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 December 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
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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
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(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 ______
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: January 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.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of
December 31, 1997 and for the three month periods ended
December 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, 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. 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 December 31, 1996, 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
GROSS SALES AND EXCISE TAXES
The Company's gross sales decreased 3.1% to $5,743,000 in the
three months ended December 31, 1997 from $5,927,000 in the three
months ended December 31, 1996. The Company's sales volumes for
the first three months of fiscal 1998, were less than expected
due to a decline in contract beer production and the timing of
customer promotions.
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 38.2% to $68,000 in the first three months of
fiscal 1998 from $110,000 in the same period of fiscal 1997.
This decrease results from a reduction in the barrels of beer
sold. 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 decreased 2.4% to $5,675,000 in the three
months ended December 31, 1997 from $5,817,000 in the three
months ended December 31, 1996. Net sales of specialty soft
drinks increased 37.8%. Net sales of Malta decreased 2.2%. Net
sales of alcoholic specialty beverages, produced under the
Company's own labels and contract, decreased 25.3% during the
first three months of fiscal 1998 as compared to the same period
in fiscal 1997. Net sales of the Company's flagship line of
distinctive full-flavored beers, marketed under the Brewery Hill
name, increased 1.3% to $232,000 in the three months ended
December 31, 1997, from $229,000 in the same period of the prior
<PAGE>
fiscal year. Net sales of popular priced beers decreased 7.8%.
GROSS MARGINS
The Company's gross margins (gross profit as a percentage of net
sales) was 24.1% for the first three months of fiscal 1998, in
comparison to 24.5% for the first three months of fiscal 1997.
This decrease results from the increase in specialty soft drinks
to 11.4% of net sales in the first three months of fiscal 1998
from 8.1% in the first three months of fiscal 1997. The growth
in the specialty soft drinks has occurred in a product line which
yields the lowest gross margin of all the Company's products,
because it is primarily packaged using new bottles.
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 increased to 3.4%
of net sales, increasing to $193,000 during the first three
months of fiscal 1998 from $172,000 during the first three 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 34.8% to
$300,000 in the first three months of fiscal 1998 from $460,000
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 $357,000 or 6.3% of net
sales in the first three months of fiscal 1998 in comparison to
5.9% or $342,000 in the first three months of fiscal 1997.
OPERATING INCOME
Operating income was $516,000, or 9.1% of net sales in the first
three months of fiscal 1998 increasing from $451,000, or 7.8% of
net sales in the first three months of fiscal 1997. This
increase results from the decrease in selling, advertising and
promotional expenses.
INTEREST INCOME
Interest income was $48,000 in the first three months of fiscal
1998 compared to $27,000 in the first three months of fiscal
1997. The interest income results from income earned on short-
term investments. Cash and cash equivalents increased to
$3,756,000 at December 31, 1997 from $2,467,000 at December 31,
1996.
PROVISION FOR INCOME TAXES
The effective tax rate was 41% and 43% for the first three months
of fiscal 1998 and 1997, respectively. State income taxes and
nondeductible goodwill amortization impact the effective tax
rates.
<PAGE>
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 $704,000 and $949,000 in the
first three months of fiscal 1998 and 1997, respectively.
The cash flows from operations were primarily generated from net
income and decreases in accounts receivable and inventory levels,
offset by decreases in accounts payable and income taxes payable.
The timing of sales to malta customers and certain contract
customers resulted in higher than normal accounts receivable at
September 30, 1997. During the first three months of fiscal
1998, payments were received from these customers and the
accounts receivable balance was reduced by $773,000. Inventory
levels decreased by $187,000 in the first three months of fiscal
1998 due to a decrease in finished goods inventory. Accounts
payable, accrued expenses and refundable security deposits
decreased $477,000. Income taxes payable decreased by $244,000
as a result of the timing of tax payments. In the first three
months of fiscal 1998, the cash provided from operations was used
to purchase equipment of $132,000 and to increase cash reserves.
The Company anticipates capital expenditure requirements for
fiscal 1998 will range from $900,000 to $1.3 million. These
capital expenditures include upgrading the ammonia refrigeration
and electrical systems, and structural repairs to the brewhouse.
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.
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(Registrant)
Date: February 13, 1998
------------------------- /s/ Charles E. Lawson
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CHARLES E. LAWSON
President and Chief Executive
Officer
Date: February 13, 1998
------------------------- /s/ Patrick E. Belardi
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PATRICK E. BELARDI
Vice President and Chief
Financial Officer
<PAGE>
THE LION BREWERY, INC.
BALANCE SHEETS
December September
31, 30,
1997 1997
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(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,756,000 $ 3,184,000
Accounts receivable, less
allowance for doubtful
accounts of $189,000 at
December 31, 1997 and
$186,000 at September 30,
1997 1,668,000 2,444,000
Inventories 2,078,000 2,271,000
Prepaid expenses and other 281,000 209,000
assets ----------- -----------
Total current assets 7,783,000 8,108,000
Property, plant & equipment, net
of accumulated depreciation of
$2,528,000 at December 31,
1997 and $2,352,000 at
September 30, 1997 4,437,000 4,481,000
Goodwill, net of accumulated
amortization of $681,000 at
December 31, 1997 and $640,000
at September 30, 1997 5,833,000 5,874,000
Other assets 4,000 4,000
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$18,057,000 $18,467,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,328,000 $ 1,986,000
Accrued expenses 1,242,000 1,069,000
Refundable deposits 258,000 250,000
Income taxes payable 136,000 380,000
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2,964,000 3,685,000
Net pension liability 341,000 341,000
Deferred income taxes 46,000 67,000
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Total liabilities 3,351,000 4,093,000
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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 4,175,000 3,843,000
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Total stockholders' equity 14,706,000 14,374,000
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Total liabilities and $18,057,000 $18,467,000
stockholders' equity =========== ===========
The accompanying notes to financial statements are an integral part of
these financial statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
1997 1996
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Gross sales $5,743,000 $5,927,000
Less excise taxes 68,000 110,000
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Net sales 5,675,000 5,817,000
Cost of sales 4,309,000 4,392,000
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Gross profit 1,366,000 1,425,000
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Operating expenses:
Delivery 193,000 172,000
Selling, advertising and promotional expenses 300,000 460,000
General and administrative 357,000 342,000
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850,000 974,000
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Operating income 516,000 451,000
Interest income 48,000 27,000
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Income before provision for income taxes 564,000 478,000
Provision for income taxes 232,000 216,000
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Net income $ 332,000 $ 262,000
========== ==========
Net income per share:
Basic $ 0.09 $ 0.07
========== ==========
Diluted $ 0.08 $ 0.07
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Shares used in the per share calculation:
Basic 3,885,000 3,885,000
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Diluted 3,906,000 3,908,000
========== ==========
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 THREE MONTHS ENDED DECEMBER 31, 1997 AND 1996
(Unaudited)
1997 1996
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Cash flows from operating activities:
Net income $ 332,000 $ 262,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 217,000 195,000
Bad debt expense 3,000 3,000
Provision for inventory reserve 6,000 6,000
Benefit for deferred income taxes (21,000) (24,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 773,000 529,000
Inventories 187,000 (104,000)
Prepaid expenses and other assets (72,000) (41,000)
Increase (decrease) in:
Accounts payable, accrued expenses and
refundable deposits (477,000) 220,000
Income taxes payable (244,000) (97,000)
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Net cash provided by operating activities 704,000 949,000
Cash flows from investing activities:
Purchase of equipment (132,000) (474,000)
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Net increase in cash and cash equivalents 572,000 475,000
Cash and cash equivalents, beginning of year 3,184,000 1,992,000
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Cash and cash equivalents, end of year $3,756,000 $2,467,000
========== ==========
Supplementary disclosure of cash flow
information:
Cash paid for:
Income taxes $ 496,000 $ 337,000
========== ==========
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 DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 3,756
<SECURITIES> 0
<RECEIVABLES> 1,668
<ALLOWANCES> 189
<INVENTORY> 2,078
<CURRENT-ASSETS> 7,783
<PP&E> 6,965
<DEPRECIATION> 2,528
<TOTAL-ASSETS> 18,057
<CURRENT-LIABILITIES> 2,964
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 14,667
<TOTAL-LIABILITY-AND-EQUITY> 18,057
<SALES> 5,675
<TOTAL-REVENUES> 5,675
<CGS> 4,309
<TOTAL-COSTS> 4,309
<OTHER-EXPENSES> 850
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 564
<INCOME-TAX> 232
<INCOME-CONTINUING> 332
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 332
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.08
</TABLE>
