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 March 31, 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 (IRS Employer
of 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 March 31,
1999 is 4,497,059.
<PAGE>
PART I
Item 1. Financial Statements.
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1999
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Accounts receivable $ 895,400
Inventories 856,700
Prepaid expenses 115,300
Deferred income taxes 138,300
------------
Total Current Assets: 2,005,700
------------
PROPERTY AND EQUIPMENT 15,093,800
------------
OTHER ASSETS
Deferred Taxes and Other Assets 2,045,300
------------
Total Other Assets: 2,045,300
------------
Total Assets: $ 19,144,800
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,159,200
Accrued liabilities 111,400
Accrued wages and related expense 224,900
Current maturities of notes payable to related party 994,000
Current maturities of obligation under capital lease 229,100
Current maturities of obligation under long-term debt 337,400
------------
Total Current Liabilities: 3,056,000
LINE OF CREDIT 1,043,900
LONG TERM DEBT, less current maturities 3,823,200
OBLIGATIONS under capital lease - less current maturities 1,472,400
------------
Total Liabilities: 9,395,500
------------
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized, 4,497,059 shares issued and
outstanding 12,413,000
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 (2,891,300)
------------
Total Stockholders' Equity 9,749,300
------------
Total Liabilities and Stockholders' Equity: $ 19,144,800
=============
<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 INCOME
(Unaudited)
<CAPTION>
---------------------------------------
THREE MONTHS ENDED
March 31, 1999
---------------------------------------
1999 1998
----------- -----------
<S> <C> <C>
SALES $ 1,849,300 $ 1,310,000
LESS EXCISE TAXES 110,800 68,600
----------- -----------
NET SALES 1,738,500 1,241,400
COST OF GOODS SOLD 1,405,300 1,122,500
----------- -----------
GROSS PROFIT 333,200 118,900
----------- -----------
OPERATING EXPENSES
Retail operating 90,000 111,800
Marketing 344,600 168,000
General and administrative 350,500 428,800
----------- -----------
785,100 708,600
----------- -----------
LOSS FROM OPERATIONS (451,900) (589,700)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income -- 1,800
Other income (expense) 5,900 (3,700)
Interest expense (206,600) (121,900)
----------- -----------
(200,700) (123,800)
----------- -----------
LOSS BEFORE INCOME TAXES (652,600) (713,500)
Benefit From Income Taxes (260,100) (285,200)
----------- -----------
NET LOSS $ (392,500) $ (428,300)
=========== ===========
LOSS PER SHARE $ (0.09) $ (0.10)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,497,059 4,463,385
=========== ===========
<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
March 31,
---------------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(392,500) $(428,300)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 202,500 165,400
Deferred income taxes (261,100) (285,200)
Changes in:
Accounts receivable (215,500) (133,400)
Inventories 121,300 22,300
Prepaid expenses (81,800) (164,600)
Deposits and other assets (2,100) --
Accounts payable 352,500 14,000
Accrued wages and related expenses 14,100 (36,000)
Accrued liabilities 20,400 54,800
--------- ---------
Net cash used by operating activities: (242,200) (791,000)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold
improvements (19,200) (77,700)
--------- ---------
Net cash used by investing activities: (19,200) (77,700)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 305,900 --
Principal payments on long-term debt (33,100) (1,900)
Borrowings on long-term debt -- 305,000
Payments on obligation under long-term lease (53,400) (38,700)
--------- ---------
Net cash provided by financing activities: 219,400 264,400
--------- ---------
DECREASE IN CASH (42,000) (604,300)
CASH, beginning of period 42,000 706,300
--------- ---------
CASH, end of period $ -- $ 102,000
========= =========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 206,600 $ 121,900
--------- ---------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<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 three months ended March 31, 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 a term loan. The term loan is repayable
in monthly installments of $24,700 over sixty months commencing March 1999. The
bank's commitment under the line of credit matures September 2000. The agreement
is secured by substantially all of the assets of the Releta Brewing Company,
LLC, a second position on the assets of the Company, accounts receivable,
inventory 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 9.27%.
The note requires monthly payments of principal and interest of $24,400. The
note matures in December 2012 with a balloon payment and is secured by real
property located in Ukiah, California.
The Company has a notes payable which consists of convertible notes to United
Breweries of America, a related party, in the amount of $994,000 as of March 31,
1999. The notes bear interest at the prime rate plus 1.5%, maturing 18 months
after the advances, unsecured, subordinated to bank and financial institution
debt; notes mature through June 2000; notes are convertible at the option of
United Breweries of America to common stock at $1.50 per share upon maturity.
The company has a note in the amount of $27,800 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 March 31, 1999, the Company had available net operating loss carryovers of
approximately $5,100,000, $1,990,000 and $580,000 of federal, California and New
York net operating losses, respectively. The federal and New York operating
losses expire through 2018. California
<PAGE>
operating losses expire through 2003. 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.
Item 2. Management's 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 and 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,"
"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 results of the first three months of 1999 showed a substantial growth in
sales volume both out of the facility located in Ukiah, California, and the
facility located in Saratoga Springs, New York. Sales (measured in barrels)
during the first three months of 1999 increased to 9,985 barrels from 6,095
barrels in the first three months of 1998. This represents an increase of 64%
over the first three months of 1998. Of the total sales of 9,985 barrels, the
sales out of the Ukiah facility amounted to 7,600 barrels and the sales out of
the Saratoga Springs facility amounted to 2,385 barrels.
The increase in net sales during the three-month period ending March 31, 1999
was achieved in significant part through increased and improved marketing
efforts.
The high costs associated with the brewery located at Ukiah, the fixed costs of
the Ten Springs brewery, and interest expense contributed to a net loss of
$392,500 for the first three months of 1999. The loss from operations as a
percentage of net sales decreased from 47.5% for the first quarter of 1998 to
26% for the first quarter of 1999.
<PAGE>
Results of Operations
Three Months Ending March 31, 1999 Compared to Three Months Ending March 31,
1998. The following discussion sets forth information for the three-month
periods ending March 31, 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:
---------------------
Three Months Ended
March 31
---------------------
1999 1998
Statements of Income Data:
Sales 106.37% 105.52%
Excise taxes 6.37 5.52
Net Sales 100.00 100.00
Cost of Sales 80.83 90.42
Gross Profit 19.17 9.58
Retail Operating Expense 5.18 9.01
Marketing Expense 19.82 13.53
General and Administrative Expenses 20.16 34.54
Total Operating Expenses 45.16 57.08
Loss from Operations (25.99) (47.50)
Other Income (expense) .34 (0.30)
Interest income (expense) (11.88) (9.67)
Loss before income taxes (37.54) (57.47)
Benefit from income taxes 14.96 22.97
Net Loss (22.58) (34.50)
<PAGE>
--------------------------------
Three Months Ended
March 31
--------------------------------
1999 1998
Balance Sheet Data:
Cash $ 0 $ 102,000
Working Capital (1,050,300) 230,900
Property and Equipment 15,093,800 15,555,500
Deposits and Other Assets 2,045,300 41,300
Total Assets 19,144,800 17,895,300
Long-term Debt 4,867,100 3,074,300
Obligation under Capital Lease 1,472,400 1,523,500
Total Liabilities 9,395,500 6,665,400
Shareholder's equity 9,749,300 11,229,900
Net Sales. Net sales for the first three months of 1999 were $1,738,500 compared
to $1,241,400 for the first three months of 1998, representing an increase of
40.04%. The sales volume increased to 9,985 barrels during the first quarter of
1999, from 6,095 barrels during the first quarter of 1998, representing an
increase of 63.82%. Management attributes the increased sales to improved
marketing strategies, including new point-of-sale materials. The increase in
overall net sales during the first quarter of 1999 was achieved solely by higher
wholesale shipments during the first quarter of 1999, which represented an
increase of $561,800 over the wholesale shipments during the first quarter of
1998. Partially as a result of management's focus on wholesale beer sales,
retail sales for the first quarter of 1999 were $60,500 less than retail sales
during the first quarter of 1998.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
first quarter of 1999 was 80.83%, as compared to 90.42% during the first quarter
of 1998, representing a decrease of 9.59%. As a percentage of net sales, during
the first quarter of 1999, labor costs decreased from 20.27% in 1998, to 15.67%
in 1999, depreciation decreased from 12.16% in 1998 to 9.80% in 1999, utilities
decreased from 4.58% in 1998 to 3.84% in 1999, property taxes decreased from
2.18% in 1998 to 1.78% in 1999, insurance costs increased from 1.64% in 1998 to
1.84% in 1999, wastewater decreased from 1.33% in 1998 to 0.6% in 1999, indirect
materials decreased from 1.17% in 1998 to 0.36% in 1999, thereby mainly
contributing to the decrease of 9.59% of the cost of goods sold as a percentage
of net sales, as compared to the first quarter of 1998. Management attributes
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 quarter of 1999 increased to $333,200, from $118,900 for
the comparable period of 1998, representing an increase of 180%. As a percentage
of net sales, the gross profit during the first quarter of 1999 increased to
19.17% from 9.58% for the corresponding period of 1998.
<PAGE>
Operating Expenses. Operating expenses for the first quarter of 1999 were
$785,100, as compared to $708,600 for the first quarter of 1998, representing an
increase of 10.8%. Operating expenses consist of retail operating expenses,
marketing and distribution expenses, and general and administrative expenses.
Retail operating expenses for the first quarter of 1999 were $90,000,
representing a decrease of $21,800, or 19.50%, from the first quarter of 1998.
As a percentage of net sales, retail operating expenses decreased to 5.18% as
compared to 9.01% for the first three months of 1998. The decrease in retail
operating expenses consisted of a decrease in labor costs of $21,600 and other
expenses by $200.
Marketing and distribution expenses for the first quarter of 1999 were $344,600,
representing an increase of $176,600, or 105%, from the first quarter of 1998.
As a percentage of net sales, marketing and distribution expenses represented
19.82% as compared to 13.53% during the first quarter of 1998. Compared to the
first quarter of 1998, marketing and sales labor increased by $117,200;
telephone expenses increased by $7,500, sales promotions expenses increased by
$30,400, point-of-sale expenses increased by $27,200, website and other media
expenses increased by $6,500, freight decreased by $13,700, and other net
expenses increased by $1,500.
General and administrative expenses were $350,500, representing a decrease of
$78,300 from the first quarter of 1998. As a percentage of net sales, the
general and administrative expenses were 20.16% for the first quarter of 1999,
as compared to 34.54% for the first quarter of 1998. As compared to the first
quarter of 1998, professional and legal fees decreased by $49,900, depreciation
decreased by $11,300, meal and entertainment decreased by $9,000 and net
miscellaneous expenses decreased by $8,100.
Other Income (Expense). Other expenses for the first three months of 1999 were
($200,700), representing an increase of $76,900 when compared to the first
quarter of 1998. The increase was due to an increase in interest expenses for
the first quarter of 1999 of $84,700, which was partially offset by an increase
in miscellaneous income of $7,800.
Benefit From Income Taxes. The benefit from income taxes for the first three
months of 1999 was $260,100, as compared to $285,200 for the first quarter of
1998. The benefit from income taxes was due to the expected future benefit of
carrying forward net operating losses.
Net Loss. The net loss for the first three months of 1999 was $392,500, as
compared to a net loss of $428,300 for the first three months of 1998. As a
percentage of net sales, the net loss for the first quarter of 1999 decreased to
22.58%, as compared to 34.50% for the first quarter 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 95% of the Company's gross sales for the first quarter 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
<PAGE>
located at the Hopland Brewery. This segment accounted for 5% of the Company's
total gross sales during the first quarter 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.
<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>
Three Months Ended March 31, 1999
-----------------------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,755,400 $ 93,900 $ -- $ 1,849,300
Operating Loss (73,300) (28,100) -- (101,400)
Identifiable Assets 14,116,600 7,900 5,020,300 19,144,800
Depreciation and amortization 180,100 1,700 20,700 202,500
Capital Expenditures 22,800 -- 4,100 26,900
Three Months Ended March 31, 1998
-----------------------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------------------------
Sales $ 1,155,600 $ 154,400 $ -- $ 1,310,000
Operating Loss (131,900) (29,000) -- (160,900)
Identifiable Assets 14,587,500 30,600 3,277,200 17,895,300
Depreciation and amortization 151,700 1,500 12,200 165,400
Capital Expenditures 77,800 -- -- 77,800
</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.
<PAGE>
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 9.27%, maturing in December 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.
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. $1,483,968 of the line of credit was advanced
to the Company as an initial term loan, which is repayable in sixty consecutive
monthly installments, each in the amount of $24,733, commencing on March 24,
1999. Of the initial term loan, $600,000 was used to repay all amounts
outstanding on the loan from WestAmerica Bank. 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 March 31, 1999, the total
amount outstanding on the line of credit was $2,503,135.
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.
Shareholder Commitment. In early 1998, the Company's largest shareholder, United
Breweries of America, Inc. ("UBA"), agreed to provide the Company with a credit
facility of up to $2 million to fund the operations of the Company. The credit
facility was to be secured by the assets of Releta Brewing Company, LLC ("RBC").
Advances on the credit facility bear interest at the prime rate of the Bank of
America in San Francisco plus 1.5% , 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. The advances also
include a conversion feature whereby UBA can, 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. In the course of
facilitating the loan from The CIT Group/Credit Finance, Inc. ("CIT"), UBA and
the Company materially amended the terms of the credit facility. Specifically,
UBA was obligated to forego its security interest in the assets of RBC and
subordinate the payment of any interest or principal on the advances from the
credit facility to the obligations owed to CIT and Savings Bank of
<PAGE>
Mendocino County. In addition, UBA pledged shares of stock of an affiliate of
UBA to CIT. UBA has advanced a total of $994,000 as of March 31, 1999; accrued
but unpaid interest on the advances totals $22,662 as of March 31, 1999.
Subsequently, due to the material amendments to the terms of the credit
facility, UBA and the Company have terminated the current credit facility. The
termination of the current credit facility and the establishment of a new credit
facility is not expected to affect the status of the advances which UBA has made
to date. In addition, UBA has offered the Company a new credit facility in the
amount of $800,000. UBA's new $800,000 credit facility would be on similar terms
as the old credit facility provided that, under the new credit facility, the
Company would be required to make quarterly interest payments in cash and the
conversion price at which UBA can convert outstanding principal and interest
into the Company's common stock may be reduced. Under the current credit
facility, the Company has made interest payments by issuing additional
convertible notes to UBA. The Company is in discussions with CIT, Finova, and
Savings Bank of Mendocino County to obtain their agreement to certain terms of
the proposed UBA credit facility. There can be no assurances that the Company
can obtain such terms from its other creditors which would result in UBA making
the new credit facility available to the Company. The failure to obtain the new
credit facility from UBA, or an alternate source of working capital will have a
material adverse effect on the Company.
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.
The Company's ratio of current assets to current liabilities on March 31, 1999,
was .66 to 1.0 and its ratio of assets to liabilities was 2.04 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 1900 rather than
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.
<PAGE>
The Company believes that its 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 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 may 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 has not confirmed the state of
year 2000 readiness of these parties.
The Company has not yet established a "contingency plan" to address potential
year 2000 problems and is currently considering the extent to which it will
develop a formal contingency plan.
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.
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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
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).
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 (P) Indemnification Agreement with Vijay Mallya.
10.30 (P) Indemnification Agreement with Michael Laybourn.
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
10.31 (P) Indemnification Agreement with Jerome Merchant.
10.32 (P) Indemnification Agreement with Yashpal Singh.
10.33 (P) Indemnification Agreement with P.A. Murali.
10.34 (P) Indemnification Agreement with Robert Neame.
10.35 (P) Indemnification Agreement with Sury Rao Palamand.
10.36 (P) 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.
10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing
Company LLC in favor of The CIT Group/Credit Finance, Inc.
10.40 (S) Promissory Notes in favor of 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.
(B) Incorporated by reference from the Company's Report on Form
10-KSB for the annual period ended December 31, 1994,
previously filed with the Commission.
(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.
(H) Incorporated by reference from the Company's Report on Form
10-QSB/A No. 1 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.
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
(R) Incorporated by reference from the Company's Report on Form
10-QSB for the quarterly period ended September 30, 1998.
(S) Incorporated by reference from the Amendment No. 4 to
Schedule 13D filed with the Commission on February 18, 1999,
by United Breweries of America, Inc. and Vijay Mallya.
(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.
+ Portions of this Exhibit were omitted pursuant to an
application for an order declaring confidential treatment
filed with the Securities and Exchange Commission.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
<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: May 12, 1999 By: /s/ H. Michael Laybourn
------------------------------
H. Michael Laybourn
President
Dated: May 12, 1999 By: /s/ P.A. Murali
------------------------------
P.A. Murali
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit
Number
27 Financial Date Schedule
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 895,400
<ALLOWANCES> 0
<INVENTORY> 856,700
<CURRENT-ASSETS> 2,005,700
<PP&E> 16,940,400
<DEPRECIATION> 1,846,600
<TOTAL-ASSETS> 19,144,800
<CURRENT-LIABILITIES> 3,056,000
<BONDS> 0
0
227,600
<COMMON> 12,413,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,144,800
<SALES> 1,849,300
<TOTAL-REVENUES> 1,849,300
<CGS> 1,405,300
<TOTAL-COSTS> 2,190,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (206,600)
<INCOME-PRETAX> (652,600)
<INCOME-TAX> (260,100)
<INCOME-CONTINUING> (392,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (392,500)
<EPS-PRIMARY> (0.09)
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