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 June 30, 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 Identification No.)
incorporation or organization)
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 June 30,
2002 is 11,266,874.
PART I
ITEM 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 65,100
Accounts receivable 4,702,700
Inventories 1,292,200
Prepaid expenses 297,900
------------
Total Current Assets: 6,357,900
------------
PROPERTY AND EQUIPMENT 14,358,800
------------
OTHER ASSETS
Deferred Income Taxes 1,922,600
Deposits and other Assets 239,100
Intangibles net of amortization 115,700
------------
Total Other Assets: 2,277,400
------------
Total Assets: $ 22,994,100
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Disbursements in excess of deposits $ 157,300
Accounts payable 4,478,600
Accrued liabilities 471,800
Accrued wages and related expense 173,100
Taxes Payable in United Kingdom 133,700
Current maturities of obligation under capital lease 357,800
Current maturities of obligation under long-term debt 37,400
Line of credit 3,291,800
Notes to related party 1,789,700
------------
Total Current Liabilities: 10,891,200
LONG TERM DEBT, less current maturities 3,446,400
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 846,500
------------
Total Liabilities: 15,184,100
------------
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, 11,266,874 shares issued and
outstanding 14,648,600
Accumulated comprehensive loss (74,200)
Accumulated deficit (6,992,000)
------------
Total Stockholders' Equity 7,810,000
------------
Total Liabilities and Stockholders' Equity: $ 22,994,100
============
The accompanying notes are an integral part of these financial statements.
1
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
----------------------------- -----------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
----------------------------- -----------------------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES 6,487,900 5,910,700 11,658,000 11,233,200
COST OF GOODS SOLD 4,181,500 3,886,000 7,696,800 7,392,500
------------ ------------ ------------ ------------
GROSS PROFIT 2,306,400 2,024,700 3,961,200 3,840,700
------------ ------------ ------------ ------------
OPERATING EXPENSES
Retail Operating Expenses 87,900 125,200 168,800 234,600
Marketing 1,174,000 1,088,800 2,214,800 2,199,300
General and administrative 657,600 628,700 1,312,800 1,358,400
------------ ------------ ------------ ------------
1,919,500 1,842,700 3,696,400 3,792,300
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 386,900 182,000 264,800 48,400
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income (expense) 2,300 10,400 12,500 9,700
Interest expense (209,800) (243,200) (424,000) (479,900)
------------ ------------ ------------ ------------
(207,500) (232,800) (411,500) (470,200)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 179,400 (50,800) (146,700) (421,800)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 52,300 71,500 80,600 (1,100)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 127,100 $ (122,300) $ (227,300) $ (420,700)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE LOSS, net of tax
Foreign Currency Translation Adjustment 23,400 -- 3,600 --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 150,500 $ (122,300) $ (223,700) $ (420,700)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.01) $ (0.02) $ (0.04)
============ ============ ============ ============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ 0.01 $ (0.01) $ (0.02) $ (0.04)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
------------------------- -------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 274,700 268,100 563,800 534,200
Deferred income taxes -- (76,000)
Stock issued for services 172,100 -- 172,100 --
Changes in:
Accounts receivable (409,000) (550,900) 367,000 454,600
Inventories 44,300 102,400 (17,500) 57,300
Prepaid expenses (224,600) (212,100) (146,500) (167,200)
Deposits and other assets (56,800) (130,200) (124,000) (342,900)
Accounts payable (328,900) (89,000) (349,100) 110,700
Accrued wages and related expenses 4,200 8,500 1,300 12,200
Accrued liabilities 117,900 (45,100) (311,700) (647,400)
---------- ---------- ---------- ----------
Net cash from operating activities: (279,000) (770,600) (71,900) (485,200)
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold
improvements (91,600) (203,100) (230,900) (257,900)
---------- ---------- ---------- ----------
Net cash from investing activities: (91,600) (203,100) (230,900) (257,900)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 485,200 853,800 822,100 291,200
Principal payments on long-term debt (8,800) (93,300) (685,100) (175,200)
Payments on obligation under capital lease (90,900) 25,100 (67,500) (44,800)
Proceeds from notes payable to related parties 23,600 34,300 47,000 390,700
Disbursement in excess of deposit (57,900) 42,900 157,300 117,700
Translation adjustment 11,500 (300) 4,100 (9,700)
---------- ---------- ---------- ----------
Net cash from financing activities: 362,700 862,500 277,900 569,900
---------- ---------- ---------- ----------
INCREASE / (DECREASE) IN CASH (7,900) (111,200) (24,900) (173,200)
---------- ---------- ---------- ----------
CASH, beginning of period 73,000 146,300 90,000 208,300
---------- ---------- ---------- ----------
CASH, end of period $ 65,100 $ 35,100 $ 65,100 $ 35,100
========== ========== ========== ==========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 175,600 $ 210,000 $ 355,300 $ 413,100
---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
During the third quarter of the year 2001, Mendocino Brewing Company, Inc. (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.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. Unfortunately, due to the serious illness of a director of UBI, certain
of the accounts of UBI were not available for inclusion in these financial
statements. Management has determined that, in accordance with generally
accepted accounting principles, such amounts in question are immaterial to the
overall presentation of the Company's financial statement. Therefore, the
amounts of the accounts in question have been estimated based on historical
data.
In the opinion of management, all adjustments considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 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), a second deed of trust on the Company's
Ukiah land improvements and the assets of UBI. $1,484,000 of the line of credit
was advanced to the Company as an initial term loan, which is repayable in sixty
consecutive monthly installments of principal, each in the amount of $24,700.
The Company commenced repayment of the term loan in March 1999 and approximately
$519,400 of the term loan was outstanding as of June 30, 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 in March 2002 and the balance
will be repaid once the balance of purchase is refinanced through an existing
line of credit. During June 2002, CIT Group further increased the line of credit
by $65,000 repayable by September 2002. 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 June 30, 2002, the total amount
outstanding on the line of credit was approximately $2,148,500.
Necor Bank Limited, a South African registered company, has provided UBSN Ltd.
with a multi-currency option facility of 1,250,000 Pounds Sterling. This
overdraft facility is secured by a fixed and floating currency charge over all
of the assets of UBSN Ltd. ("UBSN"). The amount outstanding on this line of
credit as of June 30, 2002, was approximately $1,143,300.
4
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 June 30,
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 June 30, 2002, is
approximately $274,300.
Note 4 - Income Taxes
The Company has recorded an increase in the valuation allowance of $138,000 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.
5
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 in 2001 a valuation
allowance of $1,486,000 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 may generate sufficient profits in the future to utilize the
deferred tax assets. Temporary differences and carryforwards which give rise to
deferred tax assets and liabilities on June 30, 2002, are as follows:
Accounts receivables allowance $ 13,100
Benefits from net operating loss carry forwards 3,605,500
Inventory 13,100
Accruals 41,400
Valuation allowance (1,624,000)
Depreciation and amortization (154,700)
Investment in UBI 350,700
Others (323,100)
Note 5 - Related party Transactions
During 2001, the Company 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 Limited; a Market
Development Agreement, a Distribution Agreement, and a Brewing License Agreement
between the Company and UBSN; a Distribution Agreement between UBI and UBSN; a
Trademark Licensing Agreement between the Company 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, 2001, and such
information is incorporated herein by reference.
The following table reflects the value of the transactions for the six months
ended June 30, 2002 and 2001 and the balances outstanding at June 30, 2002.
- -----------------------------------------------------------------------------------------------
2002 2001
- -----------------------------------------------------------------------------------------------
Sales to Shepherd Neame Ltd $ 969,800 $ 743,800
- -----------------------------------------------------------------------------------------------
Purchases from Shepherd Neame Ltd. 4,122,700 3,772,500
- -----------------------------------------------------------------------------------------------
Expenses reimbursement to Shepherd Neame Ltd. 369,400 258,700
- -----------------------------------------------------------------------------------------------
Commission paid to American United Breweries Int'l., Inc. ("AUBI") -- 29,000
- -----------------------------------------------------------------------------------------------
Interest expenses associated with UBA convertible notes payable 47,000 66,800
- -----------------------------------------------------------------------------------------------
Expenses reimbursement to UBA -- 12,800
- -----------------------------------------------------------------------------------------------
Accounts payable to Shepherd Neame Ltd 2,345,400 --
- -----------------------------------------------------------------------------------------------
Account receivable from Shepherd Neame Ltd. 525,100 --
- -----------------------------------------------------------------------------------------------
Amounts payable to AUBI 20,000 80,400
- -----------------------------------------------------------------------------------------------
6
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 Six months ended
------------------ ----------------
6/30/2002 6/30/2001 6/30/2002 6/30/2001
--------------------------------------------------------------
Net income (loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700)
==============================================================
Weighted average common shares outstanding 11,266,874 11,070,728 11,266,874 11,070,728
==============================================================
Basic net income (loss) per share $ 0.01 $ (0.01) $ (0.02) $ (0.04)
==============================================================
Diluted net income (loss) per share
Net income (loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700)
Interest expense on convertible notes
payable 23,600 -- -- --
--------------------------------------------------------------
Income for the purpose of computing
diluted net income per share $ 150,700 $ (122,300) $ (227,300) $ (420,700)
==============================================================
Weighted average common shares outstanding 11,266,874 11,070,728 11,266,874 11,070,728
Dilutive stock options 429,273 -- -- --
Assumed conversion of convertible notes payable 1,193,133 -- -- --
--------------------------------------------------------------
Weighted average common shares outstanding
for the purpose of computing diluted net
income (loss) per share 12,889,280 11,070,728 11,266,874 11,070,728
==============================================================
Diluted net income (loss) per share $ 0.01 $ (0.01) $ (0.02) $ (0.04)
7
Note 7 - Inventory June 30, 2002
Raw Materials $ 397,300
Beer-in-process 195,200
Finished Goods 648,500
Merchandise 51,200
-----------
$ 1,292,200
===========
Note 8 - Property and Equipment
June 30, 2002
Buildings $ 7,922,000
Machinery and equipment 8,414,100
Equipment under capital lease 2,379,500
Land 810,900
Leasehold improvements 663,200
Equipment in progress 248,200
Vehicles 83,200
Furniture and fixtures 206,900
-----------
20,728,000
Less: Accumulated depreciation and amortization 6,369,200
-----------
$14,358,800
===========
Note 9 - Stockholders' Equity
The following table summarizes equity transactions during the six months ended
June 30, 2002:
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 (227,300)
Shares Issued for Services 183,646 $ 172,100
Currency Translation
Adjustment 3,600
Balance,
June 30, 2002 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (74,200) $ (6,992,000) $ 7,810,000
======= ============ ============ ============ ============ ============ ============
8
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:
Six months ended June 30, 2002
Domestic Brewing European Distributing Retail Corporate &
Operations Operations Operations Others Total
Net Sales $ 5,132,700 $ 6,299,000 $ 226,300 -- $11,658,000
Operating Profit/(Loss) 1,300 275,300 (11,800) -- 264.800
Identifiable Assets 14,684,500 4,284,700 85,500 3,939,400 22,994,100
Depreciation &
amortization 381,000 159,900 3,100 19,800 563,800
Capital Expenditures 87,700 143,200 -- 230,900
Six months ended June 30, 2002
Domestic Brewing European Distributing Retail Corporate &
Operations Operations Operations Others Total
Net Sales $ 5,099,000 $ 5,867,400 $ 266,800 -- $ 11,233,200
Operating Profit/(Loss) (162,600) 247,000 (36,000) -- 48,400
Identifiable Assets 14,866,800 4,693,200 75,300 5,671,600 25,306,900
Depreciation &
amortization 346,800 134,600 3,600 49,200 534,200
Capital Expenditures 115,700 127,700 -- 14,500 257,900
9
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 first six months ended June 30, 2002, compared to the first
six months ended June 30, 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:
10
o The first-in, first-out (FIFO) method to value the majority of
the Company's inventories; and
o The intrinsic value method, or APB Opinion No. 25, to account
for incentive awards of Company common stock; and
o The recognition of deferred tax assets for net operating loss
carryforwards that are expected to be used to offset future
taxable income.
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.
OVERVIEW
During the second quarter of 2002, the Company introduced Kingfisher
premium Lager Beer in 22 oz bottles in the entire domestic market, and in draft
for the West Coast market. The Company also launched White Hawk Original IPA,
available in six packs and in draft, in the West Coast market.
Kingfisher Premium Lager beer won a Gold Medal at the Brewing Industry
International Awards held at London, United Kingdom in April 2002 in the draught
lager class in the alcohol by volume range of 4.6% to 6.9%. In May 2002,
Kingfisher was awarded Gold Medal at the Australian International Beer Awards
2002 held at Melbourne, Australia in International Section - Packaged Beer
Class-1-Lager, Sub-Class-A European Style Lager.
The Company's brewing operation's sales in the United States during the
first six months of the year 2002 decreased to 27,988 barrels, a decrease of 388
barrels, or 1.4%, from the 28,376 barrels sold in the first six months of the
year 2001. Compared to the first six months of the year 2001, sales of Company's
own brands during the first six months of the year 2002 decreased to 21,388
barrels, a decrease of 2,853 barrels, sales of Kingfisher increased to 3,379
barrels, an increase of 3,379 barrels and sales of contract brands decreased to
3,221 barrels, a decrease of 914 barrels. Management attributes the decreased
sales of the Company's own brands to a general decline in sales of craft beers,
a significant decline in business experienced by the restaurant and lodging
industry, and competition from alternative alcoholic beverages.
During the first six months of the year 2002, UBSN, the Company's
subsidiary in the United Kingdom, sold 25,782 barrels, compared to 25,682
barrels during the corresponding period in the year 2001. Sales volume in the
United Kingdom and Europe in the first six months of 2002 increased to 25,782
barrels, an increase of 2,073 barrels compared to the first six months of 2001.
Because distribution of Kingfisher in the United States is now performed by MBC
instead of UBSN, UBSN's sales volume dropped by 1,973 barrels.
The Company ended the first six months of 2002 with a net loss of
$227,300, compared to a net loss of $420,700 for the same period in 2001. As set
forth more fully under "Results of Operations," below, increases in the cost of
goods and selling and distribution expenses, and decreases in net sales, retail
operating expenses, general and administrative expenses, and income tax benefit
contributed to the net loss.
11
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.
----------------------------
Six Months Ended June 30
----------------------------
2002 2001
Statements of Operations Data: % %
-------- --------
Net Sales 100.00 100.00
Costs of Sales 66.02 65.81
Gross Profit 33.98 34.19
-------- --------
Retail Operating Expenses 1.45 2.09
Marketing Expense 19.00 19.58
General and Administrative Expenses 11.26 12.09
-------- --------
Total Operating Expenses 31.71 33.76
-------- --------
Profit From Operations 2.27 0.43
Other (Income) / Expense 0.11 0.09
Interest Expense (3.64) (4.27)
-------- --------
Loss before income taxes (1.26) (3.75)
Provision for / (Benefit) from income taxes 0.69 (0.01)
--------
Net Loss (1.95) (3.76)
Other Comprehensive Loss 0.03 --
======== ========
Comprehensive Loss (1.92) (3.76)
----------------------------------
Six Months Ended June 30
----------------------------------
2002 2001
Balance Sheet Data: $ $
----------- -----------
Cash and Cash Equivalents 65,100 35,100
Working Capital (4,533,300) (3,913,100)
Property and Equipment 14,358,800 14,545,100
Deposits and Other Assets 2,277,400 3,756,900
Total Assets 22,994,100 25,306,900
Long-term Debt 3,446,400 3,083,000
Obligation Under Capital Lease 846,500 1,050,500
Total Liabilities 15,184,100 15,051,500
Accumulated Deficit (6,992,000) (4,889,100)
Stockholder's Equity 7,810,000 10,255,400
12
Net Sales
Overall net sales for the first six months of 2002 were $11,658,000, an
increase of $424,800, or 3.78%, compared to $11,233,200 for the first six months
of 2001. The increase is mainly caused by an increase in sales in the United
Kingdom and Europe during the first six months of 2002.
Domestic Operations. Domestic net sales for the first six months of 2002
were $5,359,000, compared to $5,365,800 for the same period in 2001, a 0.13%
decrease. The sales volume decreased to 27,988 barrels in the first six months
of 2002 from 28,376 barrels in the first six months of 2001, representing a
decrease of 388 barrels, or 1.37%. The details of the decrease are as follows:
sale of the Company's brands decreased by 2,853 barrels, sales of Kingfisher
increased by 3,379 barrels, and sales of contract brands decreased by 914
barrels. The decrease in overall net sales during the first six months of 2002
was partly offset by a marginal increase in wholesale shipments (an increase of
$33,700 over the wholesale shipments during the first six months of 2002). In
view of management's focus on wholesale beer sales and decline in retail
business, retail sales for the first six months of 2002 showed a decrease of
$40,500 over the same period in 2001.
European Operations: Net sales for the first six months of 2002 were
$6,299,000 ((pound)4,347,400) compared to $5,867,400 ((pound)4,103,400) during
the corresponding period of 2001, an increase of 7.36%. Because of exchange rate
fluctuations, when the net sales results are compared in Pounds Sterling, the
increase is only 5.95%. During the first six months of 2002, UBSN sold 25,782
barrels, compared to 25,682 barrels during the first six months of 2001. Sales
volume in the United Kingdom and Europe in the first six months of 2002
increased by 2,073 barrels compared to the first six months of 2001. Because
Kingfisher is now distributed in the United States out of MBC, instead of UBSN,
sales volume dropped by 1,973 barrels.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales during the first six
months of 2002 was 66.02%, as compared to 65.81% during the corresponding period
of 2001. Higher labor cost, increases in the cost of materials, and higher
insurance costs contributed to the increase. Prices of bottles and certain types
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 six months of 2002 was 66.69%, as compared to
65.81% during the corresponding period of 2001, representing an increase of
0.88% mainly due to increased labor costs, insurance, and increase in the price
of raw materials.
European Operations: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first six months of 2002 was 65.45%, as compared
to 65.81% during the 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 a decrease of 0.36%.
Gross Profit
As a result of the higher net sales described above, gross profit for the
first six months 2002
13
increased to $3,961,200, from $3,840,700 during the corresponding period of
2001, representing an increase of 3.1%. As a percentage of net sales, because of
the increase in cost of goods sold as discussed above, the gross profit during
the first six months of 2002 decreased to 33.98% from that of 34.2% for the
first six months of 2001.
Operating Expenses
Operating expenses for the first six months of 2002 were $3,696,400, as
compared to $3,792,300 for the first six months of 2001, representing a decrease
of 2.53%. 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 six
months of 2002 were $168,800, representing a decrease of $65,800, or 28.04%,
from the same period in 2001. As a percentage of net sales, retail operating
expenses decreased to 1.45% as compared to 2.09% for the first six months of
2001. The decrease in retail operating expenses consisted mainly of decreases in
labor expenses, which management attributes to reduced hours of operation and
better utilization of its manpower.
Marketing and Distribution Expenses: Marketing and distribution expenses
for the first six months of 2002 were $2,214,800, representing an increase of
$15,500, or 0.70%, from the first six months of 2001. As a percentage of net
sales, marketing and distribution expenses represented 19.0% as compared to
19.6% during the first six months of 2001.
Domestic Operations: Expenses for the first six months of 2002 were
$846,300 compared to $988,800 during the corresponding period of 2001,
representing a decrease of $142,500. As a percentage of net sales in the United
States, the expenses decreased to 15.79% during the first six months of 2002,
compared to 18.43% during the corresponding period of 2001 mainly on account of
optimizing manpower and promotional expenses.
European operations: Expenses for the first six months of 2002 were
$1,368,500 compared to $1,210,500 during the corresponding period of 2001,
representing an increase of $158,000. As a percentage of net sales in the United
Kingdom, the expenses increased to 21.73% during the first six months of 2002
compared to 20.63% 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 increase is mainly on account of increased
promotional expenses but is partly offset by the reduction in expenses caused by
the discontinuation of exports to the United States in the third quarter of
2001.
General and Administrative Expenses: General and administrative expenses
were $1,312,800, representing a decrease of $45,600 from the first six months of
2001. As a percentage of net sales, the general and administrative expenses were
11.26% for the first six months of 2002, as compared to 12.09% for corresponding
period of 2001.
Domestic Operations: General and administrative expenses were $780,300,
representing a decrease of $29,600 over the first six months of 2001. The
reduction was mainly due to reduced travel expenses, telephone expenses and
depreciation. Part of this reduction was offset by increase in legal expenses,
audit fee, insurance and rent.
14
European Operations: General and administrative expenses were $532,500,
representing a decrease of $16,000 from the first six months of 2001.
Other Expenses
Other expenses for the first six months of 2002 totaled $411,500,
representing a decrease of $58,700 when compared to the first six months of
2001. The other expenses consist of interest expenses and miscellaneous income.
Interest expenses decreased by $55,900 because of reductions in the line of
credit, long term debts, and interest rates. Miscellaneous income increased by
$2,800.
Income Taxes
The Company has a provision for income taxes of $80,600 for the first six
months of 2002, compared to a net benefit from income taxes of $1,100 for the
first six months 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 implemented various strategies such as introducing new
products, optimizing expenses and improving efficiencies to bring the Company to
profitable operations in order to utilize the deferred tax assets prior to
expiration. Management has been successful in the past by reducing the amount of
losses and moving 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 the
current 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 Company's net loss for the first six months of 2002 was $227,300, as
compared to loss of $420,700 for the first six months of 2001. After providing
for a positive foreign currency translation adjustment of $3,600 during the
first six months of 2002 ($0 for 2001), the comprehensive loss for 2002 was
$223,700, compared to a loss of $420,700 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 has been operating under a temporary certificate of
occupancy from the City of Ukiah since 1998. 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
15
results of operations, because of, among other reasons, increased administrative
burdens and costs.
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.
Brewing Contract with Wolavers Enterprises, LLC.
During September 2001 the Company entered into an agreement with Wolaver's
Enterprises, LLC, ("Wolaver's") a Florida limited liability company, to provide
brewing, on a contract basis, of their line of organic beers. The Company has
sold 1,642 barrels of Wolaver's brand beer during the first six months of the
year 2002, compared to 1,879 barrels during the corresponding period of 2001. 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, effective as of October 18, 2002.
The Company is currently exploring its options with regard to its relationship
with Wolaver's. Termination of this contract would have an adverse impact 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
(other than those leased through FINOVA Capital Corporation).
Shareholder Commitment
On August 31, 1999, the Company entered into a Master Line of Credit
Agreement with UBA, 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
16
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 June 30, 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 $274,328.
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 defer payments of 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) were scheduled to mature during 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 or 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. The Company and UBA are currently involved in ongoing
negotiations with regard to the Company's offer to convert the notes to shares
of common stock. Management believes that they will be successful in negotiating
the conversion of the debt, however, if the Company and UBA cannot reach
agreement on the terms of such conversion, a failure to convert the debt will
have an adverse effect on the Company.
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
17
term loan in March 1999 and approximately $519,400 of the term loan was
outstanding as of June 30, 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. During June 2002, CIT Group
further increased the line of credit by $65,000, which is repayable in
installments by September 2002. 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 June 30, 2002, the total amount outstanding on
the line of credit was approximately $2,148,500. The CIT Group line of credit is
due for renewal in September 2002, and the Company is currently discussing such
a renewal with the CIT Group. 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 June 30, 2002, was approximately
$1,143,300.
Shepherd Neame Loan: Shepherd Neame Limited has a brewing contract
with UBSN for brewing Kingfisher Lager for the Company's European and Canadian
markets. In consideration for UBSN's agreement to extend the brewing contract,
Shepherd Neame Limited advanced a loan of GBP 600,000 to UBSN, repayable in
monthly installments 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 8.44% for the first six months of the year 2002 and 9.73%
for the first six months 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 in the near
future. If the agreement is not extended and terminates, the Company will be
required to purchase a certain number of kegs from MicroStar and the Company
would probably attempt to finance the purchase through debt
18
or lease financing, if available. However, there can be no assurances that the
Company will be able to extend the agreement or finance the purchase of kegs.
Failure to extend the agreement or 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 June 30,
2002 was 0.58 to 1.0 and its ratio of total assets to total liabilities was 1.51
to 1.0. On June 30, 2001, the Company's ratio of current assets to current
liabilities was 0.64 to 1.0 and its ratio of total assets to total liabilities
was 1.68 to 1.0.
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
19
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 and
recommended accordingly to the Company's Board of Directors. 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 recommended to the
Company's Board of Directors that the Company abandon the proposed reverse stock
split. The Company's Board of Directors formally approved the actions described
above, at the Board Meeting held on May 20, 2002.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number Description of Document
-------------- -----------------------
99.1 Statement of Principal Executive Officer
99.2 Statement of Principal Financial Officer
(b) Current Reports on Form 8-K
No Current Reports on Form 8-K were filed during the three months
ended June 30, 2002.
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: August 13, 2002 By: /s/ Dr. Vijay Mallya
-------------------------------------
Dr. Vijay Mallya
Chairman of the Board and Chief
Executive Officer
Dated: August 13, 2002 By: /s/ N. Mahadevan
-------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
20
INDEX OF EXHIBITS
Exhibit Number Description of Document Sequential Page Number
99.1 Statement of Principal Executive Officer 22
99.2 Statement of Principal Financial Officer 23
21