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 JUNE 30, 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 June 30, 2005 is 11,473,914.
PART I
ITEM 1. FINANCIAL STATEMENTS.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
JUNE 30, DECEMBER 31,
2005 2004
CURRENT ASSETS
Cash $ 524,900 $ 526,600
Accounts receivable, allowance for doubtful 7,752,600 8,477,200
accounts of $36,500 and $27,500
Inventories 1,148,200 1,185,400
Prepaid expenses 753,200 347,300
----------- -----------
Total Current Assets: 10,178,900 10,536,500
----------- -----------
PROPERTY AND EQUIPMENT 13,306,200 13,533,900
----------- -----------
OTHER ASSETS
Deposits and other assets 195,800 205,100
Intangibles net of amortization 82,200 87,600
----------- -----------
Total Other Assets: 278,000 292,700
----------- -----------
Total Assets: $23,763,100 $24,363,100
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 3,846,500 $ 3,282,200
Note payable 576,200 576,200
Accounts payable 5,376,800 5,897,600
Accrued liabilities 1,365,800 1,402,900
Legal dispute settlement 200,000 911,800
Income taxes payable 192,400 134,100
Current maturities of obligation
under long-term debt 388,000 400,300
Current maturities of obligation
under capital lease 123,600 146,500
----------- -----------
Total Current Liabilities: 12,069,300 12,751,600
NOTES TO RELATED PARTY 2,473,300 2,010,100
Long term debt, less current maturities 3,013,100 3,384,800
OBLIGATIONS UNDER CAPITAL LEASE, less current
maturities 26,400 62,600
----------- -----------
Total Liabilities: 17,582,100 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 14,747,300 14,648,600
issued and outstanding
Accumulated comprehensive income 108,900 194,300
Accumulated deficit (8,902,800) (8,916,500)
----------- -----------
Total Stockholders' Equity 6,181,000 6,154,000
----------- -----------
Total Liabilities and Stockholders' Equity:
$23,763,100 $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 SIX MONTHS ENDED
June 30 June 30
2005 2004 2005 2004
---- ---- ---- ----
SALES $ 8,408,800 $ 8,374,600 $ 15,814,900 $ 15,320,600
EXCISE TAXES 168,200 187,500 317,400 330,300
------------- ------------- ------------- -------------
NET SALES 8,240,600 8,187,100 15,497,500 14,990,300
COST OF GOODS SOLD 5,538,400 5,372,500 10,524,800 10,007,300
------------- ------------- ------------- -------------
GROSS PROFIT 2,702,200 2,814,600 4,972,700 4,983,000
------------- ------------- ------------- -------------
OPERATING EXPENSES
Marketing 1,276,800 1,478,400 2,593,000 2,806,700
General and administrative 969,300 922,400 1,872,500 1,906,500
------------- ------------- ------------- -------------
2,246,100 2,400,800 4,465,500 4,713,200
------------- ------------- ------------- -------------
Income from operations 456,100 413,800 507,200 269,800
------------- ------------- ------------- -------------
Other income (expense)
Other income 36,400 5,100 41,000 9,100
Profit (Loss) on sale of equipment (5,900) 15,600 (9,200) 14,000
Interest expense (233,000) (210,700) (453,600) (422,700)
------------- ------------- ------------- -------------
(202,500) (190,000) (421,800) (399,600)
------------- ------------- ------------- -------------
INCOME (LOSS) before income taxes 253,600 223,800 85,400 (129,800)
PROVISION FOR INCOME TAXES 41,500 57,400 71,700 78,200
------------- ------------- ------------- -------------
Net INCOME (Loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000)
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME /
(LOSS), net of tax (76,100) (36,400) (85,400) 25,700
------------- ------------- ------------- -------------
Foreign Currency Translation Adjustment
COMPREHENSIVE Income (LOSS) $ 136,000 $ 130,000 $ (71,700) $ (182,300)
============= ============= ============= =============
NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ 0.00 $ (0.02)
============= ============= ============= =============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ 0.02 $ 0.01 $ 0.00 $ (0.02)
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
-3-
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30
2004 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $ 13,700 $ (208,000)
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 453,800 536,400
Allowance for doubtful accounts 9,000 49,000
Loss (Profit) on sale of assets 9,200 (14,000)
Changes in:
Accounts receivable 275,300 16,900
Inventories 37,200 16,500
Prepaid expenses (425,300) 148,100
Deposits and other assets 30,900 (38,700)
Accounts payable (264,900) (16,600)
Accrued liabilities (611,900) (437,300)
Income taxes payable 69,900 (189,900)
----------- -----------
Net cash from operating activities: (403,100) (137,600)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold
improvements (396,700) (280,100)
Proceeds from new distributors -- --
Proceeds from sale of fixed assets 73,100 23,200
----------- -----------
Net cash from investing activities: (323,600) (256,900)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 704,600 807,500
Repayment on long-term debt (331,000) (381,500)
Borrowings on related party debt 463,200 41,600
Payments on obligation under long term lease (59,100) (56,900)
----------- -----------
Net cash from financing activities: 777,700 410,700
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (52,700) 12,900
----------- -----------
NET CHANGE IN CASH (1,700) 29,100
----------- -----------
CASH, beginning of period 526,600 554,300
----------- -----------
CASH, end of period $ 524,900 $ 583,400
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 390,400 $ 319,300
Income taxes $ - $ 100,300
Non-cash investing activity
Seller Financed equipment $ 29,500 $ 26,500
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 June 30, 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. The Company used
the proceeds from the BFI Line of Credit (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 $53,740 under a promissory note. On May 6, 2005, the
Company used the entire immediately available amount drawable under these
facilities to pay off the balance remaining outstanding under the CIT Line of
Credit (discussed above). On June 30, 2005 BFI advanced the Company $200,000
under a promissory note repayable in 30 weekly installments. The total amount
outstanding on these facilities as of June 30, 2005 was $1,576,700.
On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a
temporary loan in the principal amount of $576,200 to MBC in
-5-
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%.
Nedbank Limited, a South African registered company, 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 included a revolving short-term loan, overdraft
protection, and foreign exchange services. It was available until terminated by
Nedbank, and was secured by all of the assets of UBSN. On April 6, 2005, the
balance remaining outstanding on the Nedbank facility was settled in full using
the proceeds from the RBS facility (discussed below).
On April 26, 2005, Royal Bank of Scotland ("RBS") provided an invoice
discounting facility for a maximum amount of GBP 1,750,000 based on 80%
prepayment against qualified accounts receivable related to UBSN's United
Kingdom customers. The initial term of the facility is for a period of one year
after which the facility can be terminated by either party by providing the
other party a notice of six months. The facility carries an interest rate of
1.38% above RBS base rate and a service charge of 0.10% of each invoice
discounted. The amount outstanding on this line of credit as of June 30, 2005
was approximately $2,269,800.
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
June 30, 2005 was approximately $2,235,100.
As of June 30, 2005, the balance of the delinquent property taxes due on the
Company's Ukiah property was approximately $430,900. Pursuant to an agreement
with Mendocino County, the remaining balance of the overdue taxes should be paid
in three annual installments, due on or before April 10, 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 $143,600, or 20% of the original amount outstanding, together with
interest accrued until March 2005.
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
-6-
installments of GBP 60,000, commencing in June 2003. The loan carries an
interest rate of 5% per year. The amount outstanding on this loan as of June 30,
2005 was approximately GPB 410,000 ($735,100 in US Dollars).
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 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 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. The Company
expects the maturity dates to be extended again. 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 so because the notes are subordinated to the long-term debt
agreement with SBMC and the BFI Line of Credit. Because of the subordination,
the Company has shown these notes as long term debt. UBA loaned 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. All of
the notes are convertible, at UBA's option, into common stock at $1.50 per
share. As of June 30, 2005, the aggregate principal balance due under these
Notes was $1,915,400; interest accrued on the Notes is approximately $557,900.
These notes are subordinated to the credit facilities extended to the Company by
BFI and SBMC pursuant to subordination agreements executed by UBA. As per the
terms of the subordination agreements, UBA is precluded from demanding repayment
of the notes due unless the BFI and SBMC facilities are settled in full. The BFI
Line of Credit matures in May 2006 and the SBMC facility matures in the year
2012. Therefore, the Company will not require the use of working capital to
repay any of the UBA notes until the BFI and SBMC facilities are repaid. The
Company also expects the maturity dates of all of the notes to UBA to be
extended, although there is no current agreement to do so. Accordingly, the
entire amount due under the notes is classified as a long term liability.
-7-
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.
The following table reflects the value of the transactions for six months ended
June 30, 2005 and 2004.
- ------------------------------------------------ -------------- --------------
2005 2004
- ------------------------------------------------ -------------- --------------
Interest expenses associated with UBA
convertible notes payable $63,300 41,600
- ------------------------------------------------ -------------- --------------
- ------------------------------------------------ -------------- --------------
- ------------------------------------------------ -------------- --------------
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 the periods
as the potentially dilutive shares would be antidilutive.
Three Months Ended Six Months Ended
------------------ ----------------
6/30/2005 6/30/2004 6/30/2005 6/30/2004
----------------------------------------------------------------------------
Net income (loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000)
================== ================== =================== ==================
Weighted average common shares
outstanding 11,473,914 11,266,874 11,473,914 11,266,874
================== ================== =================== ==================
Basic net income (loss) per share $ 0.02 $ 0.01 $ 0.00 $ (0.02)
================== ================== =================== ==================
Diluted net income (loss) per share
Net income (loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000)
Interest expense on convertible notes 35,000 21,000 63,200 --
payable
------------------ ------------------ ------------------- ------------------
Income for the purpose of computing
diluted net income per share $ 247,100 $ 187,400 $ 76,900 $ (208,000)
================== ================== =================== ==================
-8-
Weighted average common shares
outstanding 11,473,914 11,266,874 11,473,914 11,266,874
Dilutive stock options -- -- -- --
Assumed conversion of convertible notes -- -- -- --
payable
------------------ ------------------ ------------------- ------------------
Weighted average common shares
outstanding for the purpose of
computing diluted net income (loss) per
share
11,473,914 11,266,874 11,473,914 11,266,874
================== ================== =================== ==================
Diluted net income (loss) per share $ 0.02 $ 0.01 $ 0.00 $ (0.02)
NOTE 6 - INVENTORY
JUNE 30, 2005 DECEMBER 31, 2004
Raw Materials $ 356,800 $ 357,500
Beer-in-process 181,500 140,100
Finished Goods 583,300 664,700
Merchandise 26,600 23,100
---------- ----------
TOTAL $1,148,200 $1,185,400
========== ==========
NOTE 7 - STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the six months ended
June 30, 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 Income 13,700 13,700
Currency
Translation
Adjustment (85,400) (85,400)
Balance,
June 30,
2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $108,900 $ (8,902,800) $ 6,181,000
============= ============ ============= ============== ================= =============== ==============
-9-
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 options
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.
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:
Six months ended June 30, 2005
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Sales $ 5,732,000 $ 9,988,200 $ 94,700 $ -- $15,814,900
Operating Profit 181,000 318,000 8,200 -- 507,200
Identifiable Assets 12,908,100 8,302,100 102,900 2,450,000 23,763,100
Depreciation & 235,200 200,200 2,500 15,900 453,800
amortization
Capital Expenditures 34,200 362,500 -- -- 396,700
Six months ended June 30, 2004
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Sales $ 5,740,800 $ 9,488,800 $ 91,000 $ -- $ 15,320,600
Operating Profit/(Loss) 15,600 258,700 (4,500) -- 269,800
Identifiable Assets 13,394,000 7,105,000 95,100 2,564,900 23,159,000
Depreciation & 302,000 216,600 2,500 15,300 536,400
amortization
Capital Expenditures 26,500 253,600 -- -- 280,100
-10-
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, 2005, compared to the six
months ended June 30, 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 other filings and
reports made with the Securities and Exchange Commission (the "Commission"). In
addition, such statements could be affected by general industry and market
conditions and growth rates, and in general domestic and European economic and
political conditions. The Company undertakes no obligation to update these
forward-looking statements to reflect facts, circumstances, assumptions or
events that occur after the date the forward-looking statements are made or to
publicly release the results of any revision to these forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements.
-11-
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
assets held for sale, fixed asset lives, contingencies and litigation. The
Company has also chosen certain accounting policies when options were available,
including:
o The first-in, first-out (FIFO) method to value the majority of
the Company's inventories.
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 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
-12-
change, the Company's evaluation of its deferred tax assets
could materially change.
o 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 statement as a reduction in revenue and as a
corresponding reduction in marketing and selling expenses. This
reclassification has no impact on net income.
These accounting policies are applied consistently for all years
presented. The Company's operating results would be affected if other
alternatives were used. Information about the impact on operating results is
included in the footnotes to the Company's consolidated financial statements.
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 62% of the Company's gross sales during
the first six months of the year 2005 (as compared to 62% for the same period
during 2004), with the Company's United States operations, including
manufacturing and distribution of beer as well as retail sales accounting for
the remaining 38%. With expanded wholesale distribution of beer, 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 (by volume) 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 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
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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 six months of the year 2005 with a net
income of $13,700, as compared to a net loss of $208,000 for the same period in
2004. As set forth more fully under "Results of Operations," below, during the
first six months of the year 2005 the Company experienced an increase in gross
sales of $494,300, or 3.2% as compared to the corresponding period in 2004.
Costs of goods sold increased by $517,500, or 5.2%, marketing costs decreased by
$213,700, or 7.6%, general and administrative costs decreased by $34,000, or
1.8%, and interest expenses increased by $30,900, or 7.3%.
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 SIX MONTHS ENDED
STATEMENTS OF OPERATIONS DATA: JUNE 30, JUNE 30,
------------------------------------- --------------------------------
2005 2004 2005 2004
% % % %
- - - -
Sales 102.04 102.29 102.05 102.20
Less Excise taxes 2.04 2.29 2.05 2.20
NET SALES 100.00 100.00 100.00 100.00
Costs of Sales 67.21 65.62 67.91 66.76
GROSS PROFIT 32.79 34.38 32.09 33.24
Marketing 15.49 18.06 16.73 18.72
General and Administrative Expense 11.76 11.27 12.08 12.72
PROFIT FROM OPERATIONS 5.53 5.05 3.28 1.80
Other Income / (Expense) 0.37 0.25 0.20 0.15
Interest Expense (2.83) (2.57) (2.93) (2.82)
Income/(Loss) before income taxes 3.07 2.73 0.55 (0.87)
Provision for income taxes 0.50 0.70 0.46 0.52
NET INCOME / (LOSS) 2.57 2.03 0.09 (1.39)
Other Comprehensive Income / (loss) (0.92) (0.44) (0.55) 0.17
COMPREHENSIVE INCOME / (LOSS) 1.65 1.59 (0.46) (1.22)
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---------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------
2005 2004
BALANCE SHEET DATA: $ $
- -
Cash and Cash Equivalents 524,900 583,400
Working Capital (1,890,400) (2,090,500)
Property and Equipment 13,306,200 13,632,400
Deposits and Other Assets 278,000 284,200
Total Assets 23,763,100 23,159,000
Long-term Debt (less current maturities) 3,013,100 3,409,200
Capital Lease (less current maturities) 26,400 129,500
Total Liabilities 17,582,100 16,834,700
Accumulated Deficit (8,902,800) (8,655,600)
Stockholder's equity 6,181,000 6,324,300
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2004
NET SALES
Overall net sales for the second quarter of 2005 were $8,240,600, an
increase of $53,500, or 0.65%, compared to $8,187,100 for the second quarter of
2004. The increase was mainly due to increased sales, increased prices for
products in the United Kingdom, and exchange rate fluctuations.
Domestic Operations: Net sales for the second quarter of 2005 were
$2,992,500 compared to $3,165,000 for the same period in 2004, a decrease of
$172,500, or 5.45%. The sales volume decreased to 15,691 barrels in the second
quarter of 2005 from 16,883 barrels in second quarter of 2004; a net decrease of
1,192 barrels, or 7.06%. The bulk of the decrease (1,099 barrels) was made up of
sales of the Company's domestic brands. Sales of contract brands decreased by
113 barrels, but sales of Kingfisher brands increased by 20 barrels.
EUROPEAN TERRITORY: Net sales for the second quarter of 2005 were
$5,248,100 (GBP 2,823,900) compared to $5,022,100 (GBP 2,777,800) during the
corresponding period of 2004, an increase of $226,000, or 4.5%. During the
second quarter of 2005, UBSN sold 17,059 barrels, compared to 16,743 barrels
during the second quarter of 2004, representing an increase of 316 barrels, or
1.89%. Exchange rate fluctuations increased the financial effect of the
Company's growth in sales in its European Territory. When measured from period
to period exclusively in Pounds Sterling (which is the basic currency of account
for the European Territory), the Company's net sales in its European Territory
increased by only 1.66%.
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COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the second
quarter of 2005 was 67.21%, as compared to 65.62% during the corresponding
period of 2004, mainly due to increased costs in the United States.
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the United States during the second quarter of 2005 was 64.71%, as compared to
63.55% during the corresponding period of 2004. This slight increase of 1.16% is
mainly the result of increases in packaging materials and wages, which were
partly offset by a decrease in depreciation.
EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in
the United Kingdom during the second quarter of 2005 was 69.03%, as compared to
67.4% 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 an increase as a percentage of net sales of 1.63%.
The increase in prices for the Company's products did not fully offset the cost
increases in the United Kingdom.
GROSS PROFIT
As a result of the higher cost of goods described above, gross profit
for the second quarter of 2005 decreased to $2,702,200, from $2,814,600 during
the corresponding period of 2004, representing a decrease of 3.99%. As a
percentage of net sales, the gross profit during the second quarter of 2005
decreased to 32.79% from 34.38% for the second quarter of 2004.
OPERATING EXPENSES
Operating expenses for the second quarter of the year 2005 were
$2,246,100, a decrease of $154,700, or 6.44%, as compared to $2,400,800 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 salaries and commissions, advertising costs,
product and sales promotion costs, travel expenses and related costs and the
Company's tavern and tasting room expenses. Such expenses for the second quarter
of 2005 were $1,276,800, as compared to $1,478,400 for the second quarter of
2004, representing a decrease of 13.64%.
DOMESTIC OPERATIONS: Expenses for the second quarter of 2005 were
$333,000 compared to $410,800 during the corresponding period of 2004,
representing a decrease of $77,800. As a percentage of net sales in the United
States, the expenses decreased to 11.13% during the second quarter of 2005,
compared to 12.98% during the corresponding period of 2004. The decreases were
mainly due to reduced salary and travel costs resulting from a temporary
reduction in staff that occurred in the first half of 2005.
EUROPEAN TERRITORY: Expenses for the second quarter of 2005 were
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$943,800 compared to $1,067,600 during the corresponding period of 2004,
representing a decrease of $123,800. As a percentage of net sales in the United
Kingdom, the expenses decreased to 17.98% during the second quarter of 2005
compared to 21.26% 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 decrease resulted mainly from lower freight
costs and decreased dispensing equipment maintenance expenses.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $969,300 for the second quarter of the year 2005,
representing a marginal increase of $46,900, over $922,400 for the corresponding
period in 2004. These expenses were equal to 11.76% of net sales for the second
quarter of the year 2005, as compared to 11.27% for the corresponding period in
2004.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$482,600 for the second quarter of the year 2005, representing a decrease of
$65,500, or 11.95%, from $548,100 for the second quarter of the year 2004. The
decrease was primarily due to a decrease in legal expenses, because a material
legal dispute with a distributor was settled in 2004.
EUROPEAN TERRITORY. General and administrative expenses related to the
European Territory were $486,700 for the second quarter of the year 2005,
representing an increase of $112,400, or 30%, when compared to $374,300 for the
second 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). These
increases were mainly due to increases in salary and travel costs, exchange rate
differences, and the Company's provision for bad debts.
OTHER EXPENSES
Other expenses for the second quarter of 2005 totaled $202,500,
representing an increase of $12,500, or 6.58%, when compared to the second
quarter of 2004. The increase was mainly due to higher interest expenses as a
result of increased borrowings under the lines of credit.
INCOME TAXES
The Company has a provision for income taxes of $41,500 for the second
quarter of 2005, compared to $57,400 for the second 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 PROFIT
The Company's net profit for the second quarter of 2005 was $212,100, as
compared to profit of $166,400 for the second quarter of 2004. After providing
for a negative foreign currency translation adjustment of $76,100 during the
second quarter of 2005 (as compared to a negative adjustment of $36,400 for the
same period in 2004), the comprehensive profit for the second quarter of 2005
was $136,000, compared to a profit of $130,000 for the same period in 2004.
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SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2004
NET SALES
Overall net sales for the first six months of the year 2005 were
$15,497,500, an increase of $507,200, or 3.38%, compared to $14,990,300 for the
same period in 2004. The increase was mainly due to increased sales in the
United Kingdom, increased prices for the Company's products in the United
Kingdom customers, and exchange rate fluctuations.
DOMESTIC OPERATIONS: Domestic net sales for first six months of the year
2005 were $5,509,300 compared to $5,501,500 for the same period in 2004, a
marginal increase of $7,800. Although the Company sold less of its own brand
products, this decrease was offset by revenue from contract bottling of cider.
The sales volume decreased to 29,061 barrels during the first six months of the
year 2005 from 29,655 barrels in the first six months of the year 2004,
representing a decrease of 594 barrels. Sales of Kingfisher brands decreased by
33 barrels, and sales of contract brands decreased by 5 barrels. The remainder
of the decrease was made up of the Company's brands.
EUROPEAN TERRITORY: Net sales for the first six months of the year 2005
were $9,988,200 (GBP 5,331,300) compared to $9,488,800 (GBP 5,205,900) during
the corresponding period of 2004, an increase of 5.26%. During the first six
months of the year 2005, UBSN sold 32,351 barrels compared to 31,886 barrels
during the first six months of the year 2004, an increase of 465 barrels, or
1.46%. Exchange rate fluctuations when measured in United States dollars
increased the growth percentage as compared to last year. Hence, when the net
sales results are compared in Pounds Sterling, there is an increase of 2.41%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first six
months of the year 2005 was 67.91%, as compared to 66.76% during the
corresponding period of 2004 mainly due to increased costs in the United States.
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the United States during first six months of the year 2005 was 67.55%, as
compared to 66.77%, during the corresponding period of 2004, representing an
increase as a percentage of net sales of 0.78% that was mainly due to a increase
in packaging material costs that was partly offset by a decrease in depreciation
expenses.
EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in
the United Kingdom during the first six months of the year 2005 was 68.52%, as
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compared to 67.18% during the corresponding period in 2004 (in each case as
calculated in U.S. dollars, after taking into account the effects of the
exchange rate calculation), due to cost increases that were not fully offset by
price increases.
GROSS PROFIT
As a result of the higher cost of goods described above, gross profit
for the first six months of the year 2005 decreased to $4,972,700, from
$4,983,000 during the corresponding period of 2004, representing a decrease of
0.21%. As a percentage of net sales, the gross profit during the first six
months of 2005 decreased to 32.09% from that of 33.24% during the corresponding
period in 2004.
OPERATING EXPENSES
Operating expenses for the first six months of the year 2005 were
$4,465,500, a decrease of $247,700, or 5.26%, as compared to $4,713,200 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 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 six
months of the year 2005 were $2,593,000, as compared to $2,806,700 for the same
period in 2004, representing a decrease of 7.61%.
DOMESTIC OPERATIONS: Expenses for the first six months of the year 2005
were $686,500 compared to $811,100 during the corresponding period of 2004,
representing a decrease of $124,600. As a percentage of net sales in the United
States, these expenses decreased to 12.46% during the first six months of the
year 2005, compared to 14.75% during the corresponding period of 2004. The
decreased expenses included lower salary and travel costs due to a temporary
decrease in staff (both in New York and California) in the first half of 2005
year and decreases in promotional expenses and point of sale items.
-19-
EUROPEAN TERRITORY: Expenses for the first six months of the year 2005
were $1,906,500 compared to $1,995,600 during the corresponding period of 2004,
representing a decrease of $89,100. As a percentage of net sales in the United
Kingdom, the expenses increased to 21.03% during the first six months of the
year 2005 compared to 21.03% 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 decrease resulted mainly from lower freight
costs and decreased dispensing equipment maintenance expenses. UBSN started an
advertisement campaign during June 2005, so promotional expenses are likely to
increase during the rest of the year 2005.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $1,872,500 for the first six months of the year
2005, representing a decrease of $34,000 or 1.78%, over $1,906,500 for the
corresponding period in 2004. These expenses were equal to 12.08% of net sales
for first six months of the year 2005, as compared to 12.72% for the
corresponding period in 2004.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$952,500 for the first six months of the year 2005, representing a decrease of
$93,900, or 8.92%, from $1,046,400 for the same period in 2004. The decrease was
primarily due to decreased legal expenses because a material legal dispute with
a distributor was settled in 2004.
EUROPEAN TERRITORY. General and administrative expenses related to the
European Territory were $920,000 for the first six months of the year 2005,
representing an increase of $59,900 or 6.96%, as compared to $860,100 for the
same period in 2004 (in each case as calculated in U.S. dollars, after taking
into account the effects of the exchange rate calculation). These increases were
mainly due to increases in salaries.
OTHER EXPENSES
Other expenses for the first six months of the year 2005 totaled
$421,800 representing an increase of $22,200 when compared to the same period in
2004. The increase is mainly due to higher interest expenses as a result of
increased borrowings under the lines of credit.
INCOME TAXES
The Company has a provision for income taxes of $71,700 for the first
six months of the year 2005, compared to $78,200 the same period in 2004. The
provision for taxes is related 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 first six months of the year 2005 was
$13,700, as compared to loss of $208,000 for the first six months of the year
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2004. After providing for a negative foreign currency translation adjustment of
$85,400 during the first six months of 2005 (as compared to a positive
adjustment of $25,700 for the same period in 2004), the comprehensive loss for
the first six months of the year 2005 was $71,700, compared to a loss of
$182,300 for the same period in 2004.
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 thirteen (13) separate
advances to the Company under the Credit Agreement and one additional advance on
substantially the same terms as those 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 June 30, 2005 was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $557,900, for a total of $2,473,300.
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
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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 UBA Notes and the unpaid
interest thereon may be converted, at UBA's discretion, into shares of the
Company's unregistered Common Stock at a conversion rate of $1.50 per share. As
of June 30, 2005, the outstanding principal and interest on the UBA Notes was
convertible into 1,648,867 shares of the Company's Common Stock.
These UBA Notes are subordinated to credit facilities extended to the
Company by BFI and SBMC under a subordination agreement executed by UBA. As per
the terms of the subordination agreement, UBA is precluded from demanding
repayment of the notes due unless the BFI and SBMC facilities are settled in
full. Hence the Company does not expect to make payments on any of these UBA
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
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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%.
BFI also advanced the Company $200,000 under a promissory note (the "BFI
Note" and, together with the BFI Line of Credit, the "BFI Facility"). The BFI
Note is repayable in thirty weekly installment of $6,665 commencing in July 8
2005. On May 6, 2005, the Company used the entire 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. 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 the buy-out of equipment
leased through Finova Capital Corporation secured by the existing assets of the
Company and the assets released by Finova upon 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"), 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, was secured by all of the assets of UBSN. The agreement restricted the
subsidiary from making distributions and payments to the parent in excess of
approximately 100,000 Pounds Sterling annually (approximately $189,000). This
facility was settled in full utilizing proceeds from RBS facility discussed
below.
ROYAL BANK OF SCOTLAND FACILITY: Royal Bank of Scotland provided UBSN
with a GBP 1,750,000 maximum revolving line of credit with an advance rate based
on 80% of UBSN's qualified accounts receivable. UBSN utilized the proceeds of
this facility and settled the Nedbank facility (discussed above) on April 26,
2005.
SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to
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brew Kingfisher Lager for the Company's European and Canadian markets. As
consideration for extending the brewing contract, Shepherd Neame advanced a loan
of 600,000 Pounds Sterling to UBSN, repayable in annual installments of 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 8.64% for the first six months of the year 2005 and
7.61% for the corresponding period in 2004. For loans primarily associated with
Company's European territory, the weighted average rate paid was 6.2% for the
first six months of the year 2005 and 6.75% for the corresponding period in
2004.
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 upon
termination of the contract is likely to have a material adverse effect on the
Company.
OVERDUE PROPERTY TAXES: As of June 30, 2005, the balance of the
delinquent property taxes due on the Company's Ukiah property was approximately
$430,900. Pursuant to an agreement with Mendocino County, the remaining balance
of the overdue taxes should be paid in three annual installments, due on or
before April 10, 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 $143,600, or 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 $2,299,000 as of June 30, 2005. Under
UBI's line of credit agreement, distributions and other payments to the Company
from its subsidiary are limited to approximately $506,000 per year.
CURRENT RATIO
The Company's ratio of current assets to current liabilities on June 30,
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2005 was 0.84 to 1.0 and its ratio of total assets to total liabilities was 1.35
to 1.0. On June 30, 2004, the Company's ratio of current assets to current
liabilities was 0.82 to 1.0 and its ratio of total assets to total liabilities
was 1.38 to 1.0.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 30, 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 June 30, 2005.
INTEREST RATE RISK
The Company had total debt as of June 30, 2005 of $9,668,600, of which
$6,267,500 was subject to variable rates of interest (either prime or LIBOR plus
1.38% or prime plus 3.75%). Its long-term debt (including current portion) as of
June 30, 2005 totaled $5,316,500, of which $3,401,100 had fixed rates of
interest and the balance of $1,915,400 were subject to variable rates. Short
term debts amounted to $4,352,100 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 $62,700 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 management, including the Chief Executive Officer ("CEO")
and Chief Financial Officer ("CFO") has evaluated the effectiveness of the
design, maintenance, and operation of the Company's "disclosure controls and
procedures" as of the end of the period covered by this report. Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by the Company in its reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is
recorded, processed, summarized, and reported within the time periods specified
in the Commission's rules and forms. Disclosure controls and procedures are also
designed to ensure that information that the Company is required to disclose in
its reports under the Exchange Act is accumulated and communicated to the
Company's management, including its CEO and CFO, as appropriate to allow timely
decisions regarding the required disclosure.
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Certain aspects of the Company's internal control over financial
reporting are included in the Company's disclosure controls and procedures, and
are therefore included in management's evaluation. Management evaluates internal
control over financial reporting on a quarterly basis to determine whether any
changes have occurred. Internal control over financial reporting is also
evaluated on an annual basis in connection with the preparation of the Company's
Form 10-K.
Management's review of the disclosure controls and procedures includes a
review of their objectives, design, implementation, and results. Based on this
evaluation, the CEO and CFO believe that, subject to the limitations set forth
below, the Company's disclosure controls and procedures were effective in
providing reasonable assurance that the information required to be disclosed in
the Company's reports under the Exchange Act is recorded, processed, summarized,
and reported within the time specified by the Commission, and that material
information pertaining to the Company is timely communicated to the Company's
management (including the CEO and CFO). Management is not aware of any changes
in the Company's internal or other controls over financial reporting identified
in connection with that evaluation that occurred during the most recent fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
Please refer to the certifications of the Company's Chief Executive
Officer and Chief Financial Officer (which are attached to this report as
Exhibits 31.1 and 31.2) for additional information regarding the Company's
controls and procedures.
LIMITATIONS ON CONTROLS
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.
Please refer to the certifications of the Company's Chief Executive
Officer and Chief Financial Officer (which are attached to this report as
Exhibits 31.1 and 31.2) for additional information regarding the Company's
controls and procedures.
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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. 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 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 June 30, 2005,
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the outstanding principal and interest on the UBA Notes (including the New Note)
totaled approximately $2,473,300, and the UBA Notes were convertible into
1,648,867 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 6. EXHIBITS
Number Description of Document
------ -----------------------
10.1 Invoice Discounting Agreement between The Royal Bank of
Scotland Commercial Services Limited and UBSN Limited,
dated April 26, 2005
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
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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: August 17, 2005 By: /s/ Yashpal Singh
Yashpal Singh
President, Director and Chief
Executive Officer
Dated: August 17, 2005 By: /s/ N. Mahadevan
N. Mahadevan
Chief Financial Officer and
Secretary
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Invoice Discounting Agreement between The Royal Bank of
Scotland Commercial Services Limited and UBSN Limited, dated
April 26, 2005
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