-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AVbsQXJcew68J/em7FN9+EEEfM9Ov4AtTl/i7tc3sqTiip0x7jXAEi25CCvmAuKQ +dCQqjJ0EJ1MEvIfJT3OtQ== 0000897101-03-000978.txt : 20030814 0000897101-03-000978.hdr.sgml : 20030814 20030814143737 ACCESSION NUMBER: 0000897101-03-000978 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 03846427 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 10QSB 1 mendocino61403_10qsb.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| quarterly report under section 13 or 15(d) of the securities exchange act of 1934 For the quarterly period ended June 30, 2003 | | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of small business issuer as specified in its charter) California 68-0318293 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 13351 Highway 101 South, Hopland, California 95449 (Address of principal executive offices) (707) 744-1015 (Issuer's telephone number) Not Applicable (Former name, former address and former fiscal year, if changed since last report) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes __ No __ APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The number of shares of the issuer's common stock outstanding as of June 30, 2003 is 11,266,874. Transitional Small Business Disclosure Format (check one): Yes ___ No ___ PART I ITEM 1. FINANCIAL STATEMENTS. --------------------- MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET JUNE 30, 2003 (UNAUDITED) ASSETS ------ CURRENT ASSETS Cash $ 511,400 Accounts receivable 5,630,400 Inventories 1,356,600 Prepaid expenses 472,800 ------------ Total Current Assets: 7,971,200 ------------ PROPERTY AND EQUIPMENT 13,860,500 ------------ OTHER ASSETS Deposits and other Assets 280,500 Intangibles net of amortization 99,800 Total Other Assets: 380,300 ------------ Total Assets: $ 22,212,000 ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $ 4,569,600 Accrued liabilities 1,896,200 Income taxes Payable 290,800 Current maturities of obligation under capital lease 702,900 Current maturities of obligation under long-term debt 843,200 Line of credit 2,441,700 Notes to related party 1,879,600 ------------ Total Current Liabilities: 12,624,000 LONG TERM DEBT, less current maturities 3,153,400 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 197,300 ------------ Total Liabilities: 15,974,700 ------------ STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 227,600 shares authorized, issued and outstanding 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 Accumulated comprehensive loss (16,900) Accumulated deficit (8,622,000) ------------ Total Stockholders' Equity 6,237,300 ------------ Total Liabilities and Stockholders' Equity: $ 22,212,000 ============ The accompanying notes are an integral part of these financial statements. 1 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
----------------------------- ----------------------------- THREE MONTHS ENDED SIX MONTHS ENDED June 30 June 30 ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ NET SALES 7,112,900 6,349,600 12,983,000 11,425,700 COST OF GOODS SOLD 4,816,900 4,181,600 8,811,500 7,702,700 ------------ ------------ ------------ ------------ GROSS PROFIT 2,296,000 2,168,000 4,171,500 3,723,000 ------------ ------------ ------------ ------------ OPERATING EXPENSES Marketing, General and Administrative 1,856,600 1,781,100 3,789,800 3,458,200 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 439,400 386,900 381,700 264,800 ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE) Other income 5,700 2,300 10,600 12,500 Interest Expense (202,400) (209,800) (407,800) (424,000) ------------ ------------ ------------ ------------ (196,700) (207,500) (397,200) (411,500) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 242,700 179,400 (15,500) (146,700) PROVISION FOR INCOME TAX 80,800 52,300 112,000 80,600 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 161,900 $ 127,100 $ (127,500) $ (227,300) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME/ (LOSS), net of tax Foreign Currency Translation Adjustment 29,900 23,400 18,400 3,600 ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 191,800 $ 150,500 $ (109,100) $ (223,700) ============ ============ ============ ============ NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ (0.01) $ (0.02) ============ ============ ============ ============ DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ 0.01 $ (0.01) $ (0.02) ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 2 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
--------------------------- --------------------------- SIX MONTHS ENDED June 30 --------------------------- --------------------------- 2003 2002 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ (127,500) $ (227,300) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 561,200 563,800 Loss on sale of assets 1,900 -- Stock issued for services -- 172,100 Changes in: Accounts receivable 280,600 367,000 Inventories 117,700 (17,500) Prepaid expenses (212,300) (146,500) Deposits and other assets 55,700 (124,000) Accounts payable (1,149,900) (349,100) Accrued liabilities 232,500 (310,400) ----------- ----------- Net cash from operating activities: (240,100) (71,900) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (239,000) (230,900) improvements Proceeds from sale of fixed assets 10,900 -- ----------- ----------- Net cash from investing activities: (228,100) (230,900) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings on line of credit 289,300 822,100 Principal payments on long-term debt (302,000) (685,100) Net borrowing on long-term debt 403 700 -- Payments on obligation under capital lease (130,000) (67,500) Proceeds from notes payable to related parties 43,300 47,000 Proceeds from new distributors 655,200 -- Disbursement in excess of deposit (134,300) 157,300 ----------- ----------- Net cash from financing activities: 825,200 273,800 ----------- ----------- Effect of exchange rate change on cash 7,600 4,100 ----------- ----------- INCREASE/(DECREASE) IN CASH 364,600 (24,900) ----------- ----------- CASH, beginning of period 146,800 90,000 ----------- ----------- CASH, end of period $ 511,400 $ 65,100 =========== =========== Supplemental cash flow information includes the following: Cash paid during the period for: Interest $ 364,500 $ 355,300 ----------- ----------- Income Tax $ 257,700 $ 94,200 ----------- -----------
The accompanying notes are an integral part of these financial statements. 3 MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2002. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The Company has adopted EITF - 01-09 "Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor's Products)". This EITF requires that certain cash consideration paid to customers for services or placement fees are to be reported as a reduction in revenue rather than as an expense. The Company has reclassified these items on the income statements for the six-month periods ending June 30, 2002, as a reduction in revenue and as a corresponding reduction in marketing and selling expenses. This reclassification has no impact on net income. Note 2 - Line of Credit The CIT Group/Credit Finance, Inc. has provided the Company a $3,500,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of inventory at an interest rate equal to the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, scheduled to mature on November 30, 2003. The line of credit is secured by all accounts receivable, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which was repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. On January 17, 2003, CIT group amended the facility and extended the term of the facility to expire on November 30, 2003. This amendment increased the maximum credit available to $3,500,000 and provided a term loan of $750,000 consisting of the original balance of $346,300 and a new term loan of $403,700 repayable in 30 equal consecutive monthly installments of $24,700, commencing February 1, 2003, with a final payment of $8,000. As of June 30, 2003, the amount outstanding on the term loan was approximately $626,400. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of June 30, 2003, the total amount outstanding on the line of credit was approximately $1,586,900. Nedcor Bank Limited, a South African registered company, has provided a multi-currency option facility of 1,250,000 GBP to UBSN Ltd. ("UBSN"), a wholly-owned subsidiary of United Breweries International (UK) Ltd. ("UBI"), which is in turn wholly-owned by the Company. This 4 overdraft facility is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of June 30, 2003, was approximately $854,900. Note 3 - Long Term Debt and Notes to Related Parties The Company has a note outstanding in the principal amount of $2,700,000, with interest at the treasury constant maturity index for five year treasuries plus 4.17%, currently 7.24%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment and is secured by real property located in Ukiah, California. UBSN has engaged Shepherd Neame Limited ("Shepherd Neame"), a related party, to brew Kingfisher Lager for the Company's European and Canadian markets. As consideration for the extension of the brewing contract, Shepherd Neame advanced a loan of GBP 600,000 to UBSN, repayable in monthly installment of GBP 5,000 per month, commencing in June 2003. The loan carries an interest rate of 5%. The Company has issued unsecured convertible notes in favor of United Breweries of America, Inc. ("UBA") in the amount of approximately $1,515,400 as of June 30, 2003. The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10% per annum, and each note originally matured 18 months from the date of the particular advance. The notes were extended to mature on August 14, 2004. The notes are convertible, at UBA's option, into common stock at $1.50 per share. Interest accrued on the notes as of June 30, 2003, is approximately $364,200. Note 4 - Income Taxes As of June 30, 2003, the Company has available for carry-forward Federal, California and New York net operating losses. The losses will expire as follows: NET OPERATING LOSS ---------------------------------------------------- Date of Expiration FEDERAL CALIFORNIA NEW YORK ------------------ ------- ---------- -------- 2005 $ -- $ 2,417,000 $ -- 2010 -- 250,900 -- 2011 -- 153,700 -- 2012 1,802,300 -- 277,400 2018 2,758,800 -- 424,700 2019 2,153,100 -- 320,300 2020 965,600 -- 134,200 2021 1,041,100 -- 160,200 2022 806,800 -- 124,200 ----------- ----------- ----------- $ 9,527,700 $ 2,821,600 $ 1,441,000 =========== =========== =========== 5 The Company also has $66,900 of California Manufacturer's Investment Tax Credits that can be carried forward to offset future taxes until they begin to expire in 2007. Temporary differences and carry-forwards which give rise to deferred tax assets and liabilities on June 30, 2003, are as follows: Accounts receivables allowance $ 19,100 Benefits from net operating loss carry forwards 3,751,600 Inventory 8,000 Accruals 15,400 Valuation allowance (3,414,900) Depreciation and amortization (253,800) Investment in United Breweries International (UK) Ltd. 328,300 Undistributed earnings of UBI (UK) (566,000) Others 112,300 Note 5 -- Related party Transactions During 2001 and 2002, MBC and its subsidiaries entered into or amended several agreements with affiliated and related entities. Among these were a Brewing Agreement and a Loan Agreement between UBSN and Shepherd Neame; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. Additional information about these transactions is contained in the Company's annual report on Form 10-KSB for the year ended December 31, 2002, and such information is incorporated herein by reference. The following table reflects the value of the transactions for the six months ended June 30, 2003 and 2002 and the balances outstanding at June 30, 2003 and 2002.
- -------------------------------------------------------------------- ------------ ------------- 2003 2002 - -------------------------------------------------------------------- ------------ ------------- Sales to Shepherd Neame Ltd $ 1,186,700 $ 969,800 - -------------------------------------------------------------------- ------------ ------------- Purchases from Shepherd Neame Ltd. 5,101,700 4,122,700 - -------------------------------------------------------------------- ------------ ------------- Expenses reimbursement to Shepherd Neame Ltd. 462,700 369,400 - -------------------------------------------------------------------- ------------ ------------- Interest expenses associated with UBA convertible notes payable 43,300 47,000 - -------------------------------------------------------------------- ------------ ------------- Accounts payable to Shepherd Neame Ltd 2,427,400 2,345,400 - -------------------------------------------------------------------- ------------ ------------- Account receivable from Shepherd Neame Ltd. 544,900 525,100 - -------------------------------------------------------------------- ------------ ------------- Amounts payable to American United Breweries International 20,000 20,000 - -------------------------------------------------------------------- ------------ -------------
Note 6 - Net Income Per Common and Common Equivalent Share Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. 6 Diluted EPS is computed by dividing income available to shareholders by the weighted average number of common shares and common equivalent shares outstanding, which include dilutive stock options and notes payable convertible in common stock. Common equivalent shares associated with stock options and convertible notes payable have been excluded from periods with a net loss as the potentially dilutive shares would be antidilutive.
Three months ended Six months ended ------------------ ---------------- 6/30/2003 6/30/2002 6/30/2003 6/30/2002 ------------------------------------------------------------ Net income (loss) $ 161,900 $ 127,100 $ (127,500) $ (227,300) ============================================================ Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874 ============================================================ Basic net income (loss) per share $ 0.01 $ 0.01 $ (0.01) $ (0.02) ============================================================ Diluted net income (loss) per share Net income (loss) $ 161,900 $ 127,100 $ (127,500) $ (227,300) Interest expense on convertible notes payable 21,800 23,600 -- -- ------------------------------------------------------------ Income for the purpose of computing diluted net income per share $ 183,700 $ 150,700 $ (127,500) $ (227,300) ============================================================ Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874 Dilutive stock options 429,273 429,273 -- -- Assumed conversion of convertible notes payable 1,253,076 1,193,133 -- -- ------------------------------------------------------------ Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 12,949,223 12,889,280 11,266,874 11,266,874 ============================================================ Diluted net income (loss) per share $ 0.01 $ 0.01 $ (0.01) $ (0.02) ============================================================
Note 7 - Inventory June 30, 2003 ------------- Raw Materials $ 416,400 Beer-in-process 230,700 Finished Goods 680,100 Merchandise 29,400 ----------- $ 1,356,600 =========== Note 8. Property And Equipment June 30, 2003 ------------- Buildings $ 7,807,800 Machinery and equipment 8,375,900 Equipment under capital lease 2,405,800 Land 810,900 7 Leasehold improvements 777,600 Equipment in progress 21,600 Vehicles 86,300 Furniture and fixtures 205,300 ----------- 20,491,200 Less: Accumulated depreciation and amortization 6,630,700 ----------- $13,860,500 =========== Note 9 - Stockholders' Equity The following table summarizes equity transactions during the six months ended June 30, 2003:
SERIES A PREFERRED STOCK COMMON STOCK OTHER --------------------------- ------------------------ COMPREHENSIVE ACCUMULATED TOTAL SHARES AMOUNT SHARES AMOUNT INCOME/(LOSS) DEFICIT EQUITY ------------ ------------ ------------ ------------ ---------------------------- ------------ Balance, December 31, 2002 $ 227,600 $ 227,600 11,266,874 $ 14,648,600 (35,300) $ (8,494,500) $ 6,346,400 Net Loss (127,500) (127,500) Currency Translation Adjustment 18,400 18,400 ------------ ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 2003 227,600 $ 227,600 11,266,874 $ 14,648,600 $ (16,900) $ (8,622,000) $ 6,237,300 ============ ============ ============ ============ ============ ============ ============
Note 10 - Stock Based Compensation The Company has a stock-based employee compensation plan that allows the Company to grant options to purchase up to 1,000,000 shares of the Company's common stock. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, to stock-based compensation.
- ----------------------------------------- ------------------------------- ------------------------------- Three months ended June 30 Six months ended June 30 - ----------------------------------------- ------------------------------- ------------------------------- 2003 2002 2003 2002 - ----------------------------------------- --------------- --------------- --------------- --------------- Net income / (loss) as reported $ 161,900 $ 127,100 $(127,500) $(227,300) - ----------------------------------------- --------------- --------------- --------------- --------------- Deduct: Total stock-based employee (99,100) compensation expense determined under fair value based methods for all awards, net of tax related effects - ----------------------------------------- --------------- --------------- --------------- ---------------
8
- ----------------------------------------- --------------- --------------- --------------- --------------- Pro forma Net Loss $ 161,900 $ 127,100 $ (127,500) $ (326,400) - ----------------------------------------- --------------- --------------- --------------- --------------- Earning Per Share - ----------------------------------------- --------------- --------------- --------------- --------------- Basic and diluted (as reported) $ 0.01 $ 0.01 $ (0.01) $ (0.02) - ----------------------------------------- --------------- --------------- --------------- --------------- Basic and diluted (pro forma) $ 0.01 $ 0.01 $ (0.01) $ (0.02) - ----------------------------------------- --------------- --------------- --------------- ---------------
Note 11. Segment Information The Company's three business segments are (i) brewing operations, (ii) distributing operations in the United Kingdom, and (iii) retail sales at the Hopland Brewery and the tasting room at Saratoga Springs. A summary of each segment is as follows:
Six months ended June 30, 2003 Domestic Brewing Distributor Retail Corporate & Total Operations Operations Operations Others Net Sales $ 5,110,800 $ 7,655,400 $ 216,800 $ -- $12,983,000 Operating Profit/(Loss) 16,900 396,400 (31,600) -- 381,700 Identifiable Assets 14,002,700 4,855,200 105,700 2,942,000 21,905,600 Depreciation & amortization 375,400 177,300 2,600 5,900 561,200 Capital Expenditures 28,500 210,500 -- -- 239,000 Six months ended June 30, 2002 Domestic Brewing Distributor Retail Corporate & Total Operations Operations Operations Others Net Sales $ 4,987,900 $ 6,211,500 $ 226,300 $ -- $11,425,700 Operating Profit/(Loss) 1,300 275,300 (11,800) -- 264,800 Identifiable Assets 14,684,500 4,284,700 85,500 3,939,400 22,994,100 Depreciation & amortization 381,000 159,900 3,100 19,800 563,800 Capital Expenditures 87,700 143,200 -- -- 230,900
9 Note 12 - Legal Dispute The Company recently terminated a written distribution agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company ("GGD"), in accordance with the provisions of the agreement, upon 30 days' written notice to GGD. On April 1, 2003, GGD filed an action in Marin County Superior Court, claiming that the termination of the agreement was wrongful and sued the Company for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, negligent and intentional interference with economic relationships. The Company believes that even though the agreement did not require a showing of good cause for termination, the Company nevertheless had ample good cause to terminate the agreement, and that, by failing to perform according to the contract, GGD has breached its contract with the Company. The Company filed a cross-complaint against GGD asserting these claims and seeking the appropriate remedies, including compensatory and punitive damages. Based on the facts and the Company's beliefs set forth above, the Company did not provide for any liability for the claims of GGD. During the second quarter of the year 2003, the Company received $655,200 from two new distributors in exchange for the Company's business in the former territory of GGD. Normally the changing of distributors occurs outside of the Company, and the new distributors pay the old distributors for developing the territory. Because of the dispute between the Company and GGD, the Company determined that the new distributors should pay these funds directly to the Company. The Company will use these funds to pay off any obligation owed to GGD once the legal matters have been settled. UBSN is involved in a dispute with customs and excise authorities in the United Kingdom regarding the recoverability of Value Added Tax on certain materials. If UBSN is unsuccessful in defending its case, costs (including penalties and interest) are estimated at GBP 70,000. However, UBSN believes that it will be successful in its defense and accordingly, the Company did not provide for any liability for this dispute. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity and cash flows of the Company for the six months ended June 30, 2003, compared to the six months ended June 30, 2002, and the year ended December 31, 2002. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the company's Annual Report to Shareholders for the year ended December 31, 2002. 10 This discussion contains statements regarding the company's expectations concerning its future operations, earnings and outlook. These statements are forward-looking statements that involve significant risks and uncertainties, and accordingly, no assurances can be given that such expectations will be correct. These expectations are based upon many assumptions that the Company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Important factors that could cause actual results to differ (favorably or unfavorably) from the expectations stated in this discussion include, among others, changes in the pricing environment for the Company's products; changes in demand for malt beverage products in different Company markets; changes in customer preference for the Company's malt beverage products; regulatory or legislative changes; changes in raw materials prices; changes in interest rates; and changes in the company's European beer and/or restaurant business. The Company disclaims any obligation to update any of these forward-looking statements. If the Company determines to update any forward-looking statement, it will do so publicly. No private statements by the Company or its personnel should be interpreted as updating forward-looking statements. CRITICAL ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value the majority of the Company's inventories. o The intrinsic value method, or APB Opinion No. 25, to account for incentive awards of Company common stock. o A full valuation allowance of deferred tax assets for net operating loss carryforwards that are expected to expire prior to utilization. o The carrying value of certain plant and equipment is not impaired under FASB 144 based on expected future cash flows from operations. o The decision by the Company not to accrue any amounts in connection with the litigation involving Golden Gate Distributing, based on the Company's belief that it will prevail in the litigation and similar decision in connection with a dispute with customs and excise 11 authorities in the United Kingdom based on the Company's belief that it will be successful in its defense. These accounting policies are applied consistently for all years presented. The Company's operating results would be affected if other alternatives were used. Information about the impact on operating results is included in the footnotes to the Company's consolidated financial statements. OVERVIEW MBC was originally formed in March 1983 and bottled its flagship brand, Red Tail Ale, in December 1983. The Company is celebrating its 20th anniversary during the year 2003. During the first quarter of the year 2003, the Company prepared to launch Red Tail Ale in a commemorative 22 oz. bottle. This limited edition bottle, with an exciting `Red Tail Ale - Reggae on the River' label designed by artist Jesse Miller is distributed in select markets in California and Oregon. During the second quarter, the Company started brewing products of Monterey County Ales, Inc. at its breweries located in Ukiah and Saratoga Springs. The Company's brewing operation's sales in the United States during the first six months of the year 2003 increased to 28,323 barrels, an increase of 335 barrels, or 1.2%, over the 27,988 barrels sold in the first six months of the year 2002. Management had hoped for a larger increase and attributes this marginal increase to the poor economy and a significant decline in business experienced by the restaurant and tourism industry. During the first six months of the year 2003, UBSN sold 29,561 barrels in the United Kingdom, Europe and Canada, compared to 26,977 barrels during the corresponding period in the year 2002. The Company ended the first six months of 2003 with a net loss of $127,500, as compared to a net loss of $227,300 for the same period in 2002. As set forth more fully under "Results of Operations," below, the overall net loss is attributed to increases in net sales, cost of goods, marketing, general and administrative expenses, a reduction in other income and interest, and an increase in the income tax provision. RESULTS OF OPERATIONS The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto. ------------------------ SIX MONTHS ENDED JUNE 30 ------------------------ 2003 2002 STATEMENTS OF OPERATIONS DATA: % % --------- --------- NET SALES 100.00 100.00 Costs of Sales 67.87 67.42 --------- --------- GROSS PROFIT 32.13 32.58 ========= ========= 12 Marketing, General and Administrative Expense 29.19 30.26 PROFIT / (LOSS) FROM OPERATIONS 2.94 2.32 Other (Income) / Expense (0.08) (0.11) Interest Expense 3.14 3.71 --------- --------- (Loss) before income taxes (0.12) (1.28) Provision for income taxes 0.86 0.71 --------- --------- NET LOSS (0.98%) (1.99%) ========= ========= Other Comprehensive Loss (0.14) (0.03) ========= ========= COMPREHENSIVE LOSS (0.84%) (1.96%) ========= ========= ------------------------ SIX MONTHS ENDED JUNE 30 ------------------------ 2003 2002 BALANCE SHEET DATA: $ $ ---------- ---------- Cash and Cash Equivalents 511,400 65,100 Working Capital (4,652,800) (4,533,300) Property and Equipment 13,860,500 14,358,800 Deposits and Other Assets 380,300 2,277,400 Total Assets 22,212,000 22,994,100 Long-term Debt 3,153,400 3,446,400 Obligation Under Capital Lease 197,300 846,500 Total Liabilities 15,974,700 15,184,100 Accumulated Deficit (8,622,000) (6,992,000) Stockholder's equity 6,237,300 7,810,000 THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2002 NET SALES Overall net sales for the second quarter of 2003 were $7,112,900, an increase of $763,300, or 12.02%, compared to $6,349,600 for the second quarter of 2002. Of the increase, sales from the Company's domestic operations increased by $78,400 and sales from the European operation increased by $684,900. Domestic Operations. Domestic net sales for first six months of 2003 were $2,989,800 compared to $2,911,400 for the same period in 2002, a 2.69% increase. The sales volume increased to 15,730 barrels in the second quarter of 2003 from 15,490 barrels in the second quarter of 2002, representing an increase of 240 barrels or 1.55%. Of the increase, sales of the Company's brands increased by 503 barrels; sales of Kingfisher decreased by 119 barrels; and sales of contract brands decreased by 144 barrels. The decrease in the sale of contract brands is mainly due to the termination of the brewing agreement with Wolaver's Enterprises in December 13 2002, but is partially offset by sales of Monterey County Ale products. The increase in overall net sales during the second quarter of 2003 was mainly due to an increase in wholesale shipments. Retail sales for the second quarter of 2003 showed a decrease of $8,700 over the same period in 2002. European Operations: Net sales for the second quarter of 2003 were $4,123,100 (GBP 2,548,200) compared to $3,438,200 (GBP 2,329,300) during the corresponding period of 2002, an increase of 19.92%. During the second quarter of 2003, UBSN sold 15,936 barrels compared to 15,065 barrels during the same period in 2002. Exchange rate fluctuations when measured in United States dollars increased the amount of growth as compared to last year, hence when the net sales results are compared in Pounds Sterling, there is an increase of only 9.4%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the second quarter of 2003 was 67.72%, as compared to 65.86% during the corresponding period of 2002. Domestic Operations: Cost of goods sold as a percentage of net sales in the United States during the second quarter of 2003 was 68.54%, as compared to 66.25% during the corresponding period of 2002, representing an increase of 2.29%, mainly due to increases in the price of raw materials and increased insurance costs. European Operations: Cost of goods sold as a percentage of net sales in the United Kingdom during the second quarter of 2003 was 67.61%, as compared to 66.16% during corresponding period in 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing a slight increase of 1.45%. GROSS PROFIT As a result of the higher net sales described above, gross profit for the second quarter of the year 2003 increased to $2,296,000, from $2,168,000 during the corresponding period of 2002, representing an increase of 5.9%. As a percentage of net sales, the gross profit during the second quarter of 2003 decreased to 32.28% from that of 34.14% for the second quarter of 2002. MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES Marketing, general and administrative expenses for the second quarter of 2003 were $1,856,600, as compared to $1,781,100 for the second quarter of 2002, representing an increase of 4.24%. Domestic Operations: Expenses for the second quarter of 2003 were $788,800 compared to $811,400 during the corresponding period of 2002, representing a decrease of $22,600. As a percentage of net sales in the United States, the expenses decreased to 26.38% during the second quarter of 2003, compared to 27.87% during the corresponding period of 2002, mainly on account of a reduction in manpower. European operations: Expenses for the second quarter of 2003 were $1,067,800 compared to $969,700 during the corresponding period of 2002, representing an increase of 14 $98,100. As a percentage of net sales in the United Kingdom, the expenses decreased to 25.9% during the second quarter of 2003 compared to 28.2% during the corresponding period of 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase is mainly on account of increases in manpower, travel costs, and promotional expenses. OTHER EXPENSES Other expenses for the second quarter of 2003 totaled $196,700, representing a decrease of $10,800 when compared to the second quarter of 2002. The other expenses consist of interest expenses, miscellaneous income, and acquisition costs. Interest expenses decreased by $7,400 because of the reduction in long term debts and reduction in interest rates. Miscellaneous income increased by $3,400. INCOME TAXES The Company has a provision for income taxes of $80,800 for the second quarter of 2003, compared to $52,300 for the second quarter of 2002. The provision for taxes relates to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. NET INCOME The Company's net income for the second quarter of 2003 was $161,900, as compared to income of $127,100 for the second quarter of 2002. After providing for a foreign currency translation adjustment of $29,900 during the second quarter of 2003 ($23,400 for 2002), the comprehensive income for 2003 was $191,800, compared to $150,500 in 2002. SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2002 NET SALES Overall net sales for the first six months of 2003 were $12,983,000, an increase of $1,557,300, or 13.63%, compared to $11,425,700 for the first six months of 2002. Of the increase, Company's domestic operations sales increased by $113,400 and European operation's sales increased by $1,443,900. Domestic Operations. Domestic net sales for first six months of 2003 were $5,327,600 compared to $5,214,200 for the same period in 2002, a 2.17% increase. The sales volume increased to 28,323 barrels in first six months of 2003 from 27,988 barrels in the first six months of 2002, representing an increase of 335 barrels or 1.2%. Of the increase, sales of the Company's brands increased by 1,117 barrels; sales of Kingfisher decreased by 196 barrels, and sales of contract brands decreased by 586 barrels. The decrease in the sales of contract brands is mainly due to the termination of the brewing agreement with Wolaver's Enterprises, LLC in December 2002. The increase in overall net sales during the first six months of 2003 was mainly due to increase in wholesale shipments. Retail sales for the first six months of 2003 showed a decrease of $9,500 over the same period in 2002. 15 European Operations: Net sales for the first six months of 2003 were $7,655,400 (GBP 4,752,300) compared to $6,211,500 (GBP 4,287,100) during the corresponding period of 2002, an increase of 23.25%. During the first six months of 2003, UBSN sold 29,561 barrels, compared to 26,977 barrels during the same period in 2002. However, effective as of March 1, 2003, UBSN increased its prices for its products. Exchange rate fluctuations when measured in United States dollars caused the growth percentage to increase as compared to last year, hence when the net sales results are compared in Pounds Sterling, there is an increase of 10.85%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first six months of 2003 was 67.87%, as compared to 67.42% during the corresponding period of 2002. This slight increase is largely due to increased costs in the United States operations. Domestic Operations: Cost of goods sold as a percentage of net sales in the United States during the first six months of 2003 was 69.92%, as compared to 69.27% during the corresponding period of 2002, representing an increase of 0.65%, which is mainly due to an increase in the price of raw materials and increased insurance costs. European Operations: Cost of goods sold as a percentage of net sales in the United Kingdom during the first six months of 2003 was 66.90%, as compared to 66.47% during corresponding period in 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing an increase of 0.43% mainly due to product mix and exchange rate fluctuations. GROSS PROFIT As a result of the higher net sales described above, gross profit for the first six months of the year 2003 increased to $4,171,500, from $3,723,000 during the corresponding period of 2002, representing an increase of 12.05%. As a percentage of net sales, the gross profit during the first quarter of 2003 decreased to 32.13% from that of 32.58% for the first six months of 2002. MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES Marketing, general and administrative expenses for the first six months of 2003 were $3,789,800, as compared to $3,458,200 for the first six months of 2002, representing an increase of 9.59%. Domestic Operations: Expenses for the first six months of 2003 were $1,652,300 compared to $1,650,600 during the corresponding period of 2002, representing an increase of $1,700. As a percentage of net sales in the United States, the expenses decreased to 31.01% during the first six months of 2003, compared to 31.66% during the corresponding period of 2002, mainly on account of increases in legal costs on contractual disputes, insurance costs, and sales promotion expenses. However, these increases in expenses were partially offset by savings caused by the Company's reduction in manpower. European operations: Expenses for the first six months of 2003 were $2,137,500 16 compared to $1,807,600 during the corresponding period of 2002, representing an increase of $329,900. As a percentage of net sales in the United Kingdom, the expenses decreased to 27.92% during the first six months of 2003 compared to 29.1% during the corresponding period of 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase is mainly on account of increased manpower and travel costs, sales promotional expenses, commissions, and discounts on increased sales. OTHER EXPENSES Other expenses for the first six months of 2003 totaled $397,200, representing a decrease of $14,300 when compared to the first six months of 2002. The other expenses consist of interest expenses, miscellaneous income, and acquisition costs. Interest expenses decreased by $16,200 because of reductions in long term debts, interest rates, and the outstanding balance on the line of credit. Miscellaneous income decreased by $1,900. INCOME TAXES The Company has a provision for income taxes of $112,000 for the first six months of 2003, compared to $80,600 for the first six months of 2002. The provision for taxes relates to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. The Company has also provided valuation allowance $3,414,900 for federal and state net operating losses that may expire prior to utilization. NET LOSS The Company's net loss for the first six months of 2003 was $127,500, as compared to loss of $227,300 for the first six months of 2002. After providing for a foreign currency translation adjustment of $18,400 during the first quarter of 2003 ($3,600 for 2002), the comprehensive loss for 2003 was $109,100, compared to a loss of $223,700 in 2002. CAPITAL DEMANDS Both the Ukiah and Releta facilities continue to operate at significantly less than full capacity. Both breweries have placed demands upon the Company's assets and liquidity. Failure to adequately meet those demands may have a material adverse affect on the Company's business, financial condition, and results of operations. The Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility. Completion of the construction is a condition to the issuance of a final certificate of occupancy. However, the Ukiah brewery has been operating under a temporary certificate of occupancy from the City of Ukiah since 1998 with no adverse consequences. The Company does not plan to revisit completion of the project until it has the available funds to do so. If, in the future, the Company decides to complete the landscaping, the remaining work and the estimated cost thereof are as follows: covering the parking lot with asphalt, approximately $30,000; building a concrete sidewalk to one of the entrances of the brewery building, approximately $10,000. 17 PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS The Company must make timely payment of its debt and lease commitments to continue its operations. Unused capacity at the Ukiah and Saratoga Springs facilities has placed demands on the Company's working capital. Beginning approximately in the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities (see "Liquidity and Capital Resources," below). Although Management has had success in negotiating these credit facilities in the past, there can be no assurance that the Company will be able to do so in the future, either at any price or at a price the Company will be able to sustain, or that the Company will have access to any alternative sources of funds in the future. Failure to secure sufficient funds will have a materially adverse effect on the Company. BREWING CONTRACT WITH WOLAVER'S ENTERPRISES, LLC. During September 2000 the Company entered into an agreement with Wolaver's Enterprises, LLC, ("Wolaver's") a Florida limited liability company, to brew, on a contract basis, their line of organic beers. The Company produced 3,500 barrels of Wolaver's brand beer during year 2002. In July 2002, Wolaver's informed the Company that it had merged with Otter Creek Brewing Company in Middlebury, Vermont. Because of the merger, Wolaver's requested termination of the brewing contract, and the Company agreed to terminate the brewing contract effective as of December 31, 2002. Termination of this contract increased the Company's unused brewing capacity. The Company will continue to look for opportunities to utilize its brewing facilities at a greater capacity. LIQUIDITY AND CAPITAL RESOURCES Master Line of Credit. On August 31, 1999, the Company and UBA entered into a Master Line of Credit Agreement, which was subsequently amended in April of 2000, and February of 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. UBA has made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). As of June 30, 2003, the aggregate outstanding principal amount of the UBA Notes was $1,515,371, and the accrued but unpaid interest thereon was equal to approximately $364,200. The UBA Notes require the Company to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted the Company to capitalize all accrued interest, therefore, the Company has borrowed the maximum amount available under the facility. Upon maturity of any UBA Note, unless UBA has given the Company prior instructions to commence repayment of the outstanding principal balance, the outstanding principal and accrued but unpaid interest on such Note may be converted, at the option of UBA, into shares of the Company's common stock. If UBA does not elect to so convert any UBA Note upon maturity, it has the option to extend the term of such UBA Note for any period of time mutually agreed upon by UBA and the Company. During the extended term of any UBA Note, 18 UBA has the right to require the Company to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which provides a written confirmation that UBA had waived its rights as of August 13, 2001, with regard to all conversion rate protection set forth in the UBA Notes. The Company and UBA executed an Extension of Term of Notes under Master Line of Credit Agreement in February of 2002, which was later amended in August of 2002, March of 2003, and August of 2003 (the "Extension Agreement"). The Extension Agreement confirms the Company's and UBA's extension of the terms of the UBA Notes for a period that ends on August 14, 2004. Long Term Debt: MBC has obtained a $2.7 million loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in monthly installments of $24,443 including interest at the rate of 7.24%, maturing December 2012 with a balloon payment in the amount of $932,600. The interest rate is adjusted on every five year anniversary of the agreement to the treasury constant maturity rate plus 4.17%. The amount of the balloon payment will vary depending on the change in interest rates over the years. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment. Equipment Lease: FINOVA Capital Corporation leased new brewing equipment with a total cost of approximately $1.78 million to MBC for a term of 7 years (beginning December 1996) with monthly rental payments of approximately $27,100 each. At expiration of the initial term of the lease in November 2003, the Company anticipates that it will exercise its option to either purchase the equipment at its then current fair market value but not less than 25% nor more than 30% of the original cost of the equipment, or extend the term of the lease for an additional year at approximately $39,000 per month with an option to purchase the equipment at the end of the year at then current fair market value. The lease is not pre-payable. Other Loans and Credit Facilities. CIT Group/Credit Finance Line of Credit: The CIT Group/Credit Finance, Inc. has provided the Company a $3,000,000 maximum line of credit with an advance rate of 80% of qualified accounts receivable and 60% of inventory at an interest rate equal to the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of the Company except for the specific equipment and fixtures of the Company leased from FINOVA Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to the Company as an initial term loan, which was repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. The facility was originally scheduled to mature on September 23, 2002, but on January 17, 2003, the facility was amended to extend the term of the facility to expire on November 30, 2003. This amendment also increased the maximum amount of available credit to $3,500,000, and provided a term loan of $750,000 (consisting of the original balance of $346,300 and a new term loan of $403,700) that is repayable in 30 equal consecutive monthly installments of $24,700, 19 commencing February 1, 2003, with a final payment of $8,000. Based on the Company's current level of accounts receivable and inventory, the Company has drawn the maximum amount permitted under the line of credit. As of June 30, 2003, the total amount outstanding on the line of credit was approximately $1,586,900. Nedcor Bank Limited Option Facility: Necor Bank Limited, a South African registered company, has provided UBSN with a multi-currency option facility of GBP 1,250,000. This overdraft facility has an interest rate of 1.5% over Necor Bank's base rate, and is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of June 30, 2003 was approximately $854,900. Shepherd Neame Loan: Shepherd Neame has a contract with UBSN to brew Kingfisher Lager for the Company's European and Canadian markets. As consideration for extending the brewing contract, Shepherd Neame advanced a loan of GBP 600,000 to UBSN, repayable in annual installments of GBP 60,000 per year, commencing in June 2003. UBSN has repaid GBP 60,000 as of June 2003 and the amount outstanding as of June 30, 2003 is GBP 540,000. The loan carries an interest rate of 5%. Interest: The weighted average interest rates paid on the Company's U.S. debts (including the long term capital lease of equipment by FINOVA Capital Corporation Inc.) was 7.39% for the first six months of the year 2003 and 8.44% for the corresponding period of 2002. Keg Management Arrangement: The Company has entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. The agreement has been extended on a monthly basis since September 2002. If, on any given month, the agreement is not extended and terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurance that the Company will be able to finance the purchase of kegs. Failure to extend the contract or failure to purchase the necessary kegs from MicroStar on termination of contract is likely to have a material adverse effect on the Company. Overdue Property Taxes: As of June 30, 2003, the delinquent property taxes due on the Company's Ukiah property, including penalties and interest, totaled $710,600. This amount represents the overdue taxes for the period from April of 1999 to June of 2003. The Company entered into a payment plan on July 31, 2003 to settle the amount of overdue taxes. The Company made an initial payment of $143,000 under the plan. The balance of the overdue taxes would then be paid in four subsequent annual installments, on or before April 10 of each year, of 20% or more of the original overdue balance, along with accrued interest calculated at 18% per year. Because of the large amount of taxes owed, and the County's ability to sell the Ukiah property to satisfy a delinquency, failure to settle all current and future property taxes including payments due under the payment plan may have serious adverse effect on the Company's business and financial condition. Restricted New Assets: UBI has undistributed earnings of approximately $1,895,000, because its line of credit agreement restricts payments and dividends to the parent company to $150,000 per year. Summary: The Company must make timely payment of its debt and lease commitments to 20 continue its operations. To fund its operating deficits over the past six years, the Company has relied upon lines of credit and other credit facilities. Management had success in negotiating these credit facilities in the past and expects to successfully negotiate these facilities in the future. However, there can be no assurance that the Company will have access to any such sources of funds in the future, and the inability to secure sufficient funds will have a materially adverse effect on the Company. Further, the CIT Group line of credit is due for renewal in November 2003, and the Finova Lease terminates in November 2003. Failure to renew these facilities would have a material adverse impact on the Company. CURRENT RATIO The Company's ratio of current assets to current liabilities on June 30, 2003 was 0.63 to 1.0 and its ratio of total assets to total liabilities was 1.39 to 1.0. On June 30, 2002, the Company's ratio of current assets to current liabilities was 0.58 to 1.0 and its ratio of total assets to total liabilities was 1.51 to 1.0. UNION REPRESENTATION On February 28, 2003, approximately 20 employees engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery elected Teamsters Local No. 896, International Brotherhood of Teamsters, AFL-CIO to represent them as a collective bargaining agent. The Company has commenced negotiation of the collective bargaining agreement. Upon the execution of the agreement, all of such 20 employees' positions must be held and filled by members of the union. ITEM 3. CONTROLS AND PROCEDURES. The Company's Management including the Chief Executive Officer, President and Chief Financial Officer, have evaluated the effectiveness of the design, maintenance, and operation of the Company's disclosure controls and procedures during the period of time covered by this report. Management determined that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accurate and is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. 21 PART II ITEM 1. LEGAL PROCEEDINGS. The Company had a written distribution agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company ("GGD") for the distribution of beer products in certain counties, including Napa and Marin counties. Pursuant to the express terms of this agreement, the Company had the right to terminate the agreement without cause upon 30 days' written notice to GGD. The Company exercised its contractual right to terminate the agreement by written notice, such termination to be effective on or about March 28, 2003. On April 1, 2003, GGD filed an action in Marin County Superior Court, naming the Company and Mark Anderson (Mr. Anderson is employed by the Company as a sales manager) as defendants. GGD claims that the termination of the agreement was wrongful in that there was no "good cause" reason therefor, and that, in terminating the agreement, the Company committed various business torts against GGD. GGD has sued the Company for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, negligent and intentional interference with economic relationships. GGD seeks compensatory damages, disgorgement of profits, punitive damages, interest, and reasonable attorneys' fees. GGD's claims against Mr. Anderson, individually, are limited to the two interference tort claims. Because Mr. Anderson is an employee of the Company, the Company may have some obligation to indemnify Mr. Anderson for his costs and expenses in connection with these claims. In informal discussions, GGD's attorney has claimed that GGD is entitled to a recovery of compensatory damages in an amount no less than seven years' profit margins realized by GGD during its distributorship of the Company's products. The Company believes that even though the agreement did not require a showing of good cause for termination, the Company nevertheless had ample good cause to terminate the agreement, and that, by failing to perform according to the contract, GGD has breached its contract with the Company. Moreover, during the thirty days' notice period that the Company gave GGD prior to termination, GGD engaged in tortious conduct that constituted wrongful interference with the Company's contractual relationships and economic advantage, trade libel and unfair business practices. The Company has filed a cross-complaint against GGD asserting these claims and seeking the appropriate remedies, including compensatory and punitive damages. During the second quarter of the year 2003, the Company received $655,200 from two new distributors in exchange for the Company's business in the former territory of GGD. Normally the changing of distributors occurs outside of the Company, and the new distributors pay the old distributors for developing the territory. Because of the dispute between the Company and GGD, the Company determined that the new distributors should pay these funds directly to the Company. The Company will use these funds to pay off any obligation owed to GGD once the legal matters have been settled. ITEM 2. CHANGES IN SECURITIES. None. 22 ITEM 3. DEFAULT UPON SENIOR SECURITIES. ------------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. --------------------------------------------------- None. ITEM 5. OTHER ITEMS. ------------ None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. --------------------------------- (a) Exhibits. Page No. 31.1 Certification of Principal Executive Officer Pursuant to 25 Rule 13a-14(a) or Rule 15d-14(a) 31.2 Certification of Principal Financial Officer Pursuant to 27 Rule 13a-14(a) or Rule 15d-14(a) 32.1 Certification Pursuant to Title 18, U.S.C. Section 1350 29 32.2 Certification Pursuant to Title 18, U.S.C. Section 1350 30 (b) Current Reports on Form 8-K None. SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. REGISTRANT: MENDOCINO BREWING COMPANY, INC. Dated: August 12, 2003 By: /s/ Dr. Vijay Mallya ------------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: August 12, 2003 By: /s/ N. Mahadevan ------------------------------------- N. Mahadevan Chief Financial Officer and Secretary 23 EXHIBIT LIST Page No. -------- 31.1 Certification of Principal Executive Officer Pursuant to 25 Rule 13a-14(a) or Rule 15d-14(a) 31.2 Certification of Principal Financial Officer Pursuant to 27 Rule 13a-14(a) or Rule 15d-14(a) 32.1 Certification Pursuant to Title 18, U.S.C. Section 1350 29 32.2 Certification Pursuant to Title 18, U.S.C. Section 1350 30 24 EX-31 3 mendocino61403_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS STATEMENT OF PRINCIPAL EXECUTIVE OFFICER I, Dr. Vijay Mallya, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business 25 issuer's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Dr. Vijay Mallya -------------------------------------------------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: August 12 , 2003 26 EX-31 4 mendocino61403_ex31-2.txt EXHIBIT 31.2 STATEMENT OF PRINCIPAL FINANCIAL OFFICER I, N. Mahadevan, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and 27 b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ N. Mahadevan ------------------------------------------------- N. Mahadevan, Chief Financial Officer Date: August 12, 2003 28 EX-32 5 mendocino61403_ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-QSB for the quarterly period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Vijay Mallya, Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Dr. Vijay Mallya - -------------------------------------- Title: Chief Executive Officer Date: August 12, 2003 29 EX-32 6 mendocino61403_ex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-QSB for the quarterly period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, N. Mahadevan, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ N. Mahadevan - -------------------------------------- Title: Chief Financial Officer Date: August 12, 2003 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. 30 -----END PRIVACY-ENHANCED MESSAGE-----