U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
___ TRANSITION REPORT UNDER SECTION 13 OR (d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________
Commission File Number 0-23846
Minnesota Brewing Company
(Exact name of registrant issuer as specified in its charter)
Minnesota 41-1702599
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization Identification No.)
882 West Seventh Street, St. Paul, Minnesota 55102
(Address of principal executive offices) (Zip Code)
(651) 228-9173
(Registrant's Telephone Number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 of 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such report), and (2)
has been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
As of November 3, 1998 the Company had 3,462,711 shares of Common Stock, $ .01
value per share, outstanding.
<PAGE>
MINNESOTA BREWING COMPANY
INDEX
Page
----
PART I. Financial Statements
Item 1. Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997.................3
Statements of Operations for the three and nine
month periods ended September 30, 1998 and
September 30, 1997.......................................5
Statements of Cash Flow for the nine
month periods ended September 30, 1998
and September 30, 1997...................................6
Notes to Financial Statements............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations...............................................8
PART II. Other Information.................................................12
Signatures....................................................................13
2
<PAGE>
Minnesota Brewing Company
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (note)
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 200,113 $ 465,984
U.S. Treasury Bill (Pledged for BATF Bond) 474,961
Trade accounts receivable less allowance
for doubtful accounts of $402,365 at September 30,
1998 and $485,000 at December 31, 1997 954,793 759,350
Vendor rebates and other receivables -- --
Inventories:
Raw materials 135,910 134,908
Work-in-progress 590,815 357,151
Finished goods 1,047,396 660,635
Packaging 943,594 1,243,705
Other 395,506 368,719
------------ ------------
Total inventories 3,113,221 2,765,118
Other current assets 220,161 150,921
------------ ------------
Total current assets 4,963,249 4,141,373
------------ ------------
Property and Equipment 6,622,195 6,087,477
Less allowance for depreciation (2,852,763) (2,466,210)
------------ ------------
Net property and equipment 3,769,432 3,621,267
------------ ------------
Other Assets
Trademarks, net have accumulated
amortization of $92,000 at September 30, 1998
and $73,000 at December 31, 1997 256,523 221,577
Other, net of accumulated amortization of
$370,000 at September 30, 1998 and
$315,000 at December 31, 1997 325,614 291,209
------------ ------------
Total other assets 582,137 512,786
------------ ------------
$ 9,314,818 $ 8,275,426
============ ============
</TABLE>
Note: The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements
3
<PAGE>
Minnesota Brewing Company
Condensed Balance Sheets - Continued
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
(unaudited) (note)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current Liabilities:
Note payable to
related party 2,484,351 --
Trade accounts payable 2,597,964 2,197,100
Accrued liabilities 544,564 899,335
Deferred federal excise tax credit 186,586 --
------------ ------------
Total current liabilities 5,813,465 3,096,435
------------ ------------
Capitalized Lease Obligation, less current maturities 1,335,294 2,128,045
Due to related party -- 263,036
------------ ------------
Total Long term debt 1,335,294 2,391,081
Shareholders' Equity:
Common Stock; $.01 par value; 10,000,000
shares authorized with issued and
outstanding shares being 3,462,711 and
3,389,211 for September 30, 1998 and
December 31, 1997, respectively 34,627 33,892
Additional paid-in capital 10,592,217 10,435,668
Accumulated deficit (8,460,785) (7,681,650)
------------ ------------
Total shareholders' equity 2,166,059 2,787,910
------------ ------------
$ 9,314,818 $ 8,275,426
============ ============
</TABLE>
Note: The Balance Sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
See Notes to Financial Statements
4
<PAGE>
Minnesota Brewing Company
Statements of Operations
For the Periods Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Gross sales 4,317,869 $ 5,223,539 12,384,254 $ 16,545,947
Less excise taxes 469,100 704,741 1,271,115 1,935,014
------------ ------------ ------------ ------------
Net sales 3,848,769 4,518,798 11,113,139 14,610,933
Cost of goods sold 3,445,663 4,374,246 10,015,755 14,856,448
------------ ------------ ------------ ------------
Gross profit (loss) 403,106 144,552 1,097,384 (245,515)
------------ ------------ ------------ ------------
Operating expenses
Advertising 162,769 390,815 409,288 1,011,750
Sales and marketing 147,034 152,664 525,162 483,939
Administrative 234,478 187,094 801,198 768,056
Bad debt provision -- 35,000 -- 491,977
------------ ------------ ------------ ------------
Total operating expenses 544,281 765,573 1,735,648 2,755,722
------------ ------------ ------------ ------------
Operating income (loss) (141,175) (621,021) (638,264) (3,001,237)
Interest income 2,685 13,544 10,354 26,190
Interest and other expenses (52,969) (36,968) (151,224) (111,988)
Provision for income taxes -- -- -- (294,548)
------------ ------------ ------------ ------------
Net income (loss) $ (191,459) $ (644,445) $ (779,134) $ (3,381,583)
============ ============ ============ ============
Net income (loss) per
Common Share (.06) $ (.19) $ (.23) $ (1.00)
------------ ------------ ------------ ------------
Weighted average shares
outstanding 3,462,711 3,389,211 3,413,711 3,389,211
------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements
5
<PAGE>
Minnesota Brewing Company
Statements of Cash Flow (Unaudited)
For the Periods Ended September 30, 1998 and 1997
<TABLE>
<CAPTION>
Nine Months Ended September
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (779,134) $ (3,381,583)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and Amortization 460,554 485,950
Deferred income taxes 293,000
Provision for obsolete inventory and
discontinued products (183,000) 972,000
Changes in assets and liabilities:
(Increase) decrease in trade accounts
receivable (195,443) 78,673
Decrease in other receivables -- 91,084
(Increase) decrease in inventories (165,103) 284,142
(Increase) in prepaid expenses and -- --
other assets (69,240) (376,834)
Increase in accounts payable and
accrued expenses 203,375 2,318,832
Increase in deferred excise tax credit 186,586 222,651
------------ ------------
Net cash provided by operating activities (541,405) 987,915
------------ ------------
INVESTING ACTIVITIES
Purchase of property and equipment (534,718) (106,945)
Purchase of intangible assets (143,351) (136,044)
------------ ------------
Net cash provided by (used in)
investing activities (678,069) (242,989)
------------ ------------
FINANCING ACTIVITIES
Net borrowings on related party obligations 1,124,396 485,769
Principal reduction under capital lease
obligations (170,793) (168,958)
------------ ------------
Net cash provided by financing activities 953,603 316,811
------------ ------------
NET INCREASE (DECREASE) IN CASH (265,871) 1,061,737
CASH AT BEGINNING OF YEAR 465,984 386,325
------------ ------------
CASH AT END OF PERIOD $ 200,113 $ 1,448,062
============ ============
Supplemental schedule of non-cash
operating and financing activities
6
<PAGE>
Common shares issued in satisfaction
of accured ESOP Payable $ 157,284 $ --
============ ============
U. S. Treasury Bill financed with note
payable to related party $ 474,961 $ --
============ ============
</TABLE>
See Notes to Financial Statements
7
<PAGE>
Minnesota Brewing Company
Notes to Financial Statements
(Unaudited)
(1) Financial Statements
The balance sheet as of September 30, 1998, the statements of operations
for the three and nine month periods ended September 30, 1998 and 1997, and the
statements of cash flow for the nine month periods ended September 30, 1998 and
1997 have been prepared by the Company without audit. In the opinion of
management, all adjustments (all of which are normal and recurring in nature)
necessary to present fairly the financial position at September 30, 1998, and
the results of operations and cash flows for the periods then ended have been
included. Results of operations for the interim periods are not necessarily
indicative of the results that may be expected for the full fiscal year.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
The Company's revenues are derived from the production and sale of its
proprietary Grain Belt, Pig's Eye, Landmark, Yellow Belly, and Brewers Cave
beers, its contract production of beers and other beverages for other companies
and its production of proprietary beers for sale under different brand names by
private label customers.
Results of Operations
The Company's net sales for the three and nine months ended September
30, 1998, decreased 14.8% and 23.9% respectively compared with net sales for the
three and nine month periods ended September 30, 1997. The decrease in third
quarter net sales reflects decreases in contract sales on a three and nine month
basis of 59.6% and 48.3%, respectively for 1998 versus 1997. Export sales
increased 60.8% on a three-month basis, but decreased by 37.5% on a nine-month
basis. Proprietary net sales also declined by 16.4% and 13.7% on a three and
nine month basis for 1998 versus 1997.
Barrelage sales for the third quarter of 1998 were 9.4% less then in the
third quarter of 1997 and 17.1% less for the first nine months of 1998 versus
1997. Barrelage sales of proprietary products during the third quarter were down
19.3% compared to 1997 and down for the nine-month period by 19.1%. Contract
barrelage sales were down 12.7% for the third quarter and 0.9% for the nine
month period. Export sales were 41.4% higher during the third quarter compared
to 1997 and were 37.9% lower in the first nine months of 1998 compared to 1997.
Export sales for the three-month period reflect an increase in Asian orders. The
sales for the nine-month period were lower because of the decline in sales to
the Asian market in the first six months of 1998 compared to 1997.
Operating Data (in barrels sold)
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Proprietary 32,403 40,148 92,240 113,991
Contracts, other 29,168 33,396 91,654 92,473
Export 14,039 9,932 37,877 60,912
--------- --------- --------- ---------
Totals 75,610 83,476 221,771 267,376
========= ========= ========= =========
The Company's gross profit was $1,342,899 greater during the 1998 nine
month period than in the similar period of 1997 and $258,554 greater during the
third quarter of 1998 than 1997. The Company's gross profit margin increased in
the third quarter from 3.2% to 10.5% in 1998, while year to date, the gross
margin increased from negative 1.7% in 1997 to 9.9% in 1998. The increase in
gross profit in the third quarter was attributable to a reduction in cost of
9
<PAGE>
goods sold due to increased efficiencies in production and product mix. The
Company continues to operate, however, at a sales level that is insufficient to
fully absorb overhead costs.
Operating expenses were $1,020,074 less in the first nine months of 1998
compared to 1997, while as a percentage of sales they decreased from 18.9% in
1997 to 15.6% in 1998. During the third quarter of 1998 operating expenses
decreased $221,292 compared to 1997, while as a percentage of sales they
decreased from 16.9% in 1997 to 14.1% in 1998. The decreases, were primarily
attributed to decreases in advertising expenses in 1997. Administrative expenses
were greater for the three and nine months of 1998 than the same periods in 1997
primarily because of an increase in professional fees. Sales and marketing along
with advertising expenses were lower for the third quarter of 1998 versus 1997,
due to cost cutting efforts.
In the third quarter of 1998 interest income was $10,859 lower than the
third quarter of 1997 due to a reduced level of funds available for investment.
Interest income was $15,836 lower for the first nine months of 1998 compared to
1997 because of a reduced level of funds available for investment.
Interest expense is $44,847 greater for the third quarter of 1998 and
$95,982 greater for the nine month period than what was incurred for similar
periods of 1997. Interest expense on the capitalized lease obligations has
declined but has been offset primarily by increased interest expense on
borrowings related to the line of credit.
For the third quarter of 1998, the Company experienced a net loss of
$191,459 versus a net loss of $644,445 for the third quarter of 1997. The
decrease in 1998 of $452,986 was primarily attributable to a reductions in cost
of goods sold and advertising expenses. The Company experienced a net loss of
$779,134 versus a net loss of $3,381,583 for the first nine months of 1998
compared to the same period in 1997. This change principally arose from a
decrease in cost of goods sold and a recapture of tax benefits and provisions
for bad debts recorded in 1997.
In addition to the current year losses, the Company also has
approximately $6.7 million in loss carryforwards available from prior years to
offset future taxable income. The loss for the first nine months of 1998 will be
available to offset any future profits in the fourth quarter of 1998 or in
subsequent years.
During 1997 and through September 1998, the Company operated
significantly below its production capacity. Therefore, in order to attain a
profitable level of operations the Company will continue to seek to increase its
sales and production volume. Management will pursue opportunities to increase
sales volume at profitable margins. Management believes that the growth of its
proprietary labels offers the best opportunity for achieving operating profits
in the long term and has focused its efforts on the growth of its proprietary
products. An emphasis has been placed on the promotion of these proprietary
labels and the generation of additional sales in the Company's cores geographic
market areas.
Liquidity and Capital Resources
Working capital deficit at September 30, 1998 decreased $1.9 million to
a negative $0.9 million from a positive $1.0 million at December 31, 1997. The
decrease is attributable to the loss for the nine-month period coupled with an
overall increase in current liabilities, principally amounts due to related
parties.
10
<PAGE>
During the nine month period ended September 30, 1998, the Company
utilized net cash from operating activities of $541,405 which was due to an
increase in accounts receivable of $195,443 an increase in inventories of
$165,103 and an increase in prepaid expenses and other assets of $69,240. These
amounts were offset by the net loss of $779,134 (reduced by depreciation and
amortization of $460,554 and a recapture of $183,000 of obsolete inventory
reserve), an increase in accounts payable and accrued expenses of $203,375
and an increase in deferred excise tax credit of $186,586.
The Company used cash of $678,069 in investing activities primarily from
the purchase of property and equipment of $534,718 and the purchase of $143,351
of intangible assets.
Financing activities provided cash of $953,603 primarily from the
advancement of funds from a related party of $1,124,396 and offset by $170,793
in principal reductions under capital lease obligations. The borrowings relate
to rental obligations to Minnesota Brewing Limited Partnership (the
"Partnership") which have been accrued, but not paid.
The Company's plans include the continued emphasis on promoting its core
proprietary brands. During 1998, the Company has continued to borrow funds from
the Partnership to meet its liquidity needs. During 1997, the Partnership, a
related party, deferred required lease payments on the production facility and
equipment and has agreed to defer past due 1997 payments and 1998 lease payments
through at least January 1, 1999, which has provided a portion of the Company's
working capital needs. Due to the seasonal nature of its business, the Company's
September 30, 1998 working capital position is not indicative of its needs
during its peak selling and production season. At present, except for leases of
its production facility and certain of its production equipment with the
Partnership, the Company's assets are unsecured. In connection with the $475,000
advance by the Partnership discussed below, the Company agreed to grant the
Partnership a security interest in certain of its assets, including its
trademarks. The Partnership has agreed to make available to the Company a line
of credit of up to $2,500,000 to meet its working capital needs during 1998.
This availability is in addition to $475,000 the Partnership advanced the
Company subsequent to December 31, 1997 to secure the purchase of a Treasury
Bond required by the Bureau of Alcohol Tobacco and Firearms. The Company
believes that the Partnership's line of credit, possible bank line of credit and
funds from operations will be sufficient to meet its working capital and capital
resource needs during 1998.
It will be necessary for the Company to obtain a permanent line of
credit or raise additional equity in order to meet its working capital and
capital resource needs for the next twelve months. The Company has a line of
credit with the Partnership with expires on December 31, 1998, and is working to
establish a working capital line of credit with a financial institution to
supplement its short-term working capital needs. The Company anticipates that
any line of credit would be secured by its current assets.
In conjunction with the Company's initial public offering in November of
1993, the Company's existing operating leases were converted to capitalized
leases and obligations are now reflected as long-term debt on the financial
statements. The debt is being amortized over 10 years at a 7.75% interest rate.
The Company has the option to acquire the property at eight times the trailing
twelve months rent. As indicated in the Company's 1997 annual report, based upon
1997 lease payments, the purchase price would be approximately $4.9 million at
December 31, 1997. Should the Company decide to exercise its option at that date
or any
11
<PAGE>
succeeding date it would propose to finance the acquisition with debt or equity
financing or some combination thereof.
The Company's credit terms to its distributors are generally 10 days and
substantially all customers, except contract brewing accounts, are on automatic
debit to their bank account through electronic funds transfer ("EFT"). This
program substantially reduces the credit risk and facilitates the predictability
of cash flows. Amounts from contract brewing production are generally due 30
days after shipment and in many cases are secured by letters of credit.
As a small brewer producing less than 2,000,000 barrels per year, the
Company presently receives an $11.00 per barrel credit against federal exercise
taxes on the first 60,000 barrels of taxable production. The cash benefit of
this $660,000 credit is primarily received in the first quarter of the year. For
accounting purposes, however, this credit is allocated throughout the year based
upon projected taxable sales per quarter. At September 30, 1998 the Company had
recognized $473,414 of this credit and deferred $186,586 of the credit to the
fourth quarter.
The Company is a party to collective bargaining agreements with five
union organizations, all of which run through March 1999. The company believes
its employee relationship to be good.
As of December 31, 1997, the Company had net operating loss
carryforwards totaling $6.7 million available to reduce future taxable income.
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.
The Company has applied and received permits from the State of
Minnesota to convert a portion of its facilities into the production of ethanol.
It is the Company's intention to pursue the production of ethanol if it
determines that it is possible to do so on a commercially reasonable basis.
Although the Company believes that it has commitments for financing in an amount
sufficient to convert a portion of its facilities to ethanol production, the
Company does not intend to convert its facilities until it is able to arrange
definitive contracts or otherwise determine that it can operate the project in a
commercially reasonable manner. There can be no assurance that the Company will
be able to successfully complete the ethanol project.
Year 2000
The Company is evaluating the potential impact of what is commonly
referred to as the year 2000 issue, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond.
The Company has identified and tested the systems it believes are
critical and the test results indicate that these systems are Year 2000
compliant or will become Year 2000 compliant with additional software upgrades.
The Company will continually test and establish compliance with respect to all
of its existing system, potential upgrades and new acquisitions. Regardless of
the Year 2000 compliance of the Company's and products, there can be no
assurance that the Company will not be adversely affected by the failure of
others to become Year 2000 compliant.
The Company has not incurred any material expenditures in connection
with
12
<PAGE>
identifying or evaluating Year 2000 compliance issues. The Company's primary
cost incurred in evaluating Year 2000 compliance matters has been the
opportunity cost of time spent by employees assigned to the Year 2000 team.
Management does not believe that the cost associated with any necessary software
upgrades will be material.
FORWARD-LOOKING STATEMENTS
Statements included in this Form 10-Q that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. Among these risks and uncertainties are information included
in this Report on Form 10-Q which can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology constitutes forward-looking information. The following
important factors, among others, in some cases have affected and in the future
could affect the Company's actual results and could cause the Company's actual
financial performance to differ materially from that expressed in any
forward-looking statement: (i) competition within the brewing industry resulting
from the increased number of brewers and available beers, (ii) the Company's
ability to continue to achieve and maintain contract brewing arrangements; (iii)
the continued success of the Company's proprietary brands, including its
reliance upon distributors, and (iv) the Company's continued ability to sell
products for export.
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINNESOTA BREWING COMPANY
(Registrant)
Dated: November 16, 1998 /s/ Michael C. Hime
---------------------------------
Michael C. Hime
Vice President of Finance
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 200,113
<SECURITIES> 474,961
<RECEIVABLES> 954,793
<ALLOWANCES> (402,365)
<INVENTORY> 3,113,221
<CURRENT-ASSETS> 4,963,249
<PP&E> 6,622,195
<DEPRECIATION> 2,852,763
<TOTAL-ASSETS> 9,314,818
<CURRENT-LIABILITIES> 5,813,465
<BONDS> 0
0
0
<COMMON> 34,627
<OTHER-SE> 2,131,432
<TOTAL-LIABILITY-AND-EQUITY> 9,314,818
<SALES> 4,317,869
<TOTAL-REVENUES> 3,848,169
<CGS> 3,445,663
<TOTAL-COSTS> 4,040,228
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 81,815
<INCOME-PRETAX> (191,459)
<INCOME-TAX> 0
<INCOME-CONTINUING> (191,459)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (191,459)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
