U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
XXX QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
___ TRANSITION REPORT UNDER SECTION 13 OR (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___
Commission File Number 0-23846
Minnesota Brewing Company
(Exact name of registrant issuer as specified in its charter)
Minnesota 41-1702599
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
882 West Seventh Street, St. Paul, Minnesota 55102
(Address of principal executive offices) (Zip Code)
(612) 228-9173
(Registrant's Telephone Number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report), and (2)
has been subject to such filing requirements for the past 90 days. YES_X_ NO___
As of November 1, 1996 the Company had 3,389,211 shares of Common Stock, $ .01
value per share, outstanding.
MINNESOTA BREWING COMPANY
INDEX
Page
PART I. Financial Statements
Item 1. Condensed Balance Sheets as of
September 30, 1996 and December 31, 1995.............3
Statement of Operations for the three and nine
month periods ended September 30, 1996 and
September 30, 1995...................................5
Statement of Cash Flow for the nine
month periods ended September 30, 1996
and September 30, 1995...............................6
Notes to Financial Statements........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................8
PART II. Other Information..............................................13
Signatures...................................................................14
<TABLE>
<CAPTION>
Minnesota Brewing Company
Condensed Balance Sheets
September 30, December 31
1996 1995
------------ ------------
(unaudited) (note)
<S> <C> <C>
Assets
Current Assets:
Cash $ 260,013 $ --
Securities being held-to-maturity 497,335 997,719
Trade accounts receivable less allowance
for doubtful accounts of $194,000 at September 30,
1996 and $34,000 at December 31, 1995 1,372,026 1,247,445
Transition agreement receivable - 0 - 500,000
Vendor rebates and other receivables 26,140 359,845
Inventories:
Raw materials 261,441 247,347
Work-in-progress 810,574 750,926
Finished goods 1,680,164 776,415
Packaging 2,132,831 2,378,599
Other 695,907 278,058
------------ ------------
Total inventories 5,580,917 4,431,345
Other current assets 382,593 211,150
------------ ------------
Total current assets 8,119,024 7,747,504
------------ ------------
Property and Equipment 5,123,743 4,902,248
Less allowance for depreciation (1,515,526) (1,094,693)
------------ ------------
Net property and equipment 3,608,217 3,807,555
------------ ------------
Other Assets
Trademarks, net of accumulated
amortization of $35,000 at September 30, 1996
and $26,000 at December 31, 1995 232,278 209,200
Deferred income taxes 143,000 143,000
Other, net of accumulated amortization of
$198,000 at September 30, 1996 and
$137,000 at December 31, 1995 338,113 282,244
------------ ------------
Total other assets 713,391 634,444
------------ ------------
$ 12,440,632 $ 12,189,503
============ ============
Note: The Balance Sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Minnesota Brewing Company
Condensed Balance Sheets - Continued
September 30, December 31,
1996 1995
(unaudited) (note)
------------ ------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of capital lease obligation $ 211,953 $ 211,953
Noninterest-bearing advances from
related party 82,684 21,749
Trade accounts payable 651,236 471,205
Accrued expenses 760,119 714,684
Deferred federal excise tax credit 173,850
------------ ------------
Total current liabilities 1,879,842 1,419,591
------------ ------------
Capitalized Lease Obligation, less current maturities 1,825,008 1,982,428
------------ ------------
Shareholders' Equity:
Common Stock; $.01 par value; 10,000,000 shares
authorized 3,389,211 issued and outstanding
at September 30, 1996 and 3,351,611 at
December 31, 1995 33,892 33,516
Additional paid-in capital 10,435,667 10,263,094
Accumulated deficit (1,733,777) (1,509,126)
------------ ------------
Total shareholders' equity 8,735,782 8,787,484
------------ ------------
$ 12,440,632 $ 12,189,503
============ ============
Note: The Balance Sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
Minnesota Brewing Company
Statements of Operations
For the Periods Ended September 30, 1996 and 1995
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Gross sales $ 7,021,983 $ 11,056,827 $ 21,697,422 $ 28,629,130
Less excise taxes 858,620 824,145 2,464,810 1,981,743
----------- ------------ ------------ ------------
Net sales 6,163,363 10,232,682 19,232,612 26,647,387
----------- ------------ ------------ ------------
Cost of goods sold 5,385,460 9,495,971 17,373,146 24,568,707
Less transition agreement
revenue -- 490,436 -- 490,436
----------- ------------ ------------ ------------
Net cost of goods sold 5,385,460 9,005,535 17,373,146 24,078,271
----------- ------------ ------------ ------------
Gross profit 777,903 1,227,147 1,859,466 2,569,116
----------- ------------ ------------ ------------
Operating expenses
Advertising 377,283 534,909 890,107 1,234,088
Sales and marketing 216,470 196,720 562,702 552,765
Administrative 177,278 177,280 579,217 520,097
----------- ------------ ------------ ------------
Total operating expenses 771,031 908,909 2,032,026 2,306,950
----------- ------------ ------------ ------------
Operating income (loss) 6,872 318,238 (172,560) 262,166
Interest income 23,602 12,015 51,466 55,802
Interest expense (40,158) (47,296) (123,525) (147,429)
Provision for income taxes 22,468 (1,250) 19,968 (3,750)
----------- ------------ ------------ ------------
Net income (loss) $ 12,784 $ 281,707 $ (224,651) $ 166,789
=========== ============ ============ ============
Net income (loss) per
Common Share $ .00 $ .08 $ (.07) $ .05
Weighted average shares
outstanding 3,398,933 3,349,054 3,369,214 3,355,745
See Notes to Financial Statement
</TABLE>
<TABLE>
<CAPTION>
Minnesota Brewing Company
Statements of Cash Flow (Unaudited)
For the Periods Ended September 30, 1996 and 1995
Nine Months Ended September
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (224,651) $ 166,789
Adjustments to reconcile net income (loss)
to net cash provided by (used by) operating activities:
Depreciation and Amortization 490,833 433,652
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable (124,581) (1,074,674)
(Increase) decrease in other receivables 833,705 --
(Increase) decrease in inventories (1,149,572) (491,766)
(Increase) decrease in prepaid expenses
and other assets (171,443) (87,790)
Increase (decrease) in accounts payable
and accrued expenses 225,466 1,575,590
Increase in deferred excise tax credit 173,850 140,854
----------- -----------
Net cash provided by (used in)
operating activities 53,607 662,655
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (221,495) (946,435)
Purchase of Treasury Bills (1,499,616) (1,951,515)
Purchase of intangible assets (148,947) (168,848)
Proceeds of maturing Treasury Bills 2,000,000 2,776,243
----------- -----------
Net cash provided by (used in)
investing activities 129,942 (290,555)
----------- -----------
FINANCING ACTIVITIES
Exercise of stock options 172,949 103,500
Net borrowings (repayments) on related
party obligations 60,935 (58,973)
Principal payments under capital lease
obligations (157,420) (145,716)
----------- -----------
Net cash provided by (used in)
financing activities 76,464 (101,189)
----------- -----------
NET INCREASE (DECREASE) IN CASH 260,013 270,911
CASH AT BEGINNING OF YEAR -- 131,097
----------- -----------
CASH AT END OF PERIOD $ 260,013 $ 402,008
=========== ===========
See Notes to Financial Statements
</TABLE>
Minnesota Brewing Company
Notes to Financial Statements
(Unaudited)
(1) Financial Statements
The balance sheet as of September 30, 1996, the statements of
operations for the three and nine month periods ended September 30, 1996 and the
statements of cash flow for the nine month periods ended September 30, 1996 and
September 30, 1995 have been prepared by the Company without audit. In the
opinion of management, all adjustments (all of which are normal and recurring in
nature) necessary to present fairly the financial position at September 30,
1996, and the results of operations and cash flows for the periods then ended
have been included. Results of operations for the interim periods are not
necessarily indicative of the results that may be expected for the full fiscal
year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company's revenues are derived from the production and sale of its
proprietary Grain Belt, Pig's Eye, Landmark and specialty brand beers, its
contract production of beers and other beverages for other companies and its
production of proprietary beers for sale under different brand names of private
label customers.
Forward-Looking Statement
Information included in this Form 10-Q which can be identified by the
use of forward-looking terminology such as "may," "will," "expect,"
"anticipate," " estimated," or "continue" or the negative thereof or other
variations thereon or comparable terminology constitutes forward-looking
information. The following important factors, among others, in some cases have
affected and in the future could affect the Company's actual results and could
cause the Company's actual financial performance to differ materially from that
expressed in any forward-looking statement: (i) competition within the brewing
industry; (ii) the Company's ability to continue to achieve and maintain
contract brewing arrangements; (iii) the continued success of the Company's
proprietary brands and (iv) the Company's continued ability to sell product for
export.
Results of Operations
The Company's net sales for the three and nine months ended September
30, 1996, decreased 39.8% and 27.8% respectively compared with net sales for the
three and nine month periods ended September 30, 1995. The decrease in net sales
for the third quarter and for the first nine months of 1996 was primarily
attributable to the absence of sales to Pete's Brewing Company (Pete's) which
was the Company's largest contract customer in 1995. The Pete's contract was
concluded in 1995. Third quarter sales without Pete's contract sales included,
reflected slight increases in proprietary sales and contract sales to other
third parties, while export sales were down significantly due to a reduction in
orders from a foreign markets distributor.
For the nine month period ended September 30, 1996, sales increases
were experienced in proprietary products and in contract products after
excluding Pete's sales, while export sales were down for the nine month period
because of the lower level of export sales in the third quarter.
Barrelage sales for the third quarter of 1996 were 49.0% less then in
the third quarter of 1995 and 33.4% less for the first nine months of 1996
versus 1995. Barrelage sales of proprietary products during the third quarter
were up 2.4% compared to 1995, however, they were adversely affected by the
winddown of business activities by the Company's two major distributors at the
end of September 1996 prior to the transfer of their business to other
distributors. Barrelage sales of proprietary products for the first nine months
of 1996 were 10.1% ahead of 1995. Contract barrelage sales were down 62.6% for
the third quarter and 52.6% for the nine month period. After removing the effect
of Pete's sales however, contract sales to other third parties reflected an
increase of 2.1% for the third quarter of 1996 and 59.9% increase for the first
nine months of 1996 compared to similar periods in 1995. Export barrelage sales
were down 66.7% and 23.4% respectively for the third quarter of 1996 and the
first nine months of 1996 when compared to the same periods in 1995 because of
the decline in sales due to a reduction in orders from a foreign markets
distributor impacted by the change in the Japanese exchange rate.
Operating Data (in barrels sold)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1996 1995 1996 1995
------- ------- ------- -------
Proprietary 45,682 44,609 123,400 112,086
Contracts, other 43,632 42,750 144,925 90,639
Contract, Pete's - 0 - 74,006 226 215,782
Export 13,139 39,494 75,923 99,133
------- ------- ------- -------
Totals 102,453 200,859 344,474 517,640
======= ======= ======= =======
The Company's gross profit was $709,650 less during the 1996 nine month
period than in the similar period of 1995 and $449,244 less during the third
quarter of 1996 than 1995. The nine month and third quarter gross profit for
1995 includes the $500,000 transition agreement payment from Pete's Brewing
Company, which was offset against cost of goods sold. The Company's gross profit
improved in the third quarter from 12.0% to 12.6% in 1996 while year to date the
gross margin was relatively constant at 9.7% in 1996 compared to 9.6% in 1995.
The improvement in gross profit in the third quarter was attributable to an
improvement in the costs of some materials and in the blend of sales mix during
the quarter compared to 1995.
Operating expenses were $274,924 less in the first nine months of 1996
compared to 1995, while as a percentage of sales they increased from 8.7% in
1995 to 10.6% in 1996. During the third quarter of 1996 operating expenses
decreased $137,878 compared to 1995, while as a percentage of sales they
increased from 8.9% in 1995 to 12.5% in 1996 primarily because of the reduced
level of sales. The decrease in advertising expenses in both reported periods
was attributable to a lower level of advertising occurring in 1996 than in 1995.
Sales and marketing expenses were slightly higher in both reported periods for
1996 than those incurred in 1995. Administrative expenses were greater for the
first nine months of 1996 than the same period in 1995 primarily because certain
production employees' duties were expanded to include administrative matters and
reallocated accordingly. Administrative expenses were similar for the third
quarter of 1996 and 1995.
Interest income was $51,466 for the first nine months of 1996 versus
$55,802 in 1995 because of a reduced level of investable funds after an
increased investment in production equipment in 1995. However, in the third
quarter of 1996 interest income was $11,587 greater than the third quarter of
1995 due to more funds available for investment throughout the quarter.
Interest expense, which is associated with the capitalized lease for
the plant and equipment was $23,904 less for the nine month period of 1996 and
$7,138 less for the third quarter of 1996 than that which was incurred for the
similar periods of 1995 as principal payments have reduced the amount of
outstanding debt.
For the third quarter of 1996, the Company experienced a net profit of
$12,784 versus a net profit of $281,707 for the third quarter of 1995. The
decrease of $268,923 in 1996 was primarily attributable to a reduction in gross
profit. While operating expenses declined, interest income increased, interest
expense decreased, and the Company recognized a tax benefit upon the filing of
its income tax return, these factors were not sufficient to offset the impact of
the sales reduction that occurred in the third quarter of 1996 compared to 1995
and the impact of the $500,000 transition agreement payment received in the
third quarter of 1995. The Company experienced a net loss of $224,651 versus net
income of $166,789 for the first nine months of 1995. This change principally
arose from a decrease in sales due to the loss of the Pete's contract, a
reduction in export sales, and the absence of the $500,000 transition agreement
payment received in 1995.
Since the Company has approximately $1.3 million in loss carry forwards
available and has recorded the estimated deferred tax benefit, no further tax
benefit can be recorded in 1996, other than the amount that arose under the
liability method when the income tax returns were completed for 1995. The loss
for the first nine months of 1996 will serve to offset any future profits in the
fourth quarter of 1996 or in subsequent years.
Liquidity and Capital Resources
Working capital at September 30, 1996 was $6,239,182 representing a
decrease of $88,731 from $6,327,913 at December 31, 1995. The decrease is
attributable to the investment of funds into additional equipment and intangible
assets.
During the nine month period ended September 30, 1996, the Company
generated net cash from operating activities of $53,607, which was due to an
increase in accounts receivable of $124,581, an increase in inventories of
$1,149,572 and an increase in prepaid expenses and other assets of $171,443.
These amounts were partially offset by the net loss of $224,651 (reduced by
depreciation and amortization of $490,833) a decrease in other receivables of
$833,705, an increase in accounts payable and accrued expenses of $225,466 and
an increase in deferred excise tax credit of $173,850
The Company generated cash of $129,942 from investing activities
primarily from the net sale of Treasury Bills totaling $500,384, which was
transferred to bank savings accounts. This amount was partially offset by the
purchase of property and equipment of $221,495 and the purchase of $148,947 of
intangible assets.
Financing activities provided cash of $76,464 primarily from the
advancement of funds from a related party of $60,935 and the exercise of stock
options of $172,949, which were reduced by $157,420 of principal payments under
capital lease obligations.
The Company believes that it will be able to meet its working capital
and capital resource needs for the next twelve months through cash flow from
operations plus its existing cash and short term investments.
In conjunction with the Company's initial public offering in November
of 1993, the Company's existing operating leases were converted to capitalized
leases and obligations are now reflected as long-term debt on the financial
statements. The debt is being amortized over 10 years at a 7.75% interest rate.
The Company has the option to acquire the property at eight times the trailing
twelve months rent anytime after December 1, 1995. As indicated in the Company's
1995 annual report, based upon 1995 lease payments, the purchase price would be
approximately $7.2 million at December 31, 1995. Should the Company decide to
exercise its option at that date or any succeeding date it would propose to
finance the acquisition with debt or equity financing or some combination
thereof. The Company will monitor the exercise price going forward and will
select the most beneficial time to exercise the option based upon existing facts
and circumstances.
Also in conjunction with the Company's initial public offering in
November of 1993, the Company received a capital contribution of $825,140 from
the Minnesota Brewing Limited Partnership ("Partnership"). This occurred through
the Partnership's assumption of certain long-term debt payable to the Housing
and Redevelopment Authority of the City of St. Paul. The Partnership effectively
extinguished this long-term debt by placing a sufficient amount of cash in an
irrevocable escrow account to pay off the debt in full. The property and
equipment which were originally pledged by the Company as collateral under the
debt agreements remain pledged as of September 30, 1996. The Company continues
to be obligated on the debt which had an outstanding balance of $591,728 at
September 30, 1996, however, the possibility that the Company would ever have to
pay anything on the debit is remote.
As a small brewer producing less than 2,000,000 barrels per year, the
Company presently receives an $11.00 per barrel credit against federal exercise
taxes on the first 60,000 barrels of taxable production. The cash benefit of
this $660,000 credit is primarily received in the first quarter of the year. For
accounting purposes, however, this credit is allocated throughout the year based
upon projected taxable sales per quarter. At September 30, 1996 the Company had
recognized $486,150 of this credit and deferred $173,850 of the credit to the
fourth quarter. At September 30, 1995 the Company had recognized $519,146 of
this credit and deferred $140,854 for recognition in the forth quarter of 1995.
The Company is a party to collective bargaining agreements with five
union organizations which run for a three year term ending June 30, 1997.
Increase over the remaining terms are tied to increased production levels.
As of December 31, 1995, the Company had net operating loss
carryforwards totaling $1.3 million available to reduce future taxable income,
subject to an annual limitation of $575,000. To the extent the Company generates
taxable income during the periods in which this net operating loss carryforward
is available, the Company's cash requirements for payment of income tax will be
reduced.
On March 11, 1996, the Company announced that one of its principal
customers, Winterbrook Corporation filed a Chapter 11 petition for bankruptcy.
The Company produces LaCroix water products for Winterbrook. At the time of
filing, the Company had outstanding receivables totaling approximately $725,000
and was holding inventory of approximately $410,000 against this outstanding
balance. The Company entered a post-petition arrangement with Winterbrook to
ship inventory on a cash in advance basis on a shipping schedule covering all
the inventory. In addition, the Company agreed to continue to produce new
product for Winterbrook at current production prices upon the prior payment for
each week's production. The approximate uncollateralized balance due of $315,000
has been included with the other unsecured claims in the bankruptcy proceedings.
The receivable balance includes 1996 Company sales of product which was produced
from certain inventory reflected on the Company's December 31, 1995 balance
sheet. Accordingly, the Company recorded a charge to 1995 costs of goods sold of
$160,000 which was the Company's estimate of the inventory valuation reserve
necessary as of December 31, 1995, to properly reduce inventory for the
realizability issued raised by this subsequent event. This inventory reserve was
converted to an allowance for doubtful accounts in 1996. The Company continues
to work with Winterbrook in an effort to reaffirm their existing contract and to
explore methods in which to reduce the impact of the bankruptcy. If those
efforts are not successful, the Company anticipates that a charge to operations
of approximately $100,000 in the fourth quarter of 1996 may be necessary.
On March 18, 1996, the Company entered into an interim arrangement with
Winterbrook which was approved by the Bankruptcy Court. Under provisions of the
agreement, Winterbrook agreed to deposit weekly in advance sufficient monies to
cover the scheduled shipments of the majority of the finished goods over the six
weeks ending April 26, 1996. The Company has received scheduled payments
totaling approximately $410,000. The Company also continues to produce product
for Winterbrook based upon a weekly production schedule with a deposit paid in
advance.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Already reported
Item 5. Other information
On August 29, 1996, Robert E. Evans resigned from the Board of
Directors due to increasing responsibilities and the related
travel commitments as Vice Chairman of TCF Financial
Corporation.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINNESOTA BREWING COMPANY
(Registrant)
Dated: November 13, 1996 /s/ Dennis P. Barrett
------------------------------------------
Dennis P. Barrett
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 260,013
<SECURITIES> 497,335
<RECEIVABLES> 1,566,026
<ALLOWANCES> 194,000
<INVENTORY> 5,580,917
<CURRENT-ASSETS> 8,119,024
<PP&E> 5,123,743
<DEPRECIATION> 1,515,526
<TOTAL-ASSETS> 12,440,632
<CURRENT-LIABILITIES> 1,879,842
<BONDS> 1,825,008
0
0
<COMMON> 33,892
<OTHER-SE> 8,701,890
<TOTAL-LIABILITY-AND-EQUITY> 12,440,632
<SALES> 19,232,612
<TOTAL-REVENUES> 19,232,612
<CGS> 17,373,146
<TOTAL-COSTS> 17,373,146
<OTHER-EXPENSES> 2,032,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,525
<INCOME-PRETAX> (244,619)
<INCOME-TAX> 19,968
<INCOME-CONTINUING> (224,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,651)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
