U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
_XXX_ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
_____ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________.
Commission File Number 0-23846
Minnesota Brewing Company
-------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1702599
--------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
882 West Seventh Street, Saint Paul, Minnesota 55102
---------------------------------------------- -----
(Address of principal executive offices) Zip Code
(651) 228-9173
--------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such report),
and (2) has been subject to such filing requirements for the past 90 days.
YES _X_ NO ___
As of May 10, 1999 the Company had outstanding 3,462,711 shares of Common Stock
and 607,745 shares of Class A Convertible Preferred Stock.
<PAGE>
MINNESOTA BREWING COMPANY
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of
March 31, 1999 and December 31, 1998......................3,4
Statements of Operations for the three
month periods ended March 31, 1999 and
March 31, 1998..............................................5
Statements of Cash Flow for the three month
periods ended March 31, 1999 and
March 31, 1998..............................................6
Notes to Financial Statements...............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...............7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.......................................................13
PART II. OTHER INFORMATION..................................................14
SIGNATURES ...........................................................15
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MINNESOTA BREWING COMPANY
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (note)
-------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 153,702 $ 67,366
U.S. Treasury Bill (pledged for BATF Bond) 474,961 474,961
Trade accounts receivable, less allowance
for doubtful accounts of $253,000 at
March 31, 1999 and $250,000 at
December 31, 1998 1,205,975 1,064,638
Due from related party 414,135 302,143
Other 83,210 101,176
Inventories:
Raw Materials 66,665 185,281
Work-in-progress 445,759 334,130
Finished goods 905,972 840,591
Packaging 753,709 753,678
Other 354,796 359,359
-------------------------------
Total Inventories 2,526,901 2,473,039
Total Current Assets 4,858,884 4,483,323
-------------------------------
Investment in unconsolidated subsidiary 1,701,314 --
Property and Equipment 1,681,227 6,754,715
Less allowance for depreciation 1,112,731 3,273,066
-------------------------------
Net property and equipment 568,496 3,481,649
-------------------------------
Other Assets
Trademarks, net of accumulated
amortization of $106,000 at March 3l,
1999 and $99,000 at December 31, 1998 256,123 263,189
Other, net of accumulated amortization
of $473,000 at March 31, 1999 and
$445,000 at December 31, 1998 203,365 220,418
-------------------------------
Total Other Assets 459,488 483,607
-------------------------------
$ 7,588,182 $ 8,448,579
===============================
</TABLE>
Note: The Balance Sheet at December 31, 1998 has been derived from the
audited financial statements at that date. See Notes to Financial
Statements
3
<PAGE>
MINNESOTA BREWING COMPANY
CONDENSED BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (note)
--------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Total accounts payable $ 1,965,053 2,002,197
Related party line of credit 1,849,961 1,324,961
Deferred federal excise tax credit 162,998 --
Current maturates of capital lease obligation -- 265,517
Accrued expenses 668,643 659,631
--------------------------------
Total Current Liabilities 4,646,655 4,252,306
--------------------------------
Long term debt
Capitalized lease obligations, less current
maturates -- 1,261,921
--------------------------------
Deferred gain on capital lease termination (Note 3) 248,560 --
Shareholders' Equity (Note 2)
Common stock; $.01 par value; 10,000,000
shares authorized 3,462,711 issued and
outstanding at March 31, 1999 and
December 31, 1998 34,627 34,627
Preferred stock, 700,000 shares authorized,
9% cumulative dividend, 607,745 and 547,614
shares issued and outstanding at
March 31, 1999 and
December 31, 1998, respectively 1,519,363 1,369,036
Additional paid-in capital 10,592,217 10,592,217
Accumulated deficit (9,453,240) (9,061,528)
--------------------------------
Total Shareholders'
Equity 2,692,967 2,934,352
--------------------------------
$ 7,588,182 $ 8,448,579
================================
</TABLE>
Note: The Balance Sheet at December 31, 1998 has been derived from the
audited financial statements at that date.
See Notes to Financial Statements
4
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
--------------------------------
<S> <C> <C>
Sales $ 3,591,952 $ 3,327,352
Less excise taxes 296,810 414,805
--------------------------------
Net sales 3,295,142 2,912,547
Cost of goods sold 3,106,182 2,815,567
--------------------------------
Gross profit 188,960 96,980
--------------------------------
Operating expenses:
Advertising 110,703 202,769
Sales and marketing 134,407 174,791
Administrative 258,655 244,285
--------------------------------
Total operating expenses 503,765 621,845
--------------------------------
Operating loss (314,805) (524,865)
--------------------------------
Other income (expenses)
Interest income 1,594 4,640
Interest and other expense (78,501) (76,037)
--------------------------------
Net loss (391,712) (596,262)
Basic and diluted net loss per share $ (.11) $ (.18)
================================
Basic and diluted weighted average
shares outstanding 3,444,336 3,389,211
</TABLE>
See Notes to Financial Statements
5
<PAGE>
MINNESOTA BREWING COMPANY
STATEMENTS OF CASH FLOW (UNAUDITED)
FOR THE PERIODS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1999 1998
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss
Adjustments to Reconcile net loss $ (391,712) $ (596,262)
to net cash used in operating activities:
Depreciation and Amortization 224,538 297,924
Changes in assets and liabilities:
Trade accounts receivable (144,337) 123,884
Inventories (60,862) (292,903)
Prepaid expenses and other assets 17,966 (33,399)
Deferred excise tax credit 162,998 253,930
Accounts payable and accrued expenses (28,132) (24,630)
--------------------------------
Net cash used in operating
Activities (219,541) (271,456)
--------------------------------
INVESTING ACTIVITIES
Investment in unconsolidated subsidiary (111,992) --
Purchase of property and equipment (104,048) (32,579)
Purchase of intangible assets (3,083) (112,873)
--------------------------------
Net cash used in investing
Activities (219,123) (145,452)
--------------------------------
FINANCING ACTIVITIES
Borrowings from related party 525,000 80,959
--------------------------------
NET INCREASE (DECREASE) IN CASH 86,336 (335,949)
CASH AT BEGINNING OF YEAR 67,366 465,984
--------------------------------
CASH AT END OF PERIOD $ 153,702 $ 130,035
================================
Supplemental Disclosure of non cash investing and financing activities:
Conversion of debt to preferred stock $ 150,327 $ --
--------------------------------
Contribution of assets in exchange for an
equity interest in unconsolidated subsidiary $ 1,701,314 $ --
--------------------------------
U.S. Treasury Bill financed with note
payable to related party $ -- $ 474,961
--------------------------------
</TABLE>
See Notes to Financial Statements
6
<PAGE>
Supplemental Disclosure of Non Cash Investing
and Financing Activities (continued)
- ---------------------------------------------
<TABLE>
<S> <C> <C>
Termination of capital lease obligation $ 1,441,202 $ --
Assets removed from books ($ 1,192,642) $ --
--------------------------------
Gain on termination $ 248,560 $ --
--------------------------------
</TABLE>
7
<PAGE>
MINNESOTA BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1
The balance sheet as of March 31, 1999, the statements of operations
for the three month periods ended March 31, 1999 and 1998 and the statements of
cash flows for the three month periods ended March 31, 1999 and 1998 have been
prepared by the Company without audit. In the opinion of management, all
adjustments (all of which are normal and recurring in nature) necessary to
present fairly the financial position at March 31, 1999, and results of
operations and cash flows have been included. Results of operations for the
interim period are not necessarily indicative of the results that may be
expected for the full fiscal year.
Note 2
Cumulative Undeclared Dividends
The Company's Class A Convertible Preferred Stock has a nine percent
(9%) cumulative dividend rate. If, for any reason, the Company is unable to pay
any dividend when due, the dividend will accumulate without interest until paid
in full. The Company did not declare or pay a dividend on the Class A
Convertible Preferred Stock for the quarter ended March 31, 1999. As a result,
at March 31, 1999 there are $30,803 of cumulative undeclared dividends. The
Company did not apply the provisions of Statement of Financial Accounting
Standards No. 128, EARNINGS PER SHARE, as the dilutive effect of these
convertible securities would be immaterial.
Note 3
Gain on Termination of Capital Lease
As discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations, on March 29, 1999, the Company terminated
its lease with a related party and entered into a new lease with its
unconsolidated subsidiary, Gopher State Ethanol, LLC ("Gopher State"). As a
result of the termination, there was a $248,560 gain on the transaction that
will be deferred and recognized as income over the remaining term of the
original lease, or through November 2003.
8
<PAGE>
Item 2. Management Discussion and Analysis of Financial Conditions and Results
of Operations
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,
its production of proprietary beers for sale under different brand names by
private label customers, and sales derived from foreign markets.
Results of Operations
The Company's net sales for the three-month period ended March 31, 1999
increased 13.1% as compared to net sales for the three months ended March 31,
1998. The increase in net sales was principally attributable to an increase in
export sales.
Sales of proprietary products were down 10.4% reflecting softer
industry beer sales in the first quarter of 1999 compared to 1998 and continued
decreases in sales and marketing efforts due to cash constraints. Sales of Grain
Belt Premium increased on a quarter to quarter comparison while Pig's Eye,
Landmark, and other products experienced decreases that offset the increases in
Premium. The Company plans to increase sales and marketing efforts of its
proprietary products by utilizing the new line of credit obtained in April 1999.
Contract sales decreased 20.1% primarily due to the tighter credit policies
imposed by the Company. Foreign sales increased approximately $548,000 due to
the improved economy in the Far East. The Company expects continued increases in
foreign sales based upon projected sales orders and commitments from customers
during 1999.
Segment Data in net sales before excise taxes (in thousands):
THREE MONTHS ENDED MARCH 31
1999 1998
-----------------------------
Proprietary $ 2,036 $ 2,272
Contract 437 547
Foreign 881 333
Other 238 175
-----------------------------
-----------------------------
Totals $ 3,592 $ 3,327
=============================
The Company's gross profit was $91,980 higher in the first quarter of
1999 than in the first quarter of 1998. The Company's gross profit margin
increased from 3.3% in 1998 to 5.7% in the first quarter of 1999. The increase
was due to the increased sales to foreign markets that are not subject to the
federal excise tax and increased prices on the sale of the Company's proprietary
products.
Operating expenses were $118,080 lower in the first quarter of 1999
than in the first quarter of 1998. As a percentage of net sales, they decreased
from 21.4% in 1998 to 15.3% in 1999 primarily as a result of the continued cost
constraints imposed by the Company. The decrease in advertising expense was
attributable to the budget
9
<PAGE>
constraints in the first quarter of 1999. However, the Company anticipates that
total advertising expense will approximate 1998 levels for the year. Sales and
marketing expenses for the first quarter of 1999 were below 1998 levels
primarily because of a decrease in available funds due to cash flow constraints.
Administrative expenses increased slightly due to increases in professional
fees.
Interest income was $3,046 less in the first quarter of 1999 versus
1998 because of a reduced level of funds available for investment. Interest
expense remained relatively the same during the first quarter of 1999 as
compared to 1998.
The Company experienced a net loss of $391,712 in the first quarter of
1999 compared to a net loss of $596,262 in the first quarter of 1998. The
decrease in the loss was primarily due to decreases in operating expenses. The
loss was consistent with the seasonality of the business where typically the
first and fourth quarters are the weakest and the second and third quarters are
the strongest.
During 1998 and through March 1999, 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 by increasing its sales and marketing efforts. Management will
pursue opportunities to increase sales volume at profitable margins. Management
believes that the growth of its proprietary labels offers the best opportunity
for achieving operating profits in the long term and has focused its efforts on
the growth of its proprietary products. An emphasis has been placed on the
promotion of these proprietary labels and the generations of additional sales in
the Company's core geographic market areas.
Liquidity and Capital Resources
Working capital at March 31, 1999 decreased $18,789 to $212,228 from
$231,017 at December 31, 1998. The decrease is primarily attributable to an
increase in the related party line of credit of $525,000. This decrease was
offset, in part, by increases in cash and trade accounts receivable of $86,336
and $144,337, respectively.
During the three months ended March 31, 1999 the Company used net cash
for operating activities of $219,541 which was due to the net loss of $391,712,
a decrease in trade accounts payable and accrued expenses of $28,132, and
increases in inventories of $60,862 and trade accounts receivables of $144,337.
These amounts were partially offset by depreciation and amortization of
$224,538, an increase in the deferred excise tax credit of $162,998, and a
decrease in prepaid expenses of $17,966.
The Company used $219,123 of cash in investing activities through the
purchase of $104,048 of long-lived assets and investments in Gopher State of
$111,992.
The Company used $525,000 in financing activities by satisfying working
capital needs through borrowings from a related party.
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
10
<PAGE>
statements. The Company had the option to acquire the property at eight times
the trailing twelve months. As indicated in the Company's 1998 annual report,
based upon 1998 lease payments, the purchase price would have been approximately
$4.9 million at December 31, 1998. On March 29, 1999, the Company and the
Partnership terminated this agreement. As a result of the termination, there was
a $248,560 gain on the transaction that will be deferred and recognized as
income over the remaining term of the original lease. This gain will be offset
against rent paid to Gopher State. The Partnership also contributed its interest
in the real estate and equipment that had been previously leased to the Company
to Gopher State. On March 29, 1999, the Company and Gopher State entered into a
new lease agreement for the same land, building and production equipment that
the Company had previously leased from the Partnership. The new lease agreement
has been classified as an operating lease and provides for rent of $25,000 per
month with an initial term of 10 years, which expires in 2009. There are no
provisions for production rent in the new agreement. The Company shall have the
option to extend this lease for three consecutive additional terms of ten (10)
years each. The lease gives the Company the right to purchase the brewing
facilities and equipment at any time during the term of the lease at the fair
market price of the assets at the time the option is exercised. The Company has
also entered into a shared facilities and services agreement, under which it has
agreed to share certain office space and services with Gopher State.
The Company's credit terms to its distributors are generally 10 days
and substantially all customers, except contract brewing accounts, are on
automatic debit to their bank account through electronic funds transfer ("EFT").
This program substantially reduces the credit risk and facilitates the
predictability of cash flows. Amounts from contract brewing production are
generally due 30 days after shipment and in many cases are secured by letters of
credit.
As a small brewer producing less than 2,000,000 barrels per year, the
Company presently receives an $11.00 per barrel credit against federal exercise
taxes on the first 60,000 barrels of taxable production. For accounting
purposes, this credit is allocated throughout the year based upon projected
taxable sales per quarter.
The Company is a party to collective bargaining agreements with five
unions, all of which expired on March 31, 1999. The unions went on strike in
late April for two weeks, however, a new agreement has been reached which
provide for compensation and work rule changes. The unions returned to work on
May 10, 1999. The Company expects to lower the cost of operations as a result of
the new agreement, that expires on March 31, 2002.
As of March 31, 1999, the Company had net operating loss carryforwards
totaling $8.3 million available. To the extent the Company generates taxable
income during the periods in which this net operating loss carryfoward is
available, the Company's cash requirements for payment of income tax will be
reduced.
On March 31, 1999, the Company issued 60,131 shares of Class A
Convertible Preferred Stock to the Partnership in satisfaction of $150,327 owed
for deferred rents
11
<PAGE>
and accrued interest. The preferred stock has a 9% cumulative dividend rate,
voting rights and is convertible into common stock at the rate of one share of
common stock per share of preferred stock. The holders of preferred stock are
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted. These shares are in addition
to the 547,614 shares issued at December 31, 1998. At March 31, 1999, the amount
of preferred dividends in arrears was $30,803. These dividends can be deferred
and if they are not paid, they accumulate without interest.
Financing
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 required 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, and requires 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. The
amended line-of-credit agreement with the Partnership will expire on April 15,
2002, provides 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.
Since 1997, 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. Because
of the significant cost of the facility, the Company has obtained additional
investors to satisfy lenders' request for equity. The Company has contributed
assets to and obtained a minority interest in Gopher State which is pursuing the
construction of the ethanol facilities.
Forward-looking Statements
Statements included in this Form 10-Q that are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. Among these risks and uncertainties and information included
in this Quarterly Report on Form 10-Q which can be identified by the use of
forward-looking terminology such as "may," "will,"
12
<PAGE>
"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
expresses in any forward-looking statement: i) competition within the brewing
industry resulting from the increased number of brewers and available beers,
(ii) the Company's ability to continue to achieve and maintain contract brewing
arrangements; (iii) the continued success of the Company's proprietary brands,
including its reliance upon distributors, (iv) the Company's continued ability
to sell products for export, and (v) the Company's ability through its
unconsolidated subsidiary, Gopher State, to successfully develop a facility for
the production of ethanol.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
13
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in Securities
Recent Sale of Unregistered Securities
On March 31, 1999, the Minnesota Brewing Company issued 607,745 shares
of Class A Convertible Preferred Stock to the Minnesota Brewing Limited
Partnership. The shares issued reflect 547,614 shares issued to the Partnership
in satisfaction of $1,369,036 owed for deferred rents and accrued interest at
December 31, 1998 and an additional 60,131 shares issued in satisfaction of
$150,327 owed for deferred rents and accrued interest at March 31, 1999. 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. If, for any reason, Minnesota Brewing Company is unable to pay any
dividend when due, the dividend will accumulate without interest. The Company
believes the transaction was exempt under Section 4(2) of the Security Act of
1933.
Item 3. Defaults upon senior securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule.
(b) Reports on Form 8-K
None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MINNESOTA BREWING COMPANY
Dated: May 17, 1999 /s/ Michael C. Hime
Michael C. Hime
Vice President of Finance (Chief Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 153,702
<SECURITIES> 474,961
<RECEIVABLES> 1,620,110
<ALLOWANCES> (253,000)
<INVENTORY> 2,526,901
<CURRENT-ASSETS> 4,858,884
<PP&E> 1,681,227
<DEPRECIATION> 1,112,731
<TOTAL-ASSETS> 7,588,182
<CURRENT-LIABILITIES> 4,646,655
<BONDS> 0
0
1,519,363
<COMMON> 34,627
<OTHER-SE> 1,138,977
<TOTAL-LIABILITY-AND-EQUITY> 7,588,182
<SALES> 3,295,142
<TOTAL-REVENUES> 3,295,142
<CGS> 3,106,182
<TOTAL-COSTS> 245,110
<OTHER-EXPENSES> 258,655
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,907
<INCOME-PRETAX> (391,712)
<INCOME-TAX> 0
<INCOME-CONTINUING> (391,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,712)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
