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 September 30, 2000
[ ] 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 November
13, 2000 was 4,995,014 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
Consolidated Balance Sheets - September 30, 2000 and
December 31, 1999 2
Consolidated Statements of Operations -Three and Nine
Months Ended September 30, 2000 and 1999 3
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2000 and 1999 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 2000 December 31, 1999
ASSETS ------------------ -----------------
------
<S> <C> <C>
CURRENT ASSETS:
Cash $ 4,325 $ 103,006
Accounts receivable, net of allowance of $4,104 (2000) and $8,000 (1999) 1,394,551 655,064
Inventories 1,100,022 729,853
Prepaid assets 188,466 218,550
---------------- ----------------
Total current assets 2,687,364 1,706,473
Property and equipment, net of accumulated depreciation of $4,762,599 (2000) 6,560,999 6,711,257
and $4,208,710 (1999)
Other assets, net 879,993 198,544
---------------- ----------------
Total assets $10,128,356 $8,616,274
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 780,363 $ 435,465
Current portion of long-term debt 24,030 26,706
Stockholder term loan (Note 6) 2,500,000 -
Accounts payable 1,649,524 809,369
Customer deposits held 144,033 131,821
Accrued payroll 197,599 170,580
Other accrued liabilities 270,243 65,853
--------------- ---------------
Total current liabilities 5,565,792 1,639,794
Long-term debt, less current portion 48,037 86,099
Stockholder term loan (Note 6) - 2,100,000
Other long-term liabilities 55,000 -
Series A Redeemable Convertible Preferred Stock, $52 par value, 10,000 shares
authorized, 5,770 shares issued and outstanding, liquidation preference of
of $300,040 300,040 300,040
STOCKHOLDERS' EQUITY:
Common stock, no par value, 25,000,000 shares authorized
shares issued and outstanding: 4,995,014 (2000), 4,094,714 (1999) 8,148,883 7,662,883
Stock notes receivable (375) (375)
Accumulated deficit (3,989,021) (3,172,167)
---------------- ----------------
Total stockholders' equity 4,159,487 4,490,341
---------------- ----------------
Total liabilities and stockholders' equity $10,128,356 $8,616,274
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31, 31, 31, March 31, 31, 31,
September 30, September 30,
--------------------------------- ------------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 3,635,196 $ 2,905,008 $ 10,058,898 $ 7,900,274
Less-excise tax 204,002 139,581 551,825 383,424
------------- ------------ ------------- -------------
Net sales 3,431,194 2,765,427 9,507,073 7,516,850
Cost of sales 2,608,364 1,868,518 6,863,673 5,279,325
------------- ------------ ------------- -------------
Gross profit 822,830 896,909 2,643,400 2,237,525
General and administrative expenses 419,112 338,087 1,220,635 952,818
Sales and marketing expenses 772,104 743,205 2,106,881 1,822,080
------------- ------------ ------------- -------------
Loss from operations (368,386) (184,383) (684,116) (537,373)
Interest expense (82,488) (64,194) (229,261) (176,440)
Other income (expense), net 100,941 (43,680) 96,523 (64,369)
------------- ------------ ------------- -------------
Total other expense, net 18,453 (107,874) (132,738) (240,809)
Net loss $ (349,933) $ (292,257) $ (816,854) $ (778,182)
============= ============ ============= =============
Basic and diluted net loss per share $ (0.07) $ (0.09) $ (0.17) $ (0.23)
============= ============ ============= =============
Shares used in per share
calculations: 4,995,314 3,365,267 4,895,014 3,365,267
============= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
PORTLAND BREWING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Sept. 30,
-----------------------------------
2000 1999
--------------- --------------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $ (816,854) $ (778,182)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 666,459 684,279
Amortization 177,795 91,630
Gain on sale of assets (848) (6,727)
(Increase) decrease in:
Accounts receivable, net (739,487) (59,100)
Inventories (370,169) (167,423)
Prepaid assets 30,084 72,267
(Decrease) increase in:
Accounts payable 840,155 59,238
Accrued payroll and other accrued liabilities 12,212 23,331
Customer deposits held 31,156 6,795
------------ ------------
Net cash used in operating activities (169,497) (73,892)
------------ ------------
Cash flows relating to investing activities:
Purchase of property and equipment (444,877) (491,780)
Proceeds from sale of property and equipment 79,524 235,231
Changes in other assets (75,491) (100,689)
Purchase of acquired business (150,000) -
------------ ------------
Net cash used in investing activities (590,844) (357,238)
------------ ------------
Cash flows relating to financing activities:
Repayments under line of credit 344,898 137,776
Issuance of long-term debt 27,720 -
Repayments of long term debt (110,958) (23,939)
Proceeds from stockholders' loans 400,000
Issuance of preferred stock - 300,040
------------ ------------
Net cash provided by financing activities 661,660 413,877
------------ ------------
Net decrease in cash (98,681) (17,253)
Cash, beginning of period 103,006 52,532
------------ ------------
Cash, end of period $ 4,325 $ 35,279
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 229,261 $ 176,440
Supplemental disclosure of noncash information:
Common stock issued in connection with acquisition $ 486,000 $ -
</TABLE>
The accompanying notes are an integral part of these consolidated
financial 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, 1999. This quarterly report should be
read in conjunction with such Annual Report.
Operating results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 2000, 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 net 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 373,800 and
380,300 shares at September 30, 2000 and 1999, respectively, warrants
outstanding for the purchase of 87,697.5 shares at September 30, 2000 and 1999,
and 577,000 shares of common stock into which the outstanding Series A
Redeemable Convertible Preferred Stock are convertible 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:
September 30, December 31,
2000 1999
------------- -------------
Raw materials $ 512,135 $ 352,860
Work-in-process 207,125 177,985
Finished goods 297,313 111,268
Merchandise 83,449 87,740
------------- -------------
$ 1,100,022 $ 729,853
============= =============
5. Segment Information
The Company is organized into three product-based segments: brewery operations,
restaurant operations and hand truck manufacturing. 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, which
adjoins its brewery, sells the Company's specialty beers along with lunch and
dinner. In October 1999, the Company purchased Harco Products, Inc., a company
which produces hand trucks for various industrial uses.
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. Interest expense is considered a corporate expense
and is not allocated to the three segments.
In the nine months ended September 30, 2000, two distributors represented 37%
and 13% respectively, of net sales. In the nine months ended September 30, 1999,
two distributors represented 39% percent and 18% respectively, of net sales.
<TABLE>
Three months ended September 30, Nine months ended September 30,
------------------------------------- ---------------------------------------
2000 1999 2000 1999
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Net Sales:
Brewery $ 2,917,430 $ 2,378,352 $ 8,094,080 $ 6,491,427
Restaurant 474,306 462,025 1,327,877 1,233,841
Less: inter-segment sales (73,850) (74,950) (230,195) (208,418)
------------- ------------- ------------- ---------------
Subtotal 3,228,719 2,765,427 9,191,762 7,516,850
Harco Products 113,308 - 315,311 -
------------- ------------- ------------- ---------------
Total net sales $ 3,342,027 $ 2,765,427 $ 9,507,073 $ 7,516,850
============= ============= ============= ===============
Gross Profit:
Brewery $ 725,575 $ 822,342 $ 2,364,918 $ 2,067,815
Restaurant 92,402 114,184 278,387 280,026
Less: inter-segment
gross profit (38,784) (39,617) (127,504) (110,316)
------------- ------------- ------------- ---------------
Subtotal 779,193 896,909 2,515,801 2,237,525
Harco Products 43,637 - 127,599 -
------------- ------------- ------------- ---------------
Total gross profit $ 822,830 $ 896,909 $ 2,643,400 $ 2,237,525
============= ============= ============= ===============
</TABLE>
6
<PAGE>
6. Stockholder Term Loan
The Company has a $2.5 million term loan ("Term Loan") payable to the
MacTarnahan Limited Partnership (a related party), which is secured by
receivables, inventory, equipment and general intangibles of the Company. The
Term Loan bears interest at a per annum rate equal to the prime lending rate of
the Western Bank plus 1% (10.5% at September 30, 2000). The Term Loan is due on
April 1, 2001, and accordingly has been classified as current in the
accompanying balance sheet as of September 30, 2000. The Company expects to
place the debt permanently with a financial institution, pay off the debt
through the raising of additional capital or extend the due date until
satisfactory permanent financing can be obtained. There can be no assurance that
the Company will be able to obtain permanent financing from a financial
institution, raise additional capital on commercially reasonable terms or at all
or extend the due date of the debt. See "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources."
7. Acquisitions
In October 1999, the Company acquired all of the outstanding common stock of
Harco Products, Inc. ("Harco"), from a related party. Harco produces hand trucks
for various industrial uses. The purchase price of $569,585 was paid by the
issuance of shares of the Company's common stock valued at $0.75 per share. The
common stock issued in connection with this acquisition contains certain
incidental registration rights. The acquisition was accounted for using the
purchase method of accounting, which requires that the purchase price be
allocated to the net assets acquired based upon the relative fair value of
assets acquired. The excess of the acquisition cost over the fair value of the
net assets acquired, of approximately $36,000, is being amortized using the
straight-line method over five years. The accompanying financial statements
include the results of operations from the date of acquisition. In connection
with the acquisition, the Company received 30,000 shares of its common stock
that Harco owned, and recorded a corresponding reduction to stockholders'
equity.
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company ("Saxer") for 900,000 shares of the Company's common
stock, $150,000 cash and a three-year agreement to pay certain amounts based on
barrel sales of the Saxer and Nor'wester brands, such amount secured by the
Saxer and Nor'wester brands. In connection with this purchase, the Company
recorded intangible assets of approximately $783,000, representing the fair
value of trademarks and brand names purchased from Saxer, which are being
amortized on a straight-line basis over five years. This amount is included in
other assets, net in the accompanying consolidated balance sheet. Also in
connection with this purchase, the Company recorded a liability of $200,000
representing the minimum payments to be made over a three-year period based on
barrel sales of the Saxer and Nor'wester brands.
8. Recent Accounting Pronouncements
In September 1998, Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133) was
issued. SFAS 133 establishes accounting and reporting standards requiring every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 also requires changes in the
derivative instrument's fair value be recognized currently in results of
operations unless specific hedge accounting criteria are met. SFAS 133, as
amended by SFAS 137, is effective for fiscal years beginning after September 15,
2000. The Company's management has studied the implications of SFAS 133 and
based on the initial evaluation, expects the adoption to have no impact on the
Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), and
further amended it to defer the effective date. The Company is required to adopt
the provisions of SAB 101 in the fourth quarter of fiscal 2001. The Company does
not expect the adoption of SAB 101 to have a material impact on its financial
statements.
7
<PAGE>
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44, (FIN 44) which provides interpretive guidance on several
implementation issues related to Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees." The Company is required to adopt the
provisions of FIN 44 in the first quarter of fiscal 2001. The Company does not
expect the adoption of FIN 44 to have a material impact on its financial
statements.
Item 2. Management's Discussion and 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 Factors That May Affect Future
Results below for additional risks and uncertainties.
Results of Operations
Third Quarter and Nine Months ended September 30, 2000 and 1999
Net Sales. Net sales in the third quarter of 2000 increased 24% to $3,431,194
from $2,765,427 in the third quarter of 1999, and increased 26% to $9,507,073
from $7,516,850 in the first nine months of 1999. Net sales included sales of
Harco Products, Inc. ("Harco") products of $113,308 in the third quarter of 2000
and $315,311 in the first nine months of 2000.
Net sales from brewery operations increased 23% to $2,917,430 in the third
quarter of 2000 from $2,378,352 in the third quarter of 1999, and increased 25%
to $8,094,080 in the first nine months of 2000 from $6,491,427 in the first nine
months of 1999, primarily as a result of increased volume from contract brewing
and packaging arrangements and the addition of the Saxer and Nor'wester brands
acquired in January 2000, offset by additional accruals for increased excise tax
in 2000. Shipments increased 26% to 19,598 barrels in the third quarter of 2000
from 15,521 barrels in the third quarter of 1999. Shipments increased 26% to
52,903 barrels in the first nine months of 2000 from 41,875 barrels in the first
nine months of 1999. The Company will pay excise tax at a higher rate if it
sells more than 60,000 barrels in 2000.
Net sales from restaurant operations increased 3% to $474,306 in the third
quarter of 2000, from $462,025 in the third quarter of 1999, and increased 8% to
$1,327,877 in the first nine months of 2000, from $1,233,841 in the first nine
months of 1999. The increases in restaurant sales in the 2000 periods were
attributable to increased volume resulting from promotional programs, and to a
lesser extent, certain price increases.
Gross Profit. Gross profit decreased 8% to $822,830 (24.0% of net sales) in the
third quarter of 2000 from $869,909 (32.4% of net sales) in the third quarter of
1999, and increased 18% to $2,643,400 (27.8% of net sales) in the first nine
months of 2000 from $2,237,525 (29.8% of net sales) in the first nine months of
1999. Gross profit included gross profit from sales of Harco products of $43,637
in the third quarter of 2000 and $127,599 in the first nine months of 2000.
Gross profit margin from brewery operations decreased to 24.9% of brewery net
sales in the third quarter of 2000 from 34.6% of brewery net sales in the third
quarter of 1999, and decreased to 29.2% of brewery net sales in the first nine
months of 2000 from 31.9% of brewery net sales in the first nine months of 1999.
The decrease in the third quarter of 2000 was a result of a greater percentage
of sales attributed to Saxer and Nor'wester brands as well as contract brewing
and packaging arrangements, which have lower gross margins
8
<PAGE>
than the Company's branded products. The decrease in the first nine months of
2000 was associated with the start up of production of the Saxer and Nor'wester
brands by the Company and the increase in contract brewing and packaging
arrangements, which have lower gross profit margins.
Gross profit from restaurant operations decreased to 19.5% of restaurant sales
in the third quarter of 2000 from 24.7% of restaurant sales in the third quarter
of 1999, and decreased to 21.0% of restaurant sales in the first nine months of
2000 from 22.7% of restaurant sales in the first nine months of 1999. The
decrease in the third quarter and first nine months of 2000 was largely the
result of increased payroll costs in the restaurant operations as the result of
internal reorganization.
General and Administrative Expenses. General and administrative expenses
increased 24% to $419,112 (12.2% of net sales) in the third quarter of 2000 from
$338,087 (12.2% of net sales) in the third quarter of 1999, and increased 28% to
$1,220,635 (12.8% of net sales) in the first nine months of 2000 from $952,818
(12.7% of net sales) in the first nine months of 1999. The increases are
primarily the result of additional operating costs related to the acquisition of
Harco in October 1999 and of the Saxer and Nor'wester brands in January 2000.
See Note 7 of Notes to Consolidated Financial Statements.
Sales and Marketing Expenses. Sales and marketing expenses increased 4% to
$772,104 (22.5% of net sales) in the third quarter of 2000 compared to $743,205
(26.9% of net sales) in the third quarter of 1999, and increased 16% to
$2,106,881 (22.2% of net sales) in the first nine months of 2000 compared to
$1,822,080 (24.2% of net sales) in the first nine months of 1999. The increases
are primarily the result of additional marketing expenses related to the
acquisition of the Saxer and Nor'wester brands in January 2000.
Interest Expense. Interest expense increased to $82,488 in the third quarter of
2000 from $64,194 in the third quarter of 1999, and increased to $229,261 in the
first nine months of 2000 from $176,440 in the first nine months of 1999. The
increases were a result of increased borrowings used to support working capital
and higher production and sales levels, and an increase in interest rates on the
outstanding debt during 2000.
Other Income (Expense) Net. Other income (net) increased to $100,941 in the
third quarter of 2000 from other expense (net) of $43,680 in the third quarter
of 1999. Other income (net) increased to $96,523 in the first nine months of
2000 from other expense (net) of $64,369 in the third quarter of 1999. The
increases included approximately $40,000 in debt forgiveness from a distributor
in lieu of payment for distribution rights of certain draft products and
approximately $88,000 in settlement of over payment of property taxes in prior
years.
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 increased 113% to $1,394,551 in the first nine months of
2000, primarily as a result of increased sales, proportionately longer payment
terms on certain accounts in 2000, the timing of receipts, and the gross
accounts receivable from contract brewing account distributors. Inventories
increased 51% to $1,100,022 in the first nine months of 2000, primarily as a
result of increased sales, increased inventory related to Harco (which was
acquired in October 1999) and increased inventory related to the Saxer and
Nor'wester brands (which were acquired in January 2000). Accounts payable
increased 104% to $1,649,524 in the first nine months of 2000 as a result of the
increased level of sales and purchases, the pass-through margin payable to
contract customers from accounts receivable billings to their distributors and
the timing of purchases and payments.
The Company has a $2.5 million term loan ("Term Loan") payable to the
MacTarnahan Limited Partnership (a related party), which is secured by
receivables, inventory, equipment and general intangibles of the
9
<PAGE>
Company. The Term Loan bears interest at a per annum rate equal to the prime
lending rate of Western Bank plus 1% (10.5% at September 30, 2000). The Term
Loan is due on April 1, 2001, and accordingly has been classified as current in
the accompanying balance sheet as of September 30, 2000. The Company expects to
place the debt permanently with a financial institution, pay off the debt
through the raising of additional capital or extend the due date until
satisfactory permanent financing can be obtained. There can be no assurance that
the Company will be able to obtain permanent financing from a financial
institution, raise additional capital on commercially reasonable terms or at all
or extend the due date of the debt.
The Company has a $1,000,000 revolving line of credit ("Revolving Line") with a
bank, under which $780,363 was outstanding at September 30, 2000. Payment of the
Revolving Line is secured by certain of the Company's assets and is guaranteed
by certain of the Company's shareholders. Interest is payable monthly at a per
annum rate equal to prime rate plus 1% (10.5% at September 30, 2000). The
Revolving Line expires on June 1, 2001.
Acquisitions
In October 1999, the Company acquired all of the outstanding common stock of
Harco from a related party. Harco produces hand trucks for various industrial
uses. The purchase price of $569,585 was paid by the issuance of shares of the
Company's common stock valued at $0.75 per share. See Note 7 of Notes to
Consolidated Financial Statements.
On January 31, 2000, the Company purchased certain assets (equipment and brands)
from Saxer Brewing Company ("Saxer") for 900,000 shares of the Company's common
stock, $150,000 cash and a three year agreement to pay certain amounts based on
barrel sales of the Saxer and Nor'wester brands, such amount secured by the
Saxer and Nor'wester brands. See Note 7 of Notes to Consolidated Financial
Statements.
Factors That May Affect Future Results
Competition. The specialty brewing industry has experienced significant change
in the past several years. Growth rates have slowed, distribution opportunities
have become limited, and more brewers have entered the industry. The Company
believes that category saturation continues to make growth more difficult for
existing regional specialty brewers, and that competition affecting its growth
will 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. The proliferation of specialty brewers, new beers, and brew
pubs, efforts by regional craft brewers to expand their production capacities
and distribution, and underutilized domestic brewing capacity are all
competitive factors for specialty brewers. Additionally, larger national brewers
have developed or are developing brands to compete directly with specialty
beers. These national competitors have advantages such as lower production
costs, larger marketing budgets, greater financial and other resources and more
developed and extensive distribution networks than the Company. 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.
Distribution. While it 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 its beer. Additionally,
distributors and retailers have become more selective in accepting new brands.
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
10
<PAGE>
significant adverse effect on the Company's results of operations, particularly
if the distributor were Columbia Distributing Company, the Company's largest
distributor.
Results of Operations. The Company experienced significant operating losses
during the last three fiscal years, and has continued to incur losses in the
first nine months of 2000. Additionally, accounts receivable and accounts
payable have increased significantly during 2000. Operating results have and may
continue to fluctuate as a result of many factors including 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, increased transportation costs as it
develops business in new geographic markets, collection of accounts receivable
and management of outstanding accounts payable and debt.
Purchase of Assets from Saxer Brewing Company. In March 2000 the Company began
production of the Saxer and Nor'wester brands at its Portland brewery. The
Company believes that the additional volume will strengthen its financial
performance over time. However, the production and distribution of the Saxer and
Nor'wester brands requires additional working capital. The Company has also
agreed to pay certain amounts based on barrel sales of the Saxer and Nor'wester
brands. The Company has increased its Term Loan from $2.1 million to $2.5
million and its Revolving Line from $750,000 to $1,000,000 to accommodate its
anticipated additional working capital needs. There are no assurances that the
production and distribution of the Saxer and Nor'wester brands will provide
sufficient cash flow from operations to accommodate the increased working
capital needs and repayment of the increased debt.
Ability to Refinance or Retire Outstanding Debt. The Company has a Term Loan
payable to the MacTarnahan Limited Partnership (a related party) of $2.5
million. The Term Loan is due on April 1, 2001. The Company expects to place the
debt permanently with a financial institution, pay off the debt through the
raising of additional capital or extend the due date until satisfactory
permanent financing can be obtained There can be no assurance that the Company
will be able to obtain permanent financing from a financial institution, raise
additional capital on commercially reasonable terms or at all or extend the due
date of the debt.
The Company's working capital requirements over the next 12 months are expected
to be met from cash flow through operations, funds available under the 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.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein:
Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
------------- ------------- --------------------------------------------------
6.29 10 July 1, 2000, Amendment to License Agreement
between the Company, R.M. MacTarnahan and Harmer
Mill & Logging Supply, Inc., dated July 1, 1994
12 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
2000.
11
<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 13th day of November, 2000.
PORTLAND BREWING COMPANY
Signature Title
/s/ C.A. Adams President and Chief Executive Officer
--------------------------- Acting Principal Financial Officer
Charles A. (Tony) Adams
12
