UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
No. 1)
(Mark
One)
x
ANNUAL
REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE
FISCAL YEAR ENDED DECEMBER 31, 2007
or
o
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)
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CALIFORNIA
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68-0318293
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(State
or Other Jurisdiction of
Incorporation
or Organization)
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(IRS
Employer
Identification
No.)
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1601
AIRPORT ROAD, UKIAH, CA 95482
(Address
of principal executive offices)
(707)
463-6610
(Registrant's
Telephone Number, Including Area Code)
Securities
registered pursuant to section 12(b) of the Act: none
Securities
registered pursuant to section 12(g) of the Act:
Common
stock, no par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities
Act.
Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
o
No
x
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
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained, to the
best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.
|
Large accelerated Filer
o
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Accelerated Filer
o
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Non-accelerated
Filer
o
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Smaller reporting company
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
o
No
x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant (based on the average of the closing bid and
asked prices for such stock, as reported by the NASDAQ OTC Bulletin Board on
June 30, 2007 was $489,000.
The
number of shares of the registrant's Common Stock outstanding as of March 29,
2008 was 11,991,686.
DOCUMENTS
INCORPORATED BY REFERENCE
None
EXPLANATORY
STATEMENT
This
Amendment No. 1 on Form 10-K/A ("Amendment No. 1") amends the Annual Report
for
Mendocino Brewing Company, Inc. filed on Form 10-K for the year ended December
31, 2007, as initially filed with the Securities & Exchange Commission (the
"SEC") on March 31, 2008 (the "Original Report"). This Amendment No. 1
corrects
typographical errors in the date of the Report of Independent Registered
Public
Accounting Firm and the date of the signature pages of the Original Report.
Except as described above, no other changes have been made in this Amendment
No.
1 that modify or update other disclosure presented in the Original
Report.
TABLE
OF CONTENTS
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Page
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ITEM
1.
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BUSINESS
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1
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ITEM
1A.
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RISK
FACTORS
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7
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS
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9
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ITEM
2.
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PROPERTIES
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9
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ITEM
3.
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LEGAL
PROCEEDINGS
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10
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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10
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PART
II
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10
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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10
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ITEM
6.
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SELECTED
FINANCIAL DATA
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12
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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12
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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18
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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18
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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18
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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18
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ITEM
9B.
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OTHER
INFORMATION
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21
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY
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21
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ITEM
11.
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EXECUTIVE
COMPENSATION
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23
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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27
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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28
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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31
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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31
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FORWARD-LOOKING
INFORMATION
Various
portions of this Annual Report on Form 10-K, (the "Annual Report") including
but
not limited to the sections captioned "Description of Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," 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. 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 availability of financing for operations, availability of raw materials,
successful performance of internal operations, the impact of competition,
changes in distributor relationships or performance, and other risks discussed
elsewhere in this Annual Report and from time to time in the Company's filings
and reports 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 by general economic and political conditions
in
the markets in which the Company competes. Readers are cautioned not to place
undue reliance on these forward-looking statements.
PART
I
ITEM
1.
BUSINESS
OVERVIEW
Mendocino
Brewing Company, Inc., (the “Company”) a California corporation, was founded in
1983. It was one of the first modern craft brewers, having opened the first
new
brewpub in California and the second in the United States following the repeal
of Prohibition. The Company has been recognized for its innovations in the
brewpub concept, its craft brew style and its distinctive labels. In 2008,
the
Company will celebrate its 25th anniversary. (In this Annual Report, the term
"the Company" and its variants and the terms "we," "us," and "our" and their
variants are generally used to refer to Mendocino Brewing Company, Inc. together
with its subsidiaries, while the term "MBC" is used to refer to Mendocino
Brewing Company, Inc. as an individual entity.)
The
Company operates in two geographic markets, domestic (the United States)
(referred to in this Annual Report as the "Domestic Territory") and Europe
(including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands, France,
Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal,
Spain, Sweden, Switzerland, and the United Kingdom) as well as Canada
(collectively, referred to in this Annual Report as the "European
Territory").
The
Company's domestic operations consist primarily of brewing and marketing
proprietary craft beers, including Red Tail Ale, Blue Heron Pale Ale, Black
Hawk
Stout, Eye of the Hawk Select Ale, White Hawk Original IPA, and Red Tail Lager,
and a licensed international specialty beer, Kingfisher Premium Lager. For
domestic distribution, the Company brews its brands in its own facilities,
which
are located in Ukiah, California and Saratoga Springs, New York. Domestically,
the Company distributes its products in 41 states and the District of
Columbia.
The
Company's European operations, which are conducted through its wholly-owned
subsidiary United Breweries International (U.K.) Limited ("UBI") and UBI's
wholly-owned subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing
and distribution of Kingfisher Premium Lager in the European Territory through
Indian restaurants, chain retail grocers, liquor stores, and other retail
outlets (such as convenience stores). The Company holds an exclusive license
to
brew and distribute Kingfisher Premium Lager from United Breweries Limited
("UB
Limited"), an Indian corporation. The Company's Chairman of the Board, Dr.
Vijay
Mallya, is also the Chairman of the Board of UB Limited.
All
of
the Company's beers sold in the European Territory are brewed in England under
contract by Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer.
Although UBSN is the sole distributor of Kingfisher Premium Lager in the United
Kingdom, Ireland, continental Europe, and Canada, it does not physically
distribute its products to its ultimate trade customers, relying instead on
specialty restaurant trade distributors in the United Kingdom and Shepherd
Neame, acting as UBSN's agent, on a commission basis, for distribution to the
supermarket and liquor and convenience store trade.
COMPANY
BACKGROUND
MBC
first
bottled its flagship brand, Red Tail Ale, in December 1983, and conducted its
initial public offering in February 1995. The Company completed construction
of
its brewery in Ukiah, California in May 1997. This facility, which has a current
annual packaging capacity of 100,000 brewers' barrels ("bbl.") in one shift,
was
designed to enable the Company's production capacity to be expanded to 200,000
bbl. per year with the inclusion of additional equipment.
The
Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs
Brewery ("Releta"), which is located in Saratoga Springs, New York, commenced
production in its leased facilities in February 1998. This facility, which
has a
current annual packaging capacity of 90,000 bbl. in one shift, was designed
to
enable the Company's production to be expanded to 200,000 bbl. per year with
the
inclusion of additional equipment.
In
July
1998, the Company purchased certain assets from Carmel Brewing Company, Inc.,
a
California corporation ("Carmel Brewing"), including trademarks, trade names,
and other brand related assets as well as certain points of sale and brewing
ingredients inventory.
On
August
13, 2001, the Company acquired UBI together with UBI's wholly-owned subsidiary
UBSN, from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"),
in exchange for MBC stock then valued at approximately $5,500,000 (the "UBI
Acquisition"). UBI and UBSN primarily market, sell, and distribute Kingfisher
Premium Lager in the Company's European Territory. Kingfisher Premium Lager,
which is the flagship brand of UB Limited, an India-based brewing and
distribution company, is a recognized international brand, with widespread
distribution outside the Company's geographic markets.
The
Company also acquired the United States brewing and distribution rights for
Kingfisher Premium Lager as a result of the UBI Acquisition. The Company brews
Kingfisher Premium Lager in its Saratoga Springs, New York and Ukiah, California
facilities. The Company has engaged Shepherd Neame to brew Kingfisher Premium
Lager for distribution in the European Territory.
During
the last quarter of fiscal year 2005, United Breweries of America, BVI, a
British Virgin Islands corporation ("UBA-BVI"), an indirect beneficial owner
of
a majority of the Company's outstanding shares, merged into United Breweries
Holdings, Ltd., an Indian Corporation ("UBHL"). As a result of the merger of
UBA-BVI into UBHL, UBHL acquired indirect control over approximately 72% of
the
Company's outstanding shares. Dr. Mallya is the Chairman of the board of
directors of UBHL.
INDUSTRY
OVERVIEW
DOMESTIC
MARKET
The
U.S.
domestic beer market falls into a number of market categories, some of which
include low-priced, premium, super premium, lite, import, and specialty/craft
beers. In the Domestic Territory, the Company competes in the specialty/craft
category, which is currently estimated by Brewers Association to be in the
range
of 8 million barrels per year. Craft beers are typically all malt, characterized
by their full flavor, and are usually produced using methods similar to those
of
traditional European brews.
EUROPEAN
MARKET
The
vast
majority of the Company's sales in the European Territory are made in the United
Kingdom. During fiscal years 2007, 2006 and 2005 the Company's sales in the
United Kingdom constituted approximately 91%, 92% and 94%, respectively, of
its
total sales in the European Territory.
Within
the European Territory, the Company primarily distributes its products through
Indian restaurants using specialist restaurant trade distributors. In addition,
the Company distributes its products through other licensed premises and through
other retail outlets such as supermarkets, liquor stores, and licensed shops
and
convenience stores.
BUSINESS
OF THE COMPANY
THE
HOPLAND TAVERN ALE HOUSE AND MERCHANDISE STORE
The
historic Hopland tavern ale house and merchandise store serves to market the
Company's products in the Domestic Territory. Located on a tourist route in
Hopland, California, 100 miles north of San Francisco, the Hopland Brewery
opened in 1983 as the first new brewpub in California and the second in the
United States following the repeal of Prohibition.
Beverages
served at the Hopland tavern include Red Tail Ale, Blue Heron Pale Ale, Black
Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, White Hawk IPA,
and a seasonal brew on tap, along with local wines and soft drinks. The adjacent
merchandise store sells the Company's brews and merchandise such as
hand-screened label T-shirts, posters, engraved glasses and mugs, logo caps
and
other brewery-related gifts.
PRODUCTS
The
Company brews five ales, one wheat beer, three lagers, one stout and a root
beer
on a year-round basis, and four seasonal ales, for distribution in the Domestic
Territory. All of these products are brewed at the Company's production
facilities in Ukiah, California, and Saratoga Springs, New York.
In
the
European Territory, the Company currently distributes Kingfisher Premium Lager.
Prior to April 1, 2005, the Company also distributed Sun Lik Chinese Lager
in
the United Kingdom.
The
Company's principal products are as follows.
RED
TAIL ALE
,
a full
flavored amber ale, is the Company's flagship brand. It is available year-round
in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon
kegs.
BLUE
HERON PALE ALE
is a
golden ale with a full body and a distinctive hop character. It is available
year-round in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon
kegs.
BLACK
HAWK STOUT
is a
rich bodied stout with big traditional flavors. It is available year-round
in 12
oz. six-packs, half-barrel kegs, and 5 gallon kegs.
EYE
OF THE HAWK SELECT ALE
is a
strong rich bodied amber ale. It is available year round in 12 oz. six-packs,
half-barrel kegs, and 5 gallon kegs.
WHITE
HAWK ORIGINAL IPA
is a
heavily hopped ale with distinctive hop character and bold malt flavor. It
is
available year round in 12 oz. six-packs and half-barrel kegs.
KINGFISHER
PREMIUM LAGER
is a
conventionally fermented specialty lager with a smooth crisp taste. In the
Domestic Territory, Kingfisher Premium Lager is currently available year-round
in 12 oz. six-packs, 22 oz. bottles, and on-draft. In the European Territory,
it
is available year-round, in 330ml and 660ml bottles in multi-packs in the United
Kingdom, Ireland, and continental Europe and in 330ml bottles in Canada, as
well
as in a variety of keg sizes. In the United Kingdom, it is also available on
draft in Indian restaurants.
RED
TAIL LAGER
is a
traditional lager, with a smooth light feel and a crisp sweet finish. It is
currently available year-round only in northern California in 12-oz. six packs
and half-barrel kegs.
DISTRIBUTION
METHODS
In
the
Domestic Territory, the Company's bottled products are sold through wholesale
distributors to consumers at supermarkets, warehouse stores, liquor stores,
taverns and bars, restaurants, and convenience stores.
Most
of
the Company's brands are also available on draft. The Company's products are
delivered to retail outlets by independent distributors whose principal business
is the distribution of beer and in some cases other alcoholic beverages, and
who
typically also distribute one or more national beer brands. Together with its
distributors, the Company markets its products to retail outlets and relies
on
its distributors to provide regular deliveries, to maintain retail shelf space,
and to oversee timely rotation of inventory. The Company also offers a variety
of ales and lagers directly to consumers at the tavern and merchandise store
in
Hopland, California and its’ tasting room attached to the Saratoga Springs
brewery in New York.
In
the
European Territory, the Company's products are distributed primarily through
Indian restaurants by specialist restaurant trade distributors. Such points
of
sale represent approximately 95% of the Company's total sales volume in the
European Territory, with the remaining 5% of sales volume attributed to a
combination of sales in other ethnic restaurants (primarily Chinese) and to
sales by supermarkets, liquor stores, and licensed shops and convenience stores.
The majority of the Company's restaurant sales are through its on-tap draft
installations. UBI also exports Kingfisher Premium Lager to 16 European markets
outside of the United Kingdom and to Canada, and its sales growth in those
markets typically correlates with the establishment and proliferation of Indian
restaurants in such locations.
COMPETITION
In
the
Domestic Territory, the Company competes against a variety of brewers in the
craft beer segment, including brewpubs, microbrewers, regional craft brewers,
and craft beer products of major national breweries. Additionally, the entire
craft beer segment competes to some extent with other segments of the United
States beer market, including major national brands like Budweiser and Miller
and imported beers such as Heineken and Becks.
The
lager
market in the United Kingdom is dominated by major international brands such
as
Carling, Budweiser, Becks, and Holsten Pils, both in the restaurant and pub
sectors and in sales through supermarkets and other retail outlets. The
Company's products are marketed through Indian and other restaurants, major
supermarket chains, smaller chains, and individual stores. In all of these
sectors, the Company faces competition from other ethnic and international
brands produced by local and large international brewers. The Company promotes
Kingfisher Premium Lager as the worldwide No. 1 selling premium Indian lager
brand. The Company believes that the profile of this brand was raised
significantly through the Company's promotion of Kingfisher World Curry Week
in
support of the charity "Action Against Hunger" that provides aid in the Indian
sub-continent and southeast Asia.
The
Company faces tough competition in the Domestic Territory as well as in the
European Territory. The Company competes with other beer and beverage companies
not only for consumer acceptance and loyalty but also for shelf and tap space
in
retail establishments. The Company must also vie for marketing focus by the
Company's distributors and their customers, all of which also distribute and
sell other beer and alcoholic beverage products. Many of these competitors
have
substantially greater financial and marketing resources and distribution
networks than the Company. Moreover, the introduction of new products by
competitors that compete directly with the Company's products, or that diminish
the importance of the Company's products to retailers or distributors may have
a
material adverse effect on the Company's results of operations, cash flows
and
financial position.
SOURCES
AND AVAILABILITY OF RAW MATERIALS
Production
of the Company's beverages requires quantities of various agricultural products,
including barley, hops, malt, and malted wheat for beer. The Company fulfills
its commodities requirements through purchases from various sources, some
through contractual arrangements and others on the open market. In the European
Territory, these purchases are made directly by or for Shepherd Neame, which
brews the Company's products on a contract basis. The Company experienced
substantial price increases in malt and hops during 2007 and the beginning
of
2008 due to low availability and high demand. The commodity markets have
experienced and the Company believes that the commodity markets will continue
to
experience price, availability and demand fluctuations. The price and supply
of
raw materials will be determined by, among other factors, the level of crop
production, weather conditions, export demand, and government regulations and
legislation affecting agriculture. The Company does not use any hedging
transactions or unconditional purchase obligations to purchase its raw
materials.
The
Company's major suppliers in the United States are Great Western Malting Co.,
Yakima, Washington, and Canada Malting company, Montreal, Canada (malt); Hop
Union LLC, Yakima, Washington and S S Steiner, Inc., New York, New York (hops);
Gamer Packaging Inc., Minneapolis, Minnesota (bottles and crown corks); Alliance
Packaging, Seattle, Washington, Inland Paper Board and Packaging, Inc., Antioch,
California and Empire State Container, Inc., Syracuse, New York (cartons);
Sierra Pacific Packaging, Oroville, California and Caraustar, Ashland, Ohio
(carriers); and DWS Printing Associates, Bay Shore, NY (labels).
The
Company's major supplier for the European Territory is Shepherd Neame, which
brews on a contract basis all of the Company's products that are sold in the
European Territory. The Company does not directly purchase any material amounts
of agricultural commodities or other products for use in the European
Territory.
DEPENDENCE
ON MAJOR CUSTOMERS
Sales
to
the Company's top five customers in fiscal year 2007 totaled $9,420,000, or
approximately 25%, of the Company's total net sales, as compared to $8,032,600
or 24% of total net sales for fiscal year 2006.
In
the
Company's Domestic Territory, sales to Mesa Distributing Company, Inc. totaled
approximately 7.9% and 8.5% of the Company's domestic sales (or approximately
3.1% and 3.3% of its total sales) for fiscal years 2007 and 2006.
Sales
to
the Company's principal European customer, Shepherd Neame during fiscal year
2007 represented approximately 17.7% of the Company's European Territory sales
(or approximately 10.7% of the Company's total sales), as compared to
approximately 16.2% of European Territory sales (or approximately 9.9% of total
net sales) in fiscal year 2006. No other individual customer accounted for
more
than 5% of the Company's total net sales during fiscal years 2007 or
2006.
TRADEMARKS
The
Company has U.S. federal trademark registrations on the principal register
of
the United States Patent and Trademark Office for the following marks: MENDOCINO
BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg.
No.
2,032,382), RED TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE
design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word mark (Reg.
No.
1,673,594), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word
mark (Reg. No. 1,768,639), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,522),
HOPLAND BREWERY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg.
No. 2,667,078), SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark (Reg.
No. 2,583,446), WHITE HAWK ORIGINAL IPA word and design mark (Reg. No.
2,956,999), RAPTOR RED LAGER word and design mark (Reg. No. 3,113,619), and
BLACK HAWK STOUT word mark (Reg. No. 3,205,652).
The
Company uses the BLUE HERON word mark under a concurrent use agreement with
Bridgeport Brewing Company which gives the Company the exclusive right to use
the BLUE HERON word mark throughout the United States with the exception of
Oregon, Idaho, Washington, and Montana. Bridgeport Brewing Company, the other
concurrent use party, has the exclusive right to use the BLUE HERON word mark
in
those states.
The
Company's use of the BLACK HAWK STOUT word mark is, by agreement with Hiram
Walker & Sons, Inc., subject to the restriction that it be used solely to
identify and distinguish malt beverage products namely, beer, ale and stout,
and
only in conjunction with the words "Mendocino Brewing Company."
The
Company's United States federal trademark registration for the BLUE HERON word
mark (Cancelled Reg. No. 1,820,076) was cancelled as a result of an alleged
technical deficiency in registration compliance filings. The Company continues
to use the BLUE HERON word mark and claims common law trademark rights in and
to
that mark. The Company presently has a pending application on file with the
United States Patent and Trademark Office for the re-registration of the BLUE
HERON word mark.
The
Company claims common law trademark rights in and to the TALON BARLEY WINE
ALE
word mark and TALON BARLEY WINE ALE word and design mark and intends to register
the marks with the United States Patent and Trademark Office.
The
Company has acquired the trademark CARMEL BREWING COMPANY and any other
variation of the same as used by Carmel Brewing Company and claims common law
trademark rights in and to all such marks. The Company has also acquired the
rights to use the RAZOR EDGE word mark through a License Agreement with Beverage
Mates, Ltd. However, the Company is currently not using the RAZOR EDGE mark,
and
it is unclear whether it will use the mark in the future. The RAZOR EDGE License
Agreement expires in 2008, but will be automatically renewed unless specifically
terminated. License fees are calculated based on sales of the product. The
Company has not had any sales of this brand since 2001.
LICENSE
AGREEMENTS
In
August
2001, the Company acquired UBI and its wholly-owned subsidiary UBSN, which
hold
the exclusive brewing and distribution rights for Kingfisher Premium Lager
in
the United Kingdom, Ireland, continental Europe, and Canada through a licensing
agreement with UB Limited. Under its terms, this licensing agreement is
currently scheduled to remain in effect until October 2013.
In
July
2001, MBC entered into the Kingfisher Trademark and Trade Name License Agreement
with Kingfisher America, Inc., pursuant to which MBC obtained a royalty-free,
exclusive license to use the Kingfisher trademark and trade name in connection
with the brewing and distribution of beer in the United States. Under its terms,
this agreement is currently scheduled to remain in effect until October
2013.
Since
1998, UBI and UBSN have licensed to Shepherd Neame the exclusive right to brew,
keg, bottle, can, label, and package all beers and related products sold under
the Kingfisher trademark in the United Kingdom, Ireland, and continental Europe.
The price UBSN pays to Shepherd Neame for brewing Kingfisher Premium Lager
for
distribution in the United Kingdom is set by a formula which varies according
to
the applicable duty on Kingfisher Premium Lager and other factors. (For
additional information see "Item 13.
—
Certain
Relationships and Related Transactions - Shepherd Neame - Brewing Agreement".)
Under its terms this agreement is currently scheduled to remain in effect until
October 2013.
In
April
2004, the Company entered into a licensing agreement with Frank's Famous Foods
("FFF") and granted a non exclusive license to FFF for the trademark and trade
name Red Tail Ale to be used in the manufacture and sale of barbecue sauces
and
marinades. FFF pays to the Company licensing fees ranging from $1.50 to $3.00
per case sold. Under its terms this licensing agreement is scheduled to
terminate April 2, 2009.
GOVERNMENTAL
REGULATION
The
Company's Domestic Territory operations are subject to licensing by local,
state
and federal governments, as well as to regulation by a variety of state and
local agencies. The Company is licensed to manufacture and sell beer by the
Departments of Alcoholic Beverage Control in California and New York. A federal
permit from the United States Treasury Department, Alcohol and Tobacco Tax
and
Trade Bureau (the "TTB") (formerly the Bureau of Alcohol, Tobacco, and Firearms)
allows the Company to manufacture fermented malt beverages. To keep these
licenses and permits in force the Company must pay annual fees and submit timely
production reports and excise tax returns. Prompt notice of any changes in
the
operations, ownership, or company structure must also be made to these
regulatory agencies. The TTB must also approve all product labels, which must
include an alcohol use warning. These agencies require that individuals owning
equity securities totaling in the aggregate 10% or more of the Company's
outstanding securities be investigated as to their suitability of character.
The
Company's production operations must also comply with the Occupational Safety
and Health Administration's workplace safety and worker health regulations
and
comparable state laws. Management believes that the Company is presently in
compliance with the aforementioned laws and regulations. In addition, the
Company has implemented its own voluntary safety program. The Hopland tavern
is
regulated by the Mendocino County Health Department, which requires an annual
permit and conducts spot inspections to monitor compliance with applicable
health codes.
In
the
United States, the federal excise tax rate is $7.00 per bbl. for up to 60,000
bbl. per year and $18.00 per bbl. for over 60,000 bbl. for brewers producing
less than 2,000,000 barrels per year. The California excise tax rate is $6.20
per bbl. The State of New York presently imposes on brewers an excise tax of
$3.88 per bbl. for production in excess of 100,000 bbl. per year.
The
Company's operations in the European Territory are subject to regulation by
United Kingdom and European laws, as well as by the laws of various individual
countries in which UBI distributes its products. Due to the contract brewing
arrangement in the European Territory, Shepherd Neame is subject to various
laws
of the European countries regarding production, bottling, packaging, and
labeling in lieu of the Company. Trade with Canada is subject to, and in
compliance with, regulation by the provincial Liquor Boards.
COMPLIANCE
WITH ENVIRONMENTAL LAWS
The
Company is subject to various federal, state, and local environmental laws
which
regulate the use, storage, handling, and disposal of various
substances.
The
Company's waste products consist of water, spent grains, hops, glass and
cardboard. The Company has instituted a recycling program for its office paper,
newspapers, magazines, glass, and cardboard at minimal cost to the Company.
The
Company sells or gives away its spent grain to local cattle ranchers. The
Company has not purchased any special equipment and does not incur any
identifiable fees in connection with environmental compliance at its Hopland
site.
Ukiah
.
The
Company has built its own wastewater treatment plant for the Ukiah facility.
As
a result, the Company is not currently required to incur sewer hook-up fees
at
that location. If the Company's discharge exceeds 55,000 gallons per day, which
Management does not expect to occur until annual capacity exceeds 100,000 bbl.,
the Company may be required to pay additional fees. The wastewater treatment
facility construction costs totaled approximately $900,000, and the approximate
operating costs of the plant are between $6,000 and $10,000 per month. The
operating costs of the facility may increase with increased production. The
Company has contracted to have the liquid sediment that remains from the treated
wastewater trucked to a local composting facility for approximately the cost
of
transportation. The Company obtained a Mendocino County Air Quality Control
Permit to operate the natural gas fired boiler in Ukiah; this permit is valid
until August 30, 2008. Management expects this permit to be
renewed.
Saratoga
Springs
.
The
Saratoga Springs facility is subject to various federal, state, and local
environmental laws which regulate use, storage and disposal of various
materials. The Company's solid waste materials consist of spent grain,
cardboard, glass, and liquid waste. The Company has instituted a recycling
program for cardboard, office paper and glass at a minimal cost to the Company.
Spent grain is sold to local cattle dairy farms. The Company pays approximately
$2,500 per month in sewer fees for liquid waste. The sewer discharge from the
brewery is monitored and is within the standards set by the Saratoga County
Sewer Department. The Company follows and operates under the rules and
regulations of the New York Department of Environmental Conservation for Air
Pollution Control.
Various
states in which the Company sells its products in the Domestic Territory,
including California and New York, have adopted certain restrictive packaging
laws and regulations for beverages that require deposits on packages. Such
laws
have not had a significant effect on the Company's sales. The adoption of
similar legislation by Congress or a substantial number of states or additional
local jurisdictions might require the Company to incur significant capital
expenditures for compliance.
In
general, European packaging regulations are covered by specifications provided
by the European Union; the Company believes it is in compliance with such
specifications.
The
Company has not received any notice from any governmental agency relating to
the
violation by the Company of any applicable environmental law.
EMPLOYEES
As
of
December 31, 2007, MBC employed 52 full-time and 15 part-time individuals in
the
United States, including 11 in management and administration, 42 in brewing
and
production operations, 4 in retail and tavern operations and 10 in sales and
marketing positions. In England, UBI and UBSN together employed 10 people in
sales and marketing and 6 in managerial and administrative positions. Management
believes that the Company's relations with its employees are generally
good.
On
February 28, 2003, approximately 21 employees engaged in brewing, bottling,
warehousing, and shipping at the Ukiah brewery elected Teamsters Local No.
896,
International Brotherhood of Teamsters, AFL-CIO (the "Union") to represent
them
as a collective bargaining agent. The Company and the Union executed a
collective bargaining agreement effective November 17, 2003. Such collective
bargaining agreement will expire on July 31, 2008. All of such 21 employees'
positions henceforth must be held and filled by members of the
union.
RESEARCH
AND DEVELOPMENT
The
Company has not spent a material amount during the last two fiscal years on
research and development activities nor on customer-sponsored research
activities relating to the development of new products, services or techniques
or the improvement of existing products, services or techniques.
ITEM
1A.
RISK
FACTORS
In
addition to the other information in this Annual Report on Form 10-K, described
below are risks and uncertainties that we believe are most likely to be material
to our business and results of operations. Our business operations and results
may also be adversely affected by additional risks and uncertainties not
presently known, or which we currently deem immaterial, or which are applicable
in general to the industries in which we compete or to the economy. If any
of
the following risks or uncertainties actually occurs, our business, financial
condition, results of operations or cash flows would likely suffer.
LACK
OF
PROFITABLE OPERATIONS: We incurred a net loss for fiscal year 2007.
Historically, the Domestic Territory has operated at a net loss. Since the
year
2005, the European territory has also been operating at a loss. We believe
such
losses are attributable to low sales volumes and low production capacity
utilization rates at our domestic brewing facilities and higher operating
expenses in the European territory. Our business is also subject to certain
fixed and semi-variable operating costs, and when combined with the impact
of
the correlation between current levels of production and maximum production
capacity, our gross margins may be sensitive to small increases or decreases
in
sales volume in the Domestic Territory. In addition, higher cost of materials
in
2006 resulted in increased materials costs. We may not be able to offset such
increased expenses with comparable price increases in our products, which could
also impact our gross margins. We may not be successful in our efforts to
increase sales volume and utilization rates. Moreover, it is uncertain when,
if
at all, our operations will become profitable once again. Future operating
losses may have a material adverse effect on our cash flows and financial
position.
LIQUIDITY:
Low utilization of the production capacity at our Ukiah and Saratoga Springs
facilities and losses from our European operations continued to place demands
on
our working capital. We have loans, lines of credit, other credit facilities,
and lease obligations with various creditors. Any breach of a loan by us which
leads to our default, or to an attempt by one of our creditors to exercise
its
rights to certain of our tangible or intangible assets which have been used
as
collateral or which have been pledged as security for our obligations, could
potentially make it difficult, at least in the short term, for us to continue
our operations.
COMPETITION:
We face intense competition in both our Domestic Territory as well as in our
European Territory from both competitors in the beer market as well as from
producers of wine and spirits. Certain of our competitors have substantially
greater financial and marketing resources and more extensive distribution
networks than we do. In addition, the introduction of new products by existing
competitors or new entrants into the market may impact our market share.
Moreover, consumer preference and consumer trends may result in a decrease
in
demand for our products which could also have an impact on our results of
operations.
RAW
MATERIALS: We are dependant on a limited number of suppliers, and in some
instances on a sole supplier, for the majority of the raw materials and
packaging materials used in our operations. As a result, an interruption in
the
supply chain may have an adverse effect on our operations if we were unable
to
find an alternative supplier at a comparable price. Our cost of materials,
particularly that of malt and hops increased significantly during the year
2007
as well as in the first quarter of the year 2008 due to limited supply and
higher demand. (See Part 1, Item 1, “Sources And Availability Of Raw
Materials’). While we have increased our selling prices marginally, we may not
be in a position to pass the entire cost increase to our customers which may
have an adverse effect on our operations.
DEPENDENCY
ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding
arrangements with several brewers to brew and package their brands at our
brewing facilities, predominantly at our Releta facility. Approximately 28%
of
our sales volume in the Domestic Territory for fiscal year 2007 includes sales
made under such contract brewing arrangements. There is no certainty that such
existing arrangements will be extended in the future or that we will be able
to
enter into new arrangements. Any significant variation in these arrangements
could have a material adverse effect on the Company's results of operations,
cash flows and financial position.
ARRANGEMENT
WITH SHEPHERD NEAME: UBI and UBSN entered into a brewing agreement that grants
Shepherd Neame the exclusive right to brew and package all beers sold under
the
Kingfisher trademark in the United Kingdom, and to distribute such products
elsewhere in the European Territory. Continued losses in the European Territory
has increased the working capital gap and diminished our ability to timely
settle our dues. Any interruption of the brewing, packaging or distribution
of
our products by Shepherd Neame for any reason is likely to have a material
adverse effect on our results of operations, cash flows and financial
position.
MATERIAL
CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an exclusive Keg
Management Agreement with MicroStar Keg Management LLC ("MicroStar") which
expires in September 2009. Under the terms of the agreement with MicroStar,
we
receive our entire supply of kegs exclusively from MicroStar. Moreover, pursuant
to the terms of the agreement, if the agreement is terminated, we are required
to purchase three times the average monthly keg usage for the preceding
six-month period from MicroStar at purchase prices ranging from $54 to $84
per
keg. If we are required in the future to purchase such kegs we may need to
incur
additional debt financing to fund such purchases. An interruption in the supply
of kegs by MicroStar to us or in case of termination of the agreement, our
failure to obtain the necessary funding to facilitate such purchases could
have
a material adverse effect on our business, results of operations, cash flow
or
financial position.
CHANGE
IN
PUBLIC ATTITUDE AND DRINKING PREFERENCES:
There
is
an increasing public concern over alcohol-related social problems, including
drunk driving, underage drinking and health consequences from the misuse of
alcohol, including alcoholism. This may adversely affect consumption of
alcoholic beverages. Consumers drinking preferences may also change due to
availability of a variety of products in the craft brew segment. Hence any
change in government regulation and shift in consumer preference may have an
adverse impact on our operations.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM
2.
PROPERTIES.
BREWING
FACILITIES
The
Company owns nine acres of land in Ukiah, California on which its Ukiah brewery
is located. Management believes that this facility is adequate for the Company's
current capacity and also provides space for future expansion. Grand Pacific
Financing Corporation currently holds a first deed of trust on this property
in
connection with a loan advanced to the Company. (See "Item 7.
—
Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources - Long-Term Debt"). The principal amount
outstanding on the loan as of December 31, 2007 was $2,963,900.
The
Company has estimated the life of the building at 40 years and depreciates
the
cost of the building on a straight-line method over its anticipated life. The
Company does not depreciate the cost of the land. The Company's tax basis on
the
Ukiah facility is $10,850,000. Various other assets incorporated in this
facility are being depreciated, on a straight-line basis, at rates of between
10
and 20 years. Property taxes are currently assessed on the Ukiah property at
a
rate of 1.125%, for an annual tax of $122,100.
The
Company also leases 3.66 acres in Saratoga Springs, New York, on which the
Ten
Springs Brewery facilities are located. In November 2004, the Company leased
additional warehouse space and extended the term of the lease until November
2019.
The
Company's Ukiah and Releta facilities have both been operating at low production
capacity utilization rates. The brewery in Ukiah, California has a current
annual packaging capacity of approximately 100,000 bbl. on a single shift basis,
whereas the annual sales volume from this facility was approximately 47,200
bbl.
or 47% of maximum production capacity in 2007, as compared with 39,700 bbl.
or
44% of maximum production capacity in 2006. The brewery at Saratoga Springs,
New
York currently has an annual packaging capacity of approximately 90,000 bbl.
per
year a on single shift basis, although its annual sales volume from this
facility was approximately 30,200 bbl. or 34% of its maximum packaging capacity
in 2007, as compared with 26,300 bbl. or 44% of its then maximum packaging
capacity in 2006. Despite their low packaging capacity utilization rates, both
of these brewing facilities incur costs for maintenance, property taxes, and
other costs on a level consistent with their maximum production capacity rather
than with their current utilization levels. The inability of the Company to
align costs and utilization rates affects the Company's capital, liquidity,
and
resources of management. Failure to adequately align such costs and utilization
rates may have a material adverse effect on the Company's business, financial
condition, and results of operations.
TAVERN
The
Company has leased a 2,275 square foot building in Hopland on which the Hopland
tavern ale house and merchandise store are located. The lease on this property
expires in August 2010.
MACHINERY
AND EQUIPMENT
The
Company leases certain equipment and vehicles under capital and operating leases
which expire at varying times through September 2012. Additionally, the Company
leases equipment and vehicles under various other leases. As these leases
expire, it is anticipated that, in accordance with the Company's current
practices, the equipment will be acquired pursuant to the terms of the leases
and the vehicles will be surrendered.
UBSN
has
leased a 1,365 square foot office located at Faversham, Kent, in England for
a
period of 10 years which lease expires in July 2015. The Company does not own
or
lease any other material properties in Europe.
The
Company considers its land, buildings, improvements, and equipment to be well
maintained, in good condition, and adequate to meet the operating demands placed
upon them. In the opinion of Management, all of these properties are adequately
covered by insurance.
ITEM
3.
LEGAL
PROCEEDINGS.
None.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not
Applicable.
PART
II
ITEM
5.
MARKET
FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET
INFORMATION
Since
May
2002, the Company's Common Stock has been quoted on the NASDAQ OTC Bulletin
Board, under the symbol "MENB". The table below sets forth, for the fiscal
quarters indicated, the reported high and low bid prices for the Company's
Common Stock, as reported on the OTC Bulletin Board. The information listed
below reflects inter-dealer bids, without retail mark-up, mark-down, or
commission, and may not represent actual transactions.
|
2007
|
|
High
|
|
Low
|
|
|
First
Quarter
|
|
$
|
0.27
|
|
$
|
0.21
|
|
|
Second
Quarter
|
|
$
|
0.35
|
|
$
|
0.20
|
|
|
Third
Quarter
|
|
$
|
0.22
|
|
$
|
0.22
|
|
|
Fourth
Quarter
|
|
$
|
0.32
|
|
$
|
0.22
|
|
|
2006
|
|
High
|
|
Low
|
|
|
First
Quarter
|
|
$
|
0.22
|
|
$
|
0.10
|
|
|
Second
Quarter
|
|
$
|
0.30
|
|
$
|
0.13
|
|
|
Third
Quarter
|
|
$
|
0.34
|
|
$
|
0.15
|
|
|
Fourth
Quarter
|
|
$
|
0.25
|
|
$
|
0.17
|
|
The
Company had approximately 2,288 holders of its common stock of record as of
March 14, 2008. The Company has never paid a cash dividend on its Common Stock
and Management does not expect the Company to pay cash dividends in the
foreseeable future. The Company's credit agreements provide that the Company
may
not declare or pay any dividend or other distribution on its Common Stock (other
than a stock dividend), or purchase or redeem any Common Stock, without the
lender's prior written consent. Management anticipates that similar restrictions
will remain in effect for as long as the Company has significant bank
financing.
The
holders of the Company's 227,600 outstanding shares of Series A Preferred Stock
(which are not listed for trading on any market or to the Company's knowledge
quoted on any bulletin board or other public quotation system) are entitled
to
aggregate cash dividends and liquidation proceeds of $1.00 per share before
any
dividend may be paid with respect to the Common Stock. The Series A Preferred
Shares must be canceled after the holders of these shares have received their
$1.00 per share aggregate dividend. For additional information see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations-Other Loans and Credit Facilities- Restricted Net
Assets."
Historically,
we have not paid any dividends. We anticipate that for the foreseeable future,
all earnings, if any, will be retained for the operation and expansion of our
business and that we will not pay cash dividends. The payment of dividends,
if
any, in the future will be at the discretion of the board of directors and
will
depend upon, among other things, future earnings, capital requirements,
restrictions in future financing agreements, the general financial condition
of
the Company and general business conditions.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
As
of
December 31, 2007, the Company did not have any securities authorized for
issuance under any equity compensation plan approved by the shareholders.
The
Company's policy with respect to the 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 served, 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 $0.50 per share during the latter
half of 2003, 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 calculated as of the last day of each year in respect of which
such compensation was due. On May 14, 2007, the Board of Directors of the
Company approved the issuance of an aggregate of 363,512 shares of the Company's
unregistered common stock to certain of the Company's independent non-employee
directors in recognition of services provided to the Board by such directors
and
as compensation, pursuant to the terms of the Company's Directors' Compensation
Plan, for their attendance at Board and Committee meetings held during 2006.
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 compensation in the
future.
RECENT
SALES OF UNREGISTERED SECURITIES
The
Company issued thirteen (13) promissory notes pursuant to a Master Line of
Credit Agreement between the Company and United Breweries of America, Inc.
("UBA") and one note on substantially similar terms to UBA between September
1999, and March 2005 (the "UBA Notes"). 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 December 31, 2007, the outstanding
principal and interest on the UBA Notes totaled approximately $2,916,297, and
the UBA Notes were convertible into 1,944,198 shares of the Company's Common
Stock. If the UBA Notes were deemed to be securities, the Company's Management
believes that the issuance of all such notes is exempt from registration
pursuant to Section 4(2) of the Securities Act of 1983, as amended (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.
ISSUER
PURCHASE OF EQUITY SECURITIES
None.
ITEM
6.
SELECTED
FINANCIAL DATA.
Not
required for smaller reporting companies.
ITEM
7.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
The
Company’s operations resulted in operating income of $611,000. After providing
for interest, other income and taxes, the net loss was for fiscal year 2007
was
$384,000.
In
the
Domestic Territory, brewing operations sales (based on volume) were 77,349
bbl.
during fiscal year 2007, as compared to 65,969 bbl. and 59,046 bbl. in fiscal
years 2006 and 2005, respectively. Sales from the Ukiah facility totaled 47,164
bbl., 39,693 bbl. and 41,620 bbl., for the fiscal years 2007, 2006 and 2005,
respectively. Sales from the Saratoga Springs facility totaled 30,185 bbl.,
26,276 bbl., and 17,426 bbl. for the fiscal years 2007, 2006 and 2005,
respectively. We bottled 2,950 bbl., 3,577 bbl., and 2,919 bbl. in fiscal years
2007, 2006 and 2005, respectively, of cider products for California Cider
Company.
We
sold
67,488 bbl. of beer in our European Territory during fiscal year 2007 as
compared to 67,797 bbl. and 67,633 bbl. during fiscal years 2006 and 2005,
respectively. Sales in the United Kingdom accounted for 61,202 bbl., 60,187
bbl.
and 61,077 bbl. during 2007, 2006 and 2005, respectively. Sales in continental
Europe and Canada totaled 6,286 bbl., 7,610 bbl. and 6,556 bbl. during fiscal
years 2007, 2006 and 2005, respectively. Although the sales of certain brands
have fluctuated over the past few years, overall sales levels have remained
consistent.
RESULTS
OF OPERATIONS
FISCAL
YEAR 2007 COMPARED TO FISCAL YEAR 2006
NET
SALES
As
used
herein, the term "net sales" refers to gross sales less excise taxes. Overall
net sales for fiscal year 2007 were $36,817,700, an increase of $4,542,300
or
14%, as compared to $32,275,400 in fiscal year 2006 mainly due to higher sales
volume in the Domestic Territory.
DOMESTIC
OPERATIONS: Net sales in the Domestic Territory totaled $13,943,700 in fiscal
year 2007, compared to $12,149,400 for fiscal year 2006, representing an
increase of $1,794,300 or 15%. Sales of beer for fiscal year 2007 increased
by
11,380 barrels, to 77,349 barrels an increase of 17% as compared to 65,969
barrels in fiscal year 2006. The increase was due to increases in the sale
of
contract brands by approximately 10,100 bbl., and Company brands by 1,300 bbl.
During fiscal year 2007, we bottled approximately 3,000 bbl. of cider products
for California Cider Company on a contract basis compared to 3,600 bbl. in
fiscal year 2006. We anticipate continuing to solicit opportunities to enter
into non-binding contract brewing arrangements to address the low production
capacity utilization rates in our Ukiah and Releta brewing facilities and
anticipate that such contract brewing arrangements will continue to impact
our
net sales in the Domestic Territory.
EUROPEAN
TERRITORY: Net sales in the Company's European Territory totaled $22,874,000
(£11,425,600) in fiscal year 2007, compared to $20,126,000 (£10,917,900) during
fiscal year 2006. The increase was due to reduction in sales discount offered
in
the year 2007 and price increase during the beginning of the year 2007. Net
sales presented in U.S. dollars resulted in an increase of 14%, as compared
to
fiscal year 2006, and by 5% compared to fiscal year 2006 when presented in
pounds sterling due to devaluation of US dollar. We sold 67,488 bbl. of beer
in
our European Territory during fiscal year 2007 as compared to 67,797 bbl. in
fiscal year 2006.
COST
OF GOODS SOLD:
Overall
cost of goods sold during fiscal year 2007 was $26,342,800, as compared to
$23,063,300 during fiscal year 2006, an increase of $3,279,500, or 14%. As
a
percentage of net sales, costs of goods sold was 72% in fiscal years 2007,
and
2006. Such amounts are calculated in U.S. dollars, and do not take into account
the effect of exchange rate fluctuations on the actual costs of goods sold
in
the Company's European Territory.
Our
utilization of our production capacity has a direct impact on cost. Generally,
when facilities are operating at higher a percentage of production capacity,
cost is favorably affected because fixed and semi-variable operating costs,
such
as depreciation and production salaries, are spread over a larger volume base.
In 2007 our volume level increased by 17% in comparison to 2006. This positive
impact could be reduced if volume decrease in the future. In addition to
capacity utilization, other factors that could affect cost of sales include
unanticipated increases in shipping costs, the availability and prices of raw
materials and packaging materials, and continued contract brewing contracts.
The
Company expects cost of goods to increase in the future due to increase in
cost
of raw materials.
DOMESTIC
OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
Territory during fiscal year 2007 was 73%, as compared to 71% during the fiscal
year 2006. The increase was due mainly to increased costs of raw materials,
packaging materials and utilities due to increases in energy costs. We rely
heavily on natural gas to operate brewing operations, and electricity to operate
our bottling and refrigeration units. During the later part of the year 2007,
prices of malts and hops increased significantly. Any significant increase
in
cost of materials and availability constraints could significantly impact our
future operations. When the market allows us to pass on price increases to
the
purchaser, we do so, but in uncertain markets, we absorb a portion of the
costs.
EUROPEAN
TERRITORY: As a percentage of net sales, cost of goods sold in the United
Kingdom during fiscal year 2007 was 71%, as compared to 72% during fiscal year
2006 (in each case as calculated in U.S. dollars, after taking into account
the
effects of exchange rate fluctuations), mainly due to higher sales realization.
GROSS
PROFIT
As
a
result of increased costs of goods sold, gross profit for fiscal year 2007
(expressed in U.S. dollars) was approximately $10,474,900, an increase of
$1,262,800, or 14%, as compared to gross profit of $9,212,100 in fiscal year
2006. As a percentage of net sales, our overall gross profit during fiscal
years
2007 and 2006 remained at 29%.
OPERATING
EXPENSES
Operating
expenses for fiscal year 2007 totaled $9,863,900, an increase of $206,500,
or
2%, as compared to $9,657,400 for fiscal year 2006. Operating expenses consist
of marketing and distribution expenses, general and administrative expenses,
and
retail operating expenses. As a percentage of net sales, such expenses decreased
to 27% in fiscal year 2007, as compared to 30% in fiscal year 2006.
MARKETING
AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist
of
salaries and commissions, advertising costs, product and sales promotion costs,
travel expenses, and related costs. For fiscal year 2007, such expenses equaled
$5,561,600, an increase of $550,100 or 11%, as compared to $5,011,500 in fiscal
year 2006. As a percentage of net sales, our marketing and distribution expenses
decreased to 15% in fiscal year 2007, as compared to 16% in fiscal year
2006.
DOMESTIC
OPERATIONS: Marketing and distribution expenses for the Domestic Territory
in
fiscal year 2007 equaled $1,178,400, an increase of $60,500, or 5%, as compared
to $1,117,900 in marketing and distribution expenses incurred during fiscal
year
2006. Marketing and distribution expenses equaled 8% of Domestic Territory
net
sales during fiscal year 2007, as compared to 9.2% during fiscal year 2006.
The
increase was mainly attributed to increase in manpower and associated increases
in salary and travel costs.
EUROPEAN
TERRITORY: Marketing and distribution expenses in the European Territory during
fiscal year 2007 equaled $4,383,200, an increase of $489,600, or 13%, as
compared to $3,893,600 during fiscal year 2006 mainly due to increase in
advertising and promotional expenses. As a percentage of net sales in the United
Kingdom, such expenses were 19% during 2007 and 2006 (in each case as calculated
in U.S. dollars, after taking into account the effects of exchange rate
calculations).
GENERAL
AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled
$4,192,100 for fiscal year 2007, representing a decrease of $356,600, or 8%,
as
compared to $4,548,700 for fiscal year 2006. General and administrative expenses
equaled 11% and 14% respectively of net sales for fiscal years 2007 and 2006
respectively.
DOMESTIC
OPERATIONS. General and administrative expenses for our Domestic Territory
equaled $1,743,100 for fiscal year 2007, representing an increase of $81,900,
or
5%, as compared to $1,661,200 for fiscal year 2006. The increase was primarily
due increases in salaries.
EUROPEAN
TERRITORY. General and administrative expenses for our European Territory
equaled $2,449,000 in fiscal year 2007, representing a decrease of $438,500,
or
15%, as compared to $2,887,500 for fiscal year 2006. The decrease was mainly
due
to decrease in the provision against bad debts due to a more conservative credit
control.
RETAIL
OPERATING EXPENSES: Retail operating expenses for fiscal year 2007 totaled
$110,200, representing an increase of $13,000, or 13%, from $97,200 in fiscal
year 2006. As a percentage of net sales, retail operating expenses were
negligible for both fiscal year 2007 and 2006.
OTHER
EXPENSES
Other
expenses including interest expenses totaled $988,000 in fiscal year 2007,
representing an increase of $5,200, or 1%, as compared to $982,800 in fiscal
year 2006. Interest expense was $1,049,600 in 2007 as compared to $1,077,700
in
2006, a reduction of $28,100 or 3% in 2007.
INCOME
TAXES
We
incurred an income tax expense of $7,000 for fiscal year 2007, as compared
to
expense of $2,500 for fiscal year 2006 related to U.S.operations.
As
a
result of the accumulated losses in our U.S. operations we have determined
that
the deferred tax assets associated with our net operating loss carryforwards
and
investment tax credits may expire prior to utilization. We recorded a valuation
allowance of $4,545,600 for deferred tax assets. We also have $68,433 of
California Manufacturers' Investment Tax Credits that can be carried forward
to
reduce future taxes. These credits begin expiring in 2011.
NET
LOSS
Our
net
loss for fiscal year 2007 was $384,000, a decrease of $1,046,600 as compared
to
a net loss of $1,430,600 for fiscal year 2006. After taking into account a
positive foreign currency translation adjustment of $32,900 for fiscal year
2007
(negative adjustment of $6,000 for fiscal year 2006), our comprehensive fiscal
year 2007 net loss was $351,100, as compared to a net loss of $1,436,600 in
fiscal year 2006.
RETAIL
SEGMENT
We
operate brew pubs at Hopland and Saratoga Springs. Although sales revenues
at
the brew pubs, are not significant, $307,400 in 2007 and $221,300 in 2006,
we
view the pubs as a marketing opportunity for our products. The pubs serve our
brews on tap and also sell logo merchandise. The Company also sells various
items of apparel and memorabilia bearing the Company’s trademarks at its pubs,
which creates further awareness of the Company’s beers and reinforces the
Company’s quality image.
FISCAL
YEAR 2006 COMPARED TO FISCAL YEAR 2005
NET
SALES
As
used
herein, the term "net sales" refers to gross sales less excise taxes. Overall
net sales for fiscal year 2006 were $32,275,400, an increase of $983,600 or
3%,
as compared to $31,291,800 in fiscal year 2005 mainly due to higher sales volume
in the Domestic Territory.
DOMESTIC
OPERATIONS: Net sales in the Domestic Territory totaled $12,149,400 in fiscal
year 2006, compared to $11,125,500 for fiscal year 2005, representing an
increase of $1,023,900 or 9%. Sales of beer for fiscal year 2006 increased
by
6,923 barrels, to 65,969 barrels an increase of 12% as compared to 59,046
barrels in fiscal year 2005. The increase was due to increases in the sale
of
contract brands by 5,632 bbl., Company brands by 405 bbl. and Kingfisher Premium
Lager by 886 bbl. During fiscal year 2006, we bottled 3,577 bbl. of cider
products for California Cider Company on a contract basis compared to 2,919
bbl.
in fiscal year 2005. We anticipate continuing to solicit opportunities to enter
into non-binding contract brewing arrangements to address the low production
capacity utilization rates in our Ukiah and Releta brewing facilities and
anticipate that such contract brewing arrangements will continue to impact
our
net sales in the Domestic Territory.
EUROPEAN
TERRITORY: Net sales in the Company's European Territory totaled $20,126,000
(£10,917,900) in fiscal year 2006, compared to $20,166,300 (£11,078,000) during
fiscal year 2005. The decrease is attributed to exchange rate fluctuations.
Net
sales presented in U.S. dollars remained flat compared to fiscal year 2005,
alternatively, when presented in pounds sterling, net sales decreased by 1%
compared to fiscal year 2005. We sold 67,797 bbl. of beer in our European
Territory during fiscal year 2006 as compared to 67,633 bbl. in fiscal year
2005.
COST
OF GOODS SOLD:
Overall
cost of goods sold during fiscal year 2006 was $23,063,300, as compared to
$21,754,200 during fiscal year 2005, an increase of $1,309,100, or 6%. As a
percentage of net sales, costs of goods sold was 72% in fiscal year 2006, as
compared to 70% during fiscal year 2005. Such amounts are calculated in U.S.
dollars, and do not take into account the effect of exchange rate fluctuations
on the actual costs of goods sold in the Company's European
Territory.
DOMESTIC
OPERATIONS: Cost of goods sold as a percentage of net sales in the Domestic
Territory during fiscal year 2006 was 71%, as compared to 70% during the fiscal
year 2005. The increase was due mainly to increased costs of raw materials
and
packaging materials and utilities due to increases in energy costs. We rely
heavily on natural gas to operate brewing operations, and electricity to operate
our bottling and refrigeration units. Any significant increase in our usage
of
natural gas or electricity or increases in price rates for these utilities
could
significantly impact our future operations.
EUROPEAN
TERRITORY: As a percentage of net sales, cost of goods sold in the United
Kingdom during fiscal year 2006 was 73%, as compared to 70% during fiscal year
2005 (in each case as calculated in U.S. dollars, after taking into account
the
effects of exchange rate fluctuations). The percentage increase was mainly
due
to increased costs and fees we owed Shepherd Neame pursuant to the standard
annual cost adjustment provisions under our production and distribution
agreements with them and product mix. Such increases were not fully offset
by
comparable price increases in our products. When the market allows us to pass
on
price increases to the purchaser, we do so, but in uncertain markets, we absorb
a portion of the costs.
GROSS
PROFIT
As
a
result of increased costs of goods sold, gross profit for fiscal year 2006
(expressed in U.S. dollars) was approximately $9,212,100, a decrease of
$325,500, or 3.4%, as compared to gross profit of $9,537,600 in fiscal year
2005. As a percentage of net sales, our overall gross profit during fiscal
year
2006 decreased to 29%, as compared to 31% for fiscal year 2005.
OPERATING
EXPENSES
Operating
expenses for fiscal year 2006 totaled $9,657,400, a decrease of $396,600, or
4%,
as compared to $10,054,000 for fiscal year 2005. Operating expenses consist
of
marketing and distribution expenses, general and administrative expenses, and
retail operating expenses. As a percentage of net sales, such expenses decreased
to 30% in fiscal year 2006, as compared to 32% in fiscal year 2005.
MARKETING
AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist
of
salaries and commissions, advertising costs, product and sales promotion costs,
travel expenses, and related costs. For fiscal year 2006, such expenses equaled
$5,011,500, a decrease of $1,204,700 or 19.38%, as compared to $6,216,200 in
fiscal year 2005. As a percentage of net sales, our marketing and distribution
expenses decreased to 16% in fiscal year 2006, as compared to 20% in fiscal
year
2005.
DOMESTIC
OPERATIONS: Marketing and distribution expenses for the Domestic Territory
in
fiscal year 2006 equaled $1,117,900, a decrease of $249,500, or 18%, as compared
to $1,367,400 in marketing and distribution expenses incurred during fiscal
year
2005. Marketing and distribution expenses equaled 9% of Domestic Territory
net
sales during fiscal year 2006, as compared to 12% during fiscal year 2005.
The
decrease was mainly attributed to reduced salary and travel costs resulting
from
a reduction in headcount.
EUROPEAN
TERRITORY: Marketing and distribution expenses in the European Territory during
fiscal year 2006 equaled $3,893,600, a decrease of $955,200, or 20%, as compared
to $4,848,800 during fiscal year 2005. As a percentage of net sales in the
United Kingdom, such expenses increased to 19% during 2006, as compared to
34%
during 2005 (in each case as calculated in U.S. dollars, after taking into
account the effects of exchange rate calculations). We ran a special advertising
campaign in London in June and July of 2005 which was not repeated in the year
2006, resulting in a significant reduction in marketing costs. The decrease
was
also due to a decrease in headcount in the United Kingdom and associated reduced
salary and travel costs and reduction in freight expenses due to lower sales
volumes in the United Kingdom.
GENERAL
AND ADMINISTRATIVE EXPENSES: Our general and administrative expenses totaled
$4,548,700 for fiscal year 2006, representing an increase of $813,300, or 22%,
as compared to $3,735,400 for fiscal year 2005. General and administrative
expenses equaled 14% and 12% respectively of net sales for fiscal years 2006
and
2005 respectively.
DOMESTIC
OPERATIONS. General and administrative expenses for our Domestic Territory
equaled $1,661,200 for fiscal year 2006, representing a decrease of $149,400,
or
8%, as compared to $1,810,600 for fiscal year 2005. The decrease was primarily
due to a portion of common corporate overheads being transferred to UBSN and
a
reduction in legal expenses partly offset by increases in salaries and loan
fees.
EUROPEAN
TERRITORY. General and administrative expenses for our European Territory
equaled $2,887,500 in fiscal year 2006, representing an increase of $962,700,
or
50%, as compared to $1,924,800 for fiscal year 2005. The increase was mainly
due
to an increase in the provision against bad debts on account of a customer
having filed for liquidation of their operations, an increase in legal fees
and
common corporate overheads being transferred from MBC.
RETAIL
OPERATING EXPENSES: Retail operating expenses for fiscal year 2006 totaled
$97,200, representing a decrease of $5,200, or 5%, from $102,400 in fiscal
year
2005.
OTHER
EXPENSES
Other
expenses totaled $982,800 in fiscal year 2006, representing an increase of
$58,900, or 6%, as compared to $923,900 in fiscal year 2005. The increase in
other expenses was mainly due to higher interest expenses associated with the
increased amount of borrowings as well as due to increases in the prime lending
rates in the United States.
INCOME
TAXES
We
incurred an income tax expense of $2,500 for fiscal year 2006, as compared
to an
income tax benefit of $125,600 for fiscal year 2005. The income tax benefit
for
fiscal year 2005 related to the estimated refunds due to us, relating to excess
payments by us of taxes for operations in the United Kingdom.
As
a
result of the accumulated losses in our U.S. operations we have determined
that
the deferred tax assets associated with our net operating loss carryforwards
and
investment tax credits may expire prior to utilization. We recorded a valuation
allowance of $4,100,500 for deferred tax assets. We also have $68,433 of
California Manufacturers' Investment Tax Credits that can be carried forward
to
reduce future taxes. These credits begin expiring in 2011.
NET
LOSS
Our
net
loss for fiscal year 2006 was $1,430,600, an increase of $115,900, or 9%, as
compared to a net loss of $1,314,700 for fiscal year 2005. After taking into
account a foreign currency translation adjustment of $6,000 for fiscal year
2006
($63,900 for fiscal year 2005), our comprehensive fiscal year 2006 net loss
was
$1,436,600, as compared to a net loss of $1,378,600 in fiscal year
2005.
RETAIL
SEGMENT
We
operate brew pubs at Hopland and Saratoga Springs. Although sales revenues
at
the brew pubs, are not significant, $221,300 in 2006 and $203,100 in 2005,
we
view the pubs as a marketing opportunity for our products. The pubs serve our
brews on tap and also sell logo merchandise.
CASH
FLOWS
Net
cash
provided (used) by operations was $1,292,400, $390,700, and $(309,600),
respectively, for 2007, 2006 and 2005. During the year ended December 31, 2007,
net cash provided by operating activities was primarily attributable to non
cash
expenses of $1,383,700 and decrease in receivables of $463,300. This was offset
in part by net loss of $384,000, an increase in inventory of $131,700 and a
net
decrease of $99,100 in accounts payable and accrued liabilities. Non-cash
expenses include depreciation, stock-based compensation and interest accrued
on
related party notes.
Net
cash
used in investing activities was $694,600, $946,800, and $523,900, respectively,
for 2007, 2006 and 2005. Such funds were used primarily for purchases of
equipment, furniture and leasehold improvements.
Net
cash
provided (used) by financing activities was $(656,600), $548,800, and $587,200,
respectively, for 2007, 2006 and 2005. Net cash from financing activities is
comprised of the net proceeds from debt financing. Such funds have been used
to
fund our purchases of equipment and other fixed assets, and our general and
administrative costs in 2007 and 2006.
LIQUIDITY
AND CAPITAL RESOURCES
Low
production capacity utilization rates at our Ukiah and Saratoga Springs
facilities and losses from European operations continue to place demands on
our
working capital. Beginning approximately in the second quarter of 1997, the
time
at which the Ukiah brewery commenced operations, proceeds from operations have
not been able to provide sufficient working capital. As a result we have 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 our
operations, we will have to make timely payments of our debt and lease
commitments as they become due. Any breach of a loan or lease covenant which
actually leads to default, or to an attempt by a creditor to exercise its rights
against our tangible or intangible assets, could potentially make it difficult,
at least in the short term, for us to continue our operations. As it has done
in
certain instances in the past, UBA has agreed to directly guaranty the
operations of UBSN for the upcoming calendar year. Without such guaranty, the
Company's cash flow concerns would be more troubling.
MASTER
LINE OF CREDIT. On August 31, 1999, MBC and UBA, one of our 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 us with a line of credit in the
principal amount of up to $1,600,000. We have executed an Extension of Term
of
Notes under Master Line of Credit Agreement (the "Extension Agreement") with
UBA. The Extension Agreement confirms UBA's and our extension of the terms
of
the UBA Notes for a period ending on June 30, 2008. On December 28, 2001, we
entered into a Confirmation of Waiver with UBA 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 us 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 us to UBA (the "UBA Notes"). The
aggregate outstanding principal amount of the UBA Notes as of December 31,
2007
was $1,915,400, and the accrued but unpaid interest thereon was equal to
approximately $1,000,900, for a total amount due of $2,916,300.
The
outstanding principal amount of the notes and the unpaid interest thereon may
be
converted, at UBA's discretion, into shares of our unregistered Common Stock
at
a conversion rate of $1.50 per share. As of December 31, 2007, the outstanding
principal and interest on the UBA Notes was convertible into 1,944,198 shares
of
our Common Stock.
The
UBA
Notes require us to make quarterly interest payments to UBA on the first day
of
April, July, October, and January. To date, UBA has permitted us to capitalize
all accrued interest; therefore, we have borrowed the maximum amount available
under the facility. Upon maturity of any UBA Note, unless UBA has given us
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 our common stock. If UBA does
not elect to so convert any UBA Note upon maturity, it has the option to extend
the term of such notes for any period of time mutually agreed upon by UBA and
us. During the extended term of any note, UBA has the right to require us to
repay the outstanding principal balance, along with the accrued and unpaid
interest thereon, to UBA within sixty (60) days.
These
UBA
Notes are subordinated to credit facilities extended to us by Grand Pacific
Financing Corporation (“Grand Pacific”) and MBCI under 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 Grand Pacific
and
MBCI facilities are settled in full. Hence, we do not expect to make payments
on
any of these UBA Notes within the next year.
(For
additional information on the Credit Agreement see "Item 13. Certain
Relationships and Related Transactions -Master Line of Credit
Agreement".)
GRAND
PACIFIC FINANCING CORPORATION LOAN : On July 3, 2006, MBC obtained a $3.0
million loan from Grand Pacific, secured by a first priority deed of trust
on
the Ukiah land, fixtures attached to the land, and improvements. The loan is
payable in monthly installments calculated on 25 years amortization basis
including
interest at the rate of 1.75% over the prime rate published by The Wall Street
Journal, maturing June 28, 2011 with a balloon payment. The amount of the
balloon payment will vary depending on the change in interest rates over the
term of the loan. Grand Pacific also collects on a monthly basis an amount
of
approximately $10,554 towards property taxes payable on the Ukiah property
and
pays such taxes when they become due.
MARQUETTE
BUSINESS CREDIT INC. FACILITY: On November 21, 2006, Marquette Business Credit
Inc. (“MBCI”) extended a total facility of $4,925,000 for a period up to June
27, 2011 consisting of a $2,750,000 revolving facility, a $1,525,000 term loan
and a $650,000 capital expenditure loan. The rate of interest on the term loan
and capital expenditure loan is the one-month LIBOR rate published in the Wall
Street Journal plus a margin of $5.25% and on the revolving facility is
one-month LIBOR rate published in the Wall Street Journal plus a margin of
$4.25%. The facility is subject to certain financial covenants including
prescribed minimum fixed charges coverage, maintaining prescribed minimum
tangible net worth and minimum earning before interest, depreciation and taxes.
The facility also has a prepayment penalty if settled prior to the maturity
date. The facility is secured by substantially all of our assets located in
the
United States excluding real property and fixtures located at our property
in
Ukiah, California.
OTHER
LOANS AND CREDIT FACILITIES
ROYAL
BANK OF SCOTLAND FACILITY: Royal Bank of Scotland Commercial Services Limited
(“RBS”) provided UBSN with a £1,750,000 maximum revolving line of credit with an
advance rate based on 80% of UBSN's qualified accounts receivable. This facility
has a minimum maturity of twelve months, but will be automatically extended
unless terminated by either party upon six months' written notice.
SHEPHERD
NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher Premium
Lager for the Company's European Territory. As consideration for extending
the
brewing contract, Shepherd Neame advanced a loan of £600,000 to UBSN, repayable
in annual installments of £60,000 per year, commencing in June 2003. The loan
carries a fixed interest rate of 5% per year. (For more information about this
loan see "Item 13. - Certain Relationships and Related Transactions
—
Loan Agreement
Between UBSN and Shepherd Neame".)
WEIGHTED
AVERAGE INTEREST: The weighted average interest rates paid on our debts incurred
in connection with the Domestic Territory was 10.01%% for fiscal year 2007
compared to 11.16% and 9.13% for fiscal years 2006 and 2005, respectively.
For
loans primarily associated with our European territory, the weighted average
interest rates paid were 6.92%, 6.15% and 6.15% in fiscal years 2007, 2006
and
2005, respectively.
KEG
MANAGEMENT ARRANGEMENT: We entered into a keg management agreement (the "Keg
Agreement") with MicroStar Keg Management LLC ("Microstar") for a five year
term
on September 1, 2004. Under this arrangement, MicroStar provides us with
half-barrel kegs for which we pay a filling and use fee. Distributors return
the
kegs to MicroStar instead of to us. MicroStar then supplies us with additional
kegs. Under the terms of the Keg Agreement, if, on any given month, the
agreement is not extended and terminates, we would be required to purchase
a
certain number of kegs from MicroStar. We anticipate financing the purchase
of
such kegs through debt or lease financing, if available. However, there can
be
no assurance that we will be able to finance the purchase of such kegs. Failure
to purchase the necessary kegs from MicroStar upon the termination of the Keg
Agreement is likely to have a material adverse effect on both our business
(if
we are unable to find a comparable supplier) as well as on our working capital
(if we are required to purchase the kegs upon early termination and are unable
to obtain adequate financing).
CURRENT
RATIO: Our ratio of current assets to current liabilities on December 31, 2007
was 0.77 to 1.0 and our ratio of total assets to total liabilities was 1.16
to
1.0. On December 31, 2006 our ratio of current assets to current liabilities
was
0.79 to 1.0 and our ratio of total assets to total liabilities was 1.17 to
1.0.
On December 31, 2005, our ratio of current assets to current liabilities was
0.75 to 1.0 and our ratio of total assets to total liabilities was 1.33 to
1.0.
RESTRICTED
NET ASSETS. Our wholly-owned subsidiary, UBI, had retained losses of
approximately £312,800 as of December 31, 2007. Under UBSN's line of credit
agreement with Royal Bank of Scotland, distributions and other payments from
our
subsidiaries to us are not permitted if the retained earnings drop below
approximately £1,000,000.
RELATED
PARTY TRANSACTIONS: Over the last several years, MBC and its subsidiaries have
entered into or amended several agreements with affiliated and related entities.
Among such agreements have been a Brewing Agreement and a Loan Agreement between
UBSN and Shepherd Neame; 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.
(For more information on these agreements please see "Item 13. -- Certain
Relationships and Related Transactions".)
OFF-BALANCE
SHEET TRANSACTIONS. We are not a party to nor do we engage in any off-balance
sheet transactions.
CONTRACTUAL
OBLIGATIONS
The
following chart sets forth our contractual obligations as of December 31,
2007.
|
Contractual
Obligations
|
|
Payments
due by period
|
|
|
|
|
Total
|
|
Less
than 1 year
|
|
1
-3 years
|
|
3
-5 years
|
|
More
than 5 years
|
|
|
Secured
line of credit
|
|
$
|
3,801,400
|
|
$
|
3,801,400
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Debt Obligations
|
|
|
4,227,000
|
|
|
254,400
|
|
$
|
519,400
|
|
$
|
3,453,200
|
|
$
|
-
|
|
|
Capital
Lease Obligations
|
|
|
119,300
|
|
|
69,500
|
|
|
49,800
|
|
|
-
|
|
|
-
|
|
|
Operating
Lease Obligations
|
|
|
1,100,500
|
|
|
267,700
|
|
|
440,500
|
|
|
342,300
|
|
|
50,000
|
|
|
Purchase
Obligations
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Other
Long Term Liabilities
|
|
|
3,511,500
|
|
|
119,100
|
|
|
238,200
|
|
|
3,154,300
|
|
|
-
|
|
|
Total
|
|
$
|
12,759,800
|
|
$
|
4,512,100
|
|
$
|
1,247,900
|
|
$
|
6,949,800
|
|
$
|
50,000
|
|
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
required for smaller reporting companies.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
The
information required by this item is set forth at Pages F-1 through F-29 to
this
Annual Report.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A.
CONTROLS
AND PROCEDURES.
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
We
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the
Exchange Act, as of December 31, 2007. Our principal executive and
financial officers supervised and participated in the evaluation. Based on
the
evaluation, our principal executive and financial officers each concluded that
our disclosure controls and procedures were effective in providing reasonable
assurance that information required to be disclosed by us in the reports we
file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s forms and rules as of
December 31, 2007. However, the company has also identified areas requiring
further
improvement
as identified below.
INTERNAL
CONTROL OVER FINANCIAL REPORTING
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act. Internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with GAAP. Our internal control over financial reporting includes
those policies and procedures that:
i.
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
ii.
provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations
of our management and directors; and
iii.
provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements.
MANAGEMENT’S
ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our
management concluded that we maintain appropriate internal control over
financial reporting at December 31, 2007. In arriving at that conclusion,
we considered the criteria established in
Internal
Control—Integrated Framework
issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
and we performed a complete assessment as outlined in
Commission
Guidance Regarding Management’s Report on Internal Control Over Financial
Reporting Under Section 13(a) or 15(d) of the Exchange Act
.
In
performing our assessment, we identified the risks that most likely affect
reliable financial reporting and are most likely to have a material impact
on
the company’s financial statements, documented each business process within the
risk area, determined the control points related to the business process and
tested the design and effectiveness of each control
.
In
addition to process (transactional) level controls, we evaluated entity level
controls to determine if compensating controls mitigated any process level
risks. Entity level controls include a broad range of non-transactional
activities including account reconciliations, management review of results,
the
company’s Code of Conduct and Audit Committee review of practices and
results.
SEC
Release 33-8809 defines “material weakness” as a deficiency, or a combination of
deficiencies in internal control over financial reporting such that there is
a
reasonable possibility that a material misstatement of the registrant’s
financial statement will not be prevented or detected on a timely basis. SEC
release 33829 defines “significant deficiency” as a deficiency, or combination
of deficiencies in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those
responsible for oversight of the registrant’s financial reporting.
In
summary, as a result of our first assessment of internal control over financial
reporting, we identified a number of significant deficiencies in medium to
low
risk processes within high risk areas of financial statement control. Despite
the existence of these significant deficiencies, we believe that our
consolidated financial statements contained in this Form 10-K filed with the
SEC
fairly present our financial position, results of operations and cash flows
for
the fiscal year ending December 31, 2007 in all material respects. In
conjunction with this conclusion, our independent registered public
accounting firm is not required to attest this year.
As
of
December 31, 2007, the following significant deficiencies in our internal
control over financial reporting were identified:
1.
We
did
not formally document certain of the reviews conducted by the financial
department in the processing and preparation of the company financial
statements. These processes include journal entries, account reconciliations,
consolidations, equity reconciliations, disclosure checklists and tax return
preparation. The company plans to remediate these issues by formalizing it’s
documentation of financial reviews.
2.
The
company did not conduct sufficient testing in 2007 to satisfy Sox requirements
as a non- accelerated filer. The company plans to remediate this issue during
2008.
3.
Human
Resource documents including job descriptions, employee handbooks, and reviews
were not current. The company plans to remediate this issue during 2008.
4.
The
Whistleblower contact has not been established. The Whistleblower contact will
be established in 2008, and the contact will be independent of
management.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As
this
is our first report on internal control, none of the weaknesses identified
above
have been previously disclosed. As a result of implementing the assessment
process over the internal control over financial reporting, we implemented
various remediation measures to improve our financial reporting and disclosure
controls.
We
have
enhanced our accounting procedures to review and monitor critical accounts
and
transactions on a timely basis. We are implementing a new ERP system to further
improve controls.
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.
ITEM
9B.
OTHER
INFORMATION.
None.
PART
III
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY
The
following table sets forth the names, ages as of February 28, 2008, and certain
information regarding each of the Company's current directors and executive
officers:
|
Name
|
|
Age
|
|
Position(s)
|
|
Director
Since
**
|
|
Scott
R. Heldfond
|
|
63
|
|
Director
|
|
2005
|
|
Michael
Laybourn
|
|
69
|
|
Director
|
|
1993
|
|
Vijay
Mallya, Ph.D.
|
|
52
|
|
Director
and Chairman of the Board
|
|
1997
|
|
Jerome
G. Merchant*+
|
|
46
|
|
Director
|
|
1997
|
|
Mahadevan
Narayanan
|
|
50
|
|
Chief
Financial Officer and Secretary
|
|
N/A
|
|
Sury
Rao Palamand, Ph.D.*+
|
|
76
|
|
Director
|
|
1998
|
|
Kent
D. Price*+
|
|
64
|
|
Director
|
|
1998
|
|
Yashpal
Singh
|
|
62
|
|
Director,
President and Chief Executive Officer
|
|
1997
|
|
**
|
All
directors are elected by the Shareholders at the Annual Meeting to
serve
until the following Annual Meeting. Currently, there are no arrangements
or understandings between any of the directors and any other person
pursuant to which any director was or is to be selected as a director.
The
Company has entered into an employment agreement with the Company's
Chief
Executive Officer pursuant to which his term of employment has been
extended until March 31, 2011. The Company's Chief Financial Officer
and
Chairman do not have any set date for the expiration of their respective
terms of office.
|
|
*
|
Member
of the Audit/Finance Committee.
|
|
+
|
Member
of the Compensation Committee.
|
Mr.
Scott
Heldfond joined the Board in January 2005. He is a Director of NASDAQ Insurance
Group, LLC, a national insurance brokerage and consulting firm owned by the
NASDAQ Stock Market. Mr. Heldfond has also served as the Managing Partner of
eSEED Capital, LLC, a technology-focused merchant banking firm since 1999.
He
also served as President and Chief Executive Officer of Frank Crystal & Co.
of California, a New York-based insurance brokerage from 1995 to 1999, Chairman
of Hales Capital LLC, an investment banking firm from 1994 to February 1997
and
President of AON Real Estate & Investments. Mr. Heldfond also served as a
Director of HomeGain, Inc (recently sold to Classified Ventures), a private
venture backed company and UBICS, a NASDAQ traded firm that provides information
technology staffing and solutions for domestic and international businesses.
Mr.
Heldfond has also served as a Director of Galoob Toys, which was the third
largest toy manufacture before its sale to Hasbro. Mr. Heldfond holds an
undergraduate degree from the University of California, Berkeley and a J.D.
from
the University of San Francisco Law School. He is a Commissioner and the
President of the Health Services Commission of the City and County of San
Francisco, in addition he serves as an advisor to or on the Board of Directors
of a number of local, statewide, and national charitable and community service
organizations. Mr. Heldfond is the Honorary Consul General to the U.S. for
the
Republic of Rwanda.
H.
Michael Laybourn, co-founder of the Company, served as the Company's President
from its inception in 1982 through December 1999, and as its Chief Executive
Officer from inception through October 1997. Mr. Laybourn was elected a Director
in November 1993 when the Company began the process of converting from a limited
partnership to a corporation and served as Chairman of the Board from June
1994
through October 1997. Mr. Laybourn is a former Vice President of the California
Small Brewers Association and a former Chairman of the Board of Directors of
the
Brewers Association of America. Mr. Laybourn holds a Bachelor of Fine Arts
degree from Arizona State University.
Vijay
Mallya, Ph.D., became Chairman of the Board in October 1997 and was its Chief
Executive Officer until January 2005. Dr. Mallya is Chairman of UBICS, Inc.,
United Breweries Limited, UB Engineering Limited, Mangalore Chemicals and
Fertilizers Ltd., Herbertsons Limited, McDowell & Co. Ltd., and other
affiliated companies (collectively the "UB Group"). United Breweries Limited
and
McDowell & Co., Ltd. are two of Asia's leading beer and spirits companies.
The UB Group has annual sales in excess of U.S. dollars $1 billion. He also
sits
on the boards of several foreign companies and organizations including companies
comprising the UB Group, The Institute of Economic Studies (India), and the
Federation of the Indian Chamber of Commerce and Industries. Dr. Mallya was
recently elected to serve as a member of the Upper House of the Indian
Parliament. Dr. Mallya holds a Bachelor of Commerce degree from the University
of Calcutta in India and an honorary Doctorate in Business Administration from
California Southern University, Santa Ana.
Jerome
G.
Merchant became a director in October 1997 and was Chief Financial Officer
of
the Company from November 1997 to October 1998. Mr. Merchant currently served
as
the Strategic Planning Consultant to the Chairman's Office of the Company from
July 1996 until January 2007. Mr. Merchant is currently a Managing Director
with
RSM EquiCo Capital Markets, LLC a mid market investment bank. He has over 20
years experience in investment banking and capital raising. Previously, he
held
executive positions at Citigroup and MetLife Investors. Mr. Merchant has advised
the investment division and clients of Citibank, Smith Barney, Bank of America,
Wells Fargo and U.S. Bank amongst others. In executive and strategic planning
capacities, he has advised public and private companies and institutional and
high-net worth investors. Between April 1993 and December 2003, Mr. Merchant
served in various senior capacities for Cal Fed Investments, a wholly owned
subsidiary of Cal Fed Bank. Previously, Mr. Merchant directed the West Coast
capital raising for a private equity group making equity oriented management
buyouts and strategic acquisitions. He received his B.S. degree in Managerial
Economics-Finance from the University of California, at Davis.
Mahadevan
Narayanan joined the company in early 2001 as Secretary, Corporate Controller
and Chief Financial Officer. Before joining the Company, he served the United
Breweries Group in India for 17 years in various financial and accounting
capacities. Mahadevan Narayanan was most recently employed as Senior Manager
of
Accounting Services of Herbertsons Ltd. for the past six years. He holds a
Bachelor of Science degree in Mathematics from Madurai Kamaraj University in
India and is an associate member of the Institute of Chartered Accountants
of
India.
Sury
Rao
Palamand became a director of the Company in January 1998. Dr. Palamand is
a
director and partner of Summit Products, Inc, a beverage development and
consulting company serving the food and beverage industry. He is also a director
and partner in the Historic Lemp Brewery involved in the development of
microbreweries and brewpubs in addition to his real estate activities in the
restoration of historic buildings. Dr. Palamand has over 40 years of experience
in the brewing industry and has published numerous scientific and technical
papers on beer and other fermented beverages in various Technical Journals
in
the USA and abroad. He is an associate member of the Institute of Brewing,
London and is a member of several brewing organizations in the United States.
In
addition, Dr. Palamand possesses technical and technological expertise in wine
making as well as in the development of soft drinks. Prior to joining the
Company as a director, Dr. Palamand served as Director of Beer and New Beverage
Development at Anheuser-Busch Companies, Inc. Dr. Palamand holds a Bachelor
of
Science degree from the University of Mysore, India, a Master of Science degree
in Applied Chemistry from the University of Bombay, India and a Masters degree
in Food Microbiology and a Ph.D. degree in Food and Flavor technology from
the
Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS
WHO
is WHO in America and in the WHO is WHO in the Midwest.
Kent
D.
Price became a director in January 1998. Kent Price is a founder and President
of Parker Price Venture Capital. Mr. Price was a Rhodes Scholar at Oxford
University, attended the University of Montana, UCLA and Harvard Business
School. Mr. Price is a member of the board of directors of the University of
Montana and a member of the Investment Committee. Mr. Price has extensive
operational experience, including his role as CEO of The Chloride Group, a
global battery company, CEO of the Bank of San Francisco, General Manager of
Banking, Finance and Securities Group at IBM, Chief Financial Office at the
Bank
of New England, Executive Vice President of the Bank of America and a senior
officer at Citibank. He has lived and worked in England, Germany, Ireland,
Nigeria, Ivory Coast, Taiwan, Hong Kong, Japan, Singapore as well as the United
States. He has served on boards in the UK, India, South Africa, Hong Kong,
Taiwan, China and the United States. Mr. Price served as a Captain in the United
States Air Force.
Yashpal
Singh, President of the Company since January 2000, became a director in October
1997 and has served as its Executive Vice President and Chief Operating Officer
since May 1998. Mr. Singh became the Chief Executive Officer in January 2005.
From May 1997 to March 1998, Mr. Singh served as Executive Vice-President-
Operations for UBA. In that capacity, he was responsible for UBA's United States
brewing operations. Between 1992 and 1997, Mr. Singh also served as Senior
Vice
President-Operations for United Breweries Ltd., an Indian Corporation, where
he
was responsible for the operations of 12 breweries, instituting new projects,
and technical and operational evaluations of potential acquisition opportunities
worldwide. Mr. Singh has over 38 years of experience in the brewing industry.
Mr. Singh holds a Bachelors degree in Science from Punjab University in India,
and has graduate training in the fields of Brewing, Malting, and Mineral Water
Technology. Mr. Singh is an associate member of the Institute of Brewing,
London, a member of the Master Brewers Association of America, and was a former
executive member of the Managing Committee of the All India Brewer's
Association.
FAMILY
RELATIONSHIPS
There
are
no family relationships between any of the directors and executive
officers.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based
solely on its review of the Forms 3, 4 and 5 furnished to the Company during
and
with respect to the year 2007, the Company is aware of one untimely filing
by a
Director, officer, or greater than 10% beneficial owner of the reports required
by Section 16(a) of the Exchange Act during the Company's most recent fiscal
year. The untimely filing was a form 4 filed by Jerome Merchant on May 17,
2007
that was due on May 16, 2007.
AUDIT
COMMITTEE
The
Company has a separately-designated standing Audit/ Finance Committee
established in accordance with Section 3(a)(58)(A) of the Exchange Act. Jerome
G. Merchant, Sury Rao Palamand and Kent D. Price serve as the committee members
of the Audit/Finance Committee.
AUDIT
COMMITTEE FINANCIAL EXPERT
The
Company's Board of Directors believes that at least one member of the Company's
Audit Committee - Mr. Kent D. Price - is both an independent Director and
qualifies as an "audit committee financial expert" as that term is defined
in
the Securities Exchange Act of 1934, as amended, and pursuant to the rules
and
regulations promulgated by the Securities and Exchange Commission.
CODE
OF
ETHICS
The
Company has adopted a Code of Ethics that applies to its Chief Executive
Officer, Chief Financial Officer, and principal accounting officer. The Code
of
Ethics is posted on the Company's website at www.mendobrew.com. The Company
intends to disclose future amendments to certain provisions of its Code of
Ethics, or waivers of such provisions granted to executive officers and
directors on its website within four (4) business days following the date of
such amendment or waiver. Any person desiring a free copy of the Code of Ethics
should send a written request to the Company's Secretary, N. Mahadevan at the
Company's principal executive offices located at 1601 Airport Road, Ukiah,
CA
95482.
DIRECTORS'
NOMINATIONS
There
have been no material changes to the procedures by which shareholders may
recommend nominees to the Company's board of directors.
ITEM
11.
EXECUTIVE
COMPENSATION
SUMMARY
COMPENSATION TABLE
The
following table sets forth the annual compensation of the principal executive
officer and the only additional employee (the chief financial officer) whose
total compensation exceeded $100,000 during the fiscal year ended December
31,
2007.
None
of
these executive officers were issued any equity shares or stock options as
compensation to date.
|
Name
and Principal Position
|
|
|
Year
|
|
|
Salary
($
)
|
|
|
Bonus
($
)
|
|
|
Stock
Awards
($
)
|
|
|
Option
Awards
($
)
|
|
|
Non
Equity Incentive Plan Compensation ($
)
|
|
|
Nonqualified
Deferred Compensation Earnings ($
)
|
|
|
All
Other Compensation ($)*
|
|
|
Total
($
)
|
|
|
(a)
|
|
|
(b
)
|
|
|
(c
)
|
|
|
(d
)
|
|
|
(e
)
|
|
|
(f
)
|
|
|
(g
)
|
|
|
(h
)
|
|
|
(i
)
|
|
|
(j
)
|
|
|
Yashpal
Singh President and Chief Executive Officer
|
|
|
2007
|
|
|
189,000
|
|
|
40,825
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
32,976
|
|
|
262,801
|
|
|
|
|
|
2006
|
|
|
150,000
|
|
|
46,900
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,006
|
|
|
215,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mahadevan
Narayanan
Chief
Financial Officer and Corporate Secretary
|
|
|
2007
|
|
|
114,000
|
|
|
21,481
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
135,481
|
|
|
|
|
|
2006
|
|
|
81,250
|
|
|
23,069
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
104,319
|
|
|
*
|
Other
compensation of the Chief Executive Officer includes
use
of company vehicle, health care reimbursement for the executive and
his
immediate family and vacation
reimbursement.
|
Compensation
Narrative
The
Compensation Committee of the Board of Directors (the "Committee") determines
and administers the compensation for MBC's executive officers. The Committee
reviews and determines all components of the executive officers' compensation,
including making individual compensation decisions and reviewing and revising
compensation guidelines as appropriate. The Committee also consults with the
Chief Executive Officer regarding revisions to the compensation of the Chief
Financial Officer and other non-executive employees, as
appropriate.
The
Company has entered into an Employment Agreement with its Chief Executive
Officer that sets forth the term of his employment and provides for certain
benefits. The Company does not currently have an employment agreement in place
with its Chief Financial Officer, but may enter into an employment agreement
with such executive officer in the future. The Company does not have any
severance payment arrangements other than with the Chief Executive Officer.
The
Company has agreed to reimburse travel expenses for the Chief Executive Officer
and his family to return to their home country upon the termination of the
Chief
Executive Officer's employment with the Company. In addition, if the Chief
Executive Officer is terminated prior to the expiration of a twelve-month notice
period, he is entitled to be paid an amount equal to his remaining unpaid
compensation for the remainder of the period. The Company does not have any
payment arrangements that would be triggered by a "change in control" of the
Company. The Company also does not maintain any retirement plan programs or
provide the executive officers with any benefits following their retirement
or
termination from the Company.
Total
compensation for the Chief Executive Officer consists of base salary, annual
cash bonus payments, health benefits for the executive officer and their
immediate dependent family members, key person life insurance, use of company
vehicle and vacation reimbursement.
Elements
of Compensation
Base
Salary
The
Committee establishes executive officers' base salaries on an annual basis.
Historically approximately 25% of the cash compensation paid to the Chief
Executive Officer and Chief Financial Officer, respectively, was paid in the
form of a bonus rather than as salary due to the lack of sufficient available
working capital during certain periods. Given the Company's stock performance
and financial situation, there is currently no salary component directly tied
to
the Company's stock price nor to its financial performance.
Annual
Cash Bonus
The
compensation packages for the Chief Executive Officer and the Chief Financial
Officer also contain a component providing for payment of annual cash bonuses.
Given the working capital constraints of the Company in the past, the Committee
historically determined that a percentage of the cash compensation of the
executive officers would be in the form of annual cash bonuses that could be
disbursed following the completion of the applicable fiscal year.
Perquisites
and Personal Benefits
In
addition to salary and annual bonus, the total compensation of the Company's
Chief Executive Officer includes perquisites and personal benefits. The types
of
perquisites and personal benefits awarded to the Chief Executive Officer were
determined when each such officer commenced employment with the Company and
are
substantially of the same nature as the perquisites provided to such executive
officer by previous employers. The perquisites available to the executive
officers consist of: use of company vehicles, health care reimbursement for
the
executive officer and his immediate family, reimbursement of certain specified
vacation expenses and life insurance).
Equity
Plans
The
Company does not currently maintain any equity compensation plans for or provide
any form of equity compensation to its executive officers.
Retirement
Plans
The
Company does not currently maintain any retirement plans, nor does it provide
any post-retirement benefits to any of its employees (including its executive
officers).
DIRECTORS'
COMPENSATION
FOR
THE YEAR 2007
Dr.
Vijay
Mallya, Chairman of the Board, is paid $120,000 per year by MBC for services
rendered as Chairman, and £70,000 per year (approximately $140,140 in U.S.
dollars at average exchange rate for the year 2007) by UBI for promoting the
Company’s products in the European territory outside the United
Kingdom.
Until
December 31, 2006, Jerome Merchant received $48,000 per year as a consultant
to
the Chairman’s office, therefore he was not paid any remuneration for attending
meetings of the Board and Board committees. Effective January 1, 2007, Mr.
Merchant receives remuneration applicable to independent directors for attending
meetings of the Board and Board committees.
Directors
who are not in receipt of fixed remuneration from the Company receive fees
for
their service as a director consisting of payments in the amount of $3,000
per
Board meeting and $1,000 per committee meeting attended by such director. The
following table provides details of directors' compensation for the year 2007.
|
Name
|
|
Fees
earned of Paid in Cash ($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non
Equity Incentive Plan Compensation ($)
|
|
Change
in Pension Value and Nonqualified Deferred Compensation Earnings
($)
|
|
All
Other Compensation
($)
|
|
Total
($)
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
(d)
|
|
(e)
|
|
(f)
|
|
(g)
|
|
(h)
|
|
|
Dr.Vijay
Mallya
|
|
260,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kent
Price
|
|
|
-
|
|
|
24,000
|
*
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,000
|
|
|
Sury
Rao Palamand
|
|
|
-
|
|
|
19,000
|
**
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
19,000
|
|
|
Jerome
Merchant
|
|
|
-
|
|
|
24,000
|
*
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
24,000
|
|
|
Scott
Heldfond
|
|
|
-
|
|
|
22,000
|
#
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22,000
|
|
|
Michael
Laybourne
|
|
|
-
|
|
|
14,000
|
##
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
14,000
|
|
|
*
|
Fee
for attending three board meetings and four committee meetings calculated
at $3,000 per board meeting and $1,000 per committee meeting, to
be
compensated in the form of Company’s common stock calculated at $0.39 per
share being the average value of the stock during the year 2007.
|
|
**
|
Fee
for attending two board meetings and two committee meetings calculated
at
$3,000 per board meeting and $1,000 per committee meeting, to be
compensated in the form of Company’s common stock calculated at $0.39 per
share being the average value of the stock during the year 2007.
|
|
#
|
Fee
for attending three board meetings and two committee meetings calculated
at $3,000 per board meeting and $1,000 per committee meeting, to
be
compensated in the form of Company’s common stock calculated at $0.39 per
share being the average value of the stock during the year 2007.
|
|
##
|
Fee
for attending one board meeting calculated at $3,000 per board meeting,
to
be compensated in the form of Company’s common stock calculated at $0.39
per share being the average value of the stock during the year 2007.
|
Stock
awards
also include ad hoc compensation of $11,000 to Messieurs Heldfond, Laybourn
Merchant, Palamand and Price in the form of common stock of the Company
calculated at the rate of $0.22 per share based on the trading value of the
stock on the date of issuance.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The
following table sets forth certain information known to the Company regarding
the beneficial ownership of the Company's Common Stock and Series A Preferred
Stock as of December 31, 2007, for (a) each shareholder known by the Company
to
own beneficially 5% or more of the outstanding shares of its Common Stock or
Series A Preferred Stock; (b) each director; and (c) all directors and executive
officers of the Company as a group. Except as otherwise noted, the Company
believes that the beneficial owners of the Common Stock and Series A Preferred
Stock listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.
|
Name
and Address
|
|
Shares
Beneficially Owned (1)
|
|
Approximate
Percentage
|
|
|
COMMON
STOCK
|
|
|
|
|
|
|
United
Breweries of America, Inc.
1050,
Bridge way,
Sausalito,
CA 94965
|
|
|
3,087,818
(2
|
)
|
|
25.7
|
%
|
|
Inversiones
Mirabel S.A.
Hong
Kong Bank Building
6th
Floor, Samuel Lewis Avenue
P
O
Box 6-4298, El Dorado
Panama
City, Panama
|
|
|
5,500,000
(2
|
)
|
|
45.9
|
%
|
|
United
Breweries (Holdings) Limited.
100/1,
Richmond Road,
Bangalore
- 560 025, India
|
|
|
8,587,818
(3
|
)
|
|
71.6
|
%
|
|
H.
Michael Laybourn +
|
|
|
416,948
|
|
|
3.5
|
%
|
|
Vijay
Mallya
|
|
|
8,587,818
(4
|
)
|
|
71.6
|
%
|
|
Kent
D Price
c/o
Parker Price Venture Capital, Inc.
101,
California Street
Suite
2830
San
Francisco, CA 94111
|
|
|
274,907
|
|
|
2.3
|
%
|
|
Sury
Rao Palamand, Ph.D. +
|
|
|
240,065
|
|
|
2.0
|
%
|
|
Jerome
G. Merchant+
|
|
|
155,665
|
|
|
1.3
|
%
|
|
Yashpal
Singh+
|
|
|
--
|
|
|
--
|
|
|
Scott
R. Heldfond +
|
|
|
93,505
|
|
|
*
|
|
|
N.
Mahadevan
|
|
|
--
|
|
|
--
|
|
|
All
Directors and executive officers as a group (8 persons)
|
|
|
9,768,908
(5
|
)
|
|
81.5
|
%
|
|
|
|
|
|
|
|
|
|
|
SERIES
A PREFERRED STOCK
|
|
|
|
|
|
|
|
|
H.
Michael Laybourn +
|
|
|
6,100
|
|
|
2.7
|
%
|
|
All
Directors and executive officers as a group (8 persons)
|
|
|
6,100
|
|
|
2.7
|
%
|
*Amount
represents less than 1% of the outstanding securities of the class.
+
1601
Airport Road, Ukiah, CA 95402
(1)
Applicable
percentages of ownership are based on 11,991,686 shares of Common Stock
outstanding.
(2)
Does
not
include 1,
944,
198
shares issuable to UBA upon conversion of certain convertible notes issued
by
MBC to UBA under a Master Line of Credit Agreement (For additional information,
see "Item 13. Certain Relationships and Related Transactions"). UBHL is the
ultimate beneficiary of substantially all of the shares owned by both UBA and
Inversiones.
(3)
Includes
all shares held by the Company's two largest shareholders, UBA and Inversiones.
UBHL is the beneficial owner of UBA and Inversiones because they are both
controlled by Rigby International Corp., a company registered in the British
Virgin Island with its primary offices at Vanterpool Plaza, 2nd Floor, Wickhams
Cay I, Road Town, Tortola, British Virgin Island 2 and its mailing address
c/o
CAS SA, 12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, which in turn is
a
wholly-owned subsidiary of UBHL. Such amount does not include 1,944,198 shares
issuable to UBA upon conversion of certain convertible notes issued by MBC
to
UBA under a Master Line of Credit Agreement.
(4)
Includes
all shares indirectly held by UBHL. Does not include 1,944,198 shares issuable
to UBA upon conversion of certain convertible notes issued by MBC to UBA
described in footnotes (2) and (3) above. Dr. Mallya disclaims beneficial
ownership of the reported securities except to the extent of his pecuniary
interest therein.
(5)
Does
not
include shares which may be obtained upon the conversion of the Notes described
in footnotes (2) and (3), above.
CHANGES
IN CONTROL
There
are
no arrangements currently known to the Company which may result in a change
in
control of the Company at a future date.
DIRECTORS'
EQUITY COMPENSATION PLAN
The
Company's Directors' Compensation Plan reserved an aggregate of 500,000 shares
of the Company's unregistered Common Stock to be issued to Directors. Each
Director is entitled to receive only that number of shares that is equal to
such
Director's amount of cash compensation that he otherwise would have received
for
attending Board and Board committee meetings. A Board meeting is valued at
$3,000 per meeting and a Board committee meeting is valued at $1,000 per
meeting. The Common Stock is to be valued at the average of the daily fair
market values over the relevant calendar year, provided that the price per
share
will never be lower than the fair market value on the date of the
shares.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
During
fiscal years 2007 and 2006, the Company was a participant in the following
transactions in which (i) the amount involved exceeded the lesser of (A)
$120,000, or (B) one percent of the Company's total assets at year end for
the
last two completed fiscal years and (ii) a related person had or will have
a
direct or indirect material interest:
Master
Line of Credit Agreement
On
August 31, 1999, the Company and United Breweries of America, Inc. ("UBA")
entered into a Master Line of Credit Agreement, which was subsequently amended
on April 28, 2000, and February 12, 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.
UBA
has
made thirteen (13) separate advances to the Company under the Credit Agreement,
and one separate advance with a principal amount of $400,000 on terms
substantially similar to those of the Credit Agreement, each pursuant to an
eighteen-month promissory note, (collectively, the "UBA Notes"). Interest
accrued on the UBA Notes at an interest rate equal to the lesser of (i) one
and
one-half percent (1.5%) per annum above the prime rate offered from time to
time
by the Bank of America in San Francisco, California, or (ii) ten percent (10%).
The maturity dates of the UBA Notes have been extended until June 30,
2008.
As
of
February 29, 2008, the aggregate outstanding principal amount of the UBA Notes
is $1,915,400, and the accrued but unpaid interest thereon is equal to
approximately $1,028,800. The entire amount of the outstanding principal and
accrual but unpaid interest is convertible into shares of common stock of the
Company at a conversion price of $1.50 per share. As of the date of this report,
United Brewers of America beneficially owns approximately 25.7% of the Company's
outstanding Common Stock (excluding any shares issuable upon the conversion
of
the UBA Notes) and the Company's Chairman, Dr. Vijay Mallya, is also the
Chairman of the board of UBA. During both the years 2007 and 2006, the largest
aggregate amount of principal outstanding was 1,915,400
No
principal or interest was paid during either 2007 or 2006,
respectively.
In
July
2001, the Company entered into a Kingfisher Trademark and Trade Name License
Agreement with Kingfisher America, Inc., a Delaware corporation affiliated
with
UB Limited, pursuant to which the Company obtained a royalty-free, exclusive
license to use the Kingfisher trademark and trade name in connection with the
brewing and distribution of beer in the United States. Under its terms, this
agreement will remain in effect for so long as the Distribution Agreement
(described below) between UBI and UBSN remains in effect. Currently, that
Agreement is scheduled to expire in October 2013.
Because
the Company's Chairman of the Board, Dr. Vijay Mallya, is also the Chairman
of
the Board of UB Limited, the transactions represented by these license
agreements may be deemed to be related party transactions.
Shepherd
Neame, Ltd.
As
described more fully below, the Company's principal European subsidiary, UBSN,
is a party to a Brewing Agreement and a Loan Agreement with Shepherd Neame.
Shepherd Neame and the Company may be deemed to be related parties, because
Mr.
R.H.B. Neame (Shepherd Neame's Chairman of the Board) was also a director of
the
Company until 2004, and Mr. David Townshend (a senior Shepherd Neame employee)
was serving as the President of UBSN (pursuant to an agreement between UBSN
and
Shepherd Neame) and was also a director of the Company until 2004.
Brewing
Agreement
On
October 9, 1998, UBI and UBSN entered into a Brewing Agreement with Shepherd
Neame, and on October 24, 2001, this agreement was amended by a Supplemental
Agreement (together, the "Brewing Agreement").
The
Brewing Agreement, which was entered into (and amended) in conjunction with
the
Loan Agreement described below, grants to Shepherd Neame the exclusive right
to
brew, keg, bottle, can, label, and package all beers and related products sold
under the Kingfisher trademark in the United Kingdom, and with respect to the
distribution of such products elsewhere in the European Territory. UBI and
UBSN
further agreed that they would require any other distributor of such products
(subject to applicable laws and regulations) to obtain such products directly
from a company related to UBI or its subsidiaries and to refrain from seeking
customers, or establishing a distribution network for such products, in the
United Kingdom. In exchange, Shepherd Neame agreed to brew and/or supply
Kingfisher Premium Lager and related products to UBSN for destinations within
(and, with the consent of Shepherd Neame, outside) the United Kingdom. The
price
UBSN pays to Shepherd Neame for brewing Kingfisher Premium Lager for
distribution in the United Kingdom is set by a formula which varies according
to
the applicable duty on Kingfisher Premium Lager and other factors. For 2007,
the
purchases from Shepherd Neame by UBSN equaled approximately
$16,235,100
at
the
average exchange rate in effect during 2007. For 2006, the purchases from
Shepherd Neame by UBSN equaled approximately $14,589,300 at the average exchange
rate in effect during 2006.
Loan
Agreement
Concurrently
with the Brewing Agreement described above, UBSN and Shepherd Neame entered
into
a Loan Agreement, under which on or about October 24, 2001, Shepherd Neame
advanced to UBSN £600,000 (the full amount available under the Loan Agreement),
at a fixed interest rate of 5%, for general corporate purposes. This loan is
payable in ten annual installments of £60,000 each, commencing on June 30, 2003
and continuing on each anniversary thereof until the Loan is fully repaid.
Any
remaining balance of principal or interest will become due and payable (and
the
loan will terminate) on June 30, 2013. It would be an event of default under
the
Loan Agreement, and the lender would have the right, at will, not only to cancel
the Loan Agreement and accelerate all sums due under it, but also to terminate
the Brewing Agreement, if UBSN were to terminate or default under the Brewing
Agreement, or if either of the License Agreements that UBI and UBSN have entered
into with UB Limited are terminated (except in accordance with their terms
or in
connection with the parties' entry into an equivalent Brewing Agreement). The
aggregate amount of principal paid during each of 2007 and 2006 was (pounds)
60,000 or $120,100
and
$110,600 at the average exchange rate during 2007 and 2006,
respectively.
Distribution
Agreement
UBI
entered into a Distribution Agreement with its wholly-owned subsidiary UBSN
on
October 9, 1998. Under this agreement, which was subsequently amended by a
Supplemental Agreement dated as of October 24, 2001 (together, the "Distribution
Agreement"), UBI granted UBSN an exclusive sublicense for the distribution
of
all lager and other beer products brewed or prepared for sale in the Company's
European Territory, and a sublicense to use the Kingfisher trademark and trade
name, to manufacture, package, market, distribute, and sell beer and other
products using the Kingfisher trademark and logo, and to enter into a Brewing
License Agreement described below. The Distribution Agreement, which also
requires UBSN to pay UBI a royalty fee of 50 British pence (approximately $1.00
at the average exchange rates in effect during fiscal year 2007) for every
100
liters (26 gallons) of beer brewed for sale in the European Territory, will
expire (unless its term is extended) in October 2013. The royalty due to UBI
for
the year 2007 was approximately $79,200. The royalty due to UBI for the year
2006 was approximately $44,000.
Market
Development Agreement
Effective
October 26, 2001, the Company and UBSN entered into a Market Development,
General and Administrative Services Agreement (the "Market Development
Agreement"), under the terms of which UBSN engaged the Company to perform a
variety of advertising, promotional, and other market development activities
in
the United States, in connection with Kingfisher beer and related consumer
products (the "Products"), provide certain legal and business management support
services to UBSN, and provide assistance with the establishment and management
of distribution channels for the Products in the United States. In consideration
for the services received under this agreement, UBSN agreed to pay the Company's
service fees amounting in the aggregate to $1,500,000 over the period from
2001
through 2003. Such payments have been made in full and no additional payments
are anticipated to be made in the future. The Company and UBSN agreed to extend
the agreement for an additional five (5) year period.
Brewing
License Agreement
Concurrently
with the Market Development Agreement described above, the Company entered
into
a Brewing License Agreement with UBSN, under the terms of which UBSN granted
to
the Company an exclusive license to brew and distribute Kingfisher Premium
Lager
in the United States, in exchange for a royalty, payable to UBSN, of eighty
cents ($0.80) for each case of Kingfisher Premium Lager brewed by the Company
under this agreement. The Company and UBSN agreed to extend the agreement for
a
further period of five years. The royalty due to UBSN pursuant to the Brewing
License Agreement for the year 2007 was approximately $101,700. The royalty
due
to UBSN pursuant to the Brewing License Agreement for the year 2006 was
approximately $102,200.
DIRECTOR
INDEPENDENCE
The
Board
of Directors of the Company has determined that the following directors qualify
as "independent" in accordance with the published listing requirements of
NASDAQ: Mr. Heldfond, Mr. Layborn, Mr. Palamand, Mr. Merchant and Mr. Price.
Mr.
Singh is not "independent" because he is an employee of the Company. Dr. Mallya
is not independent since he has received payments in excess of $60,000 from
the
Company during the last three (3) fiscal years.
The
NASDAQ rules have both objective tests and a subjective test for determining
who
is an "independent director". The objective tests provide that a director is
not
considered independent if he (i) is an employee of the Company (or has been
in
the past three (3) years; (ii) has accepted (or a family member has accepted)
compensation from the Company in excess of $100,000 during any twelve (12)
consecutive months within the preceding three (3) year period (subject to
certain exceptions); (iii) has a family member that was employed as an executive
officer of the Company during the past three (3) years; (iv) is (or a family
member is) a controlling shareholder or an executive officer of an organization
to which the Company made or received payments that exceed the greater of (a)
five percent (5%) of the recipient's consolidated gross revenues for that year
or (b) $200,000 for the current year or the preceding three (3) years. The
subjective test is based on the standard that an independent director must
be a
person who lacks a relationship that, in the opinion of the Board, would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director.
COMPANY
RELATIONSHIPS
UBA
and
Inversiones own 25.7% and 45.9% of the outstanding shares of the Company's
common stock respectively. UBA has also advanced to the Company a
principal amount of $1,915,400 under separate convertible notes. As of December
31, 2007 the principal amount outstanding on the notes together with the accrued
interest is convertible into 1,944,198 shares of common stock. Because UBHL
is
the ultimate parent of both UBA and Inversiones, UBHL is the ultimate
beneficiary of 71.6% the shares of common stock of the Company. Refer to
"Item 12 - Security ownership of certain beneficial owners and management and
related stockholder matters" above.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The
Company has appointed PMB Helin Donovan, L.L.P. ("PMB"), formerly Pohl,
McNabola, Berg & Company, LLP, as its independent auditors to perform the
audit of the Company's financial statements for the year 2007.
AUDIT
FEES. The aggregate fees billed by PMB for the audit of the Company's annual
consolidated financial statements for the year ended December 31, 2007 was
$90,000; fees of an additional $39,000 were billed to the Company during 2007
in
connection with PMB’s review of interim financial statements in connection with
the Company's Quarterly Reports on Form 10-Q for that year. Such fees
represented approximately 90% of the total fees for services rendered to the
Company by PMB during 2007.
The
aggregate fees billed by PMB for the audit of the Company's annual consolidated
financial statements for the year ended December 31, 2006 was $90,000; fees
of
an additional $45,685 were billed to the Company during 2006 in connection
with
PMB’s review of interim financial statements in connection with the Company's
Quarterly Reports on Form 10-Q for this year. Such fees represented
approximately 90% of the total fees for services rendered to the Company by
PMB
during 2006.
AUDIT
RELATED FEES. PMB did not bill any amount in fees for assurance or related
services to the Company in 2007 or 2006.
TAX
FEES.
The aggregate fees billed during 2007 for tax products and services related
to
the preparation of the Company's tax returned provided by PMB, other than those
described in the foregoing paragraphs, was $15,000. Such fees represented
approximately 10% of the total fees for services rendered to the Company by
PMB
during 2007.
The
aggregate fees billed during 2006 for tax products and services related to
the
preparation of the Company's tax returned provided by PMB, other than those
described in the foregoing paragraphs, was $15,000. Such fees represented
approximately 10% of the total fees for services rendered to the Company by
PMB
during 2006.
ALL
OTHER
FEES. During the years 2007 and 2006, PMB did not bill the Company for any
amount other than those mentioned above.
All
audit
and other services performed by PMB on behalf of the Company are approved in
advance by the Company's audit committee.
The
Company is not aware that any significant amount of the work done during the
course of the audits of the Company's 2007 and 2006 Financial Statements was
performed by persons other than full-time, permanent, employees of
PMB.
ITEM
15.
EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES.
|
(a)
|
DOCUMENTS
FILED AS PART OF THIS REPORT. The following documents are filed as
part of
this Report:
|
|
|
(1)
|
Audited
financial statements and financial statement schedules
|
Report
of
PMB Helin Donovan., LLP, Independent Registered Auditors
Consolidated
Balance Sheets as of December 31, 2007 and 2006
Consolidated
Statements of Operations and Comprehensive Income for the Years Ended December
31, 2007, 2006 and 2005
Consolidated
Statements of Stockholders' Equity for the Years Ended December 31, 2007, 2006,
and 2005
Consolidated
Statements of Cash Flow for the Years Ended December 31, 2007, 2006, and
2005
Notes
to
Financial Statements
|
|
(2)
|
FINANCIAL
STATEMENT SCHEDULES. The financial statement schedules required to
be
filed by Item 8 of this Annual Report on Form 10-K are listed above.
All
other financial statement schedules are omitted because they were
not
required or the required information is included in the Financial
Statements or Notes thereto.
|
|
Exhibit
Number
|
|
|
|
Description
of Document
|
|
|
|
|
|
|
|
3.1
|
|
(T)
|
|
Articles
of Incorporation of the Company, as amended.
|
|
|
|
|
|
|
|
3.2
|
|
(T)
|
|
Bylaws
of the Company, as amended.
|
|
|
|
|
|
|
|
10.1
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.2
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.3
|
|
(A)
|
|
Wholesale
Distribution Agreement between the Company and Bay Area
Distributing.
|
|
|
|
|
|
|
|
10.4
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.5
|
|
(B)
|
|
Liquid
Sediment Removal Services Agreement with Cold Creek Compost,
Inc.
|
|
|
|
|
|
|
|
10.6
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.7
|
|
(C)
|
|
Commercial
Real Estate Purchase Contract and Receipt for Deposit (previously
filed as
Exhibit 19.2).
|
|
|
|
|
|
|
|
10.8
|
|
(D)
|
|
Commercial
Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing
Company
LLC.
|
|
|
|
|
|
|
|
10.9
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.10
|
|
(F)
|
|
Keg
Management Agreement with MicroStar Keg Management LLC.
|
|
|
|
|
|
|
|
10.11
|
|
(G)
|
|
Agreement
to Implement Condition of Approval No. 37 of the Site Development
Permit
95-19 with the City of Ukiah, California (previously filed as Exhibit
19.6).
|
|
|
|
|
|
|
|
10.12
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.13
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.14
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.15
|
|
(I)
|
|
Hazardous
Substances Certificate and Indemnity with the Savings Bank of Mendocino
County.
|
|
|
|
|
|
|
|
10.16
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.17
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.18
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.19
|
|
(K)
|
|
Investment
Agreement with United Breweries of America,
Inc.
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
|
|
Description
of Document
|
|
10.20
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.21
|
|
(K)
|
|
Registration
Rights Agreement Among the Company, United Breweries of America,
Inc., H.
Michael Laybourn, Norman Franks, Michael Lovett, John Scahill,
and Don
Barkley.
|
|
|
|
|
|
|
|
10.22
|
|
(L)
|
|
Indemnification
Agreement with Vijay Mallya.
|
|
|
|
|
|
|
|
10.23
|
|
(L)
|
|
Indemnification
Agreement with Michael Laybourn.
|
|
|
|
|
|
|
|
10.24
|
|
(L)
|
|
Indemnification
Agreement with Jerome Merchant.
|
|
|
|
|
|
|
|
10.25
|
|
(L)
|
|
Indemnification
Agreement with Yashpal Singh.
|
|
|
|
|
|
|
|
10.27
|
|
(L)
|
|
Indemnification
Agreement with Robert Neame.
|
|
|
|
|
|
|
|
10.28
|
|
(L)
|
|
Indemnification
Agreement with Sury Rao Palamand.
|
|
|
|
|
|
|
|
10.29
|
|
(L)
|
|
Indemnification
Agreement with Kent Price.
|
|
|
|
|
|
|
|
10.30
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.31
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.32
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.33
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.35
|
|
(O)
|
|
Master
Line of Credit Agreement between the Company and United Breweries
of
America Inc. dated August 31, 1999.
|
|
|
|
|
|
|
|
10.36
|
|
(O)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated Sept. 7,
1999.
|
|
|
|
|
|
|
|
10.37
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated October
21,
1999.
|
|
|
|
|
|
|
|
10.38
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated November 12,
1999.
|
|
|
|
|
|
|
|
10.39
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated December
17,
1999.
|
|
|
|
|
|
|
|
10.40
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated December
31,
1999.
|
|
|
|
|
|
|
|
10.41
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated February
16,
2000.
|
|
|
|
|
|
|
|
10.42
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated February
17,
2000.
|
|
|
|
|
|
|
|
10.43
|
|
(P)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated April 28,
2000.
|
|
|
|
|
|
|
|
10.44
|
|
(P)
|
|
First
Amendment to Master Line of Credit Agreement between the Company
and
United Breweries of America, Inc., dated April 28,
2000.
|
|
|
|
|
|
|
|
10.45
|
|
(Q)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated September
11,
2000.
|
|
|
|
|
|
|
|
10.46
|
|
(Q)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated September
30,
2000.
|
|
|
|
|
|
|
|
10.47
|
|
(Q)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated December
31,
2000.
|
|
Exhibit
Number
|
|
|
|
Description
of Document
|
|
10.48
|
|
(Q)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated February
12,
2001.
|
|
|
|
|
|
|
|
10.49
|
|
(R)
|
|
Convertible
Note in favor of United Breweries of America Inc. dated July 1,
2001.
|
|
|
|
|
|
|
|
10.50
|
|
(S)
|
|
Confirmation
of Waiver Between Mendocino Brewing Company, Inc. and United Breweries
of
America, Inc., dated as of December 28, 2001.
|
|
|
|
|
|
|
|
10.51
|
|
(S)
|
|
Extension
of Term of Notes Under Master Line of Credit Agreement between
Mendocino
Brewing Company, Inc. and United Breweries of America, Inc., dated
February 14, 2002.
|
|
|
|
|
|
|
|
10.52
|
|
(T)
|
|
License
Agreement between United Breweries Limited and United Breweries
International (U.K.), Limited.
|
|
|
|
|
|
|
|
10.53
|
|
(T)
|
|
Supplemental
Agreement to License Agreement between United Breweries Limited
and United
Breweries International (U.K.), Limited.
|
|
|
|
|
|
|
|
10.54
|
|
(T)
|
|
Distribution
Agreement between United Breweries International (U.K.), Limited.
and
UBSN, Ltd.
|
|
|
|
|
|
|
|
10.55
|
|
(T)
|
|
Supplemental
Agreement to Distribution Agreement between United Breweries International
(U.K.), Limited. and UBSN, Ltd.
|
|
|
|
|
|
|
|
10.56
|
|
(T)
|
|
Market
Development, General and Administrative Services Agreement between
Mendocino Brewing Company, Inc. and UBSN, Ltd.
|
|
|
|
|
|
|
|
10.57
|
|
(T)
|
|
Contract
to Brew and Supply Kingfisher Products among Shepherd Neame, Limited,
United Breweries International (U.K.), Limited. and UBSN,
Ltd.
|
|
|
|
|
|
|
|
10.58
|
|
(T)
|
|
Supplemental
Agreement to Contract to Brew and Supply Kingfisher Products among
Shepherd Neame, Limited, United Breweries International (U.K.),
Limited.
and UBSN, Ltd.
|
|
|
|
|
|
|
|
10.59
|
|
(T)
|
|
Loan
Agreement between Shepherd Neame, Limited and UBSN,
Ltd.
|
|
|
|
|
|
|
|
10.60
|
|
(T)
|
|
Brewing
License Agreement between UBSN, Ltd. and Mendocino Brewing Company,
Inc.
|
|
|
|
|
|
|
|
10.61
|
|
(T)
|
|
Kingfisher
Trade Mark and Trade Name License Agreement between Kingfisher
of America,
Inc. and Mendocino Brewing Company, Inc.
|
|
|
|
|
|
|
|
10.62
|
|
(U)
|
|
First
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries
of
America, Inc., dated November 13, 2002.
|
|
|
|
|
|
|
|
10.63
|
|
(U)
|
|
Second
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries
of
America, Inc., dated March 31, 2003.
|
|
|
|
|
|
|
|
10.64
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.65
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.66
|
|
(W)
|
|
Third
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement, dated August 14, 2003.
|
|
|
|
|
|
|
|
10.67
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.68
|
|
(X)
|
|
Fourth
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries
of
America, Inc., dated as of August 14, 2004.
|
|
|
|
|
|
|
|
10.69
|
|
|
|
[Intentionally
omitted]
|
|
Exhibit
Number
|
|
|
|
Description
of Document
|
|
10.70
|
|
(Z)
|
|
Second
Agreement dated October 9, 1998 between UBSN, Ltd. and Shepherd
Neame,
Ltd.
|
|
|
|
|
|
|
|
10.71
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.72
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.73
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.74
|
|
(BB)
|
|
Convertible
Promissory Note of Mendocino Brewing Company, Inc. in favor of
United
Breweries of America, Inc., dated March 2, 2005.
|
|
|
|
|
|
|
|
10.75
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.76
|
|
(DD)
|
|
Invoice
Discounting Agreement between The Royal Bank of Scotland Commercial
Services Limited and UBSN Limited, dated April 26,
2005.
|
|
|
|
|
|
|
|
10.77
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.78
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.79
|
|
(EE)
|
|
Loan
Agreement by and between Mendocino Brewing Company, Inc. and Grand
Pacific
Financing Corporation dated June 28, 2006.
|
|
|
|
|
|
|
|
10.80
|
|
(EE)
|
|
Promissory
Note of Mendocino Brewing Company, Inc. in favor of Grand Pacific
Financing Corporation, dated June 28, 2006.
|
|
|
|
|
|
|
|
10.81
|
|
|
|
[Intentionally
omitted]
|
|
|
|
|
|
|
|
10.82
|
|
(FF)
|
|
Loan
and Security Agreement by and among Marquette Business Credit Inc.
and
Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC,
dated
November 16, 2006.
|
|
|
|
|
|
|
|
10.83
|
|
(FF)
|
|
Revolving
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company,
LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
|
|
|
|
|
|
|
10.84
|
|
(FF)
|
|
Term
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company,
LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
|
|
|
|
|
|
|
10.85
|
|
(FF)
|
|
CAPEX
Note of Mendocino Brewing Company, Inc. and Releta Brewing Company,
LLC in
favor of Marquette Business Credit Inc., dated November 16,
2006.
|
|
|
|
|
|
|
|
10.86
|
|
(FF)
|
|
Fifth
Amendment to Extension of Term of Notes Under Master Line of Credit
Agreement, effective August 31, 2005.
|
|
|
|
|
|
|
|
10.87
|
|
(FF)
|
|
Sixth
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement, effective December 31, 2006.
|
|
|
|
|
|
|
|
10.88
|
|
(FF)
|
|
Second
Amendment to Convertible Promissory Note, effective December 31,
2006.
|
|
|
|
|
|
|
|
10.89
|
|
(GG)
|
|
Seventh
Amendment to Extension of Term of Notes under Master Line of Credit
Agreement effective June 30, 2007.
|
|
|
|
|
|
|
|
10.90
|
|
(GG)
|
|
Third
Amendment to Convertible Promissory Note, effective June 30,
2007
|
|
|
|
|
|
|
|
10.91
|
|
*
|
|
Employment
Agreement of Yashpal Singh (Management Contract)
|
|
|
|
|
|
|
|
14.1
|
|
(V)
|
|
Code
of Ethics
|
|
|
|
|
|
|
|
31.1
|
|
*
|
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
31.2
|
|
*
|
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
|
|
|
|
|
32.1
|
|
*
|
|
Certification
of Chief Executive Officer Pursuant to U.S.C. 1350
|
|
|
|
|
|
|
|
32.2
|
|
*
|
|
Certification
of Chief Financial Officer Pursuant to U.S.C.
1350.
|
*
Filed
herewith.
NOTES
:
Each
Exhibit listed above that is annotated with one or more of the following letters
is incorporated by reference from the following sources:
|
|
(A)
|
The
Company's Registration Statement dated June 15, 1994, as amended,
previously filed with the Commission, Registration No.
33-78390-LA.
|
|
|
(B)
|
The
Company's Annual Report on Form 10-KSB for the period ended December
31,
1995.
|
|
|
(C)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended March
31,
1995.
|
|
|
(D)
|
The
Company's Quarterly Report on Form 10-QSB/A No. 1 for the period
ended
September 30, 1997.
|
|
|
(F)
|
The
Company's Annual Report on Form 10-KSB for the period ended December
31,
1996.
|
|
|
(G)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended September
30, 1995.
|
|
|
(I)
|
The
Company's Annual Report on Form 10-KSB for the period ended December
31,
1997.
|
|
|
(K)
|
Schedule
13D filed November 3, 1997, by United Breweries of America, Inc.
and Vijay
Mallya.
|
|
|
(L)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended June
30,
1998.
|
|
|
(N)
|
The
Company's Quarterly Report on Form 10-QSB for the period ended June
30,
1999.
|
|
|
(O)
|
Amendment
No. 5 to Schedule 13D filed September 15, 1999, by United Breweries
of
America, Inc. and Vijay Mallya.
|
|
|
(P)
|
Amendment
No. 6 to Schedule 13D filed May 12, 2000, by United Breweries of
America,
Inc. and Vijay Mallya.
|
|
|
(Q)
|
Amendment
No. 7 to Schedule 13D filed February 22, 2001, by United Breweries
of
America, Inc. and Vijay Mallya.
|
|
|
(R)
|
Amendment
No. 8 to Schedule 13D filed August 22, 2001, by United Breweries
of
America, Inc and Vijay Mallya.
|
|
|
(S)
|
The
Company's Current Report on Form 8-K filed as of February 19,
2002.
|
|
|
(T)
|
The
Company's Annual Report on Form 10-KSB for the period ended December
31,
2001.
|
|
|
(U)
|
Amendment
No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of
America, Inc. and Vijay Mallya.
|
|
|
(V)
|
The
Company's Annual Report on Form 10-KSB for the year ended December
31,
2003.
|
|
|
(W)
|
Amendment
No. 10 to Schedule 13D filed August 18, 2003 by United Breweries of
America, Inc. and Dr. Vijay Mallya.
|
|
|
(X)
|
Amendment
No. 11 to Schedule 13D, jointly filed by United Breweries of America,
Inc.
and Dr. Vijay Mallya on August 16,
2004.
|
|
|
(Z)
|
The
Company's Quarterly Report on Form 10-Q for the period ended September
30,
2004.
|
|
|
(BB)
|
The
Company's Current Report on Form 8-K filed as of March 8,
2005.
|
|
|
(DD)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June
30,
2005.
|
|
|
(EE)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June 30,
2006.
|
|
|
(FF)
|
The
Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2006.
|
|
|
(GG)
|
The
Company's Quarterly Report on Form 10-Q for the period ended June
30,
2007.
|
|
(b)
|
Exhibits
Attached
The following Exhibits are attached to this Annual Report on Form
10-K:
|
10.91
Employment Agreement of Yashpal Singh (Management Contract)
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a).
|
|
|
32.1
|
Certification
of Chief Executive Officer Pursuant to U.S.C.
1350.
|
|
|
32.2
|
Certification
of Chief Financial Officer Pursuant to U.S.C.
1350.
|
|
(c)
|
Excluded
Financial Statements
.
None.
|
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
(Registrant)
MENDOCINO BREWING COMPANY, INC.
|
|
|
|
|
|
By:
|
/s/
YASHPAL
SINGH
|
|
|
Yashpal
Singh
Its
President and Chief Executive Officer
|
|
|
|
|
|
Date:
April 14, 2008
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated.
|
|
|
|
|
|
(Registrant)
MENDOCINO BREWING COMPANY, INC.
|
|
|
|
|
|
By:
|
|
|
|
Dr.
Vijay Mallya
Director
and Chairman of the Board
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
YASHPAL
SINGH
|
|
|
Yashpal
Singh
Its
President, Director and Chief Executive Officer
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
SCOTT
R. HELDFOND
|
|
|
Scott
R. Heldfond, Director
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
JEROME
G. MERCHANT
|
|
|
Jerome
G. Merchant, Director
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
N.
MAHADEVAN
|
|
|
N.
Mahadevan
Its
Secretary and Chief Financial Officer
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
H.
MICHAEL
LAYBOURN
|
|
|
H.
Michael Laybourn, Director
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
KENT
PRICE
|
|
|
Kent
Price, Director
|
|
|
|
|
|
Date:
April 14, 2008
|
|
|
|
|
|
|
By:
|
/s/
SURY RAO PALAMAND
|
|
|
Sury
Rao Palamand, Director
|
|
|
|
|
|
Date:
April 14, 2008
|
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER
31, 2007 AND 2006
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED
DECEMBER
31, 2007 AND 2006
CONTENTS
|
Reports
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Notes
to Financial Statements
|
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
Mendocino
Brewing Company, Inc.
Ukiah,
California
We
have
audited the accompanying consolidated balance sheets of Mendocino Brewing
Company, Inc. (“MBC”) as of December 31, 2007 and 2006, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for the years ending December 31, 2007, 2006
and 2005. These consolidated financial statements are the responsibility
of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statement is free of material misstatement. The Company is not required to
have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in
the
circumstances, but not for expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MBC, Inc.
as of
December 31, 2007 and 2006 and the consolidated results of their operations
and
their consolidated cash flows for the years ending December 31, 2007, 2006
and
2005, in conformity with accounting principles generally accepted in the United
States of America.
PMB
Helin Donovan, LLP
San
Francisco, California
March
28,
2008
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
BALANCE SHEETS
AS
OF DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
339,700
|
|
$
|
345,900
|
|
|
Accounts
receivable, net of allowance for
doubtful
accounts of $52,600 and $60,500, respectively
|
|
|
7,411,400
|
|
|
7,818,300
|
|
|
Inventories
|
|
|
1,461,200
|
|
|
1,329,500
|
|
|
Prepaid
expenses
|
|
|
585,800
|
|
|
671,400
|
|
|
Total
Current Assets
|
|
|
9,798,100
|
|
|
10,165,100
|
|
|
Property
and Equipment
(net
of accumulated depreciation)
|
|
|
13,218,300
|
|
|
13,446,000
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
313,600
|
|
|
302,300
|
|
|
Intangibles,
(net of amortization)
|
|
|
47,600
|
|
|
53,900
|
|
|
Total
Other Assets
|
|
|
361,200
|
|
|
356,200
|
|
|
Total
Assets
|
|
$
|
23,377,600
|
|
$
|
23,967,300
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Secured
lines of credit
|
|
$
|
3,801,400
|
|
$
|
3,934,300
|
|
|
Accounts
payable
|
|
|
7,167,800
|
|
|
7,164,300
|
|
|
Accrued
liabilities
|
|
|
1,309,100
|
|
|
1,312,800
|
|
|
Current
maturities of notes to related parties
|
|
|
119,100
|
|
|
117,500
|
|
|
Current
maturities of obligation under long-term debt
|
|
|
254,400
|
|
|
236,500
|
|
|
Current
maturities of obligation under capital lease
|
|
|
69,500
|
|
|
83,100
|
|
|
Total
Current Liabilities
|
|
|
12,721,300
|
|
|
12,848,500
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Notes
to related parties including accrued
interest
of $1,000,900 and $818,000, respectively
|
|
|
3,392,500
|
|
|
3,321,000
|
|
|
Long
term debt, less current maturities
|
|
|
3,972,600
|
|
|
4,226,700
|
|
|
Obligations
under capital leases, less current maturities
|
|
|
49,800
|
|
|
65,600
|
|
|
Total
Long-Term Liabilities
|
|
|
7,414,900
|
|
|
7,613,300
|
|
|
Total
Liabilities
|
|
|
20,136,200
|
|
|
20,461,800
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock, Series A, no par value, with
liquidation
preference of $1 per share; 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,
11,991,686
and 11,628,174 shares issued and outstanding
|
|
|
14,902,300
|
|
|
14,815,300
|
|
|
Accumulated
comprehensive income
|
|
|
157,300
|
|
|
124,400
|
|
|
Accumulated
deficit
|
|
|
(12,045,800
|
)
|
|
(11,661,800
|
)
|
|
Total
Stockholders' Equity
|
|
|
3,241,400
|
|
|
3,505,500
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
23,377,600
|
|
$
|
23,967,300
|
|
The
accompanying notes are an integral part of
these financial statements.
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR
THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Sales
|
|
$
|
37,774,500
|
|
$
|
32,948,900
|
|
$
|
31,927,300
|
|
|
Less
excise tax
|
|
|
956,800
|
|
|
673,500
|
|
|
635,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
|
36,817,700
|
|
|
32,275,400
|
|
|
31,291,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
26,342,800
|
|
|
23,063,300
|
|
|
21,754,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
10,474,900
|
|
|
9,212,100
|
|
|
9,537,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Retail
operating
|
|
|
110,200
|
|
|
97,200
|
|
|
102,400
|
|
|
Marketing
|
|
|
5,561,600
|
|
|
5,011,500
|
|
|
6,216,200
|
|
|
General
and administrative
(1)
|
|
|
4,192,100
|
|
|
4,548,700
|
|
|
3,735,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
9,863,900
|
|
|
9,657,400
|
|
|
10,054,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) from Operations
|
|
|
611,000
|
|
|
(445,300
|
)
|
|
(516,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
Miscellaneous
income
|
|
|
68,400
|
|
|
89,900
|
|
|
60,600
|
|
|
Profit
(loss) on sale of equipment, net
|
|
|
(6,800
|
)
|
|
5,000
|
|
|
(6,000
|
)
|
|
Interest
expense
|
|
|
(1,049,600
|
)
|
|
(1,077,700
|
)
|
|
(978,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Other Income (Expense)
|
|
|
(988,000
|
)
|
|
(982,800
|
)
|
|
(923,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) before Income Taxes
|
|
|
(377,000
|
)
|
|
(1,428,100
|
)
|
|
(1,440,300
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for (Benefit from) Income Taxes
|
|
|
7,000
|
|
|
2,500
|
|
|
(125,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
|
|
(384,000
|
)
|
|
(1,430,600
|
)
|
|
(1,314,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income (Loss)
Foreign
currency translation adjustment
|
|
|
32,900
|
|
|
(6,000
|
)
|
|
(63,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
|
$
|
(351,100
|
)
|
$
|
(1,436,600
|
)
|
$
|
(1,378,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) per
common
share (basic and diluted)
|
|
$
|
(0.03
|
)
|
$
|
(0.12
|
)
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
(basic and diluted)
|
|
$
|
11,855,369
|
|
$
|
11,512,479
|
|
$
|
11,472,213
|
|
(1)
Includes $103,000, $32,000, and $44,000 of stock based compensation, for 2007,
2006, and 2005, respectively..
The
accompanying notes are an integral part of these financial
statements.
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005
|
|
|
Series
A
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
Common
|
|
|
|
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 accrued compensation
|
|
|
-
|
|
|
-
|
|
|
207,040
|
|
|
98,700
|
|
|
-
|
|
|
-
|
|
|
98,700
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,314,700
|
)
|
|
(1,314,700
|
)
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(63,900
|
)
|
|
-
|
|
|
(63,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
227,600
|
|
$
|
227,600
|
|
|
11,473,914
|
|
$
|
14,747,300
|
|
$
|
130,400
|
|
$
|
(10,231,200
|
)
|
$
|
4,874,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for accrued compensation
|
|
|
-
|
|
|
-
|
|
|
154,260
|
|
|
68,000
|
|
|
-
|
|
|
-
|
|
|
68,000
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,430,600
|
)
|
|
(1,430,600
|
)
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,000
|
)
|
|
-
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
227,600
|
|
$
|
227,600
|
|
|
11,628,174
|
|
$
|
14,815,300
|
|
$
|
124,400
|
|
$
|
(11,661,800
|
)
|
$
|
3,505,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for compensation
|
|
|
-
|
|
|
-
|
|
|
363,512
|
|
|
87,000
|
|
|
-
|
|
|
-
|
|
|
87,000
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(384,000
|
)
|
|
(384,000
|
)
|
|
Currency
translation adjustment
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
32,900
|
|
|
-
|
|
|
32,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
|
227,600
|
|
$
|
227,600
|
|
|
11,991,686
|
|
$
|
14,902,300
|
|
$
|
157,300
|
|
$
|
(12,045,800
|
)
|
$
|
3,241,400
|
|
The
accompanying notes are an integral part of these financial
statements.
MENDOCINO
BREWING COMPANY, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDING DECEMBER 31, 2007, 2006 AND 2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(384,000
|
)
|
$
|
(1,430,600
|
)
|
$
|
(1,314,700
|
)
|
|
Adjustments
to reconcile net income
(loss)
to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,097,800
|
|
|
1,017,800
|
|
|
903,700
|
|
|
Provision
for doubtful accounts
|
|
|
(8,300
|
)
|
|
-
|
|
|
10,200
|
|
|
Loss
(gain) on sale of assets
|
|
|
6,800
|
|
|
(5,000
|
)
|
|
6,000
|
|
|
Interest
accrued on related party notes
|
|
|
182,900
|
|
|
181,200
|
|
|
142,100
|
|
|
Non-cash
compensation
|
|
|
103,000
|
|
|
32,000
|
|
|
44,000
|
|
|
Deferred
income tax
|
|
|
-
|
|
|
-
|
|
|
(122,900
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable
|
|
|
463,300
|
|
|
73,500
|
|
|
702,600
|
|
|
(Increase)
decrease in inventories
|
|
|
(131,700
|
)
|
|
(178,100
|
)
|
|
34,000
|
|
|
(Increase)
decrease in prepaid expenses
|
|
|
92,400
|
|
|
(71,400
|
)
|
|
(229,800
|
)
|
|
(Increase)
decrease in deposits and other assets
|
|
|
(25,700
|
)
|
|
273,700
|
|
|
59,400
|
|
|
Increase
in accounts payable
|
|
|
(73,400
|
)
|
|
1,039,300
|
|
|
47,400
|
|
|
Increase
(decrease) in accrued liabilities
|
|
|
(30,700
|
)
|
|
(541,700
|
)
|
|
(464,200
|
)
|
|
Decrease
in income taxes payable
|
|
|
-
|
|
|
-
|
|
|
(127,400
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,292,400
|
|
|
390,700
|
|
|
(309,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property, equipment and leasehold improvements
|
|
|
(730,400
|
)
|
|
(988,200
|
)
|
|
(600,900
|
)
|
|
Proceeds
from sale of fixed assets
|
|
|
35,800
|
|
|
41,400
|
|
|
77,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities:
|
|
|
(694,600
|
)
|
|
(946,800
|
)
|
|
(523,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowing (repayment) on line of credit
|
|
|
(167,600
|
)
|
|
(148,200
|
)
|
|
706,400
|
|
|
Borrowings
on long term debt
|
|
|
-
|
|
|
4,180,900
|
|
|
-
|
|
|
Repayment
on long-term debt
|
|
|
(236,200
|
)
|
|
(2,628,300
|
)
|
|
(285,300
|
)
|
|
Borrowings
on related party debt
|
|
|
-
|
|
|
-
|
|
|
400,000
|
|
|
Repayment
on related party debt
|
|
|
(120,100
|
)
|
|
(110,600
|
)
|
|
(91,000
|
)
|
|
Proceeds
from notes payable
|
|
|
-
|
|
|
350,000
|
|
|
-
|
|
|
Repayment
of notes payable
|
|
|
-
|
|
|
(926,200
|
)
|
|
-
|
|
|
Payments
on obligations under long term leases
|
|
|
(132,700
|
)
|
|
(168,800
|
)
|
|
(142,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities:
|
|
|
(656,600
|
)
|
|
548,800
|
|
|
587,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
|
|
52,600
|
|
|
105,500
|
|
|
(32,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash
|
|
|
(6,200
|
)
|
|
98,200
|
|
|
(278,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
345,900
|
|
|
247,700
|
|
|
526,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
339,700
|
|
$
|
345,900
|
|
$
|
247,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
866,700
|
|
$
|
896,500
|
|
$
|
836,400
|
|
|
Income
taxes
|
|
$
|
7,000
|
|
$
|
2,500
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for
prior
year compensation
|
|
$
|
32,000
|
|
$
|
68,000
|
|
$
|
98,700
|
|
|
Seller
financed equipment
|
|
$
|
112,200
|
|
$
|
44,600
|
|
$
|
216,400
|
|
The
accompanying notes are an integral part of these financial
statements.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting
Policies
Description
of Operations
Mendocino
Brewing Company, Inc., ("the Company" or "MBC"), has operating subsidiaries,
Releta Brewing Company, ("Releta"), and United Breweries International, Limited
(UK), ("UBIUK"). In the United States, MBC and its subsidiary, Releta, operate
two breweries that produce beer and malt beverages for the specialty "craft"
segment of the beer market. The breweries are located in Ukiah, California
and
Saratoga Springs, New York. The Company also owns and operates a brewpub and
gift store located in Hopland, California. The majority of US sales for
Mendocino Brewing Company are in California. The Company brews several brands,
of which Red Tail Ale is the flagship brand. In addition, the Company performs
contract brewing for several other brands, and MBC holds the license to
distribute Kingfisher Lager in the US.
The
Company's UK subsidiary, UBIUK, is a holding company for UBSN Limited. UBSN
is a
distributor of alcoholic beverages, mainly Kingfisher Lager, in the United
Kingdom and Europe. The distributorship is located in Faversham, Kent in the
United Kingdom.
Principles
of Consolidation
The
consolidated financial statements present the accounts of Mendocino Brewing
Company, Inc., and its wholly-owned subsidiaries, Releta Brewing Company, LLC,
and UBIUK. All material inter-company balances, profits and transactions have
been eliminated.
Basis
of Presentation and Organization
The
financial statements for the fiscal years ended December 31, 2007, 2006 and
2005, have been prepared in accordance with accounting principles generally
accepted in the United States. The financial statements and notes are
representations of the management and the Board of Directors, who are
responsible for their integrity and objectivity.
Cash
and Cash Equivalents, Short- and Long-Term Investments
For
purposes of cash flows, the Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents, those
with original maturities not greater than three months and current maturities
less than twelve months from the balance sheet date are considered short-term
investments, and those with maturities greater than twelve months from the
balance sheet date are considered long-term investments.
Concentration
Financial
instruments that potentially subject the Company to significant concentration
of
credit risk consist primarily of cash and cash equivalents, and accounts
receivable. Substantially all of the Company's cash and cash equivalents are
deposited with large commercial banks in the US and the UK. Accounts receivable
are generally unsecured and customers are subject to an initial credit review
and ongoing monitoring.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Trade
Accounts Receivable and Allowance for Doubtful Accounts
Trade
accounts receivable are stated at the invoiced amount and are the amount the
Company expects to collect. The allowance for doubtful accounts is the Company’s
best estimate of the amount of probable credit losses in the Company’s existing
accounts receivable; however, changes in circumstances relating to accounts
receivable may result in a requirement for additional allowances in the future.
Management considers the following factors when determining the collectibility
of specific customer accounts: customer credit-worthiness, past transaction
history with the customer, current economic industry trends and changes in
customer payment terms. Past due balances over 90 days and other higher risk
amounts are reviewed individually for collectibility. If the financial condition
of the Company's customers were to deteriorate, adversely affecting their
ability to make payments, additional allowances would be required. Based on
management's assessment, the Company provides for estimated uncollectible
amounts through a charge to earnings and a credit to a valuation allowance.
Balances that remain outstanding after the Company has used reasonable
collection efforts are written off through a charge to the valuation allowance
and a credit to accounts receivable.
Allowance
for Doubtful Accounts
The
Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of accounts receivable including the current credit-worthiness
of
each customer. If the financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. As of December 31, 2007, the Company
maintained a reserve of $52,600 of potentially doubtful accounts receivable.
Bad
debt expenses totaled $393,200, $679,300, and $49,100 for the years ended
December 31, 2007, 2006, and 2005 respectively.
Inventories
Inventories
are stated at the lower of average cost or market (net realizable
value).
Property
and Equipment
Property
and equipment are stated at cost and depreciated or amortized using
straight-line method over the assets' estimated useful lives. Leasehold
improvements are amortized over the shorter of the life of the related asset
or
the life of the lease. The Company uses other depreciation methods (generally,
accelerated depreciation methods) for tax purposes where appropriate. Costs
of
maintenance and repairs are charged to expense as incurred; significant renewals
and betterments are capitalized. When property and equipment are retired, sold,
or otherwise disposed of, the asset’s carrying amount and related accumulated
depreciation are removed from the accounts and any gain or loss is included
in
operations.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Property
and Equipment (continued)
Assets
Held under Capital Leases
Assets
held under capital leases are recorded at the lower of the net present value
of
the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
Estimated
useful lives of property and equipment are as follows:
|
Building
|
|
40
years
|
|
Machinery
and equipment
|
|
3
-
40 years
|
|
Equipment
under capital lease
|
|
3
-
20 years
|
|
Leasehold
improvements
|
|
7
-
20 years
|
|
Vehicles
|
|
2
-
5 years
|
|
Furniture
and fixtures
|
|
5
-
10 years
|
Impairment
of Long-Lived Assets
The
Company assesses the impairment of its long-lived assets periodically in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") 144, "Accounting for the Impairment and Disposal of Long-Lived Assets".
The Company reviews the carrying value of property and equipment for impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable from the estimated future cash flows expected to result
from its use and eventual disposition. In cases where undiscounted expected
future cash flows are less than the carrying value, an impairment loss is
recognized equal to an amount by which the carrying value exceeds the fair
value
of assets. The factors considered by management in performing this assessment
include current operating results, trends, and prospects, as well as the effects
of obsolescence, demand, competition, and other economic factors. Long-lived
assets that management commits to sell or abandon are reported at the lower
of
carrying amount or fair value less cost to sell.
Intangibles
Intangibles
consist of, trade names, trademarks, and other intangibles. Purchased trademarks
are initially measured based on their fair values.
Trademarks
include purchased trademarks, brand names, logos or other recognizable symbols
associated with the Company's products. Trademarks are not amortized because
they have indefinite lives.
Intangibles
that are amortized are deferred financing costs. Assets determined to have
indefinite lives are no longer amortized in accordance with SFAS No. 142,
Goodwill and other Intangibles, but are tested for impairment on an annual
basis. The carrying amount of intangibles not subject to amortization is $47,600
for December 31, 2007 and 2006.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Deferred
Financing Costs
Costs
relating to obtaining financing are capitalized and amortized over the term
of
the related debt. Deferred financing costs were $311,300, and the related
accumulated amortization at December 31, 2007 and 2006 was $82,600 and $32,700,
respectively. Amortization of deferred financing costs charged to operations
was
$49,900 for the year ended December 31, 2007 and $54,300 for the year ended
December 31, 2006 and $2,700 for the year December 31, 2005. The Company will
continue to amortize these fees until 2011. When a loan is paid in full, any
unamortized financing costs are removed from the related accounts and charged
to
operations.
Impairment
of Intangible Assets
The
Company evaluates the recoverability of identifiable intangible assets whenever
events or changes in circumstances indicate that an intangible asset's carrying
amount may not be recoverable. Such circumstances could include, but are not
limited to: (1) a significant decrease in the market value of an asset, (2)
a
significant adverse change in the extent or manner in which an asset is used,
or
(3) an accumulation of costs significantly in excess of the amount originally
expected for the acquisition of an asset. The Company measures the carrying
amount of the asset against the estimated undiscounted future cash flows
associated with it. Should the sum of the expected future net cash flows are
less than the carrying value of the asset being evaluated, an impairment loss
would be recognized. The impairment loss would be calculated as the amount
by
which the carrying value of the asset exceeds its fair value. The fair value
is
measured based on quoted market prices, if available. If quoted market prices
are not available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash flows.
The
evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and
estimated amounts. During the years ended December 31, 2007, 2006 and 2005,
the
Company recorded no impairment losses related to an intangible
asset.
Concentration
of Credit Risks
Financial
instruments that potentially subject the Company to credit risk consist
principally of trade receivables, cash deposits in excess of FDIC limits, and
assets located in the United Kingdom. The Company's cash deposits are placed
with major financial institutions in the US and UK.
Wholesale
distributors account for substantially all accounts receivable; therefore,
this
risk concentration is limited due to the number of distributors and the laws
regulating the financial affairs of distributors of alcoholic beverages. The
Company has approximately $307,700 in cash deposits and $5,768,000 of accounts
receivable due from customers located in the United Kingdom as of December
31,
2007.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Income
Taxes
The
Company accounts for its income taxes using the Financial Accounting Standards
Board Statements of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires the establishment of a deferred tax asset or
liability for the recognition of future deductible or taxable amounts and
operating loss and tax credit carryforwards. Deferred tax expense or benefit
is
recognized as a result of timing differences between the recognition of assets
and liabilities for book and tax purposes during the year.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are recognized for
deductible temporary differences and operating loss, and tax credit
carryforwards. A valuation allowance is established to reduce the deferred
tax
asset if it is "more likely than not" that the related tax benefits will not
be
realized.
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48, "Accounting for Uncertainty in Income Taxes.” The Interpretation requires
that realization of an uncertain income tax position must be estimated as "more
likely than not" (i.e., greater than 50% likelihood of receiving a benefit)
before it can be recognized in the financial statements. Further, the
Interpretation requires the recognition of tax benefits recorded in the
financial statements to be based on the amount most likely to be realized
assuming a review by tax authorities having all relevant information. The
Interpretation also clarifies the financial statement classification of
tax-related penalties and interest and sets forth new disclosures regarding
unrecognized tax benefits. MBC adopted the Interpretation in the first quarter
2007.
Revenue
Recognition
The
Company recognizes revenue from the brewing and distribution operations in
accordance with SAB 104 when the product is shipped. The Company recognizes
revenue from product sales, net of discounts.
The
Company recognizes revenue only when all of the following criteria have been
met:
|
|
·
|
Persuasive
evidence of an arrangement exists;
|
|
|
·
|
Delivery
has occurred or services have been
rendered;
|
|
|
·
|
The
fee for the arrangement is fixed or determinable;
and
|
|
|
·
|
Collectibility
is reasonably assured.
|
"Persuasive
Evidence of an Arrangement" -
The
Company documents all terms of an arrangement in a written contract or purchase
order signed by the customer prior to recognizing revenue.
"Delivery
Has Occurred or Services Have Been Performed" -
The
Company delivers the products prior to recognizing revenue or performs services
as per contractual terms. Product is considered delivered upon delivery to
a
customer's designated location and services considered performed upon completion
of Company's contractual obligations.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Revenue
Recognition (continued)
"The
Fee for the Arrangement is Fixed or Determinable" -
Prior to
recognizing revenue, an amount is either fixed or determinable under the terms
of the written contract. The price is negotiated at the outset of the
arrangement and is not subject to refund or adjustment during the initial term
of the arrangement.
"Collectibility
is Reasonably Assured" -
The
Company determines that collectibility is reasonably assured prior to
recognizing revenue. Collectibility is assessed on a customer-by-customer basis
based on criteria outlined by management. The Company does not enter into
arrangements unless collectibility is reasonably assured at the outset. Existing
customers are subject to ongoing credit evaluations based on payment history
and
other factors. If it is determined during the arrangement that collectibility
is
not reasonably assured, revenue is recognized on a cash basis.
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 reports these items on the income statement as a reduction
in revenue and as a corresponding reduction in marketing and selling expenses.
Revenues
from the brewpub and gift store are recognized when sales have been
completed.
Excise
Taxes
The
federal government levies excise taxes on the sale of alcoholic beverages,
including beer. For brewers producing less than 2.0 million barrels of beer
per
calendar year, the federal excise tax is $7 per barrel on the first 60,000
barrels of beer removed for consumption or sale during a calendar year, and
$18
per barrel for each barrel in excess of 60,000. Individual states also impose
excise taxes on alcoholic beverages in varying amounts, which have also been
subject to change. Sales as presented in the Company’s statements of operations,
reflect the amount invoiced to the Company’s wholesalers and other customers.
Excise taxes due to federal and state agencies are not collected from the
Company’s customers, but rather are the responsibility of the Company. Net
sales, as presented in the Company’s statements of operations, are reduced by
applicable federal and state excise taxes.
Discounts
To
further promote retail bottled product sales and in response to local
competitive conditions, the Company regularly offers “post-offs,” or price
discounts, to distributors in most of its markets. Distributors and retailers
usually participate in the cost of these price discounts.
Seasonality
Sales
of
the Company’s products are somewhat seasonal, with the first and fourth quarters
historically being the slowest and the rest of the year generating stronger
sales. The volume of sales may also be affected by 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.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Taxes
Collected From Customers
Taxes
collected from customers and remitted to tax authorities are state and federal
excise taxes on beer shipments. Excise taxes are shown in a separate line item
in the consolidated statement of operations as reduction of gross sales. Sales
taxes collected from customers are recognized as a liability, with the liability
subsequently reduced when the taxes are remitted to the tax authority. Total
sales taxes collected from customers and remitted to tax authorities were not
material in 2007, 2006 and 2005.
Delivery
Costs
In
accordance with EITF 00-10, "Accounting for Shipping and Handling Fees and
Costs," the company reports pass-through freight costs on beer shipped to
independent beer wholesalers in cost of sales. Reimbursements of these costs
by
wholesalers are reported in sales.
Non-pass-through
costs incurred by the Company to deliver beer to customers are included in
marketing, distribution and administrative expenses. These costs are considered
marketing related because in addition to product delivery, drivers provide
marketing and other customer service functions to customers including product
display, shelf space management, distribution of promotional materials, and
product rotation.
Shipping
costs included in marketing expense totaled $927,300, $879,100, and $929,100
for
the years ended December 31, 2007, 2006, and 2005, respectively.
Stock-Based
Compensation
Prior
to
the adoption of Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment,” (“SFAS 123(R)”), the Company accounted for
stock-based awards to employees and directors using the intrinsic value method
in accordance with Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method that
was used to account for stock-based awards prior to January 1, 2006, which
had
been allowed under the original provisions of Statement 123, no stock
compensation expense had been recognized in the Company’s statement of
operations as the exercise price of the Company’s stock options granted to
employees and directors equaled the fair market value of the underlying stock
at
the date of grant.
On
January 1, 2006, the Company adopted SFAS 123(R) which requires the measurement
and recognition of compensation expense for all share-based awards made to
employees and directors, including employee stock options and employee stock
purchases, based on estimated fair values. SFAS 123(R) supersedes the Company’s
previous accounting for share-based awards under APB 25 for periods beginning
in
2006. In March 2005, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The Company has
applied the provisions of SAB 107 in its adoption of SFAS 123(R). The Company
adopted SFAS 123(R) using the modified prospective transition method, which
requires the application of the accounting standard as of the beginning of
the
Company’s current year. The Company’s financial statements as of and for the
year ended December 31, 2007 reflect the impact of SFAS 123(R). In accordance
with the modified prospective transition method, the Company’s financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS 123(R).
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Stock-Based
Compensation (continued)
Stock
compensation expense recognized during the period is based on the value of
share-based awards that are expected to vest during the period. Stock
compensation expense recognized in the Company’s statement of operations for
2006 includes compensation expense related to share-based awards granted prior
to January 1, 2006 that vested during the current period based on the grant
date
fair value estimated in accordance with the pro forma provisions of SFAS 123.
Stock compensation expense during the current period also includes compensation
expense for the share-based awards granted subsequent to January 1, 2006 based
on the grant date fair value estimated in accordance with the provisions of
SFAS
123(R). As stock compensation expense recognized in the statement of operations
is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
the
time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. In the Company’s pro forma information
required under SFAS 123 for the periods prior to 2006, forfeitures were
estimated and factored into the expected term of the options.
The
Company’s determination of estimated fair value of share-based awards utilizes
the Black-Scholes option-pricing model. The Black-Scholes model is affected
by
the Company’s stock price as well as assumptions regarding a number of highly
complex and subjective variables. These variables include, but are not limited
to; the Company’s expected stock price volatility over the term of the awards,
and actual and projected employee stock option exercise behaviors.
In
2007,
2006 and 2005, the Company did not grant any options or warrants, and all
options outstanding were vested and no stock options were outstanding as of
December 31, 2007.
Stock-based
Compensation - Non-employees
The
company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No 123(R) and Emerging Issues Task Force (“EITF”) No
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services.
Basic
and Diluted Earnings (Loss) per Share
In
accordance with SFAS No. 128, "Earnings Per Share," the basic earnings (loss)
per share is computed by dividing the loss attributable to common stockholders
by the weighted average number of common shares outstanding during the period.
Basic net loss per share excludes the dilutive effect of stock options or
warrants and convertible notes. Diluted net loss per share was the same as
basic
net loss per share for 2007, 2006 and 2005, since the effect of any potentially
dilutive securities is excluded, as they are anti-dilutive due to the Company's
net losses. The following table sets forth the computation of basic and diluted
net loss per common share:
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Basic
and Diluted Earnings (Loss) per Share (continued)
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Net
income (loss) - available to common shareholders
|
|
$
|
(384,000
|
)
|
$
|
(1,430,600
|
)
|
$
|
(1,314,700
|
)
|
|
Weighted
average common shares outstanding: Basic and diluted
|
|
|
11,855,369
|
|
|
11,512,479
|
|
|
11,472,213
|
|
|
Total
shares outstanding at end of period
|
|
|
11,991,686
|
|
|
11,628,174
|
|
|
11,473,914
|
|
|
Net
income (loss) per common share: Basic and diluted
|
|
$
|
(0.03
|
)
|
$
|
(0.12
|
)
|
$
|
(0.11
|
)
|
The
potential shares, which are excluded from the determination of basic and diluted
net loss per share as their effect is anti-dilutive, are as
follows:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Options
to purchase common stock
|
|
|
-
|
|
|
240,385
|
|
|
240,385
|
|
|
Potential
equivalent shares excluded
|
|
|
-
|
|
|
240,385
|
|
|
240,385
|
|
Foreign
Currency Translation
Financial
statements of foreign subsidiaries, located in the United Kingdom, where the
local currency, UK Pound Sterling, is the functional currency are translated
into U.S. dollars using period-end exchange rates for assets and liabilities
and
average exchange rates during the period for revenues and expenses. Cumulative
translation adjustments associated with net assets or liabilities are reported
in non-owner changes in equity. Any exchange rate gains or losses related
to foreign currency transactions are recognized in the income statement as
incurred, in the same financial statement caption as the underlying transaction,
and are not material for any year shown.
Cash
at
UBIUK was translated at exchange rates in effect at December 31, 2007, 2006
and
2005, and its cash flows were translated at the average exchange rates for
the
years then ended. Changes in cash resulting from the translations are presented
as a separate item in the statements of cash flows.
Use
of
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America includes having the Company
make estimates and assumptions affecting the reported amounts of assets,
liabilities, revenues and expenses, and disclosure of contingent assets and
liabilities. The amounts estimated could differ from actual results. Significant
estimates include, allowance for bad debts, depreciation and amortization
periods, and the future utilization of deferred tax assets. The Company has
determined that deferred tax assets associated with net operating loss
carryforwards may expire prior to utilization. The Company has placed a
valuation allowance on these assets.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Advertising
Advertising
costs are expensed as incurred and were $1,369,900, $1,094,100 and $2,239,700
for the years ended December 31, 2007, 2006, and 2005.
Fair
Value of Financial Instruments
The
carrying value of certain of the financial instruments, including accounts
receivable, other current assets, accounts payable and accrued expenses,
approximate fair value due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms, the carrying
value of short and long term notes payable approximate fair value.
Comprehensive
Income (Loss)
Comprehensive
income (loss) is composed of the Company's net income (loss) and changes in
equity from non-stockholder sources. The accumulated balances of these
non-stockholder sources are reflected as a separate item in the equity section
of the balance sheet.
Reportable
Segments
The
Company manages its operations through three business segments: brewing
operations, tavern and tasting room operations (domestic) and distributor
operations (international). The international business segment sells the
Company's products outside the U.S. The Company evaluates performance based
on
net operating profit. Where applicable, portions of the administrative function
expenses are allocated between the operating segments. The operating segments
do
not share manufacturing or distribution facilities. In the event any materials
and/or services are provided to one operating segment by the other, the
transaction is valued according to the company's transfer policy, which
approximates market price. The costs of operating the manufacturing plants
are
captured discretely within each segment. The Company's property, plant and
equipment, inventory, and accounts receivable are captured and reported
discretely within each operating segment.
Reclassifications
Certain
amounts in the prior periods presented have been reclassified to conform to
the
current period financial statement presentation. These reclassifications have
no
effect on previously reported net loss.
Recent
Accounting Pronouncements
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair value
accounting but does not affect existing standards which require assets or
liabilities to be carried at fair value. Under SFAS 159, a company may elect
to
use fair value to measure accounts and loans receivable, available-for-sale
and
held-to-maturity securities, equity method investments, accounts payable,
guarantees and issued debt. Other eligible items include firm commitments for
financial
instruments
that otherwise would not be recognized at inception and non-cash warranty
obligations where a warrantor is permitted to pay a third party to provide
the
warranty goods or services. If the use of fair value is elected, any upfront
costs and fees related to the item must be recognized in earnings and cannot
be
deferred, e.g., debt issue costs. The fair value election is irrevocable and
generally made on an instrument-by-instrument basis, even if a company has
similar instruments that it elects not to measure based on fair value. At the
adoption date, unrealized gains and losses on existing items for which fair
value has been elected are reported as a cumulative adjustment to beginning
retained earnings. Subsequent to the adoption of SFAS 159, changes in fair
value
are recognized in earnings. SFAS 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by the Company in the
first quarter of fiscal 2009. MBC is currently is determining whether fair
value
accounting is appropriate for any of its eligible items and cannot estimate
the
impact, if any, which SFAS 159 will have on its consolidated results of
operations and financial condition.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Description
of Operations and Summary of Significant Accounting Policies
(continued)
Recent
Accounting Pronouncements (continued)
In
December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141 (revised 2007), or SFAS No. 141(R), Business
Combinations. Under SFAS No. 141(R), an entity is required to
recognize the assets acquired, liabilities assumed, contractual contingencies,
and contingent consideration at their fair value on the acquisition date. It
further requires that acquisition-related costs be recognized separately from
the acquisition and expensed as incurred, restructuring costs generally be
expensed in periods subsequent to the acquisition date, and changes in
accounting for deferred tax asset valuation allowances and acquired income
tax
uncertainties after the measurement period impact income tax expense. In
addition, acquired in-process research and development, or IPR&D is
capitalized as an intangible asset and amortized over its estimated useful
life. We are required to adopt the provisions of SFAS No. 141(R)
beginning with our fiscal quarter ending April 26, 2009. SFAS 141(R)
is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. Early adoption is not
permitted. Generally, the effect of SFAS 141(R) will depend on future
acquisitions.
Also
in
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes new accounting
and reporting standards for noncontrolling interest (minority interest) in
a
subsidiary, provides guidance on the accounting for and reporting of the
deconsolidation of a subsidiary, and increases transparency through expanded
disclosures. Specifically, SFAS 160 requires the recognition of minority
interest as equity in the consolidated financial statements and separate from
the parent company’s equity. It also requires consolidated net earnings in the
consolidated statement of earnings to include the amount of net earnings
attributable to minority interest. This statement will be effective for the
Company as of the beginning of fiscal year 2009. Early adoption is not
permitted. We are presently evaluating the impact of the adoption of SFAS 160
and believe there will be no material impact on our consolidated financial
statements.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force ("EITF"), the American Institute of Certified Public
Accountants ("AICPA"), and the SEC did not or are not believed by management
to
have a material impact on the Company's present or future financial
statements.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
2.
Liquidity
and Management Plans
At
December 31, 2007, the Company had cash and cash equivalents of $339,700, a
working capital deficit of $2,923,200 and an accumulated deficit of $12,045,800.
Additionally, the Company has a history of past losses as infrastructure and
marketing costs were incurred in advance of obtaining customers. However the
Company did have income from operations of $611,000 for the year 2007, and
cash
from operations of $1,292,400 for the year 2007.
Management
has taken several actions to ensure that the Company will have sufficient cash
for its working capital needs through December 31, 2008, including reductions
in
discretionary expenditures. In addition, Company’s majority shareholder issued a
letter of support to provide financial assistance when required. The Company
would also seek additional capital infusion to support operations. Management
believes that these actions will enable the Company to meet its working capital
needs through December 31, 2008.
3.
Inventories
Inventories,
consisting of materials, materials overhead, labor, and manufacturing overhead,
are stated at the lower of average cost or market (net realizable value) and
consist of the following at December 31:
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw
materials
|
|
$
|
601,000
|
|
$
|
481,900
|
|
|
Work-in-progress
|
|
|
177,200
|
|
|
199,600
|
|
|
Finished
goods
|
|
|
647,200
|
|
|
630,000
|
|
|
Merchandise
|
|
|
35,800
|
|
|
18,000
|
|
|
|
|
$
|
1,461,200
|
|
$
|
1,329,500
|
|
4.
Property
and Equipment
The
following is a summary of property and equipment, at cost less accumulated
depreciation, at December 31:
|
|
|
|
2007
|
|
|
2006
|
|
|
Machinery
and equipment
|
|
$
|
13,614,800
|
|
$
|
12,956,600
|
|
|
Buildings
|
|
|
7,202,300
|
|
|
7,202,300
|
|
|
Equipment
under capital lease
|
|
|
6,300
|
|
|
6,300
|
|
|
Land
|
|
|
810,900
|
|
|
810,900
|
|
|
Leasehold
improvements
|
|
|
1,432,400
|
|
|
1,432,400
|
|
|
Vehicles
|
|
|
373,000
|
|
|
424,600
|
|
|
Furniture
and fixtures
|
|
|
183,800
|
|
|
176,900
|
|
|
Equipment
in progress
|
|
|
106,300
|
|
|
5,900
|
|
|
|
|
|
23,729,800
|
|
|
23,015,900
|
|
|
Less:
Accumulated depreciation and amortization
|
|
|
(10,511,500
|
)
|
|
(9,569,900
|
)
|
|
|
|
$
|
13,218,300
|
|
$
|
13,446,000
|
|
The
Company has property and equipment located in the United Kingdom with a net
book
value of approximately $1,990,100 as of December 31, 2007. Amortization of
assets under capital leases is included in depreciation and amortization
expense.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
5.
Line
of Credit and Note Payable
In
November 2006, Marquette Business Credit, Inc. provided a line of credit
drawable up to 85% of eligible receivable and 60% of eligible inventory for
a
period up to June 2011. The borrowings were collateralized, with recourse,
by
certain eligible trade receivables up to a maximum percentage of 85% of the
qualified net amounts of such receivables of each of MBC and Releta and 60%
of
MBC’s and Relata’s eligible inventory located in the US. This facility carries
interest at a rate of one-month LIBOR plus 4.25% and secured by substantially
all assets, excluding real property of the Releta and MBC.
The
Company retains the right to recall any of the collateralized receivables under
the line of credit, and the receivables are subject to recourse. Therefore,
the
transaction does not qualify as a sale under the terms of Financial Accounting
Standards Board Statement No. 140 (Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities). Included in the Balance
Sheets as receivable at December 31, 2007, are account balances totaling
$1,713,400 of uncollected receivables collateralized to the financial
institution under this facility. The amount outstanding on this line of credit
as of December 31, 2007 was approximately $1,313,500.
On
April
26, 2005, Royal Bank of Scotland Commercial Services Limited ("RBS") provided
an
invoice discounting facility to UBSN Limited for a maximum amount of £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 December 31,
2007 was approximately $2,487,900.
6.
Long-Term
Debt
Maturities
of long-term debt for succeeding years are as follows:
|
|
|
|
2007
|
|
|
2006
|
|
|
Note
to a financial institution, payable in monthly installment of $18,200,
plus interest at one month LIBOR plus 5.25% with a balloon payment
of
$544,600 in June 2011; secured by substantially all assets of the
Releta
Brewing Company and Mendocino Brewing Company excluding real property
at
Ukiah.
|
|
$
|
1,289,000
|
|
$
|
1,506,900
|
|
|
|
|
|
|
|
|
|
|
|
Note
to a financial institution, payable in monthly installment of $23,200
including interest at prime plus 1.75% with a balloon payment of
approximately $2,845,900 in June 2011. (net of discount of $25,900),
secured by property in Ukiah, CA.
|
|
|
2,938,000
|
|
|
2,956,300
|
|
|
|
|
|
4,227,000
|
|
|
4,463,200
|
|
|
Less
current maturities
|
|
|
254,400
|
|
|
236,500
|
|
|
|
|
$
|
3,972,600
|
|
$
|
4,226,700
|
|
|
Payments
due during Year Ending December 31,
|
|
|
2008
|
|
$
|
254,400
|
|
|
2009
|
|
|
258,000
|
|
|
2010
|
|
|
261.400
|
|
|
2011
|
|
|
3,453,200
|
|
|
2012
and thereafter
|
|
|
-
|
|
|
|
|
$
|
4,227,000
|
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
7.
Capital
Lease Obligations
The
Company leases certain brewing equipment, vehicles and office equipment under
agreements that are classified as capital leases. The future minimum lease
payments required under the capital leases and the present value of the net
minimum lease payments as of December 31, 2007, are as follows:
|
Year
Ending December 31,
|
|
|
|
|
2008
|
|
$
|
81,000
|
|
|
2009
|
|
|
37,600
|
|
|
2010
|
|
|
18,700
|
|
|
2011
and thereafter
|
|
|
-
|
|
|
|
|
|
137,300
|
|
|
Less
amounts representing interest
|
|
|
(18,000
|
)
|
|
Present
value of minimum lease payments
|
|
|
119,300
|
|
|
Less
current maturities
|
|
|
(69,500
|
)
|
|
Non-current
leases payable
|
|
$
|
49,800
|
|
8.
Notes
to Related Party - Subordinated
Notes
payable to a related party consist of unsecured convertible notes to United
Breweries of America (UBA), with interest at the prime rate plus 1.5%, but
not
to exceed 10% per year. The notes are convertible into common stock at $1.50
per
share. The notes have been extended until June 2008. UBA may demand payment
within 60 days of the end of the extension period but is precluded from doing
so
because the notes are subordinated to long-term debt agreements with Grand
Pacific Financing Corporation and Marquette Business Credit, Inc., both maturing
in June 2011. Therefore, the Company will not require the use of working capital
to repay any of the UBA notes until the above facilities are repaid.
Accordingly, the entire amount due of $2,916,300 and $2,733,400 as of December
31, 2007 and 2006 under the notes is classified as a long term liability. The
notes include $1,000,900 and $818,000 of accrued interest at December 31, 2007
and 2006.
Notes
payable also includes an unsecured loan from Shepherd Neame Limited to UBSN
Limited payable in annual installment of $119,100 with interest at 5% per year
beginning June 2003 and maturing June 2012. The amounts outstanding, under
this
loan as of December 31, 2007 and 2006 were $595,300 and $705,100
respectively.
|
Payments
due during Year Ending December 31,
|
|
|
2008
|
|
$
|
119,100
|
|
|
2009
|
|
|
119,100
|
|
|
2010
|
|
|
119,100
|
|
|
2011
|
|
|
3,035,300
|
|
|
2012
|
|
|
119,000
|
|
|
Thereafter
|
|
|
-
|
|
|
|
|
$
|
3,511,600
|
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
9.
Profit-Sharing
Plan
Subsequent
to December 31, 2004, the Company terminated its profit sharing plan.
Contributions to the Plan were made at the discretion of the Board of Directors,
and any contributions vested over a six year period. The plan covered
substantially all full-time employees that met certain minimum age and service
requirements. No contributions were made to the Plan for the years ended
December 31, 2007, 2006, and 2005.
10.
Commitments
and Contingencies
Legal
The
Company is periodically involved in legal actions and claims that arise as
a
result of events that occur in the normal course of operations. The Company’s
management and its legal counsel assess such contingent liabilities, and such
assessment inherently involves an exercise of judgment. In assessing loss
contingencies related to legal proceedings that are pending against the Company
or unasserted claims that may result in such proceedings, the Company’s legal
counsel evaluates the perceived merits of any legal proceedings or unasserted
claims as well as the perceived merits of the amount of relief sought or
expected to be sought therein.
If
the
assessment of a contingency indicates that it is probable that a material loss
has been incurred and the amount of the liability can be estimated, then the
estimated liability would be accrued in the Company’s financial statements. If
the assessment indicates that a potentially material loss contingency is not
probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be
disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve
guarantees, in which case the nature of the guarantee would be disclosed. The
Company is not currently aware of any legal proceedings or claims that the
Company believes will have, individually or in the aggregate, a material adverse
effect on the Company's financial position or results of operations
Operating
Leases
The
Company leases many of its operating and office facilities for various terms
under long-term, non-cancelable operating lease agreements. The leases expire
at
various dates through 2015 and provide for renewal options ranging from
month-to-month to five years. In the normal course of business, it is expected
that these leases will be renewed or replaced by leases on similar properties.
The leases provide for increases in future minimum annual rental payments based
on defined increases which are generally meant to correlate with the Consumer
Price Index, subject to certain minimum increases. Also, the agreements
generally require the Company to pay certain costs (real estate taxes, insurance
and repairs).
The
Company and its subsidiaries have various lease agreements for the brewpub
and
gift store in Hopland, California; land at its Saratoga Springs, New York,
facility; a building in the United Kingdom; and certain personal property.
The
land lease includes a renewal option for two additional five-year periods,
which
the Company intends to exercise, and some leases are adjusted annually for
changes in the consumer price index. The leases begin expiring in 2008. Rent
expense charged to operations was $220,600, $212,800, and $206,600 for the
years
ended December 31, 2007, 2006, and 2005.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
10.
|
Commitments
and Contingencies
(continued)
|
Operating
Leases (continued)
Future
minimum lease payments under these agreements are as follows:
|
Year
Ending December 31,
|
|
|
2008
|
|
$
|
267,700
|
|
|
2009
|
|
|
228,600
|
|
|
2010
|
|
|
211,900
|
|
|
2011
|
|
|
188,700
|
|
|
2012
|
|
|
153,600
|
|
|
Thereafter
|
|
|
50,000
|
|
|
|
|
$
|
1,100,500
|
|
Keg
Management Agreement
In
September 2004, the Company renewed the keg management agreement with MicroStar
Keg Management LLC. Under this arrangement, MicroStar provides all kegs for
which the Company pays a service fee between $5 and $15, depending on the
applicable territory. The agreement is effective for five years ending in
September 2009. If the agreement is terminated, the Company is required to
purchase three times the average monthly keg usage for the preceding six-month
period from MicroStar at purchase prices ranging from $54 to $84 per keg. The
Company expects to continue this relationship. Rental expense associated with
this agreement was $55,500, $62,300, and $65,500 for the years ended December
31, 2007, 2006, and 2005.
11.
Related-Party
Transactions
The
Company conducts business with United Breweries of America (UBA), which owns
approximately 74% of the Company's common stock through common ownership.
Additionally, UBSN Limited has significant transactions, amounting to 10.7%
of
sales in the year ending December 31, 2007, with Shepherd Neame, Ltd., which
is
a related party to a former Board member. The Company also had transactions
with
AUBI, a company affiliated with one of the Board members. The following table
reflects balances outstanding and the value of the transactions with these
related parties for the years ended December 31, 2007, 2006, and
2005:
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
TRANSACTIONS
|
|
|
|
|
|
|
|
|
Sales
to Shepherd Neame Ltd.
|
|
$
|
4,058,800
|
|
$
|
3,255,300
|
|
$
|
2,871,100
|
|
|
Purchases
from Shepherd Neame Ltd.
|
|
|
16,235,100
|
|
|
14,589,300
|
|
|
14,108,500
|
|
|
Expenses
reimbursement to Shepherd Neame Ltd.
|
|
|
1,251,200
|
|
|
1,105,300
|
|
|
1,143,300
|
|
|
Interest
expenses associated with UBA notes (see note 8)
|
|
|
182,900
|
|
|
181,200
|
|
|
142,100
|
|
|
Interest
paid to Shepherd Neame Ltd. (see note 6)
|
|
|
33,000
|
|
|
35,900
|
|
|
40,500
|
|
|
ACCOUNT
BALANCES
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities to Shepherd Neame Ltd.
|
|
|
5,776,700
|
|
|
5,575,000
|
|
|
4,080,400
|
|
|
Accounts
receivable and prepayments to Shepherd Neame Ltd.
|
|
|
1,065,300
|
|
|
781,900
|
|
|
629,700
|
|
|
Amounts
payable to AUBI
|
|
|
20,000
|
|
|
20,000
|
|
|
20,000
|
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
12.
Major
Customers
Sales
to
the top five customers totaled $9,420,000, $8,032,600, and $7,610,500 for the
years ended December 31, 2007, 2006, and 2005, which represents 25%, 24%, and
24% of sales for the years ended December 31, 2007, 2006, and 2005.
13.
Stockholders'
Equity
Independent
outside members of the Board of Directors are compensated for attending Board
of
Directors and committee meetings through the issuance of common stock. Expenses
related to this compensation totaled $103,000, $32,000, and $44,000 for the
years ended December 31, 2007, 2006, and 2005. In July 2007, the Company issued
113,512 shares of its unregistered common stock to independent outside directors
totaling $32,000 in accrued compensation and 250,000 shares of its unregistered
common stock totaling to $55,000 as compensation.
Preferred
Stock
Ten
million shares of preferred stock have been authorized, of which 227,600 are
designated as Series A. Series A shareholders are entitled to receive cash
dividends and/or liquidation proceeds equal, in the aggregate, to $1.00 per
share before any cash dividends are paid on the common stock or any other series
of preferred stock. When the entire Series A dividend/liquidation proceeds
have
been paid, the Series A shares are automatically canceled and will cease to
be
outstanding. Only a complete corporate dissolution will cause a liquidation
preference to be paid.
14.
Stock
Option Plan
Under
the
1994 Stock Option Plan, which expired in 2004, the Company could issue options
to purchase up to 1,000,000 shares of common stock. The Plan provided for both
incentive stock options, as defined in Section 422 of the Internal Revenue
Code,
and options that did not qualify as incentive stock options.
The
exercise price of incentive options was no less than the fair-market value
of
the Company's stock at the date the option was granted, while the exercise
price
of non-statutory options was no less than 85% of the fair-market value per
share
on the date of grant. Options granted to a person possessing more than 10%
of
the combined voting power of all classes of the Company's stock had an exercise
price of no less than 110% of the fair-market value of the Company's stock
at
the date of grant. During 2002, 240,385 non-statutory stock options with a
five-year term were issued to the independent members of the Board of Directors
at the market price on the date of grant. All stock options outstanding were
non-statutory, and issued with a five year term and were fully vested on date
of
grant. Therefore, there was no stock compensation expense in 2005, 2006, or
2007. The exercise price of the options outstanding as of December 31, 2006
was
$0.52 per share. The 240,835 options expired in January 2007.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
14.
Stock
Option Plan (continued)
The
following table summarizes the number of options granted and exercisable and
the
weighted average exercise prices:
|
|
|
|
Shares
under
option
|
|
|
Weighted-average
exercise
price
|
|
|
Weighted-average
remaining
life
|
|
|
Balance
at December 31, 2004
|
|
|
340,385
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
Options
expired
|
|
|
(100,000
|
)
|
$
|
1.25
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
240,385
|
|
$
|
0.52
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Options
expired
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Balance
at December 31, 2006
|
|
|
240,385
|
|
$
|
0.52
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
granted
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
|
Options
expired
|
|
|
(240,385
|
)
|
$
|
0.52
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
All
240,385 options outstanding at December 31, 2006 and 2005 were exercisable.
Current
year ended December 31, 2007
In
conjunction with the adoption of SFAS 123(R), the Company elected to attribute
the value of share-based compensation to expense using the straight-line method,
which was previously used for its pro forma information required under SFAS
123.
Share-based compensation expense related to stock options was nil for the year
ended December 31, 2007, 2006, and 2005.
Share-based
compensation expense (related to common stock granted to members of the Board
of
Directors) reduced the Company’s results of operations for the years ended
December 31, 2007 and 2006 are as follows:
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Loss
from continuing operations before income taxes
|
|
$
|
(103,000
|
)
|
$
|
(32,000
|
)
|
|
(44,000
|
)
|
|
Loss
from continuing operations after income taxes
|
|
|
(103,000
|
)
|
|
(32,000
|
)
|
|
(44,000
|
)
|
|
Cash
flows from operations
|
|
|
103,000
|
|
|
32,000
|
|
|
44,000
|
|
|
Cash
flows from financing activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Basic
and Diluted EPS
|
|
$
|
(0.01
|
)
|
$
|
(0.00
|
)
|
|
(0.00
|
)
|
During
the year ended December 31, 2007, the Company granted no performance based
options to executives and senior management.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
14.
Stock
Option Plan (continued)
The
following is a summary of changes to outstanding stock options during the fiscal
year ended December 31, 2007:
|
|
|
|
|
|
|
Weighted
Average
Exercise
|
|
|
Weighted
Average
Remaining
Contractual
|
|
|
|
|
|
|
|
|
Options
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Outstanding
at December 31, 2006
|
|
|
240,385
|
|
$
|
0.52
|
|
|
0.1
|
|
$
|
-
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Forfeited
or expired
|
|
|
(240,385
|
)
|
$
|
0.52
|
|
|
-
|
|
|
-
|
|
|
Outstanding
at December 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Vested
and expected to vest at December 31, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Options
exercisable at December 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
Prior
to
the adoption of Statement of Financial Accounting Standards No. 123(R)
“Accounting for Stock-Based Compensation-Revised “(SFAS 123(R)), at January 1,
2006, the Company would not have recognized compensation expense for employee
share-based awards, when the price of such awards equaled the market price
of
the underlying stock on the date of the grant. The Company previously had
adopted the provisions of Statement of SFAS 123 as amended by SFAS 148,
“Accounting for Stock Based Compensation, Transition and Disclosure” (SFAS 148)
through disclosure only.
The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement
No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
|
|
|
|
2005
|
|
|
Net
income (loss) - as reported
|
|
$
|
(1,314,700
|
)
|
|
Compensation
expense - APB 25
|
|
|
-
|
|
|
Compensation
expense - SFAS 123
|
|
|
-
|
|
|
Net
income (loss) - pro forma
|
|
$
|
(1,314,700
|
)
|
|
Income
(loss) per share - pro forma
|
|
$
|
(0.11
|
)
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
|
Total
options under the Plan at December 31, 2005, comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Contractual
life
(Years)
|
|
|
|
|
$0.52
|
|
|
240,385
|
|
|
1.1
|
|
|
240,385
|
|
|
Total
options under the Plan at December 31, 2006, comprised the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
Remaining
Contractual
life
(Years)
|
|
|
|
|
$0.52
|
|
|
240,385
|
|
|
0.1
|
|
|
240,385
|
|
The
accumulated losses during the past in the U.S. operations has resulted in the
Company determining that the deferred tax assets associated with net operating
loss carryforwards and investment tax credits may expire prior to utilization.
The Company recorded a valuation allowance of $4,545,600 for deferred tax
assets. The Company also has $68,433 of California Manufacturers' Investment
Tax
Credits that can be carried forward to reduce future taxes. These credits begin
expiring in 2011.
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
Provision
for income taxes
|
|
|
|
|
|
|
|
|
US
Federal
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
US
States
|
|
|
7,000
|
|
|
2,500
|
|
|
1,800
|
|
|
United
Kingdom
|
|
|
-
|
|
|
-
|
|
|
(127,400
|
)
|
|
Current
provision
|
|
|
7,000
|
|
|
2,500
|
|
|
(125,600
|
)
|
|
Change
in deferred income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Total
provision for income taxes
|
|
$
|
7,000
|
|
$
|
2,500
|
|
$
|
(125,600
|
)
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
15.
Income
Taxes (continued)
The
difference between the actual income tax provision and the tax provision
computed by applying the statutory US Federal and United Kingdom income tax
rates to earnings before taxes is attributable to the
following:
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
US
Federal income tax expense (benefit) at 34%
|
|
$
|
42,700
|
|
$
|
24,800
|
|
$
|
(110,700
|
)
|
|
US
State income tax expense (benefit)
|
|
|
11,100
|
|
|
6,500
|
|
|
(28,800
|
)
|
|
United
Kingdom income tax expense (benefit)
|
|
|
(150,800
|
)
|
|
(450,300
|
)
|
|
(296,800
|
)
|
|
Other
|
|
|
(341,100
|
)
|
|
38,200
|
|
|
(31,500
|
)
|
|
Change
in valuation allowance
|
|
|
445,100
|
|
|
383,300
|
|
|
342,200
|
|
|
Total
|
|
$
|
7,000
|
|
$
|
2,500
|
|
$
|
(125,600
|
)
|
Temporary
differences and carryforwards that give rise to deferred tax assets and
liabilities are as follows:
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Benefit
of net operating loss carryforwards
|
|
$
|
5,116,500
|
|
$
|
4,956,200
|
|
$
|
4,295,700
|
|
|
Undistributed
earnings of UBIUK
|
|
|
(454,800
|
)
|
|
(448,900
|
)
|
|
(393,900
|
)
|
|
Investment
in UBIUK
|
|
|
349,000
|
|
|
349,900
|
|
|
358,100
|
|
|
Depreciation
and amortization
|
|
|
(523,000
|
)
|
|
(871,900
|
)
|
|
(670,000
|
)
|
|
Other
|
|
|
57,900
|
|
|
115,200
|
|
|
127,300
|
|
|
Subtotal
|
|
|
4,545,600
|
|
|
4,100,500
|
|
|
3,717,200
|
|
|
Less
valuation allowance
|
|
|
(4,545,600
|
)
|
|
(4,100,500
|
)
|
|
(3,717,200
|
)
|
|
Total
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Change
in valuation allowance
|
|
$
|
445,100
|
|
$
|
383,300
|
|
$
|
342,200
|
|
The
Company has net operating losses available for carry forward. The US Federal
net
operating losses total approximately $12,376,000 and expire beginning 2013
and
ending in 2027. The US state operating losses total approximately $1,563,000
and
expire beginning 2012 and ending 2027. The Company’s United Kingdom operating
losses total approximately $2,568,000 and they do not expire.
Tax
years
that remain open for examination by the Internal Revenue Service include 2004,
2005, 2006, and 2007 (expected to be filed in 2008), and by the State of
California include 2003 through 2007. In addition, tax years from 1997 to 2003
may subject to examination by the Internal Revenue Service to the extent that
the Company utilizes the net operating losses from those years in its current
or
future year tax returns.
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
16.
Segment
Information
The
Company's business presently consists of three segments. The first is brewing
for wholesale to distributors and other retailers. This segment accounted for
39%, 38%, and 36% of the Company's gross sales during 2007, 2006 and 2005.
The
second consists of distributing alcoholic beverages to retail establishments
and
restaurants in the United Kingdom and Europe. This segment accounted for
approximately 61%, 61%, and 63% of the Company's gross sales during 2007, 2006,
and 2005. The third segment consists of beer for sale along with merchandise
at
the Company's brewpub and retail merchandise store located at the Hopland
Brewery and at Saratoga Springs brewery. This segment accounted for less than
one percent of the Company's gross sales during 2007, 2006 and 2005. A summary
of each segment is as follows:
|
|
|
|
Year
Ended December 31,2007
|
|
|
|
|
|
Brewing
Operations
|
|
|
Tavern
& Tasting
Room
|
|
|
Distributor
Operations
|
|
|
Corporate
and Other
|
|
|
Total
|
|
|
Sales
|
|
$
|
14,593,100
|
|
$
|
307,400
|
|
$
|
22,874,000
|
|
$
|
-
|
|
$
|
37,774,500
|
|
|
Operating
income (Loss)
|
|
|
726,600
|
|
|
77,700
|
|
|
(193,300
|
)
|
|
-
|
|
|
611,000
|
|
|
Identifiable
assets
|
|
|
12,619,500
|
|
|
69,900
|
|
|
8,458,800
|
|
|
2,229,400
|
|
|
23,377,600
|
|
|
Depreciation
and amortization
|
|
|
510,900
|
|
|
4,300
|
|
|
582,600
|
|
|
|
|
|
1,097,800
|
|
|
Capital
expenditures
|
|
|
166,700
|
|
|
-
|
|
|
665,000
|
|
|
-
|
|
|
831,700
|
|
|
|
|
|
Year
Ended December 31,2006
|
|
|
|
|
|
Brewing
Operations
|
|
|
Tavern
& Tasting
Room
|
|
|
Distributor
Operations
|
|
|
Corporate
and Other
|
|
|
Total
|
|
|
Sales
|
|
$
|
12,601,600
|
|
$
|
221,300
|
|
$
|
20,126,000
|
|
$
|
-
|
|
$
|
32,948,900
|
|
|
Operating
income (Loss)
|
|
|
753,400
|
|
|
45,700
|
|
|
(1,244,400
|
)
|
|
-
|
|
|
(445,300
|
)
|
|
Identifiable
assets
|
|
|
12,784,200
|
|
|
61,600
|
|
|
8,768,800
|
|
|
2,352,700
|
|
|
23,967,300
|
|
|
Depreciation
and amortization
|
|
|
505,600
|
|
|
4,600
|
|
|
480,300
|
|
|
27,300
|
|
|
1,017,800
|
|
|
Capital
expenditures
|
|
|
327,200
|
|
|
-
|
|
|
705,600
|
|
|
-
|
|
|
1,032,800
|
|
|
|
|
|
Year
Ended December 31,2005
|
|
|
|
|
|
Brewing
Operations
|
|
|
Tavern
& Tasting
Room
|
|
|
Distributor
Operations
|
|
|
Corporate
and Other
|
|
|
Total
|
|
|
Sales
|
|
$
|
11,557,900
|
|
$
|
203,100
|
|
$
|
20,166,300
|
|
$
|
-
|
|
$
|
31,927,300
|
|
|
Operating
income (Loss)
|
|
|
168,200
|
|
|
32,300
|
|
|
(716,900
|
)
|
|
-
|
|
|
(516,400
|
)
|
|
Identifiable
assets
|
|
|
12,670,400
|
|
|
63,400
|
|
|
7,864,800
|
|
|
1,868,800
|
|
|
22,557,400
|
|
|
Depreciation
and amortization
|
|
|
465,200
|
|
|
4,900
|
|
|
401,600
|
|
|
32,000
|
|
|
903,700
|
|
|
Capital
expenditures
|
|
|
34,200
|
|
|
-
|
|
|
753,600
|
|
|
-
|
|
|
787,800
|
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
17.
Unrestricted
Net Assets
The
Company's wholly-owned subsidiary, UBI, has retained losses of approximately
$625,100 as of December 31, 2007. 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 earnings drop below approximately $1,984,300.
Condensed financial information of the parent company, Mendocino Brewing
Company, Inc., is as follows:
|
Balance
Sheets
|
|
2007
|
|
2006
|
|
|
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
32,000
|
|
$
|
55,700
|
|
|
Accounts
receivable
|
|
|
1,643,400
|
|
|
1,727,500
|
|
|
Inventories
|
|
|
1,461,200
|
|
|
1,329,500
|
|
|
Other
current assets
|
|
|
192,800
|
|
|
209,100
|
|
|
Total
current assets
|
|
|
3,329,400
|
|
|
3,321,800
|
|
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
1,225,000
|
|
|
1,225,000
|
|
|
Property
and equipment
|
|
|
11,228,200
|
|
|
11,526,800
|
|
|
Other
assets
|
|
|
361,200
|
|
|
349,900
|
|
|
Total
assets
|
|
$
|
16,143,800
|
|
$
|
16,423,500
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Line
of credit and note payable
|
|
$
|
1,313,500
|
|
$
|
1,363,600
|
|
|
Accounts
payable
|
|
|
1,270,900
|
|
|
1,333,000
|
|
|
Accrued
liabilities
|
|
|
510,500
|
|
|
494,900
|
|
|
Current
maturities of debt and leases
|
|
|
261,500
|
|
|
246,200
|
|
|
Total
current liabilities
|
|
|
3,356,400
|
|
|
3,437,700
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
payable
|
|
|
753,900
|
|
|
1,079,800
|
|
|
Long-term
debt and capital leases
|
|
|
3,972,600
|
|
|
4,233,700
|
|
|
Notes
payable to related party
|
|
|
2,916,300
|
|
|
2,733,400
|
|
|
Total
liabilities
|
|
|
10,999,200
|
|
|
11,484,600
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
14,902,300
|
|
|
14,815,300
|
|
|
Preferred
stock
|
|
|
227,600
|
|
|
227,600
|
|
|
Accumulated
deficit
|
|
|
(9,985,300
|
)
|
|
(10,104,000
|
)
|
|
Total
stockholders' equity
|
|
|
5,144,600
|
|
|
4,938,900
|
|
|
Total
Liabilities and stockholders' equity
|
|
$
|
16,143,800
|
|
$
|
16,423,500
|
|
MENDOCINO
BREWING COMPANY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
17.
Unrestricted
Net Assets (continued)
|
Statement
of Operations
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
sales
|
|
$
|
13,943,700
|
|
$
|
12,149,400
|
|
$
|
11,125,500
|
|
|
Cost
of goods sold
|
|
|
10,209,400
|
|
|
8,576,200
|
|
|
7,737,000
|
|
|
Selling,
marketing, and retail expenses
|
|
|
1,288,600
|
|
|
1,215,100
|
|
|
1,469,800
|
|
|
General
and administrative expenses
|
|
|
1,743,100
|
|
|
1,661,200
|
|
|
1,810,600
|
|
|
Income
from operations
|
|
|
702,900
|
|
|
696,900
|
|
|
108,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income and (expense)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expenses
|
|
|
(760,600
|
)
|
|
(832,000
|
)
|
|
(760,800
|
)
|
|
Other
income
|
|
|
179,300
|
|
|
208,100
|
|
|
329,100
|
|
|
Provision
for taxes
|
|
|
4,400
|
|
|
(2,500
|
)
|
|
(1,800
|
)
|
|
|
|
|
(576,900
|
)
|
|
(626,400
|
)
|
|
(433,500
|
)
|
|
Net
income (loss)
|
|
$
|
125,700
|
|
$
|
70,500
|
|
$
|
(325,400
|
)
|
|
Statements
of Cash Flows
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flows from operating activities
|
|
$
|
760,400
|
|
$
|
(65,500
|
)
|
$
|
(426,300
|
)
|
|
Cash
flow from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(166,700
|
)
|
|
(327,200
|
)
|
|
(34,200
|
)
|
|
Proceeds
from sale of assets
|
|
|
4,400
|
|
|
11,000
|
|
|
-
|
|
|
Net
cash from investment activities
|
|
|
(162,300
|
)
|
|
(316,200
|
)
|
|
(34,200
|
)
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowing (repayment) on line of credit
|
|
|
(50,100
|
)
|
|
(241,200
|
)
|
|
52,100
|
|
|
Borrowing
on long-term debt
|
|
|
4,180,900
|
|
|
4,180,900
|
|
|
-
|
|
|
Repayment
of long-term debt
|
|
|
(236,200
|
)
|
|
(2,628,300
|
)
|
|
(285,300
|
)
|
|
Proceeds
from note payable
|
|
|
-
|
|
|
350,000
|
|
|
|
|
|
Repayment
of notes payable
|
|
|
-
|
|
|
(926,200
|
)
|
|
-
|
|
|
Payment
on obligation under capital lease
|
|
|
(9,600
|
)
|
|
(69,500
|
)
|
|
(122,900
|
)
|
|
Net
change in inter company payable
|
|
|
(325,900
|
)
|
|
(239,800
|
)
|
|
142,100
|
|
|
Proceeds
from related party
|
|
|
-
|
|
|
-
|
|
|
400,000
|
|
|
Net
cash flow from financing activities
|
|
|
(621,800
|
)
|
|
425,900
|
|
|
186,000
|
|
|
Cash,
beginning of year
|
|
|
55,700
|
|
|
11,500
|
|
|
286,000
|
|
|
Cash,
end of year
|
|
$
|
32,000
|
|
$
|
55,700
|
|
$
|
11,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividend received from subsidiary
|
|
$
|
-
|
|
$
|
-
|
|
$
|
149,900
|
|
Mendocino Brewing (CE) (USOTC:MENB)
Gráfica de Acción Histórica
De May 2024 a Jun 2024
Mendocino Brewing (CE) (USOTC:MENB)
Gráfica de Acción Histórica
De Jun 2023 a Jun 2024
