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
JUNE 30, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(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 small business 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
(Issuer's Telephone Number)
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 report), and (2) has been
subject to such filing requirements for the past 90 days. YES __X__ NO ____
As of June 30, 1997 the Company had 3,389,211 shares of Common Stock, no par
value per share, outstanding.
<PAGE>
MINNESOTA BREWING COMPANY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of
June 30, 1997 and December 31, 1996...............3,4
Statements of Operations for the three and six
month periods ended June 30, 1997 and
June 30, 1996.......................................5
Statements of Cash Flow for the six
month periods ended June 30, 1997
and June 30, 1996...................................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...............................................12
Signatures...................................................................13
<PAGE>
MINNESOTA BREWING COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 413,230 $ 386,325
Trade accounts receivable, less allowance
for doubtful accounts of $630,000 at
June 30, 1997 and $485,000 at
December 31, 1996 1,641,708 1,034,921
Vendor rebates receivables -- 91,084
Inventories:
Raw materials 142,402 174,757
Work-in-progress 513,748 448,663
Finished goods 1,722,199 1,373,193
Packaging 1,039,548 2,117,881
Other 505,298 418,038
----------- -----------
Total Inventories 3,923,195 4,532,532
Other current Assets 334,058 221,599
----------- -----------
Total Current Assets 6,312,191 6,266,461
----------- -----------
Property and Equipment 5,558,642 5,473,986
Less accumulated depreciation 1,957,769 1,711,388
----------- -----------
Net property and equipment 3,600,873 3,762,598
----------- -----------
Other Assets
Trademarks, net of accumulated
amortization of $63,000 at
June 30, 1997 and $40,000 at December 31, 1996 264,524 221,273
Deferred income taxes -- 143,000
Other, net of accumulated amortization of
$266,000 at June 30, 1997 and
$219,000 at December 31, 1996 387,584 381,896
----------- -----------
Total Other Assets 652,108 746,169
----------- -----------
$10,565,172 $10,775,228
=========== ===========
</TABLE>
Note: The Balance Sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
<PAGE>
MINNESOTA BREWING COMPANY
CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligation $ 228,975 $ 228,975
Noninterest-bearing amounts due to
related party 348,819 20,051
Trade accounts payable 2,576,201 902,413
Accrued expenses 1,061,455 772,369
Deferred federal excise tax credit 347,717 --
------------ ------------
Total Current Liabilities 4,563,167 1,923,808
------------ ------------
Capitalized lease obligations, less current maturities 1,641,177 1,753,454
------------ ------------
Shareholders' Equity:
Common stock; $.01 par value; 10,000,000 shares
authorized, 3,389,211 issued and outstanding
at June 30, 1997 and December 31, 1996 33,892 33,892
Additional paid-in capital 10,435,668 10,435,668
Accumulated deficit (6,108,732) (3,371,594)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 4,360,828 7,097,966
------------ ------------
$ 10,565,172 $ 10,775,228
============ ============
</TABLE>
Note: The Balance Sheet at December 31, 1996 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1997 1996 1997 1996
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 7,144,208 $ 8,903,401 $ 11,322,408 $ 14,675,439
Less excise taxes 694,589 933,636 1,230,273 1,606,190
----------- ----------- ------------ ------------
Net sales 6,449,619 7,969,765 10,092,135 13,069,249
Cost of goods sold 6,969,225 7,008,036 10,482,202 11,987,686
----------- ----------- ------------ ------------
Gross profit (loss) (519,606) 961,729 (390,067) 1,081,563
----------- ----------- ------------ ------------
Operating expenses:
Advertising 120,468 294,740 331,275 512,824
Sales and marketing 477,917 178,834 620,934 346,232
Administrative 848,049 224,954 1,037,941 401,939
----------- ----------- ------------ ------------
Total operating expenses 1,446,434 698,528 1,990,150 1,260,995
----------- ----------- ------------ ------------
Operating income (loss) (1,966,040) 263,201 (2,380,217) (179,432)
----------- ----------- ------------ ------------
Other income (expense):
Interest income 5,880 13,956 12,647 27,864
Interest expenses (36,968) (41,182) (75,020) (83,367)
Provision for income taxes (294,548) (2,500) (294,548) (2,500)
----------- ----------- ------------ ------------
Net income (loss) (2,291,676) 233,475 (2,737,138) (237,435)
=========== =========== ============ ============
Net income (loss)
per common share $ (.68) $ .07 $ (.81) $ (.07)
Weighted average shares
outstanding 3,389,211 3,368,601 3,389,211 3,359,618
</TABLE>
See Notes to Financial Statements
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE PERIODS ENDED JUNE 30, 1997 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net Loss $(2,737,138) $ (237,435)
Adjustments to reconcile net loss
To net cash provided by (used in) operating activities:
Depreciation and Amortization 309,380 325,251
Deferred income taxes 293,000 --
Provision for doubtful accounts receivable 457,000 --
Provision for obsolete inventory and discontinued
products 972,000 --
Changes in assets and liabilities:
Trade accounts receivable (1,063,787) (2,425,960)
Other receivables 91,084 546,033
Inventories (362,663) (893,340)
Prepaid expenses and other assets (262,459) (59,215)
Accounts payable and accrued expenses 1,962,874 2,163,460
Deferred excise tax credit 347,718 362,539
----------- -----------
Net cash provided by (used in)
operating activities 7,009 (218,667)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (84,656) (168,820)
Purchase of Treasury Bills (1,493,046)
Purchase of intangible assets (111,939) (60,211)
Sales of Treasury Bills -- 2,000,000
----------- -----------
Net cash provided by (used in)
Investing activities (196,595) 277,923
----------- -----------
FINANCING ACTIVITIES
Exercise of stock options -- 172,949
Net borrowings on related
party obligations 328,768 72,661
Principal payments under capital lease
obligations (112,277) (103,930)
----------- -----------
Net cash provided by 216,491 141,680
financing activities ----------- -----------
NET INCREASE IN CASH 26,905 200,936
CASH AT BEGINNING OF YEAR 386,325 --
----------- -----------
CASH AT END OF PERIOD $ 413,230 $ 200,936
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Financial Statements
The balance sheet as of June 30, 1997, the statements of operations for
the three and six month periods ended June 30, 1997 and 1996 and the statements
of cash flows for the six month periods ended June 30, 1997 and 1996 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 Company's financial position at June 30, 1997, and results of
operations and cash flows have been included. Results of operations for the
interim period are not necessarily indicative of the results that may be
expected for the full fiscal year.
(2) Significant Events
During the quarter ended June 30, 1997, the Company replaced its top
management and revised its business plan and operations to focus more on the
promotion and sales of certain of its proprietary products. Subsequently the
Company decided to discontinue sales of several of its proprietary products. In
addition, new management is placing less emphasis on securing contract brewing
arrangements that do not have profitable volume potential. Several of the
Company's contract brewing customers have experienced financial difficulties; as
a result, collection of amounts due from those customers, as well as the
carrying value of inventory purchased by the Company on their behalf, appear to
be unrealizable. Accordingly, during the quarter ended June 30, 1997, the
Company recorded charges to operations totaling $1,501,000 relating to increased
allowances for bad debts and inventory obsolescence, and the write-off of
inventory and related costs associated with discontinued products and contracts.
The negative tax provision of $293,000 for the second quarter of 1997
reflects the reversal of the $293,000 deferred tax asset, as its utilization can
not be specifically determined in accordance with Generally Accepted Accounting
Principles in light of the Company's recent losses. The Company had originally
recorded the deferred tax assset in 1994.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company's revenues are derived from the production and sale of its
proprietary labels, which include Grain Belt Golden, Grain Belt Premium, Grain
Belt Premium Light, Pig's Eye and Yellow Belly malt beverages. In addition the
Company produces beverages for a number of companies under a variety of labels.
RESULTS OF OPERATIONS
The Company's net sales for the three and six month periods ended June
30, 1997 were 19.1% and 22.8% less, respectively, than the net sales for the
three and six month periods ended June 30, 1996. The decrease in net sales was
principally attributable to decreases in contract sales on a three and six month
basis of 59.7% and 50.5%, respectively for 1997 versus 1996. Export sales were
approximately the same on a quarter to quarter comparison, while they decreased
on a six month comparison basis. Sales of proprietary products increased by 6.8%
on a six month comparable basis between 1997 and 1996 but decreased by 1.1% on a
three month basis.
Operating income was reduced in the second quarter of 1997 by a
$456,000 provision to the allowance for doubtful accounts. The provision related
specifically to several contract customers and the recent deterioration in
collection experience related to those customers. The Company provided $972,000
in allowances for inventory realization in June 1997 as a result of a management
review of inventory on hand relative to projected needs, which resulted in
certain finished goods, labels and related packaging materials being identified
as having no or minimal net salvage value. The specified items relate to
discontinued products; contracts that have not met minimum levels of projected
sales; and those produced for customers who are financially unable to pay for
them.
Barrelage sales for the 1997 second quarter were 22.3% less than in the
second quarter of 1996 and 24.1% less for the first six months of 1997 versus
1996. Barrelage sales of proprietary products were up 4.5% in the 1997 three
month period compared to the 1996 three month period, but decreased 4.4.% in the
1997 six month period compared to the 1996 period. The change in barrelage sales
differs from the change in net sales because of variations in product mix. Grain
Belt Premium and Minnesota Brew had increases on a quarter to quarter comparison
while Pig's Eye and Landmark experienced decreases. For the first six months of
1997 versus 1996 contract barrelage sales were down 42.4% compared to 1996,
primarily due to a substantial decrease in contract water sales production. For
the same six month period, export barrelage sales were off 18.8% principally
because of the absence of certain foreign orders in 1997.
Operating Data (in barrels sold): Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
------- ------- ------- -------
Proprietary 45,504 43,534 74,305 77,718
Contract 29,158 64,130 58,438 101,519
Export 38,757 38,245 50,980 62,784
------- ------- ------- -------
Total 113,419 145,909 183,723 242,021
======= ======= ======= =======
The Company's gross profit was $1,472,000 less during the first six month
period when compared to the similar period in 1996 and $1,481,000 less in the
second quarter of 1997 versus the second quarter of 1996. The Company's gross
profit margin for the second quarter decreased from 12.1% in 1996 to a negative
8.1% in 1997. The decreases are primarily related to the provisions for
inventory allowances described above.
<PAGE>
Operating expenses for the three and six month periods of 1997 were
$748,000 and $729,000 greater, respectively than for the similar periods in
1996. As a percentage of net sales, three month operating expenses increased
from 8.8% in 1996 to 22.4% in 1997 as a result of the lower sales volume in the
1997 period and the unfavorable adjustment to increase the allowance for
doubtful accounts. Operating expenses as a percentage of net sales also
increased to 19.7% for the first six months of 1997 as compared to 9.6% in 1996.
The decrease in advertising expense was attributable to the timing of
expenditures in the second quarter of 1997. Administrative expense increases
were primarily associated with the provision for the allowance for doubtful
accounts.
Interest income was $8,000 less in the second quarter of 1997 versus 1996
because of a reduced level of funds available for investment. Interest expense
in the second quarter was $4,000 less in 1997 than in 1996 and was associated
with a lower principal balance on the capitalized lease for the plant and
equipment.
The Company experienced a net loss of $2,292,000 in the second quarter of
1997 compared to a net income of $233,475 in the second quarter of 1996. The
loss was related primarily to the provisions to accounts receivable, inventory
and tax adjustments discussed herein, and also due to the lower sales volume.
For the first six months of 1997 the Company experienced a net loss of
$2,737,000 versus a loss of $237,000 for the comparable period in 1996.
The negative tax provision of $293,000 for the second quarter of 1997
reflects the reversal of the $293,000 deferred tax asset, as its utilization can
not be specifically determined in accordance with Generally Accepted Accounting
Principles in light of the Company's recent losses. The Company had orginally
recorded the deferred tax asset in 1994. In addition to the current year losses,
the Company also has approximately $2.8 million in loss carryforwards available
from prior years to offset future taxable income.
During 1996 and through June 1997, the Company operated significantly below
its production capacity. Therefore, in order to attain a profitable level of
operations, the Company will seek to increase its sales and production volume.
Management will pursue opportunities to increase sales volume at profitable
margins. During 1996 and the first half of 1997, the Company entered into
several new agreements with contract customers. Certain of these new accounts
provided an initial burst of sales volume in 1996, which significantly
diminished after that. Management believes that the growth of its proprietary
labels offers the best opportunity for achieving operating profits in the long
term and has begun to focus its efforts on growth of its proprietary products.
An emphasis will be placed on the promotion of these proprietary labels and the
generation of additional sales in the Company's core geographic market areas.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 1997 decreased $2,594,000 to $1.7 million from
$4.3 million at December 31, 1996. The decrease is primarily attributable to the
loss for the quarter coupled with the negative effect on accounts receivable and
inventories resulting from the significant valuation adjustments made to each
asset group.
During the six months ended June 30, 1997 the Company generated net cash
from operating activities of $7,000 which was due to non-cash items including
depreciation and amortization of $309,000 and deferred taxes of $293,000, a
decrease in other receivables of $91,000, a net decrease in inventories of
$609,000, an increase in accounts payable and accrued expenses of $1,963,000 and
an increase in deferred excise tax credit of $348,000. These amounts were offset
by the net loss of $2,737,000, net increase of prepaid expenses of $262,000, and
a net increase in accounts receivable of $607,000.
<PAGE>
The Company used $197,000 of cash in investing activities through the
purchase of $85,000 of property and equipment and the purchase of $112,000 of
intangible assets.
The Company generated $216,000 of cash through financing activities as a
result of borrowings from a related party of $329,000 which were partially
offset by principal payments on the capitalized lease of $112,000. The
borrowings relate to rental obligations to Minnesota Brewing Limited Partnership
(the Partnership"), which have been accrued but not yet paid.
The Company believes it will be able to meet its working capital and
capital resource needs for the next twelve months through cash flow from
operations, its existing cash and cash equivalents and short term borrowings.
The Company does not currently have a credit facility, but is exploring the
possibility of establishing a working capital line of credit to supplement its
short-term working capital needs. The Company anticipates that any line of
credit would be secured by its current assets.
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 the obligations were reflected as property and equipment and
long-term debt in 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 from the Partnership at eight times the trailing twelve months rent. As
indicated in the Company's 1996 annual report, based upon 1996 lease payments,
the purchase price would be approximately $5.7 million at December 31, 1996.
Should the Company decide to exercise its option 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 and the availability of financing.
The Company's credit terms to its distributors are generally 10 days and
substantially all customers, except contract brewing accounts, are on automatic
debit to their bank account through electronic funds transfer ("EFT"). This
program substantially reduces the credit risk and facilitates the predictability
of cash flows. Amounts from contract brewing production are generally due 30
days after shipment and in many cases are secured by letters of credit.
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 and second quarters of
the year. For accounting purposes, however, this credit is allocated throughout
the year based upon projected taxable sales per quarter.
The Company is a party to collective bargaining agreements with five union
organizations which ran for a three year term and ended June 30, 1997. Contract
negotiation with the union organization representatives are ongoing.
<PAGE>
As of June 30, 1997, the Company had net operating loss carryforwards
totaling $1.9 million available without restriction and $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.
As previously reported, Williams & Scott, Inc. ("WSI") one of the Company's
contract brewing customers filed for protection under Chapter 7 of the United
State Bankruptcy Act in March 1997. Pursuant to the terms of the Licensing and
Production Agreement entered into in February 1997, the Company has a second
security interest on certain of WSI assets, subject to a prior security interest
of a bank, and has certain production rights with respect to WSI's Rhino Chaser
micro-styled beers. The Company, however, is unable to determine what amount it
will be able to realize from the WSI bankruptcy and has fully reserved all
accounts receivable with respect to WSI.
FORWARD-LOOKING STATEMENTS
Statements included in this Form 10-Q that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. Among these risks and uncertainties are information included
in this Annual Report on Form 10-Q which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," 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 resulting
from the increased number of brewers and available beers, (ii) the Company's
ability to continue to achieve and maintain contract brewing arrangements; (iii)
the continued success of the Company's proprietary brands, including its
reliance upon distributors, and (iv) the Company's continued ability to sell
products for export.
<PAGE>
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
The Company's Annual Meeting of Shareholders was held on May 20, 1997. The
Company's nominees for election as directors were Bruce E. Hendry, Richard A.
McMahon, Dennis P. Barrett, John C. Brzezinski, Subramanian Krishnan, Stephen C.
Leuthold and Richard A. Perrine. Four additional persons, Jack Lee, Gregory
Heineman, James Potter and John Rollwagen, were nominated from the floor. The
following persons were elected to serve as directors: Bruce E. Hendry, Stephen
C. Leuthold, Richard A. Perrine, Jack Lee, Greg Heineman, James Potter and John
Rollwagen.
Nominees received the following votes
Name Votes for Votes withheld
- ---- --------- --------------
Bruce E. Hendry 3,141,027 39,109
Richard A. McMahon 1,254,474 381,005
Dennis P. Barrett 1,254,474 381,005
John C. Brzezinski 1,254,674 380,805
Subramanian Krishnan 1,254,914 380,565
Stephen C. Leuthold 3,085,741 38,350
Richard A. Perrine 3,141,746 38,390
Jack Lee 1,545,157
Gregory Heineman 1,545,157
John Rollwagen 1,545,157
James Potter 1,545,157
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None
<PAGE>
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
Dated: August 14, 1997 /s/ Michael C. Hime
-------------------------------
Michael C. Hime
Vice President of Finance
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 413,230
<SECURITIES> 0
<RECEIVABLES> 1,641,708
<ALLOWANCES> (636,000)
<INVENTORY> 3,923,195
<CURRENT-ASSETS> 6,312,191
<PP&E> 5,558,642
<DEPRECIATION> (1,957,769)
<TOTAL-ASSETS> 10,565,172
<CURRENT-LIABILITIES> 4,563,167
<BONDS> 0
0
0
<COMMON> 4,360,828
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,565,172
<SALES> 7,144,208
<TOTAL-REVENUES> 6,447,619
<CGS> 6,969,225
<TOTAL-COSTS> 8,415,659
<OTHER-EXPENSES> (5,880)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,968
<INCOME-PRETAX> (1,997,128)
<INCOME-TAX> 294,548
<INCOME-CONTINUING> (2,291,676)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,291,676)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
