<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
OR
[ ] 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 - 25836
PORTLAND BREWING COMPANY
(Name of small business issuer in its charter)
OREGON 93-0865997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2730 NW 31ST AVENUE, PORTLAND, OREGON 97210
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (503) 226-7623
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
---------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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-B contained 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-
KSB, or any amendment to this Form 10-KSB. [ ]
Revenues for the year ended December 31, 1997: $11,094,678
State the aggregate market value of the voting stock held by
non-affiliates: Not Applicable, the Registrant's stock has no established
trading market.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1998 was 2,074,943 shares.
The index to exhibits appears on page 19 of this document.
Transitional Small Business Disclosure Format (check one): Yes X No
--- ---
<PAGE>
PORTLAND BREWING COMPANY
1997 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 6. Description of Business 2
Item 7. Description of Property 8
Item 8. Directors, Executive Officers and Significant Employees 9
Item 9. Remuneration of Directors and Officers 11
Item 10. Security Ownership of Management and Certain Security Holders 12
Item 11. Interest of Management and Others in Certain Transactions 15
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters 17
Item 2. Legal Proceedings 17
Item 3. Changes in and Disagreements with Accountants 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Compliance with Section 16(a) of the Exchange Act 17
Item 6. Reports on Form 8-K 17
PART F/S
Index to Financial Statements 18
PART III
Item 1. Index to Exhibits 19
Item 2. Description of Exhibits 19
</TABLE>
1
<PAGE>
PART I
ITEM 6. DESCRIPTION OF BUSINESS
GENERAL
The Company was incorporated in Oregon on November 14, 1983. The Company was
formed to brew and sell specialty beer (i.e., beer which is made in
relatively small batches and which generally sell at retail prices of
approximately $5.00 - $6.00 per six-pack). The Company's award-winning
product line includes the following core brands: MacTarnahan's Amber Ale,
Original (Oregon) Honey Beer, Haystack Black Porter and ZigZag River Lager;
seasonal brands including Icicle Creek Winter Ale, India Pale Ale, Malarkey's
Wild Irish Ale, Portland Summer Pale Ale and Uncle Otto's Harvest Oktoberfest
Maerzen; and specialty products including Wheat Berry Brew, Bavarian Style
Weizen, Oatmeal Stout and Highlander Ale. The Company uses distributors to
sell principally to the packaged/bottle market through authorized retail
outlets and the on-premise draft market through establishments licensed to
serve alcoholic beverages. The Company primarily serves its home market of
Oregon, the western United States and the Midwestern United States.
The Company opened its first brewery in January 1986 at 1339 NW Flanders
Street in Portland, Oregon. In March 1986 a pub was added which allows
customers to view various stages of the brewing process. In July 1996 the
Company completed an expansion of the Flanders Street BrewPub which
significantly increased the restaurant area of the pub. The Company opened a
second brewery in June 1993 located at 2730 NW 31st Avenue in Portland, which
initially more than doubled its annual production capacity to approximately
26,000 barrels. Subsequent equipment additions and expansion have increased
capacity to approximately 135,000 barrels per year. In July 1994, a
restaurant, The BrewHouse Taproom & Grill, was constructed at the main
brewery and opened to the public.
INDUSTRY OVERVIEW
NATIONAL BEER INDUSTRY. Between 1934 and 1988 beer consumption in the US
climbed steadily. Since 1988 the market has remained virtually stagnant.
(SEE FOOTNOTE 1) During this period of little or no growth in beer
consumption, both the domestic specialty and import segments of the beer
market experienced rapid growth. Breweries, large and small, face heightened
competition with one another for market share.
The large national breweries (Anheuser-Busch, Miller Brewing Co., Adolph
Coors Brewing Co. and The Stroh Brewery Company) continue to dominate the
U.S. market with approximately 87% market share. Import sales occupy
approximately 8% (SEE FOOTNOTE 1) of the U.S. market. The specialty beer
industry comprises approximately 3% (SEE FOOTNOTE 1) of the U.S. market. All
other breweries make up the remainder of the U.S. market. Total domestic beer
sales (including sales of imports) increased an estimated 1% in 1997 and 1%
in 1996. (SEE FOOTNOTE 1) The larger breweries have increased efforts to
compete with smaller regional breweries.
SPECIALTY BEER INDUSTRY--NATIONAL. The Institute for Brewing Studies defines
the specialty brewing industry as microbreweries, brew pubs, contract brewing
companies and regional breweries that began as microbreweries. A large
brewery sells more than 500,000 barrels per year. A regional brewery sells
between 15,000 and 500,000 barrels per year. Portland Brewing Company is a
regional specialty brewer. Microbreweries are defined as selling less than
15,000 barrels per year. Brewpubs sell a minimum of 50% of their beer on
premise with the beer being brewed on location. Contract brewers brew beer
using a customer's recipe and ingredients at their facilities. The specialty
segment of the beer industry continues to grow. The number of microbreweries,
brewpubs and regional specialty brewers had grown to approximately 1,400 at
the end of 1997, from approximately 1,100 at the beginning of 1997. (SEE
FOOTNOTE 1)
2
<PAGE>
The compound annual growth rate in the specialty beer industry is
estimated to be approximately 7% from 1998 to 2001. In 1997, the specialty
beer market's share of the total beer market was near 3%. In 2001, the
specialty beer market share is expected to reach approximately 4%. (SEE
FOOTNOTE 1)
The Company believes the slowed growth rate in the specialty beer industry is
due to intense competition created by number of competitors and the
proliferation of new brands. As smaller breweries open up across the country,
the larger regional breweries are finding it harder to enter and maintain new
markets where consumers are inclined to purchase locally produced beer.
SPECIALTY BEER INDUSTRY--PACIFIC NORTHWEST. Since 1985, Oregon has been at the
center of the national specialty beer resurgence. However, sales of specialty
beers in Oregon increased by only 1% 1997, compared to 13% in 1996. Oregon and
Washington are considered mature markets in the U.S. specialty beer segment.
Consequently, the Company believes that growth in this segment will be much
more difficult in these two states. Sales of specialty beer in Oregon accounted
for nearly an 11% and 10% market share in 1997 and 1996, respectively. (SEE
FOOTNOTE 2)
- -----------
Footnotes:
(1) BEVERAGE INDUSTRY, January 1998.
(2) Oregon Liquor Control Commission's December 31, 1997 figures for beer
sales in Oregon.
The information referenced in footnotes (1) and (2) above have not been
independently verified by the Company.
- -----------
PRODUCTS
The Company offers a wide variety of specialty beers. The complete product
line includes core or primary brands, which are available year-round; a
rotating selection of seasonal brands, and specialty products. Draft product
(kegs) accounted for approximately 46% and 45% of the Company's beer
shipments in 1997 and 1996, respectively.
The Company's core brands include:
MACTARNAHAN'S AMBER ALE. MacTarnahan's Amber Ale is a complex,
copper-colored Scottish style ale of great character made with pale and
caramel malts and Cascade hops, and is available in draft, 12 oz. and 22 oz.
packages.
ORIGINAL (OREGON) HONEY BEER. Original (Oregon) Honey Beer is a pale
light-bodied ale made with two-row barley malt, Oregon clover honey, and
Nugget and Willamette hops, and is available in draft, 12 oz. and 22 oz.
packages.
HAYSTACK BLACK PORTER. Haystack Black Porter contains a balance of
domestic pale, caramel and black malts, enhanced with imported English
chocolate malt, and is available in draft, 12 oz. and 22 oz. packages.
ZIGZAG RIVER LAGER. ZigZag River Lager is a full bodied, bottom
fermented lager with a slight malty sweetness and subtle hop presence,
available in draft and 12 oz. packages.
The Company's seasonal brands (all available in draft and 12 oz. packages)
include:
ICICLE CREEK WINTER ALE. The color of old Mahogany, this seasonal ale is
the result of a blend of pale and dark specialty malts well balanced with
Galena and aromatic Saaz hops, and is offered from November through January.
3
<PAGE>
INDIA PALE ALE. The Company's India Pale Ale is aged in natural untoasted
American oak from the Ozarks that has been air dried for two years, one of the
few India Pale Ales to marry the hop and oak flavors, and is offered from
January through March.
MALARKEY'S WILD IRISH ALE. This dark brown ale is made with a blend of
Munich, Crystal and peated malts, balanced with Northern Brewer and Mt. Hood
hops, and is offered in February and March.
PORTLAND SUMMER PALE ALE. A modified recipe of the founders' original is a
clean medium-bodied pale ale, brewed with two-row barley malt and a blend of
Nugget and Cascade hops, and is offered from April through August.
UNCLE OTTO'S HARVEST OKTOBERFEST MAERZEN. This beer is created using a
blend of pale and select specialty malts, spiced with Northern Brewer and
Bohemian Saaz hops, and is offered in September and October.
The Company's current specialty products include the Flanders Street
Originals Line:
WHEAT BERRY BREW. To the traditional malted barley, hops, and yeast is
added a judicious amount of malted wheat and the natural essence of
marionberries. This combination creates Wheat Berry Brew, which is available
in draft, 12 oz. and 22 oz. packages.
BAVARIAN STYLE WEIZEN. Bavarian Style Weizen is a true Bavarian weizen
using the distinctive weizen yeast which provides a light golden spicy beer,
available in draft and 12 oz. packages
OATMEAL STOUT. The Company's heartiest brew blends the flavor of pale,
crystal and black malts, balanced with the subtle aroma of Styrian Golding
hops and a small addition of oatmeal, and is available in draft only.
HIGHLANDER ALE. Highlander Ale is full bodied and hoppy, with caramel
malts, and is available in draft only.
RESTAURANTS
The Company operates two restaurants in Portland, The Brewhouse Taproom and
Grill and The Flanders Street BrewPub. The Brewhouse Taproom and Grill is a
tasting room and restaurant that is upscale in comparison to other brewpubs
in the region. The Flanders Street BrewPub is located at the site of the
Company's original brewery and has been in continuous operation for more than
ten years. In the summer of 1996, adjacent space was acquired and the pub was
enlarged by more than twofold in order to add a full service kitchen and
dining room.
MARKETING AND SALES
The Company primarily uses licensed beer distributors to sell to and service
on- and off-premise accounts in specific geographic territories. These
distributors maintain broad distribution in the Company's home market of
Oregon and the Western states, and as capacity allows, may expand
distribution into selected high-potential markets outside the West. The
expansion of the Company's production capacity has permitted the addition of
new distributors. The Company presently uses approximately 135 distributors
throughout the western and Midwestern United States. The Company also uses
sales representatives to promote its products and augment its distributors'
efforts. The Company presently employs 11 sales representatives based in the
following areas; five in Oregon, two in California, three in Washington and
one in Minnesota.
The Company's 1998 marketing plan focuses on key Northwest markets,
including: Oregon, Northern California and Washington. Secondary markets
include Southern California, Hawaii, Alaska, Idaho, Montana and the
Midwestern U.S. The Company plans to enhance consumer awareness through
increased advertising
4
<PAGE>
and promotional activities in key markets and continued participation in
selected sports, music and community activities, which offer opportunities
for introduction of the Company and sampling of its products. The Company
plans to concentrate its sales and marketing resources toward increasing case
beer sales to major retail chains as well as draft beer sales.
TRADEMARKS
The Company has a program to obtain United States trademark registrations for
its key bottled brands. The Company owns federal trademark registrations for
the name MACTARNAHAN'S, the name HAYSTACK BLACK, the name ZIGZAG RIVER LAGER,
the OREGON HONEY BEER label design and the MACTARNAHAN'S label design. The
Company has pending applications for federal registration of the brand names
OREGON HONEY BEER, WOODSTOCK IPA, and for the mark PORTLAND BREWING. To the
best of the Company's knowledge, it has the right to use these marks on a
nationwide basis in connection with malt beverages.
The Company has long maintained a practice of registering its brand names as
trademarks in the State of Oregon. It owns Oregon registrations for numerous
marks, including the brand names HAYSTACK BLACK, BAVARIAN STYLE WEIZEN, WHEAT
BERRY BREW, UNCLE OTTO'S OKTOBERFEST, PORTLAND PORTER, PORTLAND BREWING PILS,
PORTLAND ALE and MALARKEY'S WILD IRISH ALE. In addition, the Company owns
state registrations in California, Washington and Colorado for key brand
names. To the best of the Company's knowledge, it has the right to use the
brand name of each of its current products in the areas where those products
are currently distributed.
COMPETITION
The specialty brewing industry has experienced significant change in the last
several years. Growth rates slowed, distribution opportunities became limited
and more players entered the specialty brewing category of the U.S. beer
market.
IMPACT OF LARGE DOMESTIC BREWERS. The largest domestic brewers compete with
the specialty brewing industry by purchasing equity investments in specialty
brewers, creating new brands meant to compete with specialty breweries, and
providing incentives to distributors to distribute their products. These
competitive actions have had a significant impact on the specialty brewing
industry.
Growing demand for imported beer has negatively impacted sales of domestic
specialty beers. Imported beer and domestic specialty beer compete with one
another as both are considered premium products.
NEW ENTRANTS INTO THE SPECIALTY BEER CATEGORY. Increased activities of large
domestic brewers and disappointing financial performance by the largest
specialty brewers, caused the rate of entry into the specialty beer segment
to slacken in 1997, a year in which there were more reported closures and
mergers than openings. The Company believes that category saturation will
make growth more difficult for existing regional specialty brewers in the
next few years. The Company also believes that competition affecting its
growth will likely continue to come from imported beers, national breweries,
national specialty breweries, larger regional specialty breweries with
aggressive mass marketing capabilities, and small micro breweries and brew
pubs which have strong local appeal.
DECREASED GROWTH RATES. The specialty beer segment increased only an
estimated 7% in 1997, compared to 28% in 1996 and 50% in 1995 (SEE FOOTNOTE 1
ON PAGE 3). As a result of the increased competition from large domestic
breweries and the niche marketing of new entrants into the specialty beer
segment, existing specialty breweries saw growth rates in 1997 that were well
below expectations. Competition among specialty brewers is intensifying and
distributors and retailers are managing the number of products they carry,
choosing to keep only the most profitable. The Company believes that in order
to meet financial obligations and shareholder expectations, publicly held
specialty brewers are likely to undertake aggressive sales and marketing
strategies to increase sales and gain market share.
5
<PAGE>
The domestic specialty beer category is particularly saturated in the Pacific
Northwest where domestic specialty beers accounted for 10% of all beer sales,
compared to 2.6% nationally. (SEE FOOTNOTE A)
INDUSTRY CONSOLIDATION. The Company believes that the recent specialty beer
market developments discussed above are potential indicators of industry
consolidation, and that survival in the short term may mean price
discounting, solidifying distribution and increasing sales and marketing
efforts. Further, the Company believes that survival in the long term may
mean consolidation to overcome distribution challenges and deteriorating
economics.
Footnote:
(A) Oregon Liquor Control Commission's December 31, 1997 figures for beer
sales in Oregon, and Washington State Liquor Control Board's December 31,
1997 figures for beer sales in Washington.
The information referenced in footnote (A) above has not been independently
verified by the Company.
- ------------
GOVERNMENTAL REGULATION
The production and sale of alcoholic beverages is subject to extensive
regulation by the Federal Bureau of Alcohol, Tobacco and Firearms and
individual states' alcoholic beverage regulatory agencies.
LICENSE DESCRIPTION. The Company operates with two Brewpub licenses which
allow sales off-premise as well as through up to four retail outlets. The
Company operates two restaurants; one at each of its breweries.
TAXES. The Company pays a federal excise tax (FET) of $7.00 per barrel on all
production. This tax increases to $18.00 per barrel on production above
60,000 barrels per year. In addition, the Company pays an Oregon excise tax
of $2.60 per barrel and a Washington excise tax of $4.78 per barrel on beer
sold in those states. In other states, similar excise taxes are levied on
the distributor. Increases in either the federal or state excise taxes would
inevitably raise the price of beer, which may adversely affect sales.
DRAM SHOP LIABILITY. The Oregon Supreme Court has held that the serving of
alcoholic beverages to a person known to be intoxicated may, under certain
circumstances, result in the server being held liable to third parties for
injuries caused by the intoxicated customer. The Company serves beer and
wine to its customers at its two restaurants. If an intoxicated customer is
served wine or beer and subsequently commits a tort such as causing an
automobile accident, the Company may be held liable for damages to the
injured person or persons. The Company has obtained host liquor liability
insurance coverage and will continue such coverage if available at a
reasonable cost. However, future increases in insurance premiums may make it
prohibitive for the Company to maintain adequate insurance coverage. A large
damage award against the Company, not adequately covered by insurance, would
adversely affect the Company's financial position.
RESEARCH AND DEVELOPMENT
The Company had minimal research and development expenditures in 1997 and
1996, and had no customer sponsored research and development activities
during such periods. However, the Company does, from time to time, develop
new products at its original brewery. Such products are sold to retail
customers and, accordingly, associated development costs are expensed as cost
of goods sold.
EMPLOYEES
As of December 31, 1997, the Company had 119 employees (101 full time),
including 28 in brewing, bottling and shipping operations, 68 in retail
operations, seven in administration and 16 in sales and marketing. None of
the employees are covered by collective bargaining agreements. The Company
provides its full-time employees with health, dental and life insurance,
short and long term disability, and a 401(k) plan. The Company believes its
employee relations are good.
6
<PAGE>
CONCENTRATIONS OF RISK
GEOGRAPHICAL AND DISTRIBUTOR CONCENTRATION. In 1997, wholesale distributors
accounted for 92% of total shipments, of which 42% were to Oregon
distributors. The Company's largest distributor, Columbia Distributing
Company of Portland, Oregon, distributes the Company's products in Oregon and
accounted for approximately 29% of 1997 revenues. The next largest
distributor accounted for approximately 3% of the Company's total revenues
for the same period. Distribution agreements generally grant exclusive
territories to distributors. Distribution agreements and applicable state
laws limit the ability of the Company to terminate such agreements. The
Company's distributors also market and distribute competing brands. While the
Company believes it has good relationships with most of its distributors, the
Company can give no assurance that each of its distributors will continue to
effectively market and distribute the Company's beer. Because state liquor
laws and/or standard contractual provisions limit the Company's ability to
terminate a distribution agreement, the Company can give no assurance that a
distributor for any given geographic area could be replaced without cost or
replaced immediately, either temporarily or permanently, in the event the
distributor was performing poorly in its efforts to distribute the Company's
products or was otherwise unable to perform (e.g. as a result of an employee
strike or damage caused by fire or natural disaster). The Company's inability
to replace a non-performing or poorly performing distributor in a timely
fashion and/or with minimal cost could have a significant adverse effect on
the Company's results of operations, particularly if the distributor were
Columbia Distributing Company, the Company's largest distributor.
INCREASED COMPETITION AND SATURATION IN THE SPECIALTY BEER INDUSTRY. SEE
"COMPETITION" ABOVE. Increased competition and the proliferation of brands in
the specialty beer industry has had and may continue to have an adverse
effect on the Company's business, financial condition and results of
operations. There can be no assurance that the specialty beer industry will
experience growth, will not experience a downturn or that any downturn will
not be severe. The Company's future success will depend upon its ability to
continue to build brand awareness and increase sales and profits.
OPERATING HAZARDS. The Company's operations, and the brewing industry in
general, are subject to certain hazards such as contamination of brews by
micro-organisms and risk of equipment failure. The Company's products are not
heat pasteurized, irradiated or chemically treated. The Company has product
liability insurance that it believes is adequate to cover risks of
contamination to third-parties. There can be no assurance that such insurance
will continue to be available at a price or on other terms satisfactory to
the Company. The Company carries business interruption insurance to cover
against insured losses to equipment from direct physical damage.
ENVIRONMENTAL MATTERS
The Company is addressing certain waste water treatment issues raised in a
March 1998 letter from the City of Portland, Oregon. The Company expects the
total cost of any improvements will be approximately $125,000, and that any
such improvements will be completed by the end of the third quarter of 1998.
SOURCES OF LIQUIDITY
The Company has a $1,000,000 revolving line of credit with a bank. At
December 31, 1997, $203,000 was outstanding with interest at the bank's
reference rate plus 1.5% (10.0% at December 31, 1997). The Company had a
$2,000,000 non-revolving equipment line of credit with a bank, which
converted to a term loan in June 1997. The amount outstanding under the term
loan at December 31, 1997 of $1,864,020, bears interest at the bank's
reference rate plus 0.5% (9.0% at December 31, 1997). The Company has two
additional term loans outstanding with a bank, under which $435,311 and
$596,115 were outstanding at December 31, 1997, bearing interest at 7.55% and
at the bank's reference rate plus 0.5% (9.0%), respectively.
These term loans and line of credit are secured by all assets of the Company,
including receivables, inventory, and property and equipment and contain
restrictions relating to specified financial ratios and
7
<PAGE>
restrictions on dividend payments, as well as the lender's standard covenants
and restrictions. In November 1997 the loan covenants were changed to meet
the Company's current financial requirements. The new covenants, measured on
a monthly basis, require a minimum tangible net worth of $5,000,000; a
current ratio of .70 to 1.00 through December 31, 1997 and .60 to 1:00
thereafter; liabilities to tangible net worth of equal to or less than 1.0 to
1.0; and, various monthly reporting requirements typical of such a credit
facility. At December 31, 1997, the Company was in compliance with all loan
covenants.
In April 1997 the total credit facility with the bank was renewed through
April 1998. The entire facility is due for its annual review and renewal on
April 30, 1998. The Company expects to renegotiate the facility, but at this
time the terms of such renegotiation have not been established.
In December 1997, the Company borrowed a total of $400,000 from two of its
shareholders under 10% Subordinated Notes (the "Notes"). Payments under the
Notes are due in thirty six equal monthly principal payments of $11,111
commencing July 1, 1999. Interest is payable monthly at 10% per annum,
commencing on February 1, 1998. Proceeds under the Notes were applied to the
outstanding balance under the Company's line of credit. The Notes are secured
by a second security interest in the Company's accounts receivable and
inventory.
LIQUIDITY RISKS
The Company operates in the specialty beer industry. Intense competition and
the proliferation of new brands has had and may continue to have an adverse
effect on the Company's business, financial condition and results of
operations.
The Company has experienced significant operating losses during the years
ended December 31, 1997 and 1996, and has continued to incur losses in the
first quarter of 1998. Further, as of December 31, 1997, the Company had a
working capital deficit of $415,674. Two major stockholders of the Company
have expressed their intention to provide funding, as necessary, to sustain
the Company's operations through December 31, 1998. In management's opinion,
the Company's current financial resources and the funding intentions of the
two major stockholders will meet its working capital needs through December
31, 1998.
YEAR 2000 ISSUE
The Company has made an assessment of the effect of the Year 2000 issue on
its systems, equipment and software. Based on this assessment, the Company
believes its systems, equipment and software will properly recognize calendar
dates beginning in the Year 2000 without any significant changes. The Company
intends to evaluate the information systems and software of its outside
vendors in connection with the Year 2000 issue, but anticipates any potential
modification to its systems and software will not affect the Company's future
financial results. Accordingly, the Company expects the Year 2000 issue will
not have a material financial impact on the Company.
ITEM 7. DESCRIPTION OF PROPERTY
The Company's original brewery is located at 1339 NW Flanders Street in
Portland, Oregon and is leased by the Company. It has approximately 2,500
square feet of manufacturing, shipping and warehouse space and 4,600 feet of
restaurant space, which the Company expanded in 1996. The Company's original
brewery produces lower volume specialty brews and serves as a pilot brewery
for new product development. The original brewery lease expires in 1999, with
three consecutive three-year renewal options. The current monthly rent is
$4,950 plus property taxes, insurance and maintenance, with adjustments for
inflation or changes in fair market rental.
8
<PAGE>
The Company's main brewery, located at 2730 NW 31st Avenue in Portland,
showcases the copper brewing vessels and equipment acquired in 1991 from the
Sixenbrau brewery in Nordlingen, Germany. When it opened in June 1993, the
new brewery initially more than doubled the Company's annual production
capacity to 26,000 barrels and has a present capacity of approximately
135,000 barrels. The new brewery has 27,000 square feet of manufacturing,
shipping and warehouse space with a 1,000 square foot, three-story brewhouse
(to display the copper brewing vessels), and 3,000 square feet of offices.
Also included is a 3,000 square foot restaurant, The Brewhouse Taproom &
Grill, complete with an outdoor seating area. The new brewery lease is for a
15 year term which commenced June 15, 1993. The monthly rent is $22,060 plus
property taxes, insurance and maintenance, with adjustments for inflation or
changes in fair market rental value at the beginning of the sixth and
eleventh years. In December 1997, in connection with the issuance of
$400,000 of Notes Payable, the Company was given a $5000 reduction in the
amount of rent payable for each of the months of January through April 1998.
(SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS AND ITEM 11)
The Company subleases approximately 10,025 square feet of expansion space at
a building adjoining its brewery located at 2750 NW 31st Avenue in Portland,
Oregon. The initial term of the sublease expires March 31, 1999, with one
five year renewal option. Base rent is $3,307 per month, plus a share of
taxes and operating expenses. An option agreement has been entered into with
the owner of the building, L & L Land Co. (L & L), under which the Company
may purchase the building for $1,100,000 plus an amount, for improvements to
the building consisting of the construction of a shipping dock. In 1996, the
Company and L & L paid approximately $400,000, split equally, for the
construction of a shipping dock. The purchase option expires on December 31,
1998. (SEE ITEM 11 BELOW)
In 1995, the Company began leasing, from an unrelated third party,
approximately 2,700 square feet of additional office space, at a monthly rent
of $1,760. The Company vacated this office space in October 1997. This office
space was used for accounting and other administrative functions.
ITEM 8. DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES
DIRECTORS. The following lists the persons currently serving as directors
along with certain information. The term of office for each person elected as
a director continues until the next Annual Meeting of Shareholders and until
a successor has been elected and qualified.
<TABLE>
<CAPTION>
NAME OF NOMINEE AGE
--------------- ---
<S> <C>
Charles A. (Tony) Adams 51
Edwin Hunt 75
Robert M. MacTarnahan 82
R. Scott MacTarnahan 51
Simon C. Ostler 51
Howard M. Wall, Jr. 52
</TABLE>
CHARLES A. (TONY) ADAMS. Mr. Adams has been Chairman of the Board of
Directors and President and Chief Executive Officer of the Company since
February 1992. He has been a Director of the Company since October 1988. Mr.
Adams is president of Electra Partners, Inc., a private investment holding
company. Mr. Adams was active in the real estate business beginning in 1973,
including owning and operating his own real estate company until 1983, when
he became a sales associate at CB Commercial Real Estate Group, Inc., where
he was employed until 1992. He holds a B.A. in Geology from the University of
Virginia and has studied graduate level economics and business administration
at the University of San Francisco, Portland State University and Stanford
University.
EDWIN HUNT. Mr. Hunt has been a Director since November 1993. Mr. Hunt is
the Chairman of Huntair, Inc., a company which manufactures air moving and
environmental systems for clean rooms. In September 1992,
9
<PAGE>
Mr. Hunt retired as president of Brod & McClung-Pace Co., a manufacturer of
high quality heating and ventilating equipment as well as heat transfer
equipment, where he had been employed for 46 years.
ROBERT M. MACTARNAHAN. Mr. MacTarnahan has been a Director since July 1985.
Mr. MacTarnahan has been a partner in Harmer Company and Black Lake
Investments for more than five years. Mr. MacTarnahan has been the president
of Honeyman Aluminum Products Company, a manufacturer of hand trucks for the
beverage industry, for more than 10 years. He is also active in the promotion
of the Company and the Company's MacTarnahan's Ale is named after him. (See
"Interest of Management and Others in Certain Transactions") Mr. R. Scott
MacTarnahan is his son.
R. SCOTT MACTARNAHAN. Mr. MacTarnahan has been a Director since July 1985.
He has been vice president and general manager of Honeyman Aluminum Products
Company and Harmer Company for more than 10 years. Mr. MacTarnahan received a
B.S. in Business Administration from Portland State University in 1968. Mr.
Robert M. MacTarnahan is his father.
SIMON C. OSTLER. Mr. Ostler has been a Director since October 1988. He has
been president of Systems Manufacturing Company, Inc., a manufacturer of
industrial finishing systems for more than five years. Mr. Ostler received a
C.O.P. from Greenmore College in England, in 1964.
HOWARD M. WALL, JR. Mr. Wall has been a Director of the Company since
October 1992. Since 1984 he has been the president and chief executive
officer of Portco Corporation, a Vancouver, Washington manufacturer of paper
and plastic flexible packaging for the produce, fish, and roofing industries.
He has had a long association with the Northwest hop industry, as Portco
developed the world's only biodegradable paper hop string. Mr. Wall received
a B.A. in English from the University of Oregon in 1973.
EXECUTIVE OFFICERS. The following lists the names, ages and positions of the
Company's executive officers, at December 31, 1997, along with certain other
information. The Company's officers are elected by the Board of Directors at
its annual meeting, and hold office until the next annual meeting of the
Board of Directors and until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH COMPANY
---- --- ------------------------
<S> <C> <C>
Charles A. (Tony) Adams 51 Chairman of the Board, President and
Chief Executive Officer
Frederick L. Bowman 53 Vice President, Sales and Marketing
Treasurer and Secretary
Glenmore James 43 Executive Vice President , Chief
Financial Officer
</TABLE>
For information on the business background of Mr. Adams, see "Directors"
above.
FREDERICK L. BOWMAN. Mr. Bowman is a founder of the Company and has been
Vice President, Sales and Marketing since February 1992. In July 1997 Mr.
Bowman was also elected Treasurer and Secretary. Mr. Bowman serves as
corporate liaison to the beer industry and assists in marketing efforts
including public relations and the Company's distributor support program. He
designed the Company's original products and brewery. Previous to founding
Portland Brewing Company, Mr. Bowman was involved in the wholesale automotive
industry as both a technician and a district service manager. Mr. Bowman has
attended Portland State University, University of Oregon and Oregon State
University. In addition, Mr. Bowman attended the Brewing Microbiology and
Microscopy course at the Siebel Institute in 1988.
GLENMORE JAMES. Mr. James has Chief Financial Officer since June 1994, served
as Vice President and Treasurer from June 1994 until July 1997, and served as
Secretary from September 1996 until July 1997. In July 1997 Mr. James was
elected Executive Vice President. He joined the Company full-time in April
1994. Prior to
10
<PAGE>
that, Mr. James acted as a consultant to the Company. Mr. James is
responsible for the financial and operations departments of the Company. Mr.
James has worked for fifteen years in the Portland area business community,
initially in financial accounting management positions in various
manufacturing and distribution companies and more recently as an independent
business consultant. Mr. James received his ICSA certification in 1976 from
Mid-Essex Technical College, England.
SIGNIFICANT EMPLOYEES. The names, ages and positions of the Company's
significant employees are as follows:
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION WITH COMPANY
---- --- -----------------------------
<S> <C> <C>
Alan Kornhauser 46 Brewmaster
</TABLE>
ALAN KORNHAUSER. Mr. Kornhauser joined the Company in December 1995 as
Brewmaster. He is responsible for the entire brewing process, from raw
materials to the finished product. Prior to joining the Company, Mr.
Kornhauser was Brewmaster for G. Heileman Brewing Company of Milwaukee,
Wisconsin and he also spent 18 years with Anchor Brewing Company in San
Francisco, California. Mr. Kornhauser has a B.A. degree from Beloit College
and has done post graduate work in Chemistry at the University of Rhode
Island.
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS
a. Director and Officer Remuneration
Directors receive no cash compensation for serving on the Board of Directors.
Each Director, with the exception of Mr. Adams, has been granted options
under the Company's Non-Qualified Stock Option Plan ("NQSOP"). To date,
options to purchase 21,000 shares of the Company's Common Stock at $5.3333
per share have been granted to Directors under the NQSOP. No options were
granted under the NQSOP in 1997.
The following table and notes set forth information regarding all cash
compensation paid by the Company during the year ended December 31, 1997, to
each of the three most highly compensated officers and all officers as a
group.
<TABLE>
<CAPTION>
CAPACITIES IN WHICH AGGREGATE
NAME REMUNERATION WAS RECEIVED REMUNERATION
- ---- ------------------------- ------------
<S> <C> <C>
Charles A. (Tony) Adams Chairman of the Board,
President and Chief Executive Officer $ 76,500
Glenmore James Executive Vice President, Chief Financial
Officer $ 89,391
Frederick L. Bowman Vice President, Sales and Marketing,
Treasurer and Secretary $ 47,492
All officers as a group
(3 persons) $213,383
</TABLE>
b. Remuneration Plans
INCENTIVE STOCK OPTION PLAN. In October 1992, the shareholders of the
Company approved the Company's 1992 Incentive Stock Option Plan ("ISOP"). The
ISOP is administered by the Company's Board of Directors and provides for
grants to officers and employees of options to acquire up to 163,500 shares
of the Company's Common Stock, subject to the limitations set forth in the
ISOP. Pursuant to the ISOP, the granting of options is at the discretion of
the Board of Directors, and it has the authority to set the terms and
conditions of the options granted, including the option exercise price which
must be a price equal to at least 100% of the fair market value of the
subject shares of Common Stock at the time the option is granted. As of
December 31, 1997, options covering 139,500 shares of the Company's Common
Stock were outstanding under the ISOP.
11
<PAGE>
RESTATED CASH INCENTIVE PLAN. The Company may award its officers and
employees, under its Restated Cash Incentive Plan ("the Plan"), bonuses in an
amount up to 10 percent (10%) of net operating profits before taxes. Awards
under the Plan will be allocated among the officers and employees in
accordance with the provisions of the plan at the discretion of the Board of
Directors. No amounts were awarded in 1997 or 1996 under the Plan.
NON-QUALIFIED STOCK OPTION PLAN. In August 1994, the Board of Directors
adopted the 1994 Non-Qualified Stock Option Plan ("NQSOP"). The NQSOP is
administered by the Board of Directors and provides for grants to officers,
employees, directors and consultants of options to acquire up to 45,000
shares of the Company's Common Stock at an exercise price of at least 85% of
the fair market value of the subject shares of Common Stock at the time the
option is granted. The granting of options is at the discretion of the Board
of Directors. As of December 31, 1997, options covering 21,000 shares of the
Company's Common Stock were outstanding under the NQSOP.
ITEM 10. SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of February 28, 1998 as to (i)
each person who is known by the Company to own beneficially 10% or more of
the outstanding shares of the Company's Common Stock, (ii) each of the three
most highly compensated officers and (iii) all Directors and officers as a
group. Except as otherwise noted, the Company believes the persons listed
below have sole investment and voting power with respect to the Common Stock
owned by them.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF BENEFICIAL OWNER OR
NUMBER OF PERSONS IN GROUP SHARES BENEFICIALLY OWNED (1)
-------------------------- -----------------------------
SHARES PERCENT
------ -------
<S> <C> <C>
Robert M. MacTarnahan (3) 296,043.75 13.9%
4670 SW Pacific Avenue
Beaverton, Oregon 97005
R. Scott MacTarnahan (4) 273,783.75 12.9%
4670 SW Pacific Avenue
Beaverton, Oregon 97005
Charles A. (Tony) Adams (2)(5) 282,228.75 13.1%
Glenmore James (2)(6) 29,500 1.4%
Frederick L. Bowman (2)(7) 52,445 2.5%
All Officers and Directors, as a group,
(eight persons) (8) 710,467.50 31.5%
</TABLE>
* Less than 1%
(1) Beneficial ownership includes voting power and investment power with
respect to shares and includes shares issuable upon the exercise of
outstanding stock options and warrants.
(2) The business address for these individuals is 2730 NW 31st Avenue,
Portland, Oregon 97210.
12
<PAGE>
(3) Includes 22,860 shares owned individually by Mr. Robert M. MacTarnahan,
73,335 shares held by Black Lake Investments, 120,000 shares held by Harmer
Mill & Logging Supply Co., and 30,000 shares held by Harco Products, Inc.,
each of which is controlled by Mr. and Mrs. Robert M. MacTarnahan and Mr. R.
Scott MacTarnahan, 43,848.75 shares which may be purchased for $3.3333 per
share upon exercise of a warrant held by MacTarnahan Limited Partnership,
whose general partner is Harmer Mill & Logging Supply Co. and whose limited
partners are Mr. Robert M. MacTarnahan and Mrs. Ruth MacTarnahan, and 6,000
shares which may be purchased for $5.3333 per share upon exercise of a
non-qualified stock option held by Mr. Robert M. MacTarnahan. The
non-qualified options are immediately exercisable but are subject to
repurchase at the underlying exercise price by the Company if the optionee
ceases to provide service (as defined in the Company's 1994 Nonqualified
Stock Option Plan) to the Company during a three-year period following the
date of grant. The repurchase right expires as to one-third of the
nonqualified options shares on each anniversary of the date of grant.
(4) Includes 73,335 shares held by Black Lake Investments, 120,000 shares
held by Harmer Mill & Logging Supply, Co., and 30,000 shares held by Harco
Products, Inc., each of which is controlled by Mr. Robert M. MacTarnahan and
Mr. R. Scott MacTarnahan, 600 shares held by Mr. R. Scott MacTarnahan's
spouse, 43,848.75 shares which may be purchased for $3.3333 per share upon
exercise of a warrant held by MacTarnahan Limited Partnership, whose general
partner is Harmer Mill & Logging Supply Co. and whose limited partners are
Mr. Robert M. MacTarnahan and Mrs. Ruth MacTarnahan and, 6,000 shares which
may be purchased for $5.3333 per share upon exercise of a non-qualified stock
option held by Mr. R. Scott MacTarnahan. The non-qualified options are
immediately exercisable but are subject to repurchase at the underlying
exercise price by the Company if the optionee ceases to provide service (as
defined in the Company's 1994 Nonqualified Stock Option Plan) to the Company
during a three-year period following the date of grant.
(5) Includes 180,300 shares held by Electra Partners, Inc., an entity
controlled by Mr. Adams, 21,030 shares held by Mr. Adams as Trustee of the
Charles A. Adams Family Trust, 525 shares held by Mr. Adams' daughter and 525
shares held by Mr. Adams' son, 43,848.75 shares which may be purchased for
$3.3333 upon exercise of a warrant held by Electra Partners, Inc. and 36,000
shares which may be purchased for $5.8666 per share upon exercise of an
incentive stock option held by Mr. Adams.
(6) Includes 12,000 and 16,000 shares which may be purchased for $5.3333 and
$7.00 per share, respectively, upon exercise of incentive stock options held
by Mr. James.
(7) Includes 44,445 shares owned individually by Mr. Bowman, and 8,000
shares which may be purchased for $7.00 per share upon exercise of incentive
stock options held by Mr. Bowman.
(8) Includes 93,000 shares which may be purchased for prices ranging from
$3.333 to $7.00 per share, upon exercise of stock options held by all
Directors and officers, as a group. Includes 43,848.75 shares which may be
purchased for $3.3333 per share upon exercise of a warrant held by
MacTarnahan Limited Partnership and 43,848.75 shares which may be purchased
for $3.3333 upon exercise of a warrant held by Electra Partners, Inc.
13
<PAGE>
The following table sets forth certain information regarding outstanding
options and warrants to purchase shares of Common Stock of the Company as of
February 28, 1998 as to (i) each person who is known by the Company to own
beneficially 10% or more of the outstanding shares of the Company's Common
Stock, (ii) each of the three most highly compensated officers and (iii) all
Directors and officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMMON
STOCK CALLED FOR BY DATE OF
NAME OF HOLDER OPTIONS AND WARRANTS EXERCISE PRICE EXERCISE
--------------- -------------------------- -------------- --------
<S> <C> <C> <C>
MacTarnahan Limited Partnership (1) 43,848.75 $3.333 (2)
Electra Partners, Inc. (1) 43,848.75 $3.333 (2)
Robert M. MacTarnahan 6,000 $5.333 (2)
R. Scott MacTarnahan 6,000 $5.333 (2)
Charles A. (Tony) Adams 36,000 $5.866 (3)
Frederick L. Bowman 8,000 $7.00 (4)
Glenmore James 28,000 $5.333-$7.00 (5)
All Officers and Directors as a Group,
(8 persons) 180,697.5 $3.333-$7.00 (6)
</TABLE>
(1) MacTarnahan Limited Partnership is an entity whose general partner is
Harmer Mill & Logging Supply Co. and whose limited partners are Robert
M. MacTarnahan and Ruth MacTarnahan. Electra Partners, Inc. is an
entity controlled by Mr. Adams.
(2) Options and Warrants are currently exercisable.
(3) As of February 28, 1998, options to purchase 29,250 shares of Common
Stock were exercisable. Options to purchase the remaining 6,750 shares
of Common Stock become exercisable quarterly, and will be fully
exercisable in November 1998.
(4) As of February 28, 1998, options to purchase 2,800 shares of Common
Stock were exercisable. Options to purchase the remaining 5,200 shares
of Common Stock become exercisable quarterly, and will be fully
exercisable in January 2001.
(5) As of February 28, 1998, options to purchase 10,200 shares of Common
Stock were exercisable. Options to purchase the remaining 17,800 shares
of Common Stock become exercisable quarterly, and will be fully
exercisable as follows: 4,800 shares in November 1999, 3,000 shares in
January 2001, and 10,000 in March 1999.
(6) As of February 28, 1998, options to purchase 63,650 shares of Common
Stock were exercisable. Options to purchase the remaining 29,350 shares
of Common Stock become exercisable quarterly, and will be fully
exercisable at various dates from November 1998 through January 2001.
As of February 28, 1998, warrants to purchase 87,697.5 shares of Common
Stock were exercisable.
14
<PAGE>
ITEM 11. INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
LEASE AGREEMENT WITH PORTLAND BREWING BUILDING, L.L.C
In November 1992, the Company executed a triple net, 15 year lease (with
three five-year renewal options) with Portland Brewing Building Partners
("Brewing Partners"), which developed the Company's new brewery at 2730 NW
31st Avenue in Portland. The Company believes that the terms and conditions
of its lease, as amended, are fair and reasonable and are no less favorable
to the Company than could be obtained from unaffiliated parties. Brewing
Partners was an equal 50/50 partnership of Electra Partners, Inc.
("Electra"), a company controlled by Mr. Adams, and Harmer Mill & Logging
Supply Co. ("Harmer"), a company controlled by Mr. and Mrs. Robert M.
MacTarnahan. In 1995, after a series of transactions, the property and the
lease were contributed to Portland Brewing Building, LLC, which is owned 50%
by MacTarnahan Limited Partnership (whose general partner is Harmer and whose
limited partners are Robert M. MacTarnahan and Ruth MacTarnahan); 25.1604% by
Electra; and 24.8396% by L & L Land Co. (a general partnership consisting of
Howard M. Wall, a director of the Company and his wife, Patricia Wall). In
connection with the negotiation of this lease, MacTarnahan Limited
Partnership and Electra Partners, Inc. each have warrants for the purchase of
43,848.75 shares of Common Stock, exercisable at any time through December
31, 2002, at an exercise price of $3.333 per share.
Monthly lease payments, which began June 15, 1993, are $22,060 plus property
taxes, insurance and maintenance. In December 1997, in connection with the
issuance of $400,000 of Subordinated Notes to Harmer and the Charles A. Adams
Family Trust, lease payments were reduced by $5000 for each of the months of
January through April 1998.
LEASE AGREEMENT WITH L & L LAND CO.
In January 1995, the Company entered into a sublease of approximately 10,025
square feet of space (the "sublease") located in the building commonly known
as 2750 N.W. 31st Avenue, Portland, Oregon (the "Adjacent Building"). The
Adjacent Building was owned by an unrelated third party and was leased to
Power Transmission Products, Inc., who executed the sublease in favor of the
Company. The Adjacent Building includes a total of approximately 23,000
square feet of improved space. The term of the sublease expires March 31,
1999.
In December 1995, L & L Land Co. (also appearing of record as L & L Land)
acquired the Adjacent Building. L & L Land Co. is a general partnership
between Howard M. Wall, a director of the Company, and his wife, Patricia
Wall. In acquiring the Adjacent Building, L & L Land Co. also became the
landlord under the lease to Power Transmission Products, Inc.
Contemporaneously with the acquisition of the Adjacent Building, L & L Land
Co. executed an Option to Purchase and Agreement and Option to Lease (the
"Option Agreement") with the Company dated December 28, 1995, pursuant to
which (a) the Company was granted the exclusive and irrevocable right and
option to acquire the Adjacent Building until December 31, 1998, for a total
purchase price of $1,100,000 (the amount paid by L & L Land Co. to acquire
the Adjacent Building), plus the amount, up to $200,000, paid by L & L Land
Co. for the improvements described below, (b) the Company was granted the
right and option to lease the entirety of the Adjacent Building if a written
notice is given by the Company before the later of the Company receiving
written confirmation that Power Transmission Products, Inc. has vacated the
Adjacent Building and that L & L Land Co. has the legal ability to lease the
entirety of the Adjacent Building to the Company or September 30, 1998, in
which event the Adjacent Building would be leased to the Company for a
10-year term at a rent of $10,833 per month for the first five years and at a
fair market rental value rate for the remaining five years, and (c) the
Company agreed to lease the entirety of the Adjacent Building through March
31, 1999 in the event the Power Transmission Products, Inc. lease is
terminated and vacated prior to March 31, 1999.
As consideration for the Option Agreement, the Company agreed to pay L & L
Land Co. monthly in arrears an amount equal to interest which would accrue at
the annual rate of 10% on the sum expended by L & L Land Co.
15
<PAGE>
for the improvements described below, up to a maximum expenditure of
$200,000, with such amount to commence to accrue upon final completion of the
improvements and to cease upon the earlier of acquisition of the Adjacent
Building by the Company, execution of a direct lease by the Company for the
entire Adjacent Building, the termination of the Option Agreement, or March
31, 1999, whichever is the earliest of such dates.
L & L Land Co. agreed, in the Option Agreement, to construct certain
improvements (consisting of a shipping dock) to the Adjacent Building. In
1996, the Company and L & L Land Co. paid approximately $400,000, split
equally, for the construction of the shipping dock.
LICENSE AGREEMENT WITH ROBERT M. MACTARNAHAN
In July 1994, the Company entered into a License Agreement ("License
Agreement") with Robert M. MacTarnahan, a director of the Company, and Harmer
Mill & Logging Supply Co., a company controlled by Mr. and Mrs. Robert M.
MacTarnahan. Pursuant to the License Agreement, (i) Mr. MacTarnahan conveys
to the Company the right to use his surname and its variation "MacTarnahan"
as a Company trademark, and (ii) the Company has been granted an exclusive
worldwide license to use Mr. MacTarnahan's likeness, image and other personal
attributes to promote the sale of the Company's products, merchandise, and
related materials. The license expires on December 31, 2093. In
consideration of the license grant, the Company must pay a royalty of $1.00
per barrel of MacTarnahan's Ale sold by the Company for the term of the
license. The Company has the right to terminate the License Agreement on
30-days' written notice. The license shall also terminate (a) if, in any
subsequent year after Dilution (as defined below), the Company or its
successors fails to sell a volume of products equal to or greater than 20% of
the average annual value of sales of products in the prior five (5) years, or
(b) if the Company or its successors fail to make any sales of MacTarnahan's
Ale for a period of twelve months. The term "Dilution" means the occurrence
of any of the following: (i) MacTarnahan, his affiliates, Charles A. (Tony)
Adams, Mr. Adams' affiliates, and Portland Brewing Building Partners, L.L.C.,
collectively, cease to own at least ten percent (10%) of the common stock of
the Company (or any successor), including the shares that could be purchased
by any of the foregoing upon exercise of all outstanding warrants or options
granting rights to purchase Company stock; (ii) the Company sells
substantially all of its assets; or (iii) the Company sells or assigns its
right, title and interest to the brands "MacTarnahan's Ale," "MacTarnahan's
Scottish Ale," any other version of the MacTarnahan name used as a brand name
and/or the License Agreement. In the event the license is terminated or
terminates, the Company must assign its rights to the trademark "MacTarnahan"
and the above variations to Mr. MacTarnahan.
Royalties paid to Harmer under the License Agreement for 1997 and 1996 were
$23,430 and $21,974, respectively, based on the sale of 23,430 and 21,974
barrels, respectively, of MacTarnahan's Ale during the same periods.
10% AMORTIZING SUBORDINATED NOTES
In December 1997, the Company borrowed $400,000 under 10% Subordinated Notes
(the "Notes"). Of the $400,000, $200,000 was borrowed from each of (i) Harmer
Company, an entity controlled by Robert M. MacTarnahan, a Director of the
Company; and (ii) Charles A. Adams Family Trust, an entity controlled by
Charles A. Adams, the Company's President. Payments under the Notes are due
in thirty six equal monthly principal payments of $11,111 commencing July 1,
1999. Interest is payable monthly at 10% per annum, commencing on February 1,
1998. Proceeds under the Notes were applied to the outstanding balance under
the Company's line of credit. The Notes are secured by a second security
interest in the Company's accounts receivable and inventory. (SEE NOTE 3 OF
NOTES TO FINANCIAL STATEMENTS)
16
<PAGE>
PART II
ITEM 1. MARKET PRICE AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
SHAREHOLDER MATTERS
There is no public trading market for the Company's Common Stock. The Company
had 5,693 shareholders of record as of March 19, 1998. The Company has never
declared any cash dividends on its Common Stock, nor does the Company intend
to do so in the near future. Pursuant to a bank loan agreement, the Company
cannot declare or pay dividends on any of its outstanding stock, except
dividends payable in Common Stock of the Company, without prior written
consent of the bank.
ITEM 2. LEGAL PROCEEDINGS
As of the date of this Report on Form 10-KSB, there are no legal proceedings
pending to which the Company is a party or to which any of its property is
subject, and the Company does not know of any such action being contemplated.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the quarter
ended December 31, 1997.
ITEM 5. COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's executive officers and Directors, and persons who own
more than ten percent of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc. Executive officers, Directors and greater than ten
percent stockholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file. Based solely on its review
of the copies of such forms received by it, or written representations from
certain reporting persons, the Company believes that, during 1997, all
executive officers, Directors and greater than 10% shareholders complied with
all applicable filing requirements, except for a filing on Form 5 for Mr.
James reporting the grant of stock options in 1997, which was filed late.
ITEM 6. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1997.
17
<PAGE>
PART F/S
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants F-1
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Operations for the years ended December 31,
1997 and 1996 F-3
Statements of Stockholders' Equity for the years ended
December 31, 1997 and 1996 F-4
Statements of Cash Flows for years ended December 31, 1997
and 1996 F-5
Notes to Financial Statements F-6
</TABLE>
18
<PAGE>
PART III
ITEM 1. AND ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
- ---------------- -----------
<C> <C> <S>
2.1 3.1 Articles of Incorporation, as amended (5)
2.2 3.2 Amended and Restated Bylaws (7)
3.1 4.1 Specimen of Common Stock Certificate (1)
3.2 4.2 Warrant issued to Electra Partners, Inc. dated March 25, 1996 (2)
3.3 4.3 Warrant issued to MacTarnahan Limited Partnership dated March 25, 1996 (2)
6.1 10.1 Indenture of Lease between the Company and Portland Brewing
Building Partners dated November 4, 1992, as amended (1)
6.2 10.2 Sublease between the Company, Power Transmission Products, Inc.,
and Pacific Realty Associates, L.P., dated January 26, 1995 (1)
6.3 10.3 Lease Agreement between the Company and Leonard G. Johnson
dated April 27, 1994 (5)
6.4 10.4 License Agreement between the Company, R. M. MacTarnahan and Harmer
Company dated July 1, 1994 (1)
6.5 10.5 The Company's 1992 Incentive Stock Option Plan and Specimen
Form Plan Documents (1)(6)
6.6 10.6 The Company's 1994 Nonqualified Stock Option Plan and Specimen
Form Plan Documents (1)(6)
6.7 10.7 Resolutions of the Board of Directors reserving 30,000 shares
(now 45,000 shares as adjusted for the three-for-two stock split
effected on November 18, 1994) under the Company's 1994
Nonqualified Stock Option Plan (1)
6.8 10.8 Business Loan Agreement between the Company and Bank of America-
Oregon, dated December 15, 1995 (2)
6.9 10.9 Distribution Agreement between the Company and Columbia
Distributing, dated April 8, 1996 (5)
6.10 10.10 Restated Cash Incentive Plan, as amended (1)(6)
6.11 10.11 The Company's Stock Offering Purchase Plan for Employees and
Specimen Form Plan (1)(6)
6.12 10.12 Option to Purchase and Agreement and Option to Lease between
the Company and L&L Land Co., dated December 1995(2)
6.13 10.13 Indenture of Lease between the Company and Western Stations Co.
dated May 1, 1995 (3)
6.14 10.14 Manufacturing Services Agreement between the Company and The
Stroh Brewery Company dated January 31, 1996 (4)
19
<PAGE>
<CAPTION>
Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
- ---------------- -----------
<C> <C> <S>
6.15 10.15 Amendment No. 1 to Business Loan Agreement dated July 23, 1996*
6.16 10.16 Amendment No. 2 to Business Loan Agreement dated December 19, 1996*
6.17 10.17 Amendment No. 3 to Business Loan Agreement dated March 28, 1997*
6.18 10.18 Amendment No. 4 to Business Loan Agreement dated April 23, 1997*
6.19 10.19 Amendment No. 5 to Business Loan Agreement dated November 24, 1997*
6.20 10.20 10% Amortizing Subordinated Note between the Company and
Charles A. Adams Family Trust *
6.21 10.21 10% Amortizing Subordinated Note between the Company and Harmer
Company *
10.0 23.0 Consent of Arthur Andersen LLP *
12.0 27 Financial Data Schedule *
</TABLE>
- -------------
(1) Incorporated by reference to the Company's Form SB-1 (Commission File No.
33-90914-LA) as filed with the Commission on April 4, 1995.
(2) Incorporated by reference to the Company's Form 10-KSB for the year ended
December 31, 1995 as filed with the Commission on March 28, 1996.
(3) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended March 31, 1996 as filed with the Commission on May 2, 1996.
(4) Incorporated by reference to the Company's Form 10-QSB/A No. 1 for the
quarter ended March 31, 1996 as filed with the Commission on July 31,
1996.
(5) Incorporated by reference to the Company's Form 10-QSB for the quarter
ended September 30, 1996 as filed with the Commission on November 12,
1996.
(6) Denotes a management contract or compensatory plan or arrangement.
(7) Incorporated by reference to the Company's Form 10-KSB for the year ended
December 31, 1996 as filed with the Commission on March 28, 1997.
* Filed herewith.
20
<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, on the 23rd day of March, 1998.
PORTLAND BREWING COMPANY
By: /S/ CHARLES A. ADAMS
-----------------------------------
Charles A. Adams, Chairman of the
Board, President and Chief Executive
Officer
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 and on
the 23rd day of March, 1998..
Signature Title
--------- -----
/S/ CHARLES A. ADAMS Chairman of the Board, President and Chief
-------------------------- Executive Officer (Principal Executive Officer)
Charles A. Adams
/S/ GLENMORE JAMES Executive Vice President and Chief Financial
------------------------- Officer (Principal Financial and Accounting
Glenmore James Officer)
/S/ EDWIN HUNT Director
-------------------------
Edwin Hunt
/S/ ROBERT M. MacTARNAHAN Director
-------------------------
Robert M. MacTarnahan
/S/ R. SCOTT MacTARNAHAN Director
-------------------------
R. Scott MacTarnahan
/S/ SIMON C. OSTLER Director
-------------------------
Simon C. Ostler
/S/ HOWARD M. WALL, Jr. Director
-------------------------
Howard M. Wall, Jr.
21
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Stockholders of
Portland Brewing Company:
We have audited the accompanying balance sheets of Portland Brewing Company
(an Oregon Corporation) as of December 31, 1997 and 1996, and the related
statements of operations, stockholders' equity and cash flows for the years
then ended. 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 Portland Brewing Company as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Portland, Oregon,
February 27, 1998
<PAGE>
PORTLAND BREWING COMPANY
BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS
December 31,
------------------------
CURRENT ASSETS: 1997 1996
----------- -----------
<S> <C> <C>
Cash $ 52,719 $ 49,054
Accounts receivable, net of allowance of $15,852
(1997), $56,155 (1996) 652,530 787,930
Inventories 683,733 675,680
Prepaid assets 201,541 331,296
Income tax receivable - 79,970
Deferred income taxes - 89,411
----------- -----------
Total current assets 1,590,523 2,013,341
Property and equipment, net 8,694,106 9,548,288
Other assets, net 241,515 252,999
----------- -----------
Total assets $10,526,144 $11,814,628
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,094,201 $ 1,008,634
Customer deposits held 165,203 210,105
Accrued payroll 109,979 100,864
Other accrued liabilities 51,867 50,027
Line of credit 203,000 300,000
Current portion of long-term debt 381,947 400,603
----------- -----------
Total current liabilities 2,006,197 2,070,233
Long-term debt, less current portion 2,575,777 2,904,780
Subordinated notes payable to related parties 400,000 --
STOCKHOLDERS' EQUITY:
Preferred stock, no par value, 100,000 shares
authorized, no shares issued -- --
Common stock, no par value, 5,000,000 shares
authorized, 2,074,943
shares issued and outstanding 6,715,798 6,715,798
Stock notes receivable (375) (2,524)
Retained earnings (deficit) (1,171,253) 126,341
----------- -----------
Total stockholders' equity 5,544,170 6,839,615
----------- -----------
Total liabilities and stockholders' equity $10,526,144 $11,814,628
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Sales $11,094,678 $12,866,563
Less- Excise tax 508,002 711,856
----------- -----------
Net sales 10,586,676 12,154,707
Cost of sales 7,542,398 8,336,674
----------- -----------
Gross profit 3,044,278 3,818,033
General and administrative expenses 1,419,483 1,779,760
Sales and marketing expenses 2,425,791 2,462,418
----------- -----------
Loss from operations (800,996) (424,145)
Other expense, net
Interest expense (290,858) (84,544)
Other expense, net (129,408) (20,769)
----------- -----------
Total other expense, net (420,266) (105,313)
----------- -----------
Net loss before income taxes (1,221,262) (529,458)
Provision for (benefit from) income taxes 76,332 (149,308)
----------- -----------
Net loss $(1,297,594) $ (380,150)
----------- -----------
----------- -----------
Net loss per share $ (0.63) $ (0.18)
----------- -----------
----------- -----------
Shares used in per share calculations 2,074,943 2,070,141
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------
Retained
Stock Notes Earnings
Shares Amount Receivable (Deficit) Total
--------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1995 2,070,643 $6,696,196 $(18,260) $ 506,491 $ 7,184,427
Issuance of common stock, net
of offering costs 4,500 21,002 - - 21,002
Repurchase of common stock (200) (1,400) - - (1,400)
Repayment of stock notes
receivable - - 15,736 - 15,736
Net loss - - - (380,150) (380,150)
--------- ---------- ---------- ----------- -----------
December 31, 1996 2,074,943 6,715,798 (2,524) 126,341 6,839,615
Repayment of stock notes
receivable - - 2,149 - 2,149
Net loss - - - (1,297,594) (1,297,594)
--------- ---------- ---------- ----------- -----------
December 31, 1997 2,074,943 $6,715,798 $ (375) $(1,171,253) $ 5,544,170
--------- ---------- ---------- ----------- -----------
--------- ---------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996
------ ------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $(1,297,594) $ (380,150)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation 1,060,814 843,488
Amortization 177,110 218,728
Change in net deferred income taxes 107,260 (111,789)
Loss on sale of property and equipment 33,595 1,771
(Increase) decrease in:
Accounts receivable, net 135,400 (67,668)
Inventories (53,063) 31,465
Prepaid assets 129,755 (130,875)
Income tax receivable 79,970 (38,789)
(Decrease) increase in:
Accounts payable 85,567 425,884
Customer deposits held (44,902) 44,179
Accrued payroll and other liabilities 10,955 (33,180)
---------- ----------
Net cash provided by operating activities 424,867 803,064
---------- ----------
Cash flows relating to investing activities:
Purchase of property and equipment (517,967) (3,667,413)
Proceeds from sale of property and equipment 277,740 25,200
Changes in other assets (138,465) (309,539)
---------- ----------
Net cash used in investing activities (378,692) (3,951,752)
---------- ----------
Cash flows relating to financing activities:
Net borrowings (repayments) under line of credit (97,000) 300,000
Repayments of long term debt (5,424,317) (636,583)
Proceeds from issuance of long-term debt 5,076,658 3,342,521
Proceeds from subordinated notes payable to
related parties 400,000 -
Issuance of common stock, net - 19,602
Payments of stock notes receivable 2,149 15,736
---------- ----------
Net cash (used in) provided by
financing activities (42,510) 3,041,276
---------- ----------
Net increase (decrease) in cash 3,665 (107,412)
---------- ----------
Cash, beginning of period 49,054 156,466
---------- ----------
Cash, end of period $ 52,719 $ 49,054
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of
capitalization $ 265,407 $ 84,544
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PORTLAND BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The Company was incorporated in Oregon on November 14, 1983. The Company
opened its first brewery in January 1986 at 1339 NW Flanders Street in
Portland, Oregon. In March 1986 a pub was added which allows customers to
view various stages of the brewing process. In July 1996 the Company
completed an expansion of the Flanders Street Brewpub which significantly
increased the restaurant area of the pub. The Company opened a second brewery
in June 1993 located at 2730 NW 31st Avenue in Portland, which initially more
than doubled its annual production capacity to approximately 26,000 barrels.
Subsequent equipment additions and expansion have increased capacity to
approximately 135,000 barrels per year. In July 1994, a restaurant, The
BrewHouse Taproom & Grill, was constructed at the main brewery and opened to
the public.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of 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 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.
REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time of shipment to
the customer.
INVENTORIES
Inventories are stated at the lower of average cost, which approximates the
first-in, first-out (FIFO) method, or market and include materials, labor and
manufacturing overhead. Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials $ 128,561 $ 180,613
Work-in-process 236,710 140,684
Finished goods 148,028 123,113
Merchandise 80,720 96,546
Kegs, inventory value 89,714 134,724
---------- ----------
$ 683,733 $ 675,680
---------- ----------
---------- ----------
</TABLE>
F-6
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Interest costs related to the
construction of certain long-term assets are capitalized and amortized over the
related assets' estimated useful lives. The Company capitalized net interest
costs of approximately $16,000 and $81,000 in 1997 and 1996, respectively.
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Brewing plant and equipment $7,721,477 $ 7,393,922
Office and laboratory equipment and vehicles 647,586 639,652
Kegs 975,287 973,517
Construction in progress 103,243 279,783
Leasehold improvements 2,294,131 2,257,781
---------- ----------
Total property and equipment 11,741,724 11,544,655
Less- Accumulated depreciation (3,047,618) (1,996,367)
---------- ----------
$8,694,106 $ 9,548,288
---------- ----------
---------- ----------
</TABLE>
Property and equipment is depreciated using the straight-line method over
estimated useful lives as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Brewing plant and equipment 10-20
Office and laboratory equipment and vehicles 5-10
Leasehold improvements 5-15
Kegs 5
</TABLE>
PACKAGE DESIGN
Package design costs, which include costs related to design, plates, and
dyes, are amortized on a straight-line basis over three years. Package design
costs, net of accumulated amortization were $180,597 and $159,718 at December
31, 1997 and 1996, respectively. Amortization expense related to package
design costs, which is included in selling and marketing expense, was
$113,834 and $81,822 in 1997 and 1996, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Deferred
taxes are determined based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provisions of enacted tax laws and tax rates. Deferred income tax
expenses or credits are based on the changes in the financial statement basis
versus the tax basis in the Company's assets or liabilities from period to
period.
F-7
<PAGE>
NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 changes the standards for computing and presenting
earnings per share (EPS) and supersedes Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. This Statement requires restatement of all
prior-period EPS data presented.
As it relates to the Company, the principal differences between the
provisions of SFAS 128 and previous authoritative pronouncements are the
exclusion of common stock equivalents in the determination of Basic Earnings
Per Share and the market price at which common stock equivalents are
calculated in the determination of Diluted Earnings Per Share.
Basic earnings per common share is computed using the weighted average number
of shares of common stock outstanding for the period. Diluted earnings per
common share is computed using the weighted average number of shares of
common stock and dilutive common equivalent shares related to stock options
and warrants outstanding during the period.
The adoption of SFAS 128 had no effect on previously reported loss per share
amounts for the year ended December 31, 1996. For the years ended December
31, 1997 and 1996, primary loss per share was the same as basic loss per
share and fully diluted loss per share was the same as diluted loss per
share. A net loss was reported in 1997 and 1996, and accordingly, in those
years the denominator was equal to the weighted average outstanding shares
with no consideration for outstanding options and warrants to purchase shares
of the Company's common stock, because to do so would have been
anti-dilutive. Stock options for the purchase of 139,500 and 140,500 shares
at December 31, 1997 and 1996, respectively, and warrants for the purchase of
87,697.5 shares at December 31, 1997 and 1996 were not included in loss per
share calculations, because to do so would have been anti-dilutive.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Total advertising expense was
$241,304 and $249,897 in 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
All current assets and liabilities are carried at cost, which approximates
fair value because of the short-term nature of those instruments. The
recorded amounts of the Company's long-term debt also approximate fair value,
as estimated using discounted cash flow analysis.
Financial instruments which potentially expose the Company to concentration
of credit risk consist primarily of trade accounts receivable. For the
periods ended December 31, 1997 and 1996, 29% percent and 16%, respectively,
of net sales were through a single distributor. At December 31, 1997 and
1996, 59% and 36% of total accounts receivable, respectively, was
attributable to a single distributor.
IMPAIRMENT OF LONG-LIVED ASSETS
In 1995, the FASB issued SFAS No. 121 "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of". Adoption of
SFAS No. 121 on a prospective basis is required for fiscal years beginning
after December 15, 1995. In 1996 the Company adopted SFAS No.121, with no
effect on its financial position or results of operations in 1997 or 1996.
F-8
<PAGE>
3. LINES OF CREDIT AND LONG-TERM DEBT:
The Company has a $1,000,000 revolving line of credit with a bank. At
December 31, 1997, $203,000 was outstanding with interest at the bank's
reference rate plus 1.5% (10.0% at December 31, 1997). The Company had a
$2,000,000 non-revolving equipment line of credit with a bank, which
converted to a term loan in June 1997. The amount outstanding under the term
loan at December 31, 1997 of $1,864,020, bears interest at the bank's
reference rate plus 0.5% (9.0% at December 31, 1997). The Company has two
additional term loans outstanding with a bank, under which $435,311 and
$596,115 were outstanding at December 31, 1997, bearing interest at 7.55% and
at the bank's reference rate plus 0.5% (9.0%at December 31, 1997),
respectively.
These term loans and line of credit are secured by all assets of the Company,
including receivables, inventory, and property and equipment and contain
restrictions relating to specified financial ratios and restrictions on
dividend payments, as well as the lender's standard covenants and
restrictions. In November 1997 the loan covenants were changed to meet the
Company's current financial requirements. The new covenants, measured on a
monthly basis, require a minimum tangible net worth of $5,000,000; a current
ratio of .70 to 1.00 through December 31, 1997 and .60 to 1:00 thereafter;
liabilities to tangible net worth of equal to or less than 1.0 to 1.0; and,
various monthly reporting requirements typical of such a credit facility. At
December 31, 1997, the Company was in compliance with all loan covenants.
In April 1997 the total credit facility with the bank was renewed through
April 1998. The entire facility is due for its annual review and renewal on
April 30, 1998. The Company expects to renegotiate the facility, but at this
time the terms of such renegotiation have not been established.
In December 1997, the Company borrowed a total of $400,000 from two of its
shareholders under 10% Subordinated Notes Payable (the "Notes"). Payments
under the Notes are due in thirty six equal monthly principal payments of
$11,111 commencing July 1, 1999. Interest is payable monthly at 10% per
annum, commencing on February 1, 1998. Proceeds under the Notes were applied
to the outstanding balance under the Company's line of credit. The Notes are
secured by a second security interest in the Company's accounts receivable
and inventory.
Principal payment requirements on long-term debt are as follows for the years
ending December 31:
<TABLE>
<S> <C>
1998 $ 381,947
1999 629,514
2000 668,673
2001 687,612
2002 513,365
Thereafter 476,613
----------
$3,357,724
----------
</TABLE>
F-9
<PAGE>
4. LEASES:
The following is a schedule of minimum future lease payments for the years
ending December 31:
<TABLE>
<S> <C>
1998 $ 361,616
1999 346,047
2000 331,056
2001 331,056
2002 286,832
Thereafter 1,444,930
----------
Total minimum lease payments $3,101,537
----------
----------
</TABLE>
Rental expense incurred on operating leases was $407,737 and $421,614 in
1997 and 1996, respectively.
5. INCOME TAXES:
The components of the (benefit from) provision for income taxes are:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
-------- ---------
<S> <C> <C>
Current $(30,929) $ (37,519)
Deferred 107,260 (111,789)
-------- ---------
$ 76,331 $(149,308)
-------- ---------
-------- ---------
</TABLE>
F-10
<PAGE>
The components of the net deferred tax assets and liabilities as of December 31,
1997 are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ---------
<S> <C> <C>
Deferred tax assets, current-
Basis difference in inventory $ 40,765 $ 35,699
Other 28,266 53,712
---------- ---------
Total current deferred tax assets $ 69,031 $ 89,411
---------- ---------
---------- ---------
Deferred tax assets, long-term-
Net operating loss carryforwards $1,017,013 $ 207,775
Tax credits 115,022 144,212
---------- ---------
Total long-term deferred tax assets 1,132,035 351,987
Deferred tax liabilities-
Basis difference in property, plant
and equipment (542,070) (334,498)
---------- ---------
Net long-term deferred tax assets 589,965 17,849
---------- ---------
Total deferred tax assets 658,996 107,260
Less: valuation allowance (658,996) -
---------- ---------
Net deferred tax assets $ - $ 107,260
---------- ---------
---------- ---------
</TABLE>
As of December 31, 1997 and 1996, the reported provision for income taxes
differs from the amount computed by applying the statutory federal income tax
rate of 34 percent to income before provision for income taxes as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
------ -----
<S> <C> <C>
Statutory tax rate (34.0)% (34.0)%
State and local taxes, net of federal benefit (9.0) (6.4)
Change in valuation allowance 47.7 -
Effect of nondeductible expenses 1.5 3.2
Limit on benefit of net operating loss carryback - 8.5
Other 0.1 0.5
------ -----
Income tax (benefit) provision 6.3 % (28.2)%
------ -----
------ -----
</TABLE>
F-11
<PAGE>
6. RELATED PARTY TRANSACTIONS:
LEASE AGREEMENT WITH PORTLAND BREWING BUILDING, LLC
The Company leases the property at 2730 NW 31st Avenue in Portland, Oregon
from Portland Brewing Building, L.L.C., which is an entity controlled by an
officer and director and two other directors of the Company. Monthly lease
payments are $22,060 plus property taxes, insurance and maintenance, with
lease payments to be adjusted at the beginning of the sixth and eleventh
years to reflect the greater of changes in the Consumer Price Index or 95% of
fair market rental value. The lease expires in August 2008. In December 1997,
in connection with the issuance of $400,000 of Notes, the lease payments were
reduced by $5,000 for each of the months of January through April 1998. (See
Note 3) In connection with the original negotiation of the lease in 1992, the
Company granted the lessors a warrant to purchase 87,697.5 shares of Common
Stock. The warrants are exercisable at any time through December 31, 2002, at
an exercise price of $3.333 per share.
LEASE AGREEMENT WITH L & L LAND CO.
In 1995 the Company entered into a sublease for a portion of the building
adjacent to the main brewery with the current lessee, Power Transmission
Products, Inc. An option agreement was entered into with the owner of the
building, L & L Land Co., which entitles the Company to an option to purchase
the building for $1,100,000 plus an amount paid for improvements to the
building consisting of a shipping dock. In 1996, the Company and L & L Land
Co. paid approximately $400,000, split equally, for the construction of the
shipping dock at the adjacent building. The option expires on December 31,
1998.
The Company believes that the terms and conditions of its leases are fair and
reasonable and are no less favorable to the Company than could be obtained
from unaffiliated parties.
LICENSE AGREEMENT
The Company entered into a license agreement with one of its board members to
utilize his name and likeness. The amount of the royalty owed is $1 per
barrel of MacTarnahan's Amber Ale sold. Royalties paid under the license
agreement for 1997 and 1996 were $23,450 and $21,974, respectively, based on
the sale of 23,450 and 21,974 barrels, respectively, of MacTarnahan's Amber
Ale during the same periods.
F-12
<PAGE>
7. STOCK-BASED COMPENSATION PLANS:
INCENTIVE STOCK OPTION PLAN
The Company's 1992 Incentive Stock Option Plan ("ISOP") is administered by
the Board of Directors and provides for grants of options to acquire shares
of the Company's common stock, subject to the limitations set forth in the
ISOP. The number of stock options available for grant under the ISOP is
163,500. Pursuant to the ISOP, the Board of Directors has the authority to
set the terms and conditions of the options granted, but cannot set the
option exercise price at less than 100 percent of the fair market value of
the subject shares of common stock at the time the option is granted.
Options vest quarterly over a 12- to 60-month period, with 75,125 shares
exercisable at December 31, 1997.
Activity under the ISOP is summarized as follows:
<TABLE>
<CAPTION>
Shares Available Shares Subject Exercise Price
for Grant to Options Per Share
<S> <C> <C> <C>
Balances, December 31, 1995 46,500 117,000 $3.33-$5.87
Options granted (46,750) 46,750 $7.00
Options exercised -- (4,500) $3.33-$5.33
Options canceled 17,750 (18,750) $5.33-$7.00
------- ------- -----------
Balances, December 31, 1996 17,500 140,500 $3.33-$7.00
Options granted (47,350) 47,350 $7.00
Options exercised -- -- --
Options canceled 48,350 (48,350) $3.33-$7.00
------- ------- -----------
18,500 139,500 $3.33-$7.00
Balances, December 31, 1997 ------- ------- -----------
------- ------- -----------
</TABLE>
NONQUALIFIED STOCK OPTION PLAN
In August 1994, the Board of Directors approved a Nonqualified Stock Option
Plan ("NQSOP"). The NQSOP provides for the issuance of 45,000 stock options
to employees, nonemployee members of the Board of Directors, consultants and
other independent contractors who provide valuable service to the Company, at
a minimum of 85 percent of fair market value and have a term of 10 years. At
December 31, 1997 and 1996, options to purchase 21,000 shares at $5.33 were
outstanding and exercisable.
F-13
<PAGE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 (SFAS 123)
During 1995, the Financial Accounting Standards Board issued SFAS 123, which
defines a fair value based method of accounting for employee stock options
and similar equity instruments and encourages all entities to adopt that
method of accounting for all employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those
plans using the method of accounting prescribed by APB 25. Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of
net income and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans
under APB 25; however, the Company has computed, for pro forma disclosure
purposes, the value of all options granted using the Black-Scholes
option-pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants in 1997 and 1996. No options were granted in
1995.
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Risk-free interest rate 6.25% 5.7%
Expected dividend yield 0 % 0 %
Expected lives 6 years 6 years
Expected volatility 68 % 57 %
</TABLE>
The total value of options granted during 1997 and 1996 was computed as
approximately $167,000 and $192,000, respectively, which will be amortized
on a pro forma basis over the respective vesting period of the options (two
to five years). The weighted average fair value of options granted during
1997 and 1996 was $3.85 and $4.11 per share, respectively. If the Company
had accounted for its stock-based compensation plans in accordance with SFAS
123, the Company's pro forma net loss and pro forma net loss per share for
the years ended December 31, 1997 and 1996 would have been as follows:
<TABLE>
<CAPTION>
As Reported Pro Forma
----------- ---------
<S> <C> <C>
1997
Net loss $(1,297,594) $(1,412,888)
Net loss per share $ (0.63) $ (0.68)
1996
Net loss $ (380,150) $ (418,935)
Net loss per share $ (0.18) $ (0.20)
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not indicative
of future results. SFAS 123 does not apply to awards prior to January 1,
1995. Additional awards are anticipated in future years.
F-14
<PAGE>
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------- --------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price 1997 Life (Years) Price 1997 Price
--------------- ------------ -------- --------------- --------
<S> <C> <C> <C> <C> <C>
$2.80 - $3.50 1,500 5.5 $3.33 1,500 $3.33
$4.90 - $5.60 43,500 6.8 5.33 34,500 $5.33
$5.60 - $6.30 36,000 6.9 5.86 27,000 $5.86
$6.30 - $7.00 79,500 7.7 7.00 12,125 $7.00
------- ------
Totals 160,500 75,125
------- ------
------- ------
</TABLE>
CASH INCENTIVE PLAN
The Company may award its officers and employees, under its Restated Cash
Incentive Plan ("the Plan"), bonuses in an amount up to 10 percent (10%) of net
operating profits before taxes. Awards under the Plan will be allocated among
the officers and employees in accordance with the provisions of the Plan at the
discretion of the Board of Directors. No amounts were awarded in 1997 or 1996
under the Plan.
F-15
<PAGE>
EXHIBIT 10.15
AMENDMENT NO. 1 TO BUSINESS LOAN AGREEMENT
This Amendment No. 1 (the "Amendment") dated as of July 23, 1996, is
between Bank of America NT & SA (the "Bank") and Portland Brewing Company (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995 (the "Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
C. The Bank is the successor by merger to Bank of America Oregon.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Paragraph 3.1 of the Agreement is amended to read in its
entirety as follows:
3.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank
will provide a line of credit to the Borrower. The amount
of the line of credit (the "Facility 3 Commitment") is One
Million Four Hundred Thousand Dollars ($1,400,000).
(b) This is a non-revolving line of credit with a term
repayment option. Any amount borrowed, from the date of
this Amendment and repaid before the end of the
availability period, permanently reduces the remaining
available line of credit.
(c) The Borrower agrees not to permit the outstanding principal
balance of the line of credit to exceed the Facility 3
Commitment.
2.2 Paragraph 3.2 of the Agreement is amended to read in its
entirety as follows:
3.2 AVAILABILITY PERIOD. The line of credit is available
between the date of this Agreement and August 1, 1996 (the
"Expiration Date") unless the Borrower is in default.
2.3 Subparagraph 3.4(b) of the Agreement is amended to read in its
entirety as follows:
(b) The Borrower will make one (1) payment of Seven Thousand
One Hundred Thirty Six 25/100 Dollars ($7,136.25) on
August 1, 1996. The
1
<PAGE>
Borrower will then repay the principal in 76 successive
monthly installments of Eighteen Thousand Eighty Nine 15/100
Dollars ($18,089.15) starting September 1, 1996. On
January 1, 2003, the Borrower will repay the remaining
principal balance plus any interest then due.
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA PORTLAND BREWING COMPANY
/s/ Ed Kluss x Glen James
- -------------------------- -----------------------------
By: Ed Kluss By:
Title: Vice President Title: CFO
2
<PAGE>
EXHIBIT 10.16
AMENDMENT NO. 2 TO BUSINESS LOAN AGREEMENT
This Amendment No. 2 (the "Amendment") dated as of December 19, 1996, is
between Bank of America NT & SA (the "Bank") and Portland Brewing Company (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Subparagraph 2.1 (b) of the Agreement is amended in its entirety
to read as follows:
This is a non-revolving line with a term repayment option and
with a with-in line for leasehold improvements. Any amount
borrowed, even if repaid before the end of the availability
period, permanently reduces the remaining available line of
credit.
2.2 Paragraph 2.3 of the Agreement is amended in its entirety to
read as follows:
2.3 PURPOSE. Each advance shall be used to finance the
acquisition of new equipment for use in Borrower's business and
for leasehold improvements. All equipment acquired and
improvements performed with the proceeds of such advances shall
be free and clear of any security interest, liens, encumbrances
or rights of the others except the security interests of the
Bank under any security agreements required under this
Agreement. Each request for an advance shall be accompanied by
a copy of the purchase order or invoice for new equipment to be
purchased or for improvement to be done with the proceeds of the
advance. The amount of each equipment advance shall not exceed
80% of invoice cost. The amount of each leasehold improvement
advance shall not exceed 55% of invoice cost.
2.3 Subparagraph 2.5(b) of the Agreement is amended in its entirety
to read as follows:
The Borrower will repay the principal amount outstanding on
the Expiration Date in 84 successive equal monthly
installments starting June 1, 1997. On May 1, 2004, the
Borrower will repay the remaining principal balance plus any
interest then due. The Borrower will repay the principal
amount outstanding under the leasehold improvement with-in
line on the Expiration Date in 48 successive equal monthly
installments starting June 1, 1997. On May 1, 2001, the
Borrower will repay the remaining principal balance of the
leasehold improvement with-in line plus any interest then due.
1
<PAGE>
2.4 Paragraph 2.9 is hereby added to the Agreement as follows:
2.9 LEASEHOLD IMPROVEMENTS. During the availability period,
the Borrower may request leasehold improvement loans from the
Bank in a total principal amount not to exceed Two Hundred
Seventy One Thousand Dollars ($271,000). Each leasehold
improvement loan made by the Bank will permanently reduce the
amount of Facility No. 2 Commitment available under this line of
credit for extensions of credit other than leasehold improvement
loans.
2.5 Subparagraph 5.1(a) of the Agreement is amended in its entirety
to read as follows:
Machinery, equipment, leasehold improvements and fixtures.
2.6 Paragraph 7.4A is hereby added to the Agreement as follows:
7.4A CONSENT TO REMOVAL. For any personal property collateral
located on real property which is subject to a mortgage or deed
of trust of which is not owned by the Borrower, a Consent to
Removal from the owner of the real property and the holder of
any mortgage or deed of trust.
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA PORTLAND BREWING COMPANY
x Ed Kluss x Charles Adams
- ----------------------- --------------------------
By: Ed Kluss By:
Title: Vice President Title: Pres.
2
<PAGE>
EXHIBIT 10.17
AMENDMENT NO. 3 TO BUSINESS LOAN AGREEMENT
This Amendment No. 3 (the "Amendment") dated as of March 28, 1997, is
between Bank of America NT & SA (the "Bank") and Portland Brewing Company (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Article 1 of the Agreement is amended to read in its entirety as
follows:
1. DEFINITIONS
In addition to the terms which are defined elsewhere in this
Agreement, the following terms have the meanings indicated for
the purposes of this Agreement:
1.1 "BORROWING BASE" means the lesser of:
(a) One Million Dollars ($1,000,000); or
(b) the sum of:
(i) 75% of the balance due on Outstanding Trade
Receivables net of the allowance for doubtful
accounts; and
(ii) 50% of the value of Inventory consisting of finished
goods, work in process and raw materials (not
including packaging supplies).
In determining the value of Inventory to be included in the
Borrowing Base, the Bank will use the lowest of (i) the
Borrower's cost, (ii) the Borrower's estimated market value, or
(iii) the Bank's independent determination of the resale value
of such inventory in such quantities and on such terms as the
Bank deems appropriate.
1.2. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.3 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank
will provide a line of credit to the Borrower. The amount
of the line of credit (the
1
<PAGE>
"Facility 1 Commitment") is equal to the amount of the Borrowing
Base.
(b) This is a revolving line of credit. During the
availability period, the Borrower may repay principal
amounts and reborrow them. If such outstandings exceed the
Facility 1 Commitment, the Borrower will immediately pay
the excess to the Bank upon the Bank's demand. The Bank
may apply payments received from the Borrower under this
Paragraph to the obligations of the Borrower to the Bank in
the order and manner as the Bank, in its discretion, may
determine.
(c) The Borrower agrees not to permit the outstanding principal
balance of the line of credit to exceed the Facility 1
Commitment.
1.4 AVAILABILITY PERIOD. The line of credit is available
between the date of this Agreement and May 1,1997 (the
"Expiration Date") unless the Borrower is in default.
1.5 INTEREST RATE.
(a) Unless the Borrower elects an Optional interest rate as
described below, the interest rate is the Reference Rate.
(b) The Reference Rate is the rate of interest publicly
announced from time to time by Bank of America National
Trust and Savings Association ("BofA California") in San
Francisco, California, as its Reference Rate. The
Reference Rate is set based on various factors, including
BofA California's costs and desired return,
general-economic conditions and other factors, and is used
as a reference point for pricing some loans. The Bank may
price loans to its customers at, above, or below the
Reference Rate. Any change in the Reference Rate shall
take effect at the opening of business on the day specified
in the public announcement of a change in the Reference
Rate.
1.6 REPAYMENT TERMS.
(a) The Borrower will pay interest on January 1, 1996, and then
monthly thereafter until payment in full of any principal
outstanding under this line of credit.
(b) The Borrower will repay in full all principal and any
unpaid interest or other charges outstanding under this
line of credit no later than the Expiration Date.
1.7 OPTIONAL INTEREST RATES. Instead of the interest rate
based on the Reference Rate, the Borrower may elect to have
all or portions of the line of credit (during the
availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and
the Borrower. Each interest rate is a rate per year.
Interest will be paid on the first day of every month and
on the last day of each interest period. At the end of any
interest period, the interest rate will revert to the rate
based on the Reference Rate, unless the Borrower has
designated another optional interest rate for the
portion.
2
<PAGE>
1.8 OFFSHORE RATE. The Borrower may elect to have all or
portions of the principal balance of the line of credit
bear interest at the Offshore Rate plus 2.00 percentage
points.
Designation of an Offshore Rate portion is subject to the
following requirements:
(a) The interest period during which the Offshore Rate will be
in effect will be no shorter than 30 days and no longer
than 180 days. The last day of the interest period will be
determined by the Bank using the practices of the offshore
dollar inter-bank market.
(b) Each Offshore Rate portion will be for an amount not less
than Five Hundred Thousand Dollars ($500,000).
(c) The "Offshore Rate" means the interest rate determined by
the following formula, rounded upward to the nearest 1/100
of one percent. (All amounts in the calculation will be
determined by the Bank as of the first day of the interest
period.)
Offshore Rate = Grand Cayman Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "Grand Cayman Rate" means the interest rate (rounded
upward to the nearest 1/16th of one percent) at which
the BofA California's Grand Cayman Branch, Grand
Cayman, British West Indies, would offer U.S. dollar
deposits for the applicable interest period to other
major banks in the offshore dollar inter-bank market.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be
maintained by member banks of the Federal Reserve
System for Eurocurrency Liabilities, as deemed in the
Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will
be expressed as a decimal, and will include, but not
be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(d) The Borrower may not elect an Offshore Rate with respect to
any portion of the principal balance of the line of credit
which is scheduled to be repaid before the last day of the
applicable interest period.
(e) Any portion of the principal balance of the line of credit
already bearing interest at the Offshore Rate will not be
converted to a different rate during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether
voluntary, by reason of acceleration or otherwise, will be
accompanied by the amount of accrued interest on the amount
prepaid, and a prepayment fee equal to the amount (if any)
by which
3
<PAGE>
(i) the additional interest which would have
been payable on the amount prepaid had it not been paid
until the last day of the interest period, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the
offshore dollar market for a period starting on the
date on which it was prepaid and ending on the last
day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for
an Offshore Rate portion if any of the following described
events has occurred and is continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the interest period, of an Offshore
Rate portion are not available in the offshore Dollar
inter-bank market; or
(ii) the Offshore Rate does not accurately reflect the cost
of an Offshore Rate portion.
2.2 Paragraph 9.2 of the Agreement, is amended to read in its
entirety as follows:
9.2 FINANCIAL INFORMATION. To provide the following financial
information and statements and such additional information
as requested by the Bank from time to time:
(a) Within 120 days of the Borrower's fiscal year end, the
Borrower's annual financial statements. These financial
statements must be audited by a Certified Public Accountant
("CPA") acceptable to the Bank.
(b) Within 30 days of the period's end, the Borrower's monthly
financial statements. These financial statements may be
Borrower prepared.
(c) Within 30 days of the period's end, the Borrower's
quarterly compliance certificate.
(d) A borrowing certificate setting forth the respective
amounts of Outstanding Trade Receivables and Inventory as
of the last day of each month within twenty (20) days after
month end.
(e) Statements showing an aging of the Borrower's receivables
within twenty (20) days after the end of each month.
(f) A statement showing an aging of accounts payable within
twenty (20) days after the end of each month.
(g) A summary inventory listing within twenty (20) days after
the end of each month; the listing must include a valuation
of inventory by category. Categories to include raw
materials (net of packaging supplies), finished goods and
work in process.
4
<PAGE>
2.3 Paragraph 9.3 of the Agreement, is amended to read in its
entirety as follows:
9.3 CURRENT RATIO. To maintain at the end of each quarterly
accounting period a ratio of current assets to current
liabilities of at least the amounts indicated for each
period specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
March 31, 1997,
and June 30, 1997 0.80:1.0
September 30, 1997 0.90:1.0
December 31, 1997,
and quarterly thereafter 1.00:1.0
</TABLE>
2.4 Paragraph 9.4 of the Agreement, is amended to read in its
entirety as follows:
9.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH. To maintain at
the end of each quarterly accounting period a ratio of
total liabilities to tangible net worth not exceeding
1.0:1.0.
"Tangible net worth" means the gross book value of the
Borrower's assets (excluding goodwill, patents, trademarks,
trade names, organization expense, treasury stock, unamortized
debt discount and expense, deferred research and development
costs, deferred marketing expenses, and other like intangibles)
less total liabilities, including but not limited to accrued and
deferred income taxes, and any reserves against assets.
2.5 Paragraph 9.5 of the Agreement, is amended to read in its
entirety as follows:
9.5 CASH FLOW RATIO. To maintain a cash flow ratio of at least
the amounts indicated for each period specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
June 30, 1997, and
September 30, 1997 1.35:1.0
December 31, 1997,
and quarterly thereafter 1.50:1.0
</TABLE>
"Cash flow ratio" means the ratio of cash flow to current
portion of long term debt. "Cash flow" is defined as net
income after taxes, plus depreciation and amortization, less
unfunded capex. "Unfunded capex" is defined as capital
expenditures not funded by either bank debt or equity
proceeds. This ratio will be calculated at the end of each
fiscal quarter, using the results of that quarter and each of
the 3 immediately preceding quarters. The current portion of
long term debt will be measured as of the last day of the
most recent quarter end.
5
<PAGE>
2.6 Paragraph 9.20 is added to the Agreement, to read in its
entirety as follows:
9.20 OPERATING INCOME. Borrower will not allow cumulative
operating income to be less than the amounts indicated for
each period specified below:
Period Amount
------ ------
March 31, 1997 -$200,000
June 30, 1997 -$50,000
September 30, 1997,
and December 31, 1997 $0
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA PORTLAND BREWING COMPANY
/s/ x Ed Kluss /s/ Charles Adams
- ---------------------------- ---------------------------------
By: Ed Kluss By: Charles Adams
Title: Vice President Title: President
6
<PAGE>
EXHIBIT 10.18
AMENDMENT NO. 4 TO BUSINESS LOAN AGREEMENT
This Amendment No. 4 (the "Amendment") dated as of April 23, 1997, is
between Bank of America NT & SA (the "Bank") and Portland Brewing Company (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.4 of the Agreement the date "May 1, 1998" is
substituted for the date "May 1, 1997."
2.2 In Paragraph 1.5 of the Agreement, "Reference Rate plus .50
percentage point" is substituted for "Reference Rate."
2.3 In Paragraph 1.8 of the Agreement "2.50 percentage points" is
substituted for "2.00 percentage points."
2.4 Paragraph 2.5(a) of the Agreement is amended to read in its
entirety as follows:
2.5(a) The Borrower will pay interest on January 1, 1996, and
then on the first Banking Day of each month thereafter
until payment in full of any principal outstanding under
this line of credit.
2.5 Paragraph 2.5(b) of the Agreement is amended to read in its
entirety as follows:
2.5(b) The Borrower will repay the principal amount
outstanding on the Expiration Date in 84 successive equal
monthly installments starting June 2, 1997, and then on
the first Banking Day of each month thereafter. On May 1,
2004, the Borrower will repay the remaining principal
balance plus any interest then due. The Borrower will
repay the principal amount outstanding under the
leasehold improvement with-in line on the Expiration Date
in 48 successive equal monthly installments starting
June 2, 1997, and then on the first Banking Day of each
month thereafter. On May 1, 2001, the Borrower will
repay the remaining principal balance of the leasehold
improvement with-in line plus any interest then due.
1
<PAGE>
2.6 Paragraph 2.7 of the Agreement is amended to read in its
entirety as follows:
2.7 LIBOR RATE. The Borrower may elect to have all or portions
of the principal balance of the line of credit during the
term repayment period bear interest at the LIBOR Rate plus
2.50 percentage points.
Designation of a LIBOR Rate portion is subject to the following
requirements:
(a) The interest period during which the LIBOR Rate will be in
effect will be one, two or three months. Each LIBOR Rate
will run from the first Banking Day of one month to the
first Banking Day of a subsequent month.
(b) Each LIBOR Rate portion will be an amount not less than
Five Hundred Thousand Dollars ($500,000).
(c) The Borrower shall irrevocably request a LIBOR Rate portion
no later than 9:00 a.m. San Francisco time three (3)
banking days before the commencement of the interest
period.
(d) The "LIBOR Rate" means the interest rate determined by the
following formula, rounded upward to the nearest 1/100 of
one percent. (All amounts in the calculation will be
determined by the Bank as of the first day of the interest
period.)
LIBOR Rate = London Rate
---------------------------
(1.00 - Reserve Percentage)
Where,
(i) "London Rate" means the interest rate (rounded upward
to the nearest 1/16th of one percent) at which the
Bank of America NT & SA's London Branch, London, Great
Britain, would offer U.S. dollar deposits for the
applicable interest period to other major banks in the
London inter-bank market at approximately 11:00 a.m.
London time two (2) London banking days before the
commencement of the interest period.
(ii) "Reserve Percentage" means the total of the maximum
reserve percentages for determining the reserves to be
maintained by the member banks of the Federal Reserve
System for Eurocurrency Liabilities, as defined in the
Federal Reserve Board Regulation D, rounded upward to
the nearest 1/100 of one percent. The percentage will
be expressed as a decimal, and will include, but not
be limited to, marginal, emergency, supplemental,
special, and other reserve percentages.
(e) The Borrower may not elect a LIBOR Rate with respect to any
portion of the appreciable balance of the line of credit
which is scheduled to be repaid before the last day of the
applicable interest period.
(f) Any portion of the principal balance of the line of credit
already bearing interest at the LIBOR Rate will not be
convened to a different rate during its interest period.
2
<PAGE>
(g) Each prepayment of a LIBOR Rate portion, whether voluntary,
by reason of acceleration or otherwise, will be accompanied
by the amount of accrued interest on the amount prepaid,
and a prepayment fee equal to the amount (if any) by which:
(i) the additional interest which would have been payable
on the amount prepaid had it not been paid until the
last day of the interest period, exceeds
(ii) the interest which would have been recoverable by the
Bank by placing the amount prepaid on deposit in the
London inter-bank market for a period starting on the
date on which it was prepaid and ending on the last
day of the interest period for such portion.
(h) The Bank will have no obligation to accept an election for
LIBOR Rate portion if any of the following described events
has occurred and is continuing:
(i) Dollar deposits in the principal amount, and for
periods equal to the interest period, of a LIBOR Rate
portion are not available in the London inter-bank
market; or
(ii) the LIBOR Rate does not accurately reflect the cost of
a LIBOR Rate portion.
2.7 Paragraph 4.1 of the Agreement is amended to read in its
entirety as follows:
4.1 FACILITY 1 LOAN FEES. The Borrower agrees to pay a Two
Thousand Five Hundred Dollar ($2,500) fee on Facility No.
1, due upon the execution of the Loan Agreement.
2.8 Paragraph 6.5 of the Agreement is amended to read in its
entirety as follows:
6.5 BANKING DAYS. Unless otherwise provided in this Agreement,
a banking day is a day other than a Saturday or a Sunday on
which the Bank is open for business in Oregon and banks are
open for business in California. For amounts bearing
interest at an offshore rate (if any), a banking day is a
day other than a Saturday or a Sunday on which the Bank is
open for business in Oregon, London, Great Britain and BofA
California is dealing in offshore dollars. All payments
and disbursements which would be due on a day which is not
a banking day will be due on the next banking day. All
payments received on a day which is not a banking day will
be applied to the credit on the next banking day.
2.9 Paragraph 9.2(a) of the Agreement is amended to read in its
entirety as follows:
9.2(a) Within 120 days of the Borrower's fiscal year end, the
Borrower's annual financial statements and 10-K Annual
Report. These financial statements must be audited by a
Certified Public Accountant ("CPA") acceptable to the
Bank.
3
<PAGE>
2.10 Subparagraph 9.2(h) is added to the Agreement to read
as follows:
9.2(h) Copies of the Borrower's Form l0-Q Quarterly Report
within 45 days after the date of filing with the Securities
and Exchange Commission.
3. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of
the terms and conditions of the Agreement shall remain in full force and
effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA PORTLAND BREWING COMPANY
x Ed Kluss x Glenmore James
- ------------------------ -----------------------------
By: Ed Kluss By: Glenmore James
Title: Vice President Title: CFO
4
<PAGE>
EXHIBIT 10.19
AMENDMENT NO. 5 TO BUSINESS LOAN AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of Nov. 24, 1997, is
between Bank of America NT & SA (the "Bank") and Portland Brewing Company (the
"Borrower").
RECITALS
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of December 15, 1995, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
1. DEFINITIONS. Capitalized terms used but not defined in this
Amendment shall have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 1.5 of the Agreement, the percentage "1.5" is
substituted for the percentage ".50."
2.2 Paragraph 1.7 of the Agreement is deleted in its entirety.
2.3 Paragraph 1.8 of the Agreement is deleted in its entirety.
2.4 Paragraph 2.6 of the Agreement is deleted in its entirety.
2.5 Paragraph 2.7 of the Agreement is deleted in its entirety.
2.6 Subparagraph 9.2(c) of the Agreement is amended to read in its
entirety as follows:
9.2(c) Within 30 days after the period end, the Borrower's
monthly compliance certificates.
2.7 Subparagraph 9.2(d) of the Agreement is amended to read in its
entirety as follows:
9.2(d) A borrowing certificate setting forth the respective
amounts of Outstanding Trade Receivable and Inventory
reconciling as of the last day of each week and month
due every Tuesday and 20 days after month end.
2.8 Subparagraph 9.2(i) is added to the Agreement to read as
follows:
9.2(i) A thirteen-week cashflow and weekly variance report due
20 days after the end of each month, prepared in form
and content satisfactory to the Bank.
1
<PAGE>
2.9 Paragraph 9.3 of the Agreement is amended to read in its
entirety as follows:
9.3 CURRENT RATIO. To maintain at the end of each monthly
accounting period a ratio of current assets to current
liabilities of at least the amounts indicated for each
period specified below:
<TABLE>
<CAPTION>
Period Ratio
------ -----
<S> <C>
Through December 31, 1997 0.70:1.0
January 1, 1998 to May 1, 1998 0.60:1.0
</TABLE>
2.10 Paragraph 9.4 of the Agreement is amended to read in its
entirety as follows:
9.4 "TOTAL LIABILITIES TO TANGIBLE NET WORTH." To maintain at
the end of each monthly accounting period a ratio of total
liabilities to tangible net worth not exceeding 1.0:1.0.
"Tangible Net Worth" means the gross book value of the Borrower's
assets (excluding goodwill, patents, trademarks, trade names,
organization expense, treasury stock, unamortized debt discount and
expense, deferred research and development costs, deferred marketing
expenses, and other like intangibles) less total liabilities,
including but not limited to accrued and deferred income taxes, and
any reserves against assets.
2.11 Paragraph 9.5 of the Agreement is deleted in its entirety.
2.12 Paragraph 9.9 of the Agreement is deleted in its entirety.
2.13 Paragraph 9.20 of the Agreement is deleted in its entirety.
2.14 Paragraph 9.21 is added to the Agreement to read in its entirety
as follows:
9.21 TANGIBLE NET WORTH. Borrower shall maintain at the end of
each monthly accounting period a Tangible Net Worth of not
less than Five Million Dollars ($5,000,000).
2.15 Paragraph 9.22 is added to the Agreement to read in its entirety
as follows:
9.22 CAPITAL EXPENDITURES. Borrower is limited to a maximum of
Seventy Thousand Dollars ($70,000) for capital
expenditures, net of sales of existing fixed assets, for
the period of November 1, 1997 through April 30, 1998.
2.16 Paragraph 11.3(a) is added to the Agreement to read in its
entirety as follows:
11.3(A) Default of those loans Bank has granted to Portland
Brewing Building LLC, as defined by the terms of the
loan documents evidencing such loans, shall be a
default of the Borrower under the Agreement.
2.17 Paragraph 11.12 is added to the Agreement to read in its
entirety as follows:
11.12 Any change in Borrower's common stock, preferred
stock, treasury stock or paid in surplus in event of
default.
2
<PAGE>
3. EFFECT OF AMENDMENT. Except as provided in
this Amendment, all of the terms and conditions of the
Agreement shall remain in full force and effect.
This Amendment is executed as of the date stated at the beginning of this
Amendment.
BANK OF AMERICA NT & SA PORTLAND BREWING COMPANY
x Ed Kluss x Glenmore James
- -------------------------- ----------------------------
By: Ed Kluss By: Glenmore James
Title: Vice President Title: Executive Vice President
3
<PAGE>
EXHIBIT 10.20
$200,000
PORTLAND BREWING COMPANY
10% AMORTIZING SUBORDINATED NOTE, DUE JUNE 1, 2002
FOR VALUE RECEIVED, Portland Brewing Company, an Oregon corporation,
herein referred to as the "Company", promises to pay Two Hundred Thousand
Dollars ($200,000) to Charles A. Adams Family Trust, herein referred to as
the "Holder", in thirty six equal monthly installments of $5,555.56,
commencing July 1, 1999, plus interest thereon at the rate of ten percent
(10%) per annum, payable on February 1, 1998, and on the first day of each
month thereafter until the note has been paid in full.
SECURITY. This note is secured by a second security interest in the
accounts receivable and inventory of the Company which is subordinate to a
senior security interest in the same assets held by Bank of America. In the
event of a default under the loan agreement with this bank, payment of the
remaining balance due on this note will be subordinated to the payment in full
of all sums owing by the Company to the Bank of America, or a successor bank.
AMORTIZING SUBORDINATED NOTES. This note is one of a series of notes
authorized by the Company in an aggregate principal amount not to exceed
$400,000.
REDEMPTION. This note may be redeemed by the Company at any time, in
whole or in part, without premium or penalty. Partial prepayments shall be
applied against the installments which mature last. This note shall be
redeemed in the event that the Holder sells substantially all of its assets,
merges with another company, or sells its capital stock in an underwritten
public offering.
RESTRICTION ON TRANSFER. This note is not negotiable and may not be
assigned without the prior written consent of the Company.
DEFAULT. The Company agrees that the unpaid principal balance of this
note and accrued interest shall become immediately due and payable at the
demand of the Holder in the event of:
(a) A default in any payment of principal or interest due should such
default continue for a period of thirty (30) days;
(b) A payment default or other material default which remains uncured for
thirty (30) days after the Company has notice thereof under the loan agreement
with Bank of America, or successor bank; or
(c) An election by any other holder of an Amortizing Subordinated Note
of the Company to accelerate the maturity of any such note because of a payment
default; (d) The appointment of a receiver for the Company, an assignment for
the benefit of creditors by the Company, or the filing of a petition for relief
under any bankruptcy or insolvency law by or against the Company.
In such an event if the Company does not pay the remaining principal
balance and accrued interest in full within thirty days following demand
therefor by the Holder, this note shall then (from the date of the
1
<PAGE>
demand) accrue interest at the rate of 12% per annum until all such defaults
have been cured and the installment payments have been reinstated to the
satisfaction of the Holder.
ATTORNEY'S FEES. In the event action is commenced to enforce payment of
this note, the Company agrees to pay such additional sum as reasonable
attorney's fees as may be determined by the court upon any trial or appeal
therefrom.
IN WITNESS WHEREOF, the Company has authorized this 10% Amortizing
Subordinated Note, Due June 1, 2002 to be executed by its duly authorized
officer this 31st day of December, 1997.
Portland Brewing Company
By: /S/ GLEN JAMES
Title CHIEF FINANCIAL OFFICER
2
<PAGE>
EXHIBIT 10.21
$200,000
PORTLAND BREWING COMPANY
10% AMORTIZING SUBORDINATED NOTE, DUE JUNE 1, 2002
FOR VALUE RECEIVED, Portland Brewing Company, an Oregon corporation,
herein referred to as the "Company", promises to pay Two Hundred Thousand
Dollars ($200,000) to Harmer Company, herein referred to as the "Holder", in
thirty six equal monthly installments of $5,555.56, commencing July 1, 1999,
plus interest thereon at the rate of ten percent (10%) per annum, payable on
February 1, 1998, and on the first day of each month thereafter until the note
has been paid in full.
SECURITY. This note is secured by a second security interest in the
accounts receivable and inventory of the Company which is subordinate to a
senior security interest in the same assets held by Bank of America. In the
event of a default under the loan agreement with this bank, payment of the
remaining balance due on this note will be subordinated to the payment in full
of all sums owing by the Company to the Bank of America, or a successor bank.
AMORTIZING SUBORDINATED NOTES. This note is one of a series of notes
authorized by the Company in an aggregate principal amount not to exceed
$400,000.
REDEMPTION. This note may be redeemed by the Company at any time, in
whole or in part, without premium or penalty. Partial prepayments shall be
applied against the installments which mature last. This note shall be redeemed
in the event that the Holder sells substantially all of its assets, merges
with another company, or sells its capital stock in an underwritten public
offering.
RESTRICTION ON TRANSFER. This note is not negotiable and may not be
assigned without the prior written consent of the Company.
DEFAULT. The Company agrees that the unpaid principal balance of this
note and accrued interest shall become immediately due and payable at the
demand of the Holder in the event of:
(a) A default in any payment of principal or interest due should such
default continue for a period of thirty (30) days;
(b) A payment default or other material default which remains uncured for
thirty (30) days after the Company has notice thereof under the loan agreement
with Bank of America, or successor bank; or
(c) An election by any other holder of an Amortizing Subordinated Note
of the Company to accelerate the maturity of any such note because of a payment
default; (d) The appointment of a receiver for the Company, an assignment for
the benefit of creditors by the Company, or the filing of a petition for relief
under any bankruptcy or insolvency law by or against the Company.
In such an event if the Company does not pay the remaining principal
balance and accrued interest in full within thirty days following demand
therefor by the Holder, this note shall then (from the date of the
1
<PAGE>
demand) accrue interest at the rate of 12% per annum until all such defaults
have been cured and the installment payments have been reinstated to the
satisfaction of the Holder.
ATTORNEY'S FEES. In the event action is commenced to enforce payment of
this note, the Company agrees to pay such additional sum as reasonable
attorney's fees as may be determined by the court upon any trial or appeal
therefrom.
IN WITNESS WHEREOF, the Company has authorized this 10% Amortizing
Subordinated Note, Due June 1, 2002 to be executed by its duly authorized
officer this 31st day of December, 1997.
Portland Brewing Company
By: GLEN JAMES
Title CHIEF FINANCIAL OFFICER
2
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated February 27, 1998, included in this Form 10-KSB, into the
Company's previously filed Registration Statement File No. 33-93754 on Form
S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements found in the Company's Report on Form 10-KSB for the
year ended December 31, 1997, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 52,719
<SECURITIES> 0
<RECEIVABLES> 668,382
<ALLOWANCES> 15,852
<INVENTORY> 683,733
<CURRENT-ASSETS> 1,590,523
<PP&E> 11,741,724
<DEPRECIATION> 3,047,618
<TOTAL-ASSETS> 10,526,144
<CURRENT-LIABILITIES> 2,006,197
<BONDS> 0
0
0
<COMMON> 6,715,798
<OTHER-SE> 1,171,628
<TOTAL-LIABILITY-AND-EQUITY> 10,526,144
<SALES> 11,094,678
<TOTAL-REVENUES> 10,586,676
<CGS> 7,542,398
<TOTAL-COSTS> 7,542,398
<OTHER-EXPENSES> 3,974,682
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 290,858
<INCOME-PRETAX> (1,221,262)
<INCOME-TAX> 76,332
<INCOME-CONTINUING> (1,297,594)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,297,594)
<EPS-PRIMARY> (0.63)
<EPS-DILUTED> (0.63)
</TABLE>
