U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997
-----------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange
Act
For the transition period from to
-------------- -----------
Commission file number 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)
(717) 823-8801
-----------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
-----------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) 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
----- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the
Exchange Act after the distribution of securities under a plan
confirmed by a court.
Yes No
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practicable
date: April 30, 1997 - 3,885,051 shares outstanding
-----------------------------------------------------------
Transitional Small Business Disclosure Format (check one):
Yes No X
------- -----
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
MARCH 31, SEPTEMBER 30,
1997 1996
---------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents . $ 1,529,000 $ 1,992,000
Accounts receivable, less
allowance for doubtful
accounts of $163,000
at March 31, 1997 and
$157,000 at September 30,
1996 . . . . . . . . . . . 1,926,000 2,001,000
Inventories . . . . . . . . 2,522,000 2,128,000
Prepaid expenses and other 165,000 190,000
assets . . . . . . . . . . ----------- ---------
Total current assets . . 6,142,000 6,311,000
Property, plant & equipment,
net of accumulated
depreciation of $2,001,000
at March 31, 1997 and
$1,684,000 at September 30,
1996 . . . . . . . . . . . . 4,386,000 3,600,000
Goodwill, net of accumulated
amortization of $557,000 at
March 31, 1997 and $475,000
at September 30, 1996 . . . 5,957,000 6,039,000
4,000 4,000
Other assets . . . . . . . . --------- ---------
$16,489,000 $15,954,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . $ 1,745,000 $ 1,663,000
Accrued expenses . . . . . 964,000 839,000
Refundable deposits . . . . 227,000 205,000
0 178,000
Income taxes payable . . . ---------- -----------
2,936,000 2,885,000
Net pension liability . . . . 243,000 243,000
158,000 206,000
Deferred income taxes . . . . ---------- -----------
3,337,000 3,334,000
Total liabilities . . . . . ---------- -----------
Stockholders' equity:
Common stock, $.01 par
value; 10,000,000 shares
authorized; 3,885,051
issued and outstanding at
March 31, 1997 and
September 30, 1996 . . . . 39,000 39,000
Additional paid-in capital 10,612,000 10,612,000
Adjustment to reflect
minimum pension liability,
net of deferred income
taxes . . . . . . . . . . (42,000) (42,000)
2,543,000 2,011,000
Retained earnings . . . . . ---------- ----------
Total stockholders' 13,152,000 12,620,000
equity . . . . . . . . . ---------- -----------
Total liabilities and $16,489,000 $15,954,000
stockholders' equity . . =========== ===========
The accompanying notes to financial statements are an integral
part of these financial statements.
-2-
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED MARCH
MARCH 31, 31,
------------------ ----------------------
1997 1996 1997 1996
---- ---- ---- ----
Gross sales . . . . . . $5,878,000 $5,957,000 $11,805,000 $11,986,000
Less excise taxes . . . 102,000 94,000 212,000 201,000
--------- --------- ---------- ---------
Net sales . . . . . . . 5,776,000 5,863,000 11,593,000 11,785,000
4,406,000 4,460,000 8,798,000 8,930,000
Cost of sales . . . . . --------- ---------- ---------- ---------
1,370,000 1,403,000 2,795,000 2,855,000
Gross profit . . . . --------- --------- --------- ---------
Operating expenses:
Delivery . . . . . . 190,000 214,000 362,000 409,000
Selling, advertising
and promotional
expenses . . . . . 361,000 254,000 821,000 474,000
General and 361,000 350,000 703,000 705,000
administrative . . --------- --------- --------- ---------
912,000 818,000 1,886,000 1,588,000
--------- --------- --------- ---------
Operating income . . 458,000 585,000 909,000 1,267,000
Interest expense
(income) and
amortization (31,000) 234,000 (58,000) 465,000
of debt discount . . -------- --------- --------- ---------
Income before
provision for income
taxes . . . . . . . 489,000 351,000 967,000 802,000
Provision for income 219,000 157,000 435,000 360,000
taxes . . . . . . . . --------- --------- --------- ---------
Net income . . . . . 270,000 194,000 532,000 442,000
Warrant accretion . . . 0 0 0 89,000
--------- --------- --------- ---------
Net income available to $ 270,000 $ 194,000 $ 532,000 $353,000
common shareholders . ========= ========= ========= ========
$ 0.07 $ 0.09 $ 0.14 $ 0.17
Net income per share . ========= ========= ========= ========
Shares used in the per 3,923,000 2,045,000 3,923,000 2,045,000
share calculation . . ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of
these financial statements.
-3-
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited)
1997 1996
--------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . $532,000 $442,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . 399,000 435,000
Bad debt expense . . . . . . . . . . . . 6,000 6,000
Provision for inventory reserve . . . . 12,000 25,000
Benefit for deferred income taxes . . . (48,000) (66,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable . . . . . . . . . . 69,000 403,000
Inventories . . . . . . . . . . . . . . (406,000) (593,000)
Prepaid expenses and other assets . . . 25,000 147,000
Increase (decrease) in:
Accounts payable, accrued expenses and
refundable deposits . . . . . . . . . 229,000 70,000
Income taxes payable . . . . . . . . . (178,000) (255,000)
--------- ---------
Net cash provided by operating 640,000 614,000
activities . . . . . . . . . . . . --------- ---------
Cash flows from investing activities:
Purchase of equipment . . . . . . . . . . . (1,103,000) (232,000)
--------- ---------
Cash flows from financing activities:
Deferred costs relating to the initial
public offering . . . . . . . . . . . . . 0 (318,000)
Net reductions in line of credit . . . . . 0 411,000
Repayment of long term debt . . . . . . . . 0 (475,000)
-------- ---------
0 (382,000)
Net cash used in financing activities . . -------- ---------
Net decrease in cash and cash
equivalents . . . . . . . . . . . . . (463,000) 0
1,992,000 0
Cash and cash equivalents, beginning of year --------- ---------
$1,529,000 $ 0
Cash and cash equivalents, end of year . . . ========== =========
Supplementary disclosure of cash flow information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . $ 0 $ 250,000
========= =========
Income taxes . . . . . . . . . . . . . . $ 588,000 $ 680,000
========= =========
The accompanying notes to financial statements are an integral part of
these financial statements.
-4-
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of
March 31, 1997 and for the six month periods ended March 31,
1997 and 1996 are unaudited but, in the opinion of management,
include all adjustments (consisting only of normal recurring
adjustments and accruals) which the Company considers necessary
for a fair presentation of the financial position of the
Company at such dates and the operating results and cash flows
for those periods. Results for the interim periods are not
necessarily indicative of results for the entire year. The
interim financial statements and the related notes should be
read in conjunction with the notes to the financial statements
of the Company included in the Form 10-KSB for the year ended
September 30, 1996.
2. NET INCOME PER SHARE:
On March 31, 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share" ("Statement 128").
Statement 128 is effective for fiscal years ending after
December 15, 1997, and, when adopted, it will require
restatement of prior years' earnings per share. If the Company
had adopted Statement 128 for the period ending March 31, 1997,
there would have been no effect on net income per share, on
either the basic or diluted basis.
3. LINES OF CREDIT:
In February 1997, the Company obtained a $5,000,000 revolving
line of credit and a $2,500,000 revolving equipment line of
credit from a financial institution. Both facilities are
unsecured and interest is payable 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 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.
-5-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Lion Brewery, Inc. is a brewer and bottler of brewed
beverages, including malta, specialty beers and specialty soft
drinks. 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 primarily
in the eastern United States. The Company produces malta for the
major Hispanic food distribution companies including Goya Foods,
Vitarroz, Ceverceria India and 7-Up/RC of Puerto Rico and is the
dominant producer of malta in the continental United States.
Specialty beers, generally known as craft beers, are brewed by
the Company for both sale under its own brands (label) and on a
contract basis for other breweries and 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. Furthermore, the Company
produces flavored, alcoholic, malt based brews under contract.
In March 1997, the Company began producing under contract for
Bass Beers Americas a malt based alcoholic lemon brew -- Hooper's
Hooch(TM). The Company also produces specialty soft drinks,
including all-natural brewed ginger beverages, on a contract
basis for third parties. In addition, the Company brews beer for
sale under traditional Company-owned labels for the local market
at popular prices.
The Company's flagship line of distinctive full-flavored beers
are marketed under the Brewery Hill name. The Brewery Hill line
includes Centennial Lager, Caramel Porter, Black and Tan, Honey
Amber, Raspberry Red, Pale Ale and Cherry Wheat. The Company's
original specialty beers 1857 Premium Lager, Stegmaier Porter and
Liebotschaner Cream Ale are reminiscent of the Company's rich
brewing heritage. Since the brewhouse was built at the turn of
the century in Wilkes-Barre, Pennsylvania, The Lion Brewery
benefits from a long brewing tradition. Company label beers,
brewed in its own brewery, have won numerous prestigious awards.
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
GROSS SALES AND EXCISE TAXES
The Company's gross sales decreased 1.5% to $11,805,000 in the
six months ended March 31, 1997 from $11,986,000 in the six
months ended March 31, 1996. The Company's sales volumes for the
first six months of fiscal 1997, were less than expected due to
the timing of customer promotions, delays in the introduction of
new contract brands and the competitiveness of the craft beer
market. However, gross sales of the Company's flagship line of
distinctive full-flavored beers marketed under the Brewery Hill
name increased 21.9% to $517,000 in the six months ended March
31, 1997, up from $424,000 in the same period of the prior fiscal
year.
The Company is required to pay federal and state excise taxes on
sales of its beer. The federal excise tax increases from $7 to
$18 per barrel on production over 60,000 barrels. Total excise
-6-
<PAGE>
taxes increased 5.5% to $212,000 in the first six months of
fiscal 1997 from $201,000 in the same period of fiscal 1996.
Excise taxes are accrued at a rate higher than $7 per barrel in
expectation that beer production will exceed 60,000 barrels.
NET SALES
The Company's net sales decreased 1.6% to $11,593,000 in the six
months ended March 31, 1997 from $11,785,000 in the six months
ended December 31, 1996. Net sales of the Company's flagship
line of distinctive full-flavored beers marketed under the
Brewery Hill name increased 20.5% to $482,000 in the six months
ended March 31, 1997, up from $400,000 in the same period of the
prior fiscal year. In November 1996, the Company introduced
Brewery Hill Centennial Lager, along with its winter seasonal,
Brewery Hill Caramel Porter. Net sales of malta decreased 3.7%,
while net sales of alcoholic beverages and specialty soft drinks,
produced under contract, increased 18.8% and 37.6% respectively
during the first six months of fiscal 1997 as compared to the
same period in fiscal 1996. Net sales of popular priced beers
decreased 18.8%. The Company continued its strategy initiated in
fiscal 1997 to discontinue some of the slower selling, less
profitable popular priced beers.
GROSS MARGINS
The Company's gross margins (gross profit as a percentage of net
sales) was 24.1% for the first six months of fiscal 1997, in
comparison to 24.2% for the first six months of fiscal 1996.
DELIVERY EXPENSE
Delivery expense as a percentage of net sales decreased to 3.1%
of net sales, or $362,000, during the first six months of fiscal
1997 from 3.5% of net sales or $409,000, during the first six
months of fiscal 1996. Delivery expense decreased to 4.3% of
malta sales in the first six months of fiscal 1997 from 4.7% of
malta sales in the first six months of fiscal 1996. Malta
products are usually shipped common carrier at the Company's
expense. This decrease primarily results from seasonal shipments
of malta at the customers' expense. Substantially all beer sales
are shipped F.O.B. shipping point.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSE
Selling, advertising and promotional expenses increased 73.2% to
$821,000 in the first six months of fiscal 1997 from $474,000 in
the comparable period of fiscal 1996. The increase in selling,
advertising and promotional expenses occurred as the Company
increased its Company label craft beer packaging and sales and
marketing efforts. With the introduction of Brewery Hill
Centennial Lager and Caramel Porter, the Company began radio,
billboard and print media advertisements in select markets. A
significant portion of the Company's sales and marketing efforts
is dedicated to the introduction of its new labels and the
implementation of promotional programs, including advertising,
point of sale materials and package design.
In March 1997, due to the softening of the craft beer category
and the intense competition from both large and small brewers,
the Company began to reduce its sales and marketing expenditures
for Company label craft beers. The Company will focus its
efforts more heavily on its local and contiguous markets.
-7-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $703,000 or 6.1% of net
sales in the first six months of fiscal 1997 in comparison to
6.0% or $705,000 in the first six months of fiscal 1996.
OPERATING INCOME
Operating income was $909,000, or 7.8% of net sales, in the first
six months of fiscal 1997. Primarily as a result of the increase
in selling, advertising and promotional expenses of $347,000,
operating income decreased from $1,267,000, or 10.8% of net sales
in the first six months of fiscal 1996.
The Company believes the increased selling, advertising and
promotional expenditures will have a positive effect on future
sales of its specialty craft beers, however there can be no
assurance thereof.
INTEREST EXPENSE (INCOME)
Interest income was $58,000 in the first six months of fiscal
1997 compared to interest expense of $465,000 in the first six
months of fiscal 1996. The interest income and decrease in
interest expense resulted from income earned on short-term
investments and the repayment of the debt outstanding with the
proceeds from the Company's initial public offering in May 1996.
PROVISION FOR INCOME TAXES
The effective tax rate was 45% for the first six months of fiscal
1997 and 1996. State income taxes and nondeductible goodwill
amortization impact the effective tax rates.
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. A portion of the proceeds from the offering was used
to repay indebtedness of the Company. In February 1997, the
Company obtained a $5,000,000 revolving line of credit and a
$2,500,000 revolving equipment line of credit from a financial
institution. Both facilities are unsecured and interest is
payable 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 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.
There are no borrowings under these lines of credit to date.
Cash flows provided from operations were $640,000 and $614,000 in
the first six months of fiscal 1997 and 1996, respectively. The
cash flows from operations was primarily generated from net
income, collections of accounts receivable, an increase in
accounts payable and accrued expenses. The increase in accounts
receivable collections is consistent with the increase in sales
in the fourth quarter of fiscal 1996 and the seasonality of the
beverage industry. The increase in accounts payable and accrued
expenses is primarily attributable to increases in professional
fees, rent and insurance payable.
-8-
<PAGE>
In the first six months of fiscal 1997, the cash provided from
operations was used to purchase equipment. During the first six
months of fiscal 1997, the Company expended $1,103,000 on capital
improvements. The Company is near completion of its capital
expenditure program to increase its annual production capacity
from 340,000 to 400,000 barrels. During the first six months of
fiscal 1997, the Company adapted its seven ounce bottling line to
also accommodate 12 oz. bottles and installed a malt silo system
and completed the refurbishing of existing storage tanks and its
lauter tub.
The Company believes that the net proceeds from the initial
public offering, together with cash flows from operations and
borrowing availability under its revolving credit facilities,
will be sufficient to support the Company's capital expenditure
and working capital requirements through the end of fiscal 1998.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
This report contains forward looking statements based upon
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 of recycled glass and other constraints
and shortages, and the ramp-up and expansion of manufacturing
capacity.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
EXHIBIT 27. FINANCIAL DATA SCHEDULE
-9-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE LION BREWERY, INC.
------------------------------
(Registrant)
Date: May 15, 1997
--------------------
/s/ Charles E. Lawson
------------------------------
CHARLES E. LAWSON
President and Chief Executive
Officer
Date: May 15, 1997
--------------------
/s/ Patrick E. Belardi
------------------------------
PATRICK E. BELARDI
Vice President and Chief Financial
Officer
-10-
<PAGE>
EXHIBIT INDEX
Exhibit Description
------- -----------
27 Financial Data Schedule
<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 MARCH 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,529
<SECURITIES> 0
<RECEIVABLES> 1,926
<ALLOWANCES> 163
<INVENTORY> 2,522
<CURRENT-ASSETS> 6,142
<PP&E> 4,386
<DEPRECIATION> 2,001
<TOTAL-ASSETS> 16,489
<CURRENT-LIABILITIES> 2,936
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 13,113
<TOTAL-LIABILITY-AND-EQUITY> 16,489
<SALES> 11,593
<TOTAL-REVENUES> 11,593
<CGS> 8,798
<TOTAL-COSTS> 8,798
<OTHER-EXPENSES> 1,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 967
<INCOME-TAX> 435
<INCOME-CONTINUING> 532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 532
<EPS-PRIMARY> 0.14
<EPS-DILUTED> 0.14
</TABLE>
