-----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, CFSlevq8E8xTlXviQ0aRWUgd2uYslUxU1iqqLeO2sBh3TudUpb3Zp5WEePr/N1xw m5TdL0BtW0yLsLgovK1M1Q== 0001188112-05-001104.txt : 20050520 0001188112-05-001104.hdr.sgml : 20050520 20050520155442 ACCESSION NUMBER: 0001188112-05-001104 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050520 DATE AS OF CHANGE: 20050520 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: 05848306 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.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005 | | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 1-13636 MENDOCINO BREWING COMPANY, INC. (Exact name of Registrant as Specified in its Charter) CALIFORNIA 68-0318293 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 1601 AIRPORT ROAD, UKIAH, CA 95482 (Address of principal executive offices) (707) 463-6610 (Registrant's Telephone Number, Including Area Code) Not Applicable (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: The number of shares of the issuer's common stock outstanding as of March 31, 2005 is 11,473,914.
PART I ITEM 1. FINANCIAL STATEMENTS. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS MARCH 31, DECEMBER 31, 2005 2004 CURRENT ASSETS Cash $ 1,249,300 $ 526,600 Accounts receivable, allowance for doubtful 7,830,900 8,477,200 accounts of $53,200 and $47,500 Inventories 1,014,500 1,185,400 Prepaid expenses 186,700 347,300 ----------- ----------- Total Current Assets: 10,281,400 10,536,500 ----------- ----------- PROPERTY AND EQUIPMENT 13,472,700 13,533,900 ----------- ----------- OTHER ASSETS Deposits and other assets 193,100 205,100 Intangibles net of amortization 85,100 87,600 Total Other Assets: 278,200 292,700 ----------- ----------- Total Assets: $24,032,300 $24,363,100 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 4,079,400 $ 3,282,200 Note payable 576,200 576,200 Accounts payable 4,935,100 5,897,600 Accrued liabilities 1,376,300 1,402,900 Legal dispute settlement 502,800 911,800 Income taxes payable 160,500 134,100 Current maturities of obligation under long-term debt 392,000 400,30 Current maturities of obligation under capital lease 136,500 146,500 ----------- ----------- Total Current Liabilities: 12,158,800 12,751,600 NOTES TO RELATED PARTY 2,438,300 2,010,100 Long term debt, less current maturities 3,337,700 3,384,800 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 52,500 62,600 ----------- ----------- Total Liabilities: 17,987,300 18,209,100 ----------- ----------- 1
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 10,000,000 shares authorized, 227,600 shares issued and outstanding 227,600 227,600 Common stock, no par value: 30,000,000 shares authorized, 11,473,914 and 11,266,874 shares issued and outstanding 14,747,300 14,648,600 Accumulated comprehensive income 185,000 194,300 Accumulated deficit (9,114,900) (8,916,500) ----------- ----------- Total Stockholders' Equity 6,045,000 6,154,000 ----------- ----------- Total Liabilities and Stockholders' Equity: $24,032,300 $24,363,100 =========== =========== The accompanying notes are an integral part of these financial statements. 2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ------------------------------------ Three Months Ended March 31, ------------------------------------ 2005 2004 ---- ---- Sales $ 7,406,100 $ 6,946,000 Less excise taxes 149,200 142,800 ------------ ------------ Net Sales 7,256,900 6,803,200 Cost of goods sold 4,986,400 4,634,800 ------------ ------------ Gross Profit 2,270,500 2,168,400 ------------ ------------ Marketing 1,316,200 1,328,300 General and administrative 903,200 984,100 ------------ ------------ 2,219,400 2,312,400 ------------ ------------ INCOME (Loss) from operations 51,100 (144,000) ------------ ------------ Other income (expense) Miscellaneous income 4,600 4,000 Loss on sale of asset (3,300) (1,600) Interest expense (220,600) (212,000) ------------ ------------ (219,300) (209,600) ------------ ------------ Loss before income taxes (168,200) (353,600) PROVISION FOR INCOME TAXES 30,200 20,800 ------------ ------------ Net Loss (198,400) (374,400) ------------ ------------ Foreign currency translation adjustment (9,300) 62,100 ------------ ------------ COMPREHENSIVE LOSS $ (207,700) $ (312,300) ============ ============ NET Loss per share $ (0.02) $ (0.03) ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,439,407 11,266,874 ============ ============ The accompanying notes are an integral part of these financial statements. 3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ---------------------------------------- Three Months Ended March 31 ---------------------------------------- 2005 2004 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net Loss $ (198,400) $ (374,400) Adjustments to reconcile net loss to net cash from operating activities: Depreciation and amortization 223,700 302,700 Allowance for doubtful accounts 5,700 38,200 Loss on sale of assets 3,300 1,600 Shares issued for services 98,700 -- Changes in: Accounts receivable 528,700 485,600 Inventories 170,900 81,800 Prepaid expenses 158,100 136,400 Deposits and other assets 26,400 (16,200) Accounts payable (904,400) (276,600) Accrued liabilities (426,400) (357,100) Income taxes payable 28,400 --- ------------ ----------- Net cash from operating activities: (285,300) 22,000 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold (191,700) (156,300) improvements Proceeds from sale of fixed assets 8,300 3,300 ------------ ----------- Net cash from investing activities: (183,400) (153,000) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on line of credit 822,700 416,700 Repayment on long-term debt (42,600) (172,900) Borrowings on related party debt 428,200 20,600 Payments on obligation under long term lease (20,100) (23,800) ------------ ----------- Net cash from financing activities: 1,188,200 240,600 ------------ ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 3,200 39,200 ------------ ----------- NET CHANGE IN CASH 722,700 148,800 ------------ ----------- CASH, beginning of period 526,600 554,300 ------------ ----------- CASH, end of period $ 1,249,300 $ 703,100 ============ =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 192,400 $ 191,400 Non-cash investing activity Seller Financed equipment $ 29,500 $ 15,400 The accompanying notes are an integral part of these financial statements. 4
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION As used herein, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2004. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005, are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. NOTE 2 - LINE OF CREDIT The Company had available a $3,500,000 line of credit secured by substantially all of the assets of the Releta Brewing Company, LLC, accounts receivable and inventory of the Ukiah Brewery, certain securities pledged by a stockholder, and a second position on the real property of the Ukiah Brewery. As of March 31, 2005, the total amount outstanding on the line of credit was approximately $1,309,600. The Company used the proceeds from the BFI Facility (discussed below) and paid off the entire amount outstanding under this line of credit on May 6, 2005. On May 5, 2005, the Company entered into a receivables and inventory-based line of credit transaction with BFI Business Finance ("BFI"), pursuant to which BFI has provided the Company with a $2,000,000 maximum revolving line of credit with an advance rate based on 80% of MBC's qualified accounts receivable, 70% of Releta's qualified accounts receivable, and 50% of the eligible inventory carried by both MBC and Releta (the "BFI Line of Credit"). At the same time, BFI also advanced the Company $31,240 under a promissory note (the "BFI Note" and, together with the BFI Line of Credit, the "BFI Facility"). On May 6, 2005, the Company used the entire immediately available amount drawable under the BFI Facility to pay off the balance remaining outstanding under the CIT Line of Credit (discussed above). On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a temporary loan in the principal amount of $576,200 to MBC in order to finance a buy-out of equipment leased through Finova Capital Corporation. The lender has committed to extend the loan until May 2006. The rate of interest on the loan is prime plus 3%. 5 Nedbank Limited, a South African registered company, has provided a credit facility of GBP 1,250,000 to UBSN Ltd. ("UBSN"), a wholly-owned subsidiary of United Breweries International (UK) Ltd. ("UBI"), which is in turn wholly-owned by the Company. This facility includes a revolving short-term loan, overdraft protection, and foreign exchange services. It is available until terminated by Nedbank, and is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of March 31, 2005 was approximately $2,769,800. 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. The amount outstanding on this note as of March 31, 2005 was approximately $2,267,500. The Company owed the County of Mendocino $574,500, which represents overdue taxes for the period from April of 1999 to June of 2003. Under the payment plan executed with the County, this amount is payable in four annual installments on or before April 10 of each year, commencing in the year 2005, along with accrued interest calculated at 18% per year. The Company paid the next installment along with accrued interest on April 8, 2005. Failure to timely pay any installment or any current property taxes may result in the County selling the Company's Ukiah property to satisfy this outstanding debt. UBSN has engaged Shepherd Neame Limited ("Shepherd Neame") 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 $1,133,300, therefore, each payment of 60,000 GBP would be approximately equal to $113,300. The loan carries an interest rate of 5% per year. The amount outstanding on this loan as of March 31, 2005 was approximately $887,700. On August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000, although as of December 31, 2004 the principal amount outstanding under these notes was $1,155,400. The notes bear interest at the prime rate plus 1.5%, subject to a maximum of 10% per annum, and each note originally 6 matured 18 months from the date of the particular advance. The Company and UBA have executed an Extension of Term of Notes under Master Line of Credit Agreement, which confirms the Company's and UBA's extension of the terms of the UBA Notes for a period ending on August 31, 2005. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which confirms that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. Although technically UBA has the right to demand payment within 60 days of the extension date, it is currently precluded from doing because the notes are subordinated to the long-term debt agreement with Savings Bank of Mendocino County and the line of credit with BFI. Because of the subordination, the Company has shown these notes as long term debt. The Company expects the maturity dates to be extended again. UBA funded the Company another $400,000 on March 1, 2005, in connection with which the Company then issued to UBA another convertible note maturing 18 months from that date. The notes are convertible, at UBA's option, into common stock at $1.50 per share. As of March 31, 2005, the aggregate principal balance due under these Notes was $1,555,400; interest accrued on the Notes is approximately $522,900. NOTE 4 -- RELATED PARTY TRANSACTIONS MBC and its subsidiaries have entered into or amended several agreements with affiliated and related entities. Among these were a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. Additional information about these transactions may be found in the Company's annual report on Form 10-K for the year ended December 31, 2004. UBSN is a party to a brewing agreement and a loan agreement with Shepherd Neame Limited ("Shepherd Neame"). Shepherd Neame was deemed to be a related party at March 31, 2004 since Mr. R.H.B. Neame (Shepherd Neame's Chairman of the Board) was then also a director of the Company and Mr. David Townshend (a senior employee of Shepherd Neame) was serving as the President of UBSN and also as a Director of the Company. Both M/s Neame and Townshend are no longer serving on the Board of the Company and hence Shepherd Neame is no longer treated as a related party at March 31, 2005. The following table reflects the value of the transactions for the quarter ended March 31, 2005 and 2004. 7
- --------------------------------------------------------- --------------- --------------- 2005 2004 - --------------------------------------------------------- --------------- --------------- Sales to Shepherd Neame $522,500 - --------------------------------------------------------- --------------- --------------- Purchases from Shepherd Neame 2,989,700 - --------------------------------------------------------- --------------- --------------- Expenses reimbursement to Shepherd Neame 243,100 - --------------------------------------------------------- --------------- --------------- Interest expenses associated with UBA convertible notes payable $28,200 20,600 - --------------------------------------------------------- --------------- --------------- Accounts payable to Shepherd Neame 3,228,200 - --------------------------------------------------------- --------------- --------------- Account receivable from Shepherd Neame 516,400 - --------------------------------------------------------- --------------- ---------------
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. No calculation of dilutive earnings per share is provided because of the net loss would make any potentially dilutive shares antidilutive. NOTE 6 - INVENTORY MARCH 31, DECEMBER 31, 2005 2004 Raw Materials $ 266,000 $ 357,500 Beer-in-process 184,300 140,100 Finished Goods 535,200 664,700 Merchandise 29,000 23,100 ---------- ---------- TOTAL $1,014,500 $1,185,400 ========== ========== NOTE 7 - STOCKHOLDERS' EQUITY The following table summarizes equity transactions during the three months ended March 31, 2005.
SERIES A PREFERRED STOCK COMMON STOCK OTHER -------------------------- ---------------------------- COMPREHENSIVE ACCUMULATED TOTAL SHARES AMOUNT SHARES AMOUNT INCOME / (LOSS) DEFICIT EQUITY ------------- ------------ ------------- -------------- ----------------- --------------- -------------- Balance, December 31, 2004 227,600 $ 227,600 11,266,874 $ 14,648,600 $194,300 $ (8,916,500) $ 6,154,000 Stock issued for services 207,040 98,700 98,700 Net Loss (198,400) (198,400) Currency Translation Adjustment (9,300) (9,300) Balance, March 31, 2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $185,000 $ (9,114,900) $ 6,045,000 ============= ============ ============= ============== ================= =============== ==============
8 NOTE 8 - STOCK BASED COMPENSATION The Company had a stock-based employee compensation plan that allowed the Company to grant options to purchase up to 1,000,000 shares of the Company's common stock. The plan expired in 2004. The Company accounts for the option that had been issued from 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 2005 or 2004 so no pro forma information is disclosed. NOTE 9. SEGMENT INFORMATION The Company's business segments are brewing operations, distributing operations in the United Kingdom, and retail sales at the Hopland Brewery and the tasting room at Saratoga Springs. A summary of each segment is as follows:
Three months ended March 31, 2005 Domestic European Retail Corporate & Operations Territory Operations Others Total Net Sales $ 2,475,600 $ 4,740,100 $ 41,200 $ - $ 7,256,900 Operating Profit/(Loss) (71,600) 123,200 (500) - 51,100 Identifiable Assets 12,898,000 8,850,500 105,300 2,178,500 24,032,300 Depreciation & amortization 117,700 96,700 1,200 8,100 223,700 Capital Expenditures 34,200 157,500 - 191,700 Three months ended March 31, 2004 Domestic European Retail Corporate & Operations Territory Operations Others Total Net Sales $ 2,298,600 $ 4,466,700 $ 37,900 $ - $ 6,803,200 Operating Profit/(Loss) (199,500) 63,200 (7,700) - (144,000) Identifiable Assets 13,444,000 7,250,700 93,700 2,176,300 22,964,700 Depreciation & amortization 185,600 108,500 1,300 7,300 302,700 Capital Expenditures 15,400 140,900 - 156,300
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/cash flows of the Company for the three months ended March 31, 2005, compared to the three months ended March 31, 2004. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in the company's Annual Report on Form 10-K for the year ended December 31, 2004. In this Report, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. FORWARD LOOKING STATEMENTS Various portions of this Quarterly Report, including but not limited to the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking information. Such information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs, and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of those and similar words are intended to identify such forward-looking information. Any forward-looking statements made by the Company are intended to provide investors with additional information with which they may assess the Company's future potential. All forward-looking statements are based on assumptions about an uncertain future and are based on information available at the date such statements are issued. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including but not limited to: changes in the pricing environment for the Company's products; changes in demand for malt beverage products in different Company markets; changes in distributor relationships or performance, changes in customer preference for the Company's malt beverage products; regulatory or legislative changes; the impact of competition, changes in raw materials prices; availability of financing for operations, changes in interest rates; changes in the company's European beer and/or restaurant business, and other risks discussed elsewhere in this Quarterly Report and from time to time in the Company's Securities and Exchange Commission (the "Commission") filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and in general domestic and European economic and political conditions. The Company undertakes no obligation to update these forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made or to publicly 10 release the results of any revision to these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. CRITICAL ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value the majority of the Company's inventories. o The Company follows Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," in accounting for its employee stock options using the intrinsic 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 11 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. These accounting policies are applied consistently for all years presented. The Company's operating results would be affected if other alternatives were used. Information about the impact on operating results is included in the footnotes to the Company's consolidated financial statements. SEGMENT INFORMATION Prior to 2001, the Company's business operations were exclusively located in the United States, where it was divided into two segments, manufacturing and distribution of beer, which accounted for the majority of the Company's gross sales, and retail sales (primarily at the Company's Hopland, California, tavern and merchandise store) which generally accounted for less than 5% of gross sales (by revenue). With the Company's acquisition of United Breweries International(UK) , Ltd. ("UBI") in August 2001, however, the Company gained a new business segment, distribution of beer outside the United States, primarily in the U.K. and Ireland, continental Europe, and Canada (the "European Territory"). This segment accounted for 64% of the Company's gross sales during the first quarter of 2005 and 2004, with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales (the "Domestic Territory") accounting for the remaining 36%. With expanded wholesale distribution of beer and closure of restaurant at Hopland, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. SEASONALITY Sales of the Company's products are somewhat seasonal. Historically, sales volumes in all geographic areas have been comparatively low during the first quarter of the calendar year in both the US market and the Company's European Territory. In the US, sales volumes have been stronger during the second and third quarters and slower again during the fourth quarter, while in the Company's European Territory the fourth quarter has generated the highest sales volume. The volume of sales in any given area may also be affected by local weather conditions. Because of the seasonality of the Company's business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. SUMMARY OF FINANCIAL RESULTS The Company ended the first quarter of 2005 with a net loss of $198,400, as compared to a net loss of $374,400 for the same period in 2004. As set forth more fully under "Results of Operations," below, during the first quarter the 12 Company experienced an increase in gross sales of $460,100, or 6.6% as compared to the first quarter of 2004. Costs of goods sold increased by $351,600, or 7.6%, marketing costs decreased by $12,100, or 0.9%, general and administrative costs decreased by $80,900, or 8.2%, and interest expenses increased by $8,600, or 4.1%, all of which contributed to the net loss for the period. RESULTS OF OPERATIONS The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto. ------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 2005 2004 STATEMENTS OF OPERATIONS DATA: % % - - Sales 102.06 102.10 Less Excise taxes 2.06 2.10 -------- -------- NET SALES 100.00 100.00 Costs of Sales 68.71 68.13 -------- -------- GROSS PROFIT 31.29 31.87 -------- -------- Marketing 18.14 19.52 General and Administrative Expense 12.45 14.47 PROFIT / (LOSS) FROM OPERATIONS 0.70 (2.12) Other (Income) / Expense (0.02) (0.04) Interest Expense 3.04 3.12 -------- -------- Loss before income taxes (2.32) (5.20) Provision for income taxes 0.42 0.31 -------- -------- 0.42 NET LOSS (2.73%) (5.51%) ======== ======== Other Comprehensive Loss (0.13) 0.91 ======== ======== COMPREHENSIVE LOSS (2.86%) (4.60%) ======== ======== 13 ------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- 2005 2004 BALANCE SHEET DATA: $ $ - - Cash and Cash Equivalents 1,249,300 703,100 Working Capital (1,877,400) (2,078,900) Property and Equipment 13,472,700 13,762,900 Deposits and Other Assets 278,200 291,400 Total Assets 24,032,300 22,964,700 Long-term Debt (less current maturities) 3,337,700 3,670,700 Capital Lease (less current maturities) 52,500 168,300 Total Liabilities 17,987,300 16,770,400 Accumulated Deficit (9,114,900) (8,822,000) Stockholder's equity 6,045,000 6,194,300 NET SALES Overall net sales for the first quarter of 2005 were $7,256,900, an increase of $453,700, or 6.7%, compared to $6,803,200 for the first quarter of 2004. The increase was mainly due to increased sales and exchange rate fluctuations. DOMESTIC OPERATIONS. Domestic net sales for first quarter of 2005 were $2,516,800 compared to $2,336,500 for the same period in 2004, an increase of $180,300, or 7.72%. The sales volume increased to 13,370 barrels in first quarter of 2005 from 12,772 barrels in the first quarter 2004, representing an increase of 598 barrels, or 4.68%. Of the increase, sale of Company's brands increased by 543 barrels; Kingfisher volume decreased by 53 barrels and contract brands sale increased by 108 barrels. EUROPEAN TERRITORY: Net sales for the first quarter of 2005 were $4,740,100 (GBP 2,507,100) compared to $4,466,700 (GBP 2,428,100) during the corresponding period of 2004, an increase of $273,400, or 6.12%. During the first quarter of 2005, UBSN sold 15,292 barrels (including 719 barrels of Sun Lik beer) compared to 14,389 barrels (including 756 barrels of Sun Lik beer) during the first quarter of 2004. As of April 1, 2005, Shepherd Neame terminated the distribution arrangements entered with UBSN for distribution of Sun Lik beer; as a result the Company will no longer distribute Sun Lik beer. Exchange rate fluctuations when measured in United States dollars increased growth percentage as compared to last year and hence when the net sales results are compared in Pounds Sterling, the increase in net sales is only 3.25%. 14 COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first quarter of 2005 was 68.71%, as compared to 68.13% during the corresponding period of 2004 mainly due to increased cost in the United Kingdom. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during the first quarter of 2005 was 70.94%, as compared to 71.13%, during the corresponding period of 2004, representing a decrease of 0.19% mainly due to a decrease in depreciation costs. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the first quarter of 2005 was 67.95%, as compared to 66.93% during corresponding period in 2004 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), representing increase of 1.02% mainly due increase in purchase price of the products from Shepherd Neame. GROSS PROFIT As a result of the higher net sales described above, gross profit for the first quarter 2005 increased to $2,270,500, from $2,168,400 during the corresponding period of 2004, representing an increase of 4.71%. As a percentage of net sales, the gross profit during the first quarter of 2005 decreased to 31.29% from that of 31.87% for the first quarter of 2004. OPERATING EXPENSES Operating expenses for the first quarter of the year 2005 were $2,219,400, a decrease of $93,000, or 4.02%, as compared to $2,312,400 for the corresponding period of the year 2004. Operating expenses consist of marketing and distribution expenses and general and administrative expenses. MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and distribution expenses consist of salesmen's salaries and commissions, advertising costs, product and sales promotion costs, travel expenses and related costs and Company's tavern and tasting room expenses. Such expenses for the first quarter of 2005 were $1,316,200, as compared to $1,328,300 for the first quarter of 2004, representing a marginal decrease of 0.9%. DOMESTIC OPERATIONS: Expenses for the first quarter of 2005 were $353,500 compared to $400,300 during the corresponding period of 2004, representing a decrease of $46,800. As a percentage of net sales in the United States, the expenses decreased to 14.05% during the first quarter of 2005, compared to 17.13% during the corresponding period of 2004. The reduction was due to temporarily reduced salary expenses due to reduction in manpower and reduced advertising and promotional expenses. EUROPEAN TERRITORY: Expenses for the first quarter of 2005 were $962,700 compared to $928,000 during the corresponding period of 2004, representing an increase of $34,700. As a percentage of net sales in the United 15 Kingdom, the expenses decreased to 20.31% during the first quarter of 2005 compared to 20.78% during the corresponding period of 2004 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase was caused mainly by higher salary and travel costs as a result of additional manpower, increases in sales promotional expenses, and higher commissions and discounts due to increased sales. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $903,200 for the first quarter of the year 2005, representing a decrease of $80,900, or 8.22%, over $984,100 for the corresponding period in 2004. These expenses were equal to 12.45% of net sales for the first quarter of the year 2005, as compared to 14.47% in the first quarter of 2004. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $469,900 for the first quarter of the year 2005, representing a decrease of $28,400, or 5.7%, over $498,300 for the first quarter of the year 2004. The decrease was primarily due to decreased legal expenses caused by settlement of legal dispute with a distributor in the year 2004. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $433,300 for the first quarter of the year 2005, representing a decrease of $52,500, or 10.81%, as compared to $485,800 for the first quarter of the year 2004 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The decreases was mainly due to lower depreciation, exchange rate differences within the European territory, and a smaller provision for bad debt expenses. OTHER EXPENSES Other expenses for the first quarter of 2005 totaled $219,300, representing an increase of $9,700 when compared to the first quarter of 2004 mainly due to increase in interest expenses as a result of increased borrowings under the lines of credit. INCOME TAXES The Company has a provision for income taxes of $30,200 for the first quarter of 2005, compared to $20,800 for the first quarter of 2004. The provision for taxes related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. NET LOSS The Company's net loss for the first quarter of 2005 was $198,400, as compared to loss of $374,400 for the first quarter of 2004. After providing for a negative foreign currency translation adjustment of $9,300 during the first quarter of 2005 (as compared to a positive adjustment of $62,100 for the same period in 2004), the comprehensive loss for the first quarter of 2005 was $207,700, compared to a loss of $312,300 for the same period in 2004. 16 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. In order to continue its operations, the Company will have to make timely payments of its debt and lease commitments as they fall due. Any breach of a loan or lease which actually leads to default, or to an attempt by a creditor to exercise its rights in the Company's tangible or intangible assets, could potentially make it difficult, at least in the short term, for the Company to continue its operations. MASTER LINE OF CREDIT. On August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. The Company and UBA have executed an Extension of Term of Notes under Master Line of Credit Agreement (the "Extension Agreement"). The Extension Agreement confirms the Company's and UBA's extension of the terms of the UBA Notes for a period ending on August 31, 2005. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which confirms that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. As of the date of this filing, UBA has made fourteen (14) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen-month promissory notes issued by the Company to UBA (the "UBA Notes"). The aggregate outstanding principal amount of the UBA Notes as of March 31, 2005 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $522,900. 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 17 unregistered Common Stock at a conversion rate of $1.50 per share. As of March 31, 2005, the outstanding principal and interest on the notes was convertible into 1,625,538 shares of the Company's Common Stock. Because these notes are subordinated to credit facilities extended to the Company by BFI and SBMC (discussed below), UBA is currently precluded from demanding repayment under them, and the Company does not expect to make payments on any of these notes within the next year. The Company also expects the maturity dates of these notes to be extended, although there is no current agreement to do so. LONG TERM DEBT: MBC has obtained a $2.7 million loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in partially amortizing monthly installments of $24,400 including interest at the rate of 7.24%, maturing December 2012 with a balloon payment in the amount of $932,600. The interest rate is adjusted on every five year anniversary of the agreement to the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon payment will vary depending on the change in interest rates over the years. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment. OTHER LOANS AND CREDIT FACILITIES. BFI LOAN AND LINE OF CREDIT: On May 5, 2005, the Company entered into a receivables and inventory-based line of credit transaction with BFI Business Finance ("BFI"),pursuant to which BFI has provided the Company with a $2,000,000 maximum revolving line of credit with an advance rate based on 80% of MBC's qualified accounts receivable, 70% of Releta's qualified accounts receivable, and 50% of the eligible inventory carried by both MBC and Releta (the "BFI Line of Credit"). The BFI Line of Credit has an initial term of twelve months, but it can be automatically extended, at the Company's option, for an unlimited number of additional twelve-month periods. However, BFI also retains the right to terminate the BFI Line of Credit at any time, upon 30 days' notice. The minimum monthly interest payment commitment under the BFI Line of Credit is approximately $6,000, and there is no prepayment fee if the BFI Line of Credit remains outstanding for a minimum of six (6) months. The BFI Facility carries an interest rate equal to the greater of 9.5%, or the prime rate announced in the Western edition of the Wall Street Journal plus 3.75 %, payable monthly. The facility is also subject to a monthly administrative fee of 0.40%. At the same time, BFI also advanced the Company $31,240 under a promissory note (the "BFI Note" and, together with the BFI Line of Credit, the "BFI Facility"). The BFI Note is interest-only until September of 2005; principal under the BFI Note is payable in four equal monthly installments commencing in September 2005. On May 6, 2005, the Company used the entire immediately 18 available amount drawable under the BFI Facility to pay off the balance remaining outstanding under the CIT Group Line of Credit discussed below. CIT GROUP/CREDIT FINANCE LINE OF CREDIT: The CIT Group/Credit Finance, Inc. provided MBC a $3,000,000 maximum line of credit secured by all accounts, general intangibles, inventory, and equipment of MBC except for the specific equipment and fixtures of the Company leased from Finova Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to MBC as an initial term loan, which was repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. As of March 31, 2005, the total amount outstanding on the line of credit was approximately $1,309,600. The Company used the proceeds from the BFI Facility and paid off the entire amount outstanding on May 6, 2005. SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a temporary loan in the principal amount of $576,200 to the Company in order to finance buy-out of equipment leased through Finova Capital Corporation 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 bank's prime rate plus 3%. On April 27, 2005, SBMC formally committed to extend the loan until May 2006. NEDBANK LIMITED OPTION FACILITY: Nedbank Limited, a South African registered company ("Nedbank"), has provided UBSN with a multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft facility, which may be terminated by Nedbank at any time (with or without default) on thirty days' notice, is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of March 31, 2005 was approximately $2,769,800. The agreement restricts the subsidiary from making distributions and payments to the parent in excess of approximately (pound)100,000 annually (approximately $189,000). The inability to transfer funds from the subsidiary could have an adverse effect on the Company. 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 8.53% for the first quarter of the year 2005 and 7.58% for the corresponding period in 2004. For loans primarily associated with Company's European territory, the weighted average rate paid was 6.1% for the first quarter of the year 2005 and 5.5% for the corresponding period in 2004. 19 KEG MANAGEMENT ARRANGEMENT: The Company entered into a keg management agreement with MicroStar Keg Management LLC. in September 2004 for a period of five years. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. If the agreement is terminated, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurance that the Company will be able to finance the purchase of kegs. Failure to purchase the necessary kegs from MicroStar on termination of contract is likely to have a material adverse effect on the Company. OVERDUE PROPERTY TAXES: As of March 31, 2005, the balance of delinquent property taxes due on the Company's Ukiah property was approximately $574,500. Pursuant to an agreement with Mendocino County, the balance of the overdue taxes should 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. The Company made a payment on April 8, 2005 of 20% of the original amount outstanding, together with interest accrued until March 2005. 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 $2,490,200 as of March 31, 2005. Under UBI's line of credit agreement, distributions and other payments to the Company from its subsidiary are limited to approximately $200,000 per year. CURRENT RATIO The Company's ratio of current assets to current liabilities on March 31, 2005 was 0.85 to 1.0 and its ratio of total assets to total liabilities was 1.34 to 1.0. On March 31, 2004, the Company's ratio of current assets to current liabilities was 0.81 to 1.0 and its ratio of total assets to total liabilities was 1.37 to 1.0. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of March 31, 2005, the Company did not hold derivative instruments, or engage in hedging activities, of any material value or in any material amount, whether for trading or for hedging purposes. The Company has some interest-related market risk due to floating interest rate debt totaling $4,307,800 as of March 31, 2005. 20 INTEREST RATE RISK The Company had total debt as of March 31, 2005 of $9,900,700, of which $6,171,000 was subject to variable rates of interest (either prime or LIBOR plus 1.5% or prime plus 4.25%). Its long-term debt (including current portion) as of March 31, 2005 totaled $5,245,100, of which $3,729,700 had fixed rates of interest and the balance of $1,515,400 were subject to variable rates. Short term debts amounted to $4,655,600 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 $61,700 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. 21 PART II OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The Company's policy with respect to compensation of outside Directors of MBC for their services as Directors is as follows: each outside Director receives $3,000 per Board meeting attended and $1,000 per committee meeting attended. Prior to 2003, the Company had a policy of granting shares of Common Stock in lieu of cash to non-employee directors at their option, as compensation for their attendance at meetings of the Board of Directors and of Committees of the Board on which they serve, based on a standard schedule of $3,000 per Board meeting attended and $1,000 per committee meeting attended. However, because the market value of the Company's Common Stock fell below fifty cents per share during the latter half of 2002, and has since remained consistently below $1.00 per share (at times falling below twenty cents per share) - which would have increased quite significantly the number of shares otherwise issuable to these Directors -- the Board of Directors adopted a Directors' Stock Grant Plan under which non-employee Directors would receive, as compensation for Board and Committee meetings attended, shares of the Company's Common Stock valued at the higher of the book or market value as on the last day of each year in respect of compensation due for the years 2002, 2003, and 2004. Effective as of January 31, 2005, therefore, stock grants based on the book value of the Company's Common Stock were approved under the Directors' Stock Grant Plan in respect of compensation due to Directors Michael Laybourn, Sury Rao Palamand, and Kent Price for their service on the Board and various Board Committees during 2002 and 2003, in each case assuming a fair market value of $0.56 per share for shares so granted with respect to 2002 and $0.58 per share for shares so granted with respect to 2003. Mr. Laybourn received stock grants totaling 15,978 shares for his services in 2002 and 15,585 for such services in 2003; Mr. Palamand received grants totaling 21,303 shares for 2002 and 22,513 shares for 2003; and Mr. Price received grants totaling 24,853 shares for 2002 and 24,245 shares for 2003. Management believes that the issuance of such shares was exempt from registration pursuant to Section 4(2) of the Act because of the limited number of recipients and the fact that each of the recipients has significant business experience, financial sophistication, and intimate knowledge of and familiarity with the business of the Company. Compensation due for the year 2004 is expected to be issued later this year in the form of shares at book value as of December 31, 2004. The Company's policy for compensation of its non-employee Directors has in the past included the annual issuance of options, pursuant to the Company's 1994 22 Stock Option Plan (the "Plan"), to purchase a number of shares of the Company's Common Stock having a fair market value of $25,000. The Plan expired in 2004, however, and to date no new option or similar plan has been adopted by the Board. The Board may adopt new plans and guidelines for adoption later in the year. Pursuant to a Master Line of Credit Agreement between the Company and United Breweries of America, Inc. (discussed in Part I, Item 2, above, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources - Master Line of Credit Agreement"), the Company issued thirteen (13) promissory notes to United Breweries of America, Inc. ("UBA") between September, 1999, and July, 2001 (the "UBA Notes"). (A fourteenth note, on the same terms as the others but in the amount of $400,000 (the "New Note"), was issued to UBA on March 2, 2005.) The outstanding principal amount of the UBA Notes and the New Note, and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of March 31, 2005, the outstanding principal and interest on the UBA Notes (including the New Note) totaled approximately $2,438,300, and the UBA Notes were convertible into 1,625,538 shares of the Company's Common Stock. If the UBA Notes and the New Note were deemed to be securities, the Company's Management believes that the issuance of all such notes was exempt from registration pursuant to Section 4(2) of the Act because UBA, the sole offeree and recipient thereof, has significant business experience, financial sophistication, and knowledge of and familiarity with the business of the Company. Management believes that if these notes were eventually to be converted into shares of the Company's Common Stock, the issuance of such shares would also be exempt from registration pursuant to Section 4(2) of the Act. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During 2004, two of MBC's former directors, Mr. Neame and Mr. Townshend, resigned from the Board. Thereafter, the Board of Directors acted to reduce the size of the Board from eight to seven members. All six of the remaining Board members agreed to stand for re-election, and Scott Heldfond, a San Francisco-based businessman, was nominated to fill the remaining place on the Board. MBC held its 2004 Annual Meeting of Shareholders on January 14, 2005. At that meeting, MBC's shareholders voted to elect all seven of the Board's nominees for Director. The votes cast for each of the nominees were as follows. There were no broker non-votes; ballots for a total of 1,191,193 shares were not cast with respect to any candidate. 23 DIRECTOR'S NAME VOTES FOR WITHHELD Vijay Mallya 10,006,069 69,612 H. Michael Laybourn 10,041,264 34,417 Jerome G. Merchant 10,019,169 56,512 Sury Rao Palamand 10,006,069 69,612 Kent D. Price 10,007,869 67,812 Yashpal Singh 10,005,669 70,012 Scott R. Heldfond 10,008,569 67,112 The Company's shareholders also voted to ratify the selection of Moss Adams, LLP as independent certified accountants to audit the Company's financial statements for the fiscal year ending December 31, 2004. The votes were cast as follows: for, 10,019,583; against, 33,815; abstain, 22,283. There were no broker non-votes; ballots for a total of 1,191,193 shares were not cast with respect to the selection of Moss Adams, LLP. ITEM 6. EXHIBITS NUMBER DESCRIPTION OF DOCUMENT 3.1 (T) Articles of Incorporation of the Company, as amended. 3.2 (T) Bylaws of the Company, as amended. 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (T) Amended 1994 Stock Option Plan 10.3 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.4 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.5 (B) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.6 (A) Lease Agreement between the Company and Kohn Properties. 10.7 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.8 (D) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC. 10.9 (E) Agreement between United Breweries of America Inc. and Releta Brewing Company LLC regarding payment of certain liens. 10.10 (F) Keg Management Agreement with MicroStar Keg Management LLC 24 ITEM 6 (continued) NUMBER DESCRIPTION OF DOCUMENT 10.11 (G) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6). 10.12 (H) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.13 (H) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.14 (I) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.15 (I) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.16 (J) Equipment Lease with Finova Capital Corporation. 10.17 (J) Tri-Election Rider to Equipment Lease with Finova Capital Corporation. 10.18 (J) Master Lease Schedule with Finova Capital Corporation. 10.19 (K) Investment Agreement with United Breweries of America, Inc. 10.22 (L) Indemnification Agreement with Vijay Mallya. 10.23 (L) Indemnification Agreement with Michael Laybourn. 10.24 (L) Indemnification Agreement with Jerome Merchant. 10.25 (L) Indemnification Agreement with Yashpal Singh. 10.27 (L) Indemnification Agreement with Robert Neame. 10.28 (L) Indemnification Agreement with Sury Rao Palamand. 10.29 (L) Indemnification Agreement with Kent Price. 10.30 (M) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.31 (M) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 25 ITEM 6 (continued) NUMBER DESCRIPTION OF DOCUMENT 10.32 (M) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.33 (N) Employment Agreement with Yashpal Singh. 10.35 (O) Master Loan Agreement between the Company and the United Breweries of America Inc. 10.36 (O) Convertible Note in favor of the United Breweries of America Inc. dated Sept. 7, 1999 10.37 (P) Convertible Note in favor of the United Breweries of America Inc. dated October 21, 1999 10.38 (P) Convertible Note in favor of the United Breweries of America Inc. dated November 12, 1999 10.39 (P) Convertible Note in favor of the United Breweries of America Inc. dated December 17, 1999 10.40 (P) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 1999 10.41 (P) Convertible Note in favor of the United Breweries of America Inc. dated February 16, 2000 10.42 (P) Convertible Note in favor of the United Breweries of America Inc. dated February 17, 2000 10.43 (P) Convertible Note in favor of the United Breweries of America Inc. dated April 28, 2000 10.44 (P) First Amendment to Master Loan Agreement between the Company and United Breweries of Comerica, Inc., dated April 28, 2000 10.45 (Q) Convertible Note in favor of the United Breweries of America Inc. dated September 11, 2000 10.46 (Q) Convertible Note in favor of the United Breweries of America Inc. dated September 30, 2000 10.47 (Q) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 2000 10.48 (Q) Convertible Note in favor of the United Breweries of America Inc. dated February 12, 2001 10.49 (R) Convertible Note in favor of the United Breweries of America Inc. dated July 1, 2001 26 ITEM 6 (continued) NUMBER DESCRIPTION OF DOCUMENT 10.50 (S) Confirmation of Waiver Between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of December 28, 2001 10.51 (S) Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated February 14, 2002 10.52 (T) License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited 10.53 (T) Supplemental Agreement to License Agreement between United Breweries Limited and United Breweries International (U.K.), Limited 10.54 (T) Distribution Agreement between United Breweries International (U.K.), Limited. and UBSN, Ltd. 10.55 (T) Supplemental Agreement to Distribution Agreement between United Breweries International (U.K.), Limited. and UBSN, Ltd. 10.56 (T) Market Development, General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and UBSN, Ltd. 10.57 (T) Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and UBSN, Ltd. 10.58 (T) Supplemental Agreement to Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and UBSN, Ltd. 10.59 (T) Loan Agreement between Shepherd Neame, Limited and UBSN, Ltd. 10.60 (T) Brewing License Agreement between UBSN, Ltd. and Mendocino Brewing Company, Inc. 10.61 (T) Kingfisher Trade Mark and Trade Name License Agreement between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc. 27 ITEM 6 (continued) NUMBER DESCRIPTION OF DOCUMENT 10.62 (U) First Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated November 13, 2002. 10.63 (U) Second Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated March, 2003. 10.64 (V) Amendment to Loan and Security Agreement between Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC and the CIT Group/Business Credit, Inc., dated January 17, 2003. 10.65 (V) Commitment Letter from United Breweries of America, Inc. dated March 31, 2004. 10.66 (W) Extension of Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc., dated July 1, 2004 10.67 (W) Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of July 20, 2004 10.68 (X) Fourth Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated as of August 14, 2004 10.69 (Y) Settlement Agreement and Release between the Company and House of Daniels, Inc., dba Golden Gate Distributing Company, dated as of November 1, 2004 10.71 (Z) 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 (Z) Revised Promissory Note in favor of Savings Bank of Mendocino County, dated as of November 1 2004 10.73 (AA) Settlement Agreement and Release, effective as of December 9, 2004 28 ITEM 6 (continued) NUMBER DESCRIPTION OF DOCUMENT 10.74 (BB) Convertible Promissory Note of Mendocino Brewing Company, Inc. in favor of United Breweries of America, Inc., dated March 2, 2005 10.75 (CC) Loan and Security Agreement (Accounts Receivable & Inventory Line of Credit) dated May 5, 2005 between the Company and BFI Business Finance NOTES: Each Exhibit listed above that is annotated with one or more of the following letters is incorporated by reference from the following sources: (A) The Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (B) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1995. (C) The Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1995. (D) The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997. (E) The Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1997. (F) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1996 (G) The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1995 (H) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1996 (I) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1997 (J) The Company's Registration Statement dated February 6, 1997, as amended, Registration No. 33-15673 (K) Schedule 13D filed November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya (L) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1998 (M) The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1998 29 ITEM 6 (continued) (N) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (O) Amendment No. 5 to Schedule 13D filed September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. (P) Amendment No. 6 to Schedule l3D filed May 12, 2000, by United Breweries of America, Inc. and Vijay Mallya. (Q) Amendment No. 7 to Schedule 13D filed February 22, 2001, by United Breweries of America, Inc. and Vijay Mallya. (R) Amendment No. 8 to Schedule 13D filed August 22, 2001, by United Breweries of America, Inc and Vijay Mallya. (S) The Company's Current Report on Form 8-K filed as of February 19, 2002 (T) The Company's Annual Report on Form 10-KSB for the period ended December 31, 2001 (U) Amendment No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of America, Inc. and Vijay Mallya (V) The Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 (W) The Company's Quarterly Report on Form 10-Q for the period ended June 30, 2004 (X) Amendment No. 11 to Schedule 13D, jointly filed by United Breweries of America, Inc. and Dr. Vijay Mallya on August 16, 2004 (Y) The Company's Current Report on Form 8-K filed as of November 1, 2004 (Z) The Company's Quarterly Report on Form 10-Q for the period ended September 30, 2004 (AA) The Company's Current Report on Form 8-K filed as of November 25, 2004 (BB) The Company's Current Report on Form 8-K filed as of March 2. 2005 (CC) The Company's Annual Report on Form 10-K for the year ended December 31, 2004 30 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MENDOCINO BREWING COMPANY, INC. Dated: May 20, 2005 By: /s/ Yashpal Singh ----------------- Yashpal Singh President, Director and Chief Executive Officer Dated: May 20, 2005 By: /s/ N.Mahadevan --------------- N. Mahadevan Chief Financial Officer and Secretary 31 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 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 32 EX-31.1 2 tex31_1.txt EX-31.1 EXHIBIT 31.1 CERTIFICATIONS I, Yashpal Singh, 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 May 20, 2005 /s/ Yashpal Singh ------------------------------- Yashpal Singh, President, Director and Chief Executive Officer EX-31.2 3 tex31_2.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: May 20, 2005 /s/ N. Mahadevan ----------------------------- N. Mahadevan, Chief Financial Officer EX-32.1 4 tex32_1.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Yashpal Singh, 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: May 20, 2005 /s/ Yashpal Singh ----------------- Name: Yashpal Singh Title: President, Director and Chief Executive Officer EX-32.2 5 tex32_2.txt EX-32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended March 31, 2005 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: May 20, 2005 /s/ N. Mahadevan ---------------- Name: N. Mahadevan Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----