UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 (IRS Employer
of incorporation or organization) Identification No.)
13351 Highway 101 South, Hopland, California 95449
(Address of principal executive offices)
(707) 744-1015
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the issuer's common stock outstanding as of September
30, 2002 is 11,266,874.
PART I
Item 1. Financial Statements.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, 2002
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 64,700
Accounts receivable 5,239,800
Inventories 1,378,900
Prepaid expenses 229,000
------------
Total Current Assets: 6,912,400
------------
PROPERTY AND EQUIPMENT 14,206,600
------------
OTHER ASSETS
Deferred Income Taxes 1,922,600
Deposits and other Assets 163,900
Intangibles net of amortization 111,600
------------
Total Other Assets: 2,198,100
------------
Total Assets: $ 23,317,100
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Disbursements in excess of deposits $ 112,500
Accounts payable 4,814,600
Accrued liabilities 612,400
Accrued wages and related expense 168,900
Taxes Payable in United Kingdom 279,800
Current maturities of obligation under capital lease 383,100
Current maturities of obligation under long-term debt 38,300
Lines of credit 2,768,200
Notes to related party 1,813,600
------------
Total Current Liabilities: 10,991,400
LONG TERM DEBT, less current maturities 3,463,800
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 734,300
------------
Total Liabilities: 15,189,500
------------
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 (77,300)
Accumulated deficit (6,671,300)
------------
Total Stockholders' Equity 8,127,600
------------
Total Liabilities and Stockholders'
Equity: $ 23,317,100
============
The accompanying notes are an integral part of these financial statements.
- 2 -
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
------------------------- ----------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
------------------------- ----------------------------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES 7,007,500 6,171,600 18,578,400 17,357,000
COST OF GOODS SOLD 4,557,900 4,229,900 12,254,800 11,662,600
---------- ----------- ------------ ------------
GROSS PROFIT 2,449,600 1,941,700 6,323,600 5,694,400
---------- ----------- ------------ ------------
OPERATING EXPENSES
Retail Operating Expenses 99,300 127,600 268,100 362,200
Marketing 1,069,300 967,500 3,196,900 3,070,400
General and administrative 752,400 644,400 2,065,200 2,008,600
---------- ----------- ------------ ------------
1,921,000 1,739,500 5,530,200 5,441,200
---------- ----------- ------------ ------------
INCOME FROM OPERATIONS 528,600 202,200 793,400 253,200
---------- ----------- ------------ ------------
OTHER INCOME (EXPENSE)
Other income 62,400 6,400 74,900 16,100
Acquisition Expense (808,200) (808,200)
Interest expense (207,700) (211,600) (631,700) (691,900)
---------- ----------- ------------ ------------
(145,300) (1,013,400) (556,800) (1,484,000)
---------- ----------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 383,300 (811,200) 236,600 (1,230,800)
PROVISION FOR INCOME TAXES 62,600 123,900 143,200 123,500
---------- ----------- ------------ ------------
Net INCOME (LOSS) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300)
---------- ----------- ------------ ============
OTHER COMPREHENSIVE INCOME /
(LOSS), net of tax
Foreign Currency Translation Adjustment (3,500) -- 500 --
---------- ----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 317,200 $ (935,100) $ 93,900 $ (1,354,300)
========== =========== ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.03 $ (0.08) $ 0.01 $ (0.12)
========== =========== ============ ============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ 0.03 $ (0.08) $ 0.01 $ (0.12)
========== =========== ============ ============
The accompanying notes are an integral part of these financial statements.
- 3 -
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
--------------------------
NINE MONTHS ENDED
September 30
--------------------------
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ 93,400 $ (1,354,300)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 844,100 809,500
Loss on sale of assets 14,900 --
Deferred income taxes -- --
Stock issued for services 172,100 8,600
Changes in:
Accounts receivable (52,500) (207,900)
Inventories (104,000) 128,100
Prepaid expenses (77,600) (171,100)
Deposits and other assets (47,900) 279,500
Accounts payable (91,200) 706,600
Accrued wages and related expenses (2,900) 18,500
Accrued liabilities (52,900) (36,500)
--------- ---------
Net cash from operating activities: 695,500 181,000
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold
improvements (362,300) (641,500)
Proceeds from sale of fixed assets 17,900 --
--------- ---------
Net cash from investing activities: (344,400) (641,500)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 300,900 355,000
Principal payments on long-term debt (694,100) (260,300)
Payments on obligation under capital lease (154,400) (117,800)
Purchase of Common Stock (Dissenter's Right) -- (18,100)
Proceeds from notes payable to related parties 70,900 421,600
Disbursement in excess of deposit 112,500 --
Translation adjustment (12,000) (5,000)
--------- ---------
Net cash from financing activities: (376,200) 375,400
--------- ---------
INCREASE / (DECREASE) IN CASH (25,100) (85,100)
--------- ---------
CASH, beginning of period 89,800 208,300
--------- ---------
CASH, end of period $ 64,700 $ 123,200
========= =========
Supplemental cash flow information includes
the following:
Cash paid during the period for:
Interest $ 527,400 $ 594,300
--------- ---------
The accompanying notes are an integral part of these financial statements.
- 4 -
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
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. In the opinion of management, all adjustments considered necessary for a
fair presentation have been included. Operating results for the nine months
ended September 30, 2002, are not necessarily indicative of the results that may
be expected for the year ending December 31, 2002.
The Company has adopted EITF - 01-09 "Accounting for Consideration Given by a
Vendor to a Customer (including a Reseller of the Vendor's Products)". This EITF
requires that certain cash consideration paid to customers for services or
placement fees are to be reported as a reduction in revenue rather than as an
expense. The Company has reclassified these items on the income statements for
the nine-month periods ending September 30, 2001 and 2002, as a reduction in
revenue and as a corresponding reduction in marketing and selling expenses. This
reclassification has no impact on net income.
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. 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 and
the assets of UBI), and a second deed of trust on the Company's Ukiah land
improvements. Under the line of credit, $1,484,000 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 $445,200 of the term
loan was outstanding as of September 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. The
Company repaid $85,000 in March 2002 and the balance of the $170,000 increase
will be repaid once the balance of the purchase of the bottling equipment is
refinanced through an existing line of credit. Based on the Company's current
level of accounts receivable and inventory, the
- 5 -
Company has drawn the maximum amount permitted under the line of credit. As of
September 30, 2002, the total amount outstanding on the line of credit was
approximately $2,064,300.
The Company and CIT Group are currently discussing renewal and possible
expansion of the credit facility. The facility originally matured on September
23, 2002, but CIT Group has informally agreed to continue to extend the facility
for consecutive one-month terms until the Company and CIT Group conclude
negotiations. The current extension terminates on November 24, 2002. Management
expects to have a final agreement on the terms of renewal by the end of 2002.
However, if the Company and CIT Group cannot reach agreement, it is possible
that CIT Group could refuse to further extend the current facility. Such a
refusal would have an immediate material adverse effect on the Company's ability
to continue as a going concern.
Necor Bank Limited, a South African registered company, has provided UBSN Ltd.
with an overdraft facility of GBP1,250,000. This overdraft facility is secured
by a charge over all of the assets of UBSN Ltd. ("UBSN"). The amount outstanding
on this line of credit as of September 30, 2002, was approximately $703,900.
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 treasuries plus
4.17%, which currently totals 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, brews Kingfisher Lager for the
Company's European and Canadian markets. In consideration for UBSN's extension
of the brewing contract, Shepherd Neame Limited 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
September 30, 2002. The notes bear interest at the prime rate plus 1.5%, subject
to a maximum interest rate of 10% per annum, and mature 18 months from the date
of the advance. The notes are convertible at the option of UBA, to common stock
at $1.50 per share upon maturity and thereafter. Interest accrued on the notes
as of September 30, 2002, is approximately $298,200. The advances originally
matured through December 2002, but have been extended to mature on March 31,
2003.
Note 4 - Income Taxes
The Company has recorded an increase in the valuation allowance of $138,000 for
federal and state net operating loss carryforwards. The Company is uncertain
whether it will be able to generate sufficient taxable income to utilize all the
deferred tax assets.
Temporary differences and carryforwards which give rise to deferred tax assets
and liabilities on September 30, 2002, are as follows:
- 6 -
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 United Breweries Limited, an
Indian corporation.
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 nine months
ended September 30, 2002 and 2001 and the balances outstanding at September 30,
2002.
- ----------------------------------------------------------------------- ---------- ----------
2002 2001
- ----------------------------------------------------------------------- ---------- ----------
Sales to Shepherd Neame Ltd $1,466,000 $1,219,300
- ----------------------------------------------------------------------- ---------- ----------
Purchases from Shepherd Neame Ltd. 6,571,700 5,819,100
- ----------------------------------------------------------------------- ---------- ----------
Expenses reimbursement to Shepherd Neame Ltd. 539,100 394,500
- ----------------------------------------------------------------------- ---------- ----------
Commission paid to American United Breweries Int'l.,
Inc. ("AUBI") -- 68,700
- ----------------------------------------------------------------------- ---------- ----------
Interest expenses associated with UBA convertible notes
payable 70,800 97,600
- ----------------------------------------------------------------------- ---------- ----------
Expenses reimbursement to UBA -- 14,100
- ----------------------------------------------------------------------- ---------- ----------
Accounts payable to Shepherd Neame Ltd 2,317,700 1,849,400
- ----------------------------------------------------------------------- ---------- ----------
Account receivable from Shepherd Neame Ltd. 189,900 697,900
- ----------------------------------------------------------------------- ---------- ----------
Amounts payable to AUBI 20,000 81,000
- ----------------------------------------------------------------------- ---------- ----------
- 7 -
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 Nine months ended
------------------ -----------------
9/30/2002 9/30/2001 9/30/2002 9/30/2001
----------- ------------ ----------- ------------
Net income (loss) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300)
=========== ============ =========== ============
Weighted average common shares outstanding 11,266,874 11,078,151 11,266,874 11,079,716
=========== ============ =========== ============
Basic net income (loss) per share $ 0.03 $ (0.08) $ 0.01 $ (0.12)
=========== ============ =========== ============
Diluted net income (loss) per share
Net income (loss) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300)
Interest expense on convertible notes
payable 23,900 -- 70,800 --
----------- ------------ ----------- ------------
Income for the purpose of computing
diluted net income per share $ 344,600 $ (935,100) $ 164,200 $ (1,354,300)
=========== ============ =========== ============
Weighted average common shares outstanding 11,266,874 11,078,151 11,266,874 11,079,716
Dilutive stock options 429,273 -- 429,273 --
Assumed conversion of convertible notes
payable 1,209,048 -- 1,209,048 --
----------- ------------ ----------- ------------
Weighted average common shares outstanding
for the purpose of computing diluted net
income (loss) per share 12,905,195 11,078,151 12,905,195 11,079,716
=========== ============ =========== ============
Diluted net income (loss) per share $ 0.03 $ (0.08) $ 0.01 $ (0.12)
- 8 -
Note 7 - Inventory September 30, 2002
------------------
Raw Materials $ 478,800
Beer-in-process 178,800
Finished Goods 693,700
Merchandise 27,600
-----------
$ 1,378,900
===========
Note 8. Property and Equipment
September 30, 2002
------------------
Buildings $ 7,806,500
Machinery and equipment 8,445,800
Equipment under capital lease 2,403,900
Land 810,900
Leasehold improvements 777,600
Equipment in progress 204,800
Vehicles 291,000
Furniture and fixtures 176,900
-----------
20,917,400
Less: Accumulated depreciation and amortization (6,710,800)
-----------
$14,206,600
===========
- 9 -
Note 9 - Stockholders' Equity
The following table summarizes equity transactions during the nine months ended
September 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 Profit
93,400 93,400
Shares Issued for
Services 183,646 172,100 172,100
Currency Translation
Adjustment 500 500
Balance,
September 30, 2002 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (77,300) $ (6,671,300) $ 8,127,600
======= ========= ========== ============ ========= ============ ===========
Note 10. Segment Information
The Company's operations are broken into three business segments: domestic
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:
Nine months ended September 30, 2002
European
Domestic Brewing Distributing Retail Corporate &
Operations Operations Operations Others Total
Net Sales $ 8,212,700 $9,968,500 $397,200 $ -- $18,578,400
Operating Profit/(Loss) 296,100 490,000 7,300 -- 793.400
Identifiable Assets 14,626,400 4,495,300 83,200 4,112,200 23,317,100
Depreciation &
amortization 573,300 236,900 4,400 29,500 844,100
Capital Expenditures 126,800 232,800 -- 2,700 362,300
- 10 -
Nine months ended September 30, 2001
European
Domestic Brewing Distributing Retail Corporate &
Operations Operations Operations Others Total
Net Sales $ 7,927,600 $8,941,300 $ 488,100 $ -- $17,357,000
Operating Profit/(Loss) (92,600) 360,500 (14,700) -- 253,200
Identifiable Assets 14,965,300 4,840,900 73,500 4,963,000 24,842,700
Depreciation &
amortization 521,300 208,900 5,400 73,900 809,500
Capital Expenditures 435,800 187,000 4,200 14,500 641,500
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 nine months ended September 30, 2002, compared to the nine
months ended September 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.
- 11 -
Critical Accounting Policies
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
assets held for sale, fixed asset lives, contingencies and litigation. The
Company has also chosen certain accounting policies when options were available,
including:
o The first-in, first-out (FIFO) method to value 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
The Company, founded in 1983, was one of the first modern craft brewers in
the United States. The Company's brewpub was the first in California and the
second in the United States following the repeal of prohibition. The acquisition
of UBI has allowed the Company to expand its range; it currently markets its
products in Europe and Canada, as well as the United States. The Company
competes in the specialty or craft beer segment domestically, and markets its
products mainly through Indian restaurants in Europe.
Management is pleased to report that the Company has reported a profit
for the second consecutive fiscal quarter. Although sales in the craft beer
industry have suffered an overall setback, mainly caused by the general economic
recession, the fall in tourism, and the lasting ramifications of the recent
terrorist attacks, the Company has acted in response to the setback by
instituting various measures to improve its profitability during the year. The
Company curtailed promotional expenses, and reduced other operating expenses by
reducing manpower and limiting hours of operation of the brewpub. All of these
cost-cutting measures have led to the Company's continued profitability
throughout the second and third quarters of 2002.
- 12 -
Since May of 2002, the Company's common stock has been quoted on the
Nasdaq OTC Bulletin Board, under the symbol "MENB". The Company's stock has
previously been listed on the Pacific Exchange. However, because the stock has
not has not achieved or maintained a minimum bid price of $1.00 per share, as
required by the rules of the Pacific Exchange, its trading has been suspended on
the Pacific Exchange. Management has determined that due to the low volume of
trading in the Company's stock on the Pacific Exchange, the Company's stock is
better suited to the OTC Bulletin Board, and the Board of Directors will not
contest or appeal the suspension of trading on the Pacific Exchange. It is
anticipated that the Company's stock will eventually be delisted from the
Pacific Exchange. Please see Item 5 under Part II of this report for more
details.
During the third quarter of the year 2002, the Company made a few of its
products available in new packaging sizes. On the East Coast, Red Tail Ale is
now available in twelve packs and Olde Saratoga Premium Lager beer is
available in six packs. On the West Coast, the Company introduced a new
packaging design for twelve packs of Red Tail Ale.
The Company's brewing operation's sales in the United States during the
first nine months of the year 2002 increased to 45,452 barrels, an increase of
488 barrels, or 1.1%, from the 44,964 barrels sold in the first nine months of
the year 2001. Compared to the first nine months of the year 2001, sales of
Company's own brands during the first nine months of the year 2002 decreased to
34,804 barrels, a decrease of 2,449 barrels, sales of Kingfisher increased to
5,538 barrels, an increase of 4,206 barrels and sales of contract brands
decreased to 5,110 barrels, a decrease of 1,269 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 nine months of the year 2002, UBSN, the Company's
subsidiary in the United Kingdom, sold 40,241 barrels, compared to 38,682
barrels during the corresponding period in the year 2001. Sales volume in the
United Kingdom in the first nine months of 2002 increased to 36,020 barrels, an
increase of 2,792 barrels compared to the first nine months of 2001. Sales
volume in Europe and Canada in the first nine months of 2002 increased to 4,221
barrels, an increase of 827 barrels compared to the first nine 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 2,060 barrels.
The Company ended the first nine months of 2002 with a net income of
$93,400, compared to a net loss of $1,354,300 for the same period in 2001. As
set forth more fully under "Results of Operations," below, increases in net
sales, cost of goods and sales and marketing expenses and decreases in retail
operating expenses, and general and administrative expenses contributed to the
net profit.
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.
- 13 -
------------------------------
Nine Months Ended September 30
------------------------------
2002 2001
Statements of Operations Data: % %
------ ------
Net Sales 100.00 100.00
Costs of Sales 65.96 67.19
------ ------
Gross Profit 34.04 32.81
------ ------
Retail Operating Expenses 1.44 2.09
Marketing Expense 17.21 17.69
General and Administrative Expenses 11.12 11.57
------ ------
Total Operating Expenses 29.77 31.35
------ ------
Profit from Operations 4.27 1.46
Other (Income) / Expense 0.40 0.09
Interest Expense (3.40) (3.99)
Acquisition Expense -- (4.66)
Profit / (Loss) before income taxes 1.27 (7.10)
Provision for / (Benefit) from income taxes 0.77 0.70
------
Net Loss 0.50 (7.80)
Other Comprehensive Income / (Loss) 0.00 --
====== ======
Comprehensive Loss 0.50 (7.80)
------------------------------
Nine Months Ended September 30
------------------------------
2002 2001
Balance Sheet Data: % %
------ ------
Cash and Cash Equivalents 64,700 123,200
Working Capital (4,079,000) (3,257,500)
Property and Equipment 14,206,600 14,693,600
Deposits and Other Assets 2,198,100 2,971,100
Total Assets 23,317,100 24,842,700
Long-term Debt 3,463,800 2,360,000
Obligation Under Capital Lease 734,300 973,000
Total Liabilities 15,189,500 15,485,700
Accumulated Deficit (6,671,300) (5,826,400)
Stockholder's equity 8,127,600 9,357,000
- 14 -
Net Sales
Overall net sales for the first nine months of 2002 were $18,578,400, an
increase of $1,221,400, or 7.04%, compared to $17,357,000 for the first nine
months of 2001. Of the increase, $182,400 is due to increase in sales in United
States and $1,039,000 is due to increase in sales in the United Kingdom and
Europe during the first nine months of 2002.
Domestic Operations. Domestic net sales for the first nine months of 2002
were $8,609,900, compared to $8,415,700 for the same period in 2001, a 2.31%
increase. The sales volume increased to 45,452 barrels in the first nine months
of 2002 from 44,964 barrels in the first nine months of 2001, representing an
increase of 488 barrels, or 1.09%. The details of the increase are as follows:
sale of the Company's brands decreased by 2,449 barrels, sales of Kingfisher
increased by 4,206 barrels, and sales of contract brands decreased by 1,269
barrels. The increase in overall net sales during the first nine months of 2002
was mainly due to increase in wholesale shipments (an increase of $285,100 over
the wholesale shipments during the first nine months of 2001). In view of
management's focus on wholesale beer sales and decline in retail business,
retail sales for the first nine months of 2002 showed a decrease of $90,900 over
the same period in 2001.
European Operations: Net sales for the first nine months of 2002 were
$9,968,500 ((pound)6,708,700) compared to $8,941,300 ((pound)6,183,200) during
the corresponding period of 2001, an increase of 11.49%. Because of exchange
rate fluctuations, when the net sales results are compared in Pounds Sterling,
the increase is only 8.5%. During the first nine months of 2002, UBSN sold
40,241 barrels, compared to 38,682 barrels during the first nine months of 2001.
Sales volume in the United Kingdom Europe and Canada in the first nine months of
2002 increased by 3,619 barrels compared to the first nine months of 2001.
Because Kingfisher is now distributed in the United States out of MBC, instead
of UBSN, sales volume dropped by 2,060 barrels.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales during the first nine
months of 2002 was 65.96%, as compared to 67.19% during the corresponding period
of 2001. Higher labor cost, increases in the cost of materials and higher
insurance costs were offset by higher productivity due to commissioning of a
refurbished bottling line at the Ukiah facility at the beginning of this year
contributed to the decrease. 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 nine months of 2002 was 66.72%, as compared
to 66.45% during the corresponding period of 2001, representing an increase of
0.27%.
European Operations: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first nine months of 2002 was 65.92%, as compared
to 67.89% 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 1.97%.
- 15 -
Gross Profit
As a result of the higher net sales described above, gross profit for the
first nine months 2002 increased to $6,323,600, from $5,694,400 during the
corresponding period of 2001, representing an increase of 11.05%. As a
percentage of net sales, because of the increase in net sales, the gross profit
during the first nine months of 2002 increased to 34.04% from that of 32.81% for
the first nine months of 2001.
Operating Expenses
Operating expenses for the first nine months of 2002 were $5,530,200, as
compared to $5,441,200 for the first nine months of 2001, representing an
increase of 1.64%. Operating expenses consist of retail operating expenses,
marketing and distribution expenses, and general and administrative expenses.
Retail Operating Expenses:
Retail operating expenses for the first nine months of 2002 were $268,100,
representing a decrease of $94,100, or 25.98%, from the same period in 2001. As
a percentage of net sales, retail operating expenses decreased to 1.44% as
compared to 2.09% for the first nine 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 nine months of 2002 were
$3,196,900, representing an increase of $126,500, or 4.12%, from the first nine
months of 2001. As a percentage of net sales, marketing and distribution
expenses represented 17.21% as compared to 17.69% during the first nine months
of 2001.
Domestic Operations: Expenses for the first nine months of 2002 were
$1,103,800 compared to $1,353,900 during the corresponding period of 2001,
representing a decrease of $250,100. As a percentage of net sales in the United
States, the expenses decreased to 12.82% during the first nine months of 2002,
compared to 16.09% during the corresponding period of 2001 mainly because of
reduced manpower and promotional expenses.
European operations: Expenses for the first nine months of 2002 were
$2,093,100 compared to $1,716,500 during the corresponding period of 2001,
representing an increase of $376,600. As a percentage of net sales in the United
Kingdom, the expenses increased to 21% during the first nine months of 2002
compared to 19.2% 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 due to increased labor,
freight and 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.
- 16 -
General and Administrative Expenses:
General and administrative expenses were $2,065,200, representing an
increase of $56,600 from the first nine months of 2001. As a percentage of net
sales, the general and administrative expenses were 11.12% for the first nine
months of 2002, as compared to 11.57% for corresponding period of 2001.
Domestic Operations: General and administrative expenses were $1,251,500,
representing an increase of $37,200 over the first nine months of 2001. The
increase was mainly due to increased legal expenses, audit fee, insurance and
rent.
European Operations: General and administrative expenses were $813,700,
representing an increase of $19,400 from the first nine months of 2001 mainly
due to increase in depreciation and miscellaneous expenses.
Other Expenses
Other expenses for the first nine months of 2002 totaled $556,800,
representing a decrease of $927,200 when compared to the first nine months of
2001. The other expenses consist of interest expenses, acquisition expenses and
miscellaneous income. Interest expenses decreased by $60,200 because of
reductions in the line of credit, long term debts, and interest rates.
Miscellaneous income increased by $58,800 and acquisition expenses relating
acquisition of UBI decreased by $808,200.
Income Taxes
The Company has a provision for income taxes of $143,200 for the first
nine months of 2002, compared to $123,500 for the first nine 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 in order to utilize the
deferred tax assets prior to their expiration. The introduction of new products,
optimization of expenses and improvement in efficiency has brought the Company
to profitable operations. In the past, management has been successful in
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 Income
The Company's net income for the first nine months of 2002 was $93,400, as
compared to a loss of $1,354,300 for the first nine months of 2001. After
providing for a positive foreign currency translation adjustment of $500 during
the first nine months of 2002 ($0 for 2001), the comprehensive income for 2002
was $93,900, compared to a loss of $1,354,300 in 2001.
- 17 -
Capital Demands
Both the Ukiah and Saratoga Springs 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 Company has yet to complete the build-out of the administrative space
and the exterior landscaping at its Ukiah facility. Completion of 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. Until such time, it is possible that failure to complete construction and
obtain a final certificate of occupancy could have a material adverse effect on
the Company's business, financial condition, and results of operations, because
of, among other reasons, increased administrative burdens and costs.
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 will 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 brew, on
a contract basis, their line of organic beers. The Company produced 2,615
barrels of Wolaver's brand beer during the first nine months of the year 2002,
compared to 2,832 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, and the Company agreed to terminate the
brewing contract effective as of December 31, 2002. Termination of this contract
will increase the Company's unused brewing capacity. The Company will continue
to look for opportunities to utilize its brewing facilities at a greater
capacity.
- 18 -
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, currently 7.24%, maturing in
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 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 September
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 $298,200.
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. All of the UBA
Notes originally matured in 2001 and 2002. The Company and UBA executed an
Extension of Term of Notes under Master Line of Credit Agreement on February 14,
2002, which was later amended on August 15, 2002 (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 March 31, 2003. 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 have engaged in negotiations with
regard to the Company's offer to convert the notes to shares of common stock. 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
- 19 -
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. 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. The line of credit is secured by all accounts, general
intangibles, inventory, and equipment of the Company except for the specific
equipment and fixtures of the Company leased from FINOVA Capital Corporation, as
well as by a second deed of trust on the Company's Ukiah land improvements.
$1,484,000 of the line of credit was advanced to the Company as an initial term
loan, which is repayable in sixty consecutive monthly installments of principal,
each in the amount of $24,700. The Company commenced repayment of the term loan
in March of 1999, and approximately $445,200 of the term loan was outstanding as
of September 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. The Company has repaid
$85,000 and the balance of the $170,000 increase will be repaid once the balance
of purchase of the bottling equipment is refinanced through an existing line of
credit. During June of 2002, CIT Group further increased the line of credit by
$65,000, which was repaid 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 September 30,
2002, the total amount outstanding on the line of credit was approximately
$2,064,300.
The Company and CIT Group are currently discussing renewal and possible
expansion of the credit facility. The facility originally matured on September
23, 2002, but CIT Group has informally agreed to continue to extend the facility
for consecutive one-month terms until the Company and CIT Group conclude
negotiations. The current extension terminates on November 24, 2002. Management
expects to have a final agreement on the terms of renewal by the end of 2002.
However, if the Company and CIT Group cannot reach agreement, it is possible
that CIT Group could refuse to further extend the current facility. Such a
refusal would have an immediate material adverse effect on the Company's ability
to continue as a going concern.
Necor Bank Limited Option Facility. Necor Bank Limited, a South African
registered company, has provided UBSN with an overdraft facility of GBP
1,250,000. This overdraft facility is secured by a charge over all of the assets
of UBSN. The amount outstanding on this line of credit as of September 30, 2002,
was approximately $703,900.
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 GBP 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
- 20 -
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 8.43% for the first nine months of the year 2002 and 9.73%
for the first nine 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 has been extended on a monthly basis
since September 2002, and management is currently negotiating a new agreement.
If the agreement 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 or lease financing, if available. However, there can
be no assurances that the Company will be able to negotiate a new agreement or
finance the purchase of kegs. Failure to negotiate a new 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 September
30, 2002 was 0.63 to 1.0 and its ratio of total assets to total liabilities was
1.54 to 1.0. On September 30, 2001, the Company's ratio of current assets to
current liabilities was 0.59 to 1.0 and its ratio of total assets to total
liabilities was 1.60 to 1.0.
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 quarterly 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 control 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.
- 21 -
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.
Suspension and Delisting Action by the Pacific Exchange
On September 19, 2002, the Company received notice from PCX Equities,
Inc., a subsidiary of the Pacific Exchange, that trading in the Company's common
stock on the Pacific Exchange had been suspended, effective immediately. The
suspension will remain until the Company's stock is formally delisted, which
requires review and approval by the Securities and Exchange Commission. The
underlying reason for the suspension, and the ultimate delisting, is the fact
that during the last twelve months the Company's Common Stock has not achieved
or maintained a minimum bid price of $1.00 per share, as required by the rules
of the Pacific Exchange. As of September 18, 2002, the closing bid price of the
Company's common stock on the Pacific Exchange was $0.59 per share. The Board of
Directors of the Company, which had previously approved delisting the Company's
Common Stock from the Pacific Exchange, does not intend to contest or appeal the
suspension, or the delisting procedure.
Since May 6, 2002, the Company's Common Stock has been quoted on the
Nasdaq OTC Bulletin Board, under the symbol "MENB".
Announcement of Interest by United Breweries Holdings Ltd.
On September 30, 2002, the shareholders of United Breweries Holdings, Ltd.
(formerly Kingfisher Properties & Holdings, Ltd.) ("UBHL"), a corporation based
and incorporated in India and publicly-held in that country, approved
resolutions authorizing UBHL's board of directors to consider a transaction by
which UBHL would purchase some or all of the Company's outstanding shares.
To date, UBHL has not proposed any specific transaction, to the Company,
nor has it indicated
- 22 -
when (if ever) it may make a specific proposal or commence negotiations with the
Company for an actual acquisition of any shares, although representatives of
UBHL have indicated that its board will be considering these issues in the near
future.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit Number Description of Document
-------------- -----------------------
10.1 First Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement by and between
Mendocino Brewing Company, Inc. and United Breweries
of America, Inc.
(b) Current Reports on Form 8-K
During the third quarter of 2002 the Registrant filed a Current Report on
Form 8-K dated September 19, 2002, the Registrant reported under Item 5, its
receipt of notice of suspension in the trading of Company's common stock from
the Pacific Exchange and the announcement of interest by United Breweries
Holdings Ltd. ("UBHL"), a corporation based and incorporated in India and
publicly-held in that country, authorizing UBHL's Board of Directors to consider
a transaction by which UBHL would purchase some or all of the Company's
outstanding shares.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
MENDOCINO BREWING COMPANY, INC.
Dated: November 13, 2002 By:/s/ Dr. Vijay Mallya
---------------------------------
Dr. Vijay Mallya
Chairman of the Board and
Chief Executive Officer
Dated: November 13, 2002 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/ Dr. Vijay Mallya
---------------------------------
Dr. Vijay Mallya, Chairman of the Board and
Chief Executive Officer
Date: November 13, 2002
- 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
- 26 -
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/ N. Mahadevan
------------------------------
N. Mahadevan, Chief Financial Officer
Date: November 13, 2002
- 27 -
EXHIBIT INDEX
Exhibit Page
- ------- ----
10.1 First Amendment to Extension of Term of Notes under Master 29
Line of Credit Agreement by and between Mendocino Brewing
Company, Inc. and United Breweries of America.
28
EXHIBIT 10.1
FIRST AMENDMENT TO
EXTENSION OF TERM OF NOTES UNDER MASTER LINE OF CREDIT AGREEMENT
This First Amendment to Extension of Term of Notes under Master Line of Credit
Agreement (this "Amendment") is made and entered into as of November 13, 2002,
effective as of August 15, 2002 (the "Effective Date") by and between Mendocino
Brewing Company, Inc., a California corporation ("Borrower"), and United
Breweries of America, Inc., a Delaware corporation ("Lender").
RECITALS
A. Borrower and Lender entered into an Extension of Term of Notes Under
Master Line of Credit Agreement dated February 14, 2002 (the "Original
Agreement"), which provides that the terms of certain of the Notes made by
Borrower in favor of Lender shall be extended until August 15, 2002.
B. Lender agreed not to take any action against Borrower with respect to
the Notes during the period beginning on the Effective Date and ending on the
date hereof, for so long as the parties were negotiating the terms of the
Amendment.
C. Subject to the terms and conditions of this Amendment, the parties wish
to further extend the terms of certain of the Notes.
D. Any capitalized terms not otherwise defined herein shall have the
meanings set forth in the Original Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which is acknowledged, Borrower and Lender agree as follows:
1. Extension of Term. Section 1 of the Original Agreement is amended to
read as follows:
The Notes provide that Lender has the right, at any time on or
after the respective maturity dates of the Notes, to convert the
Notes into shares of Borrower's common stock. However, Section 3 of
the Notes provides that in the event that Lender has not converted
the entire principal amount of any Note on or before its respective
maturity date, Lender has the right to extend the term of such Note
for a period of time mutually agreed upon between Lender and
Borrower. Borrower and Lender had previously agreed to extend the
term of each of the Notes itemized Nos. 1 through 8 on Exhibit A,
effective as of the maturity date of each respective Note, for an
indefinite period of time pending the Borrower's and Lender's
discussions regarding conversion of the Notes; this Agreement
hereby confirms that agreement. The parties hereby modify their
previous agreement and agree to extend the term of each of the
Notes itemized Nos. 1 through 13 on Exhibit A, effective as of the
maturity date of each respective Note, for a period of time ending
on March 31, 2003.
2. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of California, without regard to the
conflicts of laws principles of that or any other jurisdiction.
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3. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, and all taken together
shall constitute one and the same instrument.
4. Miscellaneous. This Amendment, in connection with the Original
Agreement, contains all of the agreements, conditions, promises and covenants
between the parties with respect to the subject matter hereof and supersedes all
prior or contemporaneous agreements, representations or understandings with
respect to the subject matter hereof. In the event of any conflict between the
terms of the Original Agreement and this Amendment, the terms of this Amendment
shall govern. Except as set forth in this Amendment, the terms of the Original
Agreement shall remain in full force and effect. This Amendment may not be
amended, modified, altered or otherwise changed in any respect except by written
agreement signed by authorized representatives on behalf of Borrower and Lender.
If any one or more of the provisions contained in this Amendment shall be
invalid, illegal or unenforceable in any respect, the validity, legality or
enforce ability of the remaining provisions contained herein shall not in any
way be affected or impaired.
IN WITNESS WHEREOF, duly executed representatives of each of the parties hereto
have executed and delivered this Amendment as of the Effective Date.
Borrower: Lender:
MENDOCINO BREWING COMPANY, INC. UNITED BREWERIES OF AMERICA, INC.
a California corporation a Delaware corporation
By: /s/ N. Mahadevan By: /s/ Anil Pisharody
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Name: N. Mahadevan Name: Anil Pisharody
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Title: Secretary Title: Secretary
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