UNITED STATES
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, 2001
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
----- -----
Commission file number 1-13636
Mendocino Brewing Company, Inc.
(Exact name of small business issuer as specified in its charter)
California 68-0318293
(State or other jurisdiction of incorporation or organization) (IRS EmployerIdentification No.)
13351 Highway 101 South, Hopland, California 95449
(Address of principal executive offices)
(707) 744-1015
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's common stock outstanding as of September
30, 2001 is 11,070,728.
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2001
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 123,200
Accounts receivable 5,507,400
Inventories 1,211,600
Prepaid expenses 287,700
Deferred income taxes 48,100
-----------
Total Current Assets: 7,178,000
-----------
PROPERTY AND EQUIPMENT 14,693,600
-----------
OTHER ASSETS
Deferred Income Taxes 2,768,000
Deposits and other Assets 73,600
Intangibles net of amortization
129,500
Total Other Assets: 2,971,100
-----------
Total Assets: $24,842,700
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of Credit $ 3,925,000
Accounts payable 4,744,000
Accrued liabilities 745,000
Accrued wages and related expense 183,100
Income Taxes Payable 261,000
Current maturities of obligation under long-term debt and Leases 577,400
-----------
Total Current Liabilities: 10,435,500
LONG TERM DEBT, AND CAPITAL LEASES less current maturities 3,333,000
NOTES TO RELATED PARTY
1,717,200
Total Liabilities: 15,485,700
-----------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with aggregate liquidation
preference of $227,600; 227,600 shares authorized, issued and
outstanding 227,600
Common stock, no par value: 20,000,000 shares authorized, 5,580,498 shares issued and
outstanding 14,907,400
Other Comprehensive Income 48,400
Accumulated deficit (5,826,400)
-----------
Total Stockholders' Equity 9,357,000
-----------
Total Liabilities and Stockholders' Equity: $24,842,700
===========
The accompanying notes are an integral part of these financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
------------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
------------------------- --------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
NET SALES 6,314,700 6,002,700 17,609,300 16,394,600
COST OF GOODS SOLD 4,229,900 3,801,100 11,662,600 10,507,200
----------- ---------- ----------- -----------
GROSS PROFIT 2,084,800 2,201,600 5,946,700 5,887,400
----------- ---------- ----------- -----------
OPERATING EXPENSES
Retail Operating Expenses 127,600 117,200 362,200 309,600
Marketing 1,110,600 1,091,300 3,322,700 3,071,100
General and administrative 644,400 554,500 2,008,600 1,697,300
----------- ---------- ----------- -----------
1,882,600 1,763,000 5,693,500 5,078,000
----------- ---------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 202,200 438,600 253,200 809,400
----------- ---------- ----------- -----------
OTHER INCOME (EXPENSE)
Other income (expense) 6,400 27,700 16,100 21,700
Acquisition Expenses (808,200) (808,200)
Interest expense (211,600) (226,400) (691,900) (734,400)
----------- ---------- ----------- -----------
(1,013,400) (198,700) (1,484,000) (712,700)
----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES (811,200) 239,900 (1,230,800) 96,700
PROVISION FOR (BENEFIT FROM) INCOME TAXES 123,900 (77,900) 123,500 (154,200)
----------- ---------- ----------- -----------
NET INCOME (LOSS) $ (935,100) $ 317,800 $(1,354,300) $ 250,900
=========== ========== =========== ===========
The accompanying notes are an integral part of these financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
---------------------- --------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
---------------------- --------------------------
2001 2000 2001 2000
--------- --------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $(935,100) $ 317,800 $(1,354,300) $ 250,900
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 274,000 211,500 809,500 871,500
Deferred income taxes 76,000 (156,400) -- (156,400)
Stock issued for services 8,600 7,000 8,600 7,000
Gain on disposal of fixed assets (26,000) -- (29,400)
Changes in:
Accounts receivable 97,700 (445,500) (207,900) 209,600
Inventories 34,000 (106,800) 128,100 44,800
Prepaid expenses (3,900) (3,100) (171,100) (114,700)
Deposits and other assets 658,000 (50,000) 279,500 (19,100)
Accounts payable (115,100) 309,800 706,600 28,300
Accrued wages and related expenses 6,300 (17,100) 18,500 (44,900)
Accrued liabilities 566,400 (233,200) (36,500) 176,900
--------- --------- ----------- -----------
Net cash from operating activities: 666,900 (192,000) 181,000 1,224,500
--------- --------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (382,300) (14,800) (641,500) (311,600)
improvements
Proceeds from sale of fixed assets -- 51,600 -- 57,800
Increase in intangibles -- (36,900) -- (228,900)
--------- --------- ----------- -----------
Net cash from investing activities: (382,300) (100) (641,500) (482,700)
--------- --------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit (53,900) 23,900 355,000 (870,000)
Principal payments on long-term debt (85,100) (76,800) (260,300) (250,900)
Borrowings on long-term debt -- 315,100 -- 625,100
Payments on obligation under capital lease (73,000) (73,700) (117,800) (221,800)
Purchase of common stock (Dissenter's Right) (18,100) -- (18,100) --
Proceeds from notes payable to related parties 30,900 -- 421,600 --
Translation adjustment 2,700 (3,900) (5,000) 3,300
--------- --------- ----------- -----------
Net cash from financing activities: (196,500) 184,600 375,400 (714,300)
--------- --------- ----------- -----------
INCREASE/(DECREASE) IN CASH 88,100 (7,500) (85,100) 27,500
--------- --------- ----------- -----------
CASH, beginning of period 35,100 263,300 208,300 228,300
--------- --------- ----------- -----------
CASH, end of period $ 123,200 $ 255,800 $ 123,200 $ 255,800
========= ========= =========== ===========
Supplemental cash flow information
includes the following:
Cash paid during the period for:
Interest $ 180,800 $ 213,600 $ 594,300 $ 649,400
--------- --------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. During the quarter, the Company acquired all the outstanding stock of
United Breweries International, Ltd., ("UBI"). Both UBI and the Company are
under common control and the acquisition was required to be reported as-if it
were a pooling of interest combination. The consolidated financial statements
have been presented on the assumption that the acquisition of this wholly owned
subsidiary had occurred on January 1, 2000. All prior years' financial
information has been retroactively restated. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-KSB for the year ended December 31, 2000. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the nine months ended
September 30, 2001, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001.
Note 2 - Line of Credit
The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000
maximum line of credit with an advance rate of 80% of the Company's qualified
accounts receivable and 60% of the company's inventory at an interest rate equal
to the prime rate as published by Chase Manhattan Bank of New York plus 2.25%
payable monthly, maturing September 23, 2002. The line of credit is secured by
all accounts, general intangibles, inventory, and equipment of the Mendocino
Brewing Company except for the specific equipment and fixtures of the Company
leased from FINOVA Capital Corporation, a second deed of trust on the Company's
Ukiah land improvements and the assets of UBI. $1,484,000 of the line of credit
was advanced to the Company as an initial term loan, which is repayable in sixty
consecutive monthly installments of principal, each in the amount of $24,700.
The Company commenced repayment of the term loan in March 1999 and approximately
$742,000 of the term loan was outstanding as of September 30, 2001. On November
20, 2000, the CIT Group agreed to increase the maximum limit of the line of
credit by $100,000, subject to the condition that the increased limit must be
paid back in monthly installments of approximately $11,100 during the period
from April 1, 2001 through December 1, 2001. In April 2001, CIT Group agreed to
defer commencement of the monthly repayment installments of approximately
$11,100 until September 2001. CIT Group has increased the line of credit by
$170,000 to enable the company to acquire and refurbish bottling line equipment
in order to enhance the Company's capacity. The company has drawn $100,000
against this increase. The Company intends to repay the amount of the increase
once the refurbished machinery is installed and the purchase is refinanced
through an existing line of credit. Based on the Company's current level of
accounts receivable and inventory, the Company
4
has drawn the maximum amount permitted under the line of credit. As of September
30, 2001, the total amount outstanding on the line of credit was approximately
$2,458,500.
Necor Bank Limited, a South African registered company, has provided UBSN Ltd.
with a multi-currency option facility of 1,250,000 Pounds Sterling. This
overdraft facility is secured by a fixed and floating currency charge over all
of the assets of UBSN Ltd. The amount outstanding on this line of credit as of
September 30, 2001, was approximately $1,181,600.
Note 3 - Long Term Debt and Notes to Related Parties
The Company has a note outstanding in the principal amount of $2,700,000, with
interest at Treasury Constant Maturity Index for five year treasuries plus
4.17%, currently 10.00%. The note requires monthly payments of principal and
interest of $24,400. The note matures in December 2012 with a balloon payment
and is secured by real property located in Ukiah, California.
The Company has issued convertible notes in favor of United Breweries of
America, Inc. ("UBA") in the amount of approximately $1,515,400 as of September
30, 2001. The notes bear interest at the prime rate plus 1.5%, subject to a
maximum of 10% per annum, and mature 18 months from the date of the advance. The
advances are unsecured and mature through December 2002. The notes are
convertible at the option of UBA, to common stock at $1.50 per share upon
maturity and thereafter. Interest accrued on the notes as of September 30, 2001,
is approximately $201,800.
On June 25, 2001, Savings Bank of Mendocino County ("SBMC") extended a revolving
line of credit to the Company, secured by the existing securities of the Company
which were then held by SBMC, and by a personal guarantee by Dr. Mallya. This
credit facility matured on October 12, 2001. The rate of interest on the
facility is the adjusted base commercial rate of SBMC on the first and fifteenth
day of each month, plus one percent, currently 8%. The Company has drawn
$250,000 in principal on the line of credit. As of the date of this filing, the
Company has remitted payment in the amount equal to the outstanding principal
and interest to SBMC and awaits confirmation of the payment in full.
Note 4 - Income Taxes
The Company has recorded a valuation allowance of $600,000 of federal and state
net operating loss carryforwards. There is some uncertainty that the Company
will be able to generate sufficient taxable income to utilize all the deferred
tax assets. The Company is considering and implementing various strategies to
bring the business toward profitability such as reducing debt, improving
efficiency, possible debt conversion, and a possible private placement of
preferred stock. The Company believes that if all the above strategies are
effective, it is likely that they will generate sufficient profits in the future
to utilize all the deferred tax assets.
5
As of September 30, 2001, the Company has available for carry-forward Federal,
California and New York net operating losses. The losses will expire as follows:
Net Operating Loss
----------------------------------------
Date of Expiration Federal California New York
- ------------------ ---------- ---------- ----------
2001 $ -- $ 87,500 $ --
2002 -- 761,200 --
2003 -- 961,200 --
2004 -- 694,700 --
2010 -- 276,400 --
2012 1,802,300 -- 251,500
2018 2,758,800 -- 385,000
2019 2,153,100 -- 290,300
2020 991,500 -- 137,900
---------- ---------- ----------
$7,705,700 $2,781,000 $1,064,700
========== ========== ==========
The Company also has $35,000 of California Manufactures Investment Tax Credits
that can be carried forward to offset future taxes until they begin to expire in
2007. The benefit from these loss carry-forwards and credits has been reported
as a deferred tax asset.
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns, including the future benefit of its carry-forwards.
Temporary differences and carry-forwards which give rise to deferred tax assets
and liabilities on September 30, 2001, are as follows:
Accounts receivables allowance $ 6,400
Benefits from net operating loss carry forwards 3,561,500
Inventory 6,000
Accruals 38,700
Valuation allowance (600,000)
Depreciation and amortization (111,200)
Other (85,300)
Note 5 -- Related party Transactions
On November 3, 2000, the company entered into a Share Purchase Agreement with
Inversiones Mirabel, S.A. and Golden Eagle Trust, both of which are entities
related to the Company's Chairman of the Board and Chief Executive Officer, Dr.
Vijay Mallya, and its principal shareholder, UBA. Under the terms of the Share
Purchase Agreement, the Company acquired all of the issued and outstanding
shares of UBI, the parent company of UBSN Ltd. The Company's shareholders
approved the transaction in the annual meeting held on June 28, 2001, and the
6
closing of the transaction occurred on August 13, 2001. In the transaction, the
Company issued approximately 5,500,000 shares of the Company's common stock in
exchange for the shares of UBI. UBI owns the distribution rights to the
"Kingfisher" brand of beer in the United States. Because UBI is a wholly-owned
subsidiary of the Company, the Company now has the ability to brew "Kingfisher"
brand beer in the United States, for distribution primarily in the United
States.
The closing of the acquisition of UBI was originally scheduled to occur in the
year 2000. However, the financial statements first provided to the Company by
UBI and UBSN Ltd. were prepared in accordance with accounting standards as
generally applied in the United Kingdom. It took longer than expected to conduct
all of the required audits of UBI and UBSN Ltd. so that their financial
statements are (i) consistent with United States accounting standards, and (ii)
as required by the U.S. Securities and Exchange Commission.
The transaction described above is a related party transaction because the
corporation that owned all of the shares of UBI is held by Golden Eagle Trust,
which is controlled by fiduciaries who may exercise discretion in favor of Dr.
Vijay Mallya, who is the Chairman and Chief Executive Officer of the Company.
Dr. Mallya is also a member of the board of directors of UBSN Ltd. Golden Eagle
Trust also owns a controlling interest in the Company's largest shareholder,
UBA.
Additional information about this transaction is contained in the Company's 2001
Proxy Statement, which was filed with the Commission on May 11, 2001, and such
information is incorporated herein by reference.
Note 6 - Net Income Per Common and Common Equivalent Share
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed by dividing income available to
shareholders by the weighted average number of common shares and common
equivalent shares outstanding, which include dilutive stock options and notes
payable convertible in common stock. Common equivalent shares associated with
stock options and convertible notes payable have been excluded from periods with
a net loss as the potentially dilutive shares would be antidilutive.
7
Three months ended Nine months ended
------------------ -----------------
9/30/2001 9/30/2000 9/30/2001 9/30/2000
-------------------------------------------------------
Basic net income (loss) per share
Net income (loss) $ (935,100) $ 317,800 $(1,354,300) $ 250,900
=======================================================
Weighted average common shares outstanding 11,078,151 11,030,117 11,079,716 11,030,117
=======================================================
Basic net income (loss) per share $ (0.08) $ 0.03 $ (0.12) $ 0.02
=======================================================
Diluted net income (loss) per share
Net income (loss) $ (935,100) $ 317,800 $(1,354,300) $ 250,900
Interest expense on convertible notes
payable -- 24,000 -- 63,100
-------------------------------------------------------
Income for the purpose of computing
diluted net income per share $ (935,100) $ 341,800 $(1,354,300) $ 324,000
=======================================================
Weighted average common shares outstanding 11,078,151 11,030,117 11,079,716 11,030,117
Dilutive stock options -- 181,388 -- 181,388
Assumed conversion of convertible notes
payable -- 790,933 -- 790,933
-------------------------------------------------------
Weighted average common shares outstanding
for the purpose of computing diluted net
income (loss) per share 11,078,151 12,002,438 11,079,716 12,002,438
=======================================================
Diluted net income (loss) per share $ (0.08) $ 0.03 $ (0.12) $ 0.03
=======================================================
Note 7 - Inventory
Raw Materials $495,700
Beer-in-process 196,700
Finished Goods 484,300
Merchandise 34,900
----------
$1,211,600
==========
8
Note 8 - Stockholders' Equity
The following table summarizes equity transactions during the nine months ended
September 30, 2001:
Series A
Preferred Stock Common Stock Other
-------------------- ------------------------- Comprehensive Accumulated Total
Shares Amount Shares Amount Income Deficit Equity
-------- -------- ---------- ----------- ------------- ------------ -----------
Balance,
December 31, 2000 227,600 $227,600 5,580,498 $13,875,900 -- $(4,332,300) $ 9,771,200
Stock issued for the
Purchase of United
Breweries
International -- -- 5,500,000 1,041,000 -- -- 1,041,000
Stock issued to employee -- -- 12,500 8,600 -- -- 8,600
Currency translation
Adjustment -- -- -- -- 48,400 -- 48,400
Stock repurchase -- -- (22,270) (18,100) -- -- (18,100)
Income from subsidiary
prior
to acquisition (139,800) (139,800)
Net loss -- -- -- -- -- (1,354,300) (1,354,300)
-------- -------- ---------- ----------- ------- ----------- -----------
Balance,
September 30, 2001 227,600 $227,600 11,070,728 $14,907,400 $48,400 $(5,826,400) $ 9,357,000
======== ======== ========== =========== ======= =========== ===========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto included as Item 1 of this Report.
The discussion of results and trends does not necessarily imply that these
results or 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. 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, changes in the pricing environment for the Company's products,
changes in demand for domestic craft beer, changes in customer preference for
the Company's products, impact of competition, changes in distributor
relationships or performance, changes in raw materials prices, changes in
interest rates, changes in foreign currency exchange rates, changes in the
Company's international beer business, and the domestic market's acceptance of
the Company's new mix of products 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,
the Company's statements could be affected by general industry and market
conditions and growth rates, regulatory and legislative changes, and general
foreign and domestic economic conditions. Readers are cautioned not to place
undue reliance on these forward-looking statements, which are valid as of the
date of this filing.
9
Overview
Historically, the Company's business operations have been divided into two
segments, manufacturing and distribution of beer in the United States, and
retail operations in the United States. With the Company's acquisition of United
Breweries International (UK) Ltd. ("UBI") and UBI's wholly-owned subsidiary,
UBSN Ltd. ("UBSN"), the Company gained a third business segment, distribution of
beer outside the United States, primarily in the United Kingdom, Europe, and
Canada. Further discussion of the Company's acquisition of UBI and UBSN may be
found under "Acquisition of UBSN", below.
UBI's primary function is to serve as a holding company for UBSN. UBSN sells,
markets, and distributes alcoholic beverages. Its operation is based at
Faversham, Kent, in the United Kingdom, close to the brewery of Shepherd Neame,
Ltd., licensed brewers of Kingfisher Premium Lager Beer ("Kingfisher") in the
United Kingdom. UBSN's portfolio of products includes, among others, Kingfisher
and Grover Wines, which are imported from India to be sold in Indian
restaurants. UBSN does not physically distribute its products to its ultimate
trade customers, relying instead on specialist restaurant trade distributors in
the United Kingdom. Shepherd Neame, Ltd., acts as UBSN's agent, on a commission
basis, in the supermarket trade.
In August 2001, UBSN was granted a license to market and retail Sun Lik Premium
Lager Beer ("Sun Lik") from Shepherd Neame Ltd. Sun Lik is a brand which is
owned by a division of San Miguel Corporation and originated in Hong Kong. UBSN
currently sells Sun Lik to the Chinese restaurant trade in Europe.
UBSN promotes, and is the sole distributor of, Kingfisher within the United
Kingdom, Ireland, and Continental Europe. Kingfisher is an international brand
and is currently distributed in over 30 countries. It is a two time World
Champion Lager, winning at the World Beer Championships at Stockholm, Sweden.
Over the last several years, Kingfisher has consistently been ranked in the top
ten fastest growing beer brands in the United Kingdom.
During the third quarter, the Company started brewing Kingfisher at its brewing
facility in Saratoga Springs, New York, and distributing it domestically. This
product has been well received in the market. To facilitate its production of
Kingfisher, the Company made necessary modifications to the layout of the
Saratoga Springs facility in order to install a pasteurizer, and upgraded the
equipment and laboratory.
The Company's brewing operation's sales in the United States during the first
nine months of 2001 increased to 44,964 barrels from 36,707 barrels in the first
nine months of 2000. This represents an increase of 22% over the first nine
months of 2000 (measured in barrels). Of the total sales of 44,964 barrels, the
sales out of the Ukiah facility amounted to 37,620 barrels and the sales out of
the Saratoga Springs facility amounted to 7,344 barrels.
During the first nine months of 2001, UBSN sold 38,682 barrels compared to
37,652 barrels during the corresponding period in the year 2000. This represents
an overall increase of 3% over the first nine months of 2000. Because
Kingfisher's United States distribution is now handled out of the Company's
Saratoga Springs facility, instead of through UBSN, UBSN has experienced a drop
in volume of 2,332 barrels during the first nine months of the year 2001 when
10
compared to the same period in the year 2000. Sales in the United Kingdom and
Europe increased to 36,602 barrels during the first nine months of the year
2001, compared to 33,153 barrels during the first nine months of the year 2000,
for a 10% increase.
Following the terrorist attacks in the United States on September 11, 2001, the
restaurant and lodging industry in both the United States and Europe have
experienced a significant decline in business, due to decreased tourism, and
consumers' lack of confidence in local economies, among other reasons. This
decline in the bar and restaurant business has adversely affected the Company's
sales, and is expected to continue to adversely affect the Company's sales in
the near future. However, the full effect of the terrorist attacks on the
Company's business cannot yet be determined.
The Company ended the first nine months of 2001 with a net loss of $1,354,300.
As set forth more fully under "Results of Operations", below, increases in
selling and marketing expenses, general and administrative expenses, cost of
goods, and acquisition expenses contributed to the net loss.
On February 12, 2001, UBA and the Company amended the line of credit agreement
between them to increase the maximum amount of principal under the line of
credit available to the Company from $1,200,000 to $1,600,000. Outstanding
interest may cause the aggregate amount outstanding under the line of credit to
exceed $1,600,000. As of September 30, 2001, the aggregate amount outstanding
under the line of credit from UBA is approximately $1,717,200, including
principal of approximately $1,515,400 and accrued interest of approximately
$201,800.
Results of Operations
The following discussion sets forth information for the nine-month periods
ending September 30, 2001 and 2000. 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 Operations, as set forth above under "Financial
Statements," for the periods indicated:
11
------------------------
Nine Months Ended
September 30
------------------------
2001 2000
Statements of Operations Data:
Net Sales 100.00 100.00
Cost of Goods Sold 66.23 64.09
---------- ----------
Gross Profit 33.77 35.91
Retail Operating Expense 2.06 1.89
Marketing Expense 18.87 18.73
General and Administrative Expenses 11.40 10.35
---------- ----------
Total Operating Expenses 32.33 30.97
---------- ----------
Profit from Operations 1.44 4.94
Other Income 0.09 0.13
Interest expense (3.93) (4.48)
Acquisition Expenses (4.59) --
---------- ----------
Profit/(Loss) before income taxes (6.99) 0.59
Provision (Benefit) from income taxes 0.70 (0.94)
---------- ----------
Net (Loss)/Profit (7.69) 1.53
Balance Sheet Data:
Cash 123,200 255,800
Working Capital (3,257,500) 171,100
Property and Equipment 14,693,600 15,020,400
Deposits and Other Assets 2,971,100 2,993,700
Total Assets 24,842,700 24,584,500
Long-term Debt & Leases 3,333,000 5,696,500
Total Liabilities 15,485,700 13,578,500
Shareholder's equity 9,357,000 11,006,000
Net Sales: Overall net sales for the first nine months of 2001 were $17,609,300
compared to $16,394,600 for the first nine months of the year 2000, representing
an increase of 7.41%.
US Operations. Net sales for the first nine months of 2001 were $8,598,400
compared to $7,011,600 for the first nine months of 2000, representing an
increase of 22.63%. The sales volume increased to 44,964 barrels in the first
nine months of 2001 from 36,707 barrels in the first nine months of 2000,
representing an increase of 22.49%. Management attributes the increased sales of
the Company's own brands to improved marketing strategies, including new point
of sale materials and increased sales personnel. The Company's commencement of
domestic sales of Kingfisher also contributed to the increase in sales. The
Company has achieved an increase in contract brewing operations since the
corresponding period of 2000, and has begun brewing the products of Panorama
Brewing Company. The increase in overall net sales during the first nine months
of 2001 was achieved mainly by higher wholesale shipments which represented an
increase of $1,553,800 over the wholesale shipments during the first nine months
of 2000. The Company also benefited from a general increase in the price of its
products, which was effected in the first quarter of 2001. In view of
management's focus on
12
wholesale beer sales, retail sales for the first nine months of 2001 showed only
a minimal increase of $33,000 over the first nine months of 2000.
UK Operations: Net sales for the first nine months of 2001 were $9,010,900
((pound)6,231,300) compared to $9,383,000 ((pound)6,058,600) during the
corresponding period in 2000. Exchange rate fluctuations when measured in United
States dollars caused a decrease in net sales as compared to the corresponding
period of last year, however when the net sales results are compared in Pounds
Sterling, there is an increase of 2.85%. Sales volume in the United Kingdom and
Europe increased over the year, however the increase was offset by a drop in the
sales volume in the United States.
Cost of Goods Sold: Cost of goods sold as a percentage of net sales during the
first nine months of 2001 was 66.23% as compared to 64.09% during the
corresponding period of 2000. Higher volume, increase in the cost of materials
and higher energy costs contributed to the increase. The Company has also been
selling more products packaged in bottles, which are more costly than other
packaging methods, therefore causing an increase in packaging costs.
US Operations: Cost of goods sold as a percentage of net sales in the
United States during the first nine months of 2001 was 65.04%, as compared to
61.66% during the first nine months of 2001, representing an increase of 3.38%.
Part of the increased cost is due to the expense of packaging bottled products,
as the sale of bottled beer in the first nine months has increased by 2%. The
Company also incurred increased costs in connection with the introduction of new
packaging and products. Due to increased production activity and increase in the
minimum wages effected at the beginning of this year, as a percentage of net
sales, labor costs increased from 9.91 % during the first nine months of the
year 2000, to 10.83% during the corresponding period in 2001.
As a percentage of net sales in the United States, during the first nine months
of 2001, depreciation decreased from 7.41% in 2000 to 6.06% in 2001, insurance
increased from 1.21% in 2000 to 1.30% in 2001, other manufacturing expenses
decreased from 5.47% in 2000 to 4.50% in 2001, thereby contributing to the
overall increase of 3.38% of the cost of goods sold as a percentage of net
sales, as compared to the first nine months of 2000. Also, mainly because of
energy surcharges, utilities increased from 3.66% in 2000 to 3.88% in 2001.
UK Operations: Cost of goods sold as a percentage of net sales in the
United Kingdom during the first nine months of 2001 was 67.37%, as compared to
65.91% in United States dollars during the first nine months of 2001,
representing an increase of 1.46% mainly due to exchange rate fluctuations and
cost increases not offset by price increases during the first quarter of the
year 2001.
Gross Profit. As a result of the higher net sales described above, gross profit
for the first nine months of 2001 increased to $5,946,700, from $5,887,400 for
the comparable period of 2000, representing an increase of 1.01%. As a
percentage of net sales, because of the increase in cost of goods sold as
discussed above, the gross profit during the first nine months of 2001 decreased
to 33.77% from that of 35.91% for the corresponding period of 2000.
Operating Expenses. Operating expenses for the first nine months of 2001 were
$5,693,500, as
13
compared to $5,078,000 for the first nine months of 2000, representing an
increase of 12.1%. Operating expenses consist of retail operating expenses,
marketing and distribution expenses, and general and administrative expenses.
Retail Operating Expenses: Retail operating expenses for the first nine months
of 2001 were $362,200, representing an increase of $52,600, or 16.99%, from the
first nine months of 2000. As a percentage of net sales, retail operating
expenses increased to 2.06% as compared to 1.89% for the first nine months of
2000. The increase in retail operating expenses consisted mainly of increases in
labor expenses totaling $43,900, and in other expenses of $8,700, which
management generally attribute to the aggregate increase in sales and the
increased hours of operation of the tasting room in Saratoga Springs.
Marketing and Distribution Expenses: Marketing and distribution expenses for the
first nine months of 2001 were $3,322,700 representing an increase of $251,600,
or 8.19%, from the first nine months of 2001. As a percentage of net sales,
marketing and distribution expenses represented 18.87% as compared to 18.73%
during the first nine months of 2000.
US operations: Expenses for the first nine months of 2001 were $1,536,600
compared to $1,196,300 during the first nine months of 2000, representing an
increase of $340,300. As a percentage of net sales in the United States, the
expenses increased to 17.87% during the first nine months of the year 2001,
compared to 16.08% during the corresponding period in 2000. A portion of the
increase is due to the increase of $144,000in marketing and sales labor because
of the growth in the Company's sales force. The Company committed to an
aggressive product promotion during the first nine months of 2001, therefore as
compared to the corresponding period of 2001, media and advertising increased by
$13,300 and sales promotions expenses increased by $113,900. Other increases are
as follows: telephone expenses increased by $6,000; freight increased by
$17,500; travel, entertainment and sampling increased by $41,700; and other
expenses increased by $3,900.
UK operations: Expenses for the first nine months of 2001 were $1,786,100
compared to $1,874,800 during the first nine months of 2000, representing a
decrease of $88,700. As a percentage of net sales in the United Kingdom, the
expenses measured in United States dollars decreased to 19.82% during the first
nine months of the year 2001 compared to 19.97% during the corresponding period
in 2000. The reduction is mainly because the Company began distributing
Kingfisher out of its Saratoga Springs facility, therefore the following
expenses associated with UBSN's sales of Kingfisher in the United States
decreased accordingly: reduction in freight amounted to $158,600, sales
commissions fell by $38,200, and sales promotion expenses declined by $70,600.
The Company increased manpower in the United Kingdom, which necessitated an
increase of $41,300 in salary. The costs of repair and replacement of beer
dispensing equipment installed in bars by the Company increased by $139,700.
General And Administrative Expenses: General and administrative expenses were
$2,008,600, representing an increase of $311,300 from the first nine months of
2000. As a percentage of net sales, the general and administrative expenses were
11.40% for the first nine months of 2001, as compared to 10.35% for the first
nine months of 2000.
14
US operations: General and administrative expenses were $1,214,300,
representing an increase of $238,100 over the first nine months of 2000. Mainly
because of the Company's overall increase in operations, when compared to the
first nine months of 2000, accounting and audit fees increased by $42,100;
travel and entertainment increased by $18,200; salaries increased by $59,500;
legal fees increased by $43,200; telephone expenses increased by $13,100; rent
increased by $13,200; taxes and fees increased by $15,200; loan and lease fees
increased by $16,100; bank charges increased by $13,100; and net miscellaneous
expenses increased by $4,400.
UK operations: General and administrative expenses were $794,300,
representing an increase of $73,200 from the first nine months of 2000. The
overall increase can be broken down as follows: salaries increased by $69,500;
audit fees increased by $19,700; management fees increased by $24,600;
depreciation expenses decreased by $73,100; and royalties increased by $25,900.
The net increase in other expenses was $6,600.
Other Expenses. Other expenses for the first nine months of 2001 totaled
$1,484,000, representing an increase of $712,700 when compared to the first nine
months of 2000. The other expenses consist of interest expenses, miscellaneous
income, and acquisition costs. Interest expenses decreased by $42,500 because of
the reduction in the line of credit and long term debts. Miscellaneous income
decreased by $5,600. The cost to acquire UBI from Inversiones Mirabel S.A.
("Inversiones") amounted to $808,200.
Income Taxes. The Company has a provision for income taxes of $123,500 as of
September 30, 2001. This provision is equal to the estimated amount of taxes
that will be imposed by the taxing authorities in the United Kingdom on the
profits of UBI for the nine months ending on September 30, 2001. The Company's
aggregate loss before income tax for the first nine months of 2001 was
$1,230,800 as compared to net income of $96,700 for the corresponding period of
2000.
Benefit From Income Taxes. The Company has recorded a valuation allowance of
$600,000 on deferred tax assets for net operating loss carryforwards that may
expire prior to utilization. As of September 30, 2001, the Company has
approximately $7,705,700, $2,781,000, and $1,064,700 of Federal, California and
New York net operating losses, respectively, available to carry forward. Of the
Federal and New York net operating losses, approximately $2,053,800 will expire
in 2012, and the remainder will expire through 2020. The California net
operating losses expire beginning in 2001 and will continue to expire through
2010. Although management believes that based on current projections, the
Company could utilize all of the net operating losses, it is possibile that a
portion of the losses may expire prior to utilization. The Company also has
$35,000 of California Manufactures Investment Tax Credits that can be carried
forward to offset future taxes until they begin to expire in 2007. Management
believes that the Company will utilize the deferred tax assets in the ordinary
course, but due to the significant time period that may elapse before
utilization, the Company decided that a valuation allowance was necessary. The
Company is implementing various strategies to achieve profits sufficient to
utilize these assets. The rationale for not recording a larger allowance and
strategies for utilization of the assets are as follows:
15
o Changes implemented by the Company have resulted in the annual loss before
income taxes being reduced by 25% from 1998 to 1999, from $2,701,100 to
$2,035,800; and 58% from 1999 to 2000, from $2,035,800 to $856,600. The
loss for the current year is expected to be significantly greater than the
prior year. Approximately $800,000 of acquisition costs will be capitalized
for tax purposes in the current year, thereby reducing the amount of the
loss for income tax purposes.
o For California income tax purposes, significant book to tax temporary
differences will result in additional taxable income of $300,000 per year
for the next four years.
o The Company acquired UBI, a United Kingdom company that owns a
distributorship of Kingfisher Lager in the United Kingdom, Europe and other
markets, and has the exclusive brewing and distribution rights to
Kingfisher Lager in the United States. The Company finalized the
transaction, on August 13, 2001, and has begun production and distribution
of Kingfisher Lager. UBI had profitable operations in the nine months ended
September 30, 2001, and the years ended December 31, 2000 and 1999, and
also generated positive cash flows for the periods then ended. The Company
anticipates that, it will use the excess cash flow from the operations of
UBI to reduce the Company's outstanding debt and reduce interest expense.
o The company anticipates that due to its acquisition of the rights to brew
and distribute Kingfisher, and the continued increase in sales of the
Company's own brands, the Company could achieve profitable operations in
the future.
o The Company is installing equipment to upgrade its bottling line. The
equipment will increase the bottling capacity from 120 bottles per minute
to 250 bottles per minute. This will assist the Company in reducing labor
costs and cost of goods sold.
o The Company may undertake a private placement of securities. A portion of
the proceeds of the private placement could potentially be used to pay off
debt, thereby decreasing interest expense. The Company could also consider
refinancing the operations in order to reduce interest rates and debt
payments.
o The Company may seek to convert $1,700,000 of convertible debt into the
Company's equity securities. Such a conversion could save the Company
approximately $120,000 in interest payments per year.
o The Company may include the earnings of UBI in the Company's federal and
state income tax returns; this would allow the Company to utilize the net
operating loss carryforwards more quickly.
Net Loss. The net loss for the first nine months of 2001 was $1,354,300, as
compared to income of $250,900 for the first nine months of 2000. As a
percentage of net sales, the net loss for the first nine months of 2001
increased to 7.69%.
16
Segment Information
The Company's business presently consists of three segments. The first is
brewing for wholesale to distributors and other retailers in the United States.
This segment accounted for 46% of the Company's net sales for the first nine
months of 2001. The second segment consists of distribution of beer in the
United Kingdom, Europe and Canada, which accounted for 51% of the Company's net
sales; and the third segment is the sale of beer along with food and merchandise
at the Company's brewpub and retail merchandise store located at the Hopland
Brewery. This segment accounted for 3% of the Company's total net sales during
the first nine months of 2001.
The Company's business segments are brewing operations, distributing operations
in the United Kingdom, and a retail establishment known as the Hopland Brewery.
A summary of each segment is as follows:
Nine months ended September 30, 2001
------------------------------------
US Brewing UK Operations Retail Corporate & Total
Operations ------------- Operations Others -----------
----------- ---------- -----------
Sales $ 8,110,300 $ 9,010,900 $488,100 $ -- $17,609,300
Operating Profit/(Loss) (92,600) 360,500 (14,700) -- 253.200
Identifiable Assets 14,965,300 4,840.,900 73,500 4,963,000 24,842,700
Depreciation &
amortization 521,300 208,800 5,400 73,900 809,400
Capital Expenditures 435,800 187,000 4,200 14,500 641,500
Nine months ended September 30, 2000
------------------------------------
US Brewing UK Operations Retail Corporate & Total
Operations ------------- Operations Others -----------
----------- ---------- -----------
Sales $ 6,511,800 $ 9,383,000 $499,800 $ -- $16,394,600
Operating Profit/(Loss) 221,800 603,000 (15,400) -- 809.400
Identifiable Assets 15,140,200 4,600.,200 79,500 4,764,600 24,584,500
Depreciation &
amortization 519,900 280,800 5,000 65,800 871,500
Capital Expenditures 23,800 277,900 5,600 4,300 311,600
17
Seasonality
Beer consumption nationwide has historically been approximately 20% higher
during the summer months as compared to the other months of the year. It is not
clear to what extent seasonality will affect the Company as it expands its
capacity and its geographic markets.
Capital Demands
The Releta facility commenced brewing operations in February 1998. Both the
Ukiah and Releta facilities have been operating at significantly less than full
capacity during 2001. Both breweries have placed demands upon the Company's
assets and liquidity. Failure to adequately meet those demands may have a
material adverse affect on the Company's business, financial condition, and
results of operations.
The Ukiah brewery is presently operating under a temporary certificate of
occupancy from the City of Ukiah. The Company has yet to complete the build-out
of its administrative space and the exterior landscaping of the Ukiah facility.
In the interim, the Company approached the authorities with plans to construct
offices in a different part of the building at a much lesser cost to the
Company. Those plans were approved by the city and accordingly the offices were
completed at the end of 1999 at a cost of approximately $23,000. Management
believes that if the offices had been built according to the original plan, it
would have cost the Company approximately $300,000. Management believes that it
is not necessary at this point in time to build the offices according to
original plans and has therefore decided to shelve the plan indefinitely.
With regard to the exterior landscaping of the Ukiah facility, the Company has
been using its own in-house resources to complete the bulk of the work, and has
employed outside firms from time to time for limited purposes. The work was
completed at a cost of approximately $23,000. The work related to Ukiah Brewery
building pending completion and the estimated cost thereof are as follows:
1. Covering the parking lot with asphalt, approximately $30,000
2. Building concrete sidewalk to one of the entrances of the brewery building,
approximately $10,000
3. If required, creating additional office/record room space for future
development, approximately $60,000
It is estimated that the above construction cost would be approximately
$100,000, which includes the cost of modifying the original plan submitted to
the City of Ukiah.
The management expects that the additional office space will no longer be
required, and is planning to approach the City authorities for their approval of
modifications to the original plan and complete the work on the parking lot and
sidewalk during the last quarter of 2001. They should obtain the final
certificate of occupancy from the City authorities thereafter.
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
18
adverse effect on the Company's business, financial condition, and results of
operations, because of, among other reasons, increased administrative burdens
and costs.
Liquidity and Capital Resources
Long Term Debt. Mendocino Brewing has obtained a $2.7 million long-term loan
secured by a first priority deed of trust on the Ukiah land and improvements.
The loan is payable in monthly installments of approximately $24,400 including
interest at the Treasury Constant Maturity Index plus 4.17%, currently 10%,
maturing December 2012 with a balloon payment in the amount of $1,872,300. This
loan is secured by some of the assets of the Company (other than the Releta
facility), including, without limitation, a first priority deed of trust on the
Ukiah land and improvements, fixtures, and most of the equipment of the Company.
Shareholder Commitment. During 1998, UBA, the Company's largest shareholder,
agreed to provide the Company with a credit facility of up to $2 million (the
"1998 Facility"). In mid-1999, the 1998 Facility was terminated, and a new
credit facility (the "1999 Facility") in the maximum amount of $800,000 was
offered to the Company on substantially the same terms as the 1998 Facility
pursuant to a Master Line of Credit Agreement. On April 28, 2000, the 1999
Facility was increased to $1,200,000. Pursuant to the terms of the Master Line
of Credit Agreement, advances on the credit facility bear interest at the prime
rate of the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%,
and is due and payable quarterly. The principal amount of each advance, together
with any accrued but unpaid interest on such advance, is due 18 months after the
date of such advance. Each advance made on the line of credit is evidenced by a
convertible note. Each convertible note includes a conversion feature whereby
UBA could, at its option, convert the principal and any accrued but unpaid
interest into unregistered shares of the Company's common stock on or after the
maturity date, at a rate of one share of common stock for each $1.50 of
principal and unpaid interest. The arrangement was approved by the independent
directors (Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999.
The terms of the 1999 Facility were amended during 2000 to increase the maximum
amount of principal available to the Company to $1,200,000, and were amended
again in early 2001 to increase the maximum amount of principal available to the
Company to $1,600,000. The interest which accrues on the outstanding principal
may cause the aggregate amount outstanding to exceed $1,600,000. The Company has
made draws on the credit facility during 2001, bringing the outstanding
principal and interest accrued thereon to $1,717,166 as of September 30, 2001,
which corresponds to UBA's right to acquire up to 1,144,777 shares of the
Company's common stock.
Equipment Lease. FINOVA Capital Corporation ("FINOVA") leased new brewing
equipment with a total cost of approximately $1.78 million to Mendocino Brewing
for a term of 7 years (beginning December 1996) 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
19
at then current fair market value. The lease is not pre-payable. FINOVA has
recently undertaken a reorganization under Chapter 11 of the Bankruptcy Code,
however FINOVA has not given the Company any indication that the relationship
between the Company and FINOVA will materially change, if at all.
Credit Facilities. The CIT Group/Credit Finance, Inc. has provided the Company
with a $3,000,000 maximum line of credit with an advance rate of 80% of the
qualified accounts receivable and 60% of the inventory at an interest rate of
the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly,
maturing September 23, 2002. The line of credit is secured by all accounts,
general intangibles, inventory, and equipment of the Company except for the
specific equipment and fixtures of the Company leased from FINOVA, as well as by
a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of
the line of credit was advanced to the Company as an initial term loan, which is
repayable in sixty consecutive monthly installments of principal, each in the
amount of $24,700. The Company commenced repayment of the term loan in March
1999 and approximately $742,000 of the term loan was outstanding as of September
30, 2001. On November 20, 2000, the CIT Group had agreed to increase the
borrowing limit by $100,000, subject to the condition that the increased limit
has to be paid back in monthly installments of approximately $11,100 during the
period from April 1, 2001 through December 1, 2001. In April of 2001, the CIT
Group agreed to defer the commencement of the monthly repayments to September of
this year. CIT Group has agreed to increase the line of credit by $170,000 to
enable the company to acquire and refurbish bottling equipment in order to
enhance the Company's capacity. The company has drawn $100,000 against this
increase. The Company intends to repay the amount of the increase once the
refurbished machinery is installed and the purchase is refinanced through an
existing line of credit. Based on the Company's current level of accounts
receivable and inventory, the Company has drawn the maximum amount permitted
under the line of credit. As of September 30, 2001, the total amount outstanding
on the line of credit was approximately $2,458,500.
On June 25, 2001, Savings Bank of Mendocino County ("SBMC") extended a revolving
line of credit to the Company, secured by the existing securities of the Company
which were then held by SBMC, and by a personal guarantee by Dr. Mallya. This
credit facility matured on October 12, 2001. The Company has drawn $250,000 in
principal on the facility. The rate of interest on the facility is the adjusted
base commercial rate of SBMC on the first and fifteenth day of each month, plus
one percent, currently 8%. As of the date of this filing, the Company has
remitted payment in the amount equal to the outstanding principal and interest
to SBMC, and awaits confirmation of the payment in full.
Necor Bank Limited, a South African registered company, has provided UBSN with a
multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft
facility is secured by a fixed and floating currency charge over all of the
assets of UBSN. The amount outstanding on this line of credit as of September
30, 2001, was approximately $1,181,600.
Interest. The weighted average interest rates paid on the Company's debts
(including the long term capital lease of equipment by FINOVA Capital
Corporation Inc.) was 9.73% for the first nine months of the year 2001 and
10.70% for the corresponding period of the year 2000.
20
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
and use 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. However, there can be no assurances that the Company
will be able to finance the purchase of kegs and the failure to purchase the
necessary kegs from MicroStar is likely to have a material adverse effect on the
Company.
Current Ratio. The Company's ratio of current assets to current liabilities on
September 30, 2001 was 0.69 to 1.0 and its ratio of total assets to total
liabilities was 1.60 to 1.0. On September 30, 2000, the Company's ratio of
current assets to current liabilities was 1.03 to 1.0 and its ratio of total
assets to total liabilities was 1.81 to 1.0
Impact of Expansion on Cash Flow. The Company must make timely payment of its
debt and lease commitments to continue in operation. Unused capacity at the
Ukiah and Saratoga Springs facilities has placed additional demands on the
Company's working capital. Beginning approximately with the second quarter of
1997, the time at which the Ukiah brewery commenced operations, proceeds from
operations have not been able to provide sufficient working capital for day to
day operations. UBA agreed to provide a loan of up to $2 million for working
capital purposes. In addition, pursuant to the Investment Agreement dated
October 24, 1997, between the Company and UBA, UBA agreed to provide, directly
or indirectly, funding for the working capital requirements of the Releta
facility in the amount of $1 million until October 24, 1999 or until the
brewery's operations are profitable, whichever comes first. UBA, through its
affiliated entities, has fulfilled this obligation by facilitating the CIT
Group/Credit Finance $3 million loan transaction. To fund its operating
deficits, the Company has relied upon lines of credit and other credit
facilities. However, there can be no assurances that the Company will have
access to any such sources of funds in the future, and the inability to secure
sufficient funds could be expected to have a material adverse effect on the
Company.
Acquisition of UBSN
On November 3, 2000, the company entered into a Share Purchase Agreement with
Inversiones Mirabel, S.A. and Golden Eagle Trust, both of which are entities
related to the Company's Chairman of the Board and Chief Executive Officer, Dr.
Vijay Mallya, and its principal shareholder, UBA. The Share Purchase Agreement
was approved by the Company's shareholders on June 28, 2001, and the transaction
was consummated on August 13, 2001. Under the terms of the Share Purchase
Agreement, the Company acquired all of the issued and outstanding shares of UBI
which is the parent company of UBSN Ltd. In the transaction, the Company issued
approximately 5,500,000 shares of the Company's common stock in exchange for the
shares of UBI. UBI owns the distribution rights to the "Kingfisher" brand of
beer in the United States. Because UBI is now a wholly-owned subsidiary of the
Company, the Company now has the ability to brew "Kingfisher" brand beer in the
United States.
21
The closing of the acquisition of UBI was originally scheduled to occur in the
year 2000. However, the financial statements first provided to the Company by
UBI and UBSN Ltd. were prepared in accordance with accounting standards as
generally applied in the United Kingdom. It took longer than expected to conduct
all of the required audits of UBI and UBSN Ltd. so that their financial
statements are (i) consistent with United States accounting standards, and (ii)
as required by the U.S. Securities and Exchange Commission.
The transaction described above is a related party transaction because the
corporation that owned all of the shares of UBI is held by Golden Eagle Trust,
which is controlled by fiduciaries who may exercise discretion in favor of Dr.
Vijay Mallya, who is the Chairman and Chief Executive Officer of the Company.
Dr. Mallya is also a member of the board of directors of UBSN Ltd. Golden Eagle
Trust also owns a controlling interest in the Company's largest shareholder,
UBA.
Additional information about this transaction is contained in the 2001 Proxy
Statement which was filed with the Commission on May 11, 2001, and such
information is incorporated herein by reference.
PART II
Item 1. Legal Proceedings.
The Company is engaged in ordinary and routine litigation incidental to its
business. Management does not anticipate that any amounts, which it may be
required to pay by reason thereof, will have a material effect on the Company's
financial position.
Item 2. Changes in Securities.
None.
Item 3. Default Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
- ------- -----------------------
3.1 (Z) Articles of Incorporation, as amended, of the Company.
3.2 (A) 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).
22
Exhibit
Number Description of Document
- ------- -----------------------
4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made
to Exhibit 3.2).
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).
10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing.
10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing.
10.6 (A) Sales Contract between the Company and John I. Hass, Inc.
10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc.
10.8 (A) Lease Agreement between the Company and Kohn Properties.
10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2).
10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company, LLC.
10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company, LLC regarding
payment of certain liens.
10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC.
10.18 (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).
10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah.
10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency.
10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County.
10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County.
10.23 (J) Equipment Lease with FINOVA Capital Corporation.
10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation.
10.25 (J) Master Lease Schedule with FINOVA Capital Corporation.
10.26 (L) Investment Agreement with United Breweries of America, Inc.
10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn,
Norman Franks, Michael Lovett, John Scahill, and Don
Barkley.
10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc.,
H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley.
10.29 (Q) Indemnification Agreement with Vijay Mallya.
10.30 (Q) Indemnification Agreement with Michael Laybourn.
10.31 (Q) Indemnification Agreement with Jerome Merchant.
10.32 (Q) Indemnification Agreement with Yashpal Singh.
10.34 (Q) Indemnification Agreement with Robert Neame.
10.35 (Q) Indemnification Agreement with Sury Rao Palamand.
10.36 (Q) Indemnification Agreement with Kent Price.
10.37 (R) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT
Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit.
10.38 (R) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc.
10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT
Group/Credit Finance, Inc.
23
Exhibit
Number Description of Document
- ------- -----------------------
10.41 (U) Employment Agreement with Yashpal Singh.
10.43 (V) Master Loan Agreement between the Company and the United Breweries of America, Inc.
10.44 (V) Convertible Note in favor of the United Breweries of America, Inc dated September 7, 1999.
10.45 (W) First Amendment to Master Loan Agreement between the Company and the United Breweries of America
Inc.
10.46 (W) Convertible Note in favor of the United Breweries of America Inc. dated November 12, 1999.
10.47 (W) Convertible Note in favor of the United Breweries of America Inc. dated December 17, 1999.
10.48 (w) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 1999.
10.49 (W) Convertible Note in favor of the United Breweries of America Inc. dated February 16, 2000.
10.50 (W) Convertible Note in favor of the United Breweries of America Inc. dated February 17, 2000.
10.51 (W) Convertible Note in favor of the United Breweries of America Inc. dated April 28, 2000.
10.52 (W) First Amendment to Master Loan Agreement between the Company and United Breweries of America, Inc.,
dated April 28, 2000.
10.53 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated September 11, 2000.
10.54 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated September 30, 2000.
10.55 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated December 31, 2000.
10.56 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated February 12, 2001.
10.57 (Z) Convertible Note in favor of the United Breweries of America, Inc. dated July 1, 2001
- ----------
(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.
(C) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended March 31, 1995, previously filed with the
Commission.
(E) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1995, previously filed with
the Commission.
(F) Incorporated by reference 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 reference from the Company's Report on Form 10-QSB for
the quarterly 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. 33-15673.
(K) Incorporated by reference 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.
(M) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1997.
(N) Incorporated by reference from the Company's Report on Form 10-QSB/A
No. 1 for the quarterly period ended September 30, 1997.
(O) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1997, previously filed with the
Commission.
(Q) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 1998.
24
(R) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended September 30, 1998.
(T) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1998, previously filed with the
Commission.
(U) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 1999.
(V) Incorporated by reference from the Amendment No. 5 to Schedule 13D
filed with the Commission on September 15, 1999, by United Breweries
of America, Inc. and Vijay Mallya.
(W) Incorporated by reference from the Amendment No. 6 to Schedule 13D
filed with the Commission on May 12, 2000, by United Breweries of
America, Inc. and Vijay Mallya.
(X) Incorporated by reference from the Company's Report on Form 10-KSB for
the annual period ended December 31, 1999, previously filed with the
Commission.
(Y) Incorporated by reference from the Amendment No. 7 to Schedule 13D
filed with the Commission on February 22, 2001 by United Breweries of
America, Inc. and Vijay Mallya.
(Z) Incorporated by reference from the Company's Report on Form 10-QSB for
the quarterly period ended June 30, 2001, previously filed with the
Commission.
+ Portions of this Exhibit were omitted pursuant to an application for
an order declaring confidential treatment filed with the Securities
and Exchange Commission.
The Company filed a report on Form 8-K on August 24, 2001, describing more fully
the Company's acquisition of UBI, responsive to Items 1, 2, and 7. In order to
file financial statements which were unavailable at the time of the filing of
the Form 8-K, the Company then filed an amended report on Form 8-K/A on October
22, 2001, responsive to Items 2 and 7. The Company attached the following
financial statements to the Form 8-K/A:
o Mendocino Brewing Company, Inc. and United Breweries International (UK)
Limited Pro Forma Condensed Consolidated Balance Sheet and Income Statement
for the six months ended June 30, 2000 and 2001;
o United Breweries International (UK) Limited Balance Sheet, Statement of
Income and Stockholder's Equity, and Statement of Cash Flows and conversion
into United States Dollars for the six months ended June 30, 2000 and 2001;
and
o United Breweries International (UK) Limited Consolidated Reports and
Financial Statements, Period 1st January to 30th June 2001.
25
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
MENDOCINO BREWING COMPANY, INC.
Dated: November 12, 2001 By: /s/ Yashpal Singh
---------------------------------------
Yashpal Singh
President
Dated: November 12, 2001 By: /s/ N. Mahadevan
---------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
26