600,000 SHARES
[GRAPHIC OMITTED]
MENDOCINO BREWING COMPANY, INC.
COMMON STOCK
----------------------
All of the 600,000 shares of no par value Common Stock (the "Shares")
offered by this Prospectus are being sold directly by Mendocino Brewing Company,
Inc. ("Mendocino Brewing" or the "Company"). The public offering price has been
determined by the Company based on the trading history of the Common Stock on
the Pacific Stock Exchange (the "PSE") and certain other factors that the
Company deems relevant. See "Plan of Distribution Determination of Offering
Price." The closing price of the Company's common stock on the PSE on February
6, 1997 was $6.25. The minimum purchase is 50 Shares ($425.00).
This offering is being made on a "best-efforts" basis. There is no minimum
aggregate number of shares that must be purchased to allow distribution of any
shares. Properly completed subscriptions will be accepted on a first come, first
served basis, except that record holders of the Company's Common Stock as of
October 25, 1996 (the "Record Date") will be given priority to purchase the
Shares provided that the Company receives their properly completed subscriptions
within 15 days after the effective date of this Prospectus. The offering shall
terminate upon the earlier of (a) the date on which all of the Shares have been
sold; (b) September 30, 1997, unless such date is extended by the Company; or
(c) the date on which the Company terminates the offering. See "Plan of
Distribution." The Company reserves the right to reject any subscription in full
or in part.
The Shares offered by this Prospectus involve a high degree of risk. See
"Risk Factors" beginning on page 5 of this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $8.50 None $8.50
- ----------------------------------------------------------------------------------------------------------------------
Minimum Offering N/A None N/A
- ----------------------------------------------------------------------------------------------------------------------
Minimum Subscription: 50 Shares $425.00 None $425.00
- ----------------------------------------------------------------------------------------------------------------------
Maximum Offering: 600,000 Shares $5,100,000 None $5,100,000
======================================================================================================================
<FN>
(1) The Shares are being sold directly by the Company through a designated
executive officer who is registered as a sales representative, where
required, and shall not receive any commission. See "Plan of Distribution."
(2) Before deducting estimated expenses of $400,000 payable by the Company,
including registration fees, transfer agent fees, printing and engraving,
copying, postage, and other offering costs, in addition to legal,
accounting, and consultant fees.
</FN>
</TABLE>
----------------------
The date of this Prospectus is February 6, 1997
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus. If given or made, any such information and representations must
not be relied upon as having been authorized by the Company. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy
securities to any person in any jurisdiction in which such offer or solicitation
is unlawful. Neither the delivery of this Prospectus nor any sale made after the
date of this Prospectus shall, under any circumstances, create any implication
that the information contained in this Prospectus is correct as of any date
after the date of this Prospectus.
Mendocino Brewing's principal executive offices are located at 13351 South
Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's
telephone numbers are 1-800-733-3871 and 1-707-744-1015.
The Common Stock of Mendocino Brewing Company, Inc. is listed on the
Pacific Stock Exchange under the symbol MBR. Reports and other information
concerning the Company can be inspected at such exchange.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page
---- ----
<S> <C> <C> <C>
Prospectus Summary................................... 3 Management.................................... 31
Risk Factors......................................... 5 Certain Transactions.......................... 33
Priority of Existing Stockholders.................... 10 Principal Stockholders........................ 34
Use of Proceeds...................................... 11 Description of Capital Stock.................. 35
Price Range of Common Stock and Dividend Policy...... 13 Shares Eligible for Future Resale............. 36
Capitalization....................................... 14 Plan of Distribution.......................... 37
Selected Financial Data.............................. 15 Legal Matters................................. 38
Management's Discussion & Analysis of Experts....................................... 38
Financial Condition and Results of Operations...... 16 Additional Information........................ 38
Business............................................. 22 Index to Financial Statements................. 39
</TABLE>
------------------
Until March 3, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a Prospectus. This is in addition to the obligation of dealers to
deliver a Prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The Company will provide to each person who receives a prospectus, upon
written or oral request of such person, a copy of any of the information that is
incorporated by reference in the this Prospectus (not including exhibits to the
information that is incorporated by reference unless the exhibits are themselves
specifically incorporated by reference), if there is any.
www.MENDOBREW.com
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Financial Statements and the
Notes thereto appearing elsewhere in this Prospectus.
Mendocino Brewing Company, Inc. brews Red Tail Ale, Blue Heron Pale Ale,
Black Hawk Stout, and three other ales, one stout, and one porter for the
domestic craft beer market. A "craft beer" is a full-flavored beer brewed in the
traditional style. Mendocino Brewing is one of the first modern craft brewers,
having opened the first brewpub in California and the second in the United
States since the repeal of Prohibition, and has been recognized for its
innovations in the brewpub concept, its craft brew style, its distinctive
labels, and its role in industry associations. Mendocino Brewing's objective is
to transform itself from the country's leading microbrewery (based on annual
sales from 1990 through 1995) to a major national craft brewer offering among
the highest quality craft beers available anywhere in America. See "Business."
Mendocino Brewing competes in the domestic craft beer segment of the US
beer market. The domestic craft beer segment has grown at a rate of
approximately 40% per year for several years while overall domestic beer market
sales have been relatively flat. Many industry analysts believe that the craft
beer segment will grow from 1.9% of the total domestic beer market in 1995 to 5%
- - 6% by the year 2000.
In 1994 and 1995 Mendocino Brewing raised net proceeds of $3.3 million to
finance construction of a new brewery with an annual capacity of 50,000 bbl.,
expandable to 130,000 bbl. At that time, the Company intended to finance future
growth primarily through operations and debt financing. Management believes that
following the successful completion of its initial public offering, the
continued growth in the domestic craft beer segment gave rise to a qualitative
shift in the public's awareness of craft beers, and that this shift now gives
the Company an opportunity to enter new markets at a time when many consumers
are discovering craft brews for the first time. In completing the plans for the
new brewery, Management also concluded that it could position itself better in
the market and realize certain cost efficiencies and overall cost reductions by
designing a plant with an initial capacity of 60,000 bbl. per year (20% greater
than originally planned) and an ultimate capacity of 200,000 bbl. per year (54%
greater than originally planned).
Accordingly, Mendocino Brewing changed the configuration of the new brewery
and modified its growth and marketing plans to accelerate introduction of
additional bottled brands and draft beer into existing markets, penetrate new
regional markets, and greatly increase total availability of its products.
Mendocino Brewing intends to continue to compete primarily on the basis of
product quality and image. The Company's marketing plan emphasizes introducing
Blue Heron Pale Ale and Black Hawk Stout in 12 oz. six packs using the same high
quality graphics and packaging as has contributed to the success of Red Tail
Ale, and providing these three brews in draft form.
Management expects the Company to begin brewing at its new brewery in
Ukiah, California (110 miles north of San Francisco) in March or April 1997.
Proceeds from this offering will be used to provide working capital through
addition of cash reserves and repayment of certain short term indebtedness,
complete the build-out of the brewery building, and finance further expansion to
up to 75,000 bbl. per year, depending on the mix of products brewed. See "Use of
Proceeds."
Mendocino Brewing operates a retail brewpub and merchandise store under the
name of the Hopland Brewery. Management does not expect the Company's expansion
plans to materially increase or decrease the results of operations of the
brewpub. See "Business - The Hopland Brewery Brewpub and Merchandise Store."
Mendocino Brewing was founded in March 1983 as a California limited
partnership (the "Partnership"). On January 1, 1994, the business incorporated
by transferring all of the Partnership's assets, including its name, to a newly
formed California corporation in exchange for all of the Common and Preferred
Stock of the corporation. The Partnership distributed these shares to its
partners on January 3, 1994. As used hereafter, references to the "Company" and
"Mendocino Brewing" include the business operations of the Partnership before
its incorporation.
Mendocino Brewing's principal executive offices are located at 13351 South
Highway 101, P.O. Box 400, Hopland, California 95449-0400. The Company's
telephone numbers are (800) 733-3871 and (707) 744-1015. The Company's e-mail
address is [email protected].
-3-
<PAGE>
The Offering
Shareholders of record as of October 25, 1996 have the first right to
purchase Shares pursuant to this offering on a first come, first served basis.
The minimum purchase is 50 Shares ($425.00). Any Shares that remain unsold 15
days after the effective date of this Prospectus will be offered to the general
public and sold in the order in which fully completed subscriptions are received
at the Company. For more information concerning subscription procedures, see
"Plan of Distribution -- Subscription Procedure."
<TABLE>
<S> <C>
Common Stock offered................................... 600,000 Shares
Common Stock outstanding before the offering........... 2,322,222 Shares(1)
Use of Proceeds........................................ To provide working capital through addition of cash
reserves and repayment of certain short term
indebtedness, complete the build-out of the brewery
building, and finance further expansion to up to 75,000
bbl. per year, depending on the mix of products brewed.
See "Use of Proceeds."
Pacific Stock Exchange Symbol.......................... MBR
</TABLE>
<TABLE>
Summary Financial and Operating Data
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Statements of Income Data: (unaudited)
Sales.............................. $ 3,523,000 $ 3,735,100 $ 2,665,600 $ 3,022,400
Gross profit....................... 1,524,700 1,720,000 1,181,900 1,490,400
Income (loss) from operations...... 200,000 182,700 34,400 (57,600)
Net income (loss).................. $ 153,300 $ 173,700 $ 83,800 $ (71,100)
=========== =========== =========== ============
Earnings (loss) per share.......... $ .08 $ .08 $ .04 $ (.03)
=========== =========== =========== ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,302,024 2,322,222
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996 (unaudited)
------------------------------------------
Actual Pro Forma As Adjusted(2)
----------- --------------------------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)....................... $(3,240,200) $ 1,702,800
Total assets.................................... 9,452,800 15,229,600
Long term debt, including current portion....... 982,500 5,063,800
Shareholders' equity............................ 4,353,100 9,053,100
<FN>
- --------------
(1) Does not include 300,000 shares issued to the general contractor for the
new brewery as security for an obligation. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -Financing the
New Brewery - Vendor Financing."
(2) As adjusted to give effect to the sale of 600,000 Shares (the maximum
number of Shares offered by this Prospectus) and the application of the
estimated net proceeds therefrom. Also assumes that the Company's $2.7
million construction loan has been converted to long-term debt upon
completion of the new brewery. See "Use of Proceeds," "Capitalization," and
"Management's Discussion and Analysis of Financial Conditions and Results
of Operations - Financing the New Brewery - Construction Financing."
</FN>
</TABLE>
-4-
<PAGE>
RISK FACTORS
An investment in the Shares offered by this Prospectus involves a high
degree of risk. Prospective investors should consider carefully the following
risk factors, in addition to other information concerning Mendocino Brewing and
its business contained in this Prospectus, before purchasing Shares.
Recent Losses
The Company has incurred and will continue to incur expenses in
implementing its expansion plan in anticipation of completing the new brewery.
As a consequence, although the Company has experienced increases in sales and
gross profits and decreases of cost of goods sold as a percentage of net sales
during the first three quarters of 1996, the Company has also experienced
historically high marketing, general and administrative, and one-time expenses
and decreased interest earnings which resulted or will result in a loss in the
first, third, and fourth quarters of 1996 and for 1996 as a whole. Mendocino
Brewing experienced a net loss of $112,800 in the first quarter of 1996, a net
profit of $62,200 in the second quarter, and a net loss of $20,500 in the third
quarter for an aggregate net loss of $71,100 for the first nine months of 1966.
Management anticipates that the increase in sales and gross profit and the
decrease in cost of goods sold as a percentage of net sales for the fourth
quarter of 1996, if any, will be less than in the previous three quarters, as
the Company will have been operating at the same capacity as in the fourth
quarter of 1995 but with increased marketing expenses since the Company's new
marketing plan had not been implemented in 1995. See "Management's Discussion
and Analysis of Financial Conditions and Results of Operations - Results of
Operations."
Possible Losses During Initial Expansion
Management anticipates that the Company will continue to experience high
levels of marketing expense and other expenses associated with growth that will
continue until the Company achieves revenues greater than the expenses
associated with the new brewery and new marketing plan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Operations." The levels of these expenses will be determined by,
among other things, the success of the Company's marketing plan, the mix of
products brewed at the new brewery, and factors outside of Management's
reasonable control, including the risks identified in this Prospectus. Such
expenses may result in net losses during the period of initial expansion. Such
net losses may erode the Company's working capital and may have a material
adverse impact the business, financial condition, and results of operation of
the Company.
Lack of Liquidity During Offering
The Shares offered by this Prospectus are offered on a continuing basis.
See "Plan of Distribution Subscription Procedure." Although Mendocino Brewing's
Common Stock is publicly traded on the Pacific Stock Exchange under the symbol
MBR, until the offering is terminated, investors who wish to sell Shares will
have to compete with the Company for buyers. It is unlikely that investors will
be able to sell Shares on the open market during the offering for more than the
price offered by this Prospectus. See "Plan of Distribution Determination of the
Offering Price." The Company can give no assurance that the market price of the
Common Stock will be at or above the public offering price after the offering.
No Minimum; No Assurance of Sufficient Funding
The offering of the Shares is not contingent upon the sale of any specified
minimum number of Shares, nor is there any minimum number of shares that must be
sold before shares will be distributed. See "Plan of Distribution." If the net
proceeds of this offering, together with existing debt financing and funds
generated by operations, are not sufficient to fund Mendocino Brewing's
expansion plans, the Company may need to raise additional funds from public or
private sources or enter into a strategic alliance or joint venture. Issuance of
additional equity would likely dilute the investments of existing shareholders.
Additional borrowing would increase interest expense and debt service
requirements. The amount of additional financing the Company might require would
depend in part upon the success of this offering and in part on the Company's
growth strategy. There can be no assurances as to the success of the Company's
growth strategy. There is no assurance that the Company will be able to obtain
additional financing from any source if needed. If adequate funds are not
available, the Company could be required to curtail implementation of its
expansion plans. Such curtailment could have a material adverse impact on the
Company's business, financial condition, and results of operations.
-5-
<PAGE>
Risk of Construction Delays
Construction of the new brewery broke ground in September 1995 and as of
December 31, 1996 was approximately 82% complete. New construction is subject to
the risk of cost increases due to plan changes and delays from sources such as
local government approval processes, inclement weather, unexpected geologic
conditions, shortages of or increases in the price of materials such as steel,
funding delays, cooperation and coordination among various parties to the
project such as the architect, general contractor, and equipment manufacturer,
and timing of cash flow. The new brewery has experienced cost increases and
delays, to some degree, from each of the above causes. Interest rates and
general economic conditions can also have an effect on the project. While
Management believes that the sources of many previous delays have been
addressed, many factors are inherently uncertain and/or beyond the reasonable
control of the Company. There can be no assurance that further delays in
completion of construction will not occur or that local government agencies will
construct certain infrastructure improvements that they have committed to
construct. Management has limited experience in managing construction projects.
To the extent that completion of construction is delayed, the Company may incur
additional costs and the realization of revenues from the new facility will be
delayed, which could have a material adverse impact on the Company's business,
financial condition, and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financing the New
Brewery" and "Business - New Brewery."
Amounts Due General Contractor
The general contractor for the new brewery, BDM Construction Co., Inc.
("BDM"), has 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. If the Company does not have the cash needed to pay BDM the amounts
due and is not able to work out a satisfactory alternative payment arrangement,
BDM may seek to exercise its remedies. Under certain agreements that BDM has
made the Company's other lenders, BDM may not proceed against the real estate
without first proceeding against certain shares of Company stock issued to BDM
as collateral. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Financing the New Brewery - Vendor Financing."
Resolving the Company's payment obligation to BDM may distract Management from
its other duties, involve additional expense, and result in construction delays
which in turn could have a material adverse impact on the Company's business,
financial condition, and results of operations.
Low Trading Volume and Volatility
Before this offering, trading volume on the Pacific Stock Exchange has been
light. The Company can give no assurance the sale of an additional 600,000
Shares will result in increased trading volume. In the absence of a more active
trading market, investors may find it difficult to sell their Shares and
transactions involving relatively small numbers of shares may have a large
influence on the reported price of the stock. The Company's stock price may also
be materially adversely affected by factors affecting the entire market or the
Company's industry that may be unrelated to the performance of the Company.
There can be no assurance that the market price of the Common Stock will not
experience volatility. See "Price Range of Common Stock and Dividend Policy."
Shares Available for Future Sale
Open market sales of Common Stock that is outstanding at the start of this
offering may adversely affect the market price of the Shares during or after
this offering. There are no material restrictions on the transferability of the
1,461,855 shares of Common Stock held by non-affiliates of the Company.
Affiliates of the Company may sell shares subject to the volume limitations set
forth in Rule 144. See "Shares Eligible for Future Resale."
Dividends Unlikely
Management does not have any present intention to declare or pay dividends
on the Common Stock, but expects the Company to retain earnings for use in its
business. The Company's agreements with its lenders prohibit the payment of
dividends during the terms of the loans without the consent of the respective
lenders. Management anticipates that such restrictions will remain in effect for
as long as the Company has significant bank financing, including the long-term
debt on the Ukiah real estate. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financing the New Brewery." In
addition, the Company is required to pay a $1.00 per share cash dividend on
227,600 shares of Series A Preferred Stock ($227,600 in the aggregate) before
cash dividends may be paid on the Common Stock. The Series A Preferred Stock is
canceled when the full
-6-
<PAGE>
dividend is paid. Management does not have any present intention to declare or
pay dividends on the Series A Preferred Stock. See "Dividend Policy" and
"Description of Capital Stock."
Risks of Debt
Mendocino Brewing has incurred approximately $6.5 million in debt to
finance the acquisition of real estate, construction of the new brewery, and
acquisition of new brewing equipment. The ratio of the Company's long-term debt
to equity as of September 30, 1996, when adjusted to include all long term debt
added after September 30 and before the date of this Prospectus, is 1.16 to 1.
See "Capitalization" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Financing the New Brewery" and "--
Liquidity and Capital Resources." Loan and lease payments must be paid
regardless of the Company's revenue. Failure to make payments could lead to
foreclosure and sale of all or an important part of the Company's assets. Such
an event would have a material adverse impact on the Company's business,
financial condition, and results of operations.
Dependence on Key Personnel
Mendocino Brewing's success may depend upon the continued service of
President Michael Laybourn, Master Brewer Donald Barkley, and other members of
the Company's executive management. None of these employees is contractually
obligated to continue in the employ of the Company or to refrain from working on
behalf of another brewery. The loss of any key employee could have a material
adverse effect upon the Company's business, financial condition, and results of
operations. The Company's future performance may depend on its ability to
identify, recruit, motivate, and retain additional key management personnel,
including executive, marketing, and production managers and other personnel. The
failure to attract and retain key management personnel could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Management" and "Principal Shareholders." Certain of the
Company's employees are parties to written employment agreements as more fully
described in "Management - Employment Agreements and Change in Control
Arrangements." The Company does not maintain key man life insurance on any of
its employees.
Potential Control Groups
Mendocino Brewing's officers, directors, and founders and their spouses
own, in the aggregate, 961,926 shares of the Company's outstanding Common Stock,
which represents 41.4% of the Common Stock outstanding at the commencement of
this offering and will represent 32.9% of the Common Stock outstanding if the
maximum number of Shares offered by this Prospectus is sold. To the extent these
shareholders choose to act together, these shareholders may possess sufficient
voting power determine matters requiring approval of the shareholders of the
Company, including the election of the Company's directors or a change in
control of the Company. The interests of these shareholders in matters to be
voted upon could be different from the interests of other shareholders.
See "Management" and "Principal Shareholders."
Reliance on Domestic Craft Beer Segment Growth Rate
The domestic craft beer segment of the highly competitive U.S. beer market
has been characterized by more than ten years of steady growth. The overall
growth rate was 44% in 1995. The growth rate may vary from region to region, and
there is no assurance that the rate of growth will continue. If the growth rate
were to not continue, the Company might face increased competition and might
incur greater expenses and reduced gross margins that could have a material
adverse impact on its business, financial condition, and results of operations.
See "Business - Industry Overview - Domestic Craft Beer Segment."
Geographic Concentration
Mendocino Brewing's wholesale distributions have historically been
concentrated in Northern California. The Company's two largest distributors,
both in Northern California, accounted for 40% of 1995 wholesale distributions.
Management believes that regional identification has assisted the Company in
establishing the popularity of its Red Tail Ale brand in Northern California.
There is no assurance that the Company's Blue Heron Pale Ale and Black Hawk
Stout brands will be as widely accepted as Red Tail Ale, or that consumers in
new geographic markets will be receptive to the Company's products. Management
believes that Northern California is likely to continue to be the largest market
for its brands, and that regional identification may assist the Company's
competitors in other regions. Penetration of other regional markets is an
important element of the Company's expansion plan, and failure to accomplish
this objective will hinder the success of the expansion plan and could have a
material adverse impact on the Company's business, financial condition, and
results of operations. See "Business - Regional Expansion."
-7-
<PAGE>
Reliance on Distributors
Mendocino Brewing relies exclusively on independent distributors for its
wholesale sales. The distributors that the Company relies upon may also market
competing imported and domestic craft beers. Although by law distributors are
independent of any brewer, a distributor can be controlled if it relies on one
or two large brewers who account for the majority of its sales. The Company has
formal written distribution agreements with its distributors which may be
terminated by either party with 30-day written notice. The laws of some states,
however, may restrict the Company's ability to terminate its agreements with
distributors in those states. Inability to terminate a distributor who is
performing poorly could have a material adverse effect on the Company's
business, financial condition, and results of operations. A down-turn in the
performance of a single distributor can also have a material adverse impact on
the Company's business, financial condition, and results of operations. See
"Business -- Product Distribution."
Competition
Certain competitors in the domestic craft beer segment have large
advertising budgets, substantial financial resources, and/or access to the
distribution networks of major national and international brewers. Several of
Mendocino Brewing's primary competitors are expanding or have recently expanded
their production capacity. The amount of supermarket shelf space that can be
devoted to any class of products is limited. Well financed competitors could
hinder distribution of the Company's products and have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Business - Industry Overview - Domestic Craft Beer Segment."
Aging of Inventories
The Company does not use preservatives in its products, and accordingly the
packaged beer has a shelf life of approximately 120 days from the release date.
The Company's policy is to sell product to distributors with sufficient
remaining shelf life to ensure that the beer will be fresh when sold to the
consumer. Product that remains unsold after 120 days is returned to the Company
for destruction or other disposition. If and to the extent that near-term sales
projections exceed actual performance and result in material excess packaged
beer inventories, the Company may experience inventory write-downs which could
in turn have a material adverse impact on the Company's financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations - Impact of
Inventory Aging Policies."
Dramshop Liability
Serving alcohol to an intoxicated or minor patron is a violation of
California law. A server who sells alcoholic beverages to an intoxicated or
minor patron may also be liable to third parties for the acts of the patron.
Although Mendocino Brewing has implemented procedures to minimize the liability
associated with serving alcoholic beverages to intoxicated or minor patrons,
there can be no assurance that intoxicated or minor patrons will not be served
or that the Company will not be subject to liability for the acts of such
patrons. The Company maintains general liability insurance which includes liquor
and host liquor liability coverage, currently limited to $1,000,000 per
occurrence and $2,000,000 in the aggregate annually, with $4,000,000 in
additional secondary coverage. The Company intends to continue such coverage if
coverage remains available at an affordable cost. Future increases in premiums
could make it prohibitive for the Company to maintain adequate insurance. A
large uninsured damage award could have a material adverse impact on the
Company's business, financial condition, and results of operations.
Product Liability
Mendocino Brewing's products are not heat pasteurized, irradiated, or
chemically treated. In addition, the Company's brewing operations are subject to
certain hazards such as contamination. The Company maintains product liability
insurance, and no such claims have been made in the Company's thirteen-year
history and such claims are rare in the industry. The Company carries general
product liability insurance, currently limited to $1,000,000 per occurrence and
$2,000,000 in the aggregate annually, with $4,000,000 in additional secondary
coverage. The Company intends to continue such coverage if it remains available
at an affordable cost. Future increases in premiums could make it prohibitive
for the Company to maintain adequate insurance coverage. A large uninsured
damage award could have a material adverse impact on the Company's business,
financial condition, and results of operations.
-8-
<PAGE>
Environmental Hazards
As a user of real estate, the possibility exists that Mendocino Brewing
could be held responsible for any contamination of the earth beneath it,
regardless of whether the Company in any way caused such contamination. Although
the seller of the Company's real estate has agreed to indemnify the Company
against any pre-existing contamination liability, there can be no assurance that
the seller will have the willingness or financial wherewithal to perform any
indemnification obligation. The assertion of any such claim and/or the failure
or inability of the seller to provide indemnification could have a material
adverse impact on the Company's business, financial condition, and results of
operations.
Primary Production Facility and Uninsured Losses
After completing the new brewery, Management expects that Mendocino Brewing
will eventually cease using the Hopland facility for wholesale production and
will rely primarily or exclusively on the new brewery. The Company has obtained
comprehensive insurance, including liability, fire, and extended coverage, as is
customarily obtained for businesses similar to the Company. Certain types of
catastrophic losses, however, such as losses resulting from floods, tornadoes,
thunderstorms, and earthquakes, are either uninsurable or not economically
insurable to the full extent of potential loss. Such "Acts of God," work
stoppages, regulatory actions, and other causes could interrupt production and
have a material adverse impact on the Company's business, financial condition,
and results of operations. The Ukiah facility is located in a 100-year flood
plain, although the base of the building has been elevated above the plain. The
Company intends to purchase flood insurance if it is economically feasible to do
so.
Possible Increases in Excise Taxes
Alcoholic beverages are subject to substantial federal and state excise
taxes. The federal rate of taxation increases from $7.00 per bbl. to $18.00 per
bbl. for annual production in excess of 60,000 bbl. Alcoholic beverages have in
recent years been targets of attempts to increase so-called "sin taxes." If
excise taxes are increased, the Company could have to raise prices to maintain
profit margins. Historically, price increases due to additional excise taxes
have not reduced unit sales, but past experience does not necessarily indicate
future effects, and the actual effect is likely to depend on the amount of the
increase, general economic conditions, and other factors. The occurrence of
significant tax increases could have a material adverse impact on the Company's
business, financial condition, and results of operations.
Energy and Supply Shortages and Allocations
Shortages or increased costs of fuel, water, raw materials, power, or
building materials, or allocations by suppliers or governmental regulatory
bodies, could materially delay the expansion of the brewery, hinder the
operations of the Hopland brewing facility and/or the brewpub, or otherwise have
a material adverse impact on the Company's business, financial condition, and
results of operations.
-9-
<PAGE>
PRIORITY OF EXISTING SHAREHOLDERS
Shareholders of record as of October 25, 1996 have the first right to
purchase Shares pursuant to this offering on a first come, first served basis.
The minimum purchase is 50 Shares ($425.00). Shares that remain unsold 15 days
after the date of this Prospectus, if any, will be offered to the public and
sold in the order in which fully completed subscriptions are received. For more
information concerning subscription procedures, see "Plan of Distribution --
Subscription Procedure."
-10-
<PAGE>
USE OF PROCEEDS
The proceeds of this offering will be used to provide working capital
through addition of cash reserves and repayment of certain short term
indebtedness, complete the build-out of the new brewery building, and finance
further expansion. The estimated cost of completing the new brewery at a
capacity of 60,000 bbl. per year is $11.1 million and at a capacity of 75,000
bbl. per year is $11.6 million. Of this amount, as of September 30, 1996,
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 as
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Financing the New Brewery." The balance of the cost of
the new brewery will be paid from the proceeds of this offering or deferred
until after the brewery commences operations.
<TABLE>
The following table illustrates the intended uses of all proceeds:
<S> <C>
Payment/reimbursement of offering expenses ........................................... $ 400,000
-----------
Prioritized purposes:
Working capital .................................................................. 300,000
Tenant improvements to the new brewery
(primarily office space and landscaping) .................................... 600,000
General contractor fees .......................................................... 500,000
Reduction of short term debt (WestAmerica) ....................................... 400,000
Additional general contractor fees ................................................ 400,000
-----------
Subtotal .................................................................... 2,200,000
-----------
Other purposes:
Additional working capital ....................................................... 880,000
Additional equipment ............................................................. 920,000
Additional construction .......................................................... 240,000
Repayment of seller financing on the Ukiah real estate ........................... 260,000
Final repayment of short term debt (WestAmerica) ................................. 200,000
-----------
Subtotal .................................................................... 2,500,000
-----------
Total.................................................................................. $ 5,100,000
===========
</TABLE>
The priorities set forth above for the first $2.2 million in excess of
offering costs reflect an agreement among the Company and its various lenders.
In lieu of repaying the WestAmerica debt as indicated above, Management expects
to propose to convert the short-term debt to a revolving line of credit secured
by inventory and accounts receivable. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financing the New Brewery -
WestAmerica Loan." Such conversion will be subject to the agreement of these
lenders.
No decisions have been made with respect to vendors of additional brewing
equipment.
The $600,000 WestAmerica short term loan bears interest at prime plus 1.5%
and matures on April 30, 1997. The seller financing on the Ukiah real estate
bears interest at 9% per annum and is due on June 27, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financing the New Brewery - WestAmerica Loan."
As a condition to converting the existing $2.7 million construction loan to
a 15-year term loan, the Savings Bank of Mendocino County has proposed to
require the Company to pledge proceeds of this offering in excess of $2.5
million as collateral, with the provision that the Bank will release the funds
to finance further expansion if the Company is meeting its sales and revenue
objectives. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Financing the New Brewery - Construction
Financing."
The Company will defer the costs outlined above until it has raised
sufficient proceeds from this offering to pay the costs or is able to provide
for payment from other sources. Although Management believes that the Company's
present resources are sufficient to permit it to bring the new brewery to
operational status, failure to raise additional
<PAGE>
funds could have a material adverse impact on the Company's business, financial
condition, and results of operations. See "Risk Factors - No Minimum."
Pending the above uses, Mendocino Brewing intends to invest the net
proceeds from this offering in short-term investment-grade interest bearing
securities.
-12-
<PAGE>
<TABLE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Mendocino Brewing's Common Stock was listed on the Pacific Stock Exchange
(symbol MBR) on February 21, 1995. The high and low closing sales prices for the
Common Stock on the Pacific Stock Exchange are set forth below for the quarters
indicated:
<CAPTION>
1995 1996
-------------------------------------------------- ----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $13.50 $9.25 $8.75 $8.12 $7.38 $10.82 $10.00 $8.38
Low $7.62 $7.12 $7.75 $7.00 $5.50 $5.82 $7.38 $5.75
</TABLE>
There were approximately 2,435 shareholders of record as of January 6,
1997. Management intends to retain Mendocino Brewing's earnings for use in the
business and does not expect the Company to pay cash dividends in the
foreseeable future. The Company's credit agreements provide that the Company
shall not declare or pay any dividend or other distribution on its Common Stock
(other than a stock dividend) or purchase or redeem any Common Stock, without
the lender's prior written consent. Management anticipates that such
restrictions will remain in effect for as long as the Company has significant
bank financing, including the long-term debt on the Ukiah real estate. The
holders of the Company's 227,600 outstanding shares of Series A Preferred Stock
are entitled to aggregate cash dividends and liquidation proceeds of $1.00 per
share before any dividend may be paid with respect to the Common Stock. The
Series A Preferred Shares are canceled after they have received their $1.00 per
share aggregate dividend. Management does not have any present intention to
declare or pay a dividend on the Series A Preferred Stock. See "Capitalization"
and "Description of Capital Stock."
-13-
<PAGE>
<TABLE>
CAPITALIZATION
The following table sets forth the actual capitalization of Mendocino
Brewing on September 30, 1996, and also provides the pro forma capitalization of
the Company as of September 30, 1996, after giving effect to the sale of the
maximum (600,000) number of Shares offered by the Company in this offering at
the public offering price of $8.50 per share and the application of the
estimated net proceeds:
<CAPTION>
September 30, 1996
------------------------------------------
Pro Forma
Actual As Adjusted
----------------- ----------------
<S> <C> <C>
Short-term obligations:
Short term debt................................. $ 600,000 $ 600,000(1)
Current maturities of long-term debt............ 263,800(2) 483,000(3)
----------------- ----------------
Total short-term commitments........... 863,800 1,083,000
Long-term obligations:
Long-term debt, less current portion............ 718,700(3) 4,580,800(3)
----------------- ----------------
Total long-term commitments............ 718,700 4,580,800
Shareholders' equity:
Common Stock, no par value,
20,000,000 shares authorized;
2,322,222 shares outstanding; 2,922,222
shares outstanding pro forma.............. 3,869,600 8,569,600
Preferred Stock, no par value
2,000,000 shares authorized
227,600 shares designated Series A
227,600 Series A shares outstanding with a preferred
dividend equal to $1.00 per share;
shares cancel upon the aggregate
payment of entire preferred dividend..... 227,600 227,600
Retained Earnings........................... 255,900 255,900
----------------- ----------------
Total shareholders' equity.................. 4,353,100 9,053,100
----------------- ----------------
Total capitalization................. $ 5,935,600 $ 14,716,900
================= ================
<FN>
- ----------------------------
(1) The pro forma balance sheet reflects the retirement of $900,000 in
short-term financing provided after September 30, 1996 by the general
contractor for the new brewery. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Financing the New
Brewery - Vendor Financing."
(2) Consists primarily of the final payments on the seller financing of the
Ukiah real estate due in September 1997.
(3) Long term debt includes an equipment lease from FINOVA Capital Corporation
which the Company has used to finance the acquisition of approximately
$2.07 million in cost of new brewing equipment, $750,000 of which had been
advanced as of September 30, 1996. Long term debt also includes a $2.7
million construction loan from the Savings Bank of Mendocino County.
Although the construction loan is due and payable upon completion of
construction, the Savings Bank has given Mendocino Brewing a written
commitment to convert the construction loan to permanent financing upon the
satisfaction of certain conditions.
</FN>
</TABLE>
-14-
<PAGE>
<TABLE>
SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Financial
Statements and Notes to Financial Statements, audited by Moss Adams LLP,
independent auditors, whose report thereon is also included. The selected
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and the Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
----------------------------- -------------------------
1994 1995 1995 1996
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Statements of Income Data: (unaudited)
Sales.............................. $ 3,523,000 $ 3,735,100 $ 2,665,600 $ 3,022,400
Less excise taxes.................. 157,400 168,600 116,500 118,000
----------- ----------- ------------ ------------
Net sales.......................... 3,365,600 3,566,500 2,549,100 2,904,400
Cost of goods sold................. 1,840,900 1,846,500 1,367,200 1,414,000
----------- ----------- ------------ ------------
Gross profit....................... 1,524,700 1,720,000 1,181,900 1,490,400
Operating expenses................. 1,324,700 1,537,300 1,147,500 1,548,000
----------- ----------- ------------ ------------
Income (loss) from operations...... 200,000 182,700 34,400 (57,600)
Interest income, net............... 21,800 129,100 95,200 11,000
Other income (expense)............. 3,000 14,800 15,300 (48,200)
----------- ----------- ------------ ------------
Income (loss) before income taxes.. 224,800 326,600 144,900 (94,800)
Provision for (benefit from)
income taxes..................... 71,500 152,900 61,100 (23,700)
----------- ----------- ------------ ------------
Net income (loss).................. $ 153,300 $ 173,700 $ 83,800 $ (71,100)
=========== =========== ============ ============
Earnings (loss) per share.......... $ .08 $ .08 $ .04 $ (.03)
=========== =========== ============ ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,302,024 2,322,222
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: December 31, 1995 September 30, 1996
--------------------------- --------------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents....................... $ 1,696,100 $ 242,200
Working capital (deficit)....................... 959,100 (3,240,200)(1)
Property and equipment.......................... 3,954,100 8,151,000
Deposits and other assets....................... 71,000 158,000
Total assets.................................... 6,514,000 9,452,800
Long term debt, including current portion....... 554,900 982,500
Total liabilities............................... 2,089,800 5,099,700
Shareholders' equity............................ 4,424,200 4,353,100
<FN>
- --------
(1) After September 30, 1996, Mendocino Brewing obtained a $2.7 million
construction loan with a commitment to convert the loan to long term debt,
subject to certain conditions, from the Savings Bank of Mendocino County, plus
an equipment lease agreement with FINOVA Capital Corporation for up to
approximately $2.07 million of new brewing equipment, plus short term financing
from the general contractor for the new brewery in the amount of $900,000. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations - Financing the New Brewery."
</FN>
</TABLE>
-15-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Financial Statements and the Notes thereto and other financial information
included elsewhere in this Prospectus. The discussion of results and trends does
not necessarily imply that these results and trends will continue.
Overview
Mendocino Brewing's financial performance from 1994 through the first nine
months of 1996 has been characterized by increased sales and gross profits from
brewing operations and decreased cost of goods sold as a percentage of net
sales, offset by increased marketing expenses, administrative expenses
attributable to the Company's expansion plan and the cost of being a public
company, and the aggregate net effect of certain one-time gains, certain
one-time losses, and decreasing interest earnings from the net proceeds of the
Company's initial public offering. Management attributes the increase 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. Improvements to brewing operations in September 1995 increased
capacity by 32% and significantly reduced cost of goods as a percentage of
sales.
Comparing 1995 to 1994, sales were up 6%, cost of goods sold was flat, and
gross profit was up 12.8%. Comparing the first nine months of 1996 to the same
period in 1995, sales were up 13.4%, cost of goods sold was up 3.4% but down 4.9
percentage points as a percentage of net sales, and gross profit was up 26.1%.
In 1995, increased administrative expenses resulted in an 8.6% decline in income
from operations over 1994, but a $107,300 increase in other income due to
interest on the public offering proceeds plus a one time refund of workers'
compensation premiums resulted in a 45.3% increase in income before income
taxes. In 1996, the bankruptcy of a distributor, increased promotional and labor
expenses associated with the operation of the Hopland Brewery brewpub and
merchandise store, and increased marketing expenses resulted in a 39.4% increase
in operating expenses. While Management plans to continue marketing expenses at
a high level and plans to continue promotional expenses at the Hopland Brewery
brewpub at current levels, the Company will not incur any additional losses
(approximately $33,000) attributable to the bankrupt distributor. Management's
decision to write off $38,300 in expenses incurred in exploring a long-term
alliance with a mid-western distribution company (classified as "other
expense"), when combined with a $95,000 decrease in interest earnings as the
Company spent the cash proceeds from the public offering for equipment and
building construction, resulted in a $94,800 loss for the first nine months of
1996 compared to income of $144,900 for the same period in 1995.
<TABLE>
Results of Operations
The following tables set forth, as a percentage of net sales, certain items
included in Mendocino Brewing's Statements of Income. See Financial Statements
and Notes thereto elsewhere in this Prospectus, for the periods indicated.
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30
-------------------- -------------------
1994 1995 1995 1996
------ ------- ------ ------
<S> <C> <C> <C> <C>
Statements of Income Data:
Sales........................................... 104.68% 104.73% 104.57% 104.06%
Less excise taxes............................... 4.68 4.73 4.57 4.06
------ ------- ------ ------
Net sales....................................... 100.00 100.00 100.00 100.00
Costs of goods sold............................. 54.70 51.77 53.63 48.68
------ ------- ------ ------
Gross profit.................................... 45.30 48.23 46.37 51.32
Operating expenses.............................. 39.36 43.10 45.02 53.30
------ ------- ------ ------
Income (loss) from operations................... 5.94 5.13 1.35 (1.98)
Other income (expense).......................... 0.74 4.03 4.33 (1.29)
------ ------- ------ -------
Income (loss) before income taxes............... 6.68 9.16 5.68 (3.27)
Provision for (benefit from) income taxes....... 2.13 4.29 2.39 (0.82)
------ ------- ------ -------
Net income (loss)............................... 4.55% 4.87% 3.29% (2.45)%
====== ======= ====== =======
</TABLE>
-16-
<PAGE>
Sales. Sales increased 6.0% from $3,523,000 in 1994 to $3,735,100 in 1995
and 13.4% from $2,665,600 for the nine month period ended September 30, 1995 to
$3,022,400 for the comparable period in 1996. 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. A decrease in sales in the first quarter of 1996
compared to 1995 was offset by an increase in sales in the second and third
quarters of 1996 compared to 1995. Management attributes the decrease in the
first quarter of 1996 to delays in implementing the new marketing plan and the
increases in the second and third quarters of 1996 to the new marketing plan.
Management attributes approximately half of the sales increases in the second
and third quarters to increased sales to existing distributors and the other
half to geographic expansion. Retail sales at the Hopland Brewery brewpub and
merchandise store increased 3.3% from 1994 to 1995. Management attributes the
increase in sales at the Hopland Brewery brewpub and merchandise store from 1994
to 1995 to a busy summer in 1995 due to increased tourist trade and increased
awareness of MBC's products. These factors more than offset a decrease in beer
and food sales in the first quarter of 1995 compared to 1994 which Management
attributed to heavy rains and flooding in nearby areas. Sales at the Hopland
Brewery brewpub and merchandise store were flat (down 0.4%) for the first nine
months of 1996 compared to 1995. Management attributes the slight decline in
sales at the Hopland Brewery brewpub and merchandise store for the first nine
months of 1996 compared to 1995 to slower off premise bottled beer sales (due to
increased availability of MBC products outside of Hopland) offset by increased
on-premise draft beer and food sales.
Cost of goods sold. Cost of goods sold decreased as a percentage of net
sales by 2.93 percentage points from 1994 to 1995 and by 4.95 percentage points
from the nine month period ended September 30, 1995 to the same period in 1996.
The implementation of 24-hour brewing in September 1995 significantly improved
production efficiencies. Management negotiated a reduction in the cost of
bottles starting in the third quarter of 1995.
Gross profit. Gross profit increased 12.8% from $1,524,700 in 1994 to
$1,720,000 in 1995 and 26.1% from $1,181,900 for the nine month period ended
September 30, 1995 to $1,490,400 for the comparable period in 1996.
Operating expenses. Operating expenses increased 16.0% from $1,324,700 in
1994 to $1,537,300 in 1995 and 34.9% from $1,147,500 for the nine month period
ended September 30, 1995 to $1,548,000 for the comparable period in 1996.
Several factors contributed to the increases. Marketing expenses increased by
$30,700 from 1994 to 1995 and by $287,500 in the first nine months of 1996
compared to the comparable period for 1995. Management attributes the increases
in 1996 to $79,000 in increased point of sale costs and other promotional costs,
$48,000 in increased travel and lodging expenses incurred in developing new
geographic markets, $45,000 in additional periodic price discounts to
distributors, $44,000 to increased distribution expense, $33,000 to the
write-off of a bad debt from a bankrupt distributor, $32,000 in increased
marketing and sales labor, and $6,500 in net miscellaneous expenses. Most of the
foregoing expenses were incurred in connection with the Company's expansion
plan. Management expects the Company to further increase marketing expenses
through 1997. Operating expenses at the Hopland Brewery brewpub and merchandise
store increased from 1994 to 1995 by $54,900 primarily due to $39,000 in
additional labor costs and $15,900 increased utilities, repairs and maintenance,
and net miscellaneous expenses. Operating expenses at the Hopland Brewery
brewpub and merchandise store increased from the first nine months of 1995 to
the comparable period in 1996 by $94,300 due primarily to $67,000 in additional
labor costs, $16,000 in increased promotional expenses, and $11,300 in net
miscellaneous expenses. Finally, general and administrative expense increased
from 1994 to 1995 by $127,000 consisting of $53,200 in increased labor costs,
$39,000 in costs associated with being a public company, $25,000 in increased
legal fees, and $9,800 in net miscellaneous expenses. General and administrative
expense increased from the first nine months of 1995 to 1996 in the amount of
$18,700 consisting of $20,000 in increased labor costs offset by a net decrease
of $1,300 in other costs.
Impact of Inventory Aging Policies. During the time that Mendocino
Brewing's distributors were on allocation, the Company shipped all of its
product promptly upon production. Product freshness was not an issue.
Inventories of packaged beer increased when the Company initially increased its
capacity in late 1995 and early 1996 before implementing its new marketing plan.
The Company does not use preservatives in its products, and accordingly the
packaged beer has a shelf life of approximately 120 days from the release date.
The Company's policy is to sell product to distributors with sufficient
remaining shelf life to ensure that the beer will be fresh when sold to the
consumer. Product that remains unsold after 120 days is returned to the Company
for destruction or other disposition. In accordance with these policies, in the
third quarter of 1996, the Company wrote-down its
-17-
<PAGE>
inventories by $51,000 representing approximately 6,000 cases of product
remaining from its initial overproduction. The write-down was reflected as an
increase in cost of goods sold. Management is making arrangements with a
producer of distilled beverages to convert this product to a whiskey or other
liquor which may be marketed under the Company's trademark. Management does not
expect to realize any revenue from this arrangement until the new product is
actually sold.
Other income (expense). Other income (expense) increased in 1995 over 1994.
In 1995 Mendocino Brewing benefited from an increase of $106,800 in interest
earnings attributable to interest on the proceeds of the Company's public
offering of its Common Stock. In addition, the Company received one time refunds
of workers' compensation premiums for prior years totaling $15,300 as a result
of rate adjustments in those years. In the first quarter of 1995 the Company
wrote off an equipment deposit of $15,000 made in 1993. Other income (expense)
decreased by $147,700 in the nine months ended September 30, 1996 compared to
the same period for 1995 primarily as a result of a decrease of $84,200 in net
interest earnings as cash from the initial direct public offering was used for
the expansion project, a write-off of approximately $38,300 in expenses incurred
in exploring a long-term alliance with a mid-western distribution company, the
non-recurrence of $15,300 in one-time refunds of workers' compensation premiums,
and $14,000 in un-reimbursed glass recycling fees, offset by $3,600 in income
from disposition of unneeded assets and $500 additional miscellaneous income.
Provision for (benefit from) income taxes. The provision for income taxes
in 1995 was $81,400 more than the provision for income tax in 1994 primarily
because of Mendocino Brewing's higher net income and timing differences,
resulting in more deferred income taxes. See "Notes to Financial Statements,
Note 1(h) - Description of Operations and Summary of Significant Accounting
Policies and Note 10 - Income Taxes." The Company recognized a benefit from
income taxes in the first nine months of 1996 of $23,700 compared to a tax
provision of $61,100 for the same period in 1995.
Net income. Net income increased 13.3% in 1995 over 1994 primarily due to a
12.2% increase in sales measured in dollars, a 2.93 percentage point decrease in
cost of goods sold as a percentage of sales resulting from process improvements
in brewing operations, and a $107,300 increase in net interest income. For the
nine month period ended September 30, 1996 compared to the same period for 1995,
net income was down $154,900 for a net loss of $71,100 compared to net income of
$83,800 due to a $400,500 increase in operating expense and a $147,700 decrease
in other income (expense) which more than offset a $308,500 increase in gross
profit and a $84,800 reduction in the provision for income taxes.
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 74% of the Company's 1995 annual 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 26% of the Company's 1995 annual sales, 11% of which
consisted of the sale of draft and bottled beer, and the remaining 15% of which
consisted of sales of food and merchandise. Wholesale and retail beer sales in
both segments combined comprised 85% of the Company's annual sales in 1995. See
"Notes to Financial Statements, Note 11 - Segment Information."
Mendocino Brewing is now in the process of increasing its brewing capacity
by more than three times (18,000 bbl. to 60,000 bbl.). Proceeds from the sale of
all of the stock offered by this Prospectus would permit the Company to expand
its operations to up to 75,000 bbl. per year, an aggregate increase from the
Company's current capacity of 18,000 bbl. of more than four times. (See "Use of
Proceeds.") 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. Mendocino Brewing's wholesale distributors were on
allocation while the Company's annual capacity was capped at 13,600 bbl., so
seasonality had little effect on wholesale sales through late 1995. It is not
clear to what extent seasonality will affect the Company as it expands its
capacity and its geographic markets. The Company brews four seasonal beers:
Springtide Ale in March, Eye of the Hawk Select Ale from July through October,
Frolic Shipwreck Ale 1850 in July, and Yuletide Porter in November and December.
These seasonal beers tend to augment sales
-18-
<PAGE>
during the periods in which they are available. Retail operations, which depend
largely on tourist traffic, historically have been higher in the third and
fourth quarters.
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 $11.1 million. This includes $0.8
million for the land, $6.7 million for improvements to the real estate, $3.2
million for equipment, and $0.4 million for financing costs. Increasing the
initial annual capacity of the new brewery to 75,000 bbl. will require an
additional expenditure for equipment of approximately $0.5 million. 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. Management expects the balance of
approximately $1.26 - $1.76 million to be funded from the proceeds of this
offering, cash from operations, and/or other sources as described 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 this offering from the Savings Bank of
Mendocino County along with 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 December 31, 1996, approximately 82% 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
February 2, 1997. 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 over 25 years with a balloon payment upon
maturity. 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 this offering in excess of $2.5
million as collateral for the 15-year term loan, with the provision that the
Bank will release the funds from the pledge to purchase additional equipment if
the Company is meeting its sales and revenue objectives.
Equipment Lease. FINOVA Capital Corporation has also agreed to lease new
brewing equipment with a total cost of approximately $2.07 million to Mendocino
Brewing for a term of 7 years with monthly rental payments of approximately
$29,000 each. The lease commenced in December 1996. As of December 31, 1996,
approximately 81% of the lease had been funded. Before that time, FINOVA
advanced $750,000 to the Company with interest at the Citibank prime plus 3%. 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 August 1, 1996 of approximately $265,000 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 a variable
interest rate of prime plus 1.5% payable monthly and matures on April 27, 1997.
The Company anticipates that it will convert this amount into a new revolving
line of credit secured by accounts receivable and inventory, and has received a
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. 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
<PAGE>
required to repay the loan out of cash from operations, the net proceeds of this
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"), has 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. 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 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. Management plans to pay the Company's
obligation to BDM out of the proceeds of this offering, but there is no
assurance that the Company will raise net proceeds sufficient to do so at the
time required. See "Use of Proceeds." BDM has the right to require the Company
to register the shares issued for its account for sale to the public. To the
extent that the proceeds of the offering are insufficient, the Company will be
required to pay the obligation out of cash from operations, proceeds from the
sale of the shares held as collateral, or the proceeds of another debt or equity
financing, strategic alliance, or a joint venture. See "Risk Factors - Amounts
Due General Contractor."
Remaining Costs. Management expects the balance of the anticipated cost of
the new brewery (approximately $1.26 million for a 60,000 bbl. brewery and $1.76
million for a 75,000 bbl. brewery) to come from the proceeds of this offering,
or if such proceeds are insufficient, vendor financing, future operations, other
debt or equity financing, or a strategic alliance or joint venture.
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 below. Working capital
for day to day business operations to date has been provided primarily through
operations.
New Brewery. See "-- Financing the New Brewery" above.
Debt to Equity Ratio. Upon completion of the new brewery, and after taking
into account the sale of the maximum number of Shares offered by this
Prospectus, Mendocino Brewing will have long-term debt and equipment financing
commitments (including current portions) of at least $5.0 million. The exact
amount to be financed will depend on the amount raised in this offering, the
amount and type of any additional equipment purchased, and the extent to which
the Company obtains debt or lease financing for additional equipment. On a pro
forma basis, assuming that $4.05 million in long-term debt had been added as of
September 30, 1996 to the Company's then existing long-term debt of $0.98
million, but without assuming the sale of any additional shares of Common Stock,
the Company's ratio of long-term debt to shareholder's equity, which was
actually 0.23 to 1 on September 30, 1996, would have been 1.16 to 1.
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 be provided by trade terms offered by
suppliers and vendors, the proceeds of this offering, additional debt or equity
from other sources, and/or deferral of certain expenses.
Strategic Alliances and Joint Ventures. The rapid growth of the craft beer
industry has been characterized in part by a variety of consolidations,
strategic alliances, and joint ventures. Mendocino Brewing and its President,
Michael Laybourn, are very visible within the craft brew segment because of the
Company's place in the history of
-20-
<PAGE>
modern craft brewing, the distinctiveness of its Red Tail Ale and Blue Heron
Pale Ale labels, and Mr. Laybourn's leadership positions in industry trade
groups. See "Management." From time to time Mendocino Brewing has received
indications of interest in forming a strategic alliance, joint venture, or other
relationship. To date, only one such proposal evolved beyond a term sheet before
the Company withdrew from negotiations. The Company is, however, carrying on
discussions with certain parties that could result in a strategic alliance or
joint venture. The Company's current goal in any such arrangement would be to
obtain additional capital to expand the capacity of the new brewery to 200,000
bbl. per year and enter into an arrangement for sharing the expanded brewery
capacity to provide optimal utilization of overhead and thereby reduce unit
costs and/or access additional channels of domestic and/or international
distribution. Creating additional value for shareholders is an important
objective of these goals, but providing liquidity by way of a sale or merger is
not. The Company offers no assurances or estimates of the possibility that the
Company might enter into such a strategic alliance or joint venture at any time
in the foreseeable future.
-21-
<PAGE>
BUSINESS
Overview
Mendocino Brewing Company, Inc. brews Red Tail Ale, Blue Heron Pale Ale,
Black Hawk Stout, and three other ales, one stout, and one porter for the
domestic craft beer market. A "craft beer" is a full-flavored beer brewed in the
traditional style. Mendocino Brewing is one of the first of the modern craft
brewers, having opened the first new brewpub in California and the second in the
United States since the repeal of Prohibition, and has been recognized for its
innovations in the brewpub concept, its craft brew style, its distinctive
labels, and its role in industry associations. Mendocino Brewing's objective is
to transform itself from the country's leading microbrewery (based on annual
sales from 1990 through 1995 among brewers with annual capacity of less than
15,000 bbl.) to a major national craft brewer offering among the highest quality
craft beers available anywhere in America.
Mendocino Brewing is building a new brewery in Ukiah, California (110 miles
north of San Francisco). Management presently expects to commence brewing
operations at the new facility in March or April of 1997. The new brewery will
have an initial annual capacity of approximately 60,000 bbl., which is more than
four times the Company's annual capacity from 1993 through the first nine months
of 1995 of 13,600 bbl. Proceeds from this offering, if the maximum number of
Shares is sold, will be used to further expand the new brewery's annual capacity
to approximately 75,000 bbl., depending on the mix of products brewed. See "Use
of Proceeds." Ultimately, the facility can expand to 200,000 bbl. per year.
Company Background
Mendocino Brewing Company was originally formed in March 1983 as a
California limited partnership (the "Partnership"). On January 1, 1994, the
business was incorporated by transferring all of the Partnership's assets,
including its name, to a newly formed California corporation in exchange for all
of the Common and Preferred Stock of the corporation. The Partnership
distributed these shares to its partners on January 3, 1994. As used hereafter,
references to the "Company" and "Mendocino Brewing" include the business
operations of the Partnership before its incorporation.
Mendocino Brewing first bottled its flagship brand, Red Tail Ale, in
December 1983. In February 1995, Mendocino Brewing completed a $3.6 million
direct public offering at $6 per share. The Company purchased nine acres of land
in Ukiah, California in 1995 and broke ground on the new brewery in September
1995. Seeking to maximize the capacity of the Hopland facility in the interim,
the Company added an additional bottling tank in the Fall of 1995, which
permitted the Company to begin 24 hour brewing operations. This increased the
annual capacity of the Hopland facility to 18,000 bbl., technically taking the
Company out of the microbrewery category. The Company's products are sold in
over 1,500 retail outlets in Northern California and in selected locations
throughout the United States. See "Product Distribution."
Mendocino Brewing is recognized for its contributions to the craft brewing
industry and enjoys a national and international reputation. The Company's
distinctive and award winning Red Tail Ale label is frequently featured in
calendars, posters, and literature concerning the craft beer industry. Although
introduced only this summer, the equally distinctive Blue Heron Pale Ale label
has also won awards and is featured in the 1997 Brew Art(TM) calendar published
by Ronnie Sellers Productions of Kennebunk, Maine. The Company enjoys good
visibility within the industry, due in part to the leadership its officers have
provided within various industry trade groups. See "Management."
-22-
<PAGE>
Industry Overview
Domestic Beer Market. According to Modern Brewery Age's 1995 Statistical
Report, overall domestic beer sales in 1995 was 177 million bbl. (down 1.5% from
1994). A barrel equals approximately 13.78 cases or 331 twelve ounce bottles;
177 million bbl. is therefore the approximate equivalent of 58.5 billion 12 oz.
bottles of beer.
<TABLE>
The U.S. beer market may be divided into five segments:
<CAPTION>
Representative Suggested
Segment Est. Market Share Top Brands Retail Price/6-pack
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Low-Priced 60.0% Busch, Milwaukee's Best, Old Milwaukee $2.80
Premium 31.4% Budweiser, Miller Lite, Bud Light, Coors Light $4.05
Super-Premium 1.2% Michelob, Lowenbrau $4.67
European Import 5.5% Heineken, Guinness, Bass $7.90
Domestic Craft 1.9% Samuel Adams, Pete's, Sierra Nevada, Red Tail Ale $5.99 to $6.99
</TABLE>
Domestic Craft Beer Segment. While overall beer sales have been basically
flat for several years, domestic craft beer sales have increased at a rate of
approximately 40% per year for several years and in 1995 were up 44% to 3.8
million bbl. and a 1.9% market share. Many industry analysts predict that craft
beer sales will continue to increase until they achieve a market share of 5%-6%
by the year 2000.
Craft beers are characterized by their full-flavor and are usually produced
along traditional European brewing styles. The majority of craft beers are ales,
although some are malt lagers. Wheat beers and fruit flavored ales and lagers
have enjoyed recent popularity among craft beer consumers.
Competition
The craft beer category consists of:
o Contract brews -- any style brew produced by one brewer for sale under
the label of someone else who does not have a brewery or whose brewery
does not have sufficient capacity.
o Regional craft brews -- "hand-crafted" brews, primarily ales, sold
under the label of the brewery that produced it.
o Microbrews -- "hand-crafted" brews, primarily ales, sold under the
label of the brewery that produced it, if the capacity of the brewery
does not exceed 15,000 bbl. per year.
o Large brewer craft-style brews -- a brand brewed by a national brewer
which may only imitate the style of a craft beer. These craft-style
brews are often sold under the label of a brewery that does not exist
or the label of a brewpub with no bottling capacity. The term "phantom
brewery" is sometimes used to describe such brands.
o Brewpub brews -- "hand-crafted" brews produced for sale and consumption
at the brewery, which is normally connected with a restaurant/saloon.
Brewpub brews are not normally sold for off-site consumption in
significant quantities.
Mendocino Brewing competes against all of the above brewers primarily on
the basis of product quality and image.
Of the approximately 3.7 million bbl. of craft beer produced in America in
1995, contract brews (led by Samuel Adams Boston Lager, Pete's Wicked Ale, and
their respective related brands) accounted for approximately 1.5 million bbl.,
or 41% of the total; regional craft brands (led by Sierra Nevada, Redhook,
Pyramid (Hart Brewing, Inc.), Anchor, and Full Sail) represented approximately
1.25 million bbl., or 34% of the total; and microbrews (led by Red Tail Ale)
represented approximately 910,000 bbl., or 25% of the total. Because Mendocino
Brewing's annual production exceeded 15,000 bbl. by less than 150 bbl. in 1995,
some industry publications have classified the Company as a regional craft
brewer for that year.
-23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1994 & 1995 Domestic Craft Beer Market
1994 1995
Largest Craft Brewers in Mendocino Total Sales Annual Total Sales Annual
Brewing's Primary & Target Markets (x 1,000 bbl.) Growth (x 1,000 bbl.) Growth
-------------------------------------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C>
1. Boston Beer Co. (Boston, MA) 700 56% 961 37%
2. Pete's Brewing Co. (Palo Alto, CA) 182 43 348 91
3. Sierra Nevada Brewing Co. (Chico, CA) 156 50 205 31
4. Redhook Ale Brewery (Seattle, WA) 94 27 159 69
5. Hart Brewing Co. (Kalma, WA) 72 118 123 71
6. Anchor Brewing Co. (S.F., CA) 103 12 104 1
7. Full Sail Brewing Co. (Hood River, OR) 53 39 71 36
8. Widmer Brewing Co. (Portland, OR) 50 25 70 40
9. Portland Brewing Co. (Portland, OR) 34 N/A 62 82
10. Bridgeport Brewing Co. (Portland, OR) 18 12 N/A N/A
11. Mendocino Brewing Co. (Hopland, CA) 13 4 14 8
Remaining Domestic Craft Brewers (approx. 800) 1,154 N/A 1,663 44
----- -----
Total Domestic Specialty Segment Production 2,629 N/A 3,780 44%
- -------------------------------------------------------------------------------------------------------------------
<FN>
Source: Modern Brewery Age
</FN>
</TABLE>
Products
Mendocino Brewing brews three ales and a stout year-round, three seasonal
ales, and a seasonal porter:
o RED TAIL ALE, a full flavored amber ale, is the flagship brand of
Mendocino Brewing.
o BLUE HERON PALE ALE is a golden ale with a full body and a distinctive
hop character.
o BLACK HAWK STOUT is the fullest in flavor and body of the Company's
brews.
o EYE OF THE HAWK SELECT ALE is a high gravity deep amber summer ale.
o YULETIDE PORTER is a deep brown Holiday brew with a traditionally rich,
creamy flavor.
o PEREGRINE PALE ALE is brewed year-round with a more delicate flavor and
character.
o SPRINGTIDE ALE is brewed around St. Patrick's Day and appears as a
fresh, flowery, spicy golden ale.
o FROLIC SHIPWRECK ALE 1850, a Scottish-style ale brewed around July, was
introduced in 1994 as a fund-raiser for the Mendocino County Museum to
commemorate the wreck of the clipper ship Frolic, with its cargo of
Scottish ale, on the Mendocino coast in 1850. Salvage efforts were
abandoned when workers, upon sighting the previously unreported big
trees of Mendocino County, launched the timber industry which has
characterized the area ever since.
Mendocino Brewing uses an ale yeast strain that was first introduced at New
Albion Brewing Co. in the late 1970s. Management knows of no other brewery that
ferments its beer with this particular strain of yeast. The Company maintains
the yeast strain under laboratory conditions at two separate locations.
Mendocino Brewing is among a minority of brewers who use whole hop flowers
instead of processed hop pellets in their brewing processes. This technique
contributes to the distinctive characteristics of the brews. The Company adds
active fermenting beer (Krausen) after the beer is bottled, which produces a
pleasant amount of natural carbonation. The thin layer of brewer's yeast in the
bottom of the bottle is a natural characteristic of bottle conditioned ale.
Mendocino Brewing's distinctive brews have been very well received in the
market and within the industry. Eye of the Hawk Select Ale won a gold medal at
the 1991 Great American Beer Festival after winning a silver in 1990, and also
won a bronze in 1992. Blue Heron Pale Ale also won a bronze medal at the 1991
Great American Beer Festival.
The Hopland Brewery Brewpub and Merchandise Store
To date, Mendocino Brewing's major marketing tool has been the Hopland
Brewery brewpub and merchandise store. Located on a major tourist route in
Hopland, California, 100 miles north of San Francisco, the Hopland Brewery,
which opened in 1983, was the first brewpub to open in California and the second
in the United States since the repeal of Prohibition.
-24-
<PAGE>
The brewpub is housed in a 100 year-old brick building that was once known
as the Hop Vine Saloon. The inside walls are trimmed with the original
turn-of-the-century ornamental stamped tin. Works of local artists are featured
on a rotating basis. The bar is hand-crafted, early California style blond oak
and brass that complements the tradition of the tavern and the Company's brews.
The pub includes a dart room and a stage. Patrons can view the brewing process
through windows in the adjoining brewhouse. An outdoor Beer Garden includes a
shaded grape arbor, flowers, trellised hops in the summer, picnic tables, and a
sandbox for the kids.
Beverages served include Red Tail Ale, Blue Heron Pale Ale, Black Hawk
Stout, Peregrine Pale Ale, and a seasonal brew on tap, along with local wines,
Hopland Seltzer Water, local apple juice, and soft drinks. The brewpub also
features hand pumped cask conditioned ales. The menu features home-style
cooking, spicy beer sausages, legendary hamburgers, Red Tail chili, fresh
salads, snacks, vegetarian entrees, and daily specials at moderate prices. The
brewpub operates days and evenings, with live music on Saturdays and for special
events, such as the Company's annual Anniversary Party in August and its
Oktoberfest in October.
The adjacent Merchandise Store sells off-sale packages of the Company's
brews (including gift packs) and merchandise such as hand-screened label
T-shirts, posters, engraved glasses and mugs, logo caps, books about brewing,
gift packs, and other brewery-related gifts.
Management plans to continue bottling operations at the Hopland facility
until the Company can no longer keep up with demand, and then transfer bottling
operations to the Ukiah facility. Until that time, production at the Ukiah
facility will consist solely of draft beer. The Company will continue to operate
the Hopland facility to provide special occasion draft beers for the brewpub; to
research, develop, and test-market new craft brews; and as a brewing education
and training site.
Strategy
Mendocino Brewing's objective is to transform itself from the country's
leading microbrewery (based on annual sales from 1990 through 1995) to a
nationally known and respected craft brewer that offers among the highest
quality craft beers available anywhere in America. Management perceives that the
continued growth in the domestic craft beer segment (see "-- Industry Overview")
has given rise to a qualitative shift in the public's awareness of craft beers,
and that this shift now gives the Company an opportunity to enter new markets at
a time when many consumers are discovering craft brews for the first time.
Management believes that an important step is to position Mendocino Brewing's
products as offering superior quality with very high perceived value and
distinctive brand images, even when compared with other craft brews. Management
plans to accomplish this objective by making the Company's most popular brews
available in 12 oz. six packs and draft, increasing the Company's brand
development efforts, and entering new geographic markets. In completing the
plans for the new brewery, Management also concluded that it could position
itself better in the market and realize certain cost efficiencies and overall
cost reductions by designing a plant with an initial capacity of 60,000 bbl. per
year (20% greater than originally planned) and an ultimate capacity of 200,000
bbl. per year (54% greater than originally planned).
New Product Offerings
Until recently, Mendocino Brewing's capacity limitations and marketing
considerations dictated that the bulk of the Company's production be Red Tail
Ale in 12 oz. six packs. Draft beer has been limited to production for sale at
the Hopland Brewery, and other brews, such as Blue Heron Pale Ale, Black Hawk
Stout, Eye of the Hawk Select Ale, Yuletide Porter, and Frolic Shipwreck Ale
1850, have been available only in limited quantities of 750 ml or 22 oz.
bottles. A key element of the Company's strategy is to make more of its products
available in 12 oz. six-packs and draft. The new products are:
o Blue Heron Pale Ale 12 oz. Six-Packs. Blue Heron Pale Ale is now
available at selected retail outlets in 12 oz. six packs. The bottles
and carrier pack feature a colorful new label depicting a Great Blue
Heron preparing for flight against a soft, misty background of the
Russian River (which flows through Hopland) and surrounding hills. The
design has already won the prestigious 1996 Northern California Addy
award and the silver medal in the 1996 International Brand Packaging
Award competition sponsored by Graphic Design: USA magazine. The label
is also featured in the 1997 Brew Art(TM) calendar published by Ronnie
Sellers Productions of Kennebunk, Maine.
o Black Hawk Stout 12 oz. Six-Packs. Management plans to introduce Black
Hawk Stout in 12 oz. six-packs following completion of its new label
development, which Management expects to occur in 1997.
-25-
<PAGE>
This forward looking statement is subject to risks and uncertainties.
Among other things, tasks such as completing the new brewery may divert
Management's attention from matters such as label development. The
speed with which new Black Hawk Stout labels are developed will also
depend, in part, on the amount of proceeds raised in this offering. The
Black Hawk Stout label presently consists of the basic Mendocino
Brewing Company logo with the words BLACK HAWK STOUT and is distributed
in 22 oz. bottles in limited quantities.
o Draft brews in half barrel kegs. Management presently intends to make
draft production of Red Tail Ale, Blue Heron Pale Ale, and Black Hawk
Stout in half barrel kegs the first priority of the new brewery. The
Company is designing special tap handles and other marketing materials
for its draft products. Historically in the beer industry, introducing
draft products into restaurants and other establishments has driven
bottle sales which in turn has increased demand for draft products in
locations not served. These forward looking statements are subject to
risks and uncertainty. Among other things, there is no assurance that
sale of the Company's brews will help it achieve the critical mass that
Management seeks.
Brand Development
Management believes that consumers of the Company's brews are like the
typical craft beer consumer described in the H.C. Wainwright & Co. industry
report of October 12, 1995. According to this report, the typical craft beer
consumer is interested in "upscale and diversified" products with a "distinctive
brand image" and "full flavored taste." Craft beer consumers also tend to be
consumers of gourmet coffees, fine wines, all-natural products, and other
"affordable luxuries." A survey conducted by ICR of Media, PA found that the
following percentages of people had tried a craft beer:
<TABLE>
<S> <C>
25% of all U.S. beer drinkers 32% of beer drinkers in the Northeast
23% of women beer drinkers 28% of beer drinkers in the West
26% of male beer drinkers 26% of beer drinkers in the Midwest
17% of beer drinkers in the South
51% of people with annual incomes of $75,000
+
Greater than 50% of college educated people
38% of adults 25-34 years old
10% of adults 45 years and older
</TABLE>
One of the ways Mendocino Brewing projects its quality and corporate values
to consumers is through its Red Tail Ale, Blue Heron Pale Ale, and Eye of the
Hawk Select Ale labels. The Company has used nationally-known wildlife artists
including Randy Johnson and Lee Jayred for its label designs. In 1990, Mendocino
Brewing received the Paperboard Packaging Council's Silver Award for Excellence
in Packaging and Award for Excellence in Graphic Design and a Northern
California Addy Award for its Red Tail Ale packaging. In 1996, the Company
received a Northern California Addy Award and a silver medal in the
International Band Packaging Award competition sponsored by Graphic Design: USA
magazine for its Blue Heron Pale Ale packaging. It is Management's experience
that distributors and retailers realize the importance of superior packaging
graphics and appreciate the Company's offerings for that reason.
Management believes that the Red Tail Ale label successfully communicates
the value of Mendocino Brewing's products with the label's respectful depiction
of a red tail hawk flaring its wings as it prepares to land with clusters of
hops and barley in its talons. The illustrations Mendocino Brewing uses with its
Blue Heron Pale Ale and Eye of the Hawk Select Ale labels are intended to evoke
similar responses, as will be the illustration for Black Hawk Stout when
introduced.
The popularity of Mendocino Brewing's logos and trademarks is evidenced by
the sale of merchandise bearing these marks at the Hopland Brewery merchandise
store and through the merchandise catalogue the Company introduced in 1994. As
part of its marketing efforts, therefore, the Company intends to implement a
brand marketing development program that will emphasize:
o Point-of-sale promotional materials including brochures, signage, table
tents, coasters, tap handles, and glassware.
o Clothing (caps, T-shirts, polo shirts, sweatshirts, etc.).
-26-
<PAGE>
o Signage for distributor trucks to create "moving billboards." Mendocino
Brewing's emphasis on separate, distinctive illustrations for its
various brands enables it to produce a variety of images to create
consumer interest.
o World Wide Web Page. Mendocino Brewing's web page is located at
http://mendobrew.com and features information about the Company and the
Hopland Brewery brewpub and merchandise store, the Company's brewing
process, the Company's brands, the Hopland area, Company merchandise,
and shareholder information. The web page address is featured
prominently on Company marketing materials and can be accessed through
the Real Beer web site.
o Continued use of the Brewsletter beyond its current mailing list of
12,000. The Brewsletter is a newsletter Mendocino Brewing publishes and
distributes to educate subscribers about the brewing industry and the
Company's products and to promote the Company's image and corporate
values.
o Strong visual presence at beer shows and tasting competitions,
including the Great America Beer Festival in Denver, the Portland
Brewers Festival, and the KQED Beer Festival in San Francisco.
Regional Expansion
The Company's products are distributed widely in California and in limited
quantities at selected accounts in the metropolitan areas of Washington D.C.,
Boston, Seattle, Phoenix, Chicago, Milwaukee, New York, and Atlanta, and
throughout North Carolina, Texas, Oregon, Nevada, and Colorado. The Company
plans to add distributors in New Jersey, Maryland, Virginia, and the
metropolitan areas of Minneapolis/St. Paul and Philadelphia in the near future.
Northern California is the Company's most important market, and Management
anticipates that it will remain so for the foreseeable future. The Company's two
largest distributors, Bay Area Distributing (San Francisco and the East San
Francisco Bay Area) and Golden Gate Distributing (Sonoma and Marin Counties)
accounted for 21% and 19%, respectively, of the Company's wholesale distribution
in 1995. The percentage of the Company's sales for which these distributors have
accounted has decreased, and will continue to decrease, as the Company adds new
distributors and supplies them with more product. These forward-looking
statements are subject to risks and uncertainties. There is no assurance that
the Company will be able to add additional distributors or that its products
will be well-received in targeted markets. Management believes that regional
identification assists the Company in Northern California and may assist the
Company's local competitors in other regional markets. Also, see "Risk Factors -
Geographic Concentration" and " -- Reliance on Distributors."
Pricing Strategy
Mendocino Brewing's products are priced at or near the top of the market
and have been for several years. Recently, the Company decided to pass on to
consumers some of the economies resulting from increased capacity and reduced
the suggested retail price for a six-pack of Red Tail Ale from $7.43 to $6.99.
The suggested retail price for a six-pack of Blue Heron Pale Ale is also $6.99.
The Company has noticed that the price range of 12 oz. six-packs of the major
craft brew brands has narrowed in the last two years and appears to be
converging on $6.50 per six pack, with no major craft brew brand at less than
$6.45 per six pack. There is no assurance that craft beer prices will continue
at these levels. Nevertheless, Management believes that the Company's products
will continue to command prices that will be on at least a par with other major
regional craft brewers. These forward looking statements are subject to risks
and uncertainties. Retail prices are subject to many factors most of which are
beyond the control of the Company. These factors include general economic
conditions, competition and consolidation, and ability to anticipate and respond
to evolving consumer preferences and attitudes toward adult beverages.
Management anticipates that the Company will periodically give temporary price
reductions through special promotions in response to market conditions. Frequent
price reductions can condition consumers to expect such reductions, which may
increase or reduce overall unit sales depending on the circumstances.
Social Responsibility
Part of Mendocino Brewing's mission is to be viewed as a community,
regional, and national asset and as a positive example of how a business should
be operated. Management believes that the Company's customers require products
with high intrinsic value; that product quality alone is not sufficient; and
that a product must distinguish itself from the competition with the values it
communicates. These values include commitment to employees, community
involvement, and environmental responsibility. Management attempts to instill
these values in Company personnel and operations and to communicate to customers
the commitment of the Company to act
-27-
<PAGE>
responsibly. The Company encourages employees and distributors to share
ownership and mission with Management as well as a sense of pride in the
Company's products. Although part of the Company's strategy is to grow through
expanded sales, it promotes its brews as beverages of moderation whose
distinctive taste and high quality give the consumer satisfaction.
New Brewery
The new brewery will be a 62,000 sq. ft. custom designed facility on nine
acres of land in Ukiah, California, approximately 10 miles north of the original
brewery. The facility was approximately 82% complete as of December 31, 1996.
The facility is planned to feature new fermenting tanks, kegs, and packaging and
other miscellaneous equipment to be installed with the Company's existing
bottling line. Certain features of the new brewery have been specially designed
for the Company's brewing methods, such as equipment for using whole hops and
designated space for bottle conditioning. The facility will initially open with
an annual capacity of 60,000 bbl. per year. The Company had originally planned a
50,000 bbl. facility, but was able to take advantage of certain economies by
revising its plans to a capacity of 60,000 bbl. per year (20% greater than
originally planned). The facility has been designed to allow for expansion in
stages up to a maximum capacity of 200,000 bbl. per year (54% greater than
originally planned). The Company also elected to construct an extensive water
treatment facility as part of its commitment to the environment and to reduce
the over-all cost of disposing of its waste water. Management expects the sale
of the maximum number of Shares offered by this Prospectus will be sufficient to
permit the Company to purchase additional equipment to increase the plant's
annual capacity to approximately 75,000 bbl., depending on the products brewed.
Product Distribution
Mendocino Brewing's beers are sold through distributors to consumers in
bottles at supermarkets, warehouse stores, liquor stores, taverns and bars,
restaurants, and convenience stores. The Company intends to make Red Tail Ale,
Blue Heron Pale Ale, and Black Hawk Stout available in draft form and may sell
to additional kinds of outlets, such as sporting events. The Company's products
are delivered to retail outlets by independent distributors whose principal
business is the distribution of beer and in some cases other alcoholic
beverages, and who typically also distribute one or more national beer brands.
The Company, together with its distributors, markets its products to retail
outlets and relies on its distributors to provide regular deliveries, to
maintain retail shelf space, and to oversee timely rotation of inventory. The
Company also offers its products directly to consumers at the Hopland Brewery
brewpub and merchandise store. Of the Company's total beer sales for 1995, 87%
(74% of total sales) constituted sales to independent distributors and 13% (11%
of total sales) constituted sales at the Hopland Brewery brewpub and merchandise
store. Beer sales (wholesale and retail combined) constituted 85% of the
Company's total sales in 1995, with food and merchandise retail and catalogue
sales constituting the balance. As the Company's sales increase, Management
expects sales to independent distributors to increase materially as a percentage
of total sales.
Suppliers
The Company's major suppliers are Great Western Malting Co., Yakima,
Washington (malt); John I. Haas, Co., New York, New York (hops); and California
Glass Company, Oakland, California and Vitro Packaging, Inc., Dallas, Texas
(bottles). The City of Ukiah will supply power and water to the new brewery.
Employees
As of September 30, 1996, the Company employed 43 full-time and 42
part-time individuals including 10 in management and administration, 25 in
brewing operations, and 50 in retail and brewpub operations. Upon the completion
of its expansion, Management expects the Company to have increased four current
employees to full-time status and to have hired five additional management and
administrative employees, three marketing employees and five employees in
operations. Management believes that the Company's relations with its employees
is excellent. None of its work force is unionized. The Company has agreed with
the City of Ukiah that for two years it will give preference in its hiring to
residents of Mendocino County.
Properties/Facilities
The Company currently leases a 15,500 square foot building in Hopland. The
lease expires on September 1, 2004. Additionally, the Company leases a 4,000 sq.
ft. portion of a warehouse, located approximately two miles
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<PAGE>
from the Hopland facility. The Company owns nine acres of land in Ukiah,
California on which the Company has begun construction of its new brewery.
Patents and Trademarks
The Company has federal trademark registrations of the MENDOCINO BREWING
COMPANY word mark (Reg. No. 1,785,745), RED TAIL ALE word mark (Reg. No.
2,032,382), RED TAIL DESIGN (Reg. No. 2,011,817), BLUE HERON word mark (Reg. No.
1,820,076), BLUE HERON PALE ALE DESIGN (Reg. No. 2,011,816), PEREGRINE PALE ALE
word mark (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE word mark (Reg. No.
1,673,594), EYE OF THE HAWK SELECT ALE DESIGN (Reg. No. 2,011,818), EYE OF THE
HAWK SPECIAL EDITION ANNIVERSARY ALE AND DESIGN (Reg. No. 2,011,815), BLACK HAWK
STOUT word mark (Reg. No. 1,791,807), YULETIDE PORTER word mark (Reg. No.
1,666,891), and BREWSLETTER word mark (Reg. No. 1,768,639).
The registration of the word mark BLUE HERON is a concurrent use
registration which gives the Company the exclusive right to use the word mark
BLUE HERON throughout the United States with the exception of Oregon, Idaho,
Washington, and Montana. BridgePort Brewing Company, the other concurrent owner,
has the exclusive right to use the word mark BLUE HERON in those states. The
BridgePort Pale Ale label used outside of Oregon, Idaho, Washington, and Montana
depicts a blue heron wading in a marsh although the words BLUE HERON do not
appear.
Mendocino Brewing's use of the word mark BLACK HAWK STOUT is, by agreement
with Hiram Walker & Sons, Inc., subject to the restriction that it be used only
in conjunction with the words "Mendocino Brewing Company".
Mendocino Brewing does not consider its recipes, techniques, processes,
yeast strain, or equipment to be proprietary or necessary to protect.
Legal Proceedings
Mendocino Brewing is not currently involved in any material litigation or
proceeding and is not aware of any material litigation or proceeding threatened
against it.
Government Regulation
Mendocino Brewing is licensed to manufacture and sell beer by the
California Department of Alcoholic Beverage Control ("ABC"). A "Small Beer
Manufacturer's License" allows the Company to brew up to 1,000,000 bbl. per
year, to conduct wholesale sales, and to sell beer and wine for consumption both
on and off the premises. A federal permit from the Bureau of Alcohol, Tobacco,
and Firearms ("BATF") allows the Company to manufacture fermented malt
beverages. To keep these licenses and permits in force the Company must pay
annual fees and submit timely production reports and excise tax returns. Prompt
notice of any changes in the operations, ownership, or company structure must
also be made to these regulatory agencies. BATF must also approve all product
labels, which must include an alcohol use warning. These agencies require that
individuals owning equity securities in aggregate of 10% or more in the Company
be investigated as to their suitability.
Taxation of alcohol has increased significantly in recent years. Currently,
the Federal tax rate is $7.00 per bbl. for up to 60,000 bbl. per year and $18.00
per bbl. for over 60,000 bbl. The California tax rate is $6.20 per bbl.
The Hopland Brewery's brewpub is regulated by the Mendocino County Health
Department, which requires an annual permit and conducts spot inspections to
monitor compliance with applicable health codes.
The Company's production operations must also comply with the Occupational
Safety and Health Administration's workplace safety and worker health
regulations and applicable state laws thereunder. Management believes that the
Company presently is in compliance with the aforementioned laws and regulations
and has implemented its own voluntary safety program.
Environmental Regulation
The Company is subject to various federal, state, and local environmental
laws which regulate the use, storage, handling, and disposal of various
substances.
-29-
<PAGE>
The Company's waste products consist of water, spent grains and hops, and
glass and cardboard. The Company has instituted a recycling program for its
office paper, newspapers, magazines, glass, and cardboard at minimal cost to the
Company. The Company pays approximately $1,000 per month in sewage fees relating
to waste water from its Hopland facility. The Company gives its spent grain to
local cattle ranchers, who pick up the spent grain at their expense. The Company
has not purchased any special equipment and does not incur any identifiable fees
in connection with its environmental compliance at its Hopland site.
Management anticipates that Mendocino Brewing will continue its recycling
program at the new brewery. Because of the increased quantities involved,
Management expects the Company to sell the spent grain from the Ukiah location
to ranchers and/or dairy farmers rather than give it away. The Company has built
its own waste water treatment plant for the Ukiah facility. As a consequence,
the Company will not be required to incur sewer hook-up fees at that location.
If the Company's discharge exceeds 55,000 gallons per day, which Management does
not expect to occur until annual capacity exceeds 100,000 bbl., the Company will
be required to pay additional fees. The estimated cost of the waste water
treatment facility is approximately $900,000, and the estimated cost of
operating the plant is between $6,000 and $10,000 per month. The cost may
increase with increased production. The Company is exploring various methods of
recycling treated waste water and could realize some revenue from doing so. The
Company has contracted to have the liquid sediment that remains from the treated
waste water to be trucked to a local composting facility for essentially the
cost of transportation. A Mendocino County Air Quality Control Permit will be
required to operate the natural gas fired boiler at the new facility.
The Company has not received any notice from any governmental agency that
it is a potentially responsible person under any environmental law.
Research and Development
The Company did not engage in material research and development activities
in 1994. In 1995 the Company began research into low-alcohol and non-alcoholic
ale and will continue to explore these and other new products. The Company
intends to use its original brewing facility at the Hopland Brewery to develop
and test market new brews after completion of the new facility.
Qualified Small Business Issuer
Federal and California tax laws provide a 50% exclusion of any gain from
the sale of "qualified small business stock." For the Shares offered by this
Prospectus to qualify for the exclusion, several tests must be met. For
instance, the Shares must be purchased directly from the Company, not in any
later trading market, and the Shares must be held for at least five years.
A "qualified small business" must not have more than $50 million in assets,
at least 80% of which are used in a qualified trade or business throughout the
holding period. A "qualified trade or business" does not include "operating a
hotel, motel, restaurant, or similar business." It is uncertain whether the
Company's operation of the Hopland Brewery brewpub currently prevents it from
meeting the definition of "qualified small business", as the brewing equipment
in Hopland is presently used in both wholesale and retail operations and no
applicable regulations have been published to assist in making such
determination. Management believes, after consulting with its accountants, that
completing the new brewery will reduce the assets of the Company used in the
operation of the brewpub to well below 20%, but Management does not intend to
request any opinions or rulings on this issue at the present time.
The Company intends to submit reports if and to the extent any are required
under federal law to make the 50% exclusion from capital gains available, and
submitted such a report in California for 1995, the first year in which
California required such a report. Given the absence of applicable regulations,
there is no assurance that California taxing authorities will agree with the
information contained in the report. There are limitations on the persons who
may use any exclusion. Prospective investors should consult their own tax
advisors concerning the possible applicability of these exclusions.
-30-
<PAGE>
<TABLE>
MANAGEMENT
Executive Officers, Directors, and Significant Employees
The executive officers, directors, and significant employees of the
Company, and their ages as of January 31, 1997, are as follows:
<CAPTION>
Name Age Position
-------------------------- --- -----------------------------------------------------------------
<S> <C> <C>
H. Michael Laybourn 58 Chief Executive Officer, President, and Chairman of the Board
Norman H. Franks 50 Chief Financial Officer, Vice President, Treasurer, and Director
Michael F. Lovett 49 Marketing Director, Secretary, and Director
Eric G. Bradley* 59 Director
Daniel R. Moldenhauer* 62 Director
Thomas I. Palmtag 53 National Sales Manager
John Scahill 57 Facilities Manager
Donald Barkley 43 Master Brewer
<FN>
------------
*Member of the Compensation and Audit Committees
</FN>
</TABLE>
H. Michael Laybourn, co-founder, has served as the Company's Chief
Executive Officer and President since its inception in 1982. Mr. Laybourn was
elected a director in November 1993 when the Company began the process of
converting from a limited partnership to a corporation and Chairman of the Board
in June 1994. Before co-founding Mendocino Brewing, Mr. Laybourn co-owned and
operated Thunder Road Design and Construction. Mr. Laybourn is a Vice President
of the California Small Brewers Association and Chairman of the Board of
Directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor
of Fine Arts degree from Arizona State University.
Norman H. Franks, co-founder, has served as the Company's Chief Financial
Officer and Vice President since its inception in 1982. Mr. Franks was elected a
director in November 1993 when the Company began the process of converting from
a limited partnership to a corporation. Before co-founding Mendocino Brewing,
Mr. Franks co-owned and operated Thunder Road Design and Construction. Mr.
Franks holds a B.S. degree in mechanical engineering from the University of
California, Berkeley.
Michael F. Lovett joined the Company in 1983 as Assistant Master Brewer and
became Marketing Director in 1987, serving since that time under that or other
titles. Mr. Lovett was elected a director in November 1993 when the Company
began the process of converting from a limited partnership to a corporation and
was appointed Secretary in June 1994. Between 1980 and 1983, Mr. Lovett was Vice
President Quality Control of New Albion Brewing Co. From 1976 to 1980, Mr.
Lovett was Production Superintendent at Farm Foods in San Francisco. He is the
immediate past Membership Chairman and a past Technical Chairman of the Master
Brewers Association of the Americas. Mr. Lovett holds a B.A. degree in
Psychology from San Francisco State College.
Eric G. Bradley became a director in June 1994. Mr. Bradley has been a
business and financial consultant since 1988. For the preceding 20 years, he was
employed by Kaiser Aluminum & Chemical Corp., in positions rising from Division
Controller to Business Manager. Mr. Bradley is a Fellow of the Institute of
Chartered Accountants (UK) and a Certified Personal Financial Planner.
Daniel R. Moldenhauer became a director in June 1994. Mr. Moldenhauer is a
management consultant. He was president of Conex Products Inc. of Dublin,
California from 1988 to 1990, a company formed from assets divested by Kaiser
Aluminum & Chemical Corp. and later sold to Coleman Cable Systems. Mr.
Moldenhauer served in several capacities with Kaiser Aluminum & Chemical Corp.
from 1971 to 1988, most recently as general manager of a subsidiary.
Thomas I. Palmtag joined the Company in January 1997 as National Sales
Manager. Immediately before joining the Company, he served as President of two
regional beer distributors, Colorado Beverage Distributing Co., Inc. of Colorado
Springs (1994 - 1995) and Mesa Distributing Company, Inc. of San Diego (1993 -
1994), both Miller distributors owned by Liquid Investments, Inc. in San Diego.
From 1980 to 1993, Mr. Palmtag served in various capacities for Coast
Distributing Company in San Diego, an Anheuser-Busch distributor, most recently
as Vice President and General Manager (1984 - 1993). From 1977 through 1980 Mr.
Palmtag was employed as a Marketing Manager and Sales Manager for Anheuser-Busch
in Riverside and Sylmar, California. From 1967
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<PAGE>
through 1977 he was employed in various capacities for beer distributors in
Illinois and California. Mr. Palmtag holds a B.S. degree from the University of
Wisconsin.
John Scahill, co-founder, has served as the Company's Facilities Manager
since its inception. Before co-founding the Company Mr. Scahill was a
self-employed rancher. Mr. Scahill has a background in construction and
counseling and holds a B.S. degree in sociology from the University of
California, Berkeley.
Donald Barkley joined the Company in 1983 as Master Brewer. Immediately
before joining the Company, Mr. Barkley was the Head Brewer and Plant Manager at
New Albion Brewing Co. from 1981 to 1983. Mr. Barkley joined New Albion Brewing
Co. in 1978 and held several positions. In 1993 Mr. Barkley was the President
and representative to the national board of governors of the Master Brewers
Association of the Americas, Northern California District. Mr. Barkley holds a
B.S. degree in fermentation science from the University of California, Davis.
Indemnification of Officers and Directors
The Articles of Incorporation of the Company provide for the
indemnification of its directors, officers, employees, and other agents to the
maximum extent permitted by the California Corporations Code except in
circumstances where the person is making a claim against the Company. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 (the
"Securities Act") may be permitted to directors, officers, and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Director Term of Office
Directors are elected at each annual meeting of shareholders to serve until
their successors are elected and qualified at the next annual meeting of
shareholders.
Director Compensation
The Company's inside directors do not receive any cash compensation for
their service on the Board of Directors. Outside directors receive $600 per
meeting. No additional fees are paid for attending Compensation or Audit
Committee meetings. Directors may be compensated for certain expenses in
connection with their attendance at Board meetings. Since July 1996, Director
Daniel R. Moldenhauer has acted as a project management consultant for the
Company with respect to its ongoing construction project.
<TABLE>
Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1994 and December 31, 1995, annual compensation, including salary, bonuses, and
certain other compensation, paid by the Company to the Company's Chief Executive
Officer, Chief Financial Officer, and to all executive officers as a group. None
of the Company's other executive officers' total compensation exceeded $100,000
for fiscal 1995.
<CAPTION>
Annual Compensation
Fiscal ------------------------ All Other
Name and Principal Position Year Salary Bonus Compensation*
- --------------------------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
H. Michael Laybourn............................ 1994 $ 59,520 $ 24,780 $ 13,529
Chief Executive Officer 1995 89,016 22,255 9,804
Norman H. Franks............................... 1994 $ 56,016 $ 18,884 $ 13,228
Chief Financial Officer 1995 79,008 23,702 5,835
<FN>
- --------------
* Includes an allowance for health insurance, life insurance, disability
insurance, and participation in the Company's profit sharing retirement
plan (annual discretionary contributions by the Company of up to 15% of
gross compensation).
</FN>
</TABLE>
Employment Agreements and Change in Control Arrangements
The Company has entered into employment agreements with its President,
Chief Financial Officer, and Marketing Director. The agreements call for minimum
annual base salary of $89,000, $79,000, and $55,000 respectively. The agreements
provide for bonus awards of a percentage of their respective base salaries upon
the satisfaction of performance objectives established by the Compensation
Committee (subject to the inherent
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<PAGE>
oversight powers of the Board) and approved by the employee. The agreements
specify that the performance objectives must be reasonably attainable, must not
be probable of attainment without significant effort, and must reflect or
indicate that value has been created for the shareholders. The Compensation
Committee may award a bonus regardless of whether previously specified
objectives are realized if, as a result of an employee's efforts or leadership,
the Company has achieved other goals that reflect or indicate that value has
been created for the shareholders.
The agreements also require the Company to grant options to purchase up to
20,000, 20,000, and 10,000 shares, respectively, of Company Common Stock
pursuant to the Company's 1994 Stock Option Plan at exercise prices of $9.2125,
$9.2125, and $8.375 per share, respectively. The options vest in equal monthly
increments over five years. The option agreements have terms of 5 years, 5
years, and 10 years, respectively.
The agreements do not provide for any benefits as a result of resignation
or retirement. The Board of Directors has discussed the subject of, and might in
the future grant, retirement benefits to Mendocino Brewing's founders in
addition to their participation in the Company's profit sharing plan.
The agreements provide for severance benefits in the form of 36, 36, and 18
months, respectively, of salary continuation if the Company actually or
constructively terminates the employee's employment without cause as defined in
the agreement. If the actual or constructive termination occurs within one year
after a change in control as defined in the agreement, the agreements provide
for an additional lump sum benefit of up to $500,000, $500,000, and $250,000
respectively. Any amount payable pursuant to these severance provisions will be
deferred indefinitely and without interest to the extent the amount would
otherwise constitute an excess parachute payment as defined in Section 280G of
the Internal Revenue Code. Amounts so deferred may be paid at such time in the
future, if any, that no portion of the payment will be considered an excess
parachute payment.
CERTAIN TRANSACTIONS
There have been no transactions during the last two years, and there are
now no proposed transactions, involving more than $60,000 between the Company
and any executive officer, director, nominee, 5% beneficial owner of any class
of the Company's securities, or member of the immediate family of any of the
foregoing persons, in which one or the foregoing individuals or entities had a
material interest, except as follows:
On October 11, 1996, in recognition of Mr. Laybourn's personal guaranty of
the equipment lease with FINOVA Capital Corporation described in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financing the New Brewery - Equipment Lease," the Company agreed to grant
President Michael Laybourn a 5-year option to purchase 12,500 shares of Common
Stock of the Company at an exercise price of $8.80 per share. Mr. Laybourn's
guaranty automatically terminated when FINOVA made the final payment for the
purchase price of the equipment to the manufacturer.
The Company has entered into written employment agreements with its
President, Chief Financial Officer, and Marketing Director as described in
"Management -- Employment Agreements and Change in Control Arrangements." It is
the Company's policy that all transactions with officers, directors, nominees,
5% beneficial owners of any class of the Company's securities, and members of
the immediate families of any of the foregoing persons be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
The Company's bylaws provide that the Board of Directors may approve loans
of money or property to, and guaranties of the obligations of, officers of the
corporation, and may adopt employee benefit plans authorizing such loans and
guaranties to officers of the corporation, if the vote of any interested
director or directors is not counted and the Board determines that such loan,
guaranty, or plan may reasonably be expected to benefit the corporation.
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<PAGE>
<TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of the Company's Common Stock and Series A
Preferred Stock as of the date of this Prospectus, and as adjusted to reflect
the sale of the Shares offered by this Prospectus, for (a) each shareholder
known by the Company to own beneficially 5% or more of the outstanding shares of
its Common Stock or Series A Preferred Stock; (b) each director; and (c) all
directors and executive officers of the Company as a group. Except as otherwise
noted, Management believes that the beneficial owners of the Common Stock and
Series A Preferred Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares,
subject to community property laws where applicable.
<CAPTION>
COMMON STOCK:
Shares Percentage of Shares Outstanding(1)
Directors, Executive Officers, Beneficially Before Offering Maximum Sold
and 5% Shareholders Owned 2,322,222 shares 2,922,222 shares
------------------------------- ------------- ---------------- ----------------
<S> <C> <C> <C>
H. Michael Laybourn*................ 272,367 11.73% 9.32%
Norman H. Franks*(2)................ 244,512 10.53% 8.36%
Michael F. Lovett*(3)............... 93,034 4.01% 3.18%
Eric G. Bradley..................... 1,000 0.04% 0.03%
1056 Park Lane, Piedmont, CA 94610
Daniel R. Moldenhauer............... 500 0.02% 0.02%
662 St. Ives Court
Walnut Creek, CA 94598
John Scahill*....................... 248,809 10.71% 8.51%
All directors and executive
officers as a group (5 persons) .. 611,413 26.33% 20.92%
</TABLE>
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK:
Shares
Directors, Executive Officers, Beneficially Percentage of
and 5% Shareholders Owned Shares Outstanding
------------------------------ ------------ ------------------
<S> <C> <C>
H. Michael Laybourn.................. 6,100 2.68%
All directors and executive
officers as a group (five persons) 6,100 2.68%
* c/o Mendocino Brewing Company, Inc.
13351 Hwy. 101 South
Hopland, CA 95449-0400
<FN>
- -------------------
(1) Does not include 300,000 shares issued to BDM Construction Co., Inc. ("BDM")
as security for the payment of up to $900,000 owed or to be owed to BDM for
general contractor services in connection with the new brewery. Although BDM
presently has the power to vote the 300,000 shares, no shareholder votes are
contemplated until after the due date of the obligation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Financing the New Brewery - Vendor Financing."
(2) Does not include 145 shares owned by Mr. Franks's wife. Mr. Franks disclaims
any beneficial ownership of shares held in the name of his wife.
(3) Mr. Lovett's shares are pledged to a commercial bank as security for a
personal loan. Mr. Lovett's share totals do not include 8,525 of such shares
sold between November 21, 1996 and December 18, 1996 to raise funds to make
payments on the loan. Mr. Lovett has filed a Form 144 with the SEC stating his
intention to sell a total of 14,200 shares.
</FN>
</TABLE>
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, without par value, and 2,000,000 shares of Preferred Stock,
without par value, 227,600 of which are designated Series A Preferred Stock.
Common Stock
At January 6, 1997 there were 2,322,222 shares of Common Stock outstanding
and held of record by approximately 2,435 shareholders.(1) The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the shareholders, except that upon giving the legally
required notice, shareholders may cumulate their votes in the election of
directors. The Company may pay dividends only at the times and extent declared
by the Board of Directors, and with respect to the Common Stock if and only if
the Company has paid an aggregate amount of $1.00 each on the Series A Preferred
Stock. The Company may at any time declare and pay a dividend with respect to
the Common Stock payable solely in Common Stock. Dividends are only payable out
of assets legally available for that purpose. See "Dividend Policy." Upon
liquidation or dissolution of the Company, holders of Common Stock are entitled
to share ratably in all assets remaining after payment of liabilities and
payment of an aggregate amount of $1.00 each in dividends and liquidation
proceeds on the Series A Preferred Stock. The Common Stock has no preemptive or
other subscription rights, and there are no conversion rights or redemption or
sinking fund provisions with respect to the Common Stock. All outstanding shares
of Common Stock are, and the Shares offered by this Prospectus will upon
completion of this offering be, fully paid and nonassessable.
Preferred Stock
When Mendocino Brewing changed from a partnership to a corporation, the
corporation issued 227,600 shares of Series A Preferred Stock to the
Partnership, which the Partnership then distributed to its limited partners.
Each limited partner received one share of Series A Preferred Stock for each
dollar of the limited partner's liquidation preference. The common shares
received by the Partnership were distributed among the partners in accordance
with their respective interests in the Partnership. As of the date of this
Prospectus, there are outstanding 227,600 shares of Series A Preferred Stock
held of record by 43 shareholders. The Series A Preferred Stock is not
convertible into Common Stock, nor is there any provision for redemption of the
Series A Preferred Stock. The holders of Series A Preferred Stock have the right
to receive cash dividends and/or liquidation proceeds equal in the aggregate to
$1.00 per share of Series A Preferred Stock before any cash dividends or
liquidation proceeds may be paid on Common Stock or any other series of
Preferred Stock, but there is no requirement that a dividend be paid. The Series
A Preferred Stock does not entitle its holders to any voting rights, although
the California Corporations Code requires that certain matters be approved by
the shares of each class, regardless of whether such shares otherwise have
voting rights. When the entire dividend/liquidation preference has been paid,
the Series A Preferred Stock will cease to be outstanding, and the Series A
Preferred Stock will resume the status of authorized but unissued and
undesignated Preferred Stock.
The Board of Directors has the authority, without further action by the
shareholders, to issue all or part of the remaining 1,772,400 shares of
Preferred Stock in one or more series and to determine and alter the rights,
preferences, privileges, and restrictions granted to and imposed upon any wholly
unissued series of Preferred Stock, to fix the number of any series of Preferred
Stock, and to set the designation of any series of Preferred Stock. Dividends do
not cumulate, and do not accrue until declared by the Board of Directors. The
Articles of Incorporation provide that, except as otherwise required by law, the
Preferred Stock does not vote on any matter. The issuance of additional
Preferred Stock could adversely affect the likelihood that holders of Common
Stock will receive dividend payments and/or payments upon liquidation, and could
have the effect of delaying, deferring, or preventing a change of control of the
Company. The issuance of Preferred Stock with conversion rights may
- ---------------------
(1) This amount does not include the 300,000 shares of common stock issued to
BDM Construction Co., Inc. as security for payment of certain of its fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financing the New Brewery - Vendor Financing" and Note 1 to
"Principal Shareholders."
-35-
<PAGE>
adversely affect the voting power of the holders of Common Stock. The Company
has no present plan to issue any additional shares of Preferred Stock.
Registration Rights
There are no agreements between current holders of Common Stock or Series A
Preferred Stock and the Company obligating the Company to register such shares
under the Securities Act except for the employment agreements between Mendocino
Brewing and its President, Chief Financial Officer, Marketing Director, and
certain other employees holding an aggregate of 960,052 shares of Common Stock.
Under the terms of the agreements, the holders are entitled to include the
Common Stock they own with any registration by the Company of its securities
under the Securities Act, either for its own account or for the account of other
securities holders exercising registration rights who may acquire such rights in
the future. The holders may also require the Company to file and use its best
efforts to effect a registration statement under the Securities Act at the
Company's expense with respect to their shares of Common Stock. The registration
rights are subject to certain conditions and limitations, including the right of
any underwriters of an offering to limit the number of shares to be included in
the registration.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is Boston
EquiServe, 150 Royall Street, MS 45-02-63, Canton, MA 02021 (Telephone:
617-575-2804).
SHARES ELIGIBLE FOR FUTURE RESALE
Upon completion of this offering, assuming that the maximum amount of
Shares offered by this Prospectus is sold, the Company will have outstanding
2,922,222 shares of Common Stock.(1) Of these shares, approximately 1,952,192
shares will be freely tradable without restriction or further registration under
the Securities Act unless purchased by "affiliates" of the Company, as that term
is defined in Rule 144 under the Securities Act ("Rule 144") described below.
The only material restriction on the approximately 970,030 of the shares of
Common Stock held by affiliates prior to this offering is the limitation on the
number of shares that may be sold in any three-month period under Rule 144.(2)
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years, is entitled to sell, within any three-month
period, a number of shares that does not exceed 1% of the then outstanding
shares of Common Stock. In addition, a person who is not deemed to have been an
affiliate of the Company at any time during the 90 days preceding the sale, and
who has beneficially owned the shares proposed to be sold for at least three
years, is entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares are acquired from an
affiliate of the Company, such shareholder's holding period for the purposes of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate.
- ---------------------
(1) This amount does not include the 300,000 shares of common stock issued to
BDM Construction Co., Inc. as security for payment of certain of its fees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financing the New Brewery - Vendor Financing" and Note 1 to
"Principal Shareholders."
(2) This amount does not include the 300,000 shares of common stock issued to
BDM Construction Co., Inc. as security for payment of certain of its fees. See
Note 1 above. As a result of such ownership, the Company considers BDM to be an
affiliate of the Company. Accordingly, 8,333 other shares held by BDM are also
considered to be affiliate Shares.
-36-
<PAGE>
PLAN OF DISTRIBUTION
General
The Company is offering up to 600,000 Shares of its Common Stock on a "best
efforts" basis directly to the public. The minimum subscription is 50 Shares
($425.00). Shareholders of record as of October 25, 1996 ("Record Shareholders")
have the first right to purchase the Shares, provided that the Company receives
their properly completed subscription agreement and good funds for the purchase
price no later than fifteen (15) days after the effective date of this
Prospectus. Thereafter, the Company will accept subscriptions for any remaining
Shares from the general public, subject only to the 50 Share minimum investment.
Subject to the priority of the Record Shareholders, subscriptions will be
honored on a first come, first served basis until all 600,000 Shares are sold or
until the Company terminates the offering. The offering is not contingent upon
subscriptions for any minimum number of Shares.
Determination of Offering Price.
The Company has determined the public offering price of the Shares offered
by this Prospectus by taking into account the trading history of the Common
Stock on the Pacific Stock Exchange, growth in the domestic craft brew segment,
Management's assessments of the results of operations and future prospects for
the Company's business, and recent sales growth. The price of the Company's
Common Stock on the Pacific Stock Exchange has been less than the public
offering price since the Company originally announced its intention to sell
shares at $8.50 per share, and Management expects that the public trading price
will remain less than $8.50 for the duration of the offering. Management
believes that persons interested in acquiring the Company's stock are unlikely
to pay a commission to purchase shares on the Pacific Stock Exchange for as much
as $8.50 if they can purchase shares at that price directly from the Company
without a commission. For that reason, existing shareholders who presently wish
to sell their shares are required to ask a price that, when coupled with the
buying broker's commission, is less than $8.50 per share. Investors may also
prefer to see their money put to work as new capital for the Company. In
addition, the tax advantages of holding "qualified small business stock" are
available only to investors who purchase shares directly from the Company
instead of on the open market. See "Business - Qualified Small Business Issuer."
These factors may require sellers to further reduce their asking price during
the time of the offering. See "Risk Factors -- Suppression of Public Trading
Price of the Shares During Offering."
Sales Representative.
The Company will only effect offers and sales of Shares through a
designated sales representative, presently Michael F. Lovett, who also serves as
the Company's Marketing Director and Secretary and is a member of the Board of
Directors. Mr. Lovett is not subject to any of the statutory disqualifications
set forth in Section 3(a)(39) of the Exchange Act, nor is he an associated
person (partner, officer, director, or employee) of a broker or dealer. In
connection with the sale of the Shares offered by this Prospectus, Mr. Lovett
will not receive, directly or indirectly, any commissions, remuneration, or any
other compensation. Mr. Lovett has successfully passed the Series 63 -- Uniform
Securities Agent State Law Examination and is registered as a "sales
representative of the issuer" for this offering in those jurisdictions in which
such registration is required.
Subscription Procedure
The Shares are offered by the Company on a "best efforts" basis. The
offering shall terminate upon the earlier of (a) the date on which all of the
Shares have been sold; (b) September 30, 1997, unless such date is extended by
the Company; or (c) the date on which the Company terminates the offering. To
subscribe, investors must mail (a) the Subscription Agreement (or a photocopy
thereof), properly completed and signed, (b) a check or money order payable to
the order of "Mendocino Brewing Company, Inc." for the purchase price of $8.50
per share (minimum purchase 50 Shares, $425.00), and (c) if the investor was a
beneficial owner of shares of the Company's Common Stock held of record as of
October 25, 1996 in the name of a nominee (i.e., a person other than the real
owner, such as a stock broker), written evidence of such beneficial ownership,
such as a copy of an account statement as of that date. Alternatively, the
nominee may subscribe for Shares in the nominee's name. Subscription documents
should be mailed or delivered to Mendocino Brewing Company, Inc., 13351 South
Highway 101, PO Box 400, Hopland, CA 95449-0400. Investors should not include
any other documents or correspondence. Since the number of Shares available is
limited and subscriptions will be accepted on a first come, first served basis,
with priority given to Record Shareholders, subscribers are advised to forward
the Subscription Agreement, payment for the Shares, and evidence of beneficial
ownership if required, as soon as possible.
-37-
<PAGE>
Acceptance Procedure
The Company will first process properly completed subscriptions received
from Record Shareholders in the order in which they are received. Subscriptions
from other persons will be held until 15 days after the effective date of this
Prospectus. At that time, properly completed subscriptions received from such
other persons will also be processed in the order in which they are received.
Subscription Agreements received on the same date will be processed in the order
in which they are opened. Subscriptions are irrevocable. Subscriptions that are
not accepted for any reason will be returned without interest or any deduction
for expenses. Subscriptions accompanied by an overpayment which are otherwise
properly completed will be accepted and a check will be mailed to the subscriber
for the amount of the overpayment. The Company will assess a $25 charge for any
check that is returned by the bank.
Upon acceptance of a subscription, the Company will forward to the
subscriber a copy of the accepted subscription agreement and a copy of this
Prospectus (unless the Subscription Agreement indicates that the subscriber has
already received the final Prospectus or the subscriber elects to take delivery
of the Prospectus electronically over the Internet). At the same time, the
Company will forward an instruction to the transfer agent for the Shares, Boston
EquiServe, to prepare and forward a stock certificate directly to the
subscriber. Subscribers will not be deemed holders of the Shares purchased until
the stock certificate has been issued.
The Company reserves the right to terminate the offering at any time before
the sale of all 600,000 Shares.
LEGAL MATTERS
The legality of the Shares of Common Stock being offered by this Prospectus
will be passed upon for the Company by Enterprise Law Group, Inc., Menlo Park,
California.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Moss Adams LLP, independent public accountants, as indicated in
their report with respect thereto, in reliance upon the authority of Moss Adams
LLP as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has electronically filed a Registration Statement on Form SB-2
relating to the Shares offered by this Prospectus with the Securities and
Exchange Commission, Washington, D.C. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Shares offered by this Prospectus, potential investors should refer to the
Registration Statement and its exhibits and schedules. The complete Registration
Statement and all amendments thereto will be available for viewing and
downloading without charge from the SEC's World Wide Web site located at
http://www.sec.gov shortly after being filed. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete. Copies of the Registration Statement and its amendments
may also be inspected by anyone without charge at the Commission's principal
office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
Commission's New York Regional Office located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and the Commission's Chicago Regional Office
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies of all or any part of the Registration Statement and
its amendments may also be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.
-38-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITOR'S REPORT................................................ 40
FINANCIAL STATEMENTS
Balance sheet............................................................... 41
Statements of income........................................................ 42
Statements of partners'/shareholders' equity................................ 43
Statements of cash flows.................................................... 44
Notes to financial statements............................................... 45
Balance sheet (unaudited) .................................................. 53
Statements of income (unaudited)............................................ 54
Statements of cash flows (unaudited)........................................ 55
Notes to financial statements (unaudited)................................... 57
-39-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Board of Directors
Mendocino Brewing Company, Inc.
We have audited the accompanying balance sheets of Mendocino Brewing Company,
Inc., as of December 31, 1995 and 1994, and the related statements of income,
equity and cash flows for each of the two years in the period then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mendocino Brewing Company,
Inc., as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
/s/ MOSS ADAMS LLP
Santa Rosa, California
January 26, 1996
-40-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEETS
<CAPTION>
December 31,
----------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,696,100 $2,900,800
Accounts receivable 458,900 293,900
Inventories 256,200 202,000
Prepaid expenses 47,100 13,500
Deferred income taxes 15,500 11,800
---------- ----------
Total current assets 2,473,800 3,422,000
---------- ----------
PROPERTY AND EQUIPMENT 3,954,100 301,000
---------- ----------
OTHER ASSETS
Label development costs, net of amortization 15,100 14,700
Deferred offering costs - 41,700
Deposits and other assets 71,000 254,600
Deferred income taxes - 4,100
---------- ----------
86,100 315,100
---------- ----------
Total assets $6,514,000 $4,038,100
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 105,700 $ 144,700
Accrued wages and related expense 129,800 84,200
Accrued construction costs 1,182,300 -
Accrued profit sharing 30,000 45,000
Accrued liabilities 22,300 20,600
Income taxes payable 34,200 12,400
Current maturities of long-term debt 10,400 7,900
---------- ----------
Total current liabilities 1,514,700 314,800
LONG-TERM DEBT, less current maturities 554,900 -
DEFERRED INCOME TAXES 20,200 -
---------- ----------
Total liabilities 2,089,800 314,800
---------- ----------
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized, 2,322,222 and 2,220,445 shares
issued and outstanding 3,869,600 3,342,400
Preferred stock, Series A, no par value, with
aggregate liquidation preference of $227,600,
227,600 shares authorized, issued and outstanding 227,600 227,600
Retained earnings 327,000 153,300
---------- ----------
Total stockholders' equity 4,424,200 3,723,300
---------- ----------
Total liabilities and stockholders' equity $6,514,000 $4,038,100
========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 41 -
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
<CAPTION>
Year Ended
December 31,
---------------------------
1995 1994
---------- ----------
<S> <C> <C>
Sales $3,735,100 $3,523,000
Less excise taxes 168,600 157,400
---------- ----------
Net sales 3,566,500 3,365,600
Cost of goods sold 1,846,500 1,840,900
---------- ----------
Gross profit 1,720,000 1,524,700
---------- ----------
Operating expenses
Retail operating 649,200 594,300
Marketing 277,800 247,100 247,100
General and administrative 610,300 483,300
---------- ----------
1,537,300 1,324,700
---------- ----------
Income from operations 182,700 200,000
---------- ----------
Other income (expense)
Interest income 132,800 26,000
Other income 14,800 3,000
Interest expense (3,700) (4,200)
---------- ----------
143,900 24,800
---------- ----------
Income before income taxes 326,600 224,800
Provision for income taxes 152,900 71,500
---------- ----------
Net income $ 173,700 $ 153,300
========== ==========
Earnings per share $ .08 $ .08
========== ==========
Weighted average common shares outstanding 2,307,074 1,814,403
========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 42 -
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
<CAPTION>
Partnership Equity Series A
--------------------------- Preferred Stock
Limited General ------------------------
Partners Partners Shares Amount
---------- --------- -------- --------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 $ 776,200 $ 7,700 - $ -
Conversion of partnership
units to stock as a
result of incorporation (776,200) (7,700) 227,600 227,600
Issuance of common stock - - - -
Net income - - - -
--------- -------- ------- --------
Balance, December 31, 1994 - - 227,600 227,600
Issuance of common stock - - - -
Net income - - - -
--------- -------- ------- --------
Balance, December 31, 1995 $ - $ - 227,600 $227,600
========= ======== ======= ========
</TABLE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY (Continued)
Years Ended December 31, 1995 and 1994
<CAPTION>
Common Stock
-------------------------- Retained Total
Shares Amount Earnings Equity
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1993 - $ - $ - $ 783,900
Conversion of partnership
units to stock as a
result of incorporation 1,722,222 556,300 - -
Issuance of common stock 498,223 2,786,100 - 2,786,100
Net income - - 153,300 153,300
--------- ---------- -------- ----------
Balance, December 31, 1994 2,220,445 3,342,400 153,300 3,723,300
Issuance of common stock 101,777 527,200 - 527,200
Net income - - 173,700 173,700
--------- ---------- -------- ----------
Balance, December 31, 1995 2,322,222 $3,869,600 $327,000 $4,424,200
========= ========== ======== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 43 -
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended
December 31,
----------------------------
1995 1994
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 173,700 $ 153,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 49,300 56,200
Loss (gain) on sale of assets 500 (3,000)
Deferred income taxes 20,600 (15,900)
Changes in:
Accounts receivable (165,000) (24,900)
Inventories (54,200) (24,200)
Prepaid expenses (33,600) 800
Accounts payable (39,000) 42,100
Accrued wages and related expense 45,600 44,400
Accrued profit sharing (15,000) 20,000
Accrued liabilities 1,700 (63,400)
Income taxes payable 21,800 12,400
----------- ----------
Net cash provided by operating activities 6,400 197,800
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,923,300) (148,600)
Other assets (27,800) (197,200)
Proceeds from sale of fixed assets 500 3,100
----------- ----------
Net cash used by investing activities (2,950,600) (342,700)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (11,700) (36,500)
Accrued construction costs 1,182,300 -
Proceeds from sale of common stock 568,900 2,786,200
----------- ----------
Net cash provided by financing activities 1,739,500 2,749,700
----------- ----------
INCREASE (DECREASE) IN CASH (1,204,700) 2,604,800
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,900,800 296,000
----------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,696,100 $2,900,800
=========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
- 44 -
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995 and 1994
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) Nature of business - Founded in 1983 as a limited
partnership, Mendocino Brewing Company, located in Hopland, California, operates
a microbrewery producing beer and malt beverages for the specialty beer market
and a brew pub and gift store. The majority of sales are in California.
Effective January 1, 1994, the Partnership incorporated by
contributing all of its assets and liabilities into the newly formed corporation
in exchange for common and preferred stock.
(b) Inventories - Inventories are stated at the lower-of-average
cost or market.
(c) Property and equipment - Property and equipment are stated at
cost and depreciated or amortized using straight-line and accelerated methods
over the assets' estimated useful lives. Capitalized interest was $15,200 in
1995. Costs of maintenance and repairs are charged to expense as incurred;
significant renewals and betterments are capitalized. Estimated useful lives are
as follows:
Machinery and equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Leasehold improvements 7 to 30 years
(d) Amortization - Label development costs are amortized on the
straight-line method over a three-year period.
(e) Deferred offering costs - Deferred offering costs consist of
legal and other costs incurred as part of the Company's public offering of
common stock.
(f) Deposits and other assets - Deposits and other assets consist
primarily of refundable deposits on the planned acquisition of brewing equipment
during 1996 and costs associated with developing a contract brewing alliance.
(g) Concentration of credit risks - Financial instruments that
potentially subject the Company to credit risk consist principally of trade
receivables and interest-bearing deposits. The Company's interest-bearing
deposits are placed with major financial institutions. Wholesale distributors
account for substantially all accounts receivable; therefore, this concentration
risk is limited due to the number of distributors and state laws regulating the
financial affairs of distributors of alcoholic beverages.
(h) Income taxes - The Company accounts for income taxes under
Statement of Financial Accounting Standards No. 109, "Accounting For Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under FAS 109, the Company is allowed to
recognize currently future tax deductions of expenses previously recorded for
financial reporting purposes.
-45-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
(i) Cash equivalents - The Company considers all highly liquid
investments with a maturity of 90 days or less to be cash equivalents.
(j) Earnings per share - Earnings per share were computed by
dividing net income by the weighted average number of common shares outstanding.
There were no common stock equivalents.
(k) Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires the Company
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities.
The amounts estimated could differ from actual results.
(l) Stock-based compensation - The Financial Accounting Standards
Board has recently issued Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based Compensation. This standard will become
effective for the year ending December 31, 1996, although earlier application is
permitted. The Company has determined that it will implement the new standard in
1996. Under SFAS 123, a fair value method is used to determine compensation cost
for stock options or similar equity instruments. Compensation is measured at the
grant date and is recognized over the service or vesting period. Under the
current accounting standard, compensation cost is the excess, if any, of the
quoted market price of the stock at a measurement date over the amount that must
be paid to acquire the stock.
The new standard would allow the Company to account for
stock-based compensation under the current standard, with disclosure of the
effects
of the new standard, or adopt a fair value based method of accounting. The
Company has not yet decided which method will be utilized, nor has it determined
the impact, if any, that adoption of the new standard will have on the financial
condition and results of operations. However, management believes the effect of
the new accounting standard will not be significant.
(m) Fair value of financial instruments - The following methods
and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in
the balance sheet for cash and cash equivalents approximates fair value.
Long-term debt: Based on the borrowing rates currently
available to the Company for loans with similar terms and average maturities,
the fair value of long-term debt approximates cost.
(n) Accrued construction costs - Accrued construction costs
consist of expenses incurred for the construction of the new brewery including
equipment.
(o) Reclassifications - Certain reclassifications have been made
to the 1994 financial statements to conform them to the 1995 presentation.
-46-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
<TABLE>
NOTE 2 - INVENTORIES
Inventories consist of the following:
<CAPTION>
December 31,
--------------------------
1995 1994
---------- --------
<S> <C> <C>
Raw Materials $ 91,500 $ 66,500
Work-in-process 89,500 75,300
Finished goods 37,200 24,000
Merchandise 38,000 36,200
-------- --------
$256,200 $202,000
======== ========
</TABLE>
<TABLE>
NOTE 3 - PROPERTY AND EQUIPMENT
<CAPTION>
Property and equipment consists of:
the following: December 31,
--------------------------
1995 1994
---------- --------
<S> <C> <C>
Equipment in progress $2,031,800 $ -
Construction in progress 921,700 26,200
Land 810,900 -
Machinery and equipment 537,900 598,000
Leasehold improvements 129,000 124,500
Furniture and fixtures 19,800 19,800
---------- --------
4,451,100 768,500
Less accumulated depreciation and amortization 497,000 467,500
---------- --------
$3,954,100 $301,000
========== ========
</TABLE>
<TABLE>
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
<CAPTION>
December 31,
--------------------------
1995 1994
---------- --------
<S> <C> <C>
Note payable to an individual, due in monthly payments of $4,435,
including interest at 9%, maturing June 1997,
secured by real property $ 489,100 $ -
Note payable to an individual, due in full
December 1998, including accrued interest
at 9%, secured by real property 76,200 -
</TABLE>
-47-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
<TABLE>
NOTE 4 - LONG-TERM DEBT (Continued)
<CAPTION>
December 31,
--------------------------
1995 1994
---------- --------
<S> <C> <C>
Note payable to bank, due in monthly payments of $1,302,
including interest at 10.5%, matured July 1995, secured by
fixed assets - 7,900
---------- --------
565,300 7,900
Less current maturities 10,400 7,900
---------- --------
$ 554,900 $ -
========== ========
</TABLE>
<TABLE>
Maturities of long-term debt for succeeding years are as follows:
<CAPTION>
Year ending December 31,
<S> <C>
1996 $ 10,400
1997 478,700
1998 76,200
--------
$565,300
</TABLE>
NOTE 5 - PROFIT-SHARING PLAN
The Company has a profit-sharing retirement plan under which it
may make employer contributions at the discretion of the Board of Directors;
although, no such contributions are required. The plan covers substantially all
full-time employees over age 21 with one year of service, and employer
contributions vest over a period of six years. Contributions totaled $30,000 and
$45,000 for the years ended December 31, 1995 and 1994, respectively.
NOTE 6 - COMMITMENTS
The Company leases its facilities under a noncancellable
operating lease expiring August 2004. The monthly lease payment is $2,014, to be
adjusted annually by increases in the Consumer Price Index, as defined in the
lease agreement. Additionally, the Company leases certain equipment under a
noncancellable operating lease which expires in 1997. Total rent expense was
$34,000 and $58,600 for the years ended December 31, 1995 and 1994,
respectively.
-48-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
<TABLE>
NOTE 6 - COMMITMENTS (Continued)
The following is a schedule of future minimum lease payments:
<CAPTION>
Year Ending December 31,
<S> <C>
1996 $ 26,700
1997 25,700
1998 24,200
1999 24,200
2000 24,200
Thereafter 88,600
--------
$213,600
========
</TABLE>
NOTE 7 - BREWERY CONSTRUCTION
In late 1995, the Company began construction of its new brewery
in Ukiah, California. At this time, the total cost of the brewery including
land, building and equipment is estimated to be $9.2 million. Funding for the
brewery is from a combination of proceeds from the stock sale, private party
financing for the land, bank financing for the building and a capital lease for
the equipment. The expected completion date is September 1996.
NOTE 8 - STOCKHOLDERS' EQUITY
Common Stock
On January 3, 1994, the Company issued 1,722,222 shares of no-par
value common stock in conjunction with the incorporation of the partnership.
Also during 1994, the Company began selling, in a public offering, shares of
no-par value common stock. As of December 31, 1995, 600,000 shares of stock had
been sold at $6 per share for total gross proceeds of $3,600,000. These proceeds
were reduced by $286,700 of offering costs. All shares of stock authorized to
sell in the first public offering have been issued.
Preferred Stock
The Company authorized 2,000,000 shares of preferred stock, of
which 227,600 have been designated as Series A. At the time of the incorporation
of the partnership, the Company issued 227,600 shares of non-voting, no-par
value Series A Preferred Stock in exchange for partnership interests. Series A
shareholders are entitled to receive cash dividends and/or liquidation proceeds
equal in the aggregate to $1.00 per share before any cash dividends are paid on
the Common Shares or any other series of Preferred Shares. When the entire
Series A dividend/liquidation proceeds have been paid, the Series A Shares shall
automatically be cancelled and cease to be outstanding.
-49-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 9 - STOCK OPTION PLAN
Under the 1994 Stock Option Plan, the Company may issue options
to purchase up to 200,000 shares of the Company's Common Stock. The plan
provides for both incentive stock options, as defined in Section 422 of the
Internal Revenue Code, and options that do not qualify as incentive stock
options. The Plan shall terminate upon the earlier of (a) the tenth anniversary
of its adoption by the Board or (b) the date on which all shares are available
for issuance under the Plan have been issued.
The exercise price of incentive options must be no less than the
fair-market value of such stock at the date the option is granted, while the
exercise price of nonstatutory options will be no less than 85% of the
fair-market value per share on the date of grant. With respect to options
granted to a person possessing more than 10% of the combined voting power of all
classes of the Company's stock, the exercise price will be no less than 110% of
the fair-market value of such share at the grant date. As of December 31, 1995,
no options had been granted, exercised, or cancelled under the Plan.
<TABLE>
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
<CAPTION>
December 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Current
Federal $103,700 $ 67,200
State 28,600 20,200
-------- --------
132,300 87,400
-------- --------
Deferred
Current (3,700) (11,800)
Non-current 24,300 (4,100)
-------- --------
20,600 (15,900)
-------- --------
$152,900 $ 71,500
======== ========
</TABLE>
<TABLE>
The difference between the actual income tax provision and the
tax provision computed by applying the statutory federal income tax rate to
earnings before taxes is attributable to the following:
<CAPTION>
Year Ended
December 31,
-------------------------
1995 1994
-------- --------
<S>
<C> <C>
Income tax provision at 34% $105,300 $ 76,400
State taxes 28,100 20,900
Adjustment due to lower federal rates (1,100) (9,900)
Recognition of future tax (deductions) 20,600 (15,900)
-------- --------
$152,900 $ 71,500
======== ========
</TABLE>
-50-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
<TABLE>
NOTE 10 - INCOME TAXES (Continued)
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities at December 31st are as follows:
<CAPTION>
December 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
Inventories $ 3,000 $ 800
Other 12,500 11,000
-------- --------
Current deferred tax asset $ 15,500 $ 11,800
======== ========
Depreciation and amortization $ 21,000 $ (4,800)
Other (800) 700
-------- --------
Non-current deferred tax liability (asset) $ 20,200 $ (4,100)
======== ========
</TABLE>
<TABLE>
NOTE 11 - SEGMENT INFORMATION
The Company's business segments are brewing operations and a
retail establishment known as the Hopland Brewery. A summary of each segment is
as follows:
<CAPTION>
Year Ended December 31, 1995
--------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Sales $2,775,500 $959,600 $ - $3,735,100
Operating profits 758,400 34,600 - 793,000
Identifiable assets 4,633,900 109,500 1,770,600 6,514,000
Depreciation and
amortization 30,700 8,300 10,300 49,300
Capital expenditures 3,655,900 25,500 3,900 3,685,300
</TABLE>
-51-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
<TABLE>
NOTE 11 - SEGMENT INFORMATION (Continued)
<CAPTION>
Year Ended December 31, 1994
--------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Sales $2,594,300 $928,700 $ - $3,523,000
Operating profits 631,700 51,600 - 683,300
Identifiable assets 692,500 90,700 3,254,900 4,038,100
Depreciation and
amortization 38,200 8,800 9,200 56,200
Capital expenditures 122,200 2,500 23,900 148,600
</TABLE>
<TABLE>
NOTE 12 - STATEMENT OF CASH FLOWS
Supplementary cash flow information includes the following:
<CAPTION>
December 31,
-----------------------
1995 1994
-------- -------
<S> <C> <C>
Cash paid during the year for:
Interest $ 18,900 $ 4,300
Income taxes $113,500 $75,000
</TABLE>
Non-cash investing and financing activities for the year ended
December 31, 1995, consisted of land being acquired with seller financing of
$569,100, offering costs of $41,700 incurred in 1994 being offset against stock
proceeds and $207,100 of deposits being applied to equipment in progress.
-52-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
September 30, 1996
(unaudited)
ASSETS
<S> <C>
CURRENT ASSETS
Cash and cash equivalents $ 242,200
Accounts receivable 312,900
Inventories 443,500
Prepaid expenses and taxes 89,000
Deferred income taxes 33,000
----------
Total current assets 1,120,600
----------
PROPERTY AND EQUIPMENT 8,151,000
----------
OTHER ASSETS
Label development costs, net of amortization 23,200
Deposits and other assets 158,000
----------
Total other assets 181,200
----------
Total assets $9,452,800
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing $ 600,000
Accounts payable 363,000
Accrued wages and related expense 107,300
Accrued construction costs 3,004,500
Accrued liabilities 22,200
Current maturities of long-term debt 263,800
----------
Total current liabilities 4,360,800
LONG-TERM DEBT, less current maturities 718,700
DEFERRED INCOME TAXES 20,200
----------
Total liabilities 5,099,700
----------
COMMITMENTS --
STOCKHOLDERS' EQUITY
Common stock, no par value; 20,000,000 shares
authorized, 2,322,222 shares issued and
outstanding 3,869,600
Preferred stock, Series A, no par value, with
aggregate liquidation preference of $227,600,
227,600 shares authorized, issued and outstanding 227,600
Retained earnings 255,900
----------
Total stockholders' equity 4,353,100
----------
Total liabilities and stockholders' equity $9,452,800
==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-53-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1996 1995 1996 1995
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $1,111,000 $ 990,400 $3,022,400 $2,665,600
Less excise taxes 47,000 42,000 118,000 116,500
--------- ---------- ---------- ----------
Net sales 1,064,000 948,400 2,904,400 2,549,100
Cost of goods sold 543,600 459,500 1,414,000 1,367,200
--------- ---------- ---------- ----------
Gross profit 520,400 488,900 1,490,400 1,181,900
--------- ---------- ---------- ----------
Operating expenses
Retail operating 191,200 188,400 563,500 469,200
Marketing 200,900 79,800 493,700 206,200
General and administrative 151,200 158,800 490,800 472,100
--------- ----------- ---------- ----------
543,300 427,000 1,548,000 1,147,500
--------- ---------- ---------- ----------
Income (loss) from operations (22,900) 61,900 (57,600) 34,400
Other income (expense)
Interest income, net 200 20,400 11,000 95,200
Other income (expense) (900) 9,300 (48,200) 15,300
--------- ---------- ---------- ----------
(700) 29,700 (37,200) 110,500
--------- ---------- ---------- ----------
Income (loss) before
income taxes (23,600) 91,600 (94,800) 144,900
Provision for (benefit from)
income taxes (3,100) 40,300 (23,700) 61,100
---------- ---------- ----------- ----------
Net income (loss) $ (20,500) $ 51,300 $ (71,100) $ 83,800
========== ========== ========== ==========
Earnings (loss) per share $ (0.01) $ 0.02 $ (0.03) $ 0.04
========== ========== ========== ==========
Weighted average common
shares outstanding 2,322,222 2,317,777 2,322,222 2,302,024
========= ========== ========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-54-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1996 1995 1996 1995
---------- ---------- ---------- -------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (20,500) $ 51,300 $ (71,100) $ 83,800
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization 12,200 12,600 35,200 35,000
Loss on sale of assets 300 - 300 -
Gain on sale of assets (3,900) - (3,900) -
Deferred income taxes 4,000 - (17,500) -
Changes in:
Accounts receivable 237,500 46,200 146,000 7,400
Inventories 20,100 (31,500) (187,200) 2,900
Prepaid expenses and taxes (15,900) 3,900 (41,900) (2,200)
Accounts payable (4,800) (7,400) 257,400 (39,300)
Accrued wages and
related expense 1,700 9,000 (22,600) 3,600
Accrued profit sharing (30,000) 16,900 (30,000) (16,900)
Accrued liabilities (11,700) (6,900) - (1,000)
Income taxes payable - - (34,200) -
---------- ---------- ---------- -------
Net cash provided
by operating
activities: 189,000 94,100 30,500 73,300
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property and
equipment (1,212,900) (128,900) (4,226,100) (1,394,800)
Deposits and other assets (12,200) 400 2,400 178,600
Deferred offering costs (49,600) - (103,600) -
Reduction of deferred
offering costs - - - 41,700
Proceeds from sale of
fixed assets 3,600 - 3,600 -
---------- ---------- ---------- -------
Net cash used by
investing activities: (1,271,100) (128,500) (4,323,700) (1,174,500)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from (payments on)
short-term borrowings (56,900) - 298,400 -
Proceeds from long-term debt 750,000 - 750,000 483,600
Principal payments on long-
term debt (31,300) (2,200) (31,300) (900)
Accrued construction costs 641,300 - 1,822,200 -
Proceeds from sale of
common stock - - - 527,100
---------- ---------- ---------- ----------
Net cash provided (used)
by financing
activities: 1,303,100 (2,200) 2,839,300 1,009,800
---------- ----------- ---------- ----------
INCREASE (DECREASE) IN CASH 221,000 (36,600) (1,453,900) (91,400)
CASH, BEGINNING OF PERIOD 21,200 2,846,000 1,696,100 2,900,800
---------- ---------- --------- ----------
CASH, END OF PERIOD $ 242,200 $2,809,400 $ 242,200 $2,809,400
========== ========== ========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-55-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS (continued)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Supplemental cash flow
information includes the
following:
Cash paid during the
period for
Interest 28,300 10,900 77,200 10,900
Income taxes $ - $ 36,100 $ 52,500 $ 70,900
========== ========== ========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-56-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996 and 1995
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 - LONG-TERM DEBT
Long-term debt consists of a $750,000 advance pursuant to an
equipment lease payable interest only with interest at prime plus 3% until the
balance of the leased equipment is installed and operational. The balance
($1,350,000) of the lease will be funded when the equipment is installed and
operational.
NOTE 3 - SHORT-TERM BORROWING
The Company has a $600,000 term line of credit from a bank with a
variable interest rate of prime plus 1.5%, maturing April 1997. The note is
secured by receivables and inventory. 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 August 1, 1996 of approximately $265,000 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 - 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. The offering
is directly by the Company on a best-efforts basis. The maximum net proceeds
from the sale of the Shares in the offering are estimated to be approximately
$4,700,000, after deducting selling and other offering expenses. Proceeds from
the offering will be used to finance the increase in the planned capacity of the
new brewery from 50,000 bbl. to 60,000 bbl., pay certain cost increases
resulting from design changes and inclement weather, and, if the maximum number
of shares is sold, to expand the annual production capacity of the new brewery
to 75,000 bbl. or more, depending on the mix of products brewed.
NOTE 5 - NEW BREWERY FINANCING
New brewery financing consists of a $2.7 million construction
loan from the Savings Bank of Mendocino County secured by a first priority deed
of trust on the Ukiah land and improvements and the proceeds of the proposed
common stock offering, along with 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. The construction loan bears interest
-57-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
September 30, 1996 and 1995
at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures
on February 2, 1997. 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. 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 planned
offering in excess of $2.5 million as collateral for the 15-year term loan, with
the provision that the Bank will release the funds from the pledge to fund the
purchase of additional equipment if the Company is meeting its sales and revenue
objectives.
FINOVA Capital Corporation has also agreed to lease new brewing
equipment with a total cost of approximately $2.07 million to the Company for a
term of 7 years with monthly rental payments of approximately $31,000. The lease
commenced when the brewing equipment became operational in December 1996. Before
full funding, FINOVA advanced $750,000 to the Company with interest at the
Citibank prime plus 3%. See Note 2 above. 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% or more then 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.
The general contractor for the new brewery, BDM Construction Co,
Inc. ("BDM"), has 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. The deferral arrangement is secured by a second
priority deed of trust on the Ukiah land and improvements. The Company has also
agreed to issue 300,000 new shares of Mendocino Brewing's Common Stock as
additional collateral. 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 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.
-58-
