SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO 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
(Name of small business issuer in its charter)
MINNESOTA 41-1702599
--------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
882 WEST SEVENTH STREET
SAINT PAUL, MN 55201
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (612) 228-9173
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS 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
CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF
REGULATION S-K IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE BEST OF
REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K FOR ANY AMENDMENT TO
THIS FORM 10-K. ____
ON MARCH 20, 1997, THE COMPANY HAD 3,389,211 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING.
THE AGGREGATE MARKET VALUE OF THE SHARES OF VOTING STOCK HELD BY NON-AFFILIATES
OF THE COMPANY (PERSONS OTHER THAN DIRECTORS AND OFFICERS) COMPUTED AT THE BASIS
OF THE NASDAQ LAST REPORTED SALE OF $3.375 PER SHARE ON MARCH 25, 1997 WAS
APPROXIMATELY $5,767,025.
DOCUMENTS INCORPORATED BY REFERENCE: THE COMPANY'S PROXY STATEMENT FOR ITS 1997
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 13, 1997 IS INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.
PART I
ITEM 1. BUSINESS
OVERVIEW
The Company operates a full scale brewery in Saint Paul, Minnesota
producing its proprietary Grain Belt, Pig's Eye, Landmark, Minnesota Brew,
Yellow Belly and Brewers Cave beers and marketing these beers through an
independent distribution network. The Company produces beers under the brand
names Grain Belt, Grain Belt Premium, Grain Belt Light, Grain Belt Premium
Light, Grain Belt Premium Bock, Grain Belt Premium Oktoberfest, GBX Malt Liquor,
Pig's Eye Pilsner, Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red, Pig's Eye
Non-alcoholic, Landmark, Landmark Light, Landmark Bock, Landmark Oktoberfest,
McMahon's Irish Style Potato Ale, Minnesota Brew, Minnesota Brew Light, Yellow
Belly, Brewers Cave Black Barley, Brewers Cave Amber Wheat and Brewer's Cave
Golden Caramel.
The Company's Grain Belt product line is the Company's best selling
product. The brand, which the Company acquired and commenced producing in 1991,
is over a hundred years old and is experiencing a resurgence in popularity, in
part, because the Company reintroduced Grain Belt with a style and taste similar
to the product's traditional characteristics when it maintained a significant
share of the Minnesota market. Grain Belt Premium was awarded the Gold Medal in
the American Lager category at the 1994 Great American Beer Festival. The
Company created the Pig's Eye brand in 1992 and since that time the product has
become popular in its market. Pig's Eye Ice Beer won the Silver Medal in the
American Malt Liquor category at the 1994 Great American Beer Festival. The
Company repositioned Landmark from its initial debut in 1991 as a premium beer
to a moderately priced beer and refocused its efforts on the Landmark product
line in 1993 toward specialty beers, including Landmark Boch and Landmark
Oktoberfest. The Company created Yellow Belly in 1996 as an alcoholic
alternative beverage with a distinct lemon flavoring. The Company also
introduced its Brewers Cave hand crafted micro-styled line of beers in 1996
including Black Barley, Amber Wheat and Golden Caramel.
The Company also produces other beers under contract brewing
arrangements and private label contracts. Under its contract brewing
arrangements, the Company produces beers for separate brewing companies
according to those brewers' formulas while under private label contracts the
Company packages its proprietary beers for sale by third parties under a name
owned by the third parties.
In addition, the Company has the ability to produce other beverages and
in 1993 began the production and packaging of premium sparkling water for
another beverage company. In 1995 the Company entered into production
arrangements for a brewed malt liquor for a customer who resells for home
brewing and other food processing. The Company also produces under contract
premium soft drinks along with other non-alcoholic beverages.
The Company leases its brewing facilities and related equipment from
Minnesota Brewing Limited Partnership (the "Partnership") which owns
approximately 45.5 percent of the Company's Common Stock. The Partnership
acquired the former Jacob Schmidt Brewery in Saint Paul in October 1991 from G.
Heileman Brewing Company ("Heileman") which was in bankruptcy at the time. The
Company generated net sales of $31.4 million in 1995 and net sales of $24.9
million in 1996, including the production and sale of sparkling water. The
Company's brewery has a potential annual capacity of 2.2 million barrels and
produced approximately 602,000 barrels in 1995 and 429,000 barrels in 1996,
which were equal to 27.4 percent and 19.5 percent, respectively, of total
capacity. The existence of the additional brewing capacity has enabled and will
continue to allow the Company to increase its production without substantial
additional capital outlays.
Substantially all the Company's proprietary beers are sold domestically
through approximately 150 independent distributors. During 1996, approximately
72.6 percent of the Company's proprietary beer, measured in barrels, reached
retail channels through its 15 largest distributors. The Company provides local
media advertising, primarily in Minnesota, and point-of-sale advertising and
sales promotion programs to help stimulate sales.
The quality of the Company's products has been attested to through
various beer festivals and taste test mediums but its most significant
recognition came from the following awards it has won during its brief history
at the Great American Beer Festival(TM) which occurs each fall in Denver,
Colorado:
Year Medal Award Product
---- ----------- -------
1992 Silver Landmark Oktoberfest
1993 Bronze McMahons Irish Style Potato Ale
1994 Silver Pig's Eye Ice
1994 Gold Grain Belt Premium
1995 Bronze Pig's Eye Red Amber Ale
In addition to these awards at the Great American Beer Festival for its
own products, the Company has produced beers that have won the following awards
for its contract customers:
Year Medal Award
---- -----------
1992 Gold
1993 Silver
1994 Silver
1995 Two Bronze
The Company believes that its success in producing and selling its
proprietary beers and its production of high quality beers pursuant to contract
brewing arrangements position it well to take advantage of growth opportunities
existing in the brewing industry.
COMPETITION AND THE BEER INDUSTRY
Although there are several hundred companies engaged in the highly
competitive brewing industry in the United States, the industry is highly
concentrated, with five companies -- Anheuser-Busch Companies, Inc., Miller
Brewing Co., Adolph Coors Co., Stroh Brewery Co. and Pabst Brewing Co. --
accounting for 92.5% of 1996 sales. In Minnesota, however, traditionally local
brands have a higher market share than they do nationally. The national and
Minnesota market shares of these companies and of the Company were as follows:
<TABLE>
<CAPTION>
Percent of Sales/Barrelage
------------------------------------------------------------
National (Sales)(1) Minnesota (Barrelage)(2)
--------------------------- ------------------------
1996 1995 1996 1995
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Anheuser-Busch Companies, Inc. 45.8% 44.5% 32.6% 29.4%
Miller Brewing Co. 22.1 22.9 31.9 32.7
Stroh Brewing Co. 11.6 10.8 15.7 18.8
Adolph Coors Co. 10.1 10.3 3.2 3.2
Pabst Brewing Co. 2.9 3.2 3.5 3.6
------ ------ ------ ------
92.5% 91.7% 86.9% 87.7%
Minnesota Brewing Company(3) 0.1% 0.1% 3.8% 3.7%
</TABLE>
- ------------------
(1) Information from Modern Brewery Age (Stroh & Heileman barrelage
combined for periods prior to the 1996 merger).
(2) Information from Minnesota Beer Wholesalers Association
(3) Includes only the Company's proprietary beers.
During 1996, approximately 81.3% of the Company's domestic sales of
proprietary beers were sales in Minnesota. The Company's beers are distributed
and sold in competition with these national brands, as well as other regional
and local brands, many of which have either greater financial resources and/or
greater name recognition than the Company. Although the methods of competition
in the industry vary widely, the principal methods of competition include the
quality, taste and freshness of the products, packaging, price, advertising and
service to customers.
Relatively flat sales of beer in recent years have resulted in
increased competition among beer producers. Some of this flatness has been
brought about by legislative, social and demographic changes. Trends in the
industry include huge marketing expenditures, discounting of prices and the
growth of micro brewery-type beers.
During the 1980's import beers increased their market share and brought
much innovation to the domestic industry, such as dry beers, up-scale micro and
brew-pub brands, enhanced package graphics and renewed popularity for long-neck
bottles. These changes have resulted in the industry becoming more oriented to
product segmentation. On a nationwide basis, a number of the small brewers have
experienced substantial growth in the last several years.
BREWING PROCESS AND PRODUCTION
The process of brewing generally consists of malting, mashing, boiling
and hopping, fermenting and finishing. "Malting" is the preparation of the basic
grain (usually barley) used in the brewing process. The grain is soaked in water
and allowed to germinate. Once small root shoots have sprouted and are about
three-fourths of the length of the grain kernels, the grain is dried in a large
kiln. After drying, the grain (now called "malt") is stored for four to eight
weeks and then milled. The Company purchases regular and specialty malts from
malting companies in North America. The "mashing" process begins when the ground
malt is mixed with water. This mixture is called "mash" and is heated and
stirred. The mash mixture then flows into a lauter tub, which removes, strains
and filters the mash to remove the malt husks. After the straining is complete,
clear liquid called "wort" passes to a brewkettle. In this "boiling and hopping"
stage, dried flowers of the hop vine are added to the wort and the mixture is
boiled in the brewkettle for one to two hours. Hops add flavor to the beer and
prevent spoiling. The specific mixture of the grain and the hops, and the
brewing time and temperature affect the flavor and color of the beer. After the
hops are strained off, the wort has its unique flavor and amber color. The beer
is then transferred to the fermenting cellars and yeast is added to the wort
which then ferments for one to two weeks creating alcohol and carbon dioxide.
The wort is then transferred to the Ruh or resting cellars. The next step is
called "filtration" where yeasts and unwanted proteins are removed to give beer
its brilliant clarity after which it is carbonated using carbon dioxide that was
given off and collected during the fermentation stage. Finally, the beer is
transferred to the "government cellars" or holding tanks where it is stored
before being sent to the production lines where it is packaged in kegs, bottles
or cans.
COMPANY PRODUCTS
In December 1991, the Company commenced its product sales by
introducing Landmark and reintroducing both the Grain Belt and Grain Belt
Premium labels which had been acquired from Heileman. These products were
followed by McMahon's Irish Style Potato Ale in February 1992, in time for the
St. Patrick's Day sale period. The brewery followed these initial successes with
the introduction of "Pig's Eye Pilsner" in May of 1992. Pig's Eye Lean, the
companion light version of Pig's Eye Pilsner, was introduced in late August
1992. The Company introduced Pigs Eye Ice and Pig's Eye Non-alcoholic beer in
December 1993 and Pig's Eye Red in February of 1995. Minnesota Brew entered the
market in April of 1995. Yellow Belly was brought to the market in April of 1996
and Brewers Cave products were introduced in October of 1996. The Company has
new products in various stages of testing at the present time.
A brief description of the Company's various brands follows:
GRAIN BELT. Grain Belt, the Company's leading product, is a very old
established product, originally brewed in Minneapolis with a 100-year history,
now brewed by the Company, using similar recipes. The premium product has above
average alcohol content and richer taste while regular Grain Belt has average
alcohol content and a lighter taste. The brands are Grain Belt, Grain Belt
Premium, Grain Belt Light, Grain Belt Premium Light and GBX Malt Liquor.
PIG'S EYE. Pig's Eye Pilsner is a medium bodied pilsner with average
alcohol content created for a taste and price conscious consumer. The Company
also sells Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red Amber Ale and Pig's Eye
NA.
LANDMARK. A full bodied lager, which is amber colored and has a
slightly higher alcohol content than most American beers. This brand includes
Landmark and Landmark Light.
MINNESOTA BREW. A pilsner style medium bodied beer with average alcohol
content using domestic hops and grains and brewed for the budget conscious
consumer. The Company also sells this product in Canada under the name Northern
Brew.
MCMAHON'S IRISH STYLE POTATO ALE. A product brewed with several types
of malt and potatoes fashioned after an original Irish formula. This product
possesses a maltier flavor and taste and is bronze in color.
GRAIN BELT BOCH. A rich dark amber beer brewed according to the
traditional German "Reinheitsgebot" (all natural) with a full body taste and
dark hue which comes from a brewing formula using specialty malt and imported
hops. This beer is also sold under the name Landmark Boch.
GRAIN BELT OKTOBERFEST. A German-type lager beer, brewed according to
the traditional German Reinheitsgebot. This product is very flavorful, full
bodied and copper colored, due to special malts and German hops.
This beer is also sold under the name Landmark Oktoberfest.
YELLOW BELLY. An alcoholic alternative beverage, Yellow Belly is a
quality malt beverage with select lemon flavoring that provides a delicious
distinctive refreshing taste.
BREWERS CAVE. A hand crafted micro-styled beer crafted in small batches
using specialty mixtures of barley, malts and hops to create the distinctive
Black Barley, Amber Wheat and Golden Caramel products.
CONTRACT BREWING AND PRODUCTION
Beginning in the second quarter of 1992, the Company began to produce
and package private label beer on a contract basis for various customers
according to their specifications. In July 1992, the Company entered into a
production contract with Pete's Brewing Company to brew Pete's Wicked Ale and
related brands. A new contract was entered into effective January 1995. The
Company produced 180,000 barrels pursuant to this contract in 1994 and 233,000
barrels in 1995, which were equivalent to 35.8 and 38.7 percent, respectively,
of the Company's total production in barrels. The contract with Pete's Brewing
Company was scheduled to run for an eighteen month period ending in June of
1996. In connection with the new arrangement, the Company agreed that it would
not enter into any contract brewing arrangements for micro-style contract beers
with eight designated companies.
During the third quarter of 1995, the Company entered into a transition
agreement with Pete's Brewing Company whereby Pete's agreed to pay the Company
$1,000,000 in conjunction with the movement of its production to another
brewery. The Company completed production of Pete's products in the third
quarter of 1995 and sales were concluded in the fourth quarter. The $1,000,000
was netted against cost of goods sold in 1995 and was used by the Company to
cover unanticipated costs incurred in the wind down of the Pete's contract. The
Company is working with existing contract customers and several new private
label contracts to replace this production and its contribution to the Company's
gross profit.
In July 1993, the Company began bottling premium water pursuant to a
third party contract with The Winterbrook Company ("Winterbrook"). This contract
contained restrictions prohibiting the Company from producing and bottling
premium water under other contracts. On March 4, 1996, Winterbrook filed for
protection under Chapter 11 of the United States Bankruptcy Act.
At the time of filing, the Company had outstanding receivables totaling
approximately $725,000 and was holding inventory of approximately $410,000
against this outstanding balance. The Company entered a post-petition
arrangement with Winterbrook to ship inventory on a cash in advance basis on a
shipping schedule covering all the inventory. In addition, the Company agreed to
continue to produce new product for Winterbrook at current production prices
upon the prior payment for the current week's production. The approximate
uncollateralized balance due of $315,000 was included with the other unsecured
claims and settled in the bankruptcy proceedings. The receivable balance
included 1996 Company sales of product which were produced from certain
inventory reflected on the Company's December 31, 1995 balance sheet.
Accordingly, the Company recorded a charge to 1995 cost of goods sold of
$160,000 which was management's estimate of the inventory valuation reserve
necessary as of December 31, 1995, to properly reduce inventory for the
realizability issue raised by this subsequent event. The Company continued to
work with Winterbrook management in an effort to "affirm" their existing
contract and accounts payable obligations to the Company. New management took
over Winterbrook in the fourth quarter of 1996 and chose not to honor the
commitments that previous management had made. Thus, the Company incurred a
$140,000 provision for doubtful accounts in the fourth quarter of 1996 relating
specifically to the Winterbrook account. Although Winterbrook rejected the
bottling contract, the Company continues to produce water for Winterbrook under
new terms and has begun to produce water for its own proprietary brand of water
under the name Mount Simon.
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 recapitalized 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 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 their 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(cents) 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 any 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 $418,000 to its allowance for
doubtful accounts to fully reserve WSI's 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. 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.
In addition to sales of its proprietary beers and contract brewing, the
Company also produces beer for sale under private label agreements. Under these
agreements, the Company's beers are given the customers' label for resale by the
customer. Private label customers include restaurants, exporters and marketing
organizations selling their own brands.
The Company also began to produce brewed malt liquids under contract
production arrangements in 1995. One of the liquids is shipped out prior to
fermentation and drying to a provider for use by home brewers. The second liquid
is fermented and shipped out for use as a base for "wine cooler" type products.
The brewed malt liquids are finished and sold to others by third parties.
EXPORT SALES
The Company also ships some of its beers overseas. (See Note 5 of Notes
to Financial Statements for Export Sales Information.) Substantially all export
sales are made through brokers and are marketed and sold primarily on the basis
of price. Although the Company intends to pursue this market as opportunities
present themselves, export sales may vary significantly from year to year.
During the third quarter of 1994, the Company entered into an exclusive export
marketing arrangement for the distribution of its brands in Japan.
In the fourth quarter of 1995, the company entered into another
exclusive export market arrangement for specific brands to be distributed
throughout the Pacific Rim including China.
The Company has granted exclusive brands to various brokers for
specific foreign countries to enhance the distribution of its products.
SALES AND MARKETING
The Company's beverages are sold on an "on sale" basis in restaurants
and bars and on an "off sale" basis primarily through liquor stores, convenience
stores and supermarkets. The product is marketed and delivered to these
retailers by independent beverage distributors. Although the Company generally
grants its distributors exclusive rights to sell its proprietary products within
a defined territory, most of the Company's distributors carry other beer
products. Written agreements with the Company's distributors vary, but are
generally perpetual or multi-year agreements and terminable by either party for
breach of the contract or upon specified notice periods. If the Company
terminates an agreement without cause, however, it must pay the distributor an
amount equal to the distributor's net earnings from sales of the Company's
products during the most recently completed fiscal year. Although not all
distribution arrangements are pursuant to written agreements, the Company has
written agreements with almost all of its largest distributors.
During 1996, the Company's three largest distributors accounted for
16.9% of the Company's total sales. The Company believes that as its sales
increase, sales by any one distributor will account for a decreasing percentage
of revenues.
Distributors place product orders directly with the Company. Because
the process of brewing generally takes three to five weeks, the Company
continually reviews its existing orders and expected future orders. In
connection with this process, the Company produces beer in returnable bottles,
non-returnable bottles, cans or kegs. Finished product are stored in the
Company's warehouse until they are picked up by distributors.
PRODUCT SHIPPING ACTIVITY
The following table indicates, for the periods shown, the Company's
total sales in barrelage by product line.
<TABLE>
<CAPTION>
Proprietary Contracts and Pete's
Brands Private Label(1) Contract Export Total
------ ---------------- -------- ------ -----
1995
- ----
<S> <C> <C> <C> <C> <C>
First Quarter 23,457 24,104 63,135 25,688 136,384
Second Quarter 44,020 23,785 78,641 33,951 180,397
-------- -------- -------- ------- --------
Six-Month Total 67,477 47,889 141,776 59,639 316,781
Third Quarter 44,609 42,750 74,006 39,494 200,859
Fourth Quarter 33,723 25,400 17,019 7,850 83,992
-------- -------- -------- -------- --------
Yearly Total 145,809 116,039 232,801 106,983 601,632
Percent of Total 24.2% 19.3% 38.7% 17.8% 100.0%
1996
- ----
First Quarter 34,184 37,163 226 24,539 96,112
Second Quarter 43,534 64,130 -- 38,245 145,909
-------- -------- ----------- -------- --------
Six-Month Total 77,718 101,293 226 62,784 242,021
Third Quarter 45,682 43,632 -- 13,139 102,453
Fourth Quarter 34,397 41,957 -- 8,491 84,845
-------- -------- ----------- ------- --------
Yearly Total 157,797 186,882 226 84,414 429,319
Percent of Total 36.8% 43.5% -- 19.7% 100.0%
</TABLE>
(1) Includes contract brewing and contract production of water. Excludes
production for Pete's Brewing Company.
Sales of beer are customarily at their lowest volume level in the first
and fourth quarters of each year and at their highest levels in the second and
third quarters.
PACKAGING AND RAW MATERIALS
The malted barley, hops and yeast which are used to produce the
Company's beer are readily available from several alternative sources in North
America. Because the Company is not dependent on any one supplier for these
ingredients, the Company believes a continuous supply of raw materials will be
readily available for its brewing operations.
The Company's products are packaged in bottles, cans or kegs. In 1996,
50 percent of the Company's total production (in barrels) was packaged in
aluminum cans, and 41 percent was packed in returnable and non-returnable glass
bottles. The remainder of the beer sold was packaged in quarter-barrel and
half-barrel stainless steel kegs.
The Company uses corrugated cardboard boxes and fiber board boxes for
the shipping of its bottles and cans. Although the Company buys all of its
aluminum cans from a single source and most of its non-returnable glass bottles
and cartons from a single source, the Company has not experienced any
difficulties in obtaining supply in the past and does not anticipate any
shortages in the future. Although the Company is required to provide its can and
bottle producer with advance orders regarding the number and types of
containers, the Company believes that it would be able to obtain
comparable products elsewhere at competitive prices if it were unable to
continue to obtain cans, bottles or cardboard containers from any of its current
suppliers.
GOVERNMENTAL REGULATION, LICENSING AND ENVIRONMENTAL REGULATION
The business of the Company is highly regulated by federal, state and
local laws. The Company was required to obtain a federal permit from the Bureau
of Alcohol, Tobacco and Firearms and a state permit from the Minnesota
Department of Public Safety prior to commencement of production and sale of
beer. Prior to the commencement of operations, the Company was required to
become licensed by the Department of Agriculture, which license is issued
following a satisfactory inspection by the Food and Drug Administration. Also
prior to beginning operations, the Company was required to obtain approval of
its facilities, improvements and sanitary conditions from the Minnesota
Department of Health and the City of Saint Paul Building Department, and be
issued a discharge permit from the Metropolitan Waste Control Commission.
Although the Company believes that it has complied with all applicable laws, no
assurance can be made that the Company will be able to remain in compliance. In
addition, the Company is subject to regulation by the air and water pollution
control divisions of the Minnesota Pollution Control Agency. The Company has
obtained all regulatory permits and licenses necessary to operate its brewery
and to sell its product in the states where it is currently being distributed.
Failure on the part of the Company to comply with federal, state or local
regulations could cause the Company's licenses to be revoked and force it to
cease operations.
The Company's brewery is subject to federal, state and local
environmental protection laws and regulations and the Company is operating
within existing laws and regulations or is taking action aimed at assuring
compliance therewith. Various strategies are utilized to help assure this
compliance. The Company does not expect compliance with such laws and
regulations to materially affect the Company's capital expenditures, earnings or
competitive position.
Certain states and local jurisdictions have adopted certain restrictive
packaging laws and regulations for beverages that generally require deposits or
advanced disposal fees on packages or restrict certain packaging options.
Because the most significant portion of the Company's sales are in Minnesota
(which does not have any such laws), these laws have not had a significant
effect on the Company's sales. The federal government and a number of additional
states and local jurisdiction continue to consider similar legislation or
regulations, the adoption of which might require the Company to incur
significant capital expenditures.
TRADEMARKS
The Company's trademarks "Grain Belt" and "Pig's Eye Pilsner" have been
registered with the United States Patent and Trademark Office and with the
office of the Secretary of State in a number of individual states. The Company
believes its trademarks are important to its business and intends to renew them.
Although the Company has been unable to register its "Landmark" trademark with
the United States Patent and Trademark Office because of a similar registered
trademark for a wine producer, it has obtained label approval for use of the
"Landmark" name by the Bureau of Alcohol, Tobacco and Firearms. The Company has
registered the Landmark trade name with the office of the Secretary of State in
the States of Minnesota and North Dakota and intends to continue to use the
name. The Company has also applied for trademark protection for certain of its
trademarks in foreign jurisdictions.
MARKETING
The Company's initial marketing strategy focused on sales in Minnesota,
particularly the Twin Cities of Minneapolis and Saint Paul. The Company has
utilized the media in the Twin Cities market by issuing press releases on a
timely basis regarding the Company and its products. Press coverage by both the
electronic and print media has been considerable and this planned exposure will
continue to be a key marketing element of the Company. General marketing plans
call for continued use of radio, outdoor billboards and print advertising in
Minnesota. The Company also intends to use one or more of these methods in
additional markets into which it expands as funds are available.
The Company also engages in a number of promotional activities. The
Company currently gives tours of its brewery five days a week and operates a
gift shop for the purchase of promotional items.
The Company focuses its marketing expenditures in markets where it
believes its efforts will be most effective in increasing sales. Marketing
expenditures include redesign of its products packaging or other steps that
improve the attractiveness of its products. The Company believes that some of
the success of its Pig's Eye product line has been due to the unique Pig's Eye
image and packaging. The Company intends to extend this innovative marketing
strategy to the remainder of its product line.
RESEARCH AND DEVELOPMENT
The Company conducts a limited amount of research activities relating
to the development of new products and the improvement of existing products. The
dollar amounts expended by the Company since inception on such research
activities and the number of employees engaged in these activities during such
period, however, are not considered to be material in relation to the total
business of the Company. The Company spent less than $50,000 on research
activities in 1996 and expects to spend less than $50,000 in 1997.
EMPLOYEES
As of March 20, 1997, the Company has approximately 136 full-time
equivalent employees. Key areas are summarized below:
The Company has 116 employees that work in production, including
brewing, bottling, packaging, warehouse, engineering and equipment maintenance,
10 employees in sales and marketing and 10 employees in administration. Of the
Company's employees, 104 work pursuant to five separate union contracts, all of
which expire on June 30, 1997. The Company believes its employee relationship to
be good. In connection with the formation of the Company in 1991, the Company
established the Minnesota Brewing Company Employee Stock Ownership Plan
("ESOP"), which covers all the Company's employees other than those covered by
two of the union contracts.
ITEM 2. PROPERTY
The Company's offices and brewery and warehouse facilities are located
on approximately 14 acres of property in Saint Paul, Minnesota.
The prior owner of the facilities, Heileman, acquired the facility in
1972 and invested significant amounts in expanding and modernizing the brewery,
which has been a landmark in Saint Paul since 1901. Major brewhouse and
government cellar renovations were completed in 1984, which increased the
brewery's annual production capacity to its present level of approximately 2.2
million barrels. In 1980, the brewery drilled a well over 1,000 feet to tap a
high quality source of water. The Company believes that the brewery and
equipment are in good condition. The brewery is maintained in good working
condition by a staff of eighteen technicians.
The brewery operations and production facility consist of:
BREWKETTLE: Two kettles ranging from 385 barrels to 410 barrels are
used in the initial stage of product production and require up to three
hours per batch.
CELLARS: During the process of beer production, the beer progresses
through the various beer cellars:
<TABLE>
<CAPTION>
CAPACITY TIME
TYPE OF CELLAR PROCESS IN BARRELS WITHIN CELLAR
- -------------- ------- ---------- -------------
<S> <C> <C> <C>
Fermentation Yeast is added; fermenting begins. 65,000 One to two weeks.
Ruh (Resting) Beer rests and ages. 60,000 Two to eight weeks, depending upon style.
Pre-Finishing Yeasts and unwanted proteins are removed; 22,000 Approximately one week.
beer is carbonated.
Government Beer waits for bottling and packaging. 21,000 Several days to a week.
</TABLE>
PACKAGING LINES: The Company has three separate packaging lines with
capacity from 1,625 cases of bottles per hour per line to 2,750 cases
of cans per hour. The three packaging lines have filler speeds ranging
from 650 bottles a minute per line to 1,100 cans per minute. One of
the lines is designed to fill cans, one is designed to fill returnable
bottles and one is designed to fill nonreturnable bottles of various
sizes.
KEGGING LINE: The Company's kegging line can fill up to 300 kegs
(1/2and 1/4 barrels) in an hour.
WAREHOUSE: The Company's total on site warehousing capacity is 137,400
square feet, with capacity to store up to 850,000 cases in a 123,000
sq. ft. warehouse and a refrigerated keg storage area of 14,400 sq.
ft. The warehousing facility opens to 20 shipping docks, including 17
devoted to truck-loading and three rail loading on rail siding located
on the property and served by the Soo Line Railroad and the Chicago
and Northwestern Railroad.
OFFICES: The Company's administrative offices consist of approximately
9,800 square feet, including a rathskeller where the Company's
products are available for sampling after brewery tours.
Management believes that the brewing facility and administrative
offices are adequate to support production and shipment of the Company's current
and future product lines and fully support current and future contract brewing
agreements and private label agreements with unaffiliated third parties. These
facilities and a substantial portion of all equipment are leased from the
Partnership.
The Partnership has retained ownership of all the real property,
buildings, water wells, and equipment used in the brewing process. The
Partnership leases the real property to the Company at the rate of $25,000 per
month under terms of a lease expiring in November 2003. The Partnership also
leases a significant portion of all the equipment used in the brewing process to
the Company at the rate of $1.00 per barrel of production. This Lease also
expires in 2003.
The lease agreements give the Company the right to purchase the
facility and equipment at any time over the term of the lease beginning December
1, 1995 for eight times trailing 12-month lease payments, which amounted to
approximately $5.7 million as of December 31, 1996. The agreements also allow
the Partnership to acquire additional equipment or replacement equipment needed
by the Company and lease it to the Company over the taxable depreciable life of
the equipment with an interest rate of two points over the applicable treasury
rate.
ITEM 3. LEGAL PROCEEDINGS
A claim in the amount of $196,541.76, plus interest from November 18,
1996 has been made by Pete's Brewing Company ("Pete's") against the Company.
Pete's alleges that under its previous Brewing Agreement with the Company it has
returned certain pallets for which payment or credit has not yet been made by
the Company. The Company believes that Pete's has already taken credit for all
pallets that Pete's has returned and the Company has recorded a $55,000 balance
owning to Pete's for such pallets. Pete's has made a demand for mediation of the
dispute pursuant to the terms of the Brewing Agreement. The Company anticipates
that any initial mediation session will not commence until April 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap system
under the symbol MBRW. The following table sets forth the high and low closing
bid prices for the Company's Common Stock for 1995 and 1996.
LOW HIGH
--- ----
1995
First Quarter 4.25 5.875
Second Quarter 4.50 5.50
Third Quarter 4.00 5.75
Fourth Quarter 4.375 5.50
1996
First Quarter 4.25 6.25
Second Quarter 4.25 8.75
Third Quarter 4.25 6.00
Fourth Quarter 3.00 5.25
These prices indicate interdealer prices without retail markup, markdowns or
commissions.
At March 21, 1997, the Company had 269 holders of record of its Common
Stock. In addition, on that date one depository company held approximately
1,630,104 shares as nominees for an undetermined number of additional beneficial
holders.
The Company has not paid any dividends on its Common Stock and does not
anticipate paying any in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------- -------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 24,875,349 $ 31,383,508 $ 25,221,588 $ 16,471,396 $ 10,331,431
Cost of goods sold.......................... 23,331,116 28,199,229 21,525,720 14,147,351 10,084,418
------------- -------------- ------------- -------------- -------------
Gross profit ............................... 1,554,233 3,184,279 3,695,868 2,324,045 247,013
------------- -------------- ------------- -------------- -------------
Operating expenses
Advertising............................... 1,123,996 1,594,267 1,728,073 1,108,605 1,392,072
Sales and marketing....................... 747,809 719,659 598,727 461,936 314,904
Administrative............................ 855,255 714,050 615,631 517,562 437,627
Provision for doubtful accounts........... 601,000 25,000 55,000 13,000 --
Start-up expenses......................... -- -- -- -- 215,866
------------- -------------- ------------- -------------- -------------
Total operating expenses.............. 3,328,060 3,052,976 2,997,431 2,101,103 2,360,469
------------- -------------- ------------- -------------- -------------
Operating income (loss)..................... (1,783,827) 131,803 698,437 222,942 (2,113,456)
Other income (expense), net................. (78,641) (105,341) (93,204) (71,349) (13,422)
------------ -------------- -------------- -------------- --------------
Net income (loss) before
income tax benefit........................ (1,862,468) 25,962 605,233 151,593 (2,126,878)
Income tax benefit.......................... -- -- (222,000) -- --
------------- -------------- -------------- -------------- -------------
Net income (loss)........................... $ (1,862,468) $ 25,962 $ 827,233 $ 151,593 $ (2,126,878)
============= ============== ============= ============== =============
Net income (loss) per common share.......... $ (0.55) $ 0.01 $ 0.25 $ 0.08 $ (1.28)
Weighted average common shares
outstanding............................... 3,374,155 3,351,308 3,330,088 1,923,722 1,661,111
OPERATING DATA (in barrels sold):
Domestic.................................... 157,797 145,809 140,199 144,730 132,888
Contract.................................... 187,108 348,840 290,187 104,837 19,968
Export...................................... 84,414 106,983 73,667 45,906 16,385
------------- -------------- ------------- -------------- -------------
Total....................................... 429,319 601,632 504,053 295,473 169,241
============= ============== ============= ============== =============
December 31, December 31, December 31, December 31, December 31,
1996 1995 1994 1993 1992
------------- -------------- ------------- -------------- -------------
BALANCE SHEET DATA
Working capital (deficit)................... $ 4,342,653 $ 6,327,913 $ 6,788,661 $ 6,273,365 $ (349,160)
Total assets................................ 10,775,228 12,189,503 13,363,949 11,767,667 3,959,632
Long-term debt, net......................... 1,753,454 1,982,428 2,194,380 2,390,576 794,393
Shareholders' equity........................ 7,097,966 8,787,484 8,658,022 7,777,034 158,086
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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 table below sets forth for the periods indicated the percentage of
net sales represented by items included in the Company's Statement of
Operations:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of goods sold................................... 93.8 89.9 85.3
------ ------ ------
Gross profit......................................... 6.2 10.1 14.7
Advertising.......................................... 4.5 5.1 6.8
Sales and marketing.................................. 3.0 2.3 2.4
Administrative....................................... 3.4 2.3 2.4
Provision for doubtful accounts...................... 2.4 0.1 0.2
Operating income (loss).............................. (7.2) 0.4 2.8
Interest expense..................................... (0.6) (0.6) (0.4)
Income tax benefit................................... -- -- 0.9
Net income (loss).................................... (7.5) 0.1 3.3
===== === ===
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO 1995
Net sales for 1996 were $24,875,349, a 20.7% decrease from the net
sales reported for 1995 of $31,383,508. Total barrels sold in 1996 were 429,319
compared to 601,632 barrels in 1995 resulting in a 28.6% decrease in barrelage
sales. Due to product mix and because the Company's contract customers purchase
all or part of their own packaging materials, the percentage decrease in barrels
can vary from the percentage decrease in net sales.
Sales of proprietary brands increased 8.2% from 1995 barrelage of
145,809 to 1996 barrelage sales of 157,797. The improvement was attributable to
the continuing increase in sales of Grain Belt Premium, the Company's leading
brand. In addition, the introduction of the lemon flavored malt ale "Yellow
Belly" during the year accounted for part of the increase, while the Company's
Pig's Eye brand declined slightly. The Company anticipates that in 1997 sales of
its proprietary products will continue to increase supported by its marketing
efforts, bolstered by the increased sales of its products introduced in 1996
(Yellow Belly and Brewers Cave), and additional new products being brought to
the market in 1997. Proprietary sales for 1996 were also adversely affected when
its two major distributors sold their businesses as of September 30, 1996. These
transactions and the resultant consolidation of distributors in the fourth
quarter of 1996 caused proprietary sales to fall below company forecasts for
1996 and the annual percentage increase to decline from levels attained during
the first six months of the year. The Company believes the successor
distributors are well positioned to further expand the Company's sales in the
future.
Export sales decreased 21.1% from 106,983 barrels in 1995 to 84,414
barrels in 1996. The decrease was attributable to a shift in the foreign
exchange rate and the imposition of impractical product coding requirements on a
major export account. The Company anticipates that it will experience an
increase in export sales during 1997 based upon its existing accounts. Because
the Company sells its export brands at prices lower than domestic sales, these
export sales are a lower percentage of net sales than a percentage of barrelage.
Sales from brewing agreements and contract packaging decreased 161,732
barrels in total from 348,840 in 1995 to 187,108 barrels in 1996 for a 46.4%
decrease. This decrease was primarily attributable to the loss of the Company's
largest contract account in 1995, Pete's Brewing Company, which accounted for
232,801 barrels of sales in 1995. Excluding the impact of the Pete's Brewing
Company sales, other contract sales increased 70,843 barrels or 61% from 116,039
barrels in 1995 to 186,882 barrels in 1996. This increase reflects the Company's
efforts to rebuild contract sales after the loss of the Pete's account. The
Company continues to replace this volume from existing accounts and the addition
of new contracts.
While net sales decreased 20.7% in 1996, costs of goods sold only
decreased 17.3% from $28.2 million to $23.3 million. The smaller percentage
decrease in cost of goods sold versus the decrease in net sales was attributable
to the fixed level of plant operating overhead which remained relatively stable
even though the third and fourth quarter sales fell short of Company
expectations. Therefore, the Company experienced a decline in its gross margin
from 10.1% in 1995 to 6.2% in 1996 principally from a shortfall in sales. In
addition, because of the slower level of sales than anticipated and the
financial difficulties encountered by one of the Company's contract customers
(William & Scott, Inc. -- see "Liquidity and Capital Resources" for full
description) the Company charged cost of goods sold $233,000 when it increased
its inventory valuation reserve by that amount in 1996.
Operating expenses were $275,084 greater in 1996 than in 1995 and as a
percentage of sales they increased from 9.7% in 1995 to 13.4% in 1996. Of this
amount, advertising expenses decreased $470,271 in 1996 resulting from a reduced
level of planned expenditures, including radio promotions. Sales and marketing
expenses increased $28,150 from 1995 to 1996 and as a percentage of sales from
2.3% to 3.0% in 1996. The increase was reflective of the Company's commitment to
its new brands introduced in 1996.
General and administrative expenses increased $141,205 from 1995 to
1996. As a percentage of sales they increased from 2.3% in 1995 to 3.4% in 1996.
The change was primarily because certain production employees' duties were
expanded to include administrative duties and reallocated accordingly. In
addition, professional fees and shareholder relations costs exceeded 1995
levels. The provision for doubtful accounts increased $576,000 from 1995 to
1996. As previously discussed, the major portion of this increase was the
additional provision of $140,000 required on the Winterbrook account after the
new management chose not to affirm the contract with the Company and $418,000 to
fully reserve the William & Scott, Inc. account after that company filed for
bankruptcy protection in 1997.
Interest income decreased from $73,057 in 1995 to $59,967 reflecting a
reduction in available investable funds while at the same time other income
increased from $0 in 1995 to $24,033 in 1996.
The Company's interest expense decreased $15,757 from 1995 to 1996
principally associated with the scheduled reduction in principal of the
capitalized lease covering plant and equipment.
The Company incurred losses in 1991 and 1992, its first two years of
operations, totaling approximately $2.5 million. These losses were used, in
part, to offset 1993, 1994 and 1995 taxable income. The Company has $1.3 million
net operating loss carryforwards from the 1992 loss period that can be utilized
to offset future taxable income to an approximate annual limitation of $575,000.
These carryforwards expire if not utilized by the year ended 2007. The Company's
approximate tax loss of $1.5 million in 1996 can be used to offset future
taxable income without limitation; this carryforward expires in 2011 if not used
prior to that time.
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.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO 1994
Net sales for 1995 were $31,383,508, a 24.4% increase over the net
sales reported for 1994 of $25,221,588. Total barrels sold in 1995 were 601,632
compared to 504,053 barrels in 1994 resulting in a 19.4% increase in barrelage
sales. Due to product mix and because the Company's contract customers purchase
all or part of their own packaging materials, the percentage increase in barrels
can vary from the percentage increase in net sales.
Sales from brewing agreements and contract packaging increased 58,643
barrels from 290,187 in 1994 to 348,840 in 1995 for a 20.2% increase. The
increase was primarily attributable to an increase of 52,427 barrels in
production to 232,801 barrels in 1995 for Pete's Brewing Company, which was the
Company's largest contract customer in 1995. The Pete's Brewing Company contract
concluded in the fourth quarter of 1995 and the Company began to replace this
volume from an expansion of volume from existing contracts and the addition of
new contracts.
Export sales increased 45.2% from 73,667 barrels in 1994 to 106,983
barrels in 1995. The increase was attributable to the Company's brokers securing
additional foreign orders and a continued expansion of the Company's export
sales effort. The 1995 increase included a full year's operation of the
exclusive export marketing arrangement for Japan, which commenced in the third
quarter of 1994. Because the Company sells its export brands at prices lower
than domestic sales, these export sales are a lower percentage of net sales than
the corresponding percentage of barrelage.
Sales of proprietary brands increased 4% from 1994 barrelage of 140,199
to 1995 barrelage sales of 145,809. The improvement was attributable to a
broader acceptance of Company products following receipt of the Gold Medal for
Grain Belt Premium and the Silver Medal for Pig's Eye Ice at the Great American
Beer Festival in October of 1994. The Company anticipates that in 1996 it will
be able to continue to capitalize on these awards and the Company's marketing
efforts to improve sales of proprietary products.
While net sales increased 24.4% in 1995, cost of goods sold increased
30.0% from $21.5 million to $28.2 million. The increase in cost of goods sold
was primarily attributable to increased raw material and production costs. In
addition, cost of goods sold in the year ended December 31, 1995 include a
$160,000 charge which represented the Company's current estimate of the
valuation reserve necessary, as it relates to 1995, as a result of the March 5,
1996 Winterbrook bankruptcy filing described below in "Liquidity and Capital
Resources." As a result of these cost increases along with reduced margins on
its major contract brewing agreement effective in the first quarter of 1995, the
Company experienced a decline in its gross profit from 14.7% in 1994 to 10.1% in
1995. During 1995 the Company recognized $1,000,000 from the transition
agreement with Pete's Brewing Company in connection with Pete's movement of its
production to another brewery. This payment was netted against cost of goods
sold and was used by the Company to cover costs incurred in the wind down of the
Pete's contract.
Operating expenses were $55,545 greater in 1995 than 1994. Of this
amount advertising expenses were $133,806 less in 1995 than in 1994 reflecting a
restructured advertising campaign for Pig's Eye Beer and a re-focused Grain Belt
Premium campaign to capitalize on receipt of the Gold Medal at the October 1994
Great American Beer Festival. As a percentage of sales, advertising expenses
decreased from 6.8% in 1994 to 5.1% in 1995 because of the expansion of contract
and export sales, which do not require significant levels of advertising
expense. Sales and marketing expenses increased $120,932 from 1994 to 1995 while
as a percentage of sales they decreased from 2.4% to 2.3% respectively. The
increase in expenditures was attributed to an expansion of the sales staff and
an increase in sales commissions associated with the expansion of export sales
and certain contract agreements. Administrative expenses increased $68,419 from
1994 to 1995 principally from an increase in professional fees and an increase
in shareholder relations costs. As a percentage of sales, however,
administrative expenses decreased from 2.7% in 1994 to 2.4% in 1995 primarily as
a result of the Company operating at a higher sales volume.
Interest income decreased from $102,686 in 1994 to $73,057 in 1995
reflecting a reduction in available investable funds as the Company invested a
portion of the initial public offering proceeds into production equipment.
The Company's interest expense decreased $17,492 from 1994 to 1995
principally associated with a reduction in principal of the capitalized lease of
the plant and equipment.
The Company incurred losses in 1991 and 1990, its first two years of
operations, totaling approximately $2.5 million. These losses were used to
offset 1993, 1994 and 1995 taxable income. The Company has unrecorded benefits
from $1.3 million of net operating loss carry forwards that can be utilized to
offset future taxable income to an approximate annual limitation of $575,000.
These carry forwards expire if not utilized by the year ended 2007.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1996 decreased $1,985,260 to $4.3
million from $6.3 million at December 31, 1995. The decrease is primarily
attributable to the loss for the year coupled with the investment of funds into
additional equipment and intangible assets.
During the year ended December 31, 1996, the Company generated net cash
from operating activities of $206,415 which was due to depreciation and
amortization of $712,039, a decrease in accounts receivable of $981,285 and an
increase in accounts payable and accrued expenses of $488,893. These amounts
were partially offset by the net loss of $1,862,468 and increases in inventories
of $101,187, prepaid expenses of $10,449 and a decrease of $1,698 in the amount
due to a related party for equipment rent.
The Company generated cash of $218,912 from investing activities
through net sales of Treasury Bills in the amount of $997,719 which were
partially offset by the purchase of $571,738 of property and equipment and
$207,069 in the purchase of intangible assets for branded products.
The Company also used cash of $39,002 in financing activities during
1996 for the payment of obligations under capitalized lease obligations of
$211,952 which were partially offset by proceeds of $172,950 from the exercise
of employee stock options.
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 treasury securities.
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 rent anytime after December
1, 1995. 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 December 31, 1996, the Company had net operating loss
carryforwards totaling $1.5 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.
On March 11, 1996, the Company announced that one of its principal
customers, Winterbrook Corporation, filed a Chapter 11 petition for bankruptcy.
The Company produces LaCroix water products for Winterbrook. At the time of
filing, the Company had outstanding receivables totaling approximately $725,000
and was holding inventory of approximately $410,000 against this outstanding
balance. The Company entered a post-petition arrangement with Winterbrook to
ship inventory on a cash in advance basis on a shipping schedule covering all
the inventory. In addition, the Company has agreed to continue to produce new
product for Winterbrook at current production prices upon the prior payment for
each week's production. The approximate uncollateralized balance due of $315,000
was included with the other unsecured claims and settled in the bankruptcy
proceedings. The receivable balance included 1996 Company sales of product which
were produced from certain inventory reflected on the Company's December 31,
1995 balance sheet. Accordingly, the Company recorded a charge to 1995 cost of
goods sold of $160,000 which was the Company's estimate of the inventory
valuation reserve necessary as of December 31, 1995, to properly reduce
inventory for the realizability issue raised by this subsequent event. The
Company continued to work with Winterbrook management in an effort to affirm
their existing contract and accounts payable obligations to the Company. New
management took over Winterbrook in the fourth quarter of 1996 and chose not to
honor the commitments that previous management had made. Thus, the Company
incurred a $140,000 provision for doubtful accounts in the fourth quarter of
1996 relating specifically to the Winterbrook account. With Winterbrook's
rejection of the bottling contract, Minnesota Brewing Company is now able to
produce water products for itself and others while the Company continues to
produce for the company that took over Winterbrook.
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 their payment terms with the Company after such terms had been extended
from 30 to 60 days by the Chairman and President of the Company. WSI then
provided the Company with a security interest in their inventory, accounts
receivable, equipment and intellectual property with such security interest
being subordinate to their 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. 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 Annual Report on Form 10-K 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-K 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, FASB issued SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG- LIVED ASSETS TO BE DISPOSED OF, which
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows attributed
to such assets. The Company adopted SFAS No. 121 during 1996 and such adoption
did not have an impact on the Company's financial position or results of
operations.
In October 1995, FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, which defines a fair value based method of accounting for employee
stock options or similar equity instruments and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
Under the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized over the service period,
which is usually the vesting period. However, this SFAS also allows an entity to
continue to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25, ACCOUNTING FOR
STOCK ISSUED TO EMPLOYEES. However, this SFAS will still require the Company to
make pro forma disclosures of net income and earnings per share as if the fair
value based method of accounting defined in this statement had been applied. The
Company adopted SFAS No. 123 during 1996 (the Company elected to continue using
its intrinsic value based method) and therefore the adoption of SFAS No. 123
resulted only in additional disclosures in the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company are set forth below:
Report of Independent Auditor
McGladrey & Pullen LLP......................................
Balance Sheets as of December 31, 1996 and 1995.............
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994...........................
Statements of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994............
Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994......................
Notes to Financial Statements for the years.................
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Shareholders
Minnesota Brewing Company
St. Paul, Minnesota
We have audited the accompanying balance sheets of Minnesota Brewing Company as
of December 31, 1996 and 1995, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Minnesota Brewing Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Our audit of the financial statements of Minnesota Brewing Company included
schedule II contained herein, for the years ended December 31, 1996, 1995, and
1994. In our opinion, such schedule presents fairly the information required to
be set forth therein, in conformity with generally accepted accounting
principles.
St. Paul, Minnesota McGLADREY & PULLEN, LLP
February 14, 1997
MINNESOTA BREWING COMPANY
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 386,325 $ -
Securities being held to maturity - 997,719
Trade accounts receivable, less allowance for doubtful accounts
of $485,000 in 1996 and $34,000 in 1995 (Note 5) 1,034,921 1,247,445
Other receivables:
Transition agreement receivable (Note 8) - 500,000
Vendor rebates and other 91,084 359,845
Inventories (Note 5) 4,532,532 4,431,345
Prepaid expenses 71,599 61,150
Deferred income taxes (Note 6) 150,000 150,000
------------------------------
TOTAL CURRENT ASSETS 6,266,461 7,747,504
------------------------------
Other Assets
Trademarks, net of accumulated amortization of $40,000
in 1996 and $26,000 in 1995 221,273 209,200
Deferred income taxes (Note 6) 143,000 143,000
Other intangible assets, principally packaging design, net of
accumulated amortization of $219,000 in 1996 and
$137,000 in 1995 381,896 282,244
------------------------------
746,169 634,444
------------------------------
Property and Equipment (Note 2)
Land and building under capital lease 1,899,574 1,899,574
Display fixtures and equipment 939,268 688,764
Production equipment, including capitalized lease 2,426,707 2,105,473
Office equipment 85,090 85,090
Leasehold improvements 123,347 123,347
------------------------------
5,473,986 4,902,248
Less accumulated depreciation and amortization 1,711,388 1,094,693
------------------------------
3,762,598 3,807,555
------------------------------
$ 10,775,228 $ 12,189,503
==============================
</TABLE>
See Notes to Financial Statements.
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Current Liabilities
<S> <C> <C>
Current maturities of capital lease obligations (Note 2) $ 228,975 $ 211,953
Amounts due to related party (Note 2) 20,051 21,749
Trade accounts payable 902,413 471,205
Accrued expenses:
Compensation 474,305 455,649
Beverage tax 121,976 130,141
Promotional expenses 92,760 93,226
Other 83,328 35,668
----------------------------
TOTAL CURRENT LIABILITIES 1,923,808 1,419,591
----------------------------
Capital Lease Obligation, less current maturities (Note 2) 1,753,454 1,982,428
----------------------------
Commitments and Contingencies (Notes 2, 3, 4, and 7)
Shareholders' Equity (Notes 2, 3, and 4)
Common stock, $0.01 par value; 10,000,000 shares authorized 33,892 33,516
Additional paid-in capital 10,435,668 10,263,094
Accumulated deficit (3,371,594) (1,509,126)
----------------------------
7,097,966 8,787,484
----------------------------
$ 10,775,228 $ 12,189,503
============================
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA BREWING COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (Notes 5 and 8) $ 27,983,345 $ 33,994,179 $ 27,367,416
Less excise taxes 3,107,996 2,610,671 2,145,828
-------------------------------------------
NET SALES 24,875,349 31,383,508 25,221,588
-------------------------------------------
Cost of goods sold (Notes 2 and 8) 23,331,116 29,199,229 21,525,720
Less transition agreement cost reimbursement (Note 8) - (1,000,000) -
-------------------------------------------
NET COST OF GOODS SOLD 23,331,116 28,199,229 21,525,720
-------------------------------------------
GROSS PROFIT 1,544,233 3,184,279 3,695,868
-------------------------------------------
Operating expenses:
Advertising 1,123,996 1,594,267 1,728,073
Sales and marketing 747,809 719,659 598,727
General and administrative (Note 2) 855,255 714,050 615,631
Provision for doubtful accounts 601,000 25,000 55,000
-------------------------------------------
TOTAL OPERATING EXPENSES 3,328,060 3,052,976 2,997,431
-------------------------------------------
OPERATING INCOME (LOSS) (1,783,827) 131,303 698,437
-------------------------------------------
Other income (expense):
Interest and other income 84,000 73,057 102,686
Interest expense (Note 2) (162,641) (178,398) (195,890)
-------------------------------------------
(78,641) (105,341) (93,204)
-------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE
(BENEFIT) (1,862,468) 25,962 605,233
Income tax benefit (Note 6) - - (222,000)
-------------------------------------------
NET INCOME (LOSS) $ (1,862,468) $ 25,962 $ 827,233
===========================================
NET INCOME (LOSS) PER COMMON SHARE $ (0.55) $ 0.01 $ 0.25
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,374,155 3,351,308 3,330,088
See Notes to Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
MINNESOTA BREWING COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Common Stock Additional Note
-------------------- Paid-In Accumulated Receivable
Shares Amount Capital Deficit From ESOP Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 3,328,611 $ 33,286 $ 10,159,824 $(2,362,321) $ (53,755) $ 7,777,034
Deferred compensation, ESOP - - - - 53,755 53,755
Net income - - - 827,233 - 827,233
---------------------------------------------------------------------------
Balance, December 31, 1994 3,328,611 33,286 10,159,824 (1,535,088) - 8,658,022
Exercise of employee stock options 23,000 230 103,270 - - 103,500
Net income - - - 25,962 - 25,962
---------------------------------------------------------------------------
Balance, December 31, 1995 3,351,611 33,516 10,263,094 (1,509,126) - 8,787,484
Exercise of employee stock options 37,600 376 172,574 - - 172,950
Net loss - - - (1,862,468) - (1,862,468)
---------------------------------------------------------------------------
Balance, December 31, 1996 3,389,211 $ 33,892 $ 10,435,668 $(3,371,594) $ - $ 7,097,966
===========================================================================
See Notes to Financial Statements.
</TABLE>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) $ (1,862,468) $ 25,962 $ 827,233
Adjustments to reconcile net income (loss) to net cash
provided by (used in)operating activities:
Depreciation 616,695 508,980 393,844
Amortization 95,344 84,072 45,991
Deferred income taxes - - (293,000)
Inventory valuation reserve 73,277 160,000 -
Allowance for doubtful accounts 451,000 (32,000) 53,000
Changes in assets and liabilities:
Trade accounts receivable (238,476) 1,366,889 (1,393,114)
Other receivables 768,761 (819,848) 6,881
Inventories (174,464) 166,232 (1,767,006)
Prepaid expenses (10,449) 130,754 (116,298)
Trade accounts payable and accrued expenses 488,893 (993,075) 859,692
Amounts due to related party for equipment rental (1,698) (114,638) 90,968
-----------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 206,415 483,328 (1,291,809)
-----------------------------------------
Cash Flows From Investing Activities
Purchases of property and equipment (571,738) (1,111,098) (436,137)
Purchases of held-to-maturity securities 1,477,025) (2,445,157) (2,920,818)
Sales of held-to-maturity securities 2,474,744 3,201,308 4,032,000
Purchases of intangible and other assets (207,069) (166,783) (74,390)
-----------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 218,912 (521,730) 600,655
-----------------------------------------
Cash Flows From Financing Activities
Principal payments under capital lease obligations (211,952) (196,195) (181,611)
Proceeds from exercise of employee stock options 172,950 103,500 -
-----------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (39,002) (92,695) (181,611)
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 386,325 (131,097) (872,765)
Cash and Cash Equivalents
Beginning - 131,097 1,003,862
-----------------------------------------
Ending $ 386,325 $ - $ 131,097
=========================================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 162,641 $ 178,398 $ 195,890
=========================================
Supplemental Schedule of Noncash Investing and Financing Activities
Principal payments by the ESOP on its note payable $ - $ - $ 53,755
=========================================
</TABLE>
See Notes to Financial Statements.
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK: Minnesota Brewing Company
operates a brewery in St. Paul, Minnesota. The Company leases its production
facilities and the majority of its equipment from Minnesota Brewing Limited
Partnership (the Partnership), the Company's largest shareholder. See Note 2 for
related-party transactions.
The Company brews and markets beer primarily under the Grain Belt, Pigs Eye, and
Brewers Cave labels. The Company also packages premium water and brews beer and
other products for third parties under contract brewing arrangements and private
label production agreements. The Company grants credit, normally 10-day terms,
to distributors, the majority of whom are located in Minnesota. Credit terms in
connection with contract brewing and private label arrangements are negotiated
on an individual customer basis. See Note 5 for segment data and major customer
information.
BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES: The preparation of the financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash
equivalents includes all cash accounts which are not subject to withdrawal
restrictions or penalties, and all highly liquid debt instruments purchased with
an original maturity of three months or less.
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federally insured limits. The Company has not experienced any losses in
such accounts.
SECURITIES BEING HELD TO MATURITY: The Company accounts for debt securities in
accordance with FASB Statement No. 115. This statement requires that management
determine the appropriate classification of securities at acquisition and
reassess the classification at each balance sheet date. Securities being held to
maturity are those debt securities the Company has both the intent and ability
to hold to maturity regardless of changes in market conditions, liquidity needs,
or changes in general economic conditions. At December 31, 1995, these
securities were carried at amortized cost, which approximates fair value. At
December 31, 1995, held-to-maturity securities were comprised entirely of U.S.
Treasury Bills which matured in 1996.
INVENTORIES: Inventories are valued at the lower of cost
(first-in, first-out method) or market. Inventories consist of the
following:
December 31
-----------------------------------------
1996 1995
- ------------------------------------------------------------
Raw materials $ 174,757 $ 247,347
Work-in-progress 448,663 750,926
Finished goods 1,373,193 936,415
Packaging 2,117,881 2,218,599
Other 418,038 278,058
-----------------------------------------
$ 4,532,532 $ 4,431,345
=========================================
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost. Depreciation,
including amortization of capital leases, is computed by the straight-line
method over the lesser of the lease terms or the estimated useful lives as
follows: 10 to 15 years for the production equipment; 5 years for office
equipment; 2 to 5 years for display fixtures and equipment; and 10 years for
building and leasehold improvements.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments: cash and cash equivalents, securities being
held to maturity, trade accounts and other receivables, accounts payable, and
amounts due to related party. At December 31, 1996 and 1995, no separate
comparison of fair values versus carrying values is presented for the
aforementioned financial instruments since their fair values are not
significantly different than their balance sheet carrying amounts. The aggregate
fair values of the financial instruments would not represent the underlying
value of the Company.
REVENUE RECOGNITION: Revenue is recognized at the time the inventory is shipped
to or picked up at the Company's warehouse by the independent distributors or,
in a few selected situations, upon completion of production under specific
contractual arrangements.
AMORTIZATION: The costs of various trademarks and logos are amortized over their
expected useful lives of 5 to 40 years using the straight-line method. The costs
of other assets, principally package design costs, are amortized over their
expected useful lives of 2 to 10 years using the straight-line method.
In accordance with Statement of Financial Accounting Standards No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF, the Company reviews its long-lived assets periodically to
determine potential impairment by comparing the carrying value of the long-lived
assets with the estimated future net undiscounted cash flows expected to result
from the use of the assets, including cash flows from disposition. Should the
sum of the expected future net cash flows be less than the carrying value, the
Company would recognize an impairment loss at the date. An impairment loss would
be measured by comparing the amount by which the carrying value exceeds the fair
value (estimated discounted future cash flows) of the long-lived assets. To
date, management has determined that no impairment of long-lived assets exists.
FEDERAL EXCISE TAX: The Company currently receives an $11 per barrel credit
against federal excise taxes on the first 60,000 barrels of taxable production.
This credit is realized in the first quarter of the year and for accounting
purposes is allocated throughout the year based upon projected taxable sales per
quarter.
INCOME TAXES: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards, and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in
tax laws and rates on the date of enactment. The income tax expense or benefit
is the tax payable or refundable for the year plus or minus the change in
deferred tax assets and liabilities during the year.
NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share is
computed on the basis of the weighted-average number of common and common
equivalent shares outstanding during the respective years. Common equivalent
shares consist of outstanding stock options and warrants, if dilutive.
AUTHORIZED SHARES: The Company's Articles of Incorporation provide for an
aggregate of 11,000,000 shares of $0.01 par value stock of which 10,000,000
shares are designated as common stock. The remaining 1,000,000 shares are
undesignated at December 31, 1996.
RECLASSIFICATIONS: Certain of the 1995 and 1994 amounts have been
reclassified to conform with the 1996 presentation. These reclassifications
had no effect on net income or shareholders' equity.
NOTE 2. RELATED-PARTY TRANSACTIONS
GENERAL: The Minnesota Brewing Limited Partnership owns approximately
46 percent of the Company's common stock. The Chairman of the Board of the
Company is also the controlling general partner of the Partnership.
RELATED-PARTY CAPITAL LEASES: The Company leases its land, building, and the
vast majority of its production equipment from the Partnership. Prior to
November 1993, the Company leased these assets under operating lease agreements.
In November 1993, the Company and the Partnership entered into new lease
agreements which provide for ten-year terms, and options to purchase the assets
based on eight times the preceding twelve months' lease payments of $25,000 per
month for land and building and $1.00 per barrel of production for equipment.
Beginning on December 1, 1995, and extending through the terms of the leases,
the Company has the right to purchase the assets under lease. At December 31,
1996, the purchase price would be approximately $5,700,000. In addition, the
Company is responsible for all real estate taxes associated with this property.
The lease agreements have been accounted for as capital leases. The amounts
capitalized for the land, building, and production equipment were limited to the
Partnership's depreciated cost of these assets. The excess of the periodic lease
payments over the amounts necessary to service the capitalized debt is
recognized as additional rent expense over the terms of the agreements.
The following table presents the estimated future minimum lease payments under
the two agreements and the portion of those payments accounted for as the
capital lease obligation. The future minimum lease payments under the equipment
lease have been presented using management's estimate of 1997's annual
production level.
<TABLE>
<CAPTION>
Operating Capital
Lease Lease
Total Commitment Obligation
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Years ending December 31:
1997 $ 880,000 $ 505,500 $ 374,500
1998 880,000 505,500 374,500
1999 880,000 505,500 374,500
2000 880,000 505,500 374,500
2001 880,000 505,500 374,500
Later years 1,610,400 925,100 685,300
--------------------------------------------------------------
Total estimated future minimum lease
payments $ 6,010,400 $ 3,452,600 2,557,800
==========================================
Less amount representing interest (7.75%) 575,371
--------------------
Present value of future minimum payments
under capital lease obligation at
December 31, 1996 1,982,429
Less current maturities 228,975
--------------------
Long-term portion $ 1,753,454
====================
</TABLE>
Total lease payments due under the aforementioned leases were approximately
$712,000, $902,000, and $804,000 for the years ended December 31, 1996, 1995,
and 1994, respectively. The total rent expense relating to the operating lease
portion of the above leases was approximately $337,000, $527,000, and $430,000
for the years ended December 31, 1996, 1995, and 1994, respectively.
The following is a summary of the assets recorded under capital leases:
<TABLE>
<CAPTION>
December 31
-----------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and building $ 1,899,574 $ 1,899,574
Production equipment 702,426 702,426
-----------------------------------------
2,602,000 2,602,000
Less accumulated amortization 823,932 563,743
-----------------------------------------
$ 1,778,068 $ 2,038,257
=========================================
</TABLE>
AMOUNTS DUE TO RELATED PARTY: The following table summarizes the Company's
outstanding debt to the Partnership:
<TABLE>
<CAPTION>
Average
Amount
Balance at Outstanding Balance
Beginning During at End
of Year the Year of Year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Years ended December 31:
1996 $ 21,749 $ 69,150 $ 20,051
1995 136,387 115,499 21,749
</TABLE>
Related-party commissions: During 1996, the Company paid commissions of
approximately $73,000 to a company whose ownership includes a director of the
Company.
NOTE 3. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has established an Employee Stock Ownership Plan (the Plan) to
provide additional retirement benefits to substantially all employees. Under
agreements with employees, the Company is committed to make cash payments to the
Plan of $0.60 for each hour of paid compensation for eligible employees. Total
compensation expense under this Plan was approximately $146,000, $156,000, and
$132,000 for the years ended December 31, 1996, 1995, and 1994, respectively. At
December 31, 1996 and 1995, there were 138,779 and 116,308 shares, respectively,
of Company common stock held by the Plan.
In the event a terminated plan participant desires to sell shares of the
Company's stock, or for certain employees who elect to diversify their account
balances, the Company may be required to purchase the shares from the
participant at fair market value.
Prior to 1994, the Company's balance sheet reflected the ESOP's note payable to
the Partnership and a corresponding shareholder equity reduction for a note
receivable from the ESOP. The ESOP, under the note agreement, was required to
make payments to the Partnership with the contributions it received from the
Company. The ESOP note payable was paid in full during 1994.
NOTE 4. STOCK OPTIONS AND WARRANT
At December 31, 1996, the Company has a qualified incentive stock option plan
which is described below. Grants under the plan are accounted for following APB
Opinion No. 25 and related interpretations. Accordingly, no compensation cost
has been recognized for grants under the plan. Had compensation cost for the
plan been determined based on the fair values of options granted (the method
described in FASB Statement No. 123), reported net income (loss) and net income
(loss) per common share on a pro forma basis as compared to reported results
would have been as follows:
1996 1995
- ---------------------------------------------------------------------
Net income (loss):
As reported $ (1,862,000) $ 26,000
Pro forma (1,888,000) (21,000)
Net income (loss) per common share:
As reported (0.55) 0.01
Pro forma (0.56) (0.01)
For purposes of the aforementioned pro forma information, the fair value of each
option is estimated at the grant date using the Black-Scholes option-pricing
model with the following weighted-average assumptions for grants in 1996 and
1995, respectively: dividend rate of zero for both years; price volatility of
39.0 and 39.4 percent; risk-free interest rate of 6.1 and 5.7 percent; and
expected lives of approximately 2.3 and 3.2 years.
EMPLOYEE INCENTIVE STOCK OPTION PLAN: The employee incentive stock option plan
authorizes the granting of options to purchase up to 250,000 shares of common
stock to officers, directors, and other key employees. These options are granted
at the discretion of the directors. All options must be granted at no less than
100 percent of the fair market value of the stock on the date of grant, or 110
percent for employees owning more than 10 percent of the Company's common stock.
The options expire at varying dates not to exceed ten years from the grant date
and are not transferable. When exercising options, an employee's payment may be
either cash, shares of the Company's stock valued at the fair market value, or a
combination of the two.
WARRANT: In connection with its initial public offering, the Company issued a
warrant to the underwriter to purchase up to 137,750 shares of the Company's
common stock at an exercise price of $5.40 per share. The warrant became
exercisable in November 1994 and expires in November 1998.
A summary of the stock option and warrant activity through December 31, 1996, is
as follows:
<TABLE>
<CAPTION>
Exercise Price
Warrant Stock Option Per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 and 1994 137,750 91,000 $ 4.50 - 5.40
Granted 30,000 5.00 - 5.75
Exercised (23,000) 4.50
--------------------------------------------------------------
Balance, December 31, 1995 137,750 98,000 4.50 - 5.75
Granted 18,500 4.75
Exercised (37,600) 4.50 - 5.00
--------------------------------------------------------------
Balance, December 31, 1996 137,750 78,900 $ 4.50 - 5.75
==============================================================
</TABLE>
At December 31, 1996, all options and warrants outstanding were exercisable. The
weighted-average fair value per option, of options granted in 1996 and 1995, was
$1.41 and $1.57, respectively.
A further summary about options outstanding at December 31, 1996, is as follows:
Remaining
Exercise Number Contractual
Price Outstanding Life
- ----------------------------------------------------------------------------
$ 4.50 37,900 7.2 years
4.75 18,500 9.7 years
5.00 10,000 8.4 years
5.75 12,500 8.4 years
--------------------
78,900
====================
NOTE 5. SEGMENT DATA, MAJOR CUSTOMERS, AND MAJOR SUPPLIER
SEGMENT DATA: The Company operates in one business segment, the brewing and
marketing of beverages, including beer under both proprietary and contract
labels. In addition to domestic distributors, the Company also sells directly to
foreign distributors located mainly in the Far East. Total foreign sales
(excluding freight charges and excise taxes) amounted to approximately
$4,217,000, $5,293,000, and $3,343,000 during the years ended December 31, 1996,
1995, and 1994, respectively. Trade accounts receivable from foreign
distributors were approximately $203,000 and $115,000 at December 31, 1996 and
1995, respectively.
MAJOR CUSTOMERS: As of and for the years ended December 31, 1996, 1995, and
1994, the Company had trade accounts receivable from and net sales to a company
which was a major customer in two of these years, as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer (see Note 8):
Percent of trade accounts receivable at
December 31 - 28.9% 35.4%
Percent of net sales for years ended
December 31 - 45.6% 43.1%
</TABLE>
At December 31, 1995, the Company had approximately $31,000 of inventory in
various stages of production associated directly with the production of beer
being brewed for this customer.
During 1996 and 1995, respectively, approximately 70 and 71 percent of the
Company's proprietary beer, measured in barrels, reached retail channels,
principally in Minnesota, through its 12 largest distributors.
MAJOR SUPPLIERS: The Company purchases a majority of the cans and bottles used
in its production from two suppliers. Management believes that alternative
sources of supply are available in the event the Company is unable to obtain
products from these suppliers.
NOTE 6. INCOME TAXES
The income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ -- $ 75,000 $ 252,000
State -- 18,000 53,000
Benefit of operating loss carryforwards -- (93,000) (234,000)
Deferred benefit (293,000)
--------------------------------------------------------------
$ -- $ -- $ (222,000)
==============================================================
</TABLE>
Income tax expense (benefit) differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory rate $ (652,000) $ 9,000 $ 212,000
State income tax (benefit), net of federal tax
effect (56,000) 1,000 24,000
Nondeductible expenses 7,000 9,000 11,000
Effect of income taxes at lower rates 18,000 (6,000) (10,000)
Change in valuation allowance for deferred
tax assets 677,000 (15,000) (488,000)
Other 6,000 2,000 29,000
--------------------------------------------------------------
$ -- $ -- $ (222,000)
==============================================================
</TABLE>
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 1,067,000 $ 501,000
Vacation accrual 109,000 112,000
Inventory valuation reserve 89,000 60,000
Allowance for doubtful trade and other accounts receivable 184,000 20,000
Other -- 14,000
Deferred tax liabilities--other (65,000) --
-----------------------------------------
1,384,000 707,000
Less valuation allowance (1,091,000) (414,000)
-----------------------------------------
Net deferred tax assets $ 293,000 $ 293,000
=========================================
Current $ 150,000 $ 150,000
Long-term 143,000 143,000
-----------------------------------------
$ 293,000 $ 293,000
=========================================
</TABLE>
The Company has recorded the valuation allowance on its deferred tax assets to
reduce the total to an amount that management believes is more likely than not
to be realized. Realization of deferred tax assets is dependent upon sufficient
future taxable income during periods when deductible temporary differences and
carryforwards are expected to be available to reduce taxable income. The
increase in the valuation allowance during 1996 was primarily the result of the
net operating loss (NOL) carryforward which was generated during the year. The
reductions in the valuation allowance during 1995 and 1994 were the result of
utilizing NOL carryforwards to reduce current taxable income and, in 1994, were
also the result of a change in the conclusion regarding the need for a valuation
allowance relative to $293,000 of the deferred tax assets. The Company's future
use of its NOL carryforwards is subject to certain annual limitations. The
remaining NOL carryforwards expire as follows:
$1,300,000 in 2007 and $1,500,000 in 2011.
NOTE 7. COMMITMENTS AND CONTINGENCIES
PENSION PLANS: The Company belongs to two multi-employer pension plans (Pension
Plans) covering certain employees. Total pension plan expense for 1996, 1995,
and 1994 was approximately $42,000, $54,000, and $50,000, respectively. The
Company makes annual contributions to the Pension Plans in accordance with
negotiated labor contracts. The Multi-Employer Pension Plan Amendments Act of
1980 (the Act) may, under certain circumstances, cause the Company to become
subject to liabilities in excess of contributions made under collective
bargaining agreements. Under the Act, the Company's proportionate share of the
Pension Plan's unfunded vested benefits, if any, generally are contingent upon
the termination of, withdrawal, or partial withdrawal from the Pension Plans.
The Company has not undertaken to terminate, withdraw, or partially withdraw
from the Pension Plans.
SAVINGS AND RETIREMENT PLAN: The Company has a savings and retirement plan for
eligible employees. The plan was adopted pursuant to Section 401(k) of the
Internal Revenue Code. Contributions to the plan are discretionary for both the
Company and the employees. The Company may make contributions to this 401(k)
plan which match employee contributions, subject to certain limitations. During
1996 and 1995, the Company made contributions of approximately $19,000 and
$16,000, respectively, to this plan. No Company contributions were made to this
401(k) plan during 1994.
POTENTIAL LITIGATION: The Company is subject to certain claims incidental to its
normal business activities. It is not possible to determine the ultimate outcome
of these matters at this time. However, management does not believe that any
additional liability resulting from such proceedings will have a material
adverse effect on the Company's financial statements.
NOTE 8. TRANSITION AGREEMENT WITH PETE'S BREWING COMPANY
During August 1995, the Company's major customer at the time, Pete's Brewing
Company, notified the Company that they were ceasing further production of their
beer at the Company's facility. The Company and this customer entered into a
transition agreement which required the customer to reimburse the Company
approximately $1,000,000 to offset costs incurred in connection with and in full
resolution of all issues between the parties with respect to the brewing
agreement and other matters.
NOTE 9. 1996 FOURTH QUARTER ADJUSTMENTS
After experiencing lower than anticipated levels of sales and production in the
fourth quarter and due to financial difficulties of certain contract customers,
the Company recorded a $790,000 charge to operations for increased allowances
for doubtful accounts and inventory obsolescence.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information required under this item with respect to the directors is
contained in the Section "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual
Meeting of Shareholders to be held in May 1997 (the "1997 Proxy Statement"), a
definitive copy of which will be filed with the Commission within 120 days of
the close of the past fiscal year and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this item is contained in the Section
entitled "Executive Compensation" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required under this item is contained in the Section
entitled "Shareholdings of Principal Shareholders and Management" in the
Company's 1997 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this item is contained in the Section
entitled "Certain Transactions" in the Company's 1997 Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial Statements. The financial statements included in
this Form 10-K as listed in Item 8.
(2) Financial Statement Schedules.
Independent Auditor's Report on Schedules for Years
Ended December 31, 1996, 1995 and 1994 .....
Schedule II Valuation and Qualifying Accounts...
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1996.
(c) LISTS OF EXHIBITS. Exhibits that cover management contracts or
compensatory plans or arrangements are marked with an asterisk(*).
EXHIBIT
NO. DESCRIPTION
--- -----------
3.1 Articles of Incorporation, as amended, of the Company, incorporated
by reference from Exhibit 3.1 to Form SB-2 Registration Statement
(File No. 33-69302C)
3.2 Bylaws of the Company incorporated by reference from Exhibit 3.2 to
Form SB-2
10.1 Equipment Lease dated November 2, 1993 between the Company and
Minnesota Brewing Limited Partnership, incorporated by reference
from Exhibit 10.1 to Form 10-KSB filed by the Company for the
fiscal year ended December 31, 1993
10.2 Facilities Lease dated November 2, 1993 between the Company and
Minnesota Brewing Limited Partnership, incorporated by reference
from Exhibit 10.2 to Form 10-KSB filed by the Company for the
fiscal year ended December 31, 1993
10.3 Contract Brewing Agreement dated September 30, 1992 between the
Company and The Friesland Beer Company, Inc., incorporated by
reference from Exhibit 10.7 to Form SB-2
10.4 Production Agreement dated October 21, 1992 between the Company and
William & Scott, Inc., incorporated by reference from Exhibit 10.8
to Form SB-2
10.5 Contract Packer Agreement dated July 24, 1993 between the Company
and Winterbrook Corporation d/b/a/ The Winterbrook Beverage Group,
incorporated by reference from Exhibit 10.9 to Form SB-2
10.5.1 Letter agreement dated March 18, 1996 between the Company and
Winterbrook Beverage Group regarding payment and shipment of
finished goods incorporated by reference to Exhibit 10.5.1 of 1995
Form 10-K
10.6* Minnesota Brewing Company 1993 Stock Option Plan, incorporated by
reference from Exhibit 10.10 to Form SB-2
10.7 Licensing and Production Agreement dated February 1997 between the
Company and William & Scott, Inc.
23 Consent of McGladrey & Pullen
27 Financial Data Schedule
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 25, 1997 MINNESOTA BREWING COMPANY
By /s/ Richard A. McMahon
--------------------------
Richard A. McMahon
President, Chief Executive Officer and Director
In accordance with the Exchange Act, this report has been signed below
by the following persons, on behalf of the registrant and in the capacities
indicated, on the date set forth above.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
RICHARD A. MCMAHON and DENNIS A. BARRETT as his true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting along, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys in-fact
and agents, each acting alone, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Signature Title
--------- -----
/s/ Bruce E. Hendry Chairman of the Board
-------------------
Bruce E. Hendry
/s/ Richard A. McMahon President, Chief Executive
------------------- Officer and Director
Richard A. McMahon
/s/ Dennis P. Barrett Vice President of Finance,
------------------- Treasurer and Director
Dennis P. Barrett
/s/ Subramanian Krishnan Director
-------------------
Subramanian Krishnan
/s/ Steven C. Leuthold Director
-------------------
Steven C. Leuthold
/s/ John C. Brzezinski Director
-------------------
John C. Brzezinski
/s/ Richard A. Perrine Director
-------------------
Richard A. Perrine
SCHEDULE II
MINNESOTA BREWING COMPANY
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning Cost and End of
Description of Period Expenses Deductions Period
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deducted in the balance sheet from the assets to
which it applies:
Allowance for doubtful accounts:
Year ended December 31, 1996 $ 34,000 $ 601,000 $ 150,000 (4) $ 485,000
Year ended December 31, 1995 66,000 25,000 57,000 (1) 34,000
Year ended December 31, 1994 13,000 55,000 2,000 (1) 66,000
Accumulated amortization of intangibles:
Year ended December 31, 1996 163,000 96,000 - 259,000
Year ended December 31, 1995 79,000 84,000 - 163,000
Year ended December 31, 1994 33,000 46,000 - 79,000
Deferred tax asset valuation allowance:
Year ended December 31, 1996 414,000 677,000 (2) - 1,091,000
Year ended December 31, 1995 429,000 (15,000)(2) - 414,000
Year ended December 31, 1994 917,000 (488,000)(2) - 429,000
Inventory valuation reserve:
Year ended December 31, 1996 160,000 233,000 (160,000)(3) 233,000
Year ended December 31, 1995 - 160,000 - 160,000
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Represents change in valuation allowance, not all of which is
recognized in the statement of operations.
(3) Represents a transfer from inventory reserve to allowance for doubtful
accounts.
(4) Represents $310,000 of uncollectible accounts written off, net of
recoveries, less $160,000 of inventory reserve transferred to allowance
for doubtful accounts.
LICENSING AND PRODUCTION AGREEMENT
This Agreement is dated this 18 day of February, 1997 by and among
Minnesota Brewing Company ("Minnesota Brewing") and William & Scott, Inc.
("WSI"), and to be agreed to and accepted by Santa Monica Bank ("Bank").
WHEREAS, WSI has been engaged in the business of selling alcoholic
beverage products under the trade name and trademark "Rhino Chasers;" and
WHEREAS, Minnesota Brewing has brewed the Rhino Chasers' products
pursuant to a contract with WSI; and WHEREAS, WSI is unable to pay its debts as
they mature and is contemplating a filing under Chapter 7 of the United States
Bankruptcy Code; and
WHEREAS, Bank has a perfected security interest in all of
the assets of WSI; and
WHEREAS, Minnesota Brewing has a perfected security interest in WSI's
inventory, account receivables, equipment, and intellectual property, and said
security interest is subordinate to the Bank's security interest; and
WHEREAS, WSI desires to enter into an agreement with Minnesota Brewing
and Bank which would enable WSI or a Trustee under Chapter 7 of the United
States Bankruptcy Code to maximize the value of WSI's assets and the return to
all of WSI's creditors;
NOW, THEREFORE, for good and valuable consideration, the sufficiency
and receipt of which is hereby acknowledged, Minnesota Brewing and WSI agree as
follows:
1. WSI hereby agrees to license Minnesota Brewing with all of WSI's
right, title, and interest, in all of WSI's intellectual property interest in
the trademark and trade name "Rhino Chasers" and all products bearing said name
or mark.
2. Minnesota Brewing agrees to use its best efforts to promote and
enhance the value of the trademark and trade name "Rhino Chasers" and all
products associated with said mark and name.
3. Minnesota Brewing agrees to produce, take orders for, ship, bill,
and collect all billings for shipments of all Rhino Chasers' products owned by
WSI and licensed to Minnesota Brewing pursuant to this Agreement.
4. Minnesota Brewing will price Rhino Chasers' products which it brews
at such price as determined by WSI (a copy of the current FOB pricing is
attached hereto as Exhibit A) or such other person as any Bankruptcy Trustee may
appoint. Minnesota Brewing will ship said products directly to the distributors
appointed by WSI for the sale of Rhino Chasers products.
5. Minnesota Brewing will deduct from the receipts it received from
billings for the Rhino Chasers' products the cost incurred in brewing said
products. Minnesota Brewing's costs shall be determined in accordance with the
same pricing formula that exists pursuant to the present contractual brewing
agreement between Minnesota Brewing and WSI (a copy of said agreement is
attached hereto as Exhibit B).
6. The difference between the amount of the receipts received by
Minnesota Brewing from its sales of the Rhino Chasers' products and the
production costs incurred by Minnesota Brewing as set forth above and deducted
from said receipts will be divided in the following manner:
a. 80% of the difference to be sent to Bank; and
b. the remaining 20% of the difference shall be
deposited in a trust account to be maintained by
Minnesota Brewing or an independent court appointed
trustee to be distributed by Minnesota Brewing or
trustee to WSI's creditors in accordance with the
priorities established by the United States
Bankruptcy Code.
c. After Bank has been paid in full, 100% of the
difference shall be distributed by Minnesota Brewing
or an independent court appointed trustee to WSI's
creditors in accordance with the priorities
established by the United States Bankruptcy Code.
d. After all of WSI's creditors have been paid in full,
80% of the difference shall be paid to Minnesota
Brewing and 20% shall be distributed to WSI.
7. Minnesota Brewing shall be entitled to an administrative expense for
its costs incurred in connection with the licensing and other related expenses
for maintaining the trademark and trade name for the Rhino Chasers' products but
not to exceed $.50 per case.
8. After all creditors have been paid in full pursuant to the
provisions of paragraph 6 herein, any proceeds from any subsequent sale of WSI's
intellectual property rights in the name or mark "Rhino Chasers" shall be
equally divided between Minnesota Brewing and the shareholders of WSI. Minnesota
Brewing and WSI shall agree on a third party to conduct any sale in a
commercially reasonable manner for the intellectual property rights in the name
or mark "Rhino Chasers." In connection with any such sale, Minnesota Brewing
shall have a right of first refusal to purchase said property rights.
9. This Agreement shall be for a term of three years commencing on
February ___, 1997, and shall be automatically renewable for additional one-year
periods unless either party gives written notice to the other of the intent to
terminate the Agreement at least six months prior to the expiration date of the
Agreement. Any such notices shall be sent by certified mail to Minnesota Brewing
Company, Attention: Dick McMahon, 882 West Seventh Street, St. Paul, MN 55102,
Lindquist & Vennum P.L.L.P., Attention: Daryle L. Uphoff, 4200 IDS Center, 80
South Eighth Street, Minneapolis, MN 55402, and William & Scott, Inc.,
Attention: Percy Riverra, 2130 Main Street, Huntington Beach, CA 92648.
10. Notwithstanding the termination provisions of the preceding
paragraph, WSI, any Bankruptcy Trustee, Minnesota Brewing, or Bank may terminate
this Agreement upon thirty (30) days notice by giving written notice of such
intent to terminate in accordance with the preceding paragraph and at the
addresses in the preceding paragraph if the amount available for distribution to
Bank and other creditors pursuant to paragraph 6 herein is less than an average
of $8,000 per month for three consecutive months.
11. Any dispute arising under this Agreement shall be submitted to
arbitration under the auspices of the American Arbitration Association in
Minneapolis, Minnesota, for resolution in accordance with its rules and
procedures.
MINNESOTA BREWING COMPANY
By: __________________________
Its: _______________________
WILLIAM & SCOTT, INC.
By: ____________________________
Its:__________________________
Agreed and Accepted:
SANTA MONICA BANK
By:________________________
Its:______________________
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 Number 33-71442 of Minnesota Brewing Company and the
Prospectus relating thereto of our report dated February 14, 1997 which is
included in this Annual Report on Form 10-K
McGLADREY & PULLEN, LLP
Saint Paul, Minnesota
March 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 386,325
<SECURITIES> 0
<RECEIVABLES> 1,519,921
<ALLOWANCES> 485,000
<INVENTORY> 4,532,532
<CURRENT-ASSETS> 6,266,461
<PP&E> 5,473,986
<DEPRECIATION> 1,711,388
<TOTAL-ASSETS> 10,775,228
<CURRENT-LIABILITIES> 1,923,808
<BONDS> 1,753,454
0
0
<COMMON> 33,892
<OTHER-SE> 7,064,074
<TOTAL-LIABILITY-AND-EQUITY> 10,775,228
<SALES> 24,875,349
<TOTAL-REVENUES> 24,875,349
<CGS> 23,331,116
<TOTAL-COSTS> 23,331,116
<OTHER-EXPENSES> 2,727,060
<LOSS-PROVISION> 601,000
<INTEREST-EXPENSE> 162,641
<INCOME-PRETAX> (1,862,468)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,862,468)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,862,468)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> (.55)
</TABLE>
