-----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, SOA8ei2je4S9ZGx2fIlTsOMvMLqsRnniuZZV9aZ2J6UJEq3/e/3g2NfOB9VUmebJ 216PI4A66QtAg5a4pFMfPw== 0000950005-99-000969.txt : 19991115 0000950005-99-000969.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950005-99-000969 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99748384 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 september 30, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from __________to_________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13351 South Highway 101, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of September 30, 1999 is 5,516,628 PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET September 30, 1999 (Unaudited) ASSETS ------
CURRENT ASSETS Accounts receivable $ 1,137,000 Inventories 1,261,800 Prepaid expenses 79,000 Deferred income taxes 138,300 ----------- Total Current Assets: 2,616,100 ----------- PROPERTY AND EQUIPMENT 14,896,900 ----------- OTHER ASSETS Deferred Income Taxes 2,248,400 Other Assets 149,500 ----------- Total Other Assets: 2,397,900 ----------- Total Assets: $19,910,900 =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $ 1,584,900 Line of credit 1,320,900 Accrued liabilities 221,900 Accrued wages and related expense 201,300 Current maturities of obligation under capital lease 262,100 Current maturities of obligation under long-term debt 338,600 ----------- Total Current Liabilities: 3,929,700 LONG TERM DEBT, less current maturities 3,940,300 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 1,458,000 ----------- Total Liabilities: 9,328,000 ----------- STOCKHOLDERS' EQUITY Common stock, no par value: 20,000,000 shares authorized, 5,516,628 shares issued and outstanding 13,808,500 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 (3,453,200) ----------- Total Stockholders' Equity 10,582,900 ----------- Total Liabilities and Stockholders' Equity: $19,910,900 =========== The accompanying notes are an integral part of these financial statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
-------------------------- -------------------------- THREE MONTHS ENDED NINE MONTHS ENDED September 30 September 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- SALES $ 2,654,400 $ 2,360,000 $ 6,988,900 $ 5,360,300 LESS EXCISE TAXES 153,900 134,500 412,800 303,900 ----------- ----------- ----------- ----------- NET SALES 2,500,500 2,225,500 6,576,100 5,056,400 COST OF GOODS SOLD 1,532,800 1,465,700 4,442,700 3,823,500 ----------- ----------- ----------- ----------- GROSS PROFIT 967,700 759,800 2,133,400 1,232,900 ----------- ----------- ----------- ----------- OPERATING EXPENSES Retail operating 124,400 141,100 319,000 373,500 Marketing 454,600 422,600 1,191,800 911,100 General and administrative 492,800 480,900 1,239,100 1,385,900 ----------- ----------- ----------- ----------- 1,071,800 1,044,600 2,749,900 2,670,500 ----------- ----------- ----------- ----------- LOSS FROM OPERATIONS (104,100) (284,800) (616,500) (1,437,600) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Interest income -- -- -- 1,900 Other income 17,500 16,700 26,100 12,500 Acquisition expense (25,000) -- (103,400) -- Induced debt conversion expense (248,500) -- (248,500) -- Interest expense (224,400) (153,300) (644,800) (404,900) ----------- ----------- ----------- ----------- (480,400) (136,600) (970,600) (390,500) ----------- ----------- ----------- ----------- LOSS BEFORE INCOME TAXES (584,500) (421,400) (1,587,100) (1,828,100) BENEFIT FROM INCOME TAXES (232,400) (190,700) (632,700) (731,200) ----------- ----------- ----------- ----------- NET LOSS $ (352,100) $ (230,700) $ (954,400) $(1,096,900) =========== =========== =========== =========== LOSS PER SHARE $ (0.07) $ (0.05) $ (0.21) $ (0.24) =========== =========== =========== =========== WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,836,915 4,497,059 4,610,344 4,497,059 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------- -------------------------- THREE MONTHS ENDED NINE MONTHS ENDED September 30 September 30 -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (352,100) $ (230,700) $ (954,400) $(1,096,900) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 196,900 183,100 614,600 515,300 Deferred income taxes (232,400) (190,700) (634,200) (731,200) Stock issued for services 91,600 -- 91,600 -- Debt converted to stock 309,900 -- 309,900 -- Changes in: Accounts receivable 124,000 (161,300) (457,100) (520,100) Inventories (328,600) (276,700) (283,800) (422,100) Prepaid expenses (8,800) 162,300 (45,500) (96,700) Refundable income taxes -- 106,300 -- 106,300 Deposits and other assets (2,300) -- (7,300) -- Accounts payable 153,400 -- 778,200 332,100 Accrued wages and related expenses 2,500 (4,000) (9,500) 51,400 Accrued liabilities 11,000 (154,200) 130,900 (58,000) ----------- ----------- ----------- ----------- Net cash used by operating activities: (34,900) (565,900) (466,600) (1,919,900) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (22,000) (33,400) (73,200) (199,500) improvements ----------- ----------- ----------- ----------- Purchase of goodwill -- (17,600) -- (17,600) ----------- ----------- ----------- ----------- Net cash used by investing activities: (22,000) (51,000) (73,200) (217,100) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds (repayments) from line of credit (81,500) (600,000) 582,900 (600,000) Principal payments on long-term debt (84,200) (12,400) (201,300) (18,300) Borrowings on long-term debt 286,300 1,462,200 286,300 2,445,300 Payments on obligation under capital lease (63,700) (56,900) (170,100) (139,700) Accrued construction costs -- (500) -- (500) Deferred private placement costs -- (65,400) -- (65,400) ----------- ----------- ----------- ----------- Net cash provided by financing activities: 56,900 727,000 497,800 1,621,400 ----------- ----------- ----------- ----------- INCREASE (DECREASE) IN CASH -- 110,100 (42,000) (515,600) ----------- ----------- ----------- ----------- CASH, beginning of period -- 80,600 42,000 706,300 ----------- ----------- ----------- ----------- CASH, end of period $ -- $ 190,700 $ -- $ 190,700 =========== =========== =========== =========== Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 228,200 $ 129,700 $ 581,500 $ 404,900 ----------- ----------- ----------- ----------- 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, 1998. 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, 1999, are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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 of sixty months commencing March 1999. The amount of the term loan outstanding as of September 30, 1999 is $1,310,800. The amount outstanding under the working line of credit as of September 30, 1999 is $1,320,900. The bank's commitment under the line of credit matures in September 2000. The agreement 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 In March 1998, the Company refinanced its short-term construction note that matured on January 1, 1998, to a $2,700,000 note, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 9.95%. The note requires monthly payments of principal and interest of $24,400. The note matures on December 1, 2012 with a balloon payment and is secured by real property located in Ukiah, California. On August 30, 1999, the Company converted approximately $994,000 of convertible debt to United Breweries of America, Inc. (a related party) and $61,000 of accrued interest into 938,171 shares of common stock. The convertible debt was originally issued in installments during the period from February 1998 to December 1998 and was due 18 months from the date of advance. The debt was convertible into common stock at $1.50 per share. On August 31, the Company was required to repay a portion of the debt. In order to induce the related party to convert the debt, the Company reduced the conversion price to the market price of the common stock on August 30, 1999 ($1.125 per share). As part of this transaction, the Company recognized an expense of $248,500 for this induced conversion. The Company has a note payable which consists of convertible notes to United Breweries of America, Inc. in the amount of $280,100 as of September 30, 1999. The note bears interest at the 4 prime rate plus 1.5%, matures on March 6, 2001, and is unsecured. The note is 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 nine months ending September 30, 1999 is $1,791. 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 September 30, 1999, the Company had available net operating loss carryovers of approximately $6,084,000, $2,413,000 and $673,000 of federal, California and New York net operating losses, respectively. The federal and New York operating losses expire through 2019. California operating losses expire through 2004. The benefit from these loss carryforwards has been recorded, resulting in a deferred tax asset. A valuation allowance is not provided since the Company believes it is more likely than not that the loss carryforwards will be fully utilized. Note 5 - Payments to Related Parties As of September 30, 1999, the Company had accrued payment obligations 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, 1999. Note 6 - Stock Options On August 30, 1999, the Company granted 88,888 non-qualified stock options to certain members of the board of directors. The options are exercisable at $1.125 per share, the closing price of the shares of Common Stock as of that date, and expire August 29, 2004. No compensation expense will be recognized under the disclosure only provision of SFAS 123 "Accounting for Stock-Based Compensation." Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management 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," 5 "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 Ten Springs Brewing Co., located in Saratoga Springs, New York, launching the new non-alcoholic brew of OLDE SARATOGA CLASSIC ROOT BEER. The product was well received in the market. In addition, bottling line equipment including a carrier erector and bulk glass handling equipment were installed in the Ukiah, California and Saratoga Springs facilities respectively. This new equipment brought about a reduction in manpower. At the Ukiah facility, two additional 240 barrel fermentation tanks were installed to satisfy greater production and flexibility demand. In addition, on August 30, 1999, the Company's largest shareholder, the United Breweries of America, Inc. ("UBA"), agreed to convert all of the outstanding convertible notes issued by the Company to UBA under the 1998 line of credit. By their terms the convertible notes were convertible at $1.50 per share. However, the Board of Directors of the Company offered to induce UBA to convert the notes into common stock at a price of $1.125 which was the then-current price of the Company's common stock as traded on the Pacific Exchange. As a result of the conversion, UBA now owns approximately 3,087,818 shares of common stock representing 55.9% of the issued and outstanding shares of common stock of the Company. UBA is now the majority owner of the Company. The increase in net sales during the nine-month period ending September 30, 1999 was achieved in significant part through increased and improved marketing efforts. Sales (measured in barrels) during the first nine months of 1999 increased to 36,125 barrels from 27,475 barrels in the first nine months of 1998. This represents an increase of 31.5% over the corresponding period of last year. Of the total sales of 36,125 barrels, the sales out of the Ukiah facility amounted to 28,013 barrels and the sales out of the Saratoga Springs facility amounted to 8,112 barrels. The high costs associated with the brewery located at Ukiah, the fixed costs of the Ten Springs Brewery (neither of which are being used at full capacity), the conversion of the UBA debt, and the interest expenses contributed to a net loss of $954,400 for the first nine months of 1999. The loss from operations as a percentage of net sales decreased from 28.44% for the first nine months of 1998 to 14.51% for the first nine months of 1999. 6 Results of Operations The following discussion sets forth information for the nine-month periods ending September 30, 1999 and 1998. 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 ------------------------------------ Nine Months Ended September 30 ------------------------------------ 1999 1998 Statements of Operations Data: Sales 106.28% 106.01% Excise taxes 6.28 6.01 -------------- -------------- Net Sales 100.00 100.00 Cost of Goods Sold 67.56 75.62 -------------- -------------- Gross Profit 32.44 24.38 Retail Operating 4.85 7.39 Marketing Expense 18.12 18.02 General and Administrative Expens 18.84 27.41 -------------- -------------- Total Operating Expenses 41.82 52.82 -------------- -------------- Loss from Operation (9.37) (28.44) Other Income 0.40 0.29 Acquisition expense (1.57) 0.00 Induced conversion expense (3.78) 0.00 Interest expense (9.81) (8.00) -------------- -------------- Loss before income taxes (24.13) (36.15) Benefit from income taxes 9.62 14.46 Net Loss (14.51) (21.69) Balance Sheet Data: Cash $ 0 $ 190,700 Working Capital (1,313,600) 781,100 Property and Equipment 14,896,900 15,514,600 Deposits and Other Assets 2,397,900 1,122,300 Total Assets 19,910,900 19,173,100 Long-term Debt 3,940,300 6,810,800 Obligation under Capital Lease 1,458,000 1,621,300 Total Liabilities 9,328,000 8,565,900 Shareholder's equity 10,582,900 10,607,200 Net Sales. Net sales for the first nine months of 1999 were $6,576,100 compared with $5,056,400 for the first nine months of 1998, representing an increase of 30.06%. The sales 8 volume increased to 36,125 barrels during the first nine months of 1999, from 27,475 barrels during the first nine months of 1998, representing an increase of 31.5%. Management attributes the increased sales to improved marketing strategies, including new point of sale materials. The increase in overall net sales during the first nine months of 1999 was achieved solely by higher wholesale shipments, which represented an increase of $1,613,800 over the wholesale shipments during the first nine months of 1998. As a result of management's focus on wholesale beer sales, retail sales for the first nine months of 1999 were $94,300 less than retail sales during the first nine months of 1998. Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the first nine months of 1999 was 67.56%, as compared to 75.62% during the first nine months of 1998, representing a decrease of 8.06%. As a percentage of net sales, during the first nine months of 1999, labor costs increased from 11.73% in 1998, to 11.76% in 1999, depreciation decreased from 9.10% in 1998 to 7.79% in 1999, utilities decreased from 4.52% in 1998 to 3.82% in 1999, property taxes decreased from 2.03% in 1998 to 1.43% in 1999, insurance costs decreased from 1.83% in 1998 to 1.73% in 1999, wastewater decreased from 0.66% in 1998 to 0.28% in 1999, repair and maintenance decreased from 1.15% in 1998 to 1.04% in 1999. These factors contributed to a decrease of 8.06% in the cost of goods sold as a percentage of net sales, as compared to the first nine months of 1998. Management attributes the balance of the decrease to higher sales volumes thereby lowering per barrel production costs at both the Ukiah and Ten Springs breweries. Gross Profit. As a result of the higher net sales as explained above, gross profit for the first nine months of 1999 increased to $2,133,400, from $1,232,900 for the comparable period of 1998, representing an increase of 73%. As a percentage of net sales, the gross profit during the first nine months of 1999 increased to 32.44% from 24.38% for the corresponding period of 1998. Operating Expenses. Operating expenses for the first nine months of 1999 were $2,749,900, as compared to $2,670,500 for the first nine months of 1998, representing an increase of 2.97%. 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 1999 were $319,000, representing a decrease of $54,500, or 14.59%, from the first nine months of 1998. As a percentage of net sales, retail operating expenses decreased to 4.85% as compared to 7.39% for the first nine months of 1998. The decrease in retail operating expenses consisted of a decrease in labor costs of $57,100 and an increase in other expenses by $2,600. Marketing and distribution expenses for the first nine months of 1999 were $1,191,800, representing an increase of $280,700, or 31%, from the first nine months of 1998. As a percentage of net sales, marketing and distribution expenses represented 18.12% as compared to 18.02% during the first nine months of 1998. Compared to the first nine months of 1998: marketing and sales labor increased by $132,400; telephone expenses increased by $10,700; sales promotion expenses increased by $82,500; point-of-sale expenses increased by $38,800; media advertising expenses increased by $31,500; freight increased by $13,800; travel and entertainment decreased by $28,000; and all other marketing and distribution expenses decreased by $1,000. 9 General and administrative expenses were $1,239,100, representing a decrease of $146,800 from the first nine months of 1998. As a percentage of net sales, the general and administrative expenses were 18.84% for the first nine months of 1999, as compared to 27.41% for the first nine months of 1998. As compared to the first nine months of 1998, professional and legal fees decreased by $137,500, depreciation increased by $7,500, travel and entertainment decreased by $82,700, labor (including compensation to directors of $91,600 for the first nine months of 1999 versus $0 in 1998) increased by $65,100; and all other general and administrative expenses increased by $800. Other Income (Expense). Other expenses for the first nine months of 1999 were $970,600, representing an increase of $580,100 when compared to the first nine months of 1998. The increase is due to an increase in interest expenses for the first nine months of 1999 of $239,900, an increase of $103,400 in other expenses relative to potential acquisitions that were not consummated, an increase in induced conversion expense for convertible debt of $248,500, and an increase in miscellaneous income of $11,700. Benefit From Income Taxes. The benefit from income taxes for the first nine months of 1999 was $632,700, as compared to $731,200 for the first nine months of 1998. The benefit from income taxes is due to the expected future benefit of carrying forward net operating losses. Net Loss. The net loss for the first nine months of 1999 was $954,400, as compared to a net loss of $1,096,900 for the first nine months of 1998. As a percentage of net sales, net loss for the first nine months of 1999 decreased to 14.51%, as compared to 21.69% for the first nine months of 1998. 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 1999. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 6% of the Company's total gross sales during the first nine months of 1999. With expanded wholesale beer production in both Ukiah and Saratoga Springs, management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. 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:
Nine Months Ended September 30, 1999 ----------------------------------------------------------- Brewing Hopland Corporate Operations Brewery 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 Nine Months Ended September 30, 1998 ----------------------------------------------------------- Brewing Hopland Corporate Operations Brewery and Other Total ----------------------------------------------------------- Sales $ 4,805,100 $ 555,200 $ -- $ 5,360,300 Operating Loss (1,382,700) (54,900) -- (1,437,600) Identifiable Assets 16,307,100 86,000 2,780,000 19,173,100 Depreciation and amortization 459,900 4,600 50,800 515,300 Capital Expenditures 278,800 -- 106,200 385,000
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 9.95%, 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., located in Chicago, Illinois, 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 $1,310,800 of the term loan was outstanding as of September 30, 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 September 30, 1999, the total amount outstanding on the line of credit was $2,631,700. 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. Conversion of Notes. On August 30, 1999 the Company's largest shareholder, the United Breweries of America, Inc. ("UBA"), agreed to convert all of the outstanding convertible notes issued to UBA under its 1998 credit facility. By their terms the convertible notes were convertible at $1.50 per share. However, the Board of Directors of the Company offered to induce UBA to convert the notes into common stock at a price of $1.125, which was the then-current price of the Company's common stock as traded on the Pacific Exchange. As a result of the conversion, UBA now owns approximately 3,087,818 shares of common stock representing 53.8% of the issued and outstanding shares of common stock of the Company. UBA has become the majority owner of Company. Further, as a result of the conversion, the Company recognized an expense of $248,500 for the induced conversion. Shareholder Commitment of Line of Credit. In mid 1999, UBA agreed to provide the Company with a credit facility of up to $800,000 to fund the operations of the Company. On August 31, 1999, the Company and UBA entered into a Master Line of Credit Agreement setting forth the terms of the credit 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. 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. UBA has advanced a total of $280,100 as of September 30, 1999; accrued but unpaid interest on the advances totals $1,791 as of September 30, 1999. 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, 1999, was 0.7 to 1.0 and its ratio of assets to liabilities was 2.1 to 1.0. Year 2000 Readiness Many currently-installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries in order to distinguish 21st century dates from 20th century dates. On January 1, 2000, many computer, and embedded systems, may recognize the year "00" as the year 1900 rather than the year 2000. Because many computer functions are date-sensitive, this error may cause systems to process data inaccurately or shut down if they do not recognize the date. If not corrected, this could result in a system failure or miscalculations causing disruptions of operations. The Company is taking steps to ensure its operations will not be adversely impacted by potential year 2000 computer failures. The Company is assessing all systems for year 2000 impacts and costs of upgrading or replacing systems that are not year 2000 ready, and testing and monitoring systems for year 2000 readiness. The Company does not expect the year 2000 project costs to have a material effect on its financial position or results of operations. The Company believes that the most significant internal risk posed by the year 2000 problem is the possibility of a failure of equipment involved in its brewing processes. If the brewing processes equipment were to fail, the Company would have to implement manual processes, which may slow production levels that would affect the Company's sales volume. The programmable logic controller connected to the brewing equipment and the processes are not date 13 sensitive. A testing of the brewing house facility computer operations indicated that all of the computer systems are year 2000 compliant. However, there can be no assurance that problems will not arise relevant to year 2000. The third parties whose year 2000 problems could have the greatest effect on the Company are believed by the Company to be the banks that maintain the Company's depository accounts, the company that processes the Company's payroll, and the Company's suppliers and distributors. The Company is in process of confirming the state of year 2000 readiness of these parties. 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. Compensation to Directors The Board of Directors of the Company has formed a committee consisting of Dr. Vijay Mallya, H. Michael Laybourn, and Yashpal Singh to determine the compensation of the independent directors, namely Robert H.B. Neame, Sury Rao Palamand, and Kent D. Price. On August 30, 1999 at the meeting of the Board of Directors of the Company, the Board granted 18,500 shares of common stock to Mr. Neame, 23,100 shares of common stock to Mr. Palamand, and 31,800 shares of common stock to Mr. Price. In addition, the Board granted options to purchase up to $25,000 shares of common stock to each of the independent directors for 1999 and for each year thereafter that they serve as directors. As further compensation, the Board of Directors agreed to pay the independent directors compensation in the amount of $3,000 per meeting of the Board that they attend and $1,000 per committee meeting that they attend. The directors have the option to receive such compensation in the form of common stock at the closing price of the Company's Common Stock as of the date of the relevant meeting. As of September 30, 1999, each of the independent directors has elected to be paid in stock rather than in cash. All options to purchase shares of the Company's common stock were granted pursuant to the terms of the Company's 1994 Stock Option Plan. In addition, the Board granted options to purchase common stock to Jerome G. Merchant, who is both a member of the Board of Directors and a consultant to the Company. By virtue of being appointed to the compensation committee, Dr. Mallya, Mr. Laybourn and Mr. Singh will not be eligible to receive grants of stock or options for their services as directors. As of September 30, 1999, Mr. Merchant has received an option to purchase 22,222 shares of common stock at an exercise price of $1.125 per share, Mr. Neame has received 21,166 shares of common stock and an option to purchase 22,222 shares of common stock at an 14 exercise price of $1.125 per share, Mr. Palamand has received 25,766 shares of common stock and an option to purchase 22,222 shares of common stock at an exercise price of $1.125 per share, and Mr. Price has received 34,466 shares of common stock and an option to purchase 22,222 shares of common stock at an exercise price of $1.125 per share. Retirement of H. Michael Laybourn Michael Laybourn, a founder and President of the Company, has informed the Board of Directors that he will retire as President of the Company, effective as of December 31, 1999. Mr. Laybourn has agreed to continue to serve as a director of the Company and agreed to be available to advise the Company on an as-needed basis. The Company is currently engaged in a search to find a replacement for Mr. Laybourn. 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 5. 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). 15 Exhibit Number Description of Document - ------ ----------------------- 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.3 (M) Employment Agreement with H. Michael Laybourn. 10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.6 (A) Sales Contract between the Company and John I. Hass, Inc. 10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.8 (A) Lease Agreement between the Company and Kohn Properties. 10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company, LLC. 10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company, LLC regarding payment of certain liens. 10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 10.18 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.23 (J) Equipment Lease with FINOVA Capital Corporation. 10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.25 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.26 (L) Investment Agreement with United Breweries of America, Inc. 10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.29 (Q) Indemnification Agreement with Vijay Mallya. 10.30 (Q) Indemnification Agreement with Michael Laybourn. 10.31 (Q) Indemnification Agreement with Jerome Merchant. 10.32 (Q) Indemnification Agreement with Yashpal Singh. 10.33 (Q) Indemnification Agreement with P.A. Murali. 10.34 (Q) Indemnification Agreement with Robert Neame. 10.35 (Q) Indemnification Agreement with Sury Rao Palamand. 10.36 (Q) Indemnification Agreement with Kent Price. 10.37 (R) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 (R) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 16 Exhibit Number Description of Document - ------ ----------------------- 10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.41 (U) Employment Agreement with Yashpal Singh. 10.42 (U) Employment Agreement with P.A. Murali. 10.43 (V) Master Loan Agreement between the Company and the United Breweries of America, Inc. 10.44 (V) Convertible Note in favor of the United Breweries of America, Inc 27 Financial Data Schedule. - ---------------------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (C) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended March 31, 1995, previously filed with the Commission. (E) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1995, previously filed with the Commission. (F) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995, previously filed with the Commission. (G) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1996, previously filed with the Commission. (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 33-15673. (K) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996, previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. (M) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1997. (N) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended September 30, 1997. (O) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1997, previously filed with the Commission. (Q) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1998. (R) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1998. (T) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1998, previously filed with the Commission. (U) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999. (V) Incorporated by reference from the Amendment No. 5 to Schedule 13D filed with the Commission on September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission. The Registrant filed a report on Form 8-K on September 10, 1999 relating to the conversion of certain convertible notes issued by the Company to the United Breweries of America, Inc., 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: November 12, 1999 By: /s/ H. Michael Laybourn ---------------------------------------- H. Michael Laybourn President Dated: November 12, 1999 By: /s/ P.A. Murali ---------------------------------------- P.A. Murali Chief Financial Officer 19 EXHIBIT INDEX Exhibit Number - ------ 27 Financial Data Schedule. EX-27 2 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, 1999 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 0 0 1,137,000 0 1,261,800 2,616,100 17,129,900 (2,233,000) 19,910,900 3,929,700 0 0 227,600 13,808,500 (3,453,200) 19,910,900 6,576,100 6,576,100 4,442,700 7,192,600 351,900 0 644,800 (1,587,100) 632,700 (954,400) 0 0 0 (954,400) (0.21) 0
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