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, 2003
[ ] 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)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date : The number of shares of the issuer's
common stock outstanding as of May 10, 2003 is 11,266,874.
Transitional Small Business Disclosure Format (check one):
Yes ___ No ___
1
PART I
ITEM 1. FINANCIAL STATEMENTS.
---------------------
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS
Cash $ 107,900
Accounts receivable 5,732,300
Inventories 1,390,300
Prepaid expenses 181,400
------------
Total Current Assets: 7,411,900
------------
PROPERTY AND EQUIPMENT 13,977,400
------------
OTHER ASSETS
Deposits and other Assets 177,400
Intangibles net of amortization
101,700
Total Other Assets: 279,100
------------
Total Assets: $ 21,668,400
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Disbursements in excess of deposits $ 86,600
Accounts payable 4,904,400
Accrued liabilities 918,100
Income taxes payable 422,000
Current maturities of obligation under capital lease 742,900
Current maturities of obligation under long-term debt 910,700
Line of credit 2,316,100
Notes to related party 1,857,800
------------
Total Current Liabilities: 12,158,600
LONG TERM DEBT, less current maturities 3,195,600
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 268,700
------------
Total Liabilities: 15,622,900
------------
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
2
Common stock, no par value: 30,000,000 shares authorized,
11,266,874 shares issued and outstanding 14,648,600
Accumulated comprehensive loss (46,800)
Accumulated deficit (8,783,900)
------------
Total Stockholders' Equity 6,045,500
------------
Total Liabilities and Stockholders' Equity: $ 21,668,400
============
The accompanying notes are an integral part
of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
March 31
-----------------------------
2003 2002
------------ ------------
SALES $ 6,009,900 $ 5,212,600
LESS EXCISE TAXES 139,800 136,500
------------ ------------
NET SALES 5,870,100 5,076,100
COST OF GOODS SOLD 3,994,600 3,521,200
------------ ------------
GROSS PROFIT 1,875,500 1,554,900
------------ ------------
MARKETING, GENERAL AND ADMINISTRATIVE 1,933,200 1,676,800
------------ ------------
LOSS FROM OPERATIONS (57,700) (121,900)
------------ ------------
OTHER INCOME (EXPENSE)
Other income 4,900 10,100
Interest expense (205,400) (214,300)
------------ ------------
(200,500) (204,200)
------------ ------------
LOSS BEFORE INCOME TAXES (258,200) (326,100)
PROVISION FOR INCOME TAXES 31,200 28,300
------------ ------------
NET LOSS $ (289,400) $ (354,400)
------------ ------------
Foreign currency translation adjustment (11,500) (19,800)
COMPREHENSIVE LOSS $ (300,900) $ (374,200)
============ ============
NET LOSS PER SHARE $ (0.03) $ (0.03)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,266,874 11,083,228
============ ============
The accompanying notes are an integral part
of these financial statements.
4
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
March 31
---------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (289,400) $ (354,400)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization 286,500 275,900
Deferred income taxes
Allowance for doubtful accounts 20,000 10,600
Loss/(Gain) on sale of assets -- 12,900
Changes in:
Accounts receivable (26,900) 1,109,900
Inventories 84,000 (61,800)
Prepaid expenses 221,100 62,500
Deposits and other assets 9,400 (68,300)
Accounts payable (708,900) (371,100)
Accrued liabilities 133,600 (396,200)
Income taxes payable (54,200) (35,000)
----------- -----------
Net cash from operating activities: (324,800) 185,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold improvements (118,300) (145,000)
Proceeds from sale of fixed assets -- 5,500
----------- -----------
Net cash from investing activities: (118,300) (139,500)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing/(repayment) on line of credit 203,500 (254,600)
Principal payments on long-term debt (151,200) (82,700)
Net borrowing on long term debt 403,700 --
Borrowings on related party debt 21,500 37,500
Payments on obligation under long term lease (18,600) 23,400
Disbursements in excess of deposits (47,700) 215,200
----------- -----------
Net cash from financing activities: 411,200 (61,200)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (7,000) (1,100)
----------- -----------
NET CHANGE IN CASH (38,900) (16,800)
----------- -----------
CASH, beginning of period 146,800 89,800
----------- -----------
CASH, end of period $ 107,900 $ 73,000
=========== ===========
Supplemental cash flow information includes the following:
Cash paid during the period for:
Interest $ 183,900 $ 183,400
=========== ===========
The accompanying notes are an integral part
of these financial statements.
5
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Mendocino
Brewing Company, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States. 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, 2002.
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, 2003, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003.
In these notes and 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.
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 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. The line of credit
is secured by all accounts receivable, 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 was repayable in
sixty consecutive monthly installments of principal, each in the amount of
$24,700.
The line of credit was originally scheduled to mature on September 23, 2002, but
was amended in January, 2003, and extended to expire on November 30, 2003. This
amendment increased the maximum credit available to $3,500,000 and provided a
term loan of $750,000 (consisting of the original balance of $346,300 and a new
term loan of $403,700). The $750,000 loan is repayable in 30 equal consecutive
monthly installments of approximately $24,700, commencing February 1, 2003, with
a final payment of approximately $8,000. 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, 2003, the total amount
outstanding on the line of credit was approximately $2,006,700.
Necor Bank Limited, a South African registered company, has provided a
multi-currency option facility of 1,250,000 GBP to UBSN Ltd. ("UBSN"), a
wholly-owned subsidiary of United Breweries International (UK) Ltd. ("UBI"),
which is in turn wholly-owned by the Company. This overdraft facility is secured
by all of the assets of UBSN. The amount outstanding on this line of credit as
of March 31, 2003, was approximately $1,009,900.
6
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 the treasury constant maturity index for five year treasury notes
plus 4.17%, currently 7.24%. 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.
UBSN has engaged Shepherd Neame Limited ("Shepherd Neame"), a related party, to
brew Kingfisher Lager for the Company's European and Canadian markets. As
consideration for the recent extension of the brewing contract, Shepherd Neame
advanced a loan of GBP 600,000 to UBSN, repayable in monthly installment of GBP
5,000 per month, commencing in June 2003. The loan carries an interest rate of
5%.
The Company has issued unsecured 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 each note originally matured 18 months from the
date of the particular advance. The notes were extended to mature on June 30,
2003. The notes are convertible, at UBA's option, into common stock at $1.50 per
share. Interest accrued on the notes as of March 31, 2003, is approximately
$342,400.
Note 4 - Income Taxes
As of March 31, 2003, the Company has net operating losses available to carry
forward in the jurisdictions of the U.S., California, and New York. The losses
will expire as follows:
NET OPERATING LOSS
Date of Expiration FEDERAL CALIFORNIA NEW YORK
- ------------------ ---------- ---------- ----------
2005 $ -- $2,417,000 --
2010 -- 250,900 --
2011 -- 153,700 --
2012 1,802,300 -- 277,400
2018 2,758,800 -- 424,700
2019 2,153,100 -- 320,300
2020 965,600 -- 134,200
2021 1,041,100 -- 160,200
2022 806,800 -- 124,200
---------- ---------- ----------
$9,527,700 $2,821,600 $1,441,000
========== ========== ==========
7
The Company also has $66,900 of California Manufacturer's Investment Tax Credits
that can be carried forward to offset future taxes until they begin to expire in
2007.
Temporary differences and carry-forwards which give rise to deferred tax assets
and liabilities on March 31, 2003, are as follows:
Accounts receivables allowance $19,100
Benefits from net operating loss carry forwards 3,751,600
Inventory 8,000
Accruals 15,400
Valuation allowance (3,414,900)
Depreciation and amortization (253,800)
Investment in UBI 328,300
Undistributed Earnings of UBI (566,000)
Others 112,300
Note 5 - Related Party Transactions
During 2001 and 2002, 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 and Shepherd Neame; 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 MBC and Kingfisher of America, Inc.; and a License
Agreement between UBI 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, 2002, and such
information is incorporated herein by reference.
The following table reflects the value of the transactions for the quarters
ended March 31, 2003 and March 31, 2002 and the balances outstanding at March
31, 2003, and March 31, 2002.
- ------------------------------------------------------------------------------------------------------
2003 2002
- ------------------------------------------------------------------------------------------------------
Sales to Shepherd Neame $ 428,900 $ 363,800
- ------------------------------------------------------------------------------------------------------
Purchases from Shepherd Neame 2,329,300 1,848,300
- ------------------------------------------------------------------------------------------------------
Expenses reimbursement to Shepherd Neame 206,700 155,900
- ------------------------------------------------------------------------------------------------------
Interest expenses associated with UBA convertible notes payable 21,500 23,400
- ------------------------------------------------------------------------------------------------------
Accounts payable to Shepherd Neame 2,280,700 2,915,800
- ------------------------------------------------------------------------------------------------------
Account receivable from Shepherd Neame 201,400 281,600
- ------------------------------------------------------------------------------------------------------
Amounts payable to distributor, American United Breweries Int'l, Inc. 20,000 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
that are convertible into the Company's common stock. Common equivalent shares
associated with
8
stock options and convertible notes have been excluded from periods with a net
loss as the potentially dilutive shares would be antidilutive.
Three months ended
----------------------------
3/31/2003 3/31/2002
------------ ------------
Net loss $ (289,400) $ (354,400)
============ ============
Weighted average common shares outstanding 11,266,874 11,083,228
============ ============
Basic net loss per share $ (0.03) $ (0.03)
============ ============
Diluted net loss per share
Net loss $ (289,400) $ (354,400)
Interest expense on convertible notes payable -- --
------------ ------------
Income for the purpose of computing diluted net income per share $ (289,400) $ (354,400)
============ ============
Weighted average common shares outstanding 11,266,874 11,083,228
Dilutive stock options -- --
Assumed conversion of convertible notes payable -- --
------------ ------------
Weighted average common shares outstanding for the purpose of 11,266,874 11,083,228
computing diluted net income (loss) per share
============ ============
Diluted net loss per share $ (0.03) $ (0.03)
============ ============
Note 7 - Inventory
March 31, 2003
--------------
Raw Materials $338,500
Beer-in-process 228,100
Finished Goods 789,500
Merchandise 34,200
----------
$1,390,300
==========
9
Note 8 - Property and Equipment
March 31, 2003
--------------
Buildings $ 7,807,800
Machinery and equipment 8,186,700
Equipment under capital lease 2,405,800
Land 810,900
Leasehold improvements 777,600
Equipment in progress 21,600
Vehicles 83,200
Furniture and fixtures 201,100
-----------
20,294,700
Less: Accumulated depreciation and amortization 6,317,300
-----------
$13,977,400
===========
Note 9 - Stockholders' Equity
The following table summarizes equity transactions during the three months ended
March 31, 2003:
SERIES A
PREFERRED STOCK COMMON STOCK OTHER
------------------- ------------------------- COMPREHENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT INCOME/(LOSS) DEFICIT EQUITY
------- -------- ---------- ----------- ------------- ----------- ----------
Balance,
December 31, 2002 227,600 $227,600 11,266,874 $14,648,600 $ (35,300) $(8,494,500) $6,346,400
Net Loss (289,400) (289,400)
Currency
Translation
Adjustment (11,500) (11,500)
------- -------- ---------- ----------- ------------ ----------- ----------
Balance,
March 31, 2003 227,600 $227,600 11,266,874 $14,648,600 $ (46,800) $(8,783,900) $6,045,500
======= ======== ========== =========== ============ =========== ==========
Note 10 - Stock-Based Compensation
The Company has a stock-based employee compensation plan that allows the Company
to grant options to purchase up to 1,000,000 shares of the Company's common
stock. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related Interpretations. No stock-based employee compensation cost is reflected
in net loss, as each option granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based compensation.
10
Three Months Ended March 31,
--------------------------
2003 2002
---------- ----------
Net loss, as reported $ (289,400) $ (354,400)
Deduct: Total stock-based employee compensation
expense determined under fair value based methods
For all awards, net of tax related effects -- (99,100)
---------- ----------
Pro forma net loss $ (289,400) $ (453,500)
========== ==========
Earnings per share:
Basic and diluted - as reported $ (0.03) $ (0.03)
========== ==========
Basic and diluted - pro forma $ (0.03) $ (0.04)
========== ==========
Note 11 - Segment Information
The Company's three business segments are (i) brewing operations, (ii)
distributing operations in the United Kingdom, and (iii) 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, 2003
Domestic Brewing Distributor Retail Corporate &
Operations Operations Operations Others Total
------------ ------------ ------------ ------------ ------------
Net Sales $ 2,247,400 $ 3,532,300 $ 90,400 $ -- $ 5,870,100
Operating Profit/(Loss) (168,900) 128,800 (17,600) -- (57,700)
Identifiable Assets 14,214,000 5,554,900 110,500 1,789,000 21,668,400
Depreciation & 187,500 86,700 1,300 11,000 286,500
amortization
Capital Expenditures 28,500 89,800 -- 118,300
11
Three months ended March 31, 2002
Domestic Brewing Distributor Retail Corporate &
Operations Operations Operations Others Total
------------ ------------ ------------ ------------ ------------
Net Sales $ 2,211,800 $ 2,773,300 $ 91,000 $ -- $ 5,076,100
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 & 190,700 72,400 1,700 11,100 275,900
amortization
Capital Expenditures 74,900 64,600 -- 139,500
Note 12 - Legal Dispute
The Company recently terminated a written distribution agreement with the House
of Daniels, Inc., dba Golden Gate Distributing Company ("GGD"), in accordance
with the provisions of the agreement, upon 30 days' written notice to GGD.
On April 1, 2003, GGD filed an action in Marin County Superior Court, claiming
that the termination of the agreement was wrongful and sued the Company for
breach of contract, breach of the covenant of good faith and fair dealing,
unfair business practices, negligent and intentional interference with economic
relationships.
The Company believes that even though the agreement did not require a showing of
good cause for termination, the Company nevertheless had ample good cause to
terminate the agreement, and that, by failing to perform according to the
contract, GGD has breached its contract with the Company. By the response
deadline of May 19, 2003, the Company expects that it will file a
cross-complaint against GGD asserting these claims and seeking the appropriate
remedies, including compensatory and punitive damages. Based on the facts and
the Company's beliefs set forth above, the Company did not provide for any
liability against the claims of GGD.
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/cash flows
of the Company for the three months ended March 31, 2003, compared to the three
months ended March 31, 2002, and the year ended December 31, 2002. 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, 2002.
12
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 the Company's markets; changes in customer preference for
the Company's malt beverage products; regulatory or legislative changes; changes
in raw materials prices; and changes in interest rates. 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.
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 U.S. 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 the majority of
the Company's inventories;
o The intrinsic value method, or APB Opinion No. 25, to account
for incentive awards of Company common stock;
o A full valuation allowance of deferred tax assets for net
operating loss carryforwards that are expected to expire prior
to utilization;
o The carrying value of certain plant and equipment not impaired
under FASB 144 based on expected future cash flows from
operations; and
o The decision by the Company not to accrue any amounts in
connection with the litigation involving Golden Gate
Distributing, based on the Company's belief that it will
prevail in the litigation.
These accounting policies are applied consistently for all years
presented. The Company's operating results would be affected if other
alternatives were used. Information about the impact on operating results is
included in the footnotes to the Company's consolidated financial statements.
13
OVERVIEW
MBC was originally formed in March 1983 and bottled its flagship brand,
Red Tail Ale, in December 1983. The Company is celebrating its 20th anniversary
during the year 2003. During the first quarter of the year 2003, the Company
prepared to launch Red Tail Ale in a commemorative 22 oz. bottle. This limited
edition bottle, with an exciting `Red Tail Ale - Reggae on the River' label
designed by artist Jesse Miller will be distributed in select markets including
California, Washington, Oregon, Arizona, and Texas. The Company also began
selling White Hawk IPA on the East Coast during the first quarter of the year
2003.
The Company's sales in the U.S. during the first quarter of the year
2003 increased to 12,593 barrels, a marginal increase of 95 barrels, or 0.8%,
over the 12,498 barrels sold during the first quarter of 2002. Management
attributes the small size of the increase to the poor economy in the U.S. and a
significant decline in business in the restaurant and tourism industry. During
the first quarter of 2003, UBSN sold 12,980 barrels in the U.K., Europe, and
Canada, compared to 11,912 barrels during the corresponding period in 2002.
The Company ended the first quarter of 2003 with a net loss of
$289,400, as compared to a net loss of $354,400 for the same period in 2002. As
set forth more fully under "Results of Operations," below, the main contributor
to decrease in the net loss is the percentage decrease in the cost of sales.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of net sales, certain
items included in the Company's Statements of Operations.
---------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------------
2003 2002
% %
------ ------
STATEMENTS OF OPERATIONS DATA:
Sales 102.38 102.69
Less Excise taxes 2.38 2.69
------ ----
NET SALES 100.00 100.00
Costs of Sales 68.05 69.37
------ -----
GROSS PROFIT 31.95 30.63
------ -----
Marketing, General, and Administrative
Expenses 32.93 33.03
------ -----
LOSS FROM OPERATIONS (0.98) (2.40)
Other Income (0.08) (0.20)
Interest Expense 3.50 4.22
------- ----
Loss before income taxes (4.40) (6.42)
Provision for income taxes 0.53 0.56
NET LOSS (4.93%) (6.98%)
======= ======
Other Comprehensive Loss (0.20) (0.39)
======= ======
COMPREHENSIVE LOSS (5.13%) (7.37%)
======= ======
14
---------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------------
2003 2002
$ $
------ ------
BALANCE SHEET DATA:
Cash and Cash Equivalents 107,900 73,000
Working Capital (4,746,700) (4,577,700)
Property and Equipment 13,977,400 4,481,900
Deposits and Other Assets 279,100 2,219,700
Total Assets 21,668,400 22,609,200
Long-Term Debt 3,195,600 3,708,200
Obligation under Capital Lease 268,700 928,300
Total Liabilities 15,622,900 15,121,800
Accumulated Deficit (8,783,900) (7,119,100)
Stockholder's Equity 6,045,500 7,487,400
NET SALES
Overall net sales for the first quarter of 2003 were $5,870,100, an
increase of $794,000, or 15.4%, compared to $5,076,100 for the first quarter of
2002. The increase was mainly due to increased sales in Europe.
Domestic Operations. Domestic net sales for first quarter of 2003 were
$2,337,800 compared to $2,302,800 for the same period in 2002, a 1.52% increase.
The sales volume increased to 12,593 barrels in first quarter of 2003 from
12,498 barrels in the first quarter 2002, representing an increase of 95
barrels, or 0.8%. Sales of the Company's brands increased by 615 barrels; sales
of the Kingfisher brand decreased by 78 barrels, and sales of contract brands
decreased by 442 barrels. The decrease in sales of contract brands is due to the
termination in December, 2002, of the agreement to brew and sell Wolaver's ales.
The increase in overall net sales during the first quarter of 2003 was mainly
due to increase in wholesale shipments. Retail sales at the Hopland Brewery and
the Saratoga Springs tasting room showed a marginal increase of $600 when
compared to the same period in 2002.
European Operations: Net sales for the first quarter of 2003 were
$3,532,300 (GBP 2,204,100) compared to $2,773,300 (GBP 1,957,700) during the
corresponding period of 2002, an increase of 27.37%. During the first quarter of
2003, UBSN sold 12,980 barrels compared to 11,912 barrels during the first
quarter of 2002. However, because of fluctuations in the exchange rate, when the
net sales results are compared in Pounds Sterling, the increase in net sales is
just 12.58%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first
quarter of 2003 was 68.05%, as compared to 69.37% during the corresponding
period of 2002. The slight decrease results from higher sales and increased
productivity in U.S. operations.
Domestic Operations: Cost of goods sold as a percentage of net sales in
the U.S. during the first quarter of 2003 was 71.68%, as compared to 73.09%
during the corresponding period of 2002. The decrease of 1.41% is mainly due to
increased productivity, which was partially offset by increased insurance costs
and an increase in the price of raw materials.
15
European Operations: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first quarter of 2003 was 66.07%, as compared to
66.86% during corresponding period in 2002 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation). The slight decrease of 0.79% was mainly due to a shift towards
products sold in less expensive packaging, and exchange rate fluctuations.
GROSS PROFIT
As a result of the higher net sales described above, gross profit for
the first quarter of 2003 increased to $1,875,500, from $1,554,900 during the
corresponding period of 2002, representing an increase of 20.62%. As a
percentage of net sales, the gross profit during the first quarter of 2003
increased to 31.95% from that of 30.63% for the first quarter of 2002.
MARKETING, GENERAL, AND ADMINISTRATIVE EXPENSES
Marketing, general, and administrative expenses for the first quarter
of 2003 were $1,993,200, as compared to $1,676,800 for the first quarter of
2002, representing an increase of 15.29%.
Domestic Operations: Expenses for the first quarter of 2003 were
$863,500 compared to $839,200 during the corresponding period of 2002,
representing an increase of $24,300. As a percentage of net sales in the U.S.,
the expenses increased to 36.94% during the first quarter of 2003, compared to
36.44% during the corresponding period of 2002 mainly because of an increase in
legal fees with regard to contractual disputes and loan fees on additional debt
incurred by the Company. However, the increase was partially offset by a
reduction in manpower.
European operations: Expenses for the first quarter of 2003 were
$1,069,700, compared to $837,600 during the corresponding period of 2002,
representing an increase of $232,100. As a percentage of net sales in the U.K.,
the expenses increased to 30.28% during the first quarter of 2003, compared to
30.2% during the corresponding period of 2002 (in each case as calculated in
U.S. dollars, after taking into account the effects of the exchange rate
calculation). The increase is mainly because of increases in office staff,
wages, travel expenses, promotional expenses, commissions, and discounts.
OTHER EXPENSES
Other expenses for the first quarter of 2003 totaled $200,500,
representing a decrease of $3,700 when compared to the first quarter of 2002.
The other expenses consist of interest expenses, miscellaneous income, and
acquisition costs. Interest expenses decreased by $8,900 because of reductions
in the line of credit, other long term debt, and interest rates. Miscellaneous
income decreased by $5,200.
INCOME TAXES
The Company has a provision for income taxes of $31,200 for the first
quarter of 2003, compared to $28,300 for the first quarter of 2002. The
provision for taxes is based on the estimated amount of taxes that will be
imposed by the taxing authorities in the U.K.
The Company has also provided a valuation allowance of $3,414,900 for
U.S. federal and state net operating losses that may expire prior to
utilization.
16
NET LOSS
The Company's net loss for the first quarter of 2003 was $289,400, as
compared to loss of $354,400 for the first quarter of 2002. After providing for
a negative foreign currency translation adjustment of $11,500 during the first
quarter of 2003 ($19,800 for 2002), the comprehensive loss for 2003 was
$300,900, compared to a loss of $374,200 in 2002.
CAPITAL DEMANDS
The Ukiah and Releta facilities have continued to operate at
significantly less than full capacity during 2003. 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 Company has yet to complete the build-out of its administrative
space and the exterior landscaping of the Ukiah facility. Completion of the
construction is a condition to the issuance of a final certificate of occupancy.
However, the Ukiah brewery has been operating under a temporary certificate of
occupancy from the City of Ukiah since 1998 with no adverse consequences. The
Company does not plan to revisit completion of the project until it has the
available funds to do so. If, in the future, the Company decides to complete the
construction and landscaping, the remaining work, and the estimated cost
thereof, are as follows: covering the parking lot with asphalt, approximately
$30,000; building a concrete sidewalk to one of the entrances of the brewery
building, approximately $10,000.
PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS
The Company must make timely payment of its debt and lease commitments
to continue its operations. As stated above, 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 will have a materially adverse effect on the Company.
BREWING CONTRACT WITH WOLAVER'S ENTERPRISES, LLC.
During September 2000 the Company entered into an agreement with
Wolaver's Enterprises, LLC, ("Wolaver's") a Florida limited liability company,
to brew, on a contract basis, their line of organic beers. The Company produced
3,500 barrels of Wolaver's brand beer during 2002. In July 2002, Wolaver's
informed the Company that it had merged with Otter Creek Brewing Company in
Middlebury, Vermont. Because of the merger, Wolaver's requested termination of
the brewing contract, and the Company agreed to terminate the brewing contract
effective as of December 31, 2002. Termination of this contract increased the
Company's unused brewing capacity. The Company will continue to look for
opportunities to utilize its brewing facilities at a greater capacity.
17
LIQUIDITY AND CAPITAL RESOURCES
Master Line of Credit. On August 31, 1999, the Company and UBA entered
into a Master Line of Credit Agreement, which was subsequently amended in April
of 2000, and February of 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.
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,
2003, the aggregate outstanding principal amount of the UBA Notes was
$1,515,371, and the accrued but unpaid interest thereon was equal to
approximately $342,400.
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, therefore, the Company
has borrowed the maximum amount available under the facility. Upon maturity of
any UBA Note, unless UBA has given the Company prior instructions to commence
repayment of the outstanding principal balance, the outstanding principal and
accrued but unpaid interest on such Note may be converted, at the option of UBA,
into shares of the Company's common stock. If UBA does not elect to so convert
any UBA Note upon maturity, it has the option to extend the term of such UBA
Note for any period of time mutually agreed upon by UBA and the Company. During
the extended term of any UBA Note, 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. Because the UBA Notes are
subordinated to certain bank debt, the Company does not expect to repay the UBA
Notes within the next calendar year.
On December 28, 2001, the Company and UBA entered into a Confirmation
of Waiver which provides a written confirmation that as of August 13, 2001, UBA
waived its rights with regard to all conversion rate protection as set forth in
the UBA Notes.
The Company and UBA executed an Extension of Term of Notes under Master
Line of Credit Agreement in February of 2002, which was later amended in August
of 2002 and March of 2003 (the "Extension Agreement"). The Extension Agreement
confirms the Company's and UBA's extension of the terms of the UBA Notes for a
period ending on June 30, 2003.
Long Term Debt: MBC has obtained a $2.7 million 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 rate of 7.24%, maturing
December 2012 with a balloon payment in the amount of $932,600. The interest
rate is adjusted on every five year anniversary of the agreement to the treasury
constant maturity rate plus 4.17% (but not to exceed 10%). The amount of the
balloon payment will vary depending on the change in interest rates over the
years. 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
most of the Company's equipment.
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 in November 2003,
the Company anticipates that it will exercise its option to either purchase
18
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 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 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 of Chase
Manhattan Bank of New York plus 2.25%, payable monthly. 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 was repayable in sixty consecutive
monthly installments of principal, each in the amount of $24,700.
The facility was originally scheduled to mature on September 23, 2002,
but on January 17, 2003, the facility was amended to extend the term of the
facility to expire on November 30, 2003. This amendment also increased the
maximum amount of available credit to $3,500,000, and provided a term loan of
$750,000 (consisting of the original balance of $346,300 and a new term loan of
$403,700) that is repayable in 30 equal consecutive monthly installments of
$24,733, commencing February 1, 2003, with a final payment of $8,016. 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,
2003, the total amount outstanding on the line of credit was approximately
$2,006,709.
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 GBP. This facility is secured by all of the assets of UBSN. The amount
outstanding on this line of credit as of March 31, 2003 was approximately
$1,009,900.
Shepherd Neame Loan: UBSN has contracted with Shepherd Neame to brew
Kingfisher Lager for the Company's European and Canadian markets. As
consideration for extending the brewing contract, Shepherd Neame advanced a loan
of 600,000 GBP to UBSN, repayable in monthly installments of 5,000 GBP per
month, commencing in June of 2003. The loan carries an interest rate of 5%.
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 8.19% for the first quarter of the year 2003, and 8.41%
for the corresponding period of 2002.
Keg Management Arrangement: The Company is a party to 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 to the
Company. MicroStar then supplies the Company with additional kegs. The agreement
has been extended on a monthly basis since September of 2002. If, on any given
month, the agreement is not extended and terminates, the Company will be
required to purchase a
19
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
assurance that the Company will be able to finance the purchase of the kegs. A
failure to extend the contract, or to purchase the necessary kegs from MicroStar
upon termination of contract, would likely have a material adverse effect on the
Company.
Overdue Property Taxes: As of December 31, 2002, the delinquent
property taxes due on the Company's Ukiah property, including penalties and
interest, totaled $540,300. This amount represents the overdue taxes for the
period from April of 1999 to April of 2002. The taxes due for the 2002 to 2003
tax year total approximately $117,000, for an aggregate outstanding tax bill of
$657,000. If the default continues beyond June 2004, the Mendocino County Tax
Collector will have the power to auction the property in order to collect on the
overdue bill. Management has entered into negotiations with the County to
develop a payment plan for the outstanding amounts in order to and settle the
overdue taxes. The Company and the County have not yet reached agreement on the
terms of the payment plan, but the Company anticipates that the initial payment
under the plan will be an amount equal to 20% or more of the taxes then due. The
balance of the overdue taxes would then be paid in four subsequent annual
installments, on or before April 10 of each year, of 20% or more of the original
overdue balance, along with accrued interest calculated at 18% per year. In
addition, all current and future property taxes coming due each year during the
plan must be paid before their respective due dates. Because of the large amount
of taxes owed, and the County's ability to sell the Ukiah property to satisfy
the delinquency, failure to either enter into a payment plan satisfactory to the
County, or to settle the tax dues in full before June 2004 may have serious
adverse effect on the Company's business and financial condition.
Summary: The Company must make timely payment of its debt and lease
commitments to continue its operations. To fund its operating deficits over the
past six years, the Company has relied upon lines of credit and other credit
facilities. Management had success in negotiating these credit facilities in the
past and expects to successfully negotiate these facilities in the future.
However, there can be no assurance that the Company will have access to any such
sources of funds in the future, and the inability to secure sufficient funds
will have a materially adverse effect on the Company. Further, the CIT Group
line of credit is due for renewal in November 2003, and the Finova Lease
terminates in November 2003. Failure to renew these facilities would have a
material adverse impact on the Company.
CURRENT RATIO
The Company's ratio of current assets to current liabilities on March
31, 2003, was 0.61 to 1.0, and its ratio of total assets to total liabilities
was 1.39 to 1.0. On March 31, 2002, the Company's ratio of current assets to
current liabilities was 0.57 to 1.0, and its ratio of total assets to total
liabilities was 1.50 to 1.0.
UNION REPRESENTATION
On February 28, 2003, approximately 20 employees engaged in brewing,
bottling, warehousing, and shipping at the Ukiah brewery elected Teamsters Local
No. 896, International Brotherhood of Teamsters, AFL-CIO to represent them as a
collective bargaining agent. The Company has commenced negotiation of the
collective bargaining agreement. Upon the execution of the agreement, all of
such 20 employees' positions must be held and filled by members of the union.
20
ITEM 3. CONTROLS AND PROCEDURES.
------------------------
The Company's Management including the Chief Executive Officer,
President and Chief Financial Officer, have evaluated, within 90 days prior to
the filing of this Report, the effectiveness of the design, maintenance, and
operation of the Company's disclosure controls and procedures. Management
determined that the Company's disclosure controls and procedures were effective
in ensuring that information required to be disclosed by the Company in the
reports that it files under the Exchange Act is accurate and is recorded,
processed, summarized, and reported within the time periods specified in the
Commission's rules and forms.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving an entity's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision making can be faulty and that breakdowns in
internal controls can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation thereof, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART II
ITEM 1. LEGAL PROCEEDINGS.
------------------
The Company had a written distribution agreement with the House of
Daniels, Inc., dba Golden Gate Distributing Company ("GGD") for the distribution
of beer products in certain counties, including Napa and Marin counties.
Pursuant to the express terms of this agreement, the Company had the right to
terminate the agreement without cause upon 30 days' written notice to GGD. The
Company exercised its contractual right to terminate the agreement by written
notice, such termination to be effective on or about March 28, 2003.
On April 1, 2003, GGD filed an action in Marin County Superior Court,
naming the Company and Mark Anderson (Mr. Anderson is employed by the Company as
a sales manager) as defendants. GGD claims that the termination of the agreement
was wrongful in that there was no "good cause" reason therefor, and that, in
terminating the agreement, the Company committed various business torts against
GGD. GGD has sued the Company for breach of contract, breach of the covenant of
good faith and fair dealing, unfair business practices, negligent and
intentional interference with economic relationships. GGD seeks compensatory
damages, disgorgement of profits, punitive damages, interest, and reasonable
attorneys' fees. GGD's claims against Mr. Anderson, individually, are limited to
the two interference tort claims. In informal discussions, GGD's attorney has
claimed that GGD is entitled to a recovery of compensatory damages in an amount
no less than seven years' profit margins realized by GGD during its
distributorship of the Company's products.
The Company believes that even though the agreement did not require a
showing of good cause for termination, the Company nevertheless had ample good
cause to terminate the agreement, and that, by failing to perform according to
the contract, GGD has breached its contract with the Company. Moreover, during
the thirty days' notice period that the Company gave GGD prior to
21
termination, GGD engaged in tortious conduct that constituted wrongful
interference with the Company's contractual relationships and economic
advantage, trade libel and unfair business practices. By the response deadline
of May 19, 2003, the Company expects that it will file a cross-complaint against
GGD asserting these claims and seeking the appropriate remedies, including
compensatory and punitive damages.
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.
------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits. The Company's officers' certifications pursuant to Title
18, United States Code, Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 were inadvertently omitted from
the Company's Quarterly Report of Form 10-QBS for the quarterly period
ended on September 30, 2002, and are attached hereto as Exhibit 99.2.
Exhibit Number Description of Document
-------------- -----------------------
99.1 Officers' Certifications pursuant to Title 18, United
States Code, Section 1350
99.2 Officers' Certifications pursuant to Title 18, United
States Code, Section 1350
(b) Current Reports on Form 8-K
None.
22
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 14, 2003 By: /s/ Vijay Mallya
---------------------------------------------
Dr. Vijay Mallya
Chairman of the Board and Chief Executive Officer
Dated: May 14, 2003 By: /s/ N. Mahadevan
---------------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
23
CERTIFICATIONS
STATEMENT OF PRINCIPAL EXECUTIVE OFFICER
I, Dr. Vijay Mallya, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Mendocino
Brewing Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
24
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Vijay Mallya
- -------------------------------------------------
Dr. Vijay Mallya,
Chairman of the Board and Chief Executive Officer
Date: May 13, 2003
25
STATEMENT OF PRINCIPAL FINANCIAL OFFICER
I, N. Mahadevan, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Mendocino
Brewing Company, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors
26
that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ N. Mahadevan
- --------------------------------
N. Mahadevan,
Chief Financial Officer
Date: May 13, 2003
27
EXHIBIT LIST
Page
----
No.
- ----
99.1 Certification Pursuant to Title 18, U.S.C. Section 1350 29
99.2 Certification Pursuant to Title 18, U.S.C. Section 1350 30
28