-----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, NF9fdG/DsQ06Lg6cq07c450MVoc+6TKeTT7EWpULEF/X/GMuIAVttGR8N7mTsNfQ Zbz55wL1kdir/beUq1tizg== /in/edgar/work/0000950005-00-001115/0000950005-00-001115.txt : 20001114 0000950005-00-001115.hdr.sgml : 20001114 ACCESSION NUMBER: 0000950005-00-001115 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: [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: 759939 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 0001.txt 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 September 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from to______________to_______________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13351 South Highway 101, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of September 30, 2000 is 5,530,177. PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET September 30, 2000 (Unaudited)
ASSETS CURRENT ASSETS Cash $ 97,200 Accounts receivable 1,458,700 Inventories 1,071,000 Prepaid expenses 171,900 Deferred income taxes 43,100 ----------- Total Current Assets: 2,841,900 ----------- PROPERTY AND EQUIPMENT 14,148,700 ----------- OTHER ASSETS Deferred Taxes 2,596,700 Other Assets 397,000 ----------- Total Other Assets: 2,993,700 ----------- Total Assets: $19,984,300 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 1,695,200 Accrued liabilities 307,200 Accrued wages and related expense 159,700 Current maturities of obligation under capital lease 288,000 Current maturities of obligation under long-term debt 327,400 ----------- Total Current Liabilities: 2,777,500 LINE OF CREDIT 1,482,700 LONG TERM DEBT, less current maturities 4,528,800 OBLIGATIONS under capital lease - less current maturities 1,167,700 ----------- Total Liabilities: 9,956,700 ----------- STOCKHOLDERS' EQUITY Common stock, no par value: 20,000,000 shares authorized, 5,530,177 shares issued and outstanding 13,841,900 Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding 227,600 Accumulated deficit (4,041,900) ----------- Total Stockholders' Equity 10,027,600 ----------- Total Liabilities and Stockholders' Equity: $19,984,300 ----------- 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 NINE MONTHS ENDED September 30 September 30 ------------------------------------ ------------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- SALES $2,711,000 $2,654,400 $7,441,600 $6,988,900 LESS EXCISE TAXES 157,500 153,900 430,000 412,800 ---------- ---------- ---------- ---------- NET SALES 2,553,500 2,500,500 7,011,600 6,576,100 COST OF GOODS SOLD 1,457,400 1,532,800 4,323,100 4,442,700 ---------- ---------- ---------- ---------- GROSS PROFIT 1,096,100 967,700 2,688,500 2,133,400 ---------- ---------- ---------- ---------- OPERATING EXPENSES Retail operating 117,200 124,400 309,600 319,600 Marketing 476,600 454,600 1,196,300 1,191,800 General and administrative 294,100 492,800 976,200 1,239,100 ---------- ---------- ---------- ---------- 887,900 1,071,800 2,482,100 2,749,900 ---------- ---------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS 208,200 (104,100) 206,400 (616,500) ---------- ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest income (expense) 800 -- 800 -- Other income (expense) 26,900 17,500 69,900 26,100 Acquisition expense -- (25,000) -- (104,400) Induced debt conversion expense -- (248,000) -- (248,000) Interest expense (209,700) (224,400) (668,100) (644,800) ---------- ---------- ---------- ---------- (182,000) (480,400) (597,400) (970,600) ---------- ---------- ---------- ---------- INCOME (LOSS) BEFORE INCOME TAXES 26,200 (584,500) (391,000) (1,587,100) PROVISION FOR (BENEFIT FROM) INCOME TAXES (156,400) (232,400) (154,200) (632,700) ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ 182,600 $ (352,100) $ (236,800) $ (954,400) ========== ========== ========== ========== BASIC EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.07) $ (0.04) $ (0.21) ========== ========== ========== ========== DILUTED EARNINGS (LOSS) PER SHARE $ 0.03 $ (0.07) $ (0.04) $ (0.21) ========== ========== ========== ========== 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 NINE MONTHS ENDED September 30 September 30 ---------------------------------- --------------------------------- 2000 1999 2000 1999 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 182,600 $(352,100) $(236,800) $(954,400) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 197,400 196,900 590,700 614,600 Deferred income taxes (156,400) (232,400) (156,400) (634,200) Stock issued for services 7,000 91,600 7,000 91,600 Gain on disposal of fixed assets (26,000) -- (26,000) -- Debt converted to stock -- 309,900 -- 309,900 Changes in: Accounts receivable (218,200) 124,000 (418,400) (457,100) Inventories (78,100) (328,600) 97,700 (283,800) Prepaid expenses (3,100) (8,800) (114,700) (45,500) Deposits and other assets (50,000) (2,300) (19,100) (7,300) Accounts payable (214,900) 153,400 (13,500) 778,200 Accrued wages and related expenses (17,100) 2,500 (44,900) (9,500) Accrued liabilities (12,100) 11,000 176,900 130,900 -------- ------- --------- --------- Net cash from operating activities: (388,900) (34,900) (157,500) (466,600) -------- ------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (14,800) (22,000) (33,700) (73,200) improvements Proceeds of sale of fixed assets 51,600 -- 51,600 -- Increase in intangibles (36,900) -- (228,900) -- -------- ------- --------- --------- Net cash from investing activities: (100) (22,000) (211,000) (73,200) -------- ------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from line of credit 214,700 (81,500) 322,900 582,900 Principal payments on long-term debt (76,800) (84,200) (250,900) (201,300) Borrowings on long-term debt 315,100 286,300 625,100 286,300 Payments on obligation under long-term lease (73,700) (63,700) (221,800) (170,100) Disbursements in excess of deposits -- -- (9,600) -- -------- ------- --------- --------- Net cash from financing activities: 379,300 56,900 465,700 497,800 -------- ------- --------- --------- INCREASE / (DECREASE) IN CASH (9,700) -- 97,200 (42,000) -------- ------- --------- --------- CASH, beginning of period -- 42,000 ------- --------- --------- 106,900 --------- CASH, end of period $ 97,200 $ -- $ 97,200 $ -- ========= ========= ========= ========= Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 198,000 $ 228,200 $ 583,100 $ 581,500 --------- --------- --------- --------- 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 nine months ended September 30, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. Note 2 - Line of Credit The Company has available a $3,000,000 line of credit from a financial institution with interest at the prime rate plus 2.25%. Approximately $1,484,000 was advanced to the Company in the form of a term loan. The term loan is repayable in monthly installments of $24,700 over sixty months commencing March 1999. The amount of the term loan outstanding as of September 30, 2000 is $1,014,000. The amount under the working capital line of credit outstanding as of September 30, 2000 is $1,482,700. The bank's commitment under the line of credit matures in September 2002. The line of credit is secured by substantially all of the assets of the Releta Brewing Company, LLC, and all of the accounts receivable, inventory, general intangibles of the Company, a second position on the assets of the Company, and certain securities pledged by a stockholder. Note 3 - Notes Payable The Company has a $2,700,000 note, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 10.00%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment and is secured by real property located in Ukiah, California. The Company has a notes payable which consists of convertible notes to United Breweries of America, Inc. in the amount of $1,186,400 as of September 30, 2000. The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10% per annum, and mature 18 months from the date of the advance. The advances are unsecured and the notes mature through September 2001. The notes are convertible at the option of United Breweries of America, Inc., to common stock at $1.50 per share upon maturity. Interest accrued on the above notes as of September 30, 2000 is $74,200. Note 4 - Net Income Per Common and Common Equivalent Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. 4 Diluted EPS is computed by dividing income available to shareholders by the weighted average number of common shares and common equivalent shares outstanding, which include dilutive stock options and notes payable convertible in common stock. Common equivalent shares associated with stock options and convertible notes payable have been excluded from periods with a net loss as the potentially dilutive shares would be antidilutive.
Three months ended Nine months ended ------------------------- -------------------------- 9/30/00 9/30/00 9/30/00 9/30/00 ----------- ----------- ----------- ----------- Basic net income (loss) per share Net income (loss) $ 182,600 $ (352,100) $ (236,800) $ (954,400) =========== =========== =========== =========== Weighted average common shares outstanding 5,530,177 4,836,915 5,530,177 4,610,334 =========== =========== =========== =========== Basic net income (loss) per share $ 0.03 $ (0.07) $ (0.04) $ (0.21) =========== =========== =========== =========== Diluted net income (loss) per share Net income (loss) $ 182,600 $ (352,100) $ (236,800) $ (954,400) Interest expense on convertible notes payable 24,000 -- -- -- ----------- ----------- ----------- ----------- Income for the purpose of computing diluted net income per share $ 206,600 $ (352,100) $ (236,800) $ (954,400) =========== =========== =========== =========== Weighted average common shares outstanding 5,530,177 4,836,915 5,530,177 4,610,334 Dilutive stock options 181,388 -- -- -- Assumed conversion of convertible notes payable 790,933 -- -- -- ----------- ----------- ----------- ----------- Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 6,502,438 4,836,915 5,530,177 4,610,334 =========== =========== =========== =========== Diluted net income (loss) per share $ 0.03 $ (0.07) $ (0.04) $ (0.21) =========== =========== =========== ===========
Note 5 - Income Taxes As of September 30, 2000, the Company has available for carryforward approximately $7,172,000, $2,771,000 and $862,000 of Federal, California and New York net operating losses. Approximately $940,000 of the Federal and New York net operating losses will expire in 2012 and the remaining through 2020. The California net operating losses expire beginning in 2001 through 2005. The Company also has $28,000 of California Manufactures Investment Tax Credits that can be carried forward to offset future taxes that begin to expire in 2005. Note 6 - Related Party Transactions As of September 30, 2000, the Company has expensed consulting fees to one of its directors in the amount of $24,300 for consulting services performed for the Company. Of this amount, the company has paid $21,600 through September 30, 2000. 5 As of September 30, 2000, the Company has recognized $8,700 in expenses incurred on its behalf by American United Breweries International Inc. (AUBI). The outstanding amount payable to AUBI as of September 30, 2000 is $23,800. On March 29, 2000, the Company announced that it intends to enter into two concurrent related-party transactions. Subsequently, the transactions were consolidated into a single transaction. In the transaction, the Company will acquire UBSN Ltd. by acquiring all of the issued and outstanding shares of United Breweries International UK, Ltd. ("UBI UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the Company has offered to issue approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the transaction, UBI UK Ltd. will become a wholly-owned subsidiary of the Company. The closing of the transaction is expected to occur in January 2001, or as soon thereafter as the various conditions to closing have been satisfied or waived. The closing of the transaction, the obligation of the Company to proceed with the acquisition of the shares of UBI UK, Ltd., and the precise number of shares of common stock to be issued are subject to the satisfaction or waiver of certain conditions including: (i) the approval of the proposed acquisition by the Board of Directors of the Company; (ii) the approval of the transaction by the shareholders of the Company; (iii) the approval by the Securities and Exchange Commission of the Company's Proxy Statement with respect to the transaction; and (iv) the receipt by the Company of a "fairness opinion", in a form satisfactory to the Board of Directors of the Company, regarding the transaction from Sage Capital LLC. UBI UK, Ltd. has obtained the distribution rights to the "Kingfisher" brand of beer in the United States. Under the terms of the distribution agreement, the Company will also have an option to brew "Kingfisher" brand beer in the United States, for distribution primarily in the United States, on mutually agreed terms and conditions. However, in order to commence the brewing and distribution of the "Kingfisher" beer, the Company will have to obtain a license to use the "Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The Company will be solely responsible for obtaining that trademark license, at its sole expense, and there are no assurances that such license will be obtained. The transaction described above is a related party transaction because the corporation that owns all of the shares of UBI UK, Ltd. is held by a trust, which is controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Dr. Vijay Mallya is the Chairman and Chief Executive Officer of the Company. In addition, Dr. Mallya is a member of the board of directors of UBSN, Ltd. Further, KAI is owned by a foreign corporation, the shares of which are controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 6 The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto included as Item 1 of this Report. The discussion of results and trends does not necessarily imply that these results or trends will continue. Forward-Looking Information The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-QSB contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, impact of competition, changes in distributor relationships or performance and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are valid as of the date of this filing. Overview The third quarter was highlighted by the Releta Brewing Company, LLC (Ten Springs Brewery), located in Saratoga Springs, New York launching the new Sun Lager label. The product was well received in the market. The increase in net sales during the nine-month period ending September 30, 2000 was achieved in significant part through increased and improved marketing efforts. Sales (measured in barrels) increased from 36,125 bbl. in the first nine months of 1999 to 36,707 during the first nine months of 2000, representing an increase of 1.61% over the corresponding period of last year. Of the total sales of 36,707 bbls., the sales out of the Ukiah facility were 31,257 bbls., and the sales out of the Saratoga Springs facility were 5,450 bbls. The sales volume out of the Ukiah facility increased by 11.6%. In Saratoga Springs, the volume decreased to 5,450 bbls in 2000 from 8,110 bbls in 1999. This was mainly due to management's effort to concentrate on the growth of the company's own brands and to phase out its reliance on contract brewing. This resulted in a reduction in contract brewing from 60% of the total sales in the first nine months of 1999 to 24% for the first nine months of 2000. However, the volume of the company's own brands increased by 27% during the first nine months of 2000 when compared to the corresponding period of 1999. This resulted in the net sales expressed in dollar terms decreasing by only 17% although the volume decreased by 33% during the first nine months of 2000. 7 The high costs associated with the new brewery located at Ukiah, the fixed costs of the Ten Springs Brewery (both of which are still not being utilized to their full capacity), and interest expenses contributed to a net loss of $236,800 for the first nine months of 2000. The loss from operations as a percentage of net sales decreased from 14.51% for the first nine months of 1999 to 3.38% for the first nine months of 2000. Results of Operations The following discussion sets forth information for the nine-month periods ending September 30, 2000 and 1999. This information has been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflects, in Management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The following table sets forth, as a percentage of sales, certain items included in the Company's Statements of Operations, as set forth above under "Financial Statements," for the periods indicated: 8 ---------------------------------- Nine Months Ended September 30 ---------------------------------- 2000 1999 Statements of Income Data: Sales 106.13% 106.28% Excise taxes 6.13 6.28 Net Sales 100.00 100.00 Cost of Sales 61.66 67.56 -------------- -------------- Gross Profit 38.34 32.44 Retail Operating Expense 4.42 4.85 Marketing Expense 17.06 18.12 General and Administrative Expenses 13.92 18.84 -------------- -------------- Total Operating Expenses 35.40 41.82 -------------- -------------- Income (Loss) from Operations 2.94 (9.37) Other Income (Expenses) 0.99 0.40 Acquisition Expense -- (1.57) Interest income (expense) (9.51) (9.81) Loss before income taxes (5.58) (24.13) Benefit from income taxes 2.20 9.62 Net Profit (Loss) (3.38) (14.51) Balance Sheet Data: Cash $ 97,200 $ 0 Working Capital 64,400 (1,313,600) Property and Equipment 14,148,700 14,896,900 Deposits and Other Assets 2,993,700 2,397,900 Total Assets 19,984,300 19,910,900 Long-term Debt 4,528,800 3,940,300 Obligation under Capital Lease 1,167,700 1,458,000 Total Liabilities 9,956,700 9,328,000 Shareholder's equity 10,027,600 10,582,900 Net Sales. Net sales for the first nine months of 2000 were $7,011,600 compared to $6,576,100 for the first nine months of 1999, representing an increase of 6.62%. The sales volume increased to 36,707 barrels during the first nine months of 2000, from 36,125 barrels during the first nine months of 1999, representing an increase of 1.61%. Management attributes the increased sales to 9 improved marketing strategies, including new point of sale materials. The increase in overall net sales during the first nine months of 2000 was achieved solely by higher wholesale shipments which represented an increase of $463,900 over the wholesale shipments during the first nine months of 1999. In view of management's focus on wholesale beer sale, retail sales for the first nine months of 2000 were $11,200 less than retail sales during the first nine months of 1999. Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the first nine months of 2000 was 61.66%, as compared to 67.56% during the first nine months of 1999, representing a decrease of 5.90%. As a percentage of net sales, during the first nine months of 2000, labor costs decreased from 11.76% in 1999, to 9.91% in 2000, depreciation decreased from 7.79% in1999 to 7.41% in 2000, utilities decreased from 3.82% in 1999 to 3.66% in 2000, and other expenses decreased by .30%, thereby contributing to the decrease of 5.90% of the cost of goods sold as a percentage of net sales, as compared to the first nine months of 1999. Management attributes the balance of the decrease to higher sales volumes thereby lowering per barrel production cost at Ukiah and improvement in process efficiencies at both Ukiah and Saratoga Springs. Gross Profit. As a result of the higher net sales as explained above, gross profit for the first nine months of 2000 increased to $2,688,500, from $2,133,400 for the comparable period of 1999, representing an increase of 26%. As a percentage of net sales, the gross profit during the first nine months of 2000 increased to 38.34% from that of 32.44% for the corresponding period of 1999. Operating Expenses. Operating expenses for the first nine months of 2000 were $2,482,100, as compared to $2,749,900 for the first nine months of 1999, representing a decrease of 9.74%. Operating expenses consist of retail operating expenses, marketing and distribution expenses, and general and administrative expenses. Retail operating expenses for the first nine months of 2000 were $309,600, representing a decrease of $9,400, or 2.95%, from the first nine months of 1999. As a percentage of net sales, retail operating expenses decreased to 4.82% as compared to 4.85% for the first nine months of 1999. The decrease in retail operating expenses consisted mainly of a decrease in labor costs. Marketing and distribution expenses for the first nine months of 2000 were $1,196,300, representing an increase of $4,500, or 0.38%, from the first nine months of 1999. Selling expenses increased $71,500 (mainly salaries), overall marketing and advertising decreased by $28,500, and sales promotions decreased $38,500. The management decided to focus more on radio advertising which resulted in an increase of $60,500 in media-related expenses. This increase was partially offset by a decrease in purchases of point of sale materials, event sponsorships and incentive/discount programs. The company decided to utilize existing stocks of point of sale materials so that new designs can be introduced in a phased manner. General and administrative expenses were $976,200, representing a decrease of $262,900 from the first nine months of 1999. As a percentage of net sales, the general and administrative expenses were 13.92% for the first nine months of 2000, as compared to 18.84% for the first nine months of 1999. As compared to the first nine months of 1999, professional and legal fees decreased by $50,200, travel and entertainment decreased by $20,500, labor decreased by $201,600, and all other expenses increased net by $9,400. 10 Other Income (Expenses). Other expenses for the first nine months of 2000 were ($597,400), representing a decrease of $373,200 when compared to the first nine months of 1999. The decrease is due to a nonrecurrence of acquisition costs of $103,400 and induced debt conversion expenses of $248,500, an increase in other income of $44,300 owing to a gain on sale of assets, and an increase in interest expense of $23,000. Benefit From Income Taxes. The benefit from income taxes for the first nine months of 2000 was $156,400, as compared to $632,700 for the first nine months of 1999. The benefit from income taxes is due to the expected future benefit of carrying forward of net operating losses. Net Loss. Net loss for the first nine months of 2000 was $236,800, as compared to a net loss of $954,400 for the first nine months of 1999. As a percentage of net sales, net loss for the first nine months of 2000 decreased to 3.38%, as compared to 14.51% for the first nine months of 1999. Segment Information Mendocino Brewing Company, Inc.'s business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 94% of the Company's gross sales for the first nine months of 2000. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 6% of the Company's total gross sales during the first nine months of 2000. With expanded wholesale beer production in both Ukiah and Saratoga Springs, management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. 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:
Nine Months Ended September 30, 2000 ------------------------------------------------------------ Brewing Retail Corporate Operations Operations and Other Total ------------ ------------ ------------ ------------ Sales $ 6,991,800 $ 449,800 $ -- $ 7,441,600 Operating Profit (Loss) 221,800 (15,400) -- 206,400 Identifiable Assets 15,140,200 79,500 4,764,600 19,984,300 Depreciation and amortization 519,900 5,000 65,800 590,700 Capital Expenditures 23,800 5,600 4,300 33,700
11 Nine Months Ended September 30, 1999 ------------------------------------------------------------ Brewing Retail Corporate Operations Operations and Other Total ------------ ------------ ------------ ------------ Sales $ 6,540,700 $ 448,200 $ -- $ 6,988,900 Operating Loss (589,900) (26,600) -- (616,500) Identifiable Assets 15,932,700 82,900 3,895,300 19,910,900 Depreciation and amortization 564,600 5,100 44,900 614,600 Capital Expenditures 211,500 800 4,100 216,400
Seasonality Beer consumption nationwide has historically been approximately 20% higher during the summer months as compared to the other months of the year. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Capital Demands The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. The Ukiah brewery is presently operating under a temporary certificate of occupancy from the City of Ukiah. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition and results of operations. Liquidity and Capital Resources Long Term Debt. The Company has in place a $2,700,000 term loan from the Savings Bank of Mendocino County. The loan is payable in monthly installments of $24,400, including interest at the Treasury Constant Maturity Index plus 4.17%, currently 10.00%, maturing on December 1, 2012 with a balloon payment. The loan is secured by some of the assets of the Company (other than the Ten Springs brewery), including without limitation, a first priority deed of trust on the Ukiah land and improvements, fixtures and most of the equipment of the Company. Credit Facility. The CIT Group/Credit Finance, Inc. ("CIT") has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly. The line of credit was originally scheduled to mature on September 23, 2000, however CIT agreed to renew the line of credit through September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $1,014,000 of the term loan was outstanding as of September 30, 2000. Based on the Company's current level of accounts receivable and inventory, the Company has 12 drawn the maximum amount permitted under the line of credit. As of September 30, 2000, the total amount outstanding on the line of credit was $1,482,700. Equipment Lease. The Company has leased from FINOVA Capital Corporation ("Finova") brewing equipment at a total cost of approximately $1,780,000 to the Company for a term of 7 years (commencing December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at monthly rental payments of approximately $39,000 with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. There can be no assurances that the Company will be able to finance the purchase of equipment at the end of the term of the lease and the failure to purchase the necessary equipment from Finova is likely to have a material adverse effect on the Company. Shareholder Commitment of Line of Credit. In mid 1999, UBA, the Company's largest shareholder, agreed to provide the Company with a credit facility of up $800,000 (the "1999 Facility"). On August 31, 1999, the Company and UBA entered into a Master Line of Credit Agreement setting forth the terms of the 1999 Facility. Pursuant to the terms of the Master Line of Credit Agreement, advances on the 1999 Facility bear interest at the prime rate of the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%, and is due and payable quarterly. The principal amount of each advance, together with any accrued but unpaid interest on such advance, is due 18 months after the date of such advance. Each advance made on the 1999 Facility will be evidenced by a convertible note. Each convertible note includes a conversion feature whereby UBA could, at its option, convert the principal and any accrued but unpaid interest into unregistered shares of the Company's common stock on or after the maturity date, at a rate of one share of common stock for each $1.50 of principal and unpaid interest. On April 30, 2000, the Company accepted UBA's offer to increase the maximum amount of the 1999 Facility from $800,000 to $1,200,000. Subsequently, the Company and UBA entered into a First Amendment to the Master Line of Credit Agreement. As of September 30, 2000, the Company has made eight draws on the 1999 Facility. The aggregate amount drawn, together with accrued but unpaid interest, equaled $1,260,600 which corresponds to the right of UBA to acquire up to 840,400 shares of common stock of the Company at a conversion price of $1.50 per share. The obligations of the Company pursuant to the line of credit are subordinate to the obligations of the Company to CIT, Finova, and Savings Bank of Mendocino County. However, provided that the Company meets certain requirements under the terms of its existing obligations to CIT, Finova, and Savings Bank of Mendocino County, the Company is required to make quarterly payments of interest in cash. Further, if UBA elects not to convert the principal and any unpaid interest into common stock at maturity and provided that the financial condition of the Company meets certain requirements under the terms of its existing obligations with CIT, Finova and Savings Bank of Mendocino County, then the Company shall repay any such amounts over a period of five years in equal monthly installments. There can be no assurances that UBA will convert any of the amounts drawn on the line of credit into common stock. 13 Keg Management Arrangement. The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurances that the Company will be able to finance the purchase of kegs and the failure to purchase the necessary kegs from MicroStar is likely to have a material adverse effect on the Company. The Company's ratio of current assets to current liabilities on September 30, 2000, was 1.02 to 1.0 and its ratio of assets to liabilities was 2.0 to 1.0. Year 2000 Matters Year 2000 issues could affect the performance of the Company's business. While not all Year 2000 date-related disruption scenarios have passed, through the date of this filing, the Company has experienced no material disruptions or other significant problems. There is a possibility of disruptions in the future including errors that could still arise in the Company's internal and network information systems because of their failure to correctly recognize and process date information after the calendar change from 1999 to 2000, or their inability to properly process the date February 29, 2000. The Company also may yet experience supplier-related Year 2000 problems. If any of these Year 2000 problems occur, the Company's operations could be significantly hampered. The Company is continuing to monitor and mitigate its exposure as appropriate, but based on currently available information, the Company continues to believe that Year 2000-related disruptions or other problems, if any, will not have a significant adverse impact on the Company's operational results or financial condition. However, the Company cannot be certain that Year 2000 issues will not have a material adverse impact. Impact of Expansion on Cash Flow The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah facility and the Saratoga Springs facility has placed additional demands on the Company's working capital. Historically, working capital for the day to day business operations was provided primarily through operations. Beginning approximately with the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for the day to day operations of the Company. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities. However, there can be no assurances that the Company will have access to any such sources of funds in the future, and the inability to secure sufficient funds will have a materially adverse effect on the Company. Merger with UBSN On March 29, 2000, the Company announced that it intends to enter into two concurrent related-party transactions. Shortly thereafter, the structure of the transaction was consolidated into a single transaction. 14 In the transaction, the Company will acquire UBSN Ltd. by acquiring all of the issued and outstanding shares of United Breweries International UK, Ltd. ("UBI UK, Ltd."), which is the parent company of UBSN Ltd. In the transaction, the Company has offered to issue approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI UK, Ltd. Upon the closing of the transaction, UBI UK, Ltd. will become a wholly-owned subsidiary of the Company. The closing of the transaction is expected to occur in January 2001, or as soon thereafter as the various conditions to closing have been satisfied or waived. UBI UK, Ltd. has obtained the distribution rights to the "Kingfisher" brand of beer in the United States. Under the terms of the distribution agreement, the Company will also have an option to brew "Kingfisher" brand beer in the United States, for distribution primarily in the United States, on terms and conditions mutually agreeable with American United Breweries of America, Inc ("AUBI"). However, in order to commence the brewing and distribution of the "Kingfisher" beer, the Company will have to obtain a license to use the "Kingfisher" trademark from Kingfisher of America Inc ("KAI"). The Company will be solely responsible for obtaining that trademark license, at its sole expense, and there are no assurances that such license will be obtained. The closing of the transaction, the obligation of the Company to proceed with the acquisition of the shares of UBI UK, Ltd., and the precise number of shares of common stock to be issued are subject to the satisfaction or waiver of certain conditions including: (i) the approval of the proposed acquisition by the Board of Directors of the Company; (ii) the approval of the transaction by the shareholders of the Company; (iii) the approval by the Securities and Exchange Commission of the Company's Proxy Statement with respect to the transaction; and (iv) the receipt by the Company of a "fairness opinion", in a form satisfactory to the Board of Directors of the Company, regarding the transaction from Sage Capital LLC. The closing of the acquisition was originally scheduled to occur in late June, 2000. However, conforming all of the foreign entities' financial statements consistent with United States accounting standards and as required by the U.S. Securities and Exchange Commission, and conducting all of the required audits, has taken longer than expected. The transaction described above is a related party transaction because the corporation that owns all of the shares of UBI UK, Ltd. is held by a trust, which is controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. In addition, Dr. Mallya is a member of the board of directors of UBSN Ltd. Dr. Vijay Mallya is the Chairman and Chief Executive Officer of the Company. Further, AUBI and KAI are owned by foreign corporations, the shares of which are controlled by fiduciaries who may exercise discretion in favor of Dr. Mallya, amongst others. Additional information is contained in the 2000 Proxy Statement, filed with the Securities and Exchange Commission on or about November 9, 2000, and such information is incorporated herein by reference. 15 Part II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. Item 2. Changes in Securities. None. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K. Exhibit Number Description of Document ------ ----------------------- 3.1 (A) Articles of Incorporation, as amended, of the Company. 3.2 (B) Bylaws of the Company 4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.1). 4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.2). 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.6 (A) Sales Contract between the Company and John I. Hass, Inc. 10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.8 (A) Lease Agreement between the Company and Kohn Properties. 10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company, LLC. 10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company, LLC regarding payment of certain liens. 10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 10.18 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 16 Exhibit Number Description of Document ------ ----------------------- 10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.23 (J) Equipment Lease with FINOVA Capital Corporation. 10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.25 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.26 (L) Investment Agreement with United Breweries of America, Inc. 10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.29 (Q) Indemnification Agreement with Vijay Mallya. 10.30 (Q) Indemnification Agreement with Michael Laybourn. 10.31 (Q) Indemnification Agreement with Jerome Merchant. 10.32 (Q) Indemnification Agreement with Yashpal Singh. 10.33 (Q) Indemnification Agreement with P.A. Murali. 10.34 (Q) Indemnification Agreement with Robert Neame. 10.35 (Q) Indemnification Agreement with Sury Rao Palamand. 10.36 (Q) Indemnification Agreement with Kent Price. 10.37 (R) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 (R) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.41 (U) Employment Agreement with Yashpal Singh. 10.42 (U) Employment Agreement with P.A. Murali. 10.43 (V) Master Loan Agreement between the Company and the United Breweries of America, Inc. 10.44 (V) Convertible Note in favor of the United Breweries of America, Inc 10.45 (W) First Amendment to Master Loan Agreement between the Company and the United Breweries of America Inc. 27 Financial Data Schedule. - --------------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (C) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended March 31, 1995, previously filed with the Commission. (E) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1995, previously filed with the Commission. (F) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995, previously filed with the Commission. (G) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1996, previously filed with the Commission. 17 Exhibit Number Description of Document ------ ----------------------- (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 33-15673. (k) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996, previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. (M) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1997. (N) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended September 30, 1997. (O) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1997, previously filed with the Commission. (Q) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1998. (R) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1998. (U) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999. (V) Incorporated by reference from the Amendment No. 5 to Schedule 13D filed with the Commission on September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. (W) Incorporated by reference from the Amendment No. 6 to Schedule 13D filed with the Commission on May 11, 2000, by United Breweries of America, Inc. and Vijay Mallya. (X) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1999, previously filed with the Commission. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission. No reports on Form 8-K were filed during the quarter for which this report is filed. 18 SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: November 13, 2000 By: /s/Yashpal Singh ------------------------------------------ Yashpal Singh President Dated: November 13, 2000 By: /s/P.A. Murali ------------------------------------------ P.A. Murali Chief Financial Officer and Secretary 19 EXHIBIT INDEX Exhibit Number ------ 27 Financial Data Schedule. EX-27 2 0002.txt FINANCIAL DATA SCHEDULE
5 MENDOCINO BREWING COMPANY, INC. FINANCIAL DATA SCHEDULE UNAUDITED FINANCIAL STATEMENTS OF MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY AS OF SEPTEMBER 30, 2000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 97,200 0 1,458,700 0 1,071,000 2,841,900 17,170,800 (3,022,100) 19,984,300 2,777,500 0 13,841,900 0 227,600 (4,224,500) 19,984,300 7,011,600 7,011,600 4,323,100 6,805,200 0 0 668,100 (391,000) 154,200 (236,800) 0 0 0 (236,800) (0.04) (0.04)
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