SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _________________ to ___________________
Commission file number: 1-13636
Mendocino Brewing Company, Inc.
(Name of small business issuer in its charter)
California 68-0318293
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
13351 South Highway 101, Hopland, CA 95449
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (707) 744-1015
Securities registered under Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, without par value
The Pacific Exchange
Securities registered under Section 12(g) of the Act:
Not applicable
(Title of class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B not contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $9,240,000
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the last reported sale price of such stock as of March 9, 2000
was: $1,727,877
The number of shares the issuer's Common Stock outstanding as of March 15, 2000
is: 5,530,177
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Shareholders to be filed not later than April 30, 1999 are incorporated by
reference in Part III of this Form 10-K.
Transitional Small Business Disclosure Format Yes [ ] No [X]
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PART I
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk related
factors set forth herein.
Item 1. Description of Business.
Overview
Mendocino Brewing Company, Inc. brews Red Tail Ale, Blue Heron Pale
Ale, Black Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale and two
seasonals for the domestic craft beer market. Mendocino Brewing is one of the
first of the modern craft brewers, having opened the first new brewpub in
California and the second in the United States since the repeal of Prohibition,
and has been recognized for its innovations in the brewpub concept, its craft
brew style, its distinctive labels, and its role in industry associations.
In May 1997, Mendocino Brewing placed in operation a new brewery in
Ukiah, California (110 miles north of San Francisco) with an initial annual
capacity of approximately 60,000 bbl., which was more than four times the
Company's annual capacity from 1993 through the first nine months of 1995 of
13,600 bbl. The facility was designed to enable the Company's production to be
expanded to 200,000 bbl. per year with the addition of necessary equipment.
The Company's subsidiary, Releta Brewing Company, LLC. ("Releta") d/b/a
Ten Springs Brewery, located in Saratoga Springs, New York, commenced production
in February 1998 with an initial capacity of 60,000 bbl. per year expandable to
150,000 bbl. per year. In July 1998, the Company purchased all brand related
assets of Carmel Brewing Company, Inc., a California corporation ("Carmel
Brewing"), in exchange for unregistered shares of the Company's Common Stock
having an aggregate value of $100,000 based on a per share price of $3.00. The
transaction also involved the acquisition by the Company of certain point of
sales and brewing ingredient inventory from Carmel Brewing and the lease by the
Company from Carmel Brewing of certain bottling line equipment and certain kegs
on a short-term basis. The Carmel brands were launched from the Ukiah facility.
During 1998, the Company's largest shareholder, United Breweries of
America Inc. ("UBA"), agreed to provide the Company with a credit facility of up
to $2,000,000. Subsequently, the Company drew approximately $994,000 on the
credit facility. In mid 1999, the Company induced UBA to convert the $994,000
drawn on the credit facility, together with approximately $61,000 of accrued
interest, into 938,171 shares of common stock of the Company. After being
offered an inducement by the Company, UBA agreed to convert all amounts drawn
through August 30, 1999 into common stock of the Company.
Further, in early 1999, the credit facility was terminated. In mid
1999, UBA agreed to provide the Company with a new credit facility of up to
$800,000 to fund the operations of the Company. Subsequently, the Company has
requested that UBA increase the amount of the credit facility to $1,200,000. As
of December 31, 1999, the Company has drawn $565,127 on the credit facility.
On March 29, 2000 the Company announced that it intends to enter into
two concurrent related party transactions with affiliates of UBA. In the first
transaction, the Company intends to acquire UBSN Ltd. UK, which is the European
distributor of the UB Group's flagship brand, Kingfisher Premium Lager. In the
second transaction, the Company intends to acquire the distribution rights to
Kingfisher Premium Lager Beer in the United States from United Breweries
International, UK Ltd.
Company Background
Mendocino Brewing Company was originally formed in March 1983 as a
California limited partnership (the "Partnership"). On January 1, 1994, the
business was incorporated by transferring all of the Partnership's assets,
including its name, to a newly formed California corporation in exchange for all
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of the Common and Preferred Stock of the corporation. The Partnership
distributed these shares to its partners on January 3, 1994. As used hereafter,
references to the "Company" and "Mendocino Brewing" include the business
operations of the Partnership before its incorporation.
Mendocino Brewing first bottled its flagship brand, Red Tail Ale, in
December 1983. In February 1995, Mendocino Brewing completed a $3.6 million
direct public offering at $6 per share. The Company purchased nine acres of land
in Ukiah, California in 1995 and began production at the new brewery in May
1997. In October 1997, the Company raised an additional $4 million in cash
through a private placement with UBA, which also contributed Releta to the
Company as a new subsidiary. The Company's products are sold in selected
locations throughout the United States. See "Product Distribution."
Industry Overview
The U.S. beer market may be divided into six segments:
Segment Representative Brands
- ------- ---------------------
Low-Priced Busch, Milwaukee's Best, Old Milwaukee
Premium Budweiser, Coors Genuine Draft
Premium Lite Miller Lite, Bud Light, Coors Light
Super-Premium Michelob, Lowenbrau, Killians
European Import Heineken, Guinness, Bass, Becks
Domestic Craft Samuel Adams, Sierra Nevada, Red Tail Ale
The Company competes in the domestic craft beer segment, which
comprises approximately 2.5% of total U.S. beer sales. Craft beers are
characterized by their full-flavor and are usually produced along traditional
European brewing styles. While U.S. beer sales were basically flat for several
years, domestic craft beer sales increased at a rate of between 5% and 10% per
year since 1996. The rate at which the domestic craft beer segment continues to
grow will have a material affect on the Company's business, financial condition,
and results of operations. Actual industry segment performance depends on many
factors that are outside the control of the Company.
Competition
The craft beer category consists of:
Contract brews any style brew produced by one brewer for sale under
the label of someone else who does not have a brewery
or whose brewery does not have sufficient capacity.
Regional craft brews "hand-crafted" brews, primarily ales, sold under the
label of the brewery that produced it.
Microbrews "hand-crafted" brews, primarily ales, sold under the
label of the brewery that produced it, if the capacity
of the brewery does not exceed 15,000 bbl. per year.
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Large brewer a brand brewed by a national brewer which may only
craft-style brews imitate the style of a craft beer. These craft-style
brews are often sold under the label of a brewery that
does not exist or the label of a brewpub with no
bottling capacity. The term "phantom brewery" is
sometimes used to describe such brands.
Brewpub brews "hand-crafted" brews produced for sale and consumption
at the brewery, which is normally connected with a
restaurant/saloon. Brewpub brews are not normally sold
for off-site consumption in significant quantities.
Mendocino Brewing competes against all of the above brewers to some
degree and also against other segments of the U.S. beer market. Competition for
retail shelf-space also increased in 1999. Increased competition could hinder
distribution of the Company's products and have a material adverse effect on the
Company's business, financial condition, and results of operations.
Products
Mendocino Brewing has historically brewed four ales and a stout
year-round, one seasonal ale, and one seasonal porter:
* RED TAIL ALE, a full flavored amber ale, is the flagship brand of
Mendocino Brewing. It is available year-round in 12 oz. six-packs,
half-barrel kegs, and 5 gallon kegs.
* BLUE HERON PALE ALE is a golden ale with a full body and a distinctive
hop character. It is available year-round in 12 oz. six-packs,
half-barrel kegs, and 5 gallon kegs.
* BLACK HAWK STOUT is the fullest in flavor and body of the Company's
brews. It is available year-round in 12 oz. six-packs, half-barrel
kegs, and 5 gallon kegs.
* EYE OF THE HAWK SELECT ALE is a high gravity deep amber summer ale. It
is available year round in 12 oz. six-packs, half-barrel kegs, and 5
gallon kegs.
* PEREGRINE GOLDEN ALE is brewed year-round in 12 oz. six-packs,
half-barrel kegs, and 5 gallon kegs.
* YULETIDE PORTER is a deep brown Holiday brew with a traditionally
rich, creamy flavor. It is available in November and December.
* FROLIC SHIPWRECK ALE 1850, a Scottish-style ale brewed around July,
was introduced in 1994 as a fund-raiser for the Mendocino County
Museum to commemorate the wreck of the clipper ship Frolic, with its
cargo of Scottish ale, on the Mendocino coast in 1850. Salvage efforts
were abandoned when workers, upon sighting the previously unreported
big trees of Mendocino County, launched the timber industry which has
characterized the area ever since. It is available at the Hopland
Brewery on draft.
* CARMEL WHEAT BEER is a light-bodied and delicately flavored beer
characterized by its cloudy Hefeweizen appearance, refreshing floral
aromas and subtle wheat flavor. It is available year-round in 12 oz.
six-packs, half-barrel kegs, and 5 gallon kegs.
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* CARMEL PALE ALE is a full, smooth flavored ale that imparts a malty
and spicy character to the palate. It is available year-round in 12
oz. six-packs, half-barrel kegs, and 5 gallon kegs.
* FAT BEAR STOUT is a full-bodied brew characterized by smooth roasty
flavors and malty aromas. It is only available in the East Coast in 12
oz. six-packs and half-barrel kegs.
* WHITEFACE PALE ALE is a robust and spicy American style ale crafted
with the finest malts and perfect blend of hops. It is only available
in the East Coast in 12 oz. six-packs and half-barrel kegs.
* SARATOGA CLASSIC PILSNER is a crisp, full-flavored, German-style
pilsner with a clean hoppy finish. It is only available in the East
Coast in 12 oz. six-packs and half-barrel kegs.
* OLDE SARATOGA ROOT BEER is an exceptionally rich creamy premium
gourmet root beer crafted with all natural ingredients and cane sugar.
It is only available in the East Coast in quarter-barrel kegs.
Mendocino Brewing's brands use an ale yeast strain that was first
introduced at New Albion Brewing Co. in the late 1970s. Mendocino Brewing is
among a minority of brewers who use whole hops instead of processed hop pellets
in their brewing processes. This technique contributes to the distinctive
characteristics of the brews. The Company adds active fermenting beer (Krausen)
after the beer is bottled, which produces a pleasant amount of natural
carbonation. The thin layer of brewer's yeast in the bottom of the bottle is a
natural characteristic of bottle conditioned ale. Bottle-conditioned beers are
considered as classic styles.
Mendocino Brewing's distinctive brews have been very well received in
the market and within the industry. In 1999, products of the Company continued
to win praise for their quality. Red Tail Ale and Eye of the Hawk Select Ale
were adjudged as exceptional and Black Hawk Stout and Frolic Ale as highly
recommended in their respective categories by the Beverage Testing Institute of
Chicago, Illinois, which conducts comprehensive testing and tasting of all
leading brands in different categories.
In October 1997, Mendocino Brewing Company was awarded three medals at
the World Beer Championships, one of the largest and most comprehensive beer
competitions in the world. The Company received a Gold Medal for Red Tail Ale, a
Silver Medal for Eye of the Hawk Select Ale, and a Bronze Medal for Black Hawk
Stout. Blue Heron Pale Ale was awarded a Gold Medal with a Special Award of
Excellence from the Underground Wine Journal in February 1997 in a competition
among 183 ales from across the United States and won a bronze medal at the 1991
Great American Beer Festival. Eye of the Hawk Select Ale won a gold medal at the
1991 Great American Beer Festival after winning a silver in 1990, and also won a
bronze in 1992. In 1998 the Company received four more medals at world beer
championships.
The Saratoga Springs facility presently performs some contract brewing
services for other brands.
The Hopland Brewery Brewpub and Merchandise Store
To date, Mendocino Brewing's major marketing tools have been the
Hopland Brewery brewpub and merchandise store, its Brewsletter newsletter, and
its distinctive labels. Located on a major tourist
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route in Hopland, California, 100 miles north of San Francisco, the Hopland
Brewery opened in 1983 as the first new brewpub in California and the second in
the United States since the repeal of Prohibition.
The brewpub is housed in a 100 year-old brick building that was once
known as the Hop Vine Saloon. The inside walls are trimmed with the original
turn-of-the-century ornamental stamped tin. Works of local artists are featured
on a rotating basis. The bar is hand-crafted, early California style blond oak
and brass that complements the tradition of the tavern and the Company's brews.
An outdoor Beer Garden includes a shaded grape arbor, flowers, trellised hops in
the summer, picnic tables, and a sandbox for children.
Beverages served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, and a seasonal brew on
tap, along with local wines, Hopland Seltzer Water, and soft drinks. The brewpub
also features hand pumped cask conditioned ales. The menu features home-style
cooking, sausages, hamburgers, Red Tail chili, fresh salads, snacks, vegetarian
entrees, and daily specials. The brewpub operates days and evenings, with live
music for special events, such as the Company's annual Anniversary Party in
August and its Oktoberfest in October. The Company brews special occasion draft
beers at the Hopland Brewery, and uses or plans to use the facility for research
and development, test-marketing, and as a brewing education and training site.
The adjacent Merchandise Store sells off-sale packages of the Company's
brews (including gift packs) and merchandise such as hand-screened label
T-shirts, posters, engraved glasses and mugs, logo caps, books about brewing,
gift packs, and other brewery-related gifts.
The Brewsletter newsletter is published quarterly and is available on
the Company's web site at www.mendobrew.com. The Brewsletter contains articles
about the Company, the beer industry, and beer brewing and a calendar of events
for the Hopland Brewery. The Brewsletter is circulated to the Company's
shareholders and persons who have signed the guest registry at the Hopland
Brewery.
One of the ways Mendocino Brewing projects its quality and corporate
values to consumers is through its Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, and Eye of the Hawk Select Ale labels. The Company has used
nationally-known wildlife artists including Randy Johnson and Lee Jayred for its
label designs. In 1990, Mendocino Brewing received the Paperboard Packaging
Council's Silver Award for Excellence in Packaging and Award for Excellence in
Graphic Design and a Northern California Addy Award for its Red Tail Ale
packaging. In 1996, the Company received a Northern California Addy Award and a
silver medal in the International Brand Packaging Award competition sponsored by
Graphic Design: USA magazine for its Blue Heron Pale Ale packaging. In 1997, the
Company's Eye of the Hawk Select Ale label won First Place at the Second
International Label competition in the Beer Label category.
Regional Distribution
The Company's products are distributed widely in California and in
limited quantities at selected accounts in Arizona, Colorado, Delaware, District
of Columbia, Florida, Georgia, Idaho, Kansas, Illinois, Louisiana, Maryland,
Massachusetts, Minnesota, Missouri, Nevada, Nebraska, New Hampshire, New Jersey,
New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, South
Carolina, Tennessee, Texas, Vermont, Washington, Wisconsin, Wyoming and
Virginia. The Company plans to add Michigan, Connecticut, and Maine in the near
future. Northern California is the Company's primary market and Southern
California currently is the second largest market.
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Social Responsibility
Part of Mendocino Brewing's mission is to be viewed as a community,
regional, and national asset and as a positive example of how a business should
be operated. Management attempts to instill these values in Company personnel
and operations and to communicate to customers the commitment of the Company to
act responsibly. The Company encourages employees and distributors to share
ownership and mission with Management as well as a sense of pride in the
Company's products.
Product Distribution
Mendocino Brewing's beers are sold through distributors to consumers in
bottles at supermarkets, warehouse stores, liquor stores, taverns and bars,
restaurants, and convenience stores. All brands are also available in draft. The
Company's products are delivered to retail outlets by independent distributors
whose principal business is the distribution of beer and in some cases other
alcoholic beverages, and who typically also distribute one or more national beer
brands. Mendocino Brewing, together with its distributors, markets its products
to retail outlets and relies on its distributors to provide regular deliveries,
to maintain retail shelf space, and to oversee timely rotation of inventory. The
Company also offers its products directly to consumers at the Hopland Brewery
brewpub and merchandise store. Beer sales (wholesale and retail combined)
constituted 95.6% of the Company's total sales in 1999, with food and
merchandise retail and catalogue sales constituting the balance. Sales to the
top five customers totaled $4,191,700 and $3,029,000 for the years ended
December 31, 1999 and 1998, respectively representing 45% and 44% of sales.
Suppliers
The Company's major suppliers are Great Western Malting Co., Yakima,
Washington, and Briess Malting, Milwaukee, Wisconsin (malt); Lupofresh Inc.
Wapato, Washington (hops); Ball Foster Glass, Muncie, Indiana (bottles); Gaylord
Container Corporation, Antioch, California (cartons); Sierra Pacific Packaging,
Oroville, California (carriers); and Inland Printing Company Inc., Lacrosse,
Wisconsin (labels).
Employees
As of December 31, 1999, the Company employed 63 full-time and 8
part-time individuals including 11 in management and administration, 32 in
brewing and production operations, 16 in retail and brewpub operations and 12 in
sales and marketing positions. Management believes that the Company's relations
with its employees are excellent. The Company does not have any union labor
contracts with any of its employees.
Trademarks
The Company has federal trademark registrations of the MENDOCINO
BREWING COMPANY word mark (Reg. No. 1,785,745), RED TAIL ALE word mark (Reg. No.
2,032,382), RED TAIL DESIGN (Reg. No. 2,011,817), BLUE HERON word mark (Reg. No.
1,820,076), BLUE HERON PALE ALE DESIGN (Reg. No. 2,011,816), PEREGRINE PALE ALE
word mark (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE word mark (Reg. No.
1,673,594), EYE OF THE HAWK SELECT ALE DESIGN (Reg. No. 2,011,818), EYE OF THE
HAWK SPECIAL EDITION ANNIVERSARY ALE AND DESIGN (Reg. No. 2,011,815), BLACK HAWK
STOUT word mark (Reg. No. 1,791,807), YULETIDE PORTER word mark (Reg. No.
1,666,891), and BREWSLETTER word mark (Reg. No. 1,768,639).
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Releta has federal trademark registrations of the FAT BEAR word mark
(Reg. No. 2,267,709), TEN SPRINGS word mark (Reg. No. 2,243,852), and WHITEFACE
word mark (Reg. No. 2,322,226), Releta has also applied for intent to use
registrations of the trademarks NORTH COUNTRY ALES and SARATOGA CLASSIC PILSNER.
The Company has also acquired the trademark, whether registered or
unregistered of CARMEL BREWING COMPANY and any other variation of the name
Carmel Brewing Company used by Carmel Brewing.
The registration of the word mark BLUE HERON is a concurrent use
registration which gives the Company the exclusive right to use the word mark
BLUE HERON throughout the United States with the exception of Oregon, Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the exclusive right to use the word mark BLUE HERON in those states.
The Company's use of the word mark BLACK HAWK STOUT is, by agreement
with Hiram Walker & Sons, Inc., subject to the restriction that it be used only
in conjunction with the words "Mendocino Brewing Company".
The Company also acquired use of the word mark RAZOR EDGE through a
License Agreement with Beverage Mates, Ltd. This Agreement, together with the
amendment completed in 1999, gives the Company an exclusive license for ten
years to use the mark in connection with the manufacture, production, labeling
and packaging of Beverage Mates' products throughout the United States with the
exception of North Carolina, and South Carolina, until certain agreements
pertaining to these states permit the Company to sell in such states.
Government Regulation
Mendocino Brewing is licensed to manufacture and sell beer by the
Departments of Alcoholic Beverage Control in California and New York. A federal
permit from the Bureau of Alcohol, Tobacco, and Firearms ("BATF") allows the
Company to manufacture fermented malt beverages. To keep these licenses and
permits in force the Company must pay annual fees and submit timely production
reports and excise tax returns. Prompt notice of any changes in the operations,
ownership, or company structure must also be made to these regulatory agencies.
BATF must also approve all product labels, which must include an alcohol use
warning. These agencies require that individuals owning equity securities in
aggregate of 10% or more in the Company be investigated as to their suitability.
Taxation of alcohol has increased significantly in recent years.
Currently, the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year
and $18.00 per bbl. for over 60,000 bbl. The California tax rate is $6.20 per
bbl. The State of New York presently imposes an excise tax of $4.19 per bbl. on
brewers for over 100,000 bbls. per year.
The Hopland Brewery's brewpub is regulated by the Mendocino County
Health Department, which requires an annual permit and conducts spot inspections
to monitor compliance with applicable health codes.
The Company's production operations must also comply with the
Occupational Safety and Health Administration's workplace safety and worker
health regulations and applicable state laws thereunder. Management believes
that the Company presently is in compliance with the aforementioned laws and
regulations and has implemented its own voluntary safety program.
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Environmental Regulation
The Company is subject to various federal, state, and local
environmental laws which regulate the use, storage, handling, and disposal of
various substances.
The Company's waste products consist of water, spent grains, hops, and
glass and cardboard. The Company has instituted a recycling program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company pays approximately $550 per month in sewage fees relating
to waste water from its Hopland facility. The Company sells or gives away its
spent grain to local cattle ranchers. The Company has not purchased any special
equipment and does not incur any identifiable fees in connection with its
environmental compliance at its Hopland site. The Company earned the distinction
of being a 1998 Waste Reduction Awards Program (WRAP) winner which is sponsored
by the California Environmental Protection Agency and Integrated Waste
Management Board.
The Company has built its own wastewater treatment plant for the Ukiah
facility. As a consequence, the Company will not be required to incur sewer
hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons
per day, which Management does not expect to occur until annual capacity exceeds
100,000 bbl., the Company will be required to pay additional fees. The estimated
cost of the wastewater treatment facility was $900,000, and the estimated cost
of operating the plant is between $6,000 and $10,000 per month. The cost may
increase with increased production. The Company is exploring various methods of
recycling treated wastewater and could realize some revenue from doing so. The
Company has contracted to have the liquid sediment that remains from the treated
wastewater trucked to a local composting facility for essentially the cost of
transportation. A Mendocino County Air Quality Control Permit will be required
to operate the natural gas fired boiler in Ukiah.
The Saratoga Springs facility is subject to various state, federal and
local environmental laws which regulate use, storage and disposal of various
materials. The Company's solid waste products consist of spent grain, cardboard,
glass and liquid waste. As for solid waste, the Company has instituted at this
facility a recycling program for cardboard, office papers and glass at a minimal
cost to the Company. The Company sells spent grain to local cattle dairy farms.
The Company pays approximately $870 per month towards sewer fees for liquid
waste. The sewer discharge from the brewery is monitored and is within the
standards set by Saratoga County Sewer Department. The Company follows and
operates under rules and regulations of New York Department of Environmental
Conservation for Air Pollution Control.
The Company has not received any notice from any governmental agency
that it is a potentially responsible person under any environmental law.
Research and Development
Research and development activity in 1999 was minimal.
Qualified Small Business Issuer
Federal and California tax laws provide a 50% exclusion of any gain
from the sale of "qualified small business stock." For shares to qualify for the
exclusion, several tests must be met. For instance, the shares must be purchased
directly from the Company, not in any later trading market, and the shares must
be held for at least five years.
A "qualified small business" must not have more than $50 million in
assets, at least 80% of which are used in a qualified trade or business
throughout the holding period. A "qualified trade or
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business" does not include "operating a hotel, motel, restaurant, or similar
business." It is uncertain whether the Company's operation of the Hopland
Brewery brewpub currently prevents it from meeting the definition of "qualified
small business", as the brewing equipment in Hopland was used in both wholesale
and retail operations and no applicable regulations have been published to
assist in making such determination. Management believes, after consulting with
its accountants, that completing the new brewery in Ukiah and acquiring the
brewery in Saratoga Springs has reduced the assets of the Company used in the
operation of the brewpub to well below 20%, but Management does not intend to
request any opinions or rulings on this issue at the present time.
The Company intends to submit reports if and to the extent any are
required under federal law to make the 50% exclusion from capital gains
available, and submitted such a report in California for 1995, the first year in
which California required such a report. Given the absence of applicable
regulations, there is no assurance that California taxing authorities will agree
with the information contained in the report. There are limitations on the
persons who may use any exclusion. Prospective investors should consult their
own tax advisors concerning the possible applicability of these exclusions.
Item 2. Description of Property.
The Company owns nine acres of land in Ukiah, California on which its
Ukiah brewery is operated. The Company currently leases a 15,500 square foot
building in Hopland on which the Hopland Brewery is located. The lease expires
in August 2004. The Company leases 3.66 acres in Saratoga Springs, New York, on
which Ten Springs Brewery operates under a lease expiring October 2002.
Additionally, the Company leases certain equipment and vehicles under operating
leases which expire through March 2000. The Company leases certain brewing
equipment from FINOVA Capital Corporation which expires November 11, 2003.
Item 3. 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 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
Mendocino Brewing's Common Stock is listed on the Pacific Exchange,
Inc. (symbol MBR). The high and low closing sales prices for the Common Stock on
the Pacific Exchange are set forth below for the quarters indicated:
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1999 1998
---------------------------------- ----------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
High $1.50 $2.00 $2.13 $1.25 $3.31 $2.75 $1.68 $1.18
Low $0.56 $1.06 $0.88 $0.63 $2.00 $1.18 $1.06 $0.56
The Company had approximately 2,431 shareholders of record as of March
15, 2000. Management intends to retain Mendocino Brewing's earnings for use in
the business and does not expect the Company to pay cash dividends in the
foreseeable future. The Company's credit agreements provide that the Company
shall not declare or pay any dividend or other distribution on its Common Stock
(other than a stock dividend) or purchase or redeem any Common Stock, without
the lender's prior written consent. Management anticipates that such
restrictions will remain in effect for as long as the Company has significant
bank financing, including the long-term debt on the Ukiah real estate. The
holders of the Company's 227,600 outstanding shares of Series A Preferred Stock
are entitled to aggregate cash dividends and liquidation proceeds of $1.00 per
share before any dividend may be paid with respect to the Common Stock. The
Series A Preferred Shares are canceled after they have received their $1.00 per
share aggregate dividend. Management does not have any present intention to
declare or pay a dividend on the Series A Preferred Stock.
Item 6. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction
with the Financial Statements and the Notes thereto and other financial
information included elsewhere in this Report. The discussion of results and
trends does not necessarily imply that these results and trends will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-KSB 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-KSB 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 year was highlighted by introduction of new products and new
packaging in both the Ukiah and Saratoga Springs facilities.
11
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In Ukiah, Carmel Pale Ale and Peregrine Golden Ale products were
launched during the second quarter of the year. New packaging for Carmel Wheat,
Red Tail 12 pack and Eye of the Hawk Millennium Edition was introduced.
In Saratoga Springs, a new non-alcoholic brew of OLDE SARATOGA CLASSIC
ROOT BEER was launched during the third quarter.
All the new products have been well received in the market. The
licensed brand Razor Edge also rolled out during the first quarter of the year
from both the Ukiah and Saratoga Springs facilities.
In addition, bottling line equipment such as a carrier erector and bulk
glass handling equipment were installed in Ukiah and Saratoga facilities,
respectively, which has brought about reductions in manpower. At the Ukiah
facility, two additional 240 bbl fermentation tanks were installed to satisfy
greater production and flexibility demand.
Pursuant to the October 1997 Investment Agreement between the Company
and UBA, UBA agreed to provide, or arrange for the provision of funding for the
working capital requirements of Releta. UBA has fulfilled this commitment by
making available to the Company a credit facility of up to $2,000,000 for
working capital purposes (the "1998 Facility"). By mid 1999, the Company had
borrowed $994,000 drawn on the credit facility and slightly more than $61,000 of
interest had accrued thereon. Subsequently, UBA agreed to convert all of the
outstanding convertible notes (together with all accrued but unpaid interest)
into common stock after the Board of Directors of the Company offered UBA an
inducement to convert. As a result of the conversion, UBA became the majority
owner of Company.
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. UBA can, at its option, convert the principal and any
accrued but unpaid interest into unregistered shares of the Company's common
stock at a rate of one share of common stock for each $1.50 of principal and
unpaid interest. As of December 31, 1999, the Company has made 5 draws on the
credit facility. As of December 31, 1999, the aggregate amount drawn on the line
of credit, together with interest accrued thereon, is equal to $576,284, which
corresponds to the right to acquire up to 384,189 shares of common stock of the
Company.
Net sales for 1999 increased by 33.2% over 1998 due primarily to
increased and improved marketing efforts. Production and sales in 1999 (measured
in barrels, brewed and shipped out of Ukiah and Saratoga Springs facilities,
including brands being brewed under contract) increased by 30.5% and 31.4%
respectively, when compared to 1998. Production in 1999 increased to 48,973
barrels as compared to 37,514 barrels in 1998. Sales in 1999 increased to 47,154
barrels as compared to 35,882 barrels in 1998. The Company ended the year with a
net loss of $1,306,300. Increased fixed costs associated with the breweries,
higher selling and marketing expenses, increased interest expenses and induced
conversion expense, contributed to the net loss of $1,306,300 for the year ended
December 31, 1999.
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On March 29, 2000 the Company announced that it intends to enter into
two concurrent related party transactions with affiliates of UBA. In the first
transaction, the Company intends to acquire UBSN Ltd. UK, which is the European
distributor of the UB Group's flagship brand, Kingfisher Premium Lager. In the
second transaction, the Company intends to acqire the distribution right to
Kingfisher Premium Lager Beer in the United States from United Breweries
International, UK Ltd.
Results of Operations
The following tables set forth, as a percentage of net sales, certain
items included in Mendocino Brewing's Statements of Operations. See Financial
Statements and Notes thereto.
----------------------
Year Ended December 31
----------------------
1999 1998
Statements of Operations Data: % %
------ ------
Sales 106.22 105.95
Less Excise taxes 6.22 5.95
------ ------
Net Sales 100.00 100.00
Costs of Sales 66.31 75.16
------ ------
Gross Profit 33.69 24.84
------ ------
Retail Operating Expenses 4.80 7.38
Marketing Expense 19.44 20.09
General and Administrative Expenses 18.99 29.12
------ ------
Total Operating Expenses 43.23 56.59
------ ------
Loss from Operations (9.54) (31.75)
Other Expense (4.13) 0.10
Interest Expense (9.73) (9.71)
------ ------
Loss before income taxes (23.40) (41.36)
Benefit from income taxes (8.39) (17.44)
------ ------
Net Loss (15.02) (23.92)
====== ======
-----------------------------
Year Ended December 31
-----------------------------
1999 1998
Balance Sheet Data: $ $
---------- -----------
Cash and Cash Equivalents 0 42,000
Working Capital (1,500,400) (630,700)
Property and Equipment 14,727,200 15,259,800
Deposits and Other Assets 22,900 34,600
Total Assets 19,629,900 18,923,200
Long-term Debt 4,165,900 4,753,200
Obligation Under Capital Lease 1,396,900 1,525,800
Total Liabilities 9,327,500 8,781,400
Accumulated Deficit (3,805,100) (2,498,800)
Shareholder's equity 10,257,400 10,141,800
Net Sales
Net sales for 1999 increased by 32.2% from $6,529,700 in 1998 to
$8,698,600 in 1999. The sales volume increased to 47,154 barrels during 1999
from 35,882 barrels in 1998, representing an
13
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increase of 31.4%. Of the total sales of barrels in 1999, the sales out of the
Ukiah facility accounted for 37,156 barrels and the shipments from Saratoga
Springs facility was 9,998 barrels. Management attributes the increased sales to
improved marketing strategies, including new point of sale materials and
increased sales personnel. The increase in overall net sales was achieved solely
by higher wholesale shipments during 1999 when compared to 1998. In view of
management's focus on wholesale beer sales, retail sales for the year 1999
decreased by $102,400 while the wholesale beer sales for the year 1999 increased
by $2,423,600.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales decreased in 1999 to
66.31% when compared to that of 75.16% in 1998. During 1999, as a percentage of
net sales as compared to 1998, depreciation decreased from 10.64% in 1998 to
7.96% in 1999, property taxes decreased from 2.13% in 1998 to 1.49% in 1999,
labor costs decreased from 12.48% in 1998, to 11.61% in 1999, utilities
decreased from 4.59% in 1998 to 3.89% in 1999, wastewater decreased from 0.47%
in 1998 to 0.26% in 1999, repair & maintenance decreased from 1.31% in 1998 to
1.21% in 1999, telephone decreased from 0.19% in 1998 to 0.09% in 1999,
equipment rental decreased from 0.46% in 1998 to 0.26% in 1999, thereby
contributing to the decrease of 8.85% of the cost of goods sold as a percentage
of net sales for the year of 1999. Management attributes the balance of the
decrease to higher sales volumes thereby lowering per barrel production costs at
both the Ukiah and Saratoga breweries.
Gross Profit
As a result of the higher net sales as explained above, gross profit
increased in 1999 to $2,930,700 from $1,621,700 for the comparable period of
1998, representing an increase of 81%. As a percentage of net sales, the gross
profit during 1999 increased to 33.69% from that of 24.84% for the corresponding
period of 1998.
Operating Expenses
Operating expenses were $3,760,800 in 1999, as compared to $3,695,000
for 1998, representing an increase of 1.78%. Operating expenses consist of
retail operating expenses, marketing and distribution expenses, and general and
administrative expenses.
Retail operating expenses for 1999 were $417,500 compared to $481,900
in 1998. This represents a decrease of $64,400 or 13.36% from 1998. As a
percentage of net sales, retail operating expenses decreased to 4.80% in 1999 as
compared to 7.38% for 1998. The decrease in retail operating expenses consisted
of a decrease in labor costs of $66,200 and an increase in other net expenses of
$1,800.
Marketing and distribution expenses were $1,691,100 for 1999,
representing an increase of 29% compared to $1,311,700 in 1998. As a percentage
of net sales, marketing and distribution expenses represented 19.44% in 1999 as
compared to 20.09% in 1998. The increase in marketing and distribution expenses
consisted of an increase in marketing and sales labor of $128,400; telephone
expenses increased by $9,500; sales promotions expenses increased by $162,500;
point of sale expenses increased by $31,900; media advertising increased by
$12,900; auto expenses increased by $8,500; travel and entertainment decreased
by $8,300; freight increased by $32,500; and an increase in other net expenses
of $1,500.
14
<PAGE>
General and administrative expenses were $1,652,200 in 1999, as
compared to $1,901,400 in 1998 representing a decrease of $249,200. As a
percentage of net sales, the general and administrative expenses represented a
decrease of 10.2% in 1999 to 18.9% as compared to 29.1% in 1998. The decrease of
general and administrative expenses consisted of a decrease in professional and
legal fees of $225,100, supplies decreased by $10,400, travel and entertainment
decreased by $100,800, labor (which includes directors compensation of $102,600
for 1999) increased by $87,700; and all other expenses decreased by $600.
Other Income/(Expense)
The other income/(expense) for the year 1999 was $1,205,700 as compared
to $627,800 in 1998. The increase of $577,900 was due to an increase in interest
expense of $210,500, an increase of $263,900 in induced conversion expense for
convertible debt, an increase in other expenses of $103,500 relative to
potential acquisitions that were not consummated, and miscellaneous income of
$8,000.
Benefit From Income Taxes
The benefit from income taxes for the year 1999 was $729,500 as
compared to $1,138,800 in 1998. The benefit from income taxes is due to the
expected future benefit of carrying forward net operating losses and other
timing differences.
As of December 31, 1999, the Company has available for carryforward
approximately $6,747,000, $2,551,000 and $794,000 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 2019. The
California net operating losses expire beginning in 2001 through 2004. The
Company also has $28,000 of California Manufactures Investment Tax Credits that
can be carried forward to future taxes and begin to expire in 2005. The benefit
from these loss carryforwards and credits has been recorded, resulting in a
deferred tax asset. A valuation allowance is not provided since the Company
believes it is more likely than not the loss carryforwards will be fully
utilized.
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns, including the future benefit of its
carryforwards. Temporary differences and carryforwards which give rise to
deferred assets on December 31, 1999 are as follows:
Benefits from net operating loss carryforwards $ 2,590,800
Investment tax credit carryforwards 28,000
Inventory 6,900
Accruals 39,700
Depreciation and amortization (78,600)
Other (103,400)
-----------
Net deferred income taxes 2,483,400
Deferred income taxes expected to be utilized in 2000 43,100
-----------
Deferred income taxes $ 2,440,300
-----------
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Net Loss
The net loss for the year 1999 was $1,306,300 as compared to $1,562,300
for the year 1998. As a percentage of net sales, the net loss for the year 1999
represented 15.0% when compared to 23.9% in 1998.
Segment Information
Mendocino Brewing's business presently consists of two segments. The
first is brewing for wholesale to distributors and other retailers. This segment
accounted for 94% of the Company's total gross sales during 1999. The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store located at the Hopland Brewery.
This segment accounted for 6% of the Company's total gross sales during 1999.
With expanded wholesale beer production in both Ukiah and Saratoga
Springs, Management expects that retail sales, as a percentage of total sales,
will decrease proportionally to the expected increase in the Company's wholesale
sales.
Seasonality
Beer consumption nationwide has historically increased by approximately
20% during the summer months. It is not clear to what extent seasonality will
affect the Company as it expands its capacity and its geographic markets.
Capital Demands
The Releta facility commenced brewing operations in February 1998. The
Company expects both the Ukiah and Releta facilities to operate at significantly
less than full capacity during all or part of 2000. Both breweries have placed
demands upon the Company's assets, liabilities, commitments for capital
expenditures, and liquidity. Failure to adequately meet those demands may have a
material adverse affect on the Company's business, financial condition, and
results of operations.
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. Mendocino Brewing has obtained a $2.7 million long term
loan secured by a first priority deed of trust on the Ukiah land and
improvements. The loan is payable in monthly installments of $24,443 including
interest at the Treasury Constant Maturity Index plus 4.17%, currently 5.83%,
maturing December 2012 with a balloon payment in the amount of $1,872,300
secured by some of the assets of the Company (other than the Releta facility),
including, without limitation, a first priority deed of trust on the Ukiah land
and improvements, fixtures and most of the equipment of the Company.
Shareholder Commitment. 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
16
<PAGE>
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. The arrangement was approved by the
independent directors (Robert Neame, Kent Price and Sury Rao Palamand) on August
30, 1999. As of December 31, 1999, the Company has made five draws on the credit
facility. The aggregate amount drawn, together with interest accrued, equaled
$576,284 which corresponds to the right of UBA to acquire up to 384,189 shares
of Common Stock of the Company at a conversion price of $1.50 per share.
Conversion of Certain Promissory Notes. On August 30, 1999, UBA agreed
to convert all of the outstanding convertible notes (together with all accrued
but unpaid interest) issued to UBA under the 1998 Facility. By their terms the
convertible notes were convertible at $1.50 per share. However, the Board of
Directors of the Company offered to induce UBA to convert the notes into common
stock at a price of $1.125, which was the then-current price of the Company's
common stock as traded on the Pacific Exchange. The total amount converted was
approximately $1,055,442, which is equal to 938,171 shares of common stock. As a
result of the conversion, UBA became the majority owner of Company, holding
55.8% of the issued and outstanding shares of common stock. Further, as a result
of the conversion, the Company recognized an expense of $263,900 for the induced
conversion. The induced conversion was approved by the independent directors
(Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999.
Equipment Lease. FINOVA Capital Corporation has leased new brewing
equipment with a total cost of approximately $1.78 million to Mendocino Brewing
for a term of 7 years (beginning 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
approximately $39,000 per month 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.
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 December 31, 1999, the
total amount outstanding on the line of credit was $2,396,400.
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<PAGE>
Keg Management Arrangement. The Company has entered into a keg
management agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar provides the Company with half-barrel kegs for which the Company pays
a filling and use 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.
Current Ratio. The Company's ratio of current assets to current
liabilities on December 31, 1999 was 0.61 to 1.0 and its ratio of total assets
to total liabilities was 2.09 to 1.0.
Impact of Expansion on Cash Flow. Mendocino Brewing must make timely
payment of its debt and lease commitments to continue in operation. Unused
capacity at the Ukiah and Saratoga Springs facilities has placed additional
demands on the Company's working capital. 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 day to day operations. UBA agreed to provide a loan of up to
$2 million for working capital purposes. In addition, pursuant to the Investment
Agreement dated October 24, 1997, between the Company and UBA, UBA has agreed to
provide, directly or indirectly, funding for the working capital requirements of
the Releta facility in the amount of $1 million until October 24, 1999 or until
the brewery's operations are profitable, whichever comes first. UBA, through its
affiliated entities, has fulfilled this obligation by facilitating the CIT
Group/Credit Finance $3 million loan transaction. 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.
Year 2000
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.
Item 7. Financial Statements.
The information required by this item is set forth at Pages F-1 through
F-17 to this Report.
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Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The information required by Item 9 will be contained in the Company's
Definitive Proxy Statement for its 2000 Annual Meeting of Shareholders (the
"2000 Proxy Statement") called to be held in June 2000, which the Company
intends to file with the Commission in April 2000, and such information is
incorporated herein by reference.
Item 10. Executive Compensation.
The information required by Item 10 will be contained in the 2000 Proxy
Statement, and such information is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 11 will be contained in the 2000 Proxy
Statement, and such information is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
On March 29, 2000, the Company announced that it intends to enter into
two concurrent related-party transactions.
In the first 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
5,000,000 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 May 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.
In a second and concurrent transaction, the Company will obtain the
distribution rights to the "Kingfisher" brand of beer in the United States from
UBI UK, Ltd. As compensation, the Company will issue additional shares of its
common stock based on a valuation established in the fairness opinion obtained
from Sage Capital LLC. Under the terms of the distribution agreement, the
Company will also have an option to brew "Kingfisher" brand beer in the United
States, for distribution primarily in the United States, on mutually agreed
terms and conditions. However, in order to commence the brewing and distribution
of the "Kingfisher" beer, the Company will have to obtain a license to use the
"Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The Company will
be solely responsible for obtaining that trademark license, at its sole expense,
and there are no assurances that such license will be obtained.
The transactions described above are related party transactions 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.
Additional information required by Item 12 will be contained in the
2000 Proxy Statement, and such information is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
------ -----------------------
3.1 (A) Articles of Incorporation, as amended, of the Company.
3.2 (B) Bylaws of the Company
4.1 Articles 5 and 6 of the Articles of Incorporation, as amended,
of the Company (Reference is made to Exhibit 3.1).
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.1).
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.
10.7 (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.
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Exhibit
Number Description of Document
------ -----------------------
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.
10.43 (V) Master Loan Agreement between the Company and the United
Breweries of America Inc.
10.44 (V) Convertible Note in favor of the United Breweries of America
Inc.
27 Financial Data Schedule.
- ----------
(A) Incorporated by reference from the Company's Registration Statement
dated June 15, 1994, as amended, previously filed with the Commission,
Registration No. 33-78390-LA.
20
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
(C) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended March 31, 1995, previously filed with the
Commission.
(E) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1995, previously filed with
the Commission.
(F) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1995, previously filed with the
Commission.
(G) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 1996, previously filed with the
Commission.
(J) Incorporated by reference from the Company's Registration Statement
dated February 6, 1997, as amended, previously filed with the
Commission, Registration No. 33-15673.
(K) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1996, previously filed with the
Commission.
(L) Incorporated by reference from the Schedule 13D filed with the
Commission on November 3, 1997, by United Breweries of America, Inc.
and Vijay Mallya.
(M) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1997.
(N) Incorporated by reference from the Company's Report on Form 10-QSB/A
No. 1 for the quarterly period ended September 30, 1997.
(O) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1997, previously filed with the
Commission.
(Q) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 1998.
(R) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1998.
(T) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1998, previously filed with the
Commission.
(U) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 1999.
(V) Incorporated by reference from the Amendment No. 5 to Schedule 13D
filed with the Commission on September 15, 1999, by United Breweries
of America, Inc. and Vijay Mallya.
+ Portions of this Exhibit were omitted pursuant to an application for
an order declaring confidential treatment filed with the Securities
and Exchange Commission.
The Registrant filed a report on Form 8-K on 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.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereto duly authorized.
(Registrant) Mendocino Brewing Company, Inc.
By: /s/ Vijay Mallya
----------------------------------------
Vijay Mallya, Chief Executive Officer
Date: March 30, 2000
Pursuant to the requirements of Section 13 of the Exchange Act, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
By: /s/ Vijay Mallya
----------------------------------------
Vijay Mallya, Chief Executive Officer
and Director
Date: March 30, 2000
By: /s/ Yashpal Singh
----------------------------------------
Yashpal Singh, President, Chief
Operating Officer and Director
Date: March 30, 2000
By: /s/ Jerome G. Merchant
----------------------
Jerome G. Merchant, Director
Date: March 30, 2000
By: /s/ P.A. Murali
----------------------------------------
P.A. Murali, Secretary and Chief
Financial Officer
Date: March 30, 2000
22
<PAGE>
- --------------------------------------------------------------------------------
MENDOCINO BREWING COMPANY, INC.,
AND SUBSIDIARY
INDEPENDENT AUDITOR'S REPORT
AND
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT...............................................F - 1
CONSOLIDATED FINANCIAL STATEMENTS
Balance sheets........................................................F - 2
Statements of operations..............................................F - 4
Statements of stockholders' equity....................................F - 5
Statements of cash flows..............................................F - 6
Notes to financial statements.........................................F - 7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Mendocino Brewing Company, Inc.
We have audited the accompanying consolidated balance sheets of Mendocino
Brewing Company, Inc., and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years ended December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Mendocino Brewing
Company, Inc., and subsidiary as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the two years ended December
31, 1999, in conformity with generally accepted accounting principles.
/s/ Moss Adams LLP
Santa Rosa, California
February 4, 2000
Page F-1
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
================================================================================
ASSETS
1999 1998
----------- -----------
CURRENT ASSETS
Cash $ -- $ 42,000
Accounts receivable 1,040,300 679,900
Inventories 1,168,700 978,000
Prepaid expenses 57,200 33,500
Deferred income taxes 43,100 138,300
----------- -----------
Total current assets 2,309,300 1,871,700
----------- -----------
PROPERTY AND EQUIPMENT 14,727,200 15,259,800
----------- -----------
OTHER ASSETS
Deferred income taxes 2,440,300 1,614,200
Deposits and other assets 22,900 34,600
Intangibles, net of amortization 130,200 142,900
----------- -----------
2,593,400 1,791,700
----------- -----------
Total assets $19,629,900 $18,923,200
=========== ===========
The accompanying notes are an integral part of these financial statements.
================================================================================
Page F-2
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (Continued)
December 31, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES
Disbursements in excess of deposits $ 9,600 $ --
Line of credit 1,159,800 --
Accounts payable 1,708,700 806,700
Accrued wages and related expense 204,600 210,800
Accrued liabilities 130,300 91,000
Current maturities of long-term debt 321,000 322,000
Current maturities of obligations under capital lease 275,700 221,300
Current maturities of notes payable to related party -- 850,600
------------ ------------
Total current liabilities 3,809,700 2,502,400
LONG-TERM DEBT, less current maturities 3,589,600 3,871,800
LINE OF CREDIT -- 738,000
OBLIGATIONS UNDER CAPITAL LEASE, less
current maturities 1,396,900 1,525,800
NOTES PAYABLE TO RELATED PARTY, less
current maturities 576,300 143,400
------------ ------------
Total liabilities 9,372,500 8,781,400
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with
aggregate liquidation preference of $227,600;
227,600 shares authorized, issued and outstanding 227,600 227,600
Common stock, no par value; 20,000,000 shares authorized,
5,530,177 and 4,497,059 shares issued and outstanding
at December 31, 1999 and 1998, respectively 13,834,900 12,413,000
Accumulated deficit (3,805,100) (2,498,800)
------------ ------------
Total stockholders' equity 10,257,400 10,141,800
------------ ------------
Total liabilities and stockholders' equity $ 19,629,900 $ 18,923,200
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
Page F-3
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
================================================================================
1999 1998
----------- -----------
SALES $ 9,240,000 $ 6,918,800
LESS EXCISE TAXES 541,400 389,100
----------- -----------
NET SALES 8,698,600 6,529,700
COST OF GOODS SOLD 5,767,900 4,908,000
----------- -----------
GROSS PROFIT 2,930,700 1,621,700
----------- -----------
OPERATING EXPENSES
Retail operating 417,500 481,900
Marketing 1,691,100 1,311,700
General and administrative 1,652,200 1,901,400
----------- -----------
3,760,800 3,695,000
----------- -----------
LOSS FROM OPERATIONS (830,100) (2,073,300)
----------- -----------
OTHER INCOME (EXPENSE)
Induced conversion (263,900) --
Interest income 500 1,900
Other income (expense) (95,500) 2,900
Gain on sale of equipment -- 3,700
Interest expense (846,800) (636,300)
----------- -----------
(1,205,700) (627,800)
----------- -----------
LOSS BEFORE INCOME TAXES (2,035,800) (2,701,100)
BENEFIT FROM INCOME TAXES (729,500) (1,138,800)
----------- -----------
NET LOSS $(1,306,300) $(1,562,300)
=========== ===========
BASIC LOSS PER COMMON SHARE $ (0.27) $ (0.35)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING 4,838,151 4,480,222
=========== ===========
The accompanying notes are an integral part of these financial statements.
================================================================================
Page F-4
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
================================================================================
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock
-------------------- ------------------------- Accumulated Total
Shares Amount Shares Amount (Deficit) Equity
------ ------ ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 227,600 $227,600 4,463,385 $12,367,200 $ (936,500) $11,658,300
Stock issued for asset acquisition -- -- 33,674 45,800 -- 45,800
Net loss -- -- -- -- (1,562,300) (1,562,300)
------- -------- --------- ----------- ----------- -----------
Balance, December 31, 1998 227,600 227,600 4,497,059 12,413,000 (2,498,800) 10,141,800
Related party debt converted to
common stock at $1.125 per -- -- 938,171 1,319,300 -- 1,319,300
Stock issued for services -- -- 94,947 102,600 -- 102,600
Net loss -- -- -- -- (1,306,300) (1,306,300)
------- -------- --------- ----------- ----------- -----------
227,600 $227,600 5,530,177 $13,834,900 $(3,805,100) $10,257,400
======= ======== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
================================================================================
Page F-5
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
================================================================================
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,306,300) $(1,562,300)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 794,600 779,400
Induced conversion expense 263,900 --
Gain on sale of assets -- (3,700)
Deferred income taxes (730,900) (1,139,600)
Stock issued for services 102,600 --
Accrued interest converted to stock 61,200 --
Changes in:
Accounts receivable (360,400) (350,200)
Inventories (190,700) (433,900)
Prepaid expenses (23,700) 9,100
Deposits and other assets 11,700 (33,100)
Refundable income taxes -- 106,300
Accounts payable 902,000 78,400
Accrued wages and related expense 39,300 41,100
Accrued liabilities (6,200) (157,800)
----------- -----------
Net cash used by operating activities (442,900) (2,666,300)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment and leasehold
improvements (99,800) (185,900)
Increase in intangibles -- (63,100)
Proceeds from sale of fixed assets -- 24,000
----------- -----------
Net cash used by investing activities (99,800) (225,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 421,800 138,000
Borrowings on long-term debt -- 1,433,600
Principal payments on long-term debt (283,200) (153,400)
Payments on obligations under capital lease (223,800) (185,200)
Disbursements in excess of deposits 9,600 --
Proceeds from notes payable to related party 576,300 994,000
----------- -----------
Net cash provided by financing activities 500,700 2,227,000
----------- -----------
DECREASE IN CASH (42,000) (664,300)
CASH, beginning of year 42,000 706,300
----------- -----------
CASH, end of year $ -- $ 42,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
================================================================================
Page F-6
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description of operations - Mendocino Brewing Company and its subsidiary operate
two breweries, which are in the business of producing beer and malt beverages
for the specialty "craft" segment of the beer market, as well as own and operate
a brewpub and gift store. The breweries are in two locations, one in Ukiah,
California and the other in Saratoga Springs, New York. The brewpub and gift
store are located in Hopland, California. The majority of sales for Mendocino
Brewing Company are in California. The Company began operations at the Saratoga
Springs, New York facility in December 1997. The company brews several brands,
of which Red Tail Ale is the flagship brand. In addition, the Company performs
contract brewing for several other brands.
Principles of consolidation - The consolidated financial statements present the
accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiary,
Releta Brewing Company, LLC, which operates in Saratoga Springs, New York. All
material inter-company balances and transactions have been eliminated.
Inventories - Inventories are stated at the lower-of-average cost or market.
Property and equipment - Property and equipment are stated at cost and
depreciated or amortized using straight-line and accelerated methods over the
assets' estimated useful lives. Costs of maintenance and repairs are charged to
expense as incurred; significant renewals and betterments are capitalized.
Estimated useful lives are as follows:
Building 40 years
Machinery equipment 5-40 years
Furniture and fixtures 5-10 years
Leasehold improvements 7-20 years
Intangibles - Intangibles consist of prepaid interest on the financing of the
Ukiah brewery, placement fees associated with debt and purchased intangibles.
Amounts are amortized using the straight-line method over the lives of the debt
and estimate useful lives of the intangibles.
Concentration of credit risks - Financial instruments that potentially subject
the Company to credit risk consist principally of trade receivables and cash
deposits in excess of FDIC limits. The Company's cash deposits are placed with
major financial institutions. Wholesale distributors account for substantially
all accounts receivable; therefore, this concentration risk is limited due to
the number of distributors and state laws regulating the financial affairs of
distributors of alcoholic beverages.
================================================================================
Page F-7
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
Income taxes - The provision for income taxes is based on pre-tax earnings
reported in the financial statements, adjusted for requirements of current tax
law, plus the change in deferred taxes. Deferred tax assets and liabilities are
recognized using enacted tax rates and reflect the expected future tax
consequences of temporary differences between the recorded amounts of assets and
liabilities for financial reporting purposes and tax basis of such assets and
liabilities and future benefits from net operating loss carryforwards and other
expenses previously recorded for financial reporting purposes.
Basic loss per share - Basic loss per share was computed using the weighted
average number of common shares outstanding. Diluted loss per share was computed
using the weighted average number of common shares outstanding. Debt convertible
into 384,189 shares of common stock at $1.50 per share, and 101,388 stock
options, at a weighted average price per share of $2.07, have been excluded from
the weighted average shares outstanding since the effect of these potentially
dilutive securities would be antidilutive.
Use of estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities. The amounts
estimated could differ from actual results.
Advertising - Advertising costs are expensed as incurred. Advertising expenses
for the years ended December 31, 1999 and 1998, were $243,200 and $214,700,
respectively.
Fair value of financial instruments - The following methods and assumptions were
used by the Company in estimating its fair value disclosures for financial
instruments:
Long-term debt: Based on the borrowing rates currently available to the Company
for loans with similar terms and average maturities, the fair value of long-term
debt approximates cost.
New accounting pronouncements - The Financial Accounting Standards Board
("FASB") has issued SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities." It requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the value of those derivatives are accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving the offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management believes that the
adoption of SFAS No. 133 will have no material effect on its financial
statements.
================================================================================
Page F-8
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 2 - INVENTORIES
1999 1998
---------- ----------
Raw materials $ 363,600 $ 276,800
Work-in-process 210,100 210,500
Finished goods 562,500 438,900
Merchandise 32,500 51,800
---------- ----------
$1,168,700 $ 978,000
========== ==========
NOTE 3 - PROPERTY AND EQUIPMENT
1999 1998
----------- -----------
Buildings $ 7,738,700 $ 7,696,500
Machinery and equipment 5,381,100 5,263,700
Equipment under capital lease 2,265,700 2,117,400
Land 810,900 813,000
Leasehold improvements 792,200 792,200
Equipment in progress 66,900 123,500
Vehicles 69,300 69,300
Furniture and fixtures 37,900 37,900
----------- -----------
17,162,700 16,913,500
Less accumulated depreciation and amortization 2,435,500 1,653,700
----------- -----------
$14,727,200 $15,259,800
=========== ===========
NOTE 4 - LINE OF CREDIT
The Company has available a $3,000,000 line of credit 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 (see Note 5). 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, accounts receivable, inventory, certain
securities pledged by a stockholder, and a second position on the real property
of Mendocino Brewing Company.
================================================================================
Page F-9
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- --------------------------------------------------------------------------------
NOTE 5 - LONG-TERM DEBT
1999 1998
---------- ----------
Note payable to bank, in monthly installments
of $24,400, including interest at the
Treasury Constant Maturity Index, currently
5.83% plus 4.17%; maturing December 2012,
with a balloon payment, secured by
substantially all the assets of Mendocino
Brewing Company $2,655,800 $2,679,900
Note payable to financial institution, in
monthly installments of $24,700, plus
interest at the prime rate plus 2.25%,
currently 10.75%; maturing March 2004;
secured by substantially all the assets of
the Releta Brewing Company, certain
securities pledged by a stockholder, accounts
receivable, inventory and a second position
on the other assets of Mendocino Brewing
Company 1,236,600 1,484,000
Note payable, in monthly installments of
$1,200, including interest at 5.65%; maturing
March 2001; secured by vehicle 18,200 29,900
---------- ----------
3,910,600 4,193,800
Less current maturities 321,000 322,000
---------- ----------
$3,589,600 $3,871,800
========== ==========
Maturities of long-term debt for succeeding years are as follows:
Year Ending December 31,
------------------------
2000 $ 321,000
2001 373,900
2002 377,100
2003 384,400
2004 145,000
2,309,200
----------
Thereafter $3,910,600
==========
================================================================================
Page F-10
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASE
The Company leases brewing and office equipment under various capital lease
agreements with various financial institutions.
Future minimum lease payments under these capital lease agreements are as
follows:
Year Ending December 31,
------------------------
2000 $ 430,800
2001 422,000
2002 402,400
2003 824,900
Thereafter 15,600
----------
2,095,700
Less amounts representing interest 423,100
----------
Present value of minimum lease payments 1,672,600
Less current maturities 275,700
----------
$1,396,900
==========
NOTE 7 - NOTES PAYABLE TO RELATED PARTY
1999 1998
-------- --------
Notes payable consists of convertible notes
to United Breweries of America, a related
party, with interest at the prime rate plus
1.5%, maturing 18 months after the advances,
unsecured, subordinated to bank debt, upon
maturity are convertible into common stock at
$1.50 per share or may be repaid in 60 month
ly installments, notes mature through June
2001, including $11,200 of accrued interest $576,300 $994,000
Less current maturities -- 850,600
-------- --------
$576,300 $143,400
======== ========
NOTE 8 - PROFIT-SHARING PLAN
The Company has a profit-sharing retirement plan under which it may make
employer contributions at the discretion of the Board of Directors, although no
such contributions are required. Employer contributions vest over a period of
six years. The plan covers substantially all full-time employees meeting certain
minimum age and service requirements. There were no contributions made for the
years ended December 31, 1999 and 1998.
================================================================================
Page F-11
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 9 - COMMITMENTS AND RELATED PARTY TRANSACTIONS
The Company leases its Hopland, California facility under a noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,100, to be
adjusted annually by increases in the Consumer Price Index, as defined in the
lease agreement. The Company leases the land on which the New York brewery
operates under a noncancellable operating lease expiring October 2002. The lease
contains options, which management intends to exercise, to extend the lease for
three additional 5 year periods and contains an option to purchase the property.
The monthly lease payment is $8,800, to be adjusted annually by increases in
Consumer Price Index, as defined in the lease agreement. Additionally, the
Company leases certain equipment and vehicles under noncancellable operating
leases that expire through August 2004. Total rent expense was $192,100 and
$201,300 for the years ended December 31, 1999 and 1998, respectively. Future
minimum lease payments are as follows:
Year Ending December 31,
------------------------
2000 $144,800
2001 134,100
2002 112,700
2003 29,300
2004 19,600
--------
$440,500
========
Keg management agreement - In January 1997, the Company entered into a keg
management agreement with MicroStar Keg Management LLC. Under this arrangement,
MicroStar provides half-barrel kegs for which the Company pays a service fee
between $5 and $15, depending on volume. The agreement is effective April 1,
1997, for a five-year period. Mendocino Brewing Company, Inc. has the option to
terminate the agreement with 30 days notice. If terminated, the Company is
required to purchase three times the average monthly keg usage for the preceding
six-month period from MicroStar at purchase prices ranging from $54 to $84 per
keg. Rental expense associated with this agreement was $101,800 and $124,800 for
the years ended December 31, 1999 and 1998, respectively.
The Company reimburses certain expenses to United Breweries of America Inc.
(UBA), a related party, owning approximately 55% of the common stock, for
consulting, salaries, corporate financing and marketing activities. Total
expenses for UBA in 1999 and 1998 were $39,300 and $77,800. Interest expense
associated with the UBA notes was $72,600 and $64,900 for the year ended
December 31, 1999 and 1998, respectively.
The Company currently has accrued expenses to related parties of $42,200 and
$44,600 as December 31, 1999 and 1998, respectively.
The Company pays a member of the Board of Directors $2,700 per month for
consulting services. During the year the Company paid $32,400 for these
consulting services.
================================================================================
Page F-12
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 10 - CONTINGENCIES
Because of the unprecedented nature of the Year 2000 Issue, its effects, if any,
may not be identified until a future date. Management cannot assure that the
Company has identified all Year 2000 Issues, that the Company's remediation
efforts has been successful in whole or in part, or that parties with whom the
Company does business will not be significantly impacted by Year 2000 Issues.
NOTE 11 - MAJOR CUSTOMERS
Sales to the top five customers totaled $4,191,700 and $3,029,000 for the years
ended December 31, 1999 and 1998, respectively representing 45% and 44% of
sales.
NOTE 12 - STOCKHOLDERS' EQUITY
Common Stock
In August 1999, the Company offered UBA an incentive to convert their
outstanding debt of $994,000 plus accrued interest of $61,400 to shares of
common stock. Per the agreement, the notes were convertible at $1.50 per share
at UBA's sole request. On the date of the conversion, the market price was
significantly lower than the conversion price of $1.50 per share. In order to
induce UBA to convert their entire debt, which has not matured, to common stock,
the Company offered to convert the debt at the market price of the stock. As
part of this transaction the Company recorded as an expense, $263,900 for the
inducement of the conversion price at less than the $1.50 conversion price.
Also in August 1999, the Company voted to compensate the independent outside
members of the Board of Directors. The Company issued 94,947 shares to these
board members as compensation and recognized $102,600 of compensation expense
for the issuance of the common stock.
Preferred Stock
The Company has authorized 2,000,000 shares of preferred stock, of which 227,600
have been designated as Series A. At the time of the incorporation of the
partnership, the Company issued 227,600 shares of non-voting, no-par value
Series A Preferred Stock in exchange for partnership assets. The partnership
distributed the Series A Preferred Stock to its partners on January 3, 1994.
Series A shareholders are entitled to receive cash dividends and/or liquidation
proceeds equal in the aggregate to $1.00 per share before any cash dividends are
paid on the Common Shares or any other series of Preferred Shares. When the
entire Series A dividend/liquidation proceeds have been paid, the Series A
Shares shall automatically be canceled and cease to be outstanding.
================================================================================
Page F-13
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 13 - STOCK OPTION PLAN
Under the 1994 Stock Option Plan, the Company may issue options to purchase up
to 200,000 shares of the Company's Common Stock. The plan provides for both
incentive stock options, as defined in Section 422 of the Internal Revenue Code,
and options that do not qualify as incentive stock options. The Plan shall
terminate upon the earlier of (a) the tenth anniversary of its adoption by the
Board or (b) the date on which all shares available for issuance under the Plan
have been issued.
The exercise price of incentive options must be no less than the fair-market
value of such stock at the date the option is granted, while the exercise price
of nonstatutory options will be no less than 85% of the fair-market value per
share on the date of grant. With respect to options granted to a person
possessing more than 10% of the combined voting power of all classes of the
Company's stock, the exercise price will be no less than 110% of the fair-market
value of such share at the grant date. During 1999, the Company issued 88,888
non-statutory stock options with a five-year term to the independent members of
the Board of Directors at the market price on the date of the grant.
The Company has adopted the disclosure only provision of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based
Compensation." Accordingly, no compensation expense has been recognized for
stock options issued during 1999. Had compensation cost for the Company's
options been determined based on the fair value at the grant date for awards in
1999 consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share would have reduced to the pro forma amounts indicated
below:
1999 1998
----------- -----------
Net loss - as reported $(1,306,300) $(1,572,400)
Net loss - pro forma $(1,363,800) $(1,572,400)
Loss per share - as reported $ (0.27) $ (0.35)
Loss per share - pro forma $ (0.28) $ (0.35)
The fair value of each option is estimated on date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999. There were no options granted in 1998.
1999
------
Dividends None
Expected volatility 120%
Risk free interest rate 6.51%
Expected life 5 years
Options issued during 1999 have an estimated weighted average fair value of
$1.08.
================================================================================
Page F-14
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 13 - STOCK OPTION PLAN (Continued)
The following table summarizes common stock option activity:
Shares Under Weighted-Average
Option Exercise Price
------ --------------
Balance, December 31, 1997 12,500 $ 8.80
Granted -- --
Exercised --
Canceled -- --
-------
Balance, December 31, 1998 12,500 8.80
Granted 88,888 1.13
Exercised --
Canceled -- --
-------
Balance, December 31, 1999 101,388 $ 2.07
=======
NOTE 14 - INCOME TAXES
1999 1998
Current
Federal $ -- $ --
State 1,400 800
----------- -----------
1,400 800
----------- -----------
Deferred
Current 95,200 (98,800)
Non-current (826,100) (1,040,800)
----------- -----------
(730,900) (1,139,600)
----------- -----------
$ (729,500) $(1,138,800)
=========== ===========
The difference between the actual income tax provision and the tax provision
computed by applying the statutory federal income tax rate to earnings before
taxes is attributable to the following:
1999 1998
Income tax benefit at 34% $ (692,200) $ (925,200)
State taxes 1,400 800
State tax benefit of net operating loss
carry forward (96,900) (111,300)
Recognition of future tax (deductions) 58,200 (103,100)
----------- -----------
$ (729,500) $(1,138,800)
=========== ===========
================================================================================
Page F-15
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 14 - INCOME TAXES (Continued)
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities are as follows:
1999 1998
----------- -----------
Inventories $ 6,900 $ 6,600
Accruals 39,700 141,800
Other (3,500) (10,100)
----------- -----------
Current deferred tax asset $ 43,100 $ 138,300
=========== ===========
Depreciation and amortization $ (78,600) $ (35,300)
Investment tax credit carryforward 28,000 43,500
Benefit of net operating loss carryforward 2,590,800 1,700,800
Other (99,900) (94,800)
----------- -----------
Non-current deferred tax asset $ 2,440,300 $ 1,614,200
=========== ===========
As of December 31, 1999, the Company has available for carryforward
approximately $6,747,000, $2,551,000 and $794,000 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, the remaining portion will expire in
2020. The California net operating losses expire beginning 2002 through 2004.
The Company also has $28,000 of California Manufactures Investment Tax Credits
that can be carried forward to reduce future taxes and expire in 2005. The
benefit from these loss carryforwards and credits has been recorded, resulting
in a deferred tax asset. A valuation allowance is not provided since the Company
believes it is more likely than not that the loss carryforwards will be fully
utilized.
================================================================================
Page F-16
<PAGE>
MENDOCINO BREWING COMPANY, INC., AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
================================================================================
NOTE 15 - SEGMENT INFORMATION
The Company's business presently consists of two segments. The first is brewing
for wholesale to distributors and other retailers. This segment accounted for
93% of the Company's total gross sales during 1999. The second segment consists
of brewing beer for sale along with food and merchandise at the Company's
brewpub and retail merchandise store located at the Hopland Brewery. This
segment accounted for 7% of the Company's total gross sales during 1999. A
summary of each segment is as follows:
<TABLE>
<CAPTION>
Year Ending December 31, 1999
------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
<S> <C> <C> <C> <C>
Sales $ 8,657,000 $583,000 $ -- $ 9,240,000
Operating profit (loss) 855,700 (33,600) -- 822,100
Identifiable assets 15,816,900 79,000 3,734,000 19,629,900
Depreciation and amortization 710,100 6,500 78,000 794,600
Capital expenditures 244,000 800 4,100 248,900
Year Ending December 31, 1998
Year Ending December 31, 1998
------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
Sales $ 6,233,400 $ 685,400 $ -- $ 6,918,800
Operating loss (89,200) (82,700) -- (171,900)
Identifiable assets 16,056,500 67,100 2,799,600 18,923,200
Depreciation and amortization 694,900 6,100 78,400 779,400
Capital expenditures 296,400 -- 114,100 410,500
</TABLE>
NOTE 16 - STATEMENT OF CASH FLOWS
Supplemental cash flow information includes the following:
1999 1998
---------- ----------
Cash paid during the year for:
Interest $ 771,600 $ 623,400
Income taxes $ 1,400 $ 2,300
Non-cash investing and financing activities:
Seller financed equipment $ 149,200 $ 224,300
Issuance of stock for intangibles $ -- $ 45,800
Transfer of liabilities to long-term debt $ -- $ 80,200
Induced conversion $1,319,300 $ --
Stock issued for services $ 102,600 $ --
================================================================================
Page F-17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 1,040,300
<ALLOWANCES> 0
<INVENTORY> 1,168,700
<CURRENT-ASSETS> 2,309,300
<PP&E> 17,162,700
<DEPRECIATION> (2,435,500)
<TOTAL-ASSETS> 19,629,900
<CURRENT-LIABILITIES> 3,809,700
<BONDS> 0
0
227,600
<COMMON> 13,834,900
<OTHER-SE> (3,805,100)
<TOTAL-LIABILITY-AND-EQUITY> 19,629,900
<SALES> 8,698,600
<TOTAL-REVENUES> 8,698,600
<CGS> 5,767,900
<TOTAL-COSTS> 9,528,700
<OTHER-EXPENSES> 359,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 846,800
<INCOME-PRETAX> (2,035,800)
<INCOME-TAX> 729,500
<INCOME-CONTINUING> (1,306,300)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,306,300)
<EPS-BASIC> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
