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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 Or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended MARCH 31, 2004
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 1-13636
Mendocino Brewing Company, Inc.
(Exact name of Registrant as Specified in its Charter)
California 68-0318293
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
1601 Airport Road, Ukiah, CA 95482
(Address of principal executive offices)
(707) 463-6610
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes [ ] No [X ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of the issuer's
common stock outstanding as of March 31, 2004 is 11,266,874.
PART I
ITEM 1. FINANCIAL STATEMENTS.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
2004 2003
CURRENT ASSETS
Cash $ 703,100 $ 554,300
Accounts receivable, allowance for doubtful 6,674,400 7,017,700
accounts of $38,200 and $37,800
Inventories 1,104,300 1,186,100
Prepaid expenses 428,600 555,500
------------ ------------
Total Current Assets: 8,910,400 9,313,600
------------ ------------
PROPERTY AND EQUIPMENT 13,762,900 13,874,800
------------ ------------
OTHER ASSETS
Deposits and other assets 198,100 188,600
Intangibles net of amortization 93,300 94,700
------------ ------------
Total Other Assets: 291,400 283,300
------------ ------------
Total Assets: $ 22,964,700 $ 23,471,700
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit 2,415,700 1,974,800
Note payable 576,200 576,200
Accounts payable 5,172,500 5,340,100
Accrued liabilities 1,048,500 1,275,100
Deferred gain 683,600 655,200
Income taxes payable 341,300 465,100
Current maturities of obligation under long-term debt 610,500 693,700
Current maturities of obligation under capital lease 141,000 129,000
------------ ------------
Total Current Liabilities: 10,989,300 11,109,200
NOTES TO RELATED PARTY 1,942,100 1,921,500
Long term debt, less current maturities 3,670,700 3,730,300
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 168,300 204,100
------------ ------------
Total Liabilities: 16,770,400 16,965,100
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with aggregate
liquidation preference of $227,600; 10,000,000 shares
authorized, 227,600 shares issued and outstanding 227,600 227,600
Common stock, no par value: 30,000,000 shares
authorized, 11,266,874 shares issued and outstanding 14,648,600 14,648,600
Accumulated comprehensive income 140,100 78,000
Accumulated deficit (8,822,000) (8,447,600)
------------ ------------
Total Stockholders' Equity 6,194,300 6,506,600
------------ ------------
Total Liabilities and Stockholders' Equity:
$ 22,964,700 $ 23,471,700
============ ============
The accompanying notes are an integral part of these financial statements.
-1-
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
-------------------------------
Three Months Ended
March 31,
-------------------------------
2004 2003
---- ----
Sales $ 6,946,000 $ 6,009,900
Less excise taxes 142,800 139,800
------------ ------------
Net Sales 6,803,200 5,870,100
Cost of goods sold 4,634,800 3,994,600
------------ ------------
Gross Profit 2,168,400 1,875,500
------------ ------------
Marketing 1,328,300 1,149,900
General and administrative 984,100 783,300
------------ ------------
2,312,400 1,933,200
------------ ------------
Loss from operations (144,000) (57,700)
------------ ------------
Other income (expense)
Miscellaneous income 4,000 4,900
Loss on sale of asset (1,600) ---
Interest expense (212,000) (205,400)
------------ ------------
(209,600) (200,500)
------------ ------------
Loss before income taxes (353,600) (258,200)
PROVISION FOR INCOME TAXES 20,800 31,200
------------ ------------
Net Loss (374,400) (289,400)
------------ ------------
Foreign currency translation adjustment 62,100 (11,500)
------------ ------------
COMPREHENSIVE LOSS $ (312,300) $ (300,900)
============ ============
NET Loss per share $ (0.03) $ (0.03)
============ ============
Weighted average common shares outstanding 11,266,874 11,266,874
============ ============
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
March 31,
-------------------------------
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(374,400) $(289,400)
Adjustments to reconcile net loss
to net cash from operating
activities:
Depreciation and amortization 302,700 286,500
Allowance for doubtful accounts 38,200 20,000
Loss on sale of assets 1,600 --
Changes in:
Accounts receivable 485,600 (26,900)
Inventories 81,800 84,000
Prepaid expenses 136,400 221,100
Deposits and other assets (16,200) 9,400
Accounts payable (276,600) (708,900)
Accrued liabilities (357,100) 133,600
Income taxes payable -- (54,200)
--------- ---------
Net cash from operating 22,000 (324,800)
--------- ---------
activities:
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and (156,300) (118,300)
leasehold improvements
Proceeds from sale of fixed assets 3,300 --
--------- ---------
Net cash from investing activities: (153,000) (118,300)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 416,700 203,500
Net (repayment)/borrowing on long-term debt (172,900) 252,500
Borrowings on related party debt 20,600 21,500
Payments on obligation under long term lease (23,800) (18,600)
Disbursements in excess of deposits -- (47,700)
--------- ---------
Net cash from financing activities: 240,600 411,200
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 39,200 (7,000)
--------- ---------
NET CHANGE IN CASH 148,800 (38,900)
--------- ---------
CASH, beginning of period 554,300 146,800
--------- ---------
CASH, end of period $ 703,100 $ 107,900
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 191,400 $ 183,900
Non-cash investing activity
Seller Financed equipment $ 15,400 $ 28,500
The accompanying notes are an integral part of these financial statements.
-3-
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States. 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, 2003. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.
The Company's line of credit from CIT Group and its temporary loan from Savings
Bank of Mendocino (both of which are more fully described below under "Other
Loans and Credit Facilities") are scheduled to fall due on June 30 and June 23,
2004, respectively. A failure to replace, renegotiate, or extend either of these
agreements would have a significant adverse impact on the Company's liquidity
and operations. Although Management has been able to do so in the past, there
can be no assurance that the Company will have access to the same or equivalent
sources of funds in the future, either on a comparable basis or on any other
terms acceptable to the Company.
On April 4, 2004, MBC received a commitment from United Breweries of America,
Inc. ("UBA"), one of its major shareholders, to the effect that UBA would
provide MBC with such financial assistance as may be in UBA's power to prevent
or avoid any default under either the CIT Group line of credit or the temporary
loan from Savings Bank of Mendocino County when they become due. The terms of
any such assistance have not yet been determined, however.
NOTE 2 - 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 a current interest rate equal to the prime rate of
Chase Manhattan Bank of New York plus 4.25% payable monthly, originally
scheduled to mature on September 23, 2002. The line of credit is secured by all
accounts receivable, 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 was repayable in sixty consecutive
monthly installments of principal, each in the amount of $24,700.
-4-
On January 17, 2003, CIT group amended the facility and extended the term of the
facility to expire on November 30, 2003. This amendment increased the maximum
credit available to $3,500,000 and provided a term loan of $750,000 consisting
of the original balance of $346,300 and a new term loan of $403,700 repayable in
30 equal consecutive monthly installments of $24,700, commencing February 1,
2003, with a final payment of $8,000. CIT group amended and extended the
facility on December 1, 2003, January 30, 2004, and February 27, 2004 in order
to allow the Company time to refinance. On May 3, 2004 CIT Group extended the
term of the facility to expire on June 30, 2004 and increased the term loan
repayment to $9,000 per week. 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 March 31, 2004, the total amount outstanding on
the line of credit was approximately $1,668,000.
Nedbank Limited, a South African registered company, has provided a credit
facility of GBP 1,250,000 to UBSN Ltd. ("UBSN"), a wholly-owned subsidiary of
United Breweries International (UK) Ltd. ("UBI"), which is in turn wholly-owned
by the Company. This facility includes a revolving short-term loan, overdraft
protection, and foreign exchange services. It is available until terminated by
Nedbank, and is secured by all of the assets of UBSN. The amount outstanding on
this line of credit as of March 31, 2004 was approximately $1,124,400.
NOTE 3 - LONG TERM DEBT, NOTE PAYABLE, AND NOTES TO RELATED PARTIES
The Company has a note outstanding in the principal amount of $2,700,000 in
favor of Savings Bank of Mendocino County ("SBMC"), with interest at the
five-year treasury constant maturity index plus 4.17%, currently 7.24%. The note
requires monthly payments of principal and interest of $24,400. The note matures
in December 2012 with a balloon payment of $932,600, and is secured by real
property located in Ukiah, California.
On December 31, 2003, SMBC extended a temporary loan in the principal amount of
$576,200 to the Company in order to finance buy-out of equipment leased through
Finova Capital Corporation. This loan, which is due for repayment on June 23,
2004, is secured by the existing assets of the Company and the assets released
by Finova on lease termination. The rate of interest on the loan is 7%.
The Company owes the County of Mendocino $574,500, which represents overdue
taxes for the period from April of 1999 to June of 2003. Under the payment plan
executed with the County, this amount is payable in four annual installments on
or before April 10 of each year, commencing in the year 2005, along with accrued
interest calculated at 18% per year. Failure to timely pay any installment or
any current property taxes may result in the County selling the Company's Ukiah
property to satisfy this outstanding debt.
-5-
UBSN has engaged Shepherd Neame Limited ("Shepherd Neame"), a related party, to
brew Kingfisher Lager for the Company's European and Canadian markets. As
consideration for the extension of the brewing contract, Shepherd Neame advanced
a loan of GBP 600,000 to UBSN, repayable in ten annual installments of GBP
60,000, commencing in June 2003. At the time of the filing this report, GBP
600,000 was approximately equal to $1,104,000, therefore, each payment of 60,000
GBP would be approximately equal to $110,400. The loan carries an interest rate
of 5% per year.
The Company has issued unsecured convertible notes in favor of UBA in the amount
of approximately $1,515,400 as of September 30, 2003. The notes bear interest at
the prime rate plus 1.5%, subject to a maximum of 10% per annum, and each note
originally matured 18 months from the date of the particular advance. The notes
were extended to mature on August 14, 2004. The notes are convertible, at UBA's
option, into common stock at $1.50 per share. Interest accrued on the notes as
of March 31, 2004, is approximately $426,700. Because these notes are
subordinated to the CIT line of credit and SBMC note, the Company does not
expect to make payments on the notes within the next year. The Company expects
the maturity dates to be extended again and has shown the amount as long-term
debt.
NOTE 4 -- RELATED PARTY TRANSACTIONS
During 2001, MBC 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 MBC
and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing
Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement
between UBI and UB Limited.
Additional information about these transactions may be found in the Company's
annual report on Form 10-KSB for the year ended December 31, 2003.
The following table reflects the value of the transactions for the quarters
ended March 31, 2004 and 2003 and the balances outstanding at March 31, 2004 and
2003.
- ------------------------------------------------- -------------- --------------
March 31,
2004 2003
- ------------------------------------------------- -------------- --------------
Sales to Shepherd Neame $522,500 $428,900
- ------------------------------------------------- -------------- --------------
Purchases from Shepherd Neame 2,989,700 2,329,300
- ------------------------------------------------- -------------- --------------
Expenses reimbursement to Shepherd Neame 243,100 206,700
- ------------------------------------------------- -------------- --------------
Interest expenses associated with
UBA convertible notes payable 20,600 21,500
- ------------------------------------------------- -------------- --------------
Accounts payable to Shepherd Neame 3,228,200 2,280,700
- ------------------------------------------------- -------------- --------------
Account receivable from Shepherd Neame 516,400 201,400
- ------------------------------------------------- -------------- --------------
-6-
NOTE 5 - 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
------------------
3/31/2004 3/31/2003
---------------------------------------
Net (loss) $(374,400) $(289,400)
=======================================
Weighted average common shares outstanding
11,266,874 11,266,874
=======================================
Basic net (loss) per share $ (0.03) $ (0.03)
=======================================
Diluted net loss per share
Net loss $ (374,400) $ (289,400)
Interest expense on convertible notes payable
- -
---------------------------------------
Income for the purpose of computing diluted net
income per share $ (374,400) $ (289,400)
=======================================
Weighted average common shares outstanding 11,266,874 11,266,874
Dilutive stock options - -
Assumed conversion of convertible notes payable - -
---------------------------------------
Weighted average common shares outstanding for 11,266,874 11,266,874
the purpose of computing diluted net loss per
share
=======================================
Diluted net loss per share $ (0.03) $ (0.03)
=======================================
-7-
NOTE 6 - INVENTORY
March 31, 2004 December 31, 2003
-------------------------------------------
Raw Materials $ 351,200 $ 459,600
Beer-in-process 199,600 190,400
Finished Goods 536,100 510,000
Merchandise 17,400 26,100
------ ------
TOTAL $ 1,104,300 $1,186,100
=========== ==========
NOTE 7 - STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the three months ended
March 31, 2004.
SERIES A OTHER
PREFERRED STOCK COMMON STOCK COMPREHENSIVE
---------------------------------------------------- INCOME/ ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT (LOSS) DEFICIT EQUITY
------------ ------------ ------------ ------------ ------------- ------------ ------------
Balance
December 31, 2003 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 78,000 $(8,447,600) $ 6,506,600
Net Loss (374,400) (374,400)
Currency
Translation
Adjustment 62,100 62,100
------------ ------------ ------------ ------------ ------------- ------------ ------------
Balance,
March 31, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 140,100 $(8,822,000) $ 6,194,300
============ ============ ============ ============ ============= ============ ============
-8-
NOTE 8 - STOCK BASED COMPENSATION
The Company has a stock-based employee compensation plan that allows the Company
to grant options to purchase up to 1,000,000 shares of the Company's common
stock. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related Interpretations. No stock-based employee compensation cost is reflected
in net loss, as all options granted under these plans had an exercise price
equal to the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based compensation.
- -------------------------------------------------------------------------------
Three months ended
March 31,
- -------------------------------------------------------------------------------
2004 2003
- ------------------------------------------------- -------------- --------------
Net Loss reported $(374,400) $(289,400)
- ------------------------------------------------- -------------- --------------
Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all awards, net of tax related
effects -- --
- ------------------------------------------------- -------------- --------------
Pro forma Net Income (Loss) $(374,400) $(289,400)
- ------------------------------------------------- -------------- --------------
Earning Per Share
- ------------------------------------------------- -------------- --------------
Basic and diluted (as reported) $ (0.03) $ (0.03)
- ------------------------------------------------- -------------- --------------
Basic and diluted (pro forma) $ (0.03) $ (0.03)
- ------------------------------------------------- -------------- --------------
-9-
NOTE 9. 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:
Three months ended March 31, 2004
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Net Sales $ 2,298,600 $ 4,466,700 $ 37,900 $ - $ 6,803,200
Operating
Profit/(Loss) (199,500) 63,200 (7,700) - (144,000)
Identifiable
Assets 13,444,000 7,250,700 93,700 2,176,300 22,964,700
Depreciation
& amortization 185,600 108,500 1,300 7,300 302,700
Capital
Expenditures 15,400 140,900 - 156,300
Three months ended March 31, 2003
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Net Sales $ 2,247,400 $ 3,532,300 $ 90,400 $ - $ 5,870,100
Operating
Profit/(Loss) (168,900) 128,800 (17,600) - (57,700)
Identifiable
Assets 14,214,000 5,554,900 110,500 1,789,000 21,668,400
Depreciation &
amortization 187,500 86,700 1,300 11,000 286,500
Capital
Expenditures 28,500 89,800 - 118,300
-10-
NOTE 10 - LEGAL DISPUTES
Effective March 28, 2003, the Company terminated a written distribution
agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company
(GGD), in accordance with the provisions of the agreement, upon 30 days' written
notice to GGD. On April 1, 2003, GGD filed an action in Marin County Superior
Court, naming the Company and Mark Anderson (Mr. Anderson is employed by the
Company as a sales manager) as defendants. Because Mr. Anderson is an employee
of the Company, the Company may have some obligation to indemnify him for his
costs and expenses in connection with these claims. GGD claims that the
termination of the agreement was wrongful and sued the Company for breach of
contract, breach of the covenant of good faith and fair dealing, unfair business
practices, and intentional interference with economic relationships.
The Company believes that cause was not required to terminate the agreement, but
even if cause was required, the Company believes it had sufficient cause to
terminate the agreement. The Company filed a cross-complaint against GGD
alleging breach of contract, tortious interference with prospective economic
advantage, and unfair business practices. The Company is seeking the appropriate
remedies, including compensatory and punitive damages.
During the second quarter of the year 2003, the Company received $655,200 from
the two new distributors for the territories of Napa, Solano, Marin, and Sonoma
Counties. The Company has treated this receipt as deferred gain pending disposal
of the lawsuit.
-11-
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 three months ended March 31, 2004, compared to the three
months ended March 31, 2003 and the year ended December 31, 2003. This
discussion should be read in conjunction with the Consolidated Financial
Statements and Notes included in the company's Annual Report on Form 10-KSB for
the year ended December 31, 2003.
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.
FORWARD LOOKING STATEMENTS
Various portions of this Quarterly Report, including but not limited to the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contain forward-looking information. Such
information involves risks and uncertainties that are based on current
expectations, estimates and projections about the Company's business,
Management's beliefs, and assumptions made by Management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
and variations of those and similar words are intended to identify such
forward-looking information. Any forward-looking statements made by the Company
are intended to provide investors with additional information with which they
may assess the Company's future potential. All forward-looking statements are
based on assumptions about an uncertain future and are based on information
available at the date such statements are issued. Actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including but not limited
to: changes in the pricing environment for the Company's products; changes in
demand for malt beverage products in different Company markets; changes in
distributor relationships or performance, changes in customer preference for the
Company's malt beverage products; regulatory or legislative changes; the impact
of competition, changes in raw materials prices; availability of financing for
operations, changes in interest rates; changes in the company's European beer
and/or restaurant business, and other risks discussed elsewhere in this
Quarterly Report and from time to time in the Company's Securities and Exchange
Commission (the "Commission") filings and reports. In addition, such statements
could be affected by general industry and market conditions and growth rates,
and in general domestic and European economic and political conditions. The
Company undertakes no obligation to update these forward-looking statements to
reflect facts, circumstances, assumptions or events that occur after the date
the forward-looking statements are made or to publicly release the results of
any revision to these forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements.
-12-
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.
o The Company follows Accounting Principles Board Opinion No. 25 (APB
25), "Accounting for Stock Issued to Employees," in accounting for its
employee stock options using the fair value based method.
o The Company reviews its long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. The Company's evaluation is
based on an estimate of the future undiscounted cash flows of the
related asset or asset grouping over the remaining life in measuring
whether the assets are recoverable. Long-lived asset are written down
to their estimated net fair value calculated using a discounted future
cash flow analysis in the event of an impairment. If circumstances
related to the Company's long-lived assets change, the Company's
valuation of the long-lived assets could materially change.
o The Company evaluates the realizability of its deferred tax assets
quarterly by assessing the need for and amount of the valuation
allowance. This evaluation is based on an assessment of the Company's
ability to generate future U.S. taxable income. Results of operations
in recent years are considered in the assessment. The Company records
a valuation allowance for the portion of its deferred tax assets that
do not meet the recognition criteria of SFAS No. 109, "Accounting for
Income Taxes." If circumstances related the Company's ability to
generate future U.S. taxable income change, the Company's evaluation
of its deferred tax assets could materially change.
o The Company believes that it will prevail in the litigation involving
Golden Gate Distributing (see "PART II, Item 1 - Legal Proceedings,"
below) and has not accrued any amount in connection with this
litigation.
-13-
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.
SEGMENT INFORMATION
Prior to 2001, the Company's business operations were exclusively located
in the United States, where it was divided into two segments, manufacturing and
distribution of beer, which accounted for the majority of the Company's gross
sales, and retail sales (primarily at the Company's Hopland, California, tavern
and merchandise store) which generally accounted for less than 5% of gross sales
(by revenue). With the Company's acquisition of United Breweries
International(UK) , Ltd. ("UBI") in August 2001, however, the Company gained a
new business segment, distribution of beer outside the United States, primarily
in the U.K. and Ireland, continental Europe, and Canada (the "European
Territory"). This segment accounted for 64% of the Company's gross sales during
the first quarter of 2004 (as compared to 59% for the same period during 2003),
with the Company's United States operations, including manufacturing and
distribution of beer as well as retail sales (the "Domestic Territory")
accounting for the remaining 36%. With expanded wholesale distribution of beer
and closure of restaurant at Hopland, Management expects that retail sales, as a
percentage of total sales, will decrease proportionally to the expected increase
in the Company's wholesale sales.
SEASONALITY
Sales of the Company's products are somewhat seasonal. Historically, sales
volumes in all geographic areas have been comparatively low during the first
quarter of the calendar year in both the US market and the Company's European
Territory. In the US, sales volumes have been stronger during the second and
third quarters and slower again during the fourth quarter, while in the
Company's European Territory the fourth quarter has generated the highest sales
volume. The volume of sales in any given area may also be affected by local
weather conditions. Because of the seasonality of the Company's business,
results for any one quarter are not necessarily indicative of the results that
may be achieved for the full fiscal year.
SUMMARY OF FINANCIAL RESULTS
The Company ended the first quarter of 2004 with a net loss of $355,400, as
compared to a net loss of $289,400 for the same period in 2003. As set forth
more fully under "Results of Operations," below, during the first quarter the
Company experienced an increase in gross sales of $936,100, or 15.6% during the
period, but this increase was offset by higher costs of goods sold (which
increased by $640,200, or 16.0%), marketing costs (which increased by $178,400,
or 15.5%), general and administrative costs (which increased by $200,800, or
25.6%), and higher interest expenses (which increased by $6,600, or 3.2%), all
of which contributed to the net loss for the period.
-14-
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.
----------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
STATEMENTS OF OPERATIONS DATA: % %
- -
Sales 102.10 102.38
Less Excise taxes 2.10 2.38
------- -------
NET SALES 100.00 100.00
Costs of Sales 68.13 68.05
------- -------
GROSS PROFIT 31.87 31.95
------- -------
Marketing 19.52 19.59
General and Administrative Expense 14.47 13.34
PROFIT / (LOSS) FROM OPERATIONS (2.12) (0.98)
Other (Income) / Expense (0.04) (0.08)
Interest Expense 3.12 3.50
------- -------
Loss before income taxes (5.20) (4.40)
Provision for income taxes 0.31 0.53
------- -------
NET LOSS (5.51%) (4.93%)
======= =======
Other Comprehensive Loss 0.91 (0.20)
======= =======
COMPREHENSIVE LOSS (4.60%) (5.13%)
======= =======
----------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
BALANCE SHEET DATA: $ $
- -
Cash and Cash Equivalents 703,100 107,900
Working Capital (2,078,900) (2,888,900)
Property and Equipment 13,762,900 13,977,400
Deposits and Other Assets 291,400 279,100
Total Assets 22,964,700 21,668,400
Long-term Debt (less current maturities) 3,670,700 3,195,600
Capital Lease (less current maturities) 168,300 268,700
Total Liabilities 16,770,400 15,622,900
Accumulated Deficit (8,822,000) (8,783,900)
Stockholder's equity 6,194,300 6,045,500
-15-
NET SALES
Overall net sales for the first quarter of 2004 were $6,803,200, an
increase of $933,100, or 15.9%, compared to $5,870,100 for the first quarter of
2003. The increase was mainly due to increased sales of European operations and
exchange rate fluctuations.
DOMESTIC OPERATIONS: Domestic net sales for first quarter of 2004 were
$2,336,500 compared to $2,337,800 for the same period in 2003, a reduction of
0.06%. The decrease in sales compared to previous year was due to decrease of
$52,500 in retail sales during the first quarter of the year 2004 compared to
corresponding period in the year 2003 because of the closure of the restaurant
at Hopland in October 2003. The sales volume increased to 12,772 barrels in the
first quarter of 2004 from 12,593 barrels in the first quarter 2003,
representing an increase of 179 barrels, or 1.42%. Of the increase, sales of
Company's brands decreased by 155 barrels; Kingfisher volume increased by 239
barrels and contract brands sales increased by 95 barrels.
EUROPEAN TERRITORY: Net sales for the first quarter of 2004 were $4,466,700
(GBP 2,428,100) compared to $3,532,300 (GBP 2,204,100) during the corresponding
period of 2003, an increase of 26.45%. During the first quarter of 2004, UBSN
sold 14,389 barrels compared to 12,980 barrels during the first quarter of 2003.
Exchange rate fluctuations when measured in United States dollars increased
growth percentage as compared to last year and hence when the net sales results
are compared in Pounds Sterling, there is an increase of 10.16%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first quarter of
2004 was 68.13%, as compared to 68.05% during the corresponding period of 2003
mainly due to increased cost in the United Kingdom.
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the
United States during the first quarter of 2004 was 71.13%, as compared to
71.68%, during the corresponding period of 2003, representing a decrease of
0.77% mainly due to a decrease in retail operation costs because of closure of
the restaurant at Hopland.
EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the
United Kingdom during the first quarter of 2004 was 66.93%, as compared to
66.07% during corresponding period in 2003 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation), representing increase of 1.3% mainly due increase in purchase
price of the products from Shepherd Neame.
GROSS PROFIT
As a result of the higher net sales described above, gross profit for the
first quarter 2004 increased to $2,168,400, from $1,875,500 during the
corresponding period of 2003, representing an increase of 15.62%. As a
percentage of net sales, the gross profit during the first quarter of 2004
decreased to 31.87% from that of 31.95% for the first quarter of 2003.
OPERATING EXPENSES
Operating expenses for the first quarter of the year 2004 were $2,312,400,
an increase of $379,200, or 19.62%, as compared to $1,933,200 for the
corresponding period of the year 2003. Operating expenses consist of marketing
and distribution expenses and general and administrative expenses.
MARKETING AND DISTRIBUTION EXPENSES:
The Company's marketing and distribution expenses consist of salesmen's
salaries and commissions, advertising costs, product and sales promotion costs,
travel expenses and related costs and Company's tavern and tasting room
expenses. Such expenses for the first quarter of 2004 were $1,328,300, as
compared to $1,149,900 for the first quarter of 2003, representing an increase
of 15.51%.
DOMESTIC OPERATIONS: Expenses for the first quarter of 2004 were $400,300
compared to $400,900 during the corresponding period of 2003, representing a
decrease of $600. As a percentage of net sales in the United States, the
expenses decreased to 17.13% during the first quarter of 2004, compared to
17.15% during the corresponding period of 2003. There were increases in salary
and travel costs during the first quarter of the year 2004 compared to the
corresponding period of 2003 due to increased man power at both coasts which was
offset by reduction in tavern and tasting room expenses due to closure of the
restaurant at Hopland.
-16-
EUROPEAN TERRITORY: Expenses for the first quarter of 2004 were $928,000
compared to $749,000 during the corresponding period of 2003, representing an
increase of $179,000. As a percentage of net sales in the United Kingdom, the
expenses decreased to 20.78% during the first quarter of 2004 compared to 21.2%
during the corresponding period of 2003 (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 increase in manpower and
travel costs due to additional man power, increase in sales promotional expenses
and higher commission and discount on increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES:
The Company's general and administrative expenses were $984,100 for the
first quarter of the year 2004, representing an increase of $200,800, or 25.64%,
over $783,300 for the corresponding period in 2003. These expenses were equal to
14.47% of net sales for the first quarter of the year 2004, as compared to
13.34% for corresponding period in 2003.
DOMESTIC OPERATIONS: Domestic general and administrative expenses were
$498,300 for the first quarter of the year 2004, representing an increase of
$35,700, or 7.72%, over $462,600 for the first quarter of the year 2003. The
increase was primarily due to increased legal expenses caused by legal dispute
with a distributor.
EUROPEAN TERRITORY: General and administrative expenses related to the
European Territory were $485,800 for the first quarter of the year 2004,
representing an increase of $165,100, or 51.48%, as compared to $320,700 for the
first quarter of the year 2003 (in each case as calculated in U.S. dollars,
after taking into account the effects of the exchange rate calculation). These
increases were mainly due higher salary costs, higher exchange rate differences
within the European territory and increased depreciation expenses.
OTHER EXPENSES
Other expenses for the first quarter of 2004 totaled $209,600, representing
an increase of $9,100 when compared to the first quarter of 2003 mainly due to
increase in interest expenses as a result of increased borrowings under the
lines of credit.
INCOME TAXES
The Company has a provision for income taxes of $20,800 for the first
quarter of 2004, compared to $31,200 for the first quarter of 2003. The
provision for taxes related to the estimated amount of taxes that will be
imposed by taxing authorities in the United Kingdom.
NET LOSS
The Company's net loss for the first quarter of 2004 was $374,400, as
compared to a loss of $289,400 for the first quarter of 2003. After providing
for a positive foreign currency translation adjustment of $62,100 during the
first quarter of 2004 (as compared top a negative adjustment of $11,500 for the
same period in 2003), the comprehensive loss for the first quarter of 2004 was
$312,300, compared to a loss of $300,900 for the same period in 2003.
-17-
CAPITAL DEMANDS
The Company's Ukiah and Releta facilities are both operating at
significantly less than full capacity (as they have been for some time), placing
continuing 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 its administrative space
and the exterior landscaping of its Ukiah facility, and does not plan to revisit
completion of the project until it has the available funds to do so. If, in the
future, the Company decides to complete the construction and landscaping, the
remaining work and the currently cost thereof are estimated to be as follows:
covering the parking lot with asphalt, approximately $30,000; building a
concrete sidewalk to one of the entrances of the brewery building, approximately
$10,000.
PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS
The Company must make timely payment of its debt and lease commitments to
continue its operations. Beginning at about the time when the Ukiah brewery
commenced operations (the second quarter of 1997), 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has entered into a substantial number of loans, lines of
credit, other credit facilities, and lease agreements over the last several
years, with the result that a substantial majority of its assets are encumbered
and it is carrying a relatively large debt burden. In order to continue its
operations, the Company will have to make timely payments of its debt and lease
commitments as they fall due. Any breach of a loan or lease which actually leads
to default, or to an attempt by a creditor to exercise its rights in the
Company's tangible or intangible assets, could potentially make it impossible,
at least in the short term, for the Company to continue its operations.
In particular, MBC's line of credit from CIT Group and its temporary loan
from Savings Bank of Mendocino (both of which are more fully described below
under "Other Loans and Credit Facilities") are scheduled to fall due on June 23
and June 30, 2004, respectively. A failure to replace, renegotiate, or extend
either of these agreements would have a significant adverse impact on the
Company's liquidity and operations. Although Management has been able to do so
in the past, there can be no assurance that the Company will have access to the
same or equivalent sources of funds in the future, either on a comparable basis
or on any other terms acceptable to the Company.
-18-
On April 4, 2004, MBC received a commitment from United Breweries of
America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA
would provide MBC with such financial assistance as may be in UBA's power to
prevent or avoid any default under either the CIT Group line of credit or the
temporary loan from Savings Bank of Mendocino County when they become due. The
terms of any such assistance have not yet been determined, however.
MASTER LINE OF CREDIT. On August 31, 1999, MBC and United Breweries of
America, Inc. ("UBA"), one of the Company's principal shareholders, entered into
a Master Line of Credit Agreement, which was subsequently amended in April 2000
and February 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. The Company and UBA executed an Extension of Term of Notes under
Master Line of Credit Agreement in February 2002, which was later amended in
August 2002, and again in March and August 2003 (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 August 14, 2004. On December 28, 2001, the
Company and UBA entered into a Confirmation of Waiver which confirms that as of
August 13, 2001, UBA waived its rights with regard to all conversion rate
protection as set forth in the UBA Notes.
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"). The aggregate outstanding principal amount of the UBA Notes as of March
31, 2004 was $1,515,400, and the accrued but unpaid interest thereon was equal
to approximately $426,700.
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 capitalize all accrued interest; therefore, the Company
has borrowed the maximum amount available under the facility. Upon maturity of
any UBA Note, unless UBA has given the Company prior instructions to commence
repayment of the outstanding principal balance, the outstanding principal and
accrued but unpaid interest on such Note may be converted, at the option of UBA,
into shares of the Company's common stock. If UBA does not elect to so convert
any UBA Note upon maturity, it has the option to extend the term of such UBA
Note for any period of time mutually agreed upon by UBA and the Company. During
the extended term of any UBA Note, 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 outstanding principal amount of the Notes and the unpaid interest
thereon may be converted, at UBA's discretion, into shares of the Company's
unregistered Common Stock at a conversion rate of $1.50 per share. As of March
31, 2004, the outstanding principal and interest on the notes was convertible
into 1,294,718 shares of the Company's Common Stock. On December 28, 2001, the
Company and UBA entered into a Confirmation of Waiver which provides a written
confirmation that as of August 13, 2001, UBA waived its rights with regard to
all conversion rate protection as set forth in the UBA Notes.
LONG TERM DEBT: MBC has obtained a $2.7 million 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 partially
amortizing monthly installments of $24,400 including interest at the rate of
7.24%, maturing December 2012 with a balloon payment in the amount of $932,600.
The interest rate is adjusted on every five year anniversary of the agreement to
the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon
payment will vary depending on the change in interest rates over the years. 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.
-19-
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 a
current interest rate equal to the prime rate of Chase Manhattan Bank of New
York plus 4.25 %, payable monthly, originally scheduled to mature on 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 was
repayable in sixty consecutive monthly installments of principal, each in the
amount of $24,700.
On January 17, 2003, the term of this facility was extended to November 30,
2003. At the same time, the maximum credit available was increased to
$3,500,000, and the Company was provided a term loan of $750,000 consisting of
the original balance of $346,300 and a new term loan of $403,700 repayable in 30
equal consecutive monthly installments of $24,700, commencing February 1, 2003,
with a final payment of $8,000. CIT group amended and extended the facility on
December 1, 2003, January 30, 2004, and February 27, 2004 in order to allow the
Company time to refinance. On May 3, 2004 CIT Group further extended the term of
the facility to expire on June 30, 2004 and increased the term loan repayment to
$9,000 per week. 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 March 31, 2004, the total amount outstanding on the line of credit
was approximately $1,668,000. Management believes that it will be successful in
refinancing this agreement, but failure to do so would have a significant impact
on the Company's liquidity and operations.
SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, Savings
Bank of Mendocino County ("SBMC") extended a temporary loan in the principal
amount of $576,200 to the Company in order to finance buy-out of equipment
leased through Finova Capital Corporation. This loan, which is due for repayment
on June 23, 2004, is secured by the existing assets of the Company and the
assets released by Finova on lease termination. The rate of interest on the loan
is 7%. Management believes that it will be successful in refinancing this
agreement, but failure to do so would have a significant impact on the Company's
liquidity and operations.
NEDBANK LIMITED OPTION FACILITY: Nedbank Limited, a South African
registered company ("Nedbank"), has provided UBSN with a multi-currency option
facility of 1,250,000 Pounds Sterling. This overdraft facility, which may be
terminated by Nedbank at any time (with or without default) on thirty days'
notice, is secured by all of the assets of UBSN. The amount outstanding on this
line of credit as of March 31, 2004 was approximately $1,124,400. The Company
believes that Nedbank will continue to extend this facility, although there can
be no guarantee that it will not call the outstanding balance at any time. A
number of factors, including for instance adverse changes in the Company's
financial condition, changes in Nedbank's lending policies unrelated to the
Company, or adverse economic developments generally, could cause Nedbank to
decline to do so. If Nedbank were to exercise its option to call the amount
outstanding under this facility, the Company will have to find an alternative
lender or source of funds to repay the balance owing to Nedbank. There can be no
guarantee that the Company will be able to do so within the time frame provided
under its agreements with Nedbank.
SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew
Kingfisher Lager for the Company's European and Canadian markets. As
consideration for extending the brewing contract, Shepherd Neame advanced a loan
of (pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of
(pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year.
-20-
WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on the
Company's U.S. debts was 7.58% for the first quarter of the year 2004 and 7.36%
(including the long term capital lease of equipment by Finova Capital
Corporation Inc.) for the corresponding period in 2003. For loans primarily
associated with Company's European territory, the weighted average rate paid was
5.5% for the first quarter of the year 2004 and 5.25% for the corresponding
period in 2003.
KEG MANAGEMENT ARRANGEMENT: The Company 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. The Company is currently
negotiating a new contract. If, on any given month, the agreement is not
extended and terminates, the Company is required to purchase a certain number of
kegs from MicroStar. The Company would probably finance the purchase through
debt or lease financing, if available. However, there can be no assurance that
the Company will be able to finance the purchase of kegs. Failure to extend the
contract or failure to purchase the necessary kegs from MicroStar on termination
of contract is likely to have a material adverse effect on the Company.
OVERDUE PROPERTY TAXES: As of March 31, 2004, the delinquent property taxes
due on the Company's Ukiah property, including penalties and interest, totaled
$643,400, representing the balance due for overdue taxes for the period from
April 1999 to June 2003. Pursuant to an agreement with Mendocino County, the
balance of the overdue taxes will be paid in four annual installments, due on or
before April 10, 2005, 2006, 2007, and 2008, each representing 20% or more of
the original overdue balance, along with accrued interest calculated at 18% per
year. Because of the large amount of taxes owed, and the County's ability to
sell the Ukiah property to satisfy a delinquency, failure to settle these tax
dues (including payments due under the payment plan) could have a serious
adverse effect on the Company's business and financial condition.
RESTRICTED NET ASSETS. The Company's wholly-owned subsidiary, UBI, has
undistributed earnings of approximately $2,348,100 as of March 31, 2004. Under
UBI's line of credit agreement, distributions and other payments to the Company
from its subsidiary are limited to approximately $200,000 per year.
CURRENT RATIO
The Company's ratio of current assets to current liabilities on March 31,
2004 was 0.81 to 1.0 and its ratio of total assets to total liabilities was 1.37
to 1.0. On March 31, 2003, the Company's ratio of current assets to current
liabilities was 0.61 to 1.0 and its ratio of total assets to total liabilities
was 1.39 to 1.0.
-21-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2004, the Company did not hold derivative instruments, or
engage in hedging activities, of any material value or in any material amount,
whether for trading or for hedging purposes. The Company has some
interest-related market risk due to floating interest rate debt totaling
$4,307,800 as of March 31, 2004.
INTEREST RATE RISK
The Company had total debt as of March 31, 2004 of $8,788,600, of which
$4,307,800 was subject to variable rates of interest (either prime or LIBOR plus
1.5% or prime plus 4.25%). Its long-term debt (including current portion) as of
March 31, 2004 totaled $5,796,600, of which $3,904,600 had fixed rates of
interest and the balance of $1,892,000 were subject to variable rates. Short
term debts amounted to $2,992,000, of which $576,200 were at fixed rates of
interest and the remaining $2,415,800 were subject to variable rates. At current
borrowing levels, an increase in prime and LIBOR rates of 1% would result in an
annual increase of $43,100 in interest expense on the Company's variable rate
loans.
FOREIGN CURRENCY RATE FLUCTUATIONS
The Company's earnings and cash flows at its subsidiaries UBI and UBSN are
subject to fluctuations due to changes in foreign currency rates. The Company
believes that changes in the foreign currency exchange rate would not have a
material adverse effect on its results of operations as the majority of its
foreign transactions are delineated in UBI's functional currency, the British
Pound.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chairman of the Board, President, and Chief Financial Officer
have evaluated the effectiveness of the design, maintenance, and operation of
the Company's disclosure controls and procedures in effect during the period of
time covered by this report. Based on this evaluation, they believe that the
Company's disclosure controls and procedures were then effective in providing
reasonable assurance that relevant information is timely identified and
communicated, alerting them to material information required to be disclosed in
the Company's periodic reports filed with or submitted to the SEC. Management is
not aware of any material changes in the Company's internal or other controls
over financial reporting identified in connection with that evaluation that have
significantly affected, or are likely to affect, the Company's internal controls
over financial reporting.
Disclosure controls and procedures, no matter how well designed and
implemented, can provide only reasonable assurance of achieving the Company's
disclosure objectives. The likelihood of achieving such objectives is affected
by limitations inherent in such controls and procedures, including the fact that
human judgment in decision making can be faulty and that breakdowns in internal
controls can occur because of human failures such as simple errors or mistakes
or intentional circumvention of the established process.
-22-
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Effective March 28, 2003, the Company terminated a written distribution
agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company
("GGDC"). On April 1, 2003, GGDC filed an action in Marin County Superior Court,
naming the Company and Mr. Mark Anderson (who is employed by the Company as a
sales manager) as defendants, and seeking actual and punitive damages in an
amount not stated in the complaint. GGDC's action asserts claims for breach of
contract, breach of the covenant of good faith and fair dealing, unfair business
practices, and intentional interference with economic relationships, all arising
out of the allegedly wrongful termination of the GGDC distribution agreement.
On January 21, 2004, GGDC filed an amended complaint, naming as additional
defendants Dr. Vijay Mallya, the Company's Chairman; United Breweries of
America, Inc., one of its principal shareholders; and the distribution companies
now servicing the territory formerly handled by GGDC. The amended complaint
seeks to impose a constructive trust on $655,000 that the Company received from
its new distributors, and alleges new causes of action for conspiracy and
conversion. The Company could be found to have an obligation to indemnify some
or all of the other defendants for their legal costs and expenses and for all or
a portion of any judgment against them in the action.
The Company disputes GGDC's allegations, and intends to vigorously defend
the action. The Company has filed a cross-complaint against GGDC, alleging
breach of contract, tortious interference with prospective economic advantage,
and unfair business practices. The Company is seeking the appropriate remedies,
including compensatory and punitive damages.
The Company is unable at this time to evaluate the likelihood of an
unfavorable outcome in this litigation, or to provide an estimate of the amount
or range of the potential loss in such an event.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) CURRENT REPORTS ON FORM 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MENDOCINO BREWING COMPANY, INC.
Dated: May 17, 2004 By: /s/ Dr. Vijay Mallya
--------------------------------------
Dr. Vijay Mallya
Chairman of the Board and
Chief Executive Officer
Dated: May 17, 2004 By: /s/ N. Mahadevan
--------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
-23-