-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IRbzl+aNb6L7T+SsoShdNmDcL/GVn33w+xFifojlSbAzOae9ubWYcy+UzEePrWAE loTrmcG6Pr2zVCaA6pkYgA== 0000897101-99-000393.txt : 19990416 0000897101-99-000393.hdr.sgml : 19990416 ACCESSION NUMBER: 0000897101-99-000393 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MINNESOTA BREWING CO CENTRAL INDEX KEY: 0000913159 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 411702599 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23846 FILM NUMBER: 99595022 BUSINESS ADDRESS: STREET 1: 882 WEST SEVENTH ST CITY: ST PAUL STATE: MN ZIP: 55102 BUSINESS PHONE: 6122289173 MAIL ADDRESS: STREET 1: 882 WEST SEVENTH STREET CITY: ST PAUL STATE: MN ZIP: 55104 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K (MARK ONE) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from ______ to ______ COMMISSION FILE NUMBER: 0-23846 MINNESOTA BREWING COMPANY (Name of small business issuer in its charter) MINNESOTA 41-1702599 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 882 WEST SEVENTH STREET SAINT PAUL, MN 55102 (Address of principal executive offices and zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (651) 228-9173 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.01 PAR VALUE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES _X_ NO ___ CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OF REGULATION S-K IN THIS FORM, AND NO DISCLOSURE WILL BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K FOR ANY AMENDMENT TO THIS FORM 10-K. _X_ ON APRIL 13, 1999, THE COMPANY HAD 3,462,711 SHARES OF COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AND 607,745 SHARES OF CLASS A CONVERTIBLE PREFERRED STOCK. EACH SHARE OF CLASS A CONVERTIBLE PREFERRED STOCK OUTSTANDING IS CONVERTIBLE INTO ONE SHARE OF COMMON STOCK. THE AGGREGATE MARKET VALUE OF THE SHARES OF VOTING STOCK HELD BY NON-AFFILIATES OF THE COMPANY (PERSONS OTHER THAN DIRECTORS AND OFFICERS) COMPUTED AT THE BASIS OF THE LAST REPORTED SALE OF $1.50 PER SHARE ON APRIL 13, 1999 WAS APPROXIMATELY $2,900,000. DOCUMENTS INCORPORATED BY REFERENCE: THE COMPANY'S PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF SHAREHOLDERS TO BE IS INCORPORATED BY REFERENCE INTO PART III OF THIS FORM 10-K. MINNESOTA BREWING COMPANY FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 TABLE OF CONTENTS PART I ITEM 1. Business.......................................................... ITEM 2. Property.......................................................... ITEM 3. Legal Proceedings................................................. ITEM 4. Submission of Matters to a Vote of Security Holders................................................ PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters..................................... ITEM 6. Selected Financial Data........................................... ITEM 7. Management's Discussion and Analysis Of Financial Condition and Results of Operations ............... ITEM 7A. Quantitative and Qualitative Disclosures about Market Risks....... ITEM 8. Financial Statements and Supplementary Data....................... ITEM 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure............................................ PART III ITEM 10. Directors and Executive Officers of the Registrant ITEM 11 Executive Compensation............................................ ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................ ITEM 13. Certain Relationships and Related Transactions.................................................... PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... SIGNATURES.................................................................... 2 PART I ITEM 1. BUSINESS OVERVIEW The Company operates a full scale brewery in Saint Paul, Minnesota producing its proprietary Grain Belt, Pig's Eye, Landmark, Minnesota Brew, Yellow Belly and Brewers Cave beers and marketing these beers through an independent distribution network. The Company produces beers under the brand names Grain Belt, Grain Belt Premium, Grain Belt Light, Grain Belt Premium Light, Grain Belt Premium Bock, Grain Belt Premium Oktoberfest, GBX Malt Liquor, Pig's Eye Pilsner, Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red, Pig's Eye Non-alcoholic, Landmark, Landmark Light, Landmark Bock, Minnesota Brew, Minnesota Brew Light, Yellow Belly, Brewers Cave Black Barley, Brewers Cave Amber Wheat and Brewer's Cave Golden Caramel. The Company's Grain Belt product line is the Company's best selling product. The brand, which the Company acquired and commenced producing in 1991, is over a hundred years old and is experiencing a resurgence in popularity, in part, because the Company reintroduced Grain Belt with a style and taste similar to the product's traditional characteristics when it maintained a significant share of the Minnesota market. Grain Belt Premium was awarded the Gold Medal in the American Lager category at the 1994 Great American Beer Festival. The Company created the Pig's Eye brand in 1992. Pig's Eye Ice Beer won the Silver Medal in the American Malt Liquor category at the 1994 Great American Beer Festival. The Company repositioned Landmark from its initial debut in 1991 as a premium beer to a moderately priced beer and refocused its efforts on the Landmark product line in 1993 toward specialty beers, including Landmark Boch and Landmark Oktoberfest. The Company created Yellow Belly in 1996 as an alcoholic alternative beverage with a distinct lemon flavoring. In 1998, the Yellow Belly line was extended to include both Margarita and Long Island T malt beverages. The Company also introduced its Brewers Cave hand crafted micro-styled line of beers in 1996 including Black Barley, Amber Wheat and Golden Caramel. The Company also produces other beers under contract brewing arrangements and private label contracts. Under its contract brewing arrangements, the Company produces beers for separate brewing companies according to those brewers' formulas. In addition, under private label contracts the Company packages its proprietary beers for sale by third parties under brand names owned by the third parties. In addition, the Company has the ability to produce other beverages and in 1993 began the production and packaging of premium sparkling water for another beverage company. The Company also produces, under contract, premium soft drinks along with other non-alcoholic beverages. Until March 29, 1999 the Company leased its brewing facilities and related equipment from Minnesota Brewing Limited Partnership (the "Partnership"). In October of 1991 the Partnership acquired the former Jacob Schmidt Brewery in Saint Paul from G. Heileman Brewing Company ("Heileman") which was in bankruptcy at the time. On March 29, 1999, the Partnership transferred the brewing facility to Gopher State Ethanol, LLC ("Gopher State") a Delaware Limited Liability Company formed to explore the production of ethanol at the facility. The Company generated net sales of $18.1 million in 1997 and net sales of $14.8 million in 1998, including the production and sale of sparkling water. The Company's brewery has a potential annual capacity of 2.2 million barrels and produced approximately 298,000 barrels in 1997 and 293,000 barrels in 1998, which were equal to 13.5 and 13.3 percent, respectively, of total capacity. The Company believes that the existence of the additional brewing capacity has enabled and will continue to allow the Company to increase its production without substantial additional capital outlays. Substantially all of the Company's proprietary beers are sold domestically through approximately 150 independent distributors. During 1998, approximately 61 percent of the Company's proprietary beer sales volume reached retail channels through its 12 largest distributors. The Company provides local media advertising, primarily in Minnesota, point-of-sale advertising and sales promotion programs to help stimulate sales. 3 The quality of the Company's products has been attested to through various beer festivals and taste test mediums but its most significant recognition came from the following awards it has won during its brief history at the Great American Beer Festival(TM) which occurs each fall in Denver, Colorado: Year Medal Awarded Product ---- ------------- ------- 1992 Silver Landmark Oktoberfest 1993 Bronze McMahons Irish Style Potato Ale 1994 Silver Pig's Eye Ice 1994 Gold Grain Belt Premium 1995 Bronze Pig's Eye Red Amber Ale 1997 Silver Pig's Eye - Non Alcoholic In addition to these recognitions for its own products, the Company has produced beers that have won awards for its contract customers. The Company believes that its success in producing and selling its proprietary beers, and its production of high quality beers pursuant to contract brewing arrangements position it to take advantage of growth opportunities existing in the brewing industry. COMPETITION AND THE BEER INDUSTRY Although there are several hundred companies engaged in the highly competitive brewing industry in the United States, the industry is highly concentrated, with five companies -- Anheuser-Busch Companies, Inc., Miller Brewing Co., Adolph Coors Co., Stroh Brewery Co. and Pabst Brewing Co. -- accounting for 91.5% of 1998 sales. In Minnesota, however, local brands have traditionally had a higher market share than they do nationally. The national and Minnesota market shares of these companies and of the Company were as follows:
Percent of Sales/Barrelage ---------------------------------------------------- National (Sales)(1) Minnesota (Barrelage)(2) ------------------------ ------------------------ 1998 1997 1998 1997 -------- ---------- ---------- ---------- Anheuser-Busch Companies, Inc. 48.1% 47.4% 37.0% 40.7% Miller Brewing Co. 21.3 22.1 31.5 29.3 Adolph Coors Co. 10.8 10.7 3.4 3.0 Stroh Brewing Co. (3) 9.3 10.2 11.3 12.0 Pabst Brewing Co. 2.0 2.6 2.6 3.3 ---- ----- ----- ---- 91.5% 93.0% 85.8% 88.3% Minnesota Brewing Company(4) 0.1% 0.1% 2.9% 3.4%
(1) Information from Modern Brewery Age. (2) Information from Minnesota Beer Wholesalers Association. (3) Stroh Brewing Co. was acquired during 1999 by Pabst Brewing Co. and Miller Brewing Co. (4) Includes only the Company's proprietary beers. During 1998, approximately 63% of the Company's domestic sales of proprietary beers were sold in Minnesota. The Company's beers are distributed and sold in competition with the national brands listed above, as well as other regional and local brands, many of which have either greater financial resources and/or greater name recognition than the Company. Although the methods of competition in the industry vary widely, the principal 4 methods of competition include the quality, taste and freshness of the products, packaging, price, advertising, distribution and service to customers. Relatively flat sales in the overall beer industry in recent years have resulted in increased competition among beer producers. Some of this flatness has been brought about by legislative, social and demographic changes. Trends in the industry include huge marketing expenditures, discounting of prices and the growth of micro brewery-type beers. During the 1980's, import beers increased their market share and brought much innovation to the domestic industry, such as ice beers, non-alcoholic and dry beers, up-scale micro and brew-pub brands, enhanced package graphics and renewed popularity for long-neck bottles. These changes have resulted in the industry becoming more oriented to product segmentation. On a nationwide basis, a number of the small brewers have experienced substantial growth in the last several years. BREWING PROCESS AND PRODUCTION The process of brewing generally consists of malting, mashing, boiling and hopping, fermenting and finishing. "Malting" is the preparation of the basic grain (usually barley) used in the brewing process. The grain is soaked in water and allowed to germinate. Once small root shoots have sprouted and are about three-fourths of the length of the grain kernels, the grain is dried in a large kiln. After drying, the grain (now called "malt") is stored for four to eight weeks and then milled. The Company purchases regular and specialty malts from malting companies in North America. The "mashing" process begins when the ground malt is mixed with water. This mixture is called "mash" and is heated and stirred. The mash mixture then flows into a lauter tub, which removes strains and filters the mash to remove the malt husks. After the straining is complete, clear liquid called "wort" passes to a brewkettle. In this "boiling and hopping" stage, dried flowers of the hop vine are added to the wort and the mixture is boiled in the brewkettle for one to two hours. Hops add flavor to the beer and prevent spoiling. The specific mixture of the grain and the hops, and the brewing time and temperature affect the flavor and color of the beer. After the hops are strained off, the wort has its unique flavor and amber color. The beer is then transferred to the fermenting cellars and yeast is added to the wort, which then ferments for one to two weeks creating alcohol and carbon dioxide. The wort is then transferred to the Ruh or resting cellars. The next step is called "filtration" where yeasts and unwanted proteins are removed to give beer its brilliant clarity after which it is carbonated using carbon dioxide that was given off and collected during the fermentation stage. Finally, the beer is transferred to the "government cellars" or holding tanks where it is stored before being sent to the production lines where it is packaged in kegs, bottles or cans. COMPANY PRODUCTS In December 1991, the Company commenced its product sales by introducing Landmark and reintroducing both the Grain Belt and Grain Belt Premium labels that had been acquired from Heileman. The Company followed with the introduction of "Pig's Eye Pilsner" and Pig's Eye Lean, in 1992. The Company introduced Pigs Eye Ice and Pig's Eye Non-alcoholic beer in December 1993 and Pig's Eye Red in February of 1995. Minnesota Brew entered the market in April of 1995. Yellow Belly was brought to the market in April of 1996 and Brewers Cave products were introduced in October of 1996. In 1998, Yellow Belly Margarita and Long Island T were introduced. The Company has new products in various stages of testing at the present time. 5 A brief description of the Company's various brands follows: GRAIN BELT. Grain Belt, the Company's leading product, is a very old established product, originally brewed in Minneapolis with a 100-year history, now brewed by the Company, using similar recipes. Grain Belt Premium has above average alcohol content and richer taste while regular Grain Belt has average alcohol content and a lighter taste. The brands are Grain Belt, Grain Belt Premium, Grain Belt Golden, Grain Belt Light, Grain Belt Premium Light and GBX Malt Liquor. PIG'S EYE. Pig's Eye Pilsner is a medium bodied pilsner with average alcohol content created for a taste and price conscious consumer. The Company also sells Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red Amber Ale and Pig's Eye NA. LANDMARK. A full-bodied lager, Landmark is amber colored and has a slightly higher alcohol content than most American beers. This brand includes Landmark and Landmark Light. MINNESOTA BREW. A pilsner style medium bodied beer with average alcohol content using domestic hops and grains and brewed for the budget conscious consumer. The Company also sells this product in Canada under the name Northern Brew. GRAIN BELT BOCH. A rich dark amber beer brewed according to the traditional German "Reinheitsgebot" (all natural) with a full body taste and dark hue that comes from a brewing formula using specialty malt and imported hops. This beer is also sold under the name Landmark Boch. GRAIN BELT OKTOBERFEST. A German-type lager beer brewed according to the traditional German Reinheitsgebot. This product is very flavorful, full-bodied and copper colored, due to special malts and German hops. This beer is also sold under the name Landmark Oktoberfest. YELLOW BELLY. An alcoholic alternative beverage, Yellow Belly is a quality malt beverage with select lemon, Margarita and Long Island T flavors that provide a distinctive refreshing taste. BREWERS CAVE. A hand crafted micro-style beer crafted in small batches using specialty mixtures of barley, malts and hops to create the distinctive Black Barley, Amber Wheat and Golden Caramel products. CONTRACT BREWING AND PRODUCTION Beginning in the second quarter of 1992, the Company began to produce and package beer on a contract basis for various customers according to their specifications. In addition to sales of its proprietary beers and contract brewing, the Company also produces beer for sale under private label agreements. Under these agreements, the Company's beers are given the customers' label for resale by the customer. Private label customers include restaurants, exporters and marketing organizations selling their own brands. The Company also began to produce brewed malt liquids under contract production arrangements in 1995. MBC brews the liquid, then the liquid is shipped out prior to fermentation and dried by the customer for use by home brewers. The brewed malt liquids are finished and sold to others by third parties. At the end of 1997, the Company began producing malt extract for a third party. This production can be done by the Company at a significantly lower cost per barrel, and as a result less revenue per barrel than other products it produces. During 1998 the Company produced 94,000 barrels under this arrangement. 6 In 1998, the Company became certified to brew organic beer. The Company began producing this product for a contract customer during the year. EXPORT SALES The Company also ships to Korea, Japan and China. (See Note 6 of Notes to Financial Statements for Export Sales Information.) Substantially all export sales are made through brokers and are marketed and sold primarily on the basis of price. Although the Company intends to pursue this market as opportunities present themselves, export sales may vary significantly from year to year. The Company has granted exclusive brands to various brokers to enhance the distribution of its products. During 1998, export sales were approximately 18% of net sales. See Note 6 to the financial statements for sales by major product line. SALES AND MARKETING The Company's beverages are sold on an "on sale" basis in restaurants, bars and sports arenas and on an "off sale" basis primarily through liquor stores, convenience stores and supermarkets. The product is marketed and delivered to these retailers by independent beverage distributors. Although the Company generally grants its distributors exclusive rights to sell its proprietary products within a defined territory, most of the Company's distributors carry products of other beer producers. Written agreements with the Company's distributors vary, but are generally perpetual or multi-year agreements and terminable by either party for breach of the contract or upon specified notice periods. If the Company terminates an agreement without cause, however, it maybe required to pay the distributor an amount equal to the distributor's net earnings from sales of the Company's products during the most recently completed fiscal year. The Company has written agreements with all of its largest distributors and with all but a few of its smaller distributors. During 1998, the Company's three largest distributors accounted for 26.0% of the Company's total sales. The Company believes that as its sales increase, sales by any one distributor will account for a decreasing percentage of total revenues. Distributors place product orders directly with the Company. The process of brewing generally takes three to five weeks, after which the products are packaged for sale in returnable bottles, non-returnable bottles, cans or kegs. Finished products are stored in the Company's warehouse until distributors pick them up. 7 PRODUCT SHIPPING ACTIVITY The following table indicates, for the periods shown, the Company's total sales in barrelage by product line. Proprietary Contracts and Brands Private Label Export Total ------ ------------- ------ ----- 1997 - ---- First Quarter 28,801 29,280 12,223 70,304 Second Quarter 45,042 29,797 38,757 113,596 Third Quarter 40,148 33,396 9,932 83,476 Fourth Quarter 29,708 27,103 7,911 64,722 ------- ------- ------ ------- Yearly Total 143,699 119,576 68,823 332,098 Percent of Total 43.3% 36.0% 20.7% 100.0% 1998 - ---- First Quarter 25,434 31,935 5,869 63,238 Second Quarter 34,376 30,578 17,969 82,923 Third Quarter 32,381 29,190 14,039 75,610 Fourth Quarter 25,725 45,450 16,173 87,348 ------- ------- ------ ------- Yearly total 117,916 137,153 54,050 309,119 Percent of Total 38.1% 44.4% 17.5% 100.0% Sales of beer are customarily at their lowest levels in the first and fourth quarters of each year and at their highest levels in the second and third quarters. The 1998 fourth quarter sales for the Company were higher than normal due to an increase in contracts and private label arrangements. This is primarily due to the Company's production of malt extract for a food products company. PACKAGING AND RAW MATERIALS The malted barley, hops and yeast used to produce the Company's beer are readily available from several alternative sources in North America. Because the Company is not dependent on any one supplier for these ingredients, the Company believes a continuous supply of raw materials will be readily available for its brewing operations. The Company's products are packaged in bottles, cans or kegs. In 1998, 63.2% of the Company's total production was packaged in aluminum cans, and 36.7% was packed in returnable and non-returnable glass bottles. The remainder of the beer sold was packaged in quarter-barrel and half-barrel stainless steel kegs. The Company uses corrugated cardboard boxes and fiberboard boxes for the shipping of its bottles and cans. Although the Company buys all of its aluminum cans from a single source and most of its non-returnable glass bottles and cartons from a single source, the Company has not experienced any difficulties in obtaining supply in the past and does not anticipate any shortages in the future. Although the Company is required to provide its can and bottle producer with advance orders regarding the number and types of containers, the Company believes that it 8 would be able to obtain comparable products elsewhere at competitive prices if it were unable to continue to obtain cans, bottles or cardboard containers from any of its current suppliers. GOVERNMENTAL REGULATION, LICENSING AND ENVIRONMENTAL REGULATION The business of the Company is highly regulated by federal, state and local laws. The Company was required to obtain a federal permit from the Bureau of Alcohol, Tobacco and Firearms and a state permit from the Minnesota Department of Public Safety prior to commencement of production and sale of beer. Prior to the commencement of operations, the Company was required to become licensed by the Department of Agriculture, which license is issued following a satisfactory inspection by the Food and Drug Administration. Also prior to beginning operations, the Company was required to obtain approval of its facilities, improvements and sanitary conditions from the Minnesota Department of Health and the City of Saint Paul Building Department, and be issued a discharge permit from the Metropolitan Waste Control Commission. Although the Company believes that it has complied with all applicable laws, no assurance can be made that the Company will be able to remain in compliance. In addition, the Company is subject to regulation by the air and water pollution control divisions of the Minnesota Pollution Control Agency. The Company has obtained all regulatory permits and licenses necessary to operate its brewery and to sell its products in the states where they are currently being distributed. Failure on the part of the Company to comply with federal, state or local regulations could cause the Company's licenses to be revoked and force it to cease operations. The Company's brewery is subject to federal, state and local environmental protection laws and regulations and the Company is operating within existing laws and regulations or is taking action aimed at assuring compliance therewith. Various strategies are utilized to help assure this compliance. The Company does not expect compliance with such laws and regulations to materially affect the Company's capital expenditures, earnings or competitive position. Certain states and local jurisdictions have adopted restrictive packaging laws and regulations for beverages that generally require deposits or advanced disposal fees on packages or restricts certain packaging options. Because the most significant portion of the Company's sales are in Minnesota (which does not have such laws), these laws have not had a significant effect on the Company's sales. The federal government and a number of additional states and local jurisdictions continue to consider similar legislation or regulations, the adoption of which might require the Company to incur significant capital expenditures. TRADEMARKS The Company has obtained federal or state registration for a number of its trademarks including "Grain Belt", "Pig's Eye", "Yellow Belly", "Mount Simon" and "Minnesota Brew". The Company has also applied for trademark protection for certain of its trademarks in foreign jurisdictions, and has received protection in some of these jurisdictions. MARKETING The Company's primary marketing strategy focused on sales in Minnesota, particularly the Twin Cities of Minneapolis and Saint Paul. The Company has utilized the media in the Twin Cities market by issuing press releases on a timely basis regarding the Company and its products. General marketing plans call for use of radio, outdoor billboards and print advertising in Minnesota. The Company also intends to use one or more of these methods in additional markets as it expands. The Company also engages in a number of promotional activities. The Company currently gives tours of its brewery and operates a gift shop for the purchase of promotional items. The Company also sells promotional 9 items through a third party mail order company. Point-of-sale advertising in the form of floor display, banners, shelf and cooler labels and neon signs are employed to stimulate sales in liquor stores, bars and restaurants. The Company focuses its marketing expenditures in markets where it believes its efforts will be most effective in increasing sales. Current marketing expenditures focus on the redesign of its products packaging or other steps that improve the attractive shelf appeal of its products. RESEARCH AND DEVELOPMENT The Company conducts a limited amount of research activities relating to the development of new products and the improvement of existing products. The dollar amounts expended by the Company since inception on such research activities and the number of employees engaged in these activities during such period, however, are not considered to be material in relation to the total business of the Company. EMPLOYEES As of March 26, 1999, the Company has approximately 131 full-time equivalent employees. Key areas are summarized below: The Company has 115 employees that work in production, including brewing, bottling, packaging, warehouse, engineering and equipment maintenance, 7 employees in sales and marketing and 9 employees in administration. Of the Company's employees, 103 work pursuant to five separate union contracts, all of which expired on March 31, 1999. Negotiations with the bargaining units are ongoing and management believes that new contract agreements will be negotiated. There is a possibility, however, that any or all of these units could strike sometime after April 23, 1999. In connection with the formation of the Company in 1991, the Company established the Minnesota Brewing Company Employee Stock Ownership Plan ("ESOP"), which covers all the Company's employees other than those, covered by two of the union contracts. GOPHER STATE ETHANOL Beginning in 1997 and throughout 1998 the Company has investigated and begun to develop a business for the production of ethanol. Ethanol is principally produced from the processing of corn including its fermentation into fuel grade alcohol. To date, the Company, along with the Partnership and other investors are negotiating with third party lenders to finance the construction of an ethanol facility at the Company's current location. Because of the significant cost of the facility, the Company has solicited investors to satisfy lenders request for equity and as a consequence the Company will have a minority interest in the ethanol operation. There can be no assurance that the ethanol operation will be implemented as it is subject to lender and investor's final approval. If the ethanol facility is constructed at the proposed site, it is expected to reduce the Company's operating expenses and allow for payment of management fees to the Company. ITEM 2. PROPERTY The Company's offices, brewery and warehouse facilities are located on approximately 10 acres of property in Saint Paul, Minnesota. A prior owner of the facilities, Heileman, acquired the facility in 1972 and invested significant amounts in expanding and modernizing the brewery, which has been a landmark in Saint Paul since the 1850's. Major 10 brewhouse and government cellar renovations were completed in 1984, which increased the brewery's annual production capacity to its present level of approximately 2.2 million barrels per year. In 1980, the brewery drilled a well over 1,000 feet to tap a high quality source of water. The Company believes that the brewery and equipment are in good condition. The brewery operations and production facility consist of: BREWKETTLE: Two kettles, 385 barrels and 410 barrels, to brew each batch, are used in the initial stage of product production and require up to three hours. CELLARS: During the process of beer production, the beer progresses through the various beer cellars:
CAPACITY TYPE OF CELLAR PROCESS IN BARRELS TIME WITHIN CELLAR - -------------- ------- ---------- ------------------ Fermentation Yeast is added; fermenting begins. 65,000 One to two weeks. Ruh (Resting) Beer rests and ages. 60,000 Two to eight weeks, depending upon style. Pre-Finishing Yeasts and unwanted proteins are 22,000 Approximately one week. removed; beer is carbonated. Government Beer waits for bottling and packaging. 21,000 Several days to a week.
PACKAGING LINES: The Company has three separate packaging lines with capacity from 1,500 cases of bottles per hour per line to 2,500 cases of cans per hour. The three packaging lines have filler speeds ranging from 600 bottles a minute per line to 1,050 cans per minute. One of the lines is designed to fill 12 oz. and 16 oz. cans, one is designed to fill 12 oz, 22 oz, 32 oz. and 40 oz. non-returnable bottles and one is designed to fill 12 oz. returnable bottles. RACKING LINE: The Company's racking line can fill up to 300 kegs (1/2 and 1/4 barrels) in an hour. WAREHOUSE: The Company's total warehousing capacity is 137,400 square feet, with capacity to store up to 850,000 cases in a 123,000 square foot warehouse and a refrigerated keg storage area of 14,400 square feet. The warehousing facility opens to 20 shipping docks, including 17 devoted to truck-loading and three rail loading docks on its rail siding located on the property and served by the Soo Line and the Chicago Northwest Railroads. OFFICES: The Company's administrative offices consist of approximately 9,800 square feet, including a Rathskeller where the Company's products are available for sampling after brewery tours. Management believes that the brewing facility and administrative offices are adequate to support production and shipment of the Company's current and future proprietary product lines, contract brewing agreements and private label agreements with unaffiliated third parties. These facilities and a substantial portion of all equipment are leased from the Partnership. Until March 29, 1999, the Partnership retained ownership of all of the Company's real property, buildings, water wells, and equipment used in the brewing process, and leased the real property to the Company. The lease agreement gave the Company the right to purchase the facility and equipment at any time over the term of the lease after November 30, 1995 for eight times trailing 12-month lease payments, which, as of December 31, 1998, amounted to approximately $4.9 million. The agreements also allowed the Partnership to 11 acquire additional equipment or replacement equipment needed by the Company and lease it to the Company over the taxable depreciable life of the equipment with an interest rate of two points over the applicable treasury rate. On March 29, 1999, the Partnership contributed its interest in the real estate and equipment that had been previously leased to the Company to Gopher State, which intends to produce ethanol. Gopher State has obtained interim financing to proceed with an engineering study to determine the feasibility of building an ethanol plant. On March 29, 1999, the Company and Gopher State entered into a new lease agreement for the same land, building and production equipment that the Company had previously leased from the Partnership. The new lease agreement provides for rent of $25,000 per month and has an initial term of 10 years, with a provision for three successive 10 year renewals. ITEM 3. LEGAL PROCEEDINGS None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq SmallCap system under the symbol MBRW. The following table sets forth the high and low closing bid prices for the Company's common stock for 1997 and 1998. Low High --- ---- 1997 First Quarter $ 3.13 $ 5.38 Second Quarter 2.63 4.25 Third Quarter 2.50 3.75 Fourth Quarter 1.38 3.00 1998 First Quarter $ 1.25 $ 3.56 Second Quarter 1.75 3.38 Third Quarter 1.50 2.75 Fourth Quarter 1.75 2.75 These prices indicate interdealer prices without retail markup, markdowns or commissions. At March 23, 1999, the Company had 276 holders of record of its common stock. In addition, on that date one depository company held approximately 1,628,000 shares as nominees for an undetermined number of additional beneficial holders. The Company has not paid any dividends on its common stock and does not anticipate paying any in the foreseeable future. The Company's new line of credit agreement limits its ability to pay dividends. RECENT SALE OF UNREGISTERED SECURITIES On March 31, 1999, the Company issued 607,745 shares of class A convertible preferred stock to the Partnership reflecting the conversion of an aggregate of $1,519,363 in indebtedness. The Company believes the transaction was exempt under Section 4(2) of the Security Act of 1933. 13 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA
Year Ended December 31 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Net sales ............................... $ 14,763,247 $ 18,100,532 $ 24,875,349 $ 31,383,508 $ 25,221,588 Cost of goods sold ...................... 13,614,401 18,555,849 23,331,116 28,199,229 21,525,720 ------------ ------------ ------------ ------------ ------------ Gross profit (loss) ..................... 1,148,846 (455,317) 1,544,233 3,184,279 3,695,868 ------------ ------------ ------------ ------------ ------------ Operating expenses: Advertising ........................... 623,853 1,193,348 1,123,996 1,594,267 1,728,073 Sales and marketing ................... 690,101 718,764 747,809 719,659 598,727 Administrative ........................ 979,484 1,057,241 855,255 714,050 615,631 Provision for doubtful accounts ....... 90,000 492,000 601,000 25,000 55,000 ------------ ------------ ------------ ------------ ------------ Total operating expenses .......... 2,383,438 3,461,353 3,328,060 3,052,976 2,997,431 ------------ ------------ ------------ ------------ ------------ Operating income (loss) ................. (1,234,592) (3,916,670) (1,783,827) 131,303 698,437 Other income (expense), net ............. (173,286) (100,386) (78,641) (105,341) (93,204) ------------ ------------ ------------ ------------ ------------ Net income (loss) before Income tax benefit .................... (1,407,878) (4,017,056) (1,862,468) 25,962 605,233 Income tax (benefit) .................... (28,000) 293,000 -- -- (222,000) ------------ ------------ ------------ ------------ ------------ Net income (loss) ....................... (1,379,878) (4,310,056) $ (1,862,468) $ 25,962 $ 827,233 ============ ============ ============ ============ ============ Net income (loss) per common share (1) .. $ (0.40) $ (1.27) $ (0.55) $ 0.01 $ 0.25 Weighted average common shares outstanding (basic) ................... 3,425,961 3,389,211 3,374,155 3,351,308 3,330,088 OPERATING DATA (in barrels sold): Domestic ................................ 117,916 143,699 157,797 145,809 140,199 Contract ................................ 137,153 119,576 187,108 348,840 290,187 Export .................................. 54,050 68,823 84,414 106,983 73,667 ------------ ------------ ------------ ------------ ------------ Total ................................... 309,119 332,098 429,319 601,632 504,053 ============ ============ ============ ============ ============ December 31, December 31, December 31, December 31, December 3l, 1998 1997 1996 1995 1994 ------------ ------------ ------------ ------------ ------------ BALANCE SHEET DATA: Working capital ......................... $ 231,017 $ 1,044,938 $ 4,342,653 $ 6,327,913 $ 6,788,661 Total assets ............................ 8,448,579 8,275,426 10,775,228 12,189,503 13,363,949 Long-term debt, net ..................... 1,261,921 2,391,081 1,753,454 1,982,428 2,194,380 Shareholders' equity .................... 2,934,352 2,787,910 7,097,966 8,787,484 8,658,022
(1) The net income (loss) per share were the same under the basic and diluted methods for calculation in each period presented. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION GENERAL The Company's revenues are derived from the production and sale of its proprietary Grain Belt, Pig's Eye, Landmark, Yellow Belly, and Brewers Cave beers, its contract production of beers and other beverages for other companies and its production of proprietary beers for sale under different brand names by private label customers. RESULTS OF OPERATIONS The table below sets forth for the periods indicated the percentage of net sales represented by items included in the Company's Statement of Operations:
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 1997 1996 ------------ ----------- ------------ Net sales.................................. 100.0% 100.0% 100.0% Cost of goods sold......................... 92.2 102.5 93.8 ----- ----- ----- Gross profit (loss)........................ 7.8 (2.5) 6.2 Advertising................................ 4.2 6.6 4.5 Sales and marketing........................ 4.7 4.0 3.0 Administrative............................. 6.6 5.8 3.4 Provision for doubtful accounts............ 0.6 2.7 2.4 Operating loss............................. (8.3) (21.6) (7.2) Other expense, net......................... (1.2) (0.6) (0.3) Income tax (benefit) expense............... (0.2) 1.6 -- Net loss................................... (9.3) (23.8) (7.5) ===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997 Net sales for 1998 were $14,763,247, an 18.4% decrease from the net sales for 1997 of $18,100,532. Total barrels sold in 1998 were 309,119, a 6.9% decrease compared to 332,098 barrels sold in 1997. Due to product mix and because the Company's contract customers purchase all or part of their own packaging materials, the percentage decrease in barrels can vary from the percentage decrease in net sales. Sales of proprietary brands decreased 10.6% from 1997 sales of $12,054,000 to 1998 sales of $10,780,000. The decrease in the sales primarily relates to a decline in the sales of Pig's Eye products and was partially offset by the continuing increase in sales of Grain Belt Premium, the Company's leading brand. Sales from brewing agreements and contract packaging decreased $2,358,000 from $4,495,000 in 1997 to $2,137,000 in 1998 for a 52.5% decease. Sales of packaged contract products declined due to the continuing policy of establishing tighter control over customer credit. The Company is taking steps to increase volume from existing accounts and the addition of new contracts that can meet the Company's credit standards. Export sales decreased 18.5% from $3,276,000 in 1997 to $2,671,000 in 1998. This decline is directly attributable to the economic downturn experienced by its primary customers in Asia. The Company is hopeful that it will experience an increase in export sales during 1999 based upon its existing accounts and new contractual agreements. While net sales decreased 18.4% in 1998 when compared to 1997, costs of goods sold decreased 26.6%. The Company experienced an increase in its gross margin from a loss of 2.5% in 1997 to a positive 7.8% in 1998. The larger percentage decrease in cost of goods sold versus the decrease in net sales was attributable to the large decrease in 15 the fixed level of plant operating overhead due to plant layoffs, cost containment measures, and the reduction of certain utilities. The cost of goods sold in 1997 included a significant cost for the disposition of obsolete and discontinued inventory items. Operating expenses decreased $1,077,915 in 1998 and as a percentage of net sales they decreased from 19.1% in 1997 to 16.1% in 1998. Of this amount, advertising expenses decreased $569,495, or 47.7%, from 1997 to 1998 due to budgeting constraints and the cancellation by the University of Minnesota of the Company's sponsorship program. Sales and marketing expenses decreased $28,663, or 4.0% from 1997 to 1998 due to cost containment measures implemented during 1998. General and administrative expenses decreased $77,757 from 1997 to 1998, and as a percentage of net sales increased from 5.8% in 1997 to 6.6% in 1998. The provision for doubtful accounts decreased $402,000 from 1997 to 1998. This decrease can be attributed to tighter credit policies and improved collection efforts. Interest income decreased from $34,583 in 1997 to $15,356 in 1998 reflecting a reduction in available investable funds. The Company's interest expense increased $163,235 from 1997 to 1998 due primarily to working capital borrowings during 1998. The Company had a working capital line of credit in effect with the Partnership in 1998. During 1997 and 1998, the Company operated significantly below its production capacity. Therefore, in order to attain a profitable level of operations the Company will continue to seek to increase its sales and production volume. Management continues to pursue opportunities to increase sales volume at profitable margins. Even though sales of proprietary brands decreased during 1998, management believes that the growth of its proprietary labels offers the best opportunity for achieving operating profits in the long term and has increased its efforts on the growth of its proprietary products. An emphasis has been placed on the promotion of these proprietary labels and the generations of additional sales in the Company's core geographic market areas. In addition, management anticipates growth in both its contract products and export sales. Management believes these anticipated increases in sales volume during 1999 will help the Company operate at a significantly higher level of capacity thereby increasing overall profitability. YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996 Net sales for 1997 were $18,100,532, a 27.2% decrease from the net sales for 1996 of $24,875,349. Total barrels sold in 1997 were 332,098, a 22.6% decrease compared to 429,319 barrels sold in 1996. Due to product mix and because the Company's contract customers purchase all or part of their own packaging materials, the percentage decrease in barrels can vary from the percentage decrease in net sales. Sales of proprietary brands decreased 8.9% from 1996 barrelage of 157,797 to 1997 barrelage sales of 143,699. The decrease in the sales primarily relates to a decline in the sales of Pig's Eye products and was partially offset by the continuing increase in sales of Grain Belt Premium, the Company's leading brand. Sales from brewing agreements and contract packaging decreased 67,532 barrels from 187,108 in 1996 to 119,576 barrels in 1997 for a 36.1% decrease. Contract sales decreased due to a decline in water product sales and a change in policy, establishing tighter control over customer credit. Export sales decreased 18.5% from 84,414 barrels in 1996 to 68,823 barrels in 1997. Because the Company sells its export brands at prices lower than domestic sales, these export sales are a lower percentage of net sales than a percentage of total barrelage. While net sales decreased 27.2% in 1997 when compared to 1996, costs of goods sold only decreased 20.5%. The smaller percentage decrease in cost of goods sold versus the decrease in net sales was attributable to the fixed level of plant operating overhead, which remained relatively stable even though the sales fell short of the Company's expectations. Therefore, the Company experienced a decline in its gross margin from 6.2% in 1996 to a loss of 2.5% in 16 1997 principally from a shortfall in sales. In addition, because of the lower level of sales than anticipated and the existence of slow moving and dated products, the Company added $672,000 to its inventory valuation reserve during 1997 with a corresponding unfavorable adjustment to cost of sales. In addition to the inventory valuation adjustment, the decline in gross profit from 1996 to 1997 was attributable to the reduction in sales to a level that was not sufficient to absorb overhead costs. The decline in gross profit was also attributable to contract prices that were below costs, based on the Company's current production levels. Operating expenses were $133,293 greater in 1997 than in 1996 and as a percentage of net sales they increased from 13.4% in 1996 to 19.1% in 1997. Of this amount, advertising expenses increased $69,352, or 6.2%, from 1996 to 1997 due to the Company's commitments to its new brands. Sales and marketing expenses decreased $29,045, or 3.9% from 1996 to 1997 due to reduced staffing. General and administrative expenses increased $201,986 from 1996 to 1997, and as a percentage of net sales; they increased from 3.4% in 1996 to 5.8% in 1997. The change was primarily due to the fact that professional fees, shareholder relation cost, and severance costs exceeded 1996 levels. The provision for doubtful accounts decreased $109,000 from 1996 to 1997. Interest income decreased from $84,000 in 1996 to $46,816 in 1997 reflecting a reduction in available investable funds. The Company's interest expense decreased $15,439 from 1996 to 1997 principally associated with the scheduled reduction in principal of the capitalized lease covering plant and equipment. LIQUIDITY AND CAPITAL RESOURCES Working capital at December 31, 1998 decreased $813,921 from $1.0 million at December 31, 1997. The decrease is primarily attributable to decreases of $398,618 in cash partially offset by an increase in accounts receivable of $305,288. Also, a treasury bill and amounts due from a related party amounted to $777,104 in 1998. A reduction in inventories of $292,079 as a result of decreased volume during 1998 and an increase in short-term borrowings of $1,324,961 offset this. These borrowings reflected the only financing activities for the Company during 1998. During the year ended December 31, 1998, the Company used $261,361 of net cash in operating activities, which was due in large part, to the net loss of $1,379,878. Other factors included decreases in various valuation allowances totaling $319,000, an increase of $249,288 in accounts receivable, a decrease in accounts payable and accrued expenses of $277,324. These amounts were partially offset by depreciation and amortization of $942,912, a decrease in inventories of $466,079, a decrease in prepaid expenses of $49,745 and increases in the amounts due to related party of $505,393. The Company used net cash of $1,462,218 for investing activities due to the purchase of $610,542 of property and equipment and $89,185 in the purchase of intangible assets for branded products. In addition to these normal capital expenditures, a treasury bill was purchased for $474,961 and $287,530 which was advanced to Gopher State Ethanol. The Company will be a minority-owner in this company that is scheduled to begin operations in 2000. See discussion on Gopher State Ethanol below. In conjunction with the Company's initial public offering in November of 1993, the Company's existing operating leases were converted to capitalized leases and the obligations were reflected as property and equipment and long-term debt in the financial statements. The debt was being amortized over 10 years at a 7.75% interest rate. The Company had an option to acquire the property at eight times the trailing twelve months rent any time after December 1, 1995. Based upon 1998 lease payments, the purchase price would be approximately $4.9 million at December 31, 1998. 17 On March 29, 1999, the Company and the Partnership terminated their lease agreement. The Partnership also contributed its interest in the real estate and equipment that had been previously leased to the Company to Gopher State, which will be involved in the production of ethanol. On March 29, 1999, the Company and Gopher State entered into a new lease agreement for the same land, building and production equipment that the Company had previously leased from the Partnership. The new lease agreement provides for rent of $25,000 per month and has an initial term of 10 years. There are no provisions for production rent in the new agreement. Management estimates that as a result of this new arrangement, approximately $300,000 of annual operating expenses will be eliminated. The Company issued 547,614 shares of class A convertible preferred stock to the Partnership in satisfaction of $1,369,036 owed for deferred rents and accrued interest at December 31, 1998. The preferred shares have a 9% cumulative dividend rate and are convertible into common stock at the rate of one share of common stock per share of preferred stock. On March 31, 1999, the partnership converted an additional $150,327 of debt into 60,131 additional shares of class A stock. The dividends can be deferred and if they are not paid, they accumulates without interest. The Company's credit terms to its distributors are generally 10 days and substantially all customers, except contract brewing accounts, are on automatic debit to their bank account through electronic funds transfer ("EFT"). This program substantially reduces the credit risk and facilitates the predictability of cash flows. Amounts from contract brewing production are generally due 30 days after shipment and in many cases are secured by letters of credit. As a small brewer producing less than 2,000,000 barrels per year, the Company presently receives an $11.00 per barrel credit against federal exercise taxes on the first 60,000 barrels of taxable production. The cash benefit of this $660,000 credit is primarily received in the first quarter of the year. The Company is a party to collective bargaining agreements with five union organizations, which ran for a three-year term, ended March 31, 1999. Contract negotiation with the union organization representatives is ongoing and members have agreed to continue working under the previous contracts until new contracts have been negotiated. Negotiations with the bargaining units are ongoing and management believes that new contract agreements will be negotiated. There is a possibility, however, that any or all of these units could strike sometime after April 23, 1999. As of December 31, 1998, the Company had net operating loss carryforwards totaling $8.3 million. The carryforwards expires as follows: Year of Expiration Amount ------------------ ------ 2007 $1.3 million 2011 $1.5 million 2012 $3.9 million 2018 $1.6 million FINANCING In 1998, the Company had a $2.5 million line of credit agreement with the Partnership. Advances under the line of credit accrue interest at the higher of the prime rate of interest plus 1.0 percent or 9 percent. The line was secured by substantially all the assets of the Company. This line of credit agreement expired on January 1, 1999, the Company was unable to pay all amounts due under the line and as a result the Company was in default under this agreement. On April 15, 1999, the Partnership committed to amend the line of credit agreement with the Company thereby curing the default that existed at that date. The amended line of credit, which expires on April 15, 2002, will provide borrowings up to $1.5 million. In order to achieve its 1999 plans, the Company will require additional funds from equity or debt to meet its working capital and capital resource plans. On April 15, 1999, the Company obtained a bank line of credit of $3.0 million, subject to certain borrowing base restrictions. The line of credit agreement, which expires on April 15, 2002, contains covenants, which include prohibiting the Company from paying dividends as well as requiring the Company to 18 maintain certain financial requirements. Substantially all of the Company assets are pledged as collateral under this line of credit. Management believes that this bank line of credit along with the amended line of credit agreement with the Partnership will be sufficient to meet working capital during 1999. Y2K ISSUE The Company is committed to ensuring that there is no impediment to its business operation because of internal systems failures associated with the Y2K date problem. The Y2K issue relates to the inability of certain information systems to properly recognize and process dates containing the Year 2000 and beyond and is further committed to control external factors to the extent possible. The Company obtained information from its software vendor that was used in assessing whether or not the Company is Y2K compliant. In addition, the Company has identified and tested the systems it believes are critical and the test results indicate that these systems are Y2K compliant or will become Y2K compliant with additional software upgrades by June 30, 1999. These software upgrades were identified by the independent verification of its software vendor and involve embedded microprocessors. The Company will continually test and establish compliance with respect to all of its existing systems, potential upgrades and new acquisitions. Regardless of the Y2K compliance of the Company's systems and products, there can be no assurance that the Company will not be adversely affected by the failure of third parties to become Y2K compliant. However, the Company's five largest vendors have represented themselves as being Y2K compliant. The Company has not currently established contingency plans, but has established a committee to assess its need for contingency plans during 1999. The Company has not incurred any material expenditures in connection with identifying or evaluating Y2K compliance issues. The Company estimates that it will incur approximately $30,000 in software upgrades necessary for Y2K compliance. FORWARD-LOOKING STATEMENTS Statements included in this Annual Report on Form 10-K that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties that could cause actual results to differ materially. Among these risks and uncertainties are information included in this Annual Report on Form 10-K which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology constitutes forward-looking information. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual results and could cause the Company's actual financial performance to differ materially from that expressed in any forward-looking statement: (i) competition within the brewing industry resulting from the increased number of brewers and available beers, (ii) the Company's ability to continue to achieve and maintain contract brewing arrangements; (iii) the success of the Company's proprietary brands, including its reliance upon distributors, and (iv) the Company's continued ability to sell products for export. RECENTLY ISSUED ACCOUNTING STANDARDS SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded 19 SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did require the disclosure of sales by major product line. See Note 6 to the financial statements for disclosures about the Company's operating segments. REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on available-for-sale securities and certain other items, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. For the Company, reporting comprehensive income would be equivalent to reporting operating results in the statement of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS Not applicable ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements of the Company are set forth in this Form 10-K: Page Report of Independent Auditor McGladrey & Pullen, LLP....................................... F-1 Balance Sheets as of December 31, 1998 and 1997............... F-2 Statements of Operations for the years ended December 31, 1998, 1997 and 1996........................ F-4 Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.............. F-5 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996........................ F-6 Notes to Financial Statements for the years ended December 31, 1998, 1997 and 1996........................ F-8 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 20 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Information required under this item with respect to the directors is contained in the Section "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for the Annual Meeting of Shareholders (the "1999 Proxy Statement"), a definitive copy of which will be filed with the Commission within 120 days of the close of the past fiscal year and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required under this item is contained in the Section entitled "Executive Compensation" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required under this item is contained in the Section entitled "Shareholdings of Principal Shareholders and Management" in the Company's 1999 Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required under this item is contained in the Section entitled "Certain Transactions" in the Company's 1999 Proxy Statement and is incorporated herein by reference. 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as Part of this Report (1) Financial Statements. The financial statements included in this Form 10-K as listed in Item 8. (2) Financial Statement Schedules. Independent Auditor's Report on Schedules for Years Ended December 31, 1998, 1997 and 1996 ............ Page F-1 Schedule II Valuation and Qualifying Accounts ....... Page F-20
(b) Reports on Form 8-K The Company filed no reports on Form 8-K during the quarter ended December 31, 1998. (c) Lists of Exhibits. Exhibits that cover management contracts or compensatory plans or arrangements are marked with an asterisk(*). Exhibit No. Description 3.1 Articles of Incorporation, as amended, of the Company, incorporated by reference from Exhibit 3.1 to Form SB-2 Registration Statement (File No. 33-69302C) 3.2 Bylaws of the Company incorporated by reference from Exhibit 3.2 to Form SB-2 3.3 Certificate of Rights and Preferences of Class A Convertible Preferred Stock 10.1 Lease dated March 29, 1999 between Minnesota Brewing Company and Gopher State Ethanol, LLC 10.2 Minnesota Brewing Company 1993 Stock Option Plan 23 Consent of McGladrey & Pullen, LLP 22 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated April 15, 1999 MINNESOTA BREWING COMPANY By /s/ John J. Lee ----------------------------------------------- John J. Lee President, Chief Executive Officer and Director In accordance with the Exchange Act, this report has been signed below by the following persons, on behalf of the registrant and in the capacities indicated, on the date set forth above. (Power of Attorney) Each person whose signature appears below constitutes and appoints JOHN J. LEE and MICHAEL C. HIME as his true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting along, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all said attorneys in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof. Signature Title /s/ Bruce E. Hendry Chairman of the Board - ---------------------------------- Bruce E. Hendry /s/ John J. Lee President, Chief Executive - ---------------------------------- Officer and Director John J. Lee /s/ Michael C. Hime Vice President of Finance - ---------------------------------- Chief Financial Officer Michael C. Hime /s/ James A. Potter Director - ---------------------------------- James A. Potter /s/ Greg C. Heinemann Director - ---------------------------------- Greg C. Heinemann /s/ Robert Awsumb Director - ---------------------------------- Robert Awsumb /s/ Richard A. Perrine Director - ---------------------------------- Richard A. Perrine 23 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholders Minnesota Brewing Company St. Paul, Minnesota We have audited the accompanying balance sheets of Minnesota Brewing Company as of December 31, 1998 and 1997, and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Minnesota Brewing Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audit of the financial statements of Minnesota Brewing Company included Schedule II, contained herein, for the years ended December 31, 1998, 1997, and 1996. In our opinion, such schedule presents fairly the information required to be set forth therein, in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Minneapolis, Minnesota February 26, 1999 (April 15, 1999, as to Note 2) F-1 MINNESOTA BREWING COMPANY BALANCE SHEETS DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997 - ------------------------------------------------------------------------------------------------------ Current Assets Cash and cash equivalents $ 67,366 $ 465,984 Trade accounts receivable, less allowance for doubtful accounts of $250,000 in 1998 and $306,000 in 1997 (Note 6) 1,064,638 759,350 Due from related party (Note 3) 302,143 -- Treasury bill, pledged 474,961 -- Inventories 2,473,039 2,765,118 Prepaid expenses 101,176 150,921 ----------------------------- TOTAL CURRENT ASSETS 4,483,323 4,141,373 ----------------------------- Other Assets Trademarks, net of accumulated amortization of $99,000 in 1998 and $73,000 in 1997 263,189 221,577 Other intangible assets, principally packaging design, net of accumulated amortization of $445,000 in 1998 and $315,000 in 1997 220,418 291,209 ----------------------------- 483,607 512,786 ----------------------------- Property and Equipment (Note 3) Land and building under capital lease 1,899,574 1,899,574 Display fixtures and equipment 1,390,537 1,168,706 Production equipment, including capitalized lease 3,115,399 2,722,960 Office equipment 177,465 172,890 Leasehold improvements 171,740 123,347 ----------------------------- 6,754,715 6,087,477 Less accumulated depreciation and amortization (3,273,066) (2,466,210) ----------------------------- 3,481,649 3,621,267 ----------------------------- $ 8,448,579 $ 8,275,426 =============================
See Notes to Financial Statements. F-2
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 - ---------------------------------------------------------------------------------------------------- Current Liabilities Trade accounts payable $ 2,002,197 $ 2,197,100 Related-party line of credit (Note 3) 1,324,961 -- Current maturities of capital lease obligation (Note 3) 265,517 -- Accrued expenses: Compensation 497,155 602,811 Beverage tax 113,796 126,073 Other 48,680 170,451 ------------------------------- 4,252,306 3,096,435 ------------------------------- Long-Term Debt (Note 3) Due to related party -- 263,036 Capital lease obligation, less current maturities (Note 3) 1,261,921 2,128,045 ------------------------------- 1,261,921 2,391,081 ------------------------------- Commitments and Contingencies (Notes 2, 3, 4, 5, and 8) Shareholders' Equity (Notes 3, 4, and 5) Common stock, $0.01 par value; 10,000,000 shares authorized 34,627 33,892 Preferred stock, 700,000 shares authorized, 9 percent cumulative dividend; 547,614 shares issued 1,369,036 -- Additional paid-in capital 10,592,217 10,435,668 Accumulated deficit (9,061,528) (7,681,650) ------------------------------- 2,934,352 2,787,910 ------------------------------- $ 8,448,579 $ 8,275,426 ===============================
See Notes to Financial Statements. F-3 MINNESOTA BREWING COMPANY STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Sales (Note 6) $ 16,366,830 $ 20,419,205 $ 27,983,345 Less excise taxes (1,603,583) (2,318,673) (3,107,996) ------------------------------------------------ NET SALES 14,763,247 18,100,532 24,875,349 Cost of goods sold (Note 3) 13,614,401 18,555,849 23,331,116 ------------------------------------------------ 1,148,846 (455,317) 1,544,233 ------------------------------------------------ Operating expenses: Advertising 623,853 1,193,348 1,123,996 Sales and marketing 690,101 718,764 747,809 General and administrative (Note 3) 979,484 1,057,241 855,255 Provision for doubtful accounts 90,000 492,000 601,000 ------------------------------------------------ TOTAL OPERATING EXPENSES 2,383,438 3,461,353 3,328,060 ------------------------------------------------ OPERATING LOSS (1,234,592) (3,916,670) (1,783,827) ------------------------------------------------ Other income (expense): Interest and other income 137,151 46,816 84,000 Interest expense (Note 3) (310,437) (147,202) (162,641) ------------------------------------------------ (173,286) (100,386) (78,641) ------------------------------------------------ LOSS BEFORE INCOME TAX (BENEFIT) EXPENSE (1,407,878) (4,017,056) (1,862,468) Income tax (benefit) expense (Note 7) (28,000) 293,000 -- ------------------------------------------------ NET LOSS $ (1,379,878) $ (4,310,056) $ (1,862,468) ================================================ Net loss per common share, basic and diluted $ (0.40) $ (1.27) $ (0.55) Weighted-average common and common equivalent shares outstanding 3,425,961 3,389,211 3,374,155
See Notes to Financial Statements. F-4 MINNESOTA BREWING COMPANY STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
Common Stock Additional ------------------------ Preferred Paid-In Accumulated Shares Amount Stock Capital Deficit Total - ----------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 3,351,611 $ 33,516 $ -- $10,263,094 $(1,509,126) $ 8,787,484 Exercise of employee stock options 37,600 376 -- 172,574 -- 172,950 Net loss -- -- -- -- (1,862,468) (1,862,468) --------------------------------------------------------------------------------------- Balance, December 31, 1996 3,389,211 33,892 -- 10,435,668 (3,371,594) 7,097,966 Net loss -- -- -- -- (4,310,056) (4,310,056) --------------------------------------------------------------------------------------- Balance, December 31, 1997 3,389,211 33,892 -- 10,435,668 (7,681,650) 2,787,910 Stock issued to employee stock ownership plan (Note 4) 73,500 735 -- 156,549 -- 157,284 Conversion of related-party debt to preferred stock (Note 3) -- -- 1,369,036 -- -- 1,369,036 Net loss -- -- -- -- (1,379,878) (1,379,878) --------------------------------------------------------------------------------------- Balance, December 31, 1998 3,462,711 $ 34,627 $ 1,369,036 $10,592,217 $(9,061,528) $ 2,934,352 =======================================================================================
See Notes to Financial Statements. F-5 MINNESOTA BREWING COMPANY STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Cash Flows From Operating Activities Net loss $(1,379,878) $(4,310,056) $(1,862,468) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 788,161 754,822 616,695 Amortization of intangible assets 154,751 129,666 95,344 Deferred income taxes -- 293,000 -- Inventory valuation allowance (174,000) 221,743 73,277 Intangible and other asset valuation allowance (89,000) 127,000 -- Changes in assets and liabilities: Trade accounts receivable (305,288) 366,655 981,285 Inventories 466,079 1,545,671 (174,464) Prepaid expenses 49,745 (79,322) (10,449) Trade accounts payable and accrued expenses (277,324) 1,421,653 488,893 Amounts due to related party 505,393 403,214 (1,698) --------------------------------------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (261,361) 874,046 206,415 --------------------------------------------- Cash Flows From Investing Activities Amounts due from related party (287,530) (14,613) -- Purchases of property and equipment (610,542) (613,491) (571,738) Purchases of held-to-maturity securities (474,961) -- (1,477,025) Sales of held-to-maturity securities -- -- 2,474,744 Purchases of intangible and other assets (89,185) (166,283) (207,069) --------------------------------------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,462,218) (794,387) 218,912 ---------------------------------------------
(Continued) F-6 MINNESOTA BREWING COMPANY STATEMENTS OF CASH FLOWS (CONTINUED) YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------- Cash Flows From Financing Activities Principal payments under capital lease obligations -- -- (211,952) Net proceeds from borrowings on related-party line of credit 1,324,961 -- -- Proceeds from exercise of employee stock options -- -- 172,950 --------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,324,961 -- (39,002) --------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (398,618) 79,659 386,325 Cash and Cash Equivalents Beginning 465,984 386,325 -- --------------------------------------------- Ending $ 67,366 $ 465,984 $ 386,325 ============================================= Supplemental Disclosures of Cash Flow Information Cash payments for interest $ -- $ -- $ 162,641 ============================================= Supplemental Disclosures of Noncash Investing and Financing Activities Conversion of debt to preferred stock $ 1,369,036 $ -- $ -- Common stock issued to employee stock ownership plan in satisfaction of accrued compensation 157,284 -- -- =============================================
See Notes to Financial Statements. F-7 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AND CONCENTRATION OF CREDIT RISK: Minnesota Brewing Company operates a brewery in St. Paul, Minnesota. The Company leases its production facilities and certain of its equipment from Minnesota Brewing Limited Partnership (the Partnership), the Company's largest shareholder. See Note 3 for related-party transactions. The Company brews and markets beer primarily under the Grain Belt, Pig's Eye, and Brewer's Cave labels. The Company also packages premium water and brews beer and other products for third parties under contract brewing arrangements and private label production agreements. The Company grants credit, normally ten-day terms, to distributors, the majority of whom are located in Minnesota. Credit terms in connection with contract brewing, export, and private label arrangements are negotiated on an individual customer basis. See Note 6 for segment data information. BASIS OF PRESENTATION AND ACCOUNTING ESTIMATES: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents includes all cash accounts which are not subject to withdrawal restrictions or penalties, and all highly liquid debt instruments purchased with an original maturity of three months or less. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. INVENTORIES: Inventories are valued at the lower of cost (first-in, first-out method) or market. Inventories, net of a valuation reserve of $281,000 and $455,000 in 1998 and 1997, respectively, consist of the following: December 31 ---------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Raw materials $ 185,281 $ 134,908 Work in progress 334,130 357,151 Finished goods 840,591 660,635 Packaging 753,678 1,243,705 Other 359,359 368,719 ---------------------------------- $ 2,473,039 $ 2,765,118 ================================== F-8 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS: The financial statements include the following financial instruments: cash and cash equivalents, trade accounts receivable, investment in Treasury Bill, accounts payable, and amounts due to and from related party. At December 31, 1998 and 1997, no separate comparison of fair values versus carrying values is presented for the aforementioned financial instruments, since their fair values are not significantly different than their balance sheet carrying amounts. The aggregate fair values of the financial instruments would not represent the underlying value of the Company. REVENUE RECOGNITION: Revenue is recognized at the time the inventory is shipped to or picked up at the Company's warehouse by the independent distributors or, in a few selected situations, upon completion of production under specific contractual arrangements. DEPRECIATION AND AMORTIZATION: Depreciation, including amortization of capital leases, is computed by the straight-line method over the lesser of the lease terms or the estimated useful lives as follows: 10 to 15 years for the production equipment; 5 years for office equipment; 2 to 5 years for display fixtures and equipment; and 10 to 25 years for building and leasehold improvements. The costs of various trademarks and logos are amortized over their expected useful lives of 5 to 40 years using the straight-line method. The costs of other assets, principally package design costs, are amortized over their expected useful lives of 2 to 10 years using the straight-line method. The Company periodically reviews the carrying amount of its long-lived assets to determine if circumstances exist indicating an impairment or that depreciation periods should be modified. If facts or circumstances support the possibility of impairment, the Company will prepare a projection of the undiscounted future cash flows, without interest charges, of the specific asset and determine if the asset is recoverable based on the undiscounted future cash flows. If an impairment exists based on these projections, an adjustment will be made to the carrying amount and remaining depreciable life of the specific asset based on discounted future cash flows. To date, management has determined that no impairment of long-lived assets exists, and accordingly, no adjustments to the carrying amounts of its long-lived assets have been made. It is possible that management's estimate could change as a result of changes in market conditions or operating results. The effect of a change, if any, could be material to the financial condition or results of operations. FEDERAL EXCISE TAX AND PLEDGED TREASURY BILL: The Company currently receives an $11 per barrel credit against federal excise taxes on the first 60,000 barrels of taxable production. At December 31, 1998, the Company has pledged a U.S. Treasury bill to the Bureau of Alcohol, Tobacco, and Firearms (BATF) to guarantee the payment of federal excise taxes. F-9 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INCOME TAXES: Deferred taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss or tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the amounts of assets and liabilities recorded for income tax and financial reporting purposes. Deferred tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The income tax expense or benefit is the tax payable or refundable for the year plus or minus the change in deferred tax assets and liabilities during the year. BASIC AND DILUTED LOSS PER COMMON SHARE: Basic per-share amounts are computed, generally, by dividing net income or loss, as adjusted for by the weighted-average number of common shares outstanding. Diluted per-share amounts assume the conversion, exercise, or issuance of all potential common stock instruments unless the effect is anti-dilutive, thereby reducing the loss per common share. At December 31, 1998 and 1997, the Company had options outstanding to purchase a total of 282,000 and 192,000 shares of common stock, respectively. However, because the Company has incurred a loss in all periods presented, the inclusion of those potential common shares in the calculation of diluted loss per-share would have an anti-dilutive effect. Therefore, basic and diluted loss per-share amounts are the same in each period presented. SEGMENT INFORMATION: Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 superseded SFAS No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS No. 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The adoption of SFAS No. 131 did not affect results of operations or financial position, but did require the disclosure of sales by major product line. See Note 6 for disclosures about the Company's operating segments. REPORTING COMPREHENSIVE INCOME: As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires unrealized gains or losses on available-for-sale securities and certain other items, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. For the Company, reporting comprehensive income would be equivalent to reporting operating results in the statements of operations. ADVERTISING EXPENSES: In accordance with SOP 93-7, all advertising costs are either expensed as incurred or deferred until first use of the advertising. The nature of these costs include any promotional activity intended to stimulate, indirectly or directly, the sale of company products. F-10 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) AUTHORIZED SHARES: The Company's Articles of Incorporation provide for an aggregate of 11,000,000 shares of $0.01 par value stock, of which 10,000,000 shares are designated as common stock. Of the remaining 1,000,000 shares which were undesignated, 700,000 were designated as preferred stock in connection with the conversion of related-party debt to preferred stock (see Note 3). NOTE 2. CORPORATE LIQUIDITY AND SUBSEQUENT EVENTS The Company's plans in 1999 include the continued emphasis on promoting its core proprietary brands and increasing the volume of foreign sales. In order to achieve its 1999 plans, the Company will require additional funds from equity or debt to meet its working capital and capital resource plans. On April 15, 1999, the Company obtained a bank line of credit of $3 million, subject to certain borrowing base restrictions. The line-of-credit agreement, which expires on April 15, 2002, contains covenants which include limitations on the Company's ability to pay dividends, as well as requiring the Company to maintain certain financial requirements, including maintaining a minimum net worth level. Substantially all of the Company's assets are pledged as collateral under this line of credit. On April 15, 1999, the Partnership committed to amend the line-of-credit agreement with the Company, thereby curing the default that existed at that time (see Note 3). The amended line-of-credit agreement with the Partnership which expires on April 15, 2002, will provide total borrowings of up to $1.5 million. Management believes that those lines of credit will be sufficient to meet working capital needs during 1999. On March 29, 1999, the Company and the Partnership terminated their lease agreement, which is described in Note 3. Simultaneous with the lease termination, the Partnership agreed to convert the January, February, and March 1999 rent payments, which totaled approximately $150,000, into 60,131 shares of Class A convertible preferred stock (see Note 3). The Partnership also contributed its interest in the real estate and equipment that had been previously leased to the Company to a newly formed entity (Gopher State Ethanol, LLC or "GSE"), which anticipates being involved in the production of ethanol. GSE has obtained interim financing to proceed with an engineering study to determine the feasibility of building an ethanol plant. On March 29, 1999, the Company and GSE entered into a new lease agreement for the same land, building, and production equipment that the Company had previously leased from the Partnership. The new lease agreement provides for rent of $25,000 per month and has an initial term of ten years. NOTE 3. RELATED-PARTY TRANSACTIONS GENERAL: The Minnesota Brewing Limited Partnership owns approximately 62 percent of the Company's voting stock. The Chairman of the Board of the Company is also the controlling general partner of the Partnership. F-11 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED) AMOUNTS DUE TO RELATED PARTY: The Company has borrowed funds from the Partnership under the following arrangements: RELATED-PARTY LINE OF CREDIT: As of December 31, 1998, the Company had borrowings outstanding of $1,324,961 under its line-of-credit agreement with the Partnership, which expired on January 1, 1999. As of February 26, 1999, the Company is in default on this line of credit. (See Note 2 for subsequent event). Advances under the line of credit accrue interest at the higher of either (i) the prime rate of interest (7.75 percent at December 31, 1998) plus 1 percent or (ii) 9 percent. The line is secured by substantially all the assets of the Company. The Company incurred interest expense during 1998 of $122,288 under the line of credit. This accrued interest was converted into preferred stock effective December 31, 1998, in connection with an agreement with the Partnership (see Preferred stock below for more details). The following table summarizes the Company's outstanding debt, including the related-party line of credit (exclusive of the capital lease obligation) to the Partnership: Average Amount Balance at Outstanding Balance Beginning During at End of Year the Year of Year --------------------------------------------------------------------------- Years ended December 31: 1998 $ 263,036 $ 794,000 $ 1,324,961 1997 20,051 148,578 263,036 DEFERRED RENT PAYMENTS ON RELATED-PARTY LEASES: During 1998, the Partnership had agreed to defer all rent payments owed them under the lease agreements described below until January 1, 1999. Effective December 31, 1998, the Company and the Partnership agreed to convert those deferred rent payments of $1,246,748 into preferred stock pursuant to an agreement described below. PREFERRED STOCK: As of December 31, 1998, the Company issued 547,614 shares of Class A convertible preferred stock to the Partnership in satisfaction of $1,369,036 owed for deferred rents and accrued interest. The preferred shares have a 9 percent cumulative dividend rate and can be converted at the Partnership's option into 547,614 shares of the Company's common stock. If it is not paid, it accumulates without interest. AMOUNTS DUE FROM RELATED PARTY: During 1997 and 1998, the Company has incurred costs of approximately $302,000 related to the financing and development of GSE (see Note 2). During 1999, the Company will be reimbursed for certain of those costs, with the remaining portion being reimbursed upon the completion of the construction of the GSE facility. F-12 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED) RELATED-PARTY CAPITAL LEASES: At December 31, 1998, the Company leased its land, building, and the vast majority of its production equipment from the Partnership. Prior to November 1993, the Company leased these assets under operating lease agreements. In November 1993, the Company and the Partnership entered into new lease agreements which provide for 10-year terms, and options to purchase the assets based on 8 times the preceding 12 months' lease payments of $25,000 per month for land and building an $1.00 per barrel of production for equipment. Beginning on December 1, 1995, and extending through the terms of the leases, the Company has the right to purchase the assets under lease. At December 31, 1998, the purchase price would have been approximately $4,900,000. In addition, the Company was responsible for all insurance and real estate taxes associated with this property. See Note 2 for the subsequent event regarding this lease agreement. The lease agreements have been accounted for as capital leases. The amounts capitalized for the land, building, and production equipment were limited to the Partnership's depreciated cost of these assets. The excess of the periodic lease payments over the amounts necessary to service the capitalized debt is recognized as additional rent expense over the terms of the agreements. The following table presents the estimated future minimum lease payments under the two agreements and the portion of those payments accounted for as the capital lease obligation. The future minimum lease payments under the equipment lease have been presented using management's estimate of 1999's annual production level.
Operating Capital Lease Lease Total Commitment Obligation - ---------------------------------------------------------------------------------------------------- Years ending December 31: 1999 $ 740,000 $ 365,500 $ 374,500 2000 740,000 365,500 374,500 2001 740,000 365,500 374,500 2002 740,000 365,500 374,500 2003 645,800 302,000 343,752 --------------------------------------------------- Total estimated future minimum lease payments $ 3,605,800 $ 1,764,000 1,841,752 ================================= Less amount representing interest (7.75%) 314,314 --------------- Present value of future minimum payments under capital lease obligation at December 31, 1998 1,527,438 Less current portion 265,517 --------------- $ 1,261,921 ===============
F-13 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 3. RELATED-PARTY TRANSACTIONS (CONTINUED) Total lease payments due under the aforementioned leases were approximately $609,000, $618,000, and $712,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The total rent expense relating to the operating lease portion of the above leases was approximately $231,000, $243,000, and $337,000 for the years ended December 31, 1998, 1997, and 1996, respectively. ASSETS RECORDED UNDER RELATED-PARTY LEASES: The following is a summary of the assets recorded under capital leases: December 31 ----------------------------------- 1998 1997 - -------------------------------------------------------------------------------- Land and building $ 1,899,574 $ 1,899,574 Production equipment 702,426 702,426 ----------------------------------- 2,602,000 2,602,000 Less accumulated amortization 1,344,310 1,084,121 ----------------------------------- $ 1,257,690 $ 1,517,879 =================================== RELATED-PARTY PAYMENTS: During 1998 and 1997, the Company paid insurance premiums of approximately $228,000 and $180,000, respectively, to an insurance agency whose ownership includes a director of the Company. NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN The Company has established an employee stock ownership plan (the Plan) to provide additional retirement benefits to substantially all employees. Under agreements with employees, the Company is committed to make cash payments to the Plan of $0.60 for each hour of paid compensation for eligible employees. Total compensation expense under the Plan was approximately $76,000, $136,000, and $146,000 for the years ended December 31, 1998, 1997, and 1996, respectively. During 1998, the Company contributed 73,500 shares of its common stock with a fair value of $157,284 in satisfaction of accrued expense under the Plan. At December 31, 1998 and 1997, there were 220,279 and 146,779 shares, respectively, of Company common stock held by the Plan. The fair market value of those shares totaled approximately $427,000 and $258,000 as of December 31, 1998 and 1997, respectively. F-14 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5. STOCK OPTIONS AND WARRANT At December 31, 1998, the Company has an employee incentive stock option plan which is described below. Grants under the plan are accounted for following APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for grants under the plan. Had compensation cost for the plan been determined based on the fair values of options granted, reported net loss and net loss per common share on a pro forma basis as compared to reported results would have been as follows:
1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Net loss: As reported $ (1,380,000) $ (4,310,000) $ (1,862,000) Pro forma (1,483,000) (4,382,000) (1,888,000) Basic and diluted net loss per common share: As reported (0.40) (1.27) (0.55) Pro forma (0.43) (1.29) (0.56)
For purposes of the aforementioned pro forma information, the fair value of each option is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants in 1998, 1997, and 1996, respectively: dividend rate of zero for all years; price volatility of 68.9, 62.0, and 39.0 percent; risk-free interest rate of 5.4, 6.3, and 6.1 percent; and expected lives of approximately 3.0, 3.0, and 2.3 years. The weighted-average fair value per share of options granted in 1998, 1997, and 1996 was $1.03, $1.30, and $1.41, respectively. EMPLOYEE INCENTIVE STOCK OPTION PLAN: The employee incentive stock option plan authorizes the granting of options to purchase up to 450,000 shares of common stock to officers, directors, and other key employees. These options are granted at the discretion of the directors. All options must be granted at no less than 100 percent of the fair market value of the stock on the date of grant, or 110 percent for employees owning more than 10 percent of the Company's common stock. The options expire at varyin dates not to exceed ten years from the grant date and are not transferable. When exercising options, an employee's payment may be either cash, shares of the Company's stock valued at the fair market value, or a combination of the two. WARRANT: In connection with its initial public offering, the Company issued a warrant to the underwriter to purchase up to 137,750 shares of the Company's common stock at an exercise price of $5.40 per share. The warrant became exercisable in November 1994 and expired in November 1998. F-15 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 5. STOCK OPTIONS AND WARRANT (CONTINUED) A summary of the stock option activity through December 31, 1998, is as follows: Number of Exercise Price Shares Per Share - ------------------------------------------------------------------------ Balance, December 31, 1995 98,000 $ 4.50 - 5.75 Granted 18,500 4.75 Exercised (37,600) 4.50 - 5.00 ----------------------------------- Balance, December 31, 1996 78,900 4.50 - 5.75 Granted 125,000 4.50 Exercised/cancelled (11,900) 4.50 - 5.40 ----------------------------------- Balance, December 31, 1997 192,000 4.50 - 5.75 Granted 90,000 2.00 ----------------------------------- Balance, December 31, 1998 282,000 $ 2.00 - 5.75 =================================== At December 31, 1997 and 1996, 108,667 and 78,900 options outstanding, with a weighted-average exercise price per share of $4.85 and $4.88, respectively, were exercisable. A further summary of options outstanding at December 31, 1998, is as follows:
Exercise Number Number Remaining Price Outstanding Exercisable Contractual Life - --------------------------------------------------------------------------------------- $ 2.00 75,000 25,000 3.0 years 2.50 15,000 -- 3.0 years 4.50 151,000 109,333 3.1 years 4.75 18,500 18,500 2.8 years 5.00 10,000 10,000 1.5 years 5.75 12,500 12,500 1.5 years ---------------- --------------- 282,000 175,333 ================ ===============
At December 31, 1998, options outstanding and options exercisable have a weighted-average exercise price per share of $3.82 and $4.29, respectively. NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS SEGMENT DATA: The Company operates in one business segment, the brewing and marketing of beverages, including beer under both proprietary and contract labels. In addition to domestic distributors, the Company also sells directly to foreign distributors located mainly in the Far East. F-16 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 6. SEGMENT DATA AND MAJOR SUPPLIERS (CONTINUED) Sales by major product line are as follows:
(in thousands) 1998 1997 1996 - -------------------------------------------------------------------------------- Proprietary $10,780 $12,054 $13,637 Contract 2,137 4,495 9,744 Foreign 2,671 3,276 4,092 Other 779 594 510 ------------------------------------------ $16,367 $20,419 $27,983 ==========================================
Trade accounts receivable from foreign distributors were approximately $439,000 and $179,000 at December 31, 1998 and 1997. During 1998, 1997, and 1996, respectively, approximately 61, 53, and 70 percent of the Company's proprietary beer, measured in barrels, reached retail channels, principally in Minnesota, through its 12 largest distributors. MAJOR SUPPLIERS: The Company purchases a majority of the cans and bottles used in its production from two suppliers. Management believes that alternative sources of supply are available in the event the Company is unable to obtain products from these suppliers. NOTE 7. INCOME TAXES The components of the income tax expense (benefit) are as follows:
Years Ended December 31 ----------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------- Current: U.S. federal $ -- $ -- $ -- State -- -- -- Benefit of NOL carryback (28,000) -- -- Deferred -- 293,000 -- ----------------------------------------------------- $ (28,000) $ 293,000 $ -- =====================================================
F-17 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7. INCOME TAXES (CONTINUED) Income tax expense (benefit) differs from the federal statutory rate as follows:
Years Ended December 31 ---------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Tax provision (benefit) at federal statutory rate $ (493,000) $ (1,406,000) $ (652,000) State income tax (benefit), net of federal tax effect (62,000) (169,000) (56,000) Nondeductible expenses 5,000 5,000 7,000 Effect of income taxes at lower rates 14,000 40,000 18,000 Effect of net operating loss with no current benefit 525,000 1,542,000 677,000 Change in valuation allowance for deferred tax assets -- 293,000 -- Other (17,000) (12,000) 6,000 ---------------------------------------------------- $ (28,000) $ 293,000 $ -- ====================================================
Net deferred tax assets consist of the following:
December 31 ---------------------------------- 1998 1997 - -------------------------------------------------------------------------------------------------------- Deferred tax assets: Net operating loss carryforwards $ 3,231,000 $ 2,562,000 Vacation accrual 98,000 122,000 Inventory valuation reserve 107,000 182,000 Allowance for doubtful trade and other accounts receivable 139,000 116,000 Other 10,000 45,000 Deferred tax liabilities--other (134,000) (101,000) ---------------------------------- 3,451,000 2,926,000 Less valuation allowance (3,451,000) (2,926,000) ---------------------------------- Net deferred tax assets $ -- $ -- ==================================
The Company has recorded the valuation allowance on its deferred tax assets to reduce the total to an amount that management believes is more likely than not to be realized. Realization of deferred tax assets is dependent upon sufficient future taxable income during periods when deductible temporary differences and carryforwards are expected to be available to reduce taxable income. The increase in the valuation allowance during 1998 and 1997 was primarily the result of the net operating loss (NOL) carryforward which was generated during the year. The 1997 increase was also affected as a result of a change in the conclusion regarding the need for a valuation allowance relative to $293,000 of deferred tax assets. The remaining NOL carryforwards expire as follows: $1,300,000 in 2007, $1,500,000 in 2011, $3,900,000 in 2012, and $1,600,000 in 2018. F-18 MINNESOTA BREWING COMPANY NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 8. Commitments and Contingencies PENSION PLANS: The Company belongs to two multi-employer pension plans (Pension Plans) covering certain employees. Total pension plan expense for 1998, 1997, and 1996 was approximately $62,000, $64,000, and $42,000, respectively. The Company makes annual contributions to the Pension Plans in accordance with negotiated labor contracts. The Multi-Employer Pension Plan Amendments Act of 1980 (the Act) may, under certain circumstances, cause the Company to become subject to liabilities in excess of contributions made under collective bargaining agreements. Under the Act, the Company's proportionate share of the Pension Plan's unfunded vested benefits, if any, generally are contingent upon the termination of, withdrawal, or partial withdrawal from the Pension Plans. The Company has not undertaken to terminate, withdraw, or partially withdraw from the Pension Plans. SAVINGS AND RETIREMENT PLAN: The Company has a savings and retirement plan for eligible employees. The plan was adopted pursuant to Section 401(k) of the Internal Revenue Code. Contributions to the plan are discretionary for both the Company and the employees. The Company may make contributions to this 401(k) plan which match employee contributions, subject to certain limitations. During 1998, 1997, and 1996, the Company made contributions of approximately $47,000, $35,000, and $19,000, respectively, to this plan. LABOR RELATIONS: The collective bargaining agreements between the Company and five of its union bargaining units expire on March 31, 1999. Negotiations with the bargaining units are ongoing and management believes that new contracts will be negotiated. However, there is a possibility that any or all of these units could strike sometime after March 31, 1999. Such an action could have a material adverse effect on the Company's operations and its ability to execute its 1999 business plan (see Note 2). F-19 SCHEDULE II MINNESOTA BREWING COMPANY VALUATION AND QUALIFYING ACCOUNTS
Balance at Changed to Balance at Beginning Cost and End of Description of Period Expenses Deductions Period - -------------------------------------------------------------------------------------------------------------------- Deducted in the balance sheet from the assets to which it applies: Allowance for doubtful accounts: Year ended December 31, 1998 $ 306,000 $ 90,000 $ 146,000 (1) $ 250,000 Year ended December 31, 1997 485,000 492,000 671,000 (4) 306,000 Year ended December 31, 1996 34,000 601,000 150,000 (3) 485,000 Accumulated amortization of intangibles: Year ended December 31, 1998 388,000 156,000 -- 544,000 Year ended December 31, 1997 259,000 129,000 -- 388,000 Year ended December 31, 1996 163,000 96,000 -- 259,000 Deferred tax asset valuation allowance: Year ended December 31, 1998 2,926,000 525,000 -- 3,451,000 Year ended December 31, 1997 1,091,000 1,835,000 -- 2,926,000 Year ended December 31, 1996 414,000 677,000 -- 1,091,000 Inventory valuation allowance: Year ended December 31, 1998 455,000 53,000 227,000 (1) 281,000 Year ended December 31, 1997 233,000 672,000 450,000 (5) 455,000 Year ended December 31, 1996 160,000 233,000 (160,000)(2) 553,000
(1) Uncollectible accounts and inventories written off, net of recoveries. (2) Represents a transfer from inventory reserve to allowance for doubtful accounts. (3) Represents $310,000 of uncollectible accounts written off, net of recoveries, less $160,000 of inventory reserve transferred to allowance for doubtful accounts. (4) Represents $575,000 of uncollectible accounts written off, net of recoveries, plus $96,000 of allowance for doubtful accounts transferred to inventory reserve. (5) Represents $546,000 of inventory written off, less a transfer from allowance for doubtful accounts to inventory reserve. F-20 EX-3.3 2 CERTIFICATE OF RIGHTS AND PREFERENCES EXHIBIT 3.3 CERTIFICATE OF RIGHTS AND PREFERENCES OF CLASS A CONVERTIBLE PREFERRED STOCK OF MINNESOTA BREWING COMPANY The undersigned, being the President of Minnesota Brewing Company, a Minnesota corporation (the "Corporation"), hereby certifies that (a) the following resolution was duly adopted on March 29, 1999 by the Board of Directors of the Corporation, acting pursuant to the provisions of Section 302A.401, subdivision 3 of the Minnesota Business Corporation Act for the purposes of establishing a separate series of the Corporation's authorized preferred stock and fixing the relative rights and preferences of such series of preferred stock, and (b) such resolution has not been subsequently modified or rescinded: RESOLVED, that 700,000 shares of this Corporation's undesignated stock shall be designated as "Class A Convertible Preferred Stock" and the rights, preferences, privileges and restrictions granted to or imposed upon the Class A Convertible Preferred Stock are as follows: 1. DIVIDENDS. (a) The holders of the Class A Convertible Preferred Stock shall be entitled to receive cumulative dividends of 9% per annum payable quarterly, beginning on January 1, 1999. The Company shall pay cash dividends within thirty days of the end of each quarter. If, for any reason, the Corporation is unable to pay any dividend when due, the dividend will accrue until paid in full. (b) In the event the Corporation shall declare a distribution (other than any distribution described in Section 2) payable in securities of other persons, evidences of indebtedness issued by the Corporation or other persons, assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Class A Convertible Preferred Stock shall be entitled to a proportionate share of any such distribution as though the holders of the Class A Convertible Preferred Stock were the holders of the number of shares of Common Stock of the Corporation into which their respective shares of Class A Convertible Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Corporation entitled to receive such distribution. 2. LIQUIDATION PREFERENCE. (a) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of the Class A Convertible Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock by reason of their ownership thereof, the amount of $2.50 per share (as adjusted for any stock dividends, combinations or splits with respect to such shares), plus all declared but unpaid dividends on such share for each share of Class A Convertible Preferred Stock then held by them. If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Class A Convertible Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed ratably among the holders of the Class A Convertible Preferred Stock in proportion to the preferential amount each such holder is otherwise entitled to receive. (b) In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, and subject to the payment in full of the liquidation preferences with respect to the Class A Convertible Preferred Stock as provided in subparagraph (a) of this Section 2 and the Corporation's Articles of Incorporation, the holders of the Common Stock shall be entitled to receive an amount per share equal to their paid-in capital for such shares divided by the number of shares of Common Stock outstanding; and thereafter the holders of Common Stock shall be entitled to receive the entire remaining assets and funds of the Corporation legally available for distribution, such assets and funds to be distributed among such holders in proportion to the shares then held by them on an as-if and fully converted basis provided, however, that the holders of the Class A Convertible Preferred Stock shall not have the right to participate in any such distribution under this subparagraph (b) of this Section 2 unless they first waive, in writing, the right to receive the amounts that would be due them as their liquidation preference under this subparagraph (a) of this Section 2. (c) For purposes of this Section 2, (i) any acquisition of the Corporation by means of merger or other form of corporate reorganization in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued, by the acquiring corporation or its subsidiary (other than a mere reincorporation transaction) in which the shareholders of the Corporation immediately prior to the transaction described above hold less than fifty percent (50%) of the combined entity, or (ii) a sale of all or substantially all of the assets of the Corporation, shall be treated as a liquidation, dissolution or winding up of the Corporation and shall entitle the holders of Class A Convertible Preferred Stock and Common Stock to receive at the closing in cash, securities or other property (valued as provided in Section 2(d) below) the amounts and in the order of priority as specified in Sections 2(a) and 2(b) above. (d) Whenever the distribution provided for in this Section 2 shall be payable in securities or property other than cash, the value of such distribution shall be the fair market value of such securities 2 or other property as determined in good faith by the Board of Directors. 3. VOTING RIGHTS. In addition to the rights provided herein, each holder of shares of the Class A Convertible Preferred Stock shall be entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Class A Convertible Preferred Stock could be converted and shall have voting rights and powers equal to the voting rights and powers of the Common Stock and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of the Corporation. Fractional votes shall not, however, be permitted and any fractional voting rights resulting from the above formula (after aggregating all shares into which shares of Class A Convertible Preferred Stock held by each holder could be converted) shall be rounded to the nearest whole number (with one-half being rounded upward). 4. CONVERSION. The holders of the Class A Convertible Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) RIGHT TO CONVERT. Each share of Class A Convertible Preferred Stock shall be convertible, at the option of the holder thereof, at any time after April 1, 1999, at the office of the Corporation or any transfer agent for such stock, into such number of fully paid and nonassessable shares of Common Stock as are determined by dividing $2.50 by $2.50 (the "Conversion Price"). The Class A Conversion Price is herein sometimes referred to as the "Conversion Price." (b) MECHANICS OF CONVERSION. Before any holder of Class A Convertible Preferred Stock shall be entitled to convert the same into shares of Common Stock, such holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for such stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the name or names in which he wishes the certificate or certificates for shares of Common Stock to be issued. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Class A Convertible Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of surrender of the shares of Class A Convertible Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (c) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this Corporation at any time or from time to time 3 after the original issuance date of the Class A Preferred Stock shall declare or pay, without consideration, any dividend on the Common Stock payable in Common Stock or in any right to acquire Common Stock for no consideration, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or in the event the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price for the Class A Convertible Preferred Stock in effect immediately prior to such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. In the event that this Corporation shall declare or pay, without consideration, any dividend on the Common Stock payable in any right to acquire Common Stock for no consideration, then the Corporation shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. (d) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common Stock issuable upon conversion of the Class A Convertible Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock or other securities or assets, whether by capital reorganization, reclassification, consolidation or merger of the Corporation with another corporation, or the sale of all or substantially all its assets to another corporation, or otherwise (other than a subdivision or combination of shares provided for in Section 4(c) above), then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provision shall be made whereby the holders of Class A Convertible Preferred Stock shall thereafter have the right to receive upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock of the Corporation immediately theretofore receivable upon the conversion of Class A Convertible Preferred Stock, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of shares of such Common Stock immediately theretofore receivable upon the conversion of Class A Convertible Preferred Stock had such reorganization, reclassification, consolidation, merger or sale not taken place, plus all dividends unpaid and accumulated or accrued thereon to the date of such reorganization, reclassification, consolidation, merger or sale, and in any such case appropriate provision shall be made with respect to the rights and interests of the holders of Class A Convertible Preferred Stock to the end that the provisions hereof (including without limitation provisions for adjustment of the Conversion Price and of the number of shares receivable upon the conversion of Class A Convertible Preferred Stock) shall thereafter be applicable, as nearly as may be in relation to any shares of stock, securities or assets thereafter receivable upon the conversion of Class A Convertible Preferred Stock. The Corporation shall not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Corporation) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument executed and mailed to the holders of Class A Convertible Preferred Stock, at the last addresses of such holders appearing on the books of the Corporation, the obligation to deliver to such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, 4 such holder may be entitled to receive. (e) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of any Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to each holder of Class A Convertible Preferred Stock a certificate executed by the Corporation's President or Chief Financial Officer setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Class A Convertible Preferred Stock, furnish or cause to be furnished to such holder of Class A Convertible Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustment and readjustments, (ii) the Conversion Price for such series of Class A Convertible Preferred Stock at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Class A Convertible Preferred Stock. (f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Class A Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Class A Convertible Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Class A Convertible Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, engaging in best efforts to obtain the requisite shareholder approval of any necessary amendment to the Corporation's Articles of Incorporation. (g) FRACTIONAL SHARES. No fractional share shall be issued upon the conversion of any share or shares of Class A Convertible Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Class A Convertible Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional shares. If, after the aforementioned aggregation, the conversion would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in lieu of issuing any fractional share, pay the holder otherwise entitled to such fraction a sum in cash equal to the fair market value of such fraction on the date of conversion. (h) NOTICES. Any notice required by the provisions of this Section 4 to be given to the holders of shares of Class A Convertible Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. 5 5. REDEMPTION. (a) OPTIONAL REDEMPTION PRIOR TO APRIL 1, 2001. Commencing on April 1, 1999, on not less than thirty (30) days prior written notice, the Corporation shall have the option to redeem the Class A Convertible Preferred Stock at a redemption price of $2.50 per share, if the last sale price for the Company's Common Stock equals or exceeds 160% of the Conversion Price for ten (10) consecutive trading days within the ten calendar days of the date of call. (b) OPTIONAL REDEMPTION ON OR AFTER APRIL 1, 2001. The Corporation shall also have the option to redeem the Class A Convertible Preferred in whole or in part at a price of $2.50 on or after April 1, 2001. Any redemption pursuant to this Section 5 (b) shall be pro rata among all remaining preferred stockholders based upon their holdings on the date of call. (c) MECHANICS OF REDEMPTION. If the Corporation desires to exercise its right to redeem the Class A Convertible Preferred Stock, it shall mail a notice of redemption to each of the holders of the Class A Convertible Preferred Stock, first class, postage prepaid, not later than the thirtieth day before the date fixed for redemption, at their last address as shall appear on the records of the Corporation. Any notice mailed in this manner shall be conclusively presumed to have been duly given whether or not the holder receives such notice. (d) NOTICE OF REDEMPTION. The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption (the "Redemption Date"), (iii) the place where the Class A Convertible Preferred Certificates shall be delivered and the redemption price paid, and (iv) the right to convert the shares of the Class A Convertible Preferred Stock into the Corporation's Common Stock shall terminate at 5:00 pm (Minneapolis time) on the business day immediately preceding the date fixed for redemption. No failure to mail such notice nor any defect therein or in the mailing shall affect the validity of the proceedings for such redemption except as to a holder (a) to whom notice was not mailed or (b) whose notice was defective. An affidavit of the Secretary of the Corporation that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (e) TERMINATION OF CONVERSION RIGHTS. Any right to convert any share of Class A Convertible Preferred Stock into Common Stock of the Corporation that has been called for redemption shall terminate at 5:00 p.m. (Minneapolis time) on the business day immediately preceding the Redemption Date. On and after the Redemption Date, holders of the redeemed Class A Convertible Preferred Stock shall have no further rights except as to receive, upon surrender of the redeemed Class A Convertible Preferred Stock, the Redemption Price. (f) PAYMENT OF REDEMPTION PRICE. From and after the date specified for redemption, the Corporation shall, at the place specified in the notice of redemption, upon presentation and surrender to the Corporation by or on behalf of the holder of any shares of Class A Convertible Preferred Stock to 6 be redeemed, deliver, or cause to be delivered to, or upon the written order of such holder a sum in cash equal to the Redemption Price for each such share of Class A Convertible Preferred Stock. From and after the date fixed for such redemption and upon the deposit or setting aside by the Corporation of a sum sufficient to redeem all of the shares of Class A Convertible Preferred Stock called for redemption, such shares of Class A Convertible Preferred Stock shall expire and become void and all rights hereunder, except the right to receive the Redemption Price, shall cease. 6. AMENDMENT This Certificate of Rights and Preferences may not be amended without the consent of the holders of a majority of Class A Convertible Preferred Stock. MINNESOTA BREWING COMPANY By: ------------------------------------ Its: President 7 EX-10.1 3 LEASE EXHIBIT 10.1 LEASE THIS LEASE (the "Lease") is made as of March 29, 1999, by and between GOPHER STATE ETHANOL, LLC, a Delaware limited liability company, having its principal office at 882 West Seventh Street, St. Paul, Minnesota 55102 ("Landlord"), and MINNESOTA BREWING COMPANY, a Minnesota corporation, having its principal office at 882 West Seventh Street, St. Paul, Minnesota 55106 ("Tenant"). 1. Lease of Premises: Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon and subject to the conditions and for the term hereinafter specified, the following: (a) The real estate situated in Ramsey County, Minnesota, legally described and depicted on Exhibit A hereto, and the buildings and site improvements situated thereon (collectively, the "Leased Premises"), which may be amended to conform to the final renovations and construction of Landlord's adjoining ethanol production facilities and may include as Leased Premises a site for the production of carbon dioxide and will provide reasonable ingress and egress to the Brew House; and in no event will the Leased Premises include any real property integral to the ethanol production operation; and (b) The Equipment described on Exhibit B (the "Equipment"). Tenant agrees that it has selected each item of the Equipment based on its own judgment and disclaims any reliance upon any statements or representations made by Landlord. LANDLORD MAKES NO EXPRESS OR IMPLIED WARRANTY WITH RESPECT TO THE EQUIPMENT AND SPECIFICALLY DISCLAIMS ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND ANY LIABILITY FOR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO USE THE EQUIPMENT. Tenant agrees to pay the rent required under this Lease without regard to the condition of the Equipment. Unless otherwise stated, the Tenant will cause the Equipment to be located on the Leased Premises. 2. Title and Condition: The Leased Premises and Equipment are leased subject to all title matters of public record and to all applicable laws, regulations, restrictions, rules and ordinances. Tenant accepts the Leased Premises and Equipment in their present condition AS IS and without warranty or representation of any kind with respect thereto. 3. Quiet Enjoyment: If and so long as Tenant shall pay the Rent and additional rent reserved under this Lease whenever the same shall become due, and keep all of the covenants and agreements required by it to be kept during this Lease, and shall perform all of its other obligations hereunder, Tenant shall have, hold and enjoy peaceful and quiet occupation and enjoyment of the Leased Premises and Equipment. 4. Use of Leased Premises and Equipment: (a) Subject to the terms of this Lease, Tenant shall use and occupy the Leased Premises and Equipment for the purpose of operating a brewery and purposes reasonably related thereto and any other purpose not inconsistent with the operation of a brewery. Tenant shall also have the right to operate other businesses, including the production of energy or the production of carbon dioxide or any other business that does not interfere with the production of ethanol. (b) Tenant shall not use or occupy the Leased Premises or Equipment, or permit the Leased Premises or Equipment to be used or occupied contrary to any statute, rule, order, ordinance, requirement or regulation applicable thereto. (c) Tenant shall comply with all laws and regulations relating to the Equipment and its use and shall promptly pay when due all sales, use, property, excise and other taxes and all license and registration fees now or hereafter imposed by any governmental body or agency upon the Equipment or its use or the rentals hereunder. Upon request by Landlord, Tenant shall prepare and file all tax returns relating to taxes for which Tenant is responsible under this Lease which Tenant is permitted to file under the laws of the applicable taxing jurisdiction. 5. Term; Extension; Rights of Termination: (a) This Lease shall be for a term of ten (10) years commencing on the date hereof (the "Commencement Date"). Whenever used herein the word "Term" shall mean said ten (10) year term and any extended term. (b) Tenant shall have the option to extend this Lease on the terms and conditions contained herein for three (3) consecutive additional terms of ten (10) years each (each referred to as the "Renewal Term"). If Tenant desires to exercise such option, Tenant shall give written notice to Landlord of Tenant's exercise of such option to extend this Lease at any time subsequent to January 1, 2009, but no later than 180 days prior to the expiration of the initial ten-year term of this Lease. The Lease for the extended term shall be on the same terms, covenants and conditions contained in this Lease except the Rent shall be determined as provided in paragraph 6(c) hereof, and except that there shall be no further option to extend the term. 6. Rent: (a) Tenant covenants to pay to Landlord, at Landlord's address set forth above or at such place or places or to such person or persons as Landlord from time to time may designate in writing, the following rent (the "Rent"): (1) The Annual Base Rent for the Leased Premises the sum of Three Hundred Thousand and No/100 Dollars ($300,000.00) payable in advance on or before the first day of each month in equal monthly installments of Twenty-five Thousand and No/100 Dollars ($25,000.00). Annual Base Rent for any period during the term which is less than a month shall be a pro-rata portion of the monthly installment; and (2) Any rent, tax payment or other amount due under this Lease which is not paid when due, shall bear interest equal to the rate of interest from time to time published or announced by Norwest Bank Minnesota, N.A. as its "prime rate," plus 400 basis points, from the due date thereof until paid in full. (b) Tenant shall also pay and discharge during the term hereof, when the same shall become due, as additional rent, subject to the provisions of paragraph 20 hereof, all other amounts, liabilities and obligations which Tenant assumes or agrees to pay or discharge pursuant to this Lease. (c) If Tenant exercises its option to extend this Lease, the Annual Base Rent shall be adjusted to the amount determined by multiplying the Annual Base Rent for the immediately preceding Term by the percentage increase, if any, in the Consumer Price Index for the period from the Commencement Date to the first day of such Renewal Term, as the case may be. The Consumer Price Index is the CPI for Urban Wage Earners and Clerical Workers, All-Items, Minneapolis-St. Paul, Minnesota (1982-84 = 150), as maintained by the U.S. Department of Labor. If said index is not maintained as of the first day of the Renewal Term, a similar index shall be used. (d) So long as the Lease is in effect, Tenant shall provide Landlord with all Landlord's steam and electricity requirements at Tenant's cost. If Tenant enters the energy business in the future and produces steam or electricity, Tenant and Landlord will negotiate in good faith with respect to Landlord's purchase of steam and electricity. 7. Option to Purchase Leased Premises and Equipment: (a) Tenant shall have the option to purchase the portion of the Leased Premises depicted on Exhibit C-1 and all of the Equipment from Landlord. So long as exercising the option does not violate the terms of the Landlord's mortgage and other financing commitments, the option may be exercised at any time during the Lease Term while this Lease is in effect and there is no default by the Tenant hereunder by Tenant's giving Landlord at least thirty (30) days prior written notice of its exercise of such option. Tenant's purchase price for the Equipment and the Leased Premises shall be the fair market value of the Leased Premises and Equipment as determined at the time the option is exercised, which shall be determined by a licensed qualified appraiser(s) selected by the parties' mutual agreement. If Tenant elects to exercise the option, the Tenant shall continue to lease the portion of the Leased Premises not included in the option, which is depicted on Exhibit C-2. Notwithstanding the foregoing, the option shall not include any real property or Equipment that is integral to the Landlord's ethanol production operation. (b) Within a reasonable time of receiving Tenant's written notice of its exercise of the purchase option, Landlord shall deliver to Tenant a commitment (the "Commitment") for an ALTA (1992) Owner's Policy of Title Insurance insuring title to the Leased Premises issued by a title company selected by Landlord ("Title"). The Commitment will commit Title to insure title to the Tenant's interest in the Leased Premises subject only to the so-called standard exceptions to coverage. (c) Within thirty (30) days of receiving the Commitment, a closing shall be held and Landlord shall execute and/or deliver to Tenant the following: (1) Warranty Deed. A Warranty Deed conveying Landlord's interest in the Leased Premises to Tenant, subject to all encumbrances, reservations, and rights of record. (2) Bill of Sale. A Bill of Sale conveying Landlord's interest in the Equipment to Tenant, subject to all encumbrances, reservations, and rights of record. (3) Other Documents. All other documents reasonably determined by the parties to be necessary to transfer the Landlord's interest in the Leased Premises to Tenant in the manner specified herein. (d) Tenant acknowledges for Tenant, and its successors and assigns that Tenant has been given a reasonable opportunity to inspect and investigate the Leased Premises and Equipment, either independently or through agents of Tenant's choosing and that Tenant has occupied the Leased Premises and used the Equipment, and that in purchasing the Leased Premises and Equipment Tenant is not relying upon any representations of Landlord as to the fitness for any particular use, or the condition or safety of the Leased Premises or Equipment including, but not limited to, its electrical, mechanical and structural components. Tenant acknowledges and agrees that Landlord has not made, does not make and specifically negates and disclaims any representations, warranties, promises, covenants, agreements of any kind whether expressed or implied, oral or written, past, present or future relating to or arising from (a) the value, nature, quality or condition of the Leased Premises or Equipment including, without limitation, the environmental condition of the Leased Premises; (b) the income to be derived from the Leased Premises or Equipment; (c) the suitability of the Leased Premises or Equipment for any and all activities and uses to which the Tenant may want the Leased Premises or Equipment; (d) the existence of any defective materials, equipment or component or part of the Leased Premises or Equipment and the existence of any environmental hazards or conditions of hazardous substances or materials; and (e) the compliance of or by the Leased Premises or Equipment with any laws, rules, ordinances or regulations of any applicable governmental authority. To the maximum extent permitted by law, the sale of the Leased Premises and Equipment is provided for herein is made on a "as-is", "where-is" condition and basis with all faults. 8. Net Lease; Non-Terminability: (a) This Lease is a net lease, and the Rent, additional rent and all other sums payable hereunder to or on behalf of Landlord, shall be paid without notice or demand, and without setoff, counterclaim, abatement, suspension, deduction or defense. (b) Except as otherwise expressly provided in paragraphs 3, 15 and 17 hereof, this Lease shall not terminate, nor shall Tenant have any right to terminate this Lease or be entitled to the abatement of any rent or any reduction thereof, nor shall the obligations hereunder of Tenant be otherwise affected, by reason of any damage to or the destruction of all or any part of the Leased Premises or Equipment from whatever cause, the taking of the Leased Premises or Equipment or any portion thereof by condemnation or otherwise, or the prohibition, limitation or restriction of Tenant's use of the Leased Premises or Equipment. 9. Taxes and Other Charges: (a) Tenant agrees, subject to paragraphs 9(c) and 20 hereof, to pay to Landlord, as additional rent, at least fifteen (15) days before the same shall become due and payable without penalty, all real estate taxes, personal property taxes, business and occupation taxes, occupational license taxes, installments of special assessments and all other governmental taxes, impositions and charges of every kind and nature. (b) Tenant will pay or cause to be paid when due all charges for gas, water, sewer, electricity, light, heat, power, telephone, and other utilities and services used, rendered or supplied to, upon or in connection with the Leased Premises or Equipment. (c) It is expressly understood and agreed that Tenant shall not be required to pay, or reimburse Landlord for any local, state or federal capital levy, franchise tax, revenue tax, income tax or profits tax of Landlord or any tax or impost charged or levied upon or with respect to the Rent. (d) If Tenant is in default of the payment of any of the governmental, utility or other charges described in this paragraph 9 for five (5) calendar days after such charges shall have become payable as provided in this Lease, Landlord may pay the same, and the amount so paid, with interest thereon at the Default Rate, shall be deemed additional rent payable by Tenant to Landlord under the provisions of this Lease, and shall on demand be forthwith paid by Tenant to Landlord. 10. Compliance with Law: Tenant shall at its sole cost and expense comply with all federal, state, county, municipal and other statutes, charters, laws, rules, orders, regulations and ordinances affecting the Leased Premises or Equipment and the occupancy, operation or use thereof. 11. Liens: Subject to paragraph 20 hereof, Tenant will not create or permit to be created or to remain, and will discharge, any lien, encumbrance or charge (other than a lien, encumbrance or charge created by Landlord) upon the Leased Premises or Equipment, or any part thereof or upon Tenant's leasehold interest therein. 12. Indemnification: To the fullest extent permitted by law, Tenant agrees to pay, and to protect, indemnify and save harmless Landlord from and against, any and all liabilities, damages, costs, expenses (including any and all attorneys fees and expenses of Tenant and any and all attorneys' fees and expenses of Landlord), causes of action, suits, claims, demands or judgments of any nature whatsoever arising from (i) any work or thing done during the term of this Lease in, on or about the Leased Premises or Equipment, or any part thereof, (ii) injury to, or the death of, persons or damage to Leased Premises or Equipment during the term of this Lease on the Equipment or Leased Premises or upon adjoining sidewalks streets, alleys, curbs, vaults, spaces or ways, or in any manner growing out of or connected with the use, non-use, conditions, possession, operation, maintenance, management or occupation of the Equipment or Leased Premises or resulting from the condition thereof or of adjoining sidewalks, streets, alleys, curbs, vaults, spaces or ways, (iii) any negligence on the part of Tenant or any of its agents, contractors, servants, employees, licensees or invitees, and (iv) violation of any agreement or condition of this Lease and of conditions, agreements, restrictions, statutes, charters, laws, rule, ordinances or regulations affecting the Equipment or Leased Premises or the ownership, occupancy or use thereof. 13. Maintenance and Repair: (a) Tenant will keep and maintain the Leased Premises and Equipment, including any altered, rebuilt, additional or substituted improvements, in good repair and appearance during the term of this Lease, ordinary wear and tear excepted. All repairs made by Tenant shall be at least equal to the original work in class and quality. Repairs shall include structural repairs, and maintenance of parking, plumbing and HVAC. (b) Tenant shall put, keep and maintain the Equipment and all portions of the Leased Premises and the sidewalks, curbs and passageways adjoining the same in a clean and orderly condition, free of dirt, rubbish, snow, ice and unlawful obstructions. (c) Tenant hereby assumes and shall bear the entire risk of loss and damage to the Equipment from any and every cause whatsoever except normal wear and tear resulting from proper use during the period from and during the delivery of the Equipment to Tenant until it is returned to Landlord. In the event any item of Equipment shall become lost, stolen, destroyed, damaged beyond repair or rendered permanently unfit for any reason or, in the event of condemnation or seizure Tenant shall promptly pay Landlord the sum of the following: (1) all rent and other amounts payable by Tenant hereunder which are due but unpaid at the time of computation; (2) the present value of all unpaid rent for the balance of the initial Lease term at the time of the computation computed using a discount rate of 8% per annum and assuming that the production during the remainder of the term will be at the same level as the production has been in the six months prior to the time the Equipment becomes lost, stolen, destroyed, damaged or rendered permanently unfit; (3) the anticipated fair market value of such items of Equipment at the expiration of the Lease term which Landlord and Tenant agree shall be conclusively deemed for this purpose to be equal to 100% of the original cost of such Equipment; (4) any tax loss suffered by Landlord relating to such Equipment; (5) any set up costs relating to such Equipment that Landlord has not yet amortized; (6) any expenses incurred by Landlord in enforcing its rights under this Agreement; and (7) interest on any past due amounts as provided elsewhere in this Agreement. Any insurance proceeds received by Landlord on insurance purchased by Tenant shall be credited to Tenant's obligation under this paragraph and Tenant shall be entitled to any surplus. (d) In the event any of the Equipment is damaged or destroyed and Tenant desires to replace such Equipment, the Landlord, upon the written request from Tenant, shall purchase such replacement equipment and lease such equipment to Tenant, amortizing 100 percent of the cost of such equipment on a straight-line basis over the taxable depreciable life of such equipment at the applicable Treasury rate plus 200 basis points. At the expiration of such period, the Landlord will continue to own the replacement equipment. (e) If Tenant fails to comply with the provisions of this paragraph 13, Landlord may give Tenant written notice of such failure to comply, specifying the maintenance or repairs to be made by Tenant. If the maintenance or repairs are not completed by Tenant within thirty (30) days after said notice, Landlord may have the work done at Tenant's expense, and the cost thereof shall become additional rent due hereunder payable by Tenant to Landlord upon written demand from Landlord. (f) In addition to the foregoing requirements, Tenant shall comply with all applicable environmental laws, rules and regulations. 14. Alterations and Additions: Tenant may, at any time and from time to time during the term of this Lease and at its sole cost and expense, make additions to, alterations of, substitutions and replacements to the Leased Premises and Equipment. If Tenant estimates that any such addition, alteration, substitution or replacement will cost more than $10,000.00, Tenant shall give to Landlord notice of its intention to undertake the same and shall obtain Landlord's prior written approval of the plans and specifications. Title to all alterations, additions, installments, changes and improvements made by Tenant, except trade fixtures, shall become the property of Landlord at the termination of this Lease. Tenant shall discharge, subject to paragraph 20 hereof, any and all liens filed against the Leased Premises or Equipment, and any improvements thereon arising out of such additions, alterations, substitutions, replacements or removals, and upon the request of Landlord shall deposit with Landlord a surety bond or other security satisfactory to Landlord to assure the completion of any such additions, alterations, substitutions, replacements or removals. 15. Condemnation: If the whole of the Leased Premises is taken under power of eminent domain or is sold to any entity having the power of eminent domain under threat of condemnation, this Lease shall terminate on the day on which the condemnor or buyer takes possession thereof. In the event of such a taking or sale of only a part of the Leased Premises which shall substantially interfere with Tenant's use or occupancy thereof and shall reduce the usable square footage of the land or building comprising the Leased Premises by twenty-five percent (25%) or more, Tenant may terminate this Lease by giving Landlord written notice thereof not more than ten (10) days after the condemnor or buyer takes possession of the part taken or sold. If a partial taking or sale shall not substantially interfere with Tenant's use or occupancy of the Leased Premises and shall not reduce the usable square footage of the land or building comprising the Leased Premises by twenty-five percent (25%) or more, or if Tenant does not terminate the Lease as hereinbefore provided, then on the day on which the condemnor or buyer takes possession of the part taken or sold, the Rent thereafter accruing shall be equitably reduced to account for that portion of the Leased Premises so taken or sold, and Landlord shall to the extent practicable restore the remaining Leased Premises to their condition prior to such partial taking or sale, anything elsewhere in this Lease regarding repair or replacement to the contrary notwithstanding. Such abatement in Rent shall be based on the before and after values of the Leased Premises as determined by, or as agreed to in, such condemnation proceedings, such that a percentage reduction in value shall result in an equal percentage reduction in Rent. Tenant shall not be entitled to any part of the award made or sales price received for such taking or sale of all or any part of the Leased Premises and will assign, and does hereby assign, any and all award or sale price received for such taking or sale and will execute any assignments or other documents necessary to affect the transfer of such award or sales price to Landlord; provided, however, Tenant shall be entitled to receive such relocation expenses as Tenant may be entitled to receive under applicable Minnesota statutes. 16. Insurance: Landlord shall carry comprehensive public liability insurance and fire and extended coverage on the Leased Premises and Equipment in amounts Landlord deems reasonably necessary and name Tenant as an additional insured. Tenant shall pay its share of the cost of such insurance policies within ten (10) days of receiving the premium receipts with respect to such insurance from Landlord. Every insurance policy shall contain to the extent obtainable, an agreement by the insurer that it will not cancel such policy except upon thirty (30) days prior written notice to all parties and to any mortgagee and that any loss otherwise payable thereunder shall be payable notwithstanding any act of negligence of Landlord or Tenant which might, absent such agreement, result in a forfeiture of all or part of such insurance payment. 17. Fire and Casualty Loss: (a) If the Leased Premises or Equipment, or any part thereof are damaged or destroyed by fire or any casualty covered by the insurance required under the provisions of paragraph 16 hereof, all insurance proceeds from said insurance shall be the property of Landlord (except insurance proceeds for Tenant's fixtures and personal property which proceeds shall belong to Tenant), and, subject to subparagraphs (b) and (c) of this paragraph 17 and the terms of any mortgage on the Leased Premises or Equipment, Landlord shall repair the Leased Premises or Equipment as soon as reasonably possible and this Lease shall continue in full force and effect. Landlord shall have no obligation to repair or replace any of Tenant's fixtures, personal property or leasehold improvements. Landlord shall in good faith proceed with and consummate the settlement of the insurance claim. Pending repair or restoration, Rent shall abate following such damage or destruction in proportion to the interference with Tenant's use of the Leased Premises or Equipment. If the Leased Premises or Equipment shall be so slightly injured that no part thereof is rendered unfit for occupancy, then Landlord shall repair the same with reasonable promptness, and in that case Rent shall not be abated during such repair period. (b) Notwithstanding anything to the contrary herein, if the damage or destruction described in this paragraph 17 occurs within six (6) months of the end of the term of this Lease and more than twenty-five percent (25%) of the building improvements on the Leased Premises or Equipment are damaged or destroyed, this Lease shall automatically terminate. If more than twenty-five percent (25%) of the building improvements on the Leased Premises or Equipment are damaged or destroyed prior to the period six (6) months before the end of the term of this Lease, Landlord shall have the option to terminate this Lease or repair the building in accordance with subparagraph (a) of this paragraph 17, which option shall be exercised by written notice to Tenant within forty-five (45) days after the damage if Landlord elects to terminate this Lease. In the event of termination under this paragraph 17, all advance Rent paid to Landlord, which has not accrued prior to termination, shall be refunded to Tenant. (c) Subject to the foregoing provisions of this paragraph 17, including those relating to rent abatement, if at any time during the term hereof the Leased Premises or Equipment are damaged, and such damage was caused by a casualty not covered under an insurance policy required to be maintained pursuant to paragraph 16, Landlord may at Landlord's option either (i) repair such damage as soon as reasonably possible at Landlord's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Tenant within thirty (30) days after the date of the occurrence of such damage of Landlord's intention to cancel and terminate this Lease as of the date of the occurrence of such damage. In the event Landlord elects to give such notice of Landlord's intention to cancel and terminate this Lease, Tenant shall have the right within twenty (20) days after the receipt of such notice to give written notice to Landlord of Tenant's intention to repair such damage at Tenant's expense, without reimbursement from Landlord, in which event this Lease shall continue in full force and effect, and Tenant shall proceed to make such repairs as soon as reasonably possible. If Tenant does not give such notice within such twenty-day period this Lease shall be canceled and terminated as of the date of the occurrence of such damage. (d) Notwithstanding any other provision in this Lease to the contrary, Landlord and Tenant hereby release one another from any and all liability or responsibility (to the other or anyone claiming through or under them by way of subrogation or otherwise) for any loss or damage coverable by an "all risk" policy of casualty insurance even if such loss or damage shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible. Tenant agrees immediately to give each insurance company which has issued policies of fire and extended coverage insurance, written notice of the terms of the mutual waiver as contained in this paragraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverage by reason of the mutual waivers contained in this paragraph. 18. Assignment and Subletting: Tenant may not assign, transfer, mortgage or encumber this Lease or sublet or rent or permit occupancy or use of the Leased Premises or Equipment, or any part thereof by any third party (any of the foregoing being hereinafter referred to as an "Assignment") without the prior written consent of the Landlord which consent shall not be unreasonably withheld. Landlord hereby consents to the continued subleasing of the basement of the Bottle House to the third party. 19. Permitted Contests: Tenant shall not be required to pay, discharge or remove any tax, assessment, levy, fee or charge referred to in paragraph 9 of this Lease, or any lien referred to in paragraph 11 or 14 of this Lease, so long as Tenant shall contest in good faith at its own expense the amount or the validity thereof by appropriate proceedings which shall operate to prevent the collection of, or realization upon, the tax, assessment, levy, fee, charge or lien so contested and the sale of the Leased Premises or any part thereof to satisfy the same, and pending any such proceedings Landlord shall not have the right to pay, remove, or cause to be discharged the tax, assessment, levy, fee, charge or lien thereby being contested. Tenant shall give prompt written notice to Landlord of the commencement of any contest referred to in this paragraph 19. In the event of such contest Tenant shall furnish reasonable security as may be required by Landlord to insure payment thereof and prevent any sale, foreclosure or forfeiture of the Leased Premises by reason of such contest. Tenant further agrees that such contest shall be prosecuted to a final conclusion diligently; that it will pay, and save Landlord harmless against, any and all losses, judgments, decrees and costs (including all attorneys' fees and expenses) in connection therewith; and that it will, promptly after the final determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein, together with all penalties, fines, interest, cost and expenses resulting from such contest. 20. Events of Default: (a) Any of the following occurrences or acts shall constitute an event of default under this Lease (an "Event of Default"): (i) if Tenant, at any time during the term of this Lease (and regardless of the pendency of any bankruptcy, receivership, insolvency or other proceedings, at law, in equity, or before any administrative tribunal, which have or might have the effect of preventing Tenant from complying with the terms of this Lease), shall (A) fail to make payment of any installment of Rent or additional rent when due, or (B) fail to observe or Perform any of Tenant's other covenants, agreements or obligations hereunder, and if any such non-monetary default shall not be cured within fifteen (15) calendar days after Landlord shall have given to Tenant notice specifying such default or defaults, or (ii) if Tenant shall file a petition in bankruptcy or shall be adjudicated a bankrupt or insolvent or shall make an assignment for the benefit of its creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of Tenant as a bankrupt shall not be discharged or denied within sixty (60) calendar days after the date of filing thereof, or (iii) if a receiver, trustee or liquidator of Tenant or of all or substantially all of the property of Tenant or of the Leased Premises or Equipment or any material portion thereof shall be appointed in any proceeding brought by Tenant, or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against Tenant and if such receiver, trustee or liquidator shall not be discharged within sixty (60) calendar days after such appointment, or (iv) if the Leased Premises or Equipment shall have been abandoned or left unoccupied for thirty (30) calendar days, or (v) Tenant shall default in any other lease of, or agreement relating to, any part or all of the Leased Premises or Equipment, to which lease or agreement Tenant is a party. Notwithstanding the foregoing provisions of this paragraph, if any strike, war, governmental regulation, act of God, or other cause beyond Tenant's reasonable control (except for payments to be made by Tenant) delays the curing of any Event of Default referred to in clause (b) of this paragraph 20(a), the fifteen day period after notice of such default shall be extended by the length of such delay, if Tenant gives Landlord written notice within said fifteen-day period of the cause of the delay, such cause in fact exists, and Tenant commences the cure and diligently prosecutes the same to completion as soon as reasonably possible. (b) If any Event of Default shall have happened and be continuing, Landlord shall have the right at its election then or at any time thereafter while any such Event of Default shall continue, to give Tenant notice of Landlord's intention to terminate the term of this Lease on a date specified in such notice, and on the date specified in any such notice all right, title and interest of Tenant thereunder shall thereupon expire as fully and completely as if the date specified in such notice were the date specifically fixed herein for the expiration of the term of this Lease, and Tenant shall then peaceably and quietly quit the Leased Premises and Equipment and surrender the same to Landlord, but Tenant shall remain liable as hereafter provided. In the event any such notice is given, Landlord shall have the immediate right of reentry and possession of the Leased Premises and Equipment and the right to remove all persons and property therefrom. Should Landlord elect to reenter as herein provided or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provided by law, Landlord may from time to time, but shall not be obligated to, relet the Leased Premises or Equipment or any part thereof for such term or terms and such rental or rentals, including rent concessions or free rent, and upon such terms and conditions as Landlord may deem advisable, with the right to make alterations in and repairs to the Leased Premises or Equipment. (c) If Landlord shall reenter and obtain possession of the Leased Premises or Equipment by reason of or following an Event of Default, whether or not this Lease shall have terminated, Landlord shall have the right, without notice, to repair or alter the Leased Premises or Equipment in such manner as to Landlord may deem necessary or advisable so as to put the Leased Premises or Equipment in good order and to make the same rentable, and shall have the right, at Landlord's option, to relet the Leased Premises or Equipment or any part thereof, and Tenant agrees to pay to Landlord on demand all expenses incurred by Landlord in obtaining possession, and in altering, repairing and putting the Leased Premises or Equipment in good order and condition and in reletting the same, including fees of attorneys, architects, and other experts, and also any other legitimate expenses or commissions, and Tenant further agrees to pay to Landlord upon the first day of each month in each year following such reentry until the end of the term of this Lease the sums of money which would have been payable by Tenant as Rent hereunder if Landlord had not reentered and resumed possession of the Leased Premises or Equipment, deducting only the net amount of rent, if any, which Landlord shall actually receive in the meantime from and by any reletting of the Leased Premises or Equipment, and Tenant hereby agrees to be and remain liable for all sums aforesaid, as well as for any deficiency aforesaid, and Landlord shall have, from time to time, the right to begin and maintain successive actions or other legal proceedings against Tenant for the recovery of such deficiency or damages or for a sum equal to any installment or installments of Rent or additional rent and any other sums payable hereunder, and to recover the same upon the liability of Tenant herein provided, which liability it is expressly covenanted shall survive any action to secure possession of the Leased Premises or Equipment. Nothing herein contained shall be deemed to require Landlord to wait to begin such action or other legal proceedings until the date when this Lease would have expired by limitation had there been no such default by Tenant. At Landlord's option at any time after such termination or repossession, whether or not Landlord shall have collected any current damages, Landlord shall be entitled to recover from Tenant, and Tenant shall pay to Landlord on demand, as and for liquidated and agreed final damages for Tenant's default, an amount equal to the then present value of the excess of the Rent and other sums or charges reserved under this Lease from the day of such termination or repossession for what would be the then unexpired term if the same had remained in effect, over the then net fair rental value of the Leased Premises or Equipment for the same period, said present value to be arrived at on the basis of a discount rate equal to the prime rate of Norwest Bank Minnesota, N.A., then in effect, less two hundred basis points. (d) If under any of the preceding provisions of this paragraph 20 Landlord shall be entitled to give Tenant a notice of termination of the term of this Lease, Landlord without giving such notice of termination and notwithstanding the continuance of the term of this Lease shall have, to the extent permitted by law, all the rights, powers and remedies given to Landlord by the preceding provisions of this paragraph 20, and Tenant shall have the obligations imposed upon it by such provisions. (e) No such reentry or taking of possession of the Leased Premises or Equipment by Landlord shall be construed as an election on Landlord's part to terminate the term of this Lease unless a notice of such intention be given to Tenant or unless the termination hereof be decreed by a court of competent jurisdiction. 21. Additional Rights: (a) No right or remedy herein conferred upon or reserved to Landlord is intended to be exclusive of any other right or remedy, and each and every right and remedy of Landlord shall be cumulative and in addition to any other right or remedy given Landlord hereunder, or now or hereafter existing at law or in equity or by statute. (b) If Tenant shall be in default in the performance of any of its obligations under this Lease, and regardless of whether an action shall be brought for the enforcement thereof, Tenant shall pay to Landlord all expenses incurred by Landlord in connection therewith, including Landlord's attorneys' fees. 22. Notices, Demands and Other Instruments: All notices, demands, requests, consents, approvals, undertakings and other instruments required or permitted to be given pursuant to the terms hereof shall be in writing and shall be deemed to have been properly given (a) when served personally upon the party to whom the notice is addressed or (b) when sent by certified United States mail, postage prepaid, return receipt requested, addressed to such party at its address first above set forth. Landlord and Tenant shall, from time to time, have the right to specify as the proper address for the purposes of this Lease any other address in the United States upon giving ten (10) days notice thereof to the other party. Landlord and Tenant shall each have the right to add two additional parties to whom any such notice shall be given upon giving ten (10) days notice thereof to the other party. 23. Estoppel Certificates: At any time and from time to time, each party hereto, as requested by the other party upon not less than ten (10) days prior notice, will execute, acknowledge and deliver to the other a statement (i) certifying that this Lease is unmodified and in force and effect (or if there have been modifications, stating all such modifications and certifying that this Lease, as so modified, is in force and effect), (ii) certifying the amount of Rent, the dates to which Rent has been paid and whether Tenant is then paying Rent in accordance with this Lease and stating whether or not, to the best knowledge of the signer, the other party is in default in performance of any of its obligations under this Lease and, if so, specifying each such default of which the signer may have knowledge, it being intended that any such statement delivered pursuant to this paragraph 24 may be relied upon by others with whom the party requesting such certificate may be dealing, (iii) certifying the space then subject to this Lease, (iv) certifying whether any option of Tenant hereunder has expired without exercise, and, if so, certifying to such expiration, and (v) certifying as to such other matters concerning this Lease as the requesting party may reasonably request. 24. No Merger: There shall be no merger of this Lease or of the leasehold estate hereby created with the fee estate in the Leased Premises or any part thereof by reason of the fact that the same person may acquire or hold, directly or indirectly, this Lease or the leasehold estate hereby created or any interest in this Lease or in such leasehold estate as well as the fee estate in the Leased Premises or any interest in such fee estate. Title to the Equipment shall at all times remain in Landlord, and Tenant shall protect and defend the title of Landlord and keep it free from all claims and liens other than those of Tenant under this Lease, or liens created by Landlord. Tenant agrees to execute such financing statements and other documents as Landlord may reasonably require to evidence Landlord's title to the Equipment. 25. Surrender; Holding over: (a) Upon the expiration or sooner termination of this Lease, Tenant shall peaceably and quietly leave, yield up and surrender the Leased Premises and Equipment to Landlord in the good condition and repair, ordinary wear and tear excepted, but clean, orderly and free of occupants. Tenant shall remove from the property prior to such expiration or sooner termination all property situated thereon which is not owned by Landlord, and Tenant shall, at its sole cost and expense, repair any damage caused by such removal. Property not so removed shall become the property of Landlord, which may thereafter cause such property to be removed from the Leased Premises and disposed of, but the cost of any such removal shall be borne by Tenant. (b) In the event of Tenant's holding over after the expiration or termination of this Lease, the holdover shall be a tenancy at will, and all of the terms and provisions of this Lease shall be applicable thereto, except that Tenant shall pay Landlord as rental for the period of such holdover an amount equal to one and one half the Rent which would have been payable by Tenant had the holdover period been a continuation of the term of this Lease. Tenant agrees to vacate and deliver the Leased Premises and Equipment to Landlord upon Tenant's receipt of written notice from Landlord to vacate. The rental payable during the holdover period shall be payable to Landlord on demand. No holding over by Tenant, with or without consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided. 26. Separability: Each and every covenant and agreement contained in this Lease shall be for all purposes construed to be a separate and independent covenant and agreement and the breach of any covenant or agreement contained herein by Landlord shall in no way or manner discharge or relieve Tenant from Tenant's obligation to perform each and every covenant and agreement contained herein. If the application of any term or provision of this Lease to any person or circumstance shall to any extent be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 27. Binding Effect: This Lease does not create the relationship of principal and agent or of partnership or of joint venture or of any association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of landlord and tenant. All of the covenants, conditions and obligations herein contained shall be binding upon and inure to the benefit of the parties hereto and, subject to the restrictions and limitations herein contained, their respective heirs, legal representatives, successors and assigns to the same extent as if each such successor and assign were in each case named as a party to this Lease. This Lease may not be changed, modified or discharged except by a writing signed by Landlord and Tenant. This is a Minnesota contract and shall be construed according to the laws of Minnesota. 28. Headings and Terms: The table of contents preceding this Lease and the headings to the various paragraphs of this Lease have been inserted for reference only and shall not in any manner be construed as modifying, amending or affecting in any way the express terms and provisions hereof. The term "person" when used in this Lease shall mean any individual, corporation, partnership, firm, trust, joint venture, business association, syndicate, combination, organization or any other person or entity. 29. Right to Enter: Landlord and Landlord's agents shall have the right to enter the Leased Premises at any and all reasonable times during the term of this Lease for the purpose of inspecting and repairing the Leased Premises or Equipment or for the purpose of showing them to prospective purchasers or tenants, and to display rental (during the last six (6) months of the term hereof) and "For Sale" signs on the Leased Premises or Equipment. The foregoing provision does not, and shall not be construed so as to, impose liability on Landlord to inspect or repair the Leased Premises or Equipment. 30. Subordination: For the purposes of this paragraph 30, the term "Mortgage" shall mean at any time, any mortgage of record now or hereafter placed against the Leased Premises or Equipment, any increase, amendment, extension, refinancing or recasting of a Mortgage and, in the case of a sale or lease and leaseback by Landlord of all or any part of the Leased Premises or Equipment, the lease creating the leaseback. For the purposes hereof, a Mortgage shall be deemed to continue in effect after foreclosure thereof and during the period of redemption therefrom. This Lease is subject and subordinate to the lien of any Mortgage which may now or hereafter encumber the Leased Premises or Equipment or any development of which the Leased Premises or Equipment are a part. In confirmation of such subordination, Tenant shall, at Landlord's request from time to time, promptly execute any certificate or other document requested by the holder of the Mortgage. Tenant agrees that in the event that any proceedings are brought for the foreclosure of any Mortgage, Tenant shall immediately and automatically attorn to the purchaser at such foreclosure sale, as the landlord under this Lease, and Tenant waives the provisions of any statute or rule of law, now or hereafter in effect, which may give or purport to give Tenant any right to terminate or otherwise adversely affect this Lease or the obligations of Tenant hereunder in the event that any such foreclosure proceeding is prosecuted or completed. Neither the holder of the Mortgage (whether it acquires title by foreclosure or by deed in lieu thereof) nor any purchaser at foreclosure sale shall be liable for any act or omission of Landlord, subject to any offsets or defenses which Tenant might have against Landlord or bound by any prepayment by Tenant of more than one month's installment of Rent and additional rent or by any modification of this Lease made subsequent to the granting of the Mortgage. Notwithstanding anything to the contrary in this paragraph 31, so long as Tenant is not in default under this Lease, this Lease shall remain in full force and effect and the holder of the Mortgage and any purchaser at foreclosure sale thereof shall not disturb Tenant's possession hereunder. 31. Exculpation: The term "Landlord", as used in this Lease, shall mean only the owner or owners at the time in question of the fee title to the Leased Premises or Equipment, and in the event of any transfer of such title or interest, Landlord herein named (and in case of any subsequent transfers the then grantor) shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that any funds in the hands of Landlord, or the then grantor at the time of such transfer, in which Tenant has an interest, shall be delivered to the grantee. The obligations contained in this Lease to be performed by Landlord shall, subject as aforesaid, be binding on Landlord's successors and assigns, only during their respective periods of ownership. 32. Additional Action: Tenant will promptly execute and deliver to Landlord such further documents and take such further action as Landlord may reasonably request in order to more effectively carry out the intent and purpose of this Lease, including the execution and delivery of financing statements to fully protect Landlord's interest hereunder in accordance with the Uniform Commercial Code or other applicable law. 33. Labeling: Tenant shall keep all Equipment free from any marking or labeling which might be interpreted as a claim or ownership thereof by Tenant or any party other than Landlord or anyone so claiming through Landlord. If Landlord requests, Tenant shall cause the Equipment to be plainly marked or tagged to indicate Landlord's interest in the Equipment. IN WITNESS WHEREOF, the parties hereto have caused this Lease to be executed as of the date and year first hereinabove written. LANDLORD: GOPHER STATE ETHANOL, LLC By -------------------------------- Its: TENANT: MINNESOTA BREWING COMPANY By -------------------------------- Its: EXHIBIT A Legal Description and Depiction of Leased Premises PARCEL 1: Intentionally deleted. PARCEL 2: Intentionally deleted. PARCEL 3: Intentionally deleted, except as may be included as a site for the production of ethanol. PART OF PARCEL 4 (in areas depicted on attached diagram): Lots One (1) and Two (2) and that part of Lots Three (3), Four (4), Five (5), Six (6), Eighteen (18), Nineteen (19) and Twenty (20) lying Southeasterly of West Seventh Street, Block Seventeen (17), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, together with so much of Palace Street vacated, which accrued to Lots One (1) and Twenty (20) in said Block 17 by reason of the vacation thereof and together with so much of Oneida Street vacated, which accrued to Lots 1, 2, 3, 4, 5 and 6 in said Block 17 by reason of the vacation thereof, according to the plat thereof on file and of record in the office of the Register of Deeds within and for said county. PART OF PARCEL 5 (in areas depicted on attached diagram): Lots One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7), Eight (8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), Fourteen (14), Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19) and Twenty (20), Block Twenty-six (26), A. V. Brown's Subdivision of Blocks Nineteen (19), Twenty-four (24) and East half of Twenty-six (26), in Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, together with that part of Palace Street vacated as accrued to said Lots 10 and 11 by reason of the vacation thereof, and together with that part of Webster Street vacated lying North of James Avenue and South of the Southeasterly line of West Seventh Street as opened, extended, which accrued to said Lots 11, 12, 13, 14, 15, 16, 17, 18, 19 and 20 aforesaid, and together with that part of Oneida Street vacated as accrued to said Lots 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 in said Block 26, by reason of the vacation thereof. Subject to Railroad Easements. According to the plat thereof on file and of record in the office of the Register of Deeds within and for said county. PART OF PARCEL 6 (in areas depicted on attached diagram): Lots One (1), Two (2), Three (3), Four (4), Five (5), Six (6), Seven (7), Eight (8), Nine (9), Ten (10), Eleven (11), Twelve (12), Thirteen (13), Fourteen (14), Fifteen (15), Sixteen (16), Seventeen (17), Eighteen (18), Nineteen (19), Twenty (20), Twenty-one (21), Twenty-two (22), Twenty-three (23), Twenty-four (24), Twenty-five (25), Twenty-six (26) and Twenty-seven (27) 1 and that part of Lot Twenty-eight (28) lying Westerly of the West line of Lot 27 extended in a straight line Northerly across said Lot 28, Block One (1), Stinson and Ramsey's Sub-division of the West half of Block Sixteen (16) of Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, together with that part of Cascade Street vacated as accrued to said Lots 17and 18 by reason of the vacation thereof, and together with that part of Oneida Street vacated as accrued to Lots 7, 8, 9, 10, 11, 12, 13, 14, 15, 16 and 17 in said Block 1, by reason of the vacation thereof, and subject to rights acquired by City of St. Paul for widening of West Seventh Street, according to the plat thereof of file and of record in the Register of Deeds within and for said county. NOTE: Lot 3, Block 1 above described is Torrens Property as evidenced by Certificate of Title No. 358494. PART OF PARCEL 7 (in areas depicted on attached diagram): That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, bounded by Cascade Street, James Street, Oneida Street and Erie Street, also so much of Cascade Street, Erie Street and Oneida Street vacated, as accrued to said property by reason of the vacation thereof, according to the plat thereof on file and of record in the office of the Register of Deeds within and for said county. PART OF PARCEL 8 (in areas depicted on attached diagram): A triangular piece of land in the East half of Block Thirty (30), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, described as follows: Commencing at a point on the North line of Randolph Street 50 feet Easterly of the intersection of said North line of Randolph Street with the East line of Webster Street running thence Easterly along the North line of Randolph Street a distance of 40 feet, running thence Northerly parallel with the East line of Webster Street 24 1/2 feet, running thence in a Southwesterly direction to the place of beginning. Together with that part of the East 160 feet of the East half of said Block 30 lying Southerly of a line extended form a point on the East line of said East half of Block 30 distant 128 feet Southerly from the Northeast corner thereof to a point on the West line of said East 160 feet of East half of Block 30 distant 165 feet Southerly from the Northwest corner thereof, subject to Railroad Easement, Agreements and Leases, excepting those parts of aforedescribed lands lying in the Southerly 38 feet of said Block 30 acquired by City of St. Paul for Randolph Avenue widening. PART OF PARCEL 9 (in areas depicted on attached diagram): That part of Block Thirty (30), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, which lies East of Webster Street as opened under the Order of the Common Council and recorded in Volume 5, page 65 printed records Common Council and North of Chicago, Milwaukee, St. Paul and Pacific Railroad Company's right-of-way. PART OF PARCEL 10 (in areas depicted on attached diagram): 2 That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, lying Northerly of James Street as shown in Book 4 of Street Openings, page 11 and lying Southeasterly of a line which is 50 feet Southeasterly of, as measured at right angles and parallel to the following described line: Beginning at a point on the East line of said Block 27, 133.46 South of the Northeast corner thereof; thence Southwesterly to a point in the Easterly line of Erie Street as shown in Book 3 of Street Openings, page 19, a distance of 252.28 feet South of its intersection with the North line of said Block 27 and there terminating. PART OF PARCEL 11 (in areas depicted on attached diagram): That part of Block Twenty-seven (27), Stinson, Brown and Ramsey's Addition to St. Paul, Ramsey County, Minnesota, lying Easterly of Erie Street as shown in Book 3 of Street Openings, page 19, and lying Northerly of a line described as follows: Beginning at a point on the East line of said Block 27, 133.46 feet South of the Northeast corner thereof; thence Southwesterly to a point on the East line of said Erie Street, 252.28 feet South of its intersection with the North line of said Block 27 and there terminating, together with that part of Erie Street vacated as accrued to said parcel. 3 EX-10.2 4 1993 STOCK OPTION PLAN MINNESOTA BREWING COMPANY 1993 STOCK OPTION PLAN Table of Contents ----------------- Page ---- SECTION 1. General Purpose of Plan; Definitions 1 SECTION 2. Administration 3 SECTION 3. Stock Subject to Plan 4 SECTION 4. Eligibility 4 SECTION 5. Stock Options 5 SECTION 6. Transfer, Leave of Absence, Etc. 9 SECTION 7. Amendments and Termination 9 SECTION 8. Unfunded Status of Plan 10 SECTION 9. General Provisions 10 SECTION 10. Effective Date of Plan 11 MINNESOTA BREWING COMPANY 1993 STOCK OPTION PLAN SECTION 1. General Purpose of Plan; Definitions. The name of this plan is the Minnesota Brewing Company 1993 Stock Option Plan (the "Plan"). The purpose of the Plan is to enable Minnesota Brewing Company (the "Company") and its Subsidiaries to retain and attract executives, other key employees of the Company and its Subsidiaries, and consultants and other persons having a contractual relationship with the Company or its Subsidiaries, who contribute to the Company's success by their ability, ingenuity and industry, and to enable such individuals to participate in the long-term success and growth of the Company by giving them a proprietary interest in the Company. For purposes of the Plan, the following terms shall be defined as set forth below: (a) "Board" means the Board of Directors of the Company. (b) "Cause" means a felony conviction of a participant or the failure of a participant to contest prosecution for a felony, or a participant's willful misconduct or dishonesty, any of which is directly and materially harmful to the business or reputation of the Company. (c) "Code" means the Internal Revenue Code of 1986, as amended. (d) "Committee" means the Committee referred to in Section 2 of the Plan. If at any time no Committee shall be in office, then the functions of the Committee specified in the Plan shall be exercised by the Board, unless the Plan specifically states otherwise. (e) "Company" means Minnesota Brewing Company, a corporation organized under the laws of the State of Minnesota (or any successor corporation). (f) "Consultant" means any person, including an advisor, engaged by the Company or a Parent Corporation or Subsidiary of the Company to render services, who is compensated for such services and who is not an employee of the Company or any Parent Corporation or Subsidiary of the Company. A Non-Employee Director may serve as a Consultant. (g) "Disability" means permanent and total disability as determined by the Committee. (h) "Fair Market Value" means the value of Stock on any given date which shall be determined by the Committee as follows: (a) if the Stock is listed for trading on one of more national securities exchanges, or is traded on the Nasdaq Stock Market or the Nasdaq Small Cap Market, the last reported sales price on the principal such exchange, the Nasdaq Stock Market or the Nasdaq Small Cap Market on the date in question, or if such Stock shall not have been traded on such principal exchange on such date, the last reported sales price on such principal exchange, the Nasdaq Stock Market or the Nasdaq Small Cap Market, on the first day prior thereto on which such Stock was so traded; or (b) if the Stock is not listed for trading on a national securities exchange, the Nasdaq Stock Market or the Nasdaq Small Cap Market, but is traded in the over-the-counter market, the closing bid price for such Stock on the day prior to the date in question, or if there is no closing bid price for such Stock on such day, the closing bid price on the first day prior thereto on which such price existed; or (c) if neither (a) nor (b) is applicable, by any means fair and reasonable by the Committee, which determination shall be final and binding on all parties. (i) "Incentive Stock Option" means any Stock Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code. (j) "Non-Qualified Stock Option" means any Stock Option that is not an Incentive Stock Option, and is intended to be and is designated as a "Non-Qualified Stock Option." (k) "Outside Director" means a Director who: (a) is not a current employee of the Company or any member of an affiliated group which includes the Company; (b) is not a former employee of the Company who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year; (c) has not been an officer of the Company; (d) does not receive remuneration from the Company, either directly or indirectly, in any capacity other than as a director, except as otherwise permitted under Code Section 162(m) and regulations thereunder. For this purpose, remuneration includes any payment in exchange for good or services. This definition shall be further governed by the provisions of Code Section 162(m) and regulations promulgated thereunder. (l) "Non-Employee Director" shall have the meaning set forth in Rule 16b-3(b)(3) as promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, or any successor definition adopted by the Commission. (m) "Parent Corporation" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of the corporations (other than the Company) owns stock possessing 50% or more of the total combined voting power of ,ill classes of stock in one of the other corporations in the chain. (n) "Retirement" means retirement from active employment with the Company and any Subsidiary or Parent Corporation of the Company on or after age 55. (o) "Stock" means the Common Stock, $.01 par value per share, of the Company. (p) "Stock Option" means any option to purchase shares of Stock granted pursuant to Section 5 below. (q) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain. SECTION 2. Administration. The Plan shall be administered by the Board of Directors or by a Committee appointed by the Board of Directors of the Company consisting of at least two Directors, each of whom shall be Non-Employee Directors and Outside Directors, who shall serve at the pleasure of the Board. The Committee shall have the power and authority to grant Stock Options to eligible individuals pursuant to the terms of the Plan. In particular, the Committee shall have the authority: (i) to select the officers, other key employees of the Company and its Subsidiaries, and consultants and other persons having a contractual relationship with the Company or its Subsidiaries, to whom Stock Options, may from time to time be granted hereunder; (ii) to determine whether and to what extent Incentive Stock Options, Non-Qualified Stock Options, or a combination of the foregoing, are to be granted hereunder; (iii) to determine the number of shares to be covered by each such Stock Option granted hereunder; and (iv) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any Stock Option granted hereunder (including, but not limited to, any restriction on any Stock Option and/or the shares of Stock relating thereto). The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines arid practices governing the Plan as it shall, from time to time, deem advisable; to interpret the terms and provisions of the Plan and any Stock Option granted under the Plan (and any agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may delegate to officers of the Company the authority to exercise the powers specified in (i), (ii), (iii) and (iv) above with respect to persons who are not either the chief executive officer of the Company or the four highest paid officers of the Company other than the chief executive officer. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants. SECTION 3. Stock Subject to Plan. The total number of shares of Stock reserved and available for distribution under the Plan shall be 450,000. Such shares may consist, in whole or in part, of authorized and unissued shares. If any shares that have been optioned cease to be subject to Stock Options, such shares shall again be available for distribution in connection with future grants of Stock Options under the Plan. Upon a Stock-for-Stock exercise of a Stock Option or upon the withholding of Stock for the payment of the option price or taxes, only the net number of shares issued to the optionee shall be used to calculate the number of shares remaining available for distribution under the Plan. In the event of any merger, reorganization, consolidation, recapitalization, stock dividend, other change in corporate structure affecting the Stock, or spin-off or other distribution of assets to shareholders, such substitution or adjustment shall be made in the aggregate number of shares reserved for issuance under the Plan and in the number and option price of shares subject to outstanding options granted under the Plan as may be determined to be appropriate by the Committee, in its sole discretion, provided that the number of shares subject to any grant shall always be it whole number. SECTION 4. Eligibility. Directors, officers, other key employees of the Company and Subsidiaries, and consultants and other persons having a contractual relationship with the Company or its Subsidiaries, who are responsible for or contribute to the management, growth and/or profitability of the business of the Company and its Subsidiaries are eligible to be granted Stock Options under the Plan. The optionees under the Plan shall be selected from time to time by the Committee, in its sole discretion, from among those eligible, and the Committee shall determine, in its sole discretion, the number of shares covered by each grant. Notwithstanding the foregoing, no person shall receive grants of Stock Options under this Plan which exceed 100,000 shares during any fiscal year of the Company. SECTION 5. Stock Options. Any Stock Option granted under the Plan shall be in such form as the Committee may from time to time approve. The Stock Options granted tinder the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options. No Incentive Stock Options shall be granted under the Plan after September 1, 2003. The Committee shall have the authority to grant to any optionee Incentive Stock Options, Non-Qualified Stock Options, or both types of options. To the extent that any option does not quality as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option. Anything in the Plan to the contrary notwithstanding, no term of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be so exercised, so as to disqualify either the Plan or any Incentive Stock Option under Section 422 of the Code. The preceding sentence shall not preclude any modification or amendment to an outstanding Incentive Stock Option, whether or not such modification or amendment results in disqualification of such Stock Option as an Incentive Stock Option, provided the optionee consents in writing to the modification or amendment. Stock Options granted under the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Committee shall deem desirable. (a) Option Price. The option price per share of Stock purchasable under a Stock Option shall be determined by the Committee at the time of grant and may, except as provided in this paragraph, be less than the Fair Market Value of the Stock on the date the Stock Option is granted. In the event that the Committee does not determine the exercise price per share of Stock purchasable under a Stock Option, the exercise price shall be the Fair Market Value of the Stock on the date the Stock Option is granted except as otherwise required in this paragraph. In no event shall the Stock Option price per share of Stock purchasable under in Incentive Stock Option or a Non-Qualified Stock Option be less than 100% or 50%, respectively, of the Fair Market Value of the Stock on the date the Stock Option is granted. If an employee owns or is deemed to own (by reason of the attribution rules applicable under Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company or any Parent Corporation or Subsidiary, and an Incentive Stock Option is granted to such employee, the exercise price shall be no less than 110% of the Fair Market Value of the Stock on the date the Stock Option is granted. (b) Option Term. The term of each Stock Option shall be fixed by the Committee, but no Incentive Stock Option shall be exercisable more than ten years after the date the Stock Option is granted. In the event that the Committee does not fix the term of a Stock Option, the term shall be ten years from the date the Stock Option is granted. Notwithstanding the foregoing, if an employee owns or is deemed to own (by reason of the attribution rules of Section 424(d) of the Code) more than 10% of the combined voting power of all classes of stock of the Company of any Parent Corporation or Subsidiary and an Incentive Stock Option is granted to such employee, the term of such Stock Option shall be no more than five years from the date of grant. (c) Exercisability. Stock Options shall be exercisable at such time or times as determined by the Committee at or after grant. In the event that the Committee does not determine the time at which a Stock Option shall be exercisable, such Stock Option shall be exercisable one years after the date of grant. If the Committee provides, in its discretion, that any Stock Option is exercisable only in installments, the Committee may waive such installment exercise provisions at any time. Notwithstanding the foregoing, unless the Stock Option Agreement provides otherwise, any Stock Option granted under this Plan shall be exercisable in full, without regard to any installment exercise provisions, for a period specified by the Company, but not to exceed sixty (60) days, prior to the occurrence of any of the following events: (i) dissolution or liquidation of the Company other than in Conjunction with a bankruptcy of the Company or any similar occurrence, (ii) any merger, consolidation, acquisition, separation, reorganization, or similar occurrence, where the Company will not be the surviving entity, (iii) the transfer of substantially all of the assets of the Company or the acquisition of beneficial ownership of more than 50% of any class of equity security of the Company or its Subsidiaries. (d) Method of Exercise. Stock Options may be exercised in whole or in part at any time during the option period by giving written notice of exercise to the Company specifying the number of shares to he purchased. Such notice shall be accompanied by payment in full of the purchase price, either by certified or bank check, or by any other form of legal consideration deemed sufficient by the Committee and consistent with the Plan's purpose and applicable law, including promissory notes or a properly executed exercise notice together with irrevocable instructions to a broker acceptable to the Company to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price. As determined by the Committee, in its sole discretion, payment in full or in part may also be made in the form of unrestricted Stock already owned by the optionee, provided, however, that, in the case of an Incentive Stock Option, the right to make a payment in the form of already owned shares may be authorized only at the time the option is granted. If the terms of a Stock Option so permit, an optionee may elect to pay all or part of the exercise price by having the Company withhold from the shares of Stock that would otherwise be issued upon exercise that number of shares of Stock having a Fair Market Value equal to the aggregate exercise price for the shares with respect to which such election is made. No shares of Stock shall be issued until full payment therefor has been made. An optionee shall generally have the rights to dividends and other rights of a shareholder with respect to shares subject to the option when the optionee has given written notice of exercise, has paid in full for such shares, and, if requested, has given the representation described in paragraph (a) of Section 9. (e) Non-transferability of Options. (i) Subject to Section 5(e)(ii) below, no Stock Option shall be transferable by the optionee otherwise than by will or by the laws of descent and distribution, and all Stock Options shall be exercisable, during the optionee's lifetime, only by the optionee. (ii) The Committee may, in its discretion, authorize all or a portion of the options to be granted to an optionee to be on terms which permit transfer by such optionee to (A) the spouse, children or grandchildren of the optionees ("Immediate Family Members"), (B) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (C) a partnership or partnerships in which such Immediate Family Members are the only partners, provided that (1) there may be no consideration for any such transfer, (2) the stock option agreement pursuant to which such options are granted must be approved by the Committee, and must expressly provide for transferability in a manner consistent with this Section 5(e)(ii), and (3) subsequent transfers of transferred options shall be prohibited except those in accordance with Section 5(e)(i). Following transfer, any such options shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer, provided that the term "optionee" herein shall in such event be deemed to refer to the transferee, except that the events of termination of employment of Sections 5(f), 5(g), 5(h) and 5(i) hereof shall continue to be applied with respect to the original optionee, following which the options shall be exercisable by the transferee only to the extent, and for the periods specified in such Sections. (f) Termination by Death. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of death, the Stock Option may thereafter be immediately exercised, to the extent then exercisable (or on such accelerated basis as the Committee shall determine at or after grant), by the legal representative of the estate or by the legatee of the optionee under the will of the optionee, for a period of three years (or such shorter period as the Committee shall specify at grant) from the date of such death or until the expiration of the stated term of the option, whichever period is shorter. (g) Termination by Reason of Disability. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Disability, any Stock Option held by such optionee may thereafter be exercised, to the extent it was exercisable at the time of termination due to Disability (or on such accelerated basis as the Committee shall determine at or after grant), but may not be exercised after three years (or such shorter period as the Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of termination of employment by reason of Disability, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (h) Termination by Reason of Retirement. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates by reason of Retirement, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such Retirement, but may not be exercised after three years (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is the shorter. In the event of termination of employment by reason of Retirement, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (i) Termination for Cause. Unless otherwise determined by the Committee, if an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for Cause, any Stock Option held by the optionee shall thereupon terminate. (j) Other Termination. If an optionee's employment by the Company and any Subsidiary or Parent Corporation terminates for any reason other than Death or Disability, and other than for cause, any Stock Option held by such optionee may thereafter be exercised to the extent it was exercisable at the time of such termination, but may not he exercised after three years (or such shorter period as Committee shall specify at grant) from the date of such termination of employment or the expiration of the stated term of the option, whichever period is shorter. In the event of such termination of employment, if an Incentive Stock Option is exercised after the expiration of the exercise periods that apply for purposes of Section 422 of the Code, the option will thereafter be treated as a Non-Qualified Stock Option. (k) Annual Limit on Incentive Stock Options. The aggregate Fair Market Value (determined as of the time the Stock Option is granted) of the Common Stock with respect to which an Incentive Stock Option under this Plan or any other plan of the Company and any Subsidiary or Parent Corporation is exercisable for the first time by an optionee during any calendar year shall not exceed $100,000. (l) Non-Employee Directors. Each person serving as a Non-Employee Director of the Company as of February 10, 1998 shall be granted an Option to purchase 15,000 shares of stock at an option price per share equal to 100% of Fair Market Value of a share of Stock on such date. All such Options shall be designated as Non-Qualified Options and shall be subject to the same terms and provisions as are then in effect with respect to the granting of Non-Qualified Options to officers and by employees of the Company, except that (i) the term of such Option shall be five years, which term shall expire after one year upon the termination of service as a director, (ii) the Option shall vest in three installments of 5,000 shares beginning on the date of the 1998 Annual Meeting, with each additional installment vesting on the subsequent annual meeting. Subject to the foregoing, all provisions of this Plan not inconsistent with the foregoing shall apply to Options granted to Non-Employee Directors. SECTION 6. Transfer, Leave of Absence, Etc. For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer of an employee from the Company to a Parent Corporation or Subsidiary, or from a Parent Corporation or Subsidiary to the Company, or from one Subsidiary to another; (b) a leave of absence, approved in writing by the Committee, for military service or sickness, or for any other purpose approved by the Company if the period of such leave does not exceed ninety (90) days (or such longer period as the Committee may approve, in its sole discretion); and (c) a leave of absence in excess of ninety (90) days, approved in writing by the Committee, but only if the employee's right to reemployment is guaranteed either by a statute or by contract, and provided that, in the case of any leave of absence, the employee returns to work within 30 days after the end of such leave. SECTION 7. Amendments and Termination. The Board may amend, alter, or discontinue the Plan, but no amendment, alteration, or discontinuation shall be made (i) which would impair the rights of an optionee under a Stock Option theretofore granted, without the optionee's consent, or (ii) which, without the approval of the stockholders of the Company, would cause the Plan to no longer comply with Rule 16b-3 under the Securities Exchange Act of 1934, Section 422 of the Code, or any other regulatory requirements. The Committee may amend the terms of any Stock Option theretofore granted, prospectively or retroactively, but, Subject to Section 3 above, no such amendment shall impair the rights of any holder without his consent. The Committee may also substitute new Stock Options for previously granted stock options, including previously granted stock options having higher exercise prices. SECTION 8. Unfunded Status of Plan. The Plan is intended to Constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to an optionee by the Company, nothing contained herein shall give any such participant or optionee any rights that are greater than those of a general creditor of the Company. At its sole discretion, the Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Stock, provided, however, that the existence of such trusts or other arrangements is consistent with the unfunded status of the Plan. SECTION 9. General Provisions. (a) The Committee may require each person purchasing shares pursuant to a Stock Option under the Plan to represent to and agree with the Company in writing that the optionee is acquiring the shares without a view to distribution thereof. The certificates for Such shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer. All certificates for shares of Stock delivered under the Plan pursuant to any Options shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. (b) Nothing contained in this Plan shall prevent the Board of Directors from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of the Plan shall not confer upon any employee of the Company or any Subsidiary any right to continued employment with the Company or a Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or a Subsidiary to terminate the employment of any of its employees at any time. (c) Each optionee shall, no later than the date as of which any part of the value of a Stock Option first becomes includable as compensation in the gross income of the optionee for federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Committee regarding payment of, any federal, state, or local taxes of any kind required by law to be withheld with respect to the Stock Option. The obligations of the Company under the Plan shall be conditional on such payment or arrangements and the Company and Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the optionee. With respect to any Stock Option granted under the Plan, if the terms of such Option so permit, an optionee may elect by written notice to the Company to satisfy part or all of the withholding tax requirements associated with the Stock Option by (i) authorizing the Company to retain from the number of shares of Stock that would otherwise be deliverable to the optionee, or (ii) delivering to the Company from shares of Stock already owned by the optionee, that number of shares having an aggregate Fair Market Value equal to part or all of the tax payable by the optionee under this Section. Any such election shall be in accordance with, and subject to, applicable tax and securities laws, regulations and rulings. (d) At the time of grant, the Committee may provide in connection with any grant made under this Plan that the shares of Stock received as a result of such grant shall be subject to a repurchase right in favor of the Company, pursuant to which the optionee shall be required to offer to the Company upon termination of employment for any reason any shares that the participant acquired under the Plan, with the price being the then Fair Market Value of the Stock or, in the case of a termination for Cause, an amount equal to the cash consideration paid for the Stock, subject to such other terms and conditions as the Committee may specify at the time of grant. The Committee may, at the time of the grant of a Stock Option under the Plan, provided the Company with the right to repurchase, or require the forfeiture of, shares of Stock acquired pursuant to the Plan by any optionee who, at any time within two years after termination of employment with the Company, directly or indirectly competes with, or is employed by a competitor of, the Company. SECTION 10. Effective Date of Plan. The Plan shall be effective on the date it is approved by a vote of the holders of a majority of the Stock present and entitled to vote at a meeting of the Company's shareholders. EX-23 5 CONSENT OF INDEPENDENT AUDITOR EXHIBIT 23 CONSENT OF INDEPENDENT AUDITOR We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 Number 33-71442 of Minnesota Brewing Company and the Prospectus relating thereto of our report dated February 26, 1999, (April 15, 1999, as to Note 2) which is included in this Annual Report on Form 10-K. McGLADREY & PULLEN, LLP Minneapolis, Minnesota April 15, 1999 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 67,366 474,961 1,366,781 (250,000) 2,473,039 4,483,323 6,754,715 (3,273,066) 8,448,579 4,252,306 0 0 0 1,565,316 1,369,036 8,448,579 16,366,830 14,763,247 13,614,401 2,383,438 132,151 90,000 310,437 (1,407,878) 28,000 (1,319,878) 0 0 0 (1,319,878) (.40) (.40)
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