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Securities and Exchange CommissionWashington 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, 1999

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

MBC HOLDING COMPANY(Name of small business issuer in its charter)

|Minnesota(State or other jurisdiction
of incorporation or organization) |  | 41-1702599(I.R.S. Employer
Identification No.)
|----------------------------------------------------------------------- |  | ----------------------------------------------

882 West Seventh Street
Saint Paul, MN 55102(Address of principal executive offices and zip code)

Minnesota Brewing Company(former name)

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
March 22, 2000, the Company had 3,506,860 shares of common stock, $.01 par value and 607,745 shares of Class A convertible preferred stock outstanding. 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 $3.00 per share on, March 22, 2000 was approximately $4,773,000.

DOCUMENTS
INCORPORATED BY REFERENCE: The Company's Proxy Statement for its 2000 Annual Meeting of Shareholders is incorporated by reference into Part III of this
Form 10-K.

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## 

PART I

Item 1.  Business

Overview

The Company was formed in 1991 as Minnesota Brewing Company and changed its name to MBC Holding Company ("Company"), effective January 1, 2000. The
Company has formed a new wholly owned subsidiary, Minnesota Brewing Company, LLC, that will brew, package, and sell beverage products. The Company also has a minority interest in Gopher State Ethanol,
LLC ("Gopher State") a Delaware Limited Liability Company formed in 1999 to produce ethanol distilled grains and raw carbon dioxide ("CO2") gas. Additionally in 1999, the Company formed
MGI-CO2 St. Paul ("CO2 Joint Venture"), a joint venture with an unrelated third party to produce liquid carbon dioxide. All of the aforementioned businesses are
located in Saint Paul, Minnesota. The Company leases its production facilities and certain of its equipment from Gopher State. Previously, the Company leased these assets from another related entity,
Minnesota Brewing Limited Partnership (the "Partnership"). See Note 3 of the Financial Statements for disclosure on Related Party Transactions.

The
Company operates a full scale brewery in Saint Paul, Minnesota producing its proprietary Grain Belt, Pig's Eye, Minnesota Brew, and Yellow Belly beers and marketing these beers
through an independent distribution network, primarily in Minnesota. The Company produces beers under a number of brand names, including Grain Belt, Grain Belt Premium, Grain Belt Light, Grain Belt
Premium Light, GBX Malt Liquor, Pig's Eye Pilsner, Pig's Eye Lean, Pig's Eye Ice, Pig's Eye Red, Pig's Eye Non-alcoholic, and Yellow Belly.

The
Company's Grain Belt family 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 has maintained its market share locally, 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 and since that time the product has become popular in its market. Pig's Eye Ice Beer won the Silver Medal in the American Malt Liquor category at the 1994 Great American Beer Festival.
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 Tea
malt beverages.

The
Company also produces other beverages under contract packaging arrangements and private label contracts. Under its contract packaging arrangements, the Company produces beverages
for separate brewing companies according to those brewers' formulas. Under private label contracts the Company packages its proprietary beers for sale by third parties under brand names owned by the
third parties.

Until
March 29, 1999, the Company leased its brewing facilities and related equipment from the Partnership. On March 29, 1999, the Partnership contributed these assets
to Gopher State in exchange for an equity interest in Gopher State. As a result, the Company now leases its brewing facilities and related equipment from Gopher State. The Company generated net sales
of $14.8 million in 1998 and net sales of $17.8 million in 1999. The brewing facilities had a potential annual capacity of 2.2 million
barrels; however, that has been significantly reduced to 900,000 barrels due to the construction of the ethanol plant by Gopher State. The Company produced approximately 293,000 barrels in 1998 and
354,000 barrels in 1999, which were equal to 32.6 and 39.3 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 50 independent distributors. During 1999, approximately 80.2 percent of the
Company's proprietary

beer sales volume reached retail channels through its 12 largest distributors. The Company provides point-of-sale advertising and sales promotion programs to help stimulate
sales.

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 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 and packaging arrangements
position it to take advantage of growth opportunities existing in the beverage 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 94.8% of 1999 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 |  
|------------------------------ |  | -------------------------- | -
|
|
|Anheuser-Busch Companies, Inc. |  | 51.8                       | %
|Miller Brewing Co.             |  | 23.4                       |  
|Adolph Coors Co.               |  | 11.9                       |  
|Stroh Brewing Co.(3)           |  |                           |  
|Pabst Brewing Co.              |  | 7.7                        |  
|                               |  |                            |  
|                               |  | 94.8                       | %
|Minnesota Brewing Company(4)   |  | 0.2                        | %

---

During
1999, approximately 90% of the Company's domestic sales of proprietary beers was 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 methods of competition include the quality, taste and freshness of the
products, packaging, price, advertising, distribution and service to customers.

Declining
sales in the overall beer industry in recent years have resulted in increased competition among beer producers. An overall decline and weakened consumer demand have 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,
which 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 Tea were introduced. During 1999, the Company
sold Landmark and discontinued the Brewer's Cave product lines. See Management's Discussion and Analysis of Financial Condition and Results of Operation.

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. During 1999, the Company altered the recipe of
Grain Belt Premium Light providing for a leaner taste. The brands are Grain Belt Premium, Grain Belt Golden, 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.

Yellow Belly.An alcoholic alternative beverage, Yellow Belly is a quality malt beverage with select lemon, Margarita
and Long Island Tea flavors that provide a distinctive refreshing taste.

Contract Brewing and Packaging

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. One of the liquids is shipped out prior to fermentation and dried by a 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 is performed by the Company at a significantly lower cost per barrel and as a result,
less revenue per barrel than other products it produces. During 1999, the Company produced approximately 138,000 barrels under this arrangement.

In
1998, the Company became certified to brew Organic Beer. The Company produces this product for a contract customer.

Approximately
23% of the Company's 1999 net sales are derived from contract brewing and private label sales.

Export Sales

The Company also ships to Korea, Japan, China, and the Virgin Islands. (See Note 7 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 1999, export sales were approximately 25% of net sales.

Sales and MarketingProprietary

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 must 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
1999, the Company's three largest distributors accounted for 18.1% 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.

Sales and MarketingContract Brewing

The Company provides contract brewing for a number of different customers. New contract customers are required to enter into a production and packaging
agreement in addition to providing the Company with either an irrevocable letter of credit or a cash deposit. Services provided by the Company include procurement of materials, brewing according to
the recipe of the customer's products, packaging of the product, and assistance in obtaining label approvals and small brewer's exemption certificates with the federal government.

Product Shipping Activity

The following table indicates, for the periods shown, the Company's total sales in barrelage by product line.

|                 |  | Proprietary
Brands |   | Contracts |   | Export |   | Other(1) |   | Total   |  
|---------------- |  | ------------------ | - | --------- | - | ------ | - | -------- | - | ------- | -
|1998             |  |                    |   |           |   |        |   |          |   |         |  
|First Quarter    |  | 25,434             |   | 12,125    |   | 5,869  |   | 19,810   |   | 63,238  |  
|Second Quarter   |  | 34,376             |   | 13,989    |   | 17,969 |   | 16,589   |   | 82,923  |  
|Third Quarter    |  | 32,381             |   | 11,885    |   | 14,039 |   | 17,305   |   | 75,610  |  
|Fourth Quarter   |  | 25,725             |   | 8,375     |   | 16,173 |   | 37,075   |   | 87,348  |  
|                 |  |                    |   |           |   |        |   |          |   |         |  
|Yearly total     |  | 117,916            |   | 46,374    |   | 54,050 |   | 90,779   |   | 309,119 |  
|Percent of Total |  | 38.1               | % | 15.0      | % | 17.5   | % | 29.4     | % | 100.0   | %
|1999             |  |                    |   |           |   |        |   |          |   |         |  
|First Quarter    |  | 21,072             |   | 11,256    |   | 15,731 |   | 30,485   |   | 78,545  |  
|Second Quarter   |  | 25,146             |   | 11,052    |   | 27,320 |   | 33,565   |   | 97,084  |  
|Third Quarter    |  | 27,073             |   | 21,218    |   | 16,331 |   | 33,365   |   | 97,988  |  
|Fourth Quarter   |  | 20,115             |   | 18,242    |   | 24,597 |   | 40,860   |   | 103,814 |  
|                 |  |                    |   |           |   |        |   |          |   |         |  
|Yearly total     |  | 93,406             |   | 61,768    |   | 83,979 |   | 138,275  |   | 377,431 |  
|Percent of Total |  | 24.7               | % | 16.4      | % | 22.3   | % | 36.6     | % | 100.0   | %

---

Sales
of the Company's proprietary labels 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.

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 1999, 58.6% of the Company's total production was packaged in aluminum cans, and 38.4% was packaged in returnable and
non-returnable glass bottles. The remainder of the beverage 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 few sources, 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 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 registered a number of trademarks with the United States Patent and Trademark Office including trademarks covering its Grain Belt Premium,
Grain Belt Golden, Pig's Eye and Yellow Belly products. The Company has also registered a number of its trademarks in individual

states and in foreign jurisdictions. The Company believes its trademarks are important to its business and intends to continue to file to protect its trademarks when appropriate.

Marketing

The Company's primary marketing strategy focused on sales in Minnesota, particularly the Twin Cities of Minneapolis and Saint Paul. Press coverage by both the
electronic and print media has been considerable and this planned exposure will continue to be a key marketing element of the Company. 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 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 February 29, 2000, the Company has 143 full-time equivalent employees. Key areas are summarized below:

The
Company has 125 employees that work in production, including brewing, bottling, packaging, warehousing, engineering and maintaining equipment, 9 employees in sales and marketing
and 9 employees in administration. Of the Company's employees, 111 work pursuant to five separate union contracts, three of which expire on March 31, 2002. The remaining two union contracts
have not been renegotiated as of March 29, 2000, however, 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.

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 certain union contracts.

Gopher State

Beginning in 1997 and continuing through 1999 the Company has investigated and begun to develop a business for the production of ethanol distilled grains and
raw CO2 gas. Ethanol and the co-products are principally produced from the processing of corn including its fermentation into fuel grade alcohol. The construction of the
facility is scheduled to be complete by April 2000. Due to the significant cost of the facility, the Company had to solicit investors to satisfy lenders' requests for equity and as a result,
will
have a minority interest in the ethanol operation. The operating lease and shared

expenses agreements that were executed during 1999 have reduced the Company's operating expenses and will continue to lower these expenses in 2000.

CO2 Joint Venture

During 1999, the Company entered into an agreement with an unrelated third party, MG Industries, a Malvern, Pennsylvania, industrial and specialty gas firm.
The CO2 joint venture has begun construction of a facility, to be located adjacent to the brewery and the ethanol plant, and is set to begin operations in May 2000. It will utilize
a byproduct of the ethanol operation to produce the commercial grade CO2 that and it will be sold to various users of refined CO2 products.

Item 2.  Property

The Company's leases office, brewery, warehouse, ethanol, and carbon dioxide facilities located on approximately 15 acres of property in Saint Paul, Minnesota.

G.
Heileman Brewing Company 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 brewhouse and government cellar renovations were completed in 1984, which increased the brewery's annual production capacity to a level of approximately 2.2 million barrels per
year. However, the construction of an ethanol facility located adjacent to the brewery has decreased the level of capacity to approximately 900,000 barrels. 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, employing a staff of seventeen technicians to achieve this objective.

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:

|Type of Cellar |  | Process                                                       |  | Capacity
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 removed; beer is carbonated. |  | 22,000              |  | Approximately one week.                  
|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 450 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, another line is designed to fill 12 oz, 22 oz, 32 oz. and 40 oz. non-returnable bottles and the third line 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 11 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. As previously mentioned, these facilities and a substantial portion of all equipment are leased from Gopher
State.

The
Partnership had retained ownership of all of the Company's real property, buildings, water wells, and equipment used in the brewing process. The Partnership leased the real
property to the Company at the rate of $25,000 per month under terms of a lease that was due to expire in November 2003. The Partnership also leased a significant portion of all the equipment
used in the brewing process, to the Company at the rate of $1.00 per barrel of production. On March 29, 1999, this lease was terminated in conjunction with the formation of Gopher State.

Item 3.  Legal Proceedings

None

Item 4.  Submission of Matters to a Vote of Security Holders

None.

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 sale prices
for the Company's Common Stock for 1998 and 1999.

|               |  | Low |      | High
|-------------- |  | --- | ---- | ----
|1998           |  |     |      |     
|First Quarter  |  | $   | 1.25 |     
|Second Quarter |  |     | 1.75 |     
|Third Quarter  |  |     | 1.50 |     
|Fourth Quarter |  |     | 1.75 |     
|1999           |  |     |      |     
|First Quarter  |  | $   | 1.63 |     
|Second Quarter |  |     | 1.50 |     
|Third Quarter  |  |     | 1.75 |     
|Fourth Quarter |  |     | 2.00 |     

These
prices indicate interdealer prices without retail markup, markdowns or commissions.

At
March 23, 2000, the Company had 287 holders of record of its Common Stock. In addition, on that date one depository company held approximately 1,632,000 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 line of credit agreement and Gopher State's loan
agreement limits the Company's ability to pay dividends.

Item 6.  Selected Financial Data

SELECTED FINANCIAL DATA

|                                            |  | Year Ended December 31, |           
|------------------------------------------- |  | ----------------------- | ----------
|
|Statement of Operations Data:               |  |                         |           
|Net sales                                   |  | $                       | 17,747,768
|Cost of goods sold                          |  |                         | 15,801,387
|                                            |  |                         |           
|Gross profit (loss)                         |  |                         | 1,946,381 
|                                            |  |                         |           
|Operating expenses:                         |  |                         |           
|Advertising                                 |  |                         | 548,531   
|Sales and marketing                         |  |                         | 616,778   
|Administrative                              |  |                         | 1,003,811 
|Provision for discontinued product lines    |  |                         | 272,270   
|Provision for doubtful accounts             |  |                         | 80,000    
|                                            |  |                         |           
|Total operating expenses                    |  |                         | 2,521,390 
|                                            |  |                         |           
|Operating income (loss)                     |  |                         | (575,009  
|Other expense, net                          |  |                         | (285,481  
|                                            |  |                         |           
|Net income (loss) before Income tax benefit |  |                         | (860,490  
|Income tax (benefit)                        |  |                         | 5,000     
|                                            |  |                         |           
|Net income (loss)                           |  |                         | (865,490  
|                                            |  |                         |           
|Net income (loss) per common share (1)      |  | $                       | (0.29     
|Weighted average common shares outstanding  |  |                         | 3,477,427 
|Operating Data(in barrels sold):            |  |                         |           
|Domestic                                    |  |                         | 93,406    
|Contract                                    |  |                         | 61,769    
|Export                                      |  |                         | 83,979    
|Other                                       |  |                         | 138,275   
|                                            |  |                         |           
|Total                                       |  |                         | 377,431   
|                                            |  |                         |           
|
|
|Balance Sheet Data                          |  |                         |           
|Working capital                             |  | $                       | 564,904   
|Total assets                                |  |                         | 8,218,206 
|Long-term debt, net                         |  |                         | 1,603,008 
|Shareholders' equity                        |  |                         | 2,304,809 

---



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, and Yellow Belly beers, its contract production of
beverages and other beverages for other companies and its production of proprietary beers for sale under different brand names.

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
December 31,
1999 |   | Year Ended
December 31,
1998 |   | Year Ended
December 31,
1997 |  
|-------------------------------------------------------------- |  | ---------------------------- | - | ---------------------------- | - | ---------------------------- | -
|Net sales                                                      |  | 100.0                        | % | 100.0                        | % | 100.0                        | %
|Cost of goods sold                                             |  | 89.0                         |   | 92.2                         |   | 102.5                        |  
|                                                               |  |                              |   |                              |   |                              |  
|Gross profit (loss)                                            |  | 11.0                         |   | 7.8                          |   | (2.5                         | )
|Advertising                                                    |  | 3.1                          |   | 4.2                          |   | 6.6                          |  
|Sales and marketing                                            |  | 3.5                          |   | 4.7                          |   | 4.0                          |  
|Administrative                                                 |  | 5.7                          |   | 6.6                          |   | 5.8                          |  
|Provision for doubtful accounts and discontinued product lines |  | 2.0                          |   | 0.6                          |   | 2.7                          |  
|Operating loss                                                 |  | (3.2                         | ) | (8.3                         | ) | (21.6                        | )
|Other expense, net                                             |  | (1.6                         | ) | (1.2                         | ) | (0.6                         | )
|Income tax (benefit) expense                                   |  | (0.0                         | ) | (0.2                         | ) | 1.6                          |  
|Net loss                                                       |  | (4.9                         | ) | (9.3                         | ) | (23.8                        | )
|                                                               |  |                              |   |                              |   |                              |  



Net sales for 1999 were approximately $17,748,000 a 20.2% increase from the net sales for 1998 of $14,763,000. Total barrels sold in 1999 were 377,431 a 22.1%
increase compared to 309,119 barrels sold in 1998. The percentage increases are due to the addition of a significant new contract customer and the increased production of malt extract for a food
products company. Due to product mix and because the Company's contract customers purchase all or part of their own packaging materials, the percentage increase in barrels can vary from the percentage
increase in net sales.

Sales
of proprietary brands decreased 17.1% from 1998 sales of $10,780,000 to 1999 sales of $8,940,000. In addition, sales volume decreased 20.8% from 1998 barrelage of 117,916 to
1999 barrelage sales of 93,406. The Company experienced decreases in Grain Belt, Pig's Eye, Landmark, and other products due to the weakening demand in the regional markets and current
industry-wide trends.

Sales
from brewing agreements and contract packaging increased $2,223,000 from $2,137,000 in 1998 to $4,360,000 in 1999. In addition, sales volume increased 33.2% from 1998 barrelage
of 46,374 to 1999 barrelage sales of 61,768. The increase was primarily due to the addition of a new contract customer. See Note 7 of the Financial Statements for disclosure on this major
customer.

Sales
from customers brokering export sales increased $2,049,000 from $2,671,000 in 1998 to $4,720,000 in 1999. In addition, sales volume increased 55.4% from 1998 barrelage of 54,050
to 1999 barrelage sales of 83,979. The increase is primarily due to management's commitment to expand into new Far East markets in conjunction with its efforts to increase can volume. The Company is
hopeful that it will experience an increase in export sales during 2000 based upon its existing accounts and new contractual agreements.

Net
sales and costs of sales increased 20.2% and 16.1%, in 1999, respectively when compared to 1998. The Company experienced an increase in its gross margin from 7.8% in 1998 to 11.0%
in 1999. The larger percentage increase in net sales versus cost of sales was attributable to decreases in the fixed level of plant operating overhead due to the lease agreement with Gopher State,
continued cost containment efforts, and the reduced depreciation due to the capital lease termination.

Operating
expenses increased $137,952 in 1999 due to the discontinuation of the Brewer's Cave and Mount Simon product lines. However, as a percentage of net sales they decreased from
16.1% in 1998 to 14.2% in 1999. Of this amount, advertising expenses decreased $75,322, or 12.1%, from 1998 to 1999 due to budgeting constraints. Sales and marketing expenses decreased $73,323, or
10.6% from 1998 to 1999 primarily due to turnover of sales personnel.

General
and administrative expenses increased $24,327 from 1998 to 1999, however, as a percentage of net sales; they decreased from 6.6% in 1998 to 5.7% in 1999. The provision for
doubtful accounts decreased $10,000 from 1998 to 1999. This decrease is due to tighter credit policies and improved collection efforts.

Interest
income decreased from $15,356 in 1998 to $5,407 in 1999 reflecting a reduction in available investable funds. Other expenses increased from $173,286 in 1998 to $285,481
primarily due to decreases in other income. The Company's interest expense decreased $88,876 from 1998 to 1999 primarily due to the termination of the capital lease obligation with the Partnership.



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. In addition, sales volume decreased 17.9% from 1997 barrelage of 143,699 to
1998 barrelage sales of 117,916. 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% decrease. Conversely, sales volume increased 17,577
barrels from 119,576 in 1997 to 137,153 barrels in 1998 for a 14.7% increase. The increase was primarily due to a 60,000-barrel increase in the production and sale of brewed malt liquids.
The liquid is shipped primarily for packaging and therefore, at a much lower sales price per barrel. 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. In addition, sales volume decreased 21.5% from 68,823 barrels in 1997 to 54,050 barrels in 1998. This
decline is directly attributable to the economic downturn experienced by its primary customers in Asia.

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 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 absolute 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; they 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 is due 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 funds. The Company's interest expense increased $163,235 from 1997 to 1998 due to
working capital borrowings during 1998. The Company had a working capital line of credit in effect with the Partnership.

Liquidity and Capital Resources

Working capital at December 31, 1999 increased $333,887 to $564,904 from $231,017 at December 31, 1998. The increase is primarily due to an
increase in accounts receivable of $683,448 and a decrease in accounts payable and accrued expenses of $40,145. Also, a current held-to-maturity security was replaced with a
long-term held-to-maturity security that partially offset the variances above.

During
the year ended December 31, 1999, the Company absorbed net cash from operating activities of $1,064,926, which was due in large part, to the net loss of $865,490. Other
factors included decreases in various valuation allowances totaling $229,000, an increase of $683,448 in accounts receivable, a decrease in accounts payable and accrued expenses of $40,145, a gain on
the capital lease termination of $50,842, and an increase in prepaids of $24,662. These amounts were partially offset by depreciation and amortization of $503,335, a decrease in inventories of
$142,249, an undistributed loss in unconsolidated subsidiary of $58,754, and increases in the amounts due to related party of $85,204.

The
Company used net cash of $763,106 for investing activities due to the purchase of $586,125 of property and equipment and $57,433 in the purchase of intangible assets for branded
products. In addition to these normal capital expenditures incurred by the Company in 1999, $119,548 was invested in a joint venture. The Company will be a 50% partner in this venture that is
scheduled to begin operations in May 2000.

During
1998 and 1999, the Company operated significantly below its production capacity. Therefore, in order to attain a profitable level of operations the Company has and 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 1999, 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 2000 would help the Company operate at a
significantly higher level of capacity thereby increasing overall profitability.

On
March 31, 1999, the Company issued 60,131 shares of Class A Convertible Preferred Stock to the Partnership in satisfaction of $150,327 owed for deferred rents and
accrued interest. The preferred shares have a 9% cumulative dividend rate and is convertible into common stock at the rate of one share of common stock per share of preferred stock. The holders of
preferred stock are entitled to the number of votes equal to the number of shares of common stock into which the preferred stock could


be converted. These shares are in addition to the 547,614 shares issued in satisfaction of $1,369,036 owed for deferred rents and accrued interest. At December 31, 1999, the amount of dividends
in arrears was $133,358. These dividends are only payable from net profits. If it is not paid, it accumulates without interest. The preferred shares expire on December 31, 2003, at which time
the Company can, at its option, issue common stock priced at the current market value or pay cash equal to the $1,519,363 plus any unpaid dividends. The aggregate liquidation preference at
December 31, 1999 was $741,103.

The
Company has guaranteed a $14 million construction/mortgage loan between Gopher State and a financial institution. As of December 31, 1999, no payments are required
to date under the terms of the agreement. The total obligation as of December 31, 1999 was $2,769,582.

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.

Employee Relations

The Company is a party to collective bargaining agreements with five union organizations, which three were renegotiated during 1999 and expire on
March 31, 2002. Management believes that there will be no adverse impact on the financial results in 2000 and beyond as a result of these new, signed agreements. The remaining two union
contracts have not been negotiated as of March 29, 2000, however, 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.

Income Taxes

As of December 31, 1999, the Company had net operating loss carryforwards totaling $9.7 million. The carryforwards expires as follows:

|Year of Expiration |  | Amount
|------------------ |  | ------
|2007               |  | $     
|2011               |  | $     
|2012               |  | $     
|2013               |  | $     
|2014               |  | $     

## 

Financing

At December 31, 1999, the Company had a credit facility with a bank providing for borrowings up to $3.0 million. The credit facility contains
covenants that include limitations on the Company's ability to pay dividends as well as requiring the Company to maintain certain financial requirements. At March 15, 2000, the Company had
borrowings of $1.4 million under the credit facility. The Company believes that the bank and Partnership lines of credit will be sufficient to meet its working capital needs during 2000. Due to
the seasonal nature of its business, the Company's year-end working capital position is not indicative of its needs during its peak selling and production season. On a
long-term basis, the Company will have difficulty in meeting the due date of its related party obligations, which become due in 2002. The Company will require additional debt or equity
financing to meet its long-term liquidity needs.

Gopher State

Beginning in 1997 and continuing through 1999, the Company has investigated and begun to develop a business for the production of ethanol distilled grains and
raw CO2 gas. Ethanol is principally produced from the processing of corn including its fermentation into fuel grade alcohol. The construction of the facility is anticipated to be complete
by April 2000. Due to the significant cost of the facility, the Company had to solicit investors to satisfy lenders request for equity and as a result, will have a minority interest in the
ethanol operation. The operating lease and shared expenses agreements that were executed during 1999 has reduced the Company's operating expenses and will continue to lower these expenses in 2000.

During
1999, Gopher State was engaged in the construction of the ethanol facility and had an operating loss of $720,360. Because the Company has a minority interest in Gopher State,
the Company accounts for its ownership in Gopher State using the equity method.

CO2 Joint Venture

During 1999, the Company entered into an agreement with an unrelated third party, MG Industries, a Malvern, Pennsylvania, industrial and specialty gas firm.
The CO2 joint venture has begun construction of a facility, to be located adjacent to the brewery and the ethanol plant, and is set to begin operations in May 2000. It will utilize
a byproduct of the ethanol operation to produce the commercial grade CO2 that and it will be sold to various users of refined CO2 products.

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, (iv) the Company's continued ability to sell
products for export, (v) Gopher State's ability to successfully operate an ethanol facility, and (vi) the

Company's ability through a joint venture to successfully construct and operate a liquid carbon dioxide plant.

Recently Issued Accounting Standards

New Accounting Pronouncement:In 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement
of Position (SOP) 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. During 1999, the Company
adopted SOP 98-1 which requires that certain costs related to the development or purchase of internal-use software be capitalized over the estimated useful life of the
software. The Company adopted this statement and accordingly, capitalized approximately $40,000 in 1999.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

The Company has a $3.0 million line of credit with a financial institution with an interest rate that is one and one-half percent above the prime rate and a
line of credit with the Partnership under which it has current borrowings of $1.5 million with an interest rate that is one point above the prime rate. The Company currently believes that a 10%
increase or reduction in interest rates would not have a material effect on its future earnings, fair values or cash flows. In connection with the construction of an ethanol facility by its
minority-owned subsidiary, Gopher State, Gopher State expects to obtain a permanent loan of approximately $16 million, which is also expected to have an interest rate that varies with the prime rate.
As a result, the Company's results of operations may become more affected by interest rate movements in the future. The Company also expects that it may have some commodity price risk in the future as
a result of the Gopher State's ethanol operations, which will begin in 2000.

Item 8.  Financial Statements and Supplementary Data

The following financial statements of the Company are set forth on pages 21 through 36 of the Form 10-K:

|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of Independent Auditor McGladrey & Pullen, LLP                                                |  | 21  
|Consolidated Balance Sheets as of December 31, 1999 and 1998                                         |  | 22  
|Consolidated Statements of Operations for the years ended December 31, 1999, 1998 and 1997           |  | 23  
|Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998 and 1997 |  | 24  
|Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997           |  | 25  
|Notes to Consolidated Financial Statements for the years                                             |  | 26  

Item 9.  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

None.

## 

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 to be held in May 2000 (the "2000 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 2000 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 2000 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 2000 Proxy Statement and is incorporated
herein by reference.

PART IV

Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K

|Independent Auditor's Report on Schedules for Years Ended December 31, 1999, 1997 and 1996 |  | Page 21
|------------------------------------------------------------------------------------------ |  | -------
|Schedule II Valuation and Qualifying Accounts                                              |  | Page 37

The
Company filed no reports on Form 8-K during the quarter ended December 31, 1999.

|Exhibit
No. |  | Description                                                                                                                                                                                                                                                |  | Page
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|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, incorporated by reference from Exhibit 3.3 to Form 10-K for the year ended December 31, 1998.                                                                                |  |     
|10.1        |  | Lease dated March 29, 1999 between Minnesota Brewing Company and Gopher State Ethanol, LLC, incorporated by reference from Exhibit 10.1 to 1998 Form 10-K.                                                                                                 |  |     
|10.2        |  | MBC Holding Company 1993 Stock Option Plan.                                                                                                                                                                                                                |  |     
|10.3        |  | Amended and Restated Operating Agreement dated as of July 20, 1999 of Gopher State Ethanol LLC, a Minnesota Limited Liability Company.                                                                                                                     |  |     
|10.4        |  | Credit and Security Agreement dated as of April 15, 1999 with Wells Fargo Business Credit, Inc.                                                                                                                                                            |  |     
|21          |  | Subsidiaries of the registrantthe Company has one subsidiaryMinnesota Brewing Company LLC, a Minnesota Limited Liability Company. In addition, the Company has a 50% ownership interest in MG CO2
St. Paul, LLC., a Delaware Limited Liability Company. |  |     
|23.1        |  | Consent of McGladrey & Pullen, LLP                                                                                                                                                                                                                         |  |     
|99.1        |  | Audited financial statements of Gopher State Ethanol, LLC                                                                                                                                                                                                  |  |     

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 March 30, 2000 |  | MINNESOTA BREWING COMPANY
|-------------------- |  | -------------------------
|                     |  | By:                      

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. HENDRYBruce E. Hendry       |  | Chairman of the Board                             |  | 
|/s/JOHN J. LEEJohn J. Lee               |  | President, Chief Executive Officer and Director   |  | 
|/s/MICHAEL C. HIMEMichael C. Hime       |  | Vice President of Finance Chief Financial Officer |  | 
|/s/ROBERT AWSUMBRobert Awsumb           |  | Director                                          |  | 
|/s/RICHARD A. PERRINERichard A. Perrine |  | Director                                          |  | 
|/s/JACK ELLIOTJack Elliot               |  | Director                                          |  | 

CONTENTS

|INDEPENDENT AUDITOR'S REPORT                    |  | 21   
|----------------------------------------------- |  | -----
|FINANCIAL STATEMENTS                            |  |      
|Consolidated balance sheets                     |  | 22   
|Consolidated statements of operations           |  | 23   
|Consolidated statements of shareholders' equity |  | 24   
|Consolidated statements of cash flows           |  | 25   
|Notes to consolidated financial statements      |  | 26-36
|SUPPLEMENTARY INFORMATION                       |  |      
|Schedule IIValuation and qualifying accounts   |  | 37   

INDEPENDENT AUDITOR'S REPORT

To
the Board of Directors
  and Shareholders
MBC Holding Company
St. Paul, Minnesota

We
have audited the accompanying consolidated balance sheets of MBC Holding Company as of December 31, 1999 and 1998, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of MBC Holding Company as of
December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.

Our
audit of the consolidated financial statements of MBC Holding Company included Schedule II, contained herein, for the years ended December 31, 1999, 1998, and 1997.
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 25, 2000 (March 28, 2000, as to Note 4) |  |                        

MBC HOLDING COMPANY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998

|                                                                                                                                                                                                                                                                              |  | 1999 |            | 1998 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | -
|ASSETS                                                                                                                                                                                                                                                                        |  |      |            |      |  
|CURRENT ASSETS                                                                                                                                                                                                                                                                |  |      |            |      |  
|Cash and cash equivalents                                                                                                                                                                                                                                                     |  | $    | 26,922     |      | $
|Trade accounts receivable, less allowance for doubtful accounts of $80,000 in 1999 and $250,000 in 1998 (Note 7)                                                                                                                                                              |  |      | 1,748,086  |      |  
|Due from related party (Note 3)                                                                                                                                                                                                                                               |  |      | 216,939    |      |  
|Treasury bill, pledged                                                                                                                                                                                                                                                        |  |      |           |      |  
|Inventories                                                                                                                                                                                                                                                                   |  |      | 2,559,790  |      |  
|Prepaid expenses                                                                                                                                                                                                                                                              |  |      | 125,838    |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|Total current assets                                                                                                                                                                                                                                                          |  |      | 4,677,575  |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|INVESTMENTS                                                                                                                                                                                                                                                                   |  |      |            |      |  
|Unconsolidated subsidiary (Note 2)                                                                                                                                                                                                                                            |  |      | 1,671,895  |      |  
|U.S. Treasury Note (Note 3)                                                                                                                                                                                                                                                   |  |      | 500,000    |      |  
|Joint venture and other (Note 2)                                                                                                                                                                                                                                              |  |      | 119,548    |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|                                                                                                                                                                                                                                                                              |  |      | 2,291,443  |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|OTHER ASSETS                                                                                                                                                                                                                                                                  |  |      | 422,084    |      |  
|PROPERTY AND EQUIPMENT, net (Note 3)                                                                                                                                                                                                                                          |  |      | 827,104    |      |  
|                                                                                                                                                                                                                                                                              |  | $    | 8,218,206  |      | $
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                                                                                                                                                                                                                                          |  |      |            |      |  
|CURRENT LIABILITIES                                                                                                                                                                                                                                                           |  |      |            |      |  
|Bank line of credit (Note 4)                                                                                                                                                                                                                                                  |  | $    | 1,571,563  |      | $
|Related-party line of credit (Note 3)                                                                                                                                                                                                                                         |  |      |           |      |  
|Current maturities of long-term debt (Note 3)                                                                                                                                                                                                                                 |  |      | 8,017      |      |  
|Trade accounts payable                                                                                                                                                                                                                                                        |  |      | 1,983,794  |      |  
|Accrued expenses:                                                                                                                                                                                                                                                             |  |      |            |      |  
|Compensation                                                                                                                                                                                                                                                                  |  |      | 389,114    |      |  
|Beverage tax                                                                                                                                                                                                                                                                  |  |      | 80,488     |      |  
|Other                                                                                                                                                                                                                                                                         |  |      | 79,695     |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|                                                                                                                                                                                                                                                                              |  |      | 4,112,671  |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|LONG-TERM DEBT, PRIMARILY RELATED PARTY (Note 3)                                                                                                                                                                                                                              |  |      | 1,603,008  |      |  
|Deferred gain on capital lease termination (Note 3)                                                                                                                                                                                                                           |  |      | 197,718    |      |  
|COMMITMENTS AND CONTINGENCIES (Notes 3, 4, 5, 6, and 9)                                                                                                                                                                                                                       |  |      |            |      |  
|SHAREHOLDERS' EQUITY (Notes 3, 4, 5, and 6)                                                                                                                                                                                                                                   |  |      |            |      |  
|Preferred stock, 700,000 shares authorized, 9 percent cumulative dividend; 607,745 and 547,614 shares issued and outstanding at December 31, 1999 and 1998, respectively (aggregate liquidation preference $741,103 and
$547,614 at December 31, 1999 and 1998, respectively) |  |      | 1,519,363  |      |  
|Common stock, $0.01 par value; 10,000,000 shares authorized; 3,506,860 and 3,462,711 issued and outstanding at December 31, 1999 and 1998, respectively                                                                                                                       |  |      | 35,068     |      |  
|Additional paid-in capital                                                                                                                                                                                                                                                    |  |      | 10,677,396 |      |  
|Accumulated deficit                                                                                                                                                                                                                                                           |  |      | (9,927,018 | )    |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|                                                                                                                                                                                                                                                                              |  |      | 2,304,809  |      |  
|                                                                                                                                                                                                                                                                              |  |      |            |      |  
|                                                                                                                                                                                                                                                                              |  | $    | 8,218,206  |      | $
|                                                                                                                                                                                                                                                                              |  |      |            |      |  

See
Notes to Consolidated Financial Statements.

MBC HOLDING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998, and 1997

|                                                        |  | 1999 |            | 1998 |   | 1997       |  
|------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|SALES (Note 7)                                          |  | $    | 19,240,246 |      | $ | 16,366,830 |  
|Less excise taxes                                       |  |      | (1,492,478 | )    |   | (1,603,583 | )
|                                                        |  |      |            |      |   |            |  
|Net sales                                               |  |      | 17,747,768 |      |   | 14,763,247 |  
|COST OF GOODS SOLD (Note 3)                             |  |      | 15,801,387 |      |   | 13,614,401 |  
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      | 1,946,381  |      |   | 1,148,846  |  
|                                                        |  |      |            |      |   |            |  
|OPERATING EXPENSES:                                     |  |      |            |      |   |            |  
|Advertising                                             |  |      | 548,531    |      |   | 623,853    |  
|Sales and marketing                                     |  |      | 616,778    |      |   | 690,101    |  
|General and administrative (Note 3)                     |  |      | 1,003,811  |      |   | 979,484    |  
|Provision for discontinued product lines                |  |      | 272,270    |      |   |           |  
|Provision for doubtful accounts                         |  |      | 80,000     |      |   | 90,000     |  
|                                                        |  |      |            |      |   |            |  
|Total operating expenses                                |  |      | 2,521,390  |      |   | 2,383,438  |  
|                                                        |  |      |            |      |   |            |  
|Operating loss                                          |  |      | (575,009   | )    |   | (1,234,592 | )
|                                                        |  |      |            |      |   |            |  
|OTHER INCOME (EXPENSE):                                 |  |      |            |      |   |            |  
|Other income (expense), net                             |  |      | (63,920    | )    |   | 137,151    |  
|Interest expense (Note 3)                               |  |      | (221,561   | )    |   | (310,437   | )
|                                                        |  |      |            |      |   |            |  
|                                                        |  |      | (285,481   | )    |   | (173,286   | )
|                                                        |  |      |            |      |   |            |  
|Loss before income tax expense (benefit)                |  |      | (860,490   | )    |   | (1,407,878 | )
|INCOME TAX EXPENSE (BENEFIT) (Note 8)                   |  |      | 5,000      |      |   | (28,000    | )
|                                                        |  |      |            |      |   |            |  
|Net loss                                                |  | $    | (865,490   | )    | $ | (1,379,878 | )
|                                                        |  |      |            |      |   |            |  
|Computation of Basic and Diluted Loss Per Common Share: |  |      |            |      |   |            |  
|Net loss, as reported                                   |  | $    | (865,490   | )    | $ | (1,379,878 | )
|Preferred Stock Dividends (Note 3)                      |  |      | (133,358   | )    |   |           |  
|                                                        |  |      |            |      |   |            |  
|Net loss attributable to common shareholders            |  | $    | (998,848   | )    | $ | (1,379,878 | )
|                                                        |  |      |            |      |   |            |  
|WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING              |  |      | 3,477,427  |      |   | 3,425,961  |  
|BASIC AND DILUTED LOSS PER COMMON SHARE                 |  | $    | (0.29      | )    | $ | (0.40      | )

See
Notes to Consolidated Financial Statements.

MBC HOLDING COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998, and 1997

|                                                             |  |   |           | Common Stock |           |  |   |        |  |   |           
|------------------------------------------------------------ |  | - | --------- | ------------ | --------- |  | - | ------ |  | - | ----------
|
|
|Balance, December 31, 1996                                   |  | $ |          |              | 3,389,211 |  | $ | 33,892 |  | $ | 10,435,668
|Net loss                                                     |  |   |          |              |          |  |   |       |  |   |          
|                                                             |  |   |           |              |           |  |   |        |  |   |           
|Balance, December 31, 1997                                   |  |   |          |              | 3,389,211 |  |   | 33,892 |  |   | 10,435,668
|Stock issued to employee stock ownership plan (Note 5)       |  |   |          |              | 73,500    |  |   | 735    |  |   | 156,549   
|Conversion of related-party debt to preferred stock (Note 3) |  |   | 1,369,036 |              |          |  |   |       |  |   |          
|Net loss                                                     |  |   |          |              |          |  |   |       |  |   |          
|                                                             |  |   |           |              |           |  |   |        |  |   |           
|Balance, December 31, 1998                                   |  |   | 1,369,036 |              | 3,462,711 |  |   | 34,627 |  |   | 10,592,217
|Stock issued to employee stock ownership plan (Note 5)       |  |   |          |              | 44,149    |  |   | 441    |  |   | 88,151    
|Conversion of related-party debt to preferred stock (Note 3) |  |   | 150,327   |              |          |  |   |       |  |   | (2,972    
|Net loss                                                     |  |   |          |              |          |  |   |       |  |   |          
|                                                             |  |   |           |              |           |  |   |        |  |   |           
|Balance, December 31, 1999                                   |  | $ | 1,519,363 |              | 3,506,860 |  | $ | 35,068 |  | $ | 10,677,396
|                                                             |  |   |           |              |           |  |   |        |  |   |           

See
Notes to Consolidated Financial Statements.

MBC HOLDING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998, and 1997

|                                                                                             |  | 1999 |            | 1998 |   | 1997       |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Cash Flows From Operating Activities                                                         |  |      |            |      |   |            |  
|Net loss                                                                                     |  | $    | (865,490   | )    | $ | (1,379,878 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    |  |      |            |      |   |            |  
|Depreciation                                                                                 |  |      | 317,379    |      |   | 788,161    |  
|Amortization                                                                                 |  |      | 185,956    |      |   | 154,751    |  
|Deferred taxes                                                                               |  |      |           |      |   |           |  
|Inventory valuation allowance                                                                |  |      | (229,000   | )    |   | (174,000   | )
|Gain recognized on capital lease termination                                                 |  |      | (50,842    | )    |   |           |  
|Intangible and other asset valuation allowance                                               |  |      | (22,000    | )    |   | (89,000    | )
|Conversion of rent to preferred stock                                                        |  |      | 61,119     |      |   |           |  
|Undistributed loss in unconsolidated subsidiary                                              |  |      | 58,754     |      |   |           |  
|Changes in assets and liabilities:                                                           |  |      |            |      |   |            |  
|Trade accounts receivable                                                                    |  |      | (683,448   | )    |   | (305,288   | )
|Inventories                                                                                  |  |      | 142,249    |      |   | 466,079    |  
|Prepaid expenses                                                                             |  |      | (24,662    | )    |   | 49,745     |  
|Trade accounts payable and accrued expenses                                                  |  |      | (40,145    | )    |   | (277,324   | )
|Amounts due to or from related party                                                         |  |      | 85,204     |      |   | 505,393    |  
|                                                                                             |  |      |            |      |   |            |  
|Net cash provided by (used in) operating activities                                          |  |      | (1,064,926 | )    |   | (261,361   | )
|                                                                                             |  |      |            |      |   |            |  
|Cash Flows From Investing Activities                                                         |  |      |            |      |   |            |  
|Amounts due from related party                                                               |  |      |           |      |   | (287,530   | )
|Purchases of property and equipment                                                          |  |      | (586,125   | )    |   | (610,542   | )
|Investment in joint venture and other                                                        |  |      | (119,548   | )    |   |           |  
|Purchases of held-to-maturity securities                                                     |  |      |           |      |   | (474,961   | )
|Purchases of intangible and other assets                                                     |  |      | (57,433    | )    |   | (89,185    | )
|                                                                                             |  |      |            |      |   |            |  
|Net cash used in investing activities                                                        |  |      | (763,106   | )    |   | (1,462,218 | )
|                                                                                             |  |      |            |      |   |            |  
|Cash Flows From Financing Activities                                                         |  |      |            |      |   |            |  
|Net proceeds from bank line of credit                                                        |  |      | 1,571,563  |      |   |           |  
|Net proceeds from borrowings on related-party line of credit                                 |  |      | 211,599    |      |   | 1,324,961  |  
|Loan origination fees                                                                        |  |      | (45,000    | )    |   |            |  
|Proceeds on long-term borrowings                                                             |  |      | 49,426     |      |   |           |  
|                                                                                             |  |      |            |      |   |            |  
|Net cash provided by financing activities                                                    |  |      | 1,787,588  |      |   | 1,324,961  |  
|                                                                                             |  |      |            |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                                         |  |      | (40,444    | )    |   | (398,618   | )
|Cash and Cash Equivalents                                                                    |  |      |            |      |   |            |  
|Beginning                                                                                    |  |      | 67,366     |      |   | 465,984    |  
|                                                                                             |  |      |            |      |   |            |  
|Ending                                                                                       |  | $    | 26,922     |      | $ | 67,366     |  
|                                                                                             |  |      |            |      |   |            |  
|Supplemental Disclosures of Cash Flow Information                                            |  |      |            |      |   |            |  
|Cash payments for interest                                                                   |  | $    | 79,800     |      | $ |           |  
|                                                                                             |  |      |            |      |   |            |  
|Supplemental Disclosures of Noncash Investing and Financing Activities                       |  |      |            |      |   |            |  
|Contribution of assets in exchange for an equity interest in unconsolidated subsidiary       |  | $    | 1,730,650  |      | $ |           |  
|Maturities of a held-to-maturity security                                                    |  | $    | (474,961   | )    | $ |           |  
|U.S. Treasury Note financed with note payable to related party                               |  | $    | 500,000    |      | $ |           |  
|Termination of capital lease obligation                                                      |  | $    | 1,441,202  |      | $ |           |  
|Net book value of assets disposed of on capital lease termination                            |  | $    | (1,192,642 | )    | $ |           |  
|Gain on termination of capital lease obligation                                              |  | $    | 248,560    |      | $ |           |  
|Conversion of related party debt to preferred stock                                          |  | $    | 86,236     |      | $ | 1,369,036  |  
|Common stock issued to employee stock ownership plan in satisfaction of accrued compensation |  | $    | 88,592     |      | $ | 157,284    |  
|                                                                                             |  |      |            |      |   |            |  

See Notes to Consolidated Financial Statements.

MBC HOLDING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Nature of Business and Summary of Significant Accounting Policies

Nature of business:Effective January 1, 2000 Minnesota Brewing Company changed its name to MBC Holding Company
(the "Company"), and subsequently formed a new wholly-owned subsidiary, Minnesota Brewing Company, LLC, that will brew, package, and sell beverage products.

The
Company brews and markets beer primarily under the Grain Belt, Pig's Eye, and Yellow Belly labels. The Company also packages and brews beverages for third parties under conntract
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.

Principles of consolidation:The consolidated financial statements include the accounts of MBC Holding Company and its
subsidiary, Minnesota Brewing Company, LLC. All material intercompany accounts and transactions have been eliminated.

Use of 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 $52,000 and $281,000 in 1999 and 1998, respectively, consist of the following:

|                 |  | December 31
|---------------- |  | -----------
|
|Raw materials    |  | $          
|Work in progress |  |            
|Finished goods   |  |            
|Packaging        |  |            
|Other            |  |            
|                 |  |            
|                 |  | $          
|                 |  |            

Fair value of financial instruments:The financial statements include the following financial instruments: cash and
cash equivalents, trade accounts receivable, investment in Treasury Note, accounts payable, a bank line of credit, and amounts due to and from related parties. At December 31, 1999 and 1998, 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 as follows:

Proprietary
and ExportRevenue is recognized upon shipment for all sales to independent distributors and export customers.

ContractRevenue
is generally recognized when all significant contractual obligations have been satisfied and collection of the resulting receivable is reasonably assured.
Revenue related to service contracts is recognized at the time of performance.

Other Assets:Other assets consist primarily of intangible packaging, trademarks, and goodwill. Goodwill is being
amortized over 40 years. Trademarks are amortized over their expected useful lives of 10 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. At December 31, 1999 and 1998, other assets consisted of:

|                                                                                                                              |  | December 31
|----------------------------------------------------------------------------------------------------------------------------- |  | -----------
|
|Trademarks, net of accumulated amortization of $111,000 in 1999 and $99,000 in 1998                                           |  | $          
|Other intangible assets, principally package design, net of accumulated amortization of $505,000 in 1999 and $445,000 in 1998 |  |            
|                                                                                                                              |  |            
|                                                                                                                              |  | $          
|                                                                                                                              |  |            

Property, plant, and equipment:Depreciation, including amortization of capital leases, is computed by the
straight-line method over the lesser of the lease-term or the estimated useful lives as follows: 10 years for production equipment; 3 to 5 years for office and
computer equipment; and 2 to 5 years for display fixtures and other equipment. At December 31, 1999 and 1998, property, plant, and equipment at cost and accumulated depreciation and
amortization consisted of:

|                                      |  | December 31 |           
|------------------------------------- |  | ----------- | ----------
|
|Land and building under capital lease |  | $           |          
|Display fixtures and equipment        |  |             | 1,400,685 
|Production equipment                  |  |             | 355,755   
|Office and computer equipment         |  |             | 301,416   
|Leasehold improvements                |  |             |          
|                                      |  |             |           
|                                      |  | $           | 2,057,876 
|Accumulated Depreciation              |  |             | (1,230,772
|                                      |  |             |           
|                                      |  | $           | 827,104   
|                                      |  |             |           

During
1999, certain assets have been removed from the Company's financial statements due to the capital lease termination and the contribution of assets to GSE. See Note 3 for
related party transactions.

Long-Lived Assets: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.

Federal excise tax and pledged Treasury note:The Company currently receives an $11 per barrel credit against federal
excise taxes on the first 60,000 barrels of taxable production. During 1999, the Company pledged a U.S. Treasury note to the Bureau of Alcohol, Tobacco, and Firearms (BATF) to guarantee the payment of
federal excise taxes (See Note 3).

Income taxes:Deferred taxes are provided on a liability method, whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax bases. 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.

Loss per share:The Company computes basic and diluted net loss per share based upon the weighted-average number of
common shares outstanding during each year. Preferred stock dividends in 1999 related to the Class A convertible preferred stock (Note 3) are included in the net loss attributable to
stockholders in calculating basic and diluted loss per share. Potential common shares, such as options, warrants, and convertible preferred stock (as discussed in Note 6), were not included in
the computation of diluted loss per common share as their effect is antidilutive.

Advertising expenses:The Company expenses all direct advertising costs as incurred. The Company does account for
certain for promotional materials such as point of sale displays and brochures as a prepaid expense until the advertising program begins. The nature of these costs includes any promotional activity
intended to stimulate, indirectly or directly, the sale of company products.

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).

Reclassifications:Certain 1998 amounts have been reclassified to conform with the current year presentation.

Note 2. Investments

Unconsolidated subsidiary:During 1997, the Company investigated and began 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. In March 1999, Gopher State Ethanol, LLC (GSE) was formed for the
purpose of constructing and operating an ethanol facility. Because of the significant cost of the facility, the Company assisted GSE in obtaining financing by contributing operating assets to GSE and
guaranteeing GSE's construction/mortgage loan. The Company contributed certain production equipment with a net book value of $1,730,650. For its contribution and assistance, the Company obtained a 28%
minority interest in GSE. GSE began the construction of the ethanol facilities in April 1999 and is scheduled to begin operations during April 2000. The equity method of accounting is
being used to account for this investment. Summarized financial information of GSE is as follows:

|                       |  | December 31, 1999 |           
|---------------------- |  | ----------------- | ----------
|Net Sales              |  | $                 |          
|Cost of Sales          |  |                   |          
|Depreciation           |  |                   | (213,728  
|Net Loss               |  |                   | (457,518  
|                       |  |                   |           
|Allocation of Net Loss |  |                   | (58,754   
|                       |  |                   |           
|Current Assets         |  |                   | 442,385   
|Noncurrent Assets      |  |                   | 11,761,589
|                       |  |                   |           
|Total                  |  |                   | 12,203,974
|                       |  |                   |           
|Current Liabilities    |  |                   | 3,238,200 
|Noncurrent Liabilities |  |                   | 6,969,993 
|                       |  |                   |           
|Total                  |  |                   | 10,208,193
|                       |  |                   |           
|Net Assets             |  | $                 | 1,995,781 
|                       |  |                   |           

Joint venture:The Company has entered into a joint venture agreement with an unrelated third party for the production
of liquid carbon dioxide in a production facility to be located adjacent to the ethanol plant and the brewery. All related costs incurred by the Company have been capitalized. The joint venture is
expected to begin operations during May 2000.

Note 3. Related-Party Transactions

General:The Minnesota Brewing Limited Partnership (the "Partnership") owns approximately 52 percent of the
Company's voting stock. The Chairman of the Board of the Company is also the controlling shareholder of the Partnership.

Capital lease termination:Prior to March 29, 1999, the Company leased its land, building, and the vast majority
of the production equipment from the Partnership. The lease agreements had been accounted for as capital leases. On March 29, 1999, the Company and the Partnership terminated their lease
agreements. In connection with the lease termination the Company realized a gain of $248,560, which was deferred and is being amortized into income over 56 months, which was the number of
months remaining under the lease agreement. During 1999, the Company recognized $50,842 of this gain. 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. The Partnership also contributed its interest in the real estate and
equipment that had been previously leased to the Company, to GSE. On March 29, 1999, the Company and GSE entered into a new operating 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 through March 2009. The
agreement also provides for three ten-year renewal periods.

Total
lease payments due under the aforementioned leases were approximately $609,000, and $618,000 for the years ended December 31, 1998 and 1997, respectively. The total rent
expense relating to the operating lease portion of the above leases was approximately $250,000, $231,000, and $243,000 for the years ended December 31, 1999, 1998, and 1997, respectively.

Amounts due to related party:As of December 31, 1999 and 1998, the Company had borrowings outstanding of
$1,561,599 and $1,324,961, respectively, under its line-of-credit agreement with the Partnership. On April 15, 1999, the Partnership committed to amend its credit
facility with the Company, thereby curing the default that existed at that time. The amended agreement with the Partnership extended the maturity date to April 15, 2002, reducing the amount
available from $2.5 million to $1.0 million. As a result, the debt has been classified as long-term in 1999. In addition, the Partnership provided $500,000 for purposes of pledging a
U.S. Treasury Note for the BATF bond. Advances under the line of credit accrue interest at the higher of either (i) the prime rate of interest (8.50 percent at December 31, 1999)
plus 1 percent or (ii) 9 percent. The line is secured by substantially all the assets of the Company and is subordinated to the bank line of credit. The Company incurred interest
expense of $99,200 and $122,288 during 1999 and 1998, respectively, under this arrangement.

Long-term
debt consists of the following:

|                                                   |  | December 31 |          
|-------------------------------------------------- |  | ----------- | ---------
|
|Related party, interest at 9.0%, due in April 2002 |  | $           | 1,561,599
|Other, interest at 10.25%, due in 2004             |  |             | 49,426   
|Related party capital lease obligation             |  |             |         
|                                                   |  |             |          
|                                                   |  |             | 1,611,025
|Less current maturities                            |  |             | (8,017   
|                                                   |  |             |          
|                                                   |  | $           | 1,603,008
|                                                   |  |             |          

Assets recorded under related-party leases:The following is a summary of the assets recorded under capital leases:

|                              |  | December 31
|----------------------------- |  | -----------
|
|Land and building             |  | $          
|Production equipment          |  |            
|                              |  |            
|                              |  |            
|Less accumulated amortization |  |            
|                              |  |            
|                              |  | $          
|                              |  |            

Approximate
future maturities of long-term debt are as follows:

|2000 |  | $ | 8,000    
|---- |  | - | ---------
|2001 |  |   | 9,000    
|2002 |  |   | 1,572,000
|2003 |  |   | 11,000   
|2004 |  |   | 11,000   
|     |  |  
|     |  | $ | 1,611,000
|     |  |  

Preferred stock:On March 31, 1999, the Company issued 60,131 shares of Class A Convertible Preferred
Stock to the Partnership in satisfaction of $150,327 owed for deferred rents and accrued interest. The preferred stock has a 9% cumulative dividend rate, voting rights and is convertible into common
stock at the rate of one share of common stock per share of preferred stock. The holders of preferred stock are entitled to the number of votes equal to the number of shares of common stock into which
the preferred stock could be converted. These shares are in addition to the 547,614 shares issued in satisfaction of $1,369,036 owed for deferred rents and accrued interest at December 31,
1998. At December 31, 1999, the amount of preferred dividends in arrears was $133,358. These dividends can be deferred and if they are not paid, they accumulate without interest. Dividends can
only be paid from income of the Company and are further subject to limitation under the Company's Financing agreement (see Note 4).

Amounts Due from Related Party:Since 1997, the Company has incurred costs related to the financing and development of
GSE (see Note 2). During 1999, the Company was reimbursed for certain of those costs, with the remaining to be reimbursed upon the completion of the construction of the GSE facility. The
expected completion is April 2000. In addition, the Company and GSE entered into a shared expenses agreement on March 29, 1999. The total amount credited to expense related to this agreement
was approximately $286,000 during 1999.

Related-party payments:During 1999 and 1998, the Company paid insurance premiums of approximately $251,000 and
$228,000, respectively, to an insurance agency whose ownership includes a
director of the Company.

Note 4. Bank Line of Credit

On April 15, 1999, the Company obtained a bank line of credit providing for borrowings up to $3 million at the prime rate of interest plus 1.5
percent (10.0 percent at December 31, 1999), subject to certain borrowing base restrictions. At December 31, 1999, the total availability under this line of credit was $1,932,678.
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 earnings level. Substantially all of the Company's current assets are pledged as collateral under this
line of credit. This line of credit is subordinated to the GSE construction/mortgage loan.

The
Company was in violation of a certain covenant as of December 31, 1999, which was waived by the bank on March 28, 2000.

Note 5. 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 stock issuances to the Plan of $0.60 for each hour of paid compensation for eligible employees. Total compensation expense under the Plan
was approximately $52,000, $76,000, and $136,000 for the years ended December 31, 1999, 1998, and 1997, respectively. During 1999 and 1998, the Company contributed 44,149 and 73,500 shares,
respectively, of its common stock with a fair value of $88,592 and $157,284, respectively, in satisfaction of accrued expense under the Plan. At December 31, 1999 and 1998, there were 264,428
and 220,279 shares, respectively, of Company common stock held by the Plan. The fair market value of those shares totaled approximately $595,000 and $427,000 as of December 31, 1999 and 1998,
respectively.

Note 6. Stock Options

At December 31, 1999, 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:

|                                             |  | 1999 |            | 1998 |   | 1997       |  
|-------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- | -
|Net loss:                                    |  |      |            |      |   |            |  
|As reported                                  |  | $    | (865,000   | )    | $ | (1,380,000 | )
|Pro forma                                    |  |      | (1,084,000 | )    |   | (1,483,000 | )
|Basic and diluted net loss per common share: |  |      |            |      |   |            |  
|As reported                                  |  |      | (0.29      | )    |   | (0.40      | )
|Pro forma                                    |  |      | (0.35      | )    |   | (0.43      | )

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 1999, 1998, and 1997, respectively: dividend rate of zero for all years; price volatility of 99.5, 68.9, and 62.0 percent; risk-free
interest rate of 5.3, 5.4, and 6.3 percent; and

expected lives of 5.0 years for all periods presented. The weighted-average fair value per share of options granted in 1999, 1998, and 1997 was $2.78, $1.03, and $1.30, respectively.

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 varying 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.

A
summary of the stock option and warrant activity through December 31, 1999, is as follows:

|                           |  | Warrant  |   | Stock Option |   | Exercise Price
Per Share
|-------------------------- |  | -------- | - | ------------ | - | ------------------------
|Balance, December 31, 1996 |  | 137,750  |   | 78,900       |   |                         
|Granted                    |  |          |   | 125,000      |   |                         
|Exercised/cancelled        |  | (137,750 | ) | (11,900      | ) |                         
|                           |  |          |   |              |   |                         
|Balance, December 31, 1997 |  |         |   | 192,000      |   |                         
|Granted                    |  |         |   | 90,000       |   |                         
|                           |  |          |   |              |   |                         
|Balance, December 31, 1998 |  |         |   | 282,000      |   | $                       
|Granted                    |  |         |   | 35,000       |   |                         
|                           |  |          |   |              |   |                         
|Balance, December 31, 1999 |  |         |   | 317,000      |   | $                       
|                           |  |          |   |              |   |                         

At
December 31, 1999, 1998 and 1997, 255,333, 175,333 and 108,667 options outstanding, with a weighted-average exercise price per share of $3.95, $4.85, and $4.88 respectively,
were exercisable.

A
further summary of options outstanding at December 31, 1999, is as follows:

|Exercise
Price |      | Number
Outstanding |         | Number
Exercisable |         | Remaining
Contractual Life
|-------------- | ---- | ------------------ | ------- | ------------------ | ------- | --------------------------
|$              | 1.70 |                    | 20,000  |                    | 3,333   |                           
|               | 1.88 |                    | 15,000  |                    | 5,000   |                           
|               | 2.00 |                    | 75,000  |                    | 50,000  |                           
|               | 2.50 |                    | 15,000  |                    | 5,000   |                           
|               | 4.50 |                    | 151,000 |                    | 151,000 |                           
|               | 4.75 |                    | 18,500  |                    | 18,500  |                           
|               | 5.00 |                    | 10,000  |                    | 10,000  |                           
|               | 5.75 |                    | 12,500  |                    | 12,500  |                           
|               |      |                    |         |                    |         |                           
|               |      |                    | 317,000 |                    | 255,333 |                           
|               |      |                    |         |                    |         |                           

At
December 31, 1999, 1998 and 1997, options outstanding and options exercisable have a weighted-average exercise price per share of $3.59, $3.82 and $4.29, respectively.

Note 7. Sales by Major Product Line and Major Suppliers

Sales by Major Product Line:The Company operates in one business segment, the brewing and marketing of beverages for
both proprietary and contract labels. In addition to domestic distributors, the Company also sells directly to foreign distributors located mainly in the Far East.

Sales
by major product line are as follows:

|            |  | 1999 |            | % |    | 1998 |   | %          |  | 1997 |  | %
|----------- |  | ---- | ---------- | - | -- | ---- | - | ---------- |  | ---- |  | -
|Proprietary |  | $    | 8,940,000  |   | 46 |      | $ | 10,780,000 |  | 66   |  | $
|Contract    |  |      | 4,360,000  |   | 23 |      |   | 2,137,000  |  | 13   |  |  
|Foreign     |  |      | 4,720,000  |   | 25 |      |   | 2,671,000  |  | 16   |  |  
|Other       |  |      | 1,220,000  |   | 6  |      |   | 779,000    |  | 5    |  |  
|            |  | $    | 19,240,000 |   |    |      | $ | 16,367,000 |  |      |  | $

Identifiable
assets by product line are as follows:

|                                   |  | 1999 |           | % |    | 1998 |   | %        
|---------------------------------- |  | ---- | --------- | - | -- | ---- | - | ---------
|Proprietary                        |  | $    | 2,256,000 |   | 27 |      | $ | 2,849,000
|Contract                           |  |      | 1,875,000 |   | 23 |      |   | 516,000  
|Foreign                            |  |      | 913,000   |   | 11 |      |   | 624,000  
|Other, primarily long-lived assets |  |      | 3,174,000 |   | 39 |      |   | 4,460,000
|                                   |  |      |           |   |    |      |   |          
|                                   |  | $    | 8,218,000 |   |    |      | $ | 8,449,000
|                                   |  |      |           |   |    |      |   |          

Trade
accounts receivable from foreign distributors were approximately $659,000 and $439,000 at December 31, 1999 and 1998, respectively.

Major customer:The Company has one major customer that was added during 1999. Total revenues and the accounts
receivable balance at December 31, 1999, were approximately $2.7 million and $.5 million, respectively. Inventory on hand related to this customer was approximately $334,000 at
December 31, 1999.

Major suppliers:The Company purchases a majority of the cans and bottles used in its production from three suppliers.
Management believes that alternative sources of supply are available in the event the Company is unable to obtain products from these suppliers.

Note 8. Income Taxes

The components of the income tax expense (benefit) are as follows:

|                         |  | Years Ended December 31
|------------------------ |  | -----------------------
|
|Current:                 |  |                        
|U.S. federal             |  | $                      
|State                    |  |                        
|Benefit of NOL carryback |  |                        
|Deferred                 |  |                        
|                         |  |                        
|                         |  | $                      
|                         |  |                        

## 

Income
tax expense (benefit) differs from the federal statutory rate as follows:

|                                                           |  | Years Ended December 31 |         
|---------------------------------------------------------- |  | ----------------------- | --------
|
|Computed "expected" Federal tax benefit at statutory rates |  | $                       | (301,000
|State income tax (benefit), net of federal tax effect      |  |                         | (34,000 
|Nondeductible expenses                                     |  |                         | 5,000   
|Effect of income taxes at lower rates                      |  |                         | 8,000   
|Effect of net operating loss with no current benefit       |  |                         | 322,000 
|Change in valuation allowance for deferred tax assets      |  |                         |        
|Other                                                      |  |                         | 5,000   
|                                                           |  |                         |         
|                                                           |  | $                       | 5,000   
|                                                           |  |                         |         

Net
deferred tax assets consist of the following:

|                                                           |  | December 31 |           
|---------------------------------------------------------- |  | ----------- | ----------
|
|Deferred tax assets:                                       |  |             |           
|Net operating loss carryforwards                           |  | $           | 3,826,000 
|Vacation accrual                                           |  |             | 89,000    
|Deferred gain on capital lease termination                 |  |             | 75,000    
|Inventory valuation reserve                                |  |             | 20,000    
|Allowance for doubtful trade and other accounts receivable |  |             | 30,000    
|Other                                                      |  |             | 8,000     
|Deferred tax liabilitiesother                             |  |             | (235,000  
|                                                           |  |             |           
|                                                           |  |             | 3,813,000 
|Less valuation allowance                                   |  |             | (3,813,000
|                                                           |  |             |           
|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.

At
December 31, 1999, the Company's net operating loss carryforwards expire as follows:

|2007 |  | $ | 1,300,000
|---- |  | - | ---------
|2011 |  | $ | 1,500,000
|2012 |  | $ | 3,900,000
|2018 |  | $ | 1,700,000
|2019 |  | $ | 1,300,000

Note 9. Commitments and Contingencies

Pension plans:The Company belongs to two multi-employer pension plans (Pension Plans) covering certain employees.
Total pension plan expense for 1999, 1998, and 1997 was approximately $64,000, $62,000, and $64,000, 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 1999, 1998, and 1997, the Company made contributions of approximately $33,000, $47,000, and $35,000, respectively, to
this plan.

Lease:The Company leases land, building, and production equipment from GSE under an operating lease (see
Note 3). Approximate minimum future lease payments are under this operating lease at December 31, 1999 are as follows:

|2000       |  | $ | 300,000  
|---------- |  | - | ---------
|2001       |  | $ | 300,000  
|2002       |  | $ | 300,000  
|2003       |  | $ | 300,000  
|2004       |  | $ | 300,000  
|Thereafter |  | $ | 1,275,000
|           |  |  
|           |  | $ | 2,775,000
|           |  |  

Guarantee:The Company is an unconditional guarantor with respect to a construction/mortgage loan between GSE and a
financial institution. As of December 31, 1999, no payments are required to date under the terms of the agreement. The total obligation as of December 31, 1999 was $2,769,582.

SCHEDULE II

MBC HOLDING COMPANY

VALUATION AND QUALIFYING ACCOUNTS

|Description                                                        |  | Balance
Beginning
of Period |           | Charged to
Cost and
Expenses |   | Deductions |  | Balance at
End of
Period
|------------------------------------------------------------------ |  | --------------------------- | --------- | ---------------------------- | - | ---------- |  | ------------------------
|Deducted in the balance sheet from the assets to which it applies: |  |                             |           |                              |   |            |  |                         
|Allowance for doubtful accounts:                                   |  |                             |           |                              |   |            |  |                         
|Year ended December 31, 1999                                       |  | $                           | 250,000   |                              | $ | 80,000     |  | $                       
|Year ended December 31, 1998                                       |  |                             | 306,000   |                              |   | 90,000     |  |                         
|Year ended December 31, 1997                                       |  |                             | 485,000   |                              |   | 492,000    |  |                         
|Accumulated amortization of intangibles:                           |  |                             |           |                              |   |            |  |                         
|Year ended December 31, 1999                                       |  |                             | 544,000   |                              |   | 176,000    |  |                         
|Year ended December 31, 1998                                       |  |                             | 388,000   |                              |   | 156,000    |  |                         
|Year ended December 31, 1997                                       |  |                             | 259,000   |                              |   | 129,000    |  |                         
|Deferred tax asset valuation allowance:                            |  |                             |           |                              |   |            |  |                         
|Year ended December 31, 1999                                       |  |                             | 3,451,000 |                              |   | 362,000    |  |                         
|Year ended December 31, 1998                                       |  |                             | 2,926,000 |                              |   | 525,000    |  |                         
|Year ended December 31, 1997                                       |  |                             | 1,091,000 |                              |   | 1,835,000  |  |                         
|Inventory valuation allowance:                                     |  |                             |           |                              |   |            |  |                         
|Year ended December 31, 1999                                       |  |                             | 281,000   |                              |   | 465,000    |  |                         
|Year ended December 31, 1998                                       |  |                             | 455,000   |                              |   | 53,000     |  |                         
|Year ended December 31, 1997                                       |  |                             | 233,000   |                              |   | 672,000    |  |                         

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