SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number: 1-13636
Mendocino Brewing Company, Inc.
(Name of small business issuer in its charter)
California 68-0318293
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
13351 South Highway 101, Hopland, CA 95449
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (707) 744-1015
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value The Pacific Stock Exchange
Securities registered under Section 12(g) of the Act:
Not applicable
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares of the issuer's common stock outstanding as of
September 30, 1997 is 2,341,548. (Does not include 300,000 shares issued subject
to substantial restrictions as security for a forbearance. See Item 2 -
Management's Discussion and Analysis -- Financing the New Brewery - Vendor
Financing.)
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
September 30,1997
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 152,432
Accounts receivable 505,834
Inventories 429,320
Prepaid expenses and taxes 67,050
Refundable income taxes 116,500
Deferred income taxes 23,100
----------
Total Current Assets: 1,294,236
----------
Property and Equipment 11,128,642
----------
Other Assets
Deferred private placement costs 496,806
Deposits and other assets 100
Deferred income taxes 139,700
----------
Total Other Assets: 636,606
----------
Total Assets: $ 13,059,484
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit $ 600,000
Accounts payable 773,972
Accrued wages and related expense 148,690
Accrued construction costs 820,454
Accrued liabilities 436,075
Refundable deposit 964,000
Notes payable 3,563,057
Current maturities of
obligation under capital lease 164,460
----------
Total Current Liabilities: 7,470,708
Obligation under capital lease, less
current maturities 1,622,592
Deferred income taxes 18,100
----------
Total Liabilities: 9,111,400
Stockholders' Equity Common stock, no par
value; 20,000,000 shares authorized;
2,341,548 shares issued and outstanding 3,869,569
Preferred stock, 2,000,000 shares authorized,
227,600 of which are designated Series A,
no par value, with aggregate liquidation
preference of $227,600; 227,600 Series A
shares issued and outstanding 227,600
Accumulated deficit (149,085)
----------
Total Stockholders' Equity 3,948,084
----------
Total Liabilities and Stockholders' Equity: $ 13,059,484
==========
The accompanying notes are an integral
part of these financial statements
-1-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
Sales $ 1,467,724 $ 1,111,044 $ 3,792,203 $ 3,022,417
Less excise taxes 79,269 47,050 198,683 118,033
----------- ----------- ----------- -----------
Net sales 1,388,455 1,063,994 3,593,520 2,904,384
----------- ----------- ----------- -----------
Cost of goods sold 899,746 543,545 2,240,583 1,413,995
----------- ----------- ----------- -----------
Gross profit 488,709 520,449 1,352,937 1,490,389
----------- ----------- ----------- -----------
Operating expenses
Retail operations 196,616 191,255 531,204 563,540
Marketing and distribution 184,171 200,846 615,035 493,666
General and administrative 216,848 151,175 605,995 490,791
----------- ----------- ----------- -----------
597,635 543,276 1,752,234 1,547,997
----------- ----------- ----------- -----------
Income (loss) from operations (108,926) (22,827) (399,297) (57,608)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 1,298 210 4,404 11,029
Interest expense (44,018) - (73,639) -
Write off of deferred offering costs - - (141,006) -
Other income (expense) 7,141 (907) 12,782 (48,269)
----------- ----------- ----------- -----------
(35,579) (697) (197,459) (37,240)
----------- ----------- ----------- -----------
Loss before income taxes (144,505) (23,524) (596,756) (94,848)
----------- ----------- ----------- -----------
Benefit from income taxes (131,000) (3,086) (244,600) (23,786)
----------- ----------- ----------- -----------
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
=========== =========== =========== ===========
Loss per share $(0.01) $ (0.01) $(0.15) $(0.03)
=========== =========== =========== ===========
Weighted average common shares
outstanding 2,341,548 2,322,222 2,335,106 2,322,222
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
-2-
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization 126,913 12,182 237,569 35,190
Loss on sale of assets - 346 - 346
Gain on sale of assets - (3,915) - (3,915)
Deferred income taxes (111,600) 4,000 (135,200) (17,500)
Changes in:
Accounts receivable (23,155) 237,477 (123,622) 145,973
Inventories (126,268) 20,059 (48,819) (187,219)
Prepaid expenses and taxes 618 (15,918) (8,510) (41,910)
Refundable income tax (19,400) - (109,400) -
Accounts payable (97,815) (4,846) 206,415 257,456
Accrued wages and related expense 11,191 1,746 30,422 (22,620)
Accrued profit sharing - (30,000) - (30,000)
Accrued liabilities 384,178 (11,673) 419,972 (3)
Income taxes payable - - - (34,200)
----------- ----------- ----------- -----------
Net cash provided by operating
activities: 131,157 189,020 116,671 30,536
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (264,667) (1,212,905) (1,925,872) (4,226,070)
Deposits and other assets 40 (12,203) 13,965 2,362
Proceeds from sale of fixed assets - 3,569 - 3,569
----------- ----------- ----------- -----------
Net cash used by investing activities: (264,627) (1,221,539) (1,911,907) (4,220,139)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing (1,300) (56,900) 797,693 298,416
Principal payments on long-term debt - (31,328) - (31,327)
Proceeds from obligation under capital
lease - 750,000 - 750,000
Payments on obligation under capital
lease (38,700) - (89,890) -
Refundable deposit 464,000 - 964,000 -
Accrued construction costs 25,896 641,339 75,985 1,822,157
Proceeds from sale of common stock - - 164,271 -
Deferred stock offering costs - (49,615) 37,687 (103,549)
Deferred private placement costs (415,020) - (496,806) -
----------- ----------- ----------- -----------
Net cash provided by financing
activities: 34,876 1,253,496 1,452,940 2,735,697
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH (98,594) 220,977 (342,296) (1,453,906)
----------- ----------- ----------- -----------
CASH, BEGINNING OF PERIOD 251,026 21,226 494,728 1,696,109
----------- ----------- ----------- -----------
CASH, END OF PERIOD $ 152,432 $ 242,203 $ 152,432 $ 242,203
=========== =========== =========== ===========
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Interest $ 154,441 $ 28,284 $ 402,284 $ 77,202
Income taxes $ - $ - $ - $ 52,500
=========== =========== =========== ===========
Non-cash investing and financing activities for the nine month period ending
September 30,1997, consisted of acquiring fixed assets of $19,573 through a
capital lease.
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
-3-
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. It is believed, however, that the disclosures are adequate to make
the information presented not misleading.
The financial statements, in the opinion of management, reflect all adjustments
necessary to fairly state the financial position and the results of operations.
These results are not necessarily to be considered indicative of the results for
the entire year.
Note 2 Subsequent Event
On October 24, 1997, the Company entered into an investment agreement with
United Breweries of America, Inc., a Delaware corporation ("UBA"), whereby (a)
the Company issued 1,600,000 shares of common stock to UBA at a purchase price
of $4.25 per share in exchange for $1,800,000 cash and $5,000,000 in assets in
the form of 100% of the outstanding interests of Releta Brewing Company LLC, a
limited liability company formed by UBA for the purpose of acquiring a brewery
in Saratoga Springs, New York; and (b) UBA unconditionally agreed to purchase an
additional 517,647 shares for cash at $4.25 per share ($2,200,000 in the
aggregate) on or before November 30, 1997. The brewery is approximately one year
old and was built for a total investment of $8.7 million. Commencement of
brewing operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
UBA also agreed to provide funding for the working capital requirements of
Releta in an amount not to exceed $1 million until October 24, 1999 or until
Releta's operations are profitable, whichever comes first. Professional expenses
and investment banker fees associated with the transaction (private placement
costs) were approximately $500,000, resulting in net proceeds of approximately
$3.5 million.
Note 3 Short-Term Borrowing
The Company has a $600,000 term line of credit from a bank with variable
interest at the bank's index rate plus 1.5%, maturing November 30, 1997. The
note is secured by receivables and inventory. The bank has issued a commitment
letter to convert the loan to a revolving line of credit upon full funding of
the investment agreement with UBA.
Note 4 Notes Payable
Note payable (construction loan) to bank of $2,404,313, with interest at the
bank's index rate plus 2%; secured by substantially all of the Company's assets;
note matures January 1, 1998. The bank has issued a commitment letter to convert
the loan to long-term debt upon full funding of the investment agreement with
UBA.
Note payable to contractor of $900,000, with interest at 12%; due the later of
January 31, 1997 or 30 days after completion of the brewery; secured by common
stock and a second deed of trust on the brewery and subordinated to bank debt.
- 4 -
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note payable to certain individuals of $260,044, due in monthly payments of
$2,380, including interest at 9%; matured June 1997 with a verbal extension
until October 1997, and a balloon payment; secured by real property and
subordinated to bank debt.
Note 5 Renegotiation of Obligation under Capital Lease
In June 1997 the Company renegotiated its capital lease to retroactively reduce
the amount of the lease commitment from approximately $2.1 million to $1.8
million. The excess of lease payments previously paid over the recalculated
lease payments has been credited against future payments.
Note 6 Direct Public Offering
On November 6, 1996, the Company filed a registration statement with the
Securities and Exchange Commission to sell 600,000 shares of its no par value
common stock at a proposed offering price of $8.50 per share. In August 1997,
the offering was terminated after having sold 19,326 shares for $164,271. All
stock transactions occurred prior to June 30, 1997. As of June 30, 1997, the
Company had incurred $305,277 of offering costs related to this offering. Of
that amount, $164,271 was offset against the stock sale proceeds in
Stockholders' Equity and the balance of $141,006 was expensed in the quarter
ended June 30, 1997.
- 5 -
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto included as Item 1 in this Report.
The discussion of results and trends does not necessarily imply that these
results and trends will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-QSB contain forward-looking
information within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking information involves risks and uncertainties that
are based on current expectations, estimates, and projections about the
Company's business, management's beliefs, and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition, changes in distributor relationships or
performance, full funding of the investment agreement with United Breweries of
America, Inc., and other risks detailed below as well as those discussed
elsewhere in this Form 10-QSB and from time to time in the Company's Securities
and Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic economic conditions.
Overview
The third quarter of 1997 was highlighted by the commencement of bottling
operations at the new brewery in Ukiah. Brewing commenced in mid-second quarter.
The Ukiah brewery has given the Company the ability to offer its brews in draft
form to distributors and retail accounts for the first time. The third quarter
also saw the introduction of Black Hawk Stout(R) in 12 oz. six packs with a new,
award-winning label, for the first time. The Company now offers three brands in
12 oz. six packs.
In October 1997 the Company concluded a definitive investment agreement with
United Breweries of America, Inc. which provided for a $4 million cash
investment in the Company and the contribution to the Company of a new brewery
in Saratoga Springs, New York. See "Liquidity and Capital Resources --
Investment by United Breweries of America, Inc." Commencement of brewing
operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
Increased net sales for the nine-month period (up 23.7% over the same period in
1996) were achieved in significant part through increased marketing efforts
which were begun mid-second quarter in 1996. The limit on the Company's brewing
capacity (which was relieved by commencement of operations in Ukiah), increased
marketing expenses associated with increased productive capacity, increased
fixed cost associated with the new facility, and a one-time $141,000 write off
of public offering expenses contributed to a $352,200 loss for the nine month
period.
During October 1997, the new brewery was operating at a rate of approximately
48,000 bbl. per year, more than double the maximum capacity of the old Hopland
facility. The bottling line from the Hopland facility was moved in mid July
1997. The Company relocated seven of its eleven smaller fermenting tanks from
its Hopland facility to Ukiah for production of the
- 6 -
Company's seasonal ales, which are brewed in smaller quantities than Red Tail
Ale(R) and Blue Heron(R) Pale Ale. This will permit the Company to further
expand production to a possible 60,000 bbl. per year rate, as required by
demand, while still producing its seasonal ales.
Results of Operations
Nine Months Ending September 30, 1997 Compared to Nine Months Ending September
30, 1996. The following discussion sets forth information for the nine-month
periods ending September 30, 1996 and 1997. This information has been derived
from unaudited interim financial statements of the Company contained elsewhere
herein and reflects, in Management's opinion, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. Results of operations for any interim
period are not necessarily indicative of results to be expected for the full
fiscal year.
The following table sets forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See Financial Statements
elsewhere in this Report, for the periods indicated:
Nine Months Ended September 30,
-----------------------------------------------
1997 1996
------------ ------------
Statements of Income Data:
Sales........................................... 105.53% 104.06%
Excise taxes.................................... 5.53 4.06
------ ------
Net sales....................................... 100.00 100.00
Costs of sales.................................. 62.35 48.68
------ ------
Gross profit.................................... 37.65 51.32
------ ------
Retail operating expense........................ 14.78 19.40
Marketing and distribution expense.............. 17.12 17.00
General and administrative expense.............. 16.86 16.90
------ ------
Total operating expenses........................ 48.76 53.30
------ ------
Loss from operations............................ (11.11) (1.98)
Other expense................................... (5.49) (1.28)
------ ------
Loss before income taxes........................ (16.61) (3.27)
Benefit from income taxes....................... (6.81) (0.82)
------ ------
Net loss........................................ (9.80)% (2.45)%
====== ======
- 7 -
At September 30,
-----------------------------------------------
1997 1996
------------- --------------
Balance Sheet Data:
Cash and cash equivalents....................... $ 152,400 $ 242,200
Working capital (deficit)....................... (6,176,500) (3,240,300)
Property and equipment.......................... 11,128,600 8,151,000
Deposits and other assets....................... 100 158,000
Total assets.................................... 13,059,500 9,452,800
Long-term debt.................................. 1,622,600 718,700
Total liabilities............................... 9,111,400 5,099,700
Shareholder's equity............................ 3,948,100 4,353,100
Net Sales. Net sales for the first nine months of 1997 were $3,593,520 compared
to $2,904,384 for the first nine months of 1996, and increase of 23.7%.
Management attributes the growth in sales to the implementation of new marketing
strategies, including new point of sale materials and additional field sales
representatives, and the commencement of operations at the new Ukiah facility,
beginning in the second quarter of 1996. Wholesale beer shipments increased by
65.9% in the first nine months of 1997 compared to the same period in 1996.
Increases attributable to additional unit sales were offset by a wholesale price
reduction implemented in September 1996. Management attributes approximately 60%
of the sales increase to increased sales to existing distributors and geographic
expansion begun in the second half of 1996 and the remaining 40% to sales of
draft beer from the new brewery, which began for the first time in May 1997.
Retail sales at the Hopland Brewery brewpub and merchandise store were up 5.1%
for the first nine months of 1997 compared to 1996. Management attributes the
increase to merchandise sales resulting from tourist traffic generated by the
Company's marketing efforts.
Cost of goods sold. Cost of goods sold as a percentage of net sales increased
13.7 percentage points from the first nine months of 1996 to 62.4% in the same
period in 1997. Management attributes the increase to higher fixed costs
associated with the new Ukiah brewing facility.
Gross profit. Gross profit decreased 9.2% from the first nine months of 1996 to
$1,353,000 in the same period in 1997. As a percentage of net sales, gross
profit decreased 13.7 percentage points from the first nine months of 1996 to
37.7% in the same period in 1997. The decrease in gross profit as percentage of
net sales is attributable to the increase in cost of goods sold and a wholesale
price reduction implemented in September 1996.
Operating expenses. Operating expenses were $1,752,200, representing an increase
of 13.2% from the first nine months of 1996. Operating expenses consist of
retail operating expense, marketing and distribution, and general and
administrative expense. Retail operating expenses were $531,200, representing a
decrease of $32,300, or 5.7%, from the first nine months of 1996. The decrease
reflects a decrease in supply and repairs costs of $15,000, a decrease in labor
costs of $11,300, and a decrease in net other expenses of $6,000.
Marketing and distribution expenses were $615,000, representing an increase of
$121,400, or 24.6%, from the first nine months of 1996. As a percentage of net
sales, marketing and distribution expenses were essentially unchanged.
Promotional/advertising costs (including point of sales and packaging/label
development costs) increased by $90,400, marketing and sales labor increased by
$58,200, travel and lodging expenses (incurred in supporting new geographic
markets) increased by $26,900, the reserve for bad debts decreased by $31,100,
the Company established a $30,000 reserve in connection with a dispute with a
distributor, net other distribution expenses decreased by $66,000, and net
miscellaneous expenses increased by $13,000.
- 8 -
General and administrative expense was $606,000, representing an increase of
$115,200, or 23.5%, from the first nine months of 1996. As a percentage of net
sales, general and administrative expense was essentially unchanged. Taxes and
insurance costs associated with the new Ukiah brewery increased by $68,400,
professional fees increased by $24,700, costs associated with being a public
company increased by $11,700, and net miscellaneous expenses increased by
$10,400.
Other income (expense). Other expense was $197,500, representing an increase of
$160,200 in expense in the first nine months 1997 compared to the same period
for 1996. This was primarily as a result of writing off $141,000 in costs of the
direct public offering (net of proceeds raised) and additional net interest
expense of $73,600, offset by the non-recurrence of a $38,300 write off of costs
associated with a proposed alliance in 1996 and $16,100 in net additional
miscellaneous income.
Net loss. Increased fixed cost as the Company began production at the new
brewery in mid-quarter, increased marketing and distribution expense as the
Company continued to implement the marketing program began mid-quarter a year
ago, and the net effect of certain one time occurrences, offset by a tax benefit
of $244,600, produced a net loss in the nine months ended September 30, 1997
which was $281,100 higher than in the comparable 1996 nine month period.
Segment Information
Mendocino Brewing's business presently consists of two segments. The first is
brewing for wholesale to distributors and other retailers. This segment
accounted for 78.9% of the Company's first nine months 1997 sales. The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store, the Hopland Brewery. This
segment accounted for 21.1% of the Company's sales for the first nine months of
1997.
Mendocino Brewing began producing draft beer at its new brewery in Ukiah in May
1997. The initial annual capacity of the new brewery is 60,000 bbl. The bottling
line from the Hopland facility was moved to Ukiah in mid July 1997 and seven of
the eleven 70 - 120 bbl. fermenting tanks were moved to Ukiah in mid August. As
the Company does not intend to expand its brewpub operations, Management expects
that retail sales, as a percentage of total sales, will decrease proportionally
to the expected increase in the Company's wholesale sales.
Seasonality
Beer consumption nationwide has historically increased by approximately 20%
during the summer months. It is not clear to what extent seasonality will affect
the Company as it expands its capacity and its geographic markets.
Financing the New Brewery.
New Brewery Cost. Although the Company has commenced brewing operations at the
Ukiah facility, construction is not yet completed. The Company has yet
- 9 -
to complete the build-out of its administrative space and the exterior
landscaping.
The presently estimated cost of the new brewery at its initial annual capacity
of 60,000 bbl. is $12.2 million. This includes $0.8 million for the land, $7.3
million for improvements to the real estate, $3.4 million for equipment, and
$0.7 million for financing costs. Of this amount, approximately $10.9 million
has been paid or provided for from cash raised in the Company's initial direct
public offering, the proceeds of debt described below, cash provided by the
investment agreement with United Breweries of America, Inc., and cash from
operations. Of the remaining balance of approximately $1.3 million,
approximately $0.3 million is expected to be funded through the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. The $1 million balance will be funded from
operations or other sources or will be deferred. The Ukiah brewery is presently
operating under a temporary certificate of occupancy from the City of Ukiah.
Completion of construction is a condition to the issuance of a final certificate
of occupancy. Failure to complete construction and obtain a final certificate of
occupancy could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Construction Financing. Mendocino Brewing has obtained a $2.7 million
construction loan secured by a first priority deed of trust on the Ukiah land
and improvements. The loan is fully funded. The construction loan bears interest
at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures
on January 1, 1998.
In October 1997 the bank issued a new written commitment to convert the
construction loan to a 15 year term loan upon full funding of the investment
agreement with UBA. The commitment provides that upon conversion, the loan will
bear interest at 1.5% over prime. The minimum annual interest rate is to be
7.5%. The loan is to be amortized over 25 years with a balloon payment upon
maturity in 15 years. The lender's commitment letter states that the lender will
convert the unpaid principal at maturity to a fully amortized 10-year loan
subject to terms and conditions to be agreed upon at that time. [The commitment
letter does not legally obligate the bank to convert the construction loan to
permanent financing. Failure to find a lender to refinance the construction loan
could have a material adverse impact on the Company's business, financial
condition, and results of operations.]
Equipment Lease. FINOVA Capital Corporation has leased new brewing equipment
with a total cost of approximately $1.78 million to Mendocino Brewing for a term
of 7 years with monthly rental payments of approximately $27,100 each. At
expiration of the initial term of the lease, the Company may purchase the
equipment at its then current fair market value but not less than 25% nor more
than 30% of the original cost of the equipment, or at the Company's option, may
extend the term of the lease for an additional year at approximately $39,000 per
month with an option to purchase the equipment at the end of the year at then
current fair market value. The lease is not pre-payable.
Seller Financing of Ukiah Real Estate. The seller of the Ukiah land has a note,
secured by a third priority deed of trust on the land, with a remaining
principal balance as of September 30, 1997 of approximately $258,700 at 9%
annual interest payable in monthly installments of principal and interest of
$2,380 with the balance due at maturity in October 1997 per a verbal agreement
with the spokesman for the lending group. The Company expects to repay the loan
with the proceeds of the investment agreement with UBA.
WestAmerica Loan. WestAmerica Bank of Santa Rosa, California has loaned
Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable
and inventory. The loan is fully funded and bears interest at the bank's index
rate plus 1.5% payable monthly and matures on November 30, 1997. In October
1997, WestAmerica Bank provided the Company with commitment letter to convert
the $600,000 term loan to a revolving line of credit with an advance
- 10 -
rate of 80% of qualified accounts receivable and 25% of inventory upon full
funding of the investment agreement with United Breweries of America, Inc. The
commitment letter does not legally obligate the bank to convert the loan. To the
extent that the loan is not extended or refinanced, the Company will be required
to repay the loan. Failure to find a lender to refinance the loan could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Vendor Financing. The general contractor for the new brewery, BDM Construction
Co., Inc. ("BDM"), agreed to defer up to $900,000 in fees otherwise owed or to
become payable on December 31, 1996, subject to performance by BDM of its
obligations under the construction contract, until January 31, 1997 with
interest at 12% per annum. As of November 12, 1997, approximately $0.9 million
was due to BDM. No written modifications have been made to the deferral
arrangement to address the current circumstances. The deferral arrangement is
secured by a second priority deed of trust on the Ukiah land and improvements,
and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of
default, BDM is required to proceed against the Common Stock before initiating
any proceeding against the real estate. The Common Stock collateral was issued
to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933
subject to the restrictions (a) that the shares shall be canceled if the amounts
owed BDM are paid in full, (b) that if the full amount owed BDM is not paid, the
shares must be sold in a commercially reasonable manner as specified in the
California Commercial Code, and (c) that any shares not needed to be sold to
satisfy the obligation to BDM shall be canceled. Under California law, BDM may
not retain the shares in satisfaction of the obligation without the written
consent of the Company given after an event of default. BDM has the right to
require the Company to register the shares issued for its account for sale to
the public. As of November 11, 1997, BDM has not taken any action to enforce the
Company's obligations to it. The Company presently anticipates that payment of
its obligation to BDM will be funded with the proceeds of the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. Failure to repay BDM could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Keg Management Arrangement. The Company has entered into a keg management
agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides the Company with half-barrel kegs for which the Company pays a filling
fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar
then supplies the Company with additional kegs. If the agreement terminates, the
Company is required to purchase a certain number of kegs from MicroStar. The
Company would probably finance the purchase through debt or lease financing, if
available.
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.
Saratoga Springs Brewery. The acquisition of the additional brewery in Saratoga
Springs, New York will place additional demands on the
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Company's assets, liabilities, commitments for capital expenditures, and
liquidity. UBA has agreed to provide funding for the working capital
requirements of the Saratoga Springs brewery in an amount not to exceed $1
million until October 24, 1999 or until the brewery's operations are profitable,
whichever comes first. Commencement of brewing operations at the Saratoga
Springs brewery is contingent upon obtaining appropriate alcholic beverage
licenses, applications for which are in process.
The Company's ratio of current assets to current liabilities on September 30,
1997 was 0.17 to 1.0 and its ratio of assets to liabilities was 1.43 to 1.0.
New Brewery. See "-- Financing the New Brewery" above.
Impact of Expansion on Cash Flow. Mendocino Brewing must make timely payment of
its debt and lease commitment to continue in operation. Increased capacity will
also place additional demands on the Company's working capital to pay the cost
of additional sales and marketing activities and staff, production personnel,
and administrative staff and to fund increased purchases of supplies. There will
be a lag between the time the Company must incur some or all of these costs and
the time the Company realizes revenue from increased sales. Working capital for
day to day business operations had historically been provided primarily through
operations. Beginning approximately with the second quarter of 1997, proceeds
from operations have not been able to provide sufficient working capital for day
to day operations as the Company expands. The investment agreement with UBA is
expected to provide approximately $700,000 in working capital. In addition, UBA
has agreed to provide funding for the working capital requirements of the
Saratoga Springs brewery in an amount not to exceed $1 million until October 24,
1999 or until the brewery's operations are profitable, whichever comes first.
Investment by United Breweries of America, Inc. On October 24, 1997, the Company
entered into an investment agreement with United Breweries of America, Inc., a
Delaware corporation ("UBA"), whereby (a) the Company issued 1,600,000 shares of
common stock to UBA at a purchase price of $4.25 per share in exchange for
$1,800,000 cash and $5,000,000 in assets in the form of 100% of the outstanding
interests of Releta Brewing Company LLC, a limited liability company formed by
UBA for the purpose of acquiring the brewery in Saratoga Springs, New York; and
(b) UBA unconditionally agreed to purchase an additional 517,647 shares for cash
at $4.25 per share ($2,200,000 in the aggregate) on or before November 30, 1997.
The brewery is approximately one year old and was built with a total investment
of $8.7 million. Professional expenses and investment banker fees associated
with the transaction were approximately $500,000, resulting in net proceeds of
approximately $3.5 million. UBA also agreed to provide funding for the working
capital requirements of Releta in an amount not to exceed $1 million until
October 24, 1999 or until Releta's operations are profitable, whichever comes
first.
PART II
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
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3.1 (A) Articles of Incorporation, as amended, of the Company
3.2 (B) Bylaws of the Company
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.)
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Exhibit
Number Description of Document
- ------- -------------------------------
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.)
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).
10.3 Employment Agreement with H. Michael Laybourn.
10.4 Employment Agreement with Norman Franks
10.5 (A) Wholesale Distribution Agreement between the Company and Bay
Area Distributing.
10.6 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.7 (A) Sales Contract between the Company and John I. Hass, Inc.
10.8 (F) Liquid Sediment Removal Services Agreement with Cold Creek
Compost, Inc.
10.9 (A) Lease Agreement between the Company and Kohn Properties.
10.10 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.11 (D) Installment Note between Ukiah Redevelopment Agency and
Langley et al. (previously filed as Exhibit 19.5).
10.12 (F) Promissory Note for $76,230 in favor of Langley et al.
10.13 (G) Agreement to modify note and deed of trust dated June 6, 1995
with Langley, et al.
10.14 (G) Agreement to modify note dated June 6, 1995 with Langley, et
al.
10.15 (G) Amendment to installment note payable to Langley, et al.
10.16 Commercial Lease Between Stewart's Ice Cream Company, Inc.
and Releta Brewing Company LLC.
10.17 Agreement between United Breweries of America, Inc. and
Releta Brewing Company LLC regarding payment of certain
liens.
10.18 (F) Standard Form of Agreement Between Owner and Architect for
Designated Services between the Company and Victor Lopes.
10.19 (G) Construction agreement with BDM Construction Company, Inc.
10.20 (J) Letter Agreement Concerning Use of Proceeds with BDM
Construction Co., Inc.
10.21 (J) $900,000 Note in favor of BDM Construction Co., Inc.
10.22 (G) Consulting Agreement with Daniel R. Moldenhauer.
10.23 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc.
(previously filed as Exhibit 19.3).
10.24 (K)+ Keg Management Agreement with MicroStar Keg Management LLC.
10.25 (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).
10.26 (G) Manufacturing Business Expansion and Relocation Agreement
with the City of Ukiah.
10.27 (G) Manufacturing Business Expansion and Relocation Agreement
with the Ukiah Redevelopment Agency.
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10.28 (H) Business Loan Agreement with WestAmerica Bank.
10.29 (J) Letter Agreement Concerning Use of Proceeds with WestAmerica
Bank.
10.30 Commitment Letter/extention agreement from WestAmerica Bank
dated October 21, 1997.
10.31 (J) Construction Loan Agreement with the Savings Bank of
Mendocino County.
10.32 (J) Business Loan Agreement with the Savings Bank of Mendocino
County.
10.33 (J) $2,700,000 Note in favor of the Savings Bank of Mendocino
County.
10.34 (J) Assignment of Deposit Account in favor of the Savings Bank of
Mendocino County.
10.35 Change in Terms Agreement with the Savings Bank of Mendocino
County dated November 5, 1997.
10.36 (J) Commitment Letter from the Savings Bank of Mendocino County
dated September 13, 1996.
10.37 Commitment Letter from the Savings Bank of Mendocino County
dated October 15, 1997.
10.38 Letter Agreement with the Savings Bank of Mendocino County
dated October 23, 1997.
10.39 (J) Equipment Lease with FINOVA Capital Corporation.
10.40 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital
Corporation.
10.41 (J) Master Lease Schedule with FINOVA Capital Corporation.
10.42 (J) Advance and Subordination Agreement among the Company, FINOVA
Capital Corporation, and Enerfab, Inc.
10.43 (L) Investment Agreement with United Breweries of America, Inc.
10.44 (L) Shareholders' Agreement Among the Company, United Breweries
of America, Inc., Michael Laybourn, Norman Franks, Michael
Lovett, John Scahill, and Don Barkley
10.45 (L) Registration Rights Agreement Among the Company, United
Breweries of America, Inc., Michael Laybourn, Norman Franks,
Michael Lovett, John Scahill, and Don Barkley
27 Financial Data Schedule
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(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.
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(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.
(J) Incorporated by reference from the Company's Registration
Statement dated February 6, 1997, as amended, previously
filed with the Commission, Registration No. 333-15673.
(K) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1996
previously filed with the Commission.
(L) Incorporated by reference from the Schedule 13D filed with
the Commission on November 3, 1997 by United Breweries of
America, Inc. and Vijay Mallya.
+ Portions of this Exhibit were omitted pursuant to an
application for an order declaring confidential treatment
filed with the Securities and Exchange Commission.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
Mendocino Brewing Company, Inc.
(Registrant)
Date November 13, 1997 /s/ H. Michael Laybourn
---------------------------- -----------------------------------------
H. Michael Laybourn, President
Date November 13, 1997 /s/ Norman H. Franks
---------------------------- -----------------------------------------
Norman H. Franks, Chief Financial Officer
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