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 March 31, 2002
|_| 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 (IRS Employer
incorporation or organization) Identification 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 March 31,
2002 is 11,083,228.
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2002
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash $ 73,000
Accounts receivable 4,353,200
Inventories 1,335,000
Prepaid expenses 146,400
Deferred income taxes 36,200
------------
Total Current Assets: 5,943,800
------------
PROPERTY AND EQUIPMENT 14,481,900
------------
OTHER ASSETS
Deferred Income Taxes 1,886,400
Deposits and other Assets 178,200
Intangibles net of amortization 118,900
Total Other Assets: 2,183,500
------------
Total Assets: $ 22,609,200
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Disbursements in excess of deposits $ 215,200
Accounts payable 5,043,000
Accrued liabilities 215,300
Accrued wages and related expense 168,900
Taxes Payable in United Kingdom 230,700
Current maturities of obligation under capital lease 366,900
Current maturities of obligation under long-term debt 333,300
Line of credit 2,145,900
Notes to related party 1,766,100
------------
Total Current Liabilities: 10,485,300
LONG TERM DEBT, less current maturities 3,708,200
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 928,300
------------
Total Liabilities: 15,121,800
------------
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: 30,000,000 shares authorized, 11,083,228 shares issued and
outstanding 14,476,500
Accumulated comprehensive loss (97,600)
Accumulated deficit (7,119,100)
------------
Total Stockholders' Equity 7,487,400
------------
Total Liabilities and Stockholders' Equity: $ 22,609,200
============
1
The accompanying notes are an integral part of these financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
----------------------------
THREE MONTHS ENDED
March 31
----------------------------
2002 2001
---- ----
SALES $ 5,306,600 $ 5,470,700
LESS EXCISE TAXES 136,500 148,200
------------ ------------
NET SALES 5,170,100 5,322,500
COST OF GOODS SOLD 3,515,400 3,506,500
------------ ------------
GROSS PROFIT 1,654,700 1,816,000
------------ ------------
OPERATING EXPENSES
Retail operating 80,900 109,400
Marketing 1,040,700 1,110,500
General and administrative 655,000 729,700
------------ ------------
1,776,600 1,949,600
------------ ------------
LOSS FROM OPERATIONS (121,900) (133,600)
------------ ------------
OTHER INCOME (EXPENSE)
Other income / (Expense) 10,100 (700)
Interest expense (214,300) (236,700)
------------ ------------
(204,200) (237,400)
------------ ------------
LOSS BEFORE INCOME TAXES (326,100) (371,000)
PROVISION FOR / (BENEFIT) FROM INCOME TAXES 28,300 (72,600)
------------ ------------
NET LOSS $ (354,400) $ (298,400)
------------ ------------
Foreign currency translation adjustment (19,800) --
------------ ------------
COMPREHENSIVE LOSS $ (374,200) $ (298,400)
============ ============
NET LOSS PER SHARE $ (0.03) $ (0.03)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,083,228 11,080,498
============ ============
The accompanying notes are an integral part of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------------------------
THREE MONTHS ENDED
March 31
------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (354,400) $(298,400)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 275,900 266,600
Deferred income taxes (76,000)
Allowance for doubtful accounts 10,600 10,800
Loss / (Gain) on sale of assets 12,900 --
Changes in:
Accounts receivable 1,109,900 656,600
Inventories (61,800) (45,600)
Prepaid expenses and taxes 62,500 37,200
Deposits and other assets (68.300) (225,900)
Accounts payable (371,100) 514,700
Accrued wages and related expenses (2,900) 3,700
Accrued liabilities (393,300) (605,300)
Income taxes payable (35,000) 56,400
----------- ---------
Net cash from operating activities: 185,000 294,800
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (145,000) (55,000)
improvements
Proceeds from sale of fixed assets 5,500 --
Net cash from investing activities: (139,500) (55,000)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from line of credit (254,600) (571,300)
Principal payments on long-term debt (82,700) (81,900)
Borrowings on related party debt 37,500 356,400
Payments on obligation under long term lease 23,400 (69,900)
Disbursements in excess of deposits 215,200 74,800
----------- ---------
Net cash from financing activities: (61,200) (291,900)
----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,100) (9,900)
----------- ---------
INCREASE / (DECREASE) IN CASH (16,800) (62,000)
----------- ---------
CASH, beginning of period 89,800 208,300
----------- ---------
CASH, end of period $ 73,000 $ 146,300
=========== =========
Supplemental cash flow information includes the following:
Cash paid during the period for:
Interest $ 183,400 $ 187,300
----------- ---------
The accompanying notes are an integral part of these financial statements.
4
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 third quarter of the year 2001, the Company acquired all the
outstanding stock of United Breweries International (UK), 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, 2001. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
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 and the assets of UBI) and 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 $593,600 of the term loan was outstanding as of March 31, 2002.
During October 2001, the CIT Group increased 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. Of such increase, $85,000 was repaid in March
2002 and the balance will be repaid once the balance of 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 March 31, 2002, the total amount
outstanding on the line of credit was approximately $1,860,800.
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
March 31, 2002, was approximately $878,700.
5
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.
Shepherd Neame Limited, a related party, has a brewing contract with UBSN for
brewing Kingfisher Lager for the Company's European and Canadian markets. In
consideration of extending the brewing contract, Shepherd Neame Limited advanced
a loan of GBP 600,000 to UBSN, repayable in monthly installment of (pound)5,000
per month, commencing in June 2003.The loan carries an interest rate of 5%.
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 March 31,
2002. 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 March 31, 2002, is
approximately $250,700.
Note 4 - Income Taxes
The Company has recorded an increase in the valuation allowance of $155,000 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, and possible debt conversion. 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.
As of March 31, 2002, 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
- ------------------ ------- ---------- --------
2002 $ -- $ 761,200 $ --
2003 -- 961,200 --
2004 -- 694,700 --
2010 -- 276,400 --
2012 1,802,300 471,900 277,400
2018 2,758,800 -- 424,700
2019 2,153,100 -- 320,300
2020 965,600 -- 134,200
2021 1,341,700 -- 206,000
---------- ---------- ----------
$9,021,500 $3,165,400 $1,362,600
========== ========== ==========
6
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.
Due to slower than anticipated sales and an increase in the net loss for the
year ended December 31, 2001, over the loss for 2000, the Company determined in
the third quarter of the year 2001 that a portion of the deferred tax assets
associated with net operating loss carryforwards and investment tax credits may
expire prior to utilization. The Company has recorded a valuation allowance of
$1,641,000 for operating losses and credits that may expire prior to
utilization. The Company is implementing various strategies to bring the
business toward profitability such as reducing debt, improving efficiency, and
possible debt conversion. The Company believes that if the above strategies are
effective they will generate sufficient profits in the future to utilize the
deferred tax assets. Temporary differences and carry-forwards which give rise to
deferred tax assets and liabilities on March 31, 2002, are as follows:
Accounts receivables allowance $ 13,100
Benefits from net operating loss carry forwards 3,622,500
Inventory 13,100
Accruals 41,400
Valuation allowance (1,641,000)
Depreciation and amortization (154,700)
Investment in United Breweries International (UK) Ltd. 350,700
Others (323,100)
Note 5 -- Related party Transactions
During 2001, the Company ("MBC") and its subsidiaries entered into or amended
several agreements with affiliated and related entities. Among these were a
Brewing Agreement and a Loan Agreement between UBSN Limited ("UBSN") and
Shepherd Neame Limited; a Market Development Agreement, a Distribution
Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution
Agreement between UBI and UBSN; a Trademark Licensing Agreement between
7
MBC and Kingfisher of America, Inc.; and a License Agreement between United
Breweries International (UK) Limited and UB Limited.
Additional information about these transactions is contained in the Company's
annual report on Form 10-KSB for the year ended December 31, 2001, and such
information is incorporated herein by reference.
The following table reflects the value of the transactions for the quarter ended
March 31, 2002 and 2001 and the balances outstanding at March 31, 2002.
- --------------------------------------------------------------- ----------- -----------
2002 2001
- --------------------------------------------------------------- ----------- -----------
Sales to Shepherd Neame Ltd $ 363,800 $ 240,700
- --------------------------------------------------------------- ----------- -----------
Purchases from Shepherd Neame Ltd. 1,848,300 1,913,900
- --------------------------------------------------------------- ----------- -----------
Expenses reimbursement to Shepherd Neame Ltd. 155,900 158,100
- --------------------------------------------------------------- ----------- -----------
Commission paid to AUBI -- 53,700
- --------------------------------------------------------------- ----------- -----------
Interest expenses associated with UBA convertible notes payable 23,400 33,600
- --------------------------------------------------------------- ----------- -----------
Expenses reimbursement to UBA -- 12,800
- --------------------------------------------------------------- ----------- -----------
Accounts payable to Shepherd Neame Ltd 2,915,800 --
- --------------------------------------------------------------- ----------- -----------
Account receivable from Shepherd Neame Ltd. 281,600 --
- --------------------------------------------------------------- ----------- -----------
Amounts payable to AUBI 20,000 --
- --------------------------------------------------------------- ----------- -----------
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.
Three months ended
------------------
3/31/2002 3/31/2001
----------------------------
Net comprehensive income (loss) $ (374,200) $ (298,400)
============ ============
Weighted average common shares outstanding 11,083,228 11,080,498
============ ============
Basic net income (loss) per share $ (0.03) $ (0.03)
============ ============
Diluted net income (loss) per share
Net income (loss) $ (374,200) $ (298,400)
Interest expense on convertible notes payable
--
------------ ------------
Income for the purpose of computing diluted net income
per share $ (374,200) $ (298,400)
============ ============
Weighted average common shares outstanding 11,080,498 11,083,228
Dilutive stock options --
Assumed conversion of convertible notes payable
--
------------ ------------
Weighted average common shares outstanding for the
purpose of computing diluted net income (loss) per share 11,083,228 11,080,498
============ ============
Diluted net income (loss) per share $ (0.03) $ (0.03)
============ ============
8
Note 7 - Inventory March 31, 2002
Raw Materials $ 488,900
Beer-in-process 178,400
Finished Goods 638,200
Merchandise 29,500
-----------
$ 1,335,000
===========
Note 8. Property And Equipment
March 31, 2002
Buildings $ 7,791,900
Machinery and equipment 7,975,800
Equipment under capital lease 2,506,500
Land 810,900
Leasehold improvements 792,200
Equipment in progress 234,400
Vehicles 281,900
Furniture and fixtures 51,900
-----------
20,445,500
Less :Accumulated depreciation and amortization 5,963,600
-----------
$14,481,900
===========
Note 9 - Stockholders' Equity
The following table summarizes equity transactions during the three months ended
March 31, 2002:
9
Series A
Preferred Stock Common Stock Other
------------------------------------------------------ Comprehensive Accumulated Total
Shares Amount Shares Amount Income / (Loss) Deficit Equity
-------------------------------------- --------------- ------------------------------------------------
Balance,
December 31, 2001 227,600 $227,600 11,083,228 $14,476,500 $(77,800) $(6,764,700) $7,861,600
Net Loss (354,400)
Currency Translation
Adjustment (19,800)
Balance,
March 31, 2002 227,600 $227,600 11,083,228 $14,476,500 $(97,600) $(7,119,100) $7,487,400
======= ======== ========== =========== ======== =========== ==========
Note 10. Segment Information
The Company's business segments are brewing operations, distributing operations
in the United Kingdom, and retail sales at the Hopland Brewery and the tasting
room at Saratoga Springs. A summary of each segment is as follows:
Three months ended March 31, 2002
Domestic Brewing European Retail Corporate & Total
Operations Operations Operations Others
Net Sales $ 2,286,800 $ 2,792,300 $ 91,000 $ -- $ 5,170,100
Operating Profit/(Loss) (198,700) 97,700 (20,900) -- (121.900)
Identifiable Assets 14,904,400 4,086,800 145,100 3,472,900 22,609,200
Depreciation &
amortization 190,700 72,400 1,700 11,100 275,900
Capital Expenditures 74,900 64,600 -- 139,500
Three months ended March 31, 2001
Domestic Brewing European Retail Corporate & Total
Operations Operations Operations Others
Sales $ 2,285,000 $ 2,927,500 $ 110,000 $ -- $ 5,322,500
Operating Profit/(Loss)
(191,200) 83,600 (26,000) -- (133.600)
Identifiable Assets 14,993,600 4,368,100 77,100 4,897,500 24,336,300
Depreciation &
amortization 173,400 38,300 1,800 24,600 266,600
Capital Expenditures 2,200 277,900 -- 14,500 311,600
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition, and liquidity and cash
flows of Mendocino Brewing Company, Inc. for the first quarter ended March 31,
2002, compared to the first quarter ended March 31, 2001, and the year ended
December 31, 2001. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes included in the company's Annual
Report to Shareholders for the year ended December 31, 2001.
This discussion contains statements regarding the company's expectations
concerning its future operations, earnings and outlook. These statements are
forward-looking statements that involve significant risks and uncertainties, and
accordingly, no assurances can be given that such expectations will be correct.
These expectations are based upon many assumptions that the company believes to
be reasonable, but such assumptions may ultimately prove to be inaccurate or
incomplete, in whole or in part. Important factors that could cause actual
results to differ (favorably or unfavorably) from the expectations stated in
this discussion include, among others, changes in the pricing environment for
the company's products; changes in demand for malt beverage products in
different Company markets; changes in customer preference for the company's malt
beverage products; regulatory or legislative changes; changes in raw materials
prices; changes in interest rates; changes in the company's European beer and/or
restaurant business. The Company disclaims any obligation to update any of these
forward-looking statements. If the Company determines to update any
forward-looking statement, it will do so publicly. No private statements by the
Company or its personnel should be interpreted as updating forward-looking
statements.
In this Report, the term "the Company" and its variants is generally used
to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term
"MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual
entity standing alone.
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
assets held for sale, fixed asset lives, contingencies and litigation. The
Company has also chosen certain accounting policies when options were available,
including:
o The first-in, first-out (FIFO) method to value a majority of our
inventories; and
o The intrinsic value method, or APB Opinion No. 25, to account for
our common stock incentive awards; and
o The recognition of deferred tax assets for net operating loss
carryforwards that are expected to be used to offset future taxable
income.
11
These accounting policies are applied consistently for all years
presented. Our operating results would be affected if other alternatives were
used. Information about the impact on our operating results is included in the
footnotes to our consolidated financial statements.
Overview
During the first quarter of 2002, the Company launched Olde Saratoga
Premium Lager Beer from its Saratoga Springs brewery. Further, the Company made
preparations to launch Kingfisher premium Lager Beer in 22 oz bottles for the
domestic markets and in draft for the West Coast markets of the United States.
On April 16, 2002, Kingfisher Premium Lager beer won the Gold Medal at the
Brewing Industry International Awards held at London, United Kingdom in the
Draft Beers, International Lager Competition.
In January of 2002 the Company completed installation at the Ukiah
facility, of a refurbished bottle rinser, 350 bottle per minute H&K filler
Crowner, bi-directional accumulation table and carrier erectors. The Company
also acquired a carton erector for its Ukiah facility during the first quarter.
These installations are expected to result in decreased manufacturing costs,
improved bottling speed, and better packaging of the products.
The Company's brewing operation's sales in the United States during the
first quarter of 2002 decreased to 12,498 barrels, a decrease of 112 barrels, or
0.9%, over the 12,610 barrels sold in the first quarter of 2001. During the
first quarter of 2002, UBSN sold 11,912 barrels in the United Kingdom and
Europe, compared to 12,835 barrels during the corresponding period in 2001.
Management attributes the decreased sales to a general decline in sales of craft
beers, a significant decline in business experienced by the restaurant and
lodging industry, and competition from "malt alternatives".
The Company ended the first quarter of 2002 with a net loss of $354,400,
as compared to a net loss of $298,400 for the same period in 2001. As set forth
more fully under "Results of Operations," below, decrease in net sales,
increases in cost of goods, reduction in retail operating expenses, selling and
marketing expenses, general and administrative expenses, and decrease in income
tax benefit contributed to the net loss.
Results of Operations
The following tables set forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See the accompanying
Financial Statements and Notes thereto.
----------------------------
Three Months Ended March 31
----------------------------
2002 2001
Statements of Operations Data: % %
------------ ------------
Sales 102.64 102.78
Less Excise taxes 2.64 2.78
------------ ------------
Net Sales 100.00 100.00
Costs of Sales 68.00 65.88
------------ ------------
Gross Profit 32.00 34.12
------------ ------------
Retail Operating Expenses 1.56 2.06
Marketing Expense 20.13 20.86
General and Administrative Expenses 12.67 13.71
------------ ------------
Total Operating Expenses 34.36 36.63
------------ ------------
Profit / (Loss) from Operations (2.36) (2.51)
Other (Income) / Expense (0.20) 0.01
Interest Expense 4.15 4.45
------------ ------------
Loss before income taxes (6.31) (6.97)
Provision for / (Benefit) from income taxes (0.54) (1.36)
------------ ------------
Net Loss (6.85%) (5.61%)
============ ============
Other Comprehensive Loss (0.38) 0.00
============ ============
Comprehensive Loss (7.23%) (5.61%)
============ ============
----------------------------
Three Months Ended March 31
----------------------------
2002 2001
Balance Sheet Data: $ $
------------ ------------
Cash and Cash Equivalents 73,000 $ 146,300
Working Capital (4,577,700) (3,555,900)
Property and Equipment 14,481,900 14,611,100
Deposits and Other Assets 2,219,700 3,609,900
Total Assets 22,609,200 24,336,300
Long-term Debt 3,708,200 3,177,200
Obligation Under Capital Lease 928,300 1,053,800
Total Liabilities 15,121,800 13,950,300
Accumulated Deficit (7,119,100) (4,247,200)
Stockholder's equity 7,487,400 10,386,000
12
Net Sales
Overall net sales for the first quarter of 2002 were $5,170,100, a
decrease of $152,400, or 2.86%, compared to $5,322,500 for the first quarter of
2001. Volume decreases, partly offset by price increases in 2001 contributed to
lower realization.
Domestic Operations. Domestic net sales for first quarter of 2002 were
$2,377,800, compared to $2,395,000 for the same period in 2001, a 0.72%
decrease. The sales volume decreased to 12,498 barrels in first quarter of 2002
from 12,610 barrels in the first quarter of 2001, representing a decrease of 112
barrels, or 0.89%. Of the decrease, sale of Company's brands decreased by 330
barrels; Kingfisher volume increased by 1,455 barrels and contract brands sale
increased by 218 barrels. The decrease in overall net sales during the first
quarter of 2002 was partly offset on account of a marginal increase in wholesale
shipments which represented an increase of $5,000 over the wholesale shipments
during the first quarter of 2001. 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 wholesale beer sales and decline in
retail business, retail sales for the first quarter of 2002 showed a decrease of
$22,200 over the same period in 2001.
European Operations: Net sales for the first quarter of 2002 were
$2,792,300 ((pound)1,971,100) compared to $2,927,500 ((pound)2,031,300) during
the corresponding period of 2001, a decrease of 4.62%. During the first quarter
of 2002, UBSN sold 11,912 barrels compared to 12,835 barrels during the first
quarter of 2001. UBSN increased its selling prices at the end of the first
quarter of 2001. Exchange rate fluctuations when measured in United States
dollars suppressed growth percentage as compared to last year and hence when the
net sales results are compared in Pounds Sterling, there is a decrease of 2.96%.
Sales volume in the United Kingdom and Europe in the first quarter of 2002
increased by 294 barrels compared to the first quarter of 2001. Shifting of the
United States Kingfisher distribution from the UK, to the Company out of its US
operation resulted in a drop in the volume of sales by 1,217 barrels.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales during the first quarter
of 2002 was 68%, as compared to 65.88% during the corresponding period of 2001.
Higher production in the Saratoga unit resulting in higher labor cost, increases
in the cost of materials, and higher insurance costs contributed to the
increase. Prices of bottles and certain type of malts increased during 2002 in
the U.S.
Domestic Operations: Cost of goods sold as a percentage of net sales in
the United States during the first quarter of 2002 was 70.78%, as compared to
66.41% during the corresponding period of 2001, representing an increase of
4.37% mainly due to increased labor costs, insurance and increase in the price
of certain inputs.
European Operations: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first quarter of 2002 was 66.19%, as compared to
65.44% during corresponding period in 2001 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation), representing an increase of 0.75% mainly due to exchange rate
fluctuations and cost increases not offset by price increases during the first
quarter of 2001.
13
Gross Profit
As a result of the higher net sales described above, gross profit for the
first quarter of 2002 decreased to $1,654,700, from $1,816,000 during the
corresponding period of 2001, representing a decrease of 8.8%. As a percentage
of net sales, because of the increase in cost of goods sold as discussed above,
the gross profit during the first quarter of 2002 decreased to 32% from that of
34.12% for the first quarter of 2001.
Operating Expenses
Operating expenses for the first quarter of 2002 were $1,776,600, as
compared to $1,949,600 for the first quarter of 2001, representing a decrease of
8.87%. 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 quarter
of 2002 were $80,900, representing a decrease of $28,500, or 26.05%, from the
same period in 2001. As a percentage of net sales, retail operating expenses
decreased to 1.56% as compared to 2.06% for the first quarter of 2001. The
decrease in retail operating expenses consisted mainly of decreases in labor
expenses, which Management generally attributes to reduced hours of operation of
the brewpub in Hopland.
Marketing and Distribution Expenses: Marketing and distribution expenses
for the first quarter of 2002 were $1,040,700, representing a decrease of
$69,800, or 6.28%, from the first quarter of 2001. As a percentage of net sales,
marketing and distribution expenses represented 20.13% as compared to 20.86%
during the first quarter of 2001.
Domestic Operations: Expenses for the first quarter of 2002 were $439,300
compared to $441,300 during the corresponding period of 2001, representing a
decrease of $2,000. As a percentage of net sales in the United States, the
expenses increased to 18.48% during the first quarter of 2002, compared to
18.43% during the corresponding period of 2001 mainly on account of higher
promotional spends.
European operations: Expenses for the first quarter of 2002 were $601,400
compared to $669,200 during the corresponding period of 2001, representing a
decrease of $67,800. As a percentage of net sales in the United Kingdom, the
expenses decreased to 21.54% during the first quarter of 2002 compared to 22.86%
during the corresponding period of 2001 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation). The reduction is mainly on account of reduction in expenses
related to exports to the United States which was discontinued from the third
quarter of 2001 offset by higher promotional spends.
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General And Administrative Expenses: General and administrative expenses
were $655,000, representing a decrease of $74,700 from the first quarter of
2001. As a percentage of net sales, the general and administrative expenses were
12.67% for the first quarter of 2002, as compared to 13.71% for corresponding
period of 2001.
Domestic Operations: General and administrative expenses were $394,000,
representing a decrease of $76,900 over the first quarter of 2001. The reduction
was mainly due to reduced salaries, travel expenses, telephone expenses and
depreciation. Part of this reduction was offset by increase in legal expenses,
audit fee and rent.
European Operations: General and administrative expenses were $261,000,
representing an increase of $2,200 from the first quarter of 2001.
Other Expenses
Other expenses for the first quarter of 2002 totaled $204,200,
representing a decrease of $33,200 when compared to the first quarter of 2001.
The other expenses consist of interest expenses, miscellaneous income, and
acquisition costs. Interest expenses decreased by $22,400 because of the
reduction in the line of credit, long term debts and reduction in interest
rates. Miscellaneous income increased by $10,800.
Income Taxes
The Company has a provision for income taxes of $28,300 for the first
quarter of 2002, compared to a net benefit from income taxes of $72,600 for the
first quarter of 2001. The provision for taxes related to the estimated amount
of taxes that will be imposed by taxing authorities in the United Kingdom.
The Company has also increased the valuation allowance $155,000 for
federal and state net operating losses that may expire prior to utilization. The
Company has implemented various strategies such as reducing expenses, improving
efficiency and increasing sales growth to bring the Company to profitable
operations in order to utilize these assets prior to utilization. Management has
been successful in the past by reducing the amount of losses and assisting the
Company towards profitable operations but there can be no assurance that the
steps taken by management will result in the Company utilizing all the operating
losses recorded as deferred tax assets. If management plans are not successful,
the Company will be required to reduce the amount of deferred tax assets
recorded on the balance sheet.
Net Loss
The net loss for the first quarter of 2002 was $354,400, as compared to
loss of $298,400 for the first quarter of 2001. After providing for a negative
foreign currency translation adjustment of $19,800 during the first quarter of
2002 ($0 for 2001), the comprehensive loss for 2002 was $374,200, compared to a
loss of $298,400 in 2001.
Capital Demands
The Saratoga Springs facility commenced brewing operations in February
1998. Both the Ukiah and Releta facilities have been operating at significantly
less than full capacity. 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.
Completion of construction is a condition to the issuance of a final certificate
of occupancy. Failure to complete construction and obtain a final certificate of
occupancy could have a material adverse effect on the Company's business,
financial condition, and results of operations, because of, among other reasons,
increased administrative burdens and costs.
15
Proceeds From Operations Insufficient to Sustain Operations
The Company must make timely payment of its debt and lease commitments to
continue its operations. Unused capacity at the Ukiah and Saratoga Springs
facilities has placed demands on the Company's working capital. Beginning
approximately in 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. To fund its operating
deficits, the Company has relied upon lines of credit and other credit
facilities (see "Liquidity and Capital Resources," below). Although Management
has had success in negotiating these credit facilities in the past there can be
no assurance that the Company will be able to do so in the future, either at any
price or at a price the Company will be able to sustain, or that the Company
will have access to any alternative sources of funds in the future. Failure to
secure sufficient funds would have a materially adverse effect on the Company.
Liquidity and Capital Resources
Long Term Debt
MBC has obtained a $2.7 million long term loan from Savings Bank of
Mendocino County ("SBMC"), secured by a first priority deed of trust on the
Ukiah land, fixtures, and improvements. The loan is payable in monthly
installments of $24,443 including interest at the Treasury Constant Maturity
Index plus 4.17%, currently 5.83%, maturing December 2012 with a balloon payment
in the amount of $1,872,300. In addition to the Ukiah land and facility, this
loan is secured by some of the other assets of the Company (other than the
Releta facility), including, without limitation, most of the Company's
equipment.
Shareholder Commitment
On August 31, 1999, the Company entered into a Master Line of Credit
Agreement with United Breweries of America, Inc, one of its principal
shareholders, which agreement was subsequently amended on April 28, 2000, and
February 12, 2001 (the "Credit Agreement"). The terms of the Credit Agreement
provide the Company with a line of credit in the principal amount of up to
$1,600,000. As of the date of this filing, UBA has made thirteen (13) separate
advances to the Company under the Credit Agreement, pursuant to a series of
individual eighteen (18) month promissory notes issued by the Company to UBA
(the "UBA Notes"). As of March 31, 2002, the aggregate outstanding principal
amount of the UBA Notes was $1,515,371, and the accrued but unpaid interest
thereon was equal to approximately $250,716.
The UBA Notes require the Company to make quarterly interest payments to
UBA on the first day of April, July, October, and January. To date, UBA has
permitted the Company to capitalize all accrued interest.
The first eight (8) of the UBA Notes made pursuant to the Credit Agreement
matured during 2001 (the "Mature Notes"). The remaining five (5) of the UBA
Notes (which did not mature in 2001) are scheduled to mature during 2002, with
the first maturing on March 10, 2002. The Company and UBA executed an Extension
of Term of Notes under Master Line of Credit Agreement on February 14, 2002 (the
"Extension Agreement"). The Extension Agreement confirms the Company's and UBA's
extension of the terms of the Mature Notes. The Extension Agreement extends the
terms of the Mature Notes, as well as the terms of the next four (4) of the UBA
Notes, for a period ending on August 15, 2002. Since the last remaining UBA Note
matures on after August 15, 2002, it was not extended by the Extension
Agreement. During the extended term, UBA has the right to require the Company to
repay the outstanding principal balance, along with the accrued and unpaid
interest thereon, to UBA within sixty (60) days.
16
Equipment Lease
FINOVA Capital Corporation leased new brewing equipment with a total cost
of approximately $1.78 million to MBC 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 at then current fair
market value. The lease is not pre-payable.
Other Loans and Credit Facilities
CIT Group/Credit Finance Line of Credit. The CIT Group/Credit Finance,
Inc. has provided the Company 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 Capital Corporation, 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 $593,600 of
the term loan was outstanding as of March 31, 2002. During October 2001, the CIT
Group increased 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 of
which $85,000 was repaid and the balance will be repaid once the balance of
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 March 31,
2002, the total amount outstanding on the line of credit was approximately
$1,860,800. CIT Group line of credit is due for renewal in September 2002.
Failure to renew the facility would have a material adverse impact on the
Company.
Necor Bank Limited Option Facility. 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 March 31, 2002, was approximately
$878,700.
17
Shepherd Neame Loan: Shepherd Neame has a brewing contract with UBSN
for brewing Kingfisher Lager for the Company's European and Canadian markets. In
consideration of extending the brewing contract, Shepherd Neame advanced a loan
of GBP 600,000 to UBSN, repayable in monthly installment of (pound)5,000 per
month, commencing in June 2003.The loan carries an interest rate of 5%.
Future Capital Demands
The Company continues to have capital and liquidity needs which it
cannot finance from its own operations. (See "Results of Operations -- Proceeds
From Operations Insufficient to Sustain Operations," above.) As the Company's
existing credit facilities are currently secured by substantially all of the
Company's assets, obtaining expanded credit facilities in the future may prove
to be difficult and expensive.
Interest
The weighted average interest rates paid on the Company's U.S. debts
(including the long term capital lease of equipment by FINOVA Capital
Corporation Inc.) was 8.41% for the first quarter of the year 2002 and 10.35%
for the first quarter of the year 2001.
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. The agreement expires in September 2002, and
Management expects to negotiate an extension of the agreement during 2002. If
the agreement is not extended and terminates, the Company will be required to
purchase a certain number of kegs from MicroStar. The Company would probably
attempt to 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 a 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 March 31,
2002 was 0.57 to 1.0 and its ratio of total assets to total liabilities was 1.50
to 1.0. On March 31, 2001, the Company's ratio of current assets to current
liabilities was 0.63 to 1.0 and its ratio of total assets to total liabilities
was 1.74 to 1.0.
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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 5. Other Items.
Change in Response to Delisting Notice Received from the Pacific Stock Exchange
- - Quotation of the Company's Common Stock on the Nasdaq Bulletin Board
In Current Reports on Form 8-K dated February 4 and February 21, 2002, the
Company reported that it had received a delisting notice from the Pacific Stock
Exchange (the "Exchange"), as a result of the Company's failure to maintain the
trading price of its Common Stock on the Exchange at a level above $1.00 per
share, and that in response to the delisting notice the Company had decided to
effect a one-for-three reverse split of its Common Stock, in order to increase
the trading price for its Common Stock.
After further consideration of the delisting notice and the stock split,
and of the existing lack of transaction volume on the Exchange, the Company's
management has come to the conclusion that, rather than effecting the proposed
reverse stock split and keeping the Company's Common Stock listed on the
Exchange, it would be preferable to have the Company's Common Stock quoted on
the Nasdaq Bulletin Board, accept delisting on the Exchange, and forego the
reverse stock split. Accordingly, the Company has obtained a listing for its
Common Stock on the Nasdaq Bulletin Board, effective as of May 6, 2002, under
the symbol "MENB". At the same time, the Company has entered into negotiations
with a number of market makers to support its trading market in connection with
the new Nasdaq Bulletin Board listing.
Management has notified the Exchange that it intends to formally delist
its stock from the trading on the Exchange in the near future. Also, since the
primary purpose of the proposed reverse stock split was to avoid the delisting
of the Company's Common Stock on the Exchange, management also intends to
recommend to the Company's Board of Directors that the Company abandon the
proposed reverse stock split. While the Company's Board of Directors has
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not yet formally approved any of the actions described above, management
anticipates receiving Board approval for these decisions at the next regularly
scheduled Board Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
None.
(b) Current Reports on Form 8-K
During the first quarter of 2002 the Registrant filed two Current Reports
on Form 8-K.
1. In a Current Report dated February 4, 2002, the Registrant reported
under Item 5 certain information about (i) its Master Line of Credit
with United Breweries of America, Inc. ("UBA") and (ii) a delisting
notice it had received from the Pacific Stock Exchange with respect
to its Common Stock.
2. In a Current Report dated February 21, 2002, the Registrant reported
under Item 5 a proposed resolution of the issues raised by the
Pacific Stock Exchange, as previously reported in the February 4,
2002 Current Report.
20
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: May 15, 2002 By /s/ Yashpal Singh
-------------------------------------
Yashpal Singh
President
Dated: May 15, 2002 By /s/ N. Mahadevan
-------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
21