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
MARCH 31, 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 May 1, 1997 the Company had 3,389,211 shares of Common Stock, no par value
per share, outstanding.
MINNESOTA BREWING COMPANY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of
March 31, 1997 and December 31, 1996..................3, 4
Statements of Operations for the three
month periods ended March 31, 1997 and
March 31, 1996...........................................5
Statements of Cash Flow for the three
month periods ended March 31, 1997
and March 31, 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
<TABLE>
<CAPTION>
MINNESOTA BREWING COMPANY
CONDENSED BALANCE SHEETS
March 31, December 31
1997 1996
(unaudited) (Note)
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 568,007 $ 386,325
Trade accounts receivable, less allowance
for doubtful accounts of $465,000 at
March 31, 1997 and $485,000 at
December 31, 1996 1,193,520 1,034,921
Vendor rebates and other receivables 15,126 91,084
Inventories:
Raw materials 219,047 174,757
Work-in-progress 611,535 448,663
Finished goods 1,804,847 1,373,193
Packaging 2,034,333 2,117,881
Other 381,469 418,038
----------- -----------
Total Inventories 5,051,231 4,532,532
Other current Assets 335,372 221,599
----------- -----------
Total Current Assets 7,163,256 6,266,461
----------- -----------
Property and Equipment 5,558,642 5,473,986
Less allowance for depreciation 1,859,337 1,711,388
----------- -----------
Net property and equipment 3,699,305 3,762,598
----------- -----------
Other Assets
Trademarks, net of accumulated
amortization of $47,000 at
March 31, 1997 and $40,000 at December 31, 1996 223,465 221,273
Deferred income taxes 143,000 143,000
Other, net of accumulated amortization of
$242,000 at March 31, 1997 and
$219,000 at December 31, 1996 364,959 381,896
----------- -----------
Total Other Assets 731,424 746,169
----------- -----------
$11,593,985 $10,775,228
=========== ===========
Note: The Balance Sheet at December 31, 1996 has been derived from the audited financial
statements at that date.
See Notes to Financial Statements
</TABLE>
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(unaudited) (Note)
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current portion of capital lease obligation $ 228,975 $ 228,975
Noninterest-bearing advances from
related party 162,113 20,051
Trade accounts payable 1,869,351 902,413
Accrued expenses 702,425 772,369
Deferred federal excise tax credit 280,758 --
------------ ------------
Total Current Liabilities 3,243,622 1,923,808
------------ ------------
Capitalized lease obligations, less current maturities 1,697,857 1,753,454
------------ ------------
Shareholders' Equity:
Common stock; $.01 par value; 10,000,000 shares authorized, 3,389,211
issued and outstanding at March 31, 1997 and 3,389,211 at
December 31, 1996 33,892 33,892
Additional paid-in capital 10,435,668 10,435,668
Accumulated deficit (3,817,054) (3,371,594)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 6,652,506 7,097,966
------------ ------------
$ 11,593,985 $ 10,775,228
============ ============
Note: The Balance Sheet at December 31, 1996 has been derived from the audited financial
statements at that date.
See Notes to Financial Statements
</TABLE>
MINNESOTA BREWING COMPANY
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
THREE MONTHS ENDED MARCH 31
1997 1996
----------- -----------
Sales $ 4,178,200 $ 5,772,038
Less excise taxes 535,684 672,554
----------- -----------
Net sales 3,642,516 5,099,484
Cost of goods sold 3,512,977 4,979,650
----------- -----------
Gross profit 129,539 119,834
----------- -----------
Operating expenses:
Advertising 210,807 218,084
Sales and marketing 143,017 167,398
Administrative 189,890 176,985
----------- -----------
Total operating expenses 543,714 562,467
----------- -----------
Operating income (loss) (414,175) (442,633)
----------- -----------
Other income (expense):
Interest income 6,767 13,908
Interest expense (38,052) (42,185)
----------- -----------
Net income (loss) (445,460) (470,910)
=========== ===========
Net income (loss) per common share ($ .13) ($ .14)
Weighted average shares outstanding 3,389,211 3,355,277
See Notes to Financial Statements
<TABLE>
<CAPTION>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOW (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 1997 AND 1996
THREE MONTHS ENDED MARCH 31
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 445,460) ($ 470,910)
Adjustments to Reconcile Net Income (Loss)
to net cash used in operating activities:
Depreciation and Amortization 177,949 159,457
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable (158,599) (364,879)
(Increase) decrease in other receivables 75,958 (544,151)
(Increase) decrease in inventories (518,699) (331,005)
(Increase) decrease in prepaid expenses
and other assets (119,836) (74,151)
Increase (decrease) in accounts payable
and accrued expenses 896,994 580,614
Increase in deferred excise tax credit 280,758 404,362
----------- -----------
Net cash provided by (used in)
operating activities 189,065 447,639
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (84,656) (86,431)
Purchases of Treasury Bills -- (999,630)
Purchase of intangible assets (9,192) (9,629)
Sale of Treasury Bills -- 1,500,000
----------- -----------
Net cash provided by (used in)
investing activities (93,848) (404,310)
----------- -----------
FINANCING ACTIVITIES
Exercise of stock options -- 18,000
Net borrowings (repayments) on related
party obligations 142,062 (42,293)
Principal payments under capital lease
obligations (55,597) (51,463)
----------- -----------
Net cash provided by (used in)
financing activities 86,465 8,830
----------- -----------
NET INCREASE (DECREASE) IN CASH 181,682 (860,779)
CASH AT BEGINNING OF YEAR 386,325 -0-
----------- -----------
CASH AT END OF PERIOD $ 568,007 $ 860,779
=========== ===========
See Notes to Financial Statements
</TABLE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Financial Statements
The balance sheet as of March 31, 1997, the statements of operations
for the three month periods ended March 31, 1997 and 1996 and the statements of
cash flows for the three month periods ended March 31, 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 financial position at March 31, 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.
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 Grain Belt, Pig's Eye, Landmark, Yellow Belly, and Brewers Cave
beers, its contract production of beers and other beverages for other companies
and its production of proprietary beers for sale under different brand names by
private label customers.
RESULTS OF OPERATIONS
The Company's net sales for the three month period ended March 31, 1997
were 28.6% less than the net sales for the three months ended March 31, 1996.
The decrease in net sales was principally attributable to a decrease in export
sales while contract sales also experienced a decrease in a quarter to quarter
comparison and to a lesser extent sales of proprietary products had a similar
decrease.
Barrelage sales for the first three months of 1997 were 26.8% less than
in the first quarter of 1996. Barrelage sales of proprietary products were down
15.8% reflecting softer industry beer sales in the first quarter of 1997
compared to 1996. Grain Belt Premium and Minnesota Brew had increases on a
quarter to quarter comparison while Pigs Eye and Landmark experienced decreases.
The first quarter is the Company's lightest quarter for beer sales and the
Company expects sales in succeeding quarters to surpass last year's levels with
the inclusion of the new Brewers Cave products and a full summer's sales of
Yellow Belly. Contract barrelage sales were down 21.6% primarily due to a 30.4%
decrease in contract water sales production. With the Company's new Mount Simon
water product and the projected increases from existing and new contract
customers, the Company anticipates that contract sales in 1997 will exceed 1996
sales levels on a year to year basis. Export barrelage sales were off 50.2%
principally because of the absence of a South American order in 1997 and the
timing of certain other orders. The Company expects export sales to surpass 1996
levels by the end of the second quarter of 1997.
Operating Data (in barrels sold):
Three Months Ended
March 31
1997 1996
---- ----
Proprietary 28,766 34,184
Contract 29,315 37,389
Export 12,223 24,539
------ ------
Totals 70,304 96,112
====== ======
The Company's gross profit was $9,705 greater in the first quarter of
1997 than in the first quarter of 1996. The Company's gross profit margin
increased from 2.4% in 1996 to 3.6% in the first quarter of 1997. The
improvement was attributable to a decrease in cost of goods sold that slightly
exceeded the decrease in sales.
Operating expenses were $18,753 less in the first quarter of 1997 than
in the first quarter of 1996, but as a percentage of sales they increased from
11.0% in 1996 to 14.9% in 1997 primarily as a result of the lower sales volume
in the 1997 period. The decrease in advertising expense was attributable to the
timing of lower levels of expenditures in the first quarter of 1997. The Company
anticipates that total advertising expense will approximate 1996 levels for the
year. Sales and marketing expenses for the first quarter of 1997 were below 1996
levels primarily because of a reduction in commissions payable on certain
contract and export sales. Administrative expense increases were primarily
associated with increases in professional fees and shareholder relations
expenses. The Company continues to operate with a minimal level of
administrative expense.
Interest income was $7,141 less in the first quarter of 1997 versus
1996 because of a reduced level of funds available for investment. Interest
expense was $4,133 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 lost of $445,460 in the first quarter of
1997 compared to a net loss of $470,910 in the first quarter of 1996. The
decrease in the loss was related to an improvement in the gross profit and a
decrease in operating expenses. The loss was consistent with the seasonality of
the business where typically the first quarter is the weakest quarter, the
second and third quarters are the strongest quarters and the fourth quarter
falls in between.
No income tax benefit was recorded for the first quarter. The first
quarter loss will serve to offset anticipated profits in the second quarter,
however. In addition, the Company has approximately $2.8 million in loss
carryforwards available to offset future taxable income.
During 1996, the Company operated significantly below its production
capacity. Therefore, in order to attain a profitable level of operations, the
Company must increase its sales and production volume. Management continues to
seek out opportunities to increase sales volume. During 1996 and early 1997, the
Company entered into agreements with several new contract customers. Certain of
these new accounts provided sales volume in 1996. However, because most of these
accounts were added in late 1996 and early 1997, their full impact will not be
realized until fiscal 1997. In addition, management anticipates growth in both
its proprietary products and export sales. Management believes these anticipated
increases in sales volume during 1997 will help the Company operate at a
significantly higher level of capacity in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1997 decreased $423,019 to $3.9 million
from $4.3 million at December 31, 1996. The decrease is primarily attributable
to the loss for the quarter coupled with the investment of funds into additional
equipment and intangible assets.
During the three months ended March 31, 1997 the Company generated net
cash from operating activities of $189,065 which was due to depreciation and
amortization of $177,949, a decrease in other receivables of $75,958, an
increase in accounts payable and accrued expenses of $896,994 and an increase in
deferred excise tax credit of $280,758. These amounts were partially offset by
the net loss of $445,460 and increases in accounts receivable of $158,599,
inventories of $518,699 and prepaid expenses of $119,836.
The Company used $93,848 of cash in investing activities through the
purchase of $84,656 of property and equipment and the purchase of $9,192 of
intangible assets.
The Company provided $86,465 of cash through financing activities via
borrowings from a related party of $142,062 which were partially offset by
principal payments on the capitalized lease of $55,597.
The Company believes that it will be able to meet its working capital
and capital resource needs for the next year through cash flow from operations
plus its existing cash and savings accounts.
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 at eight times the trailing twelve months. 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.
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 December 31, 1996. The Company continues to
be obligated on the debt which had an outstanding balance of $564,580 at
December 31, 1996, however, the possibility that the Company would ever have to
pay anything on the debt is remote.
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 facilities 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 quarter 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 run for a three year term ending June 30, 1997.
Increases are tied to increased production levels.
As of March 31, 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.
In June of 1992, the Company entered into a production contract with
William & Scott, Inc. ("WSI") to brew "Rhino Chasers" micro-styled beers. The
Company produced 10,188 barrels pursuant to this contract in 1995 and 19,427
barrels in 1996, which were equivalent to 1.7% and 4.5% respectively of the
Company's total production in barrels. WSI has been in business over ten years
with a product well accepted in the market place and was re-capitalized in 1995
to further advance its market share. During the fourth quarter of 1996, WSI
exceeded its payment terms with the Company after such terms had been extended
from 30 to 60 days by the Chairman and the President of the Company. WSI then
provided the Company with a security interest in its inventory, accounts
receivable, equipment and intellectual property with such security interest
being subordinate to its bank's security interest.
In February of 1997, the Company entered into a "Licensing and
Production Agreement" with WSI which was agreed to and accepted by WSI's bank.
Under the terms of the agreement, the Company received all right, title and
interest in all of WSI's intellectual property interest in the trademark and
trade name "Rhino Chasers" and all products bearing this name or mark, subject
to the bank's security interest. The Company has agreed to use its best efforts
to promote and enhance the value of the brand and further to produce, take
orders for, ship, bill and collect all billings for the product. The Company
will retain its current contract brewing costs along with an administrative fee
of $.50 per case. Of the remaining monies, 80% will be sent to the Bank and 20%
shall be deposited in a trust account to be distributed to WSI's creditors,
including the Company. Once the Bank has been paid in full, 100% of the monies
will be paid to the creditors. After all creditors have been paid in full, the
Company shall receive 80% of the monies and 20% shall be distributed to WSI. In
addition, after all creditors have been paid in full, the Company shall receive
50% of any proceeds received from sale of the "Rhino Chasers" brand.
In March 1997, WSI filed for protection under Chapter 7 of the United
States Bankruptcy Act. Accordingly, even though the Company has a substantial
financial interest in WSI, the Company has added a $418,000 addition to its
allowance for doubtful accounts to fully reserve their account receivable
balance as of December 31, 1996. In addition, the Company added $83,000 to its
inventory valuation reserve to adjust the Rhino Chaser inventory to its net
realizable value at December 31, 1996. The Company is working with WSI's
distributors presently receiving orders, shipping product and collecting
billings. The amount the Company will ultimately receive under the "Licensing
and Production Agreement" is indeterminable at this time.
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.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported, a claim in the amount of $196,541.76, plus
interest from November 18, 1996 was made by Pete's Brewing Company ("Pete's")
against the Company. This claim was alleged by Pete's to have arisen out of a
previous Settlement Agreement between the Company and Pete's. On April 23, 1997,
the Company and Pete's settled the claim. Under the settlement, the Company
agreed to pay Pete's a total of $110,000, of which $40,000 was paid on May 7,
1997, and the remaining $70,000 will be paid over a seven month period with
interest on the unpaid balance at eight percent. The Company did not experience
any loss as a result of this settlement.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
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
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: May 14, 1997 /s/ Dennis P. Barrett
---------------------
Dennis P. Barrett
Vice President of Finance (Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 568,007
<SECURITIES> 0
<RECEIVABLES> 1,658,520
<ALLOWANCES> 465,000
<INVENTORY> 5,051,231
<CURRENT-ASSETS> 7,162,256
<PP&E> 5,558,642
<DEPRECIATION> 1,859,337
<TOTAL-ASSETS> 11,593,985
<CURRENT-LIABILITIES> 3,243,622
<BONDS> 1,697,857
0
0
<COMMON> 33,892
<OTHER-SE> 6,618,614
<TOTAL-LIABILITY-AND-EQUITY> 11,593,985
<SALES> 3,642,516
<TOTAL-REVENUES> 3,642,516
<CGS> 3,512,977
<TOTAL-COSTS> 353,824
<OTHER-EXPENSES> 189,890
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,285
<INCOME-PRETAX> (445,460)
<INCOME-TAX> 0
<INCOME-CONTINUING> (445,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (445,460)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
