-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BsoUDN5VYdOnTt8c41LQdpi5zhU5aG5ipmOx3Wi76s4iXy/aT3uV0i4CPMHH6fMf DntHFoirvN1tiMCVmhnmdw== 0000891554-01-504204.txt : 20010815 0000891554-01-504204.hdr.sgml : 20010815 ACCESSION NUMBER: 0000891554-01-504204 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 1712982 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 10QSB 1 d26553_form10qsb.txt FORM 10QSB 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, 2001 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the transition period from to --------------- -------------- Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of incorporation (IRS Employer 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 June 30, 2001 is 5,580,498. PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET June 30, 2001 (Unaudited)
ASSETS CURRENT ASSETS Accounts receivable $1,660,200 Inventories 1,206,700 Prepaid expenses 283,800 Deferred income taxes 48,100 ------------ Total Current Assets: 3,198,800 ------------ PROPERTY AND EQUIPMENT 13,735,400 ------------ OTHER ASSETS Deferred Income Taxes 2,844,000 Deposits and other Assets 731,600 Intangibles net of amortization 103,900 Total Other Assets: 3,679,500 ------------ Total Assets: $20,613,700 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Disbursements in excess of deposits $119,400 Accounts payable 2,819,900 Accrued liabilities 85,600 Accrued wages and related expense 176,800 Income Taxes Payable 3,800 Current maturities of obligation under capital lease 335,200 Current maturities of obligation under long-term debt 430,700 ------------ Total Current Liabilities: 3,971,400 LINE OF CREDIT 1,608,100 LONG TERM DEBT, less current maturities 3,083,000 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 1,050,500 NOTES TO RELATED PARTY 1,686,300 Total Liabilities: 11,399,300 ------------ STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding $ 227,600 Common stock, no par value: 20,000,000 shares authorized, 5,580,498 shares issued and outstanding 13,875,900 Accumulated deficit (4,889,100) ------------ Total Stockholders' Equity 9,214,400 ------------ Total Liabilities and Stockholders' Equity: $20,613,700 ============
The accompanying notes are an integral part of these financial statements. 1 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------------ ------------------------------- THREE MONTHS ENDED SIX MONTHS ENDED June 30 June 30 ------------------------------ ------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- SALES $3,149,700 $2,660,400 $5,692,900 $4,730,600 LESS EXCISE TAXES 178,900 150,900 327,100 272,500 ----------- ----------- ----------- ----------- NET SALES 2,970,800 2,509,500 5,365,800 4,458,100 COST OF GOODS SOLD 1,940,500 1,446,800 3,531,100 2,865,700 ----------- ----------- ----------- ----------- GROSS PROFIT 1,030,300 1,062,700 1,834,700 1,592,400 ----------- ----------- ----------- ----------- OPERATING EXPENSES Retail operating 125,200 94,500 234,600 192,400 Marketing 547,500 397,300 988,800 719,700 General and administrative 339,000 337,900 809,900 682,100 ----------- ----------- ----------- ----------- 1,011,700 829,700 2,033,300 1,594,200 ----------- ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS 18,600 233,000 (198,600) (1,800) ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Other income (expense) 10,400 29,200 9,700 43,000 Interest expense (223,000) (226,600) (443,900) (458,400) ----------- ----------- ----------- ----------- (212,600) (197,400) (434,200) (415,400) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (194,000) 35,600 (632,800) (417,200) PROVISION FOR (BENEFIT FROM) INCOME TAXES -- 2,200 (76,000) 2,200 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $(194,000) $33,400 $(556,800) $(419,400) =========== =========== =========== =========== BASIC EARNINGS (LOSS) PER SHARE $(0.03) $0.01 $(0.10) $(0.08) =========== =========== =========== =========== DILUTED EARNINGS (LOSS) PER SHARE $(0.03) $0.01 $(0.10) $(0.08) =========== =========== =========== ===========
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 ------------------------------ ------------------------------- 2001 2000 2001 2000 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $(194,000) $33,400 $(556,800) $(419,400) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 199,800 196,900 399,600 393,300 Deferred income taxes -- -- (76,000) -- Changes in: Accounts receivable (413,100) (17,200) (487,200) (200,200) Inventories 46,000 13,500 (3,400) 175,800 Prepaid expenses (212,100) (118,500) (167,200) (111,600) Deposits and other assets (152,600) (14,500) (378,500) 30,900 Accounts payable 467,700 129,100 877,700 201,400 Accrued wages and related expenses 8,500 (1,000) 12,200 (27,800) Accrued liabilities 34,800 115,600 (105,100) 189,000 --------- --------- --------- --------- Net cash from operating activities: (215,000) 337,300 (484,700) 231,400 --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (113,500) (13,100) (130,200) (18,900) improvements Increase in intangibles -- (129,300) -- (192,000) --------- --------- --------- --------- Net cash from investing activities: (113,500) (142,400) (130,200) (210,900) --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from line of credit 319,500 9,500 326,500 108,200 Principal payments on long-term debt (93,300) (87,300) (175,200) (174,100) Borrowings on long-term debt -- -- -- 310,000 Payments on obligation under capital lease 25,100 (62,100) (44,800) (148,100) Disbursements in excess of deposits 42,900 -- 117,700 (9,600) Proceeds from notes payable to related parties 34,300 -- 390,700 -- --------- --------- --------- --------- Net cash from financing activities: 328,500 (139,900) 614,900 86,400 --------- --------- --------- --------- INCREASE / (DECREASE) IN CASH -- 55,000 -- 106,900 --------- --------- --------- --------- CASH, beginning of period 51,900 -- -- --------- --------- --------- CASH, end of period $ -- $106,900 $ -- $106,900 ========= ========= ========= ========= Supplemental cash flow information includes the following: Cash paid during the period for: Interest $189,800 $193,200 $377,100 $385,100 --------- --------- --------- ---------
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 The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2000. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001. Note 2 - Line of Credit The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the Company's qualified accounts receivable and 60% of the company's inventory at an interest rate equal to the prime rate as published by Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $816,200 of the term loan was outstanding as of June 30, 2001. On November 20, 2000, the CIT Group agreed to increase the maximum limit of the line of credit by $100,000, subject to the condition that the increased limit has to be paid back in monthly installments of approximately $11,100 during the period from April 1, 2001 through December 1, 2001. In April 2001, CIT Group agreed to defer commencement of the monthly repayment installments of approximately $11,100 until September 2001. 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, 2001, the total amount outstanding on the line of credit was approximately $2,513,200. Note 3 - Long Term Debt and Notes to Related Parties The Company has a note outstanding in the principal amount of $2,700,000, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 10.00%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment and is secured by real property located in Ukiah, California. The Company has issued convertible notes in favor of United Breweries of America, Inc. ("UBA") in the amount of approximately $1,509,100 as of June 30, 2001. The Company issued 4 another of such notes on July 1, 2001, bringing the total principal outstanding to approximately $1,515,400. 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, 2001, is approximately $171,000. Note 4 - Income Taxes The benefit from income taxes is due to the expected future benefit of carrying forward net operating losses and other timing differences. The Company's income tax benefit for the quarter is less than the Company's expected tax rate of 40%. The Company anticipates that the operating loss up to June 30 will decrease by income earned in subsequent quarters. The Company has recorded the benefit for income taxes based on the estimated year-end effective tax rate. No valuation allowance has been recorded on the Company's financial statements for the period ended June 30, 2001, as the Company's management believes that during the remainder of the current fiscal year, the Company will utilize the full amount of the net operating losses scheduled to expire in 2001. As of June 30, 2001, the Company has available for carry-forward Federal, California and New York net operating losses. The losses will expire as follows: Net Operating Loss ------------------------------------------------- Date of Expiration Federal California New York ------------------ ------- ---------- -------- 2001 $ -- $87,500 $ -- 2002 -- 761,200 -- 2003 -- 961,200 -- 2004 -- 694,700 -- 2010 -- 276,400 -- 2012 1,802,300 -- 251,500 2018 2,758,800 -- 385,000 2019 2,153,100 -- 290,300 2020 991,500 -- 137,900 ---------- ---------- ---------- $7,705,700 $2,781,000 $1,064,700 ========== ========== ========== The Company also has $35,000 of California Manufactures Investment Tax Credits that can be carried forward to offset future taxes until they begin to expire in 2007. The benefit from these loss carry-forwards and credits has been reported as a deferred tax asset. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns, 5 including the future benefit of its carry-forwards. Temporary differences and carry-forwards which give rise to deferred tax assets and liabilities on June 30, 2001 are as follows: Accounts receivables allowance $6,400 Benefits from net operating loss carry forwards 3,037,500 Inventory 6,000 Accruals 38,700 Depreciation and amortization (111,200) Other (85,300) Note 5 -- Related party Transactions On November 3, 2000, the company entered into a Share Purchase Agreement with Inversiones Mirabel, S.A. and Golden Eagle Trust, both of which are entities related to the Company's Chairman of the Board and Chief Executive Officer, Dr. Vijay Mallya, and its principal shareholder, UBA. Under the terms of the Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of UBI which is the parent company of UBSN Ltd. The Company's shareholders approved the transaction in the annual meeting held on June 28, 2001, and the closing of the transaction occurred on August 13, 2001. In the transaction, the Company issued approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI. UBI owns the distribution rights to the "Kingfisher" brand of beer in the United States. Because UBI is now a wholly-owned subsidiary of the Company, the Company now has the ability to brew "Kingfisher" brand beer in the United States, for distribution primarily in the United States. The closing of the acquisition of UBI was originally scheduled to occur in the year 2000. However, the financial statements first provided to the Company by UBI and UBSN Ltd. were prepared in accordance with accounting standards as generally applied in the United Kingdom. It took longer than expected to conduct all of the required audits of UBI and UBSN Ltd. so that their financial statements are (i) consistent with United States accounting standards, and (ii) as required by the U.S. Securities and Exchange Commission. The transaction described above is a related party transaction because the corporation that owned all of the shares of UBI is held by Golden Eagle Trust, which is controlled by fiduciaries who may exercise discretion in favor of Dr. Vijay Mallya, who is the Chairman and Chief Executive Officer of the Company. Dr. Mallya is also a member of the board of directors of UBSN Ltd. Golden Eagle Trust also owns a controlling interest in the Company's largest shareholder, UBA. Additional information about this transaction is contained in the Company's 2001 Proxy Statement, which was filed with the Commission on May 11, 2001, and such information is incorporated herein by reference. 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 ------------------ ---------------- 6/30/2001 6/30/2000 6/30/2001 6/30/2000 ------------------------------------------------------------- Basic net income (loss) per share Net income (loss) $(194,000) $33,400 $(556,800) $(419,400) ============================================================= Weighted average common shares outstanding 5,580,498 5,530,117 5,580,498 5,530,117 ============================================================= Basic net income (loss) per share $(0.03) $0.01 $(0.10) $(0.08) ============================================================= Diluted net income (loss) per share Net income (loss) $(194,000) $33,400 $(556,800) $(419,400) Interest expense on convertible notes payable 26,600 ------------------------------------------------------------- Income for the purpose of computing diluted net income per share $(194,000) $60,000 $(556,800) $(419,400) ============================================================= Weighted average common shares outstanding 5,580,498 5,530,117 5,580,498 5,530,117 Dilutive stock options 88,888 -- Assumed conversion of convertible notes payable 596,661 ------------------------------------------------------------- Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 5,580,498 6,215,666 5,580,498 5,530,117 ============================================================= Diluted net income (loss) per share $(0.03) $0.01 $(0.10) $(0.08) =============================================================
7 Note 7 - Inventory Raw Materials $555,200 Beer-in-process 202,200 Finished Goods 416,300 Merchandise 33,000 ---------- $1,206,700 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto included as Item 1 of this Report. The discussion of results and trends does not necessarily imply that these results or trends will continue. Forward-Looking Information The Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-QSB contain forward-looking information. The forward-looking information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of such words and similar expressions are intended to identify such forward-looking information. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, changes in the pricing environment for the Company's products, changes in demand for domestic craft beer, changes in customer preference for the Company's products, impact of competition, changes in distributor relationships or performance, changes in raw materials prices, changes in interest rates, and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. Now that the Company's acquisition of UBI has been consummated, the following additional factors should be considered: changes in foreign currency exchange rates, changes in UBI's international beer business, and the domestic market's acceptance of the Company's new mix of products. In addition, the Company's statements could be affected by general industry and market conditions and growth rates, regulatory and legislative changes, and general foreign and domestic economic conditions. Readers are cautioned not to place undue reliance on these forward-looking statements, which are valid as of the date of this filing. 8 Overview During the second quarter, the Company launched Black Eye Ale, a blend of two of the Company's popular brands, Black Hawk Stout and Eye of the Hawk Select Ale, in 25 oz. Bottles. The Company also introduced a new packaging for an existing product, Blue Heron Pale Ale, which is now available in twelve-packs. Now that the acquisition of UBI has been consummated, the Company intends to produce Kingfisher products in its Saratoga Springs facility. To facilitate production of Kingfisher Premium Lager Beer, the Company made necessary modifications to the layout of the facility in order to install a pasteurizer, and upgraded the equipment and laboratory. Sales during the first six months of 2001 increased to 28,376 barrels from 23,398 barrels in the first six months of 2000. This represents an increase of 21% over the first six months of 2000 (measured in barrels). Of the total sales of 28,376 barrels, the sales out of the Ukiah facility amounted to 24,203 barrels and the sales out of the Saratoga Springs facility amounted to 4,173 barrels. The Company ended the first six months of 2001 with a net loss of $556,800. Higher selling and marketing expenses, general and administrative expenses and cost of goods contributed to the net loss. On February 12, 2001, UBA and the Company amended the line of credit agreement between them to increase the maximum amount of principal under the line of credit available to the Company from $1,200,000 to $1,600,000. Outstanding interest may cause the aggregate amount outstanding under the line of credit to exceed $1,600,000. As of July 1, 2001, the aggregate amount outstanding under the line of credit from UBA is approximately $1,686,300, including principal of approximately $1,515,400 and accrued interest of approximately $171,000. Results of Operations The following discussion sets forth information for the six-month periods ending June 30, 2001 and 2000. This information has been derived from unaudited interim financial statements of the Company contained elsewhere herein and reflects, in management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Results of operations for any interim period are not necessarily indicative of results to be expected for the full fiscal year. The following table sets forth, as a percentage of sales, certain items included in the Company's Statements of Operations, as set forth above under "Financial Statements," for the periods indicated: 9 -------------------------------------- Six Months Ended June 30 -------------------------------------- 2001 2000 Statements of Operations Data: Sales 106.10% 106.11% Excise taxes 6.10 6.11 -------------- -------------- Net Sales 100.00 100.00 Cost of Goods Sold 65.81 64.28 -------------- -------------- Gross Profit 34.19 35.72 Retail Operating Expense 4.37 4.32 Marketing Expense 18.43 16.14 General and Administrative Expenses 15.09 15.30 -------------- -------------- Total Operating Expenses 37.89 35.76 -------------- -------------- Loss from Operations (3.70) (0.04) Other Income 0.18 0.96 Interest expense (8.27) (10.28) -------------- Loss before income taxes (11.79) (9.36) Benefit from income taxes 1.41 (0.05) -------------- Net Loss (10.38) (9.41) Balance Sheet Data: Cash $ -- $106,900 Working Capital (772,600) (2,047,600) Property and Equipment 13,735,400 14,355,500 Deposits and Other Assets 3,679,500 2,751,900 Total Assets 20,613,700 19,659,600 Long-term Debt 3,083,000 3,985,200 Obligation under capital lease 1,050,500 1,236,600 Total Liabilities 11,399,300 9,821,600 Shareholder's equity 9,214,400 9,838,000 Net Sales. Net sales for the first six months of 2001 were $5,365,800 compared to $4,458,100 for the first six months of 2000, representing an increase of 16.92%. The sales volume increased to 28,376 barrels in the first six months of 2001 from 23,398 barrels in the first six months of 2000, representing an increase of 21.27%. Management attributes the increased sales of the Company's own brands to improved marketing strategies, including new point of sale materials and increased sales personnel. The Company has also achieved an increase in contract brewing operations since the corresponding period of 2000, and has begun brewing the products of Panorama Brewing Company. The increase in overall net sales during the first six months of 10 2001 was achieved mainly by higher wholesale shipments which represented an increase of $938,800 over the wholesale shipments during the first six months of 2000. The Company also benefited from a general increase in the price of its products, which was effected in the first quarter of 2001. In view of management's focus on wholesale beer sales, retail sales for the first six months of 2001 showed only a minimal increase of $23,500 over the first six months of 2000. Cost of Goods Sold. Cost of goods sold as a percentage of net sales during the first six months of 2001 was 65.81%, as compared to 64.28% during the first six months of 2000, representing an increase of 1.53%. During the first six months of 2001, the Company shipped approximately 4,400 more barrels (approximately 60,800 more cases) of beer packaged in bottles than it did in the corresponding period of 2000. Packaging costs increased because the cost of packaging bottled beer is much higher than the cost of packaging keg beer. The Company also incurred increased costs in connection with the introduction of new packaging and products. Therefore as a percentage of net sales, during the first six months of 2001, labor costs increased from 10.19% in 2000, to 11.29% in 2001. As a percentage of net sales, during the first six months of 2001, depreciation decreased from 7.76% in 2000 to 6.46% in 2001, insurance increased from 1.18% in 2000 to 1.25% in 2001, other manufacturing expenses increased from 4.60% in 2000 to 4.70% in 2001, thereby contributing to the overall increase of 1.53% of the cost of goods sold as a percentage of net sales, as compared to the first six months of 2000. Also, mainly because of energy surcharges, utilities increased from 3.46% in 2000 to 4.19% in 2001. Gross Profit. As a result of the higher net sales described above, gross profit for the first six months of 2001 increased to $1,834,700, from $1,592,400 for the comparable period of 2000, representing an increase of 15%. 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 2001 decreased to 34.19% from that of 35.72% for the corresponding period of 2000. Operating Expenses. Operating expenses for the first six months of 2001 were $2,033,300, as compared to $1,594,200 for the first six months of 2000, representing an increase of 27.54%. Operating expenses consist of retail operating expenses, marketing and distribution expenses, and general and administrative expenses. Retail operating expenses for the first six months of 2001 were $234,600, representing an increase of $42,200, or 21.93%, from the first six months of 2000. As a percentage of net sales, retail operating expenses increased to 4.37% as compared to 4.32% for the first six months of 2000. The increase in retail operating expenses consisted mainly of increases in labor expenses totaling $39,100, and in other expenses of $3,100, which management generally attribute to the aggregate increase in sales and the increased hours of operation of the tasting room in Saratoga Springs. Marketing and distribution expenses for the first six months of 2001 were $988,800, representing an increase of $269,100, or 37.39%, from the first six months of 2001. As a percentage of net sales, marketing and distribution expenses represented 18.43% as compared to 16.14% during the first six months of 2000. Compared to the first six months of 2000, marketing and sales labor increased by $102,200 because of the growth in the Company's sales force. The Company 11 committed to an aggressive product promotion during the first six months of 2001, therefore as compared to the corresponding period of 2001, media and advertising increased by $26,200, sales promotions expenses increased by $83,700, and point of sale expenses increased by $12,900. Other increases are as follows: telephone expenses increased by $2,400; freight increased by $15,700; travel, entertainment and sampling increased by $23,000; and other expenses increased by $3,000. General and administrative expenses were $809,900, representing an increase of $127,800 from the first six months of 2000. As a percentage of net sales, the general and administrative expenses were 15.09% for the first six months of 2001, as compared to 15.30% for the first six months of 2000. Other increases in expenses, generally caused by the Company's overall increase in operations are as follows: salaries increased by $30,900; accounting and audit fee increased by $30,500; travel and entertainment increased by $17,500; legal fees increased by $14,800; telephone expenses increased by $7,800; taxes and fees increased by $9,100; loan and lease fees increased by $7,200; bank charges increased by $5,100 and net miscellaneous expenses increased by $4,900. Other Income (Expenses). Other expenses for the first six months of 2001 totaled $434,200, representing an increase of $18,800 when compared to the first six months of 2000. Interest expenses decreased by $14,500 and miscellaneous income decreased by $33,300. The large decrease in miscellaneous income results mainly from the inclusion of two non-recurring items in the previous year's miscellaneous income: $26,400 in fire insurance proceeds and $11,400 in returned builder fees from the City of Ukiah. Loss Before Income Taxes. The loss before income tax for the first six months of 2001 was $632,700 as compared to $417,200 for the corresponding period of 2000. As a percentage of net sales, the net loss before income taxes increased to 11.79% during the first six months of 2001 as compared to 9.36% for the first six months of 2000. Benefit From Income Taxes. The Company has recorded a benefit for income taxes of $76,000 based on its estimated year-end tax rate. As of June 30, 2001, the Company has approximately $7,705,700, $2,781,000, and $1,064,700 of Federal, California and New York net operating losses, respectively, available to carry forward. Of the Federal and New York net operating losses, approximately $2,053,800 will expire in 2012, and the remainder will expire through 2020. The California net operating losses expire beginning in 2001 and will continue to expire through 2005. Although management believes that based on current projections, the Company will utilize all of the net operating losses which are scheduled to expire at the end of the current fiscal year, if the Company's actual future performance does not meet expected levels, it is possible that a portion of those losses may expire. The Company also has $35,000 of California Manufactures Investment Tax Credits that can be carried forward to offset future taxes until they begin to expire in 2007. Management believes that the Company will utilize the deferred tax assets in the ordinary course of business prior to any of the losses or credit reaching their expiration dates based on the following factors: 12 o Changes implemented by the Company have resulted in the annual loss before income taxes being reduced by 25% from 1998 to 1999, from $2,701,100 to $2,035,800; and 58% from 1999 to 2000, from $2,035,800 to $856,600. o For California income tax purposes, significant book to tax temporary differences will result in additional taxable income of $300,000 per year for the next four years. o The Company acquired United Breweries International (UK) Limited ("UBI"), a United Kingdom company, that owns a distributorship of Kingfisher Lager in the United Kingdom, Europe and other markets, and has the exclusive brewing and distribution rights to Kingfisher Lager in the United States. The Company finalized the transaction, on August 13, 2001, and may now begin production and distribution of Kingfisher Lager. UBI had profitable operations in the six months ended June 30, 2001, and the years ended December 31, 2000 and 1999, and also generated positive cash flows for the periods then ended. The Company anticipates that, it will use the excess cash flow from the operations of UBI to reduce the Company's outstanding debt and reduce interest expense. o The Company may undertake a private placement of securities. A portion of the proceeds of the private placement could potentially be used to pay off debt, thereby decreasing interest expense. Net Loss. The net loss for the first six months of 2001 was $556,800, as compared to $419,400 for the first six months of 2000. As a percentage of net sales, the net loss for the first six months of 2001 increased to 10.38%, as compared to 9.41% for the first six months of 2000. Segment Information Mendocino Brewing Company, Inc.'s business presently consists of two segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 95% of the Company's gross sales for the first six months of 2001. The second segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 5% of the Company's total gross sales during the first six months of 2001. With combined expanded wholesale beer production in the brewing operation, especially once the proposed acquisition of UBI is completed, management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. The Company's business segments are brewing operations and a retail establishment known as the Hopland Brewery. A summary of each segment is as follows: 13
Six Months Ended June 30, 2001 -------------------------------------------------------------------- Brewing Retail Corporate Operations Operations And Other Total -------------------------------------------------------------------- Sales $5,426,100 $266,800 $ -- $5,692,900 Operating Profit/(Loss) (162,600) (36,000) -- (198,600) Identifiable Assets 14,866,818 75,282 5,671,600 20,613,700 Depreciation and amortization 346,762 3,618 41,825 392,205 Capital Expenditures 115,749 -- 14,500 130,249
Six Months Ended June 30, 2000 -------------------------------------------------------------------- Brewing Retail Operations Corporate Operations and Other Total -------------------------------------------------------------------- Sales $4,475,400 $255,200 $ -- $4,730,600 Operating Loss 26,900 (28,700) -- (1,800) Identifiable Assets 15,267,100 81,300 4,311,200 19,659,600 Depreciation and amortization 354,800 3,200 35,300 393,300 Capital Expenditures 9,000 5,600 4,300 18,900
Seasonality Beer consumption nationwide has historically been approximately 20% higher during the summer months as compared to the other months of the year. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. Capital Demands The Releta facility commenced brewing operations in February 1998. The Company expects both the Ukiah and Releta facilities to operate at significantly less than full capacity during all or part of 2001. Both breweries have placed demands upon the Company's assets and liquidity. Failure to adequately meet those demands may have a material adverse affect on the Company's business, financial condition, and results of operations. The Ukiah brewery is presently operating under a temporary certificate of occupancy from the City of Ukiah. The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. In the interim, the Company approached the authorities with plans to construct offices in a different part of the building at a much lesser cost to the Company. Those plans were approved by the city and accordingly the offices were completed at the end of 1999 at a cost of approximately $23,000. Management believes that if the offices had been built according to the original plan, it would have cost the Company approximately $300,000. Management believes that it is not necessary at this point in time to build the offices according to original plans and has therefore decided to shelve the plan indefinitely. With regard to the exterior landscaping of the Ukiah facility, the Company has been using its own in-house resources to complete the bulk of the work, and has employed outside firms from time to time for limited purposes. The work was completed at a cost of approximately $23,000. 14 The work related to Ukiah Brewery building pending completion and the estimated cost thereof are as follows: 1. Covering the parking lot with asphalt, approximately $30,000 2. Building concrete sidewalk to one of the entrances of the brewery building, approximately $10,000 3. If required, creating additional office/record room space for future development, approximately $60,000 It is estimated that the above construction cost would be approximately $100,000, which includes the cost of modifying the original plan submitted to the City of Ukiah. The Company's anticipates that its acquisition of UBI will add positive cash flow and financial strength to the Company, thereby allowing the Company to pursue the completion of the planned construction. The management is planning to approach the City authorities for their approval of modifications to the original plan and complete the pending jobs during the year 2001 and obtain the final certificate of occupancy from the City authorities by the end of the year 2001. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition, and results of operations, because of, among other reasons, increased administrative burdens and costs. Liquidity and Capital Resources Long Term Debt. Mendocino Brewing has obtained a $2.7 million long-term loan secured by a first priority deed of trust on the Ukiah land and improvements. The loan is payable in monthly installments of approximately $24,400 including interest at the Treasury Constant Maturity Index plus 4.17%, currently 10%, maturing December 2012 with a balloon payment in the amount of $1,872,300. This loan is secured by some of the assets of the Company (other than the Releta facility), including, without limitation, a first priority deed of trust on the Ukiah land and improvements, fixtures, and most of the equipment of the Company. Shareholder Commitment. During 1998, UBA, the Company's largest shareholder, agreed to provide the Company with a credit facility of up to $2 million (the "1998 Facility"). In mid-1999, the 1998 Facility was terminated, and a new credit facility (the "1999 Facility") in the maximum amount of $800,000 was offered to the Company on substantially the same terms as the 1998 Facility pursuant to a Master Line of Credit Agreement. On April 28, 2000, the 1999 Facility was increased to $1,200,000. Pursuant to the terms of the Master Line of Credit Agreement, advances on the credit facility bear interest at the prime rate of the Bank of America in San Francisco plus 1.5%, up to a maximum of 10%, and is due and payable quarterly. The principal amount of each advance, together with any accrued but unpaid interest on such advance, is due 18 months after the date of such advance. Each advance made on the line of credit is evidenced by a convertible note. Each convertible note includes a conversion feature whereby UBA could, at its option, convert the principal and any accrued but unpaid interest into unregistered shares of the Company's common stock on or after the maturity date, at a rate of one 15 share of common stock for each $1.50 of principal and unpaid interest. The arrangement was approved by the independent directors (Robert Neame, Kent Price and Sury Rao Palamand) on August 30, 1999. The terms of the 1999 Facility were amended during 2000 to increase the maximum amount of principal available to the Company to $1,200,000, and were amended again in early 2001 to increase the maximum amount of principal available to the Company to $1,600,000. The interest which accrues on the outstanding principal may cause the aggregate amount outstanding to exceed $1,600,000. The Company has made draws on the credit facility during 2001, bringing the outstanding principal and interest accrued thereon to $1,686,300 as of July 1, 2001, which corresponds to UBA's right to acquire up to 1,124,228 shares of the Company's common stock. Equipment Lease. FINOVA Capital Corporation ("FINOVA") leased new brewing equipment with a total cost of approximately $1.78 million to Mendocino Brewing for a term of 7 years (beginning December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $39,000 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. The Company received notice that FINOVA has filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code, and has submitted a plan of reorganization for consideration and approval. The Company does not have any indication at this time of how the filing will affect the relationship between the Company and FINOVA, if at all. Credit Facilities. The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $890,400 of the term loan was outstanding as of March 31, 2001. On November 20, 2000, the CIT Group had agreed to increase the borrowing limit by $100,000, subject to the condition that the increased limit has to be paid back in monthly installments of approximately $11,100 during the period from April 1, 2001 through December 1, 2001. In April of 2001, the CIT Group agreed to defer the commencement of the monthly repayments to September of this year. 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, 2001, the total amount outstanding on the line of credit was approximately $2,513,200. On June 25, 2001, Savings Bank of Mendocino County ("SBMC") extended a revolving line of credit to the Company, secured by the existing securities of the Company which were then held by SBMC, and by a personal guarantee by Dr. Mallya. This credit facility matures on August 25, 2001. 16 The rate of interest on the facility is the adjusted base commercial rate of SBMC on the first and fifteenth day of each month, plus one percent, currently 8%. As of the date of this filing, the Company has drawn $200,000 in principal on the line of credit. Interest. The weighted average interest rates paid on the Company's debts (including the long term capital lease of equipment by FINOVA Capital Corporation Inc.) was 9.73% for the first six months of the year 2001 and 10.70% for the corresponding period of the year 2000. Keg Management Arrangement. The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurances that the Company will be able to finance the purchase of kegs and the failure to purchase the necessary kegs from MicroStar is likely to have a material adverse effect on the Company. Current Ratio. The Company's ratio of current assets to current liabilities on June 30, 2001 was 0.81 to 1.0 and its ratio of total assets to total liabilities was 1.81 to 1.0. On June 30, 2000, the Company's ratio of current assets to current liabilities was 0.83 to 1.0 and its ratio of total assets to total liabilities was 1.98 to 1.0 Impact of Expansion on Cash Flow. The Company must make timely payment of its debt and lease commitments to continue in operation. Unused capacity at the Ukiah and Saratoga Springs facilities has placed additional demands on the Company's working capital. Beginning approximately with the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. UBA agreed to provide a loan of up to $2 million for working capital purposes. In addition, pursuant to the Investment Agreement dated October 24, 1997, between the Company and UBA, UBA agreed to provide, directly or indirectly, funding for the working capital requirements of the Releta facility in the amount of $1 million until October 24, 1999 or until the brewery's operations are profitable, whichever comes first. UBA, through its affiliated entities, has fulfilled this obligation by facilitating the CIT Group/Credit Finance $3 million loan transaction. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities. However, there can be no assurances that the Company will have access to any such sources of funds in the future, and the inability to secure sufficient funds could be expected to have a material adverse effect on the Company. Acquisition of UBSN On November 3, 2000, the company entered into a Share Purchase Agreement with Inversiones Mirabel, S.A. and Golden Eagle Trust, both of which are entities related to the Company's Chairman of the Board and Chief Executive Officer, Dr. Vijay Mallya, and its principal shareholder, UBA. The Share Purchase Agreement was approved by the Company's shareholders on June 28, 2001, and the transaction was consummated on August 13, 2001. Under the terms of 17 the Share Purchase Agreement, the Company acquired all of the issued and outstanding shares of UBI which is the parent company of UBSN Ltd. In the transaction, the Company issued approximately 5,500,000 shares of the Company's common stock in exchange for the shares of UBI. UBI owns the distribution rights to the "Kingfisher" brand of beer in the United States. Because UBI is now a wholly-owned subsidiary of the Company, the Company now has the ability to brew "Kingfisher" brand beer in the United States. The closing of the acquisition of UBI was originally scheduled to occur in the year 2000. However, the financial statements first provided to the Company by UBI and UBSN Ltd. were prepared in accordance with accounting standards as generally applied in the United Kingdom. It took longer than expected to conduct all of the required audits of UBI and UBSN Ltd. so that their financial statements are (i) consistent with United States accounting standards, and (ii) as required by the U.S. Securities and Exchange Commission. The transaction described above is a related party transaction because the corporation that owned all of the shares of UBI is held by Golden Eagle Trust, which is controlled by fiduciaries who may exercise discretion in favor of Dr. Vijay Mallya, who is the Chairman and Chief Executive Officer of the Company. Dr. Mallya is also a member of the board of directors of UBSN Ltd. Golden Eagle Trust also owns a controlling interest in the Company's largest shareholder, UBA. Additional information about this transaction is contained in the 2001 Proxy Statement which was filed with the Commission on May 11, 2001, and such information is incorporated herein by reference. PART II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. Item 2. Changes in Securities. At the Annual Meeting of the Shareholders of the Company held on June 28, 2001, the Company's shareholders approved the adoption of Amended and Restated Articles of Incorporation (the "Amended Articles") to replace the Company's then existing Articles of Incorporation. The Amended Articles changed the Company's then existing Articles of Incorporation in the following ways: (1) the authorized number of shares of the Company's common stock have been increased from 20,000,000 to 30,000,000 shares; (2) the authorized number of the Company's preferred stock have been increased from 2,000,000 to 10,000,000 shares; and (3) the Company's Board of Directors is permitted to create and issue one or more series of preferred stock which would have voting rights and /or the right to share in the Company's assets in the event of liquidation or dissolution of the Company. The Amended Articles did not change the rights, preferences, or restrictions of any of the Company's outstanding stock. 18 Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. At the Annual Meeting of the Shareholders of the Company held June 28, 2001, the holders of the Company's common stock voted upon all of the following Proposals. The holders of the Company's preferred stock voted upon Proposal 5, the sole Proposal upon which they were eligible to vote. Proposal 1. To approve a Share Purchase Agreement dated November 3, 2000, between the Company, Inversiones Mirabel, S.A. and Golden Eagle Trust, and the transactions contemplated thereby. For 4,662,738 Against 85,110 Abstain 11,395 Non Vote 353,338 Proposal 2. To amend the Company's Bylaws to allow for the election of up to nine Directors. For 5,020,790 Against 80,844 Abstain 10,947 Non Vote 0 Proposal 3. Election of Directors For Authority Withheld Vijay Mallya 5,018,906 93,675 Michael Laybourn 5,031,506 81,075 Robert Neame 5,031,306 81,275 Kent D. Price 5,031,506 81,075 Sury Rao Palamand 5,018,881 93,700 Jerome Merchant 5,031,381 81,200 Yashpal Singh 5,018,881 93,700 David Townshend 4,999,331 113,250 Proposal 4. To approve an amendment to the Company's 1994 Stock Option Plan, increasing the number of shares for which options may be granted under the Plan to 1,000,000 shares. For 4,594,952 Against 134,636 Abstain 29,655 Non Vote 353,338 19 Proposal 5. To approve an amendment to the Company's Articles of Incorporation, increasing the authorized number of shares of the Company's common stock from 20,000,000 to 30,000,000 shares, increasing the authorized number of shares of the Company's preferred stock from 2,000,000 to 10,000,000 shares, and making certain other changes. Common Stock For 4,614,398 Against 113,200 Abstain 31,645 Non Vote 353,338 Preferred Stock For 140,850 Against 23,900 Abstain 5,900 Non Vote 0 Proposal 6. To ratify the appointment of Moss Adams, LLP as independent auditors of the Company for the current fiscal year. For 5,063,562 Against 29,681 Abstain 19,338 Non Vote 0 Item 5. Other Items. None. Item 6. Exhibits and Reports on Form 8-K.
Exhibit Number Description of Document ------ ----------------------- 3.1 Articles of Incorporation, as amended, of the Company. 3.2 (B) Bylaws of the Company 4.1 Articles 5 and 6 of the Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.1). 4.2 Article 10 of the Restated Articles of Incorporation, as amended, of the Company (Reference is made to Exhibit 3.2). 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6). 10.4 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.5 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.6 (A) Sales Contract between the Company and John I. Hass, Inc. 10.7 (F) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc.
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Exhibit Number Description of Document ------ ----------------------- 10.8 (A) Lease Agreement between the Company and Kohn Properties. 10.9 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.15 (N) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company, LLC. 10.16 (M) Agreement between United Breweries of America, Inc. and Releta Brewing Company, LLC regarding payment of certain liens. 10.17 (K)+ Keg Management Agreement with MicroStar Keg Management LLC. 10.18 (E) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.19 (G) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.20 (G) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.21 (O) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.22 (O) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.23 (J) Equipment Lease with FINOVA Capital Corporation. 10.24 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital Corporation. 10.25 (J) Master Lease Schedule with FINOVA Capital Corporation. 10.26 (L) Investment Agreement with United Breweries of America, Inc. 10.27 (L) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.28 (L) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.29 (Q) Indemnification Agreement with Vijay Mallya. 10.30 (Q) Indemnification Agreement with Michael Laybourn. 10.31 (Q) Indemnification Agreement with Jerome Merchant. 10.32 (Q) Indemnification Agreement with Yashpal Singh. 10.33 (Q) Indemnification Agreement with P.A. Murali. 10.34 (Q) Indemnification Agreement with Robert Neame. 10.35 (Q) Indemnification Agreement with Sury Rao Palamand. 10.36 (Q) Indemnification Agreement with Kent Price. 10.37 (R) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.38 (R) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.39 (R) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.41 (U) Employment Agreement with Yashpal Singh. 10.42 (U) Employment Agreement with P.A. Murali. 10.43 (V) Master Loan Agreement between the Company and the United Breweries of America, Inc. 10.44 (V) Convertible Note in favor of the United Breweries of America, Inc dated September 7, 1999. 10.45 (W) First Amendment to Master Loan Agreement between the Company and the United Breweries of America Inc. 10.46 (W) Convertible Note in favor of the United Breweries of America Inc. dated November 12, 1999.
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Exhibit Number Description of Document ------ ----------------------- 10.47 (W) Convertible Note in favor of the United Breweries of America Inc. dated December 17, 1999. 10.48 (W) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 1999. 10.49 (W) Convertible Note in favor of the United Breweries of America Inc. dated February 16, 2000. 10.50 (W) Convertible Note in favor of the United Breweries of America Inc. dated February 17, 2000. 10.51 (W) Convertible Note in favor of the United Breweries of America Inc. dated April 28, 2000. 10.52 (W) First Amendment to Master Loan Agreement between the Company and United Breweries of America, Inc., dated April 28, 2000. 10.53 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated September 11, 2000. 10.54 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated September 30, 2000. 10.55 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated December 31, 2000. 10.56 (Y) Convertible Note in favor of the United Breweries of America, Inc. dated February 12, 2001. 10.57 Convertible Note in favor of the United Breweries of America, Inc. dated July 1, 2001
- ---------- (A) Incorporated by reference from the Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (C) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended March 31, 1995, previously filed with the Commission. (E) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1995, previously filed with the Commission. (F) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1995, previously filed with the Commission. (G) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1996, previously filed with the Commission. (J) Incorporated by reference from the Company's Registration Statement dated February 6, 1997, as amended, previously filed with the Commission, Registration No. 33-15673. (K) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1996, previously filed with the Commission. (L) Incorporated by reference from the Schedule 13D filed with the Commission on November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. (M) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1997. (N) Incorporated by reference from the Company's Report on Form 10-QSB/A No. 1 for the quarterly period ended September 30, 1997. (O) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1997, previously filed with the Commission. (Q) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1998. (R) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended September 30, 1998. (T) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1998, previously filed with the Commission. (U) Incorporated by reference from the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999. 22 Exhibit Number Description of Document ------ ----------------------- (V) Incorporated by reference from the Amendment No. 5 to Schedule 13D filed with the Commission on September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. (W) Incorporated by reference from the Amendment No. 6 to Schedule 13D filed with the Commission on May 12, 2000, by United Breweries of America, Inc. and Vijay Mallya. (X) Incorporated by reference from the Company's Report on Form 10-KSB for the annual period ended December 31, 1999, previously filed with the Commission. (Y) Incorporated by reference from the Amendment No. 7 to Schedule 13D filed with the Commission on February 22, 2001 by United Breweries of America, Inc. and Vijay Mallya. + Portions of this Exhibit were omitted pursuant to an application for an order declaring confidential treatment filed with the Securities and Exchange Commission. The Company filed an amended report on Form 8-K/A on April 11, 2001, describing more fully the Company's proposed acquisition of UBI, responsive to Item 2 of Form 8-K/A. The Company attached the audited consolidated financial statements of UBI for the years ended December 31, 1999 and 2000, and pro forma financial statements for the years ended December 31, 1999 and 2000. 23 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, 2001 By: /s/ Yashpal Singh ---------------------------------- Yashpal Singh President Dated: August 13, 2001 By: /s/ N. Mahadevan ---------------------------------- N. Mahadevan Chief Financial Officer and Secretary 24 Exhibit Page - ------- ---- 3.1 Amended and Restated Articles of Incorporation of Mendocino Brewing Company, Inc. 1 10.57 Convertible Note in favor of the United Breweries of America, Inc. dated July 1, 2001 1 1 EX-3 3 d26553_ex3-1.txt EXHIBIT 3.1 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF MENDOCINO BREWING COMPANY, INC. ------------------------------- 1. The undersigned, Yashpal Singh and N. Mahadevan, hereby certify that they are the duly elected and acting President and Secretary, respectively, of Mendocino Brewing Company, Inc., a California corporation (the "Company"), and further certify the following: 2. The Articles of Incorporation of the Company are amended and restated to read in full as follows: ARTICLE 1 NAME The name of the corporation is: Mendocino Brewing Company, Inc. ARTICLE 2 PURPOSE The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California, other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE 3 AUTHORIZED SHARES Section 3.1 Classes of Stock. The corporation is authorized to issue two classes of shares designated "Common Stock" and "Preferred Stock," respectively. The corporation shall have the authority to issue a total of 30,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock. The Common Stock is sometimes referred to as "Common Shares" and the Preferred Stock is sometimes referred to as "Preferred Shares." Holders of Common Shares are sometimes referred to as "Common Shareholders" and holders of Preferred Shares are sometimes referred to as "Preferred Shareholders." Section 3.2 Authorized Series of Preferred Stock. Of the total authorized shares of Preferred Stock, 275,000 shares are designated Series A Preferred Stock ("Series A Shares"). Holders of the Series A Shares are sometimes referred to herein as "Series A Shareholders." 1 Section 3.3 Undesignated Series of Preferred Stock. Any remaining undesignated shares of Preferred Stock may be divided into such number of additional Series As the Board of Directors may determine. The Board of Directors is authorized to determine and alter the rights, preferences, privileges, and restrictions granted to and imposed upon any wholly unissued series of Preferred Stock, to fix the number of shares of any series of Preferred Stock, and to set the designation of any series of Preferred Stock. The Board of Directors, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, may increase or decrease the number of shares of any Series After shares of that series have been issued. The Board of Directors may not, however, reduce any series below the number of shares of such series then outstanding. ARTICLE 4 DIVIDENDS Section 4.1 Dividends on Series A Preferred Stock. The Series A Shareholders shall receive dividends equal in the aggregate to $1.00 per Series A Share before any dividend is paid on the Common Shares or any other series of Preferred Shares (the "Preferred Dividend"). When the entire Preferred Dividend has been paid, the Series A Shares shall automatically be cancelled and shall cease to be outstanding for all purposes, and the Series A Shares shall resume the status of authorized but unissued and undesignated Preferred Stock. Section 4.2 Dividends on Other Series of Preferred Stock. The Board of Directors shall have the authority, consistent with the provisions of Section 3.3, above, to fix the dividends and dividend preferences of any series of Preferred Stock other than the Series A Preferred Stock; provided that so long as any share of Series A Preferred Stock remains outstanding no series of Preferred Stock may be granted dividend rights which are senior to those of the Series A Preferred Stock. Section 4.3 Dividends on Common Shares. The corporation may pay dividends with respect to the Common Shares if and only if the corporation has paid the entire Preferred Dividend on the Series A Shares and the Series A Shares have been cancelled. The corporation may at any time declare and pay a dividend with respect to the Common Shares payable solely in Common Shares. Section 4.4 Conditions to All Dividends. Dividends are payable only at the times and to the extent declared by the Board of Directors. Dividends may be payable quarterly or otherwise as the Board of Directors may determine from time to time. The corporation shall distribute any declared dividend to each shareholder entitled to receive the dividend simultaneously. Dividends are payable only out of assets legally available for that purpose. No right to a dividend shall accrue unless the dividend is declared by the Board of Directors. The Board of Directors may rescind the declaration of a dividend to the extent that the dividend has not been paid if each shareholder is treated ratably in accordance with the shareholder's preferences with respect to the dividend. Section 4.5 Service Shares. "Service Shares" are Common Shares held by an employee, director, or other person who is providing services to the corporation issued pursuant to an agreement that gives the corporation the right to repurchase the shares upon the occurrence 2 of certain events (such as termination of employment). Section 503 of the California Corporations Code does not apply to any repurchase of Service Shares by the corporation. Section 4.6 Restriction on Repurchase of Junior Shares. The corporation may repurchase shares other than the Series A Shares only if (a) the Preferred Dividend on the Series A Shares has been paid in full and the Series A Shares have been cancelled; or (b) the shares to be repurchased are Service Shares. ARTICLE 5 LIQUIDATION Section 5.1 Order of Distribution. Following dissolution of the corporation, the assets of the corporation shall be distributed first to the Series A Shareholders in an amount equal to their aggregate Liquidation Preference (as defined below), then, in the order of seniority, to any holders of any Series of Preferred Shares which may be junior with respect to liquidation rights to the Series A Preferred Stock, and then to the Common Shareholders. Section 5.2 Liquidation Preferences. The Liquidation Preference of the Series A Shareholders is an amount per share equal to the unpaid Preferred Dividend of a Series A Share. Upon dissolution of the corporation, any declared but unpaid Preferred Dividends on the Series A Shares shall automatically be cancelled. When the entire Liquidation Preference of the Series A Shareholders has been paid, the Series A Shares shall automatically be cancelled and shall cease to be authorized or outstanding for all purposes. Section 5.3 Insufficient Assets. If assets of the corporation are not sufficient to distribute the entire Liquidation Preference to the Series A Shareholders, the entire assets of the corporation shall be distributed among the Series A Shareholders in accordance with their Series A Shares. Section 5.4 Service Shares. Section 502 of the California Corporations Code does not apply to any repurchase of Service Shares by the corporation. Section 5.5 Restriction on Repurchase of Junior Shares. The corporation may repurchase shares other than the Series A Shares only if (a) the corporation has sufficient net assets to enable it to pay the Series A Shareholders the full amount of their Liquidation Preference at the time of the repurchase; or (b) the shares to be repurchased are Service Shares. ARTICLE 6 PREFERRED STOCK VOTING RIGHTS Section 6.1 Voting Rights of the Series A Preferred Stock. The holders of Series A Preferred Stock shall have no voting rights, except to the extent required by law. Section 6.2 Voting Rights of Other Classes of Preferred Stock. The Board of Directors shall have the authority, consistent with the provisions of Section 3.3, above, to fix the voting rights of any series of Preferred Stock other than the Series A Preferred Stock. 3 ARTICLE 7 LIABILITY OF DIRECTORS Section 7.1 Limitation of Directors' Liability. The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 7.2 Indemnification of Corporate Agents. The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. Section 7.3 Repeal or Modification. No repeal or modification of Sections 7.1 or 7.2 shall adversely affect any right of indemnification or limitation of liability of an agent of the corporation relating to acts or omissions that occur before such repeal or modification. 3. The foregoing Amended and Restated Articles of Incorporation have been duly approved by the Board of Directors. 4. The foregoing Amended and Restated Articles of Incorporation have been duly approved by the required vote of shareholders in accordance with Section 902 of the California Corporations Code. The total number of outstanding shares of the Company is 5,808,098, consisting of 5,580,498 shares of Common Stock and 227,600 shares of Preferred Stock, which are entitled to vote with respect to the amendment and restatement. The number of shares voting in favor of the foregoing amendment and restatement equaled or exceeded the vote required. The percentage vote required was more than 50% of (a) the Common Stock and the Preferred Stock, voting together, (b) the Preferred Stock voting separately, and (c) the Common Stock voting separately. I further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of my own knowledge. IN WITNESS WHEREOF, the undersigned has executed this certificate in Ukiah, California, this June 28, 2001. /s/ Yashpal Singh -------------------------------------------- Yashpal Singh, President /s/ N. Mahadevan -------------------------------------------- N. Mahadevan, Secretary 4 EX-10 4 d26553_ex10-57.txt EXHIBIT 10.57 Exhibit 10.57 CONVERTIBLE PROMISSORY NOTE MENDOCINO BREWING COMPANY, INC. - -------------------------------------------------------------------------------- Name of Issuer: Mendocino Brewing Company, Inc. Dated: July 1, 2001 Maturity Date: December 31, 2002 - -------------------------------------------------------------------------------- 1. Promise. Mendocino Brewing Company, Inc., a California corporation having its principal office at 1601 Airport Road, Ukiah, California 95482 and any successor (the "Company"), for value received, promises to pay to United Breweries of America Inc., a Delaware corporation or to its registered successors or assigns (the "Holder") the principal sum of Six Thousand Two Hundred Seventy-Nine Dollars and Fifty-Four Cents ($6,279.54) on presentation and surrender of this Convertible Note ("Note") on December 31, 2002 (the "Maturity Date"), and to pay interest on that principal sum at a rate equal to the lesser of (i) one and one-half percent (1.50%) per annum above the prime rate offered from time to time by the Bank of America in San Francisco, California, or (ii) ten percent (10%). Interest payments shall be paid quarterly on the first day of the months of April, July, October, and January of each year. Company may use any of the funds borrowed from Holder for any corporate purposes of Company, including paying obligations owed by Company to Holder. 2. Form of Payment. All payments under this Note shall be made in lawful money of the United States of America. The Company waives diligence, presentment, protest, demand and notice of protest, dishonor, and nonpayment of this Note. 3. Conversion/Redemption/Renewal. (a) The Holder has the right, at the holder's option, at any time on or after the Maturity Date, to convert all or any portion of this Note into fully paid and nonassessable shares of common stock ("Common Stock") of the Company at the rate of one share of such Common Stock for each One Dollar and 50/100 ($1.50) (the "Conversion Rate") principal amount of this Note and any accrued but unpaid interest. The Holder agrees that all shares of Common Stock of the Company, issued by the Company upon the conversion of all or any part of this Note shall be restricted securities within the meaning of Rule 144(a) of the Securities Act of 1933. The Holder further agrees that any shares of Common Stock acquired by means of any conversion as set forth herein shall be further restricted by the terms and conditions set forth in that certain Shareholders' Agreement, dated October 24, 1997, by and among the Company, Holder, and the Original Partners (as such term is defined in the Shareholders' Agreement). (b) The conversion right set forth in this Section 3 is subject to any 1 adjustment of the Conversion Rate set forth in Section 5 and Section 6, and is only exercisable upon the surrender of this Note for conversion at the office or agency to be maintained by the Company accompanied by instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder. No fractional shares are issuable on any conversion, but in lieu of issuing fractional shares the Company shall pay for such fractional shares in cash. (c) At any time prior to seventeen (17) months from the date of this Note, the Holder may provide written notice to the Company requiring the Company to commence repay of the outstanding principal balance of this Note, together with any accrued but unpaid interest thereon, to Holder. In such case, commencing on the Maturity Date, Company shall pay Holder equal monthly installments of principal, together with any unpaid interest, over a period of five (5) years until all amounts due hereunder shall be repaid in full. (d) If Holder does not convert or redeem any or all of the principal amount of the Note into Common Stock on the Maturity Date, Holder has the right to extend the term of this Note for a period of time mutually agreed upon between Holder and the Company. At any time during such extension period, Holder shall have the right to convert all or any part of the outstanding principal amount of the Note plus accrued and unpaid interest into Common Stock as set forth in this Section 3. Moreover, at any time during such extension period, Holder shall have the right to require the Company to repay all or any part of the outstanding principal balance of this Note, together with any accrued but unpaid interest thereon, to Holder within sixty (60) days. 4. Company Redemption. Prior to the Maturity Date, this Note may be redeemed by the Company, in whole or in part, at any time after sixty (60) days written notice ("Redemption Notice") to Holder. During such sixty (60) day period, Holder shall have the right to convert all or any part of the outstanding principal amount of the Note plus accrued and unpaid interest into Common Stock, as set forth in Section 3. If Holder does not convert all outstanding amounts into Common Stock, the Company may redeem any remaining amounts at any time during a thirty (30) day period commencing with the date of expiration of the sixty (60) day period provided for in the Redemption Notice. Thereafter, Company shall be required to provide Holder with a new Redemption Notice, and Holder shall have a new sixty (60) day period within which to convert all or any part of the outstanding principal amounts plus accrued and unpaid interest into Common Stock, as set forth in Section 3. 5. Anti-Dilution. (a) If at any time there is a capital reorganization of the Company's Common Stock, including any combination, reclassification, exchange, or subdivision of shares, a merger or consolidation of the Company with or into another corporation, or the sale of all or substantially all the Company's properties and assets as, or substantially as, an entirety to another person, then, as a part of such reorganization, merger, consolidation, or sale, lawful provision shall be made so that 2 Holder shall thereafter be entitled to receive on conversion of this Note, during the period specified in this Note, the number of shares of Common Stock of the Company, or of the successor corporation resulting from such merger or consolidation, to which a holder of the Common Stock deliverable on conversion of this Note would have been entitled on that event if this Note had been converted immediately before that event. In any such case, appropriate adjustment (as determined by the Company's board of directors) shall be made in applying this Note to the rights and the percentage interests of Holder after the reorganization, merger, consolidation, or sale to the end that this Note (including adjustment of the Conversion Rate) shall be applicable after that event, as near as reasonably may be, in relation to the shares of Common Stock deliverable after that event on conversion of this Note. The Company shall, not later than thirty (30) days prior to making such adjustment, give written notice ("Notice") by courier to Holder at the address of Holder shown on the Company's books. (b) Any Notice that is sent pursuant to Section 5(a) shall set forth, in reasonable detail, the event requiring the adjustment and the method by which the adjustment was calculated and shall specify the Conversion Rate then in effect after the adjustment and the increased or decreased number of shares of Common Stock to be received upon conversion of this Note. When appropriate, advance notice may be given and included as part of the notice required under other provisions of this Note. 6. Conversion Rate Protection. (a) If at any time, or from time to time, the Company issues or sells shares of Common Stock without consideration or for a consideration per share less than the Conversion Rate in effect immediately before that issue or sale, then and in each such case: (i) the Conversion Rate then in effect and the Conversion Rate applicable for any subsequent period shall be adjusted to a price (calculated to the nearest cent) determined by dividing: (y) the sum of (aa) the number of shares of Common Stock outstanding immediately before that issue or sale multiplied by the Conversion Rate in effect immediately before that issue or sale, plus (bb) the consideration, if any, received by the Company on that issue or sale, by (z) the number of shares of the Company's Common Stock outstanding immediately after that issue or sale; and (ii) Holder shall after that issue or sale, on conversion of this Note, be entitled to receive the number of shares of Common Stock equal to the number of shares that would otherwise, but for the adjustment provided for in Section 6(a)(i), be issuable on such conversion multiplied by a fraction, the numerator of which is the Conversion Rate then in effect and the denominator of which is the Conversion Rate in effect immediately after the adjustment provided for in Section 6(a)(i) on the date of conversion. No such adjustment shall be made in an amount less than Five Cents ($0.05), but any such amount shall be carried forward and given effect in the next adjustment, if any. 3 (b) If the Company (i) grants any rights or options to subscribe for, purchase, or otherwise acquire shares of Common Stock, or (ii) issues or sells any security, other than this Note, which is convertible into shares of Common Stock, then the price per share of Common Stock issuable on the exercise of the rights or options or the conversion of the securities shall be calculated by dividing: (y) the total amount, if any, received or receivable by the Company as consideration for the granting of the rights or options or the issue or sale of the convertible securities, plus the minimum aggregate amount of additional consideration payable to the Company on exercise of the convertible securities, by (z) the maximum number of shares of Common Stock issuable on the exercise or conversion. (i) If the price per share so calculated is less than the Conversion Rate of this Note in effect immediately before the rights or options are granted or the convertible securities are issued or sold, the granting or issue or sale shall be considered to be an issue or sale for cash of the maximum number of shares of Common Stock so issuable on exercise or conversion at the price per share determined under this provision, and the Conversion Rate of this Note shall be adjusted as provided above to reflect (on the basis of that determination) the issue or sale. No further adjustment of the Conversion Rate shall be made as a result of the actual issuance of shares of Common Stock on the exercise of any such rights or options or the conversion of any such convertible securities. (ii) If such rights or options or convertible securities by their terms provide, with the passage of time or otherwise, for any increase in the amount of additional consideration payable to the Company or any decrease in the number of shares of Common Stock issuable on such exercise or exchange (by change of rate or otherwise), the Conversion Rate shall, when each such increase or decrease becomes effective, be readjusted to reflect the increase or decrease as far as it affects rights of exercise or conversion that have not expired before that time. (iii) If, on the expiration of such rights or options or the rights of conversion of such convertible securities, any of them shall not have been exercised, the Conversion Rate shall be readjusted and will then be the same as it would have been had it originally been adjusted (or had the original adjustment not been required, as the case may be), on the basis that (y) the only shares of Common Stock so issued were the shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such convertible securities, and (z) such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Company on such exercise plus the consideration, if any, actually received by the Company for granting all such rights or options or for issuing or selling all such convertible securities. (iv) No adjustment of the Conversion Rate as provided in this Section 6(b) shall occur upon the granting or issuance of stock, stock options, or warrants to employees or directors of the Company in the aggregate amount of less than six hundred thousand (600,000) shares of Common Stock. 4 7. Subordination. (a) Upon the written agreement of Holder, this Note may be subordinated to any or all debt owed by the Company to banks and other financial institutions, other than to the extent debt to any such bank or financial institution involves the issuance of shares of the Company's stock or notes, warrants, options or any other security convertible into such stock. (b) The payment of the indebtedness evidenced by this instrument is subordinated to the payment of the "Senior Debt" defined and described in the Subordination Agreement, dated as of September 24, 1998, between United Breweries of America Inc. and the CIT Group/Credit Finance, Inc., as amended by that certain Amendment to Subordination Agreement, dated as of June 22, 1999, and reference is made to such Agreement for a full statement of the terms and conditions of such subordination. (c) The payment of the indebtedness evidenced by this instrument is subordinated to the payment of the "Senior Debt" defined and described in the Subordination Agreement, dated on or about November 15, 1998, between United Breweries of America Inc. and the Savings Bank of Mendocino, Inc., and reference is made to such Agreement for a full statement of the terms and conditions of such subordination. 8. Enforcement. The Company agrees to reimburse Holder for all costs of collection or enforcement of this Note, whether or not suit is filed (including, but not limited to, reasonable attorney fees), incurred by Holder. 9. Governing Law. This Note shall be governed by and construed in accordance with the laws, without regard to the laws as to choice or conflict of laws, of the State of California. 10. Default. If Company fails to pay any installment of principal or interest when due, then, or at any time during such default, the entire amount of the unpaid principal and interest shall, at the election of Holder, become immediately due and payable. 11. Waiver. No previous waiver and no failure or delay by Holder in acting with respect to the terms of this Note shall constitute a waiver of any subsequent breach, default or failure of condition under this Note. A waiver of any term of this Note must be in writing and shall be limited to the express written terms of such waiver. No delay or omission on the part of Holder in exercising any right under this Note shall operate as a waiver of such right or of any other right. 12. Reservation of Stock. The Company covenants that it will at all times reserve and keep available, solely for issuance on conversion of this Note, all shares of Common Stock from time to time issuable upon exercise of this Note. 13. Replacement. Upon receipt of evidence reasonably satisfactory to the 5 Company, of the loss, theft, destruction, or modification of this Note and, in the event of such occurrence, on delivery of an indemnity agreement or Note reasonably satisfactory in form and amount to the Company or in the case of mutilation, on surrender and cancellation of this Note, the Company at its expense will execute and deliver, in lieu of this Note, a new Note of like tender. 14. Transfer. NO SALE OR TRANSFER OF THIS NOTE SHALL BE EFFECTIVE UNLESS AND UNTIL ALL OF THE FOLLOWING STEPS ARE COMPLIED WITH: (a) The transferor and the transferee shall execute the form of Transfer Statement attached to this Note (or a similar statement which shall then be attached to this Note); (b) This Note and the executed Transfer Statement, together with a United States Internal Revenue Service Form W-8 "Certificate of Foreign Status" or a Form W-9 "Request for Taxpayer Identification Number and Certification" completed and executed by the transferee, shall be delivered to the Company at the Company's address as provided above; and (c) If the Company is satisfied that the information contained in the Transfer Statement is consistent with the information contained in the completed and executed Form W-8 or W-9, as applicable, the Company shall enter the transfer on a Note Holder Ledger maintained by the Company for this purpose. Any purported transfer with respect to which all of the above steps have note been complied with shall be null and void and of no force or effect. 15. Entire Agreement; Written Modification Only. This Agreement contains the entire agreement of the parties, and constitutes the complete, final and exclusive embodiment of their agreement with respect to its subject matter. This Agreement supersedes any and all prior correspondence, arrangements, representations and understandings, whether written or oral, express or implied, with respect to its subject matter. This Agreement may not be modified except by a written agreement, which specifically sets forth each modification and is signed by a duly authorized representative of both parties. This Agreement is executed without reliance upon any promise, warranty or representation by the parties or any of their representatives, other than such promises, warranties or representations as are expressly contained in this Agreement. 16. Severability. If any provision of this Agreement is deemed or held invalid or unenforceable in whole or in part, for any reason, that provision shall be deemed severed from the remainder of this Agreement, and shall in no way affect or impair the validity or enforceability of any portion or all of this Agreement, which otherwise shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Convertible Note to be executed in its corporate name by the signature of its president and secretary. 6 MENDOCINO BREWING COMPANY, INC., a California corporation By: /s/ Yashpal Singh ------------------------------------- Yashpal Singh Its: President By: /s/ N. Mahadevan ------------------------------------- N. Mahadevan Its: Chief Financial Officer 6 CONVERSION NOTICE Conversion Notice To: MENDOCINO BREWING COMPANY, INC. The undersigned holder of this Note, hereby irrevocably exercises the option to convert this Note or the portion of it designated below into shares of Common Stock of the Company, in accordance with the terms of the Note, and directs that the shares issuable and deliverable on the conversion, together with any check in payment of fractional shares, be issued and delivered to the undersigned unless a different name is specified below. If shares of Common Stock are to be issued in the name of anyone other than the undersigned, the undersigned will pay all transfer taxes payable on this conversion and issuance. Dated: --------------------------- ------------------ Signature If the shares are to be issued Portion to be converted (in other than to a registered multiples) of $1,000 if less holder, print name, address, than all: city, state less and zip code $ of issuee: --------------------------- Social Security Number of other identifying number of issuers: --------------------------------------- ---------------------------- -------------------------------------- -------------------------------------- -------------------------------------- Notice: The signature of these instructions to convert must correspond with the name as written on the face of this Note in every particular, without alteration, enlargement, or any change whatsoever TRANSFER STATEMENT NOTICE TO: MENDOCINO BREWING COMPANY, INC. FOR VALUE RECEIVED, the undersigned, the holder of that certain Convertible Note initially executed on the Effective Date (as defined below) by Mendocino Brewing Company, Inc. (the "Company") to the Initial Holder (as defined below) in the Face Value set forth below (the "Note"), hereby sells, assigns, transfers and conveys all of the rights of the undersigned under the Note, subject to the terms of the Note, unto the Transferee (as described below): Name of Transferee Address Face Value of Note ------------------ ------- ------------------ The following terms have the following meanings: Effective Date: , 2001 -------------- Initial Holder: -------------------------- Dated: TRANSFEROR: ------------------------------ [Name of Transferor] By: -------------------------------- Name: -------------------------------- Its: -------------------------------- ACKNOWLEDGMENT OF THE COMPANY: MENDOCINO BREWING COMPANY, INC. By: -------------------------------- Name: -------------------------------- Its: -------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----