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, 1998
[ ] 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, 1998 is 4,497,059.
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 1998
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 190,700
Accounts receivable 849,800
Inventories 966,200
Prepaid expenses 129,500
Deferred income taxes 400,000
------------
Total Current Assets: 2,536,200
------------
PROPERTY AND EQUIPMENT 15,514,600
------------
OTHER ASSETS
Goodwill 63,400
Prepaid points and other assets 114,800
Deferred Income taxes 944,100
------------
Total Other Assets: 1,122,300
------------
Total Assets: $ 19,173,100
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 1,060,400
Accrued wages and related expense 221,100
Other accruals 270,500
Current maturities of obligations under capital lease 177,400
Current maturities of obligations under long-term debt 25,700
------------
Total Current Liabilities: 1,755,100
LONG TERM DEBT, less current maturities 5,189,500
LONG TERM DEBT, capital leases - less current maturities 1,621,300
------------
Total Liabilities: 8,565,900
------------
STOCKHOLDERS' EQUITY
Common stock, no par value: 20,000,000 shares authorized, 4,497,059 shares issued and
outstanding 12,413,000
Preferred stock, Series A, no par value, with aggregate liquidation preference of
$227,600: 227,600 shares authorized, issued and outstanding 227,600
Retained earnings (2,033,400)
------------
Total Stockholders' Equity 10,607,200
------------
Total Liabilities and Stockholders' Equity: $ 19,173,100
============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
1
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
--------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
--------------------------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
SALES $ 2,360,000 $ 1,467,700 $ 5,360,300 $ 3,792,200
LESS EXCISE TAXES 134,500 79,300 303,900 198,700
----------- ----------- ----------- -----------
NET SALES 2,225,500 1,388,400 5,056,400 3,593,500
COST OF GOODS SOLD 1,465,700 899,700 3,823,500 2,240,600
----------- ----------- ----------- -----------
GROSS PROFIT 759,800 488,700 1,232,900 1,352,900
----------- ----------- ----------- -----------
OPERATING EXPENSES
Retail operating 141,100 196,600 373,500 531,200
Marketing 422,600 184,200 911,100 615,000
General and administrative 480,900 216,800 1,385,900 606,000
----------- ----------- ----------- -----------
1,044,600 597,600 2,670,500 1,752,200
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (284,800) (108,900) (1,437,600) (399,300)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 100 1,300 1,900 4,400
Other income (expense) 16,700 7,100 12,500 12,800
Write off of deferred offering costs -- -- -- (141,000)
Interest expense (153,300) (44,000) (404,900) (73,600)
----------- ----------- ----------- -----------
(136,500) (35,600) (390,500) (197,400)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (421,300) (144,500) (1,828,100) (596,700)
Provision For Income Taxes 190,700 131,000 731,200 244,600
----------- ----------- ----------- -----------
NET LOSS $ (230,600) $ (13,500) $(1,096,900) $ (352,100)
=========== =========== =========== ===========
LOSS PER SHARE $ (0.05) $ (0.01) $ (0.24) $ (0.15)
=========== =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 4,497,059 2,341,548 4,497,059 2,335,106
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
--------------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (230,600) $ (13,500) $(1,096,900) $ (352,200)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 183,100 126,900 515,300 237,600
Deferred income taxes (190,700) (111,600) (731,200) (135,200)
Changes in:
Accounts receivable (161,400) (23,200) (520,100) (123,600)
Inventories (276,700) (126,300) (422,100) (48,800)
Prepaid expenses and taxes 162,300 600 (96,700) (8,500)
Refundable income tax 106,300 (19,400) 106,300 (109,400)
Accounts payable -- (97,800) 332,100 206,400
Accrued wages and related expenses (4,000) 11,200 51,400 30,400
Accrued liabilities (154,200) 384,200 (58,000) 420,000
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities: (565,900) 131,100 (1,919,900) 116,700
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (33,400) (264,600) (199,500) (1,925,900)
improvements
Purchase of goodwill (17,600) -- (17,600) 14,000
----------- ----------- ----------- -----------
Net cash used by investing activities: (51,000) (264,600) (217,100) (1,911,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing (600,000) (1,300) (600,000) 797,700
Principal payments on long-term debt (12,400) -- (18,300) --
Borrowings on long-term debt 1,462,200 -- 2,445,300 --
Proceeds from obligation under capital lease -- -- -- --
Payments on obligation under long-term lease (56,900) (38,700) (139,700) (89,900)
Refundable deposit -- 464,000 -- 964,000
Accrued construction costs (500) 25,900 (500) 76,000
Proceeds from sale of common stock -- -- -- 164,200
Deferred stock offering costs -- -- -- 37,700
Deferred private placement costs (65,400) (415,000) (65,400) (496,800)
----------- ----------- ----------- -----------
Net cash provided by financing activities: 727,000 34,900 1,621,400 1,452,900
----------- ----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS 110,100 (98,600) (515,600) (342,300)
CASH AND CASH EQUIVALENTS, beginning of period 80,600 251,000 706,300 494,700
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 190,700 $ 152,400 $ 190,700 $ 152,400
=========== =========== =========== ===========
Supplemental cash flow information includes the following:
Cash paid during the period for:
Interest $ 129,700 $ 154,400 $ 404,900 $ 402,300
----------- ----------- ----------- -----------
Non-cash investing and financing activities for the nine month period ending September 30, 1998, consisted of acquiring fixed assets
of $185,500 through capital leases and stock issued for goodwill of $45,800.
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
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, 1997. 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, 1998, are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
Note 2 -- Short-Term Borrowing
The Company has a note payable outstanding to an individual in the amount of
$93,700, with interest accruing at 9%, due December 31, 1998, secured by real
property and subordinated to bank debt.
Note 3 -- Long Term Debt
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 9.86%.
The note requires monthly payments of principal and interest of $24,400. The
note matures in December 2012 with a balloon payment of $1,940,000 and is
secured by real property located in Ukiah, California.
The Company's largest shareholder, United Breweries of America, Inc. ("UBA"),
has agreed to provide the Company with a credit facility of up to $2,000,000.
Each advance will bear interest at the prime rate of Bank of America of San
Francisco, plus 1.5%, and is due 18 months from the date of such advance. As of
September 30, 1998, UBA has advanced $1,014,000 under the credit facility. The
entire principal balance, together with all unpaid interest, is convertible into
common stock of the Company on or before the maturity date at a rate of one
share of common stock for each $1.50 principal and unpaid interest.
The CIT Group/Credit Finance, Inc., has provided the Company with a $3,000,000
maximum line of credit with an advance rate of 80% of the qualified accounts
receivable and 60% of the inventory at an interest rate of prime rate of Chase
Manhattan Bank in 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 subject to a lien in favor of Finova Capital
Corporation, as well as by a second deed of trust on the property of the Company
in Mendocino County, California. $1,483,968 of the line of credit was advanced
to the Company as an initial term loan, which is repayable in immediately
available funds in sixty consecutive monthly installments, each in the amount of
$24,733, commencing on March 24, 1999. $600,000 of the initial term loan was
used to repay all amounts outstanding on the loan from WestAmerica Bank.
4
Note 4 -- Income Taxes
As of September 30, 1998, the Company had available net operating loss
carryovers of approximately $3,329,300 and $2,192,700 of federal and California
net operating losses, respectively. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
financial statements and the Notes thereto included as Item 1 of this Report.
The discussion of results and trends does not necessarily imply that these
results and trends will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-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.
Overview
The third quarter of 1998 was highlighted by a substantial increase in sales
volume both out of the facility located in Ukiah, California, and the facility
located in Saratoga Springs, New York.
The increase in net sales during the nine-month period ending September 30,
1998, was achieved in significant part through increased and improved marketing
efforts.
Sales (measured in barrels) during the first nine months of 1998 increased to
27,475 barrels from 15,411 barrels in the first nine months of 1997. This
represents an increase of 78% over the first nine months of 1997. Of the total
sales of 27,475 barrels, the sales out of the Ukiah facility amounted to 21,774
barrels and the sales out of the Saratoga Springs facility amounted to 5,701
barrels.
As against sales of 15,210 barrels during the first six months of 1998, the
volume achieved during the third quarter ending September 1998 was 12,265
barrels. The high costs associated
5
with the new brewery located at Ukiah, the fixed costs of the Ten Springs
brewery, and the interest expenses contributed to a net loss of $1,096,900 for
the first nine months of 1998. Loss from operations increased to 28.44% of net
sales for the first nine months of 1998, as compared to the 11.11% loss from
operations for the corresponding period of 1997.
UBA, the Company's largest shareholder, has agreed to provide the Company with a
credit facility of up to $2,000,000 for working capital purposes. Each advance
will bear interest at prime rate of Bank of America of San Francisco plus 1.5%
and is due and payable 18 months after the date of such advance. UBA has
advanced $1,014,000 to the Company under such credit facility as of September
30, 1998. The entire principal balance, together with all unpaid interest, is
convertible into common stock of the Company on or after the maturity date at a
rate of one share of common stock for each $1.50 principal and unpaid interest.
Failure of UBA to fund this credit facility could have a material adverse effect
on the Company's business, financial condition and results of operation.
The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000
maximum line of credit with an advance rate of 80% of the qualified accounts
receivable and 60% of the inventory at an interest rate of 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 subject to a lien in favor of Finova Capital
Corporation, as well as by a second deed of trust on the property of the Company
in Mendocino County, California. $1,483,968 of the line of credit was advanced
to the Company as an initial term loan, which is repayable in immediately
available funds in sixty consecutive monthly installments, each in the amount of
$24,733, commencing on March 24, 1999. $600,000 of the initial term loan was
used to repay all amounts outstanding on the loan from WestAmerica Bank. To the
extent that the loan is not extended or refinanced at the end of the term of the
loan, the Company will be required to repay the loan. Failure of the Company to
repay the loan or to find a lender to refinance the loan could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Results of Operations
Nine Months Ending September 30, 1998 Compared to Nine Months Ending September
30, 1997. The following discussion sets forth information for the nine-month
periods ending September 30, 1998 and 1997. 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 Income, as set forth above under "Financial
Statements," for the periods indicated:
6
--------------------------
Nine Months Ended
September 30
--------------------------
1998 1997
Statements of Income Data:
Sales 106.01% 105.53%
Excise taxes 6.01 5.53
------ ------
Net Sales 100.00 100.00
Costs of Sales 75.62 62.35
------ ------
Gross Profit 24.38 37.65
Retail Operating Expense 7.39 14.78
Marketing Expense 18.02 17.12
General and Administrative Expenses 27.41 16.86
------ ------
Total Operating Expenses 52.82 48.76
------ ------
Loss from Operations (28.44) (11.11)
Other Income (expense) 0.29 (3.45)
Interest income (expense) (8.00) (2.05)
------ ------
Loss before income taxes (36.15) (16.61)
Benefit from income taxes 14.46 6.81
------ ------
Net Loss (21.69) (9.80)
====== ======
-------------------------------
At September 30
-------------------------------
1998 1997
Balance Sheet Data:
Cash and Cash Equivalents $ 190,700 $ 152,400
Working Capital 781,100 (6,176,500)
Property and Equipment 15,514,600 11,128,600
Deposits and Other Assets 178,200 100
Total Assets 19,173,100 13,059,500
Long-term Debt 6,810,800 1,622,600
Total Liabilities 8,565,900 9,111,400
Shareholder's equity 10,607,200 3,948,100
Net Sales. Net sales for the first nine months of 1998 were $5,056,400 compared
to $3,593,500 for the first nine months of 1997, representing an increase of
40.71%. The sales volume increased to 27,475 barrels during the first nine
months of 1998 from 15,411 barrels during the first nine months of 1997,
representing an increase of 78.28%. Of the total sales of 27,475 barrels, the
sales out of the Ukiah facility amounted to 21,774 barrels and the sales
measured in barrels from the Saratoga Springs facility was 5,701 barrels.
Management attributes the growth in sales at the Ukiah facility to new marketing
strategies including new point of sale materials.
7
The growth in sales at the Saratoga Springs facility is due primarily to
contract brewing arrangements and the launch of new brands on the East Coast.
The increase in overall net sales during the first nine months of 1998 was
achieved solely by higher wholesale shipments during the nine month period. The
wholesale beer sales registered an increase of 1,720,900 during the first nine
months of 1998 when compared to the corresponding period of 1997. In view of
Management's focus on wholesale beer sales, retail sales for the first nine
months of 1998 decreased by 152,700 when compared to that of the corresponding
period of 1997.
Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the
nine month period was 75.62% when compared to 62.35% for the corresponding
period of 1997 representing an increase of 13.27%. During the nine month period,
depreciation increased by $277,700, labor costs increased by $161,000, utilities
increased by $126,600, insurance increased by $92,300, rentals increased by
$83,300, property taxes increased by $102,700. Management attributed the
increase to higher fixed and production costs and to the under utilization of
brewing facilities in Ukiah, California and Saratoga Springs, New York.
Gross Profit. As a result of the high cost of sales as explained above, the
gross profit for the first nine months of 1998 decreased to $1,232,900 from
$1,352,900 for the same period in 1997, representing a decrease of 8.86%. As a
percentage of net sales, the gross profit during the first nine months of 1998
decreased to 24.38% from 37.65% for the corresponding period of 1997.
Operating Expenses. Operating expenses for the first nine months of 1998 were
$2,670,500 as compared to $1,752,200 for the first nine months of 1998,
representing an increase of 52.40%. Operating expenses consists of retail
operating expenses, marketing and distribution expenses and general and
administrative expenses.
Retail operating expenses for the first nine months of 1998 were $373,500 as
compared to $531,200 for the corresponding period of 1997, representing a
decrease of 29.68%. As a percentage of net sales retail operating expenses
decreased to 7.39% as compared to 14.78% for the same period in 1997. The
decrease in retail operating expenses reflects a decrease in labor costs of
$74,400, marketing and advertising costs of $57,800, supplies of $25,800 and a
net increase in other expenses of $300. The decrease in operating expenses is
attributable to cost cutting and better management of the Hopland pub and
merchandise store.
Marketing and Distribution expenses for the first nine months of 1998 were
$911,100 as compared to $615,000 for the same period in 1997. As a percentage of
net sales, marketing and distribution accounted for 18.02% when compared to
17.12% during the first six months of 1997. The increase in marketing and
distribution expenses comprised of an increase in marketing labor costs by
$261,900, travel and entertainment by $39,800, cost of point of sales materials
and sales promotions increased by $115,300, 15th year anniversary celebration
costs of $15,600, offset by a decrease in freight costs by $54,250, decrease in
label and package development costs by $37,900, decrease in warehouse rent by
$15,000, decrease due to a non-recurrence of a $30,000 provision in connection
with the termination of a distributor and net of other expenses increased by
$650.
General and Administrative expenses were $1,385,900 as compared to $606,000 for
the first nine months of 1998. As a percentage of net sales, the general and
administrative expenses were
8
27.41% in the first nine months of 1998 as compared to 16.86% in the
corresponding period of 1997. In comparison with the corresponding period of
last year, the first nine months of 1998 had an increase in labor costs by
$381,100, travel and entertainment by $128,400, legal and professional services
by $171,000, rent by $19,000, supplies by $16,000, telephone expenses by
$24,200, depreciation by $35,200, and net of all other expenses by $5,000. The
increase is attributable to more employees and additional breweries located at
Ukiah and Saratoga Springs.
Other Income (Expense). The other expense for the first nine months of 1998 was
$390,500 as compared to that of $197,400 for the corresponding period of 1997.
The increase of $193,100 is mainly attributable to an increase in interest
expense to the extent of $331,300 during the first nine months of 1998 when
compared to the relevant period in 1997 offset by non-recurrence of a write off
of deferred offering costs to the extent of $141,000 in 1997.
Benefit from Income Taxes. The benefit from income taxes for the first nine
months of 1998 was $731,200 as compared to $244,600 for the corresponding period
of 1997. 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 1998 was $1,096,900 as compared
to net loss of $352,100 during the first nine months of 1997. As a percentage of
net sales, net loss for the first nine months of 1998 was 21.69% as compared to
9.80% for the corresponding period of 1997.
Segment Information
The Company's business presently consists of two segments. The first is brewing
for wholesale to distributors and other retailers. This segment accounted for
89.6% of the Company's total gross sales during the first nine months of 1998.
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 10.4% of the Company's total gross
sales during the first nine months of 1998.
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 Hopland Brewery. A summary of each segment is as follows:
Nine Months Ended September 30, 1998
----------------------------------------------------------------------------
Brewing Corporate and
Operations Hopland Brewery Other Total
------------------ ------------------- ------------------ ------------------
Sales 4,805,100 555,200 - 5,360,300
Operating profit (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
9
Nine Months Ended September 30, 1997
----------------------------------------------------------------------------
Brewing Corporate and
Operations Hopland Brewery Other Total
------------------ ------------------- ------------------ ------------------
Sales 3,084,200 708,000 - 3,792,200
Operating profit (loss) (375,900) (23,400) - (399,300)
Identifiable assets 10,505,200 100,400 2,453,900 13,059,500
Depreciation and amortization 199,900 5,100 8,000 213,000
Capital Expenditures 2,037,800 - 31,900 2,069,700
Seasonality
Beer consumption nationwide has historically increased by approximately 20%
during the summer months as compared to 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 operation.
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 9.86%, maturing December 2012 with a balloon payment in the amount of
$1,940,000, 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.
Shareholder Commitment. The Company's largest shareholder, UBA, agreed to
provide the Company with a credit facility of up to $2,000,000. Each advance
will bear interest at the prime rate plus 1.5% and are due and payable 18 months
after the date of such advance. The advances will have a conversion feature into
unregistered shares of the Company's common stock. The entire principal balance,
together with all unpaid interest, is convertible into common stock of the
Company, on or after the maturity date, at a rate of one share of common stock
for each $1.50 principal and unpaid interest. UBA has advanced a total of
$1,014,000 as of September 30, 1998.
Equipment Lease. The Company has leased from FINOVA Capital Corporation new
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
10
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.
Seller Financing of Ukiah Real Estate. The seller of the Ukiah land holds a
promissory note, secured by a third priority deed of trust on the Ukiah
property, with a remaining principal balance as of September 30, 1998 of $93,700
at 9% annual interest due on December 31, 1998 pursuant to a verbal agreement
with the spokesman for the lending group.
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 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 subject to
a lien in favor of Finova Capital Corporation, as well as by a second deed of
trust on the property of the Company in Mendocino County, California. $1,483,968
of the line of credit was advanced to the Company as an initial term loan, which
is repayable in immediately available funds in sixty consecutive monthly
installments, each in the amount of $24,733, commencing on March 24, 1999.
$600,000 of the initial term loan was used to repay all amounts outstanding on
the loan from WestAmerica Bank.
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.
The Company's ratio of current assets to current liabilities on September 30,
1998, was 1.44 to 1.0 and its ratio of assets to liabilities was 2.24 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 1900 rather than
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
11
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 its 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 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 may 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 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 has not confirmed the state of
year 2000 readiness of these parties.
The Company has not yet established a "contingency plan" to address potential
year 2000 problems and is currently considering the extent to which it will
develop a formal contingency plan.
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.
Working capital for day to day business operations had historically been
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 day to day operations. UBA agreed to provide a loan of up to
$2,000,000 for working capital purposes. In addition, pursuant to the Investment
Agreement dated October 24, 1997 between the Company and UBA, UBA agreed to
provide directly or indirectly funding for the working capital requirements of
the Ten Springs Brewery in an amount not to exceed $1,000,000 until October 24,
1999, or until the brewery's operations are profitable, whichever comes first.
UBA, through its affiliated entities, has fulfilled this obligation by
facilitating the CIT Group $3,000,000 loan transaction.
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.
12
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).
10.3 (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).
10.10 (D) Installment Note between Ukiah Redevelopment Agency and Langley et al. (previously filed as
Exhibit 19.5).
10.11 (F) Promissory Note for $76,230 in favor of Langley et al.
10.12 (G) Agreement to modify note and deed of trust dated June 6, 1995 with Langley, et al.
10.13 (G) Agreement to modify note dated June 6, 1995 with Langley, et al.
10.14 (G) Amendment to installment note payable to Langley, et al.
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.
13
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 (P) Indemnification Agreement with Vijay Mallya.
10.30 (P) Indemnification Agreement with Michael Laybourn.
10.31 (P) Indemnification Agreement with Jerome Merchant.
10.32 (P) Indemnification Agreement with Yashpal Singh.
10.33 (P) Indemnification Agreement with P.A. Murali.
10.34 (P) Indemnification Agreement with Robert Neame.
10.35 (P) Indemnification Agreement with Sury Rao Palamand.
10.36 (P) Indemnification Agreement with Kent Price.
10.37 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 Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc.
10.39 Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT
Group/Credit Finance, Inc.
27 Financial Data Schedule.
<FN>
- ---------------
(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.
(B) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended
December 31, 1994, previously filed with the Commission.
(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.
(D) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended
June 30, 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.
(H) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period
ended June 30, 1996, previously filed with the Commission.
14
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.
(P) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended
June 30, 1998.
+ Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential
treatment filed with the Securities and Exchange Commission.
</FN>
No reports on Form 8-K were filed during the quarter for which this report is
filed.
15
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, 1998 By: /s/ H. Michael Laybourn
------------------------------
H. Michael Laybourn
President
Dated: November 12, 1998 By: /s/ P.A. Murali
------------------------------
P.A. Murali
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number
------
10.37 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 Patent, Trademark and License Mortgage by the Company in favor
of The CIT Group/Credit Finance, Inc.
10.39 Patent, Trademark and License Mortgage by Releta Brewing
Company LLC in favor of The CIT Group/Credit Finance, Inc.
27 Financial Data Schedule.