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 June 30, 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
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 June 30,
2000 is 5,530,117.
<PAGE>
PART I
Item 1. Financial Statements.
<TABLE>
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 106,900
Accounts receivable 1,240,500
Inventories 992,900
Prepaid expenses 168,800
Deferred income taxes 43,100
------------
Total Current Assets: 2,552,200
------------
PROPERTY AND EQUIPMENT 14,355,500
OTHER ASSETS ------------
Deferred Taxes 2,440,300
Other Assets 311,600
------------
Total Other Assets: 2,751,900
------------
Total Assets: $ 19,659,600
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,268,100
Accounts payable 1,910,200
Accrued liabilities 319,300
Accrued wages and related expense 176,800
Current maturities of notes payable to related party 310,000
Current maturities of obligation under capital lease 288,000
Current maturities of obligation under long-term debt 327,400
------------
Total Current Liabilities: 4,599,800
LONG TERM DEBT, less current maturities 3,985,200
OBLIGATIONS under capital lease - less current maturities 1,236,600
------------
Total Liabilities: 9,821,600
------------
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 227,600
Accumulated deficit (4,224,500)
------------
Total Stockholders' Equity 9,838,000
------------
Total Liabilities and Stockholders' Equity: $ 19,659,600
============
<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 SIX MONTHS ENDED
June 30 June 30
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
SALES $ 2,660,400 $ 2,485,200 $ 4,730,600 $ 4,334,500
LESS EXCISE TAXES 150,900 148,100 272,500 258,900
----------- ----------- ----------- -----------
NET SALES 2,509,500 2,337,100 4,458,100 4,075,600
COST OF GOODS SOLD 1,446,800 1,504,600 2,865,700 2,909,900
----------- ----------- ----------- -----------
GROSS PROFIT 1,062,700 832,500 1,592,400 1,165,700
----------- ----------- ----------- -----------
OPERATING EXPENSES
Retail operating 94,500 104,600 192,400 194,600
Marketing 397,300 392,600 719,700 737,200
General and administrative 337,900 395,800 682,100 746,300
----------- ----------- ----------- -----------
829,700 893,000 1,594,200 1,678,100
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 233,000 (60,500) (1,800) (512,400)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income (expense) 29,200 2,700 43,000 8,600
Acquisition expense -- (78,400) -- (78,400)
Interest expense (226,600) (213,800) (458,400) (420,400)
----------- ----------- ----------- -----------
(197,400) (289,500) (415,400) (490,200)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 35,600 (350,000) (417,200) (1,002,600)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 2,200 (140,200) 2,200 (400,300)
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 33,400 $ (209,800) $ (419,400) $ (602,300)
=========== =========== =========== ===========
BASIC EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.05) $ (0.08) $ (0.13)
=========== =========== =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.01 $ (0.05) $ (0.08) $ (0.13)
=========== =========== =========== ===========
<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 SIX MONTHS ENDED
June 30 June 30
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 33,400 $(209,800) $(419,400) $(602,300)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 196,900 215,200 393,300 417,700
Deferred income taxes -- (140,700) -- (401,800)
Changes in:
Accounts receivable (17,200) (365,600) (200,200) (581,100)
Inventories 13,500 (76,500) 175,800 44,800
Prepaid expenses (118,500) 45,100 (111,600) (36,700)
Deposits and other assets (14,500) (2,900) 30,900 (5,000)
Accounts payable 129,100 272,300 201,400 624,800
Accrued wages and related expenses (1,000) (26,100) (27,800) (12,000)
Accrued liabilities 115,600 99,500 189,000 119,900
--------- --------- --------- ---------
Net cash from operating activities: 337,300 (189,500) 231,400 (431,700)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (13,100) (32,000) (18,900) (51,200)
improvements
Increase in intangibles (129,300) -- (192,000) --
--------- --------- --------- ---------
Net cash from investing activities: (142,400) (32,000) (210,900) (51,200)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit 9,500 358,500 108,200 664,400
Principal payments on long-term debt (87,300) (84,000) (174,100) (117,100)
Borrowings on long-term debt -- -- 310,000 --
Payments on obligation under long-term lease (62,100) (53,000) (148,100) (106,400)
Disbursements in excess of deposits -- -- (9,600) --
--------- --------- --------- ---------
Net cash from financing activities: 139,900 221,500 86,400 440,900
--------- --------- --------- ---------
INCREASE / (DECREASE) IN CASH 55,000 -- 106,900 (42,000)
--------- --------- --------- ---------
CASH, beginning of period 51,900 -- -- 42,000
--------- --------- --------- ---------
CASH, end of period $ 106,900 $ -- $ 106,900 $ --
========= ========= ========= =========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 193,200 $ 191,300 $ 385,100 $ 351,200
--------- --------- --------- ---------
<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 six months ended June 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 June 30, 2000 was
$1,088,200. The amount under the working capital line of credit outstanding as
of June 30, 2000 was $1,268,000. The bank's commitment under the line of credit
matures September 2000. 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 $871,300 as of June 30, 2000. The
notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10.00%
per year, 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., into common stock at $1.50
per share upon maturity. Interest accrued on the above notes as of June 30, 2000
was $50,300.
Note 4 - Income Taxes
As of June 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.
4
<PAGE>
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 June 30,
2000, the Company has not recorded any benefit from income taxes due to this
valuation allowance.
Note 5 - Related Party Transactions
As of June 30, 2000, the Company has expensed consulting fees to one of its
directors in the amount of $16,200 for consulting services performed for the
Company. Of this amount, the Company has paid $13,500 through June 30, 2000.
As of June 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 June 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 late September 2000, 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.
Prior to the acquisition, UBI UK, Ltd. 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 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.
5
<PAGE>
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, 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
Sales (measured in barrels) during the first six months of 2000 increased to
23,398 barrels from 22,999 barrels in the first six months of 1999. This
represents an increase of 2% over the first six months of 1999. Of the total
sales of 23,398 barrels, the sales out of the Ukiah facility amounted to 20,008
barrels and the sales out of the Saratoga Springs facility amounted to 3,390
barrels. In Saratoga Springs, the volume decreased to 3,390 barrels in 2000 from
5,614 barrels in 1999. This was mainly due to management's effort to concentrate
on the growth of the Company's own brands and phase out the reliance on contract
brewing. This resulted in the contract brewing reduction from 65% of total sales
in the first six months of 1999 to 22% for the first six months
6
<PAGE>
of 2000. Although the sales volume in Saratoga decreased 2,224 barrels (5,614 to
3,390) or 40%, net sales expressed in dollars only decreased by 20%. The sales
volume for the first six months of 2000 showed a growth of 15% out of the
facility located in Ukiah, California.
The increase in net sales during the six-month period ending June 30, 2000 was
achieved in significant part through increased and improved marketing efforts.
The high costs associated with the new brewery located at Ukiah, the fixed costs
of the Ten Springs Brewery (neither of which are being utilized to their full
capacity), and the interest expenses contributed to a net loss of $419,400 for
the first six months of 2000. The loss from operations as a percentage of net
sales decreased from 12.51% for the first six months of 1999 to 0.04% for the
first six months of 2000.
Results of Operations
The following discussion sets forth information for the six-month periods ending
June 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:
7
<PAGE>
---------------------------
Six Months Ended
June 30
---------------------------
Statements of Income Data:
2000 1999
------ -----
Sales 106.11% 106.35%
Excise taxes 6.11 6.35
Net Sales 100.00 100.00
Cost of Sales 64.28 71.40
------ -----
Gross Profit 35.72 28.60
Retail Operating Expense 4.32 4.77
Marketing Expense 16.14 18.09
General and Administrative Expenses 15.30 18.31
------ -----
Total Operating Expenses 35.76 41.17
------ -----
Loss from Operations (0.04) (12.57)
Other Income 0.96 0.21
Other Expense -- (1.92)
Interest income (expense) (10.28) (10.32)
Loss before income taxes (9.36) (24.60)
(Provision) / Benefit from income taxes (0.05) 9.82
Net Profit (Loss) (9.41) (14.78)
Balance Sheet Data:
Cash $ 106,900 $ 0
Working Capital (2,047,600) (1,026,700)
Property and Equipment 14,355,500 15,026,500
Deposits and Other Assets 2,751,900 2,166,700
Total Assets 19,659,600 19,595,900
Long-term Debt 3,985,200 5,141,400
Obligation under Capital Lease 1,236,600 1,485,600
Total Liabilities 9,821,600 10,056,400
Shareholder's equity 9,838,000 9,539,500
Net Sales. Net sales for the first six months of 2000 were $4,458,100 compared
to $4,075,600 for the first six months of 1999, representing an increase of
9.39%. The sales volume increased to 23,398 barrels during the first six months
of 2000, from 22,999 barrels during the first six months of 1999, representing
an increase of 1.73%. Management attributes the increased sales to
8
<PAGE>
improved marketing strategies, including new point of sale materials and
increased sales personnel. The increase in overall net sales during the first
six months of 2000 was achieved mainly by higher wholesale shipments which
represented an increase of $390,800 over the wholesale shipments during the
first six months of 1999. In view of management's focus on wholesale beer sales,
retail sales for the first six months of 2000 showed a slight increase of $5,300
over the first six months of 1999.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
first six months of 2000 was 64.28%, as compared to 71.40% during the first six
months of 1999, representing a decrease of 7.12%. As a percentage of net sales,
during the first six months of 2000, labor costs decreased from 13.61% in 1999,
to 10.19% in 2000, depreciation decreased from 8.37% in1999 to 7.76% in 2000,
utilities decreased from 3.64% in 1999 to 3.46% in 2000, other manufacturing
expenses increased from 4.20% in 1999 to 4.60% in 2000, thereby contributing to
the overall decrease of 7.12% of the cost of goods sold as a percentage of net
sales, as compared to the first six months of 1999. Management attributes the
balance of the decrease to higher sales volumes at Ukiah and improvement in
production efficiencies at both Ukiah and Saratoga Springs, thereby lowering
overall production costs.
Gross Profit. As a result of the higher net sales described above, gross profit
for the first six months of 2000 increased to $1,592,400, from $1,165,700 for
the comparable period of 1999, representing an increase of 37%. As a percentage
of net sales, the gross profit during the first six months of 2000 increased to
35.72% from that of 28.60% for the corresponding period of 1999.
Operating Expenses. Operating expenses for the first six months of 2000 were
$1,594,200, as compared to $1,678,100 for the first six months of 1999,
representing a decrease of 5.00%. Operating expenses consist of retail operating
expenses, marketing and distribution expenses, and general and administrative
expenses.
Retail operating expenses for the first six months of 2000 were $192,400,
representing a decrease of $2,200, or 1.13%, from the first six months of 1999.
As a percentage of net sales, retail operating expenses decreased to 4.32% as
compared to 4.77% for the first six months of 1999. The decrease in retail
operating expenses consisted mainly of a decrease in labor expenses totaling
$2,200.
Marketing and distribution expenses for the first six months of 2000 were
$719,700, representing a decrease of $17,500, or 2.37%, from the first six
months of 1999. As a percentage of net sales, marketing and distribution
expenses represented 16.14% as compared to 18.09% during the first six months of
1999. Compared to the first six months of 1999, marketing and sales labor
increased by $55,000; media and advertising increased by $40,500; design and
agency fees decreased by $15,400; telephone expenses decreased by $4,800; sales
promotions expenses decreased by $43,400; point of sale expenses decreased by
$81,000; freight increased by $37,100 (due to New York facility's shipments of
the Company's own brands); travel and entertainment decreased by $16,500; and
other expenses increased by $1,200.
9
<PAGE>
General and administrative expenses were $682,100, representing a decrease of
$64,200 from the first six months of 1999. As a percentage of net sales, the
general and administrative expenses were 15.30% for the first six months of
2000, as compared to 18.31% for the first six months of 1999. As compared to the
first six months of 1999, salaries decreased by $71,400; professional and legal
fees decreased by $13,800; travel and entertainment increased by $4,600,
insurance increased by $18,400 and net miscellaneous expenses decreased by
$2,000.
Other Income (Expenses). Other income and (expenses) for the first six months of
2000 were ($415,400), representing a decrease of $74,800 when compared to the
first six months of 1999. The decrease is due to the fact that no write-offs of
acquisition costs were necessary ($74,800 in 1999), interest expenses increased
by $38,000 and miscellaneous income increased $34,400. Miscellaneous income
consisted of $26,400 in fire insurance proceeds and $11,400 in returned builder
fees from the City of Ukiah.
Loss Before Income Taxes. The loss before income tax for the first six months of
2000 was $417,200 as against $1,002,600 for the corresponding period of 1999. As
a percentage of net sales, the net loss before income taxes improved to 9.36%
during the first six months of 2000 as against 24.60% for the first six months
of 1999.
Benefit From Income Taxes. As of June 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 Manufacturers
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 June 30, 2000, the Company
has not recorded any benefit from income taxes due to this valuation allowance.
The Loss. The net loss for the first six months of 2000 was $419,400, as
compared to a net loss of $602,300 (after a benefit from income tax of $400,300)
for the first six months of 1999. As a percentage of net sales, net loss for the
first six months of 2000 decreased to 9.41%, as compared to 14.78% (after a
benefit from income tax of $400,300) for the first six 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 95% of the Company's gross sales for the first six 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 5% of the Company's total gross
sales during the first six months of 2000.
10
<PAGE>
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>
Six Months Ended June 30, 2000
----------------------------------------------------------------------------
Brewing Retail Corporate
Operations Operations and Other Total
---------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 4,475,400 $ 255,200 $ -- $ 4,730,600
Operating Profit (Loss) 26,900 (28,700) -- (1,800)
Identifiable Assets 15,267,100 81,300 4,311,200 19,659,600
Depreciation and amortization 354,800 3,200 35,300 393,300
Capital Expenditures 9,000 5,600 4,300 18,900
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------
Brewing Retail Operations Corporate
Operations and Other Total
---------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $ 4,084,600 $ 249,900 $ -- $ 4,334,500
Operating Loss (478,100) (34,300) -- (512,400)
Identifiable Assets 14,827,800 52,000 4,716,100 19,595,900
Depreciation and amortization 389,400 3,400 24,900 417,700
Capital Expenditures 121,700 -- 30,900 152,600
</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,
11
<PAGE>
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, 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 $1,088,200 of the
term loan was outstanding as of June 30, 2000. 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 June 30, 2000, the total amount
outstanding on the line of credit was $1,268,000. The Company has recently
commenced discussions with CIT for a renewal of the line of credit. However,
there are no assurances that any renewal will be agreed upon by CIT and the
Company. Further, if CIT and the Company cannot agree upon terms with respect to
a renewal of the line of credit, or if the Company fails to enter into an
agreement with another source of financing, then the Company will be materially
and adversely affected.
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
12
<PAGE>
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 June 30, 2000, the Company has made seven draws on the 1999 Facility. The
aggregate amount drawn, together with accrued but unpaid interest, equaled
$921,600 which corresponds to the right of UBA to acquire up to 614,400 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.
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 June 30, 2000,
was 0.55 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
13
<PAGE>
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.
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 September 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.
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<PAGE>
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. 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 will be contained in the 2000 Proxy Statement, and such
information is incorporated herein by reference.
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.
<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.
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<PAGE>
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.
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.
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<PAGE>
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.
(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.
(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.
</TABLE>
No reports on Form 8-K were filed during the quarter for which this report is
filed.
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<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: August 14, 2000 By: /s/Yashpal Singh
-----------------------------------------
Yashpal Singh
President
Dated: August 14, 2000 By: /s/P.A. Murali
-----------------------------------------
P.A. Murali
Chief Financial Officer and Secretary
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EXHIBIT INDEX
Exhibit
Number
------
27 Financial Data Schedule.
19
