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, 2000
[ ] 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 Identification No.)
incorporation or organization)
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,
2000 is 5,530,117.
<PAGE>
<TABLE>
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
<CAPTION>
March 31, 2000
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C>
Cash $ 51,900
Accounts receivable 1,223,300
Inventories 1,006,400
Prepaid expenses 50,300
Deferred income taxes 43,100
------------
Total Current Assets: 2,375,000
------------
PROPERTY AND EQUIPMENT 14,538,000
------------
OTHER ASSETS
Deferred Income Taxes 2,440,300
Other Assets 169,000
------------
Total Other Assets: 2,609,300
------------
Total Assets: $ 19,522,300
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,258,500
Accounts payable 1,781,000
Accrued liabilities 203,700
Accrued wages and related expense 177,800
Current maturities of notes payable to related party 310,000
Current maturities of obligation under capital lease 284,000
Current maturities of obligation under long-term debt 340,400
------------
Total Current Liabilities: 4,355,400
LONG TERM DEBT, less current maturities 4,055,500
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 1,306,800
------------
Total Liabilities: 9,717,700
------------
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized, 5,530,117 shares issued and
outstanding 13,834,900
Preferred stock, Series A, no par value, with aggregate liquidation preference of
$227,600; 227,600 shares authorized, issued and outstanding
Accumulated deficit (4,257,900)
------------
Total Stockholders' Equity 9,804,600
------------
Total Liabilities and Stockholders' Equity: $ 19,522,300
============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
1
<PAGE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
---------------------------
THREE MONTHS ENDED
March 31
---------------------------
2000 1999
----------- -----------
SALES $ 2,070,200 $ 1,849,300
LESS EXCISE TAXES 121,600 110,800
----------- -----------
NET SALES 1,948,600 1,738,500
COST OF GOODS SOLD 1,418,900 1,405,300
----------- -----------
GROSS PROFIT 529,700 333,200
----------- -----------
OPERATING EXPENSES
Retail operating 97,900 90,000
Marketing 322,400 344,600
General and administrative 344,200 350,500
----------- -----------
764,500 785,100
----------- -----------
LOSS FROM OPERATIONS (234,800) (451,900)
----------- -----------
OTHER INCOME (EXPENSE)
Other income 13,800 5,900
Interest expense (231,800) (206,600)
----------- -----------
(218,000) (200,700)
----------- -----------
LOSS BEFORE INCOME TAXES (452,800) (652,600)
BENEFIT FROM INCOME TAXES -- (260,100)
----------- -----------
NET LOSS $ (452,800) $ (392,500)
=========== ===========
LOSS PER SHARE $ (0.08) $ (0.09)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,530,117 4,497,059
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
---------------------------------
THREE MONTHS ENDED
March 31
---------------------------------
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(452,800) $(392,500)
Adjustments to reconcile net loss to net cash
from by operating activities:
Depreciation and amortization 196,400 202,500
Deferred income taxes -- (261,100)
Changes in:
Accounts receivable (183,000) (215,500)
Inventories 162,300 121,300
Prepaid expenses and taxes 6,900 (81,800)
Deposits and other assets 45,400 (2,100)
Accounts payable 72,300 352,500
Accrued wages and related expenses (26,800) 14,100
Accrued liabilities 73,400 20,400
--------- ---------
Net cash from operating activities: (105,900) (242,200)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (5,800) (19,200)
improvements
Increase in intangibles (62,700) --
--------- ---------
Net cash from investing activities: (68,500) (19,200)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 98,700 305,900
Principal payments on long-term debt (86,800) (33,100)
Borrowings on related party debt 310,000 --
Payments on obligation under long term lease (86,000) (53,400)
Disbursements in excess of deposits (9,600) --
--------- ---------
Net cash from financing activities: 226,300 219,400
--------- ---------
INCREASE / (DECREASE) IN CASH 51,900 (42,000)
--------- ---------
CASH, beginning of period -- 42,000
--------- ---------
CASH, end of period $ 51,900 $ --
========= =========
Supplemental cash flow information includes the following:
Cash paid during the period for:
Interest $ 196,100 $ 206,600
--------- ---------
<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 three months ended March 31, 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 March 31, 2000 is
$1,162,400. The amount under the working capital line of credit outstanding as
of March 31, 2000 is $1,258,500. The bank's commitment under the line of credit
matures September 2000. The agreement is secured by substantially all the assets
of the Releta Brewing Company, LLC, and all of 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 an outstanding in the principal amount of $2,700,000, 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 notes payable which consists of convertible notes to United
Breweries of America, Inc. in the amount of $738,800 as of March 31, 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 for the three months
ending March 31, 2000 is $12,500.
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 March 31, 2000, the Company has available for carryforward approximately
$7,172,000,
4
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$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. The Company has recorded a
valuation allowance of approximately $180,000 for net operating losses that are
not expected to be utilized prior to expiration. For the quarter ending March
31, 2000, the Company has not recorded any benefit from income taxes due to this
valuation allowance.
Note 5 -- Related party Transactions
As of March 31, 2000, the Company has accrued payment obligation to one of its
directors, Jerome Merchant, in the amount of $8,100 for consulting services
performed for the Company. Of this amount, the company has paid $5,400 through
March 31, 2000.
As of March 31, 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 March 31, 2000 is $10,100.
On March 29, 2000, the Company announced that it intends to enter into two
concurrent related-party transactions. Since such date, the structure of the
transactions has been revised.
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 late June 2000, or as soon thereafter as the
various conditions to closing have been satisfied or waived. Prior to the
closing UBI will obtain 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 certain 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 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 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
5
<PAGE>
exercise discretion in favor of Dr. Mallya, amongst others. Dr. Vijay Mallya is
the Chairman and Chief Executive Officer of the Company. 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.
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 first quarter of 2000 ended with the Company announcing that it intends to
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. Further, prior to the closing, UBI UK Ltd. will have will
have obtained the distribution rights to the "Kingfisher" brand of beer in the
United States. The closing of the transaction is subject to a number of
conditions including the approval of the proposed acquisition by the Board of
Directors and shareholders of the Company. It is estimated that the transaction
will close in late June or early July 2000.
Sales (measured in barrels) during the first three months of 2000 increased to
10,243 barrels from 9,985 barrels in the first three months of 1999. This
represents an increase of 3% over the first three months of 1999. Of the total
sales of 10,243 barrels, the sales out of the Ukiah facility amounted to 8,921
barrels and the sales out of the Saratoga Springs facility amounted to 1,322
6
<PAGE>
barrels. The sales volume for the first three months of 2000 showed a growth of
18% out of the facility located in Ukiah, California.
The Company ended the quarter with a net loss of $452,800. Increased fixed costs
associated with the breweries, higher selling and marketing expenses, and
increased interest expenses, contributed to the net loss of $452,800 for the
quarter ended March 31, 2000. The loss from operations as a percentage of net
sales decreased from 26% for the first quarter of 1999 to 12% for the first
quarter of 2000.
Subsequent to the end of the first quarter, on April 30, 2000, UBA and the
Company amended the line of credit agreement to increase the maximum amount of
the line of credit available to the Company from $800,000 to $1,200,000. As of
March 31, 2000, the amount outstanding under the line of credit from UBA is
$738,800, including accrued but unpaid interest of $23,700.
Results of Operations
The following discussion sets forth information for the three-month periods
ending March 31, 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:
7
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--------------------------------
Three Months Ended
March 31
--------------------------------
Statements of Operations Data: 2000 1999
------------ ------------
Sales 105.87% 106.37%
Excise taxes 5.87 6.37
------------ ------------
Net Sales 100.00 100.00
Cost of Goods Sold 72.82 80.83
------------ ------------
Gross Profit 27.18 19.17
Retail Operating Expense 5.02 5.18
Marketing Expense 16.55 19.82
General and Administrative Expenses 17.66 20.16
------------ ------------
Total Operating Expenses 39.23 45.16
------------ ------------
Loss from Operations (12.05) (25.99)
Other Income 0.71 0.34
Interest expense (11.90) (11.88)
------------ ------------
Loss before income taxes (23.24) (37.54)
Benefit from income taxes -- (14.96)
Net Loss (23.24) (22.58)
Balance Sheet Data:
Cash $ 51,900 $ 0
Working Capital (1,980,400) (1,050,300)
Property and Equipment 14,538,000 15,093,800
Deposits and Other Assets 2,609,300 2,045,300
Total Assets 19,522,300 19,144,800
Long-term Debt 4,055,500 4,867,100
Obligation under Capital Lease 1,306,800 1,472,400
Total Liabilities 9,717,700 9,395,500
Shareholder's equity 9,804,600 9,749,300
Net Sales. Net sales for the first three months of 2000 were $1,948,600 compared
to $1,738,500 for the first three months of 1999, representing an increase of
12.1%. The sales volume increased to 10,243 barrels during the first quarter of
2000, from 9,985 barrels during the first quarter of 1999, representing an
increase of 2.58%. Management attributes the increased sales to improved
marketing strategies, including new point of sale materials and increased sales
8
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personnel. The increase in overall net sales during the first quarter of 2000
was achieved mainly by higher wholesale shipments during the first quarter of
2000, which represented an increase of $199,400 over the wholesale shipments
during the first quarter of 1999. In view of management's focus on wholesale
beer sales, retail sales for the year 2000 increased slightly by $10,400.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
first quarter of 2000 was 72.82%, as compared to 80.83% during the first quarter
of 1999, representing a decrease of 8.01%. As a percentage of Net Sales, during
the first quarter of 2000, labor costs decreased from 15.67% in 1999, to 12.98%
in 2000, depreciation decreased from 9.80% in 1999 to 8.87% in 2000, property
taxes decreased from 1.78% in 1999 to 1.71% in 2000, utilities increased from
3.84% in 1999 to 4.30% in 2000, wastewater decreased from 0.60% in 1999 to 0.25%
in 2000, insurance costs decreased from 1.84% in 1999, to 1.36% in 2000, thereby
contributing to the decrease of 8.01% of the cost of goods sold as a percentage
of net sales for the year of 2000. Management attributes the balance of the
decrease to higher sales volumes thereby lowering the combined per barrel
production costs at 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 2000 increased to $529,700 from $333,200 for the
comparable period of 1999, representing an increase of 59%. As a percentage of
net sales, the gross profit during the first quarter of 2000 increased to 27.18%
from that of 19.17% for the corresponding period of 1999.
Operating Expenses. Operating expenses for the first quarter of 2000 were
$764,500, as compared to $785,100 for the first quarter of 1999, representing a
decrease of 2.62%. Operating expenses consist of retail operating expenses,
marketing and distribution expenses, and general and administrative expenses.
Retail operating expenses for the first quarter of 2000 were $97,900,
representing an increase of $7,900 or 8.78%, from the first quarter of 1999. As
a percentage of net sales however, retail operating expenses decreased to 5.02%,
as compared to 5.18% for the first three months of 1999. The increase in retail
operating expenses consisted of an increase of advertising costs by $4,000, an
increase in repair and maintenance of $1,300, an increase in kitchen supplies of
$1,900, and an increase of other net expenses of $700.
Marketing and distribution expenses for the first quarter of 2000 were $322,400,
representing a decrease of $22,200, or 6.44%, from the first quarter of 1999. As
a percentage of net sales, marketing and distribution expenses represented
16.55% as compared to 19.82% during the first quarter of 1999. Compared to the
first quarter of 1999, marketing and sales labor increased $42,000; sales
promotions expenses decreased by $33,700; point of sale expenses decreased by
$37,900; media expenses increased by $14,500; travel and entertainment decreased
by $6,100; and a decrease in other net expenses of $1,000.
General and administrative expenses were $344,200, representing a decrease of
$6,300 from the first quarter of 1999. As a percentage of net sales, the general
and administrative expenses were 17.66% for the first quarter of 2000, as
compared to 20.16% for the first quarter of 1999. As compared to the first
quarter of 1999, labor decreased by $42,700, travel and entertainment increased
by $8,100, postage increased by $2,100, telephone increased by $2,500 supplies
9
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increased by $4,200, legal and professional increased by $13,500, investor
relations increased by $5,900 and an increase of other net expenses of $100.
Other Income (Expense). Other expenses for the first three months of 2000 were
$218,000, representing an increase of $17,300 when compared to the first quarter
of 1999. The increase of $17,300 is due to an increase in interest expense of
$25,200, and an increase of $7,900 in miscellaneous income.
Loss Before Income Taxes. The loss before income tax for the first three months
of 2000 was $452,800 as against $652,600 for the corresponding period of 1999.
As a percentage of net sales, the net loss before income taxes improved to
23.24% during the first quarter of 2000 as against 37.54% for the first quarter
of 1999.
Benefit From Income Taxes. As of March 31, 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. The Company has recorded a valuation allowance of approximately
$180,000 for net operating losses that are not expected to be utilized prior to
expiration. The Company has not recorded any benefit from income taxes due to
this valuation allowance.
Net Loss. The net loss for the first three months of 2000 was $452,800, as
compared to $392,500 for the first three months of 1999. As a percentage of net
sales, the net loss for the first quarter of 2000 increased to 23.24%, as
compared to 22.58% for the first quarter of 1999. The increase in net loss is
mainly due to non-recognition of any benefit from income taxes while an amount
of $260,100 was recognized as benefit from income taxes for the corresponding
period 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 95% of the Company's gross sales for the first quarter 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 5% of the Company's total gross
sales during the first quarter of 2000.
With combined expanded wholesale beer production in 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
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<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, 2000
-----------------------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $ 1,965,600 $ 104,600 $ -- $ 2,070,200
Operating Profit/(Loss) 140,000 (30,600) -- 109,400
Identifiable Assets 15,467,700 77,400 3,977,900 19,522,300
Depreciation and amortization 172,900 1,600 21,900 196,400
Capital Expenditures 5,800 -- -- 5,800
Three Months Ended March 31, 1999
-----------------------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and Other Total
-----------------------------------------------------------------------------
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
</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.
11
<PAGE>
Credit Facility. The CIT Group/Credit Finance, Inc. 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 $1,236,600 of the term loan was
outstanding as of December 31, 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 March 31, 2000, the total amount
outstanding on the line of credit was $2,420,900.
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 of Line of Credit. Between 1997 and 1998, UBA, the
Company's largest shareholder, agreed to provide the Company with a credit
facility of up to $2 million (the "1998 Facility"). In mid-1999, the 1998
Facility was terminated, and a new credit facility (the "1999 Facility") in the
maximum amount of $800,000 was offered to the Company on substantially the same
terms as the 1998 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
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. On
April 30, 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 March 31, 2000, the Company has made seven draws on the credit facility.
The aggregate amount drawn, together with accrued but unpaid interest, equaled
$738,800 which corresponds to the right of UBA to acquire up to 492,533 shares
of Common Stock of the Company at a conversion price of $1.50 per share.
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.
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 March 31, 2000,
was 0.54 to 1.0 and its ratio of assets to liabilities was 2.01 to 1.0.
Year 2000 Readiness
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 since it is still early in 2000.
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,
13
<PAGE>
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.
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 late June 2000, or as
soon thereafter as the various conditions to closing have been satisfied or
waived. Prior to the closing, UBI UK Ltd. will have will have 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 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. 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 required by Item 12 will be contained in the 2000 Proxy
Statement, and such information is incorporated herein by reference.
14
<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 4. Other Items.
None.
<TABLE>
Item 6. Exhibits and Reports on Form 8-K.
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C> <C>
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.
15
<PAGE>
Exhibit Number Description of Document
- -------------- -----------------------
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.
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.
<FN>
- ---------------
(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.
16
<PAGE>
Exhibit Number Description of Document
- -------------- -----------------------
(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.
(W) Incorporated by reference from the Amendment No. 5 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.
</FN>
</TABLE>
The Registrant filed a report on Form 8-K on March 29, 2000 announcing the
Company's acquisition of UBSN and the U.S. distribution rights to Kingfisher
Premium Lager Beer from UBI, UK Ltd., 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: May 14, 2000 By: /s/ Yashpal Singh
----------------------------------
Yashpal Singh
President
Dated: May 14, 2000 By: /s/ P.A. Murali
----------------------------------
P.A. Murali
Chief Financial Officer and Secretary
18
<PAGE>
EXHIBIT INDEX
Exhibit Number
- --------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 51,900
<SECURITIES> 0
<RECEIVABLES> 1,223,300
<ALLOWANCES> 0
<INVENTORY> 1,006,400
<CURRENT-ASSETS> 2,375,000
<PP&E> 17,168,600
<DEPRECIATION> (2,630,600)
<TOTAL-ASSETS> 19,522,300
<CURRENT-LIABILITIES> 4,355,400
<BONDS> 0
0
227,600
<COMMON> 13,834,900
<OTHER-SE> (4,257,900)
<TOTAL-LIABILITY-AND-EQUITY> 19,522,300
<SALES> 2,070,200
<TOTAL-REVENUES> 2,070,200
<CGS> 1,418,900
<TOTAL-COSTS> 2,183,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 231,800
<INCOME-PRETAX> (452,800)
<INCOME-TAX> 0
<INCOME-CONTINUING> (452,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (452,800)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
