U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 SEPTEMBER 30, 1997
[ ] 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, 1997 the Company had 3,389,211 shares of Common Stock, $ .01
value per share, outstanding.
<PAGE>
MINNESOTA BREWING COMPANY
INDEX
Page
----
PART I. Financial Statements
--------------------
Item 1. Condensed Balance Sheets as of
September 30, 1997 and December 31, 1996.........3
Statement of Operations for the three and nine
month periods ended September 30, 1997 and
September 30, 1996...............................5
Statement of Cash Flow for the nine
month periods ended September 30, 1997
and September 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>
September 30, December 31
1997 1996
------------ ------------
(unaudited) (note)
<S> <C> <C>
Assets
Current Assets:
Cash $ 1,448,062 $ 386,325
Trade accounts receivable less allowance
for doubtful accounts of $449,000 at September 30,
1997 and $485,000 at December 31, 1996 956,248 1,034,921
Vendor rebates and other receivables -- 91,084
Inventories:
Raw materials 235,025 174,757
Work-in-progress 362,945 448,663
Finished goods 1,230,273 1,373,193
Packaging 758,878 2,117,881
Other 689,269 418,038
------------ ------------
Total inventories 3,276,390 4,532,532
Other current assets 448,433 221,599
------------ ------------
Total current assets 6,129,133 6,266,461
------------ ------------
Property and Equipment 5,580,931 5,473,986
Less allowance for depreciation (2,101,338) (1,711,388)
------------ ------------
Net property and equipment 3,479,593 3,762,598
------------ ------------
Other Assets
Trademarks, net of accumulated
amortization of $65,000 at September 30, 1997
and $40,000 at December 31, 1996 256,690 221,273
Deferred income taxes -- 143,000
Other, net of accumulated amortization of
$290,000 at September 30, 1997 and
$219,000 at December 31, 1996 386,523 381,896
------------ ------------
Total other assets 643,213 746,169
------------ ------------
$ 10,251,939 $ 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>
September 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 advances from
related party 505,820 20,051
Trade accounts payable 2,675,910 902,413
Accrued liabilities 1,317,704 772,369
Deferred federal excise tax credit 222,651
------------ ------------
Total current liabilities 4,951,060 1,923,808
------------ ------------
Capitalized Lease Obligation, less current maturities 1,584,496 1,753,454
------------ ------------
Shareholders' Equity:
Common Stock; $.01 par value; 10,000,000
shares authorized 3,389,211 issued and
outstanding at September 30, 1997 and
December 31, 1996 33,892 33,892
Additional paid-in capital 10,435,668 10,435,668
Accumulated deficit (6,753,177) (3,371,594)
------------ ------------
Total shareholders' equity 3,716,383 7,097,966
------------ ------------
$ 10,251,939 $ 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
Statements of Operations
For the Periods Ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross sales $ 5,223,539 $ 7,021,983 $ 16,545,947 $ 21,697,422
Less excise taxes 704,741 858,620 1,935,014 2,464,810
------------ ------------ ------------ ------------
Net sales 4,518,798 6,163,363 14,610,933 19,232,612
Cost of goods sold 4,374,246 5,385,460 14,856,448 17,373,146
------------ ------------ ------------ ------------
Gross profit (loss) 144,552 777,903 (245,515) 1,859,466
------------ ------------ ------------ ------------
Operating expenses
Advertising 390,815 377,283 1,011,750 890,107
Sales and marketing 152,664 216,470 483,939 562,702
Administrative 187,094 177,278 768,056 579,217
Bad debt provision 35,000 -- 491,977
------------ ------------ ------------ ------------
Total operating expenses 765,573 771,031 2,755,722 2,032,026
------------ ------------ ------------ ------------
Operating income (loss) (621,021) 6,872 (3,001,237) (172,560)
Interest income 13,544 23,602 26,190 51,466
Interest expense (36,968) (40,158) (111,988) (123,525)
Provision for income taxes -- 22,468 (294,548) 19,968
------------ ------------ ------------ ------------
Net income (loss) $ (644,445) $ 12,784 $ (3,381,583) $ (224,651)
============ ============ ============ ============
Net income (loss) per
Common Share $ (.19) $ .00 $ (1.00) $ (.07)
Weighted average shares
outstanding 3,389,211 3,398,933 3,389,211 3,369,214
</TABLE>
See Notes to Financial Statements
<PAGE>
Minnesota Brewing Company
Statements of Cash Flow (Unaudited)
For the Periods Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Nine Months Ended September
----------------------------
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,381,583) $ (224,651)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and Amortization 485,950 490,833
Deferred income taxes 293,000 --
Provision for obsolete inventory and
discontinued products 972,000 --
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable 78,673 (124,581)
Decrease in other receivables 91,084 833,705
(Increase) decrease in inventories 284,142 (1,149,572)
(Increase) in prepaid expenses and
other assets (376,834) (171,443)
Increase in accounts payable and
accrued expenses 2,318,832 225,466
Increase in deferred excise tax credit 222,651 173,850
----------- -----------
Net cash provided by operating activities 987,915 53,607
----------- -----------
INVESTING ACTIVITIES
Purchase of property and equipment (106,945) (221,495)
Purchase of Treasury Bills -- (1,499,616)
Purchase of intangible assets (136,044) (148,947)
Proceeds of maturing Treasury Bills -- 2,000,000
----------- -----------
Net cash provided by (used in)
investing activities (242,989) 129,942
----------- -----------
FINANCING ACTIVITIES
Exercise of stock options -- 172,949
Net borrowings on related party obligations 485,769 60,935
Principal payments under capital lease
obligations (168,958) (157,420)
----------- -----------
Net cash provided by financing activities 316,811 76,464
----------- -----------
NET INCREASE IN CASH 1,061,737 260,013
CASH AT BEGINNING OF YEAR 386,325 --
----------- -----------
CASH AT END OF PERIOD $ 1,448,062 $ 260,013
=========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
Minnesota Brewing Company
Notes to Financial Statements
(Unaudited)
(1) Financial Statements
The balance sheet as of September 30, 1997, the statements of
operations for the three and nine month periods ended September 30, 1997 and
1996, and the statements of cash flow for the nine month periods ended September
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 financial position at September 30,
1997, 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.
<PAGE>
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, 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 and nine months ended September
30, 1997, decreased 26.7% and 24.0% respectively compared with net sales for the
three and nine month periods ended September 30, 1996. The decrease in third
quarter net sales reflects decreases in contract sales on a three and nine month
basis of 36.6% and 46.0%, respectively for 1997 versus 1996. Export sales also
decreased by 42.3% and 18.6% on a three and nine month basis respectively.
Proprietary net sales also declined by 16.3% and 10.4% on a three and nine month
basis for 1997 versus 1996. Sales of Grain Belt products were 7.3% higher for
the nine month periods ended September 30, 1997, versus the same period in 1996.
Barrelage sales for the third quarter of 1997 were 18.5% less then in
the third quarter of 1996 and 22.4% less for the first nine months of 1997
versus 1996. Barrelage sales of proprietary products during the third quarter
were down 2.4% compared to 1996. Barrelage sales of proprietary products for the
first nine months of 1997 were 10.1% below the 1996 periods. Contract barrelage
sales were down 62.6% for the third quarter and 52.6% for the nine month period.
Export barrelage sales were down 24.4% and 19.8% respectively for the third
quarter of 1997 and the first nine months of 1997 when compared to the same
periods in 1996. The export sales were lower because of the decline in sales due
to reduction in prices for contract products that were liquidated to offset
storage costs and a general overall decrease in the export market orders.
Operating Data (in barrels sold)
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
Proprietary 40,148 45,682 113,991 123,400
Contracts, other 33,396 43,632 92,473 145,151
Export 9,932 13,139 60,912 75,923
------- ------- ------- -------
Totals 83,476 102,453 267,376 344,474
======= ======= ======= =======
The Company's gross profit was $2,104,981 less during the 1997 nine month
period than in the similar period of 1996 and $633,351 less during the third
quarter of 1997 than 1996. The Company's gross profit margin decreased in the
third quarter from 12.6% to 3.2% in 1997 while year to date the gross margin
declined from 9.7% in 1996 to a negative 1.7% in 1997. The decline in gross
profit in the third quarter was attributable to the reduction in sales to a
level that was not sufficient to absorb overhead costs. In addition the decline
in gross profit is attributable
<PAGE>
to contract prices which were below costs, based on the Company's current
production levels. The Company is in the process or renegotiating or terminating
unprofitable contract sales agreements.
Operating expenses were $723,696 greater in the first nine months of 1997
compared to 1996, while as a percentage of sales they increased from 10.6% in
1996 to 18.9% in 1997. During the third quarter of 1997 operating expenses
(inclusive of bad debt provision) decreased $5,458 compared to 1996, while as a
percentage of sales they increased from 12.5% in 1996 to 16.9% in 1997. The
increase, in advertising expenses in both reported periods was attributable to
the increased costs of advertising contracted for and lower levels of net sales
in 1997 than in 1996. Administrative expenses were greater for the three and
nine months of 1997 than the same periods in 1996 primarily because of an
increase in professional fees. Sales and marketing expenses were lower for the
third quarter of 1997 versus 1996, due to a policy of lowering costs instituted
in the third quarter of 1997.
Interest income was $26,190 for the first nine months of 1997 versus
$51,466 in 1996 because of a reduced level of funds available for investment
after an increased investment in production equipment in 1996. In the third
quarter of 1997 interest income was $10,058 less than the third quarter of 1996
due to reduced funds available for investment.
Interest expense, which is associated with the capitalized lease for the
plant and equipment was $11,537 less for the nine month period of 1997 and
$3,190 less for the third quarter of 1997 than that which was incurred for the
similar periods of 1996 as principal payments have reduced the amount of
outstanding debt.
For the third quarter of 1997, the Company experienced a net loss of
$644,445 versus a net profit of $12,784 for the third quarter of 1996. The
decrease of $657,229 in 1997 was primarily attributable to a reduction in sales,
the decrease in margins related to liquidation of dated inventory and an
increase in the provision for bad debts. The Company experienced a net loss of
$3,381,583 versus net loss of $224,651 for the first nine months of 1996. This
change principally arose from a decrease in net sales, recapture of tax
benefits, provision for obsolete inventory and discontinued products and
provisions for bad debts.
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. The loss for the first nine months of 1997 will be available to
offset any future profits in the fourth quarter of 1997 or in subsequent years.
During 1996 and through September 1997, the Company operated significantly
below its production capacity. Therefore, in order to attain a profitable level
of operations the Company will continue to 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, which subsequently
diminished. Management believes that the growth of its proprietary labels offers
the best opportunity for achieving operating profits in the long term and has
focused its efforts on the growth of its proprietary products. An emphasis has
been placed on the promotion of these proprietary labels and the generation of
additional sales in the Company's core geographic market areas.
<PAGE>
Liquidity and Capital Resources
Working capital at September 30, 1997 was $1,178,073 representing a
decrease of $3,164,580 from $4,342,653 at December 31, 1996. The decrease is
attributable to the loss for the period and the investment of funds into
additional equipment and intangible assets.
During the nine month period ended September 30, 1997, the Company
generated net cash from operating activities of $987,915, which was due to an
decrease in accounts receivable of $78,673, a decrease in inventories of
$284,142, an increase in accounts payable and accrued liabilities of $2,318,832,
a decrease in other receivables of $91,084 and an increase in deferred excise
tax credit of $222,651. These amounts were offset by the net loss of $3,381,583
(reduced by depreciation and amortization of $485,950), and an increase in
prepaid expenses and other assets of $376,834.
The Company used cash of $242,989 in investing activities primarily
from the purchase of property and equipment of $106,945 and the purchase of
$136,044 of intangible assets.
Financing activities provided cash of $316,811 primarily from the
advancement of funds from a related party of $485,769 and reduced by $168,958 in
principal payments under capital lease obligations. The borrowings relate to
rental obligations to Minnesota Brewing Limited Partnership (the "Partnership")
which have been accrued, but not paid. The Company is past due on these
obligations to the Partnership and is in the process of renegotiating the terms
of the agreement.
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, its existing cash and short term borrowings. The Company does not
currently have a credit facility, but is exploring the possibility of
establishing a working 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 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, 1996. 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 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.
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
<PAGE>
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, 1997 the Company had recognized
$437,349 of this credit and deferred $222,651 of the credit to the fourth
quarter. At September 30, 1996 the Company had recognized $486,150 of this
credit and deferred $173,850 for recognition to the fourth quarter of 1996.
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.
Contact negotiation with the union organization representatives are ongoing.
As of December 31, 1996, the Company had net operating loss
carryforwards totaling $2.8 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, William & Scott, Inc. ("WSI") one of the
Company's contract brewing customers filed for protection under Chapter 7 of the
United States Bankruptcy Act in March 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 resect to WSI. Based on information available to date,
a sale of the Rhino Chaser labels is pending approval by the Bankruptcy court.
If the sale is approved, the Company will not receive any value for its
secondary security interest.
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
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 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
(Registrant)
Dated: November 14, 1997 /s/ Michael C. Hime
Michael C. Hime
Vice President of Finance
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,448,062
<SECURITIES> 0
<RECEIVABLES> 956,248
<ALLOWANCES> (449,000)
<INVENTORY> 3,276,390
<CURRENT-ASSETS> 6,129,133
<PP&E> 5,580,931
<DEPRECIATION> (2,101,338)
<TOTAL-ASSETS> 10,251,939
<CURRENT-LIABILITIES> 4,951,060
<BONDS> 0
0
0
<COMMON> 3,716,383
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,251,939
<SALES> 5,223,539
<TOTAL-REVENUES> 4,518,798
<CGS> 4,374,246
<TOTAL-COSTS> 5,139,819
<OTHER-EXPENSES> (13,544)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36,968
<INCOME-PRETAX> (644,445)
<INCOME-TAX> 0
<INCOME-CONTINUING> (644,445)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (644,445)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> (.19)
</TABLE>
