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, 2006
-------------
|_| 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 a large accelerated
filer, an accelerated filer, or a non-accelerated filer, see definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (check one)
Large Accelerated Filer |_| Accelerated Filer |_| Non-Accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (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
stock, as of the latest practicable date: The number of shares of the issuer's
common stock outstanding as of August 14, 2006 is 11,473,914.
1
PART I
ITEM 1. FINANCIAL STATEMENTS.
---------------------
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
-------------------- --------------------
ASSETS (unaudited) (audited)
CURRENT ASSETS
Cash $ 175,500 $ 247,700
Accounts receivable, allowance for doubtful
accounts of $608,800 and $54,900, respectively 7,470,200 7,051,500
Inventories 1,270,200 1,151,400
Prepaid expenses 757,300 548,500
-------------------- --------------------
Total Current Assets 9,673,200 8,999,100
-------------------- --------------------
PROPERTY AND EQUIPMENT 13,207,600 13,185,600
-------------------- --------------------
OTHER ASSETS
Deferred income taxes 124,800 116,000
Deposits and other assets 165,700 179,200
Intangibles net of amortization 74,100 77,500
-------------------- --------------------
Total Other Assets 364,600 372,700
-------------------- --------------------
Total Assets $ 23,245,400 $ 22,557,400
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Lines of credit $ 4,494,100 $ 3,774,000
Note payable 576,200 576,200
Accounts payable 6,302,500 5,491,800
Accrued liabilities 1,760,200 1,714,800
Current maturities of notes to related parties 110,900 103,100
Current maturities of obligations under long-term debt 289,600 284,400
Current maturities of obligations under capital leases 129,100 131,600
-------------------- --------------------
Total Current Liabilities 13,662,600 12,075,900
LONG-TERM LIABILITIES
Notes to related party 3,194,100 3,171,000
Long term debt, less current maturities 2,096,900 2,314,900
Obligations under capital lease less current maturities 146,500 121,500
-------------------- --------------------
Total Long-Term Liabilities 5,437,500 5,607,400
Total Liabilities 19,100,100 17,683,300
-------------------- --------------------
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 shares issued and outstanding 14,747,300 14,747,300
Accumulated comprehensive income 87,000 130,400
Accumulated deficit (10,916,600) (10,231,200)
-------------------- --------------------
Total Stockholders' Equity 4,145,300 4,874,100
-------------------- --------------------
Total Liabilities and Stockholders' Equity $ 23,245,400 $ 22,557,400
==================== ====================
See accompanying notes to these condensed financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
June 30 June 30
2006 2005 2006 2005
------------ ------------ ------------ ------------
SALES $ 8,504,200 $ 8,408,800 $ 15,932,300 $ 15,814,900
EXCISE TAXES 175,600 168,200 331,600 317,400
------------ ------------ ------------ ------------
NET SALES 8,328,600 8,240,600 15,600,700 15,497,500
COST OF GOODS SOLD 5,846,900 5,538,400 10,860,200 10,524,800
------------ ------------ ------------ ------------
GROSS PROFIT 2,481,700 2,702,200 4,740,500 4,972,700
------------ ------------ ------------ ------------
OPERATING EXPENSES
Marketing and distribution 1,104,700 1,276,800 2,363,200 2,593,000
General and administrative 1,562,100 969,300 2,538,200 1,872,500
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 2,666,800 2,246,100 4,901,400 4,465,500
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS (185,100) 456,100 (160,900) 507,200
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Other income 14,200 36,400 16,600 41,000
Profit (Loss) on sale of equipment -- (5,900) (1,100) (9,200)
Interest expense (285,200) (233,000) (539,600) (453,600)
------------ ------------ ------------ ------------
TOTAL OTHER EXPENSES (271,000) (202,500) (524,100) (421,800)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (456,100) 253,600 (685,000) 85,400
PROVISION FOR INCOME TAXES 400 41,500 400 71,700
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (456,500) $ 212,100 $ (685,400) $ 13,700
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE (LOSS), net of tax
Foreign Currency Translation Adjustment (37,100) (76,100) (43,400) (85,400)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ (493,600) $ 136,000 $ (728,800) $ (71,700)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE $ ( 0.04) $ 0.02 $ (0.06) $ 0.00
============ ============ ============ ============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ (0.04) $ 0.02 $ (0.06) $ 0.00
============ ============ ============ ============
See accompanying notes to these condensed financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $(685,400) $ 13,700
Adjustments to reconcile net income (loss) to
net cash from operating activities:
Depreciation and amortization 471,200 453,800
Allowance for doubtful accounts 554,300 9,000
Loss (Profit) on sale of assets 1,100 9,200
Interest accrued on related party notes 87,100 63,200
Changes in:
Accounts receivable (517,700) 275,300
Inventories (118,800) 37,200
Prepaid expenses (181,000) (425,300)
Deposits and other assets (28,800) 30,900
Accounts payable 503,800 (264,900)
Accrued liabilities (13,600) (611,900)
Income taxes payable -- 69,900
--------- ---------
Net cash used in operating activities: 72,200 (339,900)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold (287,300) (396,700)
improvements
Proceeds from sale of fixed assets 3,600 73,100
--------- ---------
Net cash used in investing activities: (283,700) (323,600)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 548,100 704,600
Repayment on long-term debt (320,200) (331,000)
Borrowings on related party debt -- 400,000
Payments on obligation under capital leases (82,900) (59,100)
--------- ---------
Net cash used in financing 145,000 714,500
--------- ---------
activities:
EFFECT OF EXCHANGE RATE CHANGES ON CASH (5,700) (52,700)
--------- ---------
NET CHANGE IN CASH (72,200) (1,700)
---------
(1,700)
CASH, beginning of period 247,700 526,600
CASH, end of period $ 175,500 $ 524,900
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 452,500 $ 390,400
========= =========
Income taxes $ 400 $ --
========= =========
Non-cash investing activity
Seller Financed equipment $ 90,900 $ 29,500
========= =========
See accompanying notes to these condensed financial statements.
4
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
1. DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------------------------------
DESCRIPTION OF OPERATIONS
- -------------------------
Mendocino Brewing Company, Inc., ("the Company" or "MBC"), has operating
subsidiaries, Releta Brewing Company, ("Releta"), and United Breweries
International, Limited (UK), ("UBIUK"). In the United States, MBC and its
subsidiary, Releta, operate two breweries that produce beer and malt beverages
for the specialty "craft" segment of the beer market. The breweries are located
in Ukiah, California and Saratoga Springs, New York. The Company also owns and
operates a brewpub and gift store located in Hopland, California. The majority
of sales for Mendocino Brewing Company are in California. The Company brews
several brands, of which Red Tail Ale is the flagship brand. In addition, the
Company performs contract brewing for several other brands, and MBC holds the
license to distribute Kingfisher Lager in the US.
The Company's UK subsidiary, UBIUK, is a holding company for UBSN Limited. UBSN
is a distributor of alcoholic beverages, mainly Kingfisher Lager, in the United
Kingdom and Europe. The distributorship is located in Faversham, Kent in the
United Kingdom.
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements present the accounts of Mendocino Brewing
Company, Inc., and its wholly-owned subsidiaries, Releta Brewing Company, LLC,
and UBIUK. All material inter-company balances, profits and transactions have
been eliminated.
BASIS OF PRESENTATION AND ORGANIZATION
- ---------------------------------------
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The financial statements and
notes are representations of the management and the Board of Directors, who are
responsible for their integrity and objectivity.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, except as otherwise indicated, considered necessary for a
fair presentation of the financial condition, results of operations and cash
flows for the periods presented. These condensed unaudited consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements included in the Company's most recent Annual Report on Form
10-K,
- 5 -
as filed with the Securities and Exchange Commission, which contains additional
financial and operating information and information concerning the significant
accounting policies followed by the Company.
Operating results for the six months ended June 30, 2006, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2006 or any future period.
SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in the Company's significant accounting
policies during the six months ended June 30, 2006 as compared to what was
previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 2005, except for the adoption of SFAS No. 123 (revised 2004).
CASH AND CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS
- -----------------------------------------------------------
For purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents, those
with original maturities not greater than three months and current maturities
less than twelve months from the balance sheet date are considered short-term
investments, and those with maturities greater than twelve months from the
balance sheet date are considered long-term investments.
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and cash equivalents.
Substantially all of the Company's cash and cash equivalents are deposited with
large commercial banks in the US and the UK.
DEFERRED FINANCING COSTS
- ------------------------
Costs relating to obtaining financing are capitalized and amortized over the
term of the related debt using the straight-line method. Deferred financing
costs were $40,500, and the related accumulated amortization at June 30, 2006
was $23,000. Amortization of deferred financing costs charged to operations was
$1,400 for the six months ended June 30, 2006, and 2005. When a loan is paid in
full, any unamortized financing costs are removed from the related accounts and
charged to operations.
CONCENTRATION OF CREDIT RISKS
- -----------------------------
Financial instruments that potentially subject the Company to credit risk
consist principally of trade receivables, cash deposits in excess of FDIC
limits, and assets located in the United Kingdom. The Company's cash deposits
are placed with major financial institutions.
Wholesale distributors account for substantially all accounts receivable;
therefore, this risk concentration is limited due to the number of distributors
and the laws
- 6 -
regulating the financial affairs of distributors of alcoholic beverages. As of
June 30, 2006, the Company has approximately $158,100 in cash deposits and
$5,580,200 of accounts receivable due from customers located in the United
Kingdom.
INCOME TAXES
- ------------
The Company accounts for its income taxes using the Financial Accounting
Standards Board Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the establishment of a deferred
tax asset or liability for the recognition of future deductible or taxable
amounts and operating loss and tax credit carryforwards. Deferred tax expense or
benefit is recognized as a result of timing differences between the recognition
of assets and liabilities for book and tax purposes during the year.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carryforwards. A valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized. Management believes that sufficient uncertainty exists
regarding the future realization of deferred tax assets and, accordingly, a full
valuation allowance has been provided against net deferred tax assets. Tax
expense has taken into account any change in the valuation allowance for
deferred tax assets where the realization of various deferred tax assets is
subject to uncertainty.
STOCK-BASED COMPENSATION
- ------------------------
Prior to the adoption of Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment," ("SFAS 123(R)"), the Company accounted
for stock-based awards to employees and directors using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value
method that was used to account for stock-based awards prior to January 1, 2006,
which had been allowed under the original provisions of Statement 123, no stock
compensation expense had been recognized in the Company's statement of
operations as the exercise price of the Company's stock options granted to
employees and directors equaled the fair market value of the underlying stock at
the date of grant.
On January 1, 2006, the Company adopted SFAS 123(R) which requires the
measurement and recognition of compensation expense for all share-based awards
made to employees and directors, including employee stock options and employee
stock purchases, based on estimated fair values. SFAS 123(R) supersedes the
Company's previous accounting for share-based awards under APB 25 for periods
beginning in 2006. In March 2005, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The
Company has applied the provisions of SAB 107 in its adoption of SFAS 123(R).
The
- 7 -
Company adopted SFAS 123(R) using the modified prospective transition method,
which requires the application of the accounting standard as of the beginning of
the Company's current year. The Company's financial statements as of and for the
six months ended June 30, 2006 reflect the impact of SFAS 123(R). In accordance
with the modified prospective transition method, the Company's financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
Stock compensation expense recognized during the period is based on the value of
share-based awards that are expected to vest during the period. Stock
compensation expense recognized in the Company's statement of operations for
2006 includes compensation expense related to share-based awards granted prior
to January 1, 2006 that vested during the current period based on the grant date
fair value estimated in accordance with the pro forma provisions of SFAS 123.
Stock compensation expense during the current period also includes compensation
expense for the share-based awards granted subsequent to January 1, 2006 based
on the grant date fair value estimated in accordance with the provisions of SFAS
123(R). As stock compensation expense recognized in the statement of operations
is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Company's pro forma information
required under SFAS 123 for the periods prior to 2006, forfeitures were
estimated and factored into the expected term of the options.
The Company's determination of estimated fair value of share-based awards
utilizes the Black-Scholes option-pricing model. The Black-Scholes model is
affected by the Company's stock price as well as assumptions regarding a number
of highly complex and subjective variables. These variables include, but are not
limited to, the Company's expected stock price volatility over the term of the
awards, and actual and projected employee stock option exercise behaviors.
SFAS 123(R) requires the calculation of the beginning balance of the pool of
excess tax benefits (additional paid in capital pool or "APIC pool") available
to absorb tax deficiencies recognized subsequent to its adoption. SFAS 123(R)
states that this beginning APIC pool shall include the net excess tax benefits
that would have arisen had the company adopted the original Statement 123. FASB
Staff Position ("FSP") 123(R)-3 provides a simplified method for determining
this APIC pool, which the Company may elect to adopt up to one year from its
initial adoption of SFAS 123(R). The Company has not yet determined whether to
elect the simplified method for determining its APIC pool as provided in FSP No.
123(R)-3.
STOCK-BASED COMPENSATION NON-EMPLOYEES
- --------------------------------------
The company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No 123(R) and Emerging Issues Task Force
- 8 -
("EITF") No 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.
In 2006 and 2005, the Company did not grant any options or warrants.
Additionally, as of January 1, 2005, all outstanding stock options were fully
vested.
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
- -------------------------------------------
In accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
per share is computed by dividing the loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period.
Basic net loss per share excludes the dilutive effect of stock options or
warrants and convertible notes. Diluted net loss per share was the same as basic
net loss per share for the three and six months ended June 30, 2006, since the
effect of any potentially dilutive securities is excluded, as they are
anti-dilutive due to the Company's net losses. In 2006, all potentially dilutive
securities were non-dilutive.
Three months ended Six months ended
------------------------------------ ----------------------------------
6/30/2006 6/30/2005 6/30/2006 6/30/2005
---------------- ---------------- ---------------- --------------
Net income (loss) $ (456,500) 212,100 $ (685,400) 13,700
Weighted average common shares outstanding 11,473,914 11,473,914 11,473,914 11,473,914
Basic net income (loss) per share $ (0.04) 0.02 $ (0.06) 0.00
Diluted net income (loss) per share
Net Income (loss) $ (456,500) 212,100 $ (685,400) 13,700
Interest expense on convertible notes $ - 35,000 - 63,200
payable
Income for purpose of computing diluted $ (456,500) 247,100 $ (685,400) 76,900
net income per share
Weighted average common shares outstanding 11,473,914 11,473,914 11,473,914 11,473,914
Diluted stock option - - - -
Assumed conversion of convertible notes - - - -
payable
Weighted average common shares outstanding 11,473,914 11,473,914 11,473,914 11,473,914
for the purpose of computing diluted net
income (loss) per share
Diluted net income (loss) per share $ (0.04) 0.02 $ (0.06) 0.00
- 9 -
The potential shares, which are excluded from the determination of basic and
diluted net loss per share as their effect is anti-dilutive, are as follows:
-----------------------------------------------------
June 30, 2006 June 30, 2005
------------------------ -------------------------
Options to purchase common stock 240,385 340,385
Convertible note 1,759,500 1,648,881
------------------------ -------------------------
Potential equivalent shares excluded 1,517,318 1,989,266
======================== ==========================
Diluted net loss per share for the six months ended June 30, 2006 does not
include the effect of 240,385 common shares related to options (none of which
were in-the-money with a weighted average exercise price of $0.52) because their
effect is anti-dilutive. Diluted net loss per share for the six months ended
June 30, 2006 also does not include the effect of 1,759,500 common shares
related to the 10% Convertible Notes with an average conversion price of $1.50
per share. Diluted net income per share for the six months ended June 30, 2005
does not include the effect of 340,385 common shares related to options (none of
which were in-the-money with a weighted average exercise price of $0.73) because
their effect is anti-dilutive. Diluted net loss per share for the six months
ended June 30, 2005 also does not include the effect of 1,648,881 common shares
related to the 10% Convertible Notes with an average conversion price of $1.50
per share.
FOREIGN CURRENCY TRANSLATION
- ----------------------------
The assets and liabilities of UBIUK were translated at the United Kingdom pound
sterling - U.S. dollar exchange rates in effect at June 30, 2006 and December
31, 2005, and the statements of operations were translated at the average
exchange rates for the quarters and six months ended June 30, 2006 and 2005.
Gains and losses resulting from the translations were deferred and recorded as a
separate component of consolidated stockholders' equity. Cash at UBIUK was
translated at exchange rates in effect at June 30, 2006 and December 31, 2005,
and its cash flows were translated at the average exchange rates for the six
months ended June 30, 2006 and 2005. Changes in cash resulting from the
translations are presented as a separate item in the statements of cash flows.
USE OF ESTIMATES
- ----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America includes having the Company
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. The amounts estimated could differ from actual results. Significant
estimates include the allowance for bad debts, depreciation and amortization
periods, and the future utilization of deferred tax assets. The Company has
determined that deferred tax assets associated with net operating loss
carryforwards in the US may expire prior to utilization. The Company has placed
a valuation allowance on these assets in the US.
- 10 -
COMPREHENSIVE INCOME (LOSS)
- ---------------------------
Comprehensive income (loss) is composed of the Company's net income (loss) and
changes in equity from non-stockholder sources. The accumulated balances of
these non-stockholder sources are reflected as a separate item in the equity
section of the balance sheet.
The components of other comprehensive income for the three months and six months
ended June 30, 2006 and 2005 are reflected as a separate item in the statement
of operations.
REPORTABLE SEGMENTS
- -------------------
The Company manages its operations through three business segments: brewing
operations, tavern and tasting room operations (domestic) and distributor
operations (European Territory). The international business segment sells the
Company's products outside the U.S.
The Company evaluates performance based on net operating profit. Where
applicable, portions of the administrative function expenses are allocated
between the operating segments. The operating segments do not share
manufacturing or distribution facilities. In the event any materials and/or
services are provided to one operating segment by the other, the transaction is
valued according to the company's transfer policy, which approximates market
price. The costs of operating the manufacturing plants are captured discretely
within each segment. The Company's property, plant and equipment, inventory, and
accounts receivable are captured and reported discretely within each operating
segment.
RECLASSIFICATIONS
- -----------------
Certain amounts in the prior periods presented have been reclassified to conform
to the current period financial statement presentation. These reclassifications
have no effect on previously reported net loss.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 2006, FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the
- 11 -
form of subordination are not embedded derivatives, and amends SFAS No. 140 to
eliminate the prohibition on the qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial interest other
than another derivative financial instrument. This statement is effective for
all financial instruments acquired or issued after the beginning of the
Company's first fiscal year that begins after September 15, 2006. The Company
does not believe adoption of SFAS No. 155 will have any material effect on its
unaudited condensed consolidated financial position, results of operations or
cash flows.
In March 2006, the FASB issued SFAS No. 156, ACCOUNTING FOR SERVICING OF
FINANCIAL ASSETS--AN AMENDMENT OF FASB STATEMENT NO. 140. Companies are required
to apply SFAS No. 156 as of the first annual reporting period that begins after
September 15, 2006. The Company does not believe adoption of SFAS No. 156 will
have a material effect on its unaudited condensed consolidated financial
position, results of operations or cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109 (FIN
48). FIN 48 provides guidance for the recognition, derecognition and measurement
in financial statements of tax positions taken in previously filed tax returns
or tax positions expected to be taken in tax returns. FIN 48 requires an entity
to recognize the financial statement impact of a tax position when it is more
likely than not that the position will be sustained upon examination. If the tax
position meets the more-likely-than-not recognition threshold, the tax effect is
recognized at the largest amount of the benefit that is greater than fifty
percent likely of being realized upon ultimate settlement. The Company will be
required to adopt FIN 48 as of January 1, 2007, with any cumulative effect of
the change in accounting principle recorded as an adjustment to opening retained
earnings. The Company is currently evaluating the impact of FIN 48 and has not
yet determined the effect on its earnings or financial position.
2. LIQUIDITY AND MANAGEMENT PLANS
------------------------------
At June 30, 2006, the Company had cash and cash equivalents of $175,500, a
working capital deficit of $ 3,989,400 and an accumulated deficit of
$10,916,600. Additionally, the Company has a history of past losses as
infrastructure costs were incurred in advance of obtaining customers.
Management has taken several actions to ensure that the Company will have
sufficient cash for its working capital needs through June 30, 2007, including
obtaining a secured line of credit, and reductions in discretionary
expenditures, and additional debt financing. The Company refinanced a real
estate loan on July 3, 2006 for $3,000,000 and repaid then outstanding loans
from Savings Bank of Mendocino County ("SBMC"). In addition, the Company
borrowed $350,000 from
- 12 -
SBMC and paid off the entire outstanding amount due for its delinquent property
taxes. Management believes that these actions will enable the Company to meet
its working capital needs through June 30, 2007. The Company is pursuing other
refinancing opportunities to augment working capital.
3. INVENTORIES
-----------
Inventories are stated at the lower of average cost or market and consist of the
following:
30-JUN-06 31-DEC-05
---------- ----------
Raw Materials $ 473,600 $ 447,900
Beer-in-process 189,900 143,900
Finished Goods 588,200 539,800
Merchandise 18,500 19,800
---------- ----------
TOTAL $1,270,200 $1,151,400
========== ==========
4. LINE OF CREDIT AND NOTE PAYABLE
-------------------------------
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 had an initial term of twelve months, but could 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 under the BFI Line of Credit is approximately $6,000.
On May 6, 2005, the Company used the entire immediately available amount
drawable from BFI to pay off the balance remaining outstanding under the CIT
Group Line of Credit discussed below.
BFI advanced the Company $200,000 under a promissory note on December 31, 2005
payable in weekly installments of $6,665 commencing in January 2006.
BFI also advanced the Company an additional amount of $289,938 under another
promissory note on April 5, 2006. This note is payable commencing in April 2006
in 18 weekly installments of $3,335 and 22 weekly installments of $10,000. A
final installment of $9,908 is due on the maturity date, January 19, 2007. The
BFI borrowings carry an interest rate equal to the greater of 9.5%, or the prime
rate
- 13 -
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%.
The borrowings are secured by the collateral set forth in the loan and security
agreement entered between MBC and BFI.
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 repaid in full in consecutive monthly
installments of $24,700. The Company used the proceeds from the BFI Facility to
pay off the entire amount outstanding on May 6, 2005.
On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a
temporary loan in the principal amount of $576,200 to MBC in order to finance a
buy-out of equipment leased through Finova Capital Corporation. The lender
extended the loan until May 31, 2006. The rate of interest on the loan is prime
plus 3%. This loan was repaid on June 3, 2006 using the proceeds received from
the Grand Pacific Financing Corporation real estate loan described below.
On July 3, 2006, SBMC extended a temporary loan in the principal amount of
$350,000 for a period of six months in order to settle the delinquent property
taxes, such loan is secured against the equipment at Ukiah brewery.
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 secured by all of the assets
of UBSN. On April 26, 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 was for a period of one year
after which the facility may be terminated by either party by providing the
other party with six months notice. 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, 2006
was approximately $2,571,400. The Company's credit agreement with RBS contains
certain financial
- 14 -
covenants that require, among other things, maintenance of minimum amounts and
ratios of working capital; minimum amounts of tangible net worth; and maximum
ratio of indebtedness to tangible net worth. As of June 30, 2006, certain
financial covenants have not been met, and the bank has agreed in writing to
continue RBS's lending relationship with UBSN.
5. LONG-TERM DEBT
--------------
Maturities of long-term debt for succeeding years are as follows:
June 30, 2006 December 31, 2005
-------------------------- ---------------------
Note to a bank; payable in monthly installments of $24,400, including
interest at the Treasury Constant Maturity Index, plus 4.17% (currently
7.24%); maturing December 2012, with a balloon payment; secured by
substantially all of the assets of Mendocino Brewing Company. (This note was
repaid in full on July 3, 2006) $ 2,099,300 $ 2,168,400
Payable to the County of Mendocino in two annual installments of $143,600,
maturing April 2008. (This note was repaid in full on July 3, 2006) 287,200 430,900
-------------------------- ---------------------
2,386,500 2,599,300
Less current maturities 289,600 284,400
-------------------------- ---------------------
$ 2,096,900 $ 2,314,900
========================== =====================
On July 3, 2006, MBC obtained a $3.0 million loan from Grand Pacific Financing
Corporation("GP"), 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 $27,261 including interest at the rate of 1.75% over the prime
rate published by The Wall Street Journal, maturing July 2, 2011 with a balloon
payment. The amount of the balloon payment will vary depending on the change in
interest rates over the term of the loan. MBC used the proceeds of the loan to
repay in full all the then outstanding loans owed to SBMC.
6. NOTES TO RELATED PARTY
----------------------
SUBORDINATED CONVERTIBLE NOTES PAYABLE
- --------------------------------------
Notes payable to a related party consist of unsecured convertible notes to
United Breweries of America (UBA), with interest at the prime rate plus 1.5%,
but not to exceed 10% per year. The notes are convertible into common stock at
$1.50 per share. The notes were extended until August 2005. UBA may demand
payment within 60 days of the end of the extension period but is precluded from
doing so
- 15 -
because the notes are subordinated to long-term debt agreements with Savings
Bank of Mendocino County and the BFI line of credit. The BFI Line of Credit
matures in May 2007 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. Accordingly, the entire
amount due under the Notes is classified as a long term liability. The amount
outstanding on the notes was $2,639,300 and $2,552,200 including $723,900 and
$636,800 of accrued interest at June 30, 2006 and December 31, 2005.
5% NOTES PAYABLE
- ----------------
Notes payable also includes an unsecured loan from Shepherd Neame Limited
payable in annual installments of $100,400 with interest at 5% per year
beginning in June 2003 and maturing in December 2012. The amount outstanding
(including current maturity) on the note was $665,700 and $721,900 at June 30,
2006 and December 31, 2005.
7. COMMITMENTS AND CONTINGENCIES
-----------------------------
LEGAL
- -----
The Company is periodically involved in legal actions and claims that arise as a
result of events that occur in the normal course of operations. The Company is
not currently aware of any legal proceedings or claims that the Company believes
will have, individually or in the aggregate, a material adverse effect on the
Company's financial position or results of operations.
OPERATING LEASES
- ----------------
The Company leases many of its operating and office facilities for various terms
under long-term, non-cancelable operating lease agreements. The leases expire at
various dates through 2009 and provide for renewal options ranging from
month-to-month to five year terms. In the normal course of business, it is
expected that these leases will be renewed or replaced by leases on other
properties. The leases provide for increases in future minimum annual rental
payments based on defined increases which are generally meant to correlate with
the Consumer Price Index, subject to certain minimum increases. Also, the
agreements generally require the Company to pay executory costs (real estate
taxes, insurance and repairs).
The Company and its subsidiaries have various lease agreements for the brewpub
and gift store in Hopland, California; a sales office in Petaluma, California;
land at its Saratoga Springs, New York, facility; a building in the United
Kingdom; and certain personal property. The land lease includes a renewal option
for two additional five-year periods, which the Company intends to exercise, and
some leases are adjusted annually for changes in the consumer price index. The
leases begin expiring in 2007.
- 16 -
KEG MANAGEMENT AGREEMENT
- ------------------------
In September 2004, the Company renewed the keg management agreement with
MicroStar Keg Management LLC. Under this arrangement, MicroStar provides all
kegs for which the Company pays a filling and use fee between $5 and $15,
depending on territory. The agreement is effective for five years ending in
September 2009. If the agreement is terminated, the Company is required to
purchase three times the average monthly keg usage for the preceding six-month
period from MicroStar at purchase prices ranging from $54 to $84 per keg. The
Company expects to continue this relationship.
8. 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. UBSN is a party to a brewing agreement and a loan
agreement with Shepherd Neame Limited ("Shepherd Neame"). Additional information
about these transactions may be found in the Company's annual report on Form
10-K for the year ended December 31, 2005.
The following table reflects the value of the transactions for the six months
ended June 30, 2006 and 2005 and the balances outstanding as of June 30, 2006
and 2005.
2006 2005
------------------ ------------------
Sales to Shepherd Neame $ 1,573,600 $ 1,497,600
Purchases from Shepherd Neame $ 6,886,100 $ 8,119,700
Expense reimbursement to Shepherd Neame $ 481,700 $ 557,300
Interest expense associated with UBA convertible notes payable $ 87,100 $ 63,200
Accounts payable to Shepherd Neame $ 4,236,700 $ 3,202,200
Accounts receivable from Shepherd Neame $ 632,500 $ 439,400
9. STOCKHOLDERS' EQUITY
--------------------
The following table summarizes equity transactions during the six months ended
June 30, 2006.
SERIES A
PREFERRED STOCK COMMON STOCK OTHER
------------------------ ---------------------------- COMPREHENSIVE
INCOME / ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT (LOSS) DEFICIT EQUITY
-------- ------------ ---------- -------------- --------------- -------------- -------------
Balance, December 31,
2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $ 130,400 $ (10,231,200) $ 4,874,100
Net Loss - - - - - (685,400) (685,400)
Currency Translation
Adjustment - - - - (43,400) - (43,400)
-------- ------------ ---------- -------------- --------------- -------------- -------------
Balance, June 30, 227,600 $ 227,600 11,473,914 $ 14,747,300 $ 87,000 $ (10,916,600) $ 4,145,300
2006 ======== ============ ========== ============== =============== ============== =============
- 17 -
The following table summarizes equity transactions during the six months ended
June 30, 2005.
SERIES A
PREFERRED STOCK COMMON STOCK OTHER
------------------------ ---------------------------- COMPREHENSIVE
INCOME / ACCUMULATED TOTAL
SHARES AMOUNT SHARES AMOUNT (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
Common stock issued for
conversion of debt - - 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
======== ============ ========== ============== =============== ============== =============
Independent outside members of the Board of Directors are compensated for
attending Board of Directors and committee meetings.
PREFERRED STOCK
- ---------------
Ten million shares of preferred stock have been authorized, of which 227,600 are
designated as Series A. Series A shareholders are entitled to receive cash
dividends and/or liquidation proceeds equal, in the aggregate, to $1.00 per
share before any cash dividends are paid on the common stock or any other series
of preferred stock. When the entire Series A dividend/liquidation proceeds have
been paid, the Series A shares are automatically canceled and will cease to be
outstanding. Only a complete corporate dissolution will cause a liquidation
preference to be paid.
10. STOCK OPTION PLAN
-----------------
Under the 1994 Stock Option Plan, which expired during 2004, the Company could
issue options to purchase up to 1,000,000 shares of common stock. The Plan
provided for both incentive stock options, as defined in Section 422 of the
Internal Revenue Code, and options that did not qualify as incentive stock
options.
The exercise price of incentive options was no less than the fair-market value
of the Company's stock at the date the option was granted, while the exercise
price of non-statutory options was no less than 85% of the fair-market value per
share on the date of grant. Options granted to a person possessing more than 10%
of the combined voting power of all classes of the Company's stock had an
exercise price of no less than 110% of the fair-market value of the Company's
stock at the date of grant. During 2002, 240,385 non-statutory stock options
with a five-year term were issued to the independent members of the Board of
Directors at the market price on the date of grant. All options were exercisable
at the date of grant and expire on January 3, 2007.
- 18 -
GENERAL OPTION INFORMATION
The following is a summary of changes to outstanding stock options during the
six months ended June 30, 2006:
WEIGHTED AVERAGE AGGREGATE
NUMBER OF WEIGHTED AVERAGE REMAINING INTRINSIC
SHARE OPTIONS EXERCISE PRICE CONTRACTUAL TERM VALUE
-------------- ------------------ ------------------ -------------
Outstanding at December 31, 2005 240,385 $ 0.52 1.00 $ -
Granted - - - -
Exercised - - - -
Forfeited or expired - - - -
-------------- ------------------ ------------------ -------------
Outstanding at June 30, 2006 240,385 0.52 0.50 -
-------------- ------------------ ------------------ -------------
Vested and expected to vest at June 30, 2006 240,385 0.52 0.50 -
-------------- ------------------ ------------------ -------------
Options exercisable at June 30, 2006 240,385 $ 0.52 0.50 $ -
============== ================== ================== =============
The aggregate intrinsic value is nil as of June 30, 2006, based on the Company's
closing stock price of $0.19 on that date, and accordingly there is no pretax
intrinsic value, which would have been received by the option holders had all
option holders exercised their options as of that date. The total number of
in-the-money options exercisable as of June 30, 2006 was none.
As of June 30, 2006, there was no unrecognized compensation cost.
VALUATION AND EXPENSE INFORMATION UNDER SFAS 123(R)
There was no stock compensation related to employee stock options under SFAS
123(R) for the six months ended June 30, 2006. In 2006, the Company has not
issued any stock based compensation.
PRO FORMA INFORMATION UNDER SFAS 123 FOR PERIOD PRIOR TO 2006
The following table illustrates the effect on net income and income per share
for the six months ended June 30, 2005 if the Company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
2005
-------
Net income - as reported $13,700
Compensation expense --
-------
Net income - pro forma $13,700
=======
Income per share - pro forma $ 0.00
=======
11. SEGMENT INFORMATION
-------------------
The Company's business presently consists of three segments. The first is
brewing for wholesale to distributors and other retailers. The second consists
of distributing alcoholic beverages to retail establishments and restaurants in
the United Kingdom and Europe. The third segment consists of beer for sale along
with merchandise at the Company's brewpub and retail merchandise store located
at the
- 19 -
Hopland Brewery and at Saratoga Springs brewery. A summary of each segment is as
follows:
Six months ended June 30, 2006
Domestic European Retail Corporate & Total
Operations Territory Operations Others
Sales $ 6,250,400 $ 9,591,300 $ 90,600 $ -- $ 15,932,300
Operating Profit (Loss) 468,300 (640,400) 11,200 -- (160,900)
Identifiable Assets 12,737,000 7,976,200 62,100 2,470,100 23,245,400
Depreciation & amortization 220,100 234,800 2,300 14,000 471,200
Capital Expenditures 91,600 286,600 -- -- 378,200
Six months ended June 30, 2005
Domestic European Retail Corporate & Total
Operations Territory Operations Others
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
- 20 -
12. UNRESTRICTED NET ASSETS
-----------------------
The Company's wholly-owned subsidiary, UBI, has undistributed earnings of
approximately $604,300 as of June 30, 2006. Under UBSN's line of credit
agreement with RBS, distributions and other payments to the Company from its
subsidiary are not permitted if the retained earnings drop below approximately
$1,750,000. Condensed financial information of the parent company, Mendocino
Brewing Company, Inc. together with its other subsidiary, Releta Brewing Company
is as follows:
June 30, 2006 December 31, 2005
-------------------------- -------------------------------
(unaudited) (audited)
Assets
Cash $ 17,400 $ 11,500
Accounts receivable 1,890,000 1,388,500
Inventories 1,270,200 1,151,400
Other current assets 321,300 212,600
-------------------------- -------------------------------
Total current assets 3,498,900 2,764,000
Investment in UBI 1,225,000 1,225,000
Property and equipment 11,539,400 11,682,900
Other assets 230,900 245,700
-------------------------- -------------------------------
Total assets $ 16,494,200 $ 15,917,600
========================== ===============================
Liabilities and Stockholders' Equity
Line of credit and note payable $ 2,498,900 $ 2,181,000
Accounts payable 1,888,800 1,486,000
Accrued liabilities 981,200 892,900
Current maturities of debt and leases 318,300 352,800
-------------------------- -------------------------------
Total current liabilities 5,687,200 4,912,700
Intercompany payable to UBI 1,158,300 1,319,500
Long-term debt and capital leases 2,106,900 2,332,700
Notes payable to related party 2,639,300 2,552,300
-------------------------- -------------------------------
Total liabilities 11,591,700 11,117,200
-------------------------- -------------------------------
Stockholders' equity
Common stock 14,747,300 14,747,300
Preferred stock 227,600 227,600
Accumulated deficit (10,072,400) (10,174,500)
-------------------------- -------------------------------
Total stockholders' equity 4,902,500 4,800,400
-------------------------- -------------------------------
Total liabilities and stockholders' equity $ 16,494,200 $ 15,917,600
========================== ===============================
- 21 -
12. UNRESTRICTED NET ASSETS (CONTINUED)
------------------------------------
STATEMENTS OF OPERATIONS QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Net sales $ 3,157,800 $ 2,992,500 $ 6,009,400 $ 5,509,300
Cost of goods sold 2,178,700 1,936,400 4,142,900 3,721,700
Selling, marketing, and retail expenses 294,100 333,000 608,100 686,500
General and administrative expenses 456,800 482,600 828,900 952,500
---------------------------------------------------------------------------
Income (loss) from operations 228,200 240,500 429,500 148,600
Other income and (expense) 44,200 66,500 77,800 101,000
Interest expense 206,900 177,500 404,800 363,300
Dividend from subsidiary 149,900 149,900
Provision for taxes 400 400 1,800
---------------------------------------------------------------------------
Net profit (loss) $ 65,100 $ 279,400 $ 102,100 $ 34,400
===========================================================================
Statements of Cash Flows SIX MONTHS ENDED JUNE 30
--------------------------------------------------
2006 2005
--------------------------------------------------
(unaudited) (unaudited)
Cash flows from operating activities $ 201,200 $(543,100)
Purchase of property and equipment (91,600) (34,200)
Net borrowing (repayment) on line of credit 317,900 24,000
Repayment on long term debt (212,800) (218,600)
Payment on obligation under capital lease (47,500) (59,100)
Borrowing on related party note 400,000
Net change in payable to UBI (161,300) 152,800
--------------------------------------------------
Increase (decrease) in cash 5,900 (278,200)
Cash, beginning of period 11,500 286,000
--------------------------------------------------
Cash, end of period $ 17,400 $ 7,800
==================================================
13. SUBSEQUENT EVENTS
-----------------
On July 3, 2006, Grand Pacific Financing Corporation provided a loan of
$3,000,000 for a term of five years secured by a first deed of trust on the
Ukiah real property. MBC utilized the proceeds to repay the loans due to SBMC.
The unsecured convertible notes owed to UBA are subordinated to the Grand
Pacific Financing Corporation loan.
On July 3, 2006, SBMC provided a temporary loan of $350,000 for a term of six
months secured by equipment at the Ukiah brewery. MBC utilized the proceeds to
settle delinquent property taxes in full.
- 22 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
--------------
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the six months and three months ended June 30, 2006, compared to
the six months and three months ended June 30, 2005. 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, 2005.
In this Report, the term "the Company" and its variants is generally used to
refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term
"MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual
entity standing alone.
FORWARD LOOKING STATEMENTS
Various portions of this Quarterly Report, including but not limited to the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations," contain forward-looking information. Such
information involves risks and uncertainties that are based on current
expectations, estimates and projections about the Company's business,
Management's beliefs, and assumptions made by Management. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
and variations of those and similar words are intended to identify such
forward-looking information. Any forward-looking statements made by the Company
are intended to provide investors with additional information with which they
may assess the Company's future potential. All forward-looking statements are
based on assumptions about an uncertain future and are based on information
available at the date such statements are issued. Actual outcomes and results
may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including but not limited
to: changes in the pricing environment for the Company's products; changes in
demand for malt beverage products in different Company markets; changes in
distributor relationships or performance, changes in customer preference for the
Company's malt beverage products; regulatory or legislative changes; the impact
of competition, changes in raw materials prices; availability of financing for
operations, changes in interest rates; changes in the company's European beer
and/or restaurant business, and other risks discussed elsewhere in this
Quarterly Report and from time to time in the Company's Securities and Exchange
Commission (the "Commission") filings and reports. In addition, such statements
could be affected by general industry and market conditions and growth rates,
and in general domestic and European economic and political conditions. The
Company undertakes no obligation to update these forward-looking statements to
reflect facts, circumstances, assumptions or events that occur after the date
the forward-looking statements are made or to publicly release the results of
any revision to these forward-looking statements. Readers are cautioned not to
place undue reliance on these forward-looking statements.
- 23 -
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 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 assets 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 to the Company's ability to
generate
- 24 -
future U.S. taxable income 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.
CHANGES IN 2006
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment," ("SFAS 123(R)") which
requires the measurement and recognition of compensation expense for all
share-based awards made to employees and directors, including employee stock
options and employee stock purchases, based on estimated fair values. Prior to
the adoption of SFAS 123(R), the Company accounted for stock-based awards to
employees and directors using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic value method, which had been allowed under the
original provisions of Statement 123, no stock compensation expense had been
recognized in the Company's statement of operations as the exercise price of the
Company's stock options granted to employees and directors equaled the fair
market value of the underlying stock at the date of grant.
These accounting policies are applied consistently for all periods 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,
- 25 -
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 60% and 63% of the Company's gross sales during the first six
months of the year 2006 and 2005 respectively, with the Company's United States
operations, including manufacturing and distribution of beer as well as retail
sales (the "Domestic Territory") accounting for the remaining 40% and 37% during
the first six months of the year 2006 and 2005, respectively. With expanded
wholesale distribution of beer and the closure of the restaurant at the Hopland
facility, Management expects that retail sales, as a percentage of total sales,
will decrease proportionally to the expected increase in the Company's wholesale
sales.
SEASONALITY
Sales of the Company's products are somewhat seasonal. Historically, sales
volumes in all geographic areas have been comparatively low during the first
quarter of the calendar year in both the US market and the Company's European
Territory. In the US, sales volumes have been stronger during the second and
third quarters and slower again during the fourth quarter, while in the
Company's European Territory the fourth quarter has generated the highest sales
volume. The volume of sales in any given area may also be affected by local
weather conditions. Because of the seasonality of the Company's business,
results for any one quarter are not necessarily indicative of the results that
may be achieved for the full fiscal year.
SUMMARY OF FINANCIAL RESULTS
The Company ended the first six months of the year 2006 with a net loss of
$685,400, as compared to net income of $13,700 for the same period in 2005. As
set forth more fully under "Results of Operations," below, during the first six
months of the year 2006 the Company experienced an increase in gross sales of
$117,400, or 0.74% as compared to the corresponding period in 2005. Costs of
goods sold increased by $335,400, or 3.2%, marketing costs decreased by
$229,800, or 8.86%, general and administrative costs increased by $665,700, or
35.5%, and interest expenses increased by $86,000, or 18.96%.
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.
- 26 -
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------------
2006 2005 2006 2005
% % % %
- - - -
Sales 102.11 102.04 102.13 102.05
Less Excise taxes 2.11 2.04 2.13 2.05
NET SALES 100.00 100.00 100.00 100.00
Costs of Sales 70.20 67.21 69.61 67.91
GROSS PROFIT 29.80 32.79 30.39 32.09
Marketing 13.26 15.49 15.15 16.73
General and Administrative Expense 18.76 11.76 16.27 12.08
PROFIT (LOSS) FROM OPERATIONS (2.22) 5.53 (1.03) 3.28
Other Income / (Expense) 0.17 0.37 0.10 0.20
Interest Expense (3.42) (2.83) (3.46) (2.93)
Income/(Loss) before income taxes (5.47) 3.07 (4.39) 0.55
Provision for income taxes 0.00 0.50 0.00 0.46
NET INCOME / (LOSS) (5.47) 2.57 (4.39) 0.09
Other Comprehensive Income / (loss) (0.45) (0.92) (0.28) (0.55)
COMPREHENSIVE INCOME / (LOSS) (5.92) 1.65 (4.67) (0.46)
----------------------------------------
SIX MONTHS ENDED JUNE 30,
----------------------------------------
2006 2005
BALANCE SHEET DATA: $ $
- -
Cash and Cash Equivalents 175,500 524,900
Working Capital (3,989,400) (1,890,400)
Property and Equipment 13,207,600 13,306,200
Deposits and Other Assets 364,600 278,000
Total Assets 23,245,400 23,763,100
Long-term Debt (less current maturities) 2,096,900 2,386,600
Capital Lease (less current maturities) 146,500 26,400
Note payable to related parties 3,194,100 3,099,800
Total Liabilities 19,100,100 17,582,100
Accumulated Deficit (10,916,600) (8,902,800)
Stockholder's equity 4,145,300 6,181,000
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO
THREE MONTHS ENDED JUNE 30, 2005
NET SALES
Overall net sales for the second quarter of 2006 were $8,328,600, an
increase of $88,000, or 1.07%, compared to $8,240,600 for the second quarter of
2005. The increase was mainly due to increased sales and increased selling
prices.
Domestic Operations: Net sales for the second quarter of 2006 were
$3,157,800 compared to $2,992,500 for the same period in 2005, an increase of
$165,300, or 5.52%. The sales volume increased to 16,755 barrels in the second
quarter of 2006 from 15,691 barrels in the second quarter of 2005; a net
increase of 1,064 barrels, or 6.78%. The increase was mainly due to an increase
of 1,213 barrels of contract brands. Sales of the Company's domestic brands
decreased by 243 barrels, however sales of Kingfisher brands increased by 94
barrels.
- 27 -
EUROPEAN TERRITORY: Net sales for the second quarter of 2006 were
------------------
$5,170,800 (GBP 2,836,900) compared to $5,248,100 (GBP 2,823,900) during the
corresponding period of 2005, a decrease of $77,300, or 1.47%. During the second
quarter of 2006, UBSN sold 17,153 barrels, compared to 17,059 barrels during the
second quarter of 2005, representing an increase of 94 barrels, or 0.55%.
Exchange rate fluctuations decreased 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 0.46%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the second
quarter of 2006 was 70.20%, as compared to 67.21% during the corresponding
period of 2005, due to increased costs in the United States and in the United
Kingdom.
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
-------------------
the United States during the second quarter of 2006 was 68.99%, as compared to
64.71% during the corresponding period of 2005. This increase of 4.28% is mainly
the result of increases in raw and packaging material prices and maintenance 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 2006 was 71.41%, as compared to
69.03% during the corresponding period in 2005 (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 2.38%.
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 sold described above, gross
profit for the second quarter of 2006 decreased to $2,481,700, from $2,702,200
during the corresponding period of 2005, representing a decrease of 8.16%. As a
percentage of net sales, gross profit during the second quarter of 2006
decreased to 29.8% from 32.79% for the second quarter of 2005.
- 28 -
OPERATING EXPENSES
Operating expenses for the second quarter of the year 2006 were
$2,666,800, an increase of $420,700, or 18.73%, as compared to $2,246,100 for
the corresponding period of the year 2005. 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 2006 were $1,104,700, as compared to $1,276,800 for the second quarter of
2005, representing a decrease of 13.48%.
DOMESTIC OPERATIONS: Expenses for the second quarter of 2006 were
-------------------
$294,100 compared to $333,000 during the corresponding period of 2005,
representing a decrease of $38,900. or 11.68%. As a percentage of net sales in
the United States, the expenses decreased to 9.32% during the second quarter of
2006, compared to 11.13% during the corresponding period of 2005. The decrease
was mainly due to reduced salary and travel costs resulting from a reduction in
staff that occurred in the first half of 2005.
EUROPEAN TERRITORY: Expenses for the second quarter of 2006 were
------------------
$810,600 compared to $943,800 during the corresponding period of 2005,
representing a decrease of $133,200 or 14.11%. As a percentage of net sales in
the United Kingdom, the expenses decreased to 15.68% during the second quarter
of 2006 compared to 17.98% during the corresponding period of 2005 (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 one-time advertisement campaign expenses incurred in June 2005, partly
offset by increase in salaries.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $1,562,100 for the second quarter of the year 2006,
representing an increase of $592,800 or 61.16%, over $969,300 for the
corresponding period in 2005. These expenses were equal to 18.76% of net sales
for the second quarter of the year 2006, as compared to 11.76% for the
corresponding period in 2005.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
-------------------
$456,800 for the second quarter of the year 2006, representing a decrease of
$25,800, or 5.35%, from $482,600 for the second quarter of the year 2005. The
decrease was primarily due to the transfer of certain parts of common corporate
overhead costs to UBSN and reduction in legal expenses which were partly offset
by increases in salaries and loan fees.
EUROPEAN TERRITORY. General and administrative expenses related to the
------------------
European Territory were $1,105,300 for the second quarter of the year 2006,
representing an increase of $618,600 or 127.10%, when compared to $486,700
- 29 -
for the second quarter of the year 2005 (in each case as calculated in U.S.
dollars, after taking into account the effects of the exchange rate
calculation). The increase was mainly due to a provision against bad debts of
$554,300 created on account of a customer who earlier had provided a personal
guaranty, later filed for liquidation of their operations and a part of common
corporate overheads being transferred by MBC to UBSN.
OTHER EXPENSES
Other expenses for the second quarter of 2006 totaled $271,000,
representing an increase of $68,500, or 33.83%, when compared to the second
quarter of 2005. The increase was mainly due to higher interest expenses as a
result of increased borrowings under the lines of credit and increases in
interest rates.
INCOME TAXES
The Company has a provision for income taxes of $400 for the second
quarter of 2006, compared to $41,500 for the second quarter of 2005. The
provision for taxes related to the estimated amount of taxes that will be
imposed by taxing authorities in the United States.
NET PROFIT / LOSS
The Company's net loss for the second quarter of 2006 was $456,500, as
compared to net profit of $212,100 for the second quarter of 2005. After
providing for a negative foreign currency translation adjustment of $37,100
during the second quarter of 2006 (as compared to a negative currency
translation adjustment of $76,100 for the same period in 2005), the
comprehensive loss for the second quarter of 2006 was $493,600, compared to a
net profit of $136,000 for the same period in 2005.
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO
SIX MONTHS ENDED JUNE 30, 2005
NET SALES
Overall net sales for the first six months of the year 2006 were
$15,600,700, an increase of $103,200, or 0.67%, compared to $15,497,500 for the
same period in 2005.
DOMESTIC OPERATIONS: Domestic net sales for first six months of the year
-------------------
2006 were $6,009,400 compared to $5,509,300 for the same period in 2005, an
increase of $500,100 or 9.08%. The sales volume increased to 32,061 barrels
during the first six months of the year 2006 from 29,061 barrels in the first
six months of the year 2005, representing an increase of 3,000 barrels. Sales of
the Company's brands increased by 209 barrels, sales of the Kingfisher brands
increased by 852 barrels, and sales of contract brands increased by 1,939
barrels.
EUROPEAN TERRITORY: Net sales for the first six months of the year 2006
-------------------
were $9,591,300 (GBP 5,357,700) compared to $9,988,200 (GBP 5,331,300)
- 30 -
during the corresponding period of 2005, a decrease of 3.97%. During the first
six months of the year 2006, UBSN sold 32,554 barrels compared to 32,351 barrels
during the first six months of the year 2005, an increase of 203 barrels, or
0.63%. Exchange rate fluctuations when measured in United States dollars
decreased the growth percentage as compared to last year. Hence, when the net
sales results are compared in Pounds Sterling, there is an increase of 0.5%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first six
months of the year 2006 was 69.61%, as compared to 67.91% during the
corresponding period of 2005.
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
--------------------
the United States during the first six months of the year 2006 was 68.94%, as
compared to 67.55%, during the corresponding period of 2005, representing an
increase as a percentage of net sales of 1.39% that was mainly due to an
increase in raw and packaging material costs, an increase in the price of
natural gas and higher maintenance expenses that were 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 2006 was 70.56%, as
compared to 68.52% during the corresponding period in 2005 (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 sold described above, gross
profit for the first six months of the year 2006 decreased to $4,740,500, from
$4,972,700 during the corresponding period of 2005, representing a decrease of
4.67%. As a percentage of net sales, the gross profit during the first six
months of 2006 decreased to 30.39% from that of 32.09% during the corresponding
period in 2005.
OPERATING EXPENSES
Operating expenses for the first six months of the year 2006 were
$4,901,400, an increase of $435,900, or 9.76%, as compared to $4,465,500 for the
corresponding period of the year 2005. 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 first six
months of the year 2006 were $2,363,200, as compared to $2,593,000 for the same
period in 2005, representing a decrease of 8.86%.
- 31 -
DOMESTIC OPERATIONS: Expenses for the first six months of the year 2006
--------------------
were $608,100 compared to $686,500 during the corresponding period of 2005,
representing a decrease of $78,400 or 11.42%. As a percentage of net sales in
the United States, these expenses decreased to 10.12% during the first six
months of the year 2006, compared to 12.46% during the corresponding period of
2005. The decreased expenses included lower salary and travel costs due to a
temporary decrease in staffing and decreases in promotional expenses and point
of sale items.
EUROPEAN TERRITORY: Expenses for the first six months of the year 2006
------------------
were $1,755,100 compared to $1,906,500 during the corresponding period of 2005,
representing a decrease of $151,400 or 7.95%. As a percentage of net sales in
the United Kingdom, the expenses decreased to 18.3% during the first six months
of the year 2006 compared to 21.03% during the corresponding period of 2005 (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 onetime advertisement campaign expenses incurred during June
2005, offset by increases in personnel costs due to increases in salaries.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
-----------------------------------
administrative expenses were $2,538,200 for the first six months of the year
2006, representing an increase of $665,700 or 35.55%, over $1,872,500 for the
corresponding period in 2005. These expenses were equal to 16.27% of net sales
for the first six months of the year 2006, as compared to 12.08% for the
corresponding period in 2005.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
-------------------
$828,900 for the first six months of the year 2006, representing a decrease of
$123,600, or 12.98%, from $952,500 for the same period in 2005. The decrease was
primarily due to the transfer of a part of common corporate overhead costs to
UBSN and one time legal expenses in the year 2005 associated with a material
legal dispute with a distributor that was settled in 2004.
EUROPEAN TERRITORY. General and administrative expenses related to the
------------------
European Territory were $1,709,300 for the first six months of the year 2006,
representing an increase of $789,300 or 85.79%, as compared to $920,000 for the
same period in 2005 (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 a provision against bad debts of $554,300 created on account of a
customer who earlier had provided a personal guaranty, later filed for
liquidation of their operations and a part of common corporate overhead costs
being transferred to UBSN by MBC and increases in salaries and depreciation.
- 32 -
OTHER EXPENSES
Other expenses for the first six months of the year 2006 totaled
$524,100 representing an increase of $102,300 when compared to the same period
in 2005. The increase is mainly due to higher interest expenses as a result of
increased borrowings under the lines of credit and higher interest rates.
INCOME TAXES
The Company has a provision for income taxes of $400 for its domestic
operations and nil for its operations in the United Kingdom for the first six
months of the year 2006, compared to a provision for income taxes of $1,800 for
its domestic operations and $69,900 for its operations in the United Kingdom for
the corresponding period in 2005. The provision for taxes is related to the
estimated amount of taxes that will be imposed by taxing authorities in the
United States and United Kingdom.
NET INCOME / LOSS
The Company's net loss for the first six months of the year 2006 was
$685,400, as compared to net income of $13,700 for the first six months of the
year 2005. After providing for a negative foreign currency translation
adjustment of $43,400 during the first six months of 2006 (as compared to a
negative adjustment of $85,400 for the same period in 2005), the comprehensive
loss for the first six months of the year 2006 was $728,800, compared to a loss
of $71,700 for the same period in 2005.
LIQUIDITY AND CAPITAL RESOURCES
Unused capacity at the Ukiah and Saratoga Springs facilities has continued to
place 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. The Company's European operations operated at a loss during the
first six months of the year 2006. The Company has entered into a substantial
number of loan agreements, 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.
- 33 -
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 had an initial term of twelve months, and has been
extended for an additional twelve-month period, and may automatically extend for
an unlimited number of additional twelve-month periods. However, BFI retains the
right to terminate the BFI Line of Credit at any time, upon 30 days' notice. The
minimum monthly interest payment under the BFI Line of Credit is approximately
$6,000. The BFI Facility carries an interest rate equal to the greater of 9.5%,
or the prime rate announced in the Western edition of the Wall Street Journal
plus 3.75 %, payable monthly. The facility is also subject to a monthly
administrative fee of 0.40%.
On May 6, 2005, the Company used the entire immediately available amount
drawable under the BFI Facility to pay off the remaining outstanding balance
under a CIT Group Line of Credit.
BFI advanced the Company $200,000 under a promissory note on December 31, 2005.
The BFI Note is payable in weekly installments of $6,665, and the Company began
paying such installments in January 2006.
BFI also advanced the Company an additional $289,937.70 under another promissory
note on April 5, 2006. This note is payable in 17 weekly installments of
$3,335.00 and 22 weekly installments of $10,000. The Company began paying such
weekly installments in April 2006. A final installment of $9,908 is due on the
maturity date, January 19, 2007. This note is secured by the collateral set
forth in the Loan and Security agreement.
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. Although this date has passed, the
Company has had discussions with UBA and anticipates that the terms of the UBA
Notes will be extended again.
- 34 -
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, 2006 was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $723,900, for a total of $2,639,300.
The outstanding principal amount of the notes and the unpaid interest thereon
may be converted, at UBA's discretion, into shares of the Company's unregistered
Common Stock at a conversion rate of $1.50 per share. As of June 30, 2006, the
outstanding principal and interest on the notes was convertible into 1,759,500
shares of the Company's Common Stock. 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.
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 Notes, 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 Notes upon maturity, it has the option to extend the term of such notes
for any period of time mutually agreed upon by UBA and the Company. During the
extended term of any 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.
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. Although the
SBMC facilities were settled in full in July 2006, the UBA Notes are also
subordinated to the loan with Grand Pacific Financing Corporation as of July
2006. Hence the Company does not expect to make payments on any of these UBA
Notes within the next year.
LONG TERM DEBT: MBC 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 was payable in partially amortizing monthly
installments of $24,443 including interest at the rate of 7.24%, maturing
- 35 -
December 2012 with a balloon payment in the amount of $932,600. The interest
rate was adjustable on every five year anniversary of the agreement to the
Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon payment
varied depending on the change in interest rates over the term of the loan. In
addition to the Ukiah land and facility, this loan was secured by certain other
assets of the Company (other than the Releta facility), including, without
limitation, most of the Company's equipment. This loan was fully settled on July
3, 2006 out of the proceeds from a new loan which the Company received from
Grand Pacific Financing Corporation. The Grand Pacific Financing Corporation
loan is secured against the Ukiah real property.
OTHER LOANS AND CREDIT FACILITIES.
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 MBC in order to finance a buy-out of equipment leased through Finova
Capital Corporation. The lender extended the loan until May 31, 2006. The rate
of interest on the loan is prime plus 3%. This loan was repaid in full on July
3, 2006.
ROYAL BANK OF SCOTLAND FACILITY: In April 2005, Royal Bank of Scotland ("RBS")
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 to settle a credit facility with Nedbank Limited,
a South African registered company, on April 26, 2005. This facility had a
minimum maturity of twelve months, but was automatically extended. The facility
will continue to be extended for additional twelve month periods unless
terminated by either party upon six months' written notice.
SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher
Premium Lager for the Company's European and Canadian markets. As consideration
for extending the brewing contract, Shepherd Neame advanced a loan of
(pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of
(pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year.
WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on the
Company's U.S. debts was 10.89% for the first six months of the year 2006 and
8.64% for the corresponding period in 2005. For loans primarily associated with
the Company's European territory, the weighted average rate paid was 6.02% for
the first six months of the year 2006 and 6.2% for the corresponding period in
2005.
KEG MANAGEMENT ARRANGEMENT: The Company entered into a five-year keg management
agreement with MicroStar Keg Management LLC effective as of
- 36 -
September 1, 2004. 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, on any given month, the agreement is not
extended and terminates, the Company is required to purchase a certain number of
kegs from MicroStar. If such a termination were to occur, the Company
anticipates that it would finance the purchase through additional debt or lease
financing, if available. However, there can be no assurance that the Company
will be able to finance the purchase of kegs. Failure to purchase the necessary
kegs from MicroStar on termination of the agreement is likely to have a material
adverse effect on the Company.
CURRENT RATIO: The Company's ratio of current assets to current liabilities on
June 30, 2006 was 0.71 to 1.0 and its ratio of total assets to total liabilities
was 1.22 to 1.0. On June 30, 2005, the Company's ratio of current assets to
current liabilities was 0.84 to 1.0 and its ratio of total assets to total
liabilities was 1.35 to 1.0.
OVERDUE PROPERTY TAXES: As of June 30, 2003, the delinquent property taxes due
on the Company's Ukiah property, including penalties and interest, totaled
$718,100, representing overdue taxes for the period from April 1999 to June
2003. On July 31, 2003, the Company entered into a payment plan to settle these
issues, pursuant to which it made an initial payment to the County of $143,600.
In April 2006, the Company made payment of the 2006 installment, plus interest,
for a total payment of $221,200. The remaining balance of the overdue taxes was
paid in full on July 3, 2006 using the proceeds of a loan granted to the Company
by Grand Pacific Financing Corporation.
RESTRICTED NET ASSETS: The Company's wholly-owned subsidiary, UBI, has
undistributed earnings of approximately $604,300 as of June 30, 2006. Under
UBSN's line of credit agreement with RBS, distributions and other payments to
the Company from its subsidiary are not permitted if UBSN's retained earnings
drop below approximately $1,750,000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of June 30, 2006, 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 $6,373,400 as of June
30, 2006.
INTEREST RATE RISK
------------------
The Company had total debt as of June 30, 2006 of $10,037,900 of which
$6,985,700 was subject to variable rates of interest (either prime or LIBOR plus
1.5% or prime plus 3% or prime plus 3.75%). Its long-term debt (including
current
- 37 -
portion) as of June 30, 2006 totaled $4,967,600, of which $3,052,200 had fixed
rates of interest and the balance of $1,915,400 was subject to variable rates.
Short term debts which were subject to variable rates amounted to $5,070,300. At
current borrowing levels, an increase in prime and LIBOR rates of 1% would
result in an annual increase of $69,900 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 the
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.
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 Annual Report
on 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
- 38 -
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.
PART II
OTHER INFORMATION
ITEM 5. (A)
On July 3, 2006 the closing of a loan agreement between the Company and Grand
Pacific Financing Corporation ("Grand Pacific")occured. Under the loan agreement
Grand Pacific provided the Company with a loan of $3,000,000 for a term of five
years secured by a first deed of trust on the Company's Ukiah real property. In
addition, on July 3, 2006, Savings Bank of Mendocino County extended a temporary
loan to the Company in the principal amount of $350,000 pursuant to the terms of
a promissory note dated June 6, 2006.
ITEM 6. EXHIBITS
--------
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 (T) Articles of Incorporation of the Company, as
amended.
3.2 (T) Bylaws of the Company, as amended.
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (T) Amended 1994 Stock Option Plan
10.3 (A) Wholesale Distribution Agreement between the
Company and Bay Area Distributing.
10.4 [Intentionally omitted]
10.5 (B) Liquid Sediment Removal Services Agreement with
Cold Creek Compost, Inc.
10.6 [Intentionally omitted]
10.7 (C) Commercial Real Estate Purchase Contract and
Receipt for Deposit (previously filed as
Exhibit 19.2).
10.8 (D) Commercial Lease between Stewart's Ice Cream
Company, Inc. and Releta Brewing Company LLC.
- 39 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.9 (E) Agreement between United Breweries of America Inc.
and Releta Brewing Company LLC regarding payment of
certain liens.
10.10 (F) Keg Management Agreement with MicroStar Keg
Management LLC.
10.11 (G) Agreement to Implement Condition of Approval No. 37
of the Site Development Permit 95-19 with the City
of Ukiah, California (previously filed as
Exhibit 19.6).
10.12 (H) Manufacturing Business Expansion and Relocation
Agreement with the City of Ukiah.
10.13 (H) Manufacturing Business Expansion and Relocation
Agreement with the Ukiah Redevelopment Agency.
10.14 (I) $2,700,000 Note in favor of the Savings Bank of
Mendocino County.
10.15 (I) Hazardous Substances Certificate and Indemnity with
the Savings Bank of Mendocino County.
10.16 [Intentionally omitted]
10.17 [Intentionally omitted]
10.18 [Intentionally omitted]
10.19 (K) Investment Agreement with United Breweries of
America, Inc.
10.20 [Intentionally omitted]
10.21 (K) Registration Rights Agreement Among the Company,
United Breweries of America, Inc., H.
Michael Laybourn, Norman Franks, Michael Lovett,
John Scahill, and Don Barkley.
10.22 (L) Indemnification Agreement with Vijay Mallya.
10.23 (L) Indemnification Agreement with Michael Laybourn.
10.24 (L) Indemnification Agreement with Jerome Merchant.
10.25 (L) Indemnification Agreement with Yashpal Singh.
10.27 (L) Indemnification Agreement with Robert Neame.
10.28 (L) Indemnification Agreement with Sury Rao Palamand.
10.29 (L) Indemnification Agreement with Kent Price.
10.30 [Intentionally omitted]
10.31 [Intentionally omitted]
10.32 [Intentionally omitted]
10.33 (N) Employment Agreement with Yashpal Singh.
10.35 (O) Master Loan Agreement between the Company and the
United Breweries of America Inc.
10.36 (O) Convertible Note in favor of the United Breweries
of America Inc. dated Sept. 7, 1999
10.37 (P) Convertible Note in favor of the United Breweries
of America Inc. dated October 21, 1999
10.38 (P) Convertible Note in favor of the United Breweries
of America Inc. dated November 12, 1999
10.39 (P) Convertible Note in favor of the United Breweries
of America Inc. dated December 17, 1999
10.40 (P) Convertible Note in favor of the United Breweries
of America Inc. dated December 31, 1999
10.41 (P) Convertible Note in favor of the United Breweries
of America Inc. dated February 16, 2000
10.42 (P) Convertible Note in favor of the United Breweries
of America Inc. dated February 17, 2000
- 40 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.43 (P) Convertible Note in favor of the United Breweries
of America Inc. dated April 28, 2000
10.44 (P) First Amendment to Master Loan Agreement between
the Company and United Breweries of America, Inc.,
dated April 28, 2000
10.45 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated September 11, 2000
10.46 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated September 30, 2000
10.47 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated December 31, 2000
10.48 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated February 12, 2001
10.49 (R) Convertible Note in favor of the United Breweries
of America Inc. dated July 1, 2001
10.50 (S) Confirmation of Waiver Between Mendocino Brewing
Company, Inc. and United Breweries of America,
Inc., dated as of December 28, 2001
10.51 (S) Extension of Term of Notes Under Master Line of
Credit Agreement between Mendocino Brewing Company,
Inc. and United Breweries of America, Inc., dated
February 14, 2002
10.52 (T) License Agreement between United Breweries Limited
and United Breweries International (U.K.), Limited
10.53 (T) Supplemental Agreement to License Agreement between
United Breweries Limited and United Breweries
International (U.K.), Limited
10.54 (T) Distribution Agreement between United Breweries
International (U.K.), Limited. and UBSN, Ltd.
10.55 (T) Supplemental Agreement to Distribution Agreement
between United Breweries International (U.K.),
Limited. and UBSN, Ltd.
10.56 (T) Market Development, General and Administrative
Services Agreement between Mendocino Brewing
Company, Inc. and UBSN, Ltd.
10.57 (T) Contract to Brew and Supply Kingfisher Products
among Shepherd Neame, Limited, United Breweries
International (U.K.), Limited. and UBSN, Ltd.
10.58 (T) Supplemental Agreement to Contract to Brew and
Supply Kingfisher Products among Shepherd Neame,
Limited, United Breweries International (U.K.),
Limited. and UBSN, Ltd.
10.59 (T) Loan Agreement between Shepherd Neame, Limited and
UBSN, Ltd.
10.60 (T) Brewing License Agreement between UBSN, Ltd. and
Mendocino Brewing Company, Inc.
10.61 (T) Kingfisher Trade Mark and Trade Name License
Agreement between Kingfisher of America, Inc. and
Mendocino Brewing Company, Inc.
10.62 (U) First Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of
America, Inc., dated November 13, 2002.
- 41 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.63 (U) Second Amendment to Extension of Term of Notes
Under Master Line of Credit Agreement between
Mendocino Brewing Company, Inc. and United
Breweries of America, Inc., dated March, 2003.
10.64 [Intentionally omitted]
10.65 (V) Commitment Letter from United Breweries of America,
Inc. dated March 31, 2004.
10.66 [Intentionally omitted]
10.67 (W) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of July 20, 2004
10.68 (X) Fourth Amendment to Extension of Term of Notes
Under Master Line of Credit Agreement between
Mendocino Brewing Company, Inc. and United
Breweries of America, Inc., dated as of August 14,
2004
10.69 (Y) Settlement Agreement and Release between the
Company and House of Daniels, Inc., dba Golden Gate
Distributing Company, dated as of November 1, 2004
10.70 (Z) Second Agreement dated October 9, 1998 between
UBSN, Ltd. and Shepherd Neame, Ltd.
10.71 [Intentionally omitted]
10.72 (Z) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of November 1, 2004
10.73 (AA) Settlement Agreement and Release, effective as of
December 9, 2004
10.74 (BB) Convertible Promissory Note of Mendocino Brewing
Company, Inc. in favor of United Breweries of
America, Inc., dated March 2, 2005
10.75 (CC) Loan and Security Agreement (Accounts Receivable
and Inventory Line of Credit) dated
May 5, 2005 between the Company and BFI Business
Finance
10.76 (DD) Invoice Discounting Agreement between The Royal
Bank of Scotland Commercial Services
Limited and UBSN Limited, dated April 26, 2005
10.77 (FF) Secured Promissory Note in favor of BFI Business
Finance, dated December 27, 2005
10.78 (FF) Secured Promissory Note in favor of BFI Business
Finance, dated April 5, 2006
10.79 * Loan Agreement between Mendocino Brewing Company,
Inc. and Grand Pacific Financing Corporation, dated
June 28,2006
10.80 * Promissory Note in favor of Grand Pacific Financing
Corporation, dated June 28, 2006.
10.81 * Promissory Note in favor of Savings Bank of
Mendocino County dated June 6, 2006.
14.1 (V) Code of Ethics
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
NOTES: Each Exhibit listed above that is annotated with one or more of the
following letters is incorporated by reference from the following sources:
- 42 -
(A) The Company's Registration Statement dated June 15, 1994, as amended,
previously filed with the Commission, Registration No. 33-78390-LA.
(B) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1995.
(C) The Company's Quarterly Report on Form 10-QSB for the period ended March
31, 1995.
(D) The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period
ended September 30, 1997.
(E) The Company's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1997.
(F) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1996
(G) The Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1995
(H) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1996
(I) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1997
(J) The Company's Registration Statement dated February 6, 1997, as amended,
Registration No. 33-15673
(K) Schedule 13D filed November 3, 1997, by United Breweries of America,
Inc. and Vijay Mallya
(L) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1998
(M) The Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1998
(N) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1999
(O) Amendment No. 5 to Schedule 13D filed September 15, 1999, by United
Breweries of America, Inc. and Vijay Mallya.
(P) Amendment No. 6 to Schedule 13D filed May 12, 2000, by United Breweries
of America, Inc. and Vijay Mallya.
(Q) Amendment No. 7 to Schedule 13D filed February 22, 2001, by United
Breweries of America, Inc. and Vijay Mallya.
(R) Amendment No. 8 to Schedule 13D filed August 22, 2001, by United
Breweries of America, Inc and Vijay Mallya.
(S) The Company's Current Report on Form 8-K filed as of February 19, 2002
(T) The Company's Annual Report on Form 10-KSB for the period ended December
31, 2001
(U) Amendment No. 9 to Schedule 13D filed March 31, 2003, by United
Breweries of America, Inc. and Vijay Mallya
- 43 -
(V) The Company's Annual Report on Form 10-KSB for the year ended December
31, 2003
(W) The Company's Quarterly Report on Form 10-Q for the period ended June
30, 2004
(X) Amendment No. 11 to Schedule 13D, jointly filed by United Breweries of
America, Inc. and Dr. Vijay Mallya on August 16, 2004
(Y) The Company's Current Report on Form 8-K filed as of November 1, 2004
(Z) The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2004
(AA) The Company's Current Report on Form 8-K filed as of November 25, 2004
(BB) The Company's Current Report on Form 8-K filed as of March 2, 2005
(CC) The Company's Annual Report on Form 10-K/A for the period ended December
31, 2004
(DD) The Company's Quarterly Report on form 10-Q for the period ended June
30, 2005
(EE) The Company's Quarterly Report on form 10-Q for the period ended
September 30, 2005
(FF) The Company's Annual Report on Form 10-K for the period ended December
31, 2005
* filed herewith
- 44 -
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 14, 2006 /s/ YASHPAL SINGH
-------------------
Yashpal Singh
President, Director and Chief
Executive Officer
Dated: August 14, 2006 /s/ N. MAHADEVAN
------------------
N. Mahadevan
Chief Financial Officer and Secretary
- 45 -
EXHIBIT INDEX
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
3.1 (T) Articles of Incorporation of the Company, as
amended.
3.2 (T) Bylaws of the Company, as amended.
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (T) Amended 1994 Stock Option Plan
10.3 (A) Wholesale Distribution Agreement between the
Company and Bay Area Distributing.
10.4 [Intentionally omitted]
10.5 (B) Liquid Sediment Removal Services Agreement with
Cold Creek Compost, Inc.
10.6 [Intentionally omitted]
10.7 (C) Commercial Real Estate Purchase Contract and
Receipt for Deposit (previously filed as
Exhibit 19.2).
10.8 (D) Commercial Lease between Stewart's Ice Cream
Company, Inc. and Releta Brewing Company LLC.
10.9 (E) Agreement between United Breweries of America Inc.
and Releta Brewing Company LLC regarding payment of
certain liens.
10.10 (F) Keg Management Agreement with MicroStar Keg
Management LLC.
10.11 (G) Agreement to Implement Condition of Approval No. 37
of the Site Development Permit 95-19 with the City
of Ukiah, California (previously filed as
Exhibit 19.6).
10.12 (H) Manufacturing Business Expansion and Relocation
Agreement with the City of Ukiah.
10.13 (H) Manufacturing Business Expansion and Relocation
Agreement with the Ukiah Redevelopment Agency.
10.14 (I) $2,700,000 Note in favor of the Savings Bank of
Mendocino County.
10.15 (I) Hazardous Substances Certificate and Indemnity with
the Savings Bank of Mendocino County.
10.16 [Intentionally omitted]
10.17 [Intentionally omitted]
10.18 [Intentionally omitted]
10.19 (K) Investment Agreement with United Breweries of
America, Inc.
10.20 [Intentionally omitted]
10.21 (K) Registration Rights Agreement Among the Company,
United Breweries of America, Inc., H.
Michael Laybourn, Norman Franks, Michael Lovett,
John Scahill, and Don Barkley.
10.22 (L) Indemnification Agreement with Vijay Mallya.
10.23 (L) Indemnification Agreement with Michael Laybourn.
10.24 (L) Indemnification Agreement with Jerome Merchant.
10.25 (L) Indemnification Agreement with Yashpal Singh.
10.27 (L) Indemnification Agreement with Robert Neame.
10.28 (L) Indemnification Agreement with Sury Rao Palamand.
10.29 (L) Indemnification Agreement with Kent Price.
10.30 [Intentionally omitted]
10.31 [Intentionally omitted]
- 46 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.32 [Intentionally omitted]
10.33 (N) Employment Agreement with Yashpal Singh.
10.35 (O) Master Loan Agreement between the Company and the
United Breweries of America Inc.
10.36 (O) Convertible Note in favor of the United Breweries
of America Inc. dated Sept. 7, 1999
10.37 (P) Convertible Note in favor of the United Breweries
of America Inc. dated October 21, 1999
10.38 (P) Convertible Note in favor of the United Breweries
of America Inc. dated November 12, 1999
10.39 (P) Convertible Note in favor of the United Breweries
of America Inc. dated December 17, 1999
10.40 (P) Convertible Note in favor of the United Breweries
of America Inc. dated December 31, 1999
10.41 (P) Convertible Note in favor of the United Breweries
of America Inc. dated February 16, 2000
10.42 (P) Convertible Note in favor of the United Breweries
of America Inc. dated February 17, 2000
10.43 (P) Convertible Note in favor of the United Breweries
of America Inc. dated April 28, 2000
10.44 (P) First Amendment to Master Loan Agreement between
the Company and United Breweries of America, Inc.,
dated April 28, 2000
10.45 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated September 11, 2000
10.46 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated September 30, 2000
10.47 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated December 31, 2000
10.48 (Q) Convertible Note in favor of the United Breweries
of America Inc. dated February 12, 2001
10.49 (R) Convertible Note in favor of the United Breweries
of America Inc. dated July 1, 2001
10.50 (S) Confirmation of Waiver Between Mendocino Brewing
Company, Inc. and United Breweries of
America, Inc., dated as of December 28, 2001
10.51 (S) Extension of Term of Notes Under Master Line of
Credit Agreement between Mendocino Brewing Company,
Inc. and United Breweries of America, Inc., dated
February 14, 2002
10.52 (T) License Agreement between United Breweries Limited
and United Breweries International (U.K.), Limited
10.53 (T) Supplemental Agreement to License Agreement between
United Breweries Limited and United
Breweries International (U.K.), Limited
10.54 (T) Distribution Agreement between United Breweries
International (U.K.), Limited. and UBSN, Ltd.
10.55 (T) Supplemental Agreement to Distribution Agreement
between United Breweries International (U.K.),
Limited. and UBSN, Ltd.
- 47 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.56 (T) Market Development, General and Administrative
Services Agreement between Mendocino Brewing
Company, Inc. and UBSN, Ltd.
10.57 (T) Contract to Brew and Supply Kingfisher Products
among Shepherd Neame, Limited, United Breweries
International (U.K.), Limited. and UBSN, Ltd.
10.58 (T) Supplemental Agreement to Contract to Brew and
Supply Kingfisher Products among Shepherd Neame,
Limited, United Breweries International (U.K.),
Limited. and UBSN, Ltd.
10.59 (T) Loan Agreement between Shepherd Neame, Limited and
UBSN, Ltd.
10.60 (T) Brewing License Agreement between UBSN, Ltd. and
Mendocino Brewing Company, Inc.
10.61 (T) Kingfisher Trade Mark and Trade Name License
Agreement between Kingfisher of America, Inc. and
Mendocino Brewing Company, Inc.
10.62 (U) First Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino
Brewing Company, Inc. and United Breweries of
America, Inc., dated November 13, 2002.
10.63 (U) Second Amendment to Extension of Term of Notes
Under Master Line of Credit Agreement between
Mendocino Brewing Company, Inc. and United
Breweries of America, Inc., dated March, 2003.
10.64 [Intentionally omitted]
10.65 (V) Commitment Letter from United Breweries of America,
Inc. dated March 31, 2004.
10.66 [Intentionally omitted]
10.67 (W) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of July 20, 2004
10.68 (X) Fourth Amendment to Extension of Term of Notes
Under Master Line of Credit Agreement
between Mendocino Brewing Company, Inc. and United
Breweries of America, Inc., dated as of August 14,
2004
10.69 (Y) Settlement Agreement and Release between the
Company and House of Daniels, Inc., dba
Golden Gate Distributing Company, dated as of
November 1, 2004
10.70 (Z) Second Agreement dated October 9, 1998 between
UBSN, Ltd. and Shepherd Neame, Ltd.
10.71 [Intentionally omitted]
10.72 (Z) Revised Promissory Note in favor of Savings Bank of
Mendocino County, dated as of November 1, 2004
10.73 (AA) Settlement Agreement and Release, effective as of
December 9, 2004
10.74 (BB) Convertible Promissory Note of Mendocino Brewing
Company, Inc. in favor of United
Breweries of America, Inc., dated March 2, 2005
10.75 (CC) Loan and Security Agreement (Accounts Receivable
and Inventory Line of Credit) dated May 5, 2005
between the Company and BFI Business Finance
- 48 -
Exhibit
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
10.76 (DD) Invoice Discounting Agreement between The Royal
Bank of Scotland Commercial Services
Limited and UBSN Limited, dated April 26, 2005
10.77 (FF) Secured Promissory Note in favor of BFI Business
Finance, dated December 27, 2005
10.78 (FF) Secured Promissory Note in favor of BFI Business
Finance, dated April 5, 2006
10.79 * Loan Agreement between Mendocino Brewing Company,
Inc. and Grand Pacific Financing Corporation, dated
June 28, 2006.
10.80 * Promissory Note in favor of Grand Pacific Financing
Corporation, dated June 28, 2006.
10.81 * Promissory Note in favor of Savings Bank of
Mendocino County, dated June 6, 2006.
14.1 (V) Code of Ethics
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
NOTES: Each Exhibit listed above that is annotated with one or more of the
following letters is incorporated by reference from the following sources:
(A) The Company's Registration Statement dated June 15, 1994, as amended,
previously filed with the Commission, Registration No. 33-78390-LA.
(B) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1995.
(C) The Company's Quarterly Report on Form 10-QSB for the period ended March
31, 1995.
(D) The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period
ended September 30, 1997.
(E) The Company's Quarterly Report on Form 10-QSB for the quarterly period
ended September 30, 1997.
(F) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1996
(G) The Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1995
(H) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1996
(I) The Company's Annual Report on Form 10-KSB for the period ended December
31, 1997
(J) The Company's Registration Statement dated February 6, 1997, as amended,
Registration No. 33-15673
(K) Schedule 13D filed November 3, 1997, by United Breweries of America,
Inc. and Vijay Mallya
- 49 -
(L) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1998
(M) The Company's Quarterly Report on Form 10-QSB for the period ended
September 30, 1998
(N) The Company's Quarterly Report on Form 10-QSB for the period ended June
30, 1999
(O) Amendment No. 5 to Schedule 13D filed September 15, 1999, by United
Breweries of America, Inc. and Vijay Mallya.
(P) Amendment No. 6 to Schedule 13D filed May 12, 2000, by United Breweries
of America, Inc. and Vijay Mallya.
(Q) Amendment No. 7 to Schedule 13D filed February 22, 2001, by United
Breweries of America, Inc. and Vijay Mallya.
(R) Amendment No. 8 to Schedule 13D filed August 22, 2001, by United
Breweries of America, Inc and Vijay Mallya.
(S) The Company's Current Report on Form 8-K filed as of February 19, 2002
(T) The Company's Annual Report on Form 10-KSB for the period ended December
31, 2001
(U) Amendment No. 9 to Schedule 13D filed March 31, 2003, by United
Breweries of America, Inc. and Vijay Mallya
(V) The Company's Annual Report on Form 10-KSB for the year ended December
31, 2003
(W) The Company's Quarterly Report on Form 10-Q for the period ended June
30, 2004
(X) Amendment No. 11 to Schedule 13D, jointly filed by United Breweries of
America, Inc. and Dr. Vijay Mallya on August 16, 2004
(Y) The Company's Current Report on Form 8-K filed as of November 1, 2004
(Z) The Company's Quarterly Report on Form 10-Q for the period ended
September 30, 2004
(AA) The Company's Current Report on Form 8-K filed as of November 25, 2004
(BB) The Company's Current Report on Form 8-K filed as of March 2, 2005
(CC) The Company's Annual Report on Form 10-K/A for the period ended December
31, 2004
(DD) The Company's Quarterly Report on form 10-Q for the period ended June
30, 2005
(EE) The Company's Quarterly Report on form 10-Q for the period ended
September 30, 2005
(FF) The Company's Annual Report on Form 10-K for the period ended December
31, 2005
* filed herewith
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