-----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, Rs4LCKpGklwdl5v50K7xKMcJyyLt1vjV7S4FpIdJ/lj5paF9iUyeEX2loopw+I9n UuWcKyp/SYN40W6nZ4Nbrg== 0001169232-02-000967.txt : 20020814 0001169232-02-000967.hdr.sgml : 20020814 20020814151048 ACCESSION NUMBER: 0001169232-02-000967 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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: 02735467 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 d51475_10-qsb.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from ______________ to _____________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 13351 Highway 101 South, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of June 30, 2002 is 11,266,874. PART I ITEM 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET June 30, 2002 (Unaudited)
ASSETS CURRENT ASSETS Cash $ 65,100 Accounts receivable 4,702,700 Inventories 1,292,200 Prepaid expenses 297,900 ------------ Total Current Assets: 6,357,900 ------------ PROPERTY AND EQUIPMENT 14,358,800 ------------ OTHER ASSETS Deferred Income Taxes 1,922,600 Deposits and other Assets 239,100 Intangibles net of amortization 115,700 ------------ Total Other Assets: 2,277,400 ------------ Total Assets: $ 22,994,100 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Disbursements in excess of deposits $ 157,300 Accounts payable 4,478,600 Accrued liabilities 471,800 Accrued wages and related expense 173,100 Taxes Payable in United Kingdom 133,700 Current maturities of obligation under capital lease 357,800 Current maturities of obligation under long-term debt 37,400 Line of credit 3,291,800 Notes to related party 1,789,700 ------------ Total Current Liabilities: 10,891,200 LONG TERM DEBT, less current maturities 3,446,400 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 846,500 ------------ Total Liabilities: 15,184,100 ------------ STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 Accumulated comprehensive loss (74,200) Accumulated deficit (6,992,000) ------------ Total Stockholders' Equity 7,810,000 ------------ Total Liabilities and Stockholders' Equity: $ 22,994,100 ============
The accompanying notes are an integral part of these financial statements. 1 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
----------------------------- ----------------------------- THREE MONTHS ENDED SIX MONTHS ENDED June 30 June 30 ----------------------------- ----------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- NET SALES 6,487,900 5,910,700 11,658,000 11,233,200 COST OF GOODS SOLD 4,181,500 3,886,000 7,696,800 7,392,500 ------------ ------------ ------------ ------------ GROSS PROFIT 2,306,400 2,024,700 3,961,200 3,840,700 ------------ ------------ ------------ ------------ OPERATING EXPENSES Retail Operating Expenses 87,900 125,200 168,800 234,600 Marketing 1,174,000 1,088,800 2,214,800 2,199,300 General and administrative 657,600 628,700 1,312,800 1,358,400 ------------ ------------ ------------ ------------ 1,919,500 1,842,700 3,696,400 3,792,300 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 386,900 182,000 264,800 48,400 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Other income (expense) 2,300 10,400 12,500 9,700 Interest expense (209,800) (243,200) (424,000) (479,900) ------------ ------------ ------------ ------------ (207,500) (232,800) (411,500) (470,200) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 179,400 (50,800) (146,700) (421,800) PROVISION FOR (BENEFIT FROM) INCOME TAXES 52,300 71,500 80,600 (1,100) ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 127,100 $ (122,300) $ (227,300) $ (420,700) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE LOSS, net of tax Foreign Currency Translation Adjustment 23,400 -- 3,600 -- ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 150,500 $ (122,300) $ (223,700) $ (420,700) ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.01) $ (0.02) $ (0.04) ============ ============ ============ ============ DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.01) $ (0.02) $ (0.04) ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 2 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
------------------------- ------------------------- THREE MONTHS ENDED SIX MONTHS ENDED June 30 June 30 ------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 274,700 268,100 563,800 534,200 Deferred income taxes -- (76,000) Stock issued for services 172,100 -- 172,100 -- Changes in: Accounts receivable (409,000) (550,900) 367,000 454,600 Inventories 44,300 102,400 (17,500) 57,300 Prepaid expenses (224,600) (212,100) (146,500) (167,200) Deposits and other assets (56,800) (130,200) (124,000) (342,900) Accounts payable (328,900) (89,000) (349,100) 110,700 Accrued wages and related expenses 4,200 8,500 1,300 12,200 Accrued liabilities 117,900 (45,100) (311,700) (647,400) ---------- ---------- ---------- ---------- Net cash from operating activities: (279,000) (770,600) (71,900) (485,200) ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements (91,600) (203,100) (230,900) (257,900) ---------- ---------- ---------- ---------- Net cash from investing activities: (91,600) (203,100) (230,900) (257,900) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on line of credit 485,200 853,800 822,100 291,200 Principal payments on long-term debt (8,800) (93,300) (685,100) (175,200) Payments on obligation under capital lease (90,900) 25,100 (67,500) (44,800) Proceeds from notes payable to related parties 23,600 34,300 47,000 390,700 Disbursement in excess of deposit (57,900) 42,900 157,300 117,700 Translation adjustment 11,500 (300) 4,100 (9,700) ---------- ---------- ---------- ---------- Net cash from financing activities: 362,700 862,500 277,900 569,900 ---------- ---------- ---------- ---------- INCREASE / (DECREASE) IN CASH (7,900) (111,200) (24,900) (173,200) ---------- ---------- ---------- ---------- CASH, beginning of period 73,000 146,300 90,000 208,300 ---------- ---------- ---------- ---------- CASH, end of period $ 65,100 $ 35,100 $ 65,100 $ 35,100 ========== ========== ========== ========== Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 175,600 $ 210,000 $ 355,300 $ 413,100 ---------- ---------- ---------- ----------
The accompanying notes are an integral part of these financial statements. 3 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation During the third quarter of the year 2001, Mendocino Brewing Company, Inc. (the "Company") acquired all the outstanding stock of United Breweries International (UK), Ltd., ("UBI"). Both UBI and the Company are under common control and the acquisition was required to be reported as-if it were a pooling of interest combination. The consolidated financial statements have been presented on the assumption that the acquisition of this wholly owned subsidiary had occurred on January 1, 2000. All prior years' financial information has been retroactively restated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Unfortunately, due to the serious illness of a director of UBI, certain of the accounts of UBI were not available for inclusion in these financial statements. Management has determined that, in accordance with generally accepted accounting principles, such amounts in question are immaterial to the overall presentation of the Company's financial statement. Therefore, the amounts of the accounts in question have been estimated based on historical data. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. Note 2 - Line of Credit The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the Company's qualified accounts receivable and 60% of the company's inventory at an interest rate equal to the prime rate as published by Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Mendocino Brewing Company (except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation), a second deed of trust on the Company's Ukiah land improvements and the assets of UBI. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $519,400 of the term loan was outstanding as of June 30, 2002. During October 2001, the CIT Group increased the line of credit by $170,000 to enable the company to acquire and refurbish bottling equipment in order to enhance the Company's capacity of which $85,000 was repaid in March 2002 and the balance will be repaid once the balance of purchase is refinanced through an existing line of credit. During June 2002, CIT Group further increased the line of credit by $65,000 repayable by September 2002. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of June 30, 2002, the total amount outstanding on the line of credit was approximately $2,148,500. Necor Bank Limited, a South African registered company, has provided UBSN Ltd. with a multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft facility is secured by a fixed and floating currency charge over all of the assets of UBSN Ltd. ("UBSN"). The amount outstanding on this line of credit as of June 30, 2002, was approximately $1,143,300. 4 Note 3 - Long Term Debt and Notes to Related Parties The Company has a note outstanding in the principal amount of $2,700,000, with interest at Treasury Constant Maturity Index for five year treasuries plus 4.17%, currently 10.00%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment and is secured by real property located in Ukiah, California. Shepherd Neame Limited, a related party, has a brewing contract with UBSN for brewing Kingfisher Lager for the Company's European and Canadian markets. In consideration of extending the brewing contract, Shepherd Neame Limited advanced a loan of GBP 600,000 to UBSN, repayable in monthly installment of (pound)5,000 per month, commencing in June 2003.The loan carries an interest rate of 5%. The Company has issued convertible notes in favor of United Breweries of America, Inc. ("UBA") in the amount of approximately $1,515,400 as of June 30, 2002. The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10% per annum, and mature 18 months from the date of the advance. The advances are unsecured and mature through December 2002. The notes are convertible at the option of UBA, to common stock at $1.50 per share upon maturity and thereafter. Interest accrued on the notes as of June 30, 2002, is approximately $274,300. Note 4 - Income Taxes The Company has recorded an increase in the valuation allowance of $138,000 of federal and state net operating loss carryforwards. There is some uncertainty that the Company will be able to generate sufficient taxable income to utilize all the deferred tax assets. 5 Due to slower than anticipated sales and an increase in the net loss for the year ended December 31, 2001, over the loss for 2000, the Company determined in the third quarter of the year 2001 that a portion of the deferred tax assets associated with net operating loss carryforwards and investment tax credits may expire prior to utilization. The Company has recorded in 2001 a valuation allowance of $1,486,000 for operating losses and credits that may expire prior to utilization. The Company is implementing various strategies to bring the business toward profitability such as reducing debt, improving efficiency and possible debt conversion. The Company believes that if the above strategies are effective they may generate sufficient profits in the future to utilize the deferred tax assets. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities on June 30, 2002, are as follows: Accounts receivables allowance $ 13,100 Benefits from net operating loss carry forwards 3,605,500 Inventory 13,100 Accruals 41,400 Valuation allowance (1,624,000) Depreciation and amortization (154,700) Investment in UBI 350,700 Others (323,100) Note 5 - Related party Transactions During 2001, the Company and its subsidiaries entered into or amended several agreements with affiliated and related entities. Among these were a Brewing Agreement and a Loan Agreement between UBSN and Shepherd Neame Limited; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between the Company and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between the Company and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. Additional information about these transactions is contained in the Company's annual report on Form 10-KSB for the year ended December 31, 2001, and such information is incorporated herein by reference. The following table reflects the value of the transactions for the six months ended June 30, 2002 and 2001 and the balances outstanding at June 30, 2002.
- ----------------------------------------------------------------------------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------- Sales to Shepherd Neame Ltd $ 969,800 $ 743,800 - ----------------------------------------------------------------------------------------------- Purchases from Shepherd Neame Ltd. 4,122,700 3,772,500 - ----------------------------------------------------------------------------------------------- Expenses reimbursement to Shepherd Neame Ltd. 369,400 258,700 - ----------------------------------------------------------------------------------------------- Commission paid to American United Breweries Int'l., Inc. ("AUBI") -- 29,000 - ----------------------------------------------------------------------------------------------- Interest expenses associated with UBA convertible notes payable 47,000 66,800 - ----------------------------------------------------------------------------------------------- Expenses reimbursement to UBA -- 12,800 - ----------------------------------------------------------------------------------------------- Accounts payable to Shepherd Neame Ltd 2,345,400 -- - ----------------------------------------------------------------------------------------------- Account receivable from Shepherd Neame Ltd. 525,100 -- - ----------------------------------------------------------------------------------------------- Amounts payable to AUBI 20,000 80,400 - -----------------------------------------------------------------------------------------------
6 Note 6 - Net Income Per Common and Common Equivalent Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to shareholders by the weighted average number of common shares and common equivalent shares outstanding, which include dilutive stock options and notes payable convertible in common stock. Common equivalent shares associated with stock options and convertible notes payable have been excluded from periods with a net loss as the potentially dilutive shares would be antidilutive.
Three months ended Six months ended ------------------ ---------------- 6/30/2002 6/30/2001 6/30/2002 6/30/2001 -------------------------------------------------------------- Net income (loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700) ============================================================== Weighted average common shares outstanding 11,266,874 11,070,728 11,266,874 11,070,728 ============================================================== Basic net income (loss) per share $ 0.01 $ (0.01) $ (0.02) $ (0.04) ============================================================== Diluted net income (loss) per share Net income (loss) $ 127,100 $ (122,300) $ (227,300) $ (420,700) Interest expense on convertible notes payable 23,600 -- -- -- -------------------------------------------------------------- Income for the purpose of computing diluted net income per share $ 150,700 $ (122,300) $ (227,300) $ (420,700) ============================================================== Weighted average common shares outstanding 11,266,874 11,070,728 11,266,874 11,070,728 Dilutive stock options 429,273 -- -- -- Assumed conversion of convertible notes payable 1,193,133 -- -- -- -------------------------------------------------------------- Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 12,889,280 11,070,728 11,266,874 11,070,728 ============================================================== Diluted net income (loss) per share $ 0.01 $ (0.01) $ (0.02) $ (0.04)
7 Note 7 - Inventory June 30, 2002 Raw Materials $ 397,300 Beer-in-process 195,200 Finished Goods 648,500 Merchandise 51,200 ----------- $ 1,292,200 =========== Note 8 - Property and Equipment June 30, 2002 Buildings $ 7,922,000 Machinery and equipment 8,414,100 Equipment under capital lease 2,379,500 Land 810,900 Leasehold improvements 663,200 Equipment in progress 248,200 Vehicles 83,200 Furniture and fixtures 206,900 ----------- 20,728,000 Less: Accumulated depreciation and amortization 6,369,200 ----------- $14,358,800 =========== Note 9 - Stockholders' Equity The following table summarizes equity transactions during the six months ended June 30, 2002:
Series A Preferred Stock Common Stock Other ---------------------- ------------------------- Comprehensive Accumulated Total Shares Amount Shares Amount Income/(Loss) Deficit Equity ------- ------------ ---------- ------------ ------------- ------------ ------------ Balance, December 31, 2001 227,600 $ 227,600 11,083,228 $ 14,476,500 $ (77,800) $ (6,764,700) $ 7,861,600 Net Loss (227,300) Shares Issued for Services 183,646 $ 172,100 Currency Translation Adjustment 3,600 Balance, June 30, 2002 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (74,200) $ (6,992,000) $ 7,810,000 ======= ============ ============ ============ ============ ============ ============
8 Note 10. Segment Information The Company's business segments are brewing operations, distributing operations in the United Kingdom, and retail sales at the Hopland Brewery and the tasting room at Saratoga Springs. A summary of each segment is as follows:
Six months ended June 30, 2002 Domestic Brewing European Distributing Retail Corporate & Operations Operations Operations Others Total Net Sales $ 5,132,700 $ 6,299,000 $ 226,300 -- $11,658,000 Operating Profit/(Loss) 1,300 275,300 (11,800) -- 264.800 Identifiable Assets 14,684,500 4,284,700 85,500 3,939,400 22,994,100 Depreciation & amortization 381,000 159,900 3,100 19,800 563,800 Capital Expenditures 87,700 143,200 -- 230,900
Six months ended June 30, 2002 Domestic Brewing European Distributing Retail Corporate & Operations Operations Operations Others Total Net Sales $ 5,099,000 $ 5,867,400 $ 266,800 -- $ 11,233,200 Operating Profit/(Loss) (162,600) 247,000 (36,000) -- 48,400 Identifiable Assets 14,866,800 4,693,200 75,300 5,671,600 25,306,900 Depreciation & amortization 346,800 134,600 3,600 49,200 534,200 Capital Expenditures 115,700 127,700 -- 14,500 257,900
9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the first six months ended June 30, 2002, compared to the first six months ended June 30, 2001, and the year ended December 31, 2001. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the company's Annual Report to Shareholders for the year ended December 31, 2001. This discussion contains statements regarding the company's expectations concerning its future operations, earnings and outlook. These statements are forward-looking statements that involve significant risks and uncertainties, and accordingly, no assurances can be given that such expectations will be correct. These expectations are based upon many assumptions that the company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Important factors that could cause actual results to differ (favorably or unfavorably) from the expectations stated in this discussion include, among others, changes in the pricing environment for the company's products; changes in demand for malt beverage products in different Company markets; changes in customer preference for the company's malt beverage products; regulatory or legislative changes; changes in raw materials prices; changes in interest rates; changes in the company's European beer and/or restaurant business. The Company disclaims any obligation to update any of these forward-looking statements. If the Company determines to update any forward-looking statement, it will do so publicly. No private statements by the Company or its personnel should be interpreted as updating forward-looking statements. In this Report, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. Critical Accounting Policies In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: 10 o The first-in, first-out (FIFO) method to value the majority of the Company's inventories; and o The intrinsic value method, or APB Opinion No. 25, to account for incentive awards of Company common stock; and o The recognition of deferred tax assets for net operating loss carryforwards that are expected to be used to offset future taxable income. These accounting policies are applied consistently for all years presented. The Company's operating results would be affected if other alternatives were used. Information about the impact on operating results is included in the footnotes to the Company's consolidated financial statements. OVERVIEW During the second quarter of 2002, the Company introduced Kingfisher premium Lager Beer in 22 oz bottles in the entire domestic market, and in draft for the West Coast market. The Company also launched White Hawk Original IPA, available in six packs and in draft, in the West Coast market. Kingfisher Premium Lager beer won a Gold Medal at the Brewing Industry International Awards held at London, United Kingdom in April 2002 in the draught lager class in the alcohol by volume range of 4.6% to 6.9%. In May 2002, Kingfisher was awarded Gold Medal at the Australian International Beer Awards 2002 held at Melbourne, Australia in International Section - Packaged Beer Class-1-Lager, Sub-Class-A European Style Lager. The Company's brewing operation's sales in the United States during the first six months of the year 2002 decreased to 27,988 barrels, a decrease of 388 barrels, or 1.4%, from the 28,376 barrels sold in the first six months of the year 2001. Compared to the first six months of the year 2001, sales of Company's own brands during the first six months of the year 2002 decreased to 21,388 barrels, a decrease of 2,853 barrels, sales of Kingfisher increased to 3,379 barrels, an increase of 3,379 barrels and sales of contract brands decreased to 3,221 barrels, a decrease of 914 barrels. Management attributes the decreased sales of the Company's own brands to a general decline in sales of craft beers, a significant decline in business experienced by the restaurant and lodging industry, and competition from alternative alcoholic beverages. During the first six months of the year 2002, UBSN, the Company's subsidiary in the United Kingdom, sold 25,782 barrels, compared to 25,682 barrels during the corresponding period in the year 2001. Sales volume in the United Kingdom and Europe in the first six months of 2002 increased to 25,782 barrels, an increase of 2,073 barrels compared to the first six months of 2001. Because distribution of Kingfisher in the United States is now performed by MBC instead of UBSN, UBSN's sales volume dropped by 1,973 barrels. The Company ended the first six months of 2002 with a net loss of $227,300, compared to a net loss of $420,700 for the same period in 2001. As set forth more fully under "Results of Operations," below, increases in the cost of goods and selling and distribution expenses, and decreases in net sales, retail operating expenses, general and administrative expenses, and income tax benefit contributed to the net loss. 11 RESULTS OF OPERATIONS The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto. ---------------------------- Six Months Ended June 30 ---------------------------- 2002 2001 Statements of Operations Data: % % -------- -------- Net Sales 100.00 100.00 Costs of Sales 66.02 65.81 Gross Profit 33.98 34.19 -------- -------- Retail Operating Expenses 1.45 2.09 Marketing Expense 19.00 19.58 General and Administrative Expenses 11.26 12.09 -------- -------- Total Operating Expenses 31.71 33.76 -------- -------- Profit From Operations 2.27 0.43 Other (Income) / Expense 0.11 0.09 Interest Expense (3.64) (4.27) -------- -------- Loss before income taxes (1.26) (3.75) Provision for / (Benefit) from income taxes 0.69 (0.01) -------- Net Loss (1.95) (3.76) Other Comprehensive Loss 0.03 -- ======== ======== Comprehensive Loss (1.92) (3.76) ---------------------------------- Six Months Ended June 30 ---------------------------------- 2002 2001 Balance Sheet Data: $ $ ----------- ----------- Cash and Cash Equivalents 65,100 35,100 Working Capital (4,533,300) (3,913,100) Property and Equipment 14,358,800 14,545,100 Deposits and Other Assets 2,277,400 3,756,900 Total Assets 22,994,100 25,306,900 Long-term Debt 3,446,400 3,083,000 Obligation Under Capital Lease 846,500 1,050,500 Total Liabilities 15,184,100 15,051,500 Accumulated Deficit (6,992,000) (4,889,100) Stockholder's Equity 7,810,000 10,255,400 12 Net Sales Overall net sales for the first six months of 2002 were $11,658,000, an increase of $424,800, or 3.78%, compared to $11,233,200 for the first six months of 2001. The increase is mainly caused by an increase in sales in the United Kingdom and Europe during the first six months of 2002. Domestic Operations. Domestic net sales for the first six months of 2002 were $5,359,000, compared to $5,365,800 for the same period in 2001, a 0.13% decrease. The sales volume decreased to 27,988 barrels in the first six months of 2002 from 28,376 barrels in the first six months of 2001, representing a decrease of 388 barrels, or 1.37%. The details of the decrease are as follows: sale of the Company's brands decreased by 2,853 barrels, sales of Kingfisher increased by 3,379 barrels, and sales of contract brands decreased by 914 barrels. The decrease in overall net sales during the first six months of 2002 was partly offset by a marginal increase in wholesale shipments (an increase of $33,700 over the wholesale shipments during the first six months of 2002). In view of management's focus on wholesale beer sales and decline in retail business, retail sales for the first six months of 2002 showed a decrease of $40,500 over the same period in 2001. European Operations: Net sales for the first six months of 2002 were $6,299,000 ((pound)4,347,400) compared to $5,867,400 ((pound)4,103,400) during the corresponding period of 2001, an increase of 7.36%. Because of exchange rate fluctuations, when the net sales results are compared in Pounds Sterling, the increase is only 5.95%. During the first six months of 2002, UBSN sold 25,782 barrels, compared to 25,682 barrels during the first six months of 2001. Sales volume in the United Kingdom and Europe in the first six months of 2002 increased by 2,073 barrels compared to the first six months of 2001. Because Kingfisher is now distributed in the United States out of MBC, instead of UBSN, sales volume dropped by 1,973 barrels. Cost of Goods Sold Cost of goods sold as a percentage of net sales during the first six months of 2002 was 66.02%, as compared to 65.81% during the corresponding period of 2001. Higher labor cost, increases in the cost of materials, and higher insurance costs contributed to the increase. Prices of bottles and certain types of malts increased during 2002 in the U.S. Domestic Operations: Cost of goods sold as a percentage of net sales in the United States during the first six months of 2002 was 66.69%, as compared to 65.81% during the corresponding period of 2001, representing an increase of 0.88% mainly due to increased labor costs, insurance, and increase in the price of raw materials. European Operations: Cost of goods sold as a percentage of net sales in the United Kingdom during the first six months of 2002 was 65.45%, as compared to 65.81% during the corresponding period in 2001 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing a decrease of 0.36%. Gross Profit As a result of the higher net sales described above, gross profit for the first six months 2002 13 increased to $3,961,200, from $3,840,700 during the corresponding period of 2001, representing an increase of 3.1%. As a percentage of net sales, because of the increase in cost of goods sold as discussed above, the gross profit during the first six months of 2002 decreased to 33.98% from that of 34.2% for the first six months of 2001. Operating Expenses Operating expenses for the first six months of 2002 were $3,696,400, as compared to $3,792,300 for the first six months of 2001, representing a decrease of 2.53%. Operating expenses consist of retail operating expenses, marketing and distribution expenses, and general and administrative expenses. Retail Operating Expenses: Retail operating expenses for the first six months of 2002 were $168,800, representing a decrease of $65,800, or 28.04%, from the same period in 2001. As a percentage of net sales, retail operating expenses decreased to 1.45% as compared to 2.09% for the first six months of 2001. The decrease in retail operating expenses consisted mainly of decreases in labor expenses, which management attributes to reduced hours of operation and better utilization of its manpower. Marketing and Distribution Expenses: Marketing and distribution expenses for the first six months of 2002 were $2,214,800, representing an increase of $15,500, or 0.70%, from the first six months of 2001. As a percentage of net sales, marketing and distribution expenses represented 19.0% as compared to 19.6% during the first six months of 2001. Domestic Operations: Expenses for the first six months of 2002 were $846,300 compared to $988,800 during the corresponding period of 2001, representing a decrease of $142,500. As a percentage of net sales in the United States, the expenses decreased to 15.79% during the first six months of 2002, compared to 18.43% during the corresponding period of 2001 mainly on account of optimizing manpower and promotional expenses. European operations: Expenses for the first six months of 2002 were $1,368,500 compared to $1,210,500 during the corresponding period of 2001, representing an increase of $158,000. As a percentage of net sales in the United Kingdom, the expenses increased to 21.73% during the first six months of 2002 compared to 20.63% during the corresponding period of 2001 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase is mainly on account of increased promotional expenses but is partly offset by the reduction in expenses caused by the discontinuation of exports to the United States in the third quarter of 2001. General and Administrative Expenses: General and administrative expenses were $1,312,800, representing a decrease of $45,600 from the first six months of 2001. As a percentage of net sales, the general and administrative expenses were 11.26% for the first six months of 2002, as compared to 12.09% for corresponding period of 2001. Domestic Operations: General and administrative expenses were $780,300, representing a decrease of $29,600 over the first six months of 2001. The reduction was mainly due to reduced travel expenses, telephone expenses and depreciation. Part of this reduction was offset by increase in legal expenses, audit fee, insurance and rent. 14 European Operations: General and administrative expenses were $532,500, representing a decrease of $16,000 from the first six months of 2001. Other Expenses Other expenses for the first six months of 2002 totaled $411,500, representing a decrease of $58,700 when compared to the first six months of 2001. The other expenses consist of interest expenses and miscellaneous income. Interest expenses decreased by $55,900 because of reductions in the line of credit, long term debts, and interest rates. Miscellaneous income increased by $2,800. Income Taxes The Company has a provision for income taxes of $80,600 for the first six months of 2002, compared to a net benefit from income taxes of $1,100 for the first six months of 2001. The provision for taxes related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. The Company has implemented various strategies such as introducing new products, optimizing expenses and improving efficiencies to bring the Company to profitable operations in order to utilize the deferred tax assets prior to expiration. Management has been successful in the past by reducing the amount of losses and moving the Company towards profitable operations, but there can be no assurance that the steps taken by management will result in the Company utilizing all the operating losses recorded as deferred tax assets. If the current plans are not successful, the Company will be required to reduce the amount of deferred tax assets recorded on the balance sheet. Net Loss The Company's net loss for the first six months of 2002 was $227,300, as compared to loss of $420,700 for the first six months of 2001. After providing for a positive foreign currency translation adjustment of $3,600 during the first six months of 2002 ($0 for 2001), the comprehensive loss for 2002 was $223,700, compared to a loss of $420,700 in 2001. Capital Demands The Saratoga Springs facility commenced brewing operations in February 1998. Both the Ukiah and Releta facilities have been operating at significantly less than full capacity. Both breweries have placed demands upon the Company's assets and liquidity. Failure to adequately meet those demands may have a material adverse affect on the Company's business, financial condition, and results of operations. The Ukiah brewery has been operating under a temporary certificate of occupancy from the City of Ukiah since 1998. The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. Completion of construction is a condition to the issuance of a final certificate of occupancy. Failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition, and 15 results of operations, because of, among other reasons, increased administrative burdens and costs. Proceeds From Operations Insufficient to Sustain Operations The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah and Saratoga Springs facilities has placed demands on the Company's working capital. Beginning approximately in the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities (see "Liquidity and Capital Resources," below). Although Management has had success in negotiating these credit facilities in the past, there can be no assurance that the Company will be able to do so in the future, either at any price or at a price the Company will be able to sustain, or that the Company will have access to any alternative sources of funds in the future. Failure to secure sufficient funds would have a materially adverse effect on the Company. Brewing Contract with Wolavers Enterprises, LLC. During September 2001 the Company entered into an agreement with Wolaver's Enterprises, LLC, ("Wolaver's") a Florida limited liability company, to provide brewing, on a contract basis, of their line of organic beers. The Company has sold 1,642 barrels of Wolaver's brand beer during the first six months of the year 2002, compared to 1,879 barrels during the corresponding period of 2001. In July 2002, Wolaver's informed the Company that it had merged with Otter Creek Brewing Company in Middlebury, Vermont. Because of the merger, Wolaver's requested termination of the brewing contract, effective as of October 18, 2002. The Company is currently exploring its options with regard to its relationship with Wolaver's. Termination of this contract would have an adverse impact on the Company. Liquidity and Capital Resources Long Term Debt MBC has obtained a $2.7 million long term loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in monthly installments of $24,443 including interest at the Treasury Constant Maturity Index plus 4.17%, currently 5.83%, maturing December 2012 with a balloon payment in the amount of $1,872,300. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment (other than those leased through FINOVA Capital Corporation). Shareholder Commitment On August 31, 1999, the Company entered into a Master Line of Credit Agreement with UBA, one of its principal shareholders, which agreement was subsequently amended on April 28, 2000, and February 12, 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. As of the date of this filing, UBA has 16 made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). As of June 30, 2002, the aggregate outstanding principal amount of the UBA Notes was $1,515,371, and the accrued but unpaid interest thereon was equal to approximately $274,328. The UBA Notes require the Company to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted the Company to defer payments of accrued interest. The first eight (8) of the UBA Notes made pursuant to the Credit Agreement matured during 2001 (the "Mature Notes"). The remaining five (5) of the UBA Notes (which did not mature in 2001) were scheduled to mature during 2002. The Company and UBA executed an Extension of Term of Notes under Master Line of Credit Agreement on February 14, 2002 (the "Extension Agreement"). The Extension Agreement confirms the Company's and UBA's extension of the terms of the Mature Notes. The Extension Agreement extends the terms of the Mature Notes, as well as the terms of the next four (4) of the UBA Notes, for a period ending on August 15, 2002. Since the last remaining UBA Note matures on or after August 15, 2002, it was not extended by the Extension Agreement. During the extended term, UBA has the right to require the Company to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days. The Company and UBA are currently involved in ongoing negotiations with regard to the Company's offer to convert the notes to shares of common stock. Management believes that they will be successful in negotiating the conversion of the debt, however, if the Company and UBA cannot reach agreement on the terms of such conversion, a failure to convert the debt will have an adverse effect on the Company. Equipment Lease FINOVA Capital Corporation leased new brewing equipment with a total cost of approximately $1.78 million to MBC for a term of 7 years (beginning December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $39,000 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. Other Loans and Credit Facilities CIT Group/Credit Finance Line of Credit. The CIT Group/Credit Finance, Inc. has provided the Company a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, maturing September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the 17 term loan in March 1999 and approximately $519,400 of the term loan was outstanding as of June 30, 2002. During October 2001, the CIT Group increased the line of credit by $170,000 to enable the company to acquire and refurbish bottling equipment in order to enhance the Company's capacity of which $85,000 was repaid and the balance will be repaid once the balance of purchase is refinanced through an existing line of credit. During June 2002, CIT Group further increased the line of credit by $65,000, which is repayable in installments by September 2002. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of June 30, 2002, the total amount outstanding on the line of credit was approximately $2,148,500. The CIT Group line of credit is due for renewal in September 2002, and the Company is currently discussing such a renewal with the CIT Group. Failure to renew the facility would have a material adverse impact on the Company. Necor Bank Limited Option Facility. Necor Bank Limited, a South African registered company, has provided UBSN with a multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft facility is secured by a fixed and floating currency charge over all of the assets of UBSN. The amount outstanding on this line of credit as of June 30, 2002, was approximately $1,143,300. Shepherd Neame Loan: Shepherd Neame Limited has a brewing contract with UBSN for brewing Kingfisher Lager for the Company's European and Canadian markets. In consideration for UBSN's agreement to extend the brewing contract, Shepherd Neame Limited advanced a loan of GBP 600,000 to UBSN, repayable in monthly installments of (pound)5,000 per month, commencing in June 2003. The loan carries an interest rate of 5%. Future Capital Demands The Company continues to have capital and liquidity needs which it cannot finance from its own operations. (See "Results of Operations -- Proceeds From Operations Insufficient to Sustain Operations," above.) As the Company's existing credit facilities are currently secured by substantially all of the Company's assets, obtaining expanded credit facilities in the future may prove to be difficult and expensive. Interest The weighted average interest rates paid on the Company's U.S. debts (including the long term capital lease of equipment by FINOVA Capital Corporation Inc.) was 8.44% for the first six months of the year 2002 and 9.73% for the first six months of the year 2001. Keg Management Arrangement The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. The agreement expires in September 2002, and Management expects to negotiate an extension of the agreement in the near future. If the agreement is not extended and terminates, the Company will be required to purchase a certain number of kegs from MicroStar and the Company would probably attempt to finance the purchase through debt 18 or lease financing, if available. However, there can be no assurances that the Company will be able to extend the agreement or finance the purchase of kegs. Failure to extend the agreement or purchase the necessary kegs from MicroStar is likely to have a material adverse effect on the Company. Current Ratio The Company's ratio of current assets to current liabilities on June 30, 2002 was 0.58 to 1.0 and its ratio of total assets to total liabilities was 1.51 to 1.0. On June 30, 2001, the Company's ratio of current assets to current liabilities was 0.64 to 1.0 and its ratio of total assets to total liabilities was 1.68 to 1.0. PART II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. Item 2. Changes in Securities. None. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Items. Change in Response to Delisting Notice Received from the Pacific Stock Exchange - Quotation of the Company's Common Stock on the Nasdaq Bulletin Board In Current Reports on Form 8-K dated February 4 and February 21, 2002, the Company reported that it had received a delisting notice from the Pacific Stock Exchange (the "Exchange"), as a result of the Company's failure to maintain the trading price of its Common Stock on the Exchange at a level above $1.00 per share, and that in response to the delisting notice the Company had decided to effect a one-for-three reverse split of its Common Stock, in order to increase the trading price for its Common Stock. After further consideration of the delisting notice and the stock split, and of the existing lack of transaction volume on the Exchange, the Company's management has come to the conclusion that, rather than effecting the proposed reverse stock split and keeping the Company's Common Stock listed on the Exchange, it would be preferable to have the Company's Common Stock quoted on the 19 Nasdaq Bulletin Board, accept delisting on the Exchange, and forego the reverse stock split. Accordingly, the Company has obtained a listing for its Common Stock on the Nasdaq Bulletin Board, effective as of May 6, 2002, under the symbol "MENB". At the same time, the Company has entered into negotiations with a number of market makers to support its trading market in connection with the new Nasdaq Bulletin Board listing. Management has notified the Exchange that it intends to formally delist its stock from the trading on the Exchange in the near future and recommended accordingly to the Company's Board of Directors. Also, since the primary purpose of the proposed reverse stock split was to avoid the delisting of the Company's Common Stock on the Exchange, management recommended to the Company's Board of Directors that the Company abandon the proposed reverse stock split. The Company's Board of Directors formally approved the actions described above, at the Board Meeting held on May 20, 2002. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit Number Description of Document -------------- ----------------------- 99.1 Statement of Principal Executive Officer 99.2 Statement of Principal Financial Officer (b) Current Reports on Form 8-K No Current Reports on Form 8-K were filed during the three months ended June 30, 2002. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: August 13, 2002 By: /s/ Dr. Vijay Mallya ------------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: August 13, 2002 By: /s/ N. Mahadevan ------------------------------------- N. Mahadevan Chief Financial Officer and Secretary 20 INDEX OF EXHIBITS Exhibit Number Description of Document Sequential Page Number 99.1 Statement of Principal Executive Officer 22 99.2 Statement of Principal Financial Officer 23 21 EX-99 3 d51475_ex99-1.txt EXHIBIT 99.1 EXHIBIT 99.1 Statement of Principal Executive Officer I, Dr. Vijay Mallya, state and attest that: (1) The Quarterly Report of Mendocino Brewing Company, Inc. on Form 10-QSB for the quarterly period ended June 30, 2002 (the "Form 10-QSB") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (2) The information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of Mendocino Brewing Company, Inc. /s/ Dr. Vijay Mallya -------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: August 10, 2002 EX-99.A 4 d51475_ex99-2.txt EXHIBIT 99.2 EXHIBIT 99.2 Statement of Principal Financial Officer I, N. Mahadevan, state and attest that: (1) The Quarterly Report of Mendocino Brewing Company, Inc. on Form 10-QSB for the quarterly period ended June 30, 2002 (the "Form 10-QSB") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (2) The information contained in the Form 10-QSB fairly presents, in all material respects, the financial condition and results of operations of Mendocino Brewing Company, Inc. /s/ N. Mahadevan ---------------- N. Mahadevan, Chief Financial Officer Date: August 10, 2002 -----END PRIVACY-ENHANCED MESSAGE-----