UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 ]
Indicate by check mark whether the registrant is a shell company (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 September 30, 2005 is 11,473,914.
PART I
ITEM 1. FINANCIAL STATEMENTS.
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2005 2004
---- ----
CURRENT ASSETS
Cash $ 11,400 $ 526,600
Accounts receivable, allowance for doubtful
accounts of $61,300 and $47,500 7,774,200 8,477,200
Inventories 1,183,000 1,185,400
Prepaid expenses 325,500 347,300
--------------- ---------------
Total Current Assets: 9,294,100 10,536,500
--------------- ---------------
PROPERTY AND EQUIPMENT 13,301,000 13,533,900
--------------- ---------------
OTHER ASSETS
Deposits and other assets 224,500 205,100
Intangibles net of amortization 79,900 87,600
--------------- ---------------
Total Other Assets: 304,400 292,700
--------------- ---------------
Total Assets: $ 22,899,500 $ 24,363,100
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 4,177,900 $ 3,282,200
Note payable 576,200 576,200
Accounts payable 4,833,200 5,897,600
Accrued liabilities 1,372,500 1,402,900
Legal dispute settlement 200,000 911,800
Income taxes payable 123,900 134,100
Current maturities of obligation under long-term debt 388,100 400,300
Current maturities of obligation under capital lease 94,900 146,500
--------------- ---------------
Total Current Liabilities: 11,766,700 12,751,600
NOTES TO RELATED PARTY 2,511,600 2,010,100
LONG TERM DEBT, less current maturities 2,970,300 3,384,800
OBLIGATIONS UNDER CAPITAL LEASE, less current maturities 14,900 62,600
--------------- ---------------
Total Liabilities: 17,263,500 18,209,100
--------------- ---------------
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY
Preferred stock, Series A, no par value, with
aggregate liquidation preference of
$227,600; 10,000,000 shares authorized,
227,600 shares issued and outstanding
Common stock, no par value: 30,000,000 shares
authorized, 11,473,914 and 11,266,874 shares
issued and outstanding 227,600 227,600
Accumulated comprehensive income 14,747,300 14,648,600
128,500 194,300
Accumulated deficit (9,467,400) (8,916,500)
--------------- ---------------
Total Stockholders' Equity 5,636,000 6,154,000
--------------- ---------------
Total Liabilities and Stockholders' Equity: $ 22,899,500 $ 24,363,100
=============== ===============
The accompanying notes are an integral part of these financial statements.
1
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
September 30 September 30
2005 2004 2005 2004
---- ---- ---- ----
SALES $ 8,091,100 $ 8,154,500 $ 23,906,000 $ 23,475,100
EXCISE TAXES 171,800 176,200 489,200 506,500
------------- ------------- ------------- -------------
NET SALES 7,919,300 7,978,300 23,416,800 22,968,600
COST OF GOODS SOLD 5,436,200 5,181,800 15,961,000 15,189,100
------------- ------------- ------------- -------------
GROSS PROFIT 2,483,100 2,796,500 7,455,800 7,779,500
------------- ------------- ------------- -------------
OPERATING EXPENSES
Marketing 2,079,700 1,536,800 4,672,700 4,343,500
General and administrative 794,300 825,900 2,666,800 2,732,400
Legal dispute settlement --------- 216,400 --------- 216,400
------------- ------------- ------------- -------------
2,874,000 2,579,100 7,339,500 7,292,300
------------- ------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS (390,900) 217,400 116,300 487,200
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Other income 11,400 8,600 52,400 17,700
Profit (Loss) on sale of equipment (2,900) 1,100 (12,100) 15,100
Interest expense (252,100) (217,700) (705,700) (640,400)
------------- ------------- ------------- -------------
(243,600) (208,000) (665,400) (607,600)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (634,500) 9,400 (549,100) (120,400)
PROVISION FOR INCOME TAXES (69,900) 43,400 1,800 121,600
------------- ------------- ------------- -------------
NET (LOSS) $ (564,600) $ (34,000) $ (550,900) $ (242,000)
------------- ------------- ------------- -------------
OTHER COMPREHENSIVE INCOME /
(LOSS), net of tax 19,600 4,100 (65,800) 29,800
------------- ------------- ------------- -------------
Foreign Currency Translation Adjustment
COMPREHENSIVE (LOSS) $ (545,000) $ (29,900) $ (616,700) $ (212,200)
============= ============= ============= =============
NET (LOSS) PER COMMON SHARE $ (0.05) $ 0.00 $ (0.05) $ (0.02)
============= ============= ============= =============
DILUTED NET INCOME (LOSS)
PER COMMON SHARE $ (0.05) $ 0.00 $ (0.05) $ (0.02)
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
2
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30
2005 2004
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (550,900) $ (242,000)
Adjustments to reconcile net loss to
net cash from operating activities:
Depreciation and amortization 677,500 768,800
Allowance for doubtful accounts 13,800 16,400
Loss (Profit) on sale of assets 12,100 (15,100)
Changes in:
Accounts receivable 141,900 18,300
Inventories 2,400 (148,300)
Prepaid expenses 12,000 139,000
Deposits and other assets 8,500 (30,300)
Accounts payable (770,400) (271,200)
Accrued liabilities (586,800) (15,000)
Income taxes payable -- 2,400
--------------- ---------------
Net cash from operating activities: (1,039,900) 223,000
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, equipment, and leasehold improvements (632,700) (486,800)
Proceeds from sale of fixed assets 67,400 24,300
--------------- ---------------
Net cash from investing activities: (565,300) (462,500)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowing on line of credit 1,075,000 557,900
Repayment on long-term debt (362,300) (542,200)
Borrowings on related party debt 501,500 64,000
Payments on obligation under long term lease (99,300) (91,900)
--------------- ---------------
Net cash from financing activities: 1,114,900 (12,200)
--------------- ---------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (24,900) 19,800
--------------- ---------------
NET CHANGE IN CASH (515,200) (231,900)
--------------- ---------------
CASH, beginning of period 526,600 554,300
--------------- ---------------
CASH, end of period $ 11,400 322,400
=============== ---------------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 604,200 $ 576,400
Income taxes $ - $ 100,200
Non-cash investing activity
Seller Financed equipment $ 29,500 $ 26,500
The accompanying notes are an integral part of these financial statements.
3
MENDOCINO BREWING COMPANY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
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/A 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 nine months ended September 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
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 (`First 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 28, 2005, the Company repaid the First Note
in full. 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 September 30, 2005 was $1,454,400.
The Company used the proceeds from the BFI Line of Credit to pay off the entire
amount outstanding under a previously-extended line of credit on May 6, 2005.
The previous line was issued by CIT Business Credit in the amount of $3,500,000,
and was 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.
4
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 secured by all of the assets
of UBSN. On April 26, 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 September 30,
2005 was approximately $2,723,500.
On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a
temporary loan in the principal amount of $576,200 to MBC in order to finance a
buy-out of equipment leased through Finova Capital Corporation. The lender has
committed to extend the loan until May 2006. The rate of interest on the loan is
prime plus 3%.
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
September 30, 2005 was approximately $2,202,000.
As of September 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.
5
UBSN has engaged Shepherd Neame Limited ("Shepherd Neame") to brew Kingfisher
Lager for the Company's European and Canadian markets. As consideration for the
extension of the brewing contract, Shepherd Neame advanced a loan of GBP 600,000
to UBSN, repayable in ten annual installments of GBP 60,000, commencing in June
2003. The loan carries an interest rate of 5% per year. The amount outstanding
on this loan as of September 30, 2005 was GPB 410,000 (approximately $725,500 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. 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 "Notes"). 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 Notes for a period ending on August 31,
2005. Although that date has now passed, the Company has had discussions with
UBA and expects that the terms of the Notes will 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. 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 September 30, 2005, the aggregate principal balance due under these
Notes was $1,915,400; interest accrued on the Notes is $596,200.
These notes are subordinated to the credit facilities extended to the Company by
BFI and SBMC pursuant to subordination agreements executed by UBA. Although
technically UBA has 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, 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. Accordingly, the entire amount due under the
Notes is classified as a long term liability.
6
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 nine months ended
September 30, 2005 and 2004.
------------------------------------ -------------------- --------------------
2005 2004
------------------------------------ -------------------- --------------------
Interest expenses associated with
UBA convertible notes payable $101,500 64,000
------------------------------------ -------------------- --------------------
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 NINE MONTHS ENDED
------------------ -----------------
9/30/2005 9/30/2004 9/30/2005 9/30/2004
--------------- --------------- --------------- ---------------
Net (loss) $ (564,600) $ (34,000) $ (550,900) $ (242,000)
=============== =============== =============== ===============
Weighted average common shares outstanding 11,473,914 11,266,874 11,473,914 11,266,874
=============== =============== =============== ===============
Basic net income (loss) per share $ (0.05) $ (0.00) $ (0.05) $ (0.02)
=============== =============== =============== ===============
Diluted net income (loss) per share
Net (loss) $ (564,600) $ (34,000) $ (550,900) $ (242,000)
Interest expense on convertible notes payable --
--------------- --------------- --------------- ---------------
Income for the purpose of computing
diluted net income per share $ (564,600) $ (34,000) $ (550,900) $ (242,000)
=============== =============== =============== ===============
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 (loss) per share $ (0.05) $ (0.00) $ (0.05) $ (0.02)
7
NOTE 6 - INVENTORY
SEPTEMBER 30, 2005 DECEMBER 31, 2004
Raw Materials $ 408,800 $ 357,500
Beer-in-process 162,400 140,100
Finished Goods 592,400 664,700
Merchandise 19,400 23,100
--------------- ---------------
TOTAL $ 1,183,000 $ 1,185,400
=============== ===============
NOTE 7 - STOCKHOLDERS' EQUITY
The following table summarizes equity transactions during the nine months ended
September 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 (Loss) (550,900) (550,900)
Currency
Translation
Adjustment (65,800) (65,800)
Balance,
September 30, 2005 227,600 $ 227,600 11,473,914 $ 14,747,300 $ 128,500 $ (9,467,400) $ 5,636,000
============ ============ ============ ============ =================================== ============
8
NOTE 8 - STOCK BASED COMPENSATION
The Company had a stock-based employee compensation plan that allowed the
Company to grant options to purchase up to 1,000,000 shares of the Company's
common stock. The plan expired in 2004. The Company accounts for the 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:
Nine months ended September 30, 2005
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Sales $ 8,830,000 $ 14,920,800 $ 155,200 $ -- $ 23,906,000
Operating Profit 346,800 (254,100) 23,600 -- 116,300
Identifiable Assets 12,824,000 8,003,100 95,700 1,976,700 22,899,500
Depreciation & amortization 352,700 297,100 3,700 24,000 677,500
Capital Expenditures 34,200 598,500 - - 632,700
Nine months ended September 30, 2004
Domestic European Retail Corporate &
Operations Territory Operations Others Total
Sales $ 8,872,000 $ 14,444,300 $ 158,800 -- $ 23,475,100
Operating Profit/(Loss) 50,500 432,100 4,600 -- 487,200
Identifiable Assets 13,436,200 7,219,800 100,500 2,297,100 23,053,600
Depreciation & amortization 418,400 331,100 3,800 15,500 768,800
Capital Expenditures 26,500 460,300 -- -- 486,800
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion summarizes the significant factors affecting
the consolidated operating results, financial condition, liquidity, and cash
flows of the Company for the nine months ended September 30, 2005, compared to
the nine months ended September 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/A 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-
10
looking statements to reflect facts, circumstances, assumptions or events that
occur after the date the forward-looking statements are made or to publicly
release the results of any revision to these forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements.
CRITICAL ACCOUNTING POLICIES
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the necessary
estimates inherent in the preparation of financial statements. Estimates and
assumptions include, but are not limited to, customer receivables, inventories,
assets held for sale, fixed asset lives, contingencies and litigation. The
Company has also chosen certain accounting policies when options were available,
including:
o The first-in, first-out (FIFO) method to value the majority of
the Company's inventories.
o The Company follows Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," in
accounting for its employee stock options using the 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 its ability to realize 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
11
assessment. The Company records a valuation allowance for the
portion of its deferred tax assets that do not meet the
recognition criteria of SFAS No. 109, "Accounting for Income
Taxes." If circumstances related the Company's ability to
generate future U.S. taxable income change, the Company's
evaluation of its deferred tax assets could materially change.
o The Company 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 nine months of the year 2005 and 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
12
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 sales
volume. The volume of sales in any given area may also be affected by local
weather conditions. Because of the seasonality of the Company's business,
results for any one quarter are not necessarily indicative of the results that
may be achieved for the full fiscal year.
SUMMARY OF FINANCIAL RESULTS
The Company ended the first nine months of the year 2005 with a net loss
of $550,900, as compared to a net loss of $242,000 for the same period in 2004.
As set forth more fully under "Results of Operations," below, during the first
nine months of the year 2005 the Company experienced an increase in net sales of
$448,200 as compared to the corresponding period in 2004. Costs of goods sold
increased by $771,900, operating expenses increased by $47,200, other expenses
increased by $57,800 and provision for taxes decreased by $119,800, resulting in
increased losses in the year 2005.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See the accompanying
Financial Statements and Notes thereto.
STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------
2005 2004 2005 2004
% % % %
- - - -
Sales 102.17 102.21 102.09 102.21
Less Excise taxes 2.17 2.21 2.09 2.21
NET SALES 100.00 100.00 100.00 100.00
Costs of Sales 68.64 64.95 68.16 66.13
GROSS PROFIT 31.36 35.05 31.84 33.87
Marketing 26.26 19.26 19.95 18.91
General and Administrative 10.03 10.35 11.39 11.90
Legal dispute settlement -- 2.71 -- 0.94
PROFIT (LOSS) FROM OPERATIONS (4.94) 2.72 0.50 2.12
Other Income / (Expense) 0.10 0.12 0.17 0.15
Interest Expense (3.18) (2.73) (3.01) (2.79)
Income/(Loss) before income taxes (8.01) 0.12 (2.34) (0.52)
Provision for income taxes 0.88 0.54 0.01 0.53
NET (LOSS) (7.13) (0.43) (2.35) (1.05)
Other Comprehensive Income / (loss) 0.25 0.05 (0.28) 0.13
COMPREHENSIVE / (LOSS) (6.88) (0.38) (2.63) (0.92)
13
----------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
2005 2004
BALANCE SHEET DATA: $ $
- -
Cash and Cash Equivalents 11,400 322,400
Working Capital (2,472,600) (2,133,500)
Property and Equipment 13,301,000 13,605,900
Deposits and Other Assets 304,400 275,100
Total Assets 22,899,500 23,053,600
Long-term Debt (less current maturities) 2,970,300 3,374,400
Capital Lease (less current maturities) 14,900 93,200
Total Liabilities 17,263,500 16,759,200
Accumulated Deficit (9,467,400) (8,689,600)
Stockholder's equity 5,636,000 6,294,400
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO
THREE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES
Overall net sales for the third quarter of 2005 were $7,919,300, a
decrease of $59,000, or 0.74%, compared to $7,978,300 for the third quarter of
2004. The decrease was mainly due to higher sales discounts, incentives and
exchange rate fluctuations, partly offset by increased prices for products in
the United Kingdom,.
Domestic Operations: Net sales for the third quarter of 2005 were
$2,986,700 compared to $3,022,800 for the same period in 2004, a decrease of
$36,100, or 1.19% mainly due to higher sales discounts and incentives. The sales
volume increased to 16,196 barrels in the third quarter of 2005 from 16,010
barrels in third quarter of 2004; a net increase of 186 barrels, or 1.16%.
EUROPEAN TERRITORY: Net sales for the third quarter of 2005 were
$4,932,600 (GBP 2,762,000) compared to $4,955,500 (GBP 2,724,000) during the
corresponding period of 2004, a decrease of $22,900, or 0.5%. During the third
quarter of 2005, UBSN sold 17,523 barrels, compared to 16,186 barrels during the
third quarter of 2004, representing an increase of 1,337 barrels, or 8.26%.
Exchange rate fluctuations caused the Company's slight growth in sales in its
European
14
Territory to appear to be a decrease. 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 1.4%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the third quarter
of 2005 was 68.64%, as compared to 64.95% 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 third quarter of 2005 was 69.4%, as compared to
63.47% during the corresponding period of 2004. This increase of 5.93% is mainly
the result of increases in costs of packaging materials, wages and energy.
EUROPEAN TERRITORY: Cost of goods sold as a percentage of net sales in
the United Kingdom during the third quarter of 2005 was 68.65%, as compared to
66.31% 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 2.34%.
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 third quarter of 2005 decreased to $2,483,100, from $2,796,500 during
the corresponding period of 2004, representing a decrease of 11.2%. As a
percentage of net sales, the gross profit during the third quarter of 2005
decreased to 31.36% from 35.05% for the third quarter of 2004.
OPERATING EXPENSES
Operating expenses for the third quarter of the year 2005 were
$2,874,000, an increase of $294,900, or 11.43%, as compared to $2,579,100 for
the corresponding period of the year 2004. Operating expenses consist of
marketing and distribution expenses, general and administrative expenses and in
the year 2004, legal dispute settlement 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 third quarter
of 2005 were $2,079,700, as compared to $1,536,800 for the third quarter of
2004, representing an increase of 35.33%. These expenses increased to 26.26% of
net sales for the third quarter of the year 2005, as compared to 19.26% for the
corresponding period in 2004
DOMESTIC OPERATIONS: Expenses for the third quarter of 2005 were
$410,400 compared to $474,200 during the corresponding period of 2004,
representing a decrease of $63,800. As a percentage of net sales in the United
States, the expenses decreased to 13.74% during the third quarter of 2005,
15
compared to 15.69% during the corresponding period of 2004. The decreases were
mainly due to reduced salary and travel costs resulting from temporary reduction
in sales staff and reduction in tavern operating expenses.
EUROPEAN TERRITORY: Expenses for the third quarter of 2005 were
$1,669,300 compared to $1,062,600 during the corresponding period of 2004,
representing an increase of $606,700. As a percentage of net sales in the United
Kingdom, the expenses increased to 33.84% during the third quarter of 2005
compared to 21.44% during the corresponding period of 2004 (in each case as
calculated in U.S. dollars, after taking into account the effects of the
exchange rate calculation). The increase resulted mainly from a special
advertising campaign that ran in London in June and July of this year. UBSN had
hundreds of billboards, taxis, and bus shelters carrying its ads. Unfortunately,
the tragic effects of the bombings overshadowed the buzz generated by the
campaign.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $794,300 for the third quarter of the year 2005,
representing a marginal decrease of $31,600, over $825,900 for the corresponding
period in 2004. These expenses were equal to 10.03% of net sales for the third
quarter of the year 2005, as compared to 10.35% for the corresponding period in
2004.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$345,200 for the third quarter of the year 2005, representing a decrease of
$47,100, or 12%, from $392,300 for the third 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 $449,100 for the third quarter of the year 2005,
representing a marginal increase of $15,500, or 3.57%, when compared to $433,600
for the third 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).
LEGAL DISPUTE SETTLEMENT EXPENSES: The Company incurred a one time
expense of $216,400 during the third quarter of the year 2004 in connection with
the settlement of a legal dispute with a terminated distributor.
OTHER EXPENSES
Other expenses for the third quarter of 2005 totaled $243,600,
representing an increase of $35,600, or 17.12%, when compared to the third
quarter of 2004. The increase was mainly due to higher interest expenses as a
result of increased borrowings under the lines of credit and increase in prime
rate.
16
INCOME TAXES
Due to losses incurred in the United Kingdom during the third quarter of
2005, the Company reversed an income tax provision of $69,900 that had been
created earlier in the year. The Company's provision for the third quarter of
2004 was $43,400. The provision for taxes related to the estimated amount of
taxes that will be imposed by taxing authorities in the United Kingdom.
NET LOSS
The Company's net loss for the third quarter of 2005 was $564,600, as
compared to net loss of $34,000 for the third quarter of 2004. After providing
for a positive foreign currency translation adjustment of $19,600 during the
third quarter of 2005 (as compared to a positive adjustment of $4,100 for the
same period in 2004), the comprehensive loss for the third quarter of 2005 was
$545,000, compared to a loss of $29,900 for the same period in 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO
NINE MONTHS ENDED SEPTEMBER 30, 2004
NET SALES
Overall net sales for the first nine months of the year 2005 were
$23,416,800, an increase of $448,200, or 1.95%, compared to $22,968,600 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 nine months of the
year 2005 were $8,496,000 compared to $8,524,300 for the same period in 2004, a
marginal decrease of $28,300. Although the Company sold less of its own brand
products, this decrease was partially offset by revenue from contract bottling
of cider. The sales volume decreased to 45,257 barrels during the first nine
months of the year 2005 from 45,665 barrels in the first nine months of the year
2004. This decrease of 408 barrels was mainly due to decrease in the sale of the
Company's brands.
EUROPEAN TERRITORY: Net sales for the first nine months of the year 2005
were $14,920,800 (GBP 8,093,300) compared to $14,444,300 (GBP 7,929,900) during
the corresponding period of 2004, an increase of 3.3%. During the first nine
months of the year 2005, UBSN sold 49,873 barrels compared to 48,011 barrels
during the first nine months of the year 2004, an increase of 1,862 barrels, or
3.88%. 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 2.06%.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales during the first nine
months of the year 2005 was 68.16%, as compared to 66.13% during the
corresponding period of 2004 mainly due to increased costs in the United States.
17
DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in
the United States during first nine months of the year 2005 was 68.2%, as
compared to 65.6%, during the corresponding period of 2004, representing an
increase as a percentage of net sales of 2.6% that was mainly due to a increase
in costs of packaging material costs and utilities 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 nine months of the year 2005 was 68.56%, as
compared to 66.88% 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 nine months of the year 2005 decreased to $7,455,800, from
$7,779,500 during the corresponding period of 2004, representing a decrease of
4.16%. As a percentage of net sales, the gross profit during the first nine
months of 2005 decreased to 31.84% from that of 33.87% during the corresponding
period in 2004.
OPERATING EXPENSES
Operating expenses for the first nine months of the year 2005 were
$7,339,500, a decrease of $247,700, or 5.26%, as compared to $7,292,300 for the
corresponding period of the year 2004. Operating expenses consist of marketing
and distribution expenses, general and administrative expenses and during the
year 2004, legal dispute settlement expenses.
MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and
distribution expenses consist of salaries and commissions, advertising costs,
product and sales promotion costs, travel expenses and related costs and
Company's tavern and tasting room expenses. Such expenses for the first nine
months of the year 2005 were $4,672,700, as compared to $4,343,500 for the same
period in 2004, representing an increase of 7.58%.
DOMESTIC OPERATIONS: Expenses for the first nine months of the year 2005
were $1,096,900 compared to $1,285,300 during the corresponding period of 2004,
representing a decrease of $188,400. As a percentage of net sales in the United
States, these expenses decreased to 12.92% during the first nine months of the
year 2005, compared to 15.08% 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), and decreases in
promotional expenses and tavern operating expenses.
18
EUROPEAN TERRITORY: Expenses for the first nine months of the year 2005
were $3,575,800 compared to $3,058,200 during the corresponding period of 2004,
representing an increase of $517,600. As a percentage of net sales in the United
Kingdom, the expenses increased to 23.97% during the first nine months of the
year 2005 compared to 21.17% during the corresponding period of 2004 (in each
case as calculated in U.S. dollars, after taking into account the effects of the
exchange rate calculation). The increase resulted mainly from an advertisement
campaign carried out during the third quarter of the year 2005.
GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and
administrative expenses were $2,666,800 for the first nine months of the year
2005, representing a decrease of $65,600 or 2.4%, over $2,732,400 for the
corresponding period in 2004. These expenses were equal to 11.39% of net sales
for first nine months of the year 2005, as compared to 11.9% for the
corresponding period in 2004.
DOMESTIC OPERATIONS. Domestic general and administrative expenses were
$1,297,700 for the first nine months of the year 2005, representing a decrease
of $141,000, or 9.8%, from $1,438,700 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 $1,369,100 for the first nine months of the year 2005,
representing an increase of $75,400 or 5.83%, as compared to $1,293,700 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.
LEGAL DISPUTE SETTLEMENT EXPENSES: The Company incurred one time expense
of $216,400 during the third quarter of the year 2004 in connection with
settlement of legal dispute with a terminated distributor.
OTHER EXPENSES
Other expenses for the first nine months of the year 2005 totaled
$665,400 representing an increase of $57,800 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 and increase in prime rate.
INCOME TAXES
The Company has a provision for income taxes of $1,800 for the first
nine months of the year 2005, compared to $121,600 the same period in 2004. The
provision for taxes is mainly related to the estimated amount of taxes that will
be imposed by taxing authorities in the United Kingdom.
NET LOSS
The Company's net loss for the first nine months of the year 2005 was
$550,900, as compared to loss of $242,000 for the first nine months of the year
2004. After providing for a negative foreign currency translation adjustment of
$65,800 during the first nine months of 2005 (as compared to a positive
adjustment of $29,800 for the same period in 2004), the comprehensive loss for
the first nine months of the year 2005 was $616,700, compared to a loss of
$212,200 for the same period in 2004.
19
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 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. Although this date has passed, the
Company has had discussions with UBA and anticipates that the terms of the UBA
Notes will 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.
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 September 30, 2005 was $1,915,400, and the accrued but unpaid
interest thereon was equal to approximately $596,200, for a total of $2,511,600.
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
20
UBA does not elect to so convert any UBA Note upon maturity, it has the option
to extend the term of such UBA Note for any period of time mutually agreed upon
by UBA and the Company. During the extended term of any UBA Note, UBA has the
right to require the Company to repay the outstanding principal balance, along
with the accrued and unpaid interest thereon, to UBA within sixty (60) days.
The outstanding principal amount of the 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 September 30, 2005, the outstanding principal and interest on the UBA Notes
was convertible into 1,674,384 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.
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 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
21
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 UBSN
from making distributions and payments to MBC in excess of approximately 100,000
Pounds Sterling annually (approximately $189,000). This facility was settled in
full utilizing proceeds from the 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 to settle the Nedbank facility (discussed above) on April 26,
2005. This facility has a minimum maturity of twelve months, but will be
automatically extended unless terminated by either party upon six months'
written notice.
22
SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew
Kingfisher Lager for the Company's European and Canadian markets. As
consideration for extending the brewing contract, Shepherd Neame advanced a loan
of 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 9.1% for the first nine months of the year 2005 and
7.75% for the corresponding period in 2004. For loans primarily associated with
Company's European territory, the weighted average rate paid was 6.21% for the
first nine months of the year 2005 and 6.75% for the corresponding period in
2004.
KEG MANAGEMENT ARRANGEMENT: The Company entered into a five-year keg
management agreement with MicroStar Keg Management LLC in September 2004. Under
this arrangement, MicroStar provides the Company with half-barrel kegs for which
the Company pays a filling and use fee. Distributors return the kegs to
MicroStar instead of the Company. MicroStar then supplies the Company with
additional kegs. If the agreement is terminated, the Company is required to
purchase a certain number of kegs from MicroStar. The Company would attempt to
finance the purchase through debt or lease financing, if available.
OVERDUE PROPERTY TAXES: As of September 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 $1,700,700 as of September 30, 2005.
Under UBSN's line of credit agreement with RBS, distributions and other payments
to the Company from its subsidiary are not permitted if the retained earning
drop below approximately $1,769,600.
CURRENT RATIO
The Company's ratio of current assets to current liabilities on
September 30, 2005 was 0.79 to 1.0 and its ratio of total assets to total
liabilities was 1.33 to 1.0. On September 30, 2004, the Company's ratio of
current assets to current liabilities was 0.81 to 1.0 and its ratio of total
assets to total liabilities was 1.38 to 1.0.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 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 September 30, 2005.
INTEREST RATE RISK
The Company had total debt as of September 30, 2005 of $10,027,900, of
which $6,669,500 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 September 30, 2005 totaled $5,273,800, of which $3,358,400 had
fixed rates of interest and the balance of $1,915,400 were subject to variable
rates. Short term debts amounted to $4,754,100 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 $66,700 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.
24
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.
25
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
MBC held its 2005 Annual Meeting of Shareholders on October 4, 2005. At
that meeting, MBC's shareholders voted to elect all seven of the Board's
nominees for Director. The votes cast for each of the nominees were as follows.
There were no broker non-votes; ballots for a total of 626,004 shares were not
cast with respect to any candidate.
Director's Name Votes for Withheld
--------------- --------- --------
Dr. Vijay Mallya 10,817,338 30,572
H. Michael Laybourn 10,817,888 30,022
Jerome G. Merchant 10,817,938 29,972
Sury Rao Palamand 10,817,413 30,497
Kent D. Price 10,817,838 30,072
Yashpal Singh 10,817,363 30,547
Scott R. Heldfond 10,817,838 30,072
ITEM 5. OTHER INFORMATION
Announcement of Merger by United Breweries Holdings Ltd.
During the first week of September, 2005, the final conditions were
satisfied to effect the merger of United Breweries Holdings, Ltd. (formerly
Kingfisher Properties & Holdings, Ltd.) ("UBHL"), a corporation based and
incorporated in India and publicly-held in that country, and United Breweries of
America, BVI, a British Virgin Islands corporation (" UBA-BVI"), which is the
corporate parent of both Inversiones Mirabel, S.A., a Panamanian corporation
which holds approximately 47.9% of the Company's outstanding shares
("Inversiones"), and United Breweries of America, Inc., a Delaware corporation
("UBA"), which holds approximately 26.9% of the Company's outstanding shares.
As a result of the merger of UBA-BVI into UBHL, UBHL acquired indirect
control of approximately 75% of the Company's outstanding shares. Dr. Mallya,
the Company's Chairman of the Board and Chief Executive Officer, is also the
Chairman of the Board of UBHL.
ITEM 6. EXHIBITS
Number Description of Document
------ -----------------------
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
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MENDOCINO BREWING COMPANY, INC.
Dated: November 14, 2005 By: /s/ Yashpal Singh
---------------------
Yashpal Singh
President, Director and Chief
Executive Officer
Dated: November 14, 2005 By: /s/ N. Mahadevan
--------------------
N. Mahadevan
Chief Financial Officer and Secretary
27
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002