-----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, JpGuOHM/gG9VwThY02IwseiqUpLzzVjICNQc8x9eRjWdw8CNS8j9lEfQ8kZXkQ30 HTP9WJQDlpO76OaSjUQRoQ== 0001188112-04-001795.txt : 20041115 0001188112-04-001795.hdr.sgml : 20041115 20041115162817 ACCESSION NUMBER: 0001188112-04-001795 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041115 DATE AS OF CHANGE: 20041115 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: 041145637 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-4010.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 SEPTEMBER 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 October 31, 2004 is 11,266,874.
PART I ITEM 1. FINANCIAL STATEMENTS. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS SEPTEMBER 30, DECEMBER 31, 2004 2003 CURRENT ASSETS Cash $ 322,400 $ 554,300 Accounts receivable, net of allowance for doubtful 7,094,100 7,017,700 accounts of $16,400 and $37,800 Inventories 1,334,400 1,186,100 Prepaid expenses 421,700 555,500 ------------- ------------- Total Current Assets: 9,172,600 9,313,600 ------------- ------------- PROPERTY AND EQUIPMENT 13,605,900 13,874,800 ------------- ------------- OTHER ASSETS Deposits and other assets 186,400 188,600 Intangibles net of amortization 88,700 94,700 ------------- ------------- Total Other Assets: 275,100 283,300 ------------- ------------- Total Assets: $ 23,053,600 $ 23,471,700 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 2,541,600 $ 1,974,800 Note payable 576,200 576,200 Accounts payable 5,118,200 5,340,100 Accrued liabilities 1,026,600 1,275,100 Accrued legal settlement 900,000 655,200 Income taxes payable 473,900 465,100 Current maturities of obligation under long-term 521,600 693,700 debt Current maturities of obligation under capital lease 148,000 129,000 ------------- ------------- Total Current Liabilities: 11,306,100 11,109,200 NOTES TO RELATED PARTY 1,985,500 1,921,500 Long term debt, less current maturities 3,374,400 3,730,300 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 93,200 204,100 ------------- ------------- Total Liabilities: 16,759,200 16,965,100 ------------- ------------- 2
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 10,000,000 shares authorized, 227,600 shares issued and outstanding 227,600 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 14,648,600 Accumulated comprehensive income 107,800 78,000 Accumulated deficit (8,689,600) (8,447,600) ------------- ------------- Total Stockholders' Equity 6,294,400 6,506,600 ------------- ------------- Total Liabilities and Stockholders' Equity: $ 23,053,600 $ 23,471,700 ============= ============= The accompanying notes are an integral part of these financial statements. 3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPT 30, SEPT 30, 2004 2003 2004 2003 ---- ---- ---- ---- SALES $ 8,154,500 $ 7,830,500 $23,475,100 $21,125,800 EXCISE TAXES 176,200 202,200 506,500 514,500 ----------- ----------- ----------- ----------- NET SALES 7,978,300 7,628,300 22,968,600 20,611,300 COST OF GOODS SOLD 5,181,800 5,101,600 15,189,100 13,913,100 ----------- ----------- ----------- ----------- GROSS PROFIT 2,796,500 2,526,700 7,779,500 6,698,200 ----------- ----------- ----------- ----------- OPERATING EXPENSES Marketing 1,536,800 1,182,700 4,343,500 3,463,000 General and Administrative 825,900 756,700 2,732,400 2,266,300 ----------- ----------- ----------- ----------- 2,362,700 1,939,400 7,075,900 5,729,300 ----------- ----------- ----------- ----------- INCOME FROM OPERATIONS OTHER INCOME (EXPENSE) 433,800 587,300 703,600 968,900 ----------- ----------- ----------- ----------- Other income 8,600 143,700 17,700 154,400 Profit on sale of equipment 1,100 -- 15,100 -- Legal dispute settlement (216,400) -- (216,400) -- Interest expense (217,700) (202,200) (640,400) (610,000) ----------- ----------- ----------- ----------- (424,400) (58,500) (824,000) (455,600) ----------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES 9,400 528,800 (120,400) 513,300 PROVISION FOR INCOME TAXES 43,400 93,400 121,600 205,400 ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (34,000) $ 435,400 $ (242,000) $ 307,900 ----------- ----------- ----------- ----------- 4
OTHER COMPREHENSIVE INCOME /(LOSS), net of tax Foreign Currency Translation Adjustment 4,100 11,700 29,800 30,100 ----------- ----------- ----------- ----------- COMPREHENSIVE Income (LOSS) $ (29,900) $ 447,100 $ (212,200) $ 338,000 =========== =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE $ (0.00) $ (0.04) $ (0.02) $ 0.03 =========== =========== =========== =========== DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.00) $ (0.04) $ (0.02) $ 0.03 =========== =========== =========== =========== The accompanying notes are an integral part of these financial statements. 5
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended September 30, -------------------------------------- 2004 2003 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ (242,000) $ 307,900 Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 768,800 842,100 Allowance for doubtful accounts 16,400 -- Profit (Loss) on sale of assets (15,100) 1,200 Changes in: Accounts receivable 18,300 83,200 Inventories (148,300) 127,600 Prepaid expenses 139,000 32,900 Deposits and other assets (30,300) (2,500) Accounts payable (271,200) (1,101,500) Accrued liabilities (15,000) (9,800) Income taxes payable 2,400 -- ---------- ---------- Net cash from operating activities: 223,000 281,100 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements (486,800) (445,100) Proceeds from new distributors -- 655,200 Proceeds from sale of fixed assets 24,300 10,900 ---------- ---------- Net cash from investing activities: (462,500) 221,000 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on line of credit 557,900 180,900 Borrowing on long term debt -- 403,700 Principal payment on long-term debt (542,200) (404,800) Borrowings on related party debt 64,000 64,200 Payments on obligation under long term lease (91,900) (190,500) Disbursements in excess of deposits -- (134,300) ---------- ---------- Net cash from financing activities: (12,200) (80,800) ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 19,800 11,200 ---------- ---------- NET CHANGE IN CASH (231,900) 432,500 ---------- ---------- CASH, beginning of period 554,300 146,800 ---------- ---------- CASH, end of period $ 322,400 $ 579,300 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 576,400 $ 545,800 Income taxes $ 100,200 $ 299,900 Non-cash investing activity Seller Financed equipment $ 26,500 $ 28,500 The accompanying notes are an integral part of these financial statements. 6
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 nine months ended September 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 in the Notes below and in Item 2 of this Part I under the heading "Liquidity and Capital Resources -- Other Loans and Credit Facilities") are scheduled to fall due on December 31 and December 1, 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. 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. No options were granted or exercised in 2004 or 2003. On April 4, 2004, the Company received a commitment from United Breweries of America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA would provide the Company with such financial assistance as may be in UBA's power to prevent or avoid any default under either the Company's line of credit with CIT Group/Credit Finance, Inc. ("CIT Group") or its temporary loan from Savings Bank of Mendocino County when they become due. The terms of any such assistance have not yet been determined, however. Effective on or about November 1, 2004, the Company entered into an agreement with House of Daniels, Inc., dba Golden Gate Distributing Company ("GGDC") to settle a previously disclosed legal dispute (discussed in Part II, Item 1 of this Quarterly Report). The Company had earlier received payments from the new distributors that were to reimburse the Company for certain costs related to changes in distributors. These payments were reflected in prior financial statements as a deferred gain because of the uncertainty surrounding the litigation. This treatment was intended to remain in place until such time as the litigation with GGDC was completed. As a result of the settlement agreement, the Company has accrued a liability of $900,000 to GGDC. This liability is in excess of the payments from the new distributors, with 7 the $216,400 difference reflected as an expense for the three months ended September 30, 2004. NOTE 2 - LINE OF CREDIT The CIT Group 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 acquired from Finova Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. Of the line of credit, $1,484,000 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. In a series of amendments beginning on January 17, 2003, CIT Group increased the maximum credit available to $3,500,000, 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, and increased the term loan repayment to $10,000 per week. On October 31, 2004, CIT Group extended the facility to expire on December 31, 2004. 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 September 30, 2004, the total amount outstanding on the line of credit was approximately $1,621,500. 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 September 30, 2004 was approximately $1,060,700. 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 December 1, 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 8%. 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 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. 8 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 $1,085,400, therefore, each payment of 60,000 GBP would be approximately equal to $108,500. 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 September 30, 2004, is approximately $470,100. Because these notes are subordinated to the CIT line of credit and SBMC note, the Company does not expect to make payments on the notes within the next year. The Company expects the maturity dates to be extended again and has shown the amount as long-term debt. NOTE 4 -- RELATED PARTY TRANSACTIONS During 2001, MBC and its subsidiaries entered into or amended several agreements with affiliated and related entities. Among these were a Brewing Agreement and a Loan Agreement between UBSN and Shepherd Neame Limited; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. Additional information about these transactions may be found in the Company's annual report on Form 10-KSB for the year ended December 31, 2003. The following table reflects the value of the foregoing transactions for the nine months ended September 30, 2004 and 2003 and the account balances outstanding at September 30, 2004 and 2003.
- ----------------------------------------------------- ----------------- ---------------- 2004 2003 - ----------------------------------------------------- ----------------- ---------------- Sales to Shepherd Neame $1,886,000 $ 1,777,600 - ----------------------------------------------------- ----------------- ---------------- Purchases from Shepherd Neame 9,660,300 7,915,800 - ----------------------------------------------------- ----------------- ---------------- Expense reimbursement to Shepherd Neame 864,900 608,300 - ----------------------------------------------------- ----------------- ---------------- Interest expenses associated with UBA convertible 64,000 64,200 notes payable - ----------------------------------------------------- ----------------- ---------------- Accounts payable to Shepherd Neame 3,054,200 2,736,400 - ----------------------------------------------------- ----------------- ---------------- Account receivable from Shepherd Neame 564,600 727,300 - ----------------------------------------------------- ----------------- ----------------
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. 9
Three Months Ended Nine Months Ended ------------------ ----------------- 9/30/2004 9/30/2003 9/30/2004 9/30/2003 ----------------------------------------------------------------------- Net income (loss) $ (34,000) $ 435,400 $ (242,000) $ 307,900 ======================================================================= Weighted average common shares outstanding 11,266,874 11,266,874 11,266,874 11,266,874 ======================================================================= Basic net income (loss) per share $ (0.00) $ 0.04 $ (0.02) $ 0.03 ======================================================================= Diluted net income (loss) per share Net income (loss) $ (34,000) $ 435,400 $ (242,000) $ 307,900 Interest expense on convertible notes payable -- 20,900 -- 64,200 ----------------------------------------------------------------------- Income for the purpose of computing diluted net income per share $ (34,000) $ 456,300 $ (242,000) $ 372,100 ======================================================================= 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 -- 1,267,012 -- 1,267,012 ----------------------------------------------------------------------- Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 11,266,874 12,533,886 11,266,874 12,533,886 ======================================================================= Diluted net income (loss) per share $ (0.00) $ 0.04 $ (0.02) $ 0.03
NOTE 6 - INVENTORY September 30, 2004 December 31, 2003 Raw Materials $ 358,700 $ 459,600 Beer-in-process 204,800 190,400 Finished Goods 746,700 510,000 Merchandise 24,200 26,100 ----------- ---------- TOTAL $ 1,334,400 $1,186,100 =========== ========== NOTE 7 - STOCKHOLDERS' EQUITY The following table summarizes equity transactions during the nine months ended September 30, 2004. 10
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 (242,000) (242,000) Currency Translation Adjustment 29,800 29,800 Balance, September 30, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 107,800 $ (8,689,600) $ 6,294,400 ========== ========= ============ ============ ============== ============ =============
NOTE 8. SEGMENT INFORMATION The Company's business segments are its domestic operations (brewing and sales in the United States), European territory (sales and distribution operations in Europe and Canada), 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:
Nine months ended September 30, 2004 ---------------------------------------------------------------------------- Domestic European Retail Corporate & Total Operations Territory Operations Others Sales $ 8,872,000 $14,444,300 $158,800 $ -- $ 23,475,100 Operating Profit/(Loss) 266,900 432,100 4,600 -- 703,600 Identifiable Assets 13,436,200 7,219,800 100,500 2,297,100 23,053,600 Depreciation & amortization 418,400 331,100 3,800 15,500 768,800 Capital Expenditures 26,500 460,300 -- -- 486,800
11
Nine months ended September 30, 2003 ---------------------------------------------------------------------------- Domestic European Retail Corporate & Total Operations Territory Operations Others Sales $ 8,900,900 $ 11,844,300 $380,600 $ -- $ 21,125,800 Operating Profit/(Loss) 252,100 738,600 (21,800) -- 968,900 Identifiable Assets 13,890,000 5,297,500 97,000 2,951,400 22,235,900 Depreciation & 552,000 272,000 4,700 13,400 842,100 amortization Capital Expenditures 101,600 343,500 -- -- 445,100
NOTE 9 - LEGAL DISPUTES Effective on or about November 1, 2004, the Company entered into a Settlement Agreement and Release (the "Settlement Agreement") with respect to a civil action (the "Action") brought against the Company and others by House of Daniels, Inc., dba Golden Gate Distributing Company ("GGDC"), arising out of the Company's termination, during 2003, of a written distribution agreement with GGDC. In addition to the Company, GGDC had also sued United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders; Dr. Vijay Mallya, who is the Chairman of the Board of the Company and of UBA; Mark Anderson, the Company's West Coast Sales Manager; and two distribution companies that were contracted by the Company to service between them the territory formerly handled by GGDC (the "Subsequent Distributors"). In the course of the Action, a cross-complaint was filed against GGDC by the Company, and cross-complaints were filed against the Company by the Subsequent Distributors. The Settlement Agreement releases the claims asserted in, arising out of, or related to the Action by GGDC against the Company and the other defendants, and by the Company against GGDC. The Settlement Agreement does not release, or even cover, the cross-claims asserted against the Company by the Subsequent Distributors; however the Company does not believe that any amounts payable in connection with such claims are likely to be material. Under the terms of the Settlement Agreement, the Company is required to pay GGDC a total of $900,000 in settlement of all claims (the "Settlement Amount"). Payment is to be made in three installments: $400,000 by January 31, 2005; $300,000 by June 30, 2005; and the remaining $200,000 by December 31, 2005. No other payments are called for by any party to the Action. UBA has guaranteed the payment, in full, of each of the installment payments included in the Settlement Amount. See Note 1 for a discussion of the accounting treatment for the losses associated with the Action. 12 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 nine months ended September 30, 2004, compared to the nine months ended September 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. 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. 13 Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value the majority of the Company's inventories. o The Company follows Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," in accounting for its employee stock options using the fair value based method. o The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company's evaluation is based on an estimate of the future undiscounted cash flows of the related asset or asset grouping over the remaining life in measuring whether the assets are recoverable. Long-lived asset are written down to their estimated net fair value calculated using a discounted future cash flow analysis in the event of an impairment. If circumstances related to the Company's long-lived assets change, the Company's valuation of the long-lived assets could materially change. o The Company evaluates the realizability of its deferred tax assets quarterly by assessing the need for and amount of the valuation allowance. This evaluation is based on an assessment of the Company's ability to generate future U.S. taxable income. Results of operations in recent years are considered in the assessment. The Company records a valuation allowance for the portion of its deferred tax assets that do not meet the recognition criteria of SFAS No. 109, "Accounting for Income Taxes." If circumstances related the Company's ability to generate future U.S. taxable income change, the Company's evaluation of its deferred tax assets could materially change. o The Company accrues 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 nine months of 2004 (as compared to 56% 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%. 14 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. SUMMARY OF FINANCIAL RESULTS The Company ended the first nine months of 2004 with a net loss of $242,000, as compared to a net income of $307,900 for the same period in 2003. As set forth more fully under "Results of Operations," below, during the first nine months of 2004 the Company experienced an increase in gross sales of $2,349,300, or 11.1% during the period, but this increase was offset by higher costs of goods sold (which increased by $1,276,000, or 9.2%), marketing costs (which increased by $880,500, or 25.4%), and general and administrative costs (which increased by $466,100, or 20.6%), all of which contributed to the net loss for the period. 15 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.
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------------------------- 2004 2003 2004 2003 % % % % - - - - Sales 102.21 102.65 102.21 102.50 Less Excise taxes 2.21 2.65 2.21 2.50 NET SALES 100.00 100.00 100.00 100.00 Costs of Sales 64.95 66.88 66.13 67.50 GROSS PROFIT 35.05 33.12 33.87 32.50 Marketing 19.26 15.50 18.91 16.80 General and Administrative Expense 10.35 9.92 11.90 11.00 PROFIT FROM OPERATIONS 5.44 7.70 3.06 4.70 Other Income / (Expense) 0.12 1.88 0.14 0.75 Legal dispute settlement (2.71) 0.00 (0.94) 0.00 Interest Expense (2.73) (2.65) (2.79) (2.96) Profit/(Loss) before income taxes 0.12 6.93 (0.52) 2.49 Provision for income taxes 0.54 1.22 0.53 1.00 NET PROFIT / (LOSS) (0.43) 5.71 (1.05) 1.49 Other Comprehensive Income 0.05 0.15 0.13 0.15 COMPREHENSIVE PROFIT / (LOSS) (0.37) 5.86 (0.92) 1.64
16 NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 2004 2003 BALANCE SHEET DATA: $ $ Cash and Cash Equivalents 322,400 579,300 Working Capital (2,133,500) (1,621,000) Property and Equipment 13,605,900 13,795,500 Deposits and Other Assets 275,100 292,800 Total Assets 23,053,600 22,235,900 Long-term Debt (less current 3,374,400 3,699,200 maturities) Capital Lease (less current 93,200 183,200 maturities) Total Liabilities 16,759,200 15,551,600 Accumulated Deficit (8,689,600) (8,186,600) Stockholder's equity 6,294,400 6,684,400 THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003 NET SALES Overall net sales for the third quarter of 2004 were $7,978,300, an increase of $350,000, or 4.6%, compared to $7,628,300 for the third quarter of 2003. The increase was mainly due to increased sales in the European territory. DOMESTIC OPERATIONS: Net sales for the third quarter of 2004 were $3,022,800 compared to $3,439,400 for the same period in 2003, a decrease of $416,600, or 12.1%. The sales volume decreased to 16,010 barrels in third quarter of 2004 from 18,333 barrels in the third quarter 2003, representing a decrease of 2,323 barrels, or 12.67%. Of the decrease, sale of the Company's domestic brands decreased by 742 barrels; the sale of Kingfisher brands decreased by 155 barrels, and sales of contract brands decreased by 1,426 barrels. EUROPEAN TERRITORY: Net sales for the third quarter of 2004 were $4,955,500 (GBP 2,724,000) compared to $4,188,900 (GBP 2,601,200) during the corresponding period of 2003, an increase of $766,600, or 18.3%. During the third quarter of 2004, UBSN sold 16,186 barrels, compared to 15,419 barrels during the third quarter of 2003, representing an increase of 767 barrels, or 5%. 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 4.72%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the third quarter of 2004 was 64.95%, as compared to 66.88% during the corresponding period of 2003 mainly due to reduced costs in the United States. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during the third quarter of 2004 was 63.47%, as compared to 67.11%, during the corresponding period of 2003, representing a decrease of 3.64% due mainly to a decrease in depreciation and retail operation costs because of the closure of the restaurant in Hopland. 17 EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the European Territory during the third quarter of 2004 was 66.31%, as compared to 67.29% during corresponding period in 2003 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing increase of 0.98%. GROSS PROFIT Gross profit for the third quarter of 2004 increased to $2,796,500, from $2,526,700 during the corresponding period of 2003, representing an increase of 10.68%. As a percentage of net sales, the gross profit during the third quarter of 2004 increased to 35.05% from that of 33.12% for the third quarter of 2003. OPERATING EXPENSES Operating expenses for the third quarter of 2004 were $2,362,700, an increase of $423,300, or 21.83%, as compared to $1,939,400 for the corresponding period of 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 third quarter of 2004 were $1,536,800, as compared to $1,182,700 for the third quarter of 2003, representing an increase of $354,100, or 29.94%. 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 third quarter of 2004 were $474,200 compared to $467,400 during the corresponding period of 2003, representing an increase of $6,800, or 1.45%. As a percentage of net sales in the United States, the expenses increased to 15.69% during the third quarter of 2004, compared to 13.59% during the corresponding period of 2003. There were increases in salary and travel costs during the third quarter of 2004 compared to the corresponding period of 2003 due to increased salaries, increased advertising and promotional expenses 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 third quarter of 2004 were $1,062,600 compared to $715,300 during the corresponding period of 2003, representing an increase of $347,300, or 48.55%. As a percentage of net sales in the European Territory, the expenses increased to 21.44% during the third quarter of 2004 compared to 17.08% 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 freight expenses. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $825,900 for the third quarter of 2004, representing an increase of $69,200, or 9.14%, over $756,700 for the corresponding period in 2003. These expenses were equal to 10.35% of net sales for the third quarter of 2004, as compared to 9.92% for corresponding period in 2003. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $392,300 for the third quarter of 2004, representing a decrease of $51,600, or 11.62%, over $443,900 for the third quarter of 2003. The decrease was primarily due to one time professional expense incurred 18 in 2003 relating to Company's property tax appeal. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $433,600 for the third quarter of 2004, representing an increase of $120,800, or 38.62%, as compared to $312,800 for the third quarter of 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, higher audit and taxation costs and increased depreciation expenses. OTHER EXPENSES Other expenses for the third quarter of 2004 totaled $424,400, representing an increase of $365,900 when compared to the third quarter of 2003. The increase was mainly due to one time legal dispute settlement expenses of $216,400 (discussed in Part II, Item 1 of this Quarterly Report) incurred in the third quarter of 2004. Additionally, during the third quarter of 2003 the Company had the benefit of a one-time payment of $122,000 as a result of the early termination of a brewing contract by Wolavers Enterprises, LLC, which event was not repeated in 2004. INCOME TAXES The Company has a provision for income taxes of $43,400 for the third quarter of 2004, compared to $93,400 for the third quarter of 2003. The increase related to the estimated amount of taxes that will be imposed by taxing authorities in the European Territory. NET LOSS The Company's net loss for the third quarter of 2004 was $34,000, as compared to income of $435,400 for the third quarter of 2003. After providing for a positive foreign currency translation adjustment of $4,100 during the third quarter of 2004 (as compared to a positive adjustment of $11,700 for the same period in 2003), the comprehensive loss for the third quarter of 2004 was $29,900, compared to income of $447,100 for the same period in 2003. NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003 NET SALES Overall net sales for the first nine months of 2004 were $22,968,600, an increase of $2,357,300, or 11.44%, compared to $20,611,300 for the same period in 2003. The increase was mainly due to increased sales in the European territory, increased selling prices for the European Territory 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 nine months of 2004. This increase was partly offset by reduction in retail sales due to closure of the Company's Hopland restaurant. DOMESTIC OPERATIONS: Domestic net sales for first nine months of 2004 were $8,524,300 compared to $8,767,000 for the same period in 2003, a decrease of $242,700, or 2.77% mainly due to decrease of $221,800 in retail sales due to closure of Company's Hopland restaurant. The sales volume decreased to 45,665 barrels during the first nine months of 2004 from 46,656 barrels in the first nine months of 2003, representing a decrease of 991 barrels, or 2.12%. Of the decrease, sale of Company's brands decreased by 28 barrels; Kingfisher volume increased by 378 barrels and contract brands sale decreased by 1,341 barrels. EUROPEAN TERRITORY: Net sales for the first nine months of 2004 were $14,444,300 (GBP 19 7,929,900) compared to $11,844,300 (GBP 7,353,500) during the corresponding period in 2003, an increase of 21.95%. During the first nine months of 2004, UBSN sold 48,011 barrels compared to 45,918 barrels during the first nine months of 2003, an increase of 2,093 barrels, or 4.56%. 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 7.84%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first nine months of 2004 was 66.13%, as compared to 67.50% during the corresponding period of 2003, due mainly to decreased costs in the United States. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during first nine months of 2004 was 65.6%, as compared to 68.81%, during the corresponding period of 2003, representing a decrease of 3.21% 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 European Territory during the first nine months of 2004 was 66.88%, as compared to 67.04% 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 0.16%. GROSS PROFIT Gross profit for the first nine months of 2004 increased to $7,779,500, from $6,698,200 during the corresponding period of 2003, representing an increase of 16.14%. As a percentage of net sales, the gross profit during the first nine months of 2004 increased to 33.87% from that of 32.5% during the corresponding period in 2003. OPERATING EXPENSES Operating expenses for the first nine months of 2004 were $7,075,900, an increase of $1,346,600, or 23.5%, as compared to $5,729,300 for the corresponding period of 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 nine months of 2004 were $4,343,500, as compared to $3,463,000 for the same period in 2003, representing an increase of 25.43%. 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 nine months of 2004 were $1,285,300 compared to $1,269,900 during the corresponding period of 2003, representing an increase of $15,400. As a percentage of net sales in the United States, these expenses increased to 15.08% during the first nine months of 2004, compared to 14.49% during the corresponding period of 2003. The increased expenses included higher salary and travel costs due to increased staffing (both in New York 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 nine months of 2004 were $3,058,200 20 compared to $2,193,100 during the corresponding period of 2003, representing an increase of $865,100. As a percentage of net sales in the European Territory, the expenses increased to 21.17% during the first nine months of 2004 compared to 18.52% 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 $2,732,400 for the first nine months of 2004, representing an increase of $466,100 or 20.57%, over $2,266,300 for the corresponding period in 2003. These expenses were equal to 11.9% of net sales for first nine months of 2004, as compared to 11.1% for the corresponding period in 2003. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $1,438,700 for the first nine months of 2004, representing an increase of $145,000, or 11.21%, over $1,293,700 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 $1,293,700 for the first nine months of 2004, representing an increase of $321,100, or 33%, as compared to $972,600 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 nine months of 2004 totaled $824,000, representing an increase of $368,400 when compared to the same period in 2003. The increase was mainly due to one time legal dispute settlement expenses of $216,400 (discussed in Part II, Item 1 of this Quarterly Report) incurred in the third quarter of 2004. Additionally, during the third quarter of 2003 the Company had the benefit of a one-time payment of $122,000 as a result of the early termination of a brewing contract by Wolavers Enterprises, LLC, which event was not repeated in 2004. INCOME TAXES The Company has a provision for income taxes of $121,600 for the first nine months of 2004, compared to $205,400 for 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 European Territory. NET LOSS The Company's net loss for the first nine months of 2004 was $242,000, as compared to profit of $307,900 for the first nine months of 2003. After providing for a positive foreign currency translation adjustment of $29,800 during the first nine months of 2004 (as compared to a positive adjustment of $30,100 for the same period in 2003), the comprehensive loss for the first nine months of 2004 was $212,200, compared to a profit of $338,000 for the same period in 2003. CAPITAL DEMANDS The Company's Ukiah and Releta facilities are both operating at significantly less than 21 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 has recently received extensions of certain of these facilities, and is currently seeking to refinance certain of them. 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. On or about November 1, 2004, the Company entered into a Settlement Agreement and Release with respect to certain business-related litigation. The Settlement Agreement calls for the Company to make payments totaling $900,000 during 2005. These payments have been partially provided for out of funds received during 2003 and previously treated as deferred gain, See Note 1 of the Notes to Financial Statements, above, and Part II, Section 1 "Legal Proceedings," below for a more complete description of the settlement amount. 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, the Company's temporary loan from Savings Bank of Mendocino and its line of credit from CIT Group (both of which are more fully described below under "Other Loans and Credit Facilities") are now scheduled to fall due on December 1 and December 31, 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. 22 On April 4, 2004, the Company received a commitment from United Breweries of America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA would provide the Company 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. On or about November 1, 2004, the Company entered into a Settlement Agreement and Mutual Release with GGDC (the "Settlement Agreement") to settle a legal dispute (more fully discussed in Part II, Item 1 of this Quarterly Report). Under the Settlement Agreement, the Company has agreed to make payments to GGDC totaling $900,000 in three installments during 2005. UBA has guaranteed these payments. Failure to make timely payment of dues to GGDC may result in GGDC enforcing its legal rights to collect the dues from the Company, which could potentially make it impossible, at least in the short term, for the Company to continue its operations. MASTER LINE OF CREDIT. On August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders, entered into a Master Line of Credit Agreement (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 September 30, 2004 was $1,515,400, and the accrued but unpaid interest thereon was equal to approximately $470,100. 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 September 30, 2004, the outstanding principal and interest on the notes was convertible into 1,323,635 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 9, 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 23 $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. 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 subsequently amended and/or extended the term of this facility on December 1, 2003, January 30, 2004, February 27, 2004, May 3, 2004, July 1, 2004, and October 31, 2004 in order to allow the Company time to refinance. On July 1, 2004 CIT Group increased the term loan repayment to $10,000 per week. On October 31, 2004, the term of this facility was extended to December 31, 2004. 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 September 30, 2004, the total amount outstanding on the line of credit was approximately $1,621,500. Management believes that it will be successful in refinancing this facility, 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 currently due for repayment on December 1, 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 8%. 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 24 outstanding on this line of credit as of September 30, 2004 was approximately $1,060,700. 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 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 7.75% for the first nine months of 2004 and 7.35% (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 nine months of 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 as of September 1, 2004. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. OVERDUE PROPERTY TAXES: As of September 30, 2004, the delinquent property taxes due on the Company's Ukiah property, including penalties and interest, totaled $695,100, 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 $2,498,300 as of September 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 September 30, 2004 was 0.81 to 1.0 and its ratio of total assets to total liabilities was 1.38 to 1.0. On September 30, 2003, the Company's ratio of current assets to current liabilities was 0.83 to 1.0 and its ratio of total assets to total liabilities was 1.54 to 1.0. 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of September 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 September 30, 2004. INTEREST RATE RISK The Company had total debt as of September 30, 2004 of $8,529,300, of which $4,773,900 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 September 30, 2004 totaled $5,411,500, of which $3,755,400 had fixed rates of interest and the balance of $1,656,100 were subject to variable rates. Short term debts amounted to $3,117,800, 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 $47,700 in interest expense on the Company's variable rate loans. FOREIGN CURRENCY RATE FLUCTUATIONS The Company's earnings and cash flows at its subsidiaries UBI and UBSN are subject to fluctuations due to changes in foreign currency rates. The Company believes that changes in the foreign currency exchange rate would not have a material adverse effect on its results of operations as the majority of its foreign transactions are delineated in UBI's functional currency, the British Pound. ITEM 4. CONTROLS AND PROCEDURES The Company's 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. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In previous 2004 Quarterly Reports on Form 10-Q the Company has reported a civil action brought against it and certain of its employees and related parties by House of Daniels, Inc., dba Golden Gate Distributing Company ("GGDC"), arising out of the Company's termination, during 2003, of a written distribution agreement with GGDC (the "Action"). In 26 addition to the Company, GGDC had also sued United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders; Dr. Vijay Mallya, who is the Chairman of the Board of the Company and of UBA; Mark Anderson, the Company's West Coast Sales Manager; and two distribution companies that were contracted by the Company to service between them the territory formerly handled by GGDC (the "Subsequent Distributors"). In the course of the Action, a cross-complaint was filed against GGDC by the Company, and cross-complaints were filed against the Company by the Subsequent Distributors. Effective on or about November 1, 2004, the Company entered into a Settlement Agreement and Release (the "Settlement Agreement") with respect to the Action. The Settlement Agreement releases the claims asserted in, arising out of, or related to the Action by GGDC against the Company and the other defendants, and by the Company against GGDC. The Agreement does not release, or even cover, the cross-claims asserted against the Company by the Subsequent Distributors, however. Under the terms of the Settlement Agreement, the Company is required to pay GGDC a total of $900,000 in settlement of all claims asserted by GGDC in the Action (the "Settlement Amount"). Payment is to be made in three installments: $400,000 by January 31, 2005; $300,000 by June 30, 2005; and the remaining $200,000 by December 31, 2005. No other payments are called for by any party to the Action. UBA has guaranteed the payment, in full, of each of the installment payments included in the Settlement Amount. (See Note 9 of the Notes to Financial Statements, in Part I, Item 1, above, for information on the accounting treatment accorded to this transaction. ITEM 5. OTHER INFORMATION. (a) On October 31, 2004, CIT Group agreed to extend until December 31, 2004 the term of its current line of credit to the Company. On November 1, 2004, Savings Bank of Mendocino County extended until December 1, 2004 the term of a $576,200 temporary loan. For more information about these facilities see Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Financial Resources" under the captions "CIT Group/Credit Finance Line of Credit" and "Savings Bank of Mendocino Temporary Loan," above. ITEM 6 EXHIBITS. 10.70 Secondment Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame, Ltd. 10.71 Agreement to Extend Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc., dated October 31, 2004. 10.72 Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of November 1 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) 27 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 28 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: November 12, 2004 By: /s/ Dr. Vijay Mallya --------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Dated: November 12, 2004 By: /s/ N. Mahadevan --------------------------------- N. Mahadevan Chief Financial Officer and Corporate Secretary 29 EXHIBIT INDEX NUMBER EXHIBIT TITLE - ------ ------------- 10.70 Secondment Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd Neame, Ltd. 10.71 Agreement to Extend Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc., dated October 31, 2004. 10.72 Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of November 1, 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) 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 30 EX-10.70 2 tex10_70-4010.txt EX-10.70 EXHIBIT 10.70 TRAVERS SMITH BRAITHWAITE DATED OCTOBER 1998 ---------------------------------------- (1) SHEPHERD NEAME LIMITED (2) UBSN LIMITED SECOND AGREEMENT THIS AGREEMENT is made the ____ day of October 1998. BETWEEN: (1) SHEPHERD NEAME LIMITED (Company Registration Number 138256) whose registered office is at 17 Court Street, Faversham, Kent ME13 7AX ("the Employer"); and (2) UBSN LIMITED (Company Registration Number 2367133) whose registered office is at 75 Westow Hill, Crystal Palace, London, SE19 1TX ("the Recipient"). WHEREAS The Recipient wishes to avail itself of the services of David Townshend of Manor Farm Cottage, West Street Cliffe, Rochester, Kent ME3 7TQ, ("the Employee') and the Employer has agreed to make such services available to the Recipient with effect from the date hereof upon the terms and subject to the conditions of this Agreement. IT IS AGREED as follows 1. DEFINITIONS In this Agreement, unless the context otherwise requires, the following words and expressions shall have the following meanings: Contract of Employment the terms and conditions of employment as at the date of this Agreement between the Employer and the Employee or such other terms and conditions of employment as may apply to his employment with the Employer from time to time; Secondment Period the term of this Agreement: Services such services as the Employee is required by the Recipient to perform relating to his acting as Managing Director with responsibility for the day to day operation of the Recipient's business in accordance with the Contract of Employment, such services to be performed, for the avoidance of doubt, on a full time basis throughout normal working hours. 1 2. SERVICES The Employer shall procure that the Employee shall be seconded to the Recipient, on the terms and conditions of this Agreement, to provide the Services during the Secondment Period. 3. TERM This Agreement shall commence on the date hereof and continue until terminated by either party giving to the other not less than three months' written notice. 4. SECONDMENT FEE 4.1 During the Secondment Period, the Recipient shall pay to the Employer in arrears each calendar month a secondment fee (plus VAT thereon) of such sum as is notified to the Recipient by the Employer as being the costs of employing the Employee during the relevant calendar month in accordance with the Contract of Employment including, but not limited to, wages and salaries, pension contributions, benefits, tax and National Insurance contributions and employee related overheads and expenses (plus VAT thereon). Each monthly secondment fee (plus VAT) shall be payable by the Recipient to the Employer within 7 days of an invoice being submitted to the Recipient by the Employer. 4.2 The Employer may in its sole discretion, at any time and on any number of occasions, increase the secondment fee to take account of any increases in the salary, and/or benefits and/or pension contributions in respect of the Employee. 5. CONTROL During the Secondment Period, the Employee shall be under the exclusive day to day control and supervision of the Recipient, in particular in relation to the allocation and performance of his duties, and shall be subject to the working practices of, and take instructions from, the Recipient. 6. CONTRACT OF EMPLOYMENT The Recipient acknowledges that the Employer has provided the Recipient with a copy of the Contract of Employment. The Employer shall promptly inform the Recipient of any variation to the Contract of Employment and supply the Recipient with a copy of such variation. 7. INDEMNITY The Recipient shall not at any time during the Secondment Period through any act or omission directly or indirectly cause a breach of the Contract of Employment or any employment policy relating thereto and shall indemnify and keep indemnified the Employer against any and all casts, claims, demands, expenses, liabilities or losses (including any related settlement costs and expenses to include legal fees) made against or incurred or suffered by the Employer in relation to the Employee arising out of or in connection with the provision of the Services including, but not limited to, health and safety issues. 2 8. CONFIDENTLAUTY Any confidential information and/or know-how of which the Employee becomes aware by virtue of his activities in providing the Services shall belong to the Recipient absolutely and the Employer shall not, whether during the Secondment Period or thereafter, make use of any such rights for its own or anyone else's benefit. 9. LAW This Agreement shaft be governed by and construed in accordance with the laws of England. SIGNED By for and on behalf of SHEPHERD NEAME LIMITED in the presence of: SIGNED By for and on behalf of UBSN LIMITED in the presence of: 3 EX-10.71 3 tex10_71-4010.txt EX-10.71 EXHIBIT 10.71 CIT Tcl:312 424-9700 Business Credit Fox:312-424.9798 Ten South LaSalle Street www_cit.com 22nd Flood Chicago, IL 60603-1097 October 31, 2004 VIA FACSIMILE Mendocino Brewing Company, Inc. Releta Brewing Company LLC 1 610 Airport Road 131 Excelsior Avenue Ukiah, California 95482 Saratoga Springs, NY ] 2866 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 another 60 days. Accordingly, the Loan Agreement is hereby amended as follows: SECTION 9.1 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 December 31, 2004." The Loan Agreement shall terminate and all Obligations shall he due and payable in full on December 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 CIT 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 November 15. 2004 and $1250 on December 15, 2004. Mendocino Brewing Company, Inc. Relent Brewing Company LLC October 31, 2004 Page 2 Except as expressly modified by this letter agreement, all of the terms and provisions of the Linn 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, EXECUILD, 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 sued counterparts together constitute but one and the same lent. This letter is binding upon each of Boro3wcrs, CUE 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, THE CIT GROUP/BUSINESS CREDIT, INC. By:/s/Scott Kennedy Title: Vice President Mendocino Brewing Company, Inc. Releta Brewing Company LLC October 31, 2004 Page 3 Agreed to this 31st day of October, 2004: MENDOCINO BREWING COMPANY, INC. By : /s/ Mahadevan Narayanan By : /s/ Yashpal Singh ------------------------ ----------------- Title: Chief Financial Officer Title: President EX-10.72 4 tex10_72-4010.txt EX-10.72 EXHIBIT 10.72
SAVINGS BANK OF MENDOCINO COUNTY A Full Service Commercial BANK PROMISSORY NOTE - -------------------------------------------------------------------------------------------------------------- Principal .LOAN-DATE Maturity Loan No Call/ Coll Account Officer Initials $576,211.80 11-01--2004 12-01-2004 7010042183 21.1210 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: 7.750% DATE OF NOTE: NOVEMBER 1, 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 NOVEMBER 1, 2004, UNTIL PAID IN FULL. PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PRINCIPAL PAYMENT OF $576,211.80 PLUS INTEREST ON DECEMBER 1, 2004. This PAYMENT due on December 1, 2004, will be for all principal and all accrued interest not yet PAID. 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 4.750% 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 7.750% 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 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,
PROMISSORY NOTE (Continued) LOAN No: 7010042183 Page 2 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 DATED 12/31/2003 AND AN ASSIGNMENT OF DEPOSIT ACCOUNT OF EVEN DATE HEREWITH. 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 (Continued) LOAN No: 7010042183 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/ By: /s/ ----------------------------------------------- --------------------------------------------------- YASHPAL SINGH, PRESIDENT OF MENDOCINO BREWING NARAYANA MAHADEVAN, CONTROLLER/TREAS./SECTY. OF COMPANY, INC. MENDOCINO BREWING COMPANY, INC.
EX-31.1 5 tex31_1-4010.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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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. 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 c. 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 officer 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 the 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. Date: November 12, 2004 /s/ Dr. Vijay Mallya -------------------- Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer EX-31.2 6 tex31_2-4010.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 report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer 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. 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 c. 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 officer 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 the 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. Date: November 12, 2004 /s/ N. Mahadevan ------------------------ N. Mahadevan, Chief Financial Officer EX-32.1 7 tex32_1-4010.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 September 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. 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. Date: November 12, 2004 /s/ Dr. Vijay Mallya -------------------- Name: Vijay Mallya Title: Chairman of the Board and Chief Executive Officer EX-32.2 8 tex32_2-4010.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 September 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. 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. Date: November 12, 2004 /s/ N. Mahadevan ---------------- Name: N. Mahadevan Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----