-----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, JdYoCv+jZNgCe4hOahMkRM0iZ11TMw6q/mphkebv8ltDP/W2omH75L/lYkRZadNu jEeeFYSkAcEBrTsZiHF+RA== 0001169232-02-002953.txt : 20021114 0001169232-02-002953.hdr.sgml : 20021114 20021114172134 ACCESSION NUMBER: 0001169232-02-002953 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02826369 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 d52605_10qsb.txt FORM 10-QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 |_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________________ to ______ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 13351 Highway 101 South, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| APPLICABLE ONLY TO CORPORATE ISSUERS The number of shares of the issuer's common stock outstanding as of September 30, 2002 is 11,266,874. PART I Item 1. Financial Statements. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET September 30, 2002 (Unaudited) ASSETS CURRENT ASSETS Cash $ 64,700 Accounts receivable 5,239,800 Inventories 1,378,900 Prepaid expenses 229,000 ------------ Total Current Assets: 6,912,400 ------------ PROPERTY AND EQUIPMENT 14,206,600 ------------ OTHER ASSETS Deferred Income Taxes 1,922,600 Deposits and other Assets 163,900 Intangibles net of amortization 111,600 ------------ Total Other Assets: 2,198,100 ------------ Total Assets: $ 23,317,100 ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Disbursements in excess of deposits $ 112,500 Accounts payable 4,814,600 Accrued liabilities 612,400 Accrued wages and related expense 168,900 Taxes Payable in United Kingdom 279,800 Current maturities of obligation under capital lease 383,100 Current maturities of obligation under long-term debt 38,300 Lines of credit 2,768,200 Notes to related party 1,813,600 ------------ Total Current Liabilities: 10,991,400 LONG TERM DEBT, less current maturities 3,463,800 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 734,300 ------------ Total Liabilities: 15,189,500 ------------ STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 Accumulated comprehensive loss (77,300) Accumulated deficit (6,671,300) ------------ Total Stockholders' Equity 8,127,600 ------------ Total Liabilities and Stockholders' Equity: $ 23,317,100 ============ The accompanying notes are an integral part of these financial statements. - 2 - MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------- ---------------------------- THREE MONTHS ENDED NINE MONTHS ENDED September 30 September 30 ------------------------- ---------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- NET SALES 7,007,500 6,171,600 18,578,400 17,357,000 COST OF GOODS SOLD 4,557,900 4,229,900 12,254,800 11,662,600 ---------- ----------- ------------ ------------ GROSS PROFIT 2,449,600 1,941,700 6,323,600 5,694,400 ---------- ----------- ------------ ------------ OPERATING EXPENSES Retail Operating Expenses 99,300 127,600 268,100 362,200 Marketing 1,069,300 967,500 3,196,900 3,070,400 General and administrative 752,400 644,400 2,065,200 2,008,600 ---------- ----------- ------------ ------------ 1,921,000 1,739,500 5,530,200 5,441,200 ---------- ----------- ------------ ------------ INCOME FROM OPERATIONS 528,600 202,200 793,400 253,200 ---------- ----------- ------------ ------------ OTHER INCOME (EXPENSE) Other income 62,400 6,400 74,900 16,100 Acquisition Expense (808,200) (808,200) Interest expense (207,700) (211,600) (631,700) (691,900) ---------- ----------- ------------ ------------ (145,300) (1,013,400) (556,800) (1,484,000) ---------- ----------- ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 383,300 (811,200) 236,600 (1,230,800) PROVISION FOR INCOME TAXES 62,600 123,900 143,200 123,500 ---------- ----------- ------------ ------------ Net INCOME (LOSS) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300) ---------- ----------- ------------ ============ OTHER COMPREHENSIVE INCOME / (LOSS), net of tax Foreign Currency Translation Adjustment (3,500) -- 500 -- ---------- ----------- ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 317,200 $ (935,100) $ 93,900 $ (1,354,300) ========== =========== ============ ============ NET INCOME (LOSS) PER COMMON SHARE $ 0.03 $ (0.08) $ 0.01 $ (0.12) ========== =========== ============ ============ DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.03 $ (0.08) $ 0.01 $ (0.12) ========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. - 3 - MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------- NINE MONTHS ENDED September 30 -------------------------- 2002 2001 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 93,400 $ (1,354,300) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 844,100 809,500 Loss on sale of assets 14,900 -- Deferred income taxes -- -- Stock issued for services 172,100 8,600 Changes in: Accounts receivable (52,500) (207,900) Inventories (104,000) 128,100 Prepaid expenses (77,600) (171,100) Deposits and other assets (47,900) 279,500 Accounts payable (91,200) 706,600 Accrued wages and related expenses (2,900) 18,500 Accrued liabilities (52,900) (36,500) --------- --------- Net cash from operating activities: 695,500 181,000 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements (362,300) (641,500) Proceeds from sale of fixed assets 17,900 -- --------- --------- Net cash from investing activities: (344,400) (641,500) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on line of credit 300,900 355,000 Principal payments on long-term debt (694,100) (260,300) Payments on obligation under capital lease (154,400) (117,800) Purchase of Common Stock (Dissenter's Right) -- (18,100) Proceeds from notes payable to related parties 70,900 421,600 Disbursement in excess of deposit 112,500 -- Translation adjustment (12,000) (5,000) --------- --------- Net cash from financing activities: (376,200) 375,400 --------- --------- INCREASE / (DECREASE) IN CASH (25,100) (85,100) --------- --------- CASH, beginning of period 89,800 208,300 --------- --------- CASH, end of period $ 64,700 $ 123,200 ========= ========= Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 527,400 $ 594,300 --------- ---------
The accompanying notes are an integral part of these financial statements. - 4 - MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation During the third quarter of the year 2001, Mendocino Brewing Company, Inc. (the "Company") acquired all the outstanding stock of United Breweries International (UK), Ltd., ("UBI"). Both UBI and the Company are under common control and the acquisition was required to be reported as if it were a pooling of interest combination. The consolidated financial statements have been presented on the assumption that the acquisition of this wholly owned subsidiary had occurred on January 1, 2000. All prior years' financial information has been retroactively restated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The Company has adopted EITF - 01-09 "Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor's Products)". This EITF requires that certain cash consideration paid to customers for services or placement fees are to be reported as a reduction in revenue rather than as an expense. The Company has reclassified these items on the income statements for the nine-month periods ending September 30, 2001 and 2002, as a reduction in revenue and as a corresponding reduction in marketing and selling expenses. This reclassification has no impact on net income. Note 2 - Line of Credit The CIT Group/Credit Finance, Inc. has provided the Company with a $3,000,000 maximum line of credit with an advance rate of 80% of the Company's qualified accounts receivable and 60% of the company's inventory at an interest rate equal to the prime rate as published by Chase Manhattan Bank of New York plus 2.25% payable monthly. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company (except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation and the assets of UBI), and a second deed of trust on the Company's Ukiah land improvements. Under the line of credit, $1,484,000 was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March 1999 and approximately $445,200 of the term loan was outstanding as of September 30, 2002. During October 2001, the CIT Group increased the line of credit by $170,000 to enable the company to acquire and refurbish bottling equipment in order to enhance the Company's capacity. The Company repaid $85,000 in March 2002 and the balance of the $170,000 increase will be repaid once the balance of the purchase of the bottling equipment is refinanced through an existing line of credit. Based on the Company's current level of accounts receivable and inventory, the - 5 - Company has drawn the maximum amount permitted under the line of credit. As of September 30, 2002, the total amount outstanding on the line of credit was approximately $2,064,300. The Company and CIT Group are currently discussing renewal and possible expansion of the credit facility. The facility originally matured on September 23, 2002, but CIT Group has informally agreed to continue to extend the facility for consecutive one-month terms until the Company and CIT Group conclude negotiations. The current extension terminates on November 24, 2002. Management expects to have a final agreement on the terms of renewal by the end of 2002. However, if the Company and CIT Group cannot reach agreement, it is possible that CIT Group could refuse to further extend the current facility. Such a refusal would have an immediate material adverse effect on the Company's ability to continue as a going concern. Necor Bank Limited, a South African registered company, has provided UBSN Ltd. with an overdraft facility of GBP1,250,000. This overdraft facility is secured by a charge over all of the assets of UBSN Ltd. ("UBSN"). The amount outstanding on this line of credit as of September 30, 2002, was approximately $703,900. Note 3 - Long Term Debt and Notes to Related Parties The Company has a note outstanding in the principal amount of $2,700,000, with interest at the Treasury Constant Maturity Index for five year treasuries plus 4.17%, which currently totals 10.00%. The note requires monthly payments of principal and interest of $24,400. The note matures in December, 2012, with a balloon payment and is secured by real property located in Ukiah, California. Shepherd Neame Limited, a related party, brews Kingfisher Lager for the Company's European and Canadian markets. In consideration for UBSN's extension of the brewing contract, Shepherd Neame Limited advanced a loan of GBP 600,000 to UBSN, repayable in monthly installment of GBP 5,000 per month, commencing in June 2003. The loan carries an interest rate of 5%. The Company has issued unsecured convertible notes in favor of United Breweries of America, Inc. ("UBA") in the amount of approximately $1,515,400 as of September 30, 2002. The notes bear interest at the prime rate plus 1.5%, subject to a maximum interest rate of 10% per annum, and mature 18 months from the date of the advance. The notes are convertible at the option of UBA, to common stock at $1.50 per share upon maturity and thereafter. Interest accrued on the notes as of September 30, 2002, is approximately $298,200. The advances originally matured through December 2002, but have been extended to mature on March 31, 2003. Note 4 - Income Taxes The Company has recorded an increase in the valuation allowance of $138,000 for federal and state net operating loss carryforwards. The Company is uncertain whether it will be able to generate sufficient taxable income to utilize all the deferred tax assets. Temporary differences and carryforwards which give rise to deferred tax assets and liabilities on September 30, 2002, are as follows: - 6 -
Accounts receivables allowance $ 13,100 Benefits from net operating loss carry forwards 3,605,500 Inventory 13,100 Accruals 41,400 Valuation allowance (1,624,000) Depreciation and amortization (154,700) Investment in UBI 350,700 Others (323,100)
Note 5 -- Related party Transactions During 2001, the Company and its subsidiaries entered into or amended several agreements with affiliated and related entities. Among these were a Brewing Agreement and a Loan Agreement between UBSN and Shepherd Neame Limited; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between the Company and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between the Company and Kingfisher of America, Inc.; and a License Agreement between UBI and United Breweries Limited, an Indian corporation. Additional information about these transactions is contained in the Company's annual report on Form 10-KSB for the year ended December 31, 2001, and such information is incorporated herein by reference. The following table reflects the value of the transactions for the nine months ended September 30, 2002 and 2001 and the balances outstanding at September 30, 2002.
- ----------------------------------------------------------------------- ---------- ---------- 2002 2001 - ----------------------------------------------------------------------- ---------- ---------- Sales to Shepherd Neame Ltd $1,466,000 $1,219,300 - ----------------------------------------------------------------------- ---------- ---------- Purchases from Shepherd Neame Ltd. 6,571,700 5,819,100 - ----------------------------------------------------------------------- ---------- ---------- Expenses reimbursement to Shepherd Neame Ltd. 539,100 394,500 - ----------------------------------------------------------------------- ---------- ---------- Commission paid to American United Breweries Int'l., Inc. ("AUBI") -- 68,700 - ----------------------------------------------------------------------- ---------- ---------- Interest expenses associated with UBA convertible notes payable 70,800 97,600 - ----------------------------------------------------------------------- ---------- ---------- Expenses reimbursement to UBA -- 14,100 - ----------------------------------------------------------------------- ---------- ---------- Accounts payable to Shepherd Neame Ltd 2,317,700 1,849,400 - ----------------------------------------------------------------------- ---------- ---------- Account receivable from Shepherd Neame Ltd. 189,900 697,900 - ----------------------------------------------------------------------- ---------- ---------- Amounts payable to AUBI 20,000 81,000 - ----------------------------------------------------------------------- ---------- ----------
- 7 - Note 6 - Net Income Per Common and Common Equivalent Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to shareholders by the weighted average number of common shares and common equivalent shares outstanding, which include dilutive stock options and notes payable convertible in common stock. Common equivalent shares associated with stock options and convertible notes payable have been excluded from periods with a net loss as the potentially dilutive shares would be antidilutive.
Three months ended Nine months ended ------------------ ----------------- 9/30/2002 9/30/2001 9/30/2002 9/30/2001 ----------- ------------ ----------- ------------ Net income (loss) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300) =========== ============ =========== ============ Weighted average common shares outstanding 11,266,874 11,078,151 11,266,874 11,079,716 =========== ============ =========== ============ Basic net income (loss) per share $ 0.03 $ (0.08) $ 0.01 $ (0.12) =========== ============ =========== ============ Diluted net income (loss) per share Net income (loss) $ 320,700 $ (935,100) $ 93,400 $ (1,354,300) Interest expense on convertible notes payable 23,900 -- 70,800 -- ----------- ------------ ----------- ------------ Income for the purpose of computing diluted net income per share $ 344,600 $ (935,100) $ 164,200 $ (1,354,300) =========== ============ =========== ============ Weighted average common shares outstanding 11,266,874 11,078,151 11,266,874 11,079,716 Dilutive stock options 429,273 -- 429,273 -- Assumed conversion of convertible notes payable 1,209,048 -- 1,209,048 -- ----------- ------------ ----------- ------------ Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 12,905,195 11,078,151 12,905,195 11,079,716 =========== ============ =========== ============ Diluted net income (loss) per share $ 0.03 $ (0.08) $ 0.01 $ (0.12)
- 8 - Note 7 - Inventory September 30, 2002 ------------------ Raw Materials $ 478,800 Beer-in-process 178,800 Finished Goods 693,700 Merchandise 27,600 ----------- $ 1,378,900 =========== Note 8. Property and Equipment September 30, 2002 ------------------ Buildings $ 7,806,500 Machinery and equipment 8,445,800 Equipment under capital lease 2,403,900 Land 810,900 Leasehold improvements 777,600 Equipment in progress 204,800 Vehicles 291,000 Furniture and fixtures 176,900 ----------- 20,917,400 Less: Accumulated depreciation and amortization (6,710,800) ----------- $14,206,600 =========== - 9 - Note 9 - Stockholders' Equity The following table summarizes equity transactions during the nine months ended September 30, 2002:
Series A Preferred Stock Common Stock Other ---------------------- ---------------------------- Comprehensive Accumulated Total Shares Amount Shares Amount Income / (Loss) Deficit Equity --------- ----------- ------------ -------------- ---------------------------------- ------------ Balance, December 31, 2001 227,600 $ 227,600 11,083,228 $ 14,476,500 $ (77,800) $ (6,764,700) $ 7,861,600 Net Profit 93,400 93,400 Shares Issued for Services 183,646 172,100 172,100 Currency Translation Adjustment 500 500 Balance, September 30, 2002 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (77,300) $ (6,671,300) $ 8,127,600 ======= ========= ========== ============ ========= ============ ===========
Note 10. Segment Information The Company's operations are broken into three business segments: domestic brewing operations, distributing operations in the United Kingdom, and retail sales at the Hopland Brewery and the tasting room at Saratoga Springs. A summary of each segment is as follows:
Nine months ended September 30, 2002 European Domestic Brewing Distributing Retail Corporate & Operations Operations Operations Others Total Net Sales $ 8,212,700 $9,968,500 $397,200 $ -- $18,578,400 Operating Profit/(Loss) 296,100 490,000 7,300 -- 793.400 Identifiable Assets 14,626,400 4,495,300 83,200 4,112,200 23,317,100 Depreciation & amortization 573,300 236,900 4,400 29,500 844,100 Capital Expenditures 126,800 232,800 -- 2,700 362,300
- 10 -
Nine months ended September 30, 2001 European Domestic Brewing Distributing Retail Corporate & Operations Operations Operations Others Total Net Sales $ 7,927,600 $8,941,300 $ 488,100 $ -- $17,357,000 Operating Profit/(Loss) (92,600) 360,500 (14,700) -- 253,200 Identifiable Assets 14,965,300 4,840,900 73,500 4,963,000 24,842,700 Depreciation & amortization 521,300 208,900 5,400 73,900 809,500 Capital Expenditures 435,800 187,000 4,200 14,500 641,500
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the nine months ended September 30, 2002, compared to the nine months ended September 30, 2001, and the year ended December 31, 2001. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the company's Annual Report to Shareholders for the year ended December 31, 2001. This discussion contains statements regarding the company's expectations concerning its future operations, earnings and outlook. These statements are forward-looking statements that involve significant risks and uncertainties, and accordingly, no assurances can be given that such expectations will be correct. These expectations are based upon many assumptions that the Company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Important factors that could cause actual results to differ (favorably or unfavorably) from the expectations stated in this discussion include, among others, changes in the pricing environment for the Company's products; changes in demand for malt beverage products in different Company markets; changes in customer preference for the Company's malt beverage products; regulatory or legislative changes; changes in raw materials prices; changes in interest rates; changes in the company's European beer and/or restaurant business. The Company disclaims any obligation to update any of these forward-looking statements. If the Company determines to update any forward-looking statement, it will do so publicly. No private statements by the Company or its personnel should be interpreted as updating forward-looking statements. In this Report, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. - 11 - Critical Accounting Policies In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value the majority of the Company's inventories; and o The intrinsic value method, or APB Opinion No. 25, to account for incentive awards of Company common stock; and o The recognition of deferred tax assets for net operating loss carryforwards that are expected to be used to offset future taxable income. These accounting policies are applied consistently for all years presented. The Company's operating results would be affected if other alternatives were used. Information about the impact on operating results is included in the footnotes to the Company's consolidated financial statements. OVERVIEW The Company, founded in 1983, was one of the first modern craft brewers in the United States. The Company's brewpub was the first in California and the second in the United States following the repeal of prohibition. The acquisition of UBI has allowed the Company to expand its range; it currently markets its products in Europe and Canada, as well as the United States. The Company competes in the specialty or craft beer segment domestically, and markets its products mainly through Indian restaurants in Europe. Management is pleased to report that the Company has reported a profit for the second consecutive fiscal quarter. Although sales in the craft beer industry have suffered an overall setback, mainly caused by the general economic recession, the fall in tourism, and the lasting ramifications of the recent terrorist attacks, the Company has acted in response to the setback by instituting various measures to improve its profitability during the year. The Company curtailed promotional expenses, and reduced other operating expenses by reducing manpower and limiting hours of operation of the brewpub. All of these cost-cutting measures have led to the Company's continued profitability throughout the second and third quarters of 2002. - 12 - Since May of 2002, the Company's common stock has been quoted on the Nasdaq OTC Bulletin Board, under the symbol "MENB". The Company's stock has previously been listed on the Pacific Exchange. However, because the stock has not has not achieved or maintained a minimum bid price of $1.00 per share, as required by the rules of the Pacific Exchange, its trading has been suspended on the Pacific Exchange. Management has determined that due to the low volume of trading in the Company's stock on the Pacific Exchange, the Company's stock is better suited to the OTC Bulletin Board, and the Board of Directors will not contest or appeal the suspension of trading on the Pacific Exchange. It is anticipated that the Company's stock will eventually be delisted from the Pacific Exchange. Please see Item 5 under Part II of this report for more details. During the third quarter of the year 2002, the Company made a few of its products available in new packaging sizes. On the East Coast, Red Tail Ale is now available in twelve packs and Olde Saratoga Premium Lager beer is available in six packs. On the West Coast, the Company introduced a new packaging design for twelve packs of Red Tail Ale. The Company's brewing operation's sales in the United States during the first nine months of the year 2002 increased to 45,452 barrels, an increase of 488 barrels, or 1.1%, from the 44,964 barrels sold in the first nine months of the year 2001. Compared to the first nine months of the year 2001, sales of Company's own brands during the first nine months of the year 2002 decreased to 34,804 barrels, a decrease of 2,449 barrels, sales of Kingfisher increased to 5,538 barrels, an increase of 4,206 barrels and sales of contract brands decreased to 5,110 barrels, a decrease of 1,269 barrels. Management attributes the decreased sales of the Company's own brands to a general decline in sales of craft beers, a significant decline in business experienced by the restaurant and lodging industry, and competition from alternative alcoholic beverages. During the first nine months of the year 2002, UBSN, the Company's subsidiary in the United Kingdom, sold 40,241 barrels, compared to 38,682 barrels during the corresponding period in the year 2001. Sales volume in the United Kingdom in the first nine months of 2002 increased to 36,020 barrels, an increase of 2,792 barrels compared to the first nine months of 2001. Sales volume in Europe and Canada in the first nine months of 2002 increased to 4,221 barrels, an increase of 827 barrels compared to the first nine months of 2001. Because distribution of Kingfisher in the United States is now performed by MBC instead of UBSN, UBSN's sales volume dropped by 2,060 barrels. The Company ended the first nine months of 2002 with a net income of $93,400, compared to a net loss of $1,354,300 for the same period in 2001. As set forth more fully under "Results of Operations," below, increases in net sales, cost of goods and sales and marketing expenses and decreases in retail operating expenses, and general and administrative expenses contributed to the net profit. Results of Operations The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto. - 13 - ------------------------------ Nine Months Ended September 30 ------------------------------ 2002 2001 Statements of Operations Data: % % ------ ------ Net Sales 100.00 100.00 Costs of Sales 65.96 67.19 ------ ------ Gross Profit 34.04 32.81 ------ ------ Retail Operating Expenses 1.44 2.09 Marketing Expense 17.21 17.69 General and Administrative Expenses 11.12 11.57 ------ ------ Total Operating Expenses 29.77 31.35 ------ ------ Profit from Operations 4.27 1.46 Other (Income) / Expense 0.40 0.09 Interest Expense (3.40) (3.99) Acquisition Expense -- (4.66) Profit / (Loss) before income taxes 1.27 (7.10) Provision for / (Benefit) from income taxes 0.77 0.70 ------ Net Loss 0.50 (7.80) Other Comprehensive Income / (Loss) 0.00 -- ====== ====== Comprehensive Loss 0.50 (7.80) ------------------------------ Nine Months Ended September 30 ------------------------------ 2002 2001 Balance Sheet Data: % % ------ ------ Cash and Cash Equivalents 64,700 123,200 Working Capital (4,079,000) (3,257,500) Property and Equipment 14,206,600 14,693,600 Deposits and Other Assets 2,198,100 2,971,100 Total Assets 23,317,100 24,842,700 Long-term Debt 3,463,800 2,360,000 Obligation Under Capital Lease 734,300 973,000 Total Liabilities 15,189,500 15,485,700 Accumulated Deficit (6,671,300) (5,826,400) Stockholder's equity 8,127,600 9,357,000 - 14 - Net Sales Overall net sales for the first nine months of 2002 were $18,578,400, an increase of $1,221,400, or 7.04%, compared to $17,357,000 for the first nine months of 2001. Of the increase, $182,400 is due to increase in sales in United States and $1,039,000 is due to increase in sales in the United Kingdom and Europe during the first nine months of 2002. Domestic Operations. Domestic net sales for the first nine months of 2002 were $8,609,900, compared to $8,415,700 for the same period in 2001, a 2.31% increase. The sales volume increased to 45,452 barrels in the first nine months of 2002 from 44,964 barrels in the first nine months of 2001, representing an increase of 488 barrels, or 1.09%. The details of the increase are as follows: sale of the Company's brands decreased by 2,449 barrels, sales of Kingfisher increased by 4,206 barrels, and sales of contract brands decreased by 1,269 barrels. The increase in overall net sales during the first nine months of 2002 was mainly due to increase in wholesale shipments (an increase of $285,100 over the wholesale shipments during the first nine months of 2001). In view of management's focus on wholesale beer sales and decline in retail business, retail sales for the first nine months of 2002 showed a decrease of $90,900 over the same period in 2001. European Operations: Net sales for the first nine months of 2002 were $9,968,500 ((pound)6,708,700) compared to $8,941,300 ((pound)6,183,200) during the corresponding period of 2001, an increase of 11.49%. Because of exchange rate fluctuations, when the net sales results are compared in Pounds Sterling, the increase is only 8.5%. During the first nine months of 2002, UBSN sold 40,241 barrels, compared to 38,682 barrels during the first nine months of 2001. Sales volume in the United Kingdom Europe and Canada in the first nine months of 2002 increased by 3,619 barrels compared to the first nine months of 2001. Because Kingfisher is now distributed in the United States out of MBC, instead of UBSN, sales volume dropped by 2,060 barrels. Cost of Goods Sold Cost of goods sold as a percentage of net sales during the first nine months of 2002 was 65.96%, as compared to 67.19% during the corresponding period of 2001. Higher labor cost, increases in the cost of materials and higher insurance costs were offset by higher productivity due to commissioning of a refurbished bottling line at the Ukiah facility at the beginning of this year contributed to the decrease. Prices of bottles and certain types of malts increased during 2002 in the U.S. Domestic Operations: Cost of goods sold as a percentage of net sales in the United States during the first nine months of 2002 was 66.72%, as compared to 66.45% during the corresponding period of 2001, representing an increase of 0.27%. European Operations: Cost of goods sold as a percentage of net sales in the United Kingdom during the first nine months of 2002 was 65.92%, as compared to 67.89% during the corresponding period in 2001 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing a decrease of 1.97%. - 15 - Gross Profit As a result of the higher net sales described above, gross profit for the first nine months 2002 increased to $6,323,600, from $5,694,400 during the corresponding period of 2001, representing an increase of 11.05%. As a percentage of net sales, because of the increase in net sales, the gross profit during the first nine months of 2002 increased to 34.04% from that of 32.81% for the first nine months of 2001. Operating Expenses Operating expenses for the first nine months of 2002 were $5,530,200, as compared to $5,441,200 for the first nine months of 2001, representing an increase of 1.64%. Operating expenses consist of retail operating expenses, marketing and distribution expenses, and general and administrative expenses. Retail Operating Expenses: Retail operating expenses for the first nine months of 2002 were $268,100, representing a decrease of $94,100, or 25.98%, from the same period in 2001. As a percentage of net sales, retail operating expenses decreased to 1.44% as compared to 2.09% for the first nine months of 2001. The decrease in retail operating expenses consisted mainly of decreases in labor expenses, which management attributes to reduced hours of operation and better utilization of its manpower. Marketing and Distribution Expenses: Marketing and distribution expenses for the first nine months of 2002 were $3,196,900, representing an increase of $126,500, or 4.12%, from the first nine months of 2001. As a percentage of net sales, marketing and distribution expenses represented 17.21% as compared to 17.69% during the first nine months of 2001. Domestic Operations: Expenses for the first nine months of 2002 were $1,103,800 compared to $1,353,900 during the corresponding period of 2001, representing a decrease of $250,100. As a percentage of net sales in the United States, the expenses decreased to 12.82% during the first nine months of 2002, compared to 16.09% during the corresponding period of 2001 mainly because of reduced manpower and promotional expenses. European operations: Expenses for the first nine months of 2002 were $2,093,100 compared to $1,716,500 during the corresponding period of 2001, representing an increase of $376,600. As a percentage of net sales in the United Kingdom, the expenses increased to 21% during the first nine months of 2002 compared to 19.2% during the corresponding period of 2001 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase is mainly due to increased labor, freight and promotional expenses, but is partly offset by the reduction in expenses caused by the discontinuation of exports to the United States in the third quarter of 2001. - 16 - General and Administrative Expenses: General and administrative expenses were $2,065,200, representing an increase of $56,600 from the first nine months of 2001. As a percentage of net sales, the general and administrative expenses were 11.12% for the first nine months of 2002, as compared to 11.57% for corresponding period of 2001. Domestic Operations: General and administrative expenses were $1,251,500, representing an increase of $37,200 over the first nine months of 2001. The increase was mainly due to increased legal expenses, audit fee, insurance and rent. European Operations: General and administrative expenses were $813,700, representing an increase of $19,400 from the first nine months of 2001 mainly due to increase in depreciation and miscellaneous expenses. Other Expenses Other expenses for the first nine months of 2002 totaled $556,800, representing a decrease of $927,200 when compared to the first nine months of 2001. The other expenses consist of interest expenses, acquisition expenses and miscellaneous income. Interest expenses decreased by $60,200 because of reductions in the line of credit, long term debts, and interest rates. Miscellaneous income increased by $58,800 and acquisition expenses relating acquisition of UBI decreased by $808,200. Income Taxes The Company has a provision for income taxes of $143,200 for the first nine months of 2002, compared to $123,500 for the first nine months of 2001. The provision for taxes related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. The Company has implemented various strategies in order to utilize the deferred tax assets prior to their expiration. The introduction of new products, optimization of expenses and improvement in efficiency has brought the Company to profitable operations. In the past, management has been successful in reducing the amount of losses and moving the Company towards profitable operations, but there can be no assurance that the steps taken by management will result in the Company utilizing all the operating losses recorded as deferred tax assets. If the current plans are not successful, the Company will be required to reduce the amount of deferred tax assets recorded on the balance sheet. Net Income The Company's net income for the first nine months of 2002 was $93,400, as compared to a loss of $1,354,300 for the first nine months of 2001. After providing for a positive foreign currency translation adjustment of $500 during the first nine months of 2002 ($0 for 2001), the comprehensive income for 2002 was $93,900, compared to a loss of $1,354,300 in 2001. - 17 - Capital Demands Both the Ukiah and Saratoga Springs facilities have been operating at significantly less than full capacity. Both breweries have placed demands upon the Company's assets and liquidity. Failure to adequately meet those demands may have a material adverse affect on the Company's business, financial condition, and results of operations. The Company has yet to complete the build-out of the administrative space and the exterior landscaping at its Ukiah facility. Completion of construction is a condition to the issuance of a final certificate of occupancy. However, the Ukiah brewery has been operating under a temporary certificate of occupancy from the City of Ukiah since 1998 with no adverse consequences. The Company does not plan to revisit completion of the project until it has the available funds to do so. Until such time, it is possible that failure to complete construction and obtain a final certificate of occupancy could have a material adverse effect on the Company's business, financial condition, and results of operations, because of, among other reasons, increased administrative burdens and costs. Proceeds From Operations Insufficient to Sustain Operations The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah and Saratoga Springs facilities has placed demands on the Company's working capital. Beginning approximately in the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities (see "Liquidity and Capital Resources," below). Although Management has had success in negotiating these credit facilities in the past, there can be no assurance that the Company will be able to do so in the future, either at any price or at a price the Company will be able to sustain, or that the Company will have access to any alternative sources of funds in the future. Failure to secure sufficient funds will have a materially adverse effect on the Company. Brewing Contract with Wolavers Enterprises, LLC. During September 2001 the Company entered into an agreement with Wolaver's Enterprises, LLC, ("Wolaver's") a Florida limited liability company, to brew, on a contract basis, their line of organic beers. The Company produced 2,615 barrels of Wolaver's brand beer during the first nine months of the year 2002, compared to 2,832 barrels during the corresponding period of 2001. In July 2002, Wolaver's informed the Company that it had merged with Otter Creek Brewing Company in Middlebury, Vermont. Because of the merger, Wolaver's requested termination of the brewing contract, and the Company agreed to terminate the brewing contract effective as of December 31, 2002. Termination of this contract will increase the Company's unused brewing capacity. The Company will continue to look for opportunities to utilize its brewing facilities at a greater capacity. - 18 - Liquidity and Capital Resources Long Term Debt MBC has obtained a $2.7 million long term loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in monthly installments of $24,443 including interest, currently 7.24%, maturing in December, 2012, with a balloon payment in the amount of $1,872,300. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment (other than those leased through FINOVA Capital Corporation). Shareholder Commitment On August 31, 1999, the Company entered into a Master Line of Credit Agreement with UBA, one of its principal shareholders, which agreement was subsequently amended on April 28, 2000, and February 12, 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). As of September 30, 2002, the aggregate outstanding principal amount of the UBA Notes was $1,515,371, and the accrued but unpaid interest thereon was equal to approximately $298,200. The UBA Notes require the Company to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted the Company to defer payments of accrued interest. All of the UBA Notes originally matured in 2001 and 2002. The Company and UBA executed an Extension of Term of Notes under Master Line of Credit Agreement on February 14, 2002, which was later amended on August 15, 2002 (the "Extension Agreement"). The Extension Agreement confirms the Company's and UBA's extension of the terms of the UBA Notes for a period ending on March 31, 2003. During the extended term, UBA has the right to require the Company to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days. The Company and UBA have engaged in negotiations with regard to the Company's offer to convert the notes to shares of common stock. If the Company and UBA cannot reach agreement on the terms of such conversion, a failure to convert the debt will have an adverse effect on the Company. Equipment Lease FINOVA Capital Corporation leased new brewing equipment with a total cost of approximately $1.78 million to MBC for a term of 7 years (beginning December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease, the Company may purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or at the Company's option, may extend the term of the lease for an additional year at approximately $39,000 per month with an option to purchase the - 19 - equipment at the end of the year at then current fair market value. The lease is not pre-payable. Other Loans and Credit Facilities CIT Group/Credit Finance Line of Credit. The CIT Group/Credit Finance, Inc. provided the Company a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which is repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The Company commenced repayment of the term loan in March of 1999, and approximately $445,200 of the term loan was outstanding as of September 30, 2002. During October 2001, the CIT Group increased the line of credit by $170,000 to enable the company to acquire and refurbish bottling equipment in order to enhance the Company's capacity. The Company has repaid $85,000 and the balance of the $170,000 increase will be repaid once the balance of purchase of the bottling equipment is refinanced through an existing line of credit. During June of 2002, CIT Group further increased the line of credit by $65,000, which was repaid in installments by September, 2002. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of September 30, 2002, the total amount outstanding on the line of credit was approximately $2,064,300. The Company and CIT Group are currently discussing renewal and possible expansion of the credit facility. The facility originally matured on September 23, 2002, but CIT Group has informally agreed to continue to extend the facility for consecutive one-month terms until the Company and CIT Group conclude negotiations. The current extension terminates on November 24, 2002. Management expects to have a final agreement on the terms of renewal by the end of 2002. However, if the Company and CIT Group cannot reach agreement, it is possible that CIT Group could refuse to further extend the current facility. Such a refusal would have an immediate material adverse effect on the Company's ability to continue as a going concern. Necor Bank Limited Option Facility. Necor Bank Limited, a South African registered company, has provided UBSN with an overdraft facility of GBP 1,250,000. This overdraft facility is secured by a charge over all of the assets of UBSN. The amount outstanding on this line of credit as of September 30, 2002, was approximately $703,900. Shepherd Neame Loan. Shepherd Neame Limited has a brewing contract with UBSN for brewing Kingfisher Lager for the Company's European and Canadian markets. In consideration for UBSN's agreement to extend the brewing contract, Shepherd Neame Limited advanced a loan of GBP 600,000 to UBSN, repayable in monthly installments of GBP 5,000 per month, commencing in June, 2003. The loan carries an interest rate of 5%. Future Capital Demands The Company continues to have capital and liquidity needs which it cannot finance from its own operations. (See "Results of Operations--Proceeds From Operations Insufficient to Sustain - 20 - Operations," above.) As the Company's existing credit facilities are currently secured by substantially all of the Company's assets, obtaining expanded credit facilities in the future may prove to be difficult and expensive. Interest The weighted average interest rates paid on the Company's U.S. debts (including the long term capital lease of equipment by FINOVA Capital Corporation Inc.) was 8.43% for the first nine months of the year 2002 and 9.73% for the first nine months of the year 2001. Keg Management Arrangement The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. The agreement has been extended on a monthly basis since September 2002, and management is currently negotiating a new agreement. If the agreement terminates, the Company will be required to purchase a certain number of kegs from MicroStar and the Company would probably attempt to finance the purchase through debt or lease financing, if available. However, there can be no assurances that the Company will be able to negotiate a new agreement or finance the purchase of kegs. Failure to negotiate a new agreement or purchase the necessary kegs from MicroStar is likely to have a material adverse effect on the Company. Current Ratio The Company's ratio of current assets to current liabilities on September 30, 2002 was 0.63 to 1.0 and its ratio of total assets to total liabilities was 1.54 to 1.0. On September 30, 2001, the Company's ratio of current assets to current liabilities was 0.59 to 1.0 and its ratio of total assets to total liabilities was 1.60 to 1.0. Item 3. Controls and Procedures. The Company's management including the Chief Executive Officer, President and Chief Financial Officer, have evaluated, within 90 days prior to the filing of this quarterly report, the effectiveness of the design, maintenance, and operation of the Company's disclosure controls and procedures. Management determined that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accurate and is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. - 21 - PART II Item 1. Legal Proceedings. The Company is engaged in ordinary and routine litigation incidental to its business. Management does not anticipate that any amounts, which it may be required to pay by reason thereof, will have a material effect on the Company's financial position. Item 2. Changes in Securities. None. Item 3. Default Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None. Item 5. Other Items. Suspension and Delisting Action by the Pacific Exchange On September 19, 2002, the Company received notice from PCX Equities, Inc., a subsidiary of the Pacific Exchange, that trading in the Company's common stock on the Pacific Exchange had been suspended, effective immediately. The suspension will remain until the Company's stock is formally delisted, which requires review and approval by the Securities and Exchange Commission. The underlying reason for the suspension, and the ultimate delisting, is the fact that during the last twelve months the Company's Common Stock has not achieved or maintained a minimum bid price of $1.00 per share, as required by the rules of the Pacific Exchange. As of September 18, 2002, the closing bid price of the Company's common stock on the Pacific Exchange was $0.59 per share. The Board of Directors of the Company, which had previously approved delisting the Company's Common Stock from the Pacific Exchange, does not intend to contest or appeal the suspension, or the delisting procedure. Since May 6, 2002, the Company's Common Stock has been quoted on the Nasdaq OTC Bulletin Board, under the symbol "MENB". Announcement of Interest by United Breweries Holdings Ltd. On September 30, 2002, the shareholders of United Breweries Holdings, Ltd. (formerly Kingfisher Properties & Holdings, Ltd.) ("UBHL"), a corporation based and incorporated in India and publicly-held in that country, approved resolutions authorizing UBHL's board of directors to consider a transaction by which UBHL would purchase some or all of the Company's outstanding shares. To date, UBHL has not proposed any specific transaction, to the Company, nor has it indicated - 22 - when (if ever) it may make a specific proposal or commence negotiations with the Company for an actual acquisition of any shares, although representatives of UBHL have indicated that its board will be considering these issues in the near future. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit Number Description of Document -------------- ----------------------- 10.1 First Amendment to Extension of Term of Notes Under Master Line of Credit Agreement by and between Mendocino Brewing Company, Inc. and United Breweries of America, Inc. (b) Current Reports on Form 8-K During the third quarter of 2002 the Registrant filed a Current Report on Form 8-K dated September 19, 2002, the Registrant reported under Item 5, its receipt of notice of suspension in the trading of Company's common stock from the Pacific Exchange and the announcement of interest by United Breweries Holdings Ltd. ("UBHL"), a corporation based and incorporated in India and publicly-held in that country, authorizing UBHL's Board of Directors to consider a transaction by which UBHL would purchase some or all of the Company's outstanding shares. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: November 13, 2002 By:/s/ Dr. Vijay Mallya --------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: November 13, 2002 By: /s/ N. Mahadevan --------------------------------- N. Mahadevan Chief Financial Officer and Secretary - 23 - CERTIFICATIONS Statement of Principal Executive Officer I, Dr. Vijay Mallya, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and - 24 - 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Dr. Vijay Mallya --------------------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: November 13, 2002 - 25 - Statement of Principal Financial Officer I, N. Mahadevan, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and - 26 - 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ N. Mahadevan ------------------------------ N. Mahadevan, Chief Financial Officer Date: November 13, 2002 - 27 - EXHIBIT INDEX Exhibit Page - ------- ---- 10.1 First Amendment to Extension of Term of Notes under Master 29 Line of Credit Agreement by and between Mendocino Brewing Company, Inc. and United Breweries of America. 28 EXHIBIT 10.1 FIRST AMENDMENT TO EXTENSION OF TERM OF NOTES UNDER MASTER LINE OF CREDIT AGREEMENT This First Amendment to Extension of Term of Notes under Master Line of Credit Agreement (this "Amendment") is made and entered into as of November 13, 2002, effective as of August 15, 2002 (the "Effective Date") by and between Mendocino Brewing Company, Inc., a California corporation ("Borrower"), and United Breweries of America, Inc., a Delaware corporation ("Lender"). RECITALS A. Borrower and Lender entered into an Extension of Term of Notes Under Master Line of Credit Agreement dated February 14, 2002 (the "Original Agreement"), which provides that the terms of certain of the Notes made by Borrower in favor of Lender shall be extended until August 15, 2002. B. Lender agreed not to take any action against Borrower with respect to the Notes during the period beginning on the Effective Date and ending on the date hereof, for so long as the parties were negotiating the terms of the Amendment. C. Subject to the terms and conditions of this Amendment, the parties wish to further extend the terms of certain of the Notes. D. Any capitalized terms not otherwise defined herein shall have the meanings set forth in the Original Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is acknowledged, Borrower and Lender agree as follows: 1. Extension of Term. Section 1 of the Original Agreement is amended to read as follows: The Notes provide that Lender has the right, at any time on or after the respective maturity dates of the Notes, to convert the Notes into shares of Borrower's common stock. However, Section 3 of the Notes provides that in the event that Lender has not converted the entire principal amount of any Note on or before its respective maturity date, Lender has the right to extend the term of such Note for a period of time mutually agreed upon between Lender and Borrower. Borrower and Lender had previously agreed to extend the term of each of the Notes itemized Nos. 1 through 8 on Exhibit A, effective as of the maturity date of each respective Note, for an indefinite period of time pending the Borrower's and Lender's discussions regarding conversion of the Notes; this Agreement hereby confirms that agreement. The parties hereby modify their previous agreement and agree to extend the term of each of the Notes itemized Nos. 1 through 13 on Exhibit A, effective as of the maturity date of each respective Note, for a period of time ending on March 31, 2003. 2. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of laws principles of that or any other jurisdiction. 29 3. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all taken together shall constitute one and the same instrument. 4. Miscellaneous. This Amendment, in connection with the Original Agreement, contains all of the agreements, conditions, promises and covenants between the parties with respect to the subject matter hereof and supersedes all prior or contemporaneous agreements, representations or understandings with respect to the subject matter hereof. In the event of any conflict between the terms of the Original Agreement and this Amendment, the terms of this Amendment shall govern. Except as set forth in this Amendment, the terms of the Original Agreement shall remain in full force and effect. This Amendment may not be amended, modified, altered or otherwise changed in any respect except by written agreement signed by authorized representatives on behalf of Borrower and Lender. If any one or more of the provisions contained in this Amendment shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforce ability of the remaining provisions contained herein shall not in any way be affected or impaired. IN WITNESS WHEREOF, duly executed representatives of each of the parties hereto have executed and delivered this Amendment as of the Effective Date. Borrower: Lender: MENDOCINO BREWING COMPANY, INC. UNITED BREWERIES OF AMERICA, INC. a California corporation a Delaware corporation By: /s/ N. Mahadevan By: /s/ Anil Pisharody ------------------------------ ------------------------------ Name: N. Mahadevan Name: Anil Pisharody ------------------------------ ------------------------------ Title: Secretary Title: Secretary ------------------------------ ------------------------------ 30 -----END PRIVACY-ENHANCED MESSAGE-----