excess of plan assets (278,000) (291,000)
Unrecognized net loss 111,000 87,000
Adjustment required to
recognize minimum liability (76,000) (14,000)
--------- ---------
Net pension liability
recognized in balance sheet $ 243,000 $ 218,000
========= =========
The Company also participates in a multi-employer pension plan which
provides defined benefits to union employees. Contributions are based on a
fixed amount per hour worked. Pension cost aggregated $162,000 and $142,000
for the years ended September 30, 1996 and 1995, respectively.
9. COMMITMENTS AND CONTINGENCIES
The Company leases warehouse facilities and equipment under noncancelable
operating leases. Future minimum lease payments under these leases are:
1997 $234,000
1998 246,000
1999 187,000
2000 136,000
2001 102,000
Rent expense for all leased facilities amounted to $294,000 in 1996 and
$249,000 in 1995.
The Company has entered into employment agreements with the Company's
President and Chief Financial Officer at annual base salaries aggregating
$235,000. Bonuses are determined at the discretion of the Board of
Directors. The contracts also provide for up to 2 years severance in the
case of involuntary termination.
The Company is engaged in certain legal and administrative proceedings
incidental to its normal course of business activities. Management
believes the outcome of these proceedings will not have a material adverse
effect on the Company's financial position or results of operations.
F-13
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
10. RELATED PARTY TRANSACTIONS
Quincy Partners, a general partner of Lion Partners Company, L.P. had a
management consulting agreement with the Company providing for an annual
fee of 130,000. This agreement was terminated on May 2, 1996, the
effective date of the initial public offering (see Note 12). In connection
with the offering Quincy Partners received a consulting fee of $80,000.
The chairman of the Board of Directors receives $50,000 annually plus stock
options for his services in this capacity.
The Company obtained covenants not to compete from two selling
employee/shareholders for an aggregate of $600,000 payable in annual
installments of $100,000 over a six year noncompete period, one covenant
ending in October, 1999 and the other ending in October, 2000.
11. STOCK OPTION PLANS AND WARRANTS
The Company's 1996 Employee Stock Option Plan (the Plan) permits the
granting of options to directors and employees of the Company. The Plan is
administered by the Compensation Committee of the Board of Directors, which
generally has the authority to select individuals who are to receive
options and to specify the terms and conditions of each option so granted,
including the number of shares covered by the option, the type of option
(incentive stock option or nonqualified stock option), the exercise price
(which in all cases must be at least 100% of the fair market value of the
common stock on the date of grant), vesting provisions, and the overall
option term. Options to purchase a total of 400,000 shares of common stock
were reserved for future grants of options under the Plan. In January
1996, the Company granted options for an aggregate of 238,431 shares of
common stock to a director, certain officers and other key employees of the
Company. All of these options vest over a period of two years and have an
exercise price of $6 per share.
On March 21, 1994, the Company's Board of Directors granted options to
purchase an aggregate of 57,251 shares of common stock of the Company to
the President at $1.40 per share (estimated fair market value on the date
of grant) expiring in 2001. The options vest over three years. Vesting
accelerated at the initial public offering (see Note 12).
The senior subordinated noteholders received warrants for the purchase of
291,565 shares of the Company's common stock having a nominal exercise
price. The loan agreement provides that the noteholders may put these
warrants to the Company and accordingly, the warrants were accreted to the
estimated redemption price. During fiscal 1996 and 1995, accretion of
$89,000 and $300,000, respectively, was recorded and charged to retained
earnings. The warrants were exercised in December 1995. The Company used
$950,000 of the net proceeds of the initial public offering to repurchase
132,696 shares of common stock issued upon the exercise of the warrants.
12. PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION
On May 2, 1996, the Company completed an initial public offering of
1,875,000 shares of common stock for $6.00 per share, including the
partial exercise of the over-allotment option. The proceeds of the initial
public offering, including the partial exercise of the over-allotment
option, net of the underwriting commissions and expenses totaled
$9,466,000. A portion of these proceeds were used to repay indebtedness of
the Company of $7,948,000 and to retire 132,696 shares of Common Stock, in
connection with the termination of a loan agreement, at a cost of $950,000.
In connection with this offering, the Company issued warrants to the
underwriters to purchase up to 135,000 shares of common stock at an
exercise price of $7.20, which are exercisable for a period of five years
from the date of the offering. The holders have certain rights to obtain
the registration of these shares under the Securities Act.
F-14
<PAGE>
THE LION BREWERY, INC.
NOTES TO THE FINANCIAL STATEMENTS - (CONTINUED)
12. PUBLIC OFFERING AND PREFERRED STOCK AUTHORIZATION (CONTINUED)
In January 1996, the Company's Board of Directors authorized a change in
the Company's authorized capitalization to 10,000,000 shares of common
stock and 1,000,000 shares of undesignated preferred shares.
F-15
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Wilkes-Barre,
State of Pennsylvania, on December 29, 1996
THE LION BREWERY, INC.
By /s/ Charles E. Lawson, Jr.
----------------------------------
Charles E. Lawson, Jr.
President, Chief Executive Officer and
Director
Pursuant to the requirements of Securities Exchange Act of 1934, this
Report has been signed by the following persons on its behalf of the
Registrant and in the capacities and on the dates indicated.
President, Chief
/s/ Charles E. Lawson, Jr. Executive December 29, 1996
------------------------- Officer and
Charles E. Lawson, Jr. Director
Vice President,
/s/ Patrick E. Belardi Chief Financial December 29, 1996
------------------------- Officer and
Patrick E. Belardi Treasurer
/s/ Donald J. Sutherland Chairman of the December 29, 1996
------------------------- Board
Donald J. Sutherland
Director
-------------------------
Thomas S. Ablum
/s/ George W. Peck, IV Director December 29, 1996
-------------------------
George W. Peck, IV
/s/ Carlo A. von Schroeter Director December 29, 1996
-------------------------
Carlo A. von Schroeter
/s/ Henry T. Wilson Director December 29, 1996
-------------------------
Henry T. Wilson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE LION
BREWERY, INC.'S BALANCE SHEETS, STATEMENTS OF INCOME AND STATEMENTS OF CASH
FLOWS FOR THE PERIOD ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,992
<SECURITIES> 0
<RECEIVABLES> 2,001
<ALLOWANCES> (157)
<INVENTORY> 2,128
<CURRENT-ASSETS> 6,311
<PP&E> 3,600
<DEPRECIATION> 1,684
<TOTAL-ASSETS> 15,954
<CURRENT-LIABILITIES> 2,885
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 12,581
<TOTAL-LIABILITY-AND-EQUITY> 15,954
<SALES> 26,439
<TOTAL-REVENUES> 26,439
<CGS> 19,939
<TOTAL-COSTS> 19,939
<OTHER-EXPENSES> 3,437
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 520
<INCOME-PRETAX> 2,543
<INCOME-TAX> 1,125
<INCOME-CONTINUING> 1,418
<DISCONTINUED> 0
<EXTRAORDINARY> 322
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<NET-INCOME> 1,096
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
