SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A No. 1 (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 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 ========== <FN> The accompanying notes are an integral part of these financial statements </FN> -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 -4- MENDOCINO BREWING COMPANY, INC. NOTES TO FINANCIAL STATEMENTS (Unaudited) 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. 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 costs 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. -6- 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 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 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 -8- 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. 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 costs 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. -9- 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 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 -10- 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 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. -11- 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 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 alcoholic 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 payments 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. -12- PART II Item 6. Exhibits and Reports on Form 8-K. Exhibit Number Description of Document - ------- ------------------------------- 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.) 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. -13- Exhibit Number Description of Document - ------- ------------------------------- 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. 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/extension 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 -14- Exhibit Number Description of Document - ------- ------------------------------- - -------------------------------- * Previously filed. (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. (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 14, 1997 /s/ H. Michael Laybourn ---------------------------- ------------------------------------------- H. Michael Laybourn, President Date November 14, 1997 /s/ Norman H. Franks ---------------------------- ------------------------------------------- Norman H. Franks, Chief Financial Officer