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 June 30, 1996
[ ] 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 June
30, 1996 is 2,322,222.
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
June 30, 1996
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 21,226
Accounts receivable 550,382
Inventories 463,532
Prepaid expenses and taxes 73,088
Deferred income taxes 37,000
----------------
Total Current Assets: 1,145,228
----------------
Property and Equipment 6,947,661
----------------
Other Assets
Label development costs, net of amortization 23,575
Deposits and other assets 98,413
----------------
Total Other Assets: 121,988
----------------
Total Assets: $ 8,214,877
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowing $ 360,000
Accounts payable 367,982
Accrued wages and related expense 105,510
Accrued construction costs 2,363,142
Accrued profit sharing 30,000
Accrued liabilities 33,870
Current maturities of long-term debt 10,021
----------------
Total Current Liabilities: 3,270,525
Long term debt - less current maturities 550,652
Deferred income taxes 20,200
----------------
Total Liabilities: 3,841,377
Commitments -
Stockholders' Equity
Common stock, no par value; 20,000,000 shares authorized; 3,869,569
2,322,222 shares issued and outstanding
Preferred stock, 2,000,000 shares authorized, 227,600 of 227,600
which are designated Series A, no par value, with aggregate
liquidation preference of $227,600; 227,600 Series A shares
issued and outstanding
Retained earnings 276,331
----------------
Total Stockholders' Equity: 4,373,500
----------------
Total Liabilities and Stockholders' Equity: $ 8,214,877
================
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
-1-
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
June 30,
1996 1995
---- ----
Sales $ 1,227,428 $ 870,656
Less excise taxes 18,138 36,547
----------- -----------
Net Sales 1,209,290 834,109
Cost of goods sold 545,711 465,593
----------- -----------
Gross profit 663,579 368,516
----------- -----------
Operating expenses
Retail operations 192,082 146,498
Marketing and distribution 199,830 66,456
General and administrative 187,700 138,397
----------- -----------
579,612 351,351
----------- -----------
Income from Operations 83,967 17,165
Other income (expense)
Interest income 269 37,931
Other income (expense) (43,543) 6,001
----------- -----------
(43,274) 43,932
----------- -----------
Income before income taxes 40,693 61,097
Provision for (benefit from) income taxes (21,500) 19,957
----------- -----------
Net Income $ 62,193 $ 41,140
=========== ===========
Earnings per share $ 0.03 $ 0.02
=========== ===========
Weighted average common shares outstanding 2,322,222 2,308,888
The accompanying notes are an integral
part of these financial statements
-2-
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
Sales $ 1,911,373 $ 1,675,207
Less excise taxes 71,049 74,487
----------- -----------
Net Sales 1,840,324 1,600,720
Cost of goods sold 870,450 907,754
----------- -----------
Gross profit 969,874 692,966
----------- -----------
Operating expenses
Retail operations 372,285 280,858
Marketing and distribution 292,820 126,380
General and administrative 339,551 313,298
----------- -----------
1,004,656 720,536
----------- -----------
Loss from Operations (34,782) (27,570)
Other income (expense)
Interest income 10,819 74,790
Other income (expense) (47,361) 6,001
----------- -----------
(36,542) 80,791
----------- -----------
Income (loss) before income taxes (71,324) 53,221
Provision for (benefit from) income taxes (20,700) 20,757
----------- -----------
Net Income (loss) $ (50,624) $ 32,464
=========== ===========
Earnings per share $ (0.02) $ 0.01
=========== ===========
Weighted average common shares outstanding 2,322,222 2,294,148
The accompanying notes are an integral
part of these financial statements
-3-
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
June 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 62,193 $ 41,140
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 11,758 11,375
Deferred income taxes (21,500) -
Changes in:
Accounts receivable (300,308) 9,842
Inventories (14,823) 39,073
Prepaid expenses and taxes (20,745) 9,126
Accounts payable 229,852 (19,642)
Accrued wages and related expense 7,131 1,411
Accrued profit sharing - 11,250
Accrued liabilities 9,352 14,058
Income taxes payable - -
-------------- ------------
Net Cash Provided by (Used by) Operating Activities: (37,090) 117,633
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,759,713) (965,360)
Deposits and other assets 23,081 44,033
Deferred offering costs (37,941) -
Reduction of deferred offering costs - (77,191)
-------------- ------------
Net Cash Used by Investing Activities: (1,774,573) (998,518)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on short-term borrowings (40,000) -
Proceeds from long-term debt - 492,872
Principal payments on long-term debt (2,368) -
Accrued construction costs 1,351,847 -
-------------- ------------
Net Cash Provided by Financing Activities: 1,309,479 492,872
DECREASE IN CASH (502,184) (388,013)
CASH, BEGINNING OF PERIOD 523,410 3,234,022
CASH, END OF PERIOD $ 21,226 $ 2,846,009
-------------- ------------
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Income Taxes $ - $ 800
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
-4-
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (50,624) $ 32,464
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Depreciation and amortization 23,008 22,370
Deferred income taxes (21,500) -
Changes in:
Accounts receivable (91,504) (38,765)
Inventories (207,278) 34,467
Prepaid expenses and taxes (25,992) (6,141)
Accounts payable 262,302 (31,935)
Accrued wages and related expense (24,366) (5,440)
Accrued profit sharing - (33,750)
Accrued liabilities 11,670 5,785
Income taxes payable (34,200) -
-------------- ------------
Net Cash Used by Operating Activities: (158,484) (20,945)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (3,013,164) (1,265,802)
Deposits and other assets 14,564 255,366
Deferred offering costs (53,934) -
Reduction of deferred offering costs - (35,510)
-------------- ------------
Net Cash Used by Investing Activities: (3,052,535) (1,045,946)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 360,000 -
Proceeds from long-term debt - 492,872
Principal payments on long-term debt (4,683) (7,866)
Accrued construction costs 1,180,819 -
Proceeds from sale of common stock - 527,117
-------------- ------------
Net Cash Provided by Financing Activities: 1,536,136 1,012,123
DECREASE IN CASH (1,674,883) (54,768)
CASH, BEGINNING OF PERIOD 1,696,109 2,900,777
CASH, END OF PERIOD $ 21,226 $ 2,846,009
-------------- ------------
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Income Taxes $ 52,500 $ 34,850
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
-5-
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 - 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 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 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.
-6-
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 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
Comparing the first six months of 1996 to the same period in 1995,
gross sales are up 14.1%, cost of goods sold is down 4.1%, and gross profit is
up 40.0%. The bankruptcy of a distributor, increased promotional and labor
expenses associated with the operation of The Hopland Brewery brewpub and
merchandise store, and increased marketing expenses resulted in a 39.4% increase
in operating expenses but only $7,200 in additional losses from operations
compared to the same period in 1995. The Company plans to continue marketing
activities at a high level and plans to continue promotional expenses at The
Hopland Brewery at current levels, but the Company 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.
As a result of the above factors, net income for the six month period
was down $83,100 for a net loss of $50,624 compared to net income of $32,500 for
the same period in 1995. 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 Company, which was then organized as a limited
partnership, had paid income taxes at the corporate rates then in effect).
Operating results for the first two quarters of 1996 are not necessarily
indicative of operating results for the full year.
For fiscal year 1996, Mendocino Brewing expects to realize increases in
sales over 1995 of up to 25% as a result of the addition of a bottling tank to
its Hopland facility in September 1995, which increased then current capacity by
32%. Management expects that by the time the Company reaches production of
60,000 bbl. per year at the Ukiah facility currently under construction,
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 unanticipated difficulty in
transferring bottling operations from Hopland to Ukiah, or experiences any of
the other circumstances discussed in "Risk Factors" in the Company's Prospectus
dated June 15, 1994.
Results of Operations:
Six Months Ending June 30, 1996 Compared to Six Months Ending June 30,
1995. The following discussion sets forth information for the six month periods
ending June 30, 1995 and 1996. 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 sales, certain items
included in the Company's Statements of Income, see Financial Statements
elsewhere in this Report, for the periods indicated:
Six Months Ended June 30,
----------------------------
1996 1995
------------ ------------
Statements of Income Data:
Sales ....................................... 103.86% 104.65%
Excise taxes ................................ 3.86 4.65
Net sales ................................... 100.00 100.00
Costs of sales .............................. 47.30 56.71
Gross profit ................................ 52.70 43.29
Retail operating expense .................... 20.23 17.55
Marketing expense ........................... 15.91 7.89
General and administrative expense .......... 18.45 19.57
Total operating expenses .................... 54.59 45.01
Loss from operations ........................ (1.89) (1.72)
Other income ................................ (1.99) 5.05
Income (loss) before income taxes ........... (3.88) 3.32
Provision for (benefit from )income taxes ... (1.12) 1.30
Net income (loss) ........................... (2.75) 2.03
At June 30,
------------------------------
1996 1995
------------- -------------
Balance Sheet Data:
Cash and cash equivalents ............ $ 21,226 $ 2,846,009
Working capital (deficit)............. (2,215,297) 3,126,836
Property and equipment ............... 6,947,661 1 545,669
Deposits and other assets ............ 98,413 63,381
Total assets ......................... 8,214,877 5,004,927
Long-term debt ....................... 550,652 483,642
Total liabilities .................... 3,841,377 722,039
Shareholders' equity ................. 4,373,500 4,282,888
Sales. Sales increased 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 changes in the brewing process implemented in
September 1995, in which a 24 hour brewing schedule and an additional bottling
tank enabled production to increase. 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, the effects of
seasonality, and increased competition within the domestic craft beer segment.
Increased sales in the second quarter of 1996 are attributed to the
implementation of a new 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. The Company anticipates that the beer
inventory built up in the first quarter of 1996 will be used to meet increased
demand during the summer months. Retail sales at The Hopland Brewery brewpub and
merchandise store increased 6.0% from the six month period ended June 30, 1995
to the comparable period in 1996. Management attributes the increase to an
increased awareness of MBC's products as a result of the direct public offering
completed in February 1995.
Cost of goods sold. Cost of goods sold decreased as a percentage of net
sales 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 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 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
increased partly because of the increase in production that occurred in
September 1995 and partly in anticipation of opening the new brewery. Management
expects to further increase marketing expenses in the balance of 1996 and into
1997. Marketing expenses take the form of point of sales and promotional costs,
periodic price discount specials to distributors, and marketing labor. Retail
operating expense increased due primarily to higher labor costs and increased
promotional expenses. Management expects promotional expenses for retail
operations to continue at current levels. The Company wrote off $38,000 in bad
debts in the second quarter after a distributor went out of business. Finally,
general and administrative expense increased due to administrative labor (human
resources and shareholder relations) and legal fees related to trademark issues.
Other income (expense). Other income (expense) decreased by $117,300 in
the six months ended June 30, 1996 compared to the same period for 1995
primarily 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.
Balance Sheet. Cash and cash equivalents decreased in the six months of
1996 compared to 1995 due to the on going construction and equipment costs of
the new brewery expansion. Management presently estimates that construction
which began in September 1995 will take approximately twelve months to complete.
A $492,872 loan from owner of the property enabled the Company to purchase the
eight acres selected as the new brewery site from the Redevelopment Agency of
Ukiah. The note is due in monthly installments of $4,435 including interest at
9%, matures in June 1997, and is secured by real property. A loan from the same
owner of the property for $76,230 enabled the Company to exercise an option to
purchase an additional one acre of land adjacent to the above eight acre parcel
in November 1995. The note is due in full December, 1998, plus accrued interest
at 9%. Short term borrowing from the Savings Bank of Mendocino County for
$400,000 (obtained in March 1996 at an interest rate of 10.25%) was repaid in
full in April 1996. The Company obtained short term borrowing from WestAmerica
Bank for $600,000 (at a variable interest rate of prime + 1.5%), $240,000 of
which was unused at June 30, 1996. After June 30, 1996, the Company prepaid
$300,000 on the two real estate purchase notes and the lender agreed to
subordinate the notes to permanent financing for the new brewery and to an
anticipated $1 million SBA loan. The Company borrowed $60,000 from BDM
Construction Co. Inc. at 12% per annum due August 31, 1996 to fund the
prepayment.
Liquidity and Capital Resources. The Company has yet to secure
permanent financing for the new brewery in the amount of approximately
$3,700,000 for the construction of the building and $2,100,000 for the
acquisition of brewing equipment. Management expects the financing to be
completed during the third quarter. This forward looking statement is subject to
risks and uncertainties. The financing might not be completed in the third
quarter, or at all, if the presently contemplated funding sources impose
conditions the Company is not able to meet or otherwise fail to provide expected
financing.
PART II
Item 3. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of shareholders in Ukiah,
California, on May 22, 1996. Votes were cast for the election of directors to
serve until their successors are elected at the next annual meeting of the
Company as follows:
Candidate Votes For Votes Withheld
- --------- --------- --------------
H. Michael Laybourn 1,653,170 780
Norman H. Franks 1,653,170 780
Michael F. Lovett 1,653,170 780
Eric G. Bradley 1,653,170 780
Daniel R. Moldenhauer 1,653,070 880
The shareholders also ratified the appointment of Moss Adams as the Company's
independent auditors for 1996 by a vote of 1,646,573 for, 1,000 against, and
6,377 abstain.
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
- ---------- -----------------------
3.1 Restated Articles of Incorporation, as amended, of the Company
(Incorporated by reference from the Company's Registration
Statement dated June 15, 1994, as amended, previously filed
with the Commission, Registration No. 33-78390-LA.)
3.2 Bylaws of the Company (Incorporated by referenced from the
Company's Report on Form 10-KSB for the annual period ended
December 31, 1994 previously filed with the Commission.)
4.1 Articles 5 and 6 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.1)
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.2)
19.1 Construction agreement with BDM Construction Company, Inc.
19.2 $60,000 Note payable to BDM Construction Company, Inc.
19.3 Agreement to modify note and deed of trust dated June 6, 1995
with Langley, et al.
19.4 Agreement to modify note dated June 6, 1995 with Langley, et
al.
19.5 Amendment to installment note payable to Langley, et al.
19.6 Manufacturing Business Expansion and Relocation Agreement with
the City of Ukiah
19.7 Manufacturing Business Expansion and Relocation Agreement with
the Ukiah Redevelopment Agency
19.8 Consulting Agreement with Daniel R. Moldenhauer
19.9 Commitment Letter from the Savings Bank of Mendocino County
27 Financial Data Schedule
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 August 13, 1996 /s/ H. Michael Laybourn
---------------------------- -----------------------------------------
H. Michael Laybourn, President
Date August 13, 1996 /s/ Norman H. Franks
---------------------------- -----------------------------------------
Norman H. Franks, Chief Financial Officer