UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended september 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from __________to_________
Commission file number 1-13636
Mendocino Brewing Company, Inc.
(Exact name of small business issuer as specified in its charter)
California 68-0318293
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13351 South Highway 101, Hopland, California 95449
(Address of principal executive offices)
(707) 744-1015
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's common stock outstanding as of September
30, 1999 is 5,516,628
<PAGE>
PART I
<TABLE>
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 1999
(Unaudited)
ASSETS
------
<CAPTION>
CURRENT ASSETS
<S> <C>
Accounts receivable $ 1,137,000
Inventories 1,261,800
Prepaid expenses 79,000
Deferred income taxes 138,300
-----------
Total Current Assets: 2,616,100
-----------
PROPERTY AND EQUIPMENT 14,896,900
-----------
OTHER ASSETS
Deferred Income Taxes 2,248,400
Other Assets 149,500
-----------
Total Other Assets: 2,397,900
-----------
Total Assets: $19,910,900
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 1,584,900
Line of credit 1,320,900
Accrued liabilities 221,900
Accrued wages and related expense 201,300
Current maturities of obligation under capital lease 262,100
Current maturities of obligation under long-term debt 338,600
-----------
Total Current Liabilities: 3,929,700
LONG TERM DEBT, less current maturities 3,940,300
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 1,458,000
-----------
Total Liabilities: 9,328,000
-----------
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized, 5,516,628 shares issued and
outstanding 13,808,500
Preferred stock, Series A, no par value, with aggregate liquidation preference of
$227,600; 227,600 shares authorized, issued and outstanding 227,600
Accumulated deficit (3,453,200)
-----------
Total Stockholders' Equity 10,582,900
-----------
Total Liabilities and Stockholders' Equity: $19,910,900
===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
-------------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 2,654,400 $ 2,360,000 $ 6,988,900 $ 5,360,300
LESS EXCISE TAXES 153,900 134,500 412,800 303,900
----------- ----------- ----------- -----------
NET SALES 2,500,500 2,225,500 6,576,100 5,056,400
COST OF GOODS SOLD 1,532,800 1,465,700 4,442,700 3,823,500
----------- ----------- ----------- -----------
GROSS PROFIT 967,700 759,800 2,133,400 1,232,900
----------- ----------- ----------- -----------
OPERATING EXPENSES
Retail operating 124,400 141,100 319,000 373,500
Marketing 454,600 422,600 1,191,800 911,100
General and administrative 492,800 480,900 1,239,100 1,385,900
----------- ----------- ----------- -----------
1,071,800 1,044,600 2,749,900 2,670,500
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (104,100) (284,800) (616,500) (1,437,600)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income -- -- -- 1,900
Other income 17,500 16,700 26,100 12,500
Acquisition expense (25,000) -- (103,400) --
Induced debt conversion expense (248,500) -- (248,500) --
Interest expense (224,400) (153,300) (644,800) (404,900)
----------- ----------- ----------- -----------
(480,400) (136,600) (970,600) (390,500)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (584,500) (421,400) (1,587,100) (1,828,100)
BENEFIT FROM INCOME TAXES (232,400) (190,700) (632,700) (731,200)
----------- ----------- ----------- -----------
NET LOSS $ (352,100) $ (230,700) $ (954,400) $(1,096,900)
=========== =========== =========== ===========
LOSS PER SHARE $ (0.07) $ (0.05) $ (0.21) $ (0.24)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
4,836,915 4,497,059 4,610,344 4,497,059
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
-------------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (352,100) $ (230,700) $ (954,400) $(1,096,900)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 196,900 183,100 614,600 515,300
Deferred income taxes (232,400) (190,700) (634,200) (731,200)
Stock issued for services 91,600 -- 91,600 --
Debt converted to stock 309,900 -- 309,900 --
Changes in:
Accounts receivable 124,000 (161,300) (457,100) (520,100)
Inventories (328,600) (276,700) (283,800) (422,100)
Prepaid expenses (8,800) 162,300 (45,500) (96,700)
Refundable income taxes -- 106,300 -- 106,300
Deposits and other assets (2,300) -- (7,300) --
Accounts payable 153,400 -- 778,200 332,100
Accrued wages and related expenses 2,500 (4,000) (9,500) 51,400
Accrued liabilities 11,000 (154,200) 130,900 (58,000)
----------- ----------- ----------- -----------
Net cash used by operating activities: (34,900) (565,900) (466,600) (1,919,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (22,000) (33,400) (73,200) (199,500)
improvements ----------- ----------- ----------- -----------
Purchase of goodwill -- (17,600) -- (17,600)
----------- ----------- ----------- -----------
Net cash used by investing activities: (22,000) (51,000) (73,200) (217,100)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds (repayments) from line of credit (81,500) (600,000) 582,900 (600,000)
Principal payments on long-term debt (84,200) (12,400) (201,300) (18,300)
Borrowings on long-term debt 286,300 1,462,200 286,300 2,445,300
Payments on obligation under capital lease (63,700) (56,900) (170,100) (139,700)
Accrued construction costs -- (500) -- (500)
Deferred private placement costs -- (65,400) -- (65,400)
----------- ----------- ----------- -----------
Net cash provided by financing activities: 56,900 727,000 497,800 1,621,400
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH -- 110,100 (42,000) (515,600)
----------- ----------- ----------- -----------
CASH, beginning of period -- 80,600 42,000 706,300
----------- ----------- ----------- -----------
CASH, end of period $ -- $ 190,700 $ -- $ 190,700
=========== =========== =========== ===========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 228,200 $ 129,700 $ 581,500 $ 404,900
----------- ----------- ----------- -----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
3
<PAGE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-KSB for the year
ended December 31, 1998. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 1999, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999.
Note 2 - Line of Credit
The Company has available a $3,000,000 line of credit from a financial
institution with interest at the prime rate plus 2.25%. Approximately $1,484,000
was advanced to the Company in the form of a term loan. The term loan is
repayable in monthly installments of $24,700 of sixty months commencing March
1999. The amount of the term loan outstanding as of September 30, 1999 is
$1,310,800. The amount outstanding under the working line of credit as of
September 30, 1999 is $1,320,900. The bank's commitment under the line of credit
matures in September 2000. The agreement is secured by substantially all of the
assets of the Releta Brewing Company, LLC, and all of the accounts receivable,
inventory, general intangibles of the Company, a second position on the assets
of the Company, and certain securities pledged by a stockholder.
Note 3 - Notes Payable
In March 1998, the Company refinanced its short-term construction note that
matured on January 1, 1998, to a $2,700,000 note, with interest at Treasury
Constant Maturity Index for five year treasuries plus 4.17%, currently 9.95%.
The note requires monthly payments of principal and interest of $24,400. The
note matures on December 1, 2012 with a balloon payment and is secured by real
property located in Ukiah, California.
On August 30, 1999, the Company converted approximately $994,000 of convertible
debt to United Breweries of America, Inc. (a related party) and $61,000 of
accrued interest into 938,171 shares of common stock. The convertible debt was
originally issued in installments during the period from February 1998 to
December 1998 and was due 18 months from the date of advance. The debt was
convertible into common stock at $1.50 per share. On August 31, the Company was
required to repay a portion of the debt. In order to induce the related party to
convert the debt, the Company reduced the conversion price to the market price
of the common stock on August 30, 1999 ($1.125 per share). As part of this
transaction, the Company recognized an expense of $248,500 for this induced
conversion.
The Company has a note payable which consists of convertible notes to United
Breweries of America, Inc. in the amount of $280,100 as of September 30, 1999.
The note bears interest at the
4
<PAGE>
prime rate plus 1.5%, matures on March 6, 2001, and is unsecured. The note is
convertible at the option of United Breweries of America, Inc., to common stock
at $1.50 per share upon maturity. Interest accrued on the above notes for the
nine months ending September 30, 1999 is $1,791.
The company has a note in the amount of $24,600 payable in monthly installments
of $1,200, including interest at 5.65%, maturing March 2001, secured by an
automobile.
Note 4 - Income Taxes
As of September 30, 1999, the Company had available net operating loss
carryovers of approximately $6,084,000, $2,413,000 and $673,000 of federal,
California and New York net operating losses, respectively. The federal and New
York operating losses expire through 2019. California operating losses expire
through 2004. The benefit from these loss carryforwards has been recorded,
resulting in a deferred tax asset. A valuation allowance is not provided since
the Company believes it is more likely than not that the loss carryforwards will
be fully utilized.
Note 5 - Payments to Related Parties
As of September 30, 1999, the Company had accrued payment obligations to one of
its directors in the amount of $24,300 for consulting services performed for the
Company. Of this amount, the Company has paid $21,600 through September 30,
1999.
Note 6 - Stock Options
On August 30, 1999, the Company granted 88,888 non-qualified stock options to
certain members of the board of directors. The options are exercisable at $1.125
per share, the closing price of the shares of Common Stock as of that date, and
expire August 29, 2004. No compensation expense will be recognized under the
disclosure only provision of SFAS 123 "Accounting for Stock-Based Compensation."
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Management Discussion and Analysis of Financial Condition and Results of
Operations.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto included as Item 1 of this Report.
The discussion of results and trends does not necessarily imply that these
results or trends will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-QSB contain forward-looking
information. The forward-looking information involves risks and uncertainties
that are based on current expectations, estimates and projections about the
Company's business, Management's beliefs and assumptions made by Management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
5
<PAGE>
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition, changes in distributor relationships or
performance and other risks detailed below as well as those discussed elsewhere
in this Form 10-QSB and from time to time in the Company's Securities and
Exchange Commission filings and reports. In addition, such statements could be
affected by general industry and market conditions and growth rates, and general
domestic economic conditions. Readers are cautioned not to place undue reliance
on these forward-looking statements, which are valid as of the date of this
filing.
Overview
The third quarter was highlighted by the Ten Springs Brewing Co., located in
Saratoga Springs, New York, launching the new non-alcoholic brew of OLDE
SARATOGA CLASSIC ROOT BEER. The product was well received in the market. In
addition, bottling line equipment including a carrier erector and bulk glass
handling equipment were installed in the Ukiah, California and Saratoga Springs
facilities respectively. This new equipment brought about a reduction in
manpower. At the Ukiah facility, two additional 240 barrel fermentation tanks
were installed to satisfy greater production and flexibility demand.
In addition, on August 30, 1999, the Company's largest shareholder, the United
Breweries of America, Inc. ("UBA"), agreed to convert all of the outstanding
convertible notes issued by the Company to UBA under the 1998 line of credit. By
their terms the convertible notes were convertible at $1.50 per share. However,
the Board of Directors of the Company offered to induce UBA to convert the notes
into common stock at a price of $1.125 which was the then-current price of the
Company's common stock as traded on the Pacific Exchange. As a result of the
conversion, UBA now owns approximately 3,087,818 shares of common stock
representing 55.9% of the issued and outstanding shares of common stock of the
Company. UBA is now the majority owner of the Company.
The increase in net sales during the nine-month period ending September 30, 1999
was achieved in significant part through increased and improved marketing
efforts. Sales (measured in barrels) during the first nine months of 1999
increased to 36,125 barrels from 27,475 barrels in the first nine months of
1998. This represents an increase of 31.5% over the corresponding period of last
year. Of the total sales of 36,125 barrels, the sales out of the Ukiah facility
amounted to 28,013 barrels and the sales out of the Saratoga Springs facility
amounted to 8,112 barrels.
The high costs associated with the brewery located at Ukiah, the fixed costs of
the Ten Springs Brewery (neither of which are being used at full capacity), the
conversion of the UBA debt, and the interest expenses contributed to a net loss
of $954,400 for the first nine months of 1999. The loss from operations as a
percentage of net sales decreased from 28.44% for the first nine months of 1998
to 14.51% for the first nine months of 1999.
6
<PAGE>
Results of Operations
The following discussion sets forth information for the nine-month periods
ending September 30, 1999 and 1998. This information has been derived from
unaudited interim financial statements of the Company contained elsewhere herein
and reflects, in Management's opinion, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for these periods. Results of operations for any interim period
are not necessarily indicative of results to be expected for the full fiscal
year.
The following table sets forth, as a percentage of sales, certain items included
in the Company's Statements of Operations, as set forth above under "Financial
Statements," for the periods indicated:
7
<PAGE>
------------------------------------
Nine Months Ended
September 30
------------------------------------
1999 1998
Statements of Operations Data:
Sales 106.28% 106.01%
Excise taxes 6.28 6.01
-------------- --------------
Net Sales 100.00 100.00
Cost of Goods Sold 67.56 75.62
-------------- --------------
Gross Profit 32.44 24.38
Retail Operating 4.85 7.39
Marketing Expense 18.12 18.02
General and Administrative Expens 18.84 27.41
-------------- --------------
Total Operating Expenses 41.82 52.82
-------------- --------------
Loss from Operation (9.37) (28.44)
Other Income 0.40 0.29
Acquisition expense (1.57) 0.00
Induced conversion expense (3.78) 0.00
Interest expense (9.81) (8.00)
-------------- --------------
Loss before income taxes (24.13) (36.15)
Benefit from income taxes 9.62 14.46
Net Loss (14.51) (21.69)
Balance Sheet Data:
Cash $ 0 $ 190,700
Working Capital (1,313,600) 781,100
Property and Equipment 14,896,900 15,514,600
Deposits and Other Assets 2,397,900 1,122,300
Total Assets 19,910,900 19,173,100
Long-term Debt 3,940,300 6,810,800
Obligation under Capital Lease 1,458,000 1,621,300
Total Liabilities 9,328,000 8,565,900
Shareholder's equity 10,582,900 10,607,200
Net Sales. Net sales for the first nine months of 1999 were $6,576,100 compared
with $5,056,400 for the first nine months of 1998, representing an increase of
30.06%. The sales
8
<PAGE>
volume increased to 36,125 barrels during the first nine months of 1999, from
27,475 barrels during the first nine months of 1998, representing an increase of
31.5%. Management attributes the increased sales to improved marketing
strategies, including new point of sale materials. The increase in overall net
sales during the first nine months of 1999 was achieved solely by higher
wholesale shipments, which represented an increase of $1,613,800 over the
wholesale shipments during the first nine months of 1998. As a result of
management's focus on wholesale beer sales, retail sales for the first nine
months of 1999 were $94,300 less than retail sales during the first nine months
of 1998.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
first nine months of 1999 was 67.56%, as compared to 75.62% during the first
nine months of 1998, representing a decrease of 8.06%. As a percentage of net
sales, during the first nine months of 1999, labor costs increased from 11.73%
in 1998, to 11.76% in 1999, depreciation decreased from 9.10% in 1998 to 7.79%
in 1999, utilities decreased from 4.52% in 1998 to 3.82% in 1999, property taxes
decreased from 2.03% in 1998 to 1.43% in 1999, insurance costs decreased from
1.83% in 1998 to 1.73% in 1999, wastewater decreased from 0.66% in 1998 to 0.28%
in 1999, repair and maintenance decreased from 1.15% in 1998 to 1.04% in 1999.
These factors contributed to a decrease of 8.06% in the cost of goods sold as a
percentage of net sales, as compared to the first nine months of 1998.
Management attributes the balance of the decrease to higher sales volumes
thereby lowering per barrel production costs at both the Ukiah and Ten Springs
breweries.
Gross Profit. As a result of the higher net sales as explained above, gross
profit for the first nine months of 1999 increased to $2,133,400, from
$1,232,900 for the comparable period of 1998, representing an increase of 73%.
As a percentage of net sales, the gross profit during the first nine months of
1999 increased to 32.44% from 24.38% for the corresponding period of 1998.
Operating Expenses. Operating expenses for the first nine months of 1999 were
$2,749,900, as compared to $2,670,500 for the first nine months of 1998,
representing an increase of 2.97%. Operating expenses consist of retail
operating expenses, marketing and distribution expenses, and general and
administrative expenses.
Retail operating expenses for the first nine months of 1999 were $319,000,
representing a decrease of $54,500, or 14.59%, from the first nine months of
1998. As a percentage of net sales, retail operating expenses decreased to 4.85%
as compared to 7.39% for the first nine months of 1998. The decrease in retail
operating expenses consisted of a decrease in labor costs of $57,100 and an
increase in other expenses by $2,600.
Marketing and distribution expenses for the first nine months of 1999 were
$1,191,800, representing an increase of $280,700, or 31%, from the first nine
months of 1998. As a percentage of net sales, marketing and distribution
expenses represented 18.12% as compared to 18.02% during the first nine months
of 1998. Compared to the first nine months of 1998: marketing and sales labor
increased by $132,400; telephone expenses increased by $10,700; sales promotion
expenses increased by $82,500; point-of-sale expenses increased by $38,800;
media advertising expenses increased by $31,500; freight increased by $13,800;
travel and entertainment decreased by $28,000; and all other marketing and
distribution expenses decreased by $1,000.
9
<PAGE>
General and administrative expenses were $1,239,100, representing a decrease of
$146,800 from the first nine months of 1998. As a percentage of net sales, the
general and administrative expenses were 18.84% for the first nine months of
1999, as compared to 27.41% for the first nine months of 1998. As compared to
the first nine months of 1998, professional and legal fees decreased by
$137,500, depreciation increased by $7,500, travel and entertainment decreased
by $82,700, labor (including compensation to directors of $91,600 for the first
nine months of 1999 versus $0 in 1998) increased by $65,100; and all other
general and administrative expenses increased by $800.
Other Income (Expense). Other expenses for the first nine months of 1999 were
$970,600, representing an increase of $580,100 when compared to the first nine
months of 1998. The increase is due to an increase in interest expenses for the
first nine months of 1999 of $239,900, an increase of $103,400 in other expenses
relative to potential acquisitions that were not consummated, an increase in
induced conversion expense for convertible debt of $248,500, and an increase in
miscellaneous income of $11,700.
Benefit From Income Taxes. The benefit from income taxes for the first nine
months of 1999 was $632,700, as compared to $731,200 for the first nine months
of 1998. The benefit from income taxes is due to the expected future benefit of
carrying forward net operating losses.
Net Loss. The net loss for the first nine months of 1999 was $954,400, as
compared to a net loss of $1,096,900 for the first nine months of 1998. As a
percentage of net sales, net loss for the first nine months of 1999 decreased to
14.51%, as compared to 21.69% for the first nine months of 1998.
Segment Information
Mendocino Brewing Company, Inc.'s business presently consists of two segments.
The first is brewing for wholesale to distributors and other retailers. This
segment accounted for 94% of the Company's gross sales for the first nine months
of 1999. The second segment consists of brewing beer for sale along with food
and merchandise at the Company's brewpub and retail merchandise store located at
the Hopland Brewery. This segment accounted for 6% of the Company's total gross
sales during the first nine months of 1999.
With expanded wholesale beer production in both Ukiah and Saratoga Springs,
management expects that retail sales, as a percentage of total sales, will
decrease proportionally to the expected increase in the Company's wholesale
sales.
10
<PAGE>
<TABLE>
The Company's business segments are brewing operations and a retail
establishment known as the Hopland Brewery. A summary of each segment is as
follows:
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 6,540,700 $ 448,200 $ -- $ 6,988,900
Operating Loss (589,900) (26,600) -- (616,500)
Identifiable Assets 15,932,700 82,900 3,895,300 19,910,900
Depreciation and amortization 564,600 5,100 44,900 614,600
Capital Expenditures 211,500 800 4,100 216,400
Nine Months Ended September 30, 1998
-----------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------
Sales $ 4,805,100 $ 555,200 $ -- $ 5,360,300
Operating Loss (1,382,700) (54,900) -- (1,437,600)
Identifiable Assets 16,307,100 86,000 2,780,000 19,173,100
Depreciation and amortization 459,900 4,600 50,800 515,300
Capital Expenditures 278,800 -- 106,200 385,000
</TABLE>
Seasonality
Beer consumption nationwide has historically been approximately 20% higher
during the summer months as compared to the other months of the year. It is not
clear to what extent seasonality will affect the Company as it expands its
capacity and its geographic markets.
Capital Demands
The Company has yet to complete the build-out of its administrative space and
the exterior landscaping of the Ukiah facility. The Ukiah brewery is presently
operating under a temporary certificate of occupancy from the City of Ukiah.
Completion of construction is a condition to the issuance of a final certificate
of occupancy. Failure to complete construction and obtain a final certificate of
occupancy could have a material adverse effect on the Company's business,
financial condition and results of operations.
Liquidity and Capital Resources
Long Term Debt. The Company has in place a $2,700,000 term loan from the Savings
Bank of Mendocino County. The loan is payable in monthly installments of
$24,400, including interest at the Treasury Constant Maturity Index plus 4.17%,
currently 9.95%, maturing on December 1, 2012 with a balloon payment. The loan
is secured by some of the assets of the Company (other than the Ten Springs
brewery), including without limitation, a first priority deed of trust on the
Ukiah land and improvements, fixtures and most of the equipment of the Company.
11
<PAGE>
Credit Facility. The CIT Group/Credit Finance, Inc., located in Chicago,
Illinois, has provided the Company with a $3,000,000 maximum line of credit with
an advance rate of 80% of the qualified accounts receivable and 60% of the
inventory at an interest rate of the prime rate of Chase Manhattan Bank of New
York plus 2.25% payable monthly, maturing September 23, 2000. The line of credit
is secured by all accounts, general intangibles, inventory, and equipment of the
Company except for the specific equipment and fixtures of the Company leased
from FINOVA Capital Corporation, as well as by a second deed of trust on the
Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced
to the Company as an initial term loan, which is repayable in sixty consecutive
monthly installments of principal, each in the amount of $24,700. The Company
commenced repayment of the term loan in March 1999 and approximately $1,310,800
of the term loan was outstanding as of September 30, 1999. Based on the
Company's current level of accounts receivable and inventory, the Company has
drawn the maximum amount permitted under the line of credit. As of September 30,
1999, the total amount outstanding on the line of credit was $2,631,700.
Equipment Lease. The Company has leased from FINOVA Capital Corporation
("Finova") brewing equipment at a total cost of approximately $1,780,000 to the
Company for a term of 7 years (commencing December 1996) with monthly rental
payments of approximately $27,100 each. At expiration of the initial term of the
lease, the Company may purchase the equipment at its then current fair market
value but not less than 25% nor more than 30% of the original cost of the
equipment, or at the Company's option, may extend the term of the lease for an
additional year at monthly rental payments of approximately $39,000 with an
option to purchase the equipment at the end of the year at then current fair
market value. The lease is not pre-payable.
Conversion of Notes. On August 30, 1999 the Company's largest shareholder, the
United Breweries of America, Inc. ("UBA"), agreed to convert all of the
outstanding convertible notes issued to UBA under its 1998 credit facility. By
their terms the convertible notes were convertible at $1.50 per share. However,
the Board of Directors of the Company offered to induce UBA to convert the notes
into common stock at a price of $1.125, which was the then-current price of the
Company's common stock as traded on the Pacific Exchange. As a result of the
conversion, UBA now owns approximately 3,087,818 shares of common stock
representing 53.8% of the issued and outstanding shares of common stock of the
Company. UBA has become the majority owner of Company. Further, as a result of
the conversion, the Company recognized an expense of $248,500 for the induced
conversion.
Shareholder Commitment of Line of Credit. In mid 1999, UBA agreed to provide the
Company with a credit facility of up to $800,000 to fund the operations of the
Company. On August 31, 1999, the Company and UBA entered into a Master Line of
Credit Agreement setting forth the terms of the credit facility. Pursuant to the
terms of the Master Line of Credit Agreement, advances on the credit facility
bear interest at the prime rate of the Bank of America in San Francisco plus
1.5%, up to a maximum of 10%, and is due and payable quarterly. The principal
amount of each advance, together with any accrued but unpaid interest on such
advance, is due 18 months after the date of such advance. Each advance made on
the line of credit will be evidenced by a convertible note. Each convertible
note includes a conversion feature whereby UBA could, at its option, convert the
principal and any accrued but unpaid interest into unregistered shares of the
Company's common stock on or after the maturity date, at a rate of one share of
common stock for each $1.50 of principal and unpaid interest.
12
<PAGE>
The obligations of the Company pursuant to the line of credit are subordinate to
the obligations of the Company to CIT, Finova, and Savings Bank of Mendocino
County. However, provided that the Company meets certain requirements under the
terms of its existing obligations to CIT, Finova, and Savings Bank of Mendocino
County, the Company is required to make quarterly payments of interest in cash.
Further, if UBA elects not to convert the principal and any unpaid interest into
common stock at maturity and provided that the financial condition of the
Company meets certain requirements under the terms of its existing obligations
with CIT, Finova and Savings Bank of Mendocino County, then the Company shall
repay any such amounts over a period of five years in equal monthly
installments. There can be no assurances that UBA will convert any of the
amounts drawn on the line of credit into common stock. UBA has advanced a total
of $280,100 as of September 30, 1999; accrued but unpaid interest on the
advances totals $1,791 as of September 30, 1999.
Keg Management Arrangement. The Company has entered into a keg management
agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides the Company with half-barrel kegs for which the Company pays a filling
fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar
then supplies the Company with additional kegs. If the agreement terminates, the
Company is required to purchase a certain number of kegs from MicroStar. The
Company would probably finance the purchase through debt or lease financing, if
available. However, there can be no assurances that the Company will be able to
finance the purchase of kegs and the failure to purchase the necessary kegs from
MicroStar is likely to have a material adverse effect on the Company.
The Company's ratio of current assets to current liabilities on September 30,
1999, was 0.7 to 1.0 and its ratio of assets to liabilities was 2.1 to 1.0.
Year 2000 Readiness
Many currently-installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries in order to
distinguish 21st century dates from 20th century dates. On January 1, 2000, many
computer, and embedded systems, may recognize the year "00" as the year 1900
rather than the year 2000. Because many computer functions are date-sensitive,
this error may cause systems to process data inaccurately or shut down if they
do not recognize the date. If not corrected, this could result in a system
failure or miscalculations causing disruptions of operations.
The Company is taking steps to ensure its operations will not be adversely
impacted by potential year 2000 computer failures. The Company is assessing all
systems for year 2000 impacts and costs of upgrading or replacing systems that
are not year 2000 ready, and testing and monitoring systems for year 2000
readiness. The Company does not expect the year 2000 project costs to have a
material effect on its financial position or results of operations.
The Company believes that the most significant internal risk posed by the year
2000 problem is the possibility of a failure of equipment involved in its
brewing processes. If the brewing processes equipment were to fail, the Company
would have to implement manual processes, which may slow production levels that
would affect the Company's sales volume. The programmable logic controller
connected to the brewing equipment and the processes are not date
13
<PAGE>
sensitive. A testing of the brewing house facility computer operations indicated
that all of the computer systems are year 2000 compliant. However, there can be
no assurance that problems will not arise relevant to year 2000.
The third parties whose year 2000 problems could have the greatest effect on the
Company are believed by the Company to be the banks that maintain the Company's
depository accounts, the company that processes the Company's payroll, and the
Company's suppliers and distributors. The Company is in process of confirming
the state of year 2000 readiness of these parties.
Impact of Expansion on Cash Flow
The Company must make timely payment of its debt and lease commitments to
continue its operations. Unused capacity at the Ukiah facility and the Saratoga
Springs facility has placed additional demands on the Company's working capital.
Historically, working capital for the day to day business operations was
provided primarily through operations. Beginning approximately with the second
quarter of 1997, the time at which the Ukiah brewery commenced operations,
proceeds from operations have not been able to provide sufficient working
capital for the day to day operations of the Company. To fund its operating
deficits, the Company has relied upon lines of credit and other credit
facilities. However, there can be no assurances that the Company will have
access to any such sources of funds in the future, and the inability to secure
sufficient funds will have a materially adverse effect on the Company.
Compensation to Directors
The Board of Directors of the Company has formed a committee consisting of Dr.
Vijay Mallya, H. Michael Laybourn, and Yashpal Singh to determine the
compensation of the independent directors, namely Robert H.B. Neame, Sury Rao
Palamand, and Kent D. Price. On August 30, 1999 at the meeting of the Board of
Directors of the Company, the Board granted 18,500 shares of common stock to Mr.
Neame, 23,100 shares of common stock to Mr. Palamand, and 31,800 shares of
common stock to Mr. Price. In addition, the Board granted options to purchase up
to $25,000 shares of common stock to each of the independent directors for 1999
and for each year thereafter that they serve as directors. As further
compensation, the Board of Directors agreed to pay the independent directors
compensation in the amount of $3,000 per meeting of the Board that they attend
and $1,000 per committee meeting that they attend. The directors have the option
to receive such compensation in the form of common stock at the closing price of
the Company's Common Stock as of the date of the relevant meeting. As of
September 30, 1999, each of the independent directors has elected to be paid in
stock rather than in cash.
All options to purchase shares of the Company's common stock were granted
pursuant to the terms of the Company's 1994 Stock Option Plan. In addition, the
Board granted options to purchase common stock to Jerome G. Merchant, who is
both a member of the Board of Directors and a consultant to the Company. By
virtue of being appointed to the compensation committee, Dr. Mallya, Mr.
Laybourn and Mr. Singh will not be eligible to receive grants of stock or
options for their services as directors.
As of September 30, 1999, Mr. Merchant has received an option to purchase 22,222
shares of common stock at an exercise price of $1.125 per share, Mr. Neame has
received 21,166 shares of common stock and an option to purchase 22,222 shares
of common stock at an
14
<PAGE>
exercise price of $1.125 per share, Mr. Palamand has received 25,766 shares of
common stock and an option to purchase 22,222 shares of common stock at an
exercise price of $1.125 per share, and Mr. Price has received 34,466 shares of
common stock and an option to purchase 22,222 shares of common stock at an
exercise price of $1.125 per share.
Retirement of H. Michael Laybourn
Michael Laybourn, a founder and President of the Company, has informed the Board
of Directors that he will retire as President of the Company, effective as of
December 31, 1999. Mr. Laybourn has agreed to continue to serve as a director of
the Company and agreed to be available to advise the Company on an as-needed
basis. The Company is currently engaged in a search to find a replacement for
Mr. Laybourn.
PART II
Item 1. Legal Proceedings.
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts, which it may be
required to pay by reason thereof, will have a material effect on the Company's
financial position.
Item 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Items.
None.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
- ------ -----------------------
3.1 (A) Articles of Incorporation, as amended, of the Company.
3.2 (B) Bylaws of the Company
4.1 Articles 5 and 6 of the Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit
3.1).
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit
3.2).
15
<PAGE>
Exhibit
Number Description of Document
- ------ -----------------------
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit
99.6).
10.3 (M) Employment Agreement with H. Michael Laybourn.
10.4 (A) Wholesale Distribution Agreement between the Company and
Bay Area Distributing.
10.5 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.6 (A) Sales Contract between the Company and John I. Hass,
Inc.
10.7 (F) Liquid Sediment Removal Services Agreement with Cold
Creek Compost, Inc.
10.8 (A) Lease Agreement between the Company and Kohn Properties.
10.9 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.15 (N) Commercial Lease between Stewart's Ice Cream Company,
Inc. and Releta Brewing Company, LLC.
10.16 (M) Agreement between United Breweries of America, Inc. and
Releta Brewing Company, LLC regarding payment of certain
liens.
10.17 (K)+ Keg Management Agreement with MicroStar Keg Management
LLC.
10.18 (E) Agreement to Implement Condition of Approval No. 37 of
the Site Development Permit 95-19 with the City of
Ukiah, California (previously filed as Exhibit 19.6).
10.19 (G) Manufacturing Business Expansion and Relocation
Agreement with the City of Ukiah.
10.20 (G) Manufacturing Business Expansion and Relocation
Agreement with the Ukiah Redevelopment Agency.
10.21 (O) $2,700,000 Note in favor of the Savings Bank of
Mendocino County.
10.22 (O) Hazardous Substances Certificate and Indemnity with the
Savings Bank of Mendocino County.
10.23 (J) Equipment Lease with FINOVA Capital Corporation.
10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA
Capital Corporation.
10.25 (J) Master Lease Schedule with FINOVA Capital Corporation.
10.26 (L) Investment Agreement with United Breweries of America,
Inc.
10.27 (L) Shareholders' Agreement Among the Company, United
Breweries of America, Inc., H. Michael Laybourn, Norman
Franks, Michael Lovett, John Scahill, and Don Barkley.
10.28 (L) Registration Rights Agreement Among the Company, United
Breweries of America, Inc., H. Michael Laybourn, Norman
Franks, Michael Lovett, John Scahill, and Don Barkley.
10.29 (Q) Indemnification Agreement with Vijay Mallya.
10.30 (Q) Indemnification Agreement with Michael Laybourn.
10.31 (Q) Indemnification Agreement with Jerome Merchant.
10.32 (Q) Indemnification Agreement with Yashpal Singh.
10.33 (Q) Indemnification Agreement with P.A. Murali.
10.34 (Q) Indemnification Agreement with Robert Neame.
10.35 (Q) Indemnification Agreement with Sury Rao Palamand.
10.36 (Q) Indemnification Agreement with Kent Price.
10.37 (R) Loan and Security Agreement between the Company, Releta
Brewing Company LLC and The CIT Group/Credit Finance,
Inc. regarding a $3,000,000 maximum line of credit.
10.38 (R) Patent, Trademark and License Mortgage by the Company in
favor of The CIT Group/Credit Finance, Inc.
16
<PAGE>
Exhibit
Number Description of Document
- ------ -----------------------
10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing
Company LLC in favor of The CIT Group/Credit Finance,
Inc.
10.41 (U) Employment Agreement with Yashpal Singh.
10.42 (U) Employment Agreement with P.A. Murali.
10.43 (V) Master Loan Agreement between the Company and the United
Breweries of America, Inc.
10.44 (V) Convertible Note in favor of the United Breweries of
America, Inc
27 Financial Data Schedule.
- ----------------------
(A) Incorporated by reference from the Company's
Registration Statement dated June 15, 1994, as amended,
previously filed with the Commission, Registration No.
33-78390-LA.
(C) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended March 31,
1995, previously filed with the Commission.
(E) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended September 30,
1995, previously filed with the Commission.
(F) Incorporated by reference from the Company's Report on
Form 10-KSB for the annual period ended December 31,
1995, previously filed with the Commission.
(G) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended June 30,
1996, previously filed with the Commission.
(J) Incorporated by reference from the Company's
Registration Statement dated February 6, 1997, as
amended, previously filed with the Commission,
Registration No. 33-15673.
(K) Incorporated by reference from the Company's Report on
Form 10-KSB for the annual period ended December 31,
1996, previously filed with the Commission.
(L) Incorporated by reference from the Schedule 13D filed
with the Commission on November 3, 1997, by United
Breweries of America, Inc. and Vijay Mallya.
(M) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended September 30,
1997.
(N) Incorporated by reference from the Company's Report on
Form 10-QSB/A No. 1 for the quarterly period ended
September 30, 1997.
(O) Incorporated by reference from the Company's Report on
Form 10-KSB for the annual period ended December 31,
1997, previously filed with the Commission.
(Q) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended June 30,
1998.
(R) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended September 30,
1998.
(T) Incorporated by reference from the Company's Report on
Form 10-KSB for the annual period ended December 31,
1998, previously filed with the Commission.
(U) Incorporated by reference from the Company's Report on
Form 10-QSB for the quarterly period ended June 30,
1999.
(V) Incorporated by reference from the Amendment No. 5 to
Schedule 13D filed with the Commission on September 15,
1999, by United Breweries of America, Inc. and Vijay
Mallya.
+ Portions of this Exhibit were omitted pursuant to an
application for an order declaring confidential
treatment filed with the Securities and Exchange
Commission.
The Registrant filed a report on Form 8-K on September 10, 1999 relating to the
conversion of certain convertible notes issued by the Company to the United
Breweries of America, Inc., responsive to Item 5 of Form 8-K (Other Events). No
financial statements were filed.
17
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
MENDOCINO BREWING COMPANY, INC.
Dated: November 12, 1999 By: /s/ H. Michael Laybourn
----------------------------------------
H. Michael Laybourn
President
Dated: November 12, 1999 By: /s/ P.A. Murali
----------------------------------------
P.A. Murali
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- ------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
MENDOCINO BREWING COMPANY, INC.
FINANCIAL DATA SCHEDULE
UNAUDITED FINANCIAL STATEMENTS OF
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
AS OF SEPTEMBER 30, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,137,000
<ALLOWANCES> 0
<INVENTORY> 1,261,800
<CURRENT-ASSETS> 2,616,100
<PP&E> 17,129,900
<DEPRECIATION> (2,233,000)
<TOTAL-ASSETS> 19,910,900
<CURRENT-LIABILITIES> 3,929,700
<BONDS> 0
0
227,600
<COMMON> 13,808,500
<OTHER-SE> (3,453,200)
<TOTAL-LIABILITY-AND-EQUITY> 19,910,900
<SALES> 6,576,100
<TOTAL-REVENUES> 6,576,100
<CGS> 4,442,700
<TOTAL-COSTS> 7,192,600
<OTHER-EXPENSES> 351,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 644,800
<INCOME-PRETAX> (1,587,100)
<INCOME-TAX> 632,700
<INCOME-CONTINUING> (954,400)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (954,400)
<EPS-BASIC> (0.21)
<EPS-DILUTED> 0
</TABLE>
