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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
For the transition period from to______________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, 2000 is 5,530,177.
<PAGE>
PART I
Item 1. Financial Statements.
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 97,200
Accounts receivable 1,458,700
Inventories 1,071,000
Prepaid expenses 171,900
Deferred income taxes 43,100
-----------
Total Current Assets: 2,841,900
-----------
PROPERTY AND EQUIPMENT 14,148,700
-----------
OTHER ASSETS
Deferred Taxes 2,596,700
Other Assets 397,000
-----------
Total Other Assets: 2,993,700
-----------
Total Assets: $19,984,300
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,695,200
Accrued liabilities 307,200
Accrued wages and related expense 159,700
Current maturities of obligation under capital lease 288,000
Current maturities of obligation under long-term debt 327,400
-----------
Total Current Liabilities: 2,777,500
LINE OF CREDIT 1,482,700
LONG TERM DEBT, less current maturities 4,528,800
OBLIGATIONS under capital lease - less current maturities 1,167,700
-----------
Total Liabilities: 9,956,700
-----------
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized, 5,530,177 shares issued and
outstanding 13,841,900
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 (4,041,900)
-----------
Total Stockholders' Equity 10,027,600
-----------
Total Liabilities and Stockholders' Equity: $19,984,300
-----------
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
------------------------------------ -------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
------------------------------------ -------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES $2,711,000 $2,654,400 $7,441,600 $6,988,900
LESS EXCISE TAXES 157,500 153,900 430,000 412,800
---------- ---------- ---------- ----------
NET SALES 2,553,500 2,500,500 7,011,600 6,576,100
COST OF GOODS SOLD 1,457,400 1,532,800 4,323,100 4,442,700
---------- ---------- ---------- ----------
GROSS PROFIT 1,096,100 967,700 2,688,500 2,133,400
---------- ---------- ---------- ----------
OPERATING EXPENSES
Retail operating 117,200 124,400 309,600 319,600
Marketing 476,600 454,600 1,196,300 1,191,800
General and administrative 294,100 492,800 976,200 1,239,100
---------- ---------- ---------- ----------
887,900 1,071,800 2,482,100 2,749,900
---------- ---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS 208,200 (104,100) 206,400 (616,500)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest income (expense) 800 -- 800 --
Other income (expense) 26,900 17,500 69,900 26,100
Acquisition expense -- (25,000) -- (104,400)
Induced debt conversion expense -- (248,000) -- (248,000)
Interest expense (209,700) (224,400) (668,100) (644,800)
---------- ---------- ---------- ----------
(182,000) (480,400) (597,400) (970,600)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 26,200 (584,500) (391,000) (1,587,100)
PROVISION FOR (BENEFIT FROM) INCOME TAXES (156,400) (232,400) (154,200) (632,700)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 182,600 $ (352,100) $ (236,800) $ (954,400)
========== ========== ========== ==========
BASIC EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.07) $ (0.04) $ (0.21)
========== ========== ========== ==========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.07) $ (0.04) $ (0.21)
========== ========== ========== ==========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<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
---------------------------------- ---------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 182,600 $(352,100) $(236,800) $(954,400)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 197,400 196,900 590,700 614,600
Deferred income taxes (156,400) (232,400) (156,400) (634,200)
Stock issued for services 7,000 91,600 7,000 91,600
Gain on disposal of fixed assets (26,000) -- (26,000) --
Debt converted to stock -- 309,900 -- 309,900
Changes in:
Accounts receivable (218,200) 124,000 (418,400) (457,100)
Inventories (78,100) (328,600) 97,700 (283,800)
Prepaid expenses (3,100) (8,800) (114,700) (45,500)
Deposits and other assets (50,000) (2,300) (19,100) (7,300)
Accounts payable (214,900) 153,400 (13,500) 778,200
Accrued wages and related expenses (17,100) 2,500 (44,900) (9,500)
Accrued liabilities (12,100) 11,000 176,900 130,900
-------- ------- --------- ---------
Net cash from operating activities: (388,900) (34,900) (157,500) (466,600)
-------- ------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (14,800) (22,000) (33,700) (73,200)
improvements
Proceeds of sale of fixed assets 51,600 -- 51,600 --
Increase in intangibles (36,900) -- (228,900) --
-------- ------- --------- ---------
Net cash from investing activities: (100) (22,000) (211,000) (73,200)
-------- ------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 214,700 (81,500) 322,900 582,900
Principal payments on long-term debt (76,800) (84,200) (250,900) (201,300)
Borrowings on long-term debt 315,100 286,300 625,100 286,300
Payments on obligation under long-term lease (73,700) (63,700) (221,800) (170,100)
Disbursements in excess of deposits -- -- (9,600) --
-------- ------- --------- ---------
Net cash from financing activities: 379,300 56,900 465,700 497,800
-------- ------- --------- ---------
INCREASE / (DECREASE) IN CASH (9,700) -- 97,200 (42,000)
-------- ------- --------- ---------
CASH, beginning of period -- 42,000
------- --------- ---------
106,900
---------
CASH, end of period $ 97,200 $ -- $ 97,200 $ --
========= ========= ========= =========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 198,000 $ 228,200 $ 583,100 $ 581,500
--------- --------- --------- ---------
<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, 1999. 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, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000.
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 over sixty months commencing March
1999. The amount of the term loan outstanding as of September 30, 2000 is
$1,014,000. The amount under the working capital line of credit outstanding as
of September 30, 2000 is $1,482,700. The bank's commitment under the line of
credit matures in September 2002. The line of credit 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
The Company has a $2,700,000 note, with interest at Treasury Constant Maturity
Index for five year treasuries plus 4.17%, currently 10.00%. 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, Inc. in the amount of $1,186,400 as of September 30, 2000.
The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10%
per annum, and mature 18 months from the date of the advance. The advances are
unsecured and the notes mature through September 2001. The notes are 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 as of September 30,
2000 is $74,200.
Note 4 - Net Income Per Common and Common Equivalent Share
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period.
4
<PAGE>
<TABLE>
Diluted EPS is computed by dividing income available to shareholders by the
weighted average number of common shares and common equivalent shares
outstanding, which include dilutive stock options and notes payable convertible
in common stock. Common equivalent shares associated with stock options and
convertible notes payable have been excluded from periods with a net loss as the
potentially dilutive shares would be antidilutive.
<CAPTION>
Three months ended Nine months ended
------------------------- --------------------------
9/30/00 9/30/00 9/30/00 9/30/00
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic net income (loss) per share
Net income (loss) $ 182,600 $ (352,100) $ (236,800) $ (954,400)
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,530,177 4,836,915 5,530,177 4,610,334
=========== =========== =========== ===========
Basic net income (loss) per share $ 0.03 $ (0.07) $ (0.04) $ (0.21)
=========== =========== =========== ===========
Diluted net income (loss) per share
Net income (loss) $ 182,600 $ (352,100) $ (236,800) $ (954,400)
Interest expense on convertible
notes payable 24,000 -- -- --
----------- ----------- ----------- -----------
Income for the purpose of computing
diluted net income per share $ 206,600 $ (352,100) $ (236,800) $ (954,400)
=========== =========== =========== ===========
Weighted average common shares
outstanding 5,530,177 4,836,915 5,530,177 4,610,334
Dilutive stock options 181,388 -- -- --
Assumed conversion of convertible
notes payable 790,933 -- -- --
----------- ----------- ----------- -----------
Weighted average common shares
outstanding for the purpose of
computing diluted net income (loss)
per share 6,502,438 4,836,915 5,530,177 4,610,334
=========== =========== =========== ===========
Diluted net income (loss) per share $ 0.03 $ (0.07) $ (0.04) $ (0.21)
=========== =========== =========== ===========
</TABLE>
Note 5 - Income Taxes
As of September 30, 2000, the Company has available for carryforward
approximately $7,172,000, $2,771,000 and $862,000 of Federal, California and New
York net operating losses. Approximately $940,000 of the Federal and New York
net operating losses will expire in 2012 and the remaining through 2020. The
California net operating losses expire beginning in 2001 through 2005. The
Company also has $28,000 of California Manufactures Investment Tax Credits that
can be carried forward to offset future taxes that begin to expire in 2005.
Note 6 - Related Party Transactions
As of September 30, 2000, the Company has expensed consulting fees 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,
2000.
5
<PAGE>
As of September 30, 2000, the Company has recognized $8,700 in expenses incurred
on its behalf by American United Breweries International Inc. (AUBI). The
outstanding amount payable to AUBI as of September 30, 2000 is $23,800.
On March 29, 2000, the Company announced that it intends to enter into two
concurrent related-party transactions. Subsequently, the transactions were
consolidated into a single transaction.
In the transaction, the Company will acquire UBSN Ltd. by acquiring all of the
issued and outstanding shares of United Breweries International UK, Ltd. ("UBI
UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the
Company has offered to issue approximately 5,500,000 shares of the Company's
common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the
transaction, UBI UK Ltd. will become a wholly-owned subsidiary of the Company.
The closing of the transaction is expected to occur in January 2001, or as soon
thereafter as the various conditions to closing have been satisfied or waived.
The closing of the transaction, the obligation of the Company to proceed with
the acquisition of the shares of UBI UK, Ltd., and the precise number of shares
of common stock to be issued are subject to the satisfaction or waiver of
certain conditions including: (i) the approval of the proposed acquisition by
the Board of Directors of the Company; (ii) the approval of the transaction by
the shareholders of the Company; (iii) the approval by the Securities and
Exchange Commission of the Company's Proxy Statement with respect to the
transaction; and (iv) the receipt by the Company of a "fairness opinion", in a
form satisfactory to the Board of Directors of the Company, regarding the
transaction from Sage Capital LLC.
UBI UK, Ltd. has obtained the distribution rights to the "Kingfisher" brand of
beer in the United States. Under the terms of the distribution agreement, the
Company will also have an option to brew "Kingfisher" brand beer in the United
States, for distribution primarily in the United States, on mutually agreed
terms and conditions. However, in order to commence the brewing and distribution
of the "Kingfisher" beer, the Company will have to obtain a license to use the
"Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The Company will
be solely responsible for obtaining that trademark license, at its sole expense,
and there are no assurances that such license will be obtained.
The transaction described above is a related party transaction because the
corporation that owns all of the shares of UBI UK, Ltd. is held by a trust,
which is controlled by fiduciaries who may exercise discretion in favor of Dr.
Mallya, amongst others. Dr. Vijay Mallya is the Chairman and Chief Executive
Officer of the Company. In addition, Dr. Mallya is a member of the board of
directors of UBSN, Ltd. Further, KAI is owned by a foreign corporation, the
shares of which are controlled by fiduciaries who may exercise discretion in
favor of Dr. Mallya, amongst others.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
6
<PAGE>
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,"
"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 Releta Brewing Company, LLC (Ten
Springs Brewery), located in Saratoga Springs, New York launching the new Sun
Lager label. The product was well received in the market.
The increase in net sales during the nine-month period ending September 30, 2000
was achieved in significant part through increased and improved marketing
efforts. Sales (measured in barrels) increased from 36,125 bbl. in the first
nine months of 1999 to 36,707 during the first nine months of 2000, representing
an increase of 1.61% over the corresponding period of last year. Of the total
sales of 36,707 bbls., the sales out of the Ukiah facility were 31,257 bbls.,
and the sales out of the Saratoga Springs facility were 5,450 bbls. The sales
volume out of the Ukiah facility increased by 11.6%.
In Saratoga Springs, the volume decreased to 5,450 bbls in 2000 from 8,110 bbls
in 1999. This was mainly due to management's effort to concentrate on the growth
of the company's own brands and to phase out its reliance on contract brewing.
This resulted in a reduction in contract brewing from 60% of the total sales in
the first nine months of 1999 to 24% for the first nine months of 2000. However,
the volume of the company's own brands increased by 27% during the first nine
months of 2000 when compared to the corresponding period of 1999. This resulted
in the net sales expressed in dollar terms decreasing by only 17% although the
volume decreased by 33% during the first nine months of 2000.
7
<PAGE>
The high costs associated with the new brewery located at Ukiah, the fixed costs
of the Ten Springs Brewery (both of which are still not being utilized to their
full capacity), and interest expenses contributed to a net loss of $236,800 for
the first nine months of 2000. The loss from operations as a percentage of net
sales decreased from 14.51% for the first nine months of 1999 to 3.38% for the
first nine months of 2000.
Results of Operations
The following discussion sets forth information for the nine-month periods
ending September 30, 2000 and 1999. 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:
8
<PAGE>
----------------------------------
Nine Months Ended
September 30
----------------------------------
2000 1999
Statements of Income Data:
Sales 106.13% 106.28%
Excise taxes 6.13 6.28
Net Sales 100.00 100.00
Cost of Sales 61.66 67.56
-------------- --------------
Gross Profit 38.34 32.44
Retail Operating Expense 4.42 4.85
Marketing Expense 17.06 18.12
General and Administrative Expenses 13.92 18.84
-------------- --------------
Total Operating Expenses 35.40 41.82
-------------- --------------
Income (Loss) from Operations 2.94 (9.37)
Other Income (Expenses) 0.99 0.40
Acquisition Expense -- (1.57)
Interest income (expense) (9.51) (9.81)
Loss before income taxes (5.58) (24.13)
Benefit from income taxes 2.20 9.62
Net Profit (Loss) (3.38) (14.51)
Balance Sheet Data:
Cash $ 97,200 $ 0
Working Capital 64,400 (1,313,600)
Property and Equipment 14,148,700 14,896,900
Deposits and Other Assets 2,993,700 2,397,900
Total Assets 19,984,300 19,910,900
Long-term Debt 4,528,800 3,940,300
Obligation under Capital Lease 1,167,700 1,458,000
Total Liabilities 9,956,700 9,328,000
Shareholder's equity 10,027,600 10,582,900
Net Sales. Net sales for the first nine months of 2000 were $7,011,600 compared
to $6,576,100 for the first nine months of 1999, representing an increase of
6.62%. The sales volume increased to 36,707 barrels during the first nine months
of 2000, from 36,125 barrels during the first nine months of 1999, representing
an increase of 1.61%. Management attributes the increased sales to
9
<PAGE>
improved marketing strategies, including new point of sale materials. The
increase in overall net sales during the first nine months of 2000 was achieved
solely by higher wholesale shipments which represented an increase of $463,900
over the wholesale shipments during the first nine months of 1999. In view of
management's focus on wholesale beer sale, retail sales for the first nine
months of 2000 were $11,200 less than retail sales during the first nine months
of 1999.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
first nine months of 2000 was 61.66%, as compared to 67.56% during the first
nine months of 1999, representing a decrease of 5.90%. As a percentage of net
sales, during the first nine months of 2000, labor costs decreased from 11.76%
in 1999, to 9.91% in 2000, depreciation decreased from 7.79% in1999 to 7.41% in
2000, utilities decreased from 3.82% in 1999 to 3.66% in 2000, and other
expenses decreased by .30%, thereby contributing to the decrease of 5.90% of the
cost of goods sold as a percentage of net sales, as compared to the first nine
months of 1999. Management attributes the balance of the decrease to higher
sales volumes thereby lowering per barrel production cost at Ukiah and
improvement in process efficiencies at both Ukiah and Saratoga Springs.
Gross Profit. As a result of the higher net sales as explained above, gross
profit for the first nine months of 2000 increased to $2,688,500, from
$2,133,400 for the comparable period of 1999, representing an increase of 26%.
As a percentage of net sales, the gross profit during the first nine months of
2000 increased to 38.34% from that of 32.44% for the corresponding period of
1999.
Operating Expenses. Operating expenses for the first nine months of 2000 were
$2,482,100, as compared to $2,749,900 for the first nine months of 1999,
representing a decrease of 9.74%. 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 2000 were $309,600,
representing a decrease of $9,400, or 2.95%, from the first nine months of 1999.
As a percentage of net sales, retail operating expenses decreased to 4.82% as
compared to 4.85% for the first nine months of 1999. The decrease in retail
operating expenses consisted mainly of a decrease in labor costs.
Marketing and distribution expenses for the first nine months of 2000 were
$1,196,300, representing an increase of $4,500, or 0.38%, from the first nine
months of 1999. Selling expenses increased $71,500 (mainly salaries), overall
marketing and advertising decreased by $28,500, and sales promotions decreased
$38,500. The management decided to focus more on radio advertising which
resulted in an increase of $60,500 in media-related expenses. This increase was
partially offset by a decrease in purchases of point of sale materials, event
sponsorships and incentive/discount programs. The company decided to utilize
existing stocks of point of sale materials so that new designs can be introduced
in a phased manner.
General and administrative expenses were $976,200, representing a decrease of
$262,900 from the first nine months of 1999. As a percentage of net sales, the
general and administrative expenses were 13.92% for the first nine months of
2000, as compared to 18.84% for the first nine months of 1999. As compared to
the first nine months of 1999, professional and legal fees decreased by $50,200,
travel and entertainment decreased by $20,500, labor decreased by $201,600, and
all other expenses increased net by $9,400.
10
<PAGE>
Other Income (Expenses). Other expenses for the first nine months of 2000 were
($597,400), representing a decrease of $373,200 when compared to the first nine
months of 1999. The decrease is due to a nonrecurrence of acquisition costs of
$103,400 and induced debt conversion expenses of $248,500, an increase in other
income of $44,300 owing to a gain on sale of assets, and an increase in interest
expense of $23,000.
Benefit From Income Taxes. The benefit from income taxes for the first nine
months of 2000 was $156,400, as compared to $632,700 for the first nine months
of 1999. The benefit from income taxes is due to the expected future benefit of
carrying forward of net operating losses.
Net Loss. Net loss for the first nine months of 2000 was $236,800, as compared
to a net loss of $954,400 for the first nine months of 1999. As a percentage of
net sales, net loss for the first nine months of 2000 decreased to 3.38%, as
compared to 14.51% for the first nine months of 1999.
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 2000. 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 2000.
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>
Nine Months Ended September 30, 2000
------------------------------------------------------------
Brewing Retail Corporate
Operations Operations and Other Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 6,991,800 $ 449,800 $ -- $ 7,441,600
Operating Profit (Loss) 221,800 (15,400) -- 206,400
Identifiable Assets 15,140,200 79,500 4,764,600 19,984,300
Depreciation and amortization 519,900 5,000 65,800 590,700
Capital Expenditures 23,800 5,600 4,300 33,700
</TABLE>
11
<PAGE>
<TABLE>
Nine Months Ended September 30, 1999
------------------------------------------------------------
Brewing Retail Corporate
Operations Operations 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
</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 10.00%, 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.
Credit Facility. The CIT Group/Credit Finance, Inc. ("CIT") 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. The line of credit was originally scheduled to mature on September 23,
2000, however CIT agreed to renew the line of credit through September 23, 2002.
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 $1,014,000 of the term loan was outstanding as of September 30,
2000. Based on the Company's current level of accounts receivable and inventory,
the Company has
12
<PAGE>
drawn the maximum amount permitted under the line of credit. As of September 30,
2000, the total amount outstanding on the line of credit was $1,482,700.
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. There can be no assurances that the
Company will be able to finance the purchase of equipment at the end of the term
of the lease and the failure to purchase the necessary equipment from Finova is
likely to have a material adverse effect on the Company.
Shareholder Commitment of Line of Credit. In mid 1999, UBA, the Company's
largest shareholder, agreed to provide the Company with a credit facility of up
$800,000 (the "1999 Facility"). On August 31, 1999, the Company and UBA entered
into a Master Line of Credit Agreement setting forth the terms of the 1999
Facility. Pursuant to the terms of the Master Line of Credit Agreement, advances
on the 1999 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 1999 Facility 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. On April 30, 2000, the Company accepted UBA's
offer to increase the maximum amount of the 1999 Facility from $800,000 to
$1,200,000. Subsequently, the Company and UBA entered into a First Amendment to
the Master Line of Credit Agreement.
As of September 30, 2000, the Company has made eight draws on the 1999 Facility.
The aggregate amount drawn, together with accrued but unpaid interest, equaled
$1,260,600 which corresponds to the right of UBA to acquire up to 840,400 shares
of common stock of the Company at a conversion price of $1.50 per share.
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.
13
<PAGE>
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,
2000, was 1.02 to 1.0 and its ratio of assets to liabilities was 2.0 to 1.0.
Year 2000 Matters
Year 2000 issues could affect the performance of the Company's business. While
not all Year 2000 date-related disruption scenarios have passed, through the
date of this filing, the Company has experienced no material disruptions or
other significant problems. There is a possibility of disruptions in the future
including errors that could still arise in the Company's internal and network
information systems because of their failure to correctly recognize and process
date information after the calendar change from 1999 to 2000, or their inability
to properly process the date February 29, 2000. The Company also may yet
experience supplier-related Year 2000 problems. If any of these Year 2000
problems occur, the Company's operations could be significantly hampered. The
Company is continuing to monitor and mitigate its exposure as appropriate, but
based on currently available information, the Company continues to believe that
Year 2000-related disruptions or other problems, if any, will not have a
significant adverse impact on the Company's operational results or financial
condition. However, the Company cannot be certain that Year 2000 issues will not
have a material adverse impact.
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.
Merger with UBSN
On March 29, 2000, the Company announced that it intends to enter into two
concurrent related-party transactions. Shortly thereafter, the structure of the
transaction was consolidated into a single transaction.
14
<PAGE>
In the transaction, the Company will acquire UBSN Ltd. by acquiring all of the
issued and outstanding shares of United Breweries International UK, Ltd. ("UBI
UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the
Company has offered to issue approximately 5,500,000 shares of the Company's
common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the
transaction, UBI UK, Ltd. will become a wholly-owned subsidiary of the Company.
The closing of the transaction is expected to occur in January 2001, or as soon
thereafter as the various conditions to closing have been satisfied or waived.
UBI UK, Ltd. has obtained the distribution rights to the "Kingfisher" brand of
beer in the United States. Under the terms of the distribution agreement, the
Company will also have an option to brew "Kingfisher" brand beer in the United
States, for distribution primarily in the United States, on terms and conditions
mutually agreeable with American United Breweries of America, Inc ("AUBI").
However, in order to commence the brewing and distribution of the "Kingfisher"
beer, the Company will have to obtain a license to use the "Kingfisher"
trademark from Kingfisher of America Inc ("KAI"). The Company will be solely
responsible for obtaining that trademark license, at its sole expense, and there
are no assurances that such license will be obtained.
The closing of the transaction, the obligation of the Company to proceed with
the acquisition of the shares of UBI UK, Ltd., and the precise number of shares
of common stock to be issued are subject to the satisfaction or waiver of
certain conditions including: (i) the approval of the proposed acquisition by
the Board of Directors of the Company; (ii) the approval of the transaction by
the shareholders of the Company; (iii) the approval by the Securities and
Exchange Commission of the Company's Proxy Statement with respect to the
transaction; and (iv) the receipt by the Company of a "fairness opinion", in a
form satisfactory to the Board of Directors of the Company, regarding the
transaction from Sage Capital LLC.
The closing of the acquisition was originally scheduled to occur in late June,
2000. However, conforming all of the foreign entities' financial statements
consistent with United States accounting standards and as required by the U.S.
Securities and Exchange Commission, and conducting all of the required audits,
has taken longer than expected.
The transaction described above is a related party transaction because the
corporation that owns all of the shares of UBI UK, Ltd. is held by a trust,
which is controlled by fiduciaries who may exercise discretion in favor of Dr.
Mallya, amongst others. In addition, Dr. Mallya is a member of the board of
directors of UBSN Ltd. Dr. Vijay Mallya is the Chairman and Chief Executive
Officer of the Company. Further, AUBI and KAI are owned by foreign corporations,
the shares of which are controlled by fiduciaries who may exercise discretion in
favor of Dr. Mallya, amongst others.
Additional information is contained in the 2000 Proxy Statement, filed with the
Securities and Exchange Commission on or about November 9, 2000, and such
information is incorporated herein by reference.
15
<PAGE>
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 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).
10.4 (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.
16
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
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.
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
10.45 (W) First Amendment to Master Loan Agreement between the
Company and 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.
17
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
(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.
(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.
(W) Incorporated by reference from the Amendment No. 6 to
Schedule 13D filed with the Commission on May 11, 2000,
by United Breweries of America, Inc. and Vijay Mallya.
(X) Incorporated by reference from the Company's Report on
Form 10-KSB for the annual period ended December 31,
1999, 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.
18
<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 13, 2000 By: /s/Yashpal Singh
------------------------------------------
Yashpal Singh
President
Dated: November 13, 2000 By: /s/P.A. Murali
------------------------------------------
P.A. Murali
Chief Financial Officer and Secretary
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number
------
27 Financial Data Schedule.
