-----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, NUViG5SymsSZ4DBpbjwaeXeI2qpwtNpOpmgvnDmDF6Be9HnbWG4oAm5LyR6lC4kj 7mDhO/TzF6UehVSgjlAiew== 0001188112-04-001214.txt : 20040816 0001188112-04-001214.hdr.sgml : 20040816 20040816154358 ACCESSION NUMBER: 0001188112-04-001214 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040816 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: 04978557 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-3338d.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 June 30, 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 July 31, 2004 is 11,266,874.
PART I ITEM 1. FINANCIAL STATEMENTS. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS JUNE 30, DECEMBER 31, 2004 2003 CURRENT ASSETS Cash $ 583,400 $ 554,300 Accounts receivable, net of allowance for 7,076,900 7,017,700 doubtful accounts of $49,000 and $37,800 Inventories 1,169,600 1,186,100 Prepaid expenses 412,500 555,500 ----------- ----------- Total Current Assets: 9,242,400 9,313,600 ----------- ----------- PROPERTY AND EQUIPMENT 13,632,400 13,874,800 ----------- ----------- OTHER ASSETS Deposits and other assets 193,300 188,600 Intangibles net of amortization 90,900 94,700 ----------- ----------- Total Other Assets: 284,200 283,300 ----------- ----------- Total Assets: $23,159,000 $23,471,700 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit 2,791,700 1,974,800 Note payable 576,200 576,200 Accounts payable 5,378,700 5,340,100 Accrued liabilities 823,000 1,275,100 Deferred gain 683,600 655,200 Income taxes payable 283,700 465,100 Current maturities of obligation under long-term 649,300 693,700 debt Current maturities of obligation under capital lease 146,700 129,000 ----------- ----------- Total Current Liabilities: 11,332,900 11,109,200 NOTES TO RELATED PARTY 1,963,100 1,921,500 Long term debt, less current maturities 3,409,200 3,730,300 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 129,500 204,100 ----------- ----------- Total Liabilities: 16,834,700 16,965,100 ----------- ----------- 1
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 10,000,000 shares authorized, 227,600 shares issued and outstanding 227,600 Common stock, no par value: 30,000,000 shares 227,600 authorized, 11,266,874 shares issued and 14,648,600 outstanding 14,648,600 Accumulated comprehensive income 78,000 103,700 Accumulated deficit (8,655,600) (8,447,600) ----------- ----------- Total Stockholders' Equity 6,324,300 6,506,600 ----------- ----------- Total Liabilities and Stockholders' Equity: $23,159,000 $23,471,700 =========== =========== The accompanying notes are an integral part of these financial statements. 2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED SIX MONTHS ENDED June 30 June 30 2004 2003 2004 2003 ---- ---- ---- ---- SALES $ 8,374,600 $ 7,285,400 $15,320,600 $13,295,300 EXCISE TAXES 187,500 172,500 330,300 312,300 ----------- ----------- ----------- ----------- NET SALES 8,187,100 7,112,900 14,990,300 12,983,000 COST OF GOODS SOLD 5,372,500 4,816,900 10,007,300 8,811,500 ----------- ----------- ----------- ----------- GROSS PROFIT 2,814,600 2,296,000 4,983,000 4,171,500 ----------- ----------- ----------- ----------- OPERATING EXPENSES Marketing 1,478,400 1,130,400 2,806,700 2,280,300 General and administrative 922,400 726,200 1,906,500 1,509,500 ----------- ----------- ----------- ----------- 2,400,800 1,856,600 4,713,200 3,789,800 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS 413,800 439,400 269,800 381,700 ----------- ----------- ----------- ----------- OTHER INCOME (EXPENSE) Other income 5,100 5,700 9,100 10,600 Profit on sale of equipment 15,600 --- 14,000 --- Interest expense (210,700) (202,400) (422,700) (407,800) ----------- ----------- ----------- ----------- (190,000) (196,700) (399,600) (397,200) ----------- ----------- ----------- ----------- INCOME (LOSS) before income taxes 223,800 242,700 (129,800) (15,500) PROVISION FOR INCOME TAXES 57,400 80,800 78,200 112,000 ----------- ----------- ----------- ----------- Net INCOME (Loss) $ 166,400 $ 161,900 $ (208,000) $ (127,500) ----------- ----------- ----------- ----------- OTHER COMPREHENSIVE INCOME / (LOSS), net of tax (36,400) 29,900 25,700 18,400 ----------- ----------- ----------- ----------- Foreign Currency Translation Adjustment COMPREHENSIVE Income (LOSS) $ 130,000 $ 191,800 $ (182,300) $ (109,100) =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ 0.01 $( 0.02) $ (0.01) ======= ======= ======= ======= DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.01 $ 0.01 $ (0.02) $ (0.01) ======= ======= ======= ======= The accompanying notes are an integral part of these financial statements. 3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (208,000) $ (127,500) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 536,400 561,200 Allowance for doubtful accounts 49,000 --- Profit on sale of assets (14,000) 1,900 Changes in: Accounts receivable 16,900 280,600 Inventories 16,500 117,700 Prepaid expenses 148,100 (212,300) Deposits and other assets (38,700) 55,700 Accounts payable (16,600) (1,149,900) Accrued liabilities (437,300) 232,500 Income taxes payable (189,900) --- ---------- ---------- Net cash from operating activities: (137,500) (240,100) ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements (280,100) (239,000) Proceeds from new distributors --- 655,200 Proceeds from sale of fixed assets 23,200 10,900 ---------- ---------- Net cash from investing activities: (256,900) 427,100 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on line of credit 807,500 289,300 Borrowing on long-term debt --- 403,700 Principal repayment on long-term debt (381,500) (302,000) Borrowings on related party debt 41,600 43,300 Payments on obligation under long term lease (56,900) (130,000) Disbursements in excess of deposits ---- (134,300) ---------- ---------- Net cash from financing activities: 410,700 170,000 ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 12,800 7,600 ---------- ---------- NET CHANGE IN CASH 29,100 364,600 ---------- ---------- CASH, beginning of period 554,300 146,800 ---------- ---------- CASH, end of period $ 583,400 $ 511,400 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 319,300 $ 364,500 Income taxes $ 100,300 $ 257,700 Non-cash investing activity Seller Financed equipment $ 26,500 $ 28,500 The accompanying notes are an integral part of these financial statements. 4
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION As used herein, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 six months ended June 30, 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 August 31 and September 18, 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. 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 Company did not grant any options in 2003 or 2004. 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. 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, February 27, 2004 and May 3, 2004 in order to allow the Company time to refinance. On July 1, 2004 CIT Group extended the term of the facility to expire 5 on August 31, 2004 and increased the term loan repayment to $10,000 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 June 30, 2004, the total amount outstanding on the line of credit was approximately $1,759,300. 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 June 30, 2004 was approximately $1,303,000. 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, SBMC extended a temporary loan in the principal amount of $576,200 to the Company in order to finance a buy-out of equipment leased through Finova Capital Corporation. This loan, which is due for repayment on September 18, 2004, is secured by the existing assets of the Company and the assets released by Finova on lease termination. The current rate of interest on the loan is 7.25%. 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. 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 $1,087,600, therefore, each payment of 60,000 GBP would be approximately equal to $108,800. 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 have since been extended to mature on August 31, 2005. 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, 2004, is approximately $447,700. 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. 6 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 six months ended June 30, 2004 and 2003 and the balances outstanding at June 30, 2004 and 2003.
- ------------------------------------------------------ -------------- -------------- 2004 2003 - ------------------------------------------------------ -------------- -------------- Sales to Shepherd Neame $1,230,600 $1,186,700 - ------------------------------------------------------ -------------- -------------- Purchases from Shepherd Neame 6,374,400 5,101,700 - ------------------------------------------------------ -------------- -------------- Expense reimbursement to Shepherd Neame 593,200 462,700 - ------------------------------------------------------ -------------- -------------- Interest expenses associated with UBA convertible 41,600 43,300 notes payable - ------------------------------------------------------ -------------- -------------- Accounts payable to Shepherd Neame 3,177,200 2,427,400 - ------------------------------------------------------ -------------- -------------- Account receivable from Shepherd Neame 633,900 544,900 - ------------------------------------------------------ -------------- --------------
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 Six Months Ended ------------------ ---------------- 6/30/2004 6/30/2003 6/30/2004 6/30/2003 ----------------------------------------------------------------------- Net income (loss) $ 166,400 $ 161,900 $ (208,000) $ (127,500) ======================================================================= 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 $ (0.02) $ (0.01) ======================================================================= Diluted net income (loss) per share Net income (loss) $ 166,400 $ 161,900 $ (208,000) $ (127,500) Interest expense on convertible notes payable 21,000 21,800 -- _ ----------------------------------------------------------------------- Income for the purpose of computing diluted net income per share $ 187,400 $ 183,700 $ (208,000) $ (127,500) ======================================================================= Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874 Dilutive stock options -- -- -- - Assumed conversion of convertible notes payable -- -- -- - ----------------------------------------------------------------------- Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 11,266,874 11,266,874 11,266,874 11,266,874 ======================================================================= Diluted net income (loss) per share $ 0.01 $ 0.01 $ (0.02) $ (0.01)
7 NOTE 6 - INVENTORY June 30, 2004 December 31, 2003 Raw Materials $ 464,400 $ 459,600 Beer-in-process 192,600 190,400 Finished Goods 493,800 510,000 Merchandise 18,800 26,100 ----------- ---------- TOTAL $ 1,169,600 $1,186,100 =========== ========== NOTE 7 - STOCKHOLDERS' EQUITY The following table summarizes equity transactions during the six months ended June 30, 2004.
SERIES A PREFERRED STOCK COMMON STOCK OTHER --------------------- -------------------------- COMPREHENSIVE ACCUMULATED TOTAL SHARES AMOUNT SHARES AMOUNT INCOME/(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 (208,000) (208,000) Currency Translation Adjustment 25,700 25,700 Balance, June 30, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 103,700 $ (8,655,600) $ 6,324,300 ========== ========= ============ ============ ============== ============ =============
8 NOTE 8. SEGMENT INFORMATION The Company's business segments are its domestic operations (brewing and sales in the United States), European territory (distribution operations in the United Kingdom), and retail operations (retail sales at the Hopland Brewery in Ukiah, California and the tasting room at Saratoga Springs, New York). A summary of each segment is as follows:
Six months ended June 30, 2004 Domestic European Retail Corporate & Total Operations Territory Operations Others Sales $ 5,740,800 $ 9,488,800 $ 91,000 $ - $ 15,320,600 Operating Profit/(Loss) 15,600 258,700 (4,500) -- 269,800 Identifiable Assets 13,394,000 7,105,000 95,100 2,564,900 23,159,000 Depreciation & amortization 302,000 216,600 2,500 15,300 536,400 Capital Expenditures 26,500 253,600 - - 280,100
9
Six months ended June 30, 2003 Domestic European Retail Corporate & Total Operations Territory Operations Others Sales $ 5,423,100 $ 7,655,400 $ 216,800 $ - $ 13,295,300 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 & 375,400 177,300 2,600 5,900 561,200 amortization Capital Expenditures 28,500 210,500 - - 239,000
NOTE 9 - 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 Mr. Anderson for his costs and expenses in connection with these claims. GGD subsequently sued four other non-company defendants GGD claims that the termination of the agreement was wrongful and sued the Company and/or Mr. Anderson for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, intentional interference with prospective economic advantage, conversion, and constructive trust, and seeks compensatory and punitive damages. 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 replacement 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. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the six months ended June 30, 2004, compared to the six months ended June 30, 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. 10 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 ("SEC") 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. 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. 11 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 We accrue contingent losses when management determines it is probable that a liability has been incurred or that an asset has been impaired and the amount of the loss can be reasonably determined. 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 they were divided into two segments: manufacturing and distribution of beer, which accounted for the majority of the Company's gross sales; and retail sales (primarily at the Company's Hopland, California, tavern and merchandise store) which generally accounted for less than 5% of gross sales (by revenue). With the Company's acquisition of United Breweries International (UK), Ltd. ("UBI") in August 2001, however, the Company gained a new business segment, distribution of beer outside the United States, primarily in the U.K. and Ireland, continental Europe, and Canada (the "European Territory"). This segment accounted for 62% of the Company's gross sales during the first six months of the year 2004 (as compared to 58% for the same period during 2003), with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales accounting for the remaining 38%. With expanded wholesale distribution of beer and closure of the restaurant in 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. 12 SUMMARY OF FINANCIAL RESULTS The Company ended the first six months of 2004 with a net loss of $208,000, as compared to a net loss of $127,500 for the same period in 2003. As set forth more fully under "Results of Operations," below, during the six months of the year 2004 the Company experienced an increase in gross sales of $2,025,300, or 15.2% during the period, but this increase was offset by higher costs of goods sold (which increased by $1,195,800, or 13.6%), marketing costs (which increased by $526,400, or 23.1%), and general and administrative costs (which increased by $397,000, or 26.3%), all of which contributed to the net loss for the period. 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 2004 2003 STATEMENTS OF OPERATIONS DATA: % % - - Sales 102.20 102.41 Less Excise taxes 2.20 2.41 ------- ------- NET SALES 100.00 100.00 Costs of Sales 66.76 67.87 ------- ------- GROSS PROFIT 33.24 32.13 ------- ------- Marketing 18.72 17.56 General and Administrative Expense 12.72 11.63 PROFIT / (LOSS) FROM OPERATIONS 1.80 2.94 Other (Income) / Expense (0.15) (0.08) Interest Expense 2.82 3.14 ------- ------- Loss before income taxes (0.87) (0.12) Provision for income taxes 0.52 0.86 NET LOSS (1.39%) (0.98%) ======= ======= Other Comprehensive Income 0.17 0.14 ======= ======= COMPREHENSIVE LOSS (1.22%) (0.84%) ======= ======= 13 SIX MONTHS ENDED JUNE 30 2004 2003 BALANCE SHEET DATA: $ $ - - Cash and Cash Equivalents 583,400 511,400 Working Capital (2,090,500) (4,652,800) Property and Equipment 13,632,400 13,860,500 Deposits and Other Assets 284,200 380,300 Total Assets 23,159,000 22,212,000 Long-term Debt (less current maturities) 3,409,200 3,153,400 Capital Lease (less current maturities) 129,500 197,300 Total Liabilities 16,834,700 15,974,700 Accumulated Deficit (8,655,600) (8,622,000) Stockholder's equity 6,324,300 6,237,300 THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 NET SALES Overall net sales for the second quarter of 2004 were $8,187,100, an increase of $1,074,200, or 15.1%, compared to $7,112,900 for the second quarter of 2003. The increase was mainly due to increased sales, increased selling prices for the United Kingdom customers, and exchange rate fluctuations. UBSN launched Kingfisher natural spring water in the Indian restaurant trade in February 2004, which also contributed to increased sales during the second quarter of the year 2004. DOMESTIC OPERATIONS: Net sales for the second quarter of 2004 were $3,165,000 compared to $2,989,800 for the same period in 2003, a net increase of $175,200, or 5.86%. This increase was caused by an increase in wholesale beer shipments of $248,000, which was partially offset by a $73,300 decrease in retail sales because of the closure of the Hopland restaurant. The sales volume increased to 16,883 barrels in the second quarter of 2004 from 15,730 barrels in the second quarter of 2003, representing an increase of 1,153 barrels, or 7.33%. Of the increase, sales of the Company's domestic brands increased by 869 barrels; sales of Kingfisher brands increased by 294 barrels, and sales of contract brands decreased by 10 barrels. EUROPEAN TERRITORY: Net sales for the second quarter of 2004 were $5,022,100 (GBP 2,777,800) compared to $4,123,100 (GBP 2,548,200) during the corresponding period of 2003, an increase of $899,000, or 21.80%. During the second quarter of 2004, UBSN sold 16,743 barrels, compared to 15,936 barrels during the second quarter of 2003, representing an increase of 807 barrels, or 5.1%. Exchange rate fluctuations increased the financial effect of the Company's growth in sales in its European Territory. When measured from period to period exclusively in Pounds Sterling (which is the basic currency of account for the European Territory), the Company's net sales in its European Territory increased by only 9.01%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the second quarter of 2004 was 65.62%, as compared to 67.72% during the corresponding period of 2003 mainly due to reduced costs in the United States. 14 DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during the second quarter of 2004 was 63.55%, as compared to 68.54%, during the corresponding period of 2003, representing a decrease of 4.99% due mainly to a decrease in depreciation and retail operation costs because of the closure of the restaurant in Hopland. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the second quarter of 2004 was 67.4%, as compared to 67.61% 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 a marginal decrease of 0.21%. GROSS PROFIT As a result of the higher net sales described above, gross profit for the second quarter of 2004 increased to $2,814,600, from $2,296,000 during the corresponding period of 2003, representing an increase of 22.59%. As a percentage of net sales, the gross profit during the second quarter of 2004 increased to 34.38% from that of 32.28% for the second quarter of 2003. OPERATING EXPENSES Operating expenses for the second quarter of the year 2004 were $2,400,800, an increase of $544,200, or 29.31%, as compared to $1,856,600 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 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 second quarter of 2004 were $1,478,400, as compared to $1,130,400 for the second quarter of 2003, representing an increase of 30.79%. Increases in the Company's marketing expenses were driven by heavier competition, particularly in the Company's European Territory, and the Company believes that trend is likely to continue for the next few quarters at least. DOMESTIC OPERATIONS: Expenses for the second quarter of 2004 were $410,800 compared to $401,600 during the corresponding period of 2003, representing an increase of $9,200. As a percentage of net sales in the United States, the expenses decreased to 12.98% during the second quarter of 2004, compared to 13.43% during the corresponding period of 2003. There were increases in salary and travel costs during the second quarter of the year 2004 compared to the corresponding period of 2003 due to increased staffing levels, which increases were partially offset by reductions in tavern and tasting room expenses due to closure of the Company's Hopland restaurant. EUROPEAN TERRITORY: Expenses for the second quarter of 2004 were $1,067,600 compared to $728,800 during the corresponding period of 2003, representing an increase of $338,800. As a percentage of net sales in the United Kingdom, the expenses increased to 21.26% during the second quarter of 2004 compared to 17.68% 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 resulted mainly from higher staffing levels and associated travel costs, increased advertising and promotional expenses, and higher dispensing equipment maintenance expenses. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $922,400 for the second quarter of the year 2004, representing an increase of $196,200, or 27.02%, over $726,200 for the corresponding period in 2003. These expenses were equal to 11.27% of net sales for the second quarter of the year 2004, as compared to 10.21% for corresponding period in 2003. 15 DOMESTIC OPERATIONS. Domestic general and administrative expenses were $548,100 for the second quarter of the year 2004, representing an increase of $160,900, or 41.56%, over $387,200 for the second quarter of the year 2003. The increase was primarily due to increased legal expenses caused by a legal dispute with a distributor (discussed in Part II, Item 1 of this Quarterly Report) and higher loan and lease fees on loan extensions and refinancing efforts. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $374,300 for the second quarter of the year 2004, representing an increase of $35,300, or 10.41%, as compared to $339,000 for the second 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 to higher salary costs, start-up costs associated with the distribution and sale of Kingfisher natural spring water, and increased depreciation expenses. OTHER EXPENSES Other expenses for the second quarter of 2004 totaled $190,000, representing a decrease of $6,700, or 3.4%, when compared to the second quarter of 2003. The decrease was mainly due to higher in profits on sale of assets, partly offset by an 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 $57,400 for the second quarter of 2004, compared to $80,800 for the second 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 PROFIT The Company's net profit for the second quarter of 2004 was $166,400, as compared to profit of $161,900 for the second quarter of 2003. After providing for a negative foreign currency translation adjustment of $36,400 during the second quarter of 2004 (as compared to a positive adjustment of $29,900 for the same period in 2003), the comprehensive profit for the second quarter of 2004 was $130,000, compared to a profit of $191,800 for the same period in 2003. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 NET SALES Overall net sales for the first six months of the year 2004 were $14,990,300, an increase of $2,007,300, or 15.46%, compared to $12,983,000 for the same period in 2003. The increase was mainly due to increased sales, increased selling prices for the United Kingdom customers and exchange rate fluctuations. UBSN launched Kingfisher natural spring water in the Indian restaurant trade in February 2004, which also contributed to increased sales during the first six months of 2004. DOMESTIC OPERATIONS: Domestic net sales for first six months of the year 2004 were $5,501,500 compared to $5,327,600 for the same period in 2003, a net increase of $173,900, or 3.26%. This increase was caused by increased wholesale shipments of $229,700, which were partially offset by a $125,800 decrease in retail sales because of the closure of the Hopland restaurant. The sales volume increased to 29,655 barrels during the first six months of the year 2004 from 28,323 barrels in the first six months of the year 2003, representing an increase of 1,332 barrels, or 4.7%. Of the increase, sales of the Company's brands increased by 714 barrels; sales of Kingfisher increased by 533 barrels, 16 and sales of contract brands increased by 85 barrels. EUROPEAN TERRITORY: Net sales for the first six months of the year 2004 were $9,488,800 (GBP 5,205,900) compared to $7,655,400 (GBP 4,752,300) during the corresponding period of 2003, an increase of 23.95%. During the first six months of the year 2004, UBSN sold 31,886 barrels compared to 29,561 barrels during the first six months of the year 2003, an increase of 2,325 barrels, or 7.8%. 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 9.54%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first six months of the year 2004 was 66.76%, as compared to 67.87% during the corresponding period of 2003 mainly due to decreased cost in the United States. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during first six months of the year 2004 was 66.77%, as compared to 69.92%, during the corresponding period of 2003, representing a decrease of 3.15% mainly due to a decrease in depreciation and retail operation costs because of closure of the Hopland restaurant. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the first six months of the year 2004 was 67.18%, as compared to 66.9% during the 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 a marginal decrease of 0.28%. GROSS PROFIT As a result of the higher net sales described above, gross profit for the first six months of the year 2004 increased to $4,983,000, from $4,171,500 during the corresponding period of 2003, representing an increase of 19.45%. As a percentage of net sales, the gross profit during the first six months of 2004 increased to 33.24% from that of 32.13% during the corresponding period in 2003. OPERATING EXPENSES Operating expenses for the first six months of the year 2004 were $4,713,200, an increase of $923,400, or 24.37%, as compared to $3,789,800 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 salaries and commissions, advertising costs, product and sales promotion costs, travel expenses and related costs and Company's tavern and tasting room expenses. Such expenses for the first six months of the year 2004 were $2,806,700, as compared to $2,280,300 for the same period in 2003, representing an increase of 23.08%. Increases in the Company's marketing expenses were driven by heavier competition, particularly in the Company's European Territory, and the Company believes that trend is likely to continue for the next few quarters at least. DOMESTIC OPERATIONS: Expenses for the first six months of the year 2004 were $811,100 compared to $802,500 during the corresponding period of 2003, representing an increase of $8,600. As a percentage of net sales in the United States, these expenses decreased to 14.75% during the first six months of the year 2004, compared to 15.07% during the corresponding period of 2003. The increased expenses included higher salary and travel costs due to increased staffing (both in New York 17 and California) and an increase in promotional expenses; all of which were partially offset by reductions in tavern and tasting room expenses due to closure of the Hopland restaurant. EUROPEAN TERRITORY: Expenses for the first six months of the year 2004 were $1,995,600 compared to $1,477,800 during the corresponding period of 2003, representing an increase of $517,800. As a percentage of net sales in the United Kingdom, the expenses increased to 21.03% during the first six months of the year 2004 compared to 19.3% 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 higher staffing and associated travel costs, increases in advertising and promotional expenses, higher freight on increased sales, and higher dispensing equipment maintenance expenses. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $1,906,500 for the first six months of the year 2004, representing an increase of $397,000 or 26.3%, over $1,509,500 for the corresponding period in 2003. These expenses were equal to 12.72% of net sales for first six months of the year 2004, as compared to 11.63% for the corresponding period in 2003. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $1,046,400 for the first six months of the year 2004, representing an increase of $196,600, or 23.13%, over $849,800 for the same period in 2003. The increase was primarily due to increased legal expenses caused by a legal dispute with a distributor (discussed in Part II, Item 1 of this Quarterly Report) and higher loan and lease fees on loan extensions and refinancing efforts. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $860,100 for the first six months of the year 2004, representing an increase of $200,400, or 30.38%, as compared to $659,700 for the same period in 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 and audit fees, increased depreciation expenses, and start-up costs associated with the distribution and sale of Kingfisher natural spring water. OTHER EXPENSES Other expenses for the first six months of the year 2004 totaled $399,600, representing an increase of $2,400 when compared to the same period in 2003. The increase is mainly due to higher interest expenses as a result of increased borrowings under the lines of credit, partially offset by increases in profit on the sale of assets. INCOME TAXES The Company has a provision for income taxes of $78,200 for the first six months of the year 2004, compared to $112,000 the same period in 2003. The provision for taxes is 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 six months of the year 2004 was $208,000, as compared to loss of $127,500 for the first six months of the year 2003. After providing for a positive foreign currency translation adjustment of $25,700 during the second quarter of 2004 (as compared to a positive adjustment of $18,400 for the same period in 2003), the comprehensive loss for the first six months of the year 2004 was $182,300, compared to a loss of $109,100 for the same period in 2003. 18 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). These loans and lines of credit have typically been short-term in nature, which has required the Company to obtain periodic extensions or refinancings of these facilities. As discussed more fully below, the Company is currently seeking extensions and/or refinancings of certain of these facilities. 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 a price the Company will be able to sustain or at any price), 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 August 31 and September 18, 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. 19 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 (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, and originally included various conversion protection provisions. 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 June 30, 2004 was $1,515,400, and the accrued but unpaid interest thereon was equal to approximately $447,700. 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 June 30, 2004, the outstanding principal and interest on the notes was convertible into 1,308,723 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. The Company and UBA have entered into a series of agreements to extend the term of the UBA Notes (the "Extension Agreement"). The latest of these Extension Agreements, which was entered into as of August 14, 2004, extends the term of the UBA Notes until August 31, 2005. 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. EQUIPMENT LEASE: From 1996 until 2003, Finova Capital Corporation ("Finova") leased new brewing equipment with an original total cost of approximately $1.78 million to MBC, with monthly rental payments of approximately $27,100 each. During 2003, the Company exercised its option to purchase the equipment at a cost of approximately $576,200. 20 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, February 27, 2004 and May 3, 2004 in order to allow the Company time to refinance. On July 1, 2004 CIT Group further extended the term of the facility to expire on August 31, 2004 and increased the term loan repayment to $10,000 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 June 30, 2004, the total amount outstanding on the line of credit was approximately $1,759,300. 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 the buy-out of equipment leased through Finova Capital Corporation. This loan, which is due for repayment on September 18, 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 June 30, 2004 was approximately $1,303,000. 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 would 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 21 contract, Shepherd Neame advanced a loan of (pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of (pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan carries a fixed interest rate of 5% per year. WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on the Company's U.S. debts was 7.61% for the first six months of the year 2004 and 7.39% (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 6.75% for the first six months of the year 2004 as compared to 5.80% 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 June 30, 2004, the delinquent property taxes due on the Company's Ukiah property, including penalties and interest, totaled $669,300, representing the balance due for overdue taxes for the period from April 1999 to June 2003. Pursuant to an agreement with Mendocino County entered into in July of 2003, 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 $2,410,600 as of June 30, 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 June 30, 2004 was 0.82 to 1.0 and its ratio of total assets to total liabilities was 1.38 to 1.0. On June 30, 2003, the Company's ratio of current assets to current liabilities was 0.63 to 1.0 and its ratio of total assets to total liabilities was 1.39 to 1.0. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 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 $5,153,900 as of June 30, 2004. INTEREST RATE RISK The Company had total debt as of June 30, 2004 of $8,941,800, of which $5,153,900 was subject to variable rates of interest (either prime or LIBOR plus 1.5% or prime plus 3% or prime plus 4.25%). Its long-term debt (including current portion) as of June 30, 2004 totaled $5,573,900, of which $3,787,800 had fixed rates of interest and the balance of $1,786,100 were subject to variable rates. Short term debts amounted to $3,367,800, all of which were subject to variable rates. At current borrowing levels, an increase in prime and LIBOR rates of 1% would result in an annual increase of $51,500 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. 23 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 compensatory and punitive damages in an amount not stated in the complaint. GGDC's action asserts claims against the Company and/or Mr. Anderson for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, intentional interference with prospective economic advantage, conversion and constructive trust, all arising out of the allegedly wrongful termination of the GGDC distribution agreement. GGDC has since filed two amended complaints, naming as additional defendants Dr. Vijay Mallya, the Company's Chairman; United Breweries of America, Inc., one of its principal shareholders; and the two replacement distribution companies contracted to service the territory formerly handled by GGDC. GGDC is now seeking to impose a constructive trust on the $655,000 that the Company received from its new distributors, and alleging conspiracy and conversion of those funds. 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. 10.66 Extension of Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc., dated July 1, 2004 10.67 Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of July 20, 2004 10.68 Fourth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of August 14, 2004 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) 24 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: August 14, 2004 By: /s/ Dr. Vijay Mallya ---------------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: August 14, 2004 By: /s/ N. Mahadevan ---------------------------------------- N. Mahadevan Chief Financial Officer and Secretary 25 EXHIBIT INDEX NUMBER EXHIBIT TITLE PAGE 10.66 Extension of Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc., dated July 1, 2004. 27 10.67 Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of July 20, 2004. 30 10.68 Fourth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of August 14, 2004. This Exhibit is incorporated by reference from Amendment No. 11 to Schedule 13D, which was jointly filed by United Breweries of America, Inc. and Dr. Vijay Mallya on August 16, 2004. 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) 36 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a 38 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 40 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 41 26 EX-10.66 2 tex10_66-3338d.txt EX-10.66 EXHIBIT 10.66 CIT Business Credit Ten South LaSalle Street 22nd Floor Chicago, IL 60603-1097 [LOGO] CIT July 1, 2004 VIA FACSIMILE Mendocino Brewing Company, Inc. Releta Brewing Company LLC 1610 Airport Road 131 Excelsior Avenue Ukiah, California 95482 Saratoga Springs, NY 12866 RE: Loan and Security Agreement dated as of September 24, 1998, as amended (the "Loan Agreement") between Mendocino Brewing Company, Inc. and Releta Brewing Company LLC (collectively, "Borrowers") and The CIT Group/Business Credit, Inc., as successor to The CIT Group/Credit ]Finance, Inc. ("CIT") Ladies and Gentlemen: Reference is made to the Loan Agreement. Capitalized terms used in this letter and not specifically defined herein shall have the meanings given to such terms in the Loan Agreement. This letter shall confirm the agreement of CIT and Borrowers to amend the Loan Agreement to extend the Term 61 days and make certain other changes as set forth herein. Accordingly, the Loan Agreement is hereby amended as follows: 1. SECTION 9J of the Loan Agreement is amended and restated in its entirety to read as follows: "9-1 Term. This Agreement shall only become effective upon execution and delivery by Borrower and Lender and shall continue in full force and effect through August 3 I, 2004." 2, The second sentence of SECTION 10.2(A) of the Loan Agreement is amended and restated in its entirety to read as follows: "The Initial Term Loan shall be repayable in immediately available funds, in consecutive weekly installments by RBC, each in the amount of Ten Thousand and xx/100 Dollars ($10,000), commencing July 5, 2004 and on the Monday of each week thereafter, provided, that notwithstanding the foregoing, the then unpaid balance thereof shall be due and payable in full on the date of the expiration the Term." The Loan Agreement shall terminate and all Obligations shall be due and payable in full on August 31, 2004. In consideration of CIT's agreement to extend the date of expiration of the Term of the Loan Agreement, Borrowers agree to pay to CTT a facility fee of $2500, which fee is fully earned by CIT on the date hereof, and may be charged by CIT to Borrowers' revolving loan account under the Loan Agreement as follows: $ 1250 on July 15, 2004 and $1250 on August 16, 2004. Mendocino Brewing Company, Inc. Releta Brewing Company LLC July 1, 2004 Page 2 Except as expressly modified by this letter agreement, all of the terms and provisions of the Loan Agreement shall remain in full force and effect, and shall apply with such force and effect to this letter, and CIT expressly reserves all rights, remedies, powers and privileges granted to CIT in the Loan Agreement and in any other document executed in connection with the Loan Agreement. In order to induce CIT to agree to extend the Term and amend the Loan Agreement in the manner set forth above, each Borrower hereby represents and warrants to CIT that: (a) the execution, delivery and performance by such Borrower of this letter are within such Borrower's corporate power and has been duly authorized by all necessary corporate action; (b) this letter is a legal, valid and binding obligation of such Borrower, enforceable against such Borrower in accordance with its terms; and (c) no Event of Default exists as of the date hereof, and all of the representations and warranties contained in the Loan Agreement are true and correct as of the date hereof, except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties were true and correct as of such earlier date. THE VALIDITY, TERMS, PERFORMANCE AND ENFORCEMENT OF THIS LETTER SHALL BE GOVERNED BY THE LAWS AND DECISIONS OF THE STATE OF ILLINOIS WHICH ARE APPLICABLE TO CONTRACTS THAT ARE NEGOTIATED, EXECUTED, DELIVERED AND PERFORMED SOLELY IN THE STATE OF ILLINOIS. This letter may be executed in any number of counterparts, and each such counterpart is deemed to be an original, but all such counterparts together constitute but one and the same letter. This letter is binding upon each of Borrowers, CIT and their respective successors and assigns, and inures to the benefit of each of Borrowers, CIT and their respective successors and assigns. Please acknowledge the agreement of Borrowers to the terms and provisions of this letter by signing and returning this letter to CIT, at which time the amendments to the Loan Agreement set forth above shall become effective_ A signature page of this letter executed and transmitted via facsimile shall be deemed an original for all purposes. Very truly yours, TILE C1T GROUPBUSINESS CREDIT, INC. By: /s/ Scott Kennedy Title: Vice President Mendocino Brewing Company, Inc. Releta Brewing Company LLC July 1, 2004 Page 3 Agreed TO this 1st day of July, 2004: MENDOCINO BREWING COMPANY, INC. RELETA BREWING COMPANY LLC By: /s/ N Mahadevan By /s/ Yashpal Singh Title CFO Title President EX-10.67 3 tex10_67-3338d.txt EX-10.67 EXHIBIT 10.67 [LOGO] SAVINGS BANK OF MENDOCINO COUNTY A FULL SERVICE COMMERCIAL BANK
PROMISSORY NOTE Principal Loan Date Maturity Loan No CALL/COLL Account Officer $576,211.80 07-20-2004 09-18-2004 7010041492 21/210 00000000049040 MJL References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. ANY ITEM ABOVE CONTAINING "***" HAS BEEN OMITTED DUE TO TEXT LENGTH LIMITATIONS. BORROWER: MENDOCINO BREWING COMPANY, INC. LENDER: SAVINGS BANK OF MENDOCINO COUNTY 1601 AIRPORT RD UKIAH, CA 95482 MAIN OFFICE PO BOX 3600 200 N SCHOOL ST UKIAH, CA 95482
- -------------------------------------------------------------------------------- PRINCIPAL AMOUNT: $576,211.80 INITIAL RATE: 7.250% DATE OF NOTE: JULY 20, 2004 PROMISE TO PAY. MENDOCINO BREWING COMPANY, INC. ("BORROWER") PROMISES TO PAY TO SAVINGS BANK OF MENDOCINO COUNTY ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF FIVE HUNDRED SEVENTY--SIX THOUSAND TWO HUNDRED ELEVEN & 80/100 DOLLARS ($576,211.80), TOGETHER WITH INTEREST ON THE UNPAID PRINCIPAL BALANCE FROM JULY 20, 2004, UNTIL PAID IN FULL. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PRINCIPAL PAYMENT OF $576,211.80 PLUS INTEREST ON SEPTEMBER 18, 2004. THIS PAYMENT DUE ON SEPTEMBER 18, 2004, WILL BE FOR ALL PRINCIPAL AND ALL ACCRUED INTEREST NOT YET PAID. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING AUGUST 15, 2004, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. UNLESS OTHERWISE AGREED OR REQUIRED BY APPLICABLE LAW, PAYMENTS WILL BE APPLIED FIRST TO ANY ACCRUED UNPAID INTEREST; THEN TO PRINCIPAL; AND THEN TO ANY LATE CHARGES. INTEREST ON THIS NOTE IS COMPUTED ON A 365/365 SIMPLE INTEREST BASIS; THAT IS, BY APPLYING THE RATIO OF THE ANNUAL INTEREST RATE OVER THE NUMBER OF DAYS IN A YEAR (366 DURING LEAP YEARS), MULTIPLIED BY THE OUTSTANDING PRINCIPAL BALANCE, MULTIPLIED BY THE ACTUAL NUMBER OF DAYS THE PRINCIPAL BALANCE IS OUTSTANDING. BORROWER WILL PAY LENDER AT LENDER'S ADDRESS SHOWN ABOVE OR AT SUCH OTHER PLACE AS LENDER MAY DESIGNATE IN WRITING. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is the Savings Bank of Mendocino County's Base Commercial Rate (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans and is set by Lender in its sole discretion. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notifying Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. The interest rate change will not occur more often than each FIRST AND FIFTEENTH OF THE MONTH. Borrower understands that Lender may make loans based on other rates as well. THE INDEX CURRENTLY IS 4.250% PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 3.000 PERCENTAGE POINTS OVER THE INDEX, ADJUSTED IF NECESSARY FOR ANY MINIMUM AND MAXIMUM RATE LIMITATIONS DESCRIBED BELOW, RESULTING IN AN INITIAL RATE OF 7.250% PER ANNUM. NOTWITHSTANDING THE FOREGOING, THE VARIABLE INTEREST RATE OR RATES PROVIDED FOR IN THIS NOTE WILL BE SUBJECT TO THE FOLLOWING MINIMUM AND MAXIMUM RATES. NOTICE: Under no circumstances will the interest rate on this Note be less than 7.000% per annum or more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST CHARGE OF $100.00. Other than Borrower's obligation to pay ANY minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due. Borrower agrees not to send Lender payments marked "paid in full", "without recourse", or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender's rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes "payment in full" of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: Savings Bank of Mendocino County, Main Office, PO BOX 3600, 200 N SCHOOL ST, UKIAH, CA 95482. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged $10.00. INTEREST AFTER DEFAULT. Upon default, the total sum due under this Note will bear interest at the interest rate on this Note. DEFAULT. Each of the following shall constitute an event of default ("Event of Default") under this Note: PAYMENT DEFAULT. Borrower fails to make any payment when due under this Note. OTHER DEFAULTS. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. FALSE STATEMENTS. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower's behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter. INSOLVENCY. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self--help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower's accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute. EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity PROMISSORY NOTE LOAN NO: 7010041492 (CONTINUED) PAGE 2 of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default. CHANGE IN OWNERSHIP. Any change in ownership of twenty--five percent (25%) or more of the common stock of Borrower. ADVERSE CHANGE. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired. CURE PROVISIONS. If any default, other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount. ATTORNEYS' FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law. GOVERNING LAW. THIS NOTE WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH FEDERAL LAW AND THE LAWS OF THE STATE OF CALIFORNIA. THIS NOTE HAS BEEN ACCEPTED BY LENDER IN THE STATE OF CALIFORNIA. CHOICE OF VENUE. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of MENDOCINO County, State of California. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $10.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. ADDITIONAL PROVISIONS. THIS NOTE IS SECURED BY A COMMERCIAL SECURITY AGREEMENT AND AN ASSIGNMENT OF DEPOSIT ACCOUNT, BOTH DATED 12/31/2003. DISPUTE RESOLUTION. DISPUTE RESOLUTION. Borrower and Lender desire to resolve quickly and efficiently any disputes that might arise between them. For any controversy, claim or judicial action arising from or relating to this Note or any related agreement, transaction or conduct, whether sounding in contract, tort or otherwise: Judicial Reference. Where an action is pending before a court of any judicial district of the State of California, Borrower and Lender shall each have the right to require that all questions of fact or law be submitted to general reference pursuant to California Code of Civil Procedure Section 638 et seq., and any successor statutes thereto. (1) A single referee who is a retired superior court judge shall be appointed by the court pursuant to Code of Civil Procedure 640 and shall preside over the reference proceeding. If Borrower and Lender do not agree upon the referee, each of them may submit to the court up to three nominees who are retired superior court judges. (2) If Borrower and Lender do not agree on how the payment of the referee's fees and expenses will be shared, the court may apportion such fees and expenses between Borrower and Lender in a fair and reasonable manner that is consistent with Code of Civil Procedure Section 645.1. (3) Borrower and Lender shall be entitled to discovery, and the referee shall oversee discovery and may enforce all discovery orders in the same manner as any trial court judge. (4) The referee's statement of decision shall contain written findings of fact and conclusions of law, and the court shall enter judgment thereon pursuant to Code of Civil Procedure Sections 644(a) and 645. The decision of the referee shall then be appealable as if made by the court.No provision of this section shall limit the right of any party to exercise self--help remedies, to foreclose against or sell any real or personal property collateral or to obtain provisional or ancillary remedies, such as injunctive relief or appointment of a receiver, from a court of competent jurisdiction before, after, or during the pendency of any reference proceeding. The exercise of a remedy does not waive the right of either party to resort to reference. Jury Trial Waiver. In any action pending before any court of any jurisdiction, Borrower waives, and Lender shall not have, any right to a jury trial. ATTORNEYS' FEES. In any action arising from or relating to this Note and subject to any limits under applicable law, the prevailing party shall be entitled to reasonable attorneys' fees in accordance with California Civil Code Section 1717. Whether or not an action is involved, the expenses of Lender described in the paragraph of this Note titled "Expenses" include, without limitation, attorneys' fees incurred by Lender. SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower's heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns. NOTIFY US OF INACCURATE INFORMATION WE REPORT TO CONSUMER REPORTING AGENCIES. Please notify us if we report any inaccurate information about your account(s) to a consumer reporting agency. Your written notice describing the specific inaccuracy(ies) should be sent to us at the following address: Savings Bank of Mendocino County 200 N SCHOOL ST UKIAH, CA 95482 GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several. PROMISSORY NOTE LOAN NO: 7010041492 (CONTINUED) PAGE 3 PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE. BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE. BORROWER: MENDOCINO BREWING COMPANY, INC. BY: /s/ Yashpal Singh --------------------------------------------- YASHPAL SINGH, PRESIDENT OF MENDOCINO BREWING COMPANY, INC. By:/s/ N. Mahadevan --------------------------------------------- NARAYANA MAHADEVAN, CONTROLLER/TREAS/SEC OF MENDOCINO BREWING COMPANY, INC. - -------------------------------------------------------------------------------- LASER PRO LENDING, VAR. 5.24.00.003 COPY. HARLAND FINANCIAL SOL0LIANS, NO, 1907, 2004. ALL RIGHTS RESERVED. - CA E:1CF11LPL1 D20.FC TR-41384 PR-RH EX-31.1 4 tex31_1-3338d.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-15(e) and 15d-15(e) for the registrant 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 registrant, 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 registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 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 registrant'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 controls over financial reporting. /s/ Dr. Vijay Mallya --------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: August 14, 2004 EX-31.2 5 tex31_2-3338d.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-15(e) and 15d-15(e) for the registrant 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 registrant, 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 registrant'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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): 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 registrant'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 controls over financial reporting. /s/ N. Mahadevan --------------------------------- N. Mahadevan, Chief Financial Officer Date: August 14, 2004 EX-32.1 6 tex32_1-3338d.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 June 30, 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: August 14, 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. EX-32.2 7 tex32_2-3338d.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 June 30, 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: August 14, 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. -----END PRIVACY-ENHANCED MESSAGE-----