-----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, RTMs9oXwFlTmyArYFPpszCnAbc/ssLVSP/VJfsFImubrXT/u1nZHh9s5agIKtO7h ev50kRQy/J+fCo+JQRJ9NQ== 0001188112-04-000797.txt : 20040517 0001188112-04-000797.hdr.sgml : 20040517 20040517163432 ACCESSION NUMBER: 0001188112-04-000797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040517 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 04812938 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 10-Q 1 t10q-2658.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 Or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 2004 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission file number 1-13636 Mendocino Brewing Company, Inc. (Exact name of Registrant as Specified in its Charter) California 68-0318293 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 1601 Airport Road, Ukiah, CA 95482 (Address of principal executive offices) (707) 463-6610 (Registrant's Telephone Number, Including Area Code) Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The number of shares of the issuer's common stock outstanding as of March 31, 2004 is 11,266,874.
PART I ITEM 1. FINANCIAL STATEMENTS. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS MARCH 31, DECEMBER 31, 2004 2003 CURRENT ASSETS Cash $ 703,100 $ 554,300 Accounts receivable, allowance for doubtful 6,674,400 7,017,700 accounts of $38,200 and $37,800 Inventories 1,104,300 1,186,100 Prepaid expenses 428,600 555,500 ------------ ------------ Total Current Assets: 8,910,400 9,313,600 ------------ ------------ PROPERTY AND EQUIPMENT 13,762,900 13,874,800 ------------ ------------ OTHER ASSETS Deposits and other assets 198,100 188,600 Intangibles net of amortization 93,300 94,700 ------------ ------------ Total Other Assets: 291,400 283,300 ------------ ------------ Total Assets: $ 22,964,700 $ 23,471,700 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit 2,415,700 1,974,800 Note payable 576,200 576,200 Accounts payable 5,172,500 5,340,100 Accrued liabilities 1,048,500 1,275,100 Deferred gain 683,600 655,200 Income taxes payable 341,300 465,100 Current maturities of obligation under long-term debt 610,500 693,700 Current maturities of obligation under capital lease 141,000 129,000 ------------ ------------ Total Current Liabilities: 10,989,300 11,109,200 NOTES TO RELATED PARTY 1,942,100 1,921,500 Long term debt, less current maturities 3,670,700 3,730,300 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 168,300 204,100 ------------ ------------ Total Liabilities: 16,770,400 16,965,100 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 10,000,000 shares authorized, 227,600 shares issued and outstanding 227,600 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 14,648,600 Accumulated comprehensive income 140,100 78,000 Accumulated deficit (8,822,000) (8,447,600) ------------ ------------ Total Stockholders' Equity 6,194,300 6,506,600 ------------ ------------ Total Liabilities and Stockholders' Equity: $ 22,964,700 $ 23,471,700 ============ ============ The accompanying notes are an integral part of these financial statements.
-1- MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ------------------------------- Three Months Ended March 31, ------------------------------- 2004 2003 ---- ---- Sales $ 6,946,000 $ 6,009,900 Less excise taxes 142,800 139,800 ------------ ------------ Net Sales 6,803,200 5,870,100 Cost of goods sold 4,634,800 3,994,600 ------------ ------------ Gross Profit 2,168,400 1,875,500 ------------ ------------ Marketing 1,328,300 1,149,900 General and administrative 984,100 783,300 ------------ ------------ 2,312,400 1,933,200 ------------ ------------ Loss from operations (144,000) (57,700) ------------ ------------ Other income (expense) Miscellaneous income 4,000 4,900 Loss on sale of asset (1,600) --- Interest expense (212,000) (205,400) ------------ ------------ (209,600) (200,500) ------------ ------------ Loss before income taxes (353,600) (258,200) PROVISION FOR INCOME TAXES 20,800 31,200 ------------ ------------ Net Loss (374,400) (289,400) ------------ ------------ Foreign currency translation adjustment 62,100 (11,500) ------------ ------------ COMPREHENSIVE LOSS $ (312,300) $ (300,900) ============ ============ NET Loss per share $ (0.03) $ (0.03) ============ ============ Weighted average common shares outstanding 11,266,874 11,266,874 ============ ============ The accompanying notes are an integral part of these financial statements. -2- MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ------------------------------- Three Months Ended March 31, ------------------------------- 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $(374,400) $(289,400) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 302,700 286,500 Allowance for doubtful accounts 38,200 20,000 Loss on sale of assets 1,600 -- Changes in: Accounts receivable 485,600 (26,900) Inventories 81,800 84,000 Prepaid expenses 136,400 221,100 Deposits and other assets (16,200) 9,400 Accounts payable (276,600) (708,900) Accrued liabilities (357,100) 133,600 Income taxes payable -- (54,200) --------- --------- Net cash from operating 22,000 (324,800) --------- --------- activities: CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and (156,300) (118,300) leasehold improvements Proceeds from sale of fixed assets 3,300 -- --------- --------- Net cash from investing activities: (153,000) (118,300) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on line of credit 416,700 203,500 Net (repayment)/borrowing on long-term debt (172,900) 252,500 Borrowings on related party debt 20,600 21,500 Payments on obligation under long term lease (23,800) (18,600) Disbursements in excess of deposits -- (47,700) --------- --------- Net cash from financing activities: 240,600 411,200 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 39,200 (7,000) --------- --------- NET CHANGE IN CASH 148,800 (38,900) --------- --------- CASH, beginning of period 554,300 146,800 --------- --------- CASH, end of period $ 703,100 $ 107,900 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 191,400 $ 183,900 Non-cash investing activity Seller Financed equipment $ 15,400 $ 28,500 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, 2003. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The Company's line of credit from CIT Group and its temporary loan from Savings Bank of Mendocino (both of which are more fully described below under "Other Loans and Credit Facilities") are scheduled to fall due on June 30 and June 23, 2004, respectively. A failure to replace, renegotiate, or extend either of these agreements would have a significant adverse impact on the Company's liquidity and operations. Although Management has been able to do so in the past, there can be no assurance that the Company will have access to the same or equivalent sources of funds in the future, either on a comparable basis or on any other terms acceptable to the Company. On April 4, 2004, MBC received a commitment from United Breweries of America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA would provide MBC with such financial assistance as may be in UBA's power to prevent or avoid any default under either the CIT Group line of credit or the temporary loan from Savings Bank of Mendocino County when they become due. The terms of any such assistance have not yet been determined, however. NOTE 2 - 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 the qualified accounts receivable and 60% of the inventory at a current interest rate equal to the prime rate of Chase Manhattan Bank of New York plus 4.25% payable monthly, originally scheduled to mature on September 23, 2002. 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. -4- 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. CIT group amended and extended the facility on December 1, 2003, January 30, 2004, and February 27, 2004 in order to allow the Company time to refinance. On May 3, 2004 CIT Group extended the term of the facility to expire on June 30, 2004 and increased the term loan repayment to $9,000 per week. 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 March 31, 2004, the total amount outstanding on the line of credit was approximately $1,668,000. Nedbank Limited, a South African registered company, has provided a credit facility of GBP 1,250,000 to UBSN Ltd. ("UBSN"), a wholly-owned subsidiary of United Breweries International (UK) Ltd. ("UBI"), which is in turn wholly-owned by the Company. This facility includes a revolving short-term loan, overdraft protection, and foreign exchange services. It is available until terminated by Nedbank, and is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of March 31, 2004 was approximately $1,124,400. NOTE 3 - LONG TERM DEBT, NOTE PAYABLE, AND NOTES TO RELATED PARTIES The Company has a note outstanding in the principal amount of $2,700,000 in favor of Savings Bank of Mendocino County ("SBMC"), with interest at the five-year treasury constant maturity index plus 4.17%, currently 7.24%. The note requires monthly payments of principal and interest of $24,400. The note matures in December 2012 with a balloon payment of $932,600, and is secured by real property located in Ukiah, California. On December 31, 2003, SMBC extended a temporary loan in the principal amount of $576,200 to the Company in order to finance buy-out of equipment leased through Finova Capital Corporation. This loan, which is due for repayment on June 23, 2004, is secured by the existing assets of the Company and the assets released by Finova on lease termination. The rate of interest on the loan is 7%. The Company owes the County of Mendocino $574,500, which represents overdue taxes for the period from April of 1999 to June of 2003. Under the payment plan executed with the County, this amount is payable in four annual installments on or before April 10 of each year, commencing in the year 2005, along with accrued interest calculated at 18% per year. Failure to timely pay any installment or any current property taxes may result in the County selling the Company's Ukiah property to satisfy this outstanding debt. -5- 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 ten annual installments of GBP 60,000, commencing in June 2003. At the time of the filing this report, GBP 600,000 was approximately equal to $1,104,000, therefore, each payment of 60,000 GBP would be approximately equal to $110,400. The loan carries an interest rate of 5% per year. The Company has issued unsecured convertible notes in favor of UBA in the amount of approximately $1,515,400 as of September 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 March 31, 2004, is approximately $426,700. Because these notes are subordinated to the CIT line of credit and SBMC note, the Company does not expect to make payments on the notes within the next year. The Company expects the maturity dates to be extended again and has shown the amount as long-term debt. NOTE 4 -- RELATED PARTY TRANSACTIONS During 2001, 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 Limited; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. Additional information about these transactions may be found in the Company's annual report on Form 10-KSB for the year ended December 31, 2003. The following table reflects the value of the transactions for the quarters ended March 31, 2004 and 2003 and the balances outstanding at March 31, 2004 and 2003. - ------------------------------------------------- -------------- -------------- March 31, 2004 2003 - ------------------------------------------------- -------------- -------------- Sales to Shepherd Neame $522,500 $428,900 - ------------------------------------------------- -------------- -------------- Purchases from Shepherd Neame 2,989,700 2,329,300 - ------------------------------------------------- -------------- -------------- Expenses reimbursement to Shepherd Neame 243,100 206,700 - ------------------------------------------------- -------------- -------------- Interest expenses associated with UBA convertible notes payable 20,600 21,500 - ------------------------------------------------- -------------- -------------- Accounts payable to Shepherd Neame 3,228,200 2,280,700 - ------------------------------------------------- -------------- -------------- Account receivable from Shepherd Neame 516,400 201,400 - ------------------------------------------------- -------------- -------------- -6- NOTE 5 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Basic earnings per share (EPS) is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed by dividing income available to shareholders by the weighted average number of common shares and common equivalent shares outstanding, which include dilutive stock options and notes payable convertible in common stock. Common equivalent shares associated with stock options and convertible notes payable have been excluded from periods with a net loss as the potentially dilutive shares would be antidilutive.
Three months ended ------------------ 3/31/2004 3/31/2003 --------------------------------------- Net (loss) $(374,400) $(289,400) ======================================= Weighted average common shares outstanding 11,266,874 11,266,874 ======================================= Basic net (loss) per share $ (0.03) $ (0.03) ======================================= Diluted net loss per share Net loss $ (374,400) $ (289,400) Interest expense on convertible notes payable - - --------------------------------------- Income for the purpose of computing diluted net income per share $ (374,400) $ (289,400) ======================================= Weighted average common shares outstanding 11,266,874 11,266,874 Dilutive stock options - - Assumed conversion of convertible notes payable - - --------------------------------------- Weighted average common shares outstanding for 11,266,874 11,266,874 the purpose of computing diluted net loss per share ======================================= Diluted net loss per share $ (0.03) $ (0.03) =======================================
-7- NOTE 6 - INVENTORY March 31, 2004 December 31, 2003 ------------------------------------------- Raw Materials $ 351,200 $ 459,600 Beer-in-process 199,600 190,400 Finished Goods 536,100 510,000 Merchandise 17,400 26,100 ------ ------ TOTAL $ 1,104,300 $1,186,100 =========== ========== NOTE 7 - STOCKHOLDERS' EQUITY The following table summarizes equity transactions during the three months ended March 31, 2004.
SERIES A OTHER PREFERRED STOCK COMMON STOCK COMPREHENSIVE ---------------------------------------------------- INCOME/ ACCUMULATED TOTAL SHARES AMOUNT SHARES AMOUNT (LOSS) DEFICIT EQUITY ------------ ------------ ------------ ------------ ------------- ------------ ------------ Balance December 31, 2003 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 78,000 $(8,447,600) $ 6,506,600 Net Loss (374,400) (374,400) Currency Translation Adjustment 62,100 62,100 ------------ ------------ ------------ ------------ ------------- ------------ ------------ Balance, March 31, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 140,100 $(8,822,000) $ 6,194,300 ============ ============ ============ ============ ============= ============ ============
-8- NOTE 8 - 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 March 31, - ------------------------------------------------------------------------------- 2004 2003 - ------------------------------------------------- -------------- -------------- Net Loss reported $(374,400) $(289,400) - ------------------------------------------------- -------------- -------------- Deduct: Total stock-based employee compensation expense determined under fair value based methods for all awards, net of tax related effects -- -- - ------------------------------------------------- -------------- -------------- Pro forma Net Income (Loss) $(374,400) $(289,400) - ------------------------------------------------- -------------- -------------- Earning Per Share - ------------------------------------------------- -------------- -------------- Basic and diluted (as reported) $ (0.03) $ (0.03) - ------------------------------------------------- -------------- -------------- Basic and diluted (pro forma) $ (0.03) $ (0.03) - ------------------------------------------------- -------------- -------------- -9- NOTE 9. SEGMENT INFORMATION The Company's business segments are brewing operations, distributing operations in the United Kingdom, and retail sales at the Hopland Brewery and the tasting room at Saratoga Springs. A summary of each segment is as follows:
Three months ended March 31, 2004 Domestic European Retail Corporate & Operations Territory Operations Others Total Net Sales $ 2,298,600 $ 4,466,700 $ 37,900 $ - $ 6,803,200 Operating Profit/(Loss) (199,500) 63,200 (7,700) - (144,000) Identifiable Assets 13,444,000 7,250,700 93,700 2,176,300 22,964,700 Depreciation & amortization 185,600 108,500 1,300 7,300 302,700 Capital Expenditures 15,400 140,900 - 156,300 Three months ended March 31, 2003 Domestic European Retail Corporate & Operations Territory Operations Others Total Net Sales $ 2,247,400 $ 3,532,300 $ 90,400 $ - $ 5,870,100 Operating Profit/(Loss) (168,900) 128,800 (17,600) - (57,700) Identifiable Assets 14,214,000 5,554,900 110,500 1,789,000 21,668,400 Depreciation & amortization 187,500 86,700 1,300 11,000 286,500 Capital Expenditures 28,500 89,800 - 118,300
-10- NOTE 10 - LEGAL DISPUTES Effective March 28, 2003, the Company 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, naming the Company and Mark Anderson (Mr. Anderson is employed by the Company as a sales manager) as defendants. Because Mr. Anderson is an employee of the Company, the Company may have some obligation to indemnify him for his costs and expenses in connection with these claims. GGD claims 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, and intentional interference with economic relationships. The Company believes that cause was not required to terminate the agreement, but even if cause was required, the Company believes it had sufficient cause to terminate the agreement. The Company filed a cross-complaint against GGD alleging breach of contract, tortious interference with prospective economic advantage, and unfair business practices. The Company is seeking the appropriate remedies, including compensatory and punitive damages. During the second quarter of the year 2003, the Company received $655,200 from the two new distributors for the territories of Napa, Solano, Marin, and Sonoma Counties. The Company has treated this receipt as deferred gain pending disposal of the lawsuit. -11- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three months ended March 31, 2004, compared to the three months ended March 31, 2003 and the year ended December 31, 2003. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the company's Annual Report on Form 10-KSB for the year ended December 31, 2003. 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. -12- CRITICAL ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value the majority of the Company's inventories. o The Company follows Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," in accounting for its employee stock options using the fair value based method. o The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company's evaluation is based on an estimate of the future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived asset are written down to their estimated net fair value calculated using a discounted future cash flow analysis in the event of an impairment. If circumstances related to the Company's long-lived assets change, the Company's valuation of the long-lived assets could materially change. o The Company evaluates the realizability of its deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. This evaluation is based on an assessment of the Company's ability to generate future U.S. taxable income. Results of operations in recent years are considered in the assessment. The Company records a valuation allowance for the portion of its deferred tax assets that do not meet the recognition criteria of SFAS No. 109, "Accounting for Income Taxes." If circumstances related the Company's ability to generate future U.S. taxable income change, the Company's evaluation of its deferred tax assets could materially change. o The Company believes that it will prevail in the litigation involving Golden Gate Distributing (see "PART II, Item 1 - Legal Proceedings," below) and has not accrued any amount in connection with this litigation. -13- These accounting policies are applied consistently for all years presented. The Company's operating results would be affected if other alternatives were used. Information about the impact on operating results is included in the footnotes to the Company's consolidated financial statements. SEGMENT INFORMATION Prior to 2001, the Company's business operations were exclusively located in the United States, where it was divided into two segments, manufacturing and distribution of beer, which accounted for the majority of the Company's gross sales, and retail sales (primarily at the Company's Hopland, California, tavern and merchandise store) which generally accounted for less than 5% of gross sales (by revenue). With the Company's acquisition of United Breweries International(UK) , Ltd. ("UBI") in August 2001, however, the Company gained a new business segment, distribution of beer outside the United States, primarily in the U.K. and Ireland, continental Europe, and Canada (the "European Territory"). This segment accounted for 64% of the Company's gross sales during the first quarter of 2004 (as compared to 59% for the same period during 2003), with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales (the "Domestic Territory") accounting for the remaining 36%. With expanded wholesale distribution of beer and closure of restaurant at Hopland, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. SEASONALITY Sales of the Company's products are somewhat seasonal. Historically, sales volumes in all geographic areas have been comparatively low during the first quarter of the calendar year in both the US market and the Company's European Territory. In the US, sales volumes have been stronger during the second and third quarters and slower again during the fourth quarter, while in the Company's European Territory the fourth quarter has generated the highest sales volume. The volume of sales in any given area may also be affected by local weather conditions. Because of the seasonality of the Company's business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. SUMMARY OF FINANCIAL RESULTS The Company ended the first quarter of 2004 with a net loss of $355,400, as compared to a net loss of $289,400 for the same period in 2003. As set forth more fully under "Results of Operations," below, during the first quarter the Company experienced an increase in gross sales of $936,100, or 15.6% during the period, but this increase was offset by higher costs of goods sold (which increased by $640,200, or 16.0%), marketing costs (which increased by $178,400, or 15.5%), general and administrative costs (which increased by $200,800, or 25.6%), and higher interest expenses (which increased by $6,600, or 3.2%), all of which contributed to the net loss for the period. -14- RESULTS OF OPERATIONS The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto. ---------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 STATEMENTS OF OPERATIONS DATA: % % - - Sales 102.10 102.38 Less Excise taxes 2.10 2.38 ------- ------- NET SALES 100.00 100.00 Costs of Sales 68.13 68.05 ------- ------- GROSS PROFIT 31.87 31.95 ------- ------- Marketing 19.52 19.59 General and Administrative Expense 14.47 13.34 PROFIT / (LOSS) FROM OPERATIONS (2.12) (0.98) Other (Income) / Expense (0.04) (0.08) Interest Expense 3.12 3.50 ------- ------- Loss before income taxes (5.20) (4.40) Provision for income taxes 0.31 0.53 ------- ------- NET LOSS (5.51%) (4.93%) ======= ======= Other Comprehensive Loss 0.91 (0.20) ======= ======= COMPREHENSIVE LOSS (4.60%) (5.13%) ======= ======= ---------------------------- THREE MONTHS ENDED MARCH 31, ---------------------------- 2004 2003 BALANCE SHEET DATA: $ $ - - Cash and Cash Equivalents 703,100 107,900 Working Capital (2,078,900) (2,888,900) Property and Equipment 13,762,900 13,977,400 Deposits and Other Assets 291,400 279,100 Total Assets 22,964,700 21,668,400 Long-term Debt (less current maturities) 3,670,700 3,195,600 Capital Lease (less current maturities) 168,300 268,700 Total Liabilities 16,770,400 15,622,900 Accumulated Deficit (8,822,000) (8,783,900) Stockholder's equity 6,194,300 6,045,500 -15- NET SALES Overall net sales for the first quarter of 2004 were $6,803,200, an increase of $933,100, or 15.9%, compared to $5,870,100 for the first quarter of 2003. The increase was mainly due to increased sales of European operations and exchange rate fluctuations. DOMESTIC OPERATIONS: Domestic net sales for first quarter of 2004 were $2,336,500 compared to $2,337,800 for the same period in 2003, a reduction of 0.06%. The decrease in sales compared to previous year was due to decrease of $52,500 in retail sales during the first quarter of the year 2004 compared to corresponding period in the year 2003 because of the closure of the restaurant at Hopland in October 2003. The sales volume increased to 12,772 barrels in the first quarter of 2004 from 12,593 barrels in the first quarter 2003, representing an increase of 179 barrels, or 1.42%. Of the increase, sales of Company's brands decreased by 155 barrels; Kingfisher volume increased by 239 barrels and contract brands sales increased by 95 barrels. EUROPEAN TERRITORY: Net sales for the first quarter of 2004 were $4,466,700 (GBP 2,428,100) compared to $3,532,300 (GBP 2,204,100) during the corresponding period of 2003, an increase of 26.45%. During the first quarter of 2004, UBSN sold 14,389 barrels compared to 12,980 barrels during the first quarter of 2003. Exchange rate fluctuations when measured in United States dollars increased growth percentage as compared to last year and hence when the net sales results are compared in Pounds Sterling, there is an increase of 10.16%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first quarter of 2004 was 68.13%, as compared to 68.05% during the corresponding period of 2003 mainly due to increased cost in the United Kingdom. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during the first quarter of 2004 was 71.13%, as compared to 71.68%, during the corresponding period of 2003, representing a decrease of 0.77% mainly due to a decrease in retail operation costs because of closure of the restaurant at Hopland. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the first quarter of 2004 was 66.93%, as compared to 66.07% during corresponding period in 2003 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing increase of 1.3% mainly due increase in purchase price of the products from Shepherd Neame. GROSS PROFIT As a result of the higher net sales described above, gross profit for the first quarter 2004 increased to $2,168,400, from $1,875,500 during the corresponding period of 2003, representing an increase of 15.62%. As a percentage of net sales, the gross profit during the first quarter of 2004 decreased to 31.87% from that of 31.95% for the first quarter of 2003. OPERATING EXPENSES Operating expenses for the first quarter of the year 2004 were $2,312,400, an increase of $379,200, or 19.62%, as compared to $1,933,200 for the corresponding period of the year 2003. Operating expenses consist of marketing and distribution expenses and general and administrative expenses. MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and distribution expenses consist of salesmen's salaries and commissions, advertising costs, product and sales promotion costs, travel expenses and related costs and Company's tavern and tasting room expenses. Such expenses for the first quarter of 2004 were $1,328,300, as compared to $1,149,900 for the first quarter of 2003, representing an increase of 15.51%. DOMESTIC OPERATIONS: Expenses for the first quarter of 2004 were $400,300 compared to $400,900 during the corresponding period of 2003, representing a decrease of $600. As a percentage of net sales in the United States, the expenses decreased to 17.13% during the first quarter of 2004, compared to 17.15% during the corresponding period of 2003. There were increases in salary and travel costs during the first quarter of the year 2004 compared to the corresponding period of 2003 due to increased man power at both coasts which was offset by reduction in tavern and tasting room expenses due to closure of the restaurant at Hopland. -16- EUROPEAN TERRITORY: Expenses for the first quarter of 2004 were $928,000 compared to $749,000 during the corresponding period of 2003, representing an increase of $179,000. As a percentage of net sales in the United Kingdom, the expenses decreased to 20.78% during the first quarter of 2004 compared to 21.2% during the corresponding period of 2003 (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 increase in manpower and travel costs due to additional man power, increase in sales promotional expenses and higher commission and discount on increased sales. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $984,100 for the first quarter of the year 2004, representing an increase of $200,800, or 25.64%, over $783,300 for the corresponding period in 2003. These expenses were equal to 14.47% of net sales for the first quarter of the year 2004, as compared to 13.34% for corresponding period in 2003. DOMESTIC OPERATIONS: Domestic general and administrative expenses were $498,300 for the first quarter of the year 2004, representing an increase of $35,700, or 7.72%, over $462,600 for the first quarter of the year 2003. The increase was primarily due to increased legal expenses caused by legal dispute with a distributor. EUROPEAN TERRITORY: General and administrative expenses related to the European Territory were $485,800 for the first quarter of the year 2004, representing an increase of $165,100, or 51.48%, as compared to $320,700 for the first quarter of the year 2003 (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 higher salary costs, higher exchange rate differences within the European territory and increased depreciation expenses. OTHER EXPENSES Other expenses for the first quarter of 2004 totaled $209,600, representing an increase of $9,100 when compared to the first quarter of 2003 mainly due to increase in interest expenses as a result of increased borrowings under the lines of credit. INCOME TAXES The Company has a provision for income taxes of $20,800 for the first quarter of 2004, compared to $31,200 for the first quarter of 2003. The provision for taxes related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. NET LOSS The Company's net loss for the first quarter of 2004 was $374,400, as compared to a loss of $289,400 for the first quarter of 2003. After providing for a positive foreign currency translation adjustment of $62,100 during the first quarter of 2004 (as compared top a negative adjustment of $11,500 for the same period in 2003), the comprehensive loss for the first quarter of 2004 was $312,300, compared to a loss of $300,900 for the same period in 2003. -17- CAPITAL DEMANDS The Company's Ukiah and Releta facilities are both operating at significantly less than full capacity (as they have been for some time), placing continuing 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 its Ukiah facility, and 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 construction and landscaping, the remaining work and the currently cost thereof are estimated to be 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. PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS The Company must make timely payment of its debt and lease commitments to continue its operations. Beginning at about the time when the Ukiah brewery commenced operations (the second quarter of 1997), 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. LIQUIDITY AND CAPITAL RESOURCES The Company has entered into a substantial number of loans, lines of credit, other credit facilities, and lease agreements over the last several years, with the result that a substantial majority of its assets are encumbered and it is carrying a relatively large debt burden. 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 impossible, at least in the short term, for the Company to continue its operations. In particular, MBC's line of credit from CIT Group and its temporary loan from Savings Bank of Mendocino (both of which are more fully described below under "Other Loans and Credit Facilities") are scheduled to fall due on June 23 and June 30, 2004, respectively. A failure to replace, renegotiate, or extend either of these agreements would have a significant adverse impact on the Company's liquidity and operations. Although Management has been able to do so in the past, there can be no assurance that the Company will have access to the same or equivalent sources of funds in the future, either on a comparable basis or on any other terms acceptable to the Company. -18- On April 4, 2004, MBC received a commitment from United Breweries of America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA would provide MBC with such financial assistance as may be in UBA's power to prevent or avoid any default under either the CIT Group line of credit or the temporary loan from Savings Bank of Mendocino County when they become due. The terms of any such assistance have not yet been determined, however. 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 executed an Extension of Term of Notes under Master Line of Credit Agreement in February 2002, which was later amended in August 2002, and again in March and August 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 ending on August 14, 2004. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which confirms that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. As of the date of this filing, UBA has made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). The aggregate outstanding principal amount of the UBA Notes as of March 31, 2004 was $1,515,400, and the accrued but unpaid interest thereon was equal to approximately $426,700. The UBA Notes require the Company to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted the Company to capitalize all accrued interest; therefore, the Company has borrowed the maximum amount available under the facility. Upon maturity of any UBA Note, unless UBA has given the Company prior instructions to commence repayment of the outstanding principal balance, the outstanding principal and accrued but unpaid interest on such Note may be converted, at the option of UBA, into shares of the Company's common stock. If UBA does not elect to so convert any UBA Note upon maturity, it has the option to extend the term of such UBA Note for any period of time mutually agreed upon by UBA and the Company. During the extended term of any UBA Note, UBA has the right to require the Company to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days. The outstanding principal amount of the Notes and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of March 31, 2004, the outstanding principal and interest on the notes was convertible into 1,294,718 shares of the Company's Common Stock. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which provides a written confirmation that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. LONG TERM DEBT: MBC has obtained a $2.7 million loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in partially amortizing monthly installments of $24,400 including interest at the rate of 7.24%, maturing December 2012 with a balloon payment in the amount of $932,600. The interest rate is adjusted on every five year anniversary of the agreement to the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon payment will vary depending on the change in interest rates over the years. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment. -19- 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 the qualified accounts receivable and 60% of the inventory at a current interest rate equal to the prime rate of Chase Manhattan Bank of New York plus 4.25 %, payable monthly, originally scheduled to mature on September 23, 2002. 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. On January 17, 2003, the term of this facility was extended to November 30, 2003. At the same time, the maximum credit available was increased to $3,500,000, and the Company was 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. CIT group amended and extended the facility on December 1, 2003, January 30, 2004, and February 27, 2004 in order to allow the Company time to refinance. On May 3, 2004 CIT Group further extended the term of the facility to expire on June 30, 2004 and increased the term loan repayment to $9,000 per week. 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 March 31, 2004, the total amount outstanding on the line of credit was approximately $1,668,000. Management believes that it will be successful in refinancing this agreement, but failure to do so would have a significant impact on the Company's liquidity and operations. SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a temporary loan in the principal amount of $576,200 to the Company in order to finance buy-out of equipment leased through Finova Capital Corporation. This loan, which is due for repayment on June 23, 2004, is secured by the existing assets of the Company and the assets released by Finova on lease termination. The rate of interest on the loan is 7%. Management believes that it will be successful in refinancing this agreement, but failure to do so would have a significant impact on the Company's liquidity and operations. NEDBANK LIMITED OPTION FACILITY: Nedbank Limited, a South African registered company ("Nedbank"), has provided UBSN with a multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft facility, which may be terminated by Nedbank at any time (with or without default) on thirty days' notice, is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of March 31, 2004 was approximately $1,124,400. The Company believes that Nedbank will continue to extend this facility, although there can be no guarantee that it will not call the outstanding balance at any time. A number of factors, including for instance adverse changes in the Company's financial condition, changes in Nedbank's lending policies unrelated to the Company, or adverse economic developments generally, could cause Nedbank to decline to do so. If Nedbank were to exercise its option to call the amount outstanding under this facility, the Company will have to find an alternative lender or source of funds to repay the balance owing to Nedbank. There can be no guarantee that the Company will be able to do so within the time frame provided under its agreements with Nedbank. SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher Lager for the Company's European and Canadian markets. As consideration for extending the brewing contract, Shepherd Neame advanced a loan of (pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of (pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan carries a fixed interest rate of 5% per year. -20- WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on the Company's U.S. debts was 7.58% for the first quarter of the year 2004 and 7.36% (including the long term capital lease of equipment by Finova Capital Corporation Inc.) for the corresponding period in 2003. For loans primarily associated with Company's European territory, the weighted average rate paid was 5.5% for the first quarter of the year 2004 and 5.25% for the corresponding period in 2003. KEG MANAGEMENT ARRANGEMENT: The Company 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. The Company is currently negotiating a new contract. 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 March 31, 2004, the delinquent property taxes due on the Company's Ukiah property, including penalties and interest, totaled $643,400, representing the balance due for overdue taxes for the period from April 1999 to June 2003. Pursuant to an agreement with Mendocino County, the balance of the overdue taxes will be paid in four annual installments, due on or before April 10, 2005, 2006, 2007, and 2008, each representing 20% or more of the original overdue balance, along with accrued interest calculated at 18% per year. Because of the large amount of taxes owed, and the County's ability to sell the Ukiah property to satisfy a delinquency, failure to settle these tax dues (including payments due under the payment plan) could have a serious adverse effect on the Company's business and financial condition. RESTRICTED NET ASSETS. The Company's wholly-owned subsidiary, UBI, has undistributed earnings of approximately $2,348,100 as of March 31, 2004. Under UBI's line of credit agreement, distributions and other payments to the Company from its subsidiary are limited to approximately $200,000 per year. CURRENT RATIO The Company's ratio of current assets to current liabilities on March 31, 2004 was 0.81 to 1.0 and its ratio of total assets to total liabilities was 1.37 to 1.0. On March 31, 2003, the Company's ratio of current assets to current liabilities was 0.61 to 1.0 and its ratio of total assets to total liabilities was 1.39 to 1.0. -21- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2004, the Company did not hold derivative instruments, or engage in hedging activities, of any material value or in any material amount, whether for trading or for hedging purposes. The Company has some interest-related market risk due to floating interest rate debt totaling $4,307,800 as of March 31, 2004. INTEREST RATE RISK The Company had total debt as of March 31, 2004 of $8,788,600, of which $4,307,800 was subject to variable rates of interest (either prime or LIBOR plus 1.5% or prime plus 4.25%). Its long-term debt (including current portion) as of March 31, 2004 totaled $5,796,600, of which $3,904,600 had fixed rates of interest and the balance of $1,892,000 were subject to variable rates. Short term debts amounted to $2,992,000, of which $576,200 were at fixed rates of interest and the remaining $2,415,800 were subject to variable rates. At current borrowing levels, an increase in prime and LIBOR rates of 1% would result in an annual increase of $43,100 in interest expense on the Company's variable rate loans. FOREIGN CURRENCY RATE FLUCTUATIONS The Company's earnings and cash flows at its subsidiaries UBI and UBSN are subject to fluctuations due to changes in foreign currency rates. The Company believes that changes in the foreign currency exchange rate would not have a material adverse effect on its results of operations as the majority of its foreign transactions are delineated in UBI's functional currency, the British Pound. ITEM 4. CONTROLS AND PROCEDURES The Company's Chairman of the Board, President, and Chief Financial Officer have evaluated the effectiveness of the design, maintenance, and operation of the Company's disclosure controls and procedures in effect during the period of time covered by this report. Based on this evaluation, they believe that the Company's disclosure controls and procedures were then effective in providing reasonable assurance that relevant information is timely identified and communicated, alerting them to material information required to be disclosed in the Company's periodic reports filed with or submitted to the SEC. Management is not aware of any material changes in the Company's internal or other controls over financial reporting identified in connection with that evaluation that have significantly affected, or are likely to affect, the Company's internal controls over financial reporting. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving the Company's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in such controls and procedures, including the fact that human judgment in decision making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. -22- PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Effective March 28, 2003, the Company terminated a written distribution agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company ("GGDC"). On April 1, 2003, GGDC filed an action in Marin County Superior Court, naming the Company and Mr. Mark Anderson (who is employed by the Company as a sales manager) as defendants, and seeking actual and punitive damages in an amount not stated in the complaint. GGDC's action asserts claims for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, and intentional interference with economic relationships, all arising out of the allegedly wrongful termination of the GGDC distribution agreement. On January 21, 2004, GGDC filed an amended complaint, naming as additional defendants Dr. Vijay Mallya, the Company's Chairman; United Breweries of America, Inc., one of its principal shareholders; and the distribution companies now servicing the territory formerly handled by GGDC. The amended complaint seeks to impose a constructive trust on $655,000 that the Company received from its new distributors, and alleges new causes of action for conspiracy and conversion. The Company could be found to have an obligation to indemnify some or all of the other defendants for their legal costs and expenses and for all or a portion of any judgment against them in the action. The Company disputes GGDC's allegations, and intends to vigorously defend the action. The Company has filed a cross-complaint against GGDC, alleging breach of contract, tortious interference with prospective economic advantage, and unfair business practices. The Company is seeking the appropriate remedies, including compensatory and punitive damages. The Company is unable at this time to evaluate the likelihood of an unfavorable outcome in this litigation, or to provide an estimate of the amount or range of the potential loss in such an event. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) EXHIBITS. 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 (b) CURRENT REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MENDOCINO BREWING COMPANY, INC. Dated: May 17, 2004 By: /s/ Dr. Vijay Mallya -------------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: May 17, 2004 By: /s/ N. Mahadevan -------------------------------------- N. Mahadevan Chief Financial Officer and Secretary -23- EX-31.1 2 tex31_1-2658.txt EX-31.1 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-Q of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Dr. Vijay Mallya --------------------------------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: May17, 2004 -24- EX-31.2 3 tex31_2-2658.txt EX-31.2 EXHIBIT 31.2 STATEMENT OF PRINCIPAL FINANCIAL OFFICER I, N. Mahadevan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ N. Mahadevan --------------------------------------- N. Mahadevan, Chief Financial Officer Date: May 17, 2004 -25- EX-32.1 4 tex32_1-2658.txt EX-32.1 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-Q for the quarterly period ended March 31, 2004 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: May 17, 2004 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. -26- EX-32.2 5 tex32_2-2658.txt EX-32.2 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-Q for the quarterly period ended March 31, 2004 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: May 17, 2004 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. -27- -----END PRIVACY-ENHANCED MESSAGE-----