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 March 31, 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 the issuer's common stock outstanding as of March 31,
1996 is 2,322,222.
<PAGE>
PART I
Item 1. Financial Statements.
The financial statements required by Item 310(b) of Regulation S-B are
set forth at pages 6-9.
Item 2. Management's Discussion and Analysis.
Forward Looking Statements
Statements in this Report covering future performance, developments,
expectations, and events, including without limitation the discussion of the
Company's strategy for future sales, inventory reduction, and building and
equipment financing, are subject to a number of risks and uncertainties which
might cause actual results to differ materially from stated expectations. These
include without limitation the risks and uncertainties described in this Report
and those identified by the Company from time to time in other filings with the
Commission, press releases, and other communications.
Overview
The business is divided into two operating segments. Brewing operations
consists of the manufacture and sale of the Company's beer to distributors and
other retailers. Retail operations consist of operating the Hopland Brewery
brewpub and gift shop.
The Company's current brewing capacity is approximately 18,000 bbl. (1
barrel = 31 gallons) per year, up from 13,600 bbl. per year in 1995 as a result
of process and equipment changes. In the first three months of 1996, brewing
operations accounted for 74.10% of the Company's sales (down from 79.75% for
1995).
Retail sales as a percentage of total sales for the first three months
of 1996 were 9.98%--draft and bottled beer (up from 8.06% from the same period
in 1995) and 13.44%--food and merchandise (up from 12.20% from the same period
in 1995). The Hopland Brewery brewpub has a local base clientele, but depends
heavily on tourist trade business.
The Company's expansion plan, currently underway, calls for the
construction of a new turn-key brewery. The currently proposed expansion will
initially increase the Company's production capability to 50,000 bbl. per year.
The facility's production potential can be increased to 200,000 bbl. per year.
Results of Operations:
Three Months Ending March 31, 1996 Compared to Three Months Ending March
31, 1995. The following discussion sets forth information for the three month
periods ending March
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<PAGE>
31, 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:
Three Months Ended March 31,
----------------------------
1996 1995
------------ ------------
Statements of Income Data:
Sales ....................................... 108.38% 104.95%
Excise taxes ................................ 8.38 4.95
Net sales ................................... 100.00 100.00
Costs of sales .............................. 51.46 57.68
Gross profit ................................ 48.54 42.32
Retail operating expense .................... 28.56 17.53
Marketing expense ........................... 14.74 7.82
General and administrative expense .......... 24.77 22.81
Total operating expenses .................... 68.07 48.16
Loss from operations ........................ (19.53) (5.84)
Other income ................................ 1.78 4.81
Loss before income taxes .................... (17.75) (1.03)
Provision for income taxes .................. 0.13 0.10
Net loss .................................... (17.88) (1.13)
At March 31,
------------------------------
1996 1995
------------- -------------
Balance Sheet Data:
Cash and cash equivalents ............ $ 523,410 $ 3,234,022
Working capital ...................... (420,390) 3,589,195
Property and equipment ............... 5,197,818 590,912
Deposits and other assets ............ 109,016 33,463
Total assets ......................... 6,596,871 4,455,787
Long-term debt ....................... 554,937 --
Total liabilities .................... 2,285,564 214,040
Shareholders' equity ................. 4,311,307 4,241,748
Sales. Gross sales were 15.0% less in the first three months of 1996
than the year-earlier period, while the cost of sales decreased 26.6% during the
same period. Gross profit decreased 5.6% from the 1995 period to the 1996
period. Management attributes the reduction in sales to increased competition in
the craft beer market segment and slower demand due to seasonality. For the
first time since 1988, the Company did not sell its entire production as
distributors were not prepared for increased allocations. Management anticipates
that the resulting build-up of
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<PAGE>
beer inventory will be absorbed during the spring and summer months. The Company
has formulated and is implementing a marketing plan to address changes in the
market and its increased capacity. The decrease in cost of sales was mostly
attributable to the lower shipments of beer to distributors and a lowering of
production unit costs by 15.0% in the first quarter of 1996 compared to the same
period in 1995. Production unit costs decreased as a result of changes in the
brewing process implemented in September 1995, in which a 24 hour brewing
schedule and an additional bottling tank enabled production efficiencies to
improve. Total retail sales at the Hopland Brewery brewpub and gift shop
increased 8.8% from the same period in 1995. Combined beer and food sales
increased 12.5% from the same period in 1995, which management attributes to a
revised menu and a price increase for on premises draft beer, both implemented
in 1995. Cost of retail sales increased 16.2% overall, mostly attributable to
increased sales. Excise taxes for the first three months, which are paid on
packaged beer before shipping, increased $14,952 in 1996 over that of 1995 due
to the increase in production.
Operating expenses. Operating expenses increased 16.3% over the
comparable period in 1995. This was due to increases in labor and music costs in
The Hopland Brewery brewpub. In addition, marketing costs increased as a result
of the implementation of the revised marketing plan. Increases in marketing
labor, promotions, price discount specials to distributors in January, and
advertising were due to the development of current and expansion into new market
areas. The increase in operating expenses were partially offset by a decrease in
general and administrative expenses.
As a result of these factors, net loss in the three months ended March
31, 1996 was $112,817 compared to $8,676 for the earlier period. However, in
1995, the Company realized a $173,700 net profit despite experiencing a net loss
in the first quarter. There may not necessarily be any correlation between the
first quarter of 1996 and the full year's results of operations.
Balance Sheet. Cash and cash equivalents decreased in the first quarter
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 be completed in September 1996. A $492,872
loan from the City of Ukiah enabled the Company to purchase the eight acres
selected as the new brewery site through the Redevelopment Agency of Ukiah. The
loan is due in monthly installments of $4,435 including interest at 9%, matures
in June 1997, and is secured by the real property. A loan from the owner of the
property for $76,200 enabled the Company to purchase an additional acre of land
adjacent to the above eight acre parcel in November 1995. The note is due in
full December 1998 and bears interest at 9%. A short term loan from the Savings
Bank of Mendocino County for $400,000 was obtained in March 1996 at an interest
rate of 10.25%.
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 next quarter.
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<PAGE>
PART II
Item 1. Litigation.
On September 21, 1995, the Company filed an opposition with the United States
Patent and Trademark Office Trademark Trial and Appeal Board against the
proposed intent-to-use application for registration by Oregon Beer and Brewing
Company, Inc. of the word mark RED HAWK. The Company's opposition is based on
its rights to the marks "Black Hawk", "Eye of the Hawk", and "Red Tail Ale". On
December 28, 1995, the Company filed an opposition with the United States Patent
and Trademark Office Trademark Trial and Appeal Board against the proposed
registration by North Coast Brewing Co., Inc. of RUEDRICH'S RED SEAL and a
design which prominently features "Mendocino County". The Company's opposition
is based on its rights to the marks "Red Tail Ale" and "Mendocino Brewing
Company".
Item 5. Other Information.
The Company has federal registrations of the word marks BLUE HERON (Reg. No.
1,820,076), PEREGRINE PALE ALE (Reg. No. 1,667,796), EYE OF THE HAWK SELECT ALE
(Reg. No. 1,673,594), BLACK HAWK STOUT (Reg. No. 1,791,807), and YULETIDE PORTER
(Reg. No. 1,666,891). The registration for the word mark RED TALE ALE (Reg. No.
1,575,386) became subject to automatic cancellation on January 2, 1996. The
Company has pending a special application for a new registration of that mark.
In addition, the Company has pending applications for registration of its Blue
Heron Pale Ale design (Serial No. 74/734782), its Eye of the Hawk Anniversary
Ale design (Serial No. 74/734781), its Eye of the Hawk Select Ale design (Serial
No. 74/734784), and its Red Tail Ale design (Serial No. 74/734783).
The registration of the word mark BLUE HERON is a concurrent use registration
which gives the Company the exclusive right to use the word mark BLUE HERON
throughout the United States with the exception of Oregon, Idaho, Washington,
and Montana. Bridgeport Brewing Company, the other concurrent owner, has the
exclusive right to use the word mark BLUE HERON in those states.
The Company's use of the word mark BLACK HAWK STOUT is, by agreement with Hiram
Walker & Sons, Inc., subject to the restriction that it be used only in
conjunction with the words "Mendocino Brewing Company". Hiram Walker & Sons,
Inc. owns previous federal registrations for the mark BLACKHAWK in stylized form
for bourbon whiskey and for the mark BLACKHAWK in stylized form for Canadian
whiskey.
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
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<PAGE>
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)
20 Proxy Statement for the 1996 Annual Meeting of Shareholders
and 1995 Annual Report to Shareholders (Incorporated by
referenced from the Proxy Statement for the 1996 Annual
Meeting of Shareholders and 1995 Annual Report previously
filed with the Commission.)
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 May 10, 1996 /s/ H. Michael Laybourn
---------------------------- -----------------------------------------
H. Michael Laybourn, President
Date May 10, 1996 /s/ Norman H. Franks
---------------------------- -----------------------------------------
Norman H. Franks, Chief Financial Officer
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<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
March 31, 1996
(Unaudited)
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 523,410
Accounts receivable 250,075
Inventories 448,709
Prepaid expenses and taxes 52,343
Deferred income taxes 15,500
----------------
Total Current Assets: 1,290,037
----------------
Property and Equipment 5,197,818
----------------
Other Assets
Label development costs, net of amortization 14,344
Deposits and other assets 94,672
----------------
Total Other Assets: 109,016
----------------
Total Assets: $ 6,596,871
================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Short-term borrowing $ 400,000
Accounts payable 138,131
Accrued wages and related expense 98,379
Accrued construction costs 1,011,295
Accrued profit sharing 30,000
Accrued liabilities 24,518
Current maturities of long-term debt 8,104
----------------
Total Current Liabilities: 1,710,427
Long term debt - less current maturities 554,937
Deferred income taxes 20,200
----------------
Total Liabilities: 2,285,564
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 214,138
----------------
Total Stockholders' Equity: 4,311,307
----------------
Total Liabilities and Stockholders' Equity: $ 6,596,871
================
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
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<PAGE>
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1996 1995
---- ----
Sales $ 683,945 $ 804,551
Less excise taxes 52,911 37,939
Net Sales 631,034 766,612
Cost of goods sold 324,739 442,161
Gross profit 306,295 324,451
----------- -----------
Operating expenses
Retail operations 180,203 134,360
Marketing and distribution 92,990 59,924
General and administrative 156,338 174,902
----------- -----------
429,531 369,186
----------- -----------
Loss from Operations (123,236) (44,735)
Other income
Interest income 10,550 36,582
Other income 669 277
----------- -----------
11,219 36,859
----------- -----------
Loss before income taxes (112,017) (7,876)
Provision for income taxes 800 800
----------- -----------
Net Loss $ (112,817) $ (8,676)
=========== ===========
Earnings per share $ (0.05) $ (0.00)
=========== ===========
Weighted average common shares outstanding 2,322,222 2,264,667
The accompanying notes are an integral
part of these financial statements
-7-
<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (112,817) $ (8,676)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 11,250 10,995
Changes in:
Accounts receivable 208,803 (48,607)
Inventories (192,455) (4,606)
Prepaid expenses and taxes (5,247) (2,873)
Accounts payable 32,450 (12,293)
Accrued wages and related expense (31,496) (6,851)
Accrued profit sharing (45,000)
Accrued liabilities 2,318 (8,273)
Income taxes payable (34,200) (12,394)
-------------- ------------
Net Cash Used by Operating Activities: (121,394) (138,578)
-------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,254,225) (300,442)
Deposits and other assets (23,736) 211,333
Reduction of deferred offering costs - 41,681
-------------- ------------
Net Cash Used by Investing Activities: (1,277,961) (47,428)
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowing 400,000 -
Principal payments on long-term debt (2,316) (7,866)
Accrued construction costs (171,028) -
Proceeds from sale of common stock - 527,117
-------------- ------------
Net Cash Provided by Financing Activities: 226,656 519,251
INCREASE (DECREASE) IN CASH (1,172,699) 333,245
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,696,109 2,900,777
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 523,410 $ 3,234,022
-------------- ------------
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Interest $ 10,988 $ -
Income Taxes $ 52,500 $ 12,550
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
-8-
<PAGE>
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 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
Short-term borrowing consists of a $400,000 advance from a bank with
interest at 10.25% which matured and was paid in full in April 1996.
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The unaudited financial statements of Mendocino Brewing Company, Inc.
as of March 31, 1996
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 523,410
<SECURITIES> 0
<RECEIVABLES> 250,075
<ALLOWANCES> 0
<INVENTORY> 448,709
<CURRENT-ASSETS> 1,290,037
<PP&E> 5,705,287
<DEPRECIATION> 507,469
<TOTAL-ASSETS> 6,596,871
<CURRENT-LIABILITIES> 1,710,427
<BONDS> 0
<COMMON> 3,869,569
0
227,600
<OTHER-SE> 214,138
<TOTAL-LIABILITY-AND-EQUITY> 6,596,871
<SALES> 683,945
<TOTAL-REVENUES> 683,945
<CGS> 324,739
<TOTAL-COSTS> 324,739
<OTHER-EXPENSES> 429,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (112,017)
<INCOME-TAX> 800
<INCOME-CONTINUING> (112,817)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (112,817)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> 0
</TABLE>
