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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, 2005
| | 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, 2005 is 11,473,914.
PART I
ITEM 1. FINANCIAL STATEMENTS.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
MARCH 31, DECEMBER 31,
2005 2004
CURRENT ASSETS
Cash $ 1,249,300 $ 526,600
Accounts receivable, allowance for doubtful 7,830,900 8,477,200
accounts of $53,200 and $47,500
Inventories 1,014,500 1,185,400
Prepaid expenses 186,700 347,300
----------- -----------
Total Current Assets: 10,281,400 10,536,500
----------- -----------
PROPERTY AND EQUIPMENT 13,472,700 13,533,900
----------- -----------
OTHER ASSETS
Deposits and other assets 193,100 205,100
Intangibles net of amortization 85,100 87,600
Total Other Assets: 278,200 292,700
----------- -----------
Total Assets: $24,032,300 $24,363,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 4,079,400 $ 3,282,200
Note payable 576,200 576,200
Accounts payable 4,935,100 5,897,600
Accrued liabilities 1,376,300 1,402,900
Legal dispute settlement 502,800 911,800
Income taxes payable 160,500 134,100
Current maturities of obligation
under long-term debt 392,000 400,30
Current maturities of obligation
under capital lease 136,500 146,500
----------- -----------
Total Current Liabilities: 12,158,800 12,751,600
NOTES TO RELATED PARTY 2,438,300 2,010,100
Long term debt, less current maturities 3,337,700 3,384,800
OBLIGATIONS UNDER CAPITAL LEASE, less current
maturities 52,500 62,600
----------- -----------
Total Liabilities: 17,987,300 18,209,100
----------- -----------
1
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, 11,473,914 and 11,266,874 shares
issued and outstanding 14,747,300 14,648,600
Accumulated comprehensive income 185,000 194,300
Accumulated deficit (9,114,900) (8,916,500)
----------- -----------
Total Stockholders' Equity 6,045,000 6,154,000
----------- -----------
Total Liabilities and
Stockholders' Equity: $24,032,300 $24,363,100
=========== ===========
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
March 31,
------------------------------------
2005 2004
---- ----
Sales $ 7,406,100 $ 6,946,000
Less excise taxes 149,200 142,800
------------ ------------
Net Sales 7,256,900 6,803,200
Cost of goods sold 4,986,400 4,634,800
------------ ------------
Gross Profit 2,270,500 2,168,400
------------ ------------
Marketing 1,316,200 1,328,300
General and administrative 903,200 984,100
------------ ------------
2,219,400 2,312,400
------------ ------------
INCOME (Loss) from operations 51,100 (144,000)
------------ ------------
Other income (expense)
Miscellaneous income 4,600 4,000
Loss on sale of asset (3,300) (1,600)
Interest expense (220,600) (212,000)
------------ ------------
(219,300) (209,600)
------------ ------------
Loss before income taxes (168,200) (353,600)
PROVISION FOR INCOME TAXES 30,200 20,800
------------ ------------
Net Loss (198,400) (374,400)
------------ ------------
Foreign currency translation
adjustment (9,300) 62,100
------------ ------------
COMPREHENSIVE LOSS $ (207,700) $ (312,300)
============ ============
NET Loss per share $ (0.02) $ (0.03)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 11,439,407 11,266,874
============ ============
The accompanying notes are an integral part of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------------------------------------
Three Months Ended
March 31
----------------------------------------
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (198,400) $ (374,400)
Adjustments to reconcile net loss to net cash from
operating activities:
Depreciation and amortization 223,700 302,700
Allowance for doubtful accounts 5,700 38,200
Loss on sale of assets 3,300 1,600
Shares issued for services 98,700 --
Changes in:
Accounts receivable 528,700 485,600
Inventories 170,900 81,800
Prepaid expenses 158,100 136,400
Deposits and other assets 26,400 (16,200)
Accounts payable (904,400) (276,600)
Accrued liabilities (426,400) (357,100)
Income taxes payable 28,400 ---
------------ -----------
Net cash from operating activities: (285,300) 22,000
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (191,700) (156,300)
improvements
Proceeds from sale of fixed assets 8,300 3,300
------------ -----------
Net cash from investing activities: (183,400) (153,000)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 822,700 416,700
Repayment on long-term debt (42,600) (172,900)
Borrowings on related party debt 428,200 20,600
Payments on obligation under long term lease (20,100) (23,800)
------------ -----------
Net cash from financing activities: 1,188,200 240,600
------------ -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,200 39,200
------------ -----------
NET CHANGE IN CASH 722,700 148,800
------------ -----------
CASH, beginning of period 526,600 554,300
------------ -----------
CASH, end of period $ 1,249,300 $ 703,100
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 192,400 $ 191,400
Non-cash investing activity
Seller Financed equipment $ 29,500 $ 15,400
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
As used herein, 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.
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-K for
the year ended December 31, 2004. 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, 2005, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2005.
NOTE 2 - LINE OF CREDIT
The Company had available a $3,500,000 line of credit secured by substantially
all of the assets of the Releta Brewing Company, LLC, accounts receivable and
inventory of the Ukiah Brewery, certain securities pledged by a stockholder, and
a second position on the real property of the Ukiah Brewery. As of March 31,
2005, the total amount outstanding on the line of credit was approximately
$1,309,600. The Company used the proceeds from the BFI Facility (discussed
below) and paid off the entire amount outstanding under this line of credit on
May 6, 2005.
On May 5, 2005, the Company entered into a receivables and inventory-based line
of credit transaction with BFI Business Finance ("BFI"), pursuant to which BFI
has provided the Company with a $2,000,000 maximum revolving line of credit with
an advance rate based on 80% of MBC's qualified accounts receivable, 70% of
Releta's qualified accounts receivable, and 50% of the eligible inventory
carried by both MBC and Releta (the "BFI Line of Credit"). At the same time, BFI
also advanced the Company $31,240 under a promissory note (the "BFI Note" and,
together with the BFI Line of Credit, the "BFI Facility"). On May 6, 2005, the
Company used the entire immediately available amount drawable under the BFI
Facility to pay off the balance remaining outstanding under the CIT Line of
Credit (discussed above).
On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a
temporary loan in the principal amount of $576,200 to MBC in order to finance a
buy-out of equipment leased through Finova Capital Corporation. The lender has
committed to extend the loan until May 2006. The rate of interest on the loan is
prime plus 3%.
5
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, 2005 was approximately $2,769,800.
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. The amount outstanding on this note as of
March 31, 2005 was approximately $2,267,500.
The Company owed 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. The Company paid the next installment along
with accrued interest on April 8, 2005. 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.
UBSN has engaged Shepherd Neame Limited ("Shepherd Neame") 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 $1,133,300, therefore, each payment of 60,000 GBP would be approximately
equal to $113,300. The loan carries an interest rate of 5% per year. The amount
outstanding on this loan as of March 31, 2005 was approximately $887,700.
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, although as of
December 31, 2004 the principal amount outstanding under these notes was
$1,155,400. The notes bear interest at the prime rate plus 1.5%, subject to a
maximum of 10% per annum, and each note originally
6
matured 18 months from the date of the particular advance. The Company and UBA
have executed an Extension of Term of Notes under Master Line of Credit
Agreement, which confirms the Company's and UBA's extension of the terms of the
UBA Notes for a period ending on August 31, 2005. 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. Although technically UBA has the right
to demand payment within 60 days of the extension date, it is currently
precluded from doing because the notes are subordinated to the long-term debt
agreement with Savings Bank of Mendocino County and the line of credit with BFI.
Because of the subordination, the Company has shown these notes as long term
debt. The Company expects the maturity dates to be extended again. UBA funded
the Company another $400,000 on March 1, 2005, in connection with which the
Company then issued to UBA another convertible note maturing 18 months from that
date. The notes are convertible, at UBA's option, into common stock at $1.50 per
share. As of March 31, 2005, the aggregate principal balance due under these
Notes was $1,555,400; interest accrued on the Notes is approximately $522,900.
NOTE 4 -- RELATED PARTY TRANSACTIONS
MBC and its subsidiaries have entered into or amended several agreements with
affiliated and related entities. Among these were 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-K for the year ended December
31, 2004.
UBSN is a party to a brewing agreement and a loan agreement with Shepherd Neame
Limited ("Shepherd Neame"). Shepherd Neame was deemed to be a related party at
March 31, 2004 since Mr. R.H.B. Neame (Shepherd Neame's Chairman of the Board)
was then also a director of the Company and Mr. David Townshend (a senior
employee of Shepherd Neame) was serving as the President of UBSN and also as a
Director of the Company. Both M/s Neame and Townshend are no longer serving on
the Board of the Company and hence Shepherd Neame is no longer treated as a
related party at March 31, 2005.
The following table reflects the value of the transactions for the quarter ended
March 31, 2005 and 2004.
7
- --------------------------------------------------------- --------------- ---------------
2005 2004
- --------------------------------------------------------- --------------- ---------------
Sales to Shepherd Neame $522,500
- --------------------------------------------------------- --------------- ---------------
Purchases from Shepherd Neame 2,989,700
- --------------------------------------------------------- --------------- ---------------
Expenses reimbursement to Shepherd Neame 243,100
- --------------------------------------------------------- --------------- ---------------
Interest expenses associated with UBA convertible
notes payable $28,200 20,600
- --------------------------------------------------------- --------------- ---------------
Accounts payable to Shepherd Neame 3,228,200
- --------------------------------------------------------- --------------- ---------------
Account receivable from Shepherd Neame 516,400
- --------------------------------------------------------- --------------- ---------------
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. No
calculation of dilutive earnings per share is provided because of the net loss
would make any potentially dilutive shares antidilutive.
NOTE 6 - INVENTORY
MARCH 31, DECEMBER 31,
2005 2004
Raw Materials $ 266,000 $ 357,500
Beer-in-process 184,300 140,100
Finished Goods 535,200 664,700
Merchandise 29,000 23,100
---------- ----------
TOTAL $1,014,500 $1,185,400
========== ==========
NOTE 7 - STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the three months ended
March 31, 2005.
SERIES A
PREFERRED STOCK COMMON STOCK OTHER
-------------------------- ---------------------------- COMPREHENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT INCOME / (LOSS) DEFICIT EQUITY
------------- ------------ ------------- -------------- ----------------- --------------- --------------
Balance,
December 31,
2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $194,300 $ (8,916,500) $ 6,154,000
Stock issued
for services 207,040 98,700 98,700
Net Loss (198,400) (198,400)
Currency
Translation
Adjustment (9,300) (9,300)
Balance,
March 31,
2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $185,000 $ (9,114,900) $ 6,045,000
============= ============ ============= ============== ================= =============== ==============
8
NOTE 8 - STOCK BASED COMPENSATION
The Company had a stock-based employee compensation plan that allowed the
Company to grant options to purchase up to 1,000,000 shares of the Company's
common stock. The plan expired in 2004. The Company accounts for the option that
had been issued from 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. No options
were granted or exercised in 2005 or 2004 so no pro forma information is
disclosed.
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, 2005
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Net Sales $ 2,475,600 $ 4,740,100 $ 41,200 $ - $ 7,256,900
Operating Profit/(Loss) (71,600) 123,200 (500) - 51,100
Identifiable Assets 12,898,000 8,850,500 105,300 2,178,500 24,032,300
Depreciation & amortization 117,700 96,700 1,200 8,100 223,700
Capital Expenditures 34,200 157,500 - 191,700
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
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion summarizes the significant factors affecting
the consolidated operating results, financial condition and liquidity/cash flows
of the Company for the three months ended March 31, 2005, compared to the three
months ended March 31, 2004. This discussion should be read in conjunction with
the Consolidated Financial Statements and Notes included in the company's Annual
Report on Form 10-K for the year ended December 31, 2004.
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
10
release the results of any revision to these forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements.
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 intrinsic
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
11
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.
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 2005 and 2004, 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 2005 with a net loss of $198,400,
as compared to a net loss of $374,400 for the same period in 2004. As set forth
more fully under "Results of Operations," below, during the first quarter the
12
Company experienced an increase in gross sales of $460,100, or 6.6% as compared
to the first quarter of 2004. Costs of goods sold increased by $351,600, or
7.6%, marketing costs decreased by $12,100, or 0.9%, general and administrative
costs decreased by $80,900, or 8.2%, and interest expenses increased by $8,600,
or 4.1%, all of which contributed to the net loss for the period.
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,
-------------------------------
2005 2004
STATEMENTS OF OPERATIONS DATA: % %
- -
Sales 102.06 102.10
Less Excise taxes 2.06 2.10
-------- --------
NET SALES 100.00 100.00
Costs of Sales 68.71 68.13
-------- --------
GROSS PROFIT 31.29 31.87
-------- --------
Marketing 18.14 19.52
General and Administrative Expense 12.45 14.47
PROFIT / (LOSS) FROM OPERATIONS 0.70 (2.12)
Other (Income) / Expense (0.02) (0.04)
Interest Expense 3.04 3.12
-------- --------
Loss before income taxes (2.32) (5.20)
Provision for income taxes 0.42 0.31
-------- --------
0.42
NET LOSS (2.73%) (5.51%)
======== ========
Other Comprehensive Loss (0.13) 0.91
======== ========
COMPREHENSIVE LOSS (2.86%) (4.60%)
======== ========
13
-------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------
2005 2004
BALANCE SHEET DATA: $ $
- -
Cash and Cash Equivalents 1,249,300 703,100
Working Capital (1,877,400) (2,078,900)
Property and Equipment 13,472,700 13,762,900
Deposits and Other Assets 278,200 291,400
Total Assets 24,032,300 22,964,700
Long-term Debt (less current maturities) 3,337,700 3,670,700
Capital Lease (less current maturities) 52,500 168,300
Total Liabilities 17,987,300 16,770,400
Accumulated Deficit (9,114,900) (8,822,000)
Stockholder's equity 6,045,000 6,194,300
NET SALES
Overall net sales for the first quarter of 2005 were $7,256,900, an
increase of $453,700, or 6.7%, compared to $6,803,200 for the first quarter of
2004. The increase was mainly due to increased sales and exchange rate
fluctuations.
DOMESTIC OPERATIONS. Domestic net sales for first quarter of 2005 were
$2,516,800 compared to $2,336,500 for the same period in 2004, an increase of
$180,300, or 7.72%. The sales volume increased to 13,370 barrels in first
quarter of 2005 from 12,772 barrels in the first quarter 2004, representing an
increase of 598 barrels, or 4.68%. Of the increase, sale of Company's brands
increased by 543 barrels; Kingfisher volume decreased by 53 barrels and contract
brands sale increased by 108 barrels.
EUROPEAN TERRITORY: Net sales for the first quarter of 2005 were
$4,740,100 (GBP 2,507,100) compared to $4,466,700 (GBP 2,428,100) during the
corresponding period of 2004, an increase of $273,400, or 6.12%. During the
first quarter of 2005, UBSN sold 15,292 barrels (including 719 barrels of Sun
Lik beer) compared to 14,389 barrels (including 756 barrels of Sun Lik beer)
during the first quarter of 2004. As of April 1, 2005, Shepherd Neame terminated
the distribution arrangements entered with UBSN for distribution of Sun Lik
beer; as a result the Company will no longer distribute Sun Lik beer. 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, the increase in net sales is only 3.25%.
14
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first quarter
of 2005 was 68.71%, as compared to 68.13% during the corresponding period of
2004 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 2005 was 70.94%, as compared to
71.13%, during the corresponding period of 2004, representing a decrease of
0.19% mainly due to a decrease in depreciation costs.
EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first quarter of 2005 was 67.95%, as compared to
66.93% during corresponding period in 2004 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation), representing increase of 1.02% 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 2005 increased to $2,270,500, from $2,168,400 during the
corresponding period of 2004, representing an increase of 4.71%. As a percentage
of net sales, the gross profit during the first quarter of 2005 decreased to
31.29% from that of 31.87% for the first quarter of 2004.
OPERATING EXPENSES
Operating expenses for the first quarter of the year 2005 were
$2,219,400, a decrease of $93,000, or 4.02%, as compared to $2,312,400 for the
corresponding period of the year 2004. 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 2005 were $1,316,200, as compared to $1,328,300 for the
first quarter of 2004, representing a marginal decrease of 0.9%.
DOMESTIC OPERATIONS: Expenses for the first quarter of 2005 were
$353,500 compared to $400,300 during the corresponding period of 2004,
representing a decrease of $46,800. As a percentage of net sales in the United
States, the expenses decreased to 14.05% during the first quarter of 2005,
compared to 17.13% during the corresponding period of 2004. The reduction was
due to temporarily reduced salary expenses due to reduction in manpower and
reduced advertising and promotional expenses.
EUROPEAN TERRITORY: Expenses for the first quarter of 2005 were $962,700
compared to $928,000 during the corresponding period of 2004, representing an
increase of $34,700. As a percentage of net sales in the United
15
Kingdom, the expenses decreased to 20.31% during the first quarter of 2005
compared to 20.78% during the corresponding period of 2004 (in each case as
calculated in U.S. dollars, after taking into account the effects of the
exchange rate calculation). The increase was caused mainly by higher salary and
travel costs as a result of additional manpower, increases in sales promotional
expenses, and higher commissions and discounts due to increased sales.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $903,200 for the first quarter of the year 2005,
representing a decrease of $80,900, or 8.22%, over $984,100 for the
corresponding period in 2004. These expenses were equal to 12.45% of net sales
for the first quarter of the year 2005, as compared to 14.47% in the first
quarter of 2004.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$469,900 for the first quarter of the year 2005, representing a decrease of
$28,400, or 5.7%, over $498,300 for the first quarter of the year 2004. The
decrease was primarily due to decreased legal expenses caused by settlement of
legal dispute with a distributor in the year 2004.
EUROPEAN TERRITORY. General and administrative expenses related to the
European Territory were $433,300 for the first quarter of the year 2005,
representing a decrease of $52,500, or 10.81%, as compared to $485,800 for the
first quarter of the year 2004 (in each case as calculated in U.S. dollars,
after taking into account the effects of the exchange rate calculation). The
decreases was mainly due to lower depreciation, exchange rate differences within
the European territory, and a smaller provision for bad debt expenses.
OTHER EXPENSES
Other expenses for the first quarter of 2005 totaled $219,300,
representing an increase of $9,700 when compared to the first quarter of 2004
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 $30,200 for the first
quarter of 2005, compared to $20,800 for the first quarter of 2004. 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 2005 was $198,400, as
compared to loss of $374,400 for the first quarter of 2004. After providing for
a negative foreign currency translation adjustment of $9,300 during the first
quarter of 2005 (as compared to a positive adjustment of $62,100 for the same
period in 2004), the comprehensive loss for the first quarter of 2005 was
$207,700, compared to a loss of $312,300 for the same period in 2004.
16
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. 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 difficult, at least in the short term, for the Company to
continue its operations.
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 have executed an Extension of Term of Notes
under Master Line of Credit Agreement (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 31, 2005. 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 fourteen (14) separate
advances to the Company under the Credit Agreement, pursuant to a series of
individual eighteen-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, 2005 was $1,915,400, and the accrued but unpaid interest thereon was
equal to approximately $522,900.
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
17
unregistered Common Stock at a conversion rate of $1.50 per share. As of March
31, 2005, the outstanding principal and interest on the notes was convertible
into 1,625,538 shares of the Company's Common Stock.
Because these notes are subordinated to credit facilities extended to
the Company by BFI and SBMC (discussed below), UBA is currently precluded from
demanding repayment under them, and the Company does not expect to make payments
on any of these notes within the next year. The Company also expects the
maturity dates of these notes to be extended, although there is no current
agreement to do so.
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.
OTHER LOANS AND CREDIT FACILITIES.
BFI LOAN AND LINE OF CREDIT: On May 5, 2005, the Company entered into a
receivables and inventory-based line of credit transaction with BFI Business
Finance ("BFI"),pursuant to which BFI has provided the Company with a $2,000,000
maximum revolving line of credit with an advance rate based on 80% of MBC's
qualified accounts receivable, 70% of Releta's qualified accounts receivable,
and 50% of the eligible inventory carried by both MBC and Releta (the "BFI Line
of Credit"). The BFI Line of Credit has an initial term of twelve months, but it
can be automatically extended, at the Company's option, for an unlimited number
of additional twelve-month periods. However, BFI also retains the right to
terminate the BFI Line of Credit at any time, upon 30 days' notice. The minimum
monthly interest payment commitment under the BFI Line of Credit is
approximately $6,000, and there is no prepayment fee if the BFI Line of Credit
remains outstanding for a minimum of six (6) months. The BFI Facility carries an
interest rate equal to the greater of 9.5%, or the prime rate announced in the
Western edition of the Wall Street Journal plus 3.75 %, payable monthly. The
facility is also subject to a monthly administrative fee of 0.40%.
At the same time, BFI also advanced the Company $31,240 under a
promissory note (the "BFI Note" and, together with the BFI Line of Credit, the
"BFI Facility"). The BFI Note is interest-only until September of 2005;
principal under the BFI Note is payable in four equal monthly installments
commencing in September 2005. On May 6, 2005, the Company used the entire
immediately
18
available amount drawable under the BFI Facility to pay off the balance
remaining outstanding under the CIT Group Line of Credit discussed below.
CIT GROUP/CREDIT FINANCE LINE OF CREDIT: The CIT Group/Credit Finance,
Inc. provided MBC a $3,000,000 maximum line of credit secured by all accounts,
general intangibles, inventory, and equipment of MBC 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 MBC as an initial term loan,
which was repayable in sixty consecutive monthly installments of principal, each
in the amount of $24,700. As of March 31, 2005, the total amount outstanding on
the line of credit was approximately $1,309,600. The Company used the proceeds
from the BFI Facility and paid off the entire amount outstanding on May 6, 2005.
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 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 bank's prime rate plus 3%. On April 27, 2005, SBMC
formally committed to extend the loan until May 2006.
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, 2005 was approximately $2,769,800. The agreement
restricts the subsidiary from making distributions and payments to the parent in
excess of approximately (pound)100,000 annually (approximately $189,000). The
inability to transfer funds from the subsidiary could have an adverse effect on
the Company.
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.
WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on
the Company's U.S. debts was 8.53% for the first quarter of the year 2005 and
7.58% for the corresponding period in 2004. For loans primarily associated with
Company's European territory, the weighted average rate paid was 6.1% for the
first quarter of the year 2005 and 5.5% for the corresponding period in 2004.
19
KEG MANAGEMENT ARRANGEMENT: The Company entered into a keg management
agreement with MicroStar Keg Management LLC. in September 2004 for a period of
five years. Under this arrangement, MicroStar provides the Company with
half-barrel kegs for which the Company pays a filling and use fee. Distributors
return the kegs to MicroStar instead of the Company. MicroStar then supplies the
Company with additional kegs. If the agreement is terminated, 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 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, 2005, the balance of delinquent
property taxes due on the Company's Ukiah property was approximately $574,500.
Pursuant to an agreement with Mendocino County, the balance of the overdue taxes
should 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. The Company
made a payment on April 8, 2005 of 20% of the original amount outstanding,
together with interest accrued until March 2005. 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 $2,490,200 as of March 31, 2005. 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, 2005 was 0.85 to 1.0 and its ratio of total assets to total liabilities was
1.34 to 1.0. On March 31, 2004, the Company's ratio of current assets to current
liabilities was 0.81 to 1.0 and its ratio of total assets to total liabilities
was 1.37 to 1.0.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2005, 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, 2005.
20
INTEREST RATE RISK
The Company had total debt as of March 31, 2005 of $9,900,700, of which
$6,171,000 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, 2005 totaled $5,245,100, of which $3,729,700 had fixed rates of
interest and the balance of $1,515,400 were subject to variable rates. Short
term debts amounted to $4,655,600 which 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 $61,700 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.
21
PART II
OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company's policy with respect to compensation of outside Directors
of MBC for their services as Directors is as follows: each outside Director
receives $3,000 per Board meeting attended and $1,000 per committee meeting
attended.
Prior to 2003, the Company had a policy of granting shares of Common
Stock in lieu of cash to non-employee directors at their option, as compensation
for their attendance at meetings of the Board of Directors and of Committees of
the Board on which they serve, based on a standard schedule of $3,000 per Board
meeting attended and $1,000 per committee meeting attended. However, because the
market value of the Company's Common Stock fell below fifty cents per share
during the latter half of 2002, and has since remained consistently below $1.00
per share (at times falling below twenty cents per share) - which would have
increased quite significantly the number of shares otherwise issuable to these
Directors -- the Board of Directors adopted a Directors' Stock Grant Plan under
which non-employee Directors would receive, as compensation for Board and
Committee meetings attended, shares of the Company's Common Stock valued at the
higher of the book or market value as on the last day of each year in respect of
compensation due for the years 2002, 2003, and 2004. Effective as of January 31,
2005, therefore, stock grants based on the book value of the Company's Common
Stock were approved under the Directors' Stock Grant Plan in respect of
compensation due to Directors Michael Laybourn, Sury Rao Palamand, and Kent
Price for their service on the Board and various Board Committees during 2002
and 2003, in each case assuming a fair market value of $0.56 per share for
shares so granted with respect to 2002 and $0.58 per share for shares so granted
with respect to 2003. Mr. Laybourn received stock grants totaling 15,978 shares
for his services in 2002 and 15,585 for such services in 2003; Mr. Palamand
received grants totaling 21,303 shares for 2002 and 22,513 shares for 2003; and
Mr. Price received grants totaling 24,853 shares for 2002 and 24,245 shares for
2003. Management believes that the issuance of such shares was exempt from
registration pursuant to Section 4(2) of the Act because of the limited number
of recipients and the fact that each of the recipients has significant business
experience, financial sophistication, and intimate knowledge of and familiarity
with the business of the Company.
Compensation due for the year 2004 is expected to be issued later this
year in the form of shares at book value as of December 31, 2004. The Company's
policy for compensation of its non-employee Directors has in the past included
the annual issuance of options, pursuant to the Company's 1994
22
Stock Option Plan (the "Plan"), to purchase a number of shares of the Company's
Common Stock having a fair market value of $25,000. The Plan expired in 2004,
however, and to date no new option or similar plan has been adopted by the
Board. The Board may adopt new plans and guidelines for adoption later in the
year.
Pursuant to a Master Line of Credit Agreement between the Company and
United Breweries of America, Inc. (discussed in Part I, Item 2, above, under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources - Master Line of Credit
Agreement"), the Company issued thirteen (13) promissory notes to United
Breweries of America, Inc. ("UBA") between September, 1999, and July, 2001 (the
"UBA Notes"). (A fourteenth note, on the same terms as the others but in the
amount of $400,000 (the "New Note"), was issued to UBA on March 2, 2005.) The
outstanding principal amount of the UBA Notes and the New Note, 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, 2005, the outstanding principal and interest on the UBA Notes
(including the New Note) totaled approximately $2,438,300, and the UBA Notes
were convertible into 1,625,538 shares of the Company's Common Stock. If the UBA
Notes and the New Note were deemed to be securities, the Company's Management
believes that the issuance of all such notes was exempt from registration
pursuant to Section 4(2) of the Act because UBA, the sole offeree and recipient
thereof, has significant business experience, financial sophistication, and
knowledge of and familiarity with the business of the Company. Management
believes that if these notes were eventually to be converted into shares of the
Company's Common Stock, the issuance of such shares would also be exempt from
registration pursuant to Section 4(2) of the Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During 2004, two of MBC's former directors, Mr. Neame and Mr. Townshend,
resigned from the Board. Thereafter, the Board of Directors acted to reduce the
size of the Board from eight to seven members. All six of the remaining Board
members agreed to stand for re-election, and Scott Heldfond, a San
Francisco-based businessman, was nominated to fill the remaining place on the
Board.
MBC held its 2004 Annual Meeting of Shareholders on January 14, 2005. At
that meeting, MBC's shareholders voted to elect all seven of the Board's
nominees for Director. The votes cast for each of the nominees were as follows.
There were no broker non-votes; ballots for a total of 1,191,193 shares were not
cast with respect to any candidate.
23
DIRECTOR'S NAME VOTES FOR WITHHELD
Vijay Mallya 10,006,069 69,612
H. Michael Laybourn 10,041,264 34,417
Jerome G. Merchant 10,019,169 56,512
Sury Rao Palamand 10,006,069 69,612
Kent D. Price 10,007,869 67,812
Yashpal Singh 10,005,669 70,012
Scott R. Heldfond 10,008,569 67,112
The Company's shareholders also voted to ratify the selection of Moss
Adams, LLP as independent certified accountants to audit the Company's financial
statements for the fiscal year ending December 31, 2004. The votes were cast as
follows: for, 10,019,583; against, 33,815; abstain, 22,283. There were no broker
non-votes; ballots for a total of 1,191,193 shares were not cast with respect to
the selection of Moss Adams, LLP.
ITEM 6. EXHIBITS
NUMBER DESCRIPTION OF DOCUMENT
3.1 (T) Articles of Incorporation of the Company, as amended.
3.2 (T) Bylaws of the Company, as amended.
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (T) Amended 1994 Stock Option Plan
10.3 (A) Wholesale Distribution Agreement between the Company and
Bay Area Distributing.
10.4 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.5 (B) Liquid Sediment Removal Services Agreement with Cold
Creek Compost, Inc.
10.6 (A) Lease Agreement between the Company and Kohn Properties.
10.7 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.8 (D) Commercial Lease between Stewart's Ice Cream Company,
Inc. and Releta Brewing Company LLC.
10.9 (E) Agreement between United Breweries of America Inc. and
Releta Brewing Company LLC regarding payment of certain
liens.
10.10 (F) Keg Management Agreement with MicroStar Keg Management
LLC
24
ITEM 6 (continued)
NUMBER DESCRIPTION OF DOCUMENT
10.11 (G) Agreement to Implement Condition of Approval No. 37 of
the Site Development Permit 95-19 with the City of
Ukiah, California (previously filed as Exhibit 19.6).
10.12 (H) Manufacturing Business Expansion and Relocation
Agreement with the City of Ukiah.
10.13 (H) Manufacturing Business Expansion and Relocation
Agreement with the Ukiah Redevelopment Agency.
10.14 (I) $2,700,000 Note in favor of the Savings Bank of
Mendocino County.
10.15 (I) Hazardous Substances Certificate and Indemnity with the
Savings Bank of Mendocino County.
10.16 (J) Equipment Lease with Finova Capital Corporation.
10.17 (J) Tri-Election Rider to Equipment Lease with Finova
Capital Corporation.
10.18 (J) Master Lease Schedule with Finova Capital Corporation.
10.19 (K) Investment Agreement with United Breweries of America,
Inc.
10.22 (L) Indemnification Agreement with Vijay Mallya.
10.23 (L) Indemnification Agreement with Michael Laybourn.
10.24 (L) Indemnification Agreement with Jerome Merchant.
10.25 (L) Indemnification Agreement with Yashpal Singh.
10.27 (L) Indemnification Agreement with Robert Neame.
10.28 (L) Indemnification Agreement with Sury Rao Palamand.
10.29 (L) Indemnification Agreement with Kent Price.
10.30 (M) Loan and Security Agreement between the Company, Releta
Brewing Company LLC and The CIT Group/Credit Finance,
Inc. regarding a $3,000,000 maximum line of credit.
10.31 (M) Patent, Trademark and License Mortgage by the Company in
favor of The CIT Group/Credit Finance, Inc.
25
ITEM 6 (continued)
NUMBER DESCRIPTION OF DOCUMENT
10.32 (M) Patent, Trademark and License Mortgage by Releta Brewing
Company LLC in favor of The CIT Group/Credit Finance,
Inc.
10.33 (N) Employment Agreement with Yashpal Singh.
10.35 (O) Master Loan Agreement between the Company and the United
Breweries of America Inc.
10.36 (O) Convertible Note in favor of the United Breweries of
America Inc. dated Sept. 7, 1999
10.37 (P) Convertible Note in favor of the United Breweries of
America Inc. dated October 21, 1999
10.38 (P) Convertible Note in favor of the United Breweries of
America Inc. dated November 12, 1999
10.39 (P) Convertible Note in favor of the United Breweries of
America Inc. dated December 17, 1999
10.40 (P) Convertible Note in favor of the United Breweries of
America Inc. dated December 31, 1999
10.41 (P) Convertible Note in favor of the United Breweries of
America Inc. dated February 16, 2000
10.42 (P) Convertible Note in favor of the United Breweries of
America Inc. dated February 17, 2000
10.43 (P) Convertible Note in favor of the United Breweries of
America Inc. dated April 28, 2000
10.44 (P) First Amendment to Master Loan Agreement between the
Company and United Breweries of Comerica, Inc., dated
April 28, 2000
10.45 (Q) Convertible Note in favor of the United Breweries of
America Inc. dated September 11, 2000
10.46 (Q) Convertible Note in favor of the United Breweries of
America Inc. dated September 30, 2000
10.47 (Q) Convertible Note in favor of the United Breweries of
America Inc. dated December 31, 2000
10.48 (Q) Convertible Note in favor of the United Breweries of
America Inc. dated February 12, 2001
10.49 (R) Convertible Note in favor of the United Breweries of
America Inc. dated July 1, 2001
26
ITEM 6 (continued)
NUMBER DESCRIPTION OF DOCUMENT
10.50 (S) Confirmation of Waiver Between Mendocino Brewing
Company, Inc. and United Breweries of America, Inc.,
dated as of December 28, 2001
10.51 (S) Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and
United Breweries of America, Inc., dated February 14,
2002
10.52 (T) License Agreement between United Breweries Limited and
United Breweries International (U.K.), Limited
10.53 (T) Supplemental Agreement to License Agreement between
United Breweries Limited and United Breweries
International (U.K.), Limited
10.54 (T) Distribution Agreement between United Breweries
International (U.K.), Limited. and UBSN, Ltd.
10.55 (T) Supplemental Agreement to Distribution Agreement between
United Breweries International (U.K.), Limited. and
UBSN, Ltd.
10.56 (T) Market Development, General and Administrative Services
Agreement between Mendocino Brewing Company, Inc. and
UBSN, Ltd.
10.57 (T) Contract to Brew and Supply Kingfisher Products among
Shepherd Neame, Limited, United Breweries International
(U.K.), Limited. and UBSN, Ltd.
10.58 (T) Supplemental Agreement to Contract to Brew and Supply
Kingfisher Products among Shepherd Neame, Limited,
United Breweries International (U.K.), Limited. and
UBSN, Ltd.
10.59 (T) Loan Agreement between Shepherd Neame, Limited and UBSN,
Ltd.
10.60 (T) Brewing License Agreement between UBSN, Ltd. and
Mendocino Brewing Company, Inc.
10.61 (T) Kingfisher Trade Mark and Trade Name License Agreement
between Kingfisher of America, Inc. and Mendocino
Brewing Company, Inc.
27
ITEM 6 (continued)
NUMBER DESCRIPTION OF DOCUMENT
10.62 (U) First Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of America,
Inc., dated November 13, 2002.
10.63 (U) Second Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of America,
Inc., dated March, 2003.
10.64 (V) Amendment to Loan and Security Agreement between
Mendocino Brewing Company, Inc. and Releta Brewing
Company, LLC and the CIT Group/Business Credit, Inc.,
dated January 17, 2003.
10.65 (V) Commitment Letter from United Breweries of America, Inc.
dated March 31, 2004.
10.66 (W) Extension of Loan and Security Agreement between the
Company, Releta Brewing Company LLC and The CIT
Group/Credit Finance, Inc., dated July 1, 2004
10.67 (W) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of July 20, 2004
10.68 (X) Fourth Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of America,
Inc., dated as of August 14, 2004
10.69 (Y) Settlement Agreement and Release between the Company and
House of Daniels, Inc., dba Golden Gate Distributing
Company, dated as of November 1, 2004
10.71 (Z) Agreement to Extend Loan and Security Agreement between
the Company, Releta Brewing Company LLC and The CIT
Group/Credit Finance, Inc., dated October 31, 2004
10.72 (Z) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of November 1 2004
10.73 (AA) Settlement Agreement and Release, effective as of
December 9, 2004
28
ITEM 6 (continued)
NUMBER DESCRIPTION OF DOCUMENT
10.74 (BB) Convertible Promissory Note of Mendocino Brewing
Company, Inc. in favor of United Breweries of America,
Inc., dated March 2, 2005
10.75 (CC) Loan and Security Agreement (Accounts Receivable &
Inventory Line of Credit) dated May 5, 2005 between the
Company and BFI Business Finance
NOTES: Each Exhibit listed above that is annotated with one or more of
the following letters is incorporated by reference from the following sources:
(A) The Company's Registration Statement dated June 15, 1994, as
amended, previously filed with the Commission, Registration No.
33-78390-LA.
(B) The Company's Annual Report on Form 10-KSB for the period ended
December 31, 1995.
(C) The Company's Quarterly Report on Form 10-QSB for the period
ended March 31, 1995.
(D) The Company's Quarterly Report on Form 10-QSB/A No. 1 for the
period ended September 30, 1997.
(E) The Company's Quarterly Report on Form 10-QSB for the quarterly
period ended September 30, 1997.
(F) The Company's Annual Report on Form 10-KSB for the period ended
December 31, 1996
(G) The Company's Quarterly Report on Form 10-QSB for the period
ended September 30, 1995
(H) The Company's Quarterly Report on Form 10-QSB for the period
ended June 30, 1996
(I) The Company's Annual Report on Form 10-KSB for the period ended
December 31, 1997
(J) The Company's Registration Statement dated February 6, 1997, as
amended, Registration No. 33-15673
(K) Schedule 13D filed November 3, 1997, by United Breweries of
America, Inc. and Vijay Mallya
(L) The Company's Quarterly Report on Form 10-QSB for the period
ended June 30, 1998
(M) The Company's Quarterly Report on Form 10-QSB for the period
ended September 30, 1998
29
ITEM 6 (continued)
(N) The Company's Quarterly Report on Form 10-QSB for the period
ended June 30, 1999
(O) Amendment No. 5 to Schedule 13D filed September 15, 1999, by
United Breweries of America, Inc. and Vijay Mallya.
(P) Amendment No. 6 to Schedule l3D filed May 12, 2000, by United
Breweries of America, Inc. and Vijay Mallya.
(Q) Amendment No. 7 to Schedule 13D filed February 22, 2001, by
United Breweries of America, Inc. and Vijay Mallya.
(R) Amendment No. 8 to Schedule 13D filed August 22, 2001, by United
Breweries of America, Inc and Vijay Mallya.
(S) The Company's Current Report on Form 8-K filed as of February
19, 2002
(T) The Company's Annual Report on Form 10-KSB for the period ended
December 31, 2001
(U) Amendment No. 9 to Schedule 13D filed March 31, 2003, by United
Breweries of America, Inc. and Vijay Mallya
(V) The Company's Annual Report on Form 10-KSB for the year ended
December 31, 2003
(W) The Company's Quarterly Report on Form 10-Q for the period ended
June 30, 2004
(X) Amendment No. 11 to Schedule 13D, jointly filed by United
Breweries of America, Inc. and Dr. Vijay Mallya on August 16,
2004
(Y) The Company's Current Report on Form 8-K filed as of November 1,
2004
(Z) The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2004
(AA) The Company's Current Report on Form 8-K filed as of November
25, 2004
(BB) The Company's Current Report on Form 8-K filed as of March 2.
2005
(CC) The Company's Annual Report on Form 10-K for the year ended
December 31, 2004
30
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 20, 2005 By: /s/ Yashpal Singh
-----------------
Yashpal Singh
President, Director and Chief
Executive Officer
Dated: May 20, 2005 By: /s/ N.Mahadevan
---------------
N. Mahadevan
Chief Financial Officer and
Secretary
31
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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
32