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.)
<PAGE>
PART I
<TABLE>
Item 1. Financial Statements.
<CAPTION>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
March 31, 1997
(Unaudited)
ASSETS
<S> <C>
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
</TABLE>
-1-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1996
---- ----
<S> <C> <C>
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.
</TABLE>
-2-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C>
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
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
-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 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-
<PAGE>
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-
<PAGE>
<TABLE>
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:
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------
1997 1996
---------------- ---------------
Statements of Income Data:
<S> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
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
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
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
<PAGE>
(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
<PAGE>
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
<PAGE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The unaudited financial statements of Mendocino Brewing Company, Inc. as of
March 31, 1997
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 290,500
<SECURITIES> 0
<RECEIVABLES> 386,800
<ALLOWANCES> 0
<INVENTORY> 261,400
<CURRENT-ASSETS> 1,054,100
<PP&E> 11,223,816
<DEPRECIATION> 549,688
<TOTAL-ASSETS> 12,351,700
<CURRENT-LIABILITIES> 6,032,600
<BONDS> 0
<COMMON> 4,005,500
0
227,600
<OTHER-SE> 79,800
<TOTAL-LIABILITY-AND-EQUITY> 12,351,700
<SALES> 1,004,600
<TOTAL-REVENUES> 1,051,500
<CGS> 576,200
<TOTAL-COSTS> 623,100
<OTHER-EXPENSES> (5,300)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,000)
<INCOME-PRETAX> (122,400)
<INCOME-TAX> (800)
<INCOME-CONTINUING> (123,200)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (123,200)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
