U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(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, 1998
---------------------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _____________
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
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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: July 31, 1998 - 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.
BALANCE SHEETS
June 30, September 30,
1998 1997
----------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,847,000 $ 3,184,000
Accounts receivable, less allowance for
doubtful accounts of $215,000 at
June 30, 1998 and $186,000 at
September 30, 1997 3,152,000 2,444,000
Inventories 2,423,000 2,271,000
Prepaid expenses and other assets 75,000 209,000
----------- -----------
Total current assets 9,497,000 8,108,000
Property, plant & equipment, net of
accumulated depreciation of $2,902,000
at June 30, 1998 and $2,352,000 at
September 30, 1997 4,693,000 4,481,000
Goodwill, net of accumulated amortization of
$763,000 at June 30, 1998 and $640,000 at
September 30, 1997 5,751,000 5,874,000
Other assets 4,000 4,000
----------- -----------
$19,945,000 $18,467,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,941,000 $ 1,986,000
Accrued expenses 1,237,000 1,069,000
Refundable deposits 311,000 250,000
Income taxes payable 292,000 380,000
----------- -----------
3,781,000 3,685,000
Net pension liability 341,000 341,000
Deferred income taxes 54,000 67,000
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Total liabilities 4,176,000 4,093,000
----------- -----------
Stockholders' equity:
Common stock, $.01 par value; 10,000,000
shares authorized; 3,885,051 issued and
outstanding 39,000 39,000
Preferred stock, $.01 par value; 1,000,000
shares authorized; no shares issued or
outstanding 0 0
Additional paid-in capital 10,612,000 10,612,000
Adjustment to reflect minimum pension
liability, net of deferred income taxes (120,000) (120,000)
Retained earnings 5,238,000 3,843,000
----------- -----------
Total stockholders' equity 15,769,000 14,374,000
----------- -----------
Total liabilities and stockholders' equity $19,945,000 $18,467,000
=========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
--------------------------- --------------------------
1998 1997 1998 1997
---- ---- ---- ----
Gross sales $ 7,897,000 $ 7,747,000 $20,428,000 $19,552,000
Less excise taxes 141,000 140,000 308,000 353,000
----------- ----------- ----------- -----------
Net sales 7,756,000 7,607,000 20,120,000 19,199,000
Cost of sales 5,878,000 5,636,000 15,277,000 14,434,000
----------- ----------- ----------- -----------
Gross profit 1,878,000 1,971,000 4,843,000 4,765,000
----------- ----------- ----------- -----------
Operating expenses:
Delivery 262,000 239,000 674,000 601,000
Selling, advertising
and promotional
expenses 268,000 319,000 858,000 1,139,000
General and
administrative 383,000 369,000 1,100,000 1,073,000
----------- ----------- ----------- -----------
913,000 927,000 2,632,000 2,813,000
----------- ----------- ----------- -----------
Operating income 965,000 1,044,000 2,211,000 1,952,000
Interest income 58,000 27,000 154,000 86,000
----------- ----------- ----------- -----------
Income before provision
for income taxes 1,023,000 1,071,000 2,365,000 2,038,000
Provision for
income taxes 415,000 449,000 970,000 884,000
----------- ----------- ----------- -----------
Net income $ 608,000 $ 622,000 $ 1,395,000 $ 1,154,000
=========== =========== =========== ===========
Net income per share:
Basic $ 0.16 $ 0.16 $ 0.36 $ 0.30
=========== =========== =========== ===========
Diluted $ 0.16 $ 0.16 $ 0.36 $ 0.30
=========== =========== =========== ===========
Shares used in the
per share
calculation:
Basic 3,885,000 3,885,000 3,885,000 3,885,000
=========== =========== =========== ===========
Diluted 3,906,000 3,905,000 3,906,000 3,905,000
The accompanying notes to financial statements are an integral part
of these statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 1,395,000 $ 1,154,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 673,000 613,000
Bad debt expense 29,000 9,000
Provision for inventory reserve 18,000 18,000
Benefit for deferred income taxes (13,000) (17,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (737,000) (711,000)
Inventories (170,000) (339,000)
Prepaid expenses and other assets 134,000 67,000
Increase (decrease) in:
Accounts payable, accrued expenses
and refundable deposits 184,000 163,000
Income taxes payable (88,000) 126,000
----------- -----------
Net cash provided by operating
activities 1,425,000 1,083,000
Cash flows from investing activities:
Purchase of equipment (762,000) (1,303,000)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 663,000 (220,000)
Cash and cash equivalents, beginning of year 3,184,000 1,992,000
----------- -----------
Cash and cash equivalents, end of year $ 3,847,000 $ 1,772,000
============ ===========
Supplementary disclosure of cash flow
information:
Cash paid for:
Income taxes $ 1,071,000 $ 797,000
=========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of June 30, 1998
and for the three and nine month periods ended June 30, 1998 and 1997 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, 1997.
2. NET INCOME PER SHARE:
The Company has adopted Statement of Financial Accounting Standards SFAS No.
128, "Earnings Per Share" ("Statement 128"). Statement 128 requires the
presentation of basic earnings per share and diluted earnings per share.
Basic earnings per common share was calculated based upon net income divided
by the weighted average number of common shares outstanding during the
period. Diluted earnings per common share was calculated based upon net
income divided by the weighted average number of common shares outstanding,
adjusted for the incremental dilution of outstanding stock options during
the period. (Common share equivalents of outstanding dilutive stock options
were 21,000 and 20,000 for the three and nine month periods ending June 30,
1998 and June 30, 1997, respectively.) Diluted earnings per common share
excludes the impact of certain stock options as they are antidilutive. Basic
and diluted earnings per common share for the period ended June 30, 1997,
are the same amounts as the Company's historical presentation of net income
per share.
<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, Stegmaier 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.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GROSS SALES AND EXCISE TAXES
The Company's gross sales increased 1.9% to $7,897,000 in the three months ended
June 30, 1998 from $7,747,000 in the three months ended June 30, 1997. The
Company's sales volumes for the three months ended June 30, 1998 were favorably
impacted by increases in contract beer and soda sales.
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 increased to $141,000 in the three
months of ended June 30, 1998 from $140,000 in the same period of fiscal 1997.
Excise taxes are accrued at a rate of $7 per barrel in expectation that beer
production will not exceed 60,000 barrels.
NET SALES
The Company's net sales increased 2.0% to $7,756,000 in the three months ended
June 30, 1998 from $7,607,000 in the three months ended June 30, 1997. Net sales
of malta decreased 1.6%, as a result of the timing of customer promotions. Net
sales of alcoholic specialty beverages, produced under contract, and specialty
soft drinks increased 12.9%, and 10.0%, respectively. Although sales volume
remained stable, as a result of price decreases, net sales of craft beers,
produced under the Company's own labels, decreased 10.0%. Net sales of popular
priced beers increased 1.7%.
GROSS MARGIN
The Company's gross margin (gross profit as a percentage of net sales) was 24.2%
for the three months ended June 30, 1998, in comparison to 25.9% for the three
months ended June 30, 1997. This decrease in gross margin results from a
reduction in the availability of recycled bottles and the composition of the
Company's sales mix. The Company experienced a reduction in the availability of
certain styles of recycled bottles from its current sources. This reduction in
availability resulted in an increased cost of bottles; reducing the gross
margin. The Company will make all efforts to mitigate the future effect of the
increased cost of bottles on gross margins, but no assurances can be made that
the Company will be successful in this regard. The gross margin was also
negatively impacted by the increase in specialty soft drinks sales to 15.5% of
net sales in the three months ended June 30, 1998 from 14.4% in the three months
ended June 30, 1997. The growth in specialty soft drinks has occurred in a
product line which yields a lower gross margin because it is primarily packaged
using new bottles.
DELIVERY EXPENSE
Delivery expense as a percentage of net sales increased to 3.4% of net sales,
increasing to $262,000 during the three months ended June 30, 1998 from $239,000
during the three months ended June 30, 1997. This increase results from the
increase in specialty soft drink sales. Malta and specialty soft drinks are
shipped common carrier at the Company's expense.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSE
Selling, advertising and promotional expenses decreased 16.0% to $268,000 in the
three months ended June 30, 1998 from $319,000 in the comparable period of
fiscal 1997. This decrease is the result of the Company strategically reducing
its sales and marketing expenditures for Company label craft beers due to the
softening of the craft beer category and the intense competition from both large
and small brewers. The Company is focusing its efforts more heavily on its local
and contiguous markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses remained at 4.9% of net sales,
increasing to $383,000 during the three months ended June 30, 1998 from $369,000
during the three months ended June 30, 1997.
OPERATING INCOME
Operating income decreased 7.6% to $965,000, or 12.4% of net sales in the three
months ended June 30, 1998 decreasing from $1,044,000, or 13.7% of net sales in
the comparable period of fiscal 1997. This decrease results from a reduction in
the availability of certain styles of recycled glass from current sources.
INTEREST INCOME
Interest income was $58,000 in the three months ended June 30, 1998 compared to
$27,000 in the three months ended June 30, 1997. The interest income results
from income earned on short-term investments. Cash and cash equivalents
increased to $3,847,000 at June 30, 1998 from $1,772,000 at June 30, 1997.
PROVISION FOR INCOME TAXES
The effective tax rate was 41% and 42% for the three months ended June 30, 1998
and 1997, respectively. State income taxes and nondeductible goodwill
amortization impact the effective tax rates.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997
GROSS SALES AND EXCISE TAXES
The Company's gross sales increased 4.5% to $20,428,000 in the nine months ended
June 30, 1998 from $19,552,000 in the nine months ended June 30, 1997. The
Company's sales volumes for the first nine months of fiscal 1998 were favorably
impacted by increases in contract beer and soda sales.
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 12.7% to $308,000 in the first
nine months of fiscal 1998 from $353,000 in the same period of fiscal 1997. This
decrease results from a reduction in the excise tax rate applied. Excise taxes
are accrued at a rate of $7 per barrel in expectation that beer production will
not exceed 60,000 barrels.
NET SALES
The Company's net sales increased 4.8% to $20,120,000 in the nine months ended
June 30, 1998 from $19,199,000 in the nine months ended June 30, 1997. Net sales
of malta, alcoholic specialty beverages, produced under contract, and specialty
soft drinks increased 1.5%, 20.5%, and 16.8%, respectively. Net sales of craft
beers, produced under the Company's own labels decreased 3.9%, despite a sale of
12,300 cases of Brewery Hill Pale Ale to Beers Across America. Net sales of
popular priced beers decreased 10.0%.
GROSS MARGIN
The Company's gross margin (gross profit as a percentage of net sales) was 24.1%
for the first nine months of fiscal 1998, in comparison to 24.8% for the first
nine months of fiscal 1997. This decrease in gross margin results from a
reduction in the availability of recycled bottles and the composition of the
Company's sales mix. The Company experienced a reduction in the availability of
certain styles of recycled bottles from its current sources. This reduction in
availability resulted in an increased cost of bottles; reducing the gross
margin. The Company will make all efforts to mitigate the future effect of the
increased cost of bottles on gross margins, but no assurances can be made that
the Company will be successful in this regard. The gross margin was also
negatively impacted by the increase in specialty soft drinks to 13.6% of net
sales in the first nine months of fiscal 1998 from 12.2% in the first nine
months of fiscal 1997. The growth in the specialty soft drinks has occurred in a
product line which yields a lower gross margin because it is primarily packaged
using new bottles.
DELIVERY EXPENSE
Delivery expense as a percentage of net sales increased to 3.3% of net sales,
increasing to $674,000 during the first nine months of fiscal 1998 from $601,000
during the first nine months of fiscal 1997. This increase results from the
increase in specialty soft drink sales. Malta and specialty soft drinks are
shipped common carrier at the Company's expense.
SELLING, ADVERTISING AND PROMOTIONAL EXPENSE
Selling, advertising and promotional expenses decreased 24.7% to $858,000 in the
first nine months of fiscal 1998 from $1,139,000 in the comparable period of
fiscal 1997. This decrease is the result of the Company strategically reducing
its sales and marketing expenditures for Company label craft beers due to the
softening of the craft beer category and the intense competition from both large
and small brewers. The Company is focusing its efforts more heavily on its local
and contiguous markets.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,100,000 or 5.5% of net sales in
the first nine months of fiscal 1998 in comparison to $1,073,000 or 5.6% in the
first nine months of fiscal 1997.
OPERATING INCOME
Operating income increased 13.3% to $2,211,000, or 11.0% of net sales in the
first nine months of fiscal 1998 increasing from $1,952,000, or 10.2% of net
sales in the first nine months of fiscal 1997. This increase results from the
increase in sales and the decrease in selling, advertising and promotional
expenses.
INTEREST INCOME
Interest income was $154,000 in the first nine months of fiscal 1998 compared to
$86,000 in the first nine months of fiscal 1997. The interest income results
from income earned on short-term investments. Cash and cash equivalents
increased to $3,847,000 at June 30, 1998 from $1,772,000 at June 30, 1997.
PROVISION FOR INCOME TAXES
The effective tax rate was 41% and 43% for the first nine months of fiscal 1998
and 1997, 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. Cash flows provided from operations
were $1,425,000 and $1,083,000 in the first nine months of fiscal 1998 and 1997,
respectively.
The cash flows from operations were primarily generated from net income, a
decrease in prepaid expenses and a increase in accounts payable, which was
offset by increases in accounts receivable and inventory and a decease in income
taxes payable. The increases in accounts receivable and inventory of $737,000
and $170,000, respectively, result from the seasonality of the business and the
expansion of products produced by the Company. The increase in inventory was
offset by a decline in recycled bottle inventory, due to the Company
experiencing a reduction in the availability of certain styles of recycled
bottles from its current sources. Accounts payable, accrued expenses and
refundable security deposits increased $184,000. Income taxes payable decreased
by $88,000 as a result of the timing of tax payments. In the first nine months
of fiscal 1998, the cash provided from operations was used to purchase equipment
of $762,000 and to increase cash reserves. The Company anticipates capital
expenditure requirements for the remainder of fiscal 1998 will range from
$300,000 to $400,000. These capital expenditures include upgrading the
electrical systems and structural repairs to the brewhouse and bottleshop.
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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
EXHIBIT 27. FINANCIAL DATA SCHEDULE
<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: August 13, 1998 /s/ Charles E. Lawson
---------------------------- ------------------------------
CHARLES E. LAWSON
President and Chief Executive
Officer
Date: August 13, 1998 /s/ Patrick E. Belardi
-------------------------- -----------------------------
PATRICK E. BELARDI
Vice President and Chief
Financial Officer
<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, 1998, 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-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,847
<SECURITIES> 0
<RECEIVABLES> 3,152
<ALLOWANCES> 200
<INVENTORY> 2,423
<CURRENT-ASSETS> 9,497
<PP&E> 7,401
<DEPRECIATION> 2,708
<TOTAL-ASSETS> 19,945
<CURRENT-LIABILITIES> 3,781
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 15,730
<TOTAL-LIABILITY-AND-EQUITY> 19,945
<SALES> 20,120
<TOTAL-REVENUES> 20,120
<CGS> 15,277
<TOTAL-COSTS> 15,277
<OTHER-EXPENSES> 2,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,365
<INCOME-TAX> 970
<INCOME-CONTINUING> 1,395
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,395
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
