UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
|X| quarterly report under section 13 or 15(d) of the securities exchange act
of 1934
For the quarterly period ended June 30, 2003
| | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 1-13636
Mendocino Brewing Company, Inc.
(Exact name of small business issuer as specified in its charter)
California 68-0318293
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
13351 Highway 101 South, Hopland, California 95449
(Address of principal executive offices)
(707) 744-1015
(Issuer's telephone number)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes __ No __
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 June 30, 2003 is 11,266,874.
Transitional Small Business Disclosure Format (check one):
Yes ___ No ___
PART I
ITEM 1. FINANCIAL STATEMENTS.
---------------------
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 2003
(UNAUDITED)
ASSETS
------
CURRENT ASSETS
Cash $ 511,400
Accounts receivable 5,630,400
Inventories 1,356,600
Prepaid expenses 472,800
------------
Total Current Assets: 7,971,200
------------
PROPERTY AND EQUIPMENT 13,860,500
------------
OTHER ASSETS
Deposits and other Assets 280,500
Intangibles net of amortization 99,800
Total Other Assets: 380,300
------------
Total Assets: $ 22,212,000
============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 4,569,600
Accrued liabilities 1,896,200
Income taxes Payable 290,800
Current maturities of obligation under capital lease 702,900
Current maturities of obligation under long-term debt 843,200
Line of credit 2,441,700
Notes to related party 1,879,600
------------
Total Current Liabilities: 12,624,000
LONG TERM DEBT, less current maturities 3,153,400
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 197,300
------------
Total Liabilities: 15,974,700
------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with aggregate
liquidation preference of $227,600; 227,600
shares authorized, issued and outstanding 227,600
Common stock, no par value: 30,000,000 shares authorized,
11,266,874 shares issued and outstanding 14,648,600
Accumulated comprehensive loss (16,900)
Accumulated deficit (8,622,000)
------------
Total Stockholders' Equity 6,237,300
------------
Total Liabilities and Stockholders' Equity: $ 22,212,000
============
The accompanying notes are an integral part
of these financial statements.
1
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
----------------------------- -----------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES 7,112,900 6,349,600 12,983,000 11,425,700
COST OF GOODS SOLD 4,816,900 4,181,600 8,811,500 7,702,700
------------ ------------ ------------ ------------
GROSS PROFIT 2,296,000 2,168,000 4,171,500 3,723,000
------------ ------------ ------------ ------------
OPERATING EXPENSES
Marketing, General and Administrative 1,856,600 1,781,100 3,789,800 3,458,200
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 439,400 386,900 381,700 264,800
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income 5,700 2,300 10,600 12,500
Interest Expense (202,400) (209,800) (407,800) (424,000)
------------ ------------ ------------ ------------
(196,700) (207,500) (397,200) (411,500)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 242,700 179,400 (15,500) (146,700)
PROVISION FOR INCOME TAX 80,800 52,300 112,000 80,600
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 161,900 $ 127,100 $ (127,500) $ (227,300)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME/
(LOSS), net of tax
Foreign Currency Translation Adjustment 29,900 23,400 18,400 3,600
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 191,800 $ 150,500 $ (109,100) $ (223,700)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ (0.01) $ (0.02)
============ ============ ============ ============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ 0.01 $ 0.01 $ (0.01) $ (0.02)
============ ============ ============ ============
The accompanying notes are an integral part
of these financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------- ---------------------------
SIX MONTHS ENDED
June 30
--------------------------- ---------------------------
2003 2002
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (127,500) $ (227,300)
Adjustments to reconcile net income (loss) to net
cash from operating activities:
Depreciation and amortization 561,200 563,800
Loss on sale of assets 1,900 --
Stock issued for services -- 172,100
Changes in:
Accounts receivable 280,600 367,000
Inventories 117,700 (17,500)
Prepaid expenses (212,300) (146,500)
Deposits and other assets 55,700 (124,000)
Accounts payable (1,149,900) (349,100)
Accrued liabilities 232,500 (310,400)
----------- -----------
Net cash from operating activities: (240,100) (71,900)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (239,000) (230,900)
improvements
Proceeds from sale of fixed assets 10,900 --
----------- -----------
Net cash from investing activities: (228,100) (230,900)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings on line of credit 289,300 822,100
Principal payments on long-term debt (302,000) (685,100)
Net borrowing on long-term debt 403 700 --
Payments on obligation under capital lease (130,000) (67,500)
Proceeds from notes payable to related parties 43,300 47,000
Proceeds from new distributors 655,200 --
Disbursement in excess of deposit (134,300) 157,300
----------- -----------
Net cash from financing activities: 825,200 273,800
----------- -----------
Effect of exchange rate change on cash 7,600 4,100
----------- -----------
INCREASE/(DECREASE) IN CASH 364,600 (24,900)
----------- -----------
CASH, beginning of period 146,800 90,000
----------- -----------
CASH, end of period $ 511,400 $ 65,100
=========== ===========
Supplemental cash flow information includes the
following:
Cash paid during the period for:
Interest $ 364,500 $ 355,300
----------- -----------
Income Tax $ 257,700 $ 94,200
----------- -----------
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, 2002. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2003, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003.
The Company has adopted EITF - 01-09 "Accounting for Consideration Given by a
Vendor to a Customer (including a Reseller of the Vendor's Products)". This EITF
requires that certain cash consideration paid to customers for services or
placement fees are to be reported as a reduction in revenue rather than as an
expense. The Company has reclassified these items on the income statements for
the six-month periods ending June 30, 2002, as a reduction in revenue and as a
corresponding reduction in marketing and selling expenses. This reclassification
has no impact on net income.
Note 2 - Line of Credit
The CIT Group/Credit Finance, Inc. has provided the Company a $3,500,000 maximum
line of credit with an advance rate of 80% of the qualified accounts receivable
and 60% of inventory at an interest rate equal to the prime rate of Chase
Manhattan Bank of New York plus 2.25% payable monthly, scheduled to mature on
November 30, 2003. 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.
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. As of June 30, 2003, the amount
outstanding on the term loan was approximately $626,400. Based on the Company's
current level of accounts receivable and inventory, the Company has drawn the
maximum amount permitted under the line of credit. As of June 30, 2003, the
total amount outstanding on the line of credit was approximately $1,586,900.
Nedcor Bank Limited, a South African registered company, has provided a
multi-currency option facility of 1,250,000 GBP 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
4
overdraft facility is secured by all of the assets of UBSN. The amount
outstanding on this line of credit as of June 30, 2003, was approximately
$854,900.
Note 3 - Long Term Debt and Notes to Related Parties
The Company has a note outstanding in the principal amount of $2,700,000, with
interest at the treasury constant maturity index for five year treasuries plus
4.17%, 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
and is secured by real property located in Ukiah, California.
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 monthly installment of GBP 5,000 per
month, commencing in June 2003. The loan carries an interest rate of 5%.
The Company has issued unsecured convertible notes in favor of United Breweries
of America, Inc. ("UBA") in the amount of approximately $1,515,400 as of June
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 June 30, 2003, is approximately
$364,200.
Note 4 - Income Taxes
As of June 30, 2003, the Company has available for carry-forward Federal,
California and New York net operating losses. The losses will expire as follows:
NET OPERATING LOSS
----------------------------------------------------
Date of Expiration FEDERAL CALIFORNIA NEW YORK
------------------ ------- ---------- --------
2005 $ -- $ 2,417,000 $ --
2010 -- 250,900 --
2011 -- 153,700 --
2012 1,802,300 -- 277,400
2018 2,758,800 -- 424,700
2019 2,153,100 -- 320,300
2020 965,600 -- 134,200
2021 1,041,100 -- 160,200
2022 806,800 -- 124,200
----------- ----------- -----------
$ 9,527,700 $ 2,821,600 $ 1,441,000
=========== =========== ===========
5
The Company also has $66,900 of California Manufacturer's Investment Tax Credits
that can be carried forward to offset future taxes until they begin to expire in
2007.
Temporary differences and carry-forwards which give rise to deferred tax assets
and liabilities on June 30, 2003, are as follows:
Accounts receivables allowance $ 19,100
Benefits from net operating loss carry forwards 3,751,600
Inventory 8,000
Accruals 15,400
Valuation allowance (3,414,900)
Depreciation and amortization (253,800)
Investment in United Breweries International (UK) Ltd. 328,300
Undistributed earnings of UBI (UK) (566,000)
Others 112,300
Note 5 -- Related party Transactions
During 2001 and 2002, 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; 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 is contained in the Company's
annual report on Form 10-KSB for the year ended December 31, 2002, and such
information is incorporated herein by reference.
The following table reflects the value of the transactions for the six months
ended June 30, 2003 and 2002 and the balances outstanding at June 30, 2003 and
2002.
- -------------------------------------------------------------------- ------------ -------------
2003 2002
- -------------------------------------------------------------------- ------------ -------------
Sales to Shepherd Neame Ltd $ 1,186,700 $ 969,800
- -------------------------------------------------------------------- ------------ -------------
Purchases from Shepherd Neame Ltd. 5,101,700 4,122,700
- -------------------------------------------------------------------- ------------ -------------
Expenses reimbursement to Shepherd Neame Ltd. 462,700 369,400
- -------------------------------------------------------------------- ------------ -------------
Interest expenses associated with UBA convertible notes payable 43,300 47,000
- -------------------------------------------------------------------- ------------ -------------
Accounts payable to Shepherd Neame Ltd 2,427,400 2,345,400
- -------------------------------------------------------------------- ------------ -------------
Account receivable from Shepherd Neame Ltd. 544,900 525,100
- -------------------------------------------------------------------- ------------ -------------
Amounts payable to American United Breweries International 20,000 20,000
- -------------------------------------------------------------------- ------------ -------------
Note 6 - Net Income Per Common and Common Equivalent Share
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
during the period.
6
Diluted EPS is computed by dividing income available to shareholders by the
weighted average number of common shares and common equivalent shares
outstanding, which include dilutive stock options and notes payable convertible
in common stock. Common equivalent shares associated with stock options and
convertible notes payable have been excluded from periods with a net loss as the
potentially dilutive shares would be antidilutive.
Three months ended Six months ended
------------------ ----------------
6/30/2003 6/30/2002 6/30/2003 6/30/2002
------------------------------------------------------------
Net income (loss) $ 161,900 $ 127,100 $ (127,500) $ (227,300)
============================================================
Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874
============================================================
Basic net income (loss) per share $ 0.01 $ 0.01 $ (0.01) $ (0.02)
============================================================
Diluted net income (loss) per share
Net income (loss) $ 161,900 $ 127,100 $ (127,500) $ (227,300)
Interest expense on convertible notes
payable 21,800 23,600 -- --
------------------------------------------------------------
Income for the purpose of computing
diluted net income per share $ 183,700 $ 150,700 $ (127,500) $ (227,300)
============================================================
Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874
Dilutive stock options 429,273 429,273 -- --
Assumed conversion of convertible notes
payable 1,253,076 1,193,133 -- --
------------------------------------------------------------
Weighted average common shares outstanding
for the purpose of computing diluted net
income (loss) per share 12,949,223 12,889,280 11,266,874 11,266,874
============================================================
Diluted net income (loss) per share $ 0.01 $ 0.01 $ (0.01) $ (0.02)
============================================================
Note 7 - Inventory June 30, 2003
-------------
Raw Materials $ 416,400
Beer-in-process 230,700
Finished Goods 680,100
Merchandise 29,400
-----------
$ 1,356,600
===========
Note 8. Property And Equipment June 30, 2003
-------------
Buildings $ 7,807,800
Machinery and equipment 8,375,900
Equipment under capital lease 2,405,800
Land 810,900
7
Leasehold improvements 777,600
Equipment in progress 21,600
Vehicles 86,300
Furniture and fixtures 205,300
-----------
20,491,200
Less: Accumulated depreciation and amortization 6,630,700
-----------
$13,860,500
===========
Note 9 - Stockholders' Equity
The following table summarizes equity transactions during the six months ended
June 30, 2003:
SERIES A
PREFERRED STOCK COMMON STOCK OTHER
--------------------------- ------------------------ COMPREHENSIVE ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT INCOME/(LOSS) DEFICIT EQUITY
------------ ------------ ------------ ------------ ---------------------------- ------------
Balance,
December 31, 2002 $ 227,600 $ 227,600 11,266,874 $ 14,648,600 (35,300) $ (8,494,500) $ 6,346,400
Net Loss (127,500) (127,500)
Currency Translation
Adjustment 18,400 18,400
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance,
June 30, 2003 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (16,900) $ (8,622,000) $ 6,237,300
============ ============ ============ ============ ============ ============ ============
Note 10 - 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 June 30 Six months ended June 30
- ----------------------------------------- ------------------------------- -------------------------------
2003 2002 2003 2002
- ----------------------------------------- --------------- --------------- --------------- ---------------
Net income / (loss) as reported $ 161,900 $ 127,100 $(127,500) $(227,300)
- ----------------------------------------- --------------- --------------- --------------- ---------------
Deduct: Total stock-based employee (99,100)
compensation expense determined under
fair value based methods for all awards,
net of tax related effects
- ----------------------------------------- --------------- --------------- --------------- ---------------
8
- ----------------------------------------- --------------- --------------- --------------- ---------------
Pro forma Net Loss $ 161,900 $ 127,100 $ (127,500) $ (326,400)
- ----------------------------------------- --------------- --------------- --------------- ---------------
Earning Per Share
- ----------------------------------------- --------------- --------------- --------------- ---------------
Basic and diluted (as reported) $ 0.01 $ 0.01 $ (0.01) $ (0.02)
- ----------------------------------------- --------------- --------------- --------------- ---------------
Basic and diluted (pro forma) $ 0.01 $ 0.01 $ (0.01) $ (0.02)
- ----------------------------------------- --------------- --------------- --------------- ---------------
Note 11. Segment Information
The Company's three business segments are (i) brewing operations, (ii)
distributing operations in the United Kingdom, and (iii) retail sales at the
Hopland Brewery and the tasting room at Saratoga Springs. A summary of each
segment is as follows:
Six months ended June 30, 2003
Domestic Brewing Distributor Retail Corporate & Total
Operations Operations Operations Others
Net Sales $ 5,110,800 $ 7,655,400 $ 216,800 $ -- $12,983,000
Operating
Profit/(Loss) 16,900 396,400 (31,600) -- 381,700
Identifiable Assets 14,002,700 4,855,200 105,700 2,942,000 21,905,600
Depreciation &
amortization 375,400 177,300 2,600 5,900 561,200
Capital
Expenditures 28,500 210,500 -- -- 239,000
Six months ended June 30, 2002
Domestic Brewing Distributor Retail Corporate & Total
Operations Operations Operations Others
Net Sales $ 4,987,900 $ 6,211,500 $ 226,300 $ -- $11,425,700
Operating Profit/(Loss) 1,300 275,300 (11,800) -- 264,800
Identifiable Assets 14,684,500 4,284,700 85,500 3,939,400 22,994,100
Depreciation &
amortization 381,000 159,900 3,100 19,800 563,800
Capital Expenditures 87,700 143,200 -- -- 230,900
9
Note 12 - Legal Dispute
The Company recently 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, claiming
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, negligent and intentional interference with economic
relationships.
The Company believes that even though the agreement did not require a showing of
good cause for termination, the Company nevertheless had ample good cause to
terminate the agreement, and that, by failing to perform according to the
contract, GGD has breached its contract with the Company. The Company filed a
cross-complaint against GGD asserting these claims and seeking the appropriate
remedies, including compensatory and punitive damages. Based on the facts and
the Company's beliefs set forth above, the Company did not provide for any
liability for the claims of GGD.
During the second quarter of the year 2003, the Company received $655,200 from
two new distributors in exchange for the Company's business in the former
territory of GGD. Normally the changing of distributors occurs outside of the
Company, and the new distributors pay the old distributors for developing the
territory. Because of the dispute between the Company and GGD, the Company
determined that the new distributors should pay these funds directly to the
Company. The Company will use these funds to pay off any obligation owed to GGD
once the legal matters have been settled.
UBSN is involved in a dispute with customs and excise authorities in the United
Kingdom regarding the recoverability of Value Added Tax on certain materials. If
UBSN is unsuccessful in defending its case, costs (including penalties and
interest) are estimated at GBP 70,000. However, UBSN believes that it will be
successful in its defense and accordingly, the Company did not provide for any
liability for this dispute.
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, liquidity and cash flows of
the Company for the six months ended June 30, 2003, compared to the six months
ended June 30, 2002, and the year ended December 31, 2002. This discussion
should be read in conjunction with the Consolidated Financial Statements and
Notes included in the company's Annual Report to Shareholders for the year ended
December 31, 2002.
10
This discussion contains statements regarding the company's expectations
concerning its future operations, earnings and outlook. These statements are
forward-looking statements that involve significant risks and uncertainties, and
accordingly, no assurances can be given that such expectations will be correct.
These expectations are based upon many assumptions that the Company believes to
be reasonable, but such assumptions may ultimately prove to be inaccurate or
incomplete, in whole or in part. Important factors that could cause actual
results to differ (favorably or unfavorably) from the expectations stated in
this discussion include, among others, changes in the pricing environment for
the Company's products; changes in demand for malt beverage products in
different Company markets; changes in customer preference for the Company's malt
beverage products; regulatory or legislative changes; changes in raw materials
prices; changes in interest rates; and changes in the company's European beer
and/or restaurant business. The Company disclaims any obligation to update any
of these forward-looking statements. If the Company determines to update any
forward-looking statement, it will do so publicly. No private statements by the
Company or its personnel should be interpreted as updating forward-looking
statements.
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 intrinsic value method, or APB Opinion No. 25, to account for incentive
awards of Company common stock.
o A full valuation allowance of deferred tax assets for net operating loss
carryforwards that are expected to expire prior to utilization.
o The carrying value of certain plant and equipment is not impaired under
FASB 144 based on expected future cash flows from operations.
o The decision by the Company not to accrue any amounts in connection with
the litigation involving Golden Gate Distributing, based on the Company's
belief that it will prevail in the litigation and similar decision in
connection with a dispute with customs and excise
11
authorities in the United Kingdom based on the Company's belief that it
will be successful in its defense.
These accounting policies are applied consistently for all years presented.
The Company's operating results would be affected if other alternatives were
used. Information about the impact on operating results is included in the
footnotes to the Company's consolidated financial statements.
OVERVIEW
MBC was originally formed in March 1983 and bottled its flagship brand, Red Tail
Ale, in December 1983. The Company is celebrating its 20th anniversary during
the year 2003. During the first quarter of the year 2003, the Company prepared
to launch Red Tail Ale in a commemorative 22 oz. bottle. This limited edition
bottle, with an exciting `Red Tail Ale - Reggae on the River' label designed by
artist Jesse Miller is distributed in select markets in California and Oregon.
During the second quarter, the Company started brewing products of Monterey
County Ales, Inc. at its breweries located in Ukiah and Saratoga Springs.
The Company's brewing operation's sales in the United States during the first
six months of the year 2003 increased to 28,323 barrels, an increase of 335
barrels, or 1.2%, over the 27,988 barrels sold in the first six months of the
year 2002. Management had hoped for a larger increase and attributes this
marginal increase to the poor economy and a significant decline in business
experienced by the restaurant and tourism industry. During the first six months
of the year 2003, UBSN sold 29,561 barrels in the United Kingdom, Europe and
Canada, compared to 26,977 barrels during the corresponding period in the year
2002.
The Company ended the first six months of 2003 with a net loss of $127,500, as
compared to a net loss of $227,300 for the same period in 2002. As set forth
more fully under "Results of Operations," below, the overall net loss is
attributed to increases in net sales, cost of goods, marketing, general and
administrative expenses, a reduction in other income and interest, and an
increase in the income tax provision.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See the accompanying
Financial Statements and Notes thereto.
------------------------
SIX MONTHS ENDED JUNE 30
------------------------
2003 2002
STATEMENTS OF OPERATIONS DATA: % %
--------- ---------
NET SALES 100.00 100.00
Costs of Sales 67.87 67.42
--------- ---------
GROSS PROFIT 32.13 32.58
========= =========
12
Marketing, General and Administrative Expense 29.19 30.26
PROFIT / (LOSS) FROM OPERATIONS 2.94 2.32
Other (Income) / Expense (0.08) (0.11)
Interest Expense 3.14 3.71
--------- ---------
(Loss) before income taxes (0.12) (1.28)
Provision for income taxes 0.86 0.71
--------- ---------
NET LOSS (0.98%) (1.99%)
========= =========
Other Comprehensive Loss (0.14) (0.03)
========= =========
COMPREHENSIVE LOSS (0.84%) (1.96%)
========= =========
------------------------
SIX MONTHS ENDED JUNE 30
------------------------
2003 2002
BALANCE SHEET DATA: $ $
---------- ----------
Cash and Cash Equivalents 511,400 65,100
Working Capital (4,652,800) (4,533,300)
Property and Equipment 13,860,500 14,358,800
Deposits and Other Assets 380,300 2,277,400
Total Assets 22,212,000 22,994,100
Long-term Debt 3,153,400 3,446,400
Obligation Under Capital Lease 197,300 846,500
Total Liabilities 15,974,700 15,184,100
Accumulated Deficit (8,622,000) (6,992,000)
Stockholder's equity 6,237,300 7,810,000
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
NET SALES
Overall net sales for the second quarter of 2003 were $7,112,900, an
increase of $763,300, or 12.02%, compared to $6,349,600 for the second quarter
of 2002. Of the increase, sales from the Company's domestic operations increased
by $78,400 and sales from the European operation increased by $684,900.
Domestic Operations. Domestic net sales for first six months of 2003 were
$2,989,800 compared to $2,911,400 for the same period in 2002, a 2.69% increase.
The sales volume increased to 15,730 barrels in the second quarter of 2003 from
15,490 barrels in the second quarter of 2002, representing an increase of 240
barrels or 1.55%. Of the increase, sales of the Company's brands increased by
503 barrels; sales of Kingfisher decreased by 119 barrels; and sales of contract
brands decreased by 144 barrels. The decrease in the sale of contract brands is
mainly due to the termination of the brewing agreement with Wolaver's
Enterprises in December
13
2002, but is partially offset by sales of Monterey County Ale products. The
increase in overall net sales during the second quarter of 2003 was mainly due
to an increase in wholesale shipments. Retail sales for the second quarter of
2003 showed a decrease of $8,700 over the same period in 2002.
European Operations: Net sales for the second quarter of 2003 were
$4,123,100 (GBP 2,548,200) compared to $3,438,200 (GBP 2,329,300) during the
corresponding period of 2002, an increase of 19.92%. During the second quarter
of 2003, UBSN sold 15,936 barrels compared to 15,065 barrels during the same
period in 2002. Exchange rate fluctuations when measured in United States
dollars increased the amount of growth as compared to last year, hence when the
net sales results are compared in Pounds Sterling, there is an increase of only
9.4%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the second quarter of
2003 was 67.72%, as compared to 65.86% during the corresponding period of 2002.
Domestic Operations: Cost of goods sold as a percentage of net sales in the
United States during the second quarter of 2003 was 68.54%, as compared to
66.25% during the corresponding period of 2002, representing an increase of
2.29%, mainly due to increases in the price of raw materials and increased
insurance costs.
European Operations: Cost of goods sold as a percentage of net sales in the
United Kingdom during the second quarter of 2003 was 67.61%, as compared to
66.16% during corresponding period in 2002 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation), representing a slight increase of 1.45%.
GROSS PROFIT
As a result of the higher net sales described above, gross profit for the second
quarter of the year 2003 increased to $2,296,000, from $2,168,000 during the
corresponding period of 2002, representing an increase of 5.9%. As a percentage
of net sales, the gross profit during the second quarter of 2003 decreased to
32.28% from that of 34.14% for the second quarter of 2002.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses for the second quarter of 2003
were $1,856,600, as compared to $1,781,100 for the second quarter of 2002,
representing an increase of 4.24%.
Domestic Operations: Expenses for the second quarter of 2003 were $788,800
compared to $811,400 during the corresponding period of 2002, representing a
decrease of $22,600. As a percentage of net sales in the United States, the
expenses decreased to 26.38% during the second quarter of 2003, compared to
27.87% during the corresponding period of 2002, mainly on account of a reduction
in manpower.
European operations: Expenses for the second quarter of 2003 were
$1,067,800 compared to $969,700 during the corresponding period of 2002,
representing an increase of
14
$98,100. As a percentage of net sales in the United Kingdom, the expenses
decreased to 25.9% during the second quarter of 2003 compared to 28.2% during
the corresponding period of 2002 (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 increases in manpower, travel costs, and
promotional expenses.
OTHER EXPENSES
Other expenses for the second quarter of 2003 totaled $196,700, representing a
decrease of $10,800 when compared to the second quarter of 2002. The other
expenses consist of interest expenses, miscellaneous income, and acquisition
costs. Interest expenses decreased by $7,400 because of the reduction in long
term debts and reduction in interest rates. Miscellaneous income increased by
$3,400.
INCOME TAXES
The Company has a provision for income taxes of $80,800 for the second quarter
of 2003, compared to $52,300 for the second quarter of 2002. The provision for
taxes relates to the estimated amount of taxes that will be imposed by taxing
authorities in the United Kingdom.
NET INCOME
The Company's net income for the second quarter of 2003 was $161,900, as
compared to income of $127,100 for the second quarter of 2002. After providing
for a foreign currency translation adjustment of $29,900 during the second
quarter of 2003 ($23,400 for 2002), the comprehensive income for 2003 was
$191,800, compared to $150,500 in 2002.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
NET SALES
Overall net sales for the first six months of 2003 were $12,983,000, an increase
of $1,557,300, or 13.63%, compared to $11,425,700 for the first six months of
2002. Of the increase, Company's domestic operations sales increased by $113,400
and European operation's sales increased by $1,443,900.
Domestic Operations. Domestic net sales for first six months of 2003 were
$5,327,600 compared to $5,214,200 for the same period in 2002, a 2.17% increase.
The sales volume increased to 28,323 barrels in first six months of 2003 from
27,988 barrels in the first six months of 2002, representing an increase of 335
barrels or 1.2%. Of the increase, sales of the Company's brands increased by
1,117 barrels; sales of Kingfisher decreased by 196 barrels, and sales of
contract brands decreased by 586 barrels. The decrease in the sales of contract
brands is mainly due to the termination of the brewing agreement with Wolaver's
Enterprises, LLC in December 2002. The increase in overall net sales during the
first six months of 2003 was mainly due to increase in wholesale shipments.
Retail sales for the first six months of 2003 showed a decrease of $9,500 over
the same period in 2002.
15
European Operations: Net sales for the first six months of 2003 were
$7,655,400 (GBP 4,752,300) compared to $6,211,500 (GBP 4,287,100) during the
corresponding period of 2002, an increase of 23.25%. During the first six months
of 2003, UBSN sold 29,561 barrels, compared to 26,977 barrels during the same
period in 2002. However, effective as of March 1, 2003, UBSN increased its
prices for its products. Exchange rate fluctuations when measured in United
States dollars caused the growth percentage to increase as compared to last
year, hence when the net sales results are compared in Pounds Sterling, there is
an increase of 10.85%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first six months of
2003 was 67.87%, as compared to 67.42% during the corresponding period of 2002.
This slight increase is largely due to increased costs in the United States
operations.
Domestic Operations: Cost of goods sold as a percentage of net sales in the
United States during the first six months of 2003 was 69.92%, as compared to
69.27% during the corresponding period of 2002, representing an increase of
0.65%, which is mainly due to an increase in the price of raw materials and
increased insurance costs.
European Operations: Cost of goods sold as a percentage of net sales in the
United Kingdom during the first six months of 2003 was 66.90%, as compared to
66.47% during corresponding period in 2002 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation), representing an increase of 0.43% mainly due to product mix and
exchange rate fluctuations.
GROSS PROFIT
As a result of the higher net sales described above, gross profit for the first
six months of the year 2003 increased to $4,171,500, from $3,723,000 during the
corresponding period of 2002, representing an increase of 12.05%. As a
percentage of net sales, the gross profit during the first quarter of 2003
decreased to 32.13% from that of 32.58% for the first six months of 2002.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES
Marketing, general and administrative expenses for the first six months of 2003
were $3,789,800, as compared to $3,458,200 for the first six months of 2002,
representing an increase of 9.59%.
Domestic Operations: Expenses for the first six months of 2003 were
$1,652,300 compared to $1,650,600 during the corresponding period of 2002,
representing an increase of $1,700. As a percentage of net sales in the United
States, the expenses decreased to 31.01% during the first six months of 2003,
compared to 31.66% during the corresponding period of 2002, mainly on account of
increases in legal costs on contractual disputes, insurance costs, and sales
promotion expenses. However, these increases in expenses were partially offset
by savings caused by the Company's reduction in manpower.
European operations: Expenses for the first six months of 2003 were
$2,137,500
16
compared to $1,807,600 during the corresponding period of 2002, representing an
increase of $329,900. As a percentage of net sales in the United Kingdom, the
expenses decreased to 27.92% during the first six months of 2003 compared to
29.1% during the corresponding period of 2002 (in each case as calculated in
U.S. dollars, after taking into account the effects of the exchange rate
calculation). The increase is mainly on account of increased manpower and travel
costs, sales promotional expenses, commissions, and discounts on increased
sales.
OTHER EXPENSES
Other expenses for the first six months of 2003 totaled $397,200, representing a
decrease of $14,300 when compared to the first six months of 2002. The other
expenses consist of interest expenses, miscellaneous income, and acquisition
costs. Interest expenses decreased by $16,200 because of reductions in long term
debts, interest rates, and the outstanding balance on the line of credit.
Miscellaneous income decreased by $1,900.
INCOME TAXES
The Company has a provision for income taxes of $112,000 for the first six
months of 2003, compared to $80,600 for the first six months of 2002. The
provision for taxes relates to the estimated amount of taxes that will be
imposed by taxing authorities in the United Kingdom.
The Company has also provided valuation allowance $3,414,900 for federal and
state net operating losses that may expire prior to utilization.
NET LOSS
The Company's net loss for the first six months of 2003 was $127,500, as
compared to loss of $227,300 for the first six months of 2002. After providing
for a foreign currency translation adjustment of $18,400 during the first
quarter of 2003 ($3,600 for 2002), the comprehensive loss for 2003 was $109,100,
compared to a loss of $223,700 in 2002.
CAPITAL DEMANDS
Both the Ukiah and Releta facilities continue to operate at significantly less
than full capacity. Both breweries have placed demands upon the Company's assets
and liquidity. Failure to adequately meet those demands may have a material
adverse affect on the Company's business, financial condition, and results of
operations.
The Company has yet to complete the build-out of its administrative space and
the exterior landscaping of the Ukiah facility. Completion of the construction
is a condition to the issuance of a final certificate of occupancy. However, the
Ukiah brewery has been operating under a temporary certificate of occupancy from
the City of Ukiah since 1998 with no adverse consequences. The Company does not
plan to revisit completion of the project until it has the available funds to do
so. If, in the future, the Company decides to complete the landscaping, the
remaining work and the estimated cost thereof are 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.
17
PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS
The Company must make timely payment of its debt and lease commitments to
continue its operations. Unused capacity at the Ukiah and Saratoga Springs
facilities has placed demands on the Company's working capital. Beginning
approximately in the second quarter of 1997, the time at which the Ukiah brewery
commenced operations, proceeds from operations have not been able to provide
sufficient working capital for day to day operations. To fund its operating
deficits, the Company has relied upon lines of credit and other credit
facilities (see "Liquidity and Capital Resources," below). Although Management
has had success in negotiating these credit facilities in the past, there can be
no assurance that the Company will be able to do so in the future, either at any
price or at a price the Company will be able to sustain, or that the Company
will have access to any alternative sources of funds in the future. Failure to
secure sufficient funds will have a materially adverse effect on the Company.
BREWING CONTRACT WITH WOLAVER'S ENTERPRISES, LLC.
During September 2000 the Company entered into an agreement with
Wolaver's Enterprises, LLC, ("Wolaver's") a Florida limited liability company,
to brew, on a contract basis, their line of organic beers. The Company produced
3,500 barrels of Wolaver's brand beer during year 2002. In July 2002, Wolaver's
informed the Company that it had merged with Otter Creek Brewing Company in
Middlebury, Vermont. Because of the merger, Wolaver's requested termination of
the brewing contract, and the Company agreed to terminate the brewing contract
effective as of December 31, 2002. Termination of this contract increased the
Company's unused brewing capacity. The Company will continue to look for
opportunities to utilize its brewing facilities at a greater capacity.
LIQUIDITY AND CAPITAL RESOURCES
Master Line of Credit. On August 31, 1999, the Company and UBA entered into
a Master Line of Credit Agreement, which was subsequently amended in April of
2000, and February of 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.
UBA has made thirteen (13) separate advances to the Company under the Credit
Agreement, pursuant to a series of individual eighteen (18) month promissory
notes issued by the Company to UBA (the "UBA Notes"). As of June 30, 2003, the
aggregate outstanding principal amount of the UBA Notes was $1,515,371, and the
accrued but unpaid interest thereon was equal to approximately $364,200.
The UBA Notes require the Company to make quarterly interest payments to UBA on
the first day of April, July, October, and January. To date, UBA has permitted
the Company to 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,
18
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.
On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver
which provides a written confirmation that UBA had waived its rights as of
August 13, 2001, with regard to all conversion rate protection set forth in the
UBA Notes.
The Company and UBA executed an Extension of Term of Notes under Master Line of
Credit Agreement in February of 2002, which was later amended in August of 2002,
March of 2003, and August of 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 that ends on August 14, 2004.
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 monthly
installments of $24,443 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.
Equipment Lease: FINOVA Capital Corporation leased new brewing equipment with a
total cost of approximately $1.78 million to MBC for a term of 7 years
(beginning December 1996) with monthly rental payments of approximately $27,100
each. At expiration of the initial term of the lease in November 2003, the
Company anticipates that it will exercise its option to either purchase the
equipment at its then current fair market value but not less than 25% nor more
than 30% of the original cost of the equipment, or extend the term of the lease
for an additional year at approximately $39,000 per month with an option to
purchase the equipment at the end of the year at then current fair market value.
The lease is not pre-payable.
Other Loans and Credit Facilities.
CIT Group/Credit Finance Line of Credit: The CIT Group/Credit Finance, Inc. has
provided the Company a $3,000,000 maximum line of credit with an advance rate of
80% of qualified accounts receivable and 60% of inventory at an interest rate
equal to the prime rate of Chase Manhattan Bank of New York plus 2.25% payable
monthly. The line of credit is secured by all accounts, general intangibles,
inventory, and equipment of the Company except for the specific equipment and
fixtures of the Company leased from FINOVA Capital Corporation, as well as by a
second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the
line of credit was advanced to the Company as an initial term loan, which was
repayable in sixty consecutive monthly installments of principal, each in the
amount of $24,700.
The facility was originally scheduled to mature on September 23, 2002, but on
January 17, 2003, the facility was amended to extend the term of the facility to
expire on November 30, 2003. This amendment also increased the maximum amount of
available credit 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) that is
repayable in 30 equal consecutive monthly installments of $24,700,
19
commencing February 1, 2003, with a final payment of $8,000. Based on the
Company's current level of accounts receivable and inventory, the Company has
drawn the maximum amount permitted under the line of credit. As of June 30,
2003, the total amount outstanding on the line of credit was approximately
$1,586,900.
Nedcor Bank Limited Option Facility: Necor Bank Limited, a South African
registered company, has provided UBSN with a multi-currency option facility of
GBP 1,250,000. This overdraft facility has an interest rate of 1.5% over Necor
Bank's base rate, and is secured by all of the assets of UBSN. The amount
outstanding on this line of credit as of June 30, 2003 was approximately
$854,900.
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 GBP 600,000 to
UBSN, repayable in annual installments of GBP 60,000 per year, commencing in
June 2003. UBSN has repaid GBP 60,000 as of June 2003 and the amount outstanding
as of June 30, 2003 is GBP 540,000. The loan carries an interest rate of 5%.
Interest: The weighted average interest rates paid on the Company's U.S. debts
(including the long term capital lease of equipment by FINOVA Capital
Corporation Inc.) was 7.39% for the first six months of the year 2003 and 8.44%
for the corresponding period of 2002.
Keg Management Arrangement: The Company has entered into a keg management
agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides the Company with half-barrel kegs for which the Company pays a filling
and use fee. Distributors return the kegs to MicroStar instead of the Company.
MicroStar then supplies the Company with additional kegs. The agreement has been
extended on a monthly basis since September 2002. 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 June 30, 2003, the delinquent property taxes due
on the Company's Ukiah property, including penalties and interest, totaled
$710,600. This amount represents the overdue taxes for the period from April of
1999 to June of 2003. The Company entered into a payment plan on July 31, 2003
to settle the amount of overdue taxes. The Company made an initial payment of
$143,000 under the plan. The balance of the overdue taxes would then be paid in
four subsequent annual installments, on or before April 10 of each year, of 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
all current and future property taxes including payments due under the payment
plan may have serious adverse effect on the Company's business and financial
condition.
Restricted New Assets: UBI has undistributed earnings of approximately
$1,895,000, because its line of credit agreement restricts payments and
dividends to the parent company to $150,000 per year.
Summary: The Company must make timely payment of its debt and lease commitments
to
20
continue its operations. To fund its operating deficits over the past six years,
the Company has relied upon lines of credit and other credit facilities.
Management had success in negotiating these credit facilities in the past and
expects to successfully negotiate these facilities in the future. However, there
can be no assurance that the Company will have access to any such sources of
funds in the future, and the inability to secure sufficient funds will have a
materially adverse effect on the Company. Further, the CIT Group line of credit
is due for renewal in November 2003, and the Finova Lease terminates in November
2003. Failure to renew these facilities would have a material adverse impact on
the Company.
CURRENT RATIO
The Company's ratio of current assets to current liabilities on June 30, 2003
was 0.63 to 1.0 and its ratio of total assets to total liabilities was 1.39 to
1.0. On June 30, 2002, the Company's ratio of current assets to current
liabilities was 0.58 to 1.0 and its ratio of total assets to total liabilities
was 1.51 to 1.0.
UNION REPRESENTATION
On February 28, 2003, approximately 20 employees engaged in brewing, bottling,
warehousing, and shipping at the Ukiah brewery elected Teamsters Local No. 896,
International Brotherhood of Teamsters, AFL-CIO to represent them as a
collective bargaining agent. The Company has commenced negotiation of the
collective bargaining agreement. Upon the execution of the agreement, all of
such 20 employees' positions must be held and filled by members of the union.
ITEM 3. CONTROLS AND PROCEDURES.
The Company's Management including the Chief Executive Officer, President and
Chief Financial Officer, have evaluated the effectiveness of the design,
maintenance, and operation of the Company's disclosure controls and procedures
during the period of time covered by this report. Management determined that the
Company's disclosure controls and procedures were effective in ensuring that
information required to be disclosed by the Company in the reports that it files
under the Exchange Act is accurate and is recorded, processed, summarized, and
reported within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures, no matter how well designed and implemented,
can provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision making can be faulty and that breakdowns in
internal controls can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There have been no significant changes in internal controls or in other factors
that could significantly affect these controls subsequent to the date of the
evaluation thereof, including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company had a written distribution agreement with the House of Daniels,
Inc., dba Golden Gate Distributing Company ("GGD") for the distribution of beer
products in certain counties, including Napa and Marin counties. Pursuant to the
express terms of this agreement, the Company had the right to terminate the
agreement without cause upon 30 days' written notice to GGD. The Company
exercised its contractual right to terminate the agreement by written notice,
such termination to be effective on or about March 28, 2003.
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. GGD claims that the termination of the agreement was
wrongful in that there was no "good cause" reason therefor, and that, in
terminating the agreement, the Company committed various business torts against
GGD. GGD has sued the Company for breach of contract, breach of the covenant of
good faith and fair dealing, unfair business practices, negligent and
intentional interference with economic relationships. GGD seeks compensatory
damages, disgorgement of profits, punitive damages, interest, and reasonable
attorneys' fees. GGD's claims against Mr. Anderson, individually, are limited to
the two interference tort claims. Because Mr. Anderson is an employee of the
Company, the Company may have some obligation to indemnify Mr. Anderson for his
costs and expenses in connection with these claims. In informal discussions,
GGD's attorney has claimed that GGD is entitled to a recovery of compensatory
damages in an amount no less than seven years' profit margins realized by GGD
during its distributorship of the Company's products.
The Company believes that even though the agreement did not require a showing of
good cause for termination, the Company nevertheless had ample good cause to
terminate the agreement, and that, by failing to perform according to the
contract, GGD has breached its contract with the Company. Moreover, during the
thirty days' notice period that the Company gave GGD prior to termination, GGD
engaged in tortious conduct that constituted wrongful interference with the
Company's contractual relationships and economic advantage, trade libel and
unfair business practices. The Company has filed a cross-complaint against GGD
asserting these claims and seeking the appropriate remedies, including
compensatory and punitive damages.
During the second quarter of the year 2003, the Company received $655,200 from
two new distributors in exchange for the Company's business in the former
territory of GGD. Normally the changing of distributors occurs outside of the
Company, and the new distributors pay the old distributors for developing the
territory. Because of the dispute between the Company and GGD, the Company
determined that the new distributors should pay these funds directly to the
Company. The Company will use these funds to pay off any obligation owed to GGD
once the legal matters have been settled.
ITEM 2. CHANGES IN SECURITIES.
None.
22
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
ITEM 5. OTHER ITEMS.
------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
(a) Exhibits. Page No.
31.1 Certification of Principal Executive Officer Pursuant to 25
Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Principal Financial Officer Pursuant to 27
Rule 13a-14(a) or Rule 15d-14(a)
32.1 Certification Pursuant to Title 18, U.S.C. Section 1350 29
32.2 Certification Pursuant to Title 18, U.S.C. Section 1350 30
(b) Current Reports on Form 8-K
None.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
REGISTRANT:
MENDOCINO BREWING COMPANY, INC.
Dated: August 12, 2003 By: /s/ Dr. Vijay Mallya
-------------------------------------
Dr. Vijay Mallya
Chairman of the Board and Chief Executive
Officer
Dated: August 12, 2003 By: /s/ N. Mahadevan
-------------------------------------
N. Mahadevan
Chief Financial Officer and Secretary
23
EXHIBIT LIST
Page No.
--------
31.1 Certification of Principal Executive Officer Pursuant to 25
Rule 13a-14(a) or Rule 15d-14(a)
31.2 Certification of Principal Financial Officer Pursuant to 27
Rule 13a-14(a) or Rule 15d-14(a)
32.1 Certification Pursuant to Title 18, U.S.C. Section 1350 29
32.2 Certification Pursuant to Title 18, U.S.C. Section 1350 30
24