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, 1998
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 55102
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 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. _X_
ON APRIL 13, 1999, THE COMPANY HAD 3,462,711 SHARES OF COMMON STOCK, $.01 PAR
VALUE, OUTSTANDING AND 607,745 SHARES OF CLASS A CONVERTIBLE PREFERRED STOCK.
EACH SHARE OF CLASS A CONVERTIBLE PREFERRED STOCK OUTSTANDING IS CONVERTIBLE
INTO ONE SHARE OF COMMON STOCK.
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 LAST REPORTED SALE OF $1.50 PER SHARE ON APRIL 13, 1999 WAS APPROXIMATELY
$2,900,000.
DOCUMENTS INCORPORATED BY REFERENCE: THE COMPANY'S PROXY STATEMENT FOR ITS 1999
ANNUAL MEETING OF SHAREHOLDERS TO BE IS INCORPORATED BY REFERENCE INTO PART III
OF THIS FORM 10-K.
<PAGE>
MINNESOTA BREWING COMPANY
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
ITEM 1. Business..........................................................
ITEM 2. Property..........................................................
ITEM 3. Legal Proceedings.................................................
ITEM 4. Submission of Matters to a Vote of
Security Holders................................................
PART II
ITEM 5. Market for Registrant's Common Equity and
Related Stockholder Matters.....................................
ITEM 6. Selected Financial Data...........................................
ITEM 7. Management's Discussion and Analysis
Of Financial Condition and Results of Operations ...............
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks.......
ITEM 8. Financial Statements and Supplementary Data.......................
ITEM 9. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure............................................
PART III
ITEM 10. Directors and Executive Officers of the Registrant
ITEM 11 Executive Compensation............................................
ITEM 12. Security Ownership of Certain
Beneficial Owners and Management................................
ITEM 13. Certain Relationships and Related
Transactions....................................................
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...
SIGNATURES....................................................................
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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, 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. 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. In 1998, the
Yellow Belly line was extended to include both Margarita and Long Island T malt
beverages. 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. In addition, under private label contracts
the Company packages its proprietary beers for sale by third parties under brand
names 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. The Company also produces, under contract, premium
soft drinks along with other non-alcoholic beverages.
Until March 29, 1999 the Company leased its brewing facilities and
related equipment from Minnesota Brewing Limited Partnership (the
"Partnership"). In October of 1991 the Partnership acquired the former Jacob
Schmidt Brewery in Saint Paul from G. Heileman Brewing Company ("Heileman")
which was in bankruptcy at the time. On March 29, 1999, the Partnership
transferred the brewing facility to Gopher State Ethanol, LLC ("Gopher State") a
Delaware Limited Liability Company formed to explore the production of ethanol
at the facility.
The Company generated net sales of $18.1 million in 1997 and net
sales of $14.8 million in 1998, 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 298,000 barrels in 1997 and 293,000 barrels
in 1998, which were equal to 13.5 and 13.3 percent, respectively, of total
capacity. The Company believes that 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 of the Company's proprietary beers are sold
domestically through approximately 150 independent distributors. During 1998,
approximately 61 percent of the Company's proprietary beer sales volume reached
retail channels through its 12 largest distributors. The Company provides local
media advertising, primarily in Minnesota, point-of-sale advertising and sales
promotion programs to help stimulate sales.
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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 Awarded 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
1997 Silver Pig's Eye - Non Alcoholic
In addition to these recognitions for its own products, the Company
has produced beers that have won awards for its contract customers.
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 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 91.5% of 1998 sales. In Minnesota, however, local brands have
traditionally had 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)
------------------------ ------------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Anheuser-Busch Companies, Inc. 48.1% 47.4% 37.0% 40.7%
Miller Brewing Co. 21.3 22.1 31.5 29.3
Adolph Coors Co. 10.8 10.7 3.4 3.0
Stroh Brewing Co. (3) 9.3 10.2 11.3 12.0
Pabst Brewing Co. 2.0 2.6 2.6 3.3
---- ----- ----- ----
91.5% 93.0% 85.8% 88.3%
Minnesota Brewing Company(4) 0.1% 0.1% 2.9% 3.4%
</TABLE>
(1) Information from Modern Brewery Age.
(2) Information from Minnesota Beer Wholesalers Association.
(3) Stroh Brewing Co. was acquired during 1999 by Pabst Brewing Co. and
Miller Brewing Co.
(4) Includes only the Company's proprietary beers.
During 1998, approximately 63% of the Company's domestic sales of
proprietary beers were sold in Minnesota. The Company's beers are distributed
and sold in competition with the national brands listed above, 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
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methods of competition include the quality, taste and freshness of the products,
packaging, price, advertising, distribution and service to customers.
Relatively flat sales in the overall beer industry 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 ice beers,
non-alcoholic and 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 that had been acquired from Heileman. The Company followed with
the introduction of "Pig's Eye Pilsner" and Pig's Eye Lean, in 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. In 1998, Yellow Belly Margarita and
Long Island T were introduced. The Company has new products in various stages of
testing at the present time.
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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. Grain Belt Premium 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 Golden, 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, Landmark 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.
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 that 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, Margarita and Long Island T flavors
that provide a distinctive refreshing taste.
BREWERS CAVE. A hand crafted micro-style 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 beer on a contract basis for various customers according to
their specifications.
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. MBC brews the liquid, then the liquid is
shipped out prior to fermentation and dried by the customer for use by home
brewers. The brewed malt liquids are finished and sold to others by third
parties.
At the end of 1997, the Company began producing malt extract for a
third party. This production can be done by the Company at a significantly lower
cost per barrel, and as a result less revenue per barrel than other products it
produces. During 1998 the Company produced 94,000 barrels under this
arrangement.
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In 1998, the Company became certified to brew organic beer. The
Company began producing this product for a contract customer during the year.
EXPORT SALES
The Company also ships to Korea, Japan and China. (See Note 6 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. The Company has granted exclusive brands to various brokers to enhance
the distribution of its products. During 1998, export sales were approximately
18% of net sales. See Note 6 to the financial statements for sales by major
product line.
SALES AND MARKETING
The Company's beverages are sold on an "on sale" basis in
restaurants, bars and sports arenas 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 products of other beer producers. 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 maybe required to 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. The Company has written agreements with all of
its largest distributors and with all but a few of its smaller distributors.
During 1998, the Company's three largest distributors accounted for
26.0% 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 total revenues.
Distributors place product orders directly with the Company. The
process of brewing generally takes three to five weeks, after which the products
are packaged for sale in returnable bottles, non-returnable bottles, cans or
kegs. Finished products are stored in the Company's warehouse until distributors
pick them up.
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PRODUCT SHIPPING ACTIVITY
The following table indicates, for the periods shown, the Company's
total sales in barrelage by product line.
Proprietary Contracts and
Brands Private Label Export Total
------ ------------- ------ -----
1997
- ----
First Quarter 28,801 29,280 12,223 70,304
Second Quarter 45,042 29,797 38,757 113,596
Third Quarter 40,148 33,396 9,932 83,476
Fourth Quarter 29,708 27,103 7,911 64,722
------- ------- ------ -------
Yearly Total 143,699 119,576 68,823 332,098
Percent of Total 43.3% 36.0% 20.7% 100.0%
1998
- ----
First Quarter 25,434 31,935 5,869 63,238
Second Quarter 34,376 30,578 17,969 82,923
Third Quarter 32,381 29,190 14,039 75,610
Fourth Quarter 25,725 45,450 16,173 87,348
------- ------- ------ -------
Yearly total 117,916 137,153 54,050 309,119
Percent of Total 38.1% 44.4% 17.5% 100.0%
Sales of beer are customarily at their lowest levels in the first
and fourth quarters of each year and at their highest levels in the second and
third quarters. The 1998 fourth quarter sales for the Company were higher than
normal due to an increase in contracts and private label arrangements.
This is primarily due to the Company's production of malt extract for a food
products company.
PACKAGING AND RAW MATERIALS
The malted barley, hops and yeast 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
1998, 63.2% of the Company's total production was packaged in aluminum cans, and
36.7% 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 fiberboard 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
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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 products in the states where they are 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 restrictive
packaging laws and regulations for beverages that generally require deposits or
advanced disposal fees on packages or restricts certain packaging options.
Because the most significant portion of the Company's sales are in Minnesota
(which does not have 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 jurisdictions continue to consider similar legislation or regulations,
the adoption of which might require the Company to incur significant capital
expenditures.
TRADEMARKS
The Company has obtained federal or state registration for a number
of its trademarks including "Grain Belt", "Pig's Eye", "Yellow Belly", "Mount
Simon" and "Minnesota Brew". The Company has also applied for trademark
protection for certain of its trademarks in foreign jurisdictions, and has
received protection in some of these jurisdictions.
MARKETING
The Company's primary 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. General
marketing plans call for 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 as it expands.
The Company also engages in a number of promotional activities. The
Company currently gives tours of its brewery and operates a gift shop for the
purchase of promotional items. The Company also sells promotional
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items through a third party mail order company. Point-of-sale advertising in the
form of floor display, banners, shelf and cooler labels and neon signs are
employed to stimulate sales in liquor stores, bars and restaurants.
The Company focuses its marketing expenditures in markets where it
believes its efforts will be most effective in increasing sales. Current
marketing expenditures focus on the redesign of its products packaging or other
steps that improve the attractive shelf appeal of its products.
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.
EMPLOYEES
As of March 26, 1999, the Company has approximately 131 full-time
equivalent employees. Key areas are summarized below:
The Company has 115 employees that work in production, including
brewing, bottling, packaging, warehouse, engineering and equipment maintenance,
7 employees in sales and marketing and 9 employees in administration. Of the
Company's employees, 103 work pursuant to five separate union contracts, all of
which expired on March 31, 1999. Negotiations with the bargaining units are
ongoing and management believes that new contract agreements will be negotiated.
There is a possibility, however, that any or all of these units could strike
sometime after April 23, 1999.
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.
GOPHER STATE ETHANOL
Beginning in 1997 and throughout 1998 the Company has investigated
and begun to develop a business for the production of ethanol. Ethanol is
principally produced from the processing of corn including its fermentation into
fuel grade alcohol. To date, the Company, along with the Partnership and other
investors are negotiating with third party lenders to finance the construction
of an ethanol facility at the Company's current location. Because of the
significant cost of the facility, the Company has solicited investors to satisfy
lenders request for equity and as a consequence the Company will have a minority
interest in the ethanol operation. There can be no assurance that the ethanol
operation will be implemented as it is subject to lender and investor's final
approval. If the ethanol facility is constructed at the proposed site, it is
expected to reduce the Company's operating expenses and allow for payment of
management fees to the Company.
ITEM 2. PROPERTY
The Company's offices, brewery and warehouse facilities are located
on approximately 10 acres of property in Saint Paul, Minnesota.
A 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 the 1850's. Major
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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 per year. 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 operations and
production facility consist of:
BREWKETTLE: Two kettles, 385 barrels and 410 barrels, to brew each
batch, are used in the initial stage of product production and
require up to three hours.
CELLARS: During the process of beer production, the beer progresses
through the various beer cellars:
<TABLE>
<CAPTION>
CAPACITY
TYPE OF CELLAR PROCESS IN BARRELS TIME 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 22,000 Approximately one week.
removed; 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 1,500 cases of bottles per hour per line to 2,500
cases of cans per hour. The three packaging lines have filler speeds
ranging from 600 bottles a minute per line to 1,050 cans per minute.
One of the lines is designed to fill 12 oz. and 16 oz. cans, one is
designed to fill 12 oz, 22 oz, 32 oz. and 40 oz. non-returnable
bottles and one is designed to fill 12 oz. returnable bottles.
RACKING LINE: The Company's racking line can fill up to 300 kegs
(1/2 and 1/4 barrels) in an hour.
WAREHOUSE: The Company's total warehousing capacity is 137,400
square feet, with capacity to store up to 850,000 cases in a 123,000
square foot warehouse and a refrigerated keg storage area of 14,400
square feet. The warehousing facility opens to 20 shipping docks,
including 17 devoted to truck-loading and three rail loading docks
on its rail siding located on the property and served by the Soo
Line and the Chicago Northwest Railroads.
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 proprietary product lines, 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.
Until March 29, 1999, the Partnership retained ownership of all of
the Company's real property, buildings, water wells, and equipment used in the
brewing process, and leased the real property to the Company.
The lease agreement gave the Company the right to purchase the
facility and equipment at any time over the term of the lease after November 30,
1995 for eight times trailing 12-month lease payments, which, as of December 31,
1998, amounted to approximately $4.9 million. The agreements also allowed the
Partnership to
11
<PAGE>
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.
On March 29, 1999, the Partnership contributed its interest in the
real estate and equipment that had been previously leased to the Company to
Gopher State, which intends to produce ethanol. Gopher State has obtained
interim financing to proceed with an engineering study to determine the
feasibility of building an ethanol plant. On March 29, 1999, the Company and
Gopher State entered into a new lease agreement for the same land, building and
production equipment that the Company had previously leased from the
Partnership. The new lease agreement provides for rent of $25,000 per month and
has an initial term of 10 years, with a provision for three successive 10 year
renewals.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S 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 1997 and 1998.
Low High
--- ----
1997
First Quarter $ 3.13 $ 5.38
Second Quarter 2.63 4.25
Third Quarter 2.50 3.75
Fourth Quarter 1.38 3.00
1998
First Quarter $ 1.25 $ 3.56
Second Quarter 1.75 3.38
Third Quarter 1.50 2.75
Fourth Quarter 1.75 2.75
These prices indicate interdealer prices without retail markup, markdowns or
commissions.
At March 23, 1999, the Company had 276 holders of record of its
common stock. In addition, on that date one depository company held
approximately 1,628,000 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. The Company's new line of
credit agreement limits its ability to pay dividends.
RECENT SALE OF UNREGISTERED SECURITIES
On March 31, 1999, the Company issued 607,745 shares of class A
convertible preferred stock to the Partnership reflecting the conversion of an
aggregate of $1,519,363 in indebtedness. The Company believes the transaction
was exempt under Section 4(2) of the Security Act of 1933.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................... $ 14,763,247 $ 18,100,532 $ 24,875,349 $ 31,383,508 $ 25,221,588
Cost of goods sold ...................... 13,614,401 18,555,849 23,331,116 28,199,229 21,525,720
------------ ------------ ------------ ------------ ------------
Gross profit (loss) ..................... 1,148,846 (455,317) 1,544,233 3,184,279 3,695,868
------------ ------------ ------------ ------------ ------------
Operating expenses:
Advertising ........................... 623,853 1,193,348 1,123,996 1,594,267 1,728,073
Sales and marketing ................... 690,101 718,764 747,809 719,659 598,727
Administrative ........................ 979,484 1,057,241 855,255 714,050 615,631
Provision for doubtful accounts ....... 90,000 492,000 601,000 25,000 55,000
------------ ------------ ------------ ------------ ------------
Total operating expenses .......... 2,383,438 3,461,353 3,328,060 3,052,976 2,997,431
------------ ------------ ------------ ------------ ------------
Operating income (loss) ................. (1,234,592) (3,916,670) (1,783,827) 131,303 698,437
Other income (expense), net ............. (173,286) (100,386) (78,641) (105,341) (93,204)
------------ ------------ ------------ ------------ ------------
Net income (loss) before
Income tax benefit .................... (1,407,878) (4,017,056) (1,862,468) 25,962 605,233
Income tax (benefit) .................... (28,000) 293,000 -- -- (222,000)
------------ ------------ ------------ ------------ ------------
Net income (loss) ....................... (1,379,878) (4,310,056) $ (1,862,468) $ 25,962 $ 827,233
============ ============ ============ ============ ============
Net income (loss) per common share (1) .. $ (0.40) $ (1.27) $ (0.55) $ 0.01 $ 0.25
Weighted average common shares
outstanding (basic) ................... 3,425,961 3,389,211 3,374,155 3,351,308 3,330,088
OPERATING DATA (in barrels sold):
Domestic ................................ 117,916 143,699 157,797 145,809 140,199
Contract ................................ 137,153 119,576 187,108 348,840 290,187
Export .................................. 54,050 68,823 84,414 106,983 73,667
------------ ------------ ------------ ------------ ------------
Total ................................... 309,119 332,098 429,319 601,632 504,053
============ ============ ============ ============ ============
<CAPTION>
December 31, December 31, December 31, December 31, December 3l,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Working capital ......................... $ 231,017 $ 1,044,938 $ 4,342,653 $ 6,327,913 $ 6,788,661
Total assets ............................ 8,448,579 8,275,426 10,775,228 12,189,503 13,363,949
Long-term debt, net ..................... 1,261,921 2,391,081 1,753,454 1,982,428 2,194,380
Shareholders' equity .................... 2,934,352 2,787,910 7,097,966 8,787,484 8,658,022
</TABLE>
(1) The net income (loss) per share were the same under the basic and
diluted methods for calculation in each period presented.
14
<PAGE>
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,
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0%
Cost of goods sold......................... 92.2 102.5 93.8
----- ----- -----
Gross profit (loss)........................ 7.8 (2.5) 6.2
Advertising................................ 4.2 6.6 4.5
Sales and marketing........................ 4.7 4.0 3.0
Administrative............................. 6.6 5.8 3.4
Provision for doubtful accounts............ 0.6 2.7 2.4
Operating loss............................. (8.3) (21.6) (7.2)
Other expense, net......................... (1.2) (0.6) (0.3)
Income tax (benefit) expense............... (0.2) 1.6 --
Net loss................................... (9.3) (23.8) (7.5)
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Net sales for 1998 were $14,763,247, an 18.4% decrease from the net
sales for 1997 of $18,100,532. Total barrels sold in 1998 were 309,119, a 6.9%
decrease compared to 332,098 barrels sold in 1997. 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 decreased 10.6% from 1997 sales of
$12,054,000 to 1998 sales of $10,780,000. The decrease in the sales primarily
relates to a decline in the sales of Pig's Eye products and was partially offset
by the continuing increase in sales of Grain Belt Premium, the Company's leading
brand.
Sales from brewing agreements and contract packaging decreased
$2,358,000 from $4,495,000 in 1997 to $2,137,000 in 1998 for a 52.5% decease.
Sales of packaged contract products declined due to the continuing policy of
establishing tighter control over customer credit. The Company is taking steps
to increase volume from existing accounts and the addition of new contracts that
can meet the Company's credit standards.
Export sales decreased 18.5% from $3,276,000 in 1997 to $2,671,000
in 1998. This decline is directly attributable to the economic downturn
experienced by its primary customers in Asia. The Company is hopeful that it
will experience an increase in export sales during 1999 based upon its existing
accounts and new contractual agreements.
While net sales decreased 18.4% in 1998 when compared to 1997, costs
of goods sold decreased 26.6%. The Company experienced an increase in its gross
margin from a loss of 2.5% in 1997 to a positive 7.8% in 1998. The larger
percentage decrease in cost of goods sold versus the decrease in net sales was
attributable to the large decrease in
15
<PAGE>
the fixed level of plant operating overhead due to plant layoffs, cost
containment measures, and the reduction of certain utilities. The cost of goods
sold in 1997 included a significant cost for the disposition of obsolete and
discontinued inventory items.
Operating expenses decreased $1,077,915 in 1998 and as a percentage
of net sales they decreased from 19.1% in 1997 to 16.1% in 1998. Of this amount,
advertising expenses decreased $569,495, or 47.7%, from 1997 to 1998 due to
budgeting constraints and the cancellation by the University of Minnesota of the
Company's sponsorship program. Sales and marketing expenses decreased $28,663,
or 4.0% from 1997 to 1998 due to cost containment measures implemented during
1998.
General and administrative expenses decreased $77,757 from 1997 to
1998, and as a percentage of net sales increased from 5.8% in 1997 to 6.6% in
1998. The provision for doubtful accounts decreased $402,000 from 1997 to 1998.
This decrease can be attributed to tighter credit policies and improved
collection efforts.
Interest income decreased from $34,583 in 1997 to $15,356 in 1998
reflecting a reduction in available investable funds. The Company's interest
expense increased $163,235 from 1997 to 1998 due primarily to working capital
borrowings during 1998. The Company had a working capital line of credit in
effect with the Partnership in 1998.
During 1997 and 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 continues to pursue opportunities to increase
sales volume at profitable margins. Even though sales of proprietary brands
decreased during 1998, management believes that the growth of its proprietary
labels offers the best opportunity for achieving operating profits in the long
term and has increased its efforts on the growth of its proprietary products. An
emphasis has been placed on the promotion of these proprietary labels and the
generations of additional sales in the Company's core geographic market areas.
In addition, management anticipates growth in both its contract products and
export sales. Management believes these anticipated increases in sales volume
during 1999 will help the Company operate at a significantly higher level of
capacity thereby increasing overall profitability.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Net sales for 1997 were $18,100,532, a 27.2% decrease from the net
sales for 1996 of $24,875,349. Total barrels sold in 1997 were 332,098, a 22.6%
decrease compared to 429,319 barrels sold in 1996. 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 decreased 8.9% from 1996 barrelage of
157,797 to 1997 barrelage sales of 143,699. The decrease in the sales primarily
relates to a decline in the sales of Pig's Eye products and was partially offset
by the continuing increase in sales of Grain Belt Premium, the Company's leading
brand.
Sales from brewing agreements and contract packaging decreased
67,532 barrels from 187,108 in 1996 to 119,576 barrels in 1997 for a 36.1%
decrease. Contract sales decreased due to a decline in water product sales and a
change in policy, establishing tighter control over customer credit.
Export sales decreased 18.5% from 84,414 barrels in 1996 to 68,823
barrels in 1997. 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 total barrelage.
While net sales decreased 27.2% in 1997 when compared to 1996, costs
of goods sold only decreased 20.5%. 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
sales fell short of the Company's expectations. Therefore, the Company
experienced a decline in its gross margin from 6.2% in 1996 to a loss of 2.5% in
16
<PAGE>
1997 principally from a shortfall in sales. In addition, because of the lower
level of sales than anticipated and the existence of slow moving and dated
products, the Company added $672,000 to its inventory valuation reserve during
1997 with a corresponding unfavorable adjustment to cost of sales.
In addition to the inventory valuation adjustment, the decline in
gross profit from 1996 to 1997 was attributable to the reduction in sales to a
level that was not sufficient to absorb overhead costs. The decline in gross
profit was also attributable to contract prices that were below costs, based on
the Company's current production levels.
Operating expenses were $133,293 greater in 1997 than in 1996 and as
a percentage of net sales they increased from 13.4% in 1996 to 19.1% in 1997. Of
this amount, advertising expenses increased $69,352, or 6.2%, from 1996 to 1997
due to the Company's commitments to its new brands. Sales and marketing expenses
decreased $29,045, or 3.9% from 1996 to 1997 due to reduced staffing.
General and administrative expenses increased $201,986 from 1996 to
1997, and as a percentage of net sales; they increased from 3.4% in 1996 to 5.8%
in 1997. The change was primarily due to the fact that professional fees,
shareholder relation cost, and severance costs exceeded 1996 levels. The
provision for doubtful accounts decreased $109,000 from 1996 to 1997.
Interest income decreased from $84,000 in 1996 to $46,816 in 1997
reflecting a reduction in available investable funds. The Company's interest
expense decreased $15,439 from 1996 to 1997 principally associated with the
scheduled reduction in principal of the capitalized lease covering plant and
equipment.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 1998 decreased $813,921 from $1.0
million at December 31, 1997. The decrease is primarily attributable to
decreases of $398,618 in cash partially offset by an increase in accounts
receivable of $305,288. Also, a treasury bill and amounts due from a related
party amounted to $777,104 in 1998. A reduction in inventories of $292,079 as a
result of decreased volume during 1998 and an increase in short-term borrowings
of $1,324,961 offset this. These borrowings reflected the only financing
activities for the Company during 1998.
During the year ended December 31, 1998, the Company used $261,361
of net cash in operating activities, which was due in large part, to the net
loss of $1,379,878. Other factors included decreases in various valuation
allowances totaling $319,000, an increase of $249,288 in accounts receivable, a
decrease in accounts payable and accrued expenses of $277,324. These amounts
were partially offset by depreciation and amortization of $942,912, a decrease
in inventories of $466,079, a decrease in prepaid expenses of $49,745 and
increases in the amounts due to related party of $505,393.
The Company used net cash of $1,462,218 for investing activities due
to the purchase of $610,542 of property and equipment and $89,185 in the
purchase of intangible assets for branded products. In addition to these normal
capital expenditures, a treasury bill was purchased for $474,961 and $287,530
which was advanced to Gopher State Ethanol. The Company will be a minority-owner
in this company that is scheduled to begin operations in 2000.
See discussion on Gopher State Ethanol below.
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 was being amortized
over 10 years at a 7.75% interest rate.
The Company had an option to acquire the property at eight times the
trailing twelve months rent any time after December 1, 1995. Based upon 1998
lease payments, the purchase price would be approximately $4.9 million at
December 31, 1998.
17
<PAGE>
On March 29, 1999, the Company and the Partnership terminated their
lease agreement. The Partnership also contributed its interest in the real
estate and equipment that had been previously leased to the Company to Gopher
State, which will be involved in the production of ethanol. On March 29, 1999,
the Company and Gopher State entered into a new lease agreement for the same
land, building and production equipment that the Company had previously leased
from the Partnership. The new lease agreement provides for rent of $25,000 per
month and has an initial term of 10 years. There are no provisions for
production rent in the new agreement. Management estimates that as a result of
this new arrangement, approximately $300,000 of annual operating expenses will
be eliminated.
The Company issued 547,614 shares of class A convertible preferred
stock to the Partnership in satisfaction of $1,369,036 owed for deferred rents
and accrued interest at December 31, 1998. The preferred shares have a 9%
cumulative dividend rate and are convertible into common stock at the rate of
one share of common stock per share of preferred stock. On March 31, 1999, the
partnership converted an additional $150,327 of debt into 60,131 additional
shares of class A stock. The dividends can be deferred and if they are not paid,
they accumulates without interest.
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.
The Company is a party to collective bargaining agreements with five
union organizations, which ran for a three-year term, ended March 31, 1999.
Contract negotiation with the union organization representatives is ongoing and
members have agreed to continue working under the previous contracts until new
contracts have been negotiated. Negotiations with the bargaining units are
ongoing and management believes that new contract agreements will be negotiated.
There is a possibility, however, that any or all of these units could strike
sometime after April 23, 1999.
As of December 31, 1998, the Company had net operating loss
carryforwards totaling $8.3 million. The carryforwards expires as follows:
Year of Expiration Amount
------------------ ------
2007 $1.3 million
2011 $1.5 million
2012 $3.9 million
2018 $1.6 million
FINANCING
In 1998, the Company had a $2.5 million line of credit agreement
with the Partnership. Advances under the line of credit accrue interest at the
higher of the prime rate of interest plus 1.0 percent or 9 percent. The line was
secured by substantially all the assets of the Company. This line of credit
agreement expired on January 1, 1999, the Company was unable to pay all amounts
due under the line and as a result the Company was in default under this
agreement. On April 15, 1999, the Partnership committed to amend the line of
credit agreement with the Company thereby curing the default that existed at
that date. The amended line of credit, which expires on April 15, 2002, will
provide borrowings up to $1.5 million.
In order to achieve its 1999 plans, the Company will require
additional funds from equity or debt to meet its working capital and capital
resource plans. On April 15, 1999, the Company obtained a bank line of credit of
$3.0 million, subject to certain borrowing base restrictions. The line of credit
agreement, which expires on April 15, 2002, contains covenants, which include
prohibiting the Company from paying dividends as well as requiring the Company
to
18
<PAGE>
maintain certain financial requirements. Substantially all of the Company assets
are pledged as collateral under this line of credit.
Management believes that this bank line of credit along with the
amended line of credit agreement with the Partnership will be sufficient to meet
working capital during 1999.
Y2K ISSUE
The Company is committed to ensuring that there is no impediment to
its business operation because of internal systems failures associated with the
Y2K date problem. The Y2K issue relates to the inability of certain information
systems to properly recognize and process dates containing the Year 2000 and
beyond and is further committed to control external factors to the extent
possible.
The Company obtained information from its software vendor that was
used in assessing whether or not the Company is Y2K compliant. In addition, the
Company has identified and tested the systems it believes are critical and the
test results indicate that these systems are Y2K compliant or will become Y2K
compliant with additional software upgrades by June 30, 1999. These software
upgrades were identified by the independent verification of its software vendor
and involve embedded microprocessors. The Company will continually test and
establish compliance with respect to all of its existing systems, potential
upgrades and new acquisitions. Regardless of the Y2K compliance of the Company's
systems and products, there can be no assurance that the Company will not be
adversely affected by the failure of third parties to become Y2K compliant.
However, the Company's five largest vendors have represented themselves as being
Y2K compliant. The Company has not currently established contingency plans, but
has established a committee to assess its need for contingency plans during
1999.
The Company has not incurred any material expenditures in connection
with identifying or evaluating Y2K compliance issues. The Company estimates that
it will incur approximately $30,000 in software upgrades necessary for Y2K
compliance.
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 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
SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded
19
<PAGE>
SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did require the disclosure of sales by major product line. See
Note 6 to the financial statements for disclosures about the Company's operating
segments.
REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING
COMPREHENSIVE INCOME. SFAS No 130 establishes new rules for the reporting and
display of comprehensive income and its components. SFAS No. 130 requires
unrealized gains or losses on available-for-sale securities and certain other
items, which prior to adoption were reported separately in shareholders' equity,
to be included in other comprehensive income. For the Company, reporting
comprehensive income would be equivalent to reporting operating results in the
statement of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of the Company are set forth in
this Form 10-K:
Page
Report of Independent Auditor
McGladrey & Pullen, LLP....................................... F-1
Balance Sheets as of December 31, 1998 and 1997............... F-2
Statements of Operations for the years
ended December 31, 1998, 1997 and 1996........................ F-4
Statements of Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996.............. F-5
Statements of Cash Flows for the years
ended December 31, 1998, 1997 and 1996........................ F-6
Notes to Financial Statements for the years
ended December 31, 1998, 1997 and 1996........................ F-8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
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 (the "1999 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 1999 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 1999 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 1999 Proxy Statement and is
incorporated herein by reference.
21
<PAGE>
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.
<TABLE>
<S> <C>
Independent Auditor's Report on Schedules for Years
Ended December 31, 1998, 1997 and 1996 ............ Page F-1
Schedule II Valuation and Qualifying Accounts ....... Page F-20
</TABLE>
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1998.
(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
3.3 Certificate of Rights and Preferences of Class A Convertible
Preferred Stock
10.1 Lease dated March 29, 1999 between Minnesota Brewing Company and
Gopher State Ethanol, LLC
10.2 Minnesota Brewing Company 1993 Stock Option Plan
23 Consent of McGladrey & Pullen, LLP
22
<PAGE>
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 April 15, 1999 MINNESOTA BREWING COMPANY
By /s/ John J. Lee
-----------------------------------------------
John J. Lee
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
JOHN J. LEE and MICHAEL C. HIME 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/ John J. Lee President, Chief Executive
- ---------------------------------- Officer and Director
John J. Lee
/s/ Michael C. Hime Vice President of Finance
- ---------------------------------- Chief Financial Officer
Michael C. Hime
/s/ James A. Potter Director
- ----------------------------------
James A. Potter
/s/ Greg C. Heinemann Director
- ----------------------------------
Greg C. Heinemann
/s/ Robert Awsumb Director
- ----------------------------------
Robert Awsumb
/s/ Richard A. Perrine Director
- ----------------------------------
Richard A. Perrine
23
<PAGE>
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, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, 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, 1998, 1997, and
1996. In our opinion, such schedule presents fairly the information required to
be set forth therein, in conformity with generally accepted accounting
principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 26, 1999 (April 15, 1999,
as to Note 2)
F-1
<PAGE>
MINNESOTA BREWING COMPANY
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 67,366 $ 465,984
Trade accounts receivable, less allowance for doubtful accounts
of $250,000 in 1998 and $306,000 in 1997 (Note 6) 1,064,638 759,350
Due from related party (Note 3) 302,143 --
Treasury bill, pledged 474,961 --
Inventories 2,473,039 2,765,118
Prepaid expenses 101,176 150,921
-----------------------------
TOTAL CURRENT ASSETS 4,483,323 4,141,373
-----------------------------
Other Assets
Trademarks, net of accumulated amortization of $99,000 in 1998
and $73,000 in 1997 263,189 221,577
Other intangible assets, principally packaging design, net of
accumulated amortization of $445,000 in 1998 and $315,000
in 1997 220,418 291,209
-----------------------------
483,607 512,786
-----------------------------
Property and Equipment (Note 3)
Land and building under capital lease 1,899,574 1,899,574
Display fixtures and equipment 1,390,537 1,168,706
Production equipment, including capitalized lease 3,115,399 2,722,960
Office equipment 177,465 172,890
Leasehold improvements 171,740 123,347
-----------------------------
6,754,715 6,087,477
Less accumulated depreciation and amortization (3,273,066) (2,466,210)
-----------------------------
3,481,649 3,621,267
-----------------------------
$ 8,448,579 $ 8,275,426
=============================
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current Liabilities
Trade accounts payable $ 2,002,197 $ 2,197,100
Related-party line of credit (Note 3) 1,324,961 --
Current maturities of capital lease obligation (Note 3) 265,517 --
Accrued expenses:
Compensation 497,155 602,811
Beverage tax 113,796 126,073
Other 48,680 170,451
-------------------------------
4,252,306 3,096,435
-------------------------------
Long-Term Debt (Note 3)
Due to related party -- 263,036
Capital lease obligation, less current maturities (Note 3) 1,261,921 2,128,045
-------------------------------
1,261,921 2,391,081
-------------------------------
Commitments and Contingencies (Notes 2, 3, 4, 5, and 8)
Shareholders' Equity (Notes 3, 4, and 5)
Common stock, $0.01 par value; 10,000,000 shares authorized 34,627 33,892
Preferred stock, 700,000 shares authorized, 9 percent
cumulative dividend; 547,614 shares issued 1,369,036 --
Additional paid-in capital 10,592,217 10,435,668
Accumulated deficit (9,061,528) (7,681,650)
-------------------------------
2,934,352 2,787,910
-------------------------------
$ 8,448,579 $ 8,275,426
===============================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales (Note 6) $ 16,366,830 $ 20,419,205 $ 27,983,345
Less excise taxes (1,603,583) (2,318,673) (3,107,996)
------------------------------------------------
NET SALES 14,763,247 18,100,532 24,875,349
Cost of goods sold (Note 3) 13,614,401 18,555,849 23,331,116
------------------------------------------------
1,148,846 (455,317) 1,544,233
------------------------------------------------
Operating expenses:
Advertising 623,853 1,193,348 1,123,996
Sales and marketing 690,101 718,764 747,809
General and administrative (Note 3) 979,484 1,057,241 855,255
Provision for doubtful accounts 90,000 492,000 601,000
------------------------------------------------
TOTAL OPERATING EXPENSES 2,383,438 3,461,353 3,328,060
------------------------------------------------
OPERATING LOSS (1,234,592) (3,916,670) (1,783,827)
------------------------------------------------
Other income (expense):
Interest and other income 137,151 46,816 84,000
Interest expense (Note 3) (310,437) (147,202) (162,641)
------------------------------------------------
(173,286) (100,386) (78,641)
------------------------------------------------
LOSS BEFORE INCOME TAX (BENEFIT)
EXPENSE (1,407,878) (4,017,056) (1,862,468)
Income tax (benefit) expense (Note 7) (28,000) 293,000 --
------------------------------------------------
NET LOSS $ (1,379,878) $ (4,310,056) $ (1,862,468)
================================================
Net loss per common share, basic and diluted $ (0.40) $ (1.27) $ (0.55)
Weighted-average common and common equivalent
shares outstanding 3,425,961 3,389,211 3,374,155
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Preferred Paid-In Accumulated
Shares Amount Stock Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net loss -- -- -- -- (4,310,056) (4,310,056)
---------------------------------------------------------------------------------------
Balance, December 31, 1997 3,389,211 33,892 -- 10,435,668 (7,681,650) 2,787,910
Stock issued to employee stock
ownership plan (Note 4) 73,500 735 -- 156,549 -- 157,284
Conversion of related-party debt to
preferred stock (Note 3) -- -- 1,369,036 -- -- 1,369,036
Net loss -- -- -- -- (1,379,878) (1,379,878)
---------------------------------------------------------------------------------------
Balance, December 31, 1998 3,462,711 $ 34,627 $ 1,369,036 $10,592,217 $(9,061,528) $ 2,934,352
=======================================================================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $(1,379,878) $(4,310,056) $(1,862,468)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 788,161 754,822 616,695
Amortization of intangible assets 154,751 129,666 95,344
Deferred income taxes -- 293,000 --
Inventory valuation allowance (174,000) 221,743 73,277
Intangible and other asset valuation allowance (89,000) 127,000 --
Changes in assets and liabilities:
Trade accounts receivable (305,288) 366,655 981,285
Inventories 466,079 1,545,671 (174,464)
Prepaid expenses 49,745 (79,322) (10,449)
Trade accounts payable and accrued
expenses (277,324) 1,421,653 488,893
Amounts due to related party 505,393 403,214 (1,698)
---------------------------------------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (261,361) 874,046 206,415
---------------------------------------------
Cash Flows From Investing Activities
Amounts due from related party (287,530) (14,613) --
Purchases of property and equipment (610,542) (613,491) (571,738)
Purchases of held-to-maturity securities (474,961) -- (1,477,025)
Sales of held-to-maturity securities -- -- 2,474,744
Purchases of intangible and other assets (89,185) (166,283) (207,069)
---------------------------------------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,462,218) (794,387) 218,912
---------------------------------------------
</TABLE>
(Continued)
F-6
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities
Principal payments under capital lease obligations -- -- (211,952)
Net proceeds from borrowings on related-party
line of credit 1,324,961 -- --
Proceeds from exercise of employee stock options -- -- 172,950
---------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,324,961 -- (39,002)
---------------------------------------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (398,618) 79,659 386,325
Cash and Cash Equivalents
Beginning 465,984 386,325 --
---------------------------------------------
Ending $ 67,366 $ 465,984 $ 386,325
=============================================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ -- $ -- $ 162,641
=============================================
Supplemental Disclosures of Noncash Investing and
Financing Activities
Conversion of debt to preferred stock $ 1,369,036 $ -- $ --
Common stock issued to employee stock
ownership plan in satisfaction of accrued
compensation 157,284 -- --
=============================================
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
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 certain of its equipment from Minnesota Brewing Limited
Partnership (the Partnership), the Company's largest shareholder. See Note 3 for
related-party transactions.
The Company brews and markets beer primarily under the Grain Belt, Pig's Eye,
and Brewer's 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 ten-day
terms, to distributors, the majority of whom are located in Minnesota. Credit
terms in connection with contract brewing, export, and private label
arrangements are negotiated on an individual customer basis. See Note 6 for
segment data 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.
INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out
method) or market. Inventories, net of a valuation reserve of $281,000 and
$455,000 in 1998 and 1997, respectively, consist of the following:
December 31
----------------------------------
1998 1997
- --------------------------------------------------------------------------------
Raw materials $ 185,281 $ 134,908
Work in progress 334,130 357,151
Finished goods 840,591 660,635
Packaging 753,678 1,243,705
Other 359,359 368,719
----------------------------------
$ 2,473,039 $ 2,765,118
==================================
F-8
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the
following financial instruments: cash and cash equivalents, trade accounts
receivable, investment in Treasury Bill, accounts payable, and amounts due to
and from related party. At December 31, 1998 and 1997, 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.
DEPRECIATION AND AMORTIZATION: 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 to 25 years for building and leasehold
improvements.
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.
The Company periodically reviews the carrying amount of its long-lived assets to
determine if circumstances exist indicating an impairment or that depreciation
periods should be modified. If facts or circumstances support the possibility of
impairment, the Company will prepare a projection of the undiscounted future
cash flows, without interest charges, of the specific asset and determine if the
asset is recoverable based on the undiscounted future cash flows. If an
impairment exists based on these projections, an adjustment will be made to the
carrying amount and remaining depreciable life of the specific asset based on
discounted future cash flows. To date, management has determined that no
impairment of long-lived assets exists, and accordingly, no adjustments to the
carrying amounts of its long-lived assets have been made. It is possible that
management's estimate could change as a result of changes in market conditions
or operating results. The effect of a change, if any, could be material to the
financial condition or results of operations.
FEDERAL EXCISE TAX AND PLEDGED TREASURY BILL: The Company currently receives an
$11 per barrel credit against federal excise taxes on the first 60,000 barrels
of taxable production. At December 31, 1998, the Company has pledged a U.S.
Treasury bill to the Bureau of Alcohol, Tobacco, and Firearms (BATF) to
guarantee the payment of federal excise taxes.
F-9
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
BASIC AND DILUTED LOSS PER COMMON SHARE: Basic per-share amounts are computed,
generally, by dividing net income or loss, as adjusted for by the
weighted-average number of common shares outstanding. Diluted per-share amounts
assume the conversion, exercise, or issuance of all potential common stock
instruments unless the effect is anti-dilutive, thereby reducing the loss per
common share. At December 31, 1998 and 1997, the Company had options outstanding
to purchase a total of 282,000 and 192,000 shares of common stock, respectively.
However, because the Company has incurred a loss in all periods presented, the
inclusion of those potential common shares in the calculation of diluted loss
per-share would have an anti-dilutive effect. Therefore, basic and diluted loss
per-share amounts are the same in each period presented.
SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded SFAS No. 14,
FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position, but did require the disclosure of sales by major product line. See
Note 6 for disclosures about the Company's operating segments.
REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes new rules for
the reporting and display of comprehensive income and its components. SFAS No.
130 requires unrealized gains or losses on available-for-sale securities and
certain other items, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. For the
Company, reporting comprehensive income would be equivalent to reporting
operating results in the statements of operations.
ADVERTISING EXPENSES: In accordance with SOP 93-7, all advertising costs are
either expensed as incurred or deferred until first use of the advertising. The
nature of these costs include any promotional activity intended to stimulate,
indirectly or directly, the sale of company products.
F-10
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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. Of the remaining 1,000,000 shares which
were undesignated, 700,000 were designated as preferred stock in connection with
the conversion of related-party debt to preferred stock (see Note 3).
NOTE 2. CORPORATE LIQUIDITY AND SUBSEQUENT EVENTS
The Company's plans in 1999 include the continued emphasis on promoting its core
proprietary brands and increasing the volume of foreign sales. In order to
achieve its 1999 plans, the Company will require additional funds from equity or
debt to meet its working capital and capital resource plans. On April 15, 1999,
the Company obtained a bank line of credit of $3 million, subject to certain
borrowing base restrictions. The line-of-credit agreement, which expires on
April 15, 2002, contains covenants which include limitations on the Company's
ability to pay dividends, as well as requiring the Company to maintain certain
financial requirements, including maintaining a minimum net worth level.
Substantially all of the Company's assets are pledged as collateral under this
line of credit. On April 15, 1999, the Partnership committed to amend the
line-of-credit agreement with the Company, thereby curing the default that
existed at that time (see Note 3). The amended line-of-credit agreement with the
Partnership which expires on April 15, 2002, will provide total borrowings of up
to $1.5 million. Management believes that those lines of credit will be
sufficient to meet working capital needs during 1999.
On March 29, 1999, the Company and the Partnership terminated their lease
agreement, which is described in Note 3. Simultaneous with the lease
termination, the Partnership agreed to convert the January, February, and March
1999 rent payments, which totaled approximately $150,000, into 60,131 shares of
Class A convertible preferred stock (see Note 3). The Partnership also
contributed its interest in the real estate and equipment that had been
previously leased to the Company to a newly formed entity (Gopher State Ethanol,
LLC or "GSE"), which anticipates being involved in the production of ethanol.
GSE has obtained interim financing to proceed with an engineering study to
determine the feasibility of building an ethanol plant. On March 29, 1999, the
Company and GSE entered into a new lease agreement for the same land, building,
and production equipment that the Company had previously leased from the
Partnership. The new lease agreement provides for rent of $25,000 per month and
has an initial term of ten years.
NOTE 3. RELATED-PARTY TRANSACTIONS
GENERAL: The Minnesota Brewing Limited Partnership owns approximately 62 percent
of the Company's voting stock. The Chairman of the Board of the Company is also
the controlling general partner of the Partnership.
F-11
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)
AMOUNTS DUE TO RELATED PARTY: The Company has borrowed funds from the
Partnership under the following arrangements:
RELATED-PARTY LINE OF CREDIT: As of December 31, 1998, the Company had
borrowings outstanding of $1,324,961 under its line-of-credit agreement
with the Partnership, which expired on January 1, 1999. As of February 26,
1999, the Company is in default on this line of credit. (See Note 2 for
subsequent event). Advances under the line of credit accrue interest at the
higher of either (i) the prime rate of interest (7.75 percent at December
31, 1998) plus 1 percent or (ii) 9 percent. The line is secured by
substantially all the assets of the Company. The Company incurred interest
expense during 1998 of $122,288 under the line of credit. This accrued
interest was converted into preferred stock effective December 31, 1998, in
connection with an agreement with the Partnership (see Preferred stock
below for more details).
The following table summarizes the Company's outstanding debt, including
the related-party line of credit (exclusive of the capital lease
obligation) to the Partnership:
Average
Amount
Balance at Outstanding Balance
Beginning During at End
of Year the Year of Year
---------------------------------------------------------------------------
Years ended December 31:
1998 $ 263,036 $ 794,000 $ 1,324,961
1997 20,051 148,578 263,036
DEFERRED RENT PAYMENTS ON RELATED-PARTY LEASES: During 1998, the
Partnership had agreed to defer all rent payments owed them under the lease
agreements described below until January 1, 1999. Effective December 31,
1998, the Company and the Partnership agreed to convert those deferred rent
payments of $1,246,748 into preferred stock pursuant to an agreement
described below.
PREFERRED STOCK: As of December 31, 1998, the Company issued 547,614 shares of
Class A convertible preferred stock to the Partnership in satisfaction of
$1,369,036 owed for deferred rents and accrued interest. The preferred shares
have a 9 percent cumulative dividend rate and can be converted at the
Partnership's option into 547,614 shares of the Company's common stock. If it is
not paid, it accumulates without interest.
AMOUNTS DUE FROM RELATED PARTY: During 1997 and 1998, the Company has incurred
costs of approximately $302,000 related to the financing and development of GSE
(see Note 2). During 1999, the Company will be reimbursed for certain of those
costs, with the remaining portion being reimbursed upon the completion of the
construction of the GSE facility.
F-12
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)
RELATED-PARTY CAPITAL LEASES: At December 31, 1998, the Company leased 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 10-year terms, and options
to purchase the assets based on 8 times the preceding 12 months' lease payments
of $25,000 per month for land and building an $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, 1998, the purchase price would have been approximately $4,900,000.
In addition, the Company was responsible for all insurance and real estate taxes
associated with this property. See Note 2 for the subsequent event regarding
this lease agreement.
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 1999's annual
production level.
<TABLE>
<CAPTION>
Operating Capital
Lease Lease
Total Commitment Obligation
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Years ending December 31:
1999 $ 740,000 $ 365,500 $ 374,500
2000 740,000 365,500 374,500
2001 740,000 365,500 374,500
2002 740,000 365,500 374,500
2003 645,800 302,000 343,752
---------------------------------------------------
Total estimated future minimum lease
payments $ 3,605,800 $ 1,764,000 1,841,752
=================================
Less amount representing interest (7.75%) 314,314
---------------
Present value of future minimum payments
under capital lease obligation at December
31, 1998 1,527,438
Less current portion 265,517
---------------
$ 1,261,921
===============
</TABLE>
F-13
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED)
Total lease payments due under the aforementioned leases were approximately
$609,000, $618,000, and $712,000 for the years ended December 31, 1998, 1997,
and 1996, respectively. The total rent expense relating to the operating lease
portion of the above leases was approximately $231,000, $243,000, and $337,000
for the years ended December 31, 1998, 1997, and 1996, respectively.
ASSETS RECORDED UNDER RELATED-PARTY LEASES: The following is a summary of the
assets recorded under capital leases:
December 31
-----------------------------------
1998 1997
- --------------------------------------------------------------------------------
Land and building $ 1,899,574 $ 1,899,574
Production equipment 702,426 702,426
-----------------------------------
2,602,000 2,602,000
Less accumulated amortization 1,344,310 1,084,121
-----------------------------------
$ 1,257,690 $ 1,517,879
===================================
RELATED-PARTY PAYMENTS: During 1998 and 1997, the Company paid insurance
premiums of approximately $228,000 and $180,000, respectively, to an insurance
agency whose ownership includes a director of the Company.
NOTE 4. 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 the Plan was approximately $76,000, $136,000, and
$146,000 for the years ended December 31, 1998, 1997, and 1996, respectively.
During 1998, the Company contributed 73,500 shares of its common stock with a
fair value of $157,284 in satisfaction of accrued expense under the Plan. At
December 31, 1998 and 1997, there were 220,279 and 146,779 shares, respectively,
of Company common stock held by the Plan. The fair market value of those shares
totaled approximately $427,000 and $258,000 as of December 31, 1998 and 1997,
respectively.
F-14
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. STOCK OPTIONS AND WARRANT
At December 31, 1998, the Company has an employee 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, reported net
loss and net loss per common share on a pro forma basis as compared to reported
results would have been as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (1,380,000) $ (4,310,000) $ (1,862,000)
Pro forma (1,483,000) (4,382,000) (1,888,000)
Basic and diluted net loss per common share:
As reported (0.40) (1.27) (0.55)
Pro forma (0.43) (1.29) (0.56)
</TABLE>
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 1998, 1997,
and 1996, respectively: dividend rate of zero for all years; price volatility of
68.9, 62.0, and 39.0 percent; risk-free interest rate of 5.4, 6.3, and 6.1
percent; and expected lives of approximately 3.0, 3.0, and 2.3 years. The
weighted-average fair value per share of options granted in 1998, 1997, and 1996
was $1.03, $1.30, and $1.41, respectively.
EMPLOYEE INCENTIVE STOCK OPTION PLAN: The employee incentive stock option plan
authorizes the granting of options to purchase up to 450,000 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 varyin 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 expired in November 1998.
F-15
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. STOCK OPTIONS AND WARRANT (CONTINUED)
A summary of the stock option activity through December 31, 1998, is as follows:
Number
of Exercise Price
Shares Per Share
- ------------------------------------------------------------------------
Balance, December 31, 1995 98,000 $ 4.50 - 5.75
Granted 18,500 4.75
Exercised (37,600) 4.50 - 5.00
-----------------------------------
Balance, December 31, 1996 78,900 4.50 - 5.75
Granted 125,000 4.50
Exercised/cancelled (11,900) 4.50 - 5.40
-----------------------------------
Balance, December 31, 1997 192,000 4.50 - 5.75
Granted 90,000 2.00
-----------------------------------
Balance, December 31, 1998 282,000 $ 2.00 - 5.75
===================================
At December 31, 1997 and 1996, 108,667 and 78,900 options outstanding, with a
weighted-average exercise price per share of $4.85 and $4.88, respectively, were
exercisable.
A further summary of options outstanding at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Exercise Number Number Remaining
Price Outstanding Exercisable Contractual Life
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 2.00 75,000 25,000 3.0 years
2.50 15,000 -- 3.0 years
4.50 151,000 109,333 3.1 years
4.75 18,500 18,500 2.8 years
5.00 10,000 10,000 1.5 years
5.75 12,500 12,500 1.5 years
---------------- ---------------
282,000 175,333
================ ===============
</TABLE>
At December 31, 1998, options outstanding and options exercisable have a
weighted-average exercise price per share of $3.82 and $4.29, respectively.
NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS
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.
F-16
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS (CONTINUED)
Sales by major product line are as follows:
<TABLE>
<CAPTION>
(in thousands)
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Proprietary $10,780 $12,054 $13,637
Contract 2,137 4,495 9,744
Foreign 2,671 3,276 4,092
Other 779 594 510
------------------------------------------
$16,367 $20,419 $27,983
==========================================
</TABLE>
Trade accounts receivable from foreign distributors were approximately $439,000
and $179,000 at December 31, 1998 and 1997.
During 1998, 1997, and 1996, respectively, approximately 61, 53, and 70 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 7. INCOME TAXES
The components of the income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $ -- $ -- $ --
State -- -- --
Benefit of NOL carryback (28,000) -- --
Deferred -- 293,000 --
-----------------------------------------------------
$ (28,000) $ 293,000 $ --
=====================================================
</TABLE>
F-17
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (CONTINUED)
Income tax expense (benefit) differs from the federal statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at federal statutory rate $ (493,000) $ (1,406,000) $ (652,000)
State income tax (benefit), net of federal tax
effect (62,000) (169,000) (56,000)
Nondeductible expenses 5,000 5,000 7,000
Effect of income taxes at lower rates 14,000 40,000 18,000
Effect of net operating loss with no current
benefit 525,000 1,542,000 677,000
Change in valuation allowance for deferred
tax assets -- 293,000 --
Other (17,000) (12,000) 6,000
----------------------------------------------------
$ (28,000) $ 293,000 $ --
====================================================
</TABLE>
Net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------
1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 3,231,000 $ 2,562,000
Vacation accrual 98,000 122,000
Inventory valuation reserve 107,000 182,000
Allowance for doubtful trade and other accounts receivable 139,000 116,000
Other 10,000 45,000
Deferred tax liabilities--other (134,000) (101,000)
----------------------------------
3,451,000 2,926,000
Less valuation allowance (3,451,000) (2,926,000)
----------------------------------
Net deferred tax assets $ -- $ --
==================================
</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 1998 and 1997 was primarily the
result of the net operating loss (NOL) carryforward which was generated during
the year. The 1997 increase was also affected as a result of a change in the
conclusion regarding the need for a valuation allowance relative to $293,000 of
deferred tax assets. The remaining NOL carryforwards expire as follows:
$1,300,000 in 2007, $1,500,000 in 2011, $3,900,000 in 2012, and $1,600,000 in
2018.
F-18
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. Commitments and Contingencies
PENSION PLANS: The Company belongs to two multi-employer pension plans (Pension
Plans) covering certain employees. Total pension plan expense for 1998, 1997,
and 1996 was approximately $62,000, $64,000, and $42,000, 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
1998, 1997, and 1996, the Company made contributions of approximately $47,000,
$35,000, and $19,000, respectively, to this plan.
LABOR RELATIONS: The collective bargaining agreements between the Company and
five of its union bargaining units expire on March 31, 1999. Negotiations with
the bargaining units are ongoing and management believes that new contracts will
be negotiated. However, there is a possibility that any or all of these units
could strike sometime after March 31, 1999. Such an action could have a material
adverse effect on the Company's operations and its ability to execute its 1999
business plan (see Note 2).
F-19
<PAGE>
SCHEDULE II
MINNESOTA BREWING COMPANY
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Changed 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, 1998 $ 306,000 $ 90,000 $ 146,000 (1) $ 250,000
Year ended December 31, 1997 485,000 492,000 671,000 (4) 306,000
Year ended December 31, 1996 34,000 601,000 150,000 (3) 485,000
Accumulated amortization of intangibles:
Year ended December 31, 1998 388,000 156,000 -- 544,000
Year ended December 31, 1997 259,000 129,000 -- 388,000
Year ended December 31, 1996 163,000 96,000 -- 259,000
Deferred tax asset valuation allowance:
Year ended December 31, 1998 2,926,000 525,000 -- 3,451,000
Year ended December 31, 1997 1,091,000 1,835,000 -- 2,926,000
Year ended December 31, 1996 414,000 677,000 -- 1,091,000
Inventory valuation allowance:
Year ended December 31, 1998 455,000 53,000 227,000 (1) 281,000
Year ended December 31, 1997 233,000 672,000 450,000 (5) 455,000
Year ended December 31, 1996 160,000 233,000 (160,000)(2) 553,000
</TABLE>
(1) Uncollectible accounts and inventories written off, net of recoveries.
(2) Represents a transfer from inventory reserve to allowance for doubtful
accounts.
(3) Represents $310,000 of uncollectible accounts written off, net of
recoveries, less $160,000 of inventory reserve transferred to allowance for
doubtful accounts.
(4) Represents $575,000 of uncollectible accounts written off, net of
recoveries, plus $96,000 of allowance for doubtful accounts transferred to
inventory reserve.
(5) Represents $546,000 of inventory written off, less a transfer from
allowance for doubtful accounts to inventory reserve.
F-20
EXHIBIT 3.3
CERTIFICATE
OF
RIGHTS AND PREFERENCES
OF
CLASS A CONVERTIBLE PREFERRED STOCK
OF
MINNESOTA BREWING COMPANY
The undersigned, being the President of Minnesota Brewing Company, a
Minnesota corporation (the "Corporation"), hereby certifies that (a) the
following resolution was duly adopted on March 29, 1999 by the Board of
Directors of the Corporation, acting pursuant to the provisions of Section
302A.401, subdivision 3 of the Minnesota Business Corporation Act for the
purposes of establishing a separate series of the Corporation's authorized
preferred stock and fixing the relative rights and preferences of such series of
preferred stock, and (b) such resolution has not been subsequently modified or
rescinded:
RESOLVED, that 700,000 shares of this Corporation's undesignated stock
shall be designated as "Class A Convertible Preferred Stock" and the rights,
preferences, privileges and restrictions granted to or imposed upon the Class A
Convertible Preferred Stock are as follows:
1. DIVIDENDS.
(a) The holders of the Class A Convertible Preferred Stock shall be
entitled to receive cumulative dividends of 9% per annum payable quarterly,
beginning on January 1, 1999. The Company shall pay cash dividends within thirty
days of the end of each quarter. If, for any reason, the Corporation is unable
to pay any dividend when due, the dividend will accrue until paid in full.
(b) In the event the Corporation shall declare a distribution (other
than any distribution described in Section 2) payable in securities of other
persons, evidences of indebtedness issued by the Corporation or other persons,
assets (excluding cash dividends) or options or rights to purchase any such
securities or evidences of indebtedness, then, in each such case the holders of
the Class A Convertible Preferred Stock shall be entitled to a proportionate
share of any such distribution as though the holders of the Class A Convertible
Preferred Stock were the holders of the number of shares of Common Stock of the
Corporation into which their respective shares of Class A Convertible Preferred
Stock are convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
<PAGE>
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Class A
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of $2.50 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares), plus all declared but
unpaid dividends on such share for each share of Class A Convertible Preferred
Stock then held by them. If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Class A Convertible Preferred
Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Class A Convertible Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to receive.
(b) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and subject to the payment in
full of the liquidation preferences with respect to the Class A Convertible
Preferred Stock as provided in subparagraph (a) of this Section 2 and the
Corporation's Articles of Incorporation, the holders of the Common Stock shall
be entitled to receive an amount per share equal to their paid-in capital for
such shares divided by the number of shares of Common Stock outstanding; and
thereafter the holders of Common Stock shall be entitled to receive the entire
remaining assets and funds of the Corporation legally available for
distribution, such assets and funds to be distributed among such holders in
proportion to the shares then held by them on an as-if and fully converted basis
provided, however, that the holders of the Class A Convertible Preferred Stock
shall not have the right to participate in any such distribution under this
subparagraph (b) of this Section 2 unless they first waive, in writing, the
right to receive the amounts that would be due them as their liquidation
preference under this subparagraph (a) of this Section 2.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) in which the
shareholders of the Corporation immediately prior to the transaction described
above hold less than fifty percent (50%) of the combined entity, or (ii) a sale
of all or substantially all of the assets of the Corporation, shall be treated
as a liquidation, dissolution or winding up of the Corporation and shall entitle
the holders of Class A Convertible Preferred Stock and Common Stock to receive
at the closing in cash, securities or other property (valued as provided in
Section 2(d) below) the amounts and in the order of priority as specified in
Sections 2(a) and 2(b) above.
(d) Whenever the distribution provided for in this Section 2 shall be
payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities
2
<PAGE>
or other property as determined in good faith by the Board of Directors.
3. VOTING RIGHTS.
In addition to the rights provided herein, each holder of shares of the
Class A Convertible Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such shares of Class A
Convertible Preferred Stock could be converted and shall have voting rights and
powers equal to the voting rights and powers of the Common Stock and shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Class A Convertible Preferred Stock held by each
holder could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward).
4. CONVERSION.
The holders of the Class A Convertible Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Class A Convertible Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after
April 1, 1999, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as are determined by dividing $2.50 by $2.50 (the "Conversion Price"). The Class
A Conversion Price is herein sometimes referred to as the "Conversion Price."
(b) MECHANICS OF CONVERSION. Before any holder of Class A Convertible
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such office that
he elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class A Convertible Preferred Stock, a
certificate or certificates for the number of shares of Common Stock to which he
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of surrender of the
shares of Class A Convertible Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(c) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this Corporation
at any time or from time to time
3
<PAGE>
after the original issuance date of the Class A Preferred Stock shall declare or
pay, without consideration, any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock for no consideration, or shall
effect a subdivision of the outstanding shares of Common Stock into a greater
number of shares of Common Stock (by stock split, reclassification or otherwise
than by payment of a dividend in Common Stock or in any right to acquire Common
Stock), or in the event the outstanding shares of Common Stock shall be combined
or consolidated, by reclassification or otherwise, into a lesser number of
shares of Common Stock, then the Conversion Price for the Class A Convertible
Preferred Stock in effect immediately prior to such event shall, concurrently
with the effectiveness of such event, be proportionately decreased or increased,
as appropriate. In the event that this Corporation shall declare or pay, without
consideration, any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(d) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common
Stock issuable upon conversion of the Class A Convertible Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock or other securities or assets, whether by capital
reorganization, reclassification, consolidation or merger of the Corporation
with another corporation, or the sale of all or substantially all its assets to
another corporation, or otherwise (other than a subdivision or combination of
shares provided for in Section 4(c) above), then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of Class A Convertible
Preferred Stock shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable upon the
conversion of Class A Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of Common Stock equal to the number of shares
of such Common Stock immediately theretofore receivable upon the conversion of
Class A Convertible Preferred Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, plus all dividends unpaid and
accumulated or accrued thereon to the date of such reorganization,
reclassification, consolidation, merger or sale, and in any such case
appropriate provision shall be made with respect to the rights and interests of
the holders of Class A Convertible Preferred Stock to the end that the
provisions hereof (including without limitation provisions for adjustment of the
Conversion Price and of the number of shares receivable upon the conversion of
Class A Convertible Preferred Stock) shall thereafter be applicable, as nearly
as may be in relation to any shares of stock, securities or assets thereafter
receivable upon the conversion of Class A Convertible Preferred Stock. The
Corporation shall not effect any such consolidation, merger or sale, unless
prior to the consummation thereof the successor corporation (if other than the
Corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume by written instrument executed and mailed to
the holders of Class A Convertible Preferred Stock, at the last addresses of
such holders appearing on the books of the Corporation, the obligation to
deliver to such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions,
4
<PAGE>
such holder may be entitled to receive.
(e) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Class A Convertible Preferred Stock a certificate executed by the
Corporation's President or Chief Financial Officer setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Class A Convertible Preferred Stock, furnish or cause to
be furnished to such holder of Class A Convertible Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustment and readjustments, (ii) the Conversion Price for such series of Class
A Convertible Preferred Stock at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Class A Convertible Preferred
Stock.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Class A Convertible Preferred Stock, such number of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Class A Convertible Preferred Stock;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Class A Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose, including, without limitation, engaging in
best efforts to obtain the requisite shareholder approval of any necessary
amendment to the Corporation's Articles of Incorporation.
(g) FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Class A Convertible Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Class A Convertible Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional shares. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash equal to
the fair market value of such fraction on the date of conversion.
(h) NOTICES. Any notice required by the provisions of this Section 4 to
be given to the holders of shares of Class A Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5
<PAGE>
5. REDEMPTION.
(a) OPTIONAL REDEMPTION PRIOR TO APRIL 1, 2001. Commencing on April 1,
1999, on not less than thirty (30) days prior written notice, the Corporation
shall have the option to redeem the Class A Convertible Preferred Stock at a
redemption price of $2.50 per share, if the last sale price for the Company's
Common Stock equals or exceeds 160% of the Conversion Price for ten (10)
consecutive trading days within the ten calendar days of the date of call.
(b) OPTIONAL REDEMPTION ON OR AFTER APRIL 1, 2001. The Corporation
shall also have the option to redeem the Class A Convertible Preferred in whole
or in part at a price of $2.50 on or after April 1, 2001. Any redemption
pursuant to this Section 5 (b) shall be pro rata among all remaining preferred
stockholders based upon their holdings on the date of call.
(c) MECHANICS OF REDEMPTION. If the Corporation desires to exercise its
right to redeem the Class A Convertible Preferred Stock, it shall mail a notice
of redemption to each of the holders of the Class A Convertible Preferred Stock,
first class, postage prepaid, not later than the thirtieth day before the date
fixed for redemption, at their last address as shall appear on the records of
the Corporation. Any notice mailed in this manner shall be conclusively presumed
to have been duly given whether or not the holder receives such notice.
(d) NOTICE OF REDEMPTION. The notice of redemption shall specify (i)
the redemption price, (ii) the date fixed for redemption (the "Redemption
Date"), (iii) the place where the Class A Convertible Preferred Certificates
shall be delivered and the redemption price paid, and (iv) the right to convert
the shares of the Class A Convertible Preferred Stock into the Corporation's
Common Stock shall terminate at 5:00 pm (Minneapolis time) on the business day
immediately preceding the date fixed for redemption. No failure to mail such
notice nor any defect therein or in the mailing shall affect the validity of the
proceedings for such redemption except as to a holder (a) to whom notice was not
mailed or (b) whose notice was defective. An affidavit of the Secretary of the
Corporation that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(e) TERMINATION OF CONVERSION RIGHTS. Any right to convert any share of
Class A Convertible Preferred Stock into Common Stock of the Corporation that
has been called for redemption shall terminate at 5:00 p.m. (Minneapolis time)
on the business day immediately preceding the Redemption Date. On and after the
Redemption Date, holders of the redeemed Class A Convertible Preferred Stock
shall have no further rights except as to receive, upon surrender of the
redeemed Class A Convertible Preferred Stock, the Redemption Price.
(f) PAYMENT OF REDEMPTION PRICE. From and after the date specified for
redemption, the Corporation shall, at the place specified in the notice of
redemption, upon presentation and surrender to the Corporation by or on behalf
of the holder of any shares of Class A Convertible Preferred Stock to
6
<PAGE>
be redeemed, deliver, or cause to be delivered to, or upon the written order of
such holder a sum in cash equal to the Redemption Price for each such share of
Class A Convertible Preferred Stock. From and after the date fixed for such
redemption and upon the deposit or setting aside by the Corporation of a sum
sufficient to redeem all of the shares of Class A Convertible Preferred Stock
called for redemption, such shares of Class A Convertible Preferred Stock shall
expire and become void and all rights hereunder, except the right to receive the
Redemption Price, shall cease.
6. AMENDMENT
This Certificate of Rights and Preferences may not be amended without
the consent of the holders of a majority of Class A Convertible Preferred Stock.
MINNESOTA BREWING COMPANY
By:
------------------------------------
Its: President
7
EXHIBIT 10.1
LEASE
THIS LEASE (the "Lease") is made as of March 29, 1999, by and between
GOPHER STATE ETHANOL, LLC, a Delaware limited liability company, having its
principal office at 882 West Seventh Street, St. Paul, Minnesota 55102
("Landlord"), and MINNESOTA BREWING COMPANY, a Minnesota corporation, having its
principal office at 882 West Seventh Street, St. Paul, Minnesota 55106
("Tenant").
1. Lease of Premises:
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord,
upon and subject to the conditions and for the term hereinafter specified, the
following:
(a) The real estate situated in Ramsey County, Minnesota, legally
described and depicted on Exhibit A hereto, and the buildings and site
improvements situated thereon (collectively, the "Leased Premises"), which may
be amended to conform to the final renovations and construction of Landlord's
adjoining ethanol production facilities and may include as Leased Premises a
site for the production of carbon dioxide and will provide reasonable ingress
and egress to the Brew House; and in no event will the Leased Premises include
any real property integral to the ethanol production operation; and
(b) The Equipment described on Exhibit B (the "Equipment"). Tenant
agrees that it has selected each item of the Equipment based on its own judgment
and disclaims any reliance upon any statements or representations made by
Landlord. LANDLORD MAKES NO EXPRESS OR IMPLIED WARRANTY WITH RESPECT TO THE
EQUIPMENT AND SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE AND ANY LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT
OF THE USE OR INABILITY TO USE THE EQUIPMENT. Tenant agrees to pay the rent
required under this Lease without regard to the condition of the Equipment.
Unless otherwise stated, the Tenant will cause the Equipment to be located on
the Leased Premises.
2. Title and Condition:
The Leased Premises and Equipment are leased subject to all title
matters of public record and to all applicable laws, regulations, restrictions,
rules and ordinances. Tenant accepts the Leased Premises and Equipment in their
present condition AS IS and without warranty or representation of any kind with
respect thereto.
3. Quiet Enjoyment:
<PAGE>
If and so long as Tenant shall pay the Rent and additional rent reserved
under this Lease whenever the same shall become due, and keep all of the
covenants and agreements required by it to be kept during this Lease, and shall
perform all of its other obligations hereunder, Tenant shall have, hold and
enjoy peaceful and quiet occupation and enjoyment of the Leased Premises and
Equipment.
4. Use of Leased Premises and Equipment:
(a) Subject to the terms of this Lease, Tenant shall use and occupy the
Leased Premises and Equipment for the purpose of operating a brewery and
purposes reasonably related thereto and any other purpose not inconsistent with
the operation of a brewery. Tenant shall also have the right to operate other
businesses, including the production of energy or the production of carbon
dioxide or any other business that does not interfere with the production of
ethanol.
(b) Tenant shall not use or occupy the Leased Premises or Equipment, or
permit the Leased Premises or Equipment to be used or occupied contrary to any
statute, rule, order, ordinance, requirement or regulation applicable thereto.
(c) Tenant shall comply with all laws and regulations relating to the
Equipment and its use and shall promptly pay when due all sales, use, property,
excise and other taxes and all license and registration fees now or hereafter
imposed by any governmental body or agency upon the Equipment or its use or the
rentals hereunder. Upon request by Landlord, Tenant shall prepare and file all
tax returns relating to taxes for which Tenant is responsible under this Lease
which Tenant is permitted to file under the laws of the applicable taxing
jurisdiction.
5. Term; Extension; Rights of Termination:
(a) This Lease shall be for a term of ten (10) years commencing on the
date hereof (the "Commencement Date"). Whenever used herein the word "Term"
shall mean said ten (10) year term and any extended term.
(b) Tenant shall have the option to extend this Lease on the terms and
conditions contained herein for three (3) consecutive additional terms of ten
(10) years each (each referred to as the "Renewal Term"). If Tenant desires to
exercise such option, Tenant shall give written notice to Landlord of Tenant's
exercise of such option to extend this Lease at any time subsequent to January
1, 2009, but no later than 180 days prior to the expiration of the initial
ten-year term of this Lease. The Lease for the extended term shall be on the
same terms, covenants and conditions contained in this Lease except the Rent
shall be determined as provided in paragraph 6(c) hereof, and except that there
shall be no further option to extend the term.
6. Rent:
(a) Tenant covenants to pay to Landlord, at Landlord's address set forth
above or at such place or places or to such person or persons as Landlord from
time to time may designate in writing, the following rent (the "Rent"):
<PAGE>
(1) The Annual Base Rent for the Leased Premises the sum of
Three Hundred Thousand and No/100 Dollars ($300,000.00)
payable in advance on or before the first day of each
month in equal monthly installments of Twenty-five
Thousand and No/100 Dollars ($25,000.00). Annual Base
Rent for any period during the term which is less than a
month shall be a pro-rata portion of the monthly
installment; and
(2) Any rent, tax payment or other amount due under this
Lease which is not paid when due, shall bear interest
equal to the rate of interest from time to time
published or announced by Norwest Bank Minnesota, N.A.
as its "prime rate," plus 400 basis points, from the due
date thereof until paid in full.
(b) Tenant shall also pay and discharge during the term hereof, when the
same shall become due, as additional rent, subject to the provisions of
paragraph 20 hereof, all other amounts, liabilities and obligations which Tenant
assumes or agrees to pay or discharge pursuant to this Lease.
(c) If Tenant exercises its option to extend this Lease, the Annual Base
Rent shall be adjusted to the amount determined by multiplying the Annual Base
Rent for the immediately preceding Term by the percentage increase, if any, in
the Consumer Price Index for the period from the Commencement Date to the first
day of such Renewal Term, as the case may be. The Consumer Price Index is the
CPI for Urban Wage Earners and Clerical Workers, All-Items, Minneapolis-St.
Paul, Minnesota (1982-84 = 150), as maintained by the U.S. Department of Labor.
If said index is not maintained as of the first day of the Renewal Term, a
similar index shall be used.
(d) So long as the Lease is in effect, Tenant shall provide Landlord
with all Landlord's steam and electricity requirements at Tenant's cost. If
Tenant enters the energy business in the future and produces steam or
electricity, Tenant and Landlord will negotiate in good faith with respect to
Landlord's purchase of steam and electricity.
7. Option to Purchase Leased Premises and Equipment:
<PAGE>
(a) Tenant shall have the option to purchase the portion of the Leased
Premises depicted on Exhibit C-1 and all of the Equipment from Landlord. So long
as exercising the option does not violate the terms of the Landlord's mortgage
and other financing commitments, the option may be exercised at any time during
the Lease Term while this Lease is in effect and there is no default by the
Tenant hereunder by Tenant's giving Landlord at least thirty (30) days prior
written notice of its exercise of such option. Tenant's purchase price for the
Equipment and the Leased Premises shall be the fair market value of the Leased
Premises and Equipment as determined at the time the option is exercised, which
shall be determined by a licensed qualified appraiser(s) selected by the
parties' mutual agreement. If Tenant elects to exercise the option, the Tenant
shall continue to lease the portion of the Leased Premises not included in the
option, which is depicted on Exhibit C-2. Notwithstanding the foregoing, the
option shall not include any real property or Equipment that is integral to the
Landlord's ethanol production operation.
(b) Within a reasonable time of receiving Tenant's written notice of its
exercise of the purchase option, Landlord shall deliver to Tenant a commitment
(the "Commitment") for an ALTA (1992) Owner's Policy of Title Insurance insuring
title to the Leased Premises issued by a title company selected by Landlord
("Title"). The Commitment will commit Title to insure title to the Tenant's
interest in the Leased Premises subject only to the so-called standard
exceptions to coverage.
(c) Within thirty (30) days of receiving the Commitment, a closing shall
be held and Landlord shall execute and/or deliver to Tenant the following:
(1) Warranty Deed. A Warranty Deed conveying Landlord's
interest in the Leased Premises to Tenant, subject to
all encumbrances, reservations, and rights of record.
(2) Bill of Sale. A Bill of Sale conveying Landlord's
interest in the Equipment to Tenant, subject to all
encumbrances, reservations, and rights of record.
(3) Other Documents. All other documents reasonably
determined by the parties to be necessary to transfer
the Landlord's interest in the Leased Premises to Tenant
in the manner specified herein.
(d) Tenant acknowledges for Tenant, and its successors and assigns that
Tenant has been given a reasonable opportunity to inspect and investigate the
Leased Premises and Equipment, either independently or through agents of
Tenant's choosing and that Tenant has occupied the Leased Premises and used the
Equipment, and that in purchasing the Leased Premises and Equipment Tenant is
not relying upon any representations of Landlord as to the fitness for any
particular use, or the condition or safety of the Leased Premises or Equipment
including, but not limited to, its electrical, mechanical and structural
components. Tenant acknowledges and agrees that Landlord has not made, does not
make and specifically negates and disclaims any representations, warranties,
promises, covenants, agreements of any kind whether expressed or implied, oral
or written, past, present or future relating to or arising from (a) the value,
nature, quality or condition of the Leased Premises or Equipment including,
<PAGE>
without limitation, the environmental condition of the Leased Premises; (b) the
income to be derived from the Leased Premises or Equipment; (c) the suitability
of the Leased Premises or Equipment for any and all activities and uses to which
the Tenant may want the Leased Premises or Equipment; (d) the existence of any
defective materials, equipment or component or part of the Leased Premises or
Equipment and the existence of any environmental hazards or conditions of
hazardous substances or materials; and (e) the compliance of or by the Leased
Premises or Equipment with any laws, rules, ordinances or regulations of any
applicable governmental authority. To the maximum extent permitted by law, the
sale of the Leased Premises and Equipment is provided for herein is made on a
"as-is", "where-is" condition and basis with all faults.
8. Net Lease; Non-Terminability:
(a) This Lease is a net lease, and the Rent, additional rent and all
other sums payable hereunder to or on behalf of Landlord, shall be paid without
notice or demand, and without setoff, counterclaim, abatement, suspension,
deduction or defense.
(b) Except as otherwise expressly provided in paragraphs 3, 15 and 17
hereof, this Lease shall not terminate, nor shall Tenant have any right to
terminate this Lease or be entitled to the abatement of any rent or any
reduction thereof, nor shall the obligations hereunder of Tenant be otherwise
affected, by reason of any damage to or the destruction of all or any part of
the Leased Premises or Equipment from whatever cause, the taking of the Leased
Premises or Equipment or any portion thereof by condemnation or otherwise, or
the prohibition, limitation or restriction of Tenant's use of the Leased
Premises or Equipment.
9. Taxes and Other Charges:
(a) Tenant agrees, subject to paragraphs 9(c) and 20 hereof, to pay to
Landlord, as additional rent, at least fifteen (15) days before the same shall
become due and payable without penalty, all real estate taxes, personal property
taxes, business and occupation taxes, occupational license taxes, installments
of special assessments and all other governmental taxes, impositions and charges
of every kind and nature.
(b) Tenant will pay or cause to be paid when due all charges for gas,
water, sewer, electricity, light, heat, power, telephone, and other utilities
and services used, rendered or supplied to, upon or in connection with the
Leased Premises or Equipment.
(c) It is expressly understood and agreed that Tenant shall not be
required to pay, or reimburse Landlord for any local, state or federal capital
levy, franchise tax, revenue tax, income tax or profits tax of Landlord or any
tax or impost charged or levied upon or with respect to the Rent.
(d) If Tenant is in default of the payment of any of the governmental,
utility or other charges described in this paragraph 9 for five (5) calendar
days after such charges shall have become payable as provided in this Lease,
Landlord may pay the same, and the amount so paid,
<PAGE>
with interest thereon at the Default Rate, shall be deemed additional rent
payable by Tenant to Landlord under the provisions of this Lease, and shall on
demand be forthwith paid by Tenant to Landlord.
10. Compliance with Law:
Tenant shall at its sole cost and expense comply with all federal,
state, county, municipal and other statutes, charters, laws, rules, orders,
regulations and ordinances affecting the Leased Premises or Equipment and the
occupancy, operation or use thereof.
11. Liens:
Subject to paragraph 20 hereof, Tenant will not create or permit to be
created or to remain, and will discharge, any lien, encumbrance or charge (other
than a lien, encumbrance or charge created by Landlord) upon the Leased Premises
or Equipment, or any part thereof or upon Tenant's leasehold interest therein.
12. Indemnification:
To the fullest extent permitted by law, Tenant agrees to pay, and to
protect, indemnify and save harmless Landlord from and against, any and all
liabilities, damages, costs, expenses (including any and all attorneys fees and
expenses of Tenant and any and all attorneys' fees and expenses of Landlord),
causes of action, suits, claims, demands or judgments of any nature whatsoever
arising from (i) any work or thing done during the term of this Lease in, on or
about the Leased Premises or Equipment, or any part thereof, (ii) injury to, or
the death of, persons or damage to Leased Premises or Equipment during the term
of this Lease on the Equipment or Leased Premises or upon adjoining sidewalks
streets, alleys, curbs, vaults, spaces or ways, or in any manner growing out of
or connected with the use, non-use, conditions, possession, operation,
maintenance, management or occupation of the Equipment or Leased Premises or
resulting from the condition thereof or of adjoining sidewalks, streets, alleys,
curbs, vaults, spaces or ways, (iii) any negligence on the part of Tenant or any
of its agents, contractors, servants, employees, licensees or invitees, and (iv)
violation of any agreement or condition of this Lease and of conditions,
agreements, restrictions, statutes, charters, laws, rule, ordinances or
regulations affecting the Equipment or Leased Premises or the ownership,
occupancy or use thereof.
13. Maintenance and Repair:
(a) Tenant will keep and maintain the Leased Premises and Equipment,
including any altered, rebuilt, additional or substituted improvements, in good
repair and appearance during the term of this Lease, ordinary wear and tear
excepted. All repairs made by Tenant shall be at least equal to the original
work in class and quality. Repairs shall include structural repairs, and
maintenance of parking, plumbing and HVAC.
<PAGE>
(b) Tenant shall put, keep and maintain the Equipment and all portions
of the Leased Premises and the sidewalks, curbs and passageways adjoining the
same in a clean and orderly condition, free of dirt, rubbish, snow, ice and
unlawful obstructions.
(c) Tenant hereby assumes and shall bear the entire risk of loss and
damage to the Equipment from any and every cause whatsoever except normal wear
and tear resulting from proper use during the period from and during the
delivery of the Equipment to Tenant until it is returned to Landlord. In the
event any item of Equipment shall become lost, stolen, destroyed, damaged beyond
repair or rendered permanently unfit for any reason or, in the event of
condemnation or seizure Tenant shall promptly pay Landlord the sum of the
following:
(1) all rent and other amounts payable by Tenant hereunder which
are due but unpaid at the time of computation;
(2) the present value of all unpaid rent for the balance of the
initial Lease term at the time of the computation computed using a
discount rate of 8% per annum and assuming that the production during
the remainder of the term will be at the same level as the production
has been in the six months prior to the time the Equipment becomes lost,
stolen, destroyed, damaged or rendered permanently unfit;
(3) the anticipated fair market value of such items of Equipment
at the expiration of the Lease term which Landlord and Tenant agree
shall be conclusively deemed for this purpose to be equal to 100% of the
original cost of such Equipment;
(4) any tax loss suffered by Landlord relating to such
Equipment;
(5) any set up costs relating to such Equipment that Landlord
has not yet amortized;
(6) any expenses incurred by Landlord in enforcing its rights
under this Agreement; and
(7) interest on any past due amounts as provided elsewhere in
this Agreement.
Any insurance proceeds received by Landlord on insurance
purchased by Tenant shall be credited to Tenant's obligation under this
paragraph and Tenant shall be entitled to any surplus.
(d) In the event any of the Equipment is damaged or destroyed and Tenant
desires to replace such Equipment, the Landlord, upon the written request from
Tenant, shall purchase such replacement equipment and lease such equipment to
Tenant, amortizing 100 percent of the cost of such equipment on a straight-line
basis over the taxable depreciable life of such equipment at the applicable
Treasury rate plus 200 basis points. At the expiration of such period, the
Landlord will continue to own the replacement equipment.
<PAGE>
(e) If Tenant fails to comply with the provisions of this paragraph 13,
Landlord may give Tenant written notice of such failure to comply, specifying
the maintenance or repairs to be made by Tenant. If the maintenance or repairs
are not completed by Tenant within thirty (30) days after said notice, Landlord
may have the work done at Tenant's expense, and the cost thereof shall become
additional rent due hereunder payable by Tenant to Landlord upon written demand
from Landlord.
(f) In addition to the foregoing requirements, Tenant shall comply with
all applicable environmental laws, rules and regulations.
14. Alterations and Additions:
Tenant may, at any time and from time to time during the term of this
Lease and at its sole cost and expense, make additions to, alterations of,
substitutions and replacements to the Leased Premises and Equipment. If Tenant
estimates that any such addition, alteration, substitution or replacement will
cost more than $10,000.00, Tenant shall give to Landlord notice of its intention
to undertake the same and shall obtain Landlord's prior written approval of the
plans and specifications. Title to all alterations, additions, installments,
changes and improvements made by Tenant, except trade fixtures, shall become the
property of Landlord at the termination of this Lease. Tenant shall discharge,
subject to paragraph 20 hereof, any and all liens filed against the Leased
Premises or Equipment, and any improvements thereon arising out of such
additions, alterations, substitutions, replacements or removals, and upon the
request of Landlord shall deposit with Landlord a surety bond or other security
satisfactory to Landlord to assure the completion of any such additions,
alterations, substitutions, replacements or removals.
<PAGE>
15. Condemnation:
If the whole of the Leased Premises is taken under power of eminent
domain or is sold to any entity having the power of eminent domain under threat
of condemnation, this Lease shall terminate on the day on which the condemnor or
buyer takes possession thereof. In the event of such a taking or sale of only a
part of the Leased Premises which shall substantially interfere with Tenant's
use or occupancy thereof and shall reduce the usable square footage of the land
or building comprising the Leased Premises by twenty-five percent (25%) or more,
Tenant may terminate this Lease by giving Landlord written notice thereof not
more than ten (10) days after the condemnor or buyer takes possession of the
part taken or sold. If a partial taking or sale shall not substantially
interfere with Tenant's use or occupancy of the Leased Premises and shall not
reduce the usable square footage of the land or building comprising the Leased
Premises by twenty-five percent (25%) or more, or if Tenant does not terminate
the Lease as hereinbefore provided, then on the day on which the condemnor or
buyer takes possession of the part taken or sold, the Rent thereafter accruing
shall be equitably reduced to account for that portion of the Leased Premises so
taken or sold, and Landlord shall to the extent practicable restore the
remaining Leased Premises to their condition prior to such partial taking or
sale, anything elsewhere in this Lease regarding repair or replacement to the
contrary notwithstanding. Such abatement in Rent shall be based on the before
and after values of the Leased Premises as determined by, or as agreed to in,
such condemnation proceedings, such that a percentage reduction in value shall
result in an equal percentage reduction in Rent. Tenant shall not be entitled to
any part of the award made or sales price received for such taking or sale of
all or any part of the Leased Premises and will assign, and does hereby assign,
any and all award or sale price received for such taking or sale and will
execute any assignments or other documents necessary to affect the transfer of
such award or sales price to Landlord; provided, however, Tenant shall be
entitled to receive such relocation expenses as Tenant may be entitled to
receive under applicable Minnesota statutes.
16. Insurance:
Landlord shall carry comprehensive public liability insurance and fire
and extended coverage on the Leased Premises and Equipment in amounts Landlord
deems reasonably necessary and name Tenant as an additional insured. Tenant
shall pay its share of the cost of such insurance policies within ten (10) days
of receiving the premium receipts with respect to such insurance from Landlord.
Every insurance policy shall contain to the extent obtainable, an agreement by
the insurer that it will not cancel such policy except upon thirty (30) days
prior written notice to all parties and to any mortgagee and that any loss
otherwise payable thereunder shall be payable notwithstanding any act of
negligence of Landlord or Tenant which might, absent such agreement, result in a
forfeiture of all or part of such insurance payment.
<PAGE>
17. Fire and Casualty Loss:
(a) If the Leased Premises or Equipment, or any part thereof are damaged
or destroyed by fire or any casualty covered by the insurance required under the
provisions of paragraph 16 hereof, all insurance proceeds from said insurance
shall be the property of Landlord (except insurance proceeds for Tenant's
fixtures and personal property which proceeds shall belong to Tenant), and,
subject to subparagraphs (b) and (c) of this paragraph 17 and the terms of any
mortgage on the Leased Premises or Equipment, Landlord shall repair the Leased
Premises or Equipment as soon as reasonably possible and this Lease shall
continue in full force and effect. Landlord shall have no obligation to repair
or replace any of Tenant's fixtures, personal property or leasehold
improvements. Landlord shall in good faith proceed with and consummate the
settlement of the insurance claim. Pending repair or restoration, Rent shall
abate following such damage or destruction in proportion to the interference
with Tenant's use of the Leased Premises or Equipment. If the Leased Premises or
Equipment shall be so slightly injured that no part thereof is rendered unfit
for occupancy, then Landlord shall repair the same with reasonable promptness,
and in that case Rent shall not be abated during such repair period.
(b) Notwithstanding anything to the contrary herein, if the damage or
destruction described in this paragraph 17 occurs within six (6) months of the
end of the term of this Lease and more than twenty-five percent (25%) of the
building improvements on the Leased Premises or Equipment are damaged or
destroyed, this Lease shall automatically terminate. If more than twenty-five
percent (25%) of the building improvements on the Leased Premises or Equipment
are damaged or destroyed prior to the period six (6) months before the end of
the term of this Lease, Landlord shall have the option to terminate this Lease
or repair the building in accordance with subparagraph (a) of this paragraph 17,
which option shall be exercised by written notice to Tenant within forty-five
(45) days after the damage if Landlord elects to terminate this Lease. In the
event of termination under this paragraph 17, all advance Rent paid to Landlord,
which has not accrued prior to termination, shall be refunded to Tenant.
(c) Subject to the foregoing provisions of this paragraph 17, including
those relating to rent abatement, if at any time during the term hereof the
Leased Premises or Equipment are damaged, and such damage was caused by a
casualty not covered under an insurance policy required to be maintained
pursuant to paragraph 16, Landlord may at Landlord's option either (i) repair
such damage as soon as reasonably possible at Landlord's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Tenant within thirty (30) days after the date of the occurrence of such
damage of Landlord's intention to cancel and terminate this Lease as of the date
of the occurrence of such damage. In the event Landlord elects to give such
notice of Landlord's intention to cancel and terminate this Lease, Tenant shall
have the right within twenty (20) days after the receipt of such notice to give
written notice to Landlord of Tenant's intention to repair such damage at
Tenant's expense, without reimbursement from Landlord, in which event this Lease
shall continue in full force and effect, and Tenant shall proceed to make such
repairs as soon as reasonably possible. If Tenant does not give such notice
within such twenty-day period this Lease shall be canceled and terminated as of
the date of the occurrence of such damage.
<PAGE>
(d) Notwithstanding any other provision in this Lease to the contrary,
Landlord and Tenant hereby release one another from any and all liability or
responsibility (to the other or anyone claiming through or under them by way of
subrogation or otherwise) for any loss or damage coverable by an "all risk"
policy of casualty insurance even if such loss or damage shall have been caused
by the fault or negligence of the other party, or anyone for whom such party may
be responsible. Tenant agrees immediately to give each insurance company which
has issued policies of fire and extended coverage insurance, written notice of
the terms of the mutual waiver as contained in this paragraph, and to have the
insurance policies properly endorsed, if necessary, to prevent the invalidation
of the insurance coverage by reason of the mutual waivers contained in this
paragraph.
18. Assignment and Subletting:
Tenant may not assign, transfer, mortgage or encumber this Lease or
sublet or rent or permit occupancy or use of the Leased Premises or Equipment,
or any part thereof by any third party (any of the foregoing being hereinafter
referred to as an "Assignment") without the prior written consent of the
Landlord which consent shall not be unreasonably withheld. Landlord hereby
consents to the continued subleasing of the basement of the Bottle House to the
third party.
19. Permitted Contests:
Tenant shall not be required to pay, discharge or remove any tax,
assessment, levy, fee or charge referred to in paragraph 9 of this Lease, or any
lien referred to in paragraph 11 or 14 of this Lease, so long as Tenant shall
contest in good faith at its own expense the amount or the validity thereof by
appropriate proceedings which shall operate to prevent the collection of, or
realization upon, the tax, assessment, levy, fee, charge or lien so contested
and the sale of the Leased Premises or any part thereof to satisfy the same, and
pending any such proceedings Landlord shall not have the right to pay, remove,
or cause to be discharged the tax, assessment, levy, fee, charge or lien thereby
being contested. Tenant shall give prompt written notice to Landlord of the
commencement of any contest referred to in this paragraph 19. In the event of
such contest Tenant shall furnish reasonable security as may be required by
Landlord to insure payment thereof and prevent any sale, foreclosure or
forfeiture of the Leased Premises by reason of such contest. Tenant further
agrees that such contest shall be prosecuted to a final conclusion diligently;
that it will pay, and save Landlord harmless against, any and all losses,
judgments, decrees and costs (including all attorneys' fees and expenses) in
connection therewith; and that it will, promptly after the final determination
of such contest, fully pay and discharge the amounts which shall be levied,
assessed, charged or imposed or be determined to be payable therein, together
with all penalties, fines, interest, cost and expenses resulting from such
contest.
<PAGE>
20. Events of Default:
(a) Any of the following occurrences or acts shall constitute an event
of default under this Lease (an "Event of Default"): (i) if Tenant, at any time
during the term of this Lease (and regardless of the pendency of any bankruptcy,
receivership, insolvency or other proceedings, at law, in equity, or before any
administrative tribunal, which have or might have the effect of preventing
Tenant from complying with the terms of this Lease), shall (A) fail to make
payment of any installment of Rent or additional rent when due, or (B) fail to
observe or Perform any of Tenant's other covenants, agreements or obligations
hereunder, and if any such non-monetary default shall not be cured within
fifteen (15) calendar days after Landlord shall have given to Tenant notice
specifying such default or defaults, or (ii) if Tenant shall file a petition in
bankruptcy or shall be adjudicated a bankrupt or insolvent or shall make an
assignment for the benefit of its creditors or shall admit in writing its
inability to pay its debts generally as they become due, or if a petition or
answer proposing the adjudication of Tenant as a bankrupt shall not be
discharged or denied within sixty (60) calendar days after the date of filing
thereof, or (iii) if a receiver, trustee or liquidator of Tenant or of all or
substantially all of the property of Tenant or of the Leased Premises or
Equipment or any material portion thereof shall be appointed in any proceeding
brought by Tenant, or if any such receiver, trustee or liquidator shall be
appointed in any proceeding brought against Tenant and if such receiver, trustee
or liquidator shall not be discharged within sixty (60) calendar days after such
appointment, or (iv) if the Leased Premises or Equipment shall have been
abandoned or left unoccupied for thirty (30) calendar days, or (v) Tenant shall
default in any other lease of, or agreement relating to, any part or all of the
Leased Premises or Equipment, to which lease or agreement Tenant is a party.
Notwithstanding the foregoing provisions of this paragraph, if any strike, war,
governmental regulation, act of God, or other cause beyond Tenant's reasonable
control (except for payments to be made by Tenant) delays the curing of any
Event of Default referred to in clause (b) of this paragraph 20(a), the fifteen
day period after notice of such default shall be extended by the length of such
delay, if Tenant gives Landlord written notice within said fifteen-day period of
the cause of the delay, such cause in fact exists, and Tenant commences the cure
and diligently prosecutes the same to completion as soon as reasonably possible.
(b) If any Event of Default shall have happened and be continuing,
Landlord shall have the right at its election then or at any time thereafter
while any such Event of Default shall continue, to give Tenant notice of
Landlord's intention to terminate the term of this Lease on a date specified in
such notice, and on the date specified in any such notice all right, title and
interest of Tenant thereunder shall thereupon expire as fully and completely as
if the date specified in such notice were the date specifically fixed herein for
the expiration of the term of this Lease, and Tenant shall then peaceably and
quietly quit the Leased Premises and Equipment and surrender the same to
Landlord, but Tenant shall remain liable as hereafter provided. In the event any
such notice is given, Landlord shall have the immediate right of reentry and
possession of the Leased Premises and Equipment and the right to remove all
persons and property therefrom. Should Landlord elect to reenter as herein
provided or should Landlord take possession pursuant to legal proceedings or
pursuant to any notice provided by law, Landlord may from time to time, but
shall not be obligated to, relet the Leased Premises or Equipment or any part
thereof for such term or terms and such rental or rentals, including rent
concessions or
<PAGE>
free rent, and upon such terms and conditions as Landlord may deem advisable,
with the right to make alterations in and repairs to the Leased Premises or
Equipment.
(c) If Landlord shall reenter and obtain possession of the Leased
Premises or Equipment by reason of or following an Event of Default, whether or
not this Lease shall have terminated, Landlord shall have the right, without
notice, to repair or alter the Leased Premises or Equipment in such manner as to
Landlord may deem necessary or advisable so as to put the Leased Premises or
Equipment in good order and to make the same rentable, and shall have the right,
at Landlord's option, to relet the Leased Premises or Equipment or any part
thereof, and Tenant agrees to pay to Landlord on demand all expenses incurred by
Landlord in obtaining possession, and in altering, repairing and putting the
Leased Premises or Equipment in good order and condition and in reletting the
same, including fees of attorneys, architects, and other experts, and also any
other legitimate expenses or commissions, and Tenant further agrees to pay to
Landlord upon the first day of each month in each year following such reentry
until the end of the term of this Lease the sums of money which would have been
payable by Tenant as Rent hereunder if Landlord had not reentered and resumed
possession of the Leased Premises or Equipment, deducting only the net amount of
rent, if any, which Landlord shall actually receive in the meantime from and by
any reletting of the Leased Premises or Equipment, and Tenant hereby agrees to
be and remain liable for all sums aforesaid, as well as for any deficiency
aforesaid, and Landlord shall have, from time to time, the right to begin and
maintain successive actions or other legal proceedings against Tenant for the
recovery of such deficiency or damages or for a sum equal to any installment or
installments of Rent or additional rent and any other sums payable hereunder,
and to recover the same upon the liability of Tenant herein provided, which
liability it is expressly covenanted shall survive any action to secure
possession of the Leased Premises or Equipment. Nothing herein contained shall
be deemed to require Landlord to wait to begin such action or other legal
proceedings until the date when this Lease would have expired by limitation had
there been no such default by Tenant. At Landlord's option at any time after
such termination or repossession, whether or not Landlord shall have collected
any current damages, Landlord shall be entitled to recover from Tenant, and
Tenant shall pay to Landlord on demand, as and for liquidated and agreed final
damages for Tenant's default, an amount equal to the then present value of the
excess of the Rent and other sums or charges reserved under this Lease from the
day of such termination or repossession for what would be the then unexpired
term if the same had remained in effect, over the then net fair rental value of
the Leased Premises or Equipment for the same period, said present value to be
arrived at on the basis of a discount rate equal to the prime rate of Norwest
Bank Minnesota, N.A., then in effect, less two hundred basis points.
(d) If under any of the preceding provisions of this paragraph 20
Landlord shall be entitled to give Tenant a notice of termination of the term of
this Lease, Landlord without giving such notice of termination and
notwithstanding the continuance of the term of this Lease shall have, to the
extent permitted by law, all the rights, powers and remedies given to Landlord
by the preceding provisions of this paragraph 20, and Tenant shall have the
obligations imposed upon it by such provisions.
<PAGE>
(e) No such reentry or taking of possession of the Leased Premises or
Equipment by Landlord shall be construed as an election on Landlord's part to
terminate the term of this Lease unless a notice of such intention be given to
Tenant or unless the termination hereof be decreed by a court of competent
jurisdiction.
21. Additional Rights:
(a) No right or remedy herein conferred upon or reserved to Landlord is
intended to be exclusive of any other right or remedy, and each and every right
and remedy of Landlord shall be cumulative and in addition to any other right or
remedy given Landlord hereunder, or now or hereafter existing at law or in
equity or by statute.
(b) If Tenant shall be in default in the performance of any of its
obligations under this Lease, and regardless of whether an action shall be
brought for the enforcement thereof, Tenant shall pay to Landlord all expenses
incurred by Landlord in connection therewith, including Landlord's attorneys'
fees.
22. Notices, Demands and Other Instruments:
All notices, demands, requests, consents, approvals, undertakings and
other instruments required or permitted to be given pursuant to the terms hereof
shall be in writing and shall be deemed to have been properly given (a) when
served personally upon the party to whom the notice is addressed or (b) when
sent by certified United States mail, postage prepaid, return receipt requested,
addressed to such party at its address first above set forth. Landlord and
Tenant shall, from time to time, have the right to specify as the proper address
for the purposes of this Lease any other address in the United States upon
giving ten (10) days notice thereof to the other party. Landlord and Tenant
shall each have the right to add two additional parties to whom any such notice
shall be given upon giving ten (10) days notice thereof to the other party.
<PAGE>
23. Estoppel Certificates:
At any time and from time to time, each party hereto, as requested by
the other party upon not less than ten (10) days prior notice, will execute,
acknowledge and deliver to the other a statement (i) certifying that this Lease
is unmodified and in force and effect (or if there have been modifications,
stating all such modifications and certifying that this Lease, as so modified,
is in force and effect), (ii) certifying the amount of Rent, the dates to which
Rent has been paid and whether Tenant is then paying Rent in accordance with
this Lease and stating whether or not, to the best knowledge of the signer, the
other party is in default in performance of any of its obligations under this
Lease and, if so, specifying each such default of which the signer may have
knowledge, it being intended that any such statement delivered pursuant to this
paragraph 24 may be relied upon by others with whom the party requesting such
certificate may be dealing, (iii) certifying the space then subject to this
Lease, (iv) certifying whether any option of Tenant hereunder has expired
without exercise, and, if so, certifying to such expiration, and (v) certifying
as to such other matters concerning this Lease as the requesting party may
reasonably request.
24. No Merger:
There shall be no merger of this Lease or of the leasehold estate hereby
created with the fee estate in the Leased Premises or any part thereof by reason
of the fact that the same person may acquire or hold, directly or indirectly,
this Lease or the leasehold estate hereby created or any interest in this Lease
or in such leasehold estate as well as the fee estate in the Leased Premises or
any interest in such fee estate.
Title to the Equipment shall at all times remain in Landlord, and Tenant
shall protect and defend the title of Landlord and keep it free from all claims
and liens other than those of Tenant under this Lease, or liens created by
Landlord. Tenant agrees to execute such financing statements and other documents
as Landlord may reasonably require to evidence Landlord's title to the
Equipment.
25. Surrender; Holding over:
(a) Upon the expiration or sooner termination of this Lease, Tenant
shall peaceably and quietly leave, yield up and surrender the Leased Premises
and Equipment to Landlord in the good condition and repair, ordinary wear and
tear excepted, but clean, orderly and free of occupants. Tenant shall remove
from the property prior to such expiration or sooner termination all property
situated thereon which is not owned by Landlord, and Tenant shall, at its sole
cost and expense, repair any damage caused by such removal. Property not so
removed shall become the property of Landlord, which may thereafter cause such
property to be removed from the Leased Premises and disposed of, but the cost of
any such removal shall be borne by Tenant.
(b) In the event of Tenant's holding over after the expiration or
termination of this Lease, the holdover shall be a tenancy at will, and all of
the terms and provisions of this Lease shall be applicable thereto, except that
Tenant shall pay Landlord as rental for the period of such holdover an amount
equal to one and one half the Rent which would have been payable by
<PAGE>
Tenant had the holdover period been a continuation of the term of this Lease.
Tenant agrees to vacate and deliver the Leased Premises and Equipment to
Landlord upon Tenant's receipt of written notice from Landlord to vacate. The
rental payable during the holdover period shall be payable to Landlord on
demand. No holding over by Tenant, with or without consent of Landlord, shall
operate to extend this Lease except as otherwise expressly provided.
26. Separability:
Each and every covenant and agreement contained in this Lease shall be
for all purposes construed to be a separate and independent covenant and
agreement and the breach of any covenant or agreement contained herein by
Landlord shall in no way or manner discharge or relieve Tenant from Tenant's
obligation to perform each and every covenant and agreement contained herein. If
the application of any term or provision of this Lease to any person or
circumstance shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such term or provision to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby, and each term and provision of this Lease shall be
valid and shall be enforced to the fullest extent permitted by law.
27. Binding Effect:
This Lease does not create the relationship of principal and agent or of
partnership or of joint venture or of any association between Landlord and
Tenant, the sole relationship between Landlord and Tenant being that of landlord
and tenant. All of the covenants, conditions and obligations herein contained
shall be binding upon and inure to the benefit of the parties hereto and,
subject to the restrictions and limitations herein contained, their respective
heirs, legal representatives, successors and assigns to the same extent as if
each such successor and assign were in each case named as a party to this Lease.
This Lease may not be changed, modified or discharged except by a writing signed
by Landlord and Tenant. This is a Minnesota contract and shall be construed
according to the laws of Minnesota.
28. Headings and Terms:
The table of contents preceding this Lease and the headings to the
various paragraphs of this Lease have been inserted for reference only and shall
not in any manner be construed as modifying, amending or affecting in any way
the express terms and provisions hereof. The term "person" when used in this
Lease shall mean any individual, corporation, partnership, firm, trust, joint
venture, business association, syndicate, combination, organization or any other
person or entity.
<PAGE>
29. Right to Enter:
Landlord and Landlord's agents shall have the right to enter the Leased
Premises at any and all reasonable times during the term of this Lease for the
purpose of inspecting and repairing the Leased Premises or Equipment or for the
purpose of showing them to prospective purchasers or tenants, and to display
rental (during the last six (6) months of the term hereof) and "For Sale" signs
on the Leased Premises or Equipment. The foregoing provision does not, and shall
not be construed so as to, impose liability on Landlord to inspect or repair the
Leased Premises or Equipment.
30. Subordination:
For the purposes of this paragraph 30, the term "Mortgage" shall mean at
any time, any mortgage of record now or hereafter placed against the Leased
Premises or Equipment, any increase, amendment, extension, refinancing or
recasting of a Mortgage and, in the case of a sale or lease and leaseback by
Landlord of all or any part of the Leased Premises or Equipment, the lease
creating the leaseback. For the purposes hereof, a Mortgage shall be deemed to
continue in effect after foreclosure thereof and during the period of redemption
therefrom. This Lease is subject and subordinate to the lien of any Mortgage
which may now or hereafter encumber the Leased Premises or Equipment or any
development of which the Leased Premises or Equipment are a part. In
confirmation of such subordination, Tenant shall, at Landlord's request from
time to time, promptly execute any certificate or other document requested by
the holder of the Mortgage. Tenant agrees that in the event that any proceedings
are brought for the foreclosure of any Mortgage, Tenant shall immediately and
automatically attorn to the purchaser at such foreclosure sale, as the landlord
under this Lease, and Tenant waives the provisions of any statute or rule of
law, now or hereafter in effect, which may give or purport to give Tenant any
right to terminate or otherwise adversely affect this Lease or the obligations
of Tenant hereunder in the event that any such foreclosure proceeding is
prosecuted or completed. Neither the holder of the Mortgage (whether it acquires
title by foreclosure or by deed in lieu thereof) nor any purchaser at
foreclosure sale shall be liable for any act or omission of Landlord, subject to
any offsets or defenses which Tenant might have against Landlord or bound by any
prepayment by Tenant of more than one month's installment of Rent and additional
rent or by any modification of this Lease made subsequent to the granting of the
Mortgage. Notwithstanding anything to the contrary in this paragraph 31, so long
as Tenant is not in default under this Lease, this Lease shall remain in full
force and effect and the holder of the Mortgage and any purchaser at foreclosure
sale thereof shall not disturb Tenant's possession hereunder.
<PAGE>
31. Exculpation:
The term "Landlord", as used in this Lease, shall mean only the owner or
owners at the time in question of the fee title to the Leased Premises or
Equipment, and in the event of any transfer of such title or interest, Landlord
herein named (and in case of any subsequent transfers the then grantor) shall be
relieved from and after the date of such transfer of all liability as respects
Landlord's obligations thereafter to be performed, provided that any funds in
the hands of Landlord, or the then grantor at the time of such transfer, in
which Tenant has an interest, shall be delivered to the grantee. The obligations
contained in this Lease to be performed by Landlord shall, subject as aforesaid,
be binding on Landlord's successors and assigns, only during their respective
periods of ownership.
32. Additional Action:
Tenant will promptly execute and deliver to Landlord such further
documents and take such further action as Landlord may reasonably request in
order to more effectively carry out the intent and purpose of this Lease,
including the execution and delivery of financing statements to fully protect
Landlord's interest hereunder in accordance with the Uniform Commercial Code or
other applicable law.
33. Labeling:
Tenant shall keep all Equipment free from any marking or labeling which
might be interpreted as a claim or ownership thereof by Tenant or any party
other than Landlord or anyone so claiming through Landlord. If Landlord
requests, Tenant shall cause the Equipment to be plainly marked or tagged to
indicate Landlord's interest in the Equipment.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed as of the date and year first hereinabove written.
LANDLORD:
GOPHER STATE ETHANOL, LLC
By
--------------------------------
Its:
TENANT:
MINNESOTA BREWING COMPANY
By
--------------------------------
Its:
<PAGE>
EXHIBIT A
Legal Description and Depiction of Leased Premises
PARCEL 1: Intentionally deleted.
PARCEL 2: Intentionally deleted.
PARCEL 3: Intentionally deleted, except as may be included as a site for
the production of ethanol.
PART OF PARCEL 4 (in areas depicted on attached diagram):
Lots One (1) and Two (2) and that part of Lots Three (3), Four (4), Five (5),
Six (6), Eighteen (18), Nineteen (19) and Twenty (20) lying Southeasterly of
West Seventh Street, Block Seventeen (17), Stinson, Brown and Ramsey's Addition
to St. Paul, Ramsey County, Minnesota, together with so much of Palace Street
vacated, which accrued to Lots One (1) and Twenty (20) in said Block 17 by
reason of the vacation thereof and together with so much of Oneida Street
vacated, which accrued to Lots 1, 2, 3, 4, 5 and 6 in said Block 17 by reason of
the vacation thereof, according to the plat thereof on file and of record in the
office of the Register of Deeds within and for said county.
PART OF PARCEL 5 (in areas depicted on attached diagram):
Lots One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7), Eight
(8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), Fourteen (14),
Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19) and
Twenty (20), Block Twenty-six (26), A. V. Brown's Subdivision of Blocks Nineteen
(19), Twenty-four (24) and East half of Twenty-six (26), in Stinson, Brown and
Ramsey's Addition to St. Paul, Ramsey County, Minnesota, together with that part
of Palace Street vacated as accrued to said Lots 10 and 11 by reason of the
vacation thereof, and together with that part of Webster Street vacated lying
North of James Avenue and South of the Southeasterly line of West Seventh Street
as opened, extended, which accrued to said Lots 11, 12, 13, 14, 15, 16, 17, 18,
19 and 20 aforesaid, and together with that part of Oneida Street vacated as
accrued to said Lots 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 in said Block 26, by
reason of the vacation thereof. Subject to Railroad Easements. According to the
plat thereof on file and of record in the office of the Register of Deeds within
and for said county.
PART OF PARCEL 6 (in areas depicted on attached diagram):
Lots One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7), Eight
(8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), Fourteen (14),
Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19), Twenty
(20), Twenty-one (21), Twenty-two (22), Twenty-three (23), Twenty-four (24),
Twenty-five (25), Twenty-six (26) and Twenty-seven (27)
1
<PAGE>
and that part of Lot Twenty-eight (28) lying Westerly of the West line of Lot 27
extended in a straight line Northerly across said Lot 28, Block One (1), Stinson
and Ramsey's Sub-division of the West half of Block Sixteen (16) of Stinson,
Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, together with
that part of Cascade Street vacated as accrued to said Lots 17and 18 by reason
of the vacation thereof, and together with that part of Oneida Street vacated as
accrued to Lots 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17 in said Block 1, by
reason of the vacation thereof, and subject to rights acquired by City of St.
Paul for widening of West Seventh Street, according to the plat thereof of file
and of record in the Register of Deeds within and for said county.
NOTE: Lot 3, Block 1 above described is Torrens Property as evidenced by
Certificate of Title No. 358494.
PART OF PARCEL 7 (in areas depicted on attached diagram):
That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to
St. Paul, Ramsey County, Minnesota, bounded by Cascade Street, James Street,
Oneida Street and Erie Street, also so much of Cascade Street, Erie Street and
Oneida Street vacated, as accrued to said property by reason of the vacation
thereof, according to the plat thereof on file and of record in the office of
the Register of Deeds within and for said county.
PART OF PARCEL 8 (in areas depicted on attached diagram):
A triangular piece of land in the East half of Block Thirty (30), Stinson, Brown
and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, described as
follows: Commencing at a point on the North line of Randolph Street 50 feet
Easterly of the intersection of said North line of Randolph Street with the East
line of Webster Street running thence Easterly along the North line of Randolph
Street a distance of 40 feet, running thence Northerly parallel with the East
line of Webster Street 24 1/2 feet, running thence in a Southwesterly direction
to the place of beginning. Together with that part of the East 160 feet of the
East half of said Block 30 lying Southerly of a line extended form a point on
the East line of said East half of Block 30 distant 128 feet Southerly from the
Northeast corner thereof to a point on the West line of said East 160 feet of
East half of Block 30 distant 165 feet Southerly from the Northwest corner
thereof, subject to Railroad Easement, Agreements and Leases, excepting those
parts of aforedescribed lands lying in the Southerly 38 feet of said Block 30
acquired by City of St. Paul for Randolph Avenue widening.
PART OF PARCEL 9 (in areas depicted on attached diagram):
That part of Block Thirty (30), Stinson, Brown and Ramsey's Addition to St.
Paul, Ramsey County, Minnesota, which lies East of Webster Street as opened
under the Order of the Common Council and recorded in Volume 5, page 65 printed
records Common Council and North of Chicago, Milwaukee, St. Paul and Pacific
Railroad Company's right-of-way.
PART OF PARCEL 10 (in areas depicted on attached diagram):
2
<PAGE>
That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to
St. Paul, Ramsey County, Minnesota, lying Northerly of James Street as shown in
Book 4 of Street Openings, page 11 and lying Southeasterly of a line which is 50
feet Southeasterly of, as measured at right angles and parallel to the following
described line: Beginning at a point on the East line of said Block 27, 133.46
South of the Northeast corner thereof; thence Southwesterly to a point in the
Easterly line of Erie Street as shown in Book 3 of Street Openings, page 19, a
distance of 252.28 feet South of its intersection with the North line of said
Block 27 and there terminating.
PART OF PARCEL 11 (in areas depicted on attached diagram):
That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to
St. Paul, Ramsey County, Minnesota, lying Easterly of Erie Street as shown in
Book 3 of Street Openings, page 19, and lying Northerly of a line described as
follows: Beginning at a point on the East line of said Block 27, 133.46 feet
South of the Northeast corner thereof; thence Southwesterly to a point on the
East line of said Erie Street, 252.28 feet South of its intersection with the
North line of said Block 27 and there terminating, together with that part of
Erie Street vacated as accrued to said parcel.
3
MINNESOTA BREWING COMPANY
1993 STOCK OPTION PLAN
Table of Contents
-----------------
Page
----
SECTION 1. General Purpose of Plan; Definitions 1
SECTION 2. Administration 3
SECTION 3. Stock Subject to Plan 4
SECTION 4. Eligibility 4
SECTION 5. Stock Options 5
SECTION 6. Transfer, Leave of Absence, Etc. 9
SECTION 7. Amendments and Termination 9
SECTION 8. Unfunded Status of Plan 10
SECTION 9. General Provisions 10
SECTION 10. Effective Date of Plan 11
<PAGE>
MINNESOTA BREWING COMPANY
1993 STOCK OPTION PLAN
SECTION 1. General Purpose of Plan; Definitions.
The name of this plan is the Minnesota Brewing Company 1993 Stock
Option Plan (the "Plan"). The purpose of the Plan is to enable Minnesota Brewing
Company (the "Company") and its Subsidiaries to retain and attract executives,
other key employees of the Company and its Subsidiaries, and consultants and
other persons having a contractual relationship with the Company or its
Subsidiaries, who contribute to the Company's success by their ability,
ingenuity and industry, and to enable such individuals to participate in the
long-term success and growth of the Company by giving them a proprietary
interest in the Company.
For purposes of the Plan, the following terms shall be defined as set
forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means a felony conviction of a participant or the
failure of a participant to contest prosecution for a felony,
or a participant's willful misconduct or dishonesty, any of
which is directly and materially harmful to the business or
reputation of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means the Committee referred to in Section 2 of
the Plan. If at any time no Committee shall be in office, then
the functions of the Committee specified in the Plan shall be
exercised by the Board, unless the Plan specifically states
otherwise.
(e) "Company" means Minnesota Brewing Company, a corporation
organized under the laws of the State of Minnesota (or any
successor corporation).
(f) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent Corporation or Subsidiary of the
Company to render services, who is compensated for such
services and who is not an employee of the Company or any
Parent Corporation or Subsidiary of the Company. A
Non-Employee Director may serve as a Consultant.
(g) "Disability" means permanent and total disability as
determined by the Committee.
<PAGE>
(h) "Fair Market Value" means the value of Stock on any given date
which shall be determined by the Committee as follows: (a) if
the Stock is listed for trading on one of more national
securities exchanges, or is traded on the Nasdaq Stock Market
or the Nasdaq Small Cap Market, the last reported sales price
on the principal such exchange, the Nasdaq Stock Market or the
Nasdaq Small Cap Market on the date in question, or if such
Stock shall not have been traded on such principal exchange on
such date, the last reported sales price on such principal
exchange, the Nasdaq Stock Market or the Nasdaq Small Cap
Market, on the first day prior thereto on which such Stock was
so traded; or (b) if the Stock is not listed for trading on a
national securities exchange, the Nasdaq Stock Market or the
Nasdaq Small Cap Market, but is traded in the over-the-counter
market, the closing bid price for such Stock on the day prior
to the date in question, or if there is no closing bid price
for such Stock on such day, the closing bid price on the first
day prior thereto on which such price existed; or (c) if
neither (a) nor (b) is applicable, by any means fair and
reasonable by the Committee, which determination shall be
final and binding on all parties.
(i) "Incentive Stock Option" means any Stock Option intended to be
and designated as an "Incentive Stock Option" within the
meaning of Section 422 of the Code.
(j) "Non-Qualified Stock Option" means any Stock Option that is
not an Incentive Stock Option, and is intended to be and is
designated as a "Non-Qualified Stock Option."
(k) "Outside Director" means a Director who: (a) is not a current
employee of the Company or any member of an affiliated group
which includes the Company; (b) is not a former employee of
the Company who receives compensation for prior services
(other than benefits under a tax-qualified retirement plan)
during the taxable year; (c) has not been an officer of the
Company; (d) does not receive remuneration from the Company,
either directly or indirectly, in any capacity other than as a
director, except as otherwise permitted under Code Section
162(m) and regulations thereunder. For this purpose,
remuneration includes any payment in exchange for good or
services. This definition shall be further governed by the
provisions of Code Section 162(m) and regulations promulgated
thereunder.
(l) "Non-Employee Director" shall have the meaning set forth in
Rule 16b-3(b)(3) as promulgated by the Securities and Exchange
Commission under the Securities Exchange Act of 1934, or any
successor definition adopted by the Commission.
(m) "Parent Corporation" means any corporation (other than the
Company) in an unbroken chain of corporations ending with the
Company if each of the corporations (other than the Company)
owns stock possessing 50% or more of the total combined voting
power of ,ill classes of stock in one of the other
corporations in the chain.
<PAGE>
(n) "Retirement" means retirement from active employment with the
Company and any Subsidiary or Parent Corporation of the
Company on or after age 55.
(o) "Stock" means the Common Stock, $.01 par value per share, of
the Company.
(p) "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5 below.
(q) "Subsidiary" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company
if each of the corporations (other than the last corporation
in the unbroken chain) owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one
of the other corporations in the chain.
SECTION 2. Administration.
The Plan shall be administered by the Board of Directors or by a
Committee appointed by the Board of Directors of the Company consisting of at
least two Directors, each of whom shall be Non-Employee Directors and Outside
Directors, who shall serve at the pleasure of the Board.
The Committee shall have the power and authority to grant Stock Options
to eligible individuals pursuant to the terms of the Plan.
In particular, the Committee shall have the authority:
(i) to select the officers, other key employees of the Company and
its Subsidiaries, and consultants and other persons having a
contractual relationship with the Company or its Subsidiaries,
to whom Stock Options, may from time to time be granted
hereunder;
(ii) to determine whether and to what extent Incentive Stock
Options, Non-Qualified Stock Options, or a combination of the
foregoing, are to be granted hereunder;
(iii) to determine the number of shares to be covered by each such
Stock Option granted hereunder; and
(iv) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any Stock Option granted hereunder
(including, but not limited to, any restriction on any Stock
Option and/or the shares of Stock relating thereto).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines arid practices governing the Plan as it shall,
from time to time, deem advisable; to interpret the terms and provisions of the
Plan and any Stock Option granted under the Plan (and any agreements relating
thereto); and to otherwise supervise the administration of the Plan. The
Committee may delegate to officers of the Company the authority to exercise the
powers
<PAGE>
specified in (i), (ii), (iii) and (iv) above with respect to persons who are not
either the chief executive officer of the Company or the four highest paid
officers of the Company other than the chief executive officer.
All decisions made by the Committee pursuant to the provisions of the
Plan shall be final and binding on all persons, including the Company and Plan
participants.
SECTION 3. Stock Subject to Plan.
The total number of shares of Stock reserved and available for
distribution under the Plan shall be 450,000. Such shares may consist, in whole
or in part, of authorized and unissued shares. If any shares that have been
optioned cease to be subject to Stock Options, such shares shall again be
available for distribution in connection with future grants of Stock Options
under the Plan. Upon a Stock-for-Stock exercise of a Stock Option or upon the
withholding of Stock for the payment of the option price or taxes, only the net
number of shares issued to the optionee shall be used to calculate the number of
shares remaining available for distribution under the Plan.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, other change in corporate structure affecting
the Stock, or spin-off or other distribution of assets to shareholders, such
substitution or adjustment shall be made in the aggregate number of shares
reserved for issuance under the Plan and in the number and option price of
shares subject to outstanding options granted under the Plan as may be
determined to be appropriate by the Committee, in its sole discretion, provided
that the number of shares subject to any grant shall always be it whole number.
SECTION 4. Eligibility.
Directors, officers, other key employees of the Company and
Subsidiaries, and consultants and other persons having a contractual
relationship with the Company or its Subsidiaries, who are responsible for or
contribute to the management, growth and/or profitability of the business of the
Company and its Subsidiaries are eligible to be granted Stock Options under the
Plan. The optionees under the Plan shall be selected from time to time by the
Committee, in its sole discretion, from among those eligible, and the Committee
shall determine, in its sole discretion, the number of shares covered by each
grant.
Notwithstanding the foregoing, no person shall receive grants of Stock
Options under this Plan which exceed 100,000 shares during any fiscal year of
the Company.
SECTION 5. Stock Options.
Any Stock Option granted under the Plan shall be in such form as the
Committee may from time to time approve.
<PAGE>
The Stock Options granted tinder the Plan may be of two types: (i)
Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock
Options shall be granted under the Plan after September 1, 2003.
The Committee shall have the authority to grant to any optionee
Incentive Stock Options, Non-Qualified Stock Options, or both types of options.
To the extent that any option does not quality as an Incentive Stock Option, it
shall constitute a separate Non-Qualified Stock Option.
Anything in the Plan to the contrary notwithstanding, no term of this
Plan relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be so
exercised, so as to disqualify either the Plan or any Incentive Stock Option
under Section 422 of the Code. The preceding sentence shall not preclude any
modification or amendment to an outstanding Incentive Stock Option, whether or
not such modification or amendment results in disqualification of such Stock
Option as an Incentive Stock Option, provided the optionee consents in writing
to the modification or amendment.
Stock Options granted under the Plan shall be subject to the following
terms and conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable.
(a) Option Price. The option price per share of Stock purchasable
under a Stock Option shall be determined by the Committee at
the time of grant and may, except as provided in this
paragraph, be less than the Fair Market Value of the Stock on
the date the Stock Option is granted. In the event that the
Committee does not determine the exercise price per share of
Stock purchasable under a Stock Option, the exercise price
shall be the Fair Market Value of the Stock on the date the
Stock Option is granted except as otherwise required in this
paragraph. In no event shall the Stock Option price per share
of Stock purchasable under in Incentive Stock Option or a
Non-Qualified Stock Option be less than 100% or 50%,
respectively, of the Fair Market Value of the Stock on the
date the Stock Option is granted. If an employee owns or is
deemed to own (by reason of the attribution rules applicable
under Section 424(d) of the Code) more than 10% of the
combined voting power of all classes of stock of the Company
or any Parent Corporation or Subsidiary, and an Incentive
Stock Option is granted to such employee, the exercise price
shall be no less than 110% of the Fair Market Value of the
Stock on the date the Stock Option is granted.
(b) Option Term. The term of each Stock Option shall be fixed by
the Committee, but no Incentive Stock Option shall be
exercisable more than ten years after the date the Stock
Option is granted. In the event that the Committee does not
fix the term of a Stock Option, the term shall be ten years
from the date the Stock Option is granted. Notwithstanding the
foregoing, if an employee owns or is deemed to own (by reason
of the attribution rules of Section 424(d) of the Code) more
than 10% of the combined voting power of all classes of stock
of the Company of any
<PAGE>
Parent Corporation or Subsidiary and an Incentive Stock Option
is granted to such employee, the term of such Stock Option
shall be no more than five years from the date of grant.
(c) Exercisability. Stock Options shall be exercisable at such
time or times as determined by the Committee at or after
grant. In the event that the Committee does not determine the
time at which a Stock Option shall be exercisable, such Stock
Option shall be exercisable one years after the date of grant.
If the Committee provides, in its discretion, that any Stock
Option is exercisable only in installments, the Committee may
waive such installment exercise provisions at any time.
Notwithstanding the foregoing, unless the Stock Option
Agreement provides otherwise, any Stock Option granted under
this Plan shall be exercisable in full, without regard to any
installment exercise provisions, for a period specified by the
Company, but not to exceed sixty (60) days, prior to the
occurrence of any of the following events: (i) dissolution or
liquidation of the Company other than in Conjunction with a
bankruptcy of the Company or any similar occurrence, (ii) any
merger, consolidation, acquisition, separation,
reorganization, or similar occurrence, where the Company will
not be the surviving entity, (iii) the transfer of
substantially all of the assets of the Company or the
acquisition of beneficial ownership of more than 50% of any
class of equity security of the Company or its Subsidiaries.
(d) Method of Exercise. Stock Options may be exercised in whole or
in part at any time during the option period by giving written
notice of exercise to the Company specifying the number of
shares to he purchased. Such notice shall be accompanied by
payment in full of the purchase price, either by certified or
bank check, or by any other form of legal consideration deemed
sufficient by the Committee and consistent with the Plan's
purpose and applicable law, including promissory notes or a
properly executed exercise notice together with irrevocable
instructions to a broker acceptable to the Company to promptly
deliver to the Company the amount of sale or loan proceeds to
pay the exercise price. As determined by the Committee, in its
sole discretion, payment in full or in part may also be made
in the form of unrestricted Stock already owned by the
optionee, provided, however, that, in the case of an Incentive
Stock Option, the right to make a payment in the form of
already owned shares may be authorized only at the time the
option is granted. If the terms of a Stock Option so permit,
an optionee may elect to pay all or part of the exercise price
by having the Company withhold from the shares of Stock that
would otherwise be issued upon exercise that number of shares
of Stock having a Fair Market Value equal to the aggregate
exercise price for the shares with respect to which such
election is made. No shares of Stock shall be issued until
full payment therefor has been made. An optionee shall
generally have the rights to dividends and other rights of a
shareholder with respect to shares subject to the option when
the optionee has given written notice of exercise, has paid in
full for such shares, and, if requested, has given the
representation described in paragraph (a) of Section 9.
<PAGE>
(e) Non-transferability of Options.
(i) Subject to Section 5(e)(ii) below, no Stock Option shall
be transferable by the optionee otherwise than by will or by the laws
of descent and distribution, and all Stock Options shall be
exercisable, during the optionee's lifetime, only by the optionee.
(ii) The Committee may, in its discretion, authorize all or a
portion of the options to be granted to an optionee to be on terms
which permit transfer by such optionee to (A) the spouse, children or
grandchildren of the optionees ("Immediate Family Members"), (B) a
trust or trusts for the exclusive benefit of such Immediate Family
Members, or (C) a partnership or partnerships in which such Immediate
Family Members are the only partners, provided that (1) there may be no
consideration for any such transfer, (2) the stock option agreement
pursuant to which such options are granted must be approved by the
Committee, and must expressly provide for transferability in a manner
consistent with this Section 5(e)(ii), and (3) subsequent transfers of
transferred options shall be prohibited except those in accordance with
Section 5(e)(i). Following transfer, any such options shall continue to
be subject to the same terms and conditions as were applicable
immediately prior to transfer, provided that the term "optionee" herein
shall in such event be deemed to refer to the transferee, except that
the events of termination of employment of Sections 5(f), 5(g), 5(h)
and 5(i) hereof shall continue to be applied with respect to the
original optionee, following which the options shall be exercisable by
the transferee only to the extent, and for the periods specified in
such Sections.
(f) Termination by Death. If an optionee's employment by the
Company and any Subsidiary or Parent Corporation terminates by
reason of death, the Stock Option may thereafter be
immediately exercised, to the extent then exercisable (or on
such accelerated basis as the Committee shall determine at or
after grant), by the legal representative of the estate or by
the legatee of the optionee under the will of the optionee,
for a period of three years (or such shorter period as the
Committee shall specify at grant) from the date of such death
or until the expiration of the stated term of the option,
whichever period is shorter.
(g) Termination by Reason of Disability. If an optionee's
employment by the Company and any Subsidiary or Parent
Corporation terminates by reason of Disability, any Stock
Option held by such optionee may thereafter be exercised, to
the extent it was exercisable at the time of termination due
to Disability (or on such accelerated basis as the Committee
shall determine at or after grant), but may not be exercised
after three years (or such shorter period as the Committee
shall specify at grant) from the date of such termination of
employment or the expiration of the stated term of the option,
whichever period is shorter. In the event of termination of
employment by reason of Disability, if an Incentive Stock
Option is exercised after the expiration of the exercise
periods that apply for
<PAGE>
purposes of Section 422 of the Code, the option will
thereafter be treated as a Non-Qualified Stock Option.
(h) Termination by Reason of Retirement. If an optionee's
employment by the Company and any Subsidiary or Parent
Corporation terminates by reason of Retirement, any Stock
Option held by such optionee may thereafter be exercised to
the extent it was exercisable at the time of such Retirement,
but may not be exercised after three years (or such shorter
period as Committee shall specify at grant) from the date of
such termination of employment or the expiration of the stated
term of the option, whichever period is the shorter. In the
event of termination of employment by reason of Retirement, if
an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of
the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(i) Termination for Cause. Unless otherwise determined by the
Committee, if an optionee's employment by the Company and any
Subsidiary or Parent Corporation terminates for Cause, any
Stock Option held by the optionee shall thereupon terminate.
(j) Other Termination. If an optionee's employment by the Company
and any Subsidiary or Parent Corporation terminates for any
reason other than Death or Disability, and other than for
cause, any Stock Option held by such optionee may thereafter
be exercised to the extent it was exercisable at the time of
such termination, but may not he exercised after three years
(or such shorter period as Committee shall specify at grant)
from the date of such termination of employment or the
expiration of the stated term of the option, whichever period
is shorter. In the event of such termination of employment, if
an Incentive Stock Option is exercised after the expiration of
the exercise periods that apply for purposes of Section 422 of
the Code, the option will thereafter be treated as a
Non-Qualified Stock Option.
(k) Annual Limit on Incentive Stock Options. The aggregate Fair
Market Value (determined as of the time the Stock Option is
granted) of the Common Stock with respect to which an
Incentive Stock Option under this Plan or any other plan of
the Company and any Subsidiary or Parent Corporation is
exercisable for the first time by an optionee during any
calendar year shall not exceed $100,000.
(l) Non-Employee Directors. Each person serving as a Non-Employee
Director of the Company as of February 10, 1998 shall be
granted an Option to purchase 15,000 shares of stock at an
option price per share equal to 100% of Fair Market Value of a
share of Stock on such date. All such Options shall be
designated as Non-Qualified Options and shall be subject to
the same terms and provisions as are then in effect with
respect to the granting of Non-Qualified Options to officers
and by employees of the Company, except that (i) the term of
such Option shall be
<PAGE>
five years, which term shall expire after one year upon the
termination of service as a director, (ii) the Option shall
vest in three installments of 5,000 shares beginning on the
date of the 1998 Annual Meeting, with each additional
installment vesting on the subsequent annual meeting. Subject
to the foregoing, all provisions of this Plan not inconsistent
with the foregoing shall apply to Options granted to
Non-Employee Directors.
SECTION 6. Transfer, Leave of Absence, Etc.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer of an employee from the Company to a Parent
Corporation or Subsidiary, or from a Parent Corporation or
Subsidiary to the Company, or from one Subsidiary to another;
(b) a leave of absence, approved in writing by the Committee, for
military service or sickness, or for any other purpose
approved by the Company if the period of such leave does not
exceed ninety (90) days (or such longer period as the
Committee may approve, in its sole discretion); and
(c) a leave of absence in excess of ninety (90) days, approved in
writing by the Committee, but only if the employee's right to
reemployment is guaranteed either by a statute or by contract,
and provided that, in the case of any leave of absence, the
employee returns to work within 30 days after the end of such
leave.
SECTION 7. Amendments and Termination.
The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made (i) which would impair the rights
of an optionee under a Stock Option theretofore granted, without the optionee's
consent, or (ii) which, without the approval of the stockholders of the Company,
would cause the Plan to no longer comply with Rule 16b-3 under the Securities
Exchange Act of 1934, Section 422 of the Code, or any other regulatory
requirements.
The Committee may amend the terms of any Stock Option theretofore
granted, prospectively or retroactively, but, Subject to Section 3 above, no
such amendment shall impair the rights of any holder without his consent. The
Committee may also substitute new Stock Options for previously granted stock
options, including previously granted stock options having higher exercise
prices.
SECTION 8. Unfunded Status of Plan.
The Plan is intended to Constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to an optionee
by the Company,
<PAGE>
nothing contained herein shall give any such participant or optionee any rights
that are greater than those of a general creditor of the Company. At its sole
discretion, the Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Stock,
provided, however, that the existence of such trusts or other arrangements is
consistent with the unfunded status of the Plan.
SECTION 9. General Provisions.
(a) The Committee may require each person purchasing shares
pursuant to a Stock Option under the Plan to represent to and
agree with the Company in writing that the optionee is
acquiring the shares without a view to distribution thereof.
The certificates for Such shares may include any legend which
the Committee deems appropriate to reflect any restrictions on
transfer.
All certificates for shares of Stock delivered under the Plan
pursuant to any Options shall be subject to such
stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any
stock exchange upon which the Stock is then listed, and any
applicable federal or state securities laws, and the Committee
may cause a legend or legends to be put on any such
certificates to make appropriate reference to such
restrictions.
(b) Nothing contained in this Plan shall prevent the Board of
Directors from adopting other or additional compensation
arrangements, subject to stockholder approval if such approval
is required; and such arrangements may be either generally
applicable or applicable only in specific cases. The adoption
of the Plan shall not confer upon any employee of the Company
or any Subsidiary any right to continued employment with the
Company or a Subsidiary, as the case may be, nor shall it
interfere in any way with the right of the Company or a
Subsidiary to terminate the employment of any of its employees
at any time.
(c) Each optionee shall, no later than the date as of which any
part of the value of a Stock Option first becomes includable
as compensation in the gross income of the optionee for
federal income tax purposes, pay to the Company, or make
arrangements satisfactory to the Committee regarding payment
of, any federal, state, or local taxes of any kind required by
law to be withheld with respect to the Stock Option. The
obligations of the Company under the Plan shall be conditional
on such payment or arrangements and the Company and
Subsidiaries shall, to the extent permitted by law, have the
right to deduct any such taxes from any payment of any kind
otherwise due to the optionee. With respect to any Stock
Option granted under the Plan, if the terms of such Option so
permit, an optionee may elect by written notice to the Company
to satisfy part or all of the withholding tax requirements
associated with the Stock Option by (i) authorizing the
Company to retain from the number of shares of Stock that
would otherwise be deliverable to the optionee, or (ii)
delivering to the Company from shares of
<PAGE>
Stock already owned by the optionee, that number of shares
having an aggregate Fair Market Value equal to part or all of
the tax payable by the optionee under this Section. Any such
election shall be in accordance with, and subject to,
applicable tax and securities laws, regulations and rulings.
(d) At the time of grant, the Committee may provide in connection
with any grant made under this Plan that the shares of Stock
received as a result of such grant shall be subject to a
repurchase right in favor of the Company, pursuant to which
the optionee shall be required to offer to the Company upon
termination of employment for any reason any shares that the
participant acquired under the Plan, with the price being the
then Fair Market Value of the Stock or, in the case of a
termination for Cause, an amount equal to the cash
consideration paid for the Stock, subject to such other terms
and conditions as the Committee may specify at the time of
grant. The Committee may, at the time of the grant of a Stock
Option under the Plan, provided the Company with the right to
repurchase, or require the forfeiture of, shares of Stock
acquired pursuant to the Plan by any optionee who, at any time
within two years after termination of employment with the
Company, directly or indirectly competes with, or is employed
by a competitor of, the Company.
SECTION 10. Effective Date of Plan.
The Plan shall be effective on the date it is approved by a vote of the
holders of a majority of the Stock present and entitled to vote at a meeting of
the Company's shareholders.
EXHIBIT 23
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 26, 1999, (April 15,
1999, as to Note 2) which is included in this Annual Report on Form 10-K.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
April 15, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 67,366
<SECURITIES> 474,961
<RECEIVABLES> 1,366,781
<ALLOWANCES> (250,000)
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