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 June 30, 1997
---------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange
Act
For the transition period from to
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Commission file number 0-28282
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THE LION BREWERY, INC.
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(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
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(Address of Principal Executive Offices)
(717) 823-8801
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(Issuer's Telephone Number, Including Area Code)
N/A
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(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
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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: July 31, 1997 - 3,885,051 shares outstanding
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Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of
June 30, 1997 and for the nine month periods ended June 30,
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 the
restatement of prior years earnings per share. If the
Company had adopted Statement 128 for the period ending June
30, 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.
-2-
<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.
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, Pocono Raspberry, 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
NINE MONTHS ENDED JUNE 30, 1997 AND 1996
GROSS SALES AND EXCISE TAXES
The Company's gross sales increased 1.4% to $19,552,000 in the
nine months ended June 30, 1997 from $19,274,000 in the nine
months ended June 30,1996. The Company's sales volumes for the
first nine months of fiscal 1997, were less than expected due to
delays in the introduction of new contract brands and the
competitiveness of the craft beer market.
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
taxes decreased 10.2% to $353,000 in the first nine months of
fiscal 1997 from $393,000 in the same period of fiscal 1996.
This decrease resulted from a reduction in the a barrels of beer
sold. Excise taxes are accrued at a rate higher than $7 per
barrel in expectation that beer production will exceed 60,000
barrels.
-3-
<PAGE>
NET SALES
The Company's net sales increased 1.7% to $19,199,000 in the nine
months ended June 30, 1997 from $18,881,000 in the nine months
ended June 30, 1996. Net sales of malta and specialty soft
drinks increased 3.2% and 47.1% respectively. Net sales of
alcoholic specialty beverages, produced under the Company's own
labels and contract, decreased 17.6% during the first nine months
of fiscal 1997 as compared to the same period in fiscal 1996.
Net sales of the Company's flagship line of distinctive full-
flavored beers, marketed under the Brewery Hill name, decreased
2.8% to $723,000 in the nine months ended June 30, 1997, from
$744,000 in the same period of the prior fiscal year. Net sales
of popular priced beers decreased 27.1%.
GROSS MARGINS
The Company's gross margins (gross profit as a percentage of net
sales) was 24.8% for the first nine months of fiscal 1997, in
comparison to 24.2% for the first nine months of fiscal 1996.
The Company anticipates a change in the availability of certain
styles of recycled glass from its current sources. This
reduction in availability would result in an increased cost of
glass; reducing future gross margins. The Company will make all
efforts to mitigate the effect on gross margins, but no
assurances can be made that the Company will be successful in
this regard.
DELIVERY EXPENSE
Delivery expense as a percentage of net sales remained at 3.1% of
net sales, increasing to $601,000 during the first nine months of
fiscal 1997 from $592,000 during the first nine months of fiscal
1996.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSE
Selling, advertising and promotional expenses increased 47.5% to
$1,139,000 in the first nine months of fiscal 1997 from $772,000
in the comparable period of fiscal 1996. The increase in
selling, advertising and promotional expenses occurred as the
Company began to increase its Company label craft beer packaging
and sales and marketing efforts. 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 is focusing its
efforts more heavily on its local and contiguous markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,073,000 or 5.6% of
net sales in the first nine months of fiscal 1997 in comparison
to 5.7% or $1,071,000 in the first nine months of fiscal 1996.
-4-
<PAGE>
OPERATING INCOME
Operating income was $1,952,000, or 10.2% of net sales in the
first nine months of fiscal 1997. Primarily as a result of the
increase in selling, advertising and promotional expenses of
$367,000, operating income decreased from $2,134,000, or 11.3% of
net sales in the first nine months of fiscal 1996.
INTEREST EXPENSE (INCOME)
Interest income was $86,000 in the first nine months of fiscal
1997 compared to interest expense of $548,000 in the first nine
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 43% and 44% for the first nine months
of fiscal 1997 and 1996, respectively. 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 $1,083,000 and $892,000
in the first nine months of fiscal 1997 and 1996, respectively.
The cash flows from operations were primarily generated from net
income and an increase in accounts payable and accrued expenses.
The increase in accounts payable and accrued expenses is
primarily attributable to increases in professional fees, rent
and insurance payable.
In the first nine months of fiscal 1997, the cash provided from
operations was used to purchase equipment. During the first nine
months of fiscal 1997, the Company expended $1,303,000 on capital
improvements. The Company has completed its capital expenditure
program to increase its annual production capacity from 340,000
to 400,000 barrels. During the first nine 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.
-5-
<PAGE>
The Company believes that its cash on hand, 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
for the foreseeable future.
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
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<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.
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(Registrant)
Date: August 14, 1997
------------------- /s/ Charles E. Lawson
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CHARLES E. LAWSON
President and Chief Executive
Officer
Date: August 14, 1997
------------------- /s/ Patrick E. Belardi
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PATRICK E. BELARDI
Vice President and Chief
Financial Officer
-7-
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
June 30, September 30,
1997 1996
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $1,772,000 $1,992,000
Accounts receivable, less allowance
for doubtful accounts of $166,000 at
June 30, 1997 and $157,000 at
September 30, 1996 2,703,000 2,001,000
Inventories 2,449,000 2,128,000
Prepaid expenses and other assets 123,000 190,000
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Total current assets 7,047,000 6,311,000
Property, plant & equipment, net of
accumulated depreciation of $2,173,000
at June 30, 1997 and $1,684,000 at
September 30, 1996 4,414,000 3,600,000
Goodwill, net of accumulated
amortization of $599,000 at June 30,
1997 and $475,000 at September 30, 1996 5,915,000 6,039,000
Other assets 4,000 4,000
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$17,380,000 $15,954,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities: $1,530,000 $1,663,000
Accounts payable 1,111,000 839,000
Accrued expenses 229,000 205,000
Refundable deposits 304,000 178,000
Income taxes payable ---------- ---------
3,174,000 2,885,000
Net pension liability 243,000 243,000
Deferred income taxes 189,000 206,000
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Total liabilities 3,606,000 3,334,000
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Stockholders' equity:
Common stock, $.01 par value;
10,000,000 shares authorized;
3,885,051 issued and outstanding
at June 30, 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)
Retained earnings 3,165,000 2,011,000
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Total stockholders' equity 13,774,000 12,620,000
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Total liabilities and $17,380,000 $15,954,000
stockholders' equity ========== ==========
The accompanying notes to financial statements are an integral part
of these financial statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
----------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Gross sales $7,747,000 $7,288,000 $19,552,000 $19,274,000
Less excise taxes 140,000 192,000 353,000 393,000
--------- --------- ---------- ----------
Net sales 7,607,000 7,096,000 19,199,000 18,881,000
Cost of sales 5,636,000 5,382,000 14,434,000 14,312,000
--------- --------- ---------- ----------
Gross profit 1,971,000 1,714,000 4,765,000 4,569,000
--------- --------- ---------- ---------
Operating expenses:
Delivery 239,000 183,000 601,000 592,000
Selling,
advertising and
promotional expenses 319,000 298,000 1,139,000 772,000
General and 369,000 367,000 1,073,000 1,071,000
administrative --------- --------- --------- ---------
927,000 848,000 2,813,000 2,435,000
--------- --------- --------- ---------
Operating income 1,044,000 866,000 1,952,000 2,134,000
Interest expense
(income) and
amortization of debt (27,000) 83,000 (86,000) 548,000
discount -------- -------- -------- ---------
Income before
provision for income
taxes and
extraordinary item 1,071,000 783,000 2,038,000 1,586,000
Provision for income 449,000 345,000 884,000 705,000
taxes -------- -------- -------- ---------
Income before 622,000 438,000 1,154,000 881,000
extraordinary item
Extraordinary item,
net of income tax 0 322,000 0 322,000
benefit of $228,000 -------- -------- -------- ---------
Net income 622,000 116,000 1,154,000 559,000
Warrant accretion 0 0 0 89,000
-------- -------- ---------- ---------
Net income available
to common
shareholders $622,000 $116,000 $1,154,000 $470,000
======== ======== ========== =========
Income per share $0.16 $0.13 $0.29 $0.32
before extraordinary ===== ===== ===== =====
item per share
Net income per share $0.16 $0.03 $0.29 $0.19
===== ===== ===== =====
Shares used in the 3,920,000 3,323,000 3,920,000 2,469,000
per share calculation ========= ========= ========= =========
The accompanying notes to financial statements are an integral part of
these financial statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1997 AND 1996
(Unaudited)
1997 1996
---- ----
Cash flows from operating activities:
Net income $1,154,000 $559,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Extraordinary item 0 550,000
Depreciation and amortization 613,000 633,000
Bad debt expense 9,000 9,000
Provision for inventory reserve 18,000 60,000
Benefit for deferred income taxes (17,000) (98,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (711,000) (356,000)
Inventories (339,000) (321,000)
Prepaid expenses and other
assets 67,000 89,000
Increase (decrease) in:
Accounts payable, accrued
expenses and refundable
deposits 163,000 97,000
Income taxes payable 126,000 (330,000
Net cash provided by
operating activities 1,083,000 892,000
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Cash flows from investing activities:
Purchase of equipment (1,303,000) (596,000)
Cash flows from financing activities:
Net proceeds from sale of common stock 0 9,466,000
Repurchase of common stock 0 (950,000)
Net reductions in line of credit 0 (721,000)
Repayment of long term debtredit 0 (7,584,000)
---------- ----------
Net cash provided by financing 0 211,000
activities ---------- -------
Net increase (decrease) in (220,000) 507,000
cash and cash equivalents
Cash and cash equivalents, beginning 1,992,000 0
of year ---------- --------
Cash and cash equivalents, end of year $1,772,000 $507,000
========== ========
Supplementary disclosure of cash flow
information:
Cash paid for:
Interest $ 0 $ 517,000
========= =========
Income taxes $ 797,000 $ 940,000
========= =========
The accompanying notes to financial statements are an integral part
of these financial statements.
<PAGE>
EXHIBIT INDEX
Exhibit Description
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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 JUNE 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,772
<SECURITIES> 0
<RECEIVABLES> 2,703
<ALLOWANCES> 163
<INVENTORY> 2,449
<CURRENT-ASSETS> 7,047
<PP&E> 6,586
<DEPRECIATION> 2,172
<TOTAL-ASSETS> 17,380
<CURRENT-LIABILITIES> 3,174
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 13,735
<TOTAL-LIABILITY-AND-EQUITY> 17,380
<SALES> 19,199
<TOTAL-REVENUES> 19,199
<CGS> 14,434
<TOTAL-COSTS> 14,434
<OTHER-EXPENSES> 2,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,038
<INCOME-TAX> 884
<INCOME-CONTINUING> 1,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,154
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
