-----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, C8EJknGuP0q7CYBiYsXZ2mRqRzlB/sbA2EcNO5JIlTFOTYyS8w4106flDPyZso2X CH8L6HptbFNacGlH3o3XAw== 0000950005-97-000598.txt : 19970620 0000950005-97-000598.hdr.sgml : 19970620 ACCESSION NUMBER: 0000950005-97-000598 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970619 SROS: PSE 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 97626058 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/A 1 FORM 10QSB/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A No. 1 (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------------------- ----------------------- Commission file number: 1-13636 Mendocino Brewing Company, Inc. (Name of small business issuer in its charter) California 68-0318293 (State or other jurisdiction of (I.R.S. Employee Identification No.) incorporation or organization) 13351 South Highway 101, Hopland, CA 95449 (Address of principal executive offices) (Zip code) Issuer's telephone number: (707) 744-1015 Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, no par value The Pacific Stock Exchange Securities registered under Section 12(g) of the Act: Not applicable (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ The number of shares of the issuer's common stock outstanding as of March 31, 1997 is 2,338,218. (Does not include 300,000 shares issued subject to substantial restrictions as security for a forbearance. See Item 2 Financing the New Brewery - Vendor Financing.) PART I Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. BALANCE SHEET March 31, 1997 (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 290,523 Accounts receivable 386,825 Inventories 261,434 Prepaid expenses 20,361 Refundable income taxes 71,900 Deferred income taxes 23,100 ---------------- Total Current Assets: 1,054,143 ---------------- Property and Equipment 10,674,128 ---------------- Other Assets Label development costs, net of amortization 11,605 Deferred offering costs 317,222 Deposits and other assets 290,100 Deferred income taxes 4,500 ---------------- Total Other Assets: 623,427 ---------------- Total Assets: $ 12,351,698 ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Line of credit $ 600,000 Accounts payable 728,072 Accrued wages and related expense 126,314 Accrued construction costs 1,048,901 Accrued liabilities 29,795 Notes payable 3,326,757 Current maturities of obligation under capital lease 172,739 ---------------- Total Current Liabilities: 6,032,578 Long term debt - less current maturities 1,988,074 Deferred income taxes 18,100 ---------------- Total Liabilities: 8,038,725 Stockholders' Equity Common stock, no par value; 20,000,000 shares authorized; 4,005,532 2,338,218 shares issued and outstanding Preferred stock, 2,000,000 shares authorized, 227,600 of 227,600 which are designated Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 Series A shares issued and outstanding Retained earnings 79,841 ---------------- Total Stockholders' Equity: 4,312,973 ---------------- Total Liabilities and Stockholders' Equity: $ 12,351,698 ================ The accompanying notes are an integral part of these financial statements
-1- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF INCOME (unaudited)
Three Months Ended March 31, -------------------------------- 1997 1996 ---- ---- Sales .......................................... $ 1,051,487 $ 683,945 Less excise taxes .............................. 46,914 52,911 ----------- ----------- Net sales ...................................... 1,004,573 631,034 Cost of goods sold ............................. 576,240 324,739 ----------- ----------- Gross profit ................................... 428,333 306,295 ----------- ----------- Operating expenses Retail operating ........................... 165,844 180,203 Marketing and distribution.................. 203,235 92,990 General and administrative ................. 188,940 156,338 ----------- ----------- 558,019 429,531 ----------- ----------- Loss from operations ............................ (129,686) (123,236) Other income (expense) Interest income ............................ 2,146 10,550 Other income (expense) ..................... 5,260 669 Interest expense ........................... (150) ----------- ----------- 7,256 11,219 ----------- ----------- Loss before income taxes ....................... (122,430) (112,017) Provision for income taxes...................... 800 800 ----------- ----------- Net Loss ....................................... $ (123,630) $ (112,817) =========== =========== Loss per share ................................. $ (0.05) $ (0.05) =========== =========== Weighted average common shares outstanding .... 2,329,783 2,322,222 =========== =========== The accompanying notes are an integral part of these financial statements.
-2- MENDOCINO BREWING COMPANY, INC. STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended March 31, -------------------------------- 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net loss ........................................ $ (123,230) $ (112,817) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization ............... 15,395 11,250 Changes in: Accounts receivable ........................... 9,353 208,803 Inventories ................................... 119,068 (192,455) Prepaid expenses and taxes .................... (26,621) (5,247) Accounts payable .............................. 160,514 32,450 Accrued wages and related expense ............. 8,046 (31,496) Accrued liabilities ........................... 13,692 2,318 Income taxes payable .......................... -- (34,200) ----------- ----------- Net cash provided (used) by operating activities: 176,217 (121,394) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements................................... (1,413,459) (1,254,225) Deposits and other assets ....................... -- (23,736) ----------- ----------- Net cash used by investing activities: (1,413,459) (1,277,961) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from short-term borrowing........... 561,393 400,000 Principal payments on long-term debt ............ -- (2,316) Proceeds from obligation under capital lease..... 182,671 -- Payments on obligation under long-term lease..... (36,158) -- Accrued construction costs ...................... 304,432 (117,961) Proceeds from sale of common stock .............. 135,963 -- Deferred stock offering costs ................... (115,264) -- ----------- ----------- Net cash provided by financing activities: ..... 1,033,037 226,656 ----------- ----------- DECREASE IN CASH AND CASH EQUIVALENTS............... (204,205) (1,172,699) CASH AND CASH EQUIVALENTS, beginning of period ..... 494,728 1,696,109 ----------- ----------- CASH AND CASH EQUIVALENTS, end of period ........... $ 290,523 $ 523,410 =========== =========== Supplemental cash flow information includes the following: Cash paid during the period for Interest ................................ $ 133,254 $ 10,988 Income taxes ............................. $ -- $ 52,500 =========== ===========
The accompanying notes are an integral part of these financial statements. -3- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. It is believed, however, that the disclosures are adequate to make the information presented not misleading. The financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the financial position and the results of operations. These results are not necessarily to be considered indicative of the results for the entire year. Note 2 - Going Concern and Management's Plans In September 1995, the Company began construction of its new brewery with an expected completion date of mid-1996. The brewery was to be paid by a combination of financing and the proceeds from the Company's initial public stock offering. At the outset of construction, the projected total cost of the project, including land, building, equipment and other costs, was $9,200,000. The project is nearing completion, and the Company began brewing and selling beer in May 1997. However, due to a change increasing the size and capacity of the brewery, cost overruns, and time delays, the cost rose to an expected total of $12,000,000. The project is being paid for and financed as follows: o $3,300,000 proceeds from the initial stock offering o $2,700,000 construction loan to bank. The bank has provided a commitment letter to convert the debt to permanent financing. o $1,800,000 in equipment financing as a capital lease o $800,000 to an individual for the acquisition of land. The current balance of $261,000 is due in June 1997. o $600,000 bank line of credit secured by accounts receivable and inventory, maturing in August 1997. o $900,000 to the general contractor, due 30 days after completion of the project o $1,639,000 of estimated remaining costs are expected to be provided as a result of the Company's proposed alliance with The UB Group of Bangalore, India On May 2, 1997, the Company signed a letter of intent with The UB Group of Bangalore, India for an alliance and possible merger, at which time the UB Group paid the Company a $250,000 refundable deposit secured by shares of Company stock pledged by the Company's Chief Executive Officer and Chief Financial Officer. If the Company fails to consummate an alliance with The UB Group, there may be uncertainty about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. -4- Note 3 - Short-Term Borrowing The Company has a $600,000 term line of credit from a bank with variable interest at the bank's index rate plus 1.5%, maturing August 31, 1997. The note is secured by receivables and inventory. The seller of the Company's Ukiah land has a note, secured by a third priority deed of trust on the land, with a remaining principal balance as of March 31, 1997 of approximately $261,000 at 9% annual interest payable in monthly installments of principal and interest of $2,380 with the balance due at maturity on June 27, 1997. Note 4 - Renegotiation of Long-Term Debt In June 1997 the Company renegotiated its capital lease to retroactively reduce the amount of the lease commitment from approximately $2.1 million to $1.8 million. The excess of lease payments previously paid over the recalculated lease payments has been credited against future payments. Note 5 - Direct Public Offering On November 6, 1996, the Company filed a registration statement with the Securities and Exchange Commission to sell 600,000 shares of its no par value common stock at a proposed offering price of $8.50 per share. As of March 31, 1997, the Company had received and accepted subscriptions for 15,996 shares ($135,966). The Company suspended the offering in May 1997 in light of the letter of intent with The UB Group as discussed at Note 2 above. Item 2. Management's Discussion and Analysis. The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto included as Item 1 in this Report. The discussion of results and trends does not necessarily imply that these results and trends will continue. Overview Results for the first three months of 1997 reflected significant sales growth and high expenses as the Company continued to implement its expansion plan. Compared to the immediately preceding quarter, net sales were up 7.4%, gross profit was up 10.2%, the Company's operating loss improved 21.8%, and the pre-tax loss improved 22.6%. Compared to the comparable period in 1996, net sales adjusted for excise taxes were up 53.7% and gross profit was up 39.8%, but because the Company had not yet implemented its marketing plan in the first quarter of 1996, the operating loss in 1997 was 5.2% higher and the pre-tax loss was 9.3% higher than in 1996. Results of Operations Three Months Ending March 31, 1997 Compared to Three Months Ending December 31, 1996 and March 31, 1997. The following discussion sets forth information for the three-month periods ending March 31, 1996 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. -5- The following table sets forth, as a percentage of sales, certain items included in the Company's Statements of Income, see Financial Statements elsewhere in this Report, for the periods indicated:
Three Months Ended March 31, -------------------------------------------------- 1997 1996 ---------------- --------------- Statements of Income Data: Sales........................................... 104.67% 108.38% Excise taxes.................................... 4.67 8.38 ------ ------ Net sales....................................... 100.00 100.00 Costs of sales.................................. 57.36 51.46 ------ ------ Gross profit.................................... 42.64 48.54 Retail operating expense........................ 16.51 28.56 Marketing expense............................... 20.23 14.74 General and administrative expense.............. 18.81 24.77 ------ ------ Total operating expenses........................ 55.55 68.07 ------ ------ Loss from operations............................ (12.91) (19.53) Other income.................................... 0.72 1.78 ------ ------ Loss before income taxes........................ (12.19) (17.75) Provision for income taxes...................... 0.08 0.13 ------ ------ Net Loss........................................ (12.27) (17.88) ====== ====== At March 31, -------------------------------------------------- 1997 1996 ---------------- --------------- Balance Sheet Data: Cash and cash equivalents....................... $ 290,523 $ 523,410 Working capital................................. (4,641,550) (419,590) Property and equipment.......................... 10,674,128 5,197,818 Deposits and other assets....................... 623,427 109,016 Total assets.................................... 12,351,698 6,597,671 Long-term debt.................................. -- 554,937 Obligation under capital lease.................. 1,988,047 -- Total liabilities............................... 8,038,725 2,285,564 Shareholder's equity............................ 4,312,973 4,312,107
Net Sales. Net sales were $1,004,600 representing a sequential increase of 7.4% over the prior quarterly period and a 59.2% increase from the year-earlier period in 1996. (Five and one-half percent (5.5%) of the increase over 1996 reflects higher excise taxes accrued in 1996 when the Company paid excise taxes based on product produced rather than product shipped.) Management attributes the growth in sales to the implementation of new marketing strategies, including new point of sale materials and additional field sales representatives, beginning in the second quarter of 1996. Wholesale beer shipments increased by 78.9% in the first three months of 1997 compared to the same period in 1996. Management attributes approximately 60% of the sales increases in the first quarter to increased sales to existing distributors and 40% to geographic expansion begun in the second half of 1996. Retail sales at -6- the Hopland Brewery brewpub and merchandise store were up 12.0% for the first three months of 1997 compared to 1996. Management attributes the increase sales at the Hopland Brewery brewpub and merchandise store to a 93% increase in merchandise sales offset by a 2.0% decrease in pub food and beer sales. Cost of goods sold. Cost of goods sold was 57.39% as a percentage of net sales, representing a sequential increase of 2.1 percentage points from the prior quarterly period and an increase of 5.9 percentage points from the first three months 1996 to 57.36% in the same period in 1997. The changes were due first to increased cost of retail goods (food and merchandise) and second to a $17,000 inventory write-down. If the inventory had not been written down, the increase would have been 0.4 percentage points over the prior quarterly period and 3.0 percentage points over the first three months of 1996. Gross profit. Gross profit was $428,300, representing a sequential increase of 10.2% over the prior quarterly period and a 39.8% increase from the first quarter of 1996. As a percentage of net sales, however, gross profit decline by the same amount as the increase in cost of goods sold. Operating expenses. Operating expenses were $558,000, representing a sequential increase of merely 0.7% from the previous quarterly period and 29.9% from the first three months of 1996. Operating expenses consists of retail operating expense, marketing and distribution, and general and administrative expense. Retail operating expenses were $165,800, representing a sequential decrease of 5.0% from the prior quarterly period and 8.0% from the first three months of 1997. Compared to the first three months of 1996, supply costs decreased $6,100, labor costs decreased $5,400, advertising and promotion decreased $4,100, and net miscellaneous expenses increased $1,200. Marketing and distribution expenses were $203,200, representing a sequential increase of 7.7% from the prior quarterly period and 118.6% from the first three months of 1997. Compared to the first three months of 1997, promotional/ advertising costs (including point of sales and packaging/label development costs) increased by $37,800, marketing and sales labor increased by $30,600, distribution expense increased by $16,000, travel and lodging expenses (incurred in supporting new geographic markets) increased by $12,800, and net miscellaneous expenses increased by $13,000. General and administrative expense was $188,900, representing a sequential decrease of 1.1% from the prior quarterly period and an increase of 20.9% from the first three months of 1996. Compared to the first three months of 1996, professional fees increased $14,600, labor costs increased $9,900, costs associated with being a public company increased $5,800, and net miscellaneous expenses increased by $2,300. Other income. Other income was $7,300, representing a decrease of $4,000 in the first three months 1997 compared to the same period for 1996 primarily as a result of a decrease of $8,400 in net interest earnings as cash from the initial direct public offering was used for the expansion project. This decrease was offset by an increase of $4,400 in net additional miscellaneous income. Provision for income taxes. The provision for income taxes in the first three months of 1997 was $800 compared to a benefit from income taxes of $68,300 in the immediately prior period. The provision for income taxes in the first three months of 1996 was also $800. Net loss. Net loss for the first three months 1997 was $123,200, representing a sequential decrease in earnings of 37.2% compared to the prior -7- quarterly period and a decrease in earnings of 9.2% compared to the same period for 1996. Segment Information Mendocino Brewing's business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 80.3% of the Company's first quarter 1997 sales. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store, the Hopland Brewery. This segment accounted for 19.7% of the Company's first quarter 1997 sales. Mendocino Brewing began producing draft beer at its new brewery in Ukiah in May 1997. The initial annual capacity of the new brewery is 60,000 bbl. This will be in addition to the Company's 18,000 bbl. per year facility in Hopland until bottling operations are transferred to Ukiah. As the Company does not intend to expand its brewpub operations, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. Seasonality Beer consumption nationwide has historically increased by approximately 20% during the summer months. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Financing the New Brewery. New Brewery Cost. The presently estimated cost of the new brewery at its initial annual capacity of 60,000 bbl. is $12.0 million. This includes $0.8 million for the land, $7.3 million for improvements to the real estate, $3.3 million for equipment, and $0.6 million for financing costs. Of this amount, approximately $9.84 million has been paid or provided for from cash raised in the Company's initial direct public offering and the proceeds of debt described below and cash from operations. The balance of approximately $2.16 million is expected to be funded through an alliance and possible merger with The UB Group of Bangalore, India or its affiliates. See "Alliance and Possible Merger" below. Construction Financing. Mendocino Brewing has obtained a $2.7 million construction loan secured by a first priority deed of trust on the Ukiah land and improvements and the proceeds of the current direct public offering from the Savings Bank of Mendocino County. There is a written commitment to convert the construction loan to a 15 year term loan upon successful completion of the new brewery, subject to certain conditions. As of March 31, 1997, approximately 89% of the construction loan had been funded. The construction loan bears interest at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures on July 1, 1997. The current commitment provides that upon conversion, the loan will bear interest at the then prevailing 5 Year Treasury Constant Maturity Index (but not less than 10%), with a maximum for the first five years at 2% above the initial fully indexed rate, and a maximum during the remaining term of the loan at 3% above the initial fully indexed rate at the beginning of the remaining term. The minimum annual interest rate is 8%. The loan will be amortized over 25 years with a balloon payment upon maturity in 15 years. The lender's commitment letter states that the lender will convert the unpaid principal at maturity to a fully amortized 10-year loan subject to terms and conditions to be agreed upon at that time. The commitment letter proposes to require the Company to pledge all proceeds of the Company's current direct public offering in excess of $2.5 million as collateral for the 15-year term loan, with the provision that the lender will release the funds from the pledge -8- to purchase additional equipment if the Company is meeting its sales and revenue objectives. Equipment Lease. FINOVA Capital Corporation has agreed to lease new brewing equipment with a total cost of approximately $1.78 million to Mendocino Brewing for a term of 7 years with monthly rental payments of approximately $27,100 each. The lease commenced in December 1996. Before the lease commenced, FINOVA advanced $750,000 to the Company with interest at the Citibank prime plus 3%. As of March 31, 1997, approximately 100% of the lease had been funded. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $45,600 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. Seller Financing of Ukiah Real Estate. The seller of the Ukiah land has a note, secured by a third priority deed of trust on the land, with a remaining principal balance as of March 31, 1997 of approximately $261,000 at 9% annual interest payable in monthly installments of principal and interest of $2,380 with the balance due at maturity on June 27, 1997. WestAmerica Loan. WestAmerica Bank of Santa Rosa, California has loaned Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable and inventory. The loan is fully funded and bears interest at the bank's index rate plus 1.5% payable monthly and matures on August 31, 1997. The Company has an outstanding commitment letter from WestAmerica Bank to convert the $600,000 term loan to a revolving line of credit with an advance rate of 80% of qualified accounts receivable and 25% of inventory. As the Company's sales continue to expand, the amount of inventory and receivables financing available should increase proportionately, assuming an otherwise sound financial condition. These forward looking statements are subject to risks and uncertainties. Even if the Company's accounts receivable and inventory grows in quantity, credit may be unavailable for other reasons relating to the Company's business, financial condition, and results of operations, the craft brew industry, the lending industry, or economic conditions in general. To the extent that the loan is not extended or refinanced, the Company will be required to repay the loan out of cash from operations, the net proceeds of the Company's current direct public offering, or the proceeds of another debt or equity financing, a strategic alliance, or a joint venture. Vendor Financing. The general contractor for the new brewery, BDM Construction Co., Inc. ("BDM"), agreed to defer up to $900,000 in fees otherwise owed or to become payable on December 31, 1996, subject to performance by BDM of its obligations under the construction contract, until January 31, 1997 with interest at 12% per annum. As of December 31, 1996, $300,000 had been deferred under this arrangement. Additional amounts payable to BDM after January 31, 1997 are outstanding and no written modifications have been made to the deferral arrangement to address the current circumstances. The deferral arrangement is secured by a second priority deed of trust on the Ukiah land and improvements, and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of default, BDM is required to proceed against the Common Stock before initiating any proceeding against the real estate. The Common Stock collateral was issued to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933 subject to the restrictions (a) that the shares shall be canceled if the amounts owed BDM are paid in full, (b) that if full amount owed BDM is not paid, the shares must be sold in a commercially reasonable manner as specified in the California Commercial Code, and (c) that any shares not needed to be sold to -9- satisfy the obligation to BDM shall be canceled. Under California law, BDM may not retain the shares in satisfaction of the obligation without the written consent of the Company given after an event of default. BDM has the right to require the Company to register the shares issued for its account for sale to the public. As of May 22, 1997, BDM has not taken any action to enforce the Company's obligations to it. The Company presently anticipates that payment of its obligation to BDM will be funded through an alliance and possible merger with The UB Group of Bangalore, India or its affiliates. See "Alliance and Possible Merger" below. Keg Management Arrangement. Mendocino Brewing 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. Remaining Costs. The Company presently anticipates that funding for the $2.16 million in remaining cost of the new brewery will be provided through an alliance and possible merger with The UB Group of Bangalore, India or its affiliates. See "Alliance and Possible Merger" below. Liquidity and Capital Resources Generally. The expansion now underway has had and will continue to have a material impact on Mendocino Brewing's assets, liabilities, commitments for capital expenditures, and liquidity. Capital resources for the expansion plan have been supplied by the net proceeds of Mendocino Brewing's initial public offering and debt and equipment financing as described above. Working capital for day to day business operations has historically been provided primarily through operations. Proceeds from operations are not expected to provide sufficient working capital for day to day operations as the Company expands. The Company's ratio of current assets to current liabilities on March 31, 1997 was 0.17 to 1.0 and its ratio of assets to liabilities was 1.54 to 1.0. New Brewery. See "-- Financing the New Brewery" above. Impact of Expansion on Cash Flow. Mendocino Brewing must make timely payment of its debt and lease commitment to continue in operation. Increased capacity will also place additional demands on the Company's working capital to pay the cost of additional sales and marketing activities and staff, production personnel, and administrative staff and to fund increased purchases of supplies. There will be a lag between the time the Company must incur some or all of these costs and the time the Company realizes revenue from increased sales. Working capital to fund these expenses will have to be provided by trade terms offered by suppliers and vendors, the proceeds of the Company's current direct public offering, additional debt or equity from other sources, and/or deferral of certain expenses. The Company presently anticipates that the necessary working capital will be provided through an alliance and possible merger with The UB Group of Bangalore, India or its affiliates. See "Alliance and Possible Merger" below. Direct Public Offering. On February 6, 1997, the Company commenced a direct public offering 600,000 shares of its no par value common stock at $8.50 per share. As of March 31, 1996, the Company had received and accepted subscriptions for approximately 16,000 shares ($136,000). The Company suspended the offering in May 1997 in light of its discussions with The UB Group. See "Alliance and Possible Merger" below. -10- Alliance and Possible Merger. On May 2, 1997, the Company and the UB Group of Bangalore, India entered into a non-binding letter of intent for an alliance and possible merger, at which time the UB Group paid the Company a $250,000 refundable deposit secured by shares of Company stock pledged by the Company's Chief Executive Officer and Chief Financial Officer. The UB Group is a global beer and sprits company operating in 20 countries on four continents. Its best known brand is Kingfisher lager which was recently voted the best light lager in the world at the Stockholm Beer Festival. It is a goal of the Company that execution of a definitive agreement with the UB Group and/or its affiliates will provide sufficient additional capital to the Company to enable the Company to complete construction of the new brewery, pay the contractor, and provide sufficient working capital to operate the new brewery. There is no guaranty that the foregoing goals will be achieved or that the Company will negotiate a transaction with the UB Group on favorable terms or at all. Failure of the Company to negotiate a transaction with the UB Group would have a material adverse effect on the Company's business and financial condition. -11- PART II Item 6. Exhibits and Reports on Form 8-K. Exhibit Number Description of Document - ------------ ----------------------- 3.1 Restated Articles of Incorporation, as amended, of the Company (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.) 3.2 Bylaws of the Company (Incorporated by referenced from the Company's Report on Form 10-KSB for the annual period ended December 31, 1994 previously filed with the Commission.) 4.1 Articles 5 and 6 of the Restated 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) 19.1 Change in Terms Agreement with Savings Bank of Mendocino County 19.2 Change in Terms Agreement with WestAmerica Bank 19.3 * Refundable Deposit Agreement with The UB Group 27 Financial Data Schedule * A portion of this Exhibit has been 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. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. Mendocino Brewing Company, Inc. (Registrant) Date June 13, 1997 /s/ H. Michael Laybourn ---------------------------- ----------------------------------------- H. Michael Laybourn, President Date June 13, 1997 /s/ Norman H. Franks ---------------------------- ----------------------------------------- Norman H. Franks, Chief Financial Officer -12- EX-19.1 2 CHANGE IN TERMS AGREEMENT CHANGE IN TERMS AGREEMENT Borrower: Mendocino Brewing Company, Inc. Lender: SAVINGS BANK OF PO Box 400 MENDOCINO COUNTY Hopland, CA 95449 MAIN OFFICE P.O. Box 3600 200 North School Street Ukiah, CA 95482 Principal Amount: $2,700,000.00 Date of Agreement: April 1, 1997 DESCRIPTION OF EXISTING INDEBTEDNESS. EXISTING LOAN NUMBER: 8010962256 IN THE ORIGINAL AMOUNT OF $2,700,000.00 DATED 9/25/95 WITH AN OUTSTANDING BALANCE ON 3/28/97 IN THE AMOUNT OF $2,404,313.57, WITH INTEREST PAID TO 4/1/97. DESCRIPTION OF COLLATERAL. 1. The outstanding obligation continues to be secured by a security interest in the property described in a Deed of Trust dated 9/25/97 in Book 2366, Page 544 of Official Records, Mendocino County. DESCRIPTION OF CHANGE IN TERMS. 1. Final maturity of the loan is hereby extended to 7/1/97. 2. Interest continues to be payable monthly commencing on 5/01/97 and monthly thereafter. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to absolute performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: Mendocino Brewing Company, Inc. By: /s/ Michael Laybourn By: /s/ Norman Franks --------------------------- ------------------------------ Michael Laybourn, Norman Franks, Chief Executive Officer Chief Financial Officer EX-19.2 3 CHANGE IN TERMS AGREEMENT CHANGE IN TERMS AGREEMENT Borrower: MENDOCINO BREWING COMPANY, INC. Lender: WEST AMERICA BANK P.O. BOX 400 SONOMA CREDIT ADM. HOPLAND, CA 95449 31 D ST. 2ND FLOOR SANTA ROSA, CA 95404 ================================================================================ Principal Amount: $600,000.00 Date of Agreement: May 13, 1997 DESCRIPTION OF EXISTING INDEBTEDNESS. THAT CERTAIN NOTE DATED MAY 17, 1996 IN THE ORIGINAL AMOUNT OF $600,000.00 CURRENTLY MATURING ON APRIL 30, 1997 WITH AN OUTSTANDING BALANCE AS OF THIS DATE OF $600,000.00. DESCRITION OF COLLATERAL. THIS NOTE IS SECURED BY THAT CERTAIN COMMERCIAL SECURITY AGREEMENT DATED MAY 17, 1996. DESCRIPTION OF CHANGE IN TERMS. EFFECTIVE THE DATE OF THIS AGREEMENT THE MATURITY DATE IS CHANGED FROM APRIL 30, 1997 TO AUGUST 31, 1997. ACCRUED INTEREST SHALL BE PAYABLE ON THE LAST DAY OF EACH MONTH BEGINNING MAY 31, 1997 AND ON AUGUST 31, 1997 ALL OUTSTANDING PRINCIPAL PLUS ALL ACCRUED BUT UNPAID INTEREST SHALL BE DUE AND PAYABLE. BORROWER AGREES THAT UPON EXECUTION OF THIS AGREEMENT TO PAY A DOCUMENTATION FEE OF $150.00. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: MENDOCINO BREWING COMPANY, INC. By: /s/ H. Michael Laybourn By: /s/ Norman H. Franks ----------------------------- -------------------------------- H. MICHAEL LAYBOURN, NORMAN H. FRANKS, PRESIDENT CHIEF FINANCIAL OFFICER EX-19.3 4 REFUNDABLE DEPOSIT AGREEMENT EXECUTION COPY REFUNDABLE DEPOSIT AGREEMENT THIS REFUNDABLE DEPOSIT AGREEMENT (this "Agreement"), dated as of May 2, 1997, is entered into by and between THE UB GROUP ("The UB Group") and MENDOCINO BREWING COMPANY, INC. ("MBC"). RECITALS A. The UB Group and MBC are parties to that certain Letter of Intent, dated as of the date hereof (the "Letter of Intent"), pursuant to which they have set out their intentions with respect to a proposed series of two linked transactions. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Letter of Intent. B. It is a condition to the execution by The UB Group and MBC of the Letter of Intent that The UB Group shall have paid to MBC a refundable deposit in the amount of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) (the "Deposit") as contemplated pursuant to Section F.7. of the Letter of Intent. C. The UB Group and MBC wish to set forth their agreement relating to the Deposit. AGREEMENT NOW, THEREFORE, The UB Group and MBC hereby agree as follows: 1. Concurrently with the execution and delivery by The UB Group and MBC of the Letter of Intent, The UB Group hereby pays to MBC the Deposit. 2. MBC hereby accepts The UB Group's deposit of the Deposit and agrees that the Deposit shall be used by MBC in accordance with the Section F.7. of the Letter of Intent. 3. The Deposit is secured by a pledge to The UB Group by Michael Laybourn and Norman Frank (collectively, the "Shareholders") of the "Collateral", as defined in, and pursuant to the terms of, those certain Pledge Agreements, each dated as of the date hereof, executed by the Shareholders in favor of The UB Group (collectively, the "Pledge Agreements"). 4. In order to induce The UB Group to pay the Deposit to MBC, MBC hereby represents and warrants to The UB Group as follows: (a) MBC (i) is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation and (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; (b) MBC has full capacity to execute and deliver both this Agreement and the Letter of Intent and no further action is necessary on the part of MBC to make this Agreement or the Letter of Intent legal, valid and binding upon MBC and enforceable in accordance with its terms; 1 (c) The execution, delivery and performance of this Agreement and the Letter of Intent by MBC does not conflict with, violate, result in a breach of, or cause a default, either immediately or with the passage of time or the giving of notice or both, under (i) any provision of federal, state or local law or regulation relating to MBC or MBC's assets, (ii) any provision of any order, arbitration award, judgment or decree to which MBC or any portion of MBC's assets are subject, (iii) any provision of any note, bond, indenture, license, lease, mortgage, agreement or instrument to which MBC or any portion of MBC's assets are subject, or (iv) any other restriction of any kind or character to which MBC or any portion of MBC's assets are subject; (d) The execution, delivery and performance of this Agreement and the Letter of Intent will not result in giving to others any interest or rights, including rights of termination, acceleration or cancellation, in or with respect to any of the properties, contracts, leases, mortgages, commitments or other agreements of MBC, nor are any consents, approvals or authorizations of, or declarations to or filings with, any governmental authorities required in connection herewith or therewith; and (e) The Annual Report on Form 10-KSB/A No. 1 for the fiscal year ending December 31, 1996 does not contain any untrue statement of material fact or omits to state a material fact necessary to make such representation and warranty or any such statement therein not misleading. MBC understands and acknowledges that The UB Group is paying the Deposit to MBC in reliance on the representations and warranties of MBC set forth herein. 5. At the Closing, the Deposit shall be credited against the purchase price of the Securities. 6. In the event the negotiations between the parties with respect to the consummation of the transactions set out in the Letter of Intent are terminated by either party for any reason other than as provided below, the Deposit shall be returned by MBC to The UB Group within sixty (60) days after such termination (such sixty (60) day period to be hereinafter referred to as the "Repayment Period"). In addition, if a "Refund Event" (as defined below) occurs, the Deposit shall be immediately due and payable by MBC to The UB Group without presentment, demand, protest or any other notice of any kind, all of which are expressly waived by MBC. A Refund Event shall occur if (a) MBC fails to observe or perform any covenant, obligation, condition or agreement contained in this Agreement or Sections F.1, H, I, J and K of the Letter of Intent, or any representation or warranty made or furnished by MBC in or in connection with this Agreement or the Letter of Intent shall be materially false, incorrect, incomplete or misleading in any material respect when made or furnished; (b) either Shareholder fails to observe or perform any covenant, obligation, condition or agreement contained in the Pledge Agreements, or any representation or warranty made by either Shareholder in Section 3 of the Pledge Agreements shall be materially false, incorrect, incomplete or misleading in any material respect when made or furnished; (c) MBC makes a general assignment for the benefit of creditors or admits in writing its inability to pay its debts generally as they become due, any voluntary petition is filed by MBC under the federal or similar state bankruptcy laws, or MBC consents to the filing of any such petition or consents to the appointment of a receiver, liquidator or trustee in bankruptcy; (d) a court of competent jurisdiction enters an order or decree under the federal or any similar state bankruptcy law (i) for the appointment of a receiver, liquidator, trustee or assignee in bankruptcy or insolvency of MBC of all or substantially all of its assets or for the winding up or liquidation of its affairs, or (ii) adjudicating MBC a bankrupt or insolvent or approving a petition seeking reorganization of MBC under any bankruptcy law, and in any event such order or decree has continued in force 2 undischarged and unstayed for a period of sixty (60) days; or (e) either Shareholder shall contest the enforceability of his respective Pledge Agreement, or assert that his respective Pledge Agreement does not constitute the legal, valid and binding obligation of such Shareholder enforceable against him in accordance with its terms. 7. Miscellaneous. (a) All notices, requests, demands, consents, instructions or other communications to or upon MBC or The UB Group under this Agreement shall be in writing and faxed, mailed or delivered at its respective facsimile number or address set forth below (or to such other facsimile number or address for either party as indicated in any notice given by that party to the other party). All such notices and communications shall be effective (i) when sent by Federal Express or other overnight service of recognized standing, on the second day following the deposit with such service; (ii) when mailed, first class postage prepaid and addressed as aforesaid through the United States Postal Service, upon receipt; (iii) when delivered by hand, upon delivery; and (iv) when faxed, upon confirmation of receipt. The UB Group: THE UB GROUP One Harbor Drive, Suite 102 Sausalito, California 94965 Attn: Vijay Mallya Telephone: (415) 289-1400 Facsimile: (415) 289-1409 MBC: MENDOCINO BREWING COMPANY, INC. 13351 South Highway 101 Hopland, CA 95449 Telephone: (707) 744-1015 Facsimile: (707) 744-1910 (b) MBC shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by The UB Group in the enforcement or the attempted enforcement of this Agreement, the Pledge Agreements or any of MBC's obligations hereunder not performed when due (including, without limitation, all such fees and expenses incurred in connection with any refund demand made with respect to the occurrence of any Refund Event. (c) This Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by MBC and The UB Group. Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given. (d) This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules. 3 IN WITNESS WHEREOF, the undersigned have executed and delivered this Agreement as of the date first above written. THE UB GROUP /s/ Vijay Mallya ------------------------------------ Vijay Mallya Chairman MENDOCINO BREWING COMPANY, INC. /s/ Michael Laybourn ------------------------------------ Michael Laybourn President 4 EX-27 5 FINANCIAL DATA SCHEDULE
5 The unaudited financial statements of Mendocino Brewing Company, Inc. as of March 31, 1997 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 290,500 0 386,800 0 261,400 1,054,100 11,223,816 549,688 12,351,700 6,032,600 0 4,005,500 0 227,600 79,800 12,351,700 1,004,600 1,051,500 576,200 623,100 (5,300) 0 (2,000) (122,400) (800) (123,200) 0 0 0 (123,200) (0.05) 0
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