-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A8UJGCNozOrVR9Cu6f4HXwrsDin4pWZNB15f4GQ1Ds4/6HqrR+vsDARHF4o3T6iW dBf+KH2nkYjtJ0VRRIEhXg== 0000950005-00-000630.txt : 20000515 0000950005-00-000630.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950005-00-000630 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13636 FILM NUMBER: 628677 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 10QSB 1 FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from _________ to _________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 13351 South Highway 101, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of March 31, 2000 is 5,530,117. PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
March 31, 2000 (Unaudited) ASSETS CURRENT ASSETS Cash $ 51,900 Accounts receivable 1,223,300 Inventories 1,006,400 Prepaid expenses 50,300 Deferred income taxes 43,100 ------------ Total Current Assets: 2,375,000 ------------ PROPERTY AND EQUIPMENT 14,538,000 ------------ OTHER ASSETS Deferred Income Taxes 2,440,300 Other Assets 169,000 ------------ Total Other Assets: 2,609,300 ------------ Total Assets: $ 19,522,300 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 1,258,500 Accounts payable 1,781,000 Accrued liabilities 203,700 Accrued wages and related expense 177,800 Current maturities of notes payable to related party 310,000 Current maturities of obligation under capital lease 284,000 Current maturities of obligation under long-term debt 340,400 ------------ Total Current Liabilities: 4,355,400 LONG TERM DEBT, less current maturities 4,055,500 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 1,306,800 ------------ Total Liabilities: 9,717,700 ------------ STOCKHOLDERS' EQUITY Common stock, no par value: 20,000,000 shares authorized, 5,530,117 shares issued and outstanding 13,834,900 Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding Accumulated deficit (4,257,900) ------------ Total Stockholders' Equity 9,804,600 ------------ Total Liabilities and Stockholders' Equity: $ 19,522,300 ============ The accompanying notes are an integral part of these financial statements.
1 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) --------------------------- THREE MONTHS ENDED March 31 --------------------------- 2000 1999 ----------- ----------- SALES $ 2,070,200 $ 1,849,300 LESS EXCISE TAXES 121,600 110,800 ----------- ----------- NET SALES 1,948,600 1,738,500 COST OF GOODS SOLD 1,418,900 1,405,300 ----------- ----------- GROSS PROFIT 529,700 333,200 ----------- ----------- OPERATING EXPENSES Retail operating 97,900 90,000 Marketing 322,400 344,600 General and administrative 344,200 350,500 ----------- ----------- 764,500 785,100 ----------- ----------- LOSS FROM OPERATIONS (234,800) (451,900) ----------- ----------- OTHER INCOME (EXPENSE) Other income 13,800 5,900 Interest expense (231,800) (206,600) ----------- ----------- (218,000) (200,700) ----------- ----------- LOSS BEFORE INCOME TAXES (452,800) (652,600) BENEFIT FROM INCOME TAXES -- (260,100) ----------- ----------- NET LOSS $ (452,800) $ (392,500) =========== =========== LOSS PER SHARE $ (0.08) $ (0.09) =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 5,530,117 4,497,059 =========== =========== The accompanying notes are an integral part of these financial statements. 2 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
--------------------------------- THREE MONTHS ENDED March 31 --------------------------------- 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $(452,800) $(392,500) Adjustments to reconcile net loss to net cash from by operating activities: Depreciation and amortization 196,400 202,500 Deferred income taxes -- (261,100) Changes in: Accounts receivable (183,000) (215,500) Inventories 162,300 121,300 Prepaid expenses and taxes 6,900 (81,800) Deposits and other assets 45,400 (2,100) Accounts payable 72,300 352,500 Accrued wages and related expenses (26,800) 14,100 Accrued liabilities 73,400 20,400 --------- --------- Net cash from operating activities: (105,900) (242,200) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (5,800) (19,200) improvements Increase in intangibles (62,700) -- --------- --------- Net cash from investing activities: (68,500) (19,200) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from line of credit 98,700 305,900 Principal payments on long-term debt (86,800) (33,100) Borrowings on related party debt 310,000 -- Payments on obligation under long term lease (86,000) (53,400) Disbursements in excess of deposits (9,600) -- --------- --------- Net cash from financing activities: 226,300 219,400 --------- --------- INCREASE / (DECREASE) IN CASH 51,900 (42,000) --------- --------- CASH, beginning of period -- 42,000 --------- --------- CASH, end of period $ 51,900 $ -- ========= ========= Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 196,100 $ 206,600 --------- --------- The accompanying notes are an integral part of these financial statements
3 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 1999. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. Note 2 - Line of Credit The Company has available a $3,000,000 line of credit from a financial institution with interest at the prime rate plus 2.25%. Approximately $1,484,000 was advanced to the Company in the form of a term loan. The term loan is repayable in monthly installments of $24,700 over sixty months commencing March 1999. The amount of the term loan outstanding as of March 31, 2000 is $1,162,400. The amount under the working capital line of credit outstanding as of March 31, 2000 is $1,258,500. The bank's commitment under the line of credit matures September 2000. The agreement is secured by substantially all the assets of the Releta Brewing Company, LLC, and all of accounts receivable, inventory, general intangibles of the Company, a second position on the assets of the Company, and certain securities pledged by a stockholder. Note 3 - Notes Payable The Company has an outstanding in the principal amount of $2,700,000, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 10.00%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment and is secured by real property located in Ukiah, California. The Company has notes payable which consists of convertible notes to United Breweries of America, Inc. in the amount of $738,800 as of March 31, 2000. The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10% per annum, and mature 18 months from the date of the advance. The advances are unsecured and the notes mature through September 2001. The notes are convertible at the option of United Breweries of America, Inc., to common stock at $1.50 per share upon maturity. Interest accrued on the above notes for the three months ending March 31, 2000 is $12,500. The company has a note in the amount of $24,600 payable in monthly installments of $1,200, including interest at 5.65%, maturing March 2001, secured by an automobile. Note 4 - Income Taxes As of March 31, 2000, the Company has available for carryforward approximately $7,172,000, 4 $2,771,000 and $862,000 of Federal, California and New York net operating losses. Approximately $940,000 of the Federal and New York net operating losses will expire in 2012 and the remaining through 2020. The California net operating losses expire beginning in 2001 through 2005. The Company also has $28,000 of California Manufactures Investment Tax Credits that can be carried forward to offset future taxes that begin to expire in 2005. The Company has recorded a valuation allowance of approximately $180,000 for net operating losses that are not expected to be utilized prior to expiration. For the quarter ending March 31, 2000, the Company has not recorded any benefit from income taxes due to this valuation allowance. Note 5 -- Related party Transactions As of March 31, 2000, the Company has accrued payment obligation to one of its directors, Jerome Merchant, in the amount of $8,100 for consulting services performed for the Company. Of this amount, the company has paid $5,400 through March 31, 2000. As of March 31, 2000, the Company has recognized $8,700 in expenses incurred on its behalf by American United Breweries International Inc. (AUBI). The outstanding amount payable to AUBI as of March 31, 2000 is $10,100. On March 29, 2000, the Company announced that it intends to enter into two concurrent related-party transactions. Since such date, the structure of the transactions has been revised. The Company will acquire UBSN Ltd. by acquiring all of the issued and outstanding shares of United Breweries International UK, Ltd. ("UBI UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the Company has offered to issue approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the transaction, UBI UK Ltd. will become a wholly-owned subsidiary of the Company. The closing of the transaction is expected to occur in late June 2000, or as soon thereafter as the various conditions to closing have been satisfied or waived. Prior to the closing UBI will obtain the distribution rights to the "Kingfisher" brand of beer in the United States. Under the terms of the distribution agreement, the Company will also have an option to brew "Kingfisher" brand beer in the United States, for distribution primarily in the United States, on certain terms and conditions. However, in order to commence the brewing and distribution of the "Kingfisher" beer, the Company will have to obtain a license to use the "Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The closing of the transaction, the obligation of the Company to proceed with the acquisition of the shares of UBI UK, Ltd., and the precise number of shares of common stock to be issued are subject to the satisfaction or waiver of certain conditions including: (i) the approval of the proposed acquisition by the Board of Directors of the Company; (ii) the approval of the transaction by the shareholders of the Company; (iii) the approval by the Securities and Exchange Commission of the Company's Proxy Statement with respect to the transaction; and (iv) the receipt by the Company of a "fairness opinion", in a form satisfactory to the Board of Directors of the Company, regarding the transaction from Sage Capital LLC. The transaction described above is a related party transaction because the corporation that owns all of the shares of UBI UK, Ltd. is held by a trust, which is controlled by fiduciaries who may 5 exercise discretion in favor of Dr. Mallya, amongst others. Dr. Vijay Mallya is the Chairman and Chief Executive Officer of the Company. Further, KAI is owned by a foreign corporation, the shares of which are controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto included as Item 1 of this Report. The discussion of results and trends does not necessarily imply that these results or trends will continue. Forward-Looking Information The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-QSB contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, impact of competition, changes in distributor relationships or performance and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are valid as of the date of this filing. Overview The first quarter of 2000 ended with the Company announcing that it intends to acquire UBSN Ltd. by acquiring all of the issued and outstanding shares of United Breweries International UK, Ltd. ("UBI UK, Ltd."), which is the parent company of UBSN Ltd. Further, prior to the closing, UBI UK Ltd. will have will have obtained the distribution rights to the "Kingfisher" brand of beer in the United States. The closing of the transaction is subject to a number of conditions including the approval of the proposed acquisition by the Board of Directors and shareholders of the Company. It is estimated that the transaction will close in late June or early July 2000. Sales (measured in barrels) during the first three months of 2000 increased to 10,243 barrels from 9,985 barrels in the first three months of 1999. This represents an increase of 3% over the first three months of 1999. Of the total sales of 10,243 barrels, the sales out of the Ukiah facility amounted to 8,921 barrels and the sales out of the Saratoga Springs facility amounted to 1,322 6 barrels. The sales volume for the first three months of 2000 showed a growth of 18% out of the facility located in Ukiah, California. The Company ended the quarter with a net loss of $452,800. Increased fixed costs associated with the breweries, higher selling and marketing expenses, and increased interest expenses, contributed to the net loss of $452,800 for the quarter ended March 31, 2000. The loss from operations as a percentage of net sales decreased from 26% for the first quarter of 1999 to 12% for the first quarter of 2000. Subsequent to the end of the first quarter, on April 30, 2000, UBA and the Company amended the line of credit agreement to increase the maximum amount of the line of credit available to the Company from $800,000 to $1,200,000. As of March 31, 2000, the amount outstanding under the line of credit from UBA is $738,800, including accrued but unpaid interest of $23,700. Results of Operations The following discussion sets forth information for the three-month periods ending March 31, 2000 and 1999. This information has been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflects, in Management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The following table sets forth, as a percentage of sales, certain items included in the Company's Statements of Operations, as set forth above under "Financial Statements," for the periods indicated: 7 -------------------------------- Three Months Ended March 31 -------------------------------- Statements of Operations Data: 2000 1999 ------------ ------------ Sales 105.87% 106.37% Excise taxes 5.87 6.37 ------------ ------------ Net Sales 100.00 100.00 Cost of Goods Sold 72.82 80.83 ------------ ------------ Gross Profit 27.18 19.17 Retail Operating Expense 5.02 5.18 Marketing Expense 16.55 19.82 General and Administrative Expenses 17.66 20.16 ------------ ------------ Total Operating Expenses 39.23 45.16 ------------ ------------ Loss from Operations (12.05) (25.99) Other Income 0.71 0.34 Interest expense (11.90) (11.88) ------------ ------------ Loss before income taxes (23.24) (37.54) Benefit from income taxes -- (14.96) Net Loss (23.24) (22.58) Balance Sheet Data: Cash $ 51,900 $ 0 Working Capital (1,980,400) (1,050,300) Property and Equipment 14,538,000 15,093,800 Deposits and Other Assets 2,609,300 2,045,300 Total Assets 19,522,300 19,144,800 Long-term Debt 4,055,500 4,867,100 Obligation under Capital Lease 1,306,800 1,472,400 Total Liabilities 9,717,700 9,395,500 Shareholder's equity 9,804,600 9,749,300 Net Sales. Net sales for the first three months of 2000 were $1,948,600 compared to $1,738,500 for the first three months of 1999, representing an increase of 12.1%. The sales volume increased to 10,243 barrels during the first quarter of 2000, from 9,985 barrels during the first quarter of 1999, representing an increase of 2.58%. Management attributes the increased sales to improved marketing strategies, including new point of sale materials and increased sales 8 personnel. The increase in overall net sales during the first quarter of 2000 was achieved mainly by higher wholesale shipments during the first quarter of 2000, which represented an increase of $199,400 over the wholesale shipments during the first quarter of 1999. In view of management's focus on wholesale beer sales, retail sales for the year 2000 increased slightly by $10,400. Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the first quarter of 2000 was 72.82%, as compared to 80.83% during the first quarter of 1999, representing a decrease of 8.01%. As a percentage of Net Sales, during the first quarter of 2000, labor costs decreased from 15.67% in 1999, to 12.98% in 2000, depreciation decreased from 9.80% in 1999 to 8.87% in 2000, property taxes decreased from 1.78% in 1999 to 1.71% in 2000, utilities increased from 3.84% in 1999 to 4.30% in 2000, wastewater decreased from 0.60% in 1999 to 0.25% in 2000, insurance costs decreased from 1.84% in 1999, to 1.36% in 2000, thereby contributing to the decrease of 8.01% of the cost of goods sold as a percentage of net sales for the year of 2000. Management attributes the balance of the decrease to higher sales volumes thereby lowering the combined per barrel production costs at the Ukiah and Ten Springs breweries. Gross Profit. As a result of the higher net sales as explained above, gross profit for the first quarter of 2000 increased to $529,700 from $333,200 for the comparable period of 1999, representing an increase of 59%. As a percentage of net sales, the gross profit during the first quarter of 2000 increased to 27.18% from that of 19.17% for the corresponding period of 1999. Operating Expenses. Operating expenses for the first quarter of 2000 were $764,500, as compared to $785,100 for the first quarter of 1999, representing a decrease of 2.62%. Operating expenses consist of retail operating expenses, marketing and distribution expenses, and general and administrative expenses. Retail operating expenses for the first quarter of 2000 were $97,900, representing an increase of $7,900 or 8.78%, from the first quarter of 1999. As a percentage of net sales however, retail operating expenses decreased to 5.02%, as compared to 5.18% for the first three months of 1999. The increase in retail operating expenses consisted of an increase of advertising costs by $4,000, an increase in repair and maintenance of $1,300, an increase in kitchen supplies of $1,900, and an increase of other net expenses of $700. Marketing and distribution expenses for the first quarter of 2000 were $322,400, representing a decrease of $22,200, or 6.44%, from the first quarter of 1999. As a percentage of net sales, marketing and distribution expenses represented 16.55% as compared to 19.82% during the first quarter of 1999. Compared to the first quarter of 1999, marketing and sales labor increased $42,000; sales promotions expenses decreased by $33,700; point of sale expenses decreased by $37,900; media expenses increased by $14,500; travel and entertainment decreased by $6,100; and a decrease in other net expenses of $1,000. General and administrative expenses were $344,200, representing a decrease of $6,300 from the first quarter of 1999. As a percentage of net sales, the general and administrative expenses were 17.66% for the first quarter of 2000, as compared to 20.16% for the first quarter of 1999. As compared to the first quarter of 1999, labor decreased by $42,700, travel and entertainment increased by $8,100, postage increased by $2,100, telephone increased by $2,500 supplies 9 increased by $4,200, legal and professional increased by $13,500, investor relations increased by $5,900 and an increase of other net expenses of $100. Other Income (Expense). Other expenses for the first three months of 2000 were $218,000, representing an increase of $17,300 when compared to the first quarter of 1999. The increase of $17,300 is due to an increase in interest expense of $25,200, and an increase of $7,900 in miscellaneous income. Loss Before Income Taxes. The loss before income tax for the first three months of 2000 was $452,800 as against $652,600 for the corresponding period of 1999. As a percentage of net sales, the net loss before income taxes improved to 23.24% during the first quarter of 2000 as against 37.54% for the first quarter of 1999. Benefit From Income Taxes. As of March 31, 2000, the Company has available for carryforward approximately $7,172,000, $2,771,000 and $862,000 of Federal, California and New York net operating losses. Approximately $940,000 of the Federal and New York net operating losses will expire in 2012 and the remaining through 2020. The California net operating losses expire beginning in 2001 through 2005. The Company also has $28,000 of California Manufactures Investment Tax Credits that can be carried forward to offset future taxes that begin to expire in 2005. The Company has recorded a valuation allowance of approximately $180,000 for net operating losses that are not expected to be utilized prior to expiration. The Company has not recorded any benefit from income taxes due to this valuation allowance. Net Loss. The net loss for the first three months of 2000 was $452,800, as compared to $392,500 for the first three months of 1999. As a percentage of net sales, the net loss for the first quarter of 2000 increased to 23.24%, as compared to 22.58% for the first quarter of 1999. The increase in net loss is mainly due to non-recognition of any benefit from income taxes while an amount of $260,100 was recognized as benefit from income taxes for the corresponding period of 1999. Segment Information Mendocino Brewing Company, Inc.'s business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 95% of the Company's gross sales for the first quarter of 2000. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 5% of the Company's total gross sales during the first quarter of 2000. With combined expanded wholesale beer production in Ukiah and Saratoga Springs, management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. 10 The Company's business segments are brewing operations and a retail establishment known as the Hopland Brewery. A summary of each segment is as follows:
Three Months Ended March 31, 2000 ----------------------------------------------------------------------------- Brewing Hopland Corporate Operations Brewery and Other Total ----------------------------------------------------------------------------- Sales $ 1,965,600 $ 104,600 $ -- $ 2,070,200 Operating Profit/(Loss) 140,000 (30,600) -- 109,400 Identifiable Assets 15,467,700 77,400 3,977,900 19,522,300 Depreciation and amortization 172,900 1,600 21,900 196,400 Capital Expenditures 5,800 -- -- 5,800 Three Months Ended March 31, 1999 ----------------------------------------------------------------------------- Brewing Hopland Corporate Operations Brewery and Other Total ----------------------------------------------------------------------------- Sales $ 1,755,400 $ 93,900 $ -- $ 1,849,300 Operating Loss (73,300) (28,100) -- (101,400) Identifiable Assets 14,116,600 7,900 5,020,300 19,144,800 Depreciation and amortization 180,100 1,700 20,700 202,500 Capital Expenditures 22,800 -- 4,100 26,900
Seasonality Beer consumption nationwide has historically been approximately 20% higher during the summer months as compared to the other months of the year. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Capital Demands The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. The Ukiah brewery is presently operating under a temporary certificate of occupancy from the City of Ukiah. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition and results of operations. Liquidity and Capital Resources Long Term Debt. The Company has in place a $2,700,000 term loan from the Savings Bank of Mendocino County. The loan is payable in monthly installments of $24,400, including interest at the Treasury Constant Maturity Index plus 4.17%, currently 10.00%, maturing on December 1, 2012 with a balloon payment. The loan is secured by some of the assets of the Company (other than the Ten Springs brewery), including without limitation, a first priority deed of trust on the Ukiah land and improvements, fixtures and most of the equipment of the Company. 11 Credit Facility. The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2000. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $1,236,600 of the term loan was outstanding as of December 31, 1999. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of March 31, 2000, the total amount outstanding on the line of credit was $2,420,900. Equipment Lease. The Company has leased from FINOVA Capital Corporation ("Finova") brewing equipment at a total cost of approximately $1,780,000 to the Company for a term of 7 years (commencing December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at monthly rental payments of approximately $39,000 with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. Shareholder Commitment of Line of Credit. Between 1997 and 1998, UBA, the Company's largest shareholder, agreed to provide the Company with a credit facility of up to $2 million (the "1998 Facility"). In mid-1999, the 1998 Facility was terminated, and a new credit facility (the "1999 Facility") in the maximum amount of $800,000 was offered to the Company on substantially the same terms as the 1998 Facility. On August 31, 1999, the Company and UBA entered into a Master Line of Credit Agreement setting forth the terms of the 1999 Facility. Pursuant to the terms of the Master Line of Credit Agreement, advances on the credit facility bear interest at the prime rate of the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%, and is due and payable quarterly. The principal amount of each advance, together with any accrued but unpaid interest on such advance, is due 18 months after the date of such advance. Each advance made on the line of credit will be evidenced by a convertible note. Each convertible note includes a conversion feature whereby UBA could, at its option, convert the principal and any accrued but unpaid interest into unregistered shares of the Company's common stock on or after the maturity date, at a rate of one share of common stock for each $1.50 of principal and unpaid interest. On April 30, the Company accepted UBA's offer to increase the maximum amount of the 1999 Facility from $800,000 to $1,200,000. Subsequently, the Company and UBA entered into a First Amendment to the Master Line of Credit Agreement. As of March 31, 2000, the Company has made seven draws on the credit facility. The aggregate amount drawn, together with accrued but unpaid interest, equaled $738,800 which corresponds to the right of UBA to acquire up to 492,533 shares of Common Stock of the Company at a conversion price of $1.50 per share. 12 The obligations of the Company pursuant to the line of credit are subordinate to the obligations of the Company to CIT, Finova, and Savings Bank of Mendocino County. However, provided that the Company meets certain requirements under the terms of its existing obligations to CIT, Finova, and Savings Bank of Mendocino County, the Company is required to make quarterly payments of interest in cash. Further, if UBA elects not to convert the principal and any unpaid interest into common stock at maturity and provided that the financial condition of the Company meets certain requirements under the terms of its existing obligations with CIT, Finova and Savings Bank of Mendocino County, then the Company shall repay any such amounts over a period of five years in equal monthly installments. There can be no assurances that UBA will convert any of the amounts drawn on the line of credit into common stock. Keg Management Arrangement. The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurances that the Company will be able to finance the purchase of kegs and the failure to purchase the necessary kegs from MicroStar is likely to have a material adverse effect on the Company. The Company's ratio of current assets to current liabilities on March 31, 2000, was 0.54 to 1.0 and its ratio of assets to liabilities was 2.01 to 1.0. Year 2000 Readiness Year 2000 issues could affect the performance of the Company's business. While not all Year 2000 date-related disruption scenarios have passed, through the date of this filing, the Company has experienced no material disruptions or other significant problems. There is a possibility of disruptions in the future including errors that could still arise in the Company's internal and network information systems because of their failure to correctly recognize and process date information after the calendar change from 1999 to 2000, or their inability to properly process the date February 29, 2000. The Company also may yet experience supplier-related Year 2000 problems. If any of these Year 2000 problems occur, the Company's operations could be significantly hampered. The Company is continuing to monitor and mitigate its exposure as appropriate, but based on currently available information, the Company continues to believe that Year 2000-related disruptions or other problems, if any, will not have a significant adverse impact on the Company's operational results or financial condition. However, the Company cannot be certain that Year 2000 issues will not have a material adverse impact since it is still early in 2000. Impact of Expansion on Cash Flow The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah facility and the Saratoga Springs facility has placed additional demands on the Company's working capital. Historically, working capital for the day to day business operations was provided primarily through operations. Beginning approximately with the second quarter of 1997, the time at which the Ukiah brewery commenced operations, 13 proceeds from operations have not been able to provide sufficient working capital for the day to day operations of the Company. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities. However, there can be no assurances that the Company will have access to any such sources of funds in the future, and the inability to secure sufficient funds will have a materially adverse effect on the Company. Merger with UBSN On March 29, 2000, the Company announced that it intends to enter into two concurrent related-party transactions. Shortly thereafter, the structure of the transaction was consolidated into a single transaction. In the transaction, the Company will acquire UBSN Ltd. by acquiring all of the issued and outstanding shares of United Breweries International UK, Ltd. ("UBI UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the Company has offered to issue approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the transaction, UBI UK Ltd. will become a wholly-owned subsidiary of the Company. The closing of the transaction is expected to occur in late June 2000, or as soon thereafter as the various conditions to closing have been satisfied or waived. Prior to the closing, UBI UK Ltd. will have will have obtained the distribution rights to the "Kingfisher" brand of beer in the United States. Under the terms of the distribution agreement, the Company will also have an option to brew "Kingfisher" brand beer in the United States, for distribution primarily in the United States, on terms and conditions mutually agreeable with American United Breweries of America, Inc ("AUBI"). However, in order to commence the brewing and distribution of the "Kingfisher" beer, the Company will have to obtain a license to use the "Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The Company will be solely responsible for obtaining that trademark license, at its sole expense, and there are no assurances that such license will be obtained. The closing of the transaction, the obligation of the Company to proceed with the acquisition of the shares of UBI UK, Ltd., and the precise number of shares of common stock to be issued are subject to the satisfaction or waiver of certain conditions including: (i) the approval of the proposed acquisition by the Board of Directors of the Company; (ii) the approval of the transaction by the shareholders of the Company; (iii) the approval by the Securities and Exchange Commission of the Company's Proxy Statement with respect to the transaction; and (iv) the receipt by the Company of a "fairness opinion", in a form satisfactory to the Board of Directors of the Company, regarding the transaction from Sage Capital LLC. The transaction described above is a related party transaction because the corporation that owns all of the shares of UBI UK, Ltd. is held by a trust, which is controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Dr. Vijay Mallya is the Chairman and Chief Executive Officer of the Company. Further, AUBI and KAI are owned by foreign corporations, the shares of which are controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Additional information required by Item 12 will be contained in the 2000 Proxy Statement, and such information is incorporated herein by reference. 14 PART II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. Item 2. Changes in Securities. None. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 4. Other Items. None. Item 6. Exhibits and Reports on Form 8-K.
Exhibit Number Description of Document - -------------- ----------------------- 3.1 (A) Articles of Incorporation, as amended, of the Company. 3.2 (B) Bylaws of the Company 4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.1). 4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.2). 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.6 (A) Sales Contract between the Company and John I. Hass, Inc. 10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.8 (A) Lease Agreement between the Company and Kohn Properties. 10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company, LLC. 10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company, LLC regarding payment of certain liens. 10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 15 Exhibit Number Description of Document - -------------- ----------------------- 10.18 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.23 (J) Equipment Lease with FINOVA Capital Corporation. 10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.25 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.26 (L) Investment Agreement with United Breweries of America, Inc. 10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.29 (Q) Indemnification Agreement with Vijay Mallya. 10.30 (Q) Indemnification Agreement with Michael Laybourn. 10.31 (Q) Indemnification Agreement with Jerome Merchant. 10.32 (Q) Indemnification Agreement with Yashpal Singh. 10.33 (Q) Indemnification Agreement with P.A. Murali. 10.34 (Q) Indemnification Agreement with Robert Neame. 10.35 (Q) Indemnification Agreement with Sury Rao Palamand. 10.36 (Q) Indemnification Agreement with Kent Price. 10.37 (R) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 (R) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.41 (U) Employment Agreement with Yashpal Singh. 10.42 (U) Employment Agreement with P.A. Murali. 10.43 (V) Master Loan Agreement between the Company and the United Breweries of America, Inc. 10.44 (V) Convertible Note in favor of the United Breweries of America, Inc 10.45 (W) First Amendment to Master Loan Agreement between the Company and the United Breweries of America Inc. 27 Financial Data Schedule. - --------------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (C) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended March 31, 1995, previously filed with the Commission. (E) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1995, previously filed with the Commission. 16 Exhibit Number Description of Document - -------------- ----------------------- (F) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995, previously filed with the Commission. (G) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1996, previously filed with the Commission. (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 33-15673. (K) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996, previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. (M) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1997. (N) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended September 30, 1997. (O) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1997, previously filed with the Commission. (Q) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1998. (R) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1998. (T) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1998, previously filed with the Commission. (U) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999. (V) Incorporated by reference from the Amendment No. 5 to Schedule 13D filed with the Commission on September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. (W) Incorporated by reference from the Amendment No. 5 to Schedule 13D filed with the Commission on May 11, 2000, by United Breweries of America, Inc. and Vijay Mallya. (X) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1999, previously filed with the Commission. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission.
The Registrant filed a report on Form 8-K on March 29, 2000 announcing the Company's acquisition of UBSN and the U.S. distribution rights to Kingfisher Premium Lager Beer from UBI, UK Ltd., responsive to Item 5 of Form 8-K (Other Events). No financial statements were filed. 17 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: May 14, 2000 By: /s/ Yashpal Singh ---------------------------------- Yashpal Singh President Dated: May 14, 2000 By: /s/ P.A. Murali ---------------------------------- P.A. Murali Chief Financial Officer and Secretary 18 EXHIBIT INDEX Exhibit Number - -------------- 27 Financial Data Schedule. EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-2000 JAN-01-2000 MAR-31-2000 51,900 0 1,223,300 0 1,006,400 2,375,000 17,168,600 (2,630,600) 19,522,300 4,355,400 0 0 227,600 13,834,900 (4,257,900) 19,522,300 2,070,200 2,070,200 1,418,900 2,183,400 0 0 231,800 (452,800) 0 (452,800) 0 0 0 (452,800) (0.08) (0.08)
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