U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 1O-QSB
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended March 31, 1999
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ________ to ________
Commission File Number : 0-25836
PORTLAND BREWING COMPANY
(Exact name of small business issuer as specified 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 and zip code)
(503) 226-7623
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days: Yes
/X/ No / /
The number of shares outstanding of the Registrant's Common Stock as of April
30, 1999 was 3,365,267 shares.
Transitional Small Business Disclosure Format (check one): Yes /X/ No / /
<PAGE>
PORTLAND BREWING COMPANY
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION Page
Item 1. Financial Statements
Balance Sheets -March 31, 1999
and December 31, 1998 2
Statements of Operations -Three Months
Ended March 31, 1999 and 1998 3
Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 10
Item 6. Exhibits and Reports on Form 8-K 10
1
<PAGE>
PORTLAND BREWING COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT
ASSETS:
Cash $ 10,079 $ 52,532
Accounts receivable 553,140 765,997
Inventories 594,852 554,864
Prepaid assets 185,077 266,452
------------- -------------
Total current assets 1,343,148 1,639,845
Property and equipment, net 7,340,270 7,249,791
Other assets, net 114,481 113,933
============= =============
Total assets $ 8,797,899 $ 9,003,569
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 829,317 $ 879,265
Customer deposits held 137,516 133,464
Accrued payroll 170,300 134,247
Other accrued liabilities 63,496 70,052
Line of credit 163,011 323,626
Current portion of long-term debt 26,178 26,178
------------- -------------
Total current liabilities 1,389,818 1,566,832
Long-term debt, less current portion 104,746 113,334
Stockholder's loans, long-term 2,100,000 2,100,000
Series A Redeemable Convertible Preferred Stock, $52 par value,
10,000 shares authorized, shares issued and outstanding: 5,770,
liquidation preference of $300,040 300,040 -
STOCKHOLDERS' EQUITY:
Common stock, no par value, 25,000,000 shares authorized, shares
issued and outstanding: 3,365,267 (1999), 3,365,267 (1998) 7,115,798 7,115,798
Stock notes receivable (375) (375)
Accumulated deficit (2,212,128) (1,892,020)
------------- -------------
Total stockholders' equity 4,903,295 5,223,403
============= =============
Total liabilities and stockholders' equity $ 8,797,899 $ 9,003,569
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Sales $ 2,256,926 $ 2,244,400
Less- excise tax 111,338 95,142
------------ ------------
Net sales 2,145,588 2,149,258
Cost of sales 1,595,246 1,687,454
------------ ------------
Gross profit 550,342 461,804
General and administrative expenses 314,098 309,378
Sales and marketing expenses 497,816 496,117
------------ ------------
Loss from operations (261,572) (343,691)
Interest expense 51,340 83,765
Other expense, net 7,196 154,851
------------ ------------
Total other expense, net 58,536 238,616
Net loss $ (320,108) $ (582,307)
============ ============
Basic and diluted net loss per share $ (0.10) $ (0.28)
============ ============
Shares used in per share calculations 3,365,267 2,074,943
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $ (320,108) $ (582,307)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 232,807 259,609
Amortization 32,165 45,300
Loss (gain) on sale of assets (300) (2,151)
(Increase) decrease in:
Accounts receivable, net 212,857 (71,910)
Inventories (51,445) (22,252)
Prepaid assets 81,375 (50,962)
(Decrease) increase in:
Accounts payable (49,948) 87,596
Customer deposits held 4,052 71,676
Accrued payroll and other accrued liabilities 29,497 (7,268)
------------ ------------
Net cash provided by (used in) operating activities 170,952 (272,669)
Cash flows relating to investing activities:
Purchase of property and equipment (323,286) (54,052)
Proceeds from sale of property and equipment 300 2,283
Changes in other assets (21,256) (5,252)
------------ ------------
Net cash used in investing activities (344,242) (57,021)
Cash flows relating to financing activities:
Net borrowings (repayments) under line of credit (160,615) 247,000
Issuance of notes payable to distributors - 97,698
Issuance of preferred stock 300,040 -
Repayments of long term debt (8,588) (4,162)
------------ ------------
Net cash provided by financing activities 130,837 340,536
Net (decrease) increase in cash (42,453) 10,846
Cash, beginning of period 52,532 52,719
============ ============
Cash, end of period $ 10,079 $ 63,565
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 51,340 83,765
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PORTLAND BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods presented. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998. This quarterly report should be
read in conjunction with such Annual Report.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the entire fiscal year ending
December 31, 1999, or any portion thereof.
2. COMPREHENSIVE LOSS
The Company has adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes requirements for disclosure of comprehensive
income (loss). Comprehensive loss did not differ from reported net loss in the
periods presented.
3. NET LOSS PER SHARE
Basic loss per common share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding for the period. Diluted net
loss per common share for all periods presented is the same as basic net loss
per share since all potential dilutive securities are excluded because they are
antidilutive.
The dilutive effect of stock options outstanding for the purchase of 143,975 and
148,550 shares at March 31, 1999 and 1998, respectively, and warrants
outstanding for the purchase of 87,697.5 shares at March 31, 1999 and 1998 were
not included in loss per share calculations, because to do so would have been
antidilutive.
5
<PAGE>
4. 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>
March 31, Dec. 31,
1999 1998
------------- --- -------------
<S> <C> <C>
Raw materials $ 190,553 $ 176,288
Work-in-process 179,600 164,428
Finished goods 154,941 138,357
Merchandise 55,109 49,685
Kegs, inventory value 14,649 26,106
============= =============
$ 594,852 $ 554,864
============= =============
</TABLE>
5. SEGMENT INFORMATION
The Company is organized into two product-based segments, its brewery operations
and its restaurant operations. The Company's brewery segment brews and sells
specialty beer in its Portland, Oregon brewery which is sold to distributors and
retail customers. The Company's restaurant segment consisted of two restaurants
until November 1998, when one of the restaurants was closed. Management
evaluates segment performance based on segment gross profit.
All revenues are attributable to, and all long-lived assets are located in the
United States, the Company's country of domicile. The basis of accounting for
transactions between segments is based on the fair market value of the
respective goods or services. In the three months ended March 31, 1999, two
distributors represented 38% percent and 17%, respectively, of net sales. In the
three months ended March 31, 1998, two distributors represented 39% percent and
10%, respectively, of net sales.
<TABLE>
<CAPTION>
Three months ended March 31,
--------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Net Sales:
Brewery $ 1,867,083 $ 1,652,138
Restaurant(s) 341,844 582,614
------------- -------------
Subtotal 2,208,927 2,234,752
Less: intersegment sales (63,339) (85,494)
------------- -------------
Total net sales $ 2,145,588 $ 2,149,258
============= =============
Gross Profit:
Brewery $ 523,716 $ 409,937
Restaurant(s) 55,525 89,295
------------- -------------
Subtotal 579,241 499,232
Intersegment loss (28,899) (37,428)
============= =============
Total gross profit $ 550,342 $ 461,804
============= =============
</TABLE>
6
<PAGE>
6. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
On March 1, 1999, the Company sold 5,770 shares of its Series A Redeemable
Convertible Preferred Stock ("Series A") for $52 per share, resulting in
aggregate proceeds of $300,040. Because the redemption of the Series A is
outside the control of the Company, the Series A was not classified as
stockholders' equity at March 31, 1999. See "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources" for additional
information.
ITEM 2. MANAGEMENT'S DISCUSSION ANALYSIS OR PLAN OF OPERATION
Certain statements in the Management's Discussion and Analysis or Plan of
Operation are forward-looking statements. These forward-looking statements are
based on current expectations and entail various risks and uncertainties that
could cause actual results to differ materially from those expressed in such
forward-looking statements. Such risks and uncertainties include general
business and economic conditions, competitive products and pricing, fluctuations
in demand and availability of financing. See "Liquidity and Capital Resources"
below for additional risks and uncertainties.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
Gross sales in the first quarter of 1999 increased 1% to $2,256,926 from
$2,244,400 in the first quarter of 1998. Shipments in the first quarter of 1999
were 12,122 barrels, an increase of 11% from 10,966 barrels in the first quarter
of 1998. The first quarter of 1998 included sales at the Company's Flanders
Street BrewPub which was closed in November 1998.
Gross profit increased 19% to $550,342 (26% of net sales) in the first quarter
of 1999 from $461,804 (22% of net sales) in the first quarter of 1998. The
increase in gross profit was a result of higher production volumes in the first
quarter of 1999 and the decrease in costs associated with the Company's Flanders
Street BrewPub which was closed in November 1998.
General and administrative expenses increased 2% to $314,098 (15% of net sales)
in the first quarter of 1999 from $309,378 (14% of net sales) in the first
quarter of 1998.
Sales and marketing expenses remained relatively constant at $497,816 (23% of
net sales) in the first quarter of 1999 compared to $496,117 (23% of net sales)
in the first quarter of 1998.
Interest expense decreased to $51,340 in the first quarter of 1999 from $83,765
in the first quarter of 1998. The decrease was a result of the debt
restructuring which occurred in late 1998. See "Liquidity and Capital Resources"
below.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital principally to fund its working capital needs. The
Company has met its capital requirements through cash flow from operations, bank
borrowings, loans from shareholders and the private and public sale of its
Common Stock.
Accounts receivable decreased in the first quarter of 1999 as a result of
shorter payment terms for the Company's largest customer. The outstanding
balance under the line of credit decreased in the first quarter of 1999 as the
Company used a portion of the proceeds received from the sale of preferred stock
to make payments thereon.
In 1998, the Company recorded an extraordinary gain of $1,200,279 related to a
debt restructuring. The Company was relieved of $1,079,257 of debt and accrued
interest originated by Bank of America, NT & SA and $272,915 of trade accounts
payable. The gain was offset by professional fees related to the restructuring
7
<PAGE>
of $151,893. In connection with the debt restructuring, the MacTarnahan Limited
Partnership (a related party) purchased approximately $3.1 million of secured
Company debt held by Bank of America, NT & SA. The $3.1 million bank debt plus
accrued interest and other related charges was settled by the MacTarnahan
Limited Partnership which in turn resulted in a net loan payable from the
Company to the MacTarnahan Limited Partnership of $2.1 million. The $2.1 million
term loan ("Term Loan"), due on January 31, 2000, is secured by receivables,
inventory and equipment of the Company. The Term Loan bears interest at a per
annum rate equal to the prime lending rate of the Bank of the Northwest plus 1%
(8.75% at March 31, 1999). The Company expects to place the debt permanently
with a financial institution in 1999 or pay off the debt through the raising of
additional capital. There can be no assurance that the Company will be able to
obtain permanent financing from a financial institution or that the Company will
be able to raise additional capital on commercially reasonable terms or at all.
If permanent financing is unavailable during the next 12 months, the MacTarnahan
Limited Partnership has committed to extend the due date of the Term Loan until
satisfactory permanent financing can be obtained, for the period through April
1, 2000.
In 1998, the Company conducted negotiations with its trade creditors. As a
result of such negotiations, the Company was relieved of $272,915 of trade
accounts payable and issued notes in the aggregate principal amount of $148,065
to trade creditors, which mature on September 1, 2003 and bear interest at 6%
per annum.
The Company has a $600,000 revolving line of credit with a bank which provides
for a fixed interest rate of 7.99% ("Revolving Line") which matures on August
20, 1999. At March 31, 1999, $163,011 was outstanding under the Revolving Line.
The Revolving Line is guaranteed by Harmer Mill & Logging Supply Co., (a related
party) ("Harmer") and is secured by a certificate of deposit in the amount of
$600,000 for which Harmer will receive an accommodation fee in an amount equal
to 1% per year on the outstanding principal loan balance on the Revolving Line.
On March 1, 1999, Harmer and the Charles A. Adams Family Trust each purchased
2,885 shares of the Company's Series A Preferred Stock ("Series A") for $52 per
share, resulting in aggregate proceeds to the Company of $300,040.
Each share of Series A is convertible on February 25, 2004, into fully paid and
non-assessable shares of Common Stock at a rate of 100 shares of Common Stock
for each share of Series A. The conversion ratio, which is currently 100 to 1,
is subject to adjustment in the event of stock splits or stock dividends. Unless
converted, the Company must redeem the Series A shares on February 25, 2004, at
$52 per share plus any declared but unpaid dividends, in cash or in 24 equal
monthly payments bearing interest at 12% per annum. Because the redemption of
the Series A is outside the control of the Company, the Series A was not
classified as stockholders' equity at March 31, 1999. Each shareholder of Series
A is entitled to the number of votes equal to the number of shares of Common
Stock into which the Series A shares can be converted and the Series A shares
are entitled to vote as a separate class. Each shareholder of Series A is
entitled to receive cumulative dividends at the rate of 8% per annum, when and
if declared by the Board of Directors, prior to payment of dividends on Common
Stock. No dividends have been declared to date. In the event of any liquidation
or dissolution of the Company, either voluntary or involuntary, each shareholder
of Series A shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds to the holders of Common Stock, an
amount equal to $52.00 per share for each share of Series A and, in addition, an
amount equal to all declared but unpaid dividends on Series A.
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. There
can be no assurance that the Company will be able to increase its sales volume
or be able to maintain its selling prices in existing markets or new markets.
The Company experienced significant operating losses during the years ended
December 31, 1998 and 1997, and continued to incur losses in the first quarter
of 1999. Operating results have and may continue to fluctuate as a result of
many factors including lower sales volumes and selling prices, increased
depreciation and other fixed operating costs as a percent of sales during
periods when the Company's brewery is at less than full capacity, changes in
product mix, increased selling and marketing costs incurred as the Company
protects its business in existing markets and increased transportation costs as
it develops business in new geographic markets.
8
<PAGE>
The Company's working capital requirements over the next year are expected to be
met from cash flow through operations, funds available under the Company's
revolving line and, if appropriate and available, additional equity offerings
and/or borrowings from other lenders. There can be no assurance the Company will
be able to raise additional funds through equity offerings or additional
borrowings.
YEAR 2000 ISSUE
The Company's approach to the Year 2000 issue is discussed below. In discussing
the Year 2000 issue, the Company necessarily makes certain forward looking
statements. There can be no assurance that actual results will not differ
materially from the projections contained in the forward looking statements.
Factors which may cause actual results to differ materially include, but are not
limited to the failure of Company personnel and outside consultants to properly
assess and address the Company's Year 2000 issues, inaccurate or incomplete
disclosure by third parties regarding the Year 2000 issue, failure to address
Year 2000 issue with all vendors, including utility vendors, and customers,
infrastructure failures, such as disruptions in the supply of electricity, gas,
water or communications services, or major institutions, such as the government
and banking systems, and failure of the Company to accurately predict the costs
to address the Year 2000 issue or the lost revenues related to interruption in
the Company's or its customers' businesses.
STATE OF READINESS. The Company, in conjunction with outside consultants, has
made an assessment of the effect of the Year 2000 issue on its computer
equipment and software (sometimes referred to as "information technology" or
"IT") and devices with embedded technology (sometimes referred to as "non-IT").
The Company has identified certain modifications to its IT systems and non-IT
systems which are necessary to address the Year 2000 issue and has partially
implemented those modifications. The Company plans to identify what, if
anything, still needs to be done and to develop a timeline. Based on this
assessment and implementation of the modifications discussed above, the Company
believes its IT systems and non-IT systems will properly recognize calendar
dates beginning in the year 2000.
The Company has not evaluated the IT systems and non-IT systems of its outside
vendors and customers. The Company plans to contact vendors regarding the Year
2000 issue by the end of the second quarter of 1999.
COSTS TO ADDRESS YEAR 2000 ISSUE. To date, costs directly related to Year 2000
remediation efforts are immaterial. Accordingly, the Company expects the costs
to address the Year 2000 issue will not have a material adverse financial impact
on the Company's financial condition or results of operations. However, there
can be no assurance that additional remediation costs will not be identified,
especially since the Company has not evaluated the year 2000 readiness of its
customers or suppliers.
RISKS OF THE COMPANY'S YEAR 2000 ISSUE. The most reasonably likely worst case
scenario for the Company would involve an extended shutdown in production and/or
a reduction in customer demand. The Company is unable to quantify the effect of
such a scenario. However, the Company plans to identify its critical vendors and
customers and evaluate whether or not any of them represent a significant risk.
In addition, the first part of the fiscal year is not a critical production
period or period of customer demand and therefore the Company believes it would
be able to recover from a temporary interruption without a material adverse
effect on the Company's operations.
COMPANY'S CONTINGENCY PLAN. Based on the Company's assessment of the Year 2000
issue, the Company has not developed and does not intend to develop a
contingency plan to address the reasonably likely worst case scenario.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Sales of Unregistered Securities
On March 1, 1999, Harmer Mill & Logging Supply Co. and the Charles A. Adams
Family Trust each purchased 2,885 shares of the Company's Series A Redeemable
Convertible Preferred Stock for $52 per share, resulting in aggregate proceeds
to the Company of $300,040. See "Management's Discussion and Analysis or Plan of
Operation - Liquidity and Capital Resources" for additional information.
The Company relied on the exemption from registration provided by Section 4(2)
of the Securities Act of 1933 (the "Act") as both of Harmer Mill & Logging
Supply Co. and the Charles A. Adams Family Trust are "accredited investors"
under the Act and the issuance of the shares did not involve a public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits included herein:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended March 31,
1999.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 12th day of May, 1999.
PORTLAND BREWING COMPANY
Signature Title
--------- -----
/s/ CHARLES A. ADAMS
------------------------------- Chairman of the Board, President and
Charles A. Adams Chief Executive Officer
(Principal Executive Officer)
/s/ GLENMORE JAMES
------------------------------- Executive Vice President and Chief
Glenmore James Financial Officer
(Principal Financial and Accounting
Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements found in the Company's Report on Form 10-QSB for the three
months ended March 31,1999, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000943658
<NAME> Portland Brewing Company
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,079
<SECURITIES> 0
<RECEIVABLES> 553,140
<ALLOWANCES> 0
<INVENTORY> 594,852
<CURRENT-ASSETS> 1,343,148
<PP&E> 11,046,004
<DEPRECIATION> 3,705,734
<TOTAL-ASSETS> 8,797,899
<CURRENT-LIABILITIES> 1,389,818
<BONDS> 0
300,040
0
<COMMON> 7,115,798
<OTHER-SE> (2,212,503)
<TOTAL-LIABILITY-AND-EQUITY> 8,797,899
<SALES> 2,256,926
<TOTAL-REVENUES> 2,145,588
<CGS> 1,595,246
<TOTAL-COSTS> 1,595,246
<OTHER-EXPENSES> 819,110
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,340
<INCOME-PRETAX> (320,108)
<INCOME-TAX> 0
<INCOME-CONTINUING> (320,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (320,108)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
