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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, 2000 |
/ / | 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
MBC Holding Company
(Exact name of registrant as specified in its charter)
Minnesota (State or other jurisdiction of incorporation or organization) |
41-1702599 (IRS Employer Identification No.) |
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882 West Seventh Street, Saint Paul (Address of principal executive offices) |
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56102 (zip code) |
(651) 228-9173
(Issuer's Telephone Number)
Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /x/ NO / /
As of November 1, 2000 the Company had outstanding 3,506,860 shares of Common Stock, no par value per share, and 607,745 shares of Class A Convertible Preferred Stock.
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PART I. | FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | |||||
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 | 3, 4 | |||||
Consolidated Statements of Operations for the three and nine month periods ended September 30, 2000 and September 30, 1999 | 5 | |||||
Consolidated Statements of Cash Flow for the nine month periods ended September 30, 2000 and September 30, 1999 | 6 | |||||
Notes to Financial Statements | 7 | |||||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 | ||||
PART II. | OTHER INFORMATION | 14 | ||||
SIGNATURES | 15 |
2
MBC HOLDING COMPANY
Condensed Consolidated Balance Sheets
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September 30, 2000 |
December 31, 1999 |
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(unaudited) |
(note) |
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Assets | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | $ | 98,895 | $ | 26,922 | |||||
Trade accounts receivable, less allowance for doubtful accounts of $128,000 at September 30, 2000 and $80,000 at December 31, 1999 | 2,694,552 | 1,748,086 | |||||||
Due from related party | 674,465 | 216,939 | |||||||
Prepaid expenses | 216,817 | 125,838 | |||||||
Inventories: | |||||||||
Raw materials | 238,985 | 191,874 | |||||||
Work-in-progress | 549,580 | 465,045 | |||||||
Finished goods | 585,679 | 731,675 | |||||||
Packaging | 689,173 | 763,021 | |||||||
Other | 492,899 | 408,175 | |||||||
Total Inventories | 2,556,316 | 2,559,790 | |||||||
Total Current Assets | 6,241,045 | 4,677,575 | |||||||
Investments | |||||||||
Unconsolidated subsidiary | 1,672,173 | 1,671,895 | |||||||
U.S. Treasury Note (Note 4) | 500,000 | 500,000 | |||||||
Joint venture and other (Note 8) | 145,585 | 119,548 | |||||||
Total Investments | 2,317,758 | 2,291,443 | |||||||
Property and equipment, at cost |
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2,083,008 |
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2,057,876 |
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Less accumulated depreciation | 593,056 | 1,230,772 | |||||||
Net property and equipment | 1,489,952 | 827,104 | |||||||
Other Assets | 413,533 | 422,084 | |||||||
$ | 10,462,288 | $ | 8,218,206 | ||||||
Note: The Balance Sheet at December 31, 1999 has been derived from the audited financial statements at that date. See Notes to Financial Statements.
3
MBC HOLDING COMPANY
Condensed Consolidated Balance SheetsContinued
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September 30, 2000 |
December 31, 1999 |
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(unaudited) |
(note) |
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Liabilities and Shareholders' Equity | |||||||||
Current Liabilities | |||||||||
Bank line of credit | $ | 882,243 | $ | 1,571,563 | |||||
Current maturities of long-term debt | 8,313 | 8,017 | |||||||
Trade accounts payable | 3,573,573 | 1,983,794 | |||||||
Deferred federal excise tax credit | 223,196 | | |||||||
Accrued expenses | 646,409 | 549,297 | |||||||
Total Current Liabilities | 5,333,734 | 4,112,671 | |||||||
Long term debt, primarily related party (Note 4) | 1,561,331 | 1,603,008 | |||||||
Deferred gain on capital lease termination (Note 3) |
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168,666 |
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197,718 |
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Shareholders' Equity (Note 2) |
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Preferred stock, 700,000 shares authorized, 9% cumulative dividend, 607,745 shares issued and outstanding at September 30, 2000 and December 31, 1999 | 1,519,363 | 1,519,363 | |||||||
Common stock; $.01 par value; 10,000,000 shares authorized 3,506,860 issued and outstanding at September 30, 2000 and December 31, 1999 | 35,068 | 35,068 | |||||||
Additional paid-in capital | 10,677,396 | 10,677,396 | |||||||
Accumulated deficit | (8,833,270 | ) | (9,927,018 | ) | |||||
TOTAL SHAREHOLDERS' EQUITY | 3,398,557 | 2,304,809 | |||||||
$ | 10,462,288 | $ | 8,218,206 | ||||||
Note: The Balance Sheet at December 31, 1999 has been derived from the audited financial statements at that date. See Notes to Financial Statements
4
MBC HOLDING COMPANY
Consolidated Statements of Operations (Unaudited)
For the Periods Ended September 30, 2000 and 1999
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Three Months Ended September 30 |
Nine Months Ended September 30 |
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2000 |
1999 |
2000 |
1999 |
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Sales | $ | 7,915,821 | $ | 5,564,853 | $ | 22,423,016 | $ | 13,769,910 | |||||||
Less excise taxes | (267,902 | ) | (415,311 | ) | (831,858 | ) | (992,676 | ) | |||||||
Net sales | 7,647,919 | 5,149,542 | 21,591,158 | 12,777,234 | |||||||||||
Cost of goods sold | 6,320,678 | 4,428,900 | 18,091,254 | 11,170,051 | |||||||||||
Gross Profit | 1,327,241 | 720,642 | 3,499,904 | 1,607,183 | |||||||||||
Operating expenses: | |||||||||||||||
Advertising | 194,548 | 177,677 | 495,596 | 439,284 | |||||||||||
Sales and marketing | 188,632 | 161,819 | 607,290 | 452,355 | |||||||||||
General and administrative | 366,762 | 265,600 | 1,050,668 | 766,499 | |||||||||||
Total operating expenses | 749,942 | 605,096 | 2,153,554 | 1,658,138 | |||||||||||
Other income (expense): | |||||||||||||||
Interest income and other | 28,411 | 997 | (11,064 | ) | 5,731 | ||||||||||
Interest expense | (100,370 | ) | (45,797 | ) | (241,538 | ) | (144,332 | ) | |||||||
Net income (loss) before Preferred dividends (Note 5) | 505,340 | 70,746 | 1,093,748 | (189,556 | ) | ||||||||||
Basic net income (loss) per common share | $ | .13 | $ | .01 | $ | .28 | $ | (.08 | ) | ||||||
Diluted net income (loss)per common share | $ | .12 | $ | .01 | $ | .26 | $ | (.08 | ) | ||||||
Basic weighted average shares outstanding | 3,506,860 | 3,506,860 | 3,506,860 | 3,506,860 | |||||||||||
Diluted weighted average shares outstanding | 4,189,642 | 4,114,605 | 4,174,807 | 3,506,860 |
See Notes to Financial Statements
5
MBC HOLDING COMPANY
Consolidated Statements of Cash Flows (Unaudited)
For the Periods Ended September 30, 2000 and 1999
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Nine Months Ended September 30 |
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2000 |
1999 |
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OPERATING ACTIVITIES | ||||||||||
Net Income (loss) | $ | 1,093,748 | $ | (189,556 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||||
Depreciation and Amortization | 294,300 | 305,572 | ||||||||
Deferred gain on capital lease termination | (29,052 | ) | (33,895 | ) | ||||||
Allowance for doubtful accounts | 110,781 | 30,000 | ||||||||
Changes in assets and liabilities: | ||||||||||
Trade accounts receivable | (1,057,247 | ) | (450,634 | ) | ||||||
Inventories | 3,474 | (588,697 | ) | |||||||
Prepaid expenses and other assets | (90,979 | ) | (69,286 | ) | ||||||
Deferred excise tax credit | 223,196 | 156,861 | ||||||||
Accounts payable and accrued expenses | 1,686,891 | (456,925 | ) | |||||||
Net cash provided by (used in) operating activities | 2,235,112 | (1,296,560 | ) | |||||||
INVESTING ACTIVITIES | ||||||||||
Due from related party | (457,526 | ) | 78,896 | |||||||
Investment in joint venture and other | (26,315 | ) | (58,806 | ) | ||||||
Purchases of property and equipment | (835,181 | ) | (337,636 | ) | ||||||
Purchase of intangible assets | (113,416 | ) | (64,488 | ) | ||||||
Net cash used in investing activities | (1,432,438 | ) | (382,034 | ) | ||||||
FINANCING ACTIVITIES | ||||||||||
Net (payments) borrowings on long term debt, primarily related party obligations | (41,381 | ) | 252,158 | |||||||
Net (payments) borrowings on line of credit | (689,320 | ) | 1,477,379 | |||||||
Net cash (used in) provided by financing activities | (730,701 | ) | 1,729,537 | |||||||
NET INCREASE IN CASH | 71,973 | 50,943 | ||||||||
CASH AT BEGINNING OF YEAR | 26,922 | 67,366 | ||||||||
CASH AT END OF PERIOD | $ | 98,895 | $ | 118,309 | ||||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||||
Conversion of debt to preferred stock | $ | | $ | 150,327 | ||||||
Contribution of assets in exchange for an equity interest in unconsolidated subsidiary | $ | | $ | 1,730,650 | ||||||
U.S. Treasury Bill financed with note payable to related party | $ | | $ | (474,961 | ) | |||||
U.S. Treasury Note financed with note payable to related party | $ | | $ | 500,000 | ||||||
Termination of capital lease obligation | $ | | $ | 1,441,202 | ||||||
Assets removed from books | $ | | $ | (1,192,642 | ) | |||||
Gain on termination | $ | | $ | 248,560 | ||||||
Common shares issued in satisfaction of accrued ESOP payables | $ | | $ | 88,592 | ||||||
See Notes to Financial Statements
6
MBC Holding Company
Notes to Financial Statements
(UNAUDITED)
Note 1.
Basis of presentation
The condensed consolidated balance sheet as of September 30, 2000, the consolidated statements of operations for the three and nine month periods ended September 30, 2000 and 1999 and the consolidated statements of cash flows for the nine month periods ended September 30, 2000 and 1999 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, 2000, 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.
Note 2.
Cumulative Undeclared Dividends
The Company's Class A convertible preferred stock has a nine percent (9%) cumulative dividend rate. If, for any reason, the Company is unable to pay any dividend when due, the dividend will accumulate without interest until paid in full. The Company did not declare or pay a dividend on the Class A Convertible Preferred Stock for the nine months ended September 30, 2000. At September 30, 2000 there was $236,100 of cumulative undeclared dividends.
Note 3.
Deferred Gain
As discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, on March 29, 1999, the Company terminated its lease with a related party and entered into a new lease with its unconsolidated subsidiary, Gopher State Ethanol, LLC ("Gopher State"). As a result of the termination, there was a $248,560 gain on the transaction that was deferred and is being recognized as income over the remaining term of the original lease (November 2003). As of September 30, 2000 there was $168,666 of deferred gain remaining to be recognized.
Note 4.
U.S. Treasury Note Financed with a Related Party Note
A U.S. Treasury Note was pledged for purposes of the Bureau of Alcohol, Tobacco, and Firearms ("BATF") Brewer's Bond. This Note was purchased with the proceeds from a loan from a related party. This Treasury Note and the related party note payable mature on February 15, 2004. Accordingly, both items have been classified as long-term for financial statement purposes.
Note 5.
Basic and diluted amounts per share
Basic per share amounts are computed, generally, by dividing the net income or loss by the weighted average number of common shares outstanding. In computing the basic net income per share for the nine month period ended September 30, 2000, the cumulative undeclared dividends earned by the preferred shareholders ($34,372 and $102,370 for the three and nine month periods ended September 30, 2000, respectively) were deducted from the net income. Diluted per share amounts assume the conversion, exercise or issuance of all potential common stock instruments unless the effect is anti-dilutive thereby reducing the loss or increasing the income per share.
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Note 6.
Income Taxes
No income tax provision has been presented in the Consolidated Statements of Operation due to the utilization of the Company's net operating loss carryforwards. The Company has approximately $9.7 million of net operating loss carryforwards available to offset future taxable income.
Note 7.
Unconsolidated Subsidiary
During 1998, the Company investigated and began to develop a business for the production of ethanol. Ethanol is principally produced from the processing of corn including its fermentation into fuel grade alcohol. In March 1999, Gopher State Ethanol, LLC (Gopher State) was formed for the purpose of constructing and operating an ethanol facility. Because of the significant cost of the facility, the Company assisted Gopher State in obtaining financing by contributing operating assets to Gopher State and guaranteeing Gopher State's construction/mortgage loan. The Company contributed certain production equipment with a net book value of $1,730,650. For its contribution and assistance, the Company obtained a 28.5% minority interest in Gopher State. Construction of the ethanol facility began in April 1999 and operations commenced in May 2000. The equity method of accounting is being used to account for this investment. Summarized financial information of Gopher State is as follows (in thousands):
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September 30, 2000 |
March 29, 1999 Through December 31, 1999 |
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Three months Ended |
Nine months Ended |
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Net Sales | $ | 4,703 | $ | 6,111 | $ | | ||||
Cost of Sales | (4,016 | ) | (5,214 | ) | | |||||
Depreciation | (422 | ) | (629 | ) | (200 | ) | ||||
Net Income (Loss) | 268 | 268 | (500 | ) | ||||||
Allocation of Net Loss | | | (100 | ) | ||||||
Current Assets | 2,281 | 2,281 | 400 | |||||||
Noncurrent Assets | 20,958 | 20,958 | 11,800 | |||||||
Total | 23,239 | 23,239 | 12,200 | |||||||
Current liabilities | 1,949 | 1,949 | 3,200 | |||||||
Noncurrent Liabilities | 12,071 | 12,071 | 7,000 | |||||||
Total | 14,020 | 14,020 | 10,200 | |||||||
Net Assets | 9,219 | 9,219 | 2,000 |
Note 8.
Investment in joint venture
The Company has entered into a joint venture agreement with a nonaffiliated third party for the production of carbon dioxide ("CO2") in a production facility that is located adjacent to the ethanol plant and the brewery. The joint venture is operated under the name MG-CO2 St. Paul, and is 50% owned by the Company and 50% owned by Messer Griesheim Industries, a Pennsylvania producer and marketer of CO2. The joint venture began operations in August 2000. The joint venture purchases raw CO2 gases from Gopher State to be further processed into finished CO2 gas. The finished product will be sold to various users in the Twin Cities area.
Note 9.
Revenue Recognition
In 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. The Company will adopt SAB No. 101 when required in the fourth quarter of 2000. Management believes the adoption of SAB No. 101 will not have a significant effect on its financial statements.
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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, and Yellow Belly product lines, its contract production of beers and other beverages for other companies, its production of proprietary beers for sale under different brand names by private label customers and sales derived from foreign markets.
Results of Operations
The Company's net sales for the three-month period ended September 30, 2000 increased 48.5% as compared to the three-month period ended September 30, 1999. The Company's net sales for the nine-month period ended September 30, 2000 increased 69.0% over the nine-month period ended September 30, 1999. The increase in net sales was principally attributable to an increase in contract and export sales.
Sales of proprietary products were down 12.3% in the third quarter of 2000 compared to third quarter 1999 and increased 6.5% during the nine-month period ended September 30, 2000 as compared to the same period in 1999. The decrease in 2000 third quarter proprietary product sales compared to the same period in 1999 is primarily due to a temporary production stoppage of returnable bottles as the Company was reorganizing and updating the bottling facility. The Company plans to continue increased sales and marketing efforts of its proprietary products during 2000 and 2001 as these product lines offer the best opportunity for growth and overall profitability.
Contract sales increased 121.1% for the three-month and 257.1% for the nine-month periods ended September 30, 2000 as compared to the same periods in 1999. The increases are due to the addition of several contract customers.
Export sales increased 54.4% for the three-month and 10.7% for the nine-month periods ended September 30, 2000 as compared to the same period in 1999. The increases are due to the Company's success in the establishment of new overseas markets and improvement in the Far East markets. The Company will continue to explore opportunities that offer additional can volume for its production facilities.
Segment Data in sales before excise taxes (in thousands):
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Three Months Ended September 30 |
Nine Months Ended September 30 |
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2000 |
1999 |
2000 |
1999 |
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Proprietary | $ | 1,973 | $ | 2,249 | $ | 5,947 | $ | 5,583 | ||||||
Contract | 3,106 | 1,405 | 10,492 | 2,938 | ||||||||||
Export | 2,262 | 1,465 | 4,703 | 4,247 | ||||||||||
Other | 575 | 446 | 1,281 | 1,002 | ||||||||||
Total | $ | 7,916 | $ | 5,565 | $ | 22,423 | $ | 13,770 | ||||||
The Company's gross profit increased $1,892,721 for the nine-month period when compared to the similar period in 1999 and increased $606,599 in the third quarter of 2000 versus the third quarter of 1999. The Company's gross profit margin for the third quarter increased from 14.0% in 1999 to 17.4% in 2000. For the nine months ended September 30, 2000, gross profit margin increased from 12.6% in 1999 to 16.2% for the same period in 2000. The increases were due to the increased sales volume, utilization of more of the plants bottling capacity and the synergies that have been achieved as a result of shared expense and lease agreements with Gopher State, an unconsolidated subsidiary. These agreements were entered into in March 1999. Gopher State's share of the shared expenses were
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approximately $130,000 and $215,000 for the quarter and nine-months ended September 30, 2000, respectively.
The excise tax rate as a percentage of proprietary sales decreased for the nine months ended September 30, 2000 when compared to 1999 from 17.8% to 14.0%. For the quarter ended September 30, 2000, the rate decreased from 18.5% to 13.6% as compared to the same period in 1999. The decreases are due to the increasing number of contract customers who are responsible for their own excise tax.
Operating expenses for the three and nine-month periods of 2000 increased by $144,846 and $495,416, respectively, from similar periods in 1999. As a percentage of net sales, three month operating expenses decreased from 11.8% in 1999 to 9.8% in 2000. The operating expenses as a percentage of net sales also decreased to 10.0% for the first nine months of 2000 as compared to 13.0% in 1999. The decreases are primarily the result of the increase in net sales and general continued cost constraints imposed by the Company.
Sales and marketing expenses for the three and nine-month periods of 2000 were $26,813 and $154,935 more, respectively than for the same periods in 1999. However, as a percentage of net sales, three and nine-month sales and marketing expenses decreased from 3.1% in 1999 to 2.5% in 2000 and from 3.5% in 1999 to 2.8% in 2000, respectively. The percentage decreases are primarily due to the increase in net sales while the increase in expenditures is due to the addition of new sales and marketing personnel.
Advertising expenses for the three and nine-month periods of 2000 increased by $16,871 and $56,312, respectively, over the same periods in 1999. However, as a percentage of net sales, three and nine month advertising expenses decreased from 3.5% in 1999 to 2.5% in 2000, and from 3.4% in 1999 to 2.3% in 2000, respectively. The percentage decrease is due to an increase in net sales. As a percentage of proprietary sales, three and nine-month advertising expenses increased from 7.5% in 1999 to 9.7% in 2000 and from 7.4% in 1999 to 8.0% in 2000, respectively. These increases are due to the increase in advertising expenditures in 2000.
General and administrative expenses for the three and nine-month periods of 2000 increased by $101,162 and $284,169, respectively, from similar periods in 1999. However, as a percentage of net sales, three and nine month general and administrative expenses decreased from 5.2% in 1999 to 4.8% in 2000 and from 6.0% in 1999 to 4.9% in 2000, respectively. The increases in expenditures relate primarily to increased professional fees and outside services and the decease in percentage of net sales is reflective of the increase in net sales for the year 2000 periods.
Interest income and net other expenses for the three and nine-month periods of 2000 were income (expense) of $28,411 and ($11,064), respectively, compared to income of $997 and $5,731 for the same periods in 1999. The increase in other expenses was primarily due to the amortization of financing fees for the bank operating line of credit. Interest expense increased by $54,573 for the quarter and $97,206 for the year-to-date due to increased borrowing levels on the line of credit and increases in the prime interest rate.
The Company generated net income of $505,340 in the third quarter of 2000 compared to net income of $70,746 in the third quarter of 1999. For the first nine months of 2000, the Company generated net income of $1,093,748 versus a net loss of $189,556 for the comparable period in 1999. The improved results for the quarter and nine-month period are attributed to the success of the Company's increased net sales, reduction of costs per unit of production and marketing efforts along with the shared expenses with Gopher State.
Although the Company operated below its production capacity during 1999 and through September 2000, there have been increases in bottling production throughout 2000. In order to maintain a profitable level of operations the Company will continue to seek to increase its sales and
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production volume by increasing its sales and marketing efforts. Management will pursue opportunities to increase sales volume at profitable margins. 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.
Liquidity and Capital Resources
Working capital at September 30, 2000 increased $342,407 to $907,311 from $564,904 at December 31, 1999. While almost all current asset and liability accounts increased, the increase in current assets more than offset the increase in current liabilities.
During the nine months ended September 30, 2000 the Company generated net cash from operating activities of $2,235,112 which was due to the net income of $1,093,748, an increase in trade accounts payable and accrued expenses of $1,686,891, depreciation and amortization of $294,300, an increase in the allowance for doubtful accounts of $110,781, decrease in inventories of 3,474 and an increase in the deferred excise tax credit of $223,196. These amounts were partially offset by increases in trade accounts receivable of $1,057,247, deferred gain on capital lease termination of $29,052 and an increase in prepaids of $90,979.
The Company used $1,432,438 of cash in investing activities through the purchase of $835,181 of long-lived assets, increases in amounts due from Gopher State of $457,526, purchase of intangible assets of $113,416 and investments in the joint venture of $26,315.
The Company used $730,701 of cash in financing activities primarily through net payments on the bank line of credit of $689,320 and payments on the related party obligation of $41,381.
In conjunction with the Company's initial public offering in November of 1993, the Company's existing operating leases with Minnesota Brewing Limited Partnership ("Partnership") were converted to capitalized leases and the obligations were reflected as property and equipment and long-term debt in the financial statements. The Company had the option to acquire the property at eight times the trailing twelve months. The purchase price would have been approximately $4.9 million at December 31, 1998. In March 1999 the Partnership contributed its interest in the real estate and equipment that had been previously leased to the Company to Gopher State. The Company and the Partnership terminated the lease agreements. As a result of the termination, there was a $248,560 gain on the transaction that is being deferred and recognized as income over the remaining term of the original lease. This gain will be offset against rent paid to Gopher State. On March 29, 1999, the Company and Gopher State entered into a new lease agreement for the same land, building and production equipment that the Company had previously leased from the Partnership. The new lease agreement has been classified as an operating lease and provides for rent of $25,000 per month with an initial term of 10 years, which expires in 2009. There are no provisions for production rent in the new agreement. The Company has the option to extend this lease for three consecutive additional terms of ten (10) years each. The lease gives the Company the right to purchase the brewing facilities and equipment at any time during the term of the lease at the fair market price of the assets at the time the option is exercised. The Company has also entered into a shared facilities and services agreement, under which it has agreed to share certain office space, administrative expenses, property taxes, insurance and services with Gopher State.
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.
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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. For accounting purposes, this credit is allocated throughout the year based upon projected taxable sales.
The Company is a party to collective bargaining agreements with six union organizations, of which three were renegotiated during 1999 and expire on March 31, 2002. The remaining three (union contracts) were renegotiated in 2000. Management believes that there will be no adverse impact on the financial results in 2000 and beyond as a result of these new, signed agreements.
As of September 30, 2000, the Company had net operating loss carryforwards of approximately $9.7 million available. To the extent the Company generates taxable income during the periods in which this net operating loss carryfoward is available, the Company's cash requirements for payment of income tax will be reduced.
On March 31, 1999, the Company issued 60,131 shares of Class A Convertible Preferred Stock to the Partnership in satisfaction of $150,327 owed for deferred rents and accrued interest. The preferred stock has a 9% cumulative dividend rate, voting rights and is convertible into common stock at the rate of one share of common stock per share of preferred stock. The holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which the preferred stock could be converted. These shares are in addition to the 547,614 shares issued in satisfaction of $1,369,036 owed for deferred rents and accrued interest at December 31, 1998. At September 30, 2000, the amount of preferred dividends in arrears was $236,100. These dividends can be deferred and if they are not paid, they accumulate without interest. Dividends can only be paid from profits of the Company and are further subject to limitation under the Company's loan agreements. The preferred shares expire on December 31, 2003, at which time the Company can, at its option, issue common stock priced at the current market value, or pay cash equal to the $1,519,363 plus any unpaid dividends.
The Company's plans for the remainder of 2000 and 2001 include the continued emphasis on promoting its core proprietary brands and increasing the volume of foreign and contract sales. On July 7, 2000, the Company replaced its line-of-credit with a new $3.5 million revolving credit agreement, subject to certain borrowing base restrictions. Amounts outstanding were $882,243 as of September 30, 2000. The line-of-credit agreement expires on June 30, 2001, contains covenants, which include limitations on the Company's ability to pay dividends and requires the Company to maintain certain financial requirements, including maintaining a minimum net worth level. Substantially all of the Company's assets were pledged as collateral under this line-of-credit.
The Company also has a $1.0 million line-of-credit agreement with the Partnership, related through common ownership, through April 15, 2002. Advances outstanding were $1.0 million at September 30, 2000. In addition, the Partnership provided $500,000 for purposes of pledging a U.S. Treasury Note for the BATF bond.
Management believes that the result of operations and these credit facilities will be sufficient to meet working capital and resource needs during 2000. On a long-term basis, the Company believes it will be able to secure replacement financing when the amounts due under the various agreements become due in 2001 and 2002.
The Company is in the process of reviewing its facilities to determine if upgrades would enable it to increase production and efficiency. In the event the Company determines that it would be appropriate to upgrade, it will seek additional equity or debt financing.
Gopher State
During 1998, the Company investigated and began to develop a business for the production of ethanol. Ethanol is principally produced from the processing of corn including its fermentation into fuel
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grade alcohol. In March 1999, Gopher State Ethanol, LLC was formed for the purpose of constructing and operating an ethanol facility. Because of the significant cost of the facility, the Company assisted Gopher State in obtaining financing by contributing operating assets to Gopher State and guaranteeing Gopher State's construction/mortgage loan. The Company contributed certain production equipment with a net book value of $1,730,650. For its contribution and assistance, the Company obtained a 28.5% minority interest in Gopher State. Construction of the ethanol facility began in April 1999 and operations commenced in May 2000. The equity method of accounting is being used to account for this investment.
CO2 Joint Venture
The Company has entered into a joint venture agreement with a nonaffiliated third party for the production of carbon dioxide ("CO2") in a production facility, which is located adjacent to the ethanol plant and the brewery. The joint venture is operated under the name MG-CO2 St. Paul, and is 50% owned by the Company and 50% owned by Messer Griesheim Industries, a Pennsylvania producer and marketer of CO2. The joint venture began operations in August 2000. The joint venture purchases raw CO2 gases from Gopher State. The results of the operations for the joint venture are accounted for using the equity method. See Note 7 in the financial statements.
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 and information included in this Quarterly 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 success of the Company's proprietary brands, including its reliance upon distributors, (iv) the Company's continued ability to sell products for export, (v) Gopher State's ability to successfully operate an ethanol facility, and (vi) the Company's ability through a joint venture to successfully operate a liquid carbon dioxide plant.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In July 2000, the Company entered into a $3.5 million line-of-credit with a financial institution with an interest rate that is one and one-half percent above the prime rate. The Company also has a line-of-credit with the Partnership under which it has current borrowing of $1.0 million with an interest rate that is one percent above the prime rate. The Company currently believes that a 10% increase or reduction in interest rates would not have a material effect on its future earnings, fair values or cash flows. In connection with the construction of an ethanol facility by its minority-owned subsidiary, Gopher State, Gopher State has obtained a permanent loan of approximately $14 million and an operating line-of-credit for $2 million, which have an interest rate that varies with the prime rate. As a result, the Company's results of operations may become more affected by interest rate movements in the future. The Company has some commodity price risk as a result of the Gopher State's ethanol operations and corn purchases, which began operations in May 2000.
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None
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27. Financial Data Schedule.
None
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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.
MBC HOLDING COMPANY | |||
Dated: 11/13/00 |
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/s/ MICHAEL C. HIME Michael C. Hime Vice President of Finance (Chief Financial Officer) |
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