-----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, TEiJue1gSvNCMR1NLfThwsCRHZvzEGErSZyk54rKWvxLRPB9apMano7Y4YxWSUvQ 0Mb3RFIxUZHRZzpI8hK9Dw== 0001188112-05-001514.txt : 20050818 0001188112-05-001514.hdr.sgml : 20050818 20050818162344 ACCESSION NUMBER: 0001188112-05-001514 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050818 DATE AS OF CHANGE: 20050818 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: 051036149 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-7318.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 June 30, 2005 is 11,473,914.
PART I ITEM 1. FINANCIAL STATEMENTS. MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS JUNE 30, DECEMBER 31, 2005 2004 CURRENT ASSETS Cash $ 524,900 $ 526,600 Accounts receivable, allowance for doubtful 7,752,600 8,477,200 accounts of $36,500 and $27,500 Inventories 1,148,200 1,185,400 Prepaid expenses 753,200 347,300 ----------- ----------- Total Current Assets: 10,178,900 10,536,500 ----------- ----------- PROPERTY AND EQUIPMENT 13,306,200 13,533,900 ----------- ----------- OTHER ASSETS Deposits and other assets 195,800 205,100 Intangibles net of amortization 82,200 87,600 ----------- ----------- Total Other Assets: 278,000 292,700 ----------- ----------- Total Assets: $23,763,100 $24,363,100 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 3,846,500 $ 3,282,200 Note payable 576,200 576,200 Accounts payable 5,376,800 5,897,600 Accrued liabilities 1,365,800 1,402,900 Legal dispute settlement 200,000 911,800 Income taxes payable 192,400 134,100 Current maturities of obligation under long-term debt 388,000 400,300 Current maturities of obligation under capital lease 123,600 146,500 ----------- ----------- Total Current Liabilities: 12,069,300 12,751,600 NOTES TO RELATED PARTY 2,473,300 2,010,100 Long term debt, less current maturities 3,013,100 3,384,800 OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 26,400 62,600 ----------- ----------- Total Liabilities: 17,582,100 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 14,747,300 14,648,600 issued and outstanding Accumulated comprehensive income 108,900 194,300 Accumulated deficit (8,902,800) (8,916,500) ----------- ----------- Total Stockholders' Equity 6,181,000 6,154,000 ----------- ----------- Total Liabilities and Stockholders' Equity: $23,763,100 $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 SIX MONTHS ENDED June 30 June 30 2005 2004 2005 2004 ---- ---- ---- ---- SALES $ 8,408,800 $ 8,374,600 $ 15,814,900 $ 15,320,600 EXCISE TAXES 168,200 187,500 317,400 330,300 ------------- ------------- ------------- ------------- NET SALES 8,240,600 8,187,100 15,497,500 14,990,300 COST OF GOODS SOLD 5,538,400 5,372,500 10,524,800 10,007,300 ------------- ------------- ------------- ------------- GROSS PROFIT 2,702,200 2,814,600 4,972,700 4,983,000 ------------- ------------- ------------- ------------- OPERATING EXPENSES Marketing 1,276,800 1,478,400 2,593,000 2,806,700 General and administrative 969,300 922,400 1,872,500 1,906,500 ------------- ------------- ------------- ------------- 2,246,100 2,400,800 4,465,500 4,713,200 ------------- ------------- ------------- ------------- Income from operations 456,100 413,800 507,200 269,800 ------------- ------------- ------------- ------------- Other income (expense) Other income 36,400 5,100 41,000 9,100 Profit (Loss) on sale of equipment (5,900) 15,600 (9,200) 14,000 Interest expense (233,000) (210,700) (453,600) (422,700) ------------- ------------- ------------- ------------- (202,500) (190,000) (421,800) (399,600) ------------- ------------- ------------- ------------- INCOME (LOSS) before income taxes 253,600 223,800 85,400 (129,800) PROVISION FOR INCOME TAXES 41,500 57,400 71,700 78,200 ------------- ------------- ------------- ------------- Net INCOME (Loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000) ------------- ------------- ------------- ------------- OTHER COMPREHENSIVE INCOME / (LOSS), net of tax (76,100) (36,400) (85,400) 25,700 ------------- ------------- ------------- ------------- Foreign Currency Translation Adjustment COMPREHENSIVE Income (LOSS) $ 136,000 $ 130,000 $ (71,700) $ (182,300) ============= ============= ============= ============= NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ 0.00 $ (0.02) ============= ============= ============= ============= DILUTED NET INCOME (LOSS) PER COMMON SHARE $ 0.02 $ 0.01 $ 0.00 $ (0.02) ============= ============= ============= ============= The accompanying notes are an integral part of these financial statements. -3-
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 30 2004 2004 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (Loss) $ 13,700 $ (208,000) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 453,800 536,400 Allowance for doubtful accounts 9,000 49,000 Loss (Profit) on sale of assets 9,200 (14,000) Changes in: Accounts receivable 275,300 16,900 Inventories 37,200 16,500 Prepaid expenses (425,300) 148,100 Deposits and other assets 30,900 (38,700) Accounts payable (264,900) (16,600) Accrued liabilities (611,900) (437,300) Income taxes payable 69,900 (189,900) ----------- ----------- Net cash from operating activities: (403,100) (137,600) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property, equipment, and leasehold improvements (396,700) (280,100) Proceeds from new distributors -- -- Proceeds from sale of fixed assets 73,100 23,200 ----------- ----------- Net cash from investing activities: (323,600) (256,900) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowing on line of credit 704,600 807,500 Repayment on long-term debt (331,000) (381,500) Borrowings on related party debt 463,200 41,600 Payments on obligation under long term lease (59,100) (56,900) ----------- ----------- Net cash from financing activities: 777,700 410,700 ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (52,700) 12,900 ----------- ----------- NET CHANGE IN CASH (1,700) 29,100 ----------- ----------- CASH, beginning of period 526,600 554,300 ----------- ----------- CASH, end of period $ 524,900 $ 583,400 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash paid during the period for: Interest $ 390,400 $ 319,300 Income taxes $ - $ 100,300 Non-cash investing activity Seller Financed equipment $ 29,500 $ 26,500 The accompanying notes are an integral part of these financial statements. -4-
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 - BASIS OF PRESENTATION As used herein, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. 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 June 30, 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. The Company used the proceeds from the BFI Line of Credit (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 $53,740 under a promissory note. On May 6, 2005, the Company used the entire immediately available amount drawable under these facilities to pay off the balance remaining outstanding under the CIT Line of Credit (discussed above). On June 30, 2005 BFI advanced the Company $200,000 under a promissory note repayable in 30 weekly installments. The total amount outstanding on these facilities as of June 30, 2005 was $1,576,700. On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a temporary loan in the principal amount of $576,200 to MBC in -5- 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%. Nedbank Limited, a South African registered company, 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 included a revolving short-term loan, overdraft protection, and foreign exchange services. It was available until terminated by Nedbank, and was secured by all of the assets of UBSN. On April 6, 2005, the balance remaining outstanding on the Nedbank facility was settled in full using the proceeds from the RBS facility (discussed below). On April 26, 2005, Royal Bank of Scotland ("RBS") provided an invoice discounting facility for a maximum amount of GBP 1,750,000 based on 80% prepayment against qualified accounts receivable related to UBSN's United Kingdom customers. The initial term of the facility is for a period of one year after which the facility can be terminated by either party by providing the other party a notice of six months. The facility carries an interest rate of 1.38% above RBS base rate and a service charge of 0.10% of each invoice discounted. The amount outstanding on this line of credit as of June 30, 2005 was approximately $2,269,800. 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 June 30, 2005 was approximately $2,235,100. As of June 30, 2005, the balance of the delinquent property taxes due on the Company's Ukiah property was approximately $430,900. Pursuant to an agreement with Mendocino County, the remaining balance of the overdue taxes should be paid in three annual installments, due on or before April 10, 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 $143,600, or 20% of the original amount outstanding, together with interest accrued until March 2005. 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 -6- installments of GBP 60,000, commencing in June 2003. The loan carries an interest rate of 5% per year. The amount outstanding on this loan as of June 30, 2005 was approximately GPB 410,000 ($735,100 in US Dollars). 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 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 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. The Company expects the maturity dates to be extended again. 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 so because the notes are subordinated to the long-term debt agreement with SBMC and the BFI Line of Credit. Because of the subordination, the Company has shown these notes as long term debt. UBA loaned 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. All of the notes are convertible, at UBA's option, into common stock at $1.50 per share. As of June 30, 2005, the aggregate principal balance due under these Notes was $1,915,400; interest accrued on the Notes is approximately $557,900. These notes are subordinated to the credit facilities extended to the Company by BFI and SBMC pursuant to subordination agreements executed by UBA. As per the terms of the subordination agreements, UBA is precluded from demanding repayment of the notes due unless the BFI and SBMC facilities are settled in full. The BFI Line of Credit matures in May 2006 and the SBMC facility matures in the year 2012. Therefore, the Company will not require the use of working capital to repay any of the UBA notes until the BFI and SBMC facilities are repaid. The Company also expects the maturity dates of all of the notes to UBA to be extended, although there is no current agreement to do so. Accordingly, the entire amount due under the notes is classified as a long term liability. -7- 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. The following table reflects the value of the transactions for six months ended June 30, 2005 and 2004. - ------------------------------------------------ -------------- -------------- 2005 2004 - ------------------------------------------------ -------------- -------------- Interest expenses associated with UBA convertible notes payable $63,300 41,600 - ------------------------------------------------ -------------- -------------- - ------------------------------------------------ -------------- -------------- - ------------------------------------------------ -------------- -------------- 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 the periods as the potentially dilutive shares would be antidilutive.
Three Months Ended Six Months Ended ------------------ ---------------- 6/30/2005 6/30/2004 6/30/2005 6/30/2004 ---------------------------------------------------------------------------- Net income (loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000) ================== ================== =================== ================== Weighted average common shares outstanding 11,473,914 11,266,874 11,473,914 11,266,874 ================== ================== =================== ================== Basic net income (loss) per share $ 0.02 $ 0.01 $ 0.00 $ (0.02) ================== ================== =================== ================== Diluted net income (loss) per share Net income (loss) $ 212,100 $ 166,400 $ 13,700 $ (208,000) Interest expense on convertible notes 35,000 21,000 63,200 -- payable ------------------ ------------------ ------------------- ------------------ Income for the purpose of computing diluted net income per share $ 247,100 $ 187,400 $ 76,900 $ (208,000) ================== ================== =================== ==================
-8-
Weighted average common shares outstanding 11,473,914 11,266,874 11,473,914 11,266,874 Dilutive stock options -- -- -- -- Assumed conversion of convertible notes -- -- -- -- payable ------------------ ------------------ ------------------- ------------------ Weighted average common shares outstanding for the purpose of computing diluted net income (loss) per share 11,473,914 11,266,874 11,473,914 11,266,874 ================== ================== =================== ================== Diluted net income (loss) per share $ 0.02 $ 0.01 $ 0.00 $ (0.02)
NOTE 6 - INVENTORY JUNE 30, 2005 DECEMBER 31, 2004 Raw Materials $ 356,800 $ 357,500 Beer-in-process 181,500 140,100 Finished Goods 583,300 664,700 Merchandise 26,600 23,100 ---------- ---------- TOTAL $1,148,200 $1,185,400 ========== ========== NOTE 7 - STOCKHOLDERS' EQUITY The following table summarizes equity transactions during the six months ended June 30, 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 Income 13,700 13,700 Currency Translation Adjustment (85,400) (85,400) Balance, June 30, 2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $108,900 $ (8,902,800) $ 6,181,000 ============= ============ ============= ============== ================= =============== ==============
-9- 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 options 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. 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:
Six months ended June 30, 2005 Domestic European Retail Corporate & Operations Territory Operations Others Total Sales $ 5,732,000 $ 9,988,200 $ 94,700 $ -- $15,814,900 Operating Profit 181,000 318,000 8,200 -- 507,200 Identifiable Assets 12,908,100 8,302,100 102,900 2,450,000 23,763,100 Depreciation & 235,200 200,200 2,500 15,900 453,800 amortization Capital Expenditures 34,200 362,500 -- -- 396,700 Six months ended June 30, 2004 Domestic European Retail Corporate & Operations Territory Operations Others Total Sales $ 5,740,800 $ 9,488,800 $ 91,000 $ -- $ 15,320,600 Operating Profit/(Loss) 15,600 258,700 (4,500) -- 269,800 Identifiable Assets 13,394,000 7,105,000 95,100 2,564,900 23,159,000 Depreciation & 302,000 216,600 2,500 15,300 536,400 amortization Capital Expenditures 26,500 253,600 -- -- 280,100
-10- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion summarizes the significant factors affecting the consolidated operating results, financial condition, liquidity, and cash flows of the Company for the six months ended June 30, 2005, compared to the six months ended June 30, 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 other filings and reports made with the Securities and Exchange Commission (the "Commission"). 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. -11- 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 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 -12- change, the Company's evaluation of its deferred tax assets could materially change. o The Company has adopted EITF - 01-09 "Accounting for Consideration Given by a Vendor to a Customer (including a Reseller of the Vendor's Products)". This EITF requires that certain cash consideration paid to customers for services or placement fees are to be reported as a reduction in revenue rather than as an expense. The Company has reclassified these items on the income statement as a reduction in revenue and as a corresponding reduction in marketing and selling expenses. This reclassification has no impact on net income. 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 62% of the Company's gross sales during the first six months of the year 2005 (as compared to 62% for the same period during 2004), with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales accounting for the remaining 38%. With expanded wholesale distribution of beer, 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 (by volume) 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 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 -13- 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 six months of the year 2005 with a net income of $13,700, as compared to a net loss of $208,000 for the same period in 2004. As set forth more fully under "Results of Operations," below, during the first six months of the year 2005 the Company experienced an increase in gross sales of $494,300, or 3.2% as compared to the corresponding period in 2004. Costs of goods sold increased by $517,500, or 5.2%, marketing costs decreased by $213,700, or 7.6%, general and administrative costs decreased by $34,000, or 1.8%, and interest expenses increased by $30,900, or 7.3%. 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 SIX MONTHS ENDED STATEMENTS OF OPERATIONS DATA: JUNE 30, JUNE 30, ------------------------------------- -------------------------------- 2005 2004 2005 2004 % % % % - - - - Sales 102.04 102.29 102.05 102.20 Less Excise taxes 2.04 2.29 2.05 2.20 NET SALES 100.00 100.00 100.00 100.00 Costs of Sales 67.21 65.62 67.91 66.76 GROSS PROFIT 32.79 34.38 32.09 33.24 Marketing 15.49 18.06 16.73 18.72 General and Administrative Expense 11.76 11.27 12.08 12.72 PROFIT FROM OPERATIONS 5.53 5.05 3.28 1.80 Other Income / (Expense) 0.37 0.25 0.20 0.15 Interest Expense (2.83) (2.57) (2.93) (2.82) Income/(Loss) before income taxes 3.07 2.73 0.55 (0.87) Provision for income taxes 0.50 0.70 0.46 0.52 NET INCOME / (LOSS) 2.57 2.03 0.09 (1.39) Other Comprehensive Income / (loss) (0.92) (0.44) (0.55) 0.17 COMPREHENSIVE INCOME / (LOSS) 1.65 1.59 (0.46) (1.22)
-14-
--------------------------------- SIX MONTHS ENDED JUNE 30, --------------------------------- 2005 2004 BALANCE SHEET DATA: $ $ - - Cash and Cash Equivalents 524,900 583,400 Working Capital (1,890,400) (2,090,500) Property and Equipment 13,306,200 13,632,400 Deposits and Other Assets 278,000 284,200 Total Assets 23,763,100 23,159,000 Long-term Debt (less current maturities) 3,013,100 3,409,200 Capital Lease (less current maturities) 26,400 129,500 Total Liabilities 17,582,100 16,834,700 Accumulated Deficit (8,902,800) (8,655,600) Stockholder's equity 6,181,000 6,324,300
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 NET SALES Overall net sales for the second quarter of 2005 were $8,240,600, an increase of $53,500, or 0.65%, compared to $8,187,100 for the second quarter of 2004. The increase was mainly due to increased sales, increased prices for products in the United Kingdom, and exchange rate fluctuations. Domestic Operations: Net sales for the second quarter of 2005 were $2,992,500 compared to $3,165,000 for the same period in 2004, a decrease of $172,500, or 5.45%. The sales volume decreased to 15,691 barrels in the second quarter of 2005 from 16,883 barrels in second quarter of 2004; a net decrease of 1,192 barrels, or 7.06%. The bulk of the decrease (1,099 barrels) was made up of sales of the Company's domestic brands. Sales of contract brands decreased by 113 barrels, but sales of Kingfisher brands increased by 20 barrels. EUROPEAN TERRITORY: Net sales for the second quarter of 2005 were $5,248,100 (GBP 2,823,900) compared to $5,022,100 (GBP 2,777,800) during the corresponding period of 2004, an increase of $226,000, or 4.5%. During the second quarter of 2005, UBSN sold 17,059 barrels, compared to 16,743 barrels during the second quarter of 2004, representing an increase of 316 barrels, or 1.89%. 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 1.66%. -15- COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the second quarter of 2005 was 67.21%, as compared to 65.62% during the corresponding period of 2004, mainly due to increased costs in the United States. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during the second quarter of 2005 was 64.71%, as compared to 63.55% during the corresponding period of 2004. This slight increase of 1.16% is mainly the result of increases in packaging materials and wages, which were partly offset by a decrease in depreciation. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the second quarter of 2005 was 69.03%, as compared to 67.4% 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 an increase as a percentage of net sales of 1.63%. The increase in prices for the Company's products did not fully offset the cost increases in the United Kingdom. GROSS PROFIT As a result of the higher cost of goods described above, gross profit for the second quarter of 2005 decreased to $2,702,200, from $2,814,600 during the corresponding period of 2004, representing a decrease of 3.99%. As a percentage of net sales, the gross profit during the second quarter of 2005 decreased to 32.79% from 34.38% for the second quarter of 2004. OPERATING EXPENSES Operating expenses for the second quarter of the year 2005 were $2,246,100, a decrease of $154,700, or 6.44%, as compared to $2,400,800 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 salaries and commissions, advertising costs, product and sales promotion costs, travel expenses and related costs and the Company's tavern and tasting room expenses. Such expenses for the second quarter of 2005 were $1,276,800, as compared to $1,478,400 for the second quarter of 2004, representing a decrease of 13.64%. DOMESTIC OPERATIONS: Expenses for the second quarter of 2005 were $333,000 compared to $410,800 during the corresponding period of 2004, representing a decrease of $77,800. As a percentage of net sales in the United States, the expenses decreased to 11.13% during the second quarter of 2005, compared to 12.98% during the corresponding period of 2004. The decreases were mainly due to reduced salary and travel costs resulting from a temporary reduction in staff that occurred in the first half of 2005. EUROPEAN TERRITORY: Expenses for the second quarter of 2005 were -16- $943,800 compared to $1,067,600 during the corresponding period of 2004, representing a decrease of $123,800. As a percentage of net sales in the United Kingdom, the expenses decreased to 17.98% during the second quarter of 2005 compared to 21.26% 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 decrease resulted mainly from lower freight costs and decreased dispensing equipment maintenance expenses. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $969,300 for the second quarter of the year 2005, representing a marginal increase of $46,900, over $922,400 for the corresponding period in 2004. These expenses were equal to 11.76% of net sales for the second quarter of the year 2005, as compared to 11.27% for the corresponding period in 2004. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $482,600 for the second quarter of the year 2005, representing a decrease of $65,500, or 11.95%, from $548,100 for the second quarter of the year 2004. The decrease was primarily due to a decrease in legal expenses, because a material legal dispute with a distributor was settled in 2004. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $486,700 for the second quarter of the year 2005, representing an increase of $112,400, or 30%, when compared to $374,300 for the second 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). These increases were mainly due to increases in salary and travel costs, exchange rate differences, and the Company's provision for bad debts. OTHER EXPENSES Other expenses for the second quarter of 2005 totaled $202,500, representing an increase of $12,500, or 6.58%, when compared to the second quarter of 2004. The increase was mainly due to higher interest expenses as a result of increased borrowings under the lines of credit. INCOME TAXES The Company has a provision for income taxes of $41,500 for the second quarter of 2005, compared to $57,400 for the second 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 PROFIT The Company's net profit for the second quarter of 2005 was $212,100, as compared to profit of $166,400 for the second quarter of 2004. After providing for a negative foreign currency translation adjustment of $76,100 during the second quarter of 2005 (as compared to a negative adjustment of $36,400 for the same period in 2004), the comprehensive profit for the second quarter of 2005 was $136,000, compared to a profit of $130,000 for the same period in 2004. -17- SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 NET SALES Overall net sales for the first six months of the year 2005 were $15,497,500, an increase of $507,200, or 3.38%, compared to $14,990,300 for the same period in 2004. The increase was mainly due to increased sales in the United Kingdom, increased prices for the Company's products in the United Kingdom customers, and exchange rate fluctuations. DOMESTIC OPERATIONS: Domestic net sales for first six months of the year 2005 were $5,509,300 compared to $5,501,500 for the same period in 2004, a marginal increase of $7,800. Although the Company sold less of its own brand products, this decrease was offset by revenue from contract bottling of cider. The sales volume decreased to 29,061 barrels during the first six months of the year 2005 from 29,655 barrels in the first six months of the year 2004, representing a decrease of 594 barrels. Sales of Kingfisher brands decreased by 33 barrels, and sales of contract brands decreased by 5 barrels. The remainder of the decrease was made up of the Company's brands. EUROPEAN TERRITORY: Net sales for the first six months of the year 2005 were $9,988,200 (GBP 5,331,300) compared to $9,488,800 (GBP 5,205,900) during the corresponding period of 2004, an increase of 5.26%. During the first six months of the year 2005, UBSN sold 32,351 barrels compared to 31,886 barrels during the first six months of the year 2004, an increase of 465 barrels, or 1.46%. Exchange rate fluctuations when measured in United States dollars increased the growth percentage as compared to last year. Hence, when the net sales results are compared in Pounds Sterling, there is an increase of 2.41%. COST OF GOODS SOLD Cost of goods sold as a percentage of net sales during the first six months of the year 2005 was 67.91%, as compared to 66.76% during the corresponding period of 2004 mainly due to increased costs in the United States. DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during first six months of the year 2005 was 67.55%, as compared to 66.77%, during the corresponding period of 2004, representing an increase as a percentage of net sales of 0.78% that was mainly due to a increase in packaging material costs that was partly offset by a decrease in depreciation expenses. EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in the United Kingdom during the first six months of the year 2005 was 68.52%, as -18- compared to 67.18% during the corresponding period in 2004 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation), due to cost increases that were not fully offset by price increases. GROSS PROFIT As a result of the higher cost of goods described above, gross profit for the first six months of the year 2005 decreased to $4,972,700, from $4,983,000 during the corresponding period of 2004, representing a decrease of 0.21%. As a percentage of net sales, the gross profit during the first six months of 2005 decreased to 32.09% from that of 33.24% during the corresponding period in 2004. OPERATING EXPENSES Operating expenses for the first six months of the year 2005 were $4,465,500, a decrease of $247,700, or 5.26%, as compared to $4,713,200 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 salaries and commissions, advertising costs, product and sales promotion costs, travel expenses and related costs and Company's tavern and tasting room expenses. Such expenses for the first six months of the year 2005 were $2,593,000, as compared to $2,806,700 for the same period in 2004, representing a decrease of 7.61%. DOMESTIC OPERATIONS: Expenses for the first six months of the year 2005 were $686,500 compared to $811,100 during the corresponding period of 2004, representing a decrease of $124,600. As a percentage of net sales in the United States, these expenses decreased to 12.46% during the first six months of the year 2005, compared to 14.75% during the corresponding period of 2004. The decreased expenses included lower salary and travel costs due to a temporary decrease in staff (both in New York and California) in the first half of 2005 year and decreases in promotional expenses and point of sale items. -19- EUROPEAN TERRITORY: Expenses for the first six months of the year 2005 were $1,906,500 compared to $1,995,600 during the corresponding period of 2004, representing a decrease of $89,100. As a percentage of net sales in the United Kingdom, the expenses increased to 21.03% during the first six months of the year 2005 compared to 21.03% 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 decrease resulted mainly from lower freight costs and decreased dispensing equipment maintenance expenses. UBSN started an advertisement campaign during June 2005, so promotional expenses are likely to increase during the rest of the year 2005. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $1,872,500 for the first six months of the year 2005, representing a decrease of $34,000 or 1.78%, over $1,906,500 for the corresponding period in 2004. These expenses were equal to 12.08% of net sales for first six months of the year 2005, as compared to 12.72% for the corresponding period in 2004. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $952,500 for the first six months of the year 2005, representing a decrease of $93,900, or 8.92%, from $1,046,400 for the same period in 2004. The decrease was primarily due to decreased legal expenses because a material legal dispute with a distributor was settled in 2004. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $920,000 for the first six months of the year 2005, representing an increase of $59,900 or 6.96%, as compared to $860,100 for the same period in 2004 (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 increases in salaries. OTHER EXPENSES Other expenses for the first six months of the year 2005 totaled $421,800 representing an increase of $22,200 when compared to the same period in 2004. The increase is mainly due to higher interest expenses as a result of increased borrowings under the lines of credit. INCOME TAXES The Company has a provision for income taxes of $71,700 for the first six months of the year 2005, compared to $78,200 the same period in 2004. The provision for taxes is related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. NET INCOME The Company's net income for the first six months of the year 2005 was $13,700, as compared to loss of $208,000 for the first six months of the year -20- 2004. After providing for a negative foreign currency translation adjustment of $85,400 during the first six months of 2005 (as compared to a positive adjustment of $25,700 for the same period in 2004), the comprehensive loss for the first six months of the year 2005 was $71,700, compared to a loss of $182,300 for the same period in 2004. 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 thirteen (13) separate advances to the Company under the Credit Agreement and one additional advance on substantially the same terms as those 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 June 30, 2005 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $557,900, for a total of $2,473,300. 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 -21- 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 UBA Notes and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of June 30, 2005, the outstanding principal and interest on the UBA Notes was convertible into 1,648,867 shares of the Company's Common Stock. These UBA Notes are subordinated to credit facilities extended to the Company by BFI and SBMC under a subordination agreement executed by UBA. As per the terms of the subordination agreement, UBA is precluded from demanding repayment of the notes due unless the BFI and SBMC facilities are settled in full. Hence the Company does not expect to make payments on any of these UBA 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 -22- 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%. BFI also advanced the Company $200,000 under a promissory note (the "BFI Note" and, together with the BFI Line of Credit, the "BFI Facility"). The BFI Note is repayable in thirty weekly installment of $6,665 commencing in July 8 2005. On May 6, 2005, the Company used the entire 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. 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 the buy-out of equipment leased through Finova Capital Corporation secured by the existing assets of the Company and the assets released by Finova upon 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"), 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, was secured by all of the assets of UBSN. The agreement restricted the subsidiary from making distributions and payments to the parent in excess of approximately 100,000 Pounds Sterling annually (approximately $189,000). This facility was settled in full utilizing proceeds from RBS facility discussed below. ROYAL BANK OF SCOTLAND FACILITY: Royal Bank of Scotland provided UBSN with a GBP 1,750,000 maximum revolving line of credit with an advance rate based on 80% of UBSN's qualified accounts receivable. UBSN utilized the proceeds of this facility and settled the Nedbank facility (discussed above) on April 26, 2005. SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to -23- brew Kingfisher Lager for the Company's European and Canadian markets. As consideration for extending the brewing contract, Shepherd Neame advanced a loan of 600,000 Pounds Sterling to UBSN, repayable in annual installments of 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 8.64% for the first six months of the year 2005 and 7.61% for the corresponding period in 2004. For loans primarily associated with Company's European territory, the weighted average rate paid was 6.2% for the first six months of the year 2005 and 6.75% for the corresponding period in 2004. 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 upon termination of the contract is likely to have a material adverse effect on the Company. OVERDUE PROPERTY TAXES: As of June 30, 2005, the balance of the delinquent property taxes due on the Company's Ukiah property was approximately $430,900. Pursuant to an agreement with Mendocino County, the remaining balance of the overdue taxes should be paid in three annual installments, due on or before April 10, 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 $143,600, or 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 $2,299,000 as of June 30, 2005. Under UBI's line of credit agreement, distributions and other payments to the Company from its subsidiary are limited to approximately $506,000 per year. CURRENT RATIO The Company's ratio of current assets to current liabilities on June 30, -24- 2005 was 0.84 to 1.0 and its ratio of total assets to total liabilities was 1.35 to 1.0. On June 30, 2004, the Company's ratio of current assets to current liabilities was 0.82 to 1.0 and its ratio of total assets to total liabilities was 1.38 to 1.0. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of June 30, 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 June 30, 2005. INTEREST RATE RISK The Company had total debt as of June 30, 2005 of $9,668,600, of which $6,267,500 was subject to variable rates of interest (either prime or LIBOR plus 1.38% or prime plus 3.75%). Its long-term debt (including current portion) as of June 30, 2005 totaled $5,316,500, of which $3,401,100 had fixed rates of interest and the balance of $1,915,400 were subject to variable rates. Short term debts amounted to $4,352,100 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 $62,700 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 management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") has evaluated the effectiveness of the design, maintenance, and operation of the Company's "disclosure controls and procedures" as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by the Company in its reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures are also designed to ensure that information that the Company is required to disclose in its reports under the Exchange Act is accumulated and communicated to the Company's management, including its CEO and CFO, as appropriate to allow timely decisions regarding the required disclosure. -25- Certain aspects of the Company's internal control over financial reporting are included in the Company's disclosure controls and procedures, and are therefore included in management's evaluation. Management evaluates internal control over financial reporting on a quarterly basis to determine whether any changes have occurred. Internal control over financial reporting is also evaluated on an annual basis in connection with the preparation of the Company's Form 10-K. Management's review of the disclosure controls and procedures includes a review of their objectives, design, implementation, and results. Based on this evaluation, the CEO and CFO believe that, subject to the limitations set forth below, the Company's disclosure controls and procedures were effective in providing reasonable assurance that the information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized, and reported within the time specified by the Commission, and that material information pertaining to the Company is timely communicated to the Company's management (including the CEO and CFO). Management is not aware of any changes in the Company's internal or other controls over financial reporting identified in connection with that evaluation that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Please refer to the certifications of the Company's Chief Executive Officer and Chief Financial Officer (which are attached to this report as Exhibits 31.1 and 31.2) for additional information regarding the Company's controls and procedures. LIMITATIONS ON CONTROLS 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. Please refer to the certifications of the Company's Chief Executive Officer and Chief Financial Officer (which are attached to this report as Exhibits 31.1 and 31.2) for additional information regarding the Company's controls and procedures. -26- 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. 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 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 June 30, 2005, -27- the outstanding principal and interest on the UBA Notes (including the New Note) totaled approximately $2,473,300, and the UBA Notes were convertible into 1,648,867 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 6. EXHIBITS Number Description of Document ------ ----------------------- 10.1 Invoice Discounting Agreement between The Royal Bank of Scotland Commercial Services Limited and UBSN Limited, dated April 26, 2005 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 -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: August 17, 2005 By: /s/ Yashpal Singh Yashpal Singh President, Director and Chief Executive Officer Dated: August 17, 2005 By: /s/ N. Mahadevan N. Mahadevan Chief Financial Officer and Secretary -29- EXHIBIT INDEX Exhibit No. Description ----------- ----------- 10.1 Invoice Discounting Agreement between The Royal Bank of Scotland Commercial Services Limited and UBSN Limited, dated April 26, 2005 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 EX-10.1 2 tex10_1-7318.txt EX-10.1 INVOICE DISCOUNTING AGREEMENT THIS AGREEMENT IS MADE ON: the last date shown for the signatures of the parties at the end of this document. BETWEEN: (1) THE ROYAL BANK OF SCOTLAND COMMERCIAL SERVICES LIMITED ("We/Us") and (2) THE CLIENT NAMED IN THE CLIENT PARTICULARS ("You") 1. INTRODUCTION 1.1 This Agreement applies only to those Debts specified in the Schedule at the end of this document created by you under whatever trading name or style you may ever carry on business. We may later extend or reduce the scope of this Agreement to such Debts as we agree in writing signed by both you and us. Certain words used in this document have special meanings which are explained in the Annexe of Definitions. Their first letter is in capitals. 1.2 You will sell to us with full title guarantee and we will purchase from you all Debts to which this Agreement applies which are created after the date of this Agreement and until its termination. You will also Offer to us all Debts to which this Agreement applies which are Outstanding on the date this Agreement is made. 2. START AND LENGTH OF RELATIONSHIP BETWEEN US 2.1 This Agreement shall start on the date it is made and it will run for the minimum period shown in the Schedule. After the end of the minimum period our relationship with you will then continue until ended by either you or us giving to the other notice of at least the minimum shown in the Schedule. Such notice may be given at any time, even during the minimum period, provided it runs out on or after the end of the minimum period. During any period of notice you will continue to comply with all your obligations to us. 2.2 Should this Agreement end within the minimum period shown in the Schedule you must pay us a sum equal to the shortfall between the amount of the minimum service charge that would have been earned had this Agreement continued for the minimum period, and the service charges actually earned. 2.3 Should you wish to end this Agreement but give us notice of less than the minimum shown in the Schedule we may still agree to your request, subject to an additional fee. For each month or part of a month that your notice falls short of the minimum notice period the fee will be the higher of: 2.3.1 the monthly average of the service charges earned in the six calendar months before we agree to accept your request; or 2.3.2 one twelfth of the minimum service charge for the twelve calendar months before we agree to accept your request. 2.4 We can also immediately end this Agreement by giving you written notice at any time after a Termination Event. 3. OUR OWNERSHIP OF DEBTS, OFFERS AND CLIENT ADVICES 3.1 As soon as possible on or after the date of this Agreement you will deliver an Offer in respect of each Initial Debt Outstanding together with its Related Rights. If we wish to accept an Offer, this will be done by crediting the Notified Value of each accepted Debt to the Receivables Purchased Account. Upon doing so our ownership of such accepted Debt shall be complete and the Debt thereby assigned to us. 3.2 You hereby transfer to us the ownership of all Debts and in addition you hereby assign to us all Scottish Debts (in each case together with their Related Rights) created after the date of this Agreement until the ending of this Agreement. Our ownership of such Debts shall be complete and they shall vest in us the moment they are created even though such Debts may not yet be Notified to us. 3.3 During the life of this Agreement you will enter the Debts and any relative credits onto your Customers' accounts following Delivery of the Goods and send us a Client Advice of them, unless they are Non-Notifiable Debts. Immediately you make any Adjustments you will send us details of them on a Client Advice. 4. PURCHASE PRICE OF DEBTS 4.1 The Purchase Price of the Debts covered by this Agreement is to be the amount received by us towards the discharge of the Debts but less: 4.1.1 Customers' prompt settlement discounts later claimed; and 4.1.2 any other later claimed Customers' deductions, abatements or set-offs; and 4.1.3 the discounting charges and service charges; and 4.1.4 all other sums due to us. 5. LIMITS AND PERCENTAGES 5.1 The Limits (except Funding Limits) shall, to start with, be as stated in the Schedule. We may at any time increase or decrease any or all of the Limits with immediate effect. 5.2 We will tell you of any changes to the Limits (except Funding Limits). We can tell you by written notice, oral advice or making the same available through FacFlow, even if no enquiry be made. 5.3 We may also set up a Funding Limit for each Customer, and will tell you of any balance which exceeds it. 5.4 No Prepayments will be available against Debts in excess of a Funding Limit. If, following a reduction of a Funding Limit, the amount of Prepayments already made exceeds your Availability, the excess must be paid back immediately to us. 6. DECISIONS 6.1 We need not give reasons for any of our decisions and all decisions and information given by us are confidential. You must treat any information regarding Funding Limits as legally privileged and will indemnify us against all claims arising from breach of your duty of confidentiality. You must not take Funding Limits as our view of the creditworthiness or otherwise of a Customer. We do not operate a credit reference service. 7. DISPUTES 7.1 If any Customer disputes a Debt or his liability to pay by its due date or asserts any counterclaim or claim for reduction of or retention or set-off against a Debt (except for a settlement discount not exceeding 7.5%), then: 7.1.1 you must promptly give us full details; and 7.1.2 you must do your best to settle all such disputes and claims promptly and directly with your Customers. 7.2 You must promptly raise a credit note if a Customer is entitled to one. Unless we have brought clause 7.3 into effect you must immediately deliver the credit note to the Customer and include its details on your next Client Advice. The credit note will be debited to the Receivables Purchased Account. 7.3 We may at any time write and tell you either that no credit notes can be despatched to your Customers without our prior consent or that any credit notes must be sent to us for our consent before we then despatch them. 7.4 Clauses 7.1 to 7.3 shall not affect those rights which we may have because this Agreement has been breached. 8. OUR ACCOUNTS 8.1 The Notified Value of all Debts will be credited to our account known as the "Receivables Purchased Account". The balance on this account is our record of the prospective Purchase Price of Debts before any of the deductions used under clause 4.1 to calculate the Purchase Price. 8.2 You may also take Prepayments from us in respect of Debts credited to the Receivables Purchased Account. These payments will be debited to both the Receivables Purchased Account and to the Memorandum Discounting Statement. The amount taken must not exceed either your Availability or the Prepayment review level set by us from time to time. In our absolute discretion we may permit payments in excess of the Availability or Prepayment review level but subject to clause 9.8. Your Availability will immediately be affected if any Debt later becomes an Ineligible Debt. 8.3 We may debit the Receivables Purchased Account and the Memorandum Discounting Statement with all other sums you owe us. If the debit balance on the Memorandum Discounting Statement results in a negative Availability you must immediately pay the excess to us without our having to ask you. 8.4 The value of any Remittance received by us will be credited to the Memorandum Discounting Statement with an effective date for calculating discounting charges as follows: 8.4.1 if in cleared funds by electronic means to the specific account we tell you for such purpose - the working day following the day that we actually obtain an advice from our bank that they have received the Remittance; 8.4.2 other Remittances paid into our bank account - four working days after the date of lodgement by you of such Remittance, provided: o for FacFlow users, you record the lodgement in FacFlow on the same date it is made and tell us by means of a FacFlow Transmission within such four working day period. If your FacFlow Transmission takes place later, the effective date for calculating discounting charges will be the date of this transmission; or o for non FacFlow users, we receive a duplicate bank paying-in slip, duly stamped by the receiving bank, within the four working day period. If we receive the paying-in slip later, the effective date for calculating discounting charges will be the date of such receipt. 8.5 The balance on the Memorandum Discounting Statement will reflect: 8.5.1 payments taken by you; 8.5.2 any sums owed by you to us; and 8.5.3 any Remittances received by us. 8.6 If the Memorandum Discounting Statement shows a credit balance we will normally pay this to you without your asking us but, at our discretion, we may withhold amounts equal to: 8.6.1 any credit balances on Customers' accounts; and 8.6.2 the amount of Your Responsibility. 8.7 We cannot let you take any credit balance from your Memorandum Discounting Statement after we have been told of the issue of a petition for your sequestration, bankruptcy or winding up. Provided that we do not exercise any of our rights under clause 17 we shall need to see a court order dismissing the petition before starting payments again. 8.8 We may at any time add together the balances on all accounts recording transactions between you and us. We may also at any time apply or set-off any amounts owing by you to us and the amount of Your Responsibility against any amounts owing by us to you. Where any amounts due by you to us, including those prospectively and contingently due, cannot immediately be found out we may make a reasonable estimate. 8.9 We will provide you with statements of the Receivables Purchased Account and the Memorandum Discounting Statement. These shall be treated as correct and binding upon you, except for those errors which shall be obvious or contrary to law or where we receive your written notice within 10 days of our despatch of such statements to you. 8.10 You will accept a certificate signed by our Company Secretary or a director of ours as to all or any of the following on the date referred to in the certificate: 8.10.1 the balance on the Memorandum Discounting Statement; 8.10.2 the balance on the Receivables Purchased Account; 8.10.3 any loss or damage suffered by us; 8.10.4 the amount of Your Responsibility; 8.10.5 any other amount payable to us. In any proceedings such certificate shall be conclusive evidence as to the balance, loss, damage or amount on the date so certified. 8.11 If we ask you to do anything you will pay all costs and expenses of doing so. If you do not carry out anything which we have a right to ask for then we may do it and you will pay all our costs and expenses. 8.12 All payments due from you to us shall be made in immediately available funds free and clear of any right of retention, set-off or counterclaim or any other withholding or deduction. If you are required by law to make any withholding or deduction, you will pay such additional sum needed so that we receive the full amount due to us under this Agreement. 9. CHARGES AND INDEMNITIES 9.1 You will pay us the discounting charge which shall accrue from day to day. It will be worked out at the rate shown in the Schedule on the debit balance on the Memorandum Discounting Statement. Any payment to you will be debited to the Memorandum Discounting Statement on the day that we initiate the transfer. 9.2 The discounting charge shall be debited daily to the Receivables Purchased Account and to the Memorandum Discounting Statement. Any debit to the Memorandum Discounting Statement shall be treated as a Prepayment for the purpose of working out the discounting charge. 9.3 We shall be entitled to a service charge at the rate shown in the Schedule for each Notified Debt. The service charge covers: 9.3.1 licence to use FacFlow; 9.3.2 provision of a monthly statement; and 9.3.3 assisting reconciliation of your and our respective sales ledger records and cash receipts. We shall debit the service charge to the Receivables Purchased Account and to the Memorandum Discounting Statement at the end of each calendar month. No refund of any service charges can be made either if a credit note is issued or if this Agreement ends. 9.4 If the total of all service charges in each period shown in the Schedule falls short of the sum needed during that period to reach the minimum service charge you will pay us the shortfall. If we consider such shortfall likely then we may debit it to the Receivables Purchased Account and to the Memorandum Discounting Statement. 9.5 If this Agreement does not end on the last day of a period for the calculation of the minimum service charge then when the Agreement does end you will pay us the minimum service charge to the end of such period. 9.6 Payments to you will be made by BACS or CHAPS or such other method we may at any time advise you. Any administration charges to you for such payments will be at the rates advised in our pricing tariff, from time to time. 9.7 If our bankers charge us, you will repay to us their charges for: 9.7.1 dealing with dishonoured Remittances; 9.7.2 collecting any Remittances in a currency other than Sterling; 9.7.3 collecting Remittances in Sterling drawn on a bank outside the United Kingdom. 9.8 You will pay us a facility fee at the rate shown in the Schedule on each anniversary of this Agreement. You will also pay us an arrangement fee for any variation of this Agreement requested by you or any additional service provided outside its scope. If we permit payments in excess of your Availability, we may also make an additional facility charge until the excess is repaid. This will not affect any other rights we may have. For setting up FacFlow for you, providing training in its use, providing new versions or updates, you will pay the related fees as from time to time set out in our pricing tariff. 9.9 If we make special visits to your premises or anywhere else then you will pay all our costs and expenses. 9.10 You will fully indemnify us against all losses, costs, demands, disbursements, fees and expenses of: 9.10.1 obtaining the release of Debts from charges, trusts or other encumbrances or enforcing such release; 9.10.2 assignments or reassignments of Debts or Related Rights or giving notices of assignment or reassignment; 9.10.3 taking guarantees or indemnities from any person, including a receiver; 9.10.4 enforcing either this Agreement or any guarantee or indemnity given in respect of it; 9.10.5 all matters arising from any breach by you of this Agreement or the occurrence of a Termination Event; 9.10.6 any Customer failing to pay a Debt at its full Notified Value; 9.10.7 any solicitor or agent engaged to collect Debts or conduct legal proceedings concerning Debts and all legal fees and disbursements payable to any other party to such proceedings. 9.11 Changes to the discounting charge, the service charge and the minimum service charge shall only be effective if in writing signed by both you and us. 9.12 VAT, if applicable, will be added to all fees and charges quoted by us. 9.13 You will pay us immediately on demand any amount which we have to pay to any Customer by way of refund claimed under a direct debit guarantee given by us. 10. REPURCHASE 10.1 We may at any time require you to Repurchase an Ineligible Debt from us. 10.2 Should we require you to Repurchase Debts from us we will continue to own all such Debts until we receive the price for all Repurchases. At this point we shall transfer them back to you. We shall then account to you for any further sums received by us from your Customers in respect of such Debts. 11. AGENCY 11.1 We alone shall have sole and absolute discretion as to how to collect and enforce payment of Debts. We can do this in whatever way we see fit. Until we exercise our rights under clause 11.5 you must, at your expense, collect Debts and manage Customers' accounts for us as our undisclosed agent. You are not our agent for any other purpose. 11.2 Throughout the term of this Agreement you must ensure that all Debts are promptly and correctly recorded in your Accounting Records and that your sales ledger control bears a conspicuous notation that Debts have been sold and assigned to us. 11.3 During your agency we may communicate in your name with Customers for the purposes of Debt verification. 11.4 You must act promptly and efficiently when carrying out your duties as our agent. 11.5 We may at any time vary the terms of your agency as we see fit. If we request you will give notice to each Customer that we are the owner of all your present and future Debts. We will tell you the wording of the notice which we can also give on your behalf. Unless we state otherwise, such request will act as a cancellation of your agency, whereupon we alone shall be entitled to collect and enforce payment of all Debts in whatever way we see fit. You will fully co-operate with us and, as we direct, will help us to collect Debts. 11.6 After the cancellation of your agency: 11.6.1 you must not say you are our agent; 11.6.2 you must immediately send us your Accounting Records to do with Debts; 11.6.3 we will maintain your Customers' accounts in the form of a sales ledger; 11.6.4 you must ensure that Customers pay all their Debts to us or as we direct, including by direct debits; 11.6.5 in our absolute discretion we may settle, conduct or abandon any collection activity and you will be bound by our actions and decisions; 11.6.6 in our absolute discretion we can at any time grant time or other indulgence to any Customer and compromise claims with Customers or accept payment from a Customer which is less than the Notified Value of the Debt without discharging you from your obligations to us; 11.6.7 in our absolute discretion we may start, defend or compromise any legal proceedings and you will be bound by our actions and decisions; the proceedings may be in our or your name; you will give us all evidence we may at any time need, whether before during or after any proceedings; you will make sure that those witnesses we need will attend court; we may use an alternative dispute resolution procedure involving mediation or arbitration; 11.6.8 we can repay to a Customer any credit balance shown on their account; 11.6.9 you will be responsible for paying all our charges, costs, expenses and fees for collecting or attempting to collect any Debt, including: o our own internal costs and expenses in undertaking the collection activity; o those of any solicitor or collection or tracing agent engaged by us, together with a litigation fee to cover our work in instructing and supervising such proceedings; o court fees; o those costs payable to any other party to the proceedings; 11.6.10 we may require you to give us security for the above costs and expenses; we will credit the Receivables Purchased Account and the Memorandum Discounting Statement with any costs and expenses recovered. 12. TRUSTS AND OTHER RIGHTS 12.1 From the moment that you receive any Remittance, you will hold it absolutely in trust for us. We may give notice to anyone that such trust exists. 12.2 When you receive a Remittance you must: 12.2.1 immediately pay it into our bank account, or into a trust bank account in your name; 12.2.2 not pay it into any other account or deal with or negotiate it. 12.3 A trust bank account must be run according to our instructions. This means that we may irrevocably appoint our officers as the only people who can authorise transactions on the account. 12.4 You must authorise and indemnify our bankers so that they can credit our bank account with any transfers received from your bankers or your Customers' bankers and so they can collect the proceeds of any Remittances payable to you or your agents. 12.5 You must give us a letter addressed to your bankers instructing them to transfer to our bankers any cheques, bank giro transfers, BACS, CHAPS and other electronically transferred funds that may be received by your bank from Customers. You will not be able to cancel such instructions. 12.6 If we do not become the owner of any Debt or its Related Rights covered by this Agreement for any reason then you will be treated as holding such Debt or its Related Rights on trust for us free from all encumbrances. 12.7 You must promptly tell us about all Returned Goods. We may require you to set these aside marked with our name as the owner. You will then deliver them to us, or deal with them as we direct. We can, without notice, enter any premises where we believe Returned Goods or any other items comprised in the Related Rights are kept. We can take possession of or sell any Returned Goods on such terms and at such prices as we consider appropriate. We shall credit the net proceeds towards the discharge of the relative Debts. If we ask, you will deliver to us or allow us to take away any other items included in the Related Rights which we may deal with as we see fit. 13. YOUR UNDERTAKINGS TO US 13.1 Whilst this Agreement is in force and then until you have paid all monies owing to us you undertake: 13.1.1 to make sure the payment and settlement discount terms for each Debt and any rights of retention, abatement or rebate are not more generous than those appearing in the Schedule and that these appear on every invoice and all copies; 13.1.2 not to cancel or vary any Sale Contract or any payment terms or settlement discounts after Delivery unless you have our written consent; 13.1.3 to make sure that every Sale Contract shall: o only be made in the ordinary course of your business stated in the Client Particulars; o be subject to the law of one of the jurisdictions within the United Kingdom, other than the Channel Islands or the Isle of Man. o provide for payment by the Customer in Sterling; o not include any prohibition against assignment of the Debt; 13.1.4 to make sure that neither you nor any Associate enters into any other agreement for the factoring, charging, declaring in trust or discounting of Debts with any other party or into any arrangement prejudicial to our outright ownership of Debts; 13.1.5 to tell us immediately when you know about the following: o any change or contemplated change in the directors or partners or the control or ownership of your company, firm or business or of any guarantor or indemnifier of your obligations to us; o any threatened or pending Insolvency proceedings against you, or against any guarantor, indemnifier or Associate; o any changes in the status, address, or creditworthiness of a Customer; o any security holder taking any steps towards or actually enforcing its security over any part of your assets or undertaking; o any floating charge given by you being crystallised or becoming converted into a fixed charge; o all retrospective or quantity discounts agreed with Customers; o any payment or settlement discount terms different from those shown in the Schedule; 13.1.6 immediately we ask you: o to provide information about your Customers; o to give evidence satisfactory to us of any order and the completion of any Sale Contract; o to exercise any reservation of title to Goods in the Sale Contract; o to deliver to us and not to your Customer the originals of any of the items comprised in the Related Rights, together with as many copies as we may require; we may forward these to the Customer or other persons or organisations as appropriate at your expense; 13.1.7 not to include in an Offer or a Client Advice, until we tell you, any Debt which shall: o be due by an Associate; o be due by a Customer who also supplies goods or services to you; o arise from Goods supplied by you on approval, trial, evaluation, consignment, sale or return or similar terms; o be due by a Customer who has not purchased the Goods for his business; o be regulated by the Consumer Credit Act 1974; o arise from the sale of your capital or fixed assets; o be due under a Sale Contract in a currency other than Sterling unless a Currency Annexe applies; o be within the category of Non-Notifiable Debts detailed in the Schedule, or such other Debts as we may specify; 13.1.8 immediately to cease and desist from any contra accounting arrangements with your Customers; 13.1.9 not to include in an Offer or a Client Advice any Debt until the Goods have been Delivered; 13.1.10 to keep us advised of the identity of your Associates; 13.1.11 promptly to perform all your further and continuing obligations to a Customer and, if we ask, to give evidence of such performance; 13.1.12 to create such security in our favour on your undertaking and assets as we may specify for your performance of this Agreement, or in respect of Debts intended to be owned by us but which for any reason fail to belong to us; 13.1.13 to sign any additional documents and do anything we may need to exercise or enforce our rights, to sign assignments of Debts or Related Rights or endorse or Assign any instrument or security included in the Related Rights; any such assignment of a Scottish Debt or any of its Related Rights will support the assignments given in clauses 3.1 and 3.2 but will not prejudice the earlier assignments; 13.1.14 to follow our guidelines for the day to day efficient working of this Agreement; 13.1.15 to make sure that your warranties about Debts are complied with until they are discharged; 13.1.16 to take all steps we may require for the protection of our interests under or arising out of this Agreement and in mitigating any loss we may suffer; 13.1.17 to make sure that in relation to your sole trader and unlimited partnership Customers your processing of information about them (including any transfers to us) complies in all respects with the Data Acts, and is accurate; 13.1.18 to advise us promptly should you receive any notice or allegation of non-compliance with the Data Acts; 13.1.19 to advise us promptly of all changes made to information transferred to us if you receive a correction request from a Data Subject; 13.1.20 to advise your sole trader and unlimited partnership Customers about how you process information about them, your disclosure of it to us and the use we will make of such information, including supplying it to and making searches with our credit reference and fraud prevention agencies; 13.1.21 not to create any new Associate nor to transfer any of your assets undertaking or staff to an Associate without in each case our prior written consent; 13.1.22 to advise us without delay of any intention of yours to take steps towards your Insolvency. 14. WARRANTIES 14.1 By including a Debt in an Offer or a Client Advice you will be treated as having given all of the following warranties to us: 14.1.1 all the particulars contained in the Offer or Client Advice are correct and complete and the Debt has not been previously Notified to us; 14.1.2 each Debt relates to an actual and bona fide sale and Delivery in accordance with the Sale Contract; 14.1.3 the Debt is payable in the U.K. without any retention, set-off or counterclaim by a Customer with an established place of business in the U.K.; 14.1.4 you have the absolute right to transfer the Debt to us and, except in our favour, it shall remain free from any security, charge, trust, option, pledge, hypothecation, encumbrance, lien or any tracing rights adversely affecting the Debt, the Goods or the proceeds; 14.1.5 our ownership of the Debt will not violate any laws or agreement affecting you; 14.1.6 the Notified Value of the Debt is the same as its Contracted Value; 14.1.7 all sums due or obligations by you to the Customer have been paid or performed and you will have no other obligations towards the Customer which could reduce the amount payable to us for the Debt; 14.1.8 no right or claim of rescission, defence, adjustment or other right or claim exists or will arise to reduce or extinguish the Notified Value of the Debt or affect our ability to collect the Debt; 14.1.9 the correct name and address of the Customer and any required purchase order number appear on the invoice or credit note, on any documents supplied evidencing the Debt and all correspondence; 14.1.10 the Customer has obtained all the consents and certificates necessary in order to pay the Debt; 14.1.11 the invoice or credit note identifies the currency for payment as Sterling; 14.1.12 the Debt is one to which this Agreement applies; 14.1.13 where the Debt relates to a claim for interest: o all legal criteria for your interest claim have been fulfilled; o the principal Debt to which your interest claim relates has previously been Notified; o your interest claim must be Notified to us within three months of the date the principal Debt was paid; o no credit payment terms have been allowed for discharging your interest claim. 14.2 You warrant that prior to entering into this Agreement you have disclosed to us every fact or matter known to you or which you should have reasonably known might influence us in our decision whether or not: 14.2.1 to enter into this Agreement on these terms; or 14.2.2 to accept any person as a guarantor or indemnifier of your obligations to us. 14.3 You will immediately tell us of anything which might reasonably influence our decision to continue with this Agreement on these terms. 15. FACFLOW 15.1 We will provide you with FacFlow. You will provide all computer equipment required at your premises and will keep this equipment virus free and suitable for use. We shall have no responsibility for any damage, loss or corruption of your data, software or equipment caused through the loading or operation of our Software. 15.2 You undertake: 15.2.1 to use your best endeavours to keep such equipment free from any Equipment Defect or Transmission Defect and to make suitable contingency arrangements to cover any such defect or the withdrawal or suspension of FacFlow; 15.2.2 immediately to load and use any Software updates which we may provide; 15.2.3 to keep secret and confidential the method of operation of FacFlow, the Software and all access data and security procedures and to tell us promptly if any contravention is known or suspected; 15.2.4 on a weekly basis or more frequently if we tell you, to make back up copies on disk of your sales ledger records, including invoices and credit notes, and to securely store such copies away from your premises for at least 4 months, and to advise us of their location. 15.3 You will have a non-transferable licence to use the Software. 15.4 We own all rights in the Software. You may not copy it without our prior written consent, except one copy solely for back-up purposes. 15.5 You and we undertake to each other: 15.5.1 to use all reasonable endeavours to ensure that each FacFlow Transmission is completely and correctly sent; 15.5.2 to tell the other promptly if either is aware of any Equipment Defect or Transmission Defect and to co-operate with the other to remedy it; 15.5.3 to maintain appropriate records in support of FacFlow Transmissions and to ensure that FacFlow is not accessible to unauthorised persons. 15.6 We will maintain a Transmissions Log which shall, in the absence of manifest error, be conclusive proof and evidence of the FacFlow Transmissions sent or received by us. 15.7 We may rely upon any FacFlow Transmission ostensibly sent by you even though it may be sent without your authority. We may also rely upon any FacFlow Transmission sent through your agent or intermediary. 15.8 We may without notice suspend, withdraw or reactivate the operation of FacFlow. 15.9 We shall have no responsibility to you for any loss or damage as a result of any failure or delay in complying with our obligations in connection with FacFlow, including that arising from any: 15.9.1 Equipment Defect or Transmission Defect; 15.9.2 suspension or withdrawal of FacFlow; 15.9.3 act or omission of any third party or abnormal operating conditions; 15.9.4 failure to process any FacFlow Transmission to our internal systems, even though accepted by FacFlow. 15.10 Upon withdrawal of FacFlow you will immediately return to us any property of ours in your possession or under your control. 15.11 You will indemnify us against all losses and damages that we may incur if you breach your obligations in respect of FacFlow. 15.12 FacFlow does not operate on a real time basis. Please note any information is only accurate to an earlier point in time. In particular any request by you for a payment based upon any Availability shown may be varied by us as further information becomes available. 15.13 Subject to clause 15.12, you and we will give each FacFlow Transmission the same status as if it had been in writing, signed on behalf of the sender and physically delivered to the recipient, unless the FacFlow Transmission can be shown to have been corrupted as a result of technical failure. FacFlow Transmissions shall be treated as satisfying any legal requirement for a communication to be in writing. You waive any rights to challenge the validity of any FacFlow Transmission on the ground that it was prepared and/or sent and/or received only in electronic form. 15.14 A FacFlow Transmission regarding Initial Debts shall be treated as including the following words: "IN ACCORDANCE WITH THE INVOICE DISCOUNTING AGREEMENT BETWEEN THE ROYAL BANK OF SCOTLAND COMMERCIAL SERVICES LIMITED AND OURSELVES THE DEBTS REFERRED TO IN THIS FACFLOW TRANSMISSION SHALL BE CONSIDERED AS BEING SUBJECT TO AN OFFER 16. INFORMATION FOR US 16.1 You must give us a signed copy of your full set of accounts, including your directors' or partners' (as the case may be) and auditor's report or such other financial reports as we request, for each of your accounting reference periods (as defined in the Companies Act 1985). You must give us these items as soon as you have them, which must be no later than six months from the end of each accounting period. 16.2 You must give us your management profit and loss account and balance sheet at such intervals as we tell you. You will also give us such other financial reports that we may ask for and you will ensure that your auditors or external accountants report to us directly any information that we require. If we ask you will provide us with a copy of your partnership agreement and any amendments, if you are a limited liability partnership. 16.3 You will provide to us by the monthly returns due date specified in the Schedule: 16.3.1 an aged analysis of Debts on the basis specified in the Schedule and correct to the last day of the preceding month. The ageing must also identify those Customers' accounts which are either in dispute or have been passed to solicitors, debt collectors or other third parties for collection; 16.3.2 copy Customers' statements for the same period as in clause 16.3.1; 16.3.3 a sales ledger control in the format we tell you reconciled to the aged analysis of Debts in clause 16.3.1; 16.3.4 any other information we may ask for. 16.4 You will let any employee, representative or agent of ours enter any of your business premises or locations under your control in order to: 16.4.1 inspect Goods, stocks, Sale Contracts and evidence of their performance; 16.4.2 verify, check, remove or be provided with copies of all Accounting Records. 16.5 We may at all times rely upon any signature, act or communication of any person purporting to act on your behalf and the same shall be binding upon you. 17. TERMINATION EVENTS 17.1 In addition to the right of either you or us to give notice to the other to end this Agreement under clause 2.1, we may immediately end it at any time after any of the following events: 17.1.1 any breach or threatened breach by you of this Agreement; 17.1.2 the breach or threatened breach or the termination of any contract between us and any of your Associates; 17.1.3 any application by any creditor of yours for a court order that we must pay money to your creditor or must stop paying any monies to you; 17.1.4 if you have an obligation to a third party for repayment of borrowed money which is declared due prior to its stated maturity date or you do not pay it when due; 17.1.5 any change in your directors or partners (as the case may be) ownership, control, constitution or composition reasonably considered by us to prejudice our position; 17.1.6 breach or termination by you or a third party of any representation, warranty or undertaking given to us; 17.1.7 the termination of any waiver, consent, ranking or priority arrangement in our favour; 17.1.8 your ceasing or threatening to cease to carry on your business referred to in the Schedule; 17.1.9 your Insolvency including but not limited to the appointment of, or the giving of notice of intention to appoint, an administrator under the Insolvency Act 1986 or the coming into effect of a moratorium under the Insolvency Act 2000 or taking any steps towards such moratorium; 17.1.10 the Insolvency or death of any person who has given a guarantee or indemnity for your obligations to us, or the service of a notice of intention to end such guarantee or indemnity or the legal disability of that person; 17.1.11 if any Associate factors or discounts its debts with another party or is threatened with Insolvency proceedings or becomes Insolvent; 17.1.12 your failure to comply with the minimum notification requirements shown in the Schedule. 17.2 Upon your Insolvency, ceasing to trade, failure to repay the entire Repurchase price under clause 17.4.1 or our cancelling your agency referred to in clause 11.5, we may: 17.2.1 immediately debit your Receivables Purchased Account and Memorandum Discounting Statement with an additional service charge of five per cent of the Notified Value of the Debts then Outstanding or Notified to us thereafter in order to cover our additional administrative work; and 17.2.2 immediately increase the discounting charge by two per cent. 17.3 Upon or at any time after a Termination Event, which in good faith we reasonably and honestly consider prejudices our position (whether or not we use our right immediately to end this Agreement), we may do any or all of the following: 17.3.1 upon making the information available through FacFlow (whether or not you access FacFlow): o reduce the Prepayment percentage to zero or such other figure as we may decide; o designate all or any Outstanding Debts as Ineligible Debts; o create a special reserve against your Availability to cover Your Responsibility; o consolidate the balances on all accounts recording transactions between you and us; 17.3.2 demand that you pay us immediately any debit balance on the Client Account that exceeds the lesser of either your Availability or the Prepayment review level set by us from time to time or any balance due to us after such consolidation plus in each case service charges and discounting charges accrued but not yet debited and an amount equal to all credit balances on Customers' accounts; 17.3.3 require you to Repurchase any Debts then Outstanding; 17.3.4 delay at least ten calendar days, to allow for cheque clearances, before paying to you any credit balance on the Memorandum Discounting Statement. In connection with a Termination Event set out in clause 17.1.1 we want you to be aware that the following matters will usually be considered as prejudicing our position: o your breach of sub-clauses 7.1, 7.2, 11.1, 11.2, 11.5, 11.6, 12.2 and 12.7; o your failure duly to honour any payment obligation to us; o your breach of any undertaking in clause 13 or any warranty in clause 14; o your breach of clause 16. However this list is not exhaustive and there may well be other situations where a Termination Event prejudices our position. Within 30 days of our exercising our rights under sub-clauses 17.3.1 (points 1 and 2) or taking action under clause 17.3.2 or 17.3.3 you may give notice to us immediately to end this Agreement. 17.4 Upon the ending of this Agreement, for whatever reason: 17.4.1 you must Repurchase all Outstanding Debts from us at a price equivalent to the debit balance on the Memorandum Discounting Statement and all other sums due to us; 17.4.2 you will not attempt to cancel any notices of assignment given to Customers or attempt to collect Debts until you have paid the Repurchase price under clause 17.4.1 and we shall continue to own all Debts until so paid; 17.4.3 you will be responsible for all credit balances on Customers' accounts and indemnify us in respect of all claims for them; 17.4.4 you will not Notify us of any Debts arising after the date on which this Agreement ends; and 17.4.5 we shall pay you any credit balance on the Memorandum Discounting Statement less the amount of Your Responsibility but allowing at least ten calendar days for cheque clearances. 17.5 Except as otherwise provided, the ending of this Agreement shall not affect our respective rights and obligations in respect of: 17.5.1 any Debts which shall have come into existence prior to such termination; and 17.5.2 all transactions or events having their inception prior to such termination, including the continued running of the discounting charge and our rights to set-off monies or combine accounts. Such rights and obligations shall remain in full force and effect until all monies due from you shall have been received by us and all monies due from us to you shall have been paid. 17.6 Any discharge of your obligations to us shall be of no effect to the extent that any receipt by us shall later be set aside under insolvency law. 18. POWER TO ACT IN YOUR NAME 18.1 To ensure that you carry out your obligations to us and as security for all sums which shall become due to us, you irrevocably appoint us and our directors, Company Secretary and officers, at any time, jointly and each of them severally to act as your attorneys as we or they think fit in order to do all or any of the following: 18.1.1 complete and perfect our title to or deal with any Debt, Related Rights or Returned Goods; 18.1.2 obtain payment of and give valid discharges for any Debt; 18.1.3 secure performance of any of your obligations to us or to any Customer. 18.2 For these purposes, your attorneys may do any of the following: 18.2.1 sign all documents; 18.2.2 endorse and/or negotiate all Remittances; 18.2.3 conduct, defend or compromise any legal proceedings and settle any indebtedness; 18.2.4 take all other steps they consider necessary. 18.3 These powers shall continue both during and after the ending of this Agreement and during any disability on your part until all sums due to us have been paid. You will ratify and confirm whatever shall be lawfully done under these powers. 18.4 You also irrevocably appoint any assignee of ours or any person to whom we may novate this Agreement to perform any of the acts set out above. We may also appoint or remove a substitute attorney. 19. CONTACTING OTHER PARTIES 19.1 We may: 19.1.1 provide your bank, auditors, accountants, other professional advisers and any guarantors and/or indemnifiers to this Agreement with such information about your accounts with us as they may ask or we may consider necessary; 19.1.2 obtain from your bank, auditors, accountants and other professional advisers such information as we may request. 19.2 You confirm that you have authorised the persons referred to in 19.1.2 to give us such information. 19.3 We may disclose this Agreement and any information which we have obtained: 19.3.1 to any actual or potential assignee, transferee or sub-participant; 19.3.2 to any agency, security trustee, agent and/or arranger in connection with any financing of any such assignee, transferee or sub-participant; 19.3.3 in any listing particulars, prospectus or offering circular. 20. ASSIGNMENT, DELEGATION AND FORCE MAJEURE 20.1 You consent to our novating to any other party any or all of our obligations, rights and remedies. This Agreement shall bind and enure to the benefit of our successors and assignees. 20.2 Except where the context otherwise requires, references to "we" or "us" shall include our successors, assignees and transferees in clauses conferring benefits and/or rights on us; in clauses imposing obligations on us, such references shall extend to such successors, assignees and transferees only if they shall specifically assume such obligations. 20.3 You will not, without our prior written consent: 20.3.1 assign, grant security over or charge any of your rights or benefits or delegate any of your duties under this Agreement; 20.3.2 dispose of any part of your business, assets or undertaking, except in the ordinary course of your business; 20.3.3 create any securities, mortgages or charges on or over your assets or undertaking. 20.4 We shall not be liable to you for any consequential, secondary or indirect loss, injury or damage or any loss of or damage to goodwill, profits or anticipated savings. However nothing shall operate to excuse us from liability caused by the fraud of any of our officers. 20.5 We shall have no liability to you if we are delayed in or unable to perform our duties directly or indirectly because of an event of Force Majeure. 20.6 Any waiver or apparent waiver by us of any breach of any obligation or provision in this Agreement cannot be treated as a general waiver or be construed as implying or establishing consent to any subsequent breach. 21. SERVICE OF NOTICES AND PROCESS 21.1 Except as otherwise stated, any written notice from us to you and any proceedings issued by us requiring service on you may be given or served by delivering it at or posting it to: 21.1.1 your address stated in the client particulars or such other address advised to and acknowledged by us as being effective for the purposes of this clause; or 21.1.2 your registered office; or 21.1.3 any address last known to us at which you carried on business. It may also be handed to any officer of yours or be given by facsimile transmission or electronic medium to your number or address last known to us for communication by such means. If you are a limited liability partnership it may also be handed to any of your partners. 21.2 Any notice or process shall be considered served if: 21.2.1 delivered - at the time of delivery; or 21.2.2 sent by post - 48 hours from the time of posting; or 21.2.3 sent by facsimile transmission or electronic medium - at the time of transmission; or 21.2.4 handed over - at the time of handing over. 21.3 Any notice in writing by you to us under this Agreement shall take effect at the time it is received by us at our registered office. 22. LAW AND JURISDICTION 22.1 Our relationship with you is to be governed and interpreted by English law. You submit to the jurisdiction of the English courts. We may, however, use the courts of any other jurisdiction. 23. INTERPRETATION OF THIS AGREEMENT 23.1 Any reference to a statute includes any amendment or replacement or re-enactment of that statute for the time being and any order and any subordinate legislation made under it. 23.2 The singular includes the plural and vice versa. Reference to any gender shall include any other gender. References to a person or party shall be construed as references to any person, firm, company, corporation, association, partnership, government, whether local, national or supra-national or other official body. 23.3 The meaning of general words introduced by the word "other " is not to be limited by reference to any preceding words. 23.4 Where the meaning of a word or expression in this Agreement has to be considered in relation to any place outside England and such word or expression has no exact counterpart in that place, it is to have the meaning of its closest equivalent as conclusively determined by us. 23.5 The interpretation and construction of this Agreement shall not be affected by any headings, which are for convenience only. 24. GENERAL 24.1 The whole agreement between you and us consists of only this document, including any annexes referred to in the Schedule (and any document referred to in such annexes). References to "the Agreement" or "this Agreement" include all the annexes and all subsequent amendments, variations or extensions. Except as provided in any special conditions all earlier agreements, prior negotiations, quotations, warranties, advertisements and representations shall be of no effect. You have not relied upon any representation made to you by us or on our behalf or been influenced, induced or persuaded to enter into this Agreement by any representation. 24.2 We may use all or any of the rights and remedies contained in this Agreement. They are not exclusive of each other or of any rights or remedies given to us by law. If we choose not to enforce or cannot enforce any term or condition, this will not affect our right to enforce the rest of the Agreement or to enforce that term or condition at a later date. Also, such rights and remedies shall not be affected if we compromise with any Customer. 24.3 This Agreement is considered by both you and us to be reasonable. Should any part of it be valid only if some other part were deleted then the Agreement will apply as if it were so deleted. The remainder of this Agreement will not be affected by such deletion. 24.4 Except where clauses 5.1 (where we may change Limits at our complete discretion) and 9.11 apply, changes to the Agreement can be made between you and us in any way but will only come into effect on the date stated in our written confirmation to you of such change or if no such date is stated upon despatching such confirmation. 24.5 This Agreement is not intended to confer any right or benefit on any person who is not a party hereto. No term of this Agreement is enforceable pursuant to the Contracts (Rights of Third Parties) Act 1999 by any person who is not a party to this Agreement. ANNEXE OF DEFINITIONS In the attached Agreement the following expressions have the meanings set out below against each of them.
Accounting Records FacFlow Receivables Purchased Account Adjustments FacFlow Transmission Related Rights Assign Force Majeure Remittances Associate Funding Limit Repurchase Availability Funding Period Retention Percentage BACS Goods Returned Goods Base Rate Ineligible Debt Sale Contract CHAPS Initial Debt Schedule Client Advice Insolvent Scottish Debts Concentration Limit Percentage Limits Software Contracted Value Memorandum Discounting Statement Sterling Customer Non-Notifiable Debt Termination Event Data Acts Notified/Notify/Notifying Transmission Defect Data Subject Notified Value Terminations Log Debt Offer United Kingdom/U.K. Debt Turn Target Adjustment Outstanding U.K. Debt Delivered Prepayment VAT Equipment Defect Purchase Price Your Responsibility
"ACCOUNTING Any of the following: RECORDS" (1) accounting books, records and ledgers, financial and management accounts; (2) computer data or materials about your financial position, purchases and sales; (3) all invoices, credit notes or documents evidencing entries in such books of accounts, records and computer data and any other documents we require. "ADJUSTMENTS" Any entry on your Customers' accounts which changes the Notified Value of Debts. "ASSIGN" The transfer of ownership which includes in Scotland the giving of an assignation. "ASSOCIATE" (1) Any subsidiary or holding company of yours as defined in sections 736 and 736A of the Companies Acts 1985 to 1989 or Articles 4 or 4A of the Companies (No. 2) (Northern Ireland) Order 1990; or (2) any other form of associate of yours as defined in section 184 of the Consumer Credit Act 1974; or (3) a director, partner, shareholder or employee of yours or the spouse of any of them; or (4) any company in which you or any of them have an interest other than purely for investment purposes in a publicly quoted company. "AVAILABILITY" Your entitlement to Prepayment calculated by taking the credit balance on the Receivables Purchased Account and deducting: (1) the value of all Ineligible Debts; (2) the amount of Your Responsibility; and (3) the standard retention. The standard retention is arrived at by: (1) taking the balance on the sales ledger control; and then (2) deducting the value of all Ineligible Debts and any special reserves created at our discretion; and then (3) multiplying the resultant sum by the Retention Percentage. "BACS" The Bankers Automated Clearing System. "BASE RATE" The Sterling Base Rate per annum quoted, from time to time, by The Royal Bank of Scotland Plc or its successors or such other bank as we may tell you. "CHAPS" The Clearing Houses Automated Payments System. "CLIENT Your notification to us, in such way as we may specify, ADVICE" including in a FacFlow Transmission, of Debts, credit notes and Adjustments which have not previously been Notified to us together with such evidence of the performance of the Sale Contract or reasons for a credit note as we may specify. "CONCENTRATION Initially the percentage shown in the Schedule of the balance of PERCENTAGE" all Outstanding LIMIT Notified Debts. "CONTRACTED The amount of a Debt payable by a Customer in accordance with the Sale VALUE" Contract after taking into account any deduction, discount, claim or allowance. "CUSTOMER" A person who incurs or may incur any indebtedness under a Sale Contract. "DATA ACTS" The Data Protection Acts of 1984 and 1998. "DATA SUBJECT" Has the same meaning as in the Data Acts. "DEBT" Any present, future or contingent obligation of a Customer to make payment under a Sale Contract together with its Related Rights or where the context allows a part of such obligation or its Related Rights, including: (1) the future right to recover sums due following the determination, assessment or agreement of the amount of the obligation; and (2) VAT; and (3) all duties and charges. "DEBT TURN An adjustment to the Prepayment percentage applied at the TARGET beginning of each month, and arrived at by: ADJUSTMENT" (1) comparing the sales ledger debt turn as conclusively determined by us at the end of the previous calendar month against the debt turn target figure initially specified in the Schedule; (2) expressing any excess days as a percentage of the debt turn target figure; and (3) deducting this percentage from the Prepayment percentage. "DELIVERED" In relation to Goods: (1) their removal from your control and from your premises, carriers and agents; and (2) their physical delivery to the Customer in the United Kingdom or to the Customer's order; and (3) the assumption of risk therein by the Customer; and (4) complete performance of the Sale Contract. In relation to services: fully performed. "Deliver" and "Delivery" are to be similarly construed. "EQUIPMENT Any malfunction, failure, defect, downtime or unavailability of DEFECT" computer equipment or software or any ancillary service or link including telephone or other communication systems. "FACFLOW" A computerised data enquiry and transmission system between you and us as updated from time to time. "FACFLOW Any item of data transmitted between you and us using FacFlow. TRANSMISSION" "FORCE Any circumstances outside our or a Customer's reasonable MAJEURE" control, including an act of God, any exchange control, governmental or other official regulations or requirements, the outbreak of war, any terrorist act, revolution, civil insurrection, strike, lockout, industrial action or failure or non-operation of postal, banking or communication services. "FUNDING A monetary limit established by us in respect of each Customer LIMIT" against which the Prepayment percentage will be applied. "FUNDING The period initially as specified in the Schedule, after which PERIOD" Debts will rank as Ineligible Debts. "GOODS" Any merchandise or services the subject of a Sale Contract. "INELIGIBLE DEBT" A Debt: (1) which is disputed or in respect of which the Customer shall dispute their liability to pay or pay it by its due date for payment; or (2) in respect of which you shall be in breach of any undertaking or warranty given to us about it or any other obligations of yours to us arising from it; or (3) which remains Outstanding beyond the end of the Funding Period; or (4) in excess of our Funding Limit; or (5) owing by any Customer in excess of the Concentration Limit Percentage; or (6) in respect of which legal proceedings have been threatened against the Customer; or (7) where the Customer is Insolvent; or (8) specified by us at any other time. "INITIAL DEBT" A Debt Outstanding at the date of this Agreement. "INSOLVENT" (A) In relation to you or any guarantor or indemnifier of your obligations to us - any of or the occurrence of any of the following: (1) the issue of a petition or application, the calling of a meeting, the making of any proposal, the making of any appointment, the giving of any notice or the taking of any steps for or in relation to any of the matters listed in sub sections B (1) to (4) immediately below; (2) any part of your or their income or assets being subject to any of the following: o seizure, distress, diligence or lien; o enforcement of security rights; o execution of legal process; o sequestration; o an injunction or interdict; o attachment; o other legal process; (3) the service of any statutory demand under the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989; (4) the entry or making of any judgment, order, decree or award which shall remain unsatisfied or whose terms shall not be complied with for seven days (except pending any appeal); (5) an application for a garnishee order; (6) giving notice of the intended suspension of payments of debts; (7) becoming apparently insolvent; and the taking of any steps for the commencement of any proceedings in respect of any of the above matters. (B) In relation to a Customer - any of following: (1) in relation to an individual -- bankruptcy, apparent insolvency or sequestration or the granting of a trust deed for the benefit of creditors; (2) in relation to a company - the taking of any steps towards or the coming into force of a moratorium under the Insolvency Act 2000, a resolution for voluntary winding up by reason of insolvency, a winding up order, the appointment of an administrator under the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989 or the appointment of a provisional liquidator or receiver (whether in or out of court) or an administrative receiver of any of its assets or income or a judicial factor; (3) in relation to a partnership - its bankruptcy, apparent insolvency or sequestration or its winding up or the appointment to it of an administrator under the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989 or the appointment of a judicial factor or an order for the bankruptcy or sequestration of any partner or the apparent insolvency of any partner or the grant by a partner of a trust deed for creditors; (4) in relation to any person - entry into a voluntary arrangement under the Insolvency Act 1986 or the Insolvency (Northern Ireland) Order 1989 or apparent insolvency or any formal or informal arrangement generally for the benefit of creditors; "Insolvency" shall be construed accordingly. "LIMITS" Any of: o the Prepayment percentage; o the debt turn target figure initially shown in the Schedule; o the Concentration Limit Percentage; o Funding Limits; o Funding Period; o the Prepayment review level; o the facility fee initially shown in the Schedule. "MEMORANDUM DISCOUNTING STATEMENT" "NON- A Debt, owned by us under this Agreement, which must not be NOTIFIABLE Notified to us until we tell you, including specifically those DEBT" referred to in the Schedule and in clause 13.1.7. "NOTIFIED/ Inclusion of a Debt in an Offer or Client Advice. NOTIFY NOTIFYING" "NOTIFIED The amount of the Debt as shown in an Offer or Client Advice. VALUE" "OFFER" An unconditional offer to sell us a Debt with full title guarantee to be made in such form and with such evidence of the performance of the Sale Contract as we may specify. Where more than one Debt is at the same time subject to an Offer it shall be treated as an independent offer to sell us each Debt so offered which may be accepted or rejected by us entirely at our discretion "OUTSTANDING" A Debt unpaid by the Customer or a third party. "PREPAYMENT" A payment on account of the Purchase Price of Debts based on the Prepayment percentage initially as specified in the Schedule and arrived at in accordance with the definition of Availability. "PURCHASE PRICE" The price payable by us for a Debt calculated in accordance with clause 4.1. "RECEIVABLES An account reflecting the prospective Purchase Price of Debts. PURCHASED ACCOUNT" "RELATED RIGHTS" Any of the following in relation to any Debt or Returned Goods: (1) all your rights by law as an unpaid vendor or under the Sale Contract but without any obligation on us to complete the Sale Contract; (2) all evidence of the Sale Contract or its performance or any disputes arising; (3) documents of title to goods, warehouse keepers receipts, bills of lading, shipping documents, airway bills, certificates of origin, customs forms, commercial and consular invoices, insurance documents or similar; (4) the benefit of all insurances; (5) all Remittances, securities, bonds, guarantees and indemnities; (6) all Accounting Records to do with the Debt; (7) the ownership of all Returned Goods; (8) interest. "REMITTANCES" Cash, cheques, bills of exchange, negotiable and non negotiable instruments, letters of credit, orders, drafts, promissory notes, electronic payments and any other instruments, methods or forms of payment or engagement received by us, you or your agents towards a Debt. "REPURCHASE" Our right to require you to buy back and in respect of a Scottish Debt to take a reassignment from us of an Outstanding Debt at a price equivalent to its Notified Value or the Prepayment paid in respect of it. "RETENTION 100%, less the Prepayment percentage, as adjusted for any Debt PERCENTAGE" Turn Target Adjustment, from time to time. "RETURNED GOODS" Any Goods relating to or purporting to comply with a Sale Contract which any Customer shall for any reason: (1) reject or give notice of rejection; or (2) return or attempt to or wish to return to you or us; or (3) which you or we recover from a Customer. "SALE CONTRACT" A contract in any form, including a purchase order, between you and a Customer for the sale or hire of Goods or the provision of services or work done and materials supplied. "SCOTTISH Debts arising under Sale Contracts where either those Sale DEBTS" Contracts are governed by Scots law or the invoices for the Debts are addressed to Customers in Scotland. "SOFTWARE" The software provided by us to enable you to use FacFlow. "STERLING" The lawful currency from time to time of the U.K. "TERMINATION EVENT" Any event listed in clause 17.1. "TRANSMISSION DEFECT" Any programming error, corruption or other defect, or any delay or failure or breach of security in a FacFlow Transmission. "TRANSMISSIONS LOG" A record maintained by us of FacFlow Transmissions. "UNITED KINGDOM/ U.K." The United Kingdom of Great Britain and Northern Ireland, the Channel Islands and the Isle of Man. "U.K. DEBT" A Debt evidenced by an invoice addressed to a Customer in the United Kingdom. "VAT" Value Added Tax. "YOUR RESPONSIBILITY" Monies payable or possibly payable to us in the future including liability: (1) arising from debts transferred to us by any of your suppliers; or (2) as a guarantor or indemnifier of another client of ours; or (3) for the breach of your obligations to us; or (4) for legal costs and expenses; and our reasonable estimate of such monies where the amount cannot be immediately found out.
THE SCHEDULE (RECOURSE - DOMESTIC) 1. ANNEXE(S) INCORPORATED IN THIS AGREEMENT: (clause 24.1) 2. (A) MINIMUM PERIOD OF THIS AGREEMENT: (clause 2.1) (B) MINIMUM NOTICE PERIOD: (clause 2.1) 3. DEBTS TO WHICH THIS AGREEMENT Definitions APPLIES: (clause 1.1) 4. MONTHLY RETURNS DUE DATE: (clause 16.3) 12 months from the date this Agreement is made. 5. BASIS ON WHICH ANALYSIS OF DEBTS IS TO BE AGED: (clause 16.3.1) 6 months. All U.K. Debts. 15th day of month following. From each invoice date, separately identifying the amounts of Outstanding Debts by Customer showing Customer balances as follows: total, up to 30 days old, 31 - 60 days old, 61 - 90 days old, 91 - 120 days old and beyond 120 days old, plus a summary ageing of the totals of each of these categories.
N.B. In paragraphs 6 to 17 below: o if we keep the Receivables Purchased Account and the Memorandum Discounting Statement in respect of Debts in currencies other than Sterling then any sum expressed in Sterling shall be treated as if the words "or its currency equivalent" were also added. U.K. DEBTS 6. MINIMUM NOTIFICATION REQUIREMENTS: We must receive a Client Advice from you atleast (clause 17.1.12) once every 4 weeks. 7. PREPAYMENT PERCENTAGE: 80% (definition of "Prepayment" and "Retention Percentage") 8. DEBT TURN TARGET FIGURE: 85 days (definition of "Debt Turn Target Adjustment") 9. CONCENTRATION LIMIT PERCENTAGE: 30 % (definition of "Ineligible Debt" and "Concentration Limit Percentage") U.K. DEBTS 10. FUNDING PERIOD: 120 days from end of month of invoice. (definition of "Ineligible Debt" and "Funding Period") 11. PREPAYMENT REVIEW LEVEL: (pound)1,750,000. (clause 8.2) 12. DISCOUNTING CHARGE: 1.38 % above Base Rate. (clause 9.1) 13. SERVICE CHARGE: 0.10 % of the Notified Value of each Debt. (clause 9.3) 14. MINIMUM SERVICE CHARGE: In any period of 1 month(s) (pound)666.67. (clause 9.4) 15. FACILITY FEE: (pound)n/a per annum or part thereof. (clause 9.8) 16. YOUR PAYMENT AND SETTLEMENT DISCOUNT TERMS: 60 days from invoice month end with a settlement (clause 13.1.1) discount not exceeding n/a %. 17. ADDITIONAL NON-NOTIFIABLE DEBTS: Cash sales, staff sales, sales to Associate (clause 13.1.7) Companies, sales to Canada and sales to Shepherd Neame Limited.
19. SPECIAL CONDITIONS: 1. We are to receive a copy of your Quarterly management accounts within six Weeks of quarter end, commencing with period ending March 2005. 2. You must not include in an Offer or Notification any Debt until the goods have been delivered in accordance with this Agreement. 3. You will obtain proof of delivery in all cases and make these available to us upon request. 4. You will retain Customer Remittance advices and make these available to us upon request, where a Remittance advice is not received you will retain a copy of the cheque. 5. You will give all Customers paying by BAGS CHAPS or any other form of electronic transfer our nominated bank account details. 6. You will maintain a monthly reconciliation between your bank statements and cashbook and make them available to us upon request. 7. We are to receive an assignment to your Credit Insurance policy as "Loss Payee" with EULER , within 2 month(s) of the commencement of this Agreement. 8. You will obtain Loss of Book Debts Records Insurance with our interest noted therein or alternatively confirm that back up sales ledger records will be updated regularly and maintained off site at all times. 9. Sales ledger erosions including credit notes, journal credits, discounts and bad debts are not to exceed 5% in any rolling 3-month period. If this figure is exceeded the prepayment facility will be reduced by an amount not less than the excess above this. 10. Export sales in Sterling are to be funded to a maximum of 10% of the sales ledger. 11. A monthly spreadsheet providing a breakdown of debtors for each 30-day period is to be provided as part of the RBSCS month end return. RBSCS will monitor & verify the aged debtors report and the associated monthly spreadsheet at our periodic audits. 12. We require that the Net Worth (share capital + revenue reserves) of the Company does not fall below (pound)1,000,000. Should this occur then we may amend the terms of your facility. 13. We will debit your account with an arrangement fee of (pound)2,000 plus V.A.T., on commencement of this Agreement. CLIENT PARTICULARS CORPORATE CLIENT NAME: UBSN LIMITED COMPANIES REGISTRY NO: 02367133 ADDRESS: 17 COURT STREET FAVERSHAM KENT ME13 7AX NATURE OF YOUR BUSINESS: BREWER OF BEER AND LAGER EXECUTION TO CONFIRM THE RESPECTIVE CONSENT OF EACH PARTY TO THIS AGREEMENT AND TO ACKNOWLEDGE HAVING HAD THE OPPORTUNITY TO TAKE INDEPENDENT LEGAL ADVICE BOTH PARTIES HAVE EXECUTED AND DELIVERED THIS AGREEMENT AS INDICATED BELOW ON THE 26TH DAY OF APRIL 2005. SIGNED and DELIVERED as a deed on behalf of THE ROYAL BANK OF SCOTLAND COMMERCIAL /s/ LIMIED BY STEPHEN JAMES HARPUR Attorney for The Royal Bank of Scotland Commercial Services Limited Witness Signature /s/ Witness' Full Names: Witness' Address: Witness' Occupation CORPORATE CLIENT SIGNED and DELIVERED as a deed on behalf of UBSN LIMITED By SUNIL PURI, Director /s/ Sunil Puri Signature of Director And GUL M K LODHI, Company Secretary Signature of /s/ Gul M K Lodhi Company Secretary EX-31.1 3 tex31_1-7318.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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying 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 August 17, 2005 /s/ Yashpal Singh ----------------------------------- Yashpal Singh, President, Director and Chief Executive Officer EX-31.2 4 tex31_2-7318.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. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying 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: August 17, 2005 /s/ N. Mahadevan --------------------------------- N. Mahadevan, Chief Financial Officer EX-32.1 5 tex32_1-7318.txt EX-32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 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: August 17, 2005 /s/ Yashpal Singh ----------------- Name: Yashpal Singh Title: President, Director and Chief Executive Officer EX-32.2 6 tex32_2-7318.txt EX-32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE, SECTION 1350 In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-Q for the quarterly period ended June 30, 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: August 17, 2005 /s/ N. Mahadevan ---------------------- Name: N. Mahadevan Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----