AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 6, 1996
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MENDOCINO BREWING COMPANY, INC.
(Exact name of registrant as specified in its charter)
California 2082 680318293
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation Industrial Classification Identification
or organization) Code Number) Number)
13351 South Highway 101
Hopland, CA 95449-0400
(707) 744-1015
(Address and telephone number of registrant's principal executive offices)
H. Michael Laybourn
Chief Executive Officer
Mendocino Brewing Company, Inc.
13351 South Highway 101
Hopland, CA 95449-0400
(707) 744-1015
(Name, address and telephone number of agent for service)
Copy to
Nelson D. Crandall, Esq.
Enterprise Law Group, Inc.
Menlo Oaks Corporate Center
4400 Bohannon Drive, Suite 280
Menlo Park, CA 94025-1041
Tel: (415) 462-4700
Fax: (415) 462-4747
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
Proposed maximum Proposed maximum
Title of each class of securities Amount to be offering price per aggregate offering Amount of
to be registered registered security price registration fee
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, no par value 600,000 $8.50 $5,100,000 $1,758.62
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1996
600,000 SHARES
[COMPANY LOGO]
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 and certain other factors that the Company deems
relevant. See "Plan of Distribution." The minimum purchase is 100 Shares
($850.00).
This offering is being made on a "best-efforts" basis. 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)_____________, 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.
==========================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
-------- -------------- -------------
- ------------------------------------------------------------------------------------------
Per Share $8.50 None $8.50
- ------------------------------------------------------------------------------------------
Minimum Offering N/A None N/A
- ------------------------------------------------------------------------------------------
Minimum Subscription: 100 Shares $850.00 None $850.00
- ------------------------------------------------------------------------------------------
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>
-------------
The date of this Prospectus is _________ ___, 1996
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.
[COMPANY LOGO]
TABLE OF CONTENTS
Page
----
Prospectus Summary .................................................. 3
Risk Factors ........................................................ 5
Priority of Existing Stockholders ................................... 8
Use of Proceeds ..................................................... 8
Price Range of Common Stock and Dividend Policy ..................... 9
Capitalization ...................................................... 10
Selected Financial Data ............................................. 11
Management's Discussion & Analysis of
Financial Condition and Results of Operations ..................... 12
Business ............................................................ 17
Management .......................................................... 25
Certain Transactions ................................................ 27
Principal Stockholders .............................................. 28
Description of Capital Stock ........................................ 29
Shares Eligible for Future Resale ................................... 30
Plan of Distribution ................................................ 30
Legal Matters ....................................................... 31
Experts ............................................................. 31
Additional Information .............................................. 32
Index to Financial Statements ....................................... 32
----------------
Until [25 days after the date of this Prospectus], 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
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 along with five 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, and is considered to be an industry
leader for its innovations. Mendocino Brewing's objective is to transform itself
from the country's leading microbrewery to a major national craft brewer
offering among the highest quality craft beers available anywhere in America.
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 brewery with an annual production 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 realize
certain cost efficiencies and overall cost reductions by designing a plant with
an initial production 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 call for accelerated introduction
of additional products into existing markets, penetration of new regional
markets, and greatly increasing the total availability of its products.
Management expects the Company to complete its new brewery in Ukiah,
California (110 miles north of San Francisco) in January or February 1997.
Proceeds from this offering will be used to finance the increase in capacity
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, expand annual production capacity to approximately 75,000 bbl., depending
on the mix of products brewed. Proceeds from the offering of the Shares will
also be used to implement an expanded marketing plan and to provide working
capital. See "Use of Proceeds."
For fiscal year 1996, Management expects Mendocino Brewing to realize
increases in sales over 1995 of up to 10%. Management expects that annual sales
could triple from 1995 levels by the time the Company reaches production of
60,000 bbl. per year at the Ukiah facility, depending on the mix of bottled and
draft beer produced and future pricing. These forward looking statements are
subject to risks and uncertainties. The Company's actual results could differ
materially if, among other causes, the Company fails to complete construction of
the new brewery on time, fails to sell its increased production, materially
reduces the price of its products, experiences unanticipated difficulty in
transferring bottling operations from Hopland to Ukiah, or experiences any of
the other circumstances discussed in "Risk Factors."
Mendocino Brewing intends to continue to compete primarily on the basis of
product quality and image. The Company's marketing plan emphasizes introducing
Red Tail Ale and its other brews in draft form; 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 introducing
the Company's brews into new geographic regions.
Mendocino Brewing operates a retail brewpub and merchandise store under the
name 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."
-3-
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
their 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 mendobrew@mendobrew.com.
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 100 Shares ($850.00). Shares that remain unsold 15 days
after the effective date of this Prospectus, if any, 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."
Common Stock offered................................... 600,000 Shares
Common Stock outstanding before the offering........... 2,322,222 Shares(1)
Use of Proceeds........................................ To finance expansion of the Company's brewing capacity,
marketing, and working capital. See "Use of Proceeds."
Pacific Stock Exchange Symbol.......................... MBR
Summary Financial and Operating Data
Year Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------------------
1994 1995 1995 1996
---- ---- ---- ----
Statements of Income Data: (unaudited)
Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400
Gross profit....................... 1,524,700 1,720,000 693,000 970,000
Income (loss) from operations...... 200,000 182,700 (27,500) (34,700)
Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600)
=========== =========== ============ ============
Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02)
=========== =========== ============ ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222
=========== =========== ============ ============
June 30, 1996 (unaudited)
-------------------------------------------
Balance Sheet Data: Actual Pro Forma As Adjusted(2)
------ ------------------------
Working capital (deficit)....................... $(2,125,400) $ 1,782,500
Total assets.................................... 8,214,900 15,041,100
Long term debt, including current portion....... 560,700 4,810,000
Shareholders' equity............................ 4,373,500 9,073,500
<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 - Liquidity and
Capital Resources."
(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."
</FN>
-4-
RISK FACTORS
An investment in the Shares being 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.
Expansion Plan
Mendocino Brewing's expansion plan is subject to risk and management
challenges. Growth depends upon completing construction of the new brewery,
expanding the production capacity of the new brewery, and selling additional
beer by introducing new brands and draft beer into existing and new regional
markets. The Company's expansion program has created and will continue to create
additional expense for the Company, although the Company will not realize
additional revenues from expansion until the initial production from the new
brewery is shipped and paid for, which is not likely to occur before March or
April 1997. Management believes Mendocino Brewing has built its current customer
base primarily on consumer loyalty to Red Tail Ale plus goodwill generated
through customer visits to the Hopland Brewery. Management has limited
experience in promoting products on a large scale, and there is no assurance
that the Company's other 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. See "Business -- Strategy;" "-- New Product Offerings;" and "--
Regional Expansion" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- Material Commitments - Expansion Plan"
and "- Liquidity and Capital Resources."
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. See "Business -
Industry Overview Domestic Craft Beer Segment."
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. See "Business Industry Overview -
Domestic Craft Beer Segment."
No Minimum
The offering of the Shares is not contingent upon the sale of any specified
minimum number of Shares. Mendocino Brewing must sell a minimum number of Shares
to recover the expense of the offering. See "Plan of Distribution." Management
plans to pay between $900,000 and $1,165,000 of the Company's short term
indebtedness out of the net proceeds of this offering. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Liquidity and Capital Resources."
New Construction
Construction of the new brewery broke ground in September 1995 and as of
September 1996 was approximately 70% 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, and 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 the project. While
Management believes that the sources of 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.
Future Capital Needs -- Additional Future Funding and Reliance on
Growth Strategy
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.
See "Management's Discussion and
-5-
Analysis of Financial Conditions and Results of Operations - Liquidity and
Capital Resources." 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 will depend in part upon the success of 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.
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
purchase of new brewing equipment. The ratio of the Company's long-term debt to
equity as of June 30, 1996, when adjusted to include all long term debt added
after June 30 and before the date of this Prospectus, is 1.10 to 1. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Conditions and Results of Operations -- 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.
Geographic and Distributor 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.
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. See "Business -- Product Distribution."
Dividends
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 term of the loans. In addition, the Company is required to
pay a $1.00 cash dividend on 227,600 shares of Series A Preferred Stock
($227,600 total) before cash dividends may be paid on the Common Stock. See
"Dividend Policy" and "Description of Capital Stock."
Trading Market for the Shares
Mendocino Brewing's Common Stock is publicly traded on the Pacific Stock
Exchange under the symbol MBR. Trading volume to date has been light. In the
absence of a more active trading market, investors may find it difficult to sell
their Shares and purchases or sales of relatively small numbers of shares may
have a disproportionately 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 operating performance of the Company. There can be no assurance that the
market price of the Common Stock will not decline below the public offering
price or experience volatility. See "Price Range of Common Stock and Dividend
Policy."
Dependence on Key Personnel
Mendocino Brewing's success may depend to a significant extent upon the
continued service of President Michael Laybourn, Master Brewer Donald Barkley,
and other members of the Company's executive management. The loss of any key
employee could have a material adverse effect upon the Company's business,
financial condition, and results of operations. Furthermore, the Company's
future performance depends 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."
Potential Control Groups
Mendocino Brewing's officers, directors, and founders and their spouses
own, in the aggregate, 970,222 shares of the Company's outstanding Common Stock,
which represents 41.8% of the Common Stock outstanding at the commencement of
this offering and will represent 33.2% of the Common Stock outstanding if the
maximum number
-6-
of Shares offered by this Prospectus is sold. As a result, in some
circumstances, these shareholders, acting together, might be able to 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. See
"Management" and "Principal Shareholders." The above percentages do not take
into account 300,000 shares of Common Stock the Company has issued to the
general contractor for the new brewery as security for payment of $900,000 of
its fees. The Common Stock collateral is subject to the restrictions that the
shares shall be canceled if the fees owed the contractor are paid in full, that
if the Company is in default, the shares must be sold in a commercially
reasonable manner as specified in the California Commercial Code, and that any
shares not needed to be sold to satisfy the obligation to the contractor shall
be canceled. Under California law, the contractor 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
the contractor out of the proceeds of this offering, but there is no assurance
that the net proceeds will be sufficient. If the Company were to agree to permit
the contractor to retain the shares in satisfaction of the Company's debt, or if
the contractor were to sell the shares to a single purchaser or a single group
of purchasers, the new shareholder would own 11.4% and the officers, directors,
and founders and their spouses would own 37.0% of the outstanding Common Stock,
respectively, if none of the Shares offered pursuant to this Prospectus are
sold, and will own 9.3% and 30.1% of the outstanding Common Stock, respectively,
if all 600,000 Shares are sold pursuant to this offering. (The foregoing
percentages do not take into account 8,333 shares of Common Stock previously
acquired by the general contractor, except to include them in the outstanding
shares.) While the general contractor has the present right to vote the 300,000
shares, no shareholder votes are scheduled or anticipated before the due date of
the indebtedness. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations Liquidity and Capital Resources."
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. Other than restrictions imposed by S.E.C. Rule 144, there are no
material restrictions on the transferability of the 1,453,330 shares of Common
Stock held by non-affiliates of the Company. See "Shares Eligible for Future
Resale."
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. While higher taxes may
reduce overall demand for beer, they would likely also lower the relative price
difference between Mendocino Brewing's products and its less expensive
competitors. Management believes that the Company's position as a high quality
craft brewer whose products are already priced at or near the top of its market
segment will enable it to withstand tax increases in the near future. These
forward looking statements concerning the possible effect of future excise tax
increases are subject to risks and uncertainties. These include general economic
conditions, competition, and evolving consumer preferences and attitudes toward
adult beverages.
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 adversely affect 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
-7-
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 adversely affect the Company's financial
condition.
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 its
indemnification obligation.
Primary Production Facility and Uninsured Losses
After completing the new brewery, Mendocino Brewing will 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 adversely affect 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.
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
adversely affect the ability of Mendocino Brewing to meet its objectives.
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 100 Shares ($850.00). 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."
USE OF PROCEEDS
The maximum net proceeds to Mendocino Brewing from the sale of the Shares
in this offering are estimated to be approximately $4,700,000, after deducting
selling and other offering expenses. Proceeds from this offering will be used to
finance the increase in capacity 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.
Management presently estimates that the additional costs associated with
expanding annual capacity to approximately 75,000 bbl. will be approximately
$0.5 million. No decisions have been made with respect to the vendors of
additional brewing equipment. Management has designated an additional $700,000
to fund increased marketing efforts and to provide working capital.
The Company and its various lenders have agreed that the net proceeds of
the offering will be applied first to the addition of $300,000 to the Company's
working capital, second to construction of $600,000 worth of tenant improvements
to the brewery (primarily consisting of office space and landscaping), third to
payment of $500,000 in accrued fees to the general contractor for the new
brewery otherwise due on January 31, 1997 bearing interest at 12% per annum from
January 1, 1997; fourth, to payment of $400,000 of a $600,000 short term loan
(which
-8-
Management expects the Company to replace with a revolving line of credit
secured by accounts receivable and inventory, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources") bearing interest at prime plus 1.5% and maturing on April
30, 1997, and finally to payment of the remaining $400,000 in accrued fees to
the general contractor for the new brewery. The Savings Bank of Mendocino
County, in its commitment letter for conversion of the construction loan to a
15-year term loan, proposed to require the Company to pledge all proceeds of
this offering in excess of $2.5 million as collateral for the 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.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations -- Liquidity and Capital Resources." Subject to the approval of the
Savings Bank of Mendocino County, if and to the extent required under the
definitive documentation for the 15-year term loan, Management has also
designated approximately $265,000 toward repayment of seller financing on the
real estate bearing interest at 9% per annum and due on June 27, 1997.
Pending the above uses, Mendocino Brewing intends to invest the net
proceeds from this offering in short-term investment-grade interest bearing
securities.
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. Before February 21, 1995, there was no public
trading market for the Company's Common Stock. The high and low closing sales
prices for the Common Stock on the Pacific Stock Exchange are set forth below
for the quarters indicated:
1995 1996
------------------------------------------------------------ ------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter
----------- ----------- ----------- ----------- ----------- ----------- -----------
High $13.50 $9.25 $8.75 $8.12 $7.38 $10.82 $10.00
Low $7.62 $7.12 $7.75 $7.00 $5.50 $5.82 $7.38
There were approximately 2,496 shareholders of record as of June 30, 1996.
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. 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. See "Capitalization" and "Description of
Capital Stock."
-9-
CAPITALIZATION
The following table sets forth the actual capitalization of Mendocino
Brewing on June 30, 1996, and also provides the pro forma capitalization of the
Company as of June 30, 1996, after giving effect to the sale of the maximum
(600,000 Shares) 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:
June 30, 1996
-------------------------------------
Pro Forma
Actual As Adjusted
------ -----------
Short-term obligations:
Short term debt ......................................... $ 360,000 $ 600,000(1)
Current maturities of long-term debt .................... 10,000 32,400(2)
Current portion of equipment financing .................. 0 196,800(3)
----------- -----------
Total short-term commitments ................... 370,000 829,200
Long-term obligations:
Long-term debt, less current portion .................... 550,700 2,677,600(2)
Equipment financing, less current portion ............... 0 1,903,200(3)
----------- -----------
Total long-term commitments .................... 550,700 4,580,800
Shareholders' equity:
Common Stock, no par value,
20,000,000 shares authorized;
2,322,222 shares outstanding; 2,722,222
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 ................................... 276,300 276,300
----------- -----------
Total shareholders' equity .......................... 4,373,500 9,073,500
----------- -----------
Total capitalization ......................... $ 4,934,200 $11,783,500
=========== ===========
<FN>
(1) The pro forma balance sheet reflects the conversion of Mendocino Brewing's
short-term loan from WestAmerica Bank ($300,000 outstanding at June 30,
1996; $600,000 outstanding as of the date of this Prospectus) to a
revolving line of credit secured by inventory and accounts payable of at
least $600,000 and the retirement of $900,000 in short-term financing
provided after June 30, 1996 by the general contractor for the new brewery.
The Company repaid a separate $60,000 short term loan after June 30, 1996.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."
(2) Long term debt consists of 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.
(3) Mendocino Brewing has 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.
</FN>
-10-
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.
Year Ended Six Months Ended
December 31, June 30,
------------------------------ ------------------------------
1994 1995 1995 1996
---- ---- ---- ----
Statements of Income Data: (unaudited)
Sales.............................. $ 3,523,000 $ 3,735,100 $ 1,675,200 $ 1,911,400
Less excise taxes.................. 157,400 168,600 74,500 71,000
----------- ----------- ------------ ------------
Net sales.......................... 3,365,600 3,566,500 1,600,700 1,840,400
Cost of goods sold................. 1,840,900 1,846,500 907,800 870,400
----------- ----------- ------------ ------------
Gross profit....................... 1,524,700 1,720,000 693,000 970,000
Operating expenses................. 1,342,700 1,537,300 720,500 1,004,700
----------- ----------- ------------ ------------
Income (loss) from operations...... 200,000 182,700 (27,500) (34,700)
Interest income, net............... 21,800 129,100 74,800 10,800
Other income (expense)............. 3,000 14,800 6,000 (47,400)
----------- ----------- ------------ ------------
Income (loss) before income taxes.. 224,800 326,600 53,300 (71,300)
Provision for (benefit from)
income taxes..................... 71,500 152,900 20,800 (20,700)
----------- ----------- ------------ ------------
Net income (loss).................. $ 153,300 $ 173,700 $ 32,500 $ (50,600)
=========== =========== ============ ============
Earnings (loss) per share.......... $ .08 $ .08 $ .01 $ (.02)
=========== =========== ============ ============
Weighted average common
shares outstanding............... 1,814,403 2,307,074 2,294,148 2,322,222
=========== =========== ============ ============
Balance Sheet Data: December 31, 1995 June 30, 1996
----------------- -------------
(unaudited)
Cash and cash equivalents....................... $ 1,696,100 $ 21,200
Working capital (deficit)....................... 959,100 (2,125,600)(1)
Property and equipment.......................... 3,954,100 6,947,700
Deposits and other assets....................... 71,000 98,400
Total assets.................................... 6,514,000 8,214,900
Long term debt, including current portion....... 554,900 560,700
Total liabilities............................... 2,089,800 3,841,400
Shareholders' equity............................ 4,424,200 4,373,500
<FN>
- ----------------
(1) After June 30, 1996, Mendocino Brewing obtained a $2.7 million construction
loan with a commitment to convert the loan to a long term loan, subject to
certain conditions, form 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 - Liquidity and Capital Resources."
</FN>
-11-
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 six
months of 1996 has been characterized by increased sales and gross profits from
brewing operations offset by increased 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
interest from the net proceeds of the Company's initial public offering. The
increase in sales is attributable to increased production resulting from adding
an additional bottling tank and implementing a 24 hour brewing schedule in
September 1995, implementing certain marketing strategies, including new point
of sale materials and field sales representatives, beginning in the second
quarter of 1996, and retail price increases at the Hopland Brewery brewpub. The
improvements to brewing operations increased production 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 17.4%. Comparing the first six months of 1996 to the same
period in 1995, sales are up 14.1%, cost of goods sold is down 4.1%, and gross
profit is up 40%. In 1995, increased administrative expenses resulted in an 8.6%
decline in income from operations over 1994, but a $119,100 increase in other
income due to interest on the public offering proceeds plus a one time worker's
compensation dividend resulted in a 45.3% increase in income before income
taxes. In 1996, the bankruptcy of a distributor, increased expenses associated
with the operation of the Hopland Brewery, and increased marketing expenses
resulted in a 39.4% increase in operating expenses but only $7,200 in additional
losses from operations compared to the same period in 1995. While Management
plans to continue marketing expenses at a high level, Management has taken
actions to control expenses at the Hopland Brewery and will not incur any
additional losses attributable to the bankrupt distributor. Management's
decision to write off $38,000 in expenses incurred in exploring an alliance with
a mid-western distribution company (classified as "other expense"), when
combined with a $64,000 decrease in interest earnings as the Company spent the
cash proceeds from the public offering, further reduced pre-tax income to a
$50,600 loss for the first six months of 1996 compared to income of $32,500 for
the same period in 1995.
For fiscal year 1996, Management expects Mendocino Brewing to realize
increases in sales over 1995 of up to 10% as a result of its increased capacity
over 1995, after taking into consideration wholesale beer price incentives and
reductions to stimulate distributor interest. Management does anticipate,
however, that the Company will be required to cease production of bottled beer
for approximately two weeks while its bottling operation is transferred from
Hopland to Ukiah, and Management expects to continue to increase the Company's
marketing expense in anticipation of substantially increased capacity.
Management expects the Company to begin realizing revenues from the new brewery
April 1997. Any improvement in results of operations for fiscal 1996 are
therefore likely to be attributable to increased production from the Hopland
facility and not to completion of the new brewery. Management expects that by
the time the Company reaches production of 60,000 bbl. per year at the Ukiah
facility, depending on the mix of bottled and draft beer produced and future
pricing, annual sales could triple from 1995 levels. These forward looking
statements are subject to risks and uncertainties. The Company's actual results
could differ materially if, among other causes, the Company fails to complete
construction of the new brewery on time, fails to sell its increased production,
materially reduces the price of its products, experiences difficulty in
transferring bottling operations from Hopland to Ukiah, or experiences any of
the other circumstances discussed in "Risk Factors."
-12-
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.
Year Ended Six Months Ended
December 31, June 30
---------------- -------------------
1994 1995 1995 1996
Statements of Income Data:
Sales ........................... 104.68% 104.73% 104.65% 103.86%
Less Excise Taxes ............... 4.68 4.73 4.65 3.86
------ ------ ------ ------
Net Sales ....................... 100.00 100.00 100.00 100.00
Costs of goods sold ............. 54.70 51.77 56.71 47.30
------ ------ ------ ------
Gross profit .................... 45.30 48.23 43.29 52.70
Operating expenses .............. 39.36 43.10 45.01 54.59
------ ------ ------ ------
Income (loss) from operations ... 5.94 5.12 (1.72) (1.89)
Other income (expense) .......... 0.98 4.24 5.05 (1.99)
------ ------ ------ ------
Income before income taxes ...... 6.68 9.16 3.32 (3.88)
Provision for income taxes ...... 2.12 4.29 1.30 (1.12)
------ ------ ------ ------
Net income ...................... 4.55% 4.87% 2.03% (2.75)%
====== ====== ====== ======
Sales. Sales increased 6.0% from $3,523,000 in 1994 to $3,735,100 in 1995
and 14.1% from $1,675,200 for the six month period ended June 30, 1995 to
$1,911,400 for the comparable period in 1996. Growth in sales was attributable
to increased production resulting from adding an additional bottling tank and
implementing a 24 hour brewing schedule in September 1995, implementing certain
marketing strategies, including new point of sale materials and field sales
representatives, beginning in the second quarter of 1996, and retail price
increases at the Hopland Brewery brewpub. A decrease in sales in the first
quarter of 1996 compared to 1995 was offset by an increase in sales in the
second quarter of 1996 compared to 1995. Management attributes the decrease in
the first quarter of 1996 to delays in implementing a new marketing plan and the
increase in the second quarter of 1996 to the implementation of the marketing
plan plus expansion into new geographic market. Management attributes
approximately half of the sales increase in the second quarter to increased
sales to existing distributors with the other half attributable to geographic
expansion. Retail sales at the Hopland Brewery brewpub and merchandise store
increased 3.3% from 1994 to 1995 and 6.0% from the six month period ended June
30, 1995 to the comparable period in 1996. Management attributes the increase in
brewpub sales to a busy summer in 1995 due to increased tourist trade and an
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.
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 9.41 percentage points
from the six month period ended June 30, 1995 to the same period in 1996. The
implementation of 24-hour brewing in September 1995 significantly improved
production efficiencies. The cost of bottles also dropped in the third quarter
of 1995.
Gross profit. Gross profit increased 17.4% from $898,400 in 1994 to
$1,054,600 in 1995 and 40.0% from $693,000 for the six month period ended June
30, 1995 to $970,000 for the comparable period in 1996.
Operating expenses. Operating expenses increased 14.5% from $1,342,700 in
1994 to $1,537,300 in 1995 and 39.4% from $720,500 for the six month period
ended June 30, 1995 to $1,004,700 for the comparable period in 1996. Several
factors contributed to the increases. Marketing expenses have increased partly
because of the increase in production capacity that occurred in September 1995
and partly in anticipation of the opening of the new brewery. Management expects
the Company to further increase marketing expenses in the balance of 1996 and
into 1997. These marketing expenses take the form of point of sale and other
promotional costs, periodic price discount specials to distributors, and labor
expenses. Retail operating expenses increased due primarily to higher labor
costs, increased utilities, increased repairs and maintenance, and during the
first two quarters of 1996, increased promotional expenses. The Company wrote
off $38,000 in bad debts in the second quarter of 1996 after a California
distributor went out of business. Finally, general and administrative expense
increased due to legal fees related to growth and trademark issues, payment of
directors fees and expenses to the outside directors, costs associated with
-13-
being a public company, increased labor costs (due to the addition of a human
resources director and a shareholder relations coordinator in 1994), and payment
of performance bonuses in 1995. This increase was partially offset by a reduced
contribution to the Company's profit sharing retirement plan.
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, one time refunds of worker's
compensation premiums for prior years were paid 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 $117,300 in
the six months ended June 30, 1996 compared to the same period for 1995 as a
result of a write-off of approximately $38,000 in expenses incurred in exploring
an alliance with a mid-western distribution company and a decrease of $64,000 in
interest earnings as cash from the initial direct public offering was used for
the expansion project.
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 11 - Income Taxes." The Company recognized a benefit from
income taxes in the first six months of 1996 of $20,700 compared to a tax
provision in approximately the same amount for the same period in 1995.
Net income. Net income increased 13.3% in 1995 over 1994 primarily due to
increased sales and lower cost of goods sold as a percentage of sales resulting
from process improvements in brewing operations. For the six month period ended
June 30, 1996 compared to the same period for 1995, net income was down $83,100
for a net loss of $50,624 compared to net income of $32,500. Operating results
for the first two quarters of 1996 are not necessarily indicative of operating
results for the full year. For at least the past three fiscal years, operating
results for the first two quarters have not been indicative of operating results
for the entire year. In 1995, net income for the first two quarters was 18.7% of
net income for the year; in 1994, it was 22.5%; and in 1993, it was 15.4% (on a
pro forma basis assuming that the Partnership had paid income taxes at the
corporate rates then in effect).
Segment Information
Mendocino Brewing's business presently consists of two primary segments.
The first segment 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 7 - 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 4.2four 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. Retail beer sales for off-site consumption may decrease as the Company's
brews become more widely available.
Seasonality
Beer consumption nationwide has historically increased by approximately 20%
during the summer months. Mendocino Brewing's wholesale distributors were on an
allocation basis while the Company's annual production 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 production capacity. The Company brews four seasonal beers: Springtide Ale
in March, Eye of the Hawk Special 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 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.
-14-
Material Commitments - Expansion Plan
Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key
brewery on nine acres of land in Ukiah, California. See "Business - New Brewery"
and "Liquidity and Capital Resources."
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.
Financing the New Brewery. The presently estimated cost of the new brewery
at its initial annual production 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 for financing costs. Increasing the
initial annual production 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 $3.3 million has been paid from the net proceeds
of Mendocino Brewing's initial public offering completed in February 1995.
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. 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 an 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.
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
is to commence when the brewing equipment is operational. Until that time,
FINOVA has loaned $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% or 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.
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 Bank of Santa Rosa, California has loaned Mendocino Brewing
$600,000 secured by Mendocino Brewing's accounts receivable and other tangible
personal property located at its Hopland facility. The loan 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 with 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 and production
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 either
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
-15-
Company will be 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.
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, 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." 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.
Of 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), a portion has already been paid from operations, but Management
expects most of the remainder 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.
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 of at least $4.8 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
$4.8 million in long-term debt had been added as of June 30, 1996 to the
Company's then existing long-term debt of $0.55 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 0.13 to 1 on June 30,
1996, would have been 1.10 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
fund increased purchases of supplies and pay the cost of additional production
and administrative staff and additional sales and marketing staff and
activities. There will be a lag between the time the Company must incur some or
all of these costs and the time the Company generates revenue from sale of
increased production. 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 modern craft brewing, the distinctiveness of
its Red Tail Ale label, 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 goals in any such arrangement would be to
obtain additional capital to expand the production capacity of the new brewery
to 200,000 bbl per year, to enter into an arrangement for sharing the expanded
brewery to provide optimal utilization of overhead and thereby reduce unit
costs, and to 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.
-16-
BUSINESS
Overview
Mendocino Brewing Company, Inc. brews Red Tail Ale along with five 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, and is considered to be an
industry leader for its innovations. Mendocino Brewing's objective is to
transform itself from the country's leading microbrewery (i.e., a brewery with
annual capacity of less than 15,000 bbl. per year) to a major national craft
brewer offering among the highest quality craft beers available anywhere in
America.
To accomplish this goal, Mendocino Brewing is building a new brewery in
Ukiah, California (110 miles north of San Francisco), which Management presently
expects to be completed in January or February 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 - 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 production 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 as a leader in 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. The Company enjoys
good visibility within the industry as well, due in part to the leadership its
officers have provided within various industry trade groups. See "Management."
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 of 331 twelve ounce bottles;
177 million bbl. is therefore the approximate equivalent of 58.5 billion twelve
ounce bottles of beer.
The U.S. beer market may be divided into five segments:
Representative Suggested
Segment Est. Market Share Top Brands Retail Price/6-pack
- --------------------------------------------------------------------------------------------------------------------
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
-17-
Domestic Craft Beer Segment. While overall beer sales have been basically
flat for several years, domestic craft beer sales 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. Mendocino Brewing's
annual capacity grew slightly beyond 15,000 bbl. to 18,000 bbl. in 1995, and
technically ceased to be a microbrew at that time.
- ---------------------------------------------------------------------------------------------------------------
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
----------------------------------------------------- -------------- ------ -------------- ------
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>
-18-
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 an annual fund-raiser at the request of 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, which is no longer
available commercially elsewhere. 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. 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.
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 pint 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 will then transfer the
bottling operations to the Ukiah facility. 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.
-19-
Strategy
Mendocino Brewing's objective is to transform itself from the country's
leading microbrewery to a nationally known and respected craft brewer that
offers among the highest quality craft beers available anywhere in America.
Management believes 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. Increasing capacity by building a new brewery
has been a necessary step in achieving this objective. Management believes that
an equally 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.
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 Special 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. 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 blue heron in flight over a
river valley. The design has already won awards for graphics and
packaging, including a Northern California Addy.
o Black Hawk Stout 12 oz. six-packs. Management plans to introduce Black
Hawk Stout in 12 oz. six following completion of its new label
development, which Management expects to occur in 1997. This forward
looking statement is subject to risks and uncertainties. Among other
things, the task of 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, Black Hawk
Stout, and Peregrine Pale Ale in half barrel kegs the first priority
of the new brewery. Historically in the beer industry, introducing
draft products into restaurants and other establishments has driven
bottle sales which in turn increased demand for draft products in
locations not served. The Company is designing special tap handles and
other marketing materials for its draft products. 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:
* 25% of all U.S. beer drinkers
* 23% of women beer drinkers
* 26% of male beer drinkers
* 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
* 32% of beer drinkers in the Northeast
* 28% of beer drinkers in the West
* 26% of beer drinkers in the Midwest
* 17% of beer drinkers in the South
One of the ways Mendocino Brewing projects its quality and corporate values
to consumers is through its Red Tail Ale, Eye of the Hawk Special Ale, and Blue
Heron Pale Ale labels. The Company has used nationally-known
-20-
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. This year, the
Company received a Northern California Addy Award 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
Eye of the Hawk Select Ale and Blue Heron Pale Ale labels are intended to evoke
similar responses, as will be the illustrations for Black Hawk Stout and
Peregrine Pale Ale when introduced.
The popularity of Mendocino Brewing's logos and trademarks is evidenced by
the success of the merchandise store at the Hopland Brewery and also by the
success of 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.).
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, 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.
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
Mendocino Brewing's goal is to become a nationally known and respected
craft brewer. In addition to California, the Company's products are distributed
in limited quantities in the metropolitan areas of Washington D.C., Boston,
Seattle, Phoenix, Chicago, Milwaukee, New York, Atlanta, and North Carolina, and
throughout Texas, Oregon and Colorado at selected accounts. 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. Increased
production will make it possible for the Company to sell greater quantities of
its products in these and other locations. 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.
Pricing Strategy
Mendocino Brewing's products are priced at or near the top of the market
and have been for several years. Recently, in anticipation of substantially
increased production, the Company reduced its suggested retail price for a
six-pack of Red Tail Ale from $7.43 to $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 brands at less than $6.45 per six pack. 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
-21-
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 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 production and sales, it promotes
its brews as beverages of moderation whose distinctive taste and high quality
give the consumer satisfaction.
New Brewery
Mendocino Brewing is building a 62,000 sq. ft. custom designed turn-key
brewery on nine acres of land in Ukiah, California, approximately 10 miles north
of the original brewery. The facility was approximately 70% complete in
September 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 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.
Mendocino Brewing anticipates that it may have to cease production for
approximately two weeks to move its bottling equipment from Hopland to the Ukiah
facility. The Company intends to build up sufficient inventory of bottled
product to maintain its then existing sales levels during the transition. These
forward looking statements are subject to risks and uncertainties. The time
required to relocate the bottling equipment could be subject to several factors,
including problems or delays in disassembling, moving, reassembling, installing,
and integrating the equipment. If the hiatus between shut down and re-start is
extended, or if the build-up of inventory is inadequate for that or any other
reason, the Company could find itself unable to meet demand, which could have an
adverse effect on the Company's goodwill. If the inventory is built up too much,
there is a possibility that the Company will not be able to sell the entire
inventory before the end of its shelf-life of 90 days, although inventory
rotation will reduce such a possibility.
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. As production capacity expands, the Company
intends to make its brews available in draft form and may add 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. Of the
Company's
-22-
total sales for 1995, 74% (87% of total beer sales) constituted sales to
independent distributors and 11% (13% of total beer 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 production capacity increases, 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 increase four current
employees to full-time status and to hire 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 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 word marks MENDOCINO
BREWING COMPANY (Reg. No. 1,785,745), BLUE HERON (Reg. No. 1,820,076), PEREGRINE
PALE ALE (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE (Reg. No. 1,673,594),
BLACK HAWK STOUT (Reg. No. 1,791,807), YULETIDE PORTER (Reg. No. 1,666,891), and
BREWSLETTER (Reg. No. 1,768,639). The Company's registration for the word mark
RED TALE ALE (Reg. No. 1,575,386) became subject to automatic cancellation on
January 2, 1996. The Company has pending a special application for a new
registration of that mark. In addition, the Company has pending applications for
registration of its Blue Heron Pale Ale design (Serial No. 74/734782), its Eye
of the Hawk Anniversary Ale design (Serial No. 74/734781), its Eye of the Hawk
Select Ale design (Serial No. 74/734784), its Red Tail Ale design (Serial No.
74/734783), and its FROLIC SHIPWRECK ALE 1850 word mark and design (Serial No.
75/019,867). The bird design marks were published for opposition on August 6,
1996.
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 in other states 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, 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 against it.
-23-
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.
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
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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 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. 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 the law to make the 50% exclusion from capital gains available. 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.
MANAGEMENT
Executive Officers, Directors, and Significant Employees
The executive officers, directors, and significant employees of the
Company, and their ages as of June 30, 1996, are as follows:
Name Age Position
---------------------- --- ----------------------------------------------------------------
H. Michael Laybourn 58 Chief Executive Officer, President, and Chairman of the Board
Norman H. Franks 49 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
John Scahill 57 Facilities Manager
Donald Barkley 42 Master Brewer
<FN>
- ----------
*Member of the Compensation and Audit Committees
</FN>
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
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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.
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 District, 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 server
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.
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.
Annual Compensation
Fiscal ------------------- All Other
Name and Principal Position Year Salary Bonus Compensation*
- --------------------------- ---- ------ ----- -------------
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
- -----------
* 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).
-26-
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 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 award options to purchase up to 20,000, 20,000, and
10,000 shares 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 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, the Company granted 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 in recognition of the 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 - Liquidity and Capital Resources." Mr. Laybourn's guaranty
automatically terminates when FINOVA makes the final payment for the purchase
price of the equipment to the manufacturer following certification by an
independent engineer acceptable to FINOVA that the equipment is fully installed,
accepted, and fully operational.
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."
-27-
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 June 30, 1996, 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.
COMMON STOCK:
Percentage of Shares Outstanding(1)
Directors, Executive Officers, Shares Beneficially Before Offering Maximum Sold
and 5% Shareholders Owned 2,322,222 shares 2,922,222 shares
------------------------------ --------------- ---------------- ----------------
H. Michael Laybourn* ...................................... 272,367 11.73% 9.32%
Norman H. Franks*(2)+ ..................................... 244,428 10.53% 8.36%
Michael F. Lovett*(3) ..................................... 101,559 4.37% 3.48%
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) ......................... 619,938 26.70% 21.21%
SERIES A PREFERRED STOCK:
Directors, Executive Officers, Shares Beneficially Percentage of
and 5% Shareholders Owned Shares Outstanding
------------------------------- ----------------- ------------------
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. The
300,000 shares will be canceled if the Company timely pays the amounts owed
to BDM. BDM is not entitled to retain the shares as payment for the
obligation but must sell the shares in satisfaction of the debt in a
commercially reasonable manner unless the Company agrees, after a default,
to permit BDM to retain the shares. To the extent that any of the shares
are not required to be sold to satisfy the obligation, they will be
canceled. The obligation is also secured by a second priority security
interest on the Company's Ukiah real estate, but BDM has agreed to exhaust
its remedies against the 300,000 shares before proceeding against the real
estate collateral. 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 - Liquidity and Capital Resources."
(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.
</FN>
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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 June 30, 1996, there were 2,322,222 shares of Common Stock outstanding
and held of record by approximately 2,496 shareholders. 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
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. 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 Series A Preferred Stock
before any cash dividends or liquidation proceeds may be paid on Common Stock or
any other series of Preferred Stock. 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 share 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. Except
as otherwise required by law, 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 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 968,577 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 holders may
further require the Company to file registration statements on Form S-3 with
respect to their shares at the Company's expense when such form becomes
available for use to the
-29-
Company. 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 1,020,697
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 restrictions of Rule 144 on shares held by persons other than affiliates
will expire completely on January 3, 1997.
Approximately 1,701,525 of the shares of Common Stock outstanding prior to
this offering are "restricted securities" and may not be sold in a public
distribution except in compliance with the registration requirements of the
Securities Act or an applicable exemption under the Securities Act, including an
exemption pursuant to Rule 144 thereunder.(2) All such restricted securities are
presently eligible for sale in the public market pursuant to Rule 144.
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 were 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.
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 100 Shares
($850.00). 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 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 100 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.
The Company has determined the public offering price of the Shares offered
by this Prospectus. Among factors considered in determining the public offering
price were the trading history of the Common Stock on the Pacific Stock
Exchange, growth in the industry segment, Management's assessments of the
results of operations and future prospects for the Company's business, and
recent sales growth.
- -----------
(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 - Liquidity and Capital Resources" 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.
-30-
The Company will only effect offers and sales of Shares through its
designated sales representative, 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) __________________, 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 $850.00
per share (minimum purchase 100 Shares), 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.
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.
-31-
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.
INDEX TO FINANCIAL STATEMENTS
Page
----
INDEPENDENT AUDITOR'S REPORT .............................................. 33
FINANCIAL STATEMENTS
Balance sheet ............................................................. 34
Statements of income ...................................................... 35
Statements of partners'/shareholders' equity .............................. 36
Statements of cash flows .................................................. 37
Notes to financial statements ............................................. 38
Balance sheet (unaudited) ................................................. 46
Statements of income (unaudited) .......................................... 47
Statements of cash flows (unaudited) ...................................... 48
Notes to financial statements (unaudited) ................................. 49
-32-
MOSS-ADAMS LLP
- --------------------------------------------------------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
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
A member of
Moores
Rowland
INTERNATIONAL
An association of independent
accounting firms throughout the world.
-33-
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEETS
December 31,
-----------------------
1995 1994
---- ----
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,
outstanding 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
========== ==========
The accompanying notes are an integral
part of these financial statements.
-34-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
Year Ended
December 31,
----------------------------
1995 1994
---- ----
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
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
=========== ===========
The accompanying notes are an integral
part of these financial statements.
-35-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF PARTNERS'/SHAREHOLDERS' EQUITY
Years Ended December 31, 1995 and 1994
Partnership Equity Series A
------------------------- Preferred Stock Common Stock
Limited General --------------- ------------------ Retained Total
Partners Partners Shares Amount Shares Amount Earnings Equity
-------- -------- ------ ------ ------ ------ -------- ------
Balance, December 31, 1993 $ 776,200 $ 7,700 -- $ -- -- $ -- $ -- $ 783,900
Conversion of partnership
units to stock as a
result of incorporation (776,200) (7,700) 227,600 227,600 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 -- -- 227,600 227,600 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 $ -- $ -- 227,600 $ 227,600 2,322,222 $3,869,600 $ 327,000 $4,424,200
========== ========== ======= ========== ========= ========== ========== ==========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
-36-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
---------------------------
1995 1994
---- ----
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 ............. (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
=========== ===========
The accompanying notes are an integral
part of these financial statements.
-37-
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.
-38-
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.
-39-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 2 - INVENTORIES
Inventories consist of the following:
December 31,
---------------------------
1995 1994
---- ----
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
======== ========
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
the following: December 31,
----------------------------
1995 1994
---- ----
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
========== ========
NOTE 4 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
------------------------
1995 1994
---- ----
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 --
-40-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 4 - LONG-TERM DEBT (Continued)
December 31,
------------------------
1995 1994
---- ----
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 $ --
======== =======
Maturities of long-term debt for succeeding years are as follows:
Year ending December 31,
------------------------
1996 ....................... $ 10,400
1997 ....................... 478,700
1998 ....................... 76,200
--------
$565,300
========
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.
-41-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 6 - COMMITMENTS (Continued)
The following is a schedule of future minimum lease payments:
Year Ending December 31,
------------------------
1996 ......................... $ 26,700
1997 ......................... 25,700
1998 ......................... 24,200
1999 ......................... 24,200
2000 ......................... 24,200
Thereafter ...................... 88,600
--------
$213,600
========
NOTE 7 - BREWERY CONSTRUCTION
In late 1995, the Company began construction of it's 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.
-42-
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 then 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.
NOTE 10 - INCOME TAXES
The provision for income taxes consists of the following:
December 31,
---------------------------
1995 1994
---- ----
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
======== ========
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:
Year Ended
December 31,
--------------------------
1995 1994
---- ----
Income tax provision at 34% ............ $105,300 $ 76,400
States 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
======== ========
-43-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 10 - INCOME TAXES (Continued)
Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities at December 31st are as follows:
December 31,
--------------------
1995 1994
---- ----
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)
======== ========
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:
Year Ended December 31, 1995
---------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
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
-44-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1995 and 1994
NOTE 11 - SEGMENT INFORMATION (Continued)
Year Ended December 31, 1995
--------------------------------------------------------------
Brewing Hopland Corporate
Operations Brewery and other Total
---------- ------- --------- -----
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
NOTE 12 - STATEMENT OF CASH FLOWS
Supplementary cash flow information includes the following:
December 31,
------------------------
1995 1994
---- ----
Cash paid during the year for:
Interest ............................ $ 18,900 $ 4,300
Income taxes ........................ $113,500 $75,000
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.
-45-
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
June 30, 1996
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................... $ 21,200
Accounts receivable ......................................... 550,400
Inventories ................................................. 463,500
Prepaid expenses and taxes .................................. 73,100
Deferred income taxes ....................................... 37,000
----------
Total current assets ................................. 1,145,200
----------
PROPERTY AND EQUIPMENT .......................................... 6,947,700
----------
OTHER ASSETS
Label development costs, net of amortization ................ 23,600
Deposits and other assets ................................... 98,400
----------
Total other assets ................................... 122,000
----------
Total assets ......................................... $8,214,900
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowing ........................................ $ 360,000
Accounts payable ............................................ 368,000
Accrued wages and related expense ........................... 105,500
Accrued construction costs .................................. 2,363,100
Accrued profit sharing ...................................... 30,000
Accrued liabilities ......................................... 33,900
Current maturities of long-term debt ........................ 10,000
----------
Total current liabilities ............................ 3,270,500
LONG-TERM DEBT, less current maturities ......................... 550,700
DEFERRED INCOME TAXES ........................................... 20,200
----------
Total liabilities .................................... 3,841,400
----------
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
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 ........................................... 276,300
----------
Total stockholders' equity ........................... 4,373,500
----------
Total liabilities and stockholders' equity ........... $8,214,900
==========
The accompanying notes are an integral
part of these financial statements.
-46-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Sales .......................................... $ 1,227,400 $ 870,700 $ 1,911,400 $ 1,675,200
Less excise taxes .............................. 18,100 36,500 71,000 74,500
----------- ----------- ----------- -----------
Net sales ...................................... 1,209,300 834,100 1,840,300 1,600,700
Cost of goods sold ............................. 545,700 465,600 870,500 907,800
----------- ----------- ----------- -----------
Gross profit ................................... 663,600 368,500 969,900 693,000
----------- ----------- ----------- -----------
Operating expenses
Retail operating ........................... 192,100 146,500 372,300 280,900
Marketing .................................. 199,800 66,500 292,800 126,400
General and administrative ................. 187,700 138,400 339,600 313,300
----------- ----------- ----------- -----------
579,600 351,400 1,004,700 720,500
----------- ----------- ----------- -----------
Income (loss)from operations ................... 84,000 17,200 (34,800) (27,600)
Other income (expense)
Interest income ............................ 300 37,900 10,800 74,800
Other income (expense) ..................... (43,500) 6,000 (47,400) 6,000
----------- ----------- ----------- -----------
(43,300) 43,900 (36,500) 80,800
----------- ----------- ----------- -----------
Income (loss) before
income taxes ................................ 40,700 61,100 (71,300) 53,200
Provision for (benefit from)
income taxes ................................ (21,500) 20,000 (20,700) 20,800
----------- ----------- ----------- -----------
Net income (loss) .............................. $ 62,200 $ 41,100 $ (50,600) $ 32,500
=========== =========== =========== ===========
Earnings (loss) per share ...................... $ 0.03 $ 0.02 $ (0.02) $ 0.01
=========== =========== =========== ===========
Weighted average common
shares outstanding ........................... 2,322,222 2,308,888 2,322,222 2,294,148
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
-47-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
1996 1995 1996 1995
---- ---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) ............................... $ 62,200 $ 41,100 $ (50,600) $ 32,500
Adjustments to reconcile
net income (loss) to net
cash provided (used) by
operating activities:
Depreciation and
amortization .............................. 11,800 11,400 23,000 22,400
Deferred income taxes ....................... (21,500) -- (21,500) --
Changes in:
Accounts receivable ........................... (300,300) 9,800 (91,500) (38,800)
Inventories ................................... (14,800) 39,100 (207,300) 34,500
Prepaid expenses and taxes .................... (20,700) 9,100 (26,000) (6,100)
Accounts payable .............................. 229,900 (19,600) 262,300 (31,900)
Accrued wages and
related expense ............................. 7,100 1,400 (24,400) (5,400)
Accrued profit sharing ........................ -- 11,300 -- (33,800)
Accrued liabilities ........................... 9,400 14,100 11,700 5,800
Income taxes payable .......................... -- -- (34,200) --
----------- ----------- ----------- -----------
Net cash provided (used)
by operating
activities: ............................. (37,100) 117,600 (158,500) (20,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of property and
equipment ..................................... (1,759,700) (965,400) (3,013,200) (1,265,800)
Deposits and other assets ....................... 23,100 44,000 14,600 255,400
Deferred offering costs ......................... (37,900) -- (53,900) --
Reduction of deferred
offering costs ................................ -- (77,200) -- (35,500)
----------- ----------- ----------- -----------
Net cash used by in-
vesting activities: ..................... (1,774,600) (998,500) (3,052,500) (1,045,900)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from (payments on)
short-term borrowings ......................... (40,000) -- 360,000 --
Proceeds from long-term debt .................... -- 492,900 -- 492,900
Principal payments on long-
term debt ..................................... (2,400) -- (4,700) (7,900)
Accrued construction costs ...................... 1,351,800 -- 1,180,800 --
Proceeds from sale of
common stock .................................. -- -- -- 527,100
----------- ----------- ----------- -----------
Net cash provided by
financing activities: ................... 1,309,500 492,900 1,536,100 1,012,100
DECREASE IN CASH ................................... (502,200) (388,000) (1,674,900) (54,800)
CASH, BEGINNING OF PERIOD .......................... 523,400 3,234,000 1,696,100 2,900,800
----------- ----------- ----------- -----------
CASH, END OF PERIOD ................................ $ 21,200 $ 2,846,000 $ 21,200 $ 2,846,000
=========== =========== =========== ===========
Supplemental cash flow
information includes the
following:
Cash paid during the
period for income taxes ..................... $ -- $ 800 $ 52,500 $ 34,900
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
-48-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 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 note payable, due in monthly
installments of $4,435 including interest at 9%, maturing June 1997, and secured
by real property and a note payable, due in one lump sum of $76,200 plus
interest at 9%, maturing December 1998, and secured by real property.
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 +1.5%, maturing December 1996. The note is
secured by receivables, inventory, and equipment.
NOTE 4 - NEW BREWERY FINANCING
A $2.7 million construction loan secured by a first priority deed
of trust on the Ukiah land and improvements and the proceeds of the proposed
common stock 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. 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 an 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.
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 $29,000. The lease
is to commence when the brewing equipment is operational. Until that
-49-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
June 30, 1996 and 1995
time, FINOVA has loaned $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% or 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.
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.
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, 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 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.
-50-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 317 of the California Corporations Code authorizes a court to award,
or a corporation's Board of Directors to grant, indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the "Securities
Act"). Article 8 of the Articles of Incorporation (Exhibit 3.1 hereto) provides
for the indemnification of the Company's directors, officers, employees, and
other agents to the maximum extent permitted by the California Corporations
Code. Article 11 of the Bylaws (Exhibit 3.2 hereto) requires the Company to so
indemnify its directors and officers and authorizes, but does not require, the
Company to so indemnify other persons.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an estimate of the expenses that will be
incurred by the Registrant in connection with the distribution of the securities
being registered hereby:
Securities and Exchange Commission filing fee .............. $ 1,758.62
State securities qualification fees and expenses ........... 20,000.00
Accounting fees and expenses ............................... 26,000.00
Consulting fees and expenses ............................... 44,000.00
Legal fees and expenses .................................... 123,000.00
Printing and engraving expenses ............................ 27,000.00
Transfer agent fees and expenses ........................... 15,000.00
Postage .................................................... 20,000.00
Marketing expenses.......................................... 96,000.00
Miscellaneous .............................................. 27,000.00
------------
Total.................................................. $ 399,758.62
============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to all securities sold by the registrant or
any of its predecessors within the past three years prior to the filing of this
Form SB-2, without registration under the Securities Act:
On January 1, 1994, the Registrant issued 227,600 shares of Series A Preferred
Stock and 1,722,222 shares of Common Stock in exchange for all of the assets of
Mendocino Brewing Company, a California limited partnership (the Partnership).
The Partnership thereupon dissolved and distributed the shares to its partners,
and to the shareholders of the corporate sole general partner, in amounts
proportional to their relative ownership in the partnership (see Exhibits 2.1
and 2.2 to this Registration Statement). There was no underwriter and no public
offering was made.
The Registrant originally issued the above securities to the Partnership without
registration in reliance upon the exemption provided by Section 4(2) of the
Securities Act as a transaction not involving any public offering and in
reliance on Rules 505 and 506 included in Regulation D. The Partnership then
dissolved and distributed the above securities to its partners. The corporate
sole general partner of the Partnership adopted a plan of liquidation and
directed the Partnership to distribute the shares otherwise distributable to it
to its shareholders. The decision to incorporate the Partnership was made by the
general partner without a vote of the limited partners pursuant to the Agreement
of Limited Partnership. Substantially all of the partners of the Partnership had
been beneficial owners of
II-1
securities in the Partnership for more than three years. Because the
incorporation of the Partnership and the subsequent liquidating distribution of
the shares was made without the consent of the limited partners, there was no
sale of the shares to the partners and the registration provisions of the
Securities Act did not apply. Names of the limited partners are set forth on
Exhibit 99.5 hereto.
On or about October 11, 1996, the Registrant issued 300,000 shares of its common
stock to BDM Construction Co., Inc. ("BDM") pursuant to Section 4(2) of the
Securities Act. BDM is the general contractor for the registrant's new brewery
and had purchased 8,333 shares of the Registrant's common stock in the
Registrant's initial public offering. The Registrant issued the shares 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. The 300,000 shares will
be canceled if the Company timely pays the amounts owed to BDM. BDM is not
entitled to retain the shares as payment for the obligation but must sell the
shares in satisfaction of the debt in a commercially reasonable manner unless
the Company agrees, after a default, to permit BDM to retain the shares. To the
extent that any of the shares are not required to be sold to satisfy the
obligation, they will be canceled. 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. The certificate for the 900,000 shares bears a legend
referencing the foregoing restrictions.
The share Certificates for all for the above shares bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT
AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY,
THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT."
ITEM 27. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
Exhibit
Number Description of Document
- ------- -------------------------------
2.1 (A) Report to Limited Partners of Mendocino Brewing Company,
a California limited partnership
2.2 (A) Stock for Assets Incorporation Agreement
3.1 (A) Articles of Incorporation, as amended, of the Company
3.2 (B) Bylaws of the Company (Incorporated by referenced from the
Company's Report on Form 10-KSB for the annual period ended
December 31, 1994 previously filed with the Commission.)
4.1 Articles 5 and 6 of the Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.1.)
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.2.)
4.3 (A) Form of Common Stock Certificate (Incorporated by reference
from the Company's Registration Statement dated June 15,
1994, as amended, previously filed with the Commission,
Registration No. 33-78390-LA.)
5 Opinion and consent of counsel with respect to the legality
of the securities being registered.
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) Wholesale Distribution Agreement between the Company and
Bay Area Distributing.
10.3 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.4 (F) Letter of Intent with Vitro Packaging, Inc.
II-2
Exhibit
Number Description of Document
- ------- -------------------------------
10.5 (A) Sales Contract between the Company and John I. Hass, Inc.
10.6 (A) Lease Agreement between the Company and Kohn Properties.
10.7 (A) Lease Agreement between the Company and Associated Vintage
Group, Inc.
10.8 (F) Commitment letter from Savings Bank of Mendocino County
(previously filed as Exhibit 19.9).
10.9 (A) Letter of intent from California Statewide Certified
Development Corporation.
10.10 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).
10.11 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.12 (B) Proposal from Warren Capital Corporation.
10.13 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc.
(previously filed as Exhibit 19.3).
10.14 (D) Installment Note between Ukiah Redevelopment Agency and
Langley et al. (previously filed as Exhibit 19.5).
10.15 (E) Agreement to Implement Condition of Approval No. 37 of the
Site Development Permit 95-19 with the City of Ukiah,
California (previously filed as Exhibit 19.6).
10.16 (F) Standard Form of Agreement Between Owner and Architect for
Designated Services between the Company and Victor Lopes.
10.17 (F) Liquid Sediment Removal Services Agreement with Cold Creek
Compost, Inc.
10.18 (F) Promissory Note for $76,230 in favor of Langley et al.
10.19 (G) Construction agreement with BDM Construction Company, Inc.
10.20 (G) $60,000 Note payable to BDM Construction Company, Inc.
10.21 (G) Agreement to modify note and deed of trust dated June 6,
1995 with Langley, et al.
10.22 (G) Agreement to modify note dated June 6, 1995 with Langley,
et al.
10.23 (G) Amendment to installment note payable to Langley, et al.
10.24 (G) Manufacturing Business Expansion and Relocation Agreement
with the City of Ukiah.
10.25 (G) Manufacturing Business Expansion and Relocation Agreement
with the Ukiah Redevelopment Agency.
10.26 (G) Consulting Agreement with Daniel R. Moldenhauer.
10.27 (H) Business Loan Agreement with WestAmerica Bank.
10.28 Change in Terms Agreement with WestAmerica Bank.
10.29 Letter Agreement Concerning Use of Proceeds with
WestAmerica Bank.
10.30 Commitment Letter from WestAmerica Bank.
10.31 Business Loan Agreement with the Savings Bank of Mendocino
County.
10.32 Construction Loan Agreement with the Savings Bank of
Mendocino County.
10.33 $2,700,000 Note in favor of the Savings Bank of Mendocino
County.
10.34 Assignment of Deposit Account in favor of the Savings Bank
of Mendocino County.
10.35 Commitment Letter from the Savings Bank of Mendocino
County.
10.36 Equipment Lease with FINOVA Capital Corporation.
10.37 Tri-Election Rider to Equipment Lease with FINOVA Capital
Corporation.
10.38 Master Lease Schedule with FINOVA Capital Corporation.
II-3
Exhibit
Number Description of Document
- ------- -------------------------------
10.39 Advance and Subordination Agreement among the Company,
FINOVA Capital Corporation, and Enerfab, Inc.
10.40 $900,000 Note in favor of BDM Construction Co., Inc.
10.41 Letter Agreement Concerning Use of Proceeds with BDM
Construction Co., Inc.
10.42 Employment Agreement with H. Michael Laybourn.
10.43 Employment Agreement with Norman H. Franks.
10.44 Employment Agreement with Michael F. Lovett.
10.45 Employment Agreement with John Scahill.
24.1 Consent of Moss Adams LLP.
24.2 Consent of Enterprise Law Group, Inc. (Reference is made to
Exhibit 5.)
99.1 Form of Stock Purchase Agreement
- --------------------------------
(A) Incorporated by reference from the Company's Registration
Statement dated June 15, 1994, as amended, previously filed
with the Commission, Registration No. 33-78390-LA.
(B) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1994
previously filed with the Commission.
(C) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended March 31, 1995
previously filed with the Commission.
(D) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1995
previously filed with the Commission.
(E) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended September 30, 1995
previously filed with the Commission.
(F) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1995
previously filed with the Commission.
(G) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1996
previously filed with the Commission.
(H) Incorporated by referenced from the Company's Report on
Form 10-QSB/A No. 1 for the quarter period ended June 30,
1996 previously filed with the Commission.
Item 28. Undertakings.
(a) The Registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
(iii) Include any additional or changed material information
on the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
II-4
(e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer 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.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to meet all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Hopland, State of California, on November 4, 1996.
MENDOCINO BREWING COMPANY, INC.
By: /s/ H. MICHAEL LAYBOURN
-----------------------------------------
H. Michael Laybourn
Chief Executive Officer
Each of the undersigned hereby constitutes and appoints H. Michael Laybourn and
Norman H. Franks, and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign this Registration
Statement on Form SB-2 of Mendocino Brewing Company, Inc., and any and all
amendments thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done, as full to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them or his or their substitute or substitutes may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- ----------- ------ ------
/s/ H. MICHAEL LAYBOURN Chief Executive Officer, Director November 4, 1996
- --------------------------------------- (Principal Executive Officer)
H. Michael Laybourn
/s/ NORMAN H. FRANKS Vice President, Chief Financial Officer, Director November 4, 1996
- --------------------------------------- (Principal Financial and Accounting Officer)
Norman H. Franks
/s/ MICHAEL F. LOVETT Marketing Director, Director November 4, 1996
- ---------------------------------------
Michael F. Lovett
II-5