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 March 31, 1998
---------------------
[ ] 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.
- -------------------------------------------------------------------------------
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: April 30, 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
March 31, September 30,
1998 1997
----- ----
Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 3,831,000 $ 3,184,000
Accounts receivable, less allowance for
doubtful accounts of $200,000
at March 31, 1998 and $186,000
at September 30, 1997 2,345,000 2,444,000
Inventories 2,256,000 2,271,000
Prepaid expenses and other assets 123,000 209,000
----------- -----------
Total current assets 8,555,000 8,108,000
Property, plant & equipment, net of
accumulated depreciation of
$2,708,000 at March 31, 1998
and $2,352,000 at September 30, 1997 4,485,000 4,481,000
Goodwill, net of accumulated amortization
of $722,000 at March 31, 1998
And $640,000 at September 30, 1997 5,792,000 5,874,000
Other assets 4,000 4,000
----------- -----------
$18,836,000 $ 18,467,000
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,788,000 $ 1,986,000
Accrued expenses 1,079,000 1,069,000
Refundable deposits 267,000 250,000
Income taxes payable 175,000 380,000
------------ ------------
3,309,000 3,685,000
Net pension liability 341,000 341,000
Deferred income taxes 25,000 67,000
------------ ------------
Total liabilities 3,675,000 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 4,630,000 3,843,000
------------ ------------
Total stockholders' equity 15,161,000 14,374,000
------------ ------------
Total liabilities and stockholders' equity $18,836,000 $18,467,000
============ ============
The accompanying notes to statements are an integral part of these statements.
<PAGE>
THE LION BREWERY, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
1998 1997 1998 1997
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Gross sales $ 6,788,000 $ 5,878,000 $12,531,000 $11,805,000
Less excise taxes 99,000 102,000 167,000 212,000
----------- ----------- ----------- -----------
Net sales 6,689,000 5,776,000 12,364,000 11,593,000
Cost of sales 5,090,000 4,406,000 9,399,000 8,798,000
----------- ----------- ----------- -----------
Gross profit 1,599,000 1,370,000 2,965,000 2,795,000
----------- ----------- ----------- -----------
Operating expenses:
Delivery 219,000 190,000 412,000 362,000
Selling,
advertising and
promotional
expenses 290,000 361,000 590,000 821,000
General and
administrative 360,000 361,000 717,000 703,000
----------- ----------- ----------- -----------
869,000 912,000 1,719,000 1,886,000
----------- ----------- ----------- -----------
Operating income 730,000 458,000 1,246,000 909,000
Interest income 48,000 31,000 96,000 58,000
----------- ----------- ----------- -----------
Income before provision
for income taxes 778,000 489,000 1,342,000 967,000
Provision for income
taxes 323,000 219,000 555,000 435,000
----------- ----------- ----------- -----------
Net income $ 455,000 $ 270,000 $ 787,000 $ 532,000
=========== =========== =========== ===========
Net income per share:
Basic $ 0.12 $ 0.07 $ 0.20 $ 0.14
=========== =========== =========== ===========
Diluted $ 0.12 $ 0.07 $ 0.20 $ 0.14
=========== =========== =========== ===========
Shares used in the per share calculation:
Basic 3,885,000 3,885,000 3,885,000 3,885,000
=========== =========== =========== ===========
Diluted 3,906,000 3,906,000 3,906,000 3,906,000
=========== =========== =========== ===========
The accompanying notes to statements are an integral part of these statements
</TABLE>
<PAGE>
<TABLE>
THE LION BREWERY, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 787,000 $ 532,000
Adjustments to reconcile net income
to net cash provided by
Operating activities:
Depreciation and amortization 438,000 399,000
Bad debt expense 14,000 6,000
Provision for inventory reserve 12,000 12,000
Benefit for deferred income taxes (42,000) (48,000)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable 85,000 69,000
Inventories 3,000 (406,000)
Prepaid expenses and other assets 86,000 25,000
Increase (decrease) in:
Accounts payable, accrued expenses
and refundable deposits (171,000) 229,000
Income taxes payable (205,000) (178,000)
----------- -----------
Net cash provided by operating
activities 1,007,000 640,000
Cash flows from investing activities:
Purchase of equipment (360,000) (1,103,000)
----------- -----------
Net increase (decrease) in cash
and cash equivalents 647,000 (463,000)
Cash and cash equivalents, beginning of year 3,184,000 1,992,000
----------- -----------
Cash and cash equivalents, end of year $ 3,831,000 $ 1,529,000
=========== ===========
Supplementary disclosure of cash flow
information:
Cash paid for:
Income taxes $ 802,000 $ 588,000
=========== ===========
The accompanying notes to statements are an integral part of these statements.
</TABLE>
<PAGE>
<PAGE>
THE LION BREWERY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements and accompanying information as of March 31, 1998
and for the three and six month periods ended March 31, 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. 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 March 31, 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 MARCH 31, 1998 AND 1997
GROSS SALES AND EXCISE TAXES
The Company's gross sales increased 15.5% to $6,788,000 in the three months
ended March 31, 1998 from $5,878,000 in the three months ended March 31, 1997.
The Company's sales volumes for the three months ended March 31, 1998, were
higher than expected due to an increase in contract beer and soda 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 2.9% to $99,000 in the three
months of ended March 31, 1998 from $102,000 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 15.8% to $6,689,000 in the three months ended
March 31, 1998 from $5,776,000 in the three months ended March 31, 1997. Net
sales of malta, alcoholic specialty beverages, produced under contract, and
specialty soft drinks increased 8.9%, 108.5%, and 13.8%, respectively. Net sales
of craft beers, produced under the Company's own labels, remained consistent
during the three months ended March 31, 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 19.2% to
$298,000 in the three months ended March 31, 1998, from $250,000 in the same
period of the prior fiscal year. This increase results from the sale of 12,300
cases of Brewery Hill Pale Ale to Beers Across America. Net sales of popular
priced beers decreased 19.6%.
GROSS MARGIN
The Company's gross margin (gross profit as a percentage of net sales) was 23.9%
for the three months ended March 31, 1998, in comparison to 23.7% for the three
months ended March 31, 1997. Specialty soft drinks sales were 13.1% of net sales
in the three months ended March 31, 1998 and 13.4% in the three months ended
March 31, 1997. The growth in 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 reduction 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.
<PAGE>
DELIVERY EXPENSE
Delivery expense as a percentage of net sales remained at 3.3% of net sales,
increasing to $219,000 during the three months ended March 31, 1998 from
$190,000 during the three months ended March 31, 1997. 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 19.7% to $290,000 in the
three months ended March 31, 1998 from $361,000 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 $360,000 or 5.4% of net sales in the
three months ended March 31, 1998 in comparison to $361,000 or 6.3%in the three
months ended March 31, 1997.
OPERATING INCOME
Operating income increased 59.4% to $730,000, or 10.9% of net sales in the three
months ended March 31, 1998 increasing from $458,000, or 7.9% in the comparable
period 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 $48,000 in the three months ended March 31, 1998 compared to
$31,000 in the three months ended March 31, 1997. The interest income results
from income earned on short-term investments. Cash and cash equivalents
increased to $3,831,000 at March 31, 1998 from $1,529,000 at March 31, 1997.
PROVISION FOR INCOME TAXES
The effective tax rate was 41% and 45% for the first six months of fiscal 1998
and 1997, respectively. State income taxes and nondeductible goodwill
amortization impact the effective tax rates.
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
GROSS SALES AND EXCISE TAXES
The Company's gross sales increased 6.1% to $12,531,000 in the six months ended
March 31, 1998 from $11,805,000 in the six months ended March 31, 1997. The
Company's sales volumes for the first six months of fiscal 1998, were higher
than expected due to an increase in contract beer and soda 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 21.2% to $167,000 in the first
six months of fiscal 1998 from $212,000 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 6.7% to $12,364,000 in the six months ended
March 31, 1998 from $11,593,000 in the six months ended March 31, 1997. Net
sales of malta, alcoholic specialty beverages, produced under contract, and
specialty soft drinks increased 3.2%, 30.2%, and 22.9%, respectively. Net sales
of craft beers, produced under the Company's own labels remained consistent
during the first six 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 10.6% to
$530,000 in the six months ended March 31, 1998, from $479,000 in the same
period of the prior fiscal year. This increase results from the sale of 12,300
cases of Brewery Hill Pale Ale to Beers Across America. Net sales of popular
priced beers decreased 10.8%.
GROSS MARGIN
The Company's gross margin (gross profit as a percentage of net sales) was 24.0%
for the first six months of fiscal 1998, in comparison to 24.1% for the first
six months of fiscal 1997. This decrease results from the increase in specialty
soft drinks to 12.2% of net sales in the first six months of fiscal 1998 from
10.5% in the first six 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 reduction 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.
<PAGE>
DELIVERY EXPENSE
Delivery expense as a percentage of net sales increased to 3.3% of net sales,
increasing to $412,000 during the first six months of fiscal 1998 from $362,000
during the first six 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 28.1% to $590,000 in the
first six months of fiscal 1998 from $821,000 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 $717,000 or 5.8% of net sales in the
first six months of fiscal 1998 in comparison to $703,000 or 6.1% in the first
six months of fiscal 1997.
OPERATING INCOME
Operating income increased 37.1% to $1,246,000, or 10.1% of net sales in the
first six months of fiscal 1998 increasing from $909,000, or 7.8% of net sales
in the first six 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 $96,000 in the first six months of fiscal 1998 compared to
$58,000 in the first six months of fiscal 1997. The interest income results from
income earned on short-term investments. Cash and cash equivalents increased to
$3,831,000 at March 31, 1998 from $1,529,000 at March 31, 1997.
PROVISION FOR INCOME TAXES
The effective tax rate was 41% and 45% for the first six 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 $1,007,000 and $640,000 in the first six months of fiscal 1998 and 1997,
respectively.
The cash flows from operations were primarily generated from net income and
decreases in accounts receivable, inventory levels and prepaid expenses, 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 six months of fiscal
1998, payments were received from these customers and the accounts receivable
balance was reduced by $85,000. Accounts payable, accrued expenses and
refundable security deposits decreased $171,000. Income taxes payable decreased
by $205,000 as a result of the timing of tax payments. In the first six months
of fiscal 1998, the cash provided from operations was used to purchase equipment
of $360,000 and to increase cash reserves. The Company anticipates capital
expenditure requirements for the remainder of fiscal 1998 will range from
$600,000 to $1.0 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
------------------------------
(Registrant)
Date: March 14, 1998
------------------ /s/ Charles E. Lawson
------------------------------
CHARLES E. LAWSON
President and Chief Executive
Officer
Date: March 14, 1998
------------------ /s/ Patrick E. Belardi
------------------------------
PATRICK E. BELARDI
Vice President and Chief
Financial Officer
<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, 1998, 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-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,831
<SECURITIES> 0
<RECEIVABLES> 2,345
<ALLOWANCES> 200
<INVENTORY> 2,256
<CURRENT-ASSETS> 8,555
<PP&E> 7,193
<DEPRECIATION> 2,708
<TOTAL-ASSETS> 18,836
<CURRENT-LIABILITIES> 3,309
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 15,122
<TOTAL-LIABILITY-AND-EQUITY> 18,836
<SALES> 12,364
<TOTAL-REVENUES> 12,364
<CGS> 9,399
<TOTAL-COSTS> 9,399
<OTHER-EXPENSES> 1,719
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,342
<INCOME-TAX> 555
<INCOME-CONTINUING> 787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 787
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
