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 June 30, 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 June
30, 1997 is 2,341,548. (Does not include 300,000 shares issued subject to
substantial restrictions as security for a forbearance. See Item 2 -
Management's Discussion and Analysis -- Financing the New Brewery - Vendor
Financing.)
<PAGE>
PART I
Item 1. Financial Statements.
<TABLE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
June 30,1997
(Unaudited)
<CAPTION>
ASSETS
Current Assets
<S> <C>
Cash and cash equivalents $ 251,026
Accounts receivable 417,879
Inventories 303,052
Prepaid expenses and taxes 67,668
Refundable income taxes 161,900
Deferred income taxes 23,100
----------
Total Current Assets: 1,224,625
----------
Property and Equipment 10,985,085
----------
Other Assets
Deferred private placement costs 81,786
Deposits and other assets 5,944
Deferred income taxes 28,100
----------
Total Other Assets: 115,830
----------
Total Assets: $ 12,325,540
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit $ 600,000
Accounts payable 871,788
Accrued wages and related expense 137,500
Accrued construction costs 794,558
Accrued liabilities 51,897
Refundable deposit 500,000
Notes payable 3,564,357
Current maturities of obligation under capital lease 160,550
----------
Total Current Liabilities: 6,680,650
Obligation under capital lease, less current maturities 1,665,202
Deferred income taxes 18,100
----------
Total Liabilities: 8,363,952
Stockholders' Equity
Common stock, no par value; 20,000,000 shares authorized;
2,341,548 shares issued and outstanding 3,869,569
Preferred stock, 2,000,000 shares authorized, 227,600 of
which are designated Series A, no par value, with aggregate
liquidation preference of $227,600; 227,600 Series A shares
issued and outstanding 227,600
Accumulated deficit (135,581)
----------
Total Stockholders' Equity: 3,961,588
----------
Total Liabilities and Stockholders' Equity: $ 12,325,540
==========
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
- 1 -
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 1,272,992 $ 1,227,428 $ 2,324,479 $ 1,911,373
Less excise taxes 72,500 18,138 119,414 71,049
----------- ----------- ----------- -----------
Net sales 1,200,492 1,209,290 2,205,065 1,840,324
----------- ----------- ----------- -----------
Cost of goods sold 764,597 545,711 1,340,837 870,450
----------- ----------- ----------- -----------
Gross profit 435,895 663,579 864,228 969,874
----------- ----------- ----------- -----------
Operating expenses
Retail operations 168,743 192,082 334,117 372,285
Marketing and distribution 227,629 199,830 430,864 292,820
General and administrative 200,207 187,700 389,617 339,551
----------- ----------- ----------- -----------
596,579 579,612 1,154,598 1,004,656
----------- ----------- ----------- -----------
Income (loss) from operations (160,684) 83,967 (290,370) (34,782)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 959 269 3,105 10,819
Other income (expense) 1,179 (43,543) 6,440 (47,361)
Write off of deferred offering costs (141,006) - (141,006) -
Interest expense (29,470) - (29,621) -
----------- ----------- ----------- -----------
(168,338) (43,274) (161,082) (36,542)
----------- ----------- ----------- -----------
Income (loss) before income taxes (329,022) 40,693 (451,452) (71,324)
----------- ----------- ----------- -----------
Benefit from income taxes (113,600) (21,500) (112,800) (20,700)
----------- ----------- ----------- -----------
Net income (loss) $ (215,422) $ 62,193 $ (338,652) $ (50,624)
=========== =========== =========== ===========
Earnings (loss) per share $(0.09) $ 0.03 $(0.14) $(0.02)
=========== =========== =========== ===========
Weighted average common shares
outstanding 2,341,548 2,322,222 2,335,665 2,322,222
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 2 -
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (215,422) $ 62,193 $ (338,652) $ (50,624)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 95,261 11,758 110,656 23,008
Deferred income taxes (23,600) (21,500) (23,600) (21,500)
Changes in:
Accounts receivable (31,054) (300,308) (100,467) (91,504)
Inventories (41,618) (14,823) 77,449 (207,278)
Prepaid expenses and taxes (47,307) (20,745) (9,128) (25,992)
Refundable income tax (90,000) - (90,000) -
Accounts payable 143,716 229,852 304,230 262,302
Accrued wages and related expense 11,185 7,131 19,232 (24,366)
Accrued liabilities 22,102 9,352 35,794 11,670
Income taxes payable - - - (34,200)
----------- ----------- ----------- -----------
Net cash used by operating activities: (176,737) (37,090) (14,486) (158,484)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (430,417) (1,759,713) (1,661,205) (3,013,164)
Deposits and other assets (41) 23,081 13,925 14,564
----------- ----------- ----------- -----------
Net cash used by investing activities: (430,458) (1,736,632) (1,647,280) (2,998,600)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing 237,599 (40,000) 798,992 360,000
Principal payments on long-term debt - (2,368) - (4,683)
Payments on obligation under capital
lease (15,032) - (51,190) -
Refundable deposit 500,000 - 500,000 -
Accrued construction costs (254,342) 1,351,847 50,090 1,180,819
Proceeds from sale of common stock 28,308 - 164,271 -
Deferred stock offering costs 135,753 (37,941) 37,687 (53,935)
Deferred private placement costs (64,588) - (81,786) -
----------- ----------- ----------- -----------
Net cash provided by financing
activities: 567,698 1,271,538 1,418,064 1,482,201
----------- ----------- ----------- -----------
DECREASE IN CASH (39,497) (502,184) (243,702) (1,674,883)
----------- ----------- ----------- -----------
CASH, BEGINNING OF PERIOD 290,523 523,410 494,728 1,696,109
----------- ----------- ----------- -----------
CASH, END OF PERIOD $ 251,026 $ 21,226 $ 251,026 $ 21,226
=========== =========== =========== ===========
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Interest $ 114,589 $ - $ 247,843 $ -
Income taxes $ - $ - $ - $ 52,500
=========== =========== =========== ===========
Non-cash investing and financing activities for the six month period ending June
30, 1997, consisted of acquiring fixed assets of $19,573 through a capital
lease.
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 3 -
<PAGE>
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 for 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.
Phase I of the brewery is now complete and the Company began brewing and selling
beer in May 1997. Phase II, which consists primarily of non-production related
facilities, is expected to be completed in late 1997 once funds become
available. 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. Although the letter is
now expired, the Company is in active discussions with the bank concerning
conversion of 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 October 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 $1,900,000 of estimated remaining costs are expected to be provided as a
result of the Company's proposed alliance with The UB Group.
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. In June and July 1997, The UB Group advanced additional refundable
deposits of $250,000 and $114,000 respectively. 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 -
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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.
Note 4 Notes Payable
Notes payable (construction loan) to bank of $2,404,313, with interest at the
bank's index rate plus 2%; secured by substantially all of the Company's assets;
note matured in June 1997. Note payable to contractor of $900,000, with interest
at 12%; due the later of January 31, 1997 or 30 days after completion of the
brewery; secured by common stock and a second deed of trust on the brewery and
subordinated to bank debt. Note payable to certain individuals of $260,044, due
in monthly payments of $2,380, including interest at 9%; matured June 1997 with
a verbal extension until October 1997, and a balloon payment; secured by real
property and subordinated to bank debt.
Note 5 Renegotiation of Obligation under Capital Lease
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 6 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. In August 1997,
the offering was terminated after having sold 19,326 shares for $164,271. All
stock transactions occurred prior to June 30, 1997. As of June 30, 1997, the
Company had incurred $305,277 of offering costs related to this offering. Of
that amount, $164,271 was offset against the stock sale proceeds in
Stockholders' Equity and the balance of $141,006 was expensed in the quarter
ended June 30, 1997.
- 5 -
<PAGE>
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.
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 within the meaning of the Private Securities Litigation Reform Act
of 1995. 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, successful completion of the planned alliance with The UB Group,
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 second quarter of 1997 was highlighted by the commencement of brewing
operations at the new brewery in Ukiah. Brewing commenced in mid-quarter,
resulting in overhead allocations that were unusually high in comparison to
production.
Results of operations include a one-time $141,000 write off of expenses
associated with the public offering commenced in February 1997. The Company had
initially suspended that offering in light of the tentative alliance with The UB
Group announced May 2, 1997. Although no definitive agreement has been reached,
discussions are continuing. The UB Group has paid the Company $614,000 in
refundable deposits on a proposed stock investment in the Company.
Increased net sales for the six-month period (up 19.8%) were achieved in
significant part through increased marketing efforts which were begun
mid-quarter a year ago. The limit on the Company's brewing capacity which was
relieved by commencement of operations in Ukiah, the high level of marketing
expense in anticipation of increased capacity, the high overhead charges
associated with mid-quarter commencement of operations, and the one-time
$141,000 write off contributed to a $380,100 loss for the six month period.
As of August 11, 1997, the new brewery was operating at a rate of approximately
40,000 bbl. per year, more than double the maximum capacity of the old Hopland
facility. The bottling line from the Hopland facility was moved in mid July
1997. The Company is presently relocating seven of its eleven smaller fermenting
tanks from its Hopland facility to Ukiah for production of the Company's
seasonal ales, which are brewed in smaller quantities than Red Tail Ale(R) and
Blue Heron(R) Pale Ale. This will permit the Company to further expand
production to a 60,000 bbl. per year rate, as required by demand, while still
producing its seasonal ales.
- 6 -
<PAGE>
Results of Operations
Six Months Ending June 30, 1997 Compared to Six Months Ending June 30, 1996. The
following discussion sets forth information for the six-month periods ending
June 30, 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.
<TABLE>
The following table sets forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See Financial Statements
elsewhere in this Report, for the periods indicated:
<CAPTION>
Six Months Ended June 30,
-----------------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Statements of Income Data:
Sales........................................... 105.42% 103.86%
Excise taxes.................................... 5.42 3.86
------ ------
Net sales....................................... 100.00 100.00
Costs of sales.................................. 60.81 47.30
------ ------
Gross profit.................................... 39.19 52.70
Retail operating expense........................ 15.15 20.23
Marketing expense............................... 19.54 15.91
General and administrative expense.............. 17.67 18.45
------ ------
Total operating expenses........................ 52.36 54.59
------ ------
Loss from operations............................ (13.17) (1.89)
Other expense................................... (7.31) (1.99)
------ ------
Loss before income taxes........................ (20.47) (3.88)
Benefit from income taxes....................... (5.12) (1.12)
------ ------
Net loss........................................ (15.36) (2.75)
====== ======
</TABLE>
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 251,000 $ 21,200
Working capital................................. (5,456,000) (2,125,300)
Property and equipment.......................... 10,985,100 6,947,700
Deposits and other assets....................... 115,800 98,400
Total assets.................................... 12,325,500 8,214,900
Long-term debt.................................. 1,665,200 550,700
Total liabilities............................... 8,364,000 3,841,400
Shareholder's equity............................ 3,961,600 4,373,500
</TABLE>
Net Sales. Net sales for the first six months of 1997 were $2,205,000 compared
to $1,840,300 for the first six months of 1996. Management attributes the growth
in sales to the implementation of new marketing
- 7 -
<PAGE>
strategies, including new point of sale materials and additional field sales
representatives, beginning in the second quarter of 1996. Wholesale beer
shipments increased by 51.5% in the first six months of 1997 compared to the
same period in 1996. Increases attributable to additional unit sales were offset
by a wholesale price reductions implemented in September 1996. Management
attributes approximately 70% of the sales increase to increased sales to
existing distributors and geographic expansion begun in the second half of 1996
and the remaining 30% to sales of draft beer from the new brewery, which began
for the first time in May 1997. Retail sales at the Hopland Brewery brewpub and
merchandise store were up 10.4% for the first six months of 1997 compared to
1996. Management attributes the increase to merchandise sales resulting from
tourist traffic generated by the Company's marketing efforts.
Cost of goods sold. Cost of goods sold as a percentage of net sales increased
13.5 percentage points from the first six months of 1996 to 60.8% in the same
period in 1997. Management attributes the increase to higher fixed overhead
costs associated with the new Ukiah brewing facility which started production in
May 1997 at less than full capacity during this ramp-up period. Management
expects cost of goods sold to decrease as a percentage of sales to the extent
that production at the new brewery increases.
Gross profit. Gross profit decreased 10.9% from the first six months of 1996 to
$864,228 in the same period in 1997. As a percentage of net sales, gross profit
decreased 13.5 percentage points from the first six months of 1996 to 39.2% in
the same period in 1997. The decrease in gross profit as percentage of net sales
is attributable to the increase in cost of goods sold.
Operating expenses. Operating expenses were $1,154,600, representing an increase
of 14.9% from the first six months of 1996. Operating expenses consists of
retail operating expense, marketing and distribution, and general and
administrative expense. Retail operating expenses were $334,100, representing a
decrease of $38,200, or 10.3%, from the first six months of 1996. Supply and
repairs costs decreased $18,000, labor costs decreased $15,000, and net other
expenses decreased $5,200.
Marketing and distribution expenses were $430,864, representing an increase of
$138,000, or 47.1%, from the first six months of 1996. Promotional/advertising
costs (including point of sales and packaging/label development costs) increased
by $79,400, marketing and sales labor increased by $44,900, travel and lodging
expenses (incurred in supporting new geographic markets) increased by $17,700,
net distribution expenses decreased by $9,300, and net miscellaneous expenses
increased by $5,300. The decrease in distribution expenses reflects the
non-recurrence of a $37,700 bad debt incurred in 1996 offset primarily by
establishment of a $30,000 reserve in connection with the termination of a
distributor.
General and administrative expense was $390,000, representing an increase of
$50,100, or 14.7%, from the first six months of 1996. Professional fees
increased $25,900, labor costs increased $12,100, taxes and insurance costs
associated with the new Ukiah brewery increased $19,400, costs associated with
being a public company decreased $10,000, and net miscellaneous expenses
increased by $2,700.
Other income (expense). Other expense was $161,100, representing an increase of
$124,500 in expense in the first six months 1997 compared to the same period for
1996. This was primarily as a result of writing off $141,000 in costs of the
direct public offering (net of proceeds raised) and additional net interest
expense of $35,300, offset by the non-recurrence of a $38,300 write off of costs
associated with a proposed alliance in 1996 and $15,500 in net additional
miscellaneous income.
- 8 -
<PAGE>
Net loss. Increased overhead as the Company began production at the new brewery
in mid-quarter, increased marketing and distribution expense as the Company
continued to implement the marketing program began mid-quarter a year ago, and
the net effect of certain one time occurrences, offset by a tax benefit of
$112,800, produced a net loss in the six months ended June 30, 1997 which was
$288,000 higher than in the comparable 1996 six month period.
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 79.4% of the Company's first six months 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 20.6% of the Company's sales for the first six months of
1997.
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. The bottling
line from the Hopland facility was moved in mid July 1997 and seven of the
eleven 70 - 120 bbl. fermenting tanks are being moved 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. However, the
Company does not expect seasonality to affect it if and for as long as the
Company is selling its full capacity.
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
$10.1 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 $1.9 million is expected to be
funded through the proposed alliance with The UB Group. See "Alliance with The
UB Group" 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. As of June 30, 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 matured on July 1, 1997. The
bank has informed the Company that it is currently in the process of extending
the construction loan. There is no assurance that the loan will be extended or
that the bank will not seek to enforce its deed of trust. Such actions would
have a material adverse impact on the Company's business, financial condition,
and results of operations.
The bank originally issued a written commitment, which has now expired, to
convert the construction loan to a 15 year term loan upon successful completion
of the new brewery, subject to certain conditions. The commitment provided that
upon conversion, the loan would 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
- 9 -
<PAGE>
of the loan at 3% above the initial fully indexed rate at the beginning of the
remaining term. The minimum annual interest rate was to be 8%. The loan was to
be amortized over 25 years with a balloon payment upon maturity in 15 years. The
lender's commitment letter stated that the lender would 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. Although the written commitment has
lapsed, the Company and the bank are discussing a new commitment to convert the
loan to permanent financing in connection with the consummation of the alliance
with The UB Group. There is no assurance that the bank will continue to be
willing to convert the construction loan to permanent financing. Failure to find
a lender to refinance the construction loan would have a material adverse impact
on the Company's business, financial condition, and results of operations.
Equipment Lease. FINOVA Capital Corporation has leased 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. 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 $39,000 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 June 30, 1997 of approximately $260,000 at 9% annual
interest payable in monthly installments of principal and interest of $2,380
with the balance due at maturity in October 1997 per a verbal agreement with the
spokesman for the lending group.
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. WestAmerica Bank
had provided the Company with commitment letter 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. The commitment letter has now expired,
but the Company is discussing renewal of the loan along the terms of the
commitment letter in connection with the consummation of the alliance with The
UB Group. There is no assurance that the Company will enter into an alliance
with The UB Group. 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.
Failure to repay the loan would have a material adverse effect on the Company's
business, financial condition, and results of operations.
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 June 30, 1997, $900,000 had been deferred under
this arrangement and approximately $794,000 in additional accrued construction
costs are due to BDM. No written modifications have been made to the deferral
arrangement to address the current circumstances. The deferral arrangement is
secured by a
- 10 -
<PAGE>
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 the 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 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 August 11, 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. See "Alliance with The UB Group" below. There is no assurance that
the Company will complete an alliance with The UB Group. Failure to repay BDM
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
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 $1.9
million in remaining cost of the new brewery will be provided through the
proposed alliance with The UB Group. See "Alliance with The UB Group" below.
There is no assurance that the Company will complete an alliance with The UB
Group. Failure to complete the brewery will hamper the administration of the
Company's business.
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. Beginning approximately with the second quarter of 1997,
proceeds from operations have not been able to provide sufficient working
capital for day to day operations as the Company expands. Beginning in May 1997,
working capital has been augmented by $614,000 in refundable deposits provided
by The UB Group. See "Alliance with The UB Group" below. The Company presently
anticipates that the alliance with The UB Group will provide the working capital
required to continue to expand. There can be no assurance that such an alliance
will be formed. Failure to form the alliance or otherwise arrange for additional
working capital would have a material adverse effect on the Company's business,
financial condition, and results of operations. The Company's ratio of current
assets to current liabilities on June 30, 1997 was 0.18 to 1.0 and its ratio of
assets to liabilities was 1.47 to 1.0.
New Brewery. See "-- Financing the New Brewery" above.
- 11 -
<PAGE>
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. The Company
presently anticipates that the necessary working capital will be provided
through an alliance with The UB Group. See "Alliance with The UB Group" below.
There can be no assurance that such an alliance will be formed. Failure to form
the alliance or otherwise arrange for additional working capital would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
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 June 30, 1997, the Company had received and accepted subscriptions
for 19,326 shares ($164,271). The Company initially suspended the offering in
May 1997 in light of its discussions with The UB Group and has now terminated
the offering. See "Alliance with The UB Group" below.
Alliance with The UB Group. 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. In June and July 1997, The
UB Group advanced additional refundable deposits of $250,000 and $114,000
respectively. The UB Group is a global beer and spirits group of companies
operating in 20 countries on four continents. 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.
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)
- 12 -
<PAGE>
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.2)
19.1 Master Lease Schedule with Finova Capital Corporation
(replaces Exhibit 10.38 originally filed with the Company's
Registration Statement dated February 6, 1997, as amended,
previously filed with the Commission, Registration No.
333-15673)
19.2 Letter Agreement with The UB Group
27 Financial Data Schedule
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 August 12, 1997 /s/ H. Michael Laybourn
---------------------------- -----------------------------------------
H. Michael Laybourn, President
Date August 12, 1997 /s/ Norman H. Franks
---------------------------- -----------------------------------------
Norman H. Franks, Chief Financial Officer
- 13 -
Exhibit 19.1
FINOVA Capital Corporation 95 N. Route 17 South P.O. Box 907 Paramus,
New Jersey 07653
Telephone (201) 712-3300
MASTER LEASE SCHEDULE
NO. 5754301 TO EQUIPMENT LEASE NO. 5754300 (THE "LEASE")
EQUIPMENT LEASED:
See Schedule "A" attached hereto and made a part hereof.
LOCATION OF EQUIPMENT: Airport Park Drive, Ukiah, CA 95482
TERM OF SCHEDULE: 84 MONTHS
RENTAL PAYMENTS: $25,265.33
RENTAL PAYMENT FREQUENCY: X MONTHLY
SUPPLIER: Enerfab, Inc. 4955 Spring Grove Avenue, Cincinnati, OH 45232
ADVANCE RENTALS: $50,530.66 PAYABLE AT THE TIME OF SIGNING OF THIS
SCHEDULE TO BE APPLIED TO THE FIRST AND LAST ONE RENTAL PAYMENTS.
ADDITIONAL TERMS AND CONDITIONS
1. LEASE OF EQUIPMENT. Lessor hereby agrees to lease to Lessee, and Lessee
hereby agrees to lease and rent from Lessor the Equipment listed above, or on
any Schedule attached hereto, for the term and the rental payments provided
herein, all subject to the terms and conditions of the Lease.
2. OPTION TO PURCHASE. Provided Lessee is not in default hereunder or under any
other lease or agreement with Lessor, Lessee shall have the right, at the
expiration of the Term of this Schedule (the "Initial Term") or any extended
term hereof (the "Extended Term") upon not less than 120 days' prior written
notice to Lessor, to purchase the Equipment leased hereunder in whole and not in
part, on an as-is, where-is basis, for its then fair market value. For the
purposes of determining the fair market value of the Equipment it shall be
assumed that the Equipment will be used for its best intended purpose, is fully
assembled, in good operating condition and fully installed and operational on
the premises where the Equipment will be used. In the event Lessor and Lessee
cannot agree on a fair market value for the Equipment, an independent appraiser,
acceptable to both parties (or failing such agreement by an appraiser designated
by the American Arbitration Association in New York, NY), shall be selected to
determine the fair market value on the equipment provided herein. The cost of
such appraisal shall be borne by Lessee. The purchase price for the Equipment
shall be payable upon the expiration of the Initial Term or Extended Term of
this Schedule as the case may be. Lessee shall also reimburse Lessor for its
administrative costs and out-of-pocket expenses incurred in transferring clear
title to the Equipment to Lessee.
3. TAX INDEMNITY. With respect to each item of Equipment leased hereunder,
Lessee agrees that Lessor shall be entitled to such deductions and other
benefits as are provided to an owner of personal property by the Internal
Revenue Code of 1986 (as defined in Section 2 of the Tax Reform Act of 1986), as
amended or superseded from time to time (hereinafter the "Code"), including
without limitation depreciation deductions based upon the Accelerated Cost
Recovery System all at the maximum federal income tax rates applicable to
corporations in effect on the Commencement Date (hereinafter "Tax Benefits"). If
(i) Lessor shall lose, shall be delayed in
<PAGE>
claiming, shall not have a right to claim, shall be required to recapture, or
shall not be allowed all or any portion of any Tax Benefits, under any
circumstances, at any time, and for any reason other than as a result of acts or
omissions of Lessor, or (ii) there shall be a change in the federal income tax
rates applicable to corporations, or (iii) any of the Tax Benefits shall be
deemed to be attributable to foreign sources or (iv) Lessor is required to
include any other amounts arising from this Lease or Schedule in its gross
income other than Rental Payments in the amounts and at the times specified in
this Schedule, then upon Lessor's demand, Lessee shall pay Lessor either (x) a
lump sum amount which shall maintain the net economic after-tax yield, cash-flow
and rate of return Lessor anticipated receiving based on the tax assumptions
utilized by Lessor in calculating the rent payable hereunder ("Lessor's Yield")
or (y) such additional rent for the balance of the term of this Schedule as will
permit Lessor to maintain Lessor's Yield. For the purposes of this
indemnification, the term "Lessor" shall mean and include the affiliated group
of corporations within the meaning of Section 1504 of the Code, of which Lessor
is a member.
4. ADDITIONAL TERMS WITH RESPECT TO THE CARE AND USE OF THE EQUIPMENT. In
addition to Lessee's obligations under Paragraph 7 of the Lease, Lessee shall
(i) lubricate the Equipment on a basis that conforms to the maintenance manual
and/or lubrication schedule recommended by the manufacturer of the Equipment,
and (ii) purchase replacement parts only from sources approved by the
manufacturer. Copies of all purchase orders for such replacement parts are to be
retained in Lessee's file relating to the Equipment.
5. ADDITIONAL TERMS WITH RESPECT TO THE CONDITIONS OF REDELIVERY. In addition to
Lessee's obligations under Paragraph 8 of the Lease, Lessee shall (i)
dismantle and handle the Equipment in accordance with the manufacturer's
specifications or normal industry accepted practices for new equipment. Any
special transportation devices, such as metal skids, lifting slings,
brackets, etc., which were with the Equipment when it was delivered or
equivalent devices must be used; (ii) block all sliding members, secure all
swinging doors, pendants and other swinging components, wrap, box, band and
label all components and documents in an appropriate manner to facilitate the
efficient reinstallation of the components; (iii) remove all process fluids
from the Equipment and dispose of the same in accordance with prevailing
waste disposal laws and regulations; (iv) clean and dry sumps and tanks; (v)
not ship any "Hazardous Waste" materials with the equipment; (vi) fill all
internal fluids such as lube oil and hydraulic oil to operating levels,
secure filler caps and seal disconnected hoses; (vii) wire together all lock
keys and secure the same to a major external component of the equipment;
(viii) cause the Equipment to be complete, fully functional with no missing
components or attachments, rust free with all boots, guards and seals clean
and with all batteries for control memories fully charged.
Lessor shall have the right to attempt to resell the Equipment at the
Location for a period of 120 days from the expiration of the Term of the
Schedule or any extensions thereof. During this period the Equipment must
remain operational and Lessee must provide adequate electrical power,
lighting, heat, water and compressed air, necessary to permit Lessor to
demonstrate the Equipment to any potential buyer. If an auction is necessary
to dispose of the Equipment, Lessor shall be permitted to auction the
Equipment at the Location.
- 2 -
<PAGE>
6. BASIS OF INDEXING. If on the Commencement Date, the highest yield on seven
(7) year Treasury Notes, as published in The Wall Street Journal, with a
maturity date on or closest to the maturity date of this Schedule (the "Index"),
exceeds 6.23% (the "Yield"), the Monthly Rental Payment provided herein shall
automatically be increased for the full term to reflect such increase in the
Yield. As soon as practicable thereafter, Lessor shall provide Lessee with
written notice of any increase in the Monthly Rental Payment. Lessor's
calculations shall be conclusive absent manifest error.
7. PUBLICITY. FINOVA is hereby authorized to issue appropriate press releases
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
8. This Master Lease Schedule cancels and supersedes previous Master Lease
Schedule dated September 23, 1996.
LESSOR: FINOVA CAPITAL CORPORATION
BY:
PRINTED NAME:
TITLE:
ADDRESS: 95 N. ROUTE 17 SOUTH, P.O. BOX 907 PARAMUS, NEW JERSEY 07653
DATE ACCEPTED:
LESSEE: MENDOCINO BREWING COMPANY, INC.
BY: /s/ H. Michael Laybourn
PRINTED NAME: H. Michael Laybourn
TITLE: CEO
ADDRESS: 13551 SOUTH HIGHWAY 101, HOPLAND, CALIFORNIA 95449
DATED:
- 3 -
<PAGE>
Schedule "A" to Master Lease Schedule No. 5754300 dated ____________, 1996 to
Equipment Lease No. 5754301 dated ___________, 1996 between FINOVA Capital
Corporation as Lessor and Mendocino Brewing Company, Inc. as Lessee.
Equipment Location: Airport Park Drive Ukiah, CA 95482
Supplier: Enerfab, Inc. 4955 Spring Grove Avenue Cincinnati, OH 45232
(1)Grains Handling Silos, Spent Grain Silo and Malt handling equipment
Pale malt silos Spent grain silo Pale malt silo to malt mill conveyor Bulk bag
unloading system Volumetric feeder Floveyor (bag station to mill) Dust collector
Malt mill hoper transition (top) Malt mill funnel (bottom) Malt mill support
structure Blower assembly blower Blower assembly malt lines Blower assembly
venturi Weigh hopper scale & outlet valve Weigh hopper bin vent filter Weigh
hopper rotary valve Weigh hopper to mash mixer conveyor Knife gate valve (1)
Malt Mill (1) Ponndorf Conveyor System (1) Steam boiler (1) Refrigeration system
(1) Water chiller (1) Wort cooler (1) Beer warmer (1) Air compressor (1) Beer
filter (1) Pumps (1) Control systems
Schedule "A" to Master Lease Schedule No. 5754300 dated ___________, 1996 to
Equipment Lease No. 5754301 dated ___________, 1996 between FINOVA Capital
Corporation as Lessor and Mendocino Brewing Company, Inc. as Lessee.
(10) Mash Tun
(1) Lauter Tun
(1) Brewkettle
(1) Hop Jack Vessel
(1) Hot Wort Tank
(1) Hot Water Tank
(4) CIP Tank Systems
(1) Chilled Water Tank
(10) 200 bbl Fermenter Tanks & Structural Support Grid
(2) Yeast Tanks
(1) Schenk Combi Filter System
(1) 200 bbl Bright beer tank
X________
INITIAL
- 4 -
Exhibit 19.2
July 29, 1997
Michael Laybourn
Norman Franks
Mendocino Brewing Company, Inc.
13351 South Highway 101
Hopland, California 95449
This letter confirms our agreement as follows. The UB Group ("UB") will
today advance an additional $114,000 to Mendocino Brewing Company, Inc.
("Mendocino"). This advance, together with the $250,000 advance on June 27,
1997, shall be deemed to be an additional "refundable deposit" and shall,
together with the original $250,000 deposit, be entitled to the benefits of and
subject to the terms and conditions relating to the "refundable deposit" and the
"deposit" under the Letter of Intent, the Refundable Deposit Agreement, and the
Laybourn Pledge Agreement and the Franks Pledge Agreement (collectively, the
"Agreements").
As previously agreed, the No-Shop clause in the Letter of Intent shall
be extended through August 31, 1997. The Agreements remain in full force and
effect.
Please indicate your agreement by signing below.
Very truly yours,
/s/ O'Neil Nalavadi
---------------------------
for the UB Group
Agreed to this 29th of July, 1997
MENDOCINO BREWING COMPANY, INC.
/s/ Michael Laybourn
- -----------------------------
Michael Laybourn
Chairman of the Board
/s/ Michael Laybourn
- -----------------------------
Michael Laybourn
/s/ Norman Franks
- -----------------------------
Norman Franks
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The unaudited financial statements of Mendocino Brewing Company, Inc. as of
June 30, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 251,000
<SECURITIES> 0
<RECEIVABLES> 417,900
<ALLOWANCES> 0
<INVENTORY> 303,100
<CURRENT-ASSETS> 1,224,600
<PP&E> 11,624,200
<DEPRECIATION> 639,100
<TOTAL-ASSETS> 12,325,500
<CURRENT-LIABILITIES> 6,680,650
<BONDS> 0
<COMMON> 3,869,600
0
227,600
<OTHER-SE> (135,600)
<TOTAL-LIABILITY-AND-EQUITY> 12,325,500
<SALES> 2,205,100
<TOTAL-REVENUES> 2,234,500
<CGS> 1,340,800
<TOTAL-COSTS> 1,460,251
<OTHER-EXPENSES> (161,100)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (26,500)
<INCOME-PRETAX> (451,500)
<INCOME-TAX> (112,800)
<INCOME-CONTINUING> (338,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (338,700)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> 0
</TABLE>
