Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] 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 [ ] 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 [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). Yes [X] No [ ]
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 [X]
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
[ ] Accelerated Filer [ ] Non-accelerated Filer [ ] 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 [ ] 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 OTC Markets Bulletin Board on June 30, 2013 was approximately $711,300.
The number of shares of the registrant’s Common Stock outstanding
as of March 15, 2014 was 12,611,133.
This Annual Report on Form 10-K includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, which we refer to in this Annual Report as the Exchange Act. Forward-looking statements are not statements
of historical fact but rather reflect our current expectations, estimates and predictions about future results and events. These
statements may use words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “predict,” “project” and similar expressions as they relate to us or our Management.
Unless the context otherwise requires, references in this Annual Report to “we,” “us,” “our,”
or the “Company” refer to Mendocino Brewing Company, Inc. together with its subsidiaries. When we make forward-looking
statements, we are basing them on our Management’s beliefs and assumptions, using information currently available to us.
These forward-looking statements are subject to risks, uncertainties and assumptions, including but not limited to, risks, uncertainties
and assumptions discussed in this Annual Report. Factors that can cause or contribute to these differences include those described
under the headings “Risk Factors” and “Management Discussion and Analysis and Plan of Operation.” If one
or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results
may vary materially from what we projected. All subsequent written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this paragraph. You should specifically consider the factors
identified in this Annual Report, which would cause actual results to differ before making an investment decision. We are under
no duty to update any of the forward-looking statements after the date of this Annual Report or to conform these statements to
actual results.
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 we compete. Readers are cautioned not to place undue reliance on these forward-looking statements.
PART I
ITEM
1.
BUSINESS.
OVERVIEW
Mendocino Brewing Company,
Inc., a California corporation, was founded in 1983 as a limited partnership and converted to a corporation in 1993. We were 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. We have been recognized for our innovations in the brewpub concept, our craft brew style and our distinctive
labels. 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.
We operate in two geographic
markets, (i) the United States and Canada (referred to in this Annual Report as the “North American Territory”) and
(ii) 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) (referred to in this Annual Report as the “Foreign
Territory”). Our European operations are primarily in the United Kingdom, which is also referred to in this Annual Report
as the “UK”.
Our operations in the North
American Territory 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 distribution in the North American Territory, we brew our brands in our own facilities, which
are located in Ukiah, California and Saratoga Springs, New York. In the North American Territory, we distribute our products in
most of the states, the District of Columbia and Canada.
Our operations in the Foreign
Territory, which are conducted through our wholly-owned subsidiary, United Breweries International (U.K.) Limited (“UBIUK”)
and UBIUK’s wholly-owned subsidiary, Kingfisher Beer Europe Limited (“KBEL”), which was formerly known as UBSN
Limited, consist primarily of the marketing and distribution of Kingfisher Premium Lager through Indian restaurants, chain retail
grocers, liquor stores, and other retail outlets (such as convenience stores). We hold an exclusive license, expiring in October
2018, from United Breweries Limited, an Indian public limited company (“UB Limited”) to brew and distribute Kingfisher
Premium Lager in certain areas of the Foreign Territory. The Chairman of our board of directors, Dr. Vijay Mallya, is also the
Chairman of the board of directors of UB Limited.
All of our beers sold in
the Foreign Territory (except for beers sold in Germany) are procured under a contract with Heineken UK Limited (“HUK”).
This contract expires in October 2018. KBEL is the distributor of Kingfisher Premium Lager to specialty restaurant trade distributors,
liquor and convenience stores in the United Kingdom, Ireland, and continental Europe, but does not physically distribute our products
to customers. KBEL relies on HUK for distribution of the product in the Foreign Territory in exchange for a fee paid to HUK, except
for in Germany where beers are manufactured and distributed pursuant to a separate contract with a different entity. In addition,
HUK has the exclusive right to sell Kingfisher Premium Lager, for a royalty fee, to certain large retail customers, including,
but not limited to, Sainsbury’s, Asda, and Tesco.
COMPANY BACKGROUND
We first bottled our flagship
brand, Red Tail Ale, in December 1983, and conducted our initial public offering in February 1995. We completed construction of
our brewery in Ukiah, California in May 1997. This facility, which has a current annual packaging capacity of 100,000 brewers’
barrels (“bbl.”) assuming one eight hour shift per day, was designed to enable our production capacity at such facility
to be expanded to 200,000 bbl. per year with additional equipment.
Our 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 our leased facilities in February 1998. This facility, which has a current annual packaging capacity of
90,000 bbl. assuming one eight hour shift per day, was also designed to enable our production at such facility to be expanded to
200,000 bbl. per year with additional equipment.
In 1998, we purchased certain
assets from Carmel Brewing Company, Inc., a California corporation (“Carmel Brewing”). We continue to bottle and sell
beer under the Carmel Brewing name.
In 2001, we acquired UBIUK
together with UBIUK’s wholly-owned subsidiary, KBEL, from Inversiones Mirabel, S.A., a Panamanian corporation, (“Inversiones”)
in exchange for MBC stock then valued at approximately $5,500,000 (the “UBIUK Acquisition”). UBIUK and KBEL primarily
market, sell, and distribute Kingfisher Premium Lager in the Foreign Territory. Kingfisher Premium Lager, which is the flagship
brand of UB Limited, is a recognized international brand, with widespread distribution outside our geographic markets.
We also acquired the United
States brewing and distribution rights for Kingfisher Premium Lager as a result of the UBIUK Acquisition. We brew Kingfisher Premium
Lager in our Saratoga Springs, New York and Ukiah, California facilities. We have a contract with HUK to procure Kingfisher Premium
Lager for distribution in the Foreign Territory which expires in October 2018.
In 2005, United Breweries
of America, BVI, a British Virgin Islands corporation (“UBA-BVI”), an indirect beneficial owner of a majority of our
outstanding shares, merged into United Breweries Holdings, Ltd., an Indian public limited company (“UBHL”). As a result
of the merger of UBA-BVI into UBHL, UBHL acquired indirect control over approximately 78% of our then outstanding shares. Dr. Vijay
Mallya, our Chairman of the Board, is also the Chairman of the board of directors of UBHL.
In 2010, we purchased
certain brand-related assets from Golden West Brewing Company, a California corporation and Beautiful Brews Inc., a Florida corporation,
including trademarks, trade names, and other brand-related assets related to the Butte Creek brands of organic ales and Honey Amber
Rose ale, respectively. MBC pays royalties based on sales of products which use such assets.
INDUSTRY OVERVIEW
NORTH AMERICAN
MARKET
We are a brewer in the
craft brewing segment of the United States beer industry. The United States domestic beer market consists of a number of market
categories, some of which include low-priced, premium, super premium, lite, import, and specialty/craft beers. In the North American
Territory, we compete in the specialty/craft category which the Brewers Association estimated produced approximately 13.2 million
barrels in the year 2012. Craft beers are typically all malt, characterized by their full flavor, and are usually produced using
methods similar to those of traditional European brews. The domestic beer market is dominated by large domestic and international
brewers. The craft brewing segment is growing, but is relatively small. Recently, the United States beer market has seen two trends,
the number of craft brewers has increased and the large domestic brewers have merged or been acquired by other large domestic and
international brewers (e.g. InBev S.A.’s acquisition of Anheuser-Busch Companies, Inc.). Since our formation in the 1980s,
the rate at which the craft beer segment has grown has fluctuated over the years. The large domestic brewers produce their own
fuller-flavored products to compete against craft beers. The introduction of flavored malt beverages starting in 2001 has also
increased competition in the beer market. Additionally, the wine and spirits market has seen an increase in recent years, attributable
to competitive pricing, television advertising, increased merchandising and resurgent consumer interest in wine and spirits.
EUROPEAN MARKET
The vast majority of our
sales in the European Union are made in the United Kingdom. During fiscal years 2013 and 2012 our sales in the United Kingdom constituted
approximately 87% and 89% of our total sales in the Foreign Territory, respectively. Sales in the Foreign Territory primarily consist
of sales of Kingfisher Premium Lager. KBEL has production and distribution rights for Kingfisher Premium Lager in the United Kingdom
and the other European Union countries pursuant to an agreement with UB Limited.
Within the European Union,
our products are primarily distributed through Indian restaurants using restaurant trade distributors. In addition, our products
are distributed through other retail outlets such as supermarkets, liquor stores, and licensed shops and convenience stores. For
more information on our distribution methods and our relationship with HUK, please refer to the discussion under the “Overview”
heading above.
OUR BUSINESS
We
are a pioneering brewer in the specialty craft brewing segment in the United States. We produce high quality ales and lagers in
our own breweries in the United States. We have production and distribution rights to Kingfisher Premium Lager in the European
Union, Canada and, the United States. Generally sales are made through distributors.
PRODUCTS
We produce a variety of
flavorful craft beers by using high quality ingredients in our brewing process. For distribution in the North American Territory,
we brew eleven ales, one wheat beer, two lagers, two pilsners and four stouts, all on a year-round basis, and four seasonal brews
and one anniversary brew. All of these products are brewed at our production facilities in Ukiah, California, and Saratoga Springs,
New York. The locations of the breweries are well positioned to serve the large markets on the East and West coasts.
In the Foreign Territory,
we currently distribute Kingfisher Premium Lager. Kingfisher Premium Lager is the leading Indian beer by sales volume in India
and abroad.
Our principal products
are as follows:
RED
TAIL ALE
, a full flavored amber ale, is our flagship brand. It is available 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 hoppy character. It is available 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 in 12 oz. six-packs, half-barrel kegs,
and 5 gallon kegs.
EYE
OF THE HAWK SELECT ALE
is a 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 a distinctive hoppy character and bold malt flavor. It is available 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 United States, Kingfisher
Premium Lager is available in 12 oz. six-packs, 22 oz. bottles, half-barrel kegs, and 5 gallon kegs as well as on tap in a few
pubs and Indian restaurants. In Canada, Kingfisher Premium Lager is available in 12 oz. six-packs and 22 oz. bottles. Kingfisher
Premium Lager is available year-round in 330ml and 660ml bottles in multi-packs as well as in a variety of keg sizes in the United
Kingdom, Ireland, and continental Europe. In the United Kingdom, it is also available on tap in Indian restaurants.
DISTRIBUTION METHODS
In the North American Territory,
our products are sold through wholesale distributors to consumers at supermarkets, warehouse stores, liquor stores, taverns and
bars, restaurants, and convenience stores.
Our 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 our distributors, we market our products
to retail outlets and rely on our distributors to provide regular deliveries, to maintain retail shelf space, and to oversee timely
rotation of inventory. We also offer a variety of ales and lagers directly to consumers at a tasting room attached to the Saratoga
Springs brewery in New York and at our ale house in Ukiah, California (formerly located in Hopland, California).
In the Foreign Territory,
our products are distributed primarily through Indian restaurants by restaurant trade distributors. Such points of sale represent
approximately 90% of our total sales volume in the Foreign Territory, with the remaining 10% of sales volume attributed to sales
in supermarkets, liquor stores, and licensed shops and convenience stores. The majority of our restaurant sales are through our
on-tap draft installations. KBEL exports Kingfisher Premium Lager, for the most part pursuant to our distribution agreement with
HUK, to many European markets outside of the United Kingdom, and our sales growth in those markets typically correlates with the
establishment and proliferation of Indian restaurants in such locations.
Distribution and retailing
of products in Canada involves a wide range and varied degree of government control through provincial liquor boards. We distribute
our products through provincial liquor control boards or independent distributors, as required in each province.
COMPETITION
In the North American Territory,
we compete against a variety of brewers in the craft beer segment, including brewpubs, microbrewers, regional craft brewers, and
craft beer products of major national breweries. There has been a significant increase in the number of craft brewers in the last
two years. 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 Stella Artois, Carling, Heineken, Budweiser, and Becks, in the
restaurant and pub sectors and in sales through supermarkets and other retail outlets. Our products are marketed through Indian
and other restaurants, major supermarket chains, smaller chains, and individual stores. In all of these sectors, we face competition
from other ethnic and international brands produced by local and large international brewers. We promote Kingfisher Premium Lager
as the worldwide No. 1 selling premium Indian lager. We promote the brand through our significant participation in events directed
at the Indian restaurant trade and volume-driven promotions in supermarkets and Cash & Carry stores, a retail chain in the
United Kingdom.
In recent years, the larger
domestic and international brewers have introduced fuller-flavored beers meant to compete with our craft beer offerings. The participation
by larger domestic and international brewers increases competition and price sensitivity within the craft beer segment. Craft brewers
compete primarily on product quality, taste profile, and consistency.
We face tough competition
in the North American Territory as well as in the Foreign Territory. We compete with other beer and beverage companies not only
for consumer acceptance and loyalty but also for shelf and tap space in retail establishments. We must also vie for marketing focus
by our distributors and their customers, all of which also distribute and sell other beer and alcoholic beverage products. Many
of our competitors’ financial and marketing resources and distribution networks are substantially greater than ours. Moreover,
the introduction of new products by competitors that compete directly with our products, or that diminish the importance of our
products to retailers or distributors, may have a material adverse effect on our results of operations, cash flows and financial
position.
SOURCES AND AVAILABILITY OF RAW MATERIALS
Production of our beverages
requires various processed agricultural products, including malt and hops. We fulfill our commodities requirements through purchases
from various sources, some through contractual arrangements and others on the open market. In the Foreign Territory, purchases
of commodities were made in the past directly by Shepherd Neame, which brewed our products on a contract basis pursuant to a contract
that expired in October 2013 and are currently made by HUK, which has been brewing our products on contract basis beginning October
2013. In 2008, MBC and Releta each entered into long term contracts to purchase hops. These contracts expire in 2015. If we are
unable to enter into new contracts to purchase hops on commercially reasonable terms, our results of operations, cash flows and
financial position may be materially adversely affected. The price of malt has increased substantially since the beginning of 2012.
We believe 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.
Our major suppliers in
North America are Great Western Malting Co., Yakima, WA, and Canada Malting Company, Montreal, Canada (malt); Hop Union LLC, Yakima,
WA and S.S. Steiner Inc., New York, NY (hops); Gamer Packaging Inc., Minneapolis, MN (bottles and crowns); Alliance Packaging,
Seattle, WA, and International Paper Co. Pittsburg, PA (cartons); Rose City Printing and Packaging, Vancouver, WA and Keystone
Paper and Box Company, Inc., South Windsor, CT (carriers); and DWS Printing Associates, Bay Shore, NY (labels).
Our major supplier for
the Foreign Territory is HUK, which supplies on a contract basis all of our products that are sold in the Foreign Territory. We
do not directly purchase any agricultural commodities or other products for use in the Foreign Territory.
DEPENDENCE ON MAJOR CUSTOMERS
Sales to our top five customers
in 2013 totaled $7,575,900 (approximately 21% of our sales), as compared to sales to our top five customers in 2012 which totaled
$9,245,700 (approximately 23% of our sales).
Sales to our European customer,
Shepherd Neame, during 2013 represented approximately 11% of our Foreign Territory sales (or approximately 7% of our total sales),
as compared to approximately 15% of Foreign Territory sales (or approximately 9% of total sales) in 2012. No other individual customer
accounted for more than 5% of our total sales during 2013 or 2012. Our agreement with Shepherd Neame ended as of October 2013 and
we have entered into a new agreement with HUK to sell our product to select large retailers on royalty basis.
Seasonality
Our
product sales are seasonal, with the first and fourth quarters historically being the slowest and the rest of the year typically
having stronger sales. Sales volume may be affected by weather. Accordingly, our results for any individual quarter may not be
indicative of the results that may be achieved for the full fiscal year.
Sales and Marketing
We
market our products through various promotional programs with our distributors and wholesalers. The sales and marketing staff offer
support to the wholesalers and retailers by educating them about our products. Our products are promoted at local art, music and
food festivals, and restaurants and pubs. We operate a tasting room at our Saratoga Springs brewery and our ale house in Ukiah,
California. We utilize signs, tap handles, coasters, logo glassware and posters to promote our products in bars, pubs and restaurants.
We
participate in various consumer promotion programs, primarily price discounts. We occasionally advertise our products in print
media.
TRADEMARKS
We have United States 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), 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), BLACK HAWK STOUT word mark (Reg. No. 3,205,652), BLUE HERON word mark (Reg. No. 3,818,385),
HONEY AMBER ROSE design mark (Reg. No. 3,276,229), TWIN SISTERS (Reg. No. 3,589,090), REVOLUTION X (Reg. No. 3,237,471); ROCK HARD
TEN (Reg. No. 3,585,772), ORGANIC PIONEERS (Reg. No. 3,339,179), THE OFFICIAL BEER OF PLANET EARTH (Reg. No. 3,339,151), YOSEMITE
(Reg. No. 4,064,887), and CATCH 22 (Reg. No. 3,814,885).
We have United States federal
trademark registrations on the supplemental register of the United States Patent and Trademark Office for the following marks:
BEER DIVA word mark (Reg. No. 3,350,568).
We use the BLUE HERON word
mark (Reg. No. 3,818,385) under a concurrent use agreement with Bridgeport Brewing Company which gives us 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.
We claim common law trademark
rights in and to the following marks: TALON BARLEY WINE ALE word mark, TALON BARLEY WINE ALE design mark, TRAINWRECK word mark,
HELLTOWN word mark, and BUTTE CREEK BREWING word mark.
We acquired the trademark
CARMEL BREWING COMPANY and any other variation of the same as previously used by Carmel Brewing Company and claim common law trademark
rights in and to all such marks.
LICENSE AND ROYALTY AGREEMENTS
UBIUK and KBEL 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 which is currently scheduled to expire in October 2018.
In July 2001, we entered
into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to which we 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.
Since October 2013, KBEL
has licensed to HUK 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. In exchange for certain exclusive resale rights,
HUK pays a royalty fee to KBEL for certain sales. The price KBEL pays to HUK 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 - Brewing Agreement”.)
Under its terms, this agreement will expire in October 2018.
GOVERNMENTAL REGULATION
Our North American 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. We are 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 us to manufacture fermented malt beverages. To keep these licenses
and permits in force we must pay annual fees and submit timely production reports and excise tax returns. We must give these regulatory
agencies prompt notice of any changes in our operations, ownership, or company structure. 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 our outstanding securities be investigated as to their suitability of character. Our 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 we are presently in compliance with the aforementioned laws and regulations.
In addition, we have implemented our own voluntary safety program. Our Ukiah ale house 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
Canada, provincial governments regulate the beer industry, particularly the pricing, mark-up, container management, sale, distribution
and advertising of beer. Distribution and retailing of products in Canada involves a wide range and varied degree of government
control through provincial liquor boards. We distribute our products in Canada through provincial liquor control boards or independent
distributors, as per the applicable regulation for each province.
In the United States, for
brewers producing less than 2,000,000 barrels (or bbl.) per year, 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. 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.
Our operations in the Foreign
Territory are subject to regulation by United Kingdom and European laws, as well as by the laws of various individual countries
in which our products are distributed. Due to the current contract brewing arrangement in the Foreign Territory, HUK, rather than
the Company, is subject to various laws of the European countries (other than Germany) regarding production, bottling, packaging,
and labeling. Our products in Germany are manufactured and distributed by contractual partners in Germany who are subject to such
laws in Germany.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are subject to various
federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of various substances. We
have not received any notice from any governmental agency relating to our violation of any applicable environmental law.
Our waste products consist
of process water, spent grains, hops, glass and cardboard. We have instituted a recycling program for our office paper, newspapers,
magazines, glass, and cardboard at minimal cost to us. We sell or give away our spent grain to local cattle ranchers.
Ukiah
. We built
our own wastewater treatment plant for the Ukiah facility. As a result, we have reduced our sewer hook-up fees at that location.
If our discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds 100,000
bbl., we may be required to pay additional fees. The approximate operating costs of the plant are between $6,000 and $10,000 per
month, which may increase with increased production. We have contracted to have the liquid sediment that remains from the treated
wastewater trucked to a local composting facility at a cost of between $4,500 and $5,500 per month. We obtained a Mendocino County
Air Quality Control Permit to operate a natural gas fired boiler in Ukiah; this permit is valid until August 30, 2014. Management
expects this permit to be renewed each year.
Saratoga Springs
.
Our solid waste materials consist of spent grain, cardboard, glass, and liquid waste. We have instituted a recycling program for
cardboard, office paper and glass at minimal cost to us. Spent grain is given away to local cattle dairy farms free of charge.
We pay approximately $2,500 per month in sewer fees for liquid waste. We follow and operate under the rules and regulations of
the New York Department of Environmental Conservation for Air Pollution Control.
Various states in which
we sell our products, including California and New York, have adopted certain restrictive packaging laws and regulations for beverages.
These laws require deposit on packages. Such laws have not had a significant effect on our sales. The adoption of similar legislation
by Congress, a substantial number of states or additional local jurisdictions might require us to incur significant capital expenditures
for compliance. We believe we are in compliance with all applicable Canadian laws and regulations.
In general, European packaging
regulations are covered by specifications provided by the European Union; we believe we are in compliance with such specifications.
Dram Shop Laws
The
serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being
held liable to third parties for injuries caused by the intoxicated customer. Our brewpub and tasting room have limited hours and
our employees have knowledge of this issue. Large awards in excess of our insurance coverage could adversely affect our financial
condition.
EMPLOYEES
As of December 31, 2013,
MBC had 62 full-time and 11 part-time employees in the United States, including 12 in management and administration, 41 in brewing
and production operations, 5 in retail and tavern operations and 15 in sales and marketing positions. In England, UBIUK and KBEL
together had 21 full-time and 2 part-time employees as of December 31, 2013, including 14 in sales and marketing and 9 in managerial
and administrative positions. Management believes that our relationship with our employees is generally good.
Approximately 14 employees
currently engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery are represented by Teamsters Local No. 896,
International Brotherhood of Teamsters, AFL-CIO (the “Union”). Under our previous collective bargaining agreement with
the Union, all of such 14 employees’ positions must be held and filled by members of the Union. The collective bargaining
agreement expired on July 31, 2013. We are in discussion with the union to negotiate a new agreement. If we are unable to reach
a new agreement, we may face production interruption at our Ukiah brewery resulting in adverse material impact on our operations,
financial results and cash flow.
RESEARCH AND DEVELOPMENT
We have not spent a material
amount during the last two fiscal years on research and development activities or 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 about risks 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 economies in which we sell our products. Any of the following risks
or uncertainties might cause our business, financial condition, results of operations or cash flows to suffer.
LACK OF PROFITABLE OPERATIONS:
We incurred a net loss in the North American Territory for 2013 and 2012. From 2005 to 2011, operations in the Foreign Territory
resulted in a net loss. We did not incur a net loss in the Foreign Territory in 2012 or 2013. We believe our losses in both the
North American Territory and the Foreign Territory are attributable to low sales volume and high operating expenses. Our business
is also subject to certain fixed and semi-variable operating costs, which, when combined with the difference between current levels
of production and maximum production capacity in the North American Territory, may cause our gross margins to be sensitive to small
increases or decreases in sales volume. 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. It is uncertain when, if at all, our operations in the North American Territory 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 North American operations continued
to place demands on our working capital. We have loans, lines of credit, other credit facilities, and lease obligations with various
creditors. We may find it difficult to continue our operations, at least in the short term, if any of the following occur: a breach
of any loan provision by us that leads to our default, an inability of any lender to continue to offer credit facilities, our inability
to refinance credit facilities when and as they become due, or 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.
We rely on short and long-term debt to meet
our working capital needs. As described in the “Description of Our Indebtedness” section of Management’s Discussion
and Analysis of Financial Condition and Results of Operations, the terms of the Company’s loan agreement (“Agreement”)
with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”), require that we meet certain financial covenants.
Failure to meet the covenants is an event of default under the Agreement. On September 18, 2013, MBC and Releta received a notice
(the “Default Notice”) from Cole Taylor regarding its intention to exercise certain rights with respect to events of
default of the Company pursuant to the Agreement. Under the Agreement, upon the occurrence of an event of default, all of MBC’s
and Releta’s obligations under the Agreement may, at the option of Cole Taylor, be declared, and immediately shall become,
due and payable, without notice of any kind. The Default Notice states that Cole Taylor has elected to charge a default interest
rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable under the Agreement effective September
1, 2013. Cole Taylor has not waived the events of default described in the Default Notice and has reserved all other available
rights and remedies under the Agreement, certain other related documents and applicable law. Cole Taylor could declare the full
amount owed under the Agreement due and payable at any time for any reason or no reason. The Company has not received any notice
or other communication from Cole Taylor that it intends to exercise any of the remedies available to it under the Agreement in
connection with the events of default. The exercise of additional remedies by Cole Taylor may have a material adverse effect on
the Company’s financial condition and the Company’s ability to continue to operate. If it becomes necessary for MBC
and Releta to seek additional financing, there is no guarantee that MBC and Releta will be able to obtain such financing on terms
favorable to the Company or on any terms.
Rates of interest on our
credit facilities are variable based on the prime lending rates in the United States and the United Kingdom. Any increase in the
prime lending rates would increase our interest expense and could have a material adverse effect on our financial position and
results of operations.
The Agreement contains
covenants that limit our near-term capital expenditures
.
Maintaining our facilities or introducing new products or packaging
may require incremental capital expenditures; however, per the terms of the Agreement, our capital expenditures will be limited
to specified amounts (based on a formula). If the capital expenditures necessary to maintain our facilities or bring new products
or packaging to market are greater than the amounts to which we are limited by this arrangement, our ability to maintain or increase
sales growth could be impaired, which could materially adversely affect our business
.
On November 8, 2013, United
Breweries (Holdings) Limited (“UBHL”), MBC’s indirect majority shareholder, issued a letter of financial support
(the “Letter of Support”) to MBC, to confirm that UBHL had agreed to provide funding on an as needed basis to ensure
that the company is able to meet its financial obligations as and when they fall due. The Letter of Support does not specify either
the terms of UBHL’s support, or a maximum dollar limit. UBHL’s financial support is contingent upon compliance with
any applicable exchange control requirements and other applicable laws and regulations relating to the transfer of funds from India.
The Letter of Support was issued for a period up to December 31, 2014, but, if necessary, Management intends to seek UBHL’s
consent to extend the stated support. If it becomes necessary to seek UBHL’s financial assistance under the Letter of Support
and UBHL is either unable or unwilling to fulfill its commitment to MBC, or to extend the time period of such commitment, it may
result in a material adverse effect on our financial position and on our ability to continue operations.
The Company received a
letter dated November 11, 2013 from UBHL expressing its willingness to commit to invest $2,000,000 in the Company in four installments
to be paid every six months over a two year period. The letter did not state definitive terms for the proposed investment, but
stated that UBHL would prefer to receive “ordinary voting stock” as compensation for such investment. UBHL will consider
additional investment based on a business plan to be provided by the Company. If we are unable to come to a final agreement with
UBHL on the terms of the proposed investment or are unable to find another source of funds, it may result in a material adverse
effect on our ability to continue operations. For example, Cole Taylor may seek to satisfy any outstanding obligations through
recourse against the applicable pledged collateral which may include our real property, fixed assets and current assets. The loss
of any material pledged asset would likely have a material adverse effect on our financial position and results of operations.
COMPETITION: We face intense
competition in both our North American Territory and in our Foreign Territory from competitors in the beer market and 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 dependent
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 North American operations. As a result, an interruption in the supply chain might have an adverse effect
on our operations if we were unable to find an alternative supplier at a comparable price. Unfavorable weather conditions might
impact the output of crops necessary to brew our products which might, in turn, affect our supply chain. The price of malt increased
significantly in the first quarter of 2012 due to limited supply and higher demand and has remained at such increased price level
(See Part 1, Item 1, “Sources And Availability of Raw Materials”). We may not be in a position to pass the entire amount
of any cost increase to our customers which may have an adverse effect on our operations.
WATER: Our brewing operations
use significant amount of water. Due to drought conditions in California, there may be a shortage of water. Any shortage or restricted
supply of water will have a material adverse impact on our ability to brew the product and an adverse effect on our results of
operations, cash flows and financial position.
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 Saratoga Springs, New York facility. Approximately 33% of our sales volume in the
North American Territory for fiscal year 2012 was comprised of sales made under such contract brewing arrangements. During the
year 2013, our contract sales volume decreased significantly because our biggest contract brewer shifted production to their newly
constructed facility. There is no certainty that our existing arrangements will be extended in the future, that we will be able
to enter into a new contract for the sales volume represented by our former biggest contract brewer, or that we will be able to
enter into other new arrangements. Any significant variation in contract brewing arrangements could have a material adverse effect
on our results of operations, cash flows and financial position.
DEPENDENCY ON DISTRIBUTORS:
We sell beer (which is physically distributed by HUK in the European Territory and by another contractual partner in Germany) to
independent beer distributors for distribution to retailers. Although the Company currently has arrangements sufficient to meet
our current needs with its wholesale distributors to distribute the products, any sustained growth would require us to maintain
such relationships and possibly enter into agreements with additional distributors. Changes in control or ownership of the current
distribution network could lead to less support of our products. No assurance can be given that we will be able to maintain or
secure additional distributors on terms favorable to us. Our ability to maintain existing distribution arrangements may be adversely
affected by the fact that many of our distributors are reliant on one of the major beer producers for a large percentage of their
revenue and, therefore, they may be influenced by such producers. If our existing distribution agreements are terminated, we may
not be able to enter into new distribution agreements on substantially similar terms, which may result in an increase in the costs
of distribution.
ARRANGEMENT WITH HUK: KBEL
entered into a brewing agreement that grants HUK 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 Foreign Territory. Any interruption of the brewing, packaging
or distribution of our products by HUK for any reason is likely to have a material adverse effect on our results of operations,
cash flows and financial position. In addition, any failure of HUK to comply with any applicable laws or regulations may have an
adverse impact on us.
GROSS
MARGINS: Our gross margins may fluctuate while our expenses remain constant
.
We anticipate that our future gross margins
will fluctuate and may even decline as a result of many factors, including disproportionate depreciation and other fixed and semi-variable
operating costs, and the level of production at our breweries in relation to current production capacity. Our sales volume is much
lower than our brewing and packaging capacities, leading to under utilization (See “Item 2 – Properties” below).
Both of our brewing facilities incur maintenance and other costs on a level consistent with their maximum capacity rather than
with their current utilization levels. Our high level of fixed and semi-variable operating costs causes gross margin to be especially
sensitive to relatively small increases or decreases in sales volume. Other factors that could affect cost of sales include changes
in freight charges, the availability and prices of raw materials and packaging materials, the mix between draft and bottled product
sales, and federal or state excise taxes and levies. Our inability to align costs and utilization rates affects our capital, liquidity,
and management resources. Failure to adequately align such costs and utilization rates may have a material adverse effect on our
business, financial condition, and results of operations.
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 2014. There is no guarantee that we will be able to renew our agreement with MicroStar or enter into
a new agreement for the supply of kegs on terms favorable to the Company or at all. Under the terms of the agreement with MicroStar,
we receive our entire supply of kegs exclusively from MicroStar. If the agreement is terminated, we are required to purchase from
MicroStar four times the average monthly keg usage for the preceding six-month period. We may need additional funds to purchase
those kegs. An interruption in the supply of kegs or, in the 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 flows or
financial position.
SEASONALITY: Sales of craft
beer products in the United States and beer sales in the United Kingdom are somewhat seasonal, with the winter months historically
being the slowest and the summer months generating stronger sales. Our sales volume may also be affected by weather conditions.
Therefore, the results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. If an
adverse event such as a regional economic downturn or poor weather conditions should occur during the second and third quarters,
the adverse impact to our revenues would likely be greater as a result of the seasonal business.
REGULATION
AND TAXATION: The manufacture and sale of alcoholic beverages is a business that is highly regulated and taxed at the federal,
state and local levels. Our operations may be subject to more restrictive regulations and higher taxation compared to non-alcohol
related businesses. For instance, brewery and wholesale operations require various federal, state and local licenses, permits and
approvals. In addition, some states prohibit wholesalers and retailers from holding an interest in any supplier such as the Company.
Violation of such regulations can result in the loss or revocation of existing licenses by the wholesaler, retailer and/or supplier.
The loss or revocation of any existing licenses, permits or approvals, failure to obtain any necessary additional or new licenses,
permits or approvals, or the failure to obtain approval for the transfer of any existing permits or licenses, could have a material
adverse effect on our ability to conduct our business. Because of the many and various licensing and permitting requirements and
the complexity of complying with all such requirements, there is a risk that one or more regulatory authorities could determine
that we have not complied with applicable licensing or permitting regulations, paid the appropriate excise taxes, or maintained
the approvals necessary to conduct business within their respective jurisdictions. There can be no assurance that any such regulatory
action would not have a material adverse effect upon us or our operating results.
Various
jurisdictions frequently propose increasing the federal and/or state excise tax on alcoholic beverages, or certain types of alcoholic
beverages such as flavored malt beverages, either to increase revenues, or discourage purchase by underage drinkers. If adopted,
these measures could affect some or all of our products. If federal or state excise taxes are increased, we may have to raise prices
to maintain present profit margins which may have an impact on our sales volume. Higher taxes on beer may reduce the overall demand,
thus negatively impacting sales of our products. Recently, states have been reviewing the tax treatment for flavored malt beverages.
A change in such treatment could result in increased costs for the Company and decreased sales.
Further
federal or state regulation may be forthcoming that could limit distribution and sales of alcohol products. Such regulation might
reduce our ability to sell our products at retail and at wholesale and could severely impact our business.
CHANGE IN PUBLIC ATTITUDE
AND DRINKING PREFERENCES: There is 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.
Consumer drinking preferences may also change due to the availability of an increasing variety of products in the craft brew segment.
Any change in government regulation or shift in consumer preference may have an adverse impact on our operations. Consumer demand
for luxury items, including craft beer, is sensitive to downturns in the economy and the corresponding impact on discretionary
spending. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual
general economic conditions, job losses and the resultant rising unemployment rate, perceived or actual decreases in disposable
consumer income and wealth and changes in consumer confidence in the economy could significantly reduce customer demand for craft
beer in general, and our products, specifically. Furthermore, any of these factors may cause consumers to substitute our products
with the fuller-flavored national brands or other more affordable alternatives. In either event, decreased consumer demand would
likely have a significant negative impact on our operating results.
ADVERTISING
AND MARKETING EFFORTS: The sales and marketing programs we use to generate demand for our products may be unsuccessful
.
In the future this could lead us to lower the prices that we charge for our products, depending on competitive factors in our various
markets. To increase demand for our products, we have participated in price promotions with our wholesalers and retail customers
in most of our markets. The number of markets in which we participate in price promotions and the frequency of such promotions
may change depending upon market conditions. There can be no assurance that our price promotions will be successful in increasing
demand for our products. If consumers were unwilling to accept our products or if general consumer trends caused a decrease in
the demand for beer, including craft beer, it would adversely impact our sales and results of operations. If the flavored alcohol
beverage market, the wine market, or the spirits market continues to grow, this could draw consumers away from our products and
have an adverse effect on sales and results of operations. Furthermore, if beer consumption in general were to fall out of favor
among consumers, or if the beer industry were subjected to significant additional governmental regulation, our operations could
be adversely affected.
INFORMATION
TECHNOLOGY SYSTEMS: We rely upon the capacity, reliability and security of our information technology, or IT, systems across all
of our major business functions, including manufacturing, retail, financial and administrative functions. We also rely on systems
owned and operated by third party business vendors to process payroll for our employees. Our business requires us to use and store
customer, employee and business partner personally identifiable information, which we refer to as PII. This may include names,
addresses, phone numbers, email addresses and contact preferences.
Information
technology helps us operate efficiently and produce our financial statements. If we do not allocate and effectively manage the
resources necessary to sustain our technology infrastructure, we could be subject to transaction errors, processing inefficiencies,
business disruptions or the loss of or damage to intellectual property through security breach. Any inefficiency in our data management
systems could materially impair our ability to effectively plan, forecast and execute our business plan and comply with applicable
laws and regulations. We also face the challenge of supporting our older systems and implementing upgrades when necessary. Any
such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness
with which we report our internal and external operating results.
We
require user names and passwords in order to access our information technology systems. We also use encryption and authentication
technologies to secure the transmission and storage of data. We rely on security measures implemented by third party vendors to
protect our PII. These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance,
faulty password management or other irregularities, and result in persons obtaining unauthorized access to our data or accounts.
We
are not aware of any material cyber attack on our information technology systems. The costs to timely detect and eliminate or alleviate
network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant,
and our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, or cessation
of service, and may harm our business operations. Moreover, if a computer security breach affects our systems or results in the
unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease.
We would also be exposed to risks of loss, litigation and potential liability, which could result in a material adverse effect
on our business, results of operations and financial condition. We do not have specific insurance coverage against risks related
to cyber incidents.
INSURANCE:
We may experience material losses in excess of insurance coverage. We believe that we have a reasonable amount of insurance coverage
for a business of our size and type. There are, however, certain types of catastrophic losses that are not generally insured because
it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits occur,
such loss could have an adverse effect on our results of operations and financial condition.
LITIGATION:
In the future we may be subject to litigation that
could have a material adverse effect on our financial condition and operations.
At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings
cannot be predicted. If a plaintiff were successful in a claim against our Company, we could be faced with the payment of a material
sum of money. If this were to occur, it could have an adverse effect on our financial condition.
COMMON
STOCK PRICE: The market for our Common Stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade
on any national securities exchange, the only market currently available, to the extent any trading occurs, is the “bulletin
boards/pink sheets”. It is
possible that no active public market with significant liquidity will ever develop. Thus,
investors run the risk of never being able to sell their shares or selling at a depressed price. Our Common Stock price could be
subject to significant fluctuations and/or may decline. Factors that could affect our stock price include, but are not limited
to:
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the entry into, or termination of, key agreements;
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the introduction of new products by us or our competitors;
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future sales of our Common Stock;
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variations in our operating results;
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changes in the market values of public companies that operate in
our business segment;
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general market conditions; and
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domestic and international economic factors unrelated to our specific
performance.
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DIVIDENDS: We have never
paid cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. Instead, we will
likely retain future earnings for reinvestment in our business.
ITEM
1B.
UNRESOLVED STAFF COMMENTS.
Not required for smaller
reporting companies.
ITEM
2.
PROPERTIES.
BREWING FACILITIES
We own nine acres of land
in Ukiah, California on which our Ukiah brewery is located. Management believes that this facility is adequate for our current
capacity and also provides space for future expansion. Cole Taylor Bank currently holds a deed of trust on this property in connection
with a loan advanced to us. (See “Item 7. – Management’s Discussion and Analysis of Financial Condition and Results
of Operations – Description of our Indebtedness – Cole Taylor Facility”). The principal amount outstanding on
the loan as of December 31, 2013 was $2,570,900.
We have estimated the life
of the Ukiah brewery at 40 years and depreciate the cost of the building on a straight-line method over its anticipated life. We
do not depreciate the cost of the land. Our assessed value on the Ukiah facility is approximately $10,257,900. 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 (including machinery and equipment) at a rate of 1.157%, for an annual tax of $118,700.
We also lease 3.66 acres
in Saratoga Springs, New York, on which the Ten Springs brewery facilities are located. In 2009, we leased additional warehouse
space and entered into a new lease. The current term of this lease expires on July 2014, with an option to extend the lease for
three successive terms of five years each, provided that the lease is not in default. We have notified the landlord that we intend
to exercise this option.
Based on current product
mix, the brewery in Ukiah, California has a current annual cellar capacity of approximately 55,000 bbl, and the brewery at Saratoga
Springs, New York currently has an annual cellar capacity of approximately 45,000 bbl. per year. The Ukiah and Saratoga Springs
breweries have annual packaging capacity of 100,000 bbl. and 90,000 bbl. respectively on a single shift basis, and each brewery
has annual brewing capacity of 200,000 bbl. (See “Item 1A – Risk Factors – Gross Margins” above.)
ALE HOUSE
We have leased
a 2,500 square foot building in Ukiah, California where our ale house and merchandise store is located.
OFFICE SPACE
KBEL has leased approximately
2,000 square feet of office space in Maidstone, Kent, in England. We do not own or lease any other material properties in Europe.
MACHINERY AND EQUIPMENT
We lease certain equipment
and vehicles under capital and operating leases which expire at varying times. Additionally, we lease equipment and vehicles under
various other leases. As these leases expire, it is anticipated that, in accordance with our current practices, the equipment will
be acquired, the vehicles will be surrendered, and we will enter into new vehicle leases.
We consider our 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.
The Company is
involved from time to time in claims, proceedings and litigation arising in the normal course of business. The Company believes
that, to the extent that any pending or threatened litigation involving the Company or its properties exists, such litigation will
not likely have any material adverse effect on the Company’s financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The following table sets forth the names, ages
as of February 28, 2014, and certain information regarding each of our current directors and executive officers:
|
Name
|
|
Age
|
|
|
Position(s)
|
|
Director Since**
|
|
|
Scott R. Heldfond *+
|
|
|
69
|
|
|
Director
|
|
|
2005
|
|
|
Michael Laybourn+
|
|
|
75
|
|
|
Director
|
|
|
1993
|
|
|
Vijay Mallya, Ph.D.
|
|
|
58
|
|
|
Director and Chairman of the Board
|
|
|
1997
|
|
|
Jerome G. Merchant*
|
|
|
52
|
|
|
Director
|
|
|
1997
|
|
|
Mahadevan Narayanan
|
|
|
56
|
|
|
Chief Financial Officer and Secretary
|
|
|
N/A
|
|
|
Sury Rao Palamand, Ph.D.
|
|
|
83
|
|
|
Director
|
|
|
1998
|
|
|
Kent D. Price*+
|
|
|
70
|
|
|
Director
|
|
|
1998
|
|
|
Yashpal Singh
|
|
|
68
|
|
|
Director, President and Chief Executive Officer
|
|
|
1997
|
|
|
**
|
All directors are elected by our shareholders at the Annual Meeting to serve until the following Annual Meeting. Currently, there are no arrangements or understandings between (i) any of the directors and any other person pursuant to which any director was or is to be selected as a director or (ii) any of the executive officers and any other person pursuant to which any executive officer was or is to be selected as an executive officer. We have entered into an employment agreement with our Chief Executive Officer pursuant to which his term of employment has been extended until September 30, 2015. Our Chief Financial Officer does not have any set date for the expiration of his term of office.
|
|
*
|
Member of the Audit/Finance Committee.
|
|
+
|
Member of the Compensation Committee.
|
Mr. Scott Heldfond joined the Board in January 2005. He was a Director
of NASDAQ Insurance Group, LLC, a national insurance brokerage and consulting firm owned by the NASDAQ Stock Market prior to the
firm’s sale to Aon Risk Services in 2009. Mr. Heldfond currently services as a Director at Aon Risk Services. 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 firm from
1995 to 1999, as Chairman of Hales Capital LLC, an investment banking firm from 1994 to February 1997 and as President of AON Real
Estate & Investments . Mr. Heldfond also previously served as a Director of HomeGain, Inc. (later sold to Classified Ventures),
a private venture backed company, and currently serves as a Director of UBICS Inc., a NASDAQ traded firm that provides information
technology staffing and solutions for domestic and international businesses. Mr. Heldfond also served as a Director of Galoob Toys,
which was the third largest toy manufacturer 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 Mayoral appointed Commissioner 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 retired
Honorary Consul General to the United States for the Republic of Rwanda. Mr. Heldfond’s expertise in risk management and
insurance matters, in particular, led to his selection as a member of the Board.
H. Michael Laybourn, co-founder
of the Company, served as the Company’s President from its inception in 1983 through December 1999, and as its Chief Executive
Officer from inception through October 1997. Mr. Laybourn was elected as 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.
Mr. Laybourn’s expertise in craft brewing, in particular, led to his selection as a member of the Board.
Dr. Vijay Mallya, Ph.D.,
became Chairman of the Board in October 1997 and was MBC’s Chief Executive Officer until January 2005. Dr. Mallya is a well
known industrialist and the Chairman of UBICS, Inc., United Breweries Limited, United Spirits Limited, Whyte & Makay Limited,
United Breweries (Holdings) Limited (which is the indirect beneficial owner of two of MBC’s largest shareholders (United
Breweries of America, Inc. and Inversiones Mirabel S.A.)), Kingfisher Airlines Limited, UB Engineering Limited, Mangalore Chemicals
and Fertilizers Ltd., and other affiliated companies (collectively the “UB Group”). The UB Group is comprised of businesses
in the following sectors: alcoholic beverages, life sciences, engineering, agrochemicals, information technology, fertilizers,
print media, civil aviation and infrastructure development. United Breweries Limited and United Spirits Limited are two of Asia’s
leading beer and spirits companies. Dr. Mallya is also a keen sportsman and an ardent aviator and yachtsman. Dr. Mallya and
certain companies with which he is associated provide financial and other support for several sporting activities worldwide, including
the Force India F1 Formula One Motor Racing Team, the United East Bengal Football Team and the United Mohun Bagan Football Team.
He also sits on the boards and committees of several foreign companies and organizations including companies comprising the UB
Group, The Institute of Economic Studies (India), the Federation of the Indian Chamber of Commerce and Industries and Motorsports
Association of India. Dr. Mallya has been the recipient of many prestigious awards and accolades, including being nominated to
the Global Leaders of Tomorrow by the World Economic Forum, receiving the Légion d’ Honneur from the Government of
France in 2008 and the Outstanding Business Leader Award from the Associated Chambers of Commerce and Industry of India in 2009.
Dr. Mallya is currently serving as a member of the Upper House of the Indian Parliament for the second time. 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. Dr. Mallya’s knowledge and expertise in the global alcoholic beverage industry
were significant in his selection as a member of the Board as well as his appointment as Chairman.
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 served
as the Strategic Planning Consultant to the Chairman’s Office of the Company from July 1996 until January 2007. Mr. Merchant
is a Managing Director with Kinetic Advisors, LLC, a boutique mid-market investment advisory company. He has over 20 years of experience
in investment banking and capital raising transactions. Previously, he held executive positions at McGladrey Capital Markets, Citigroup
and MetLife Investors. Mr. Merchant has advised the investment division and clients of Citibank and Smith Barney, 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 focused
on equity oriented management buyouts and strategic acquisitions. He received his B.S. degree in Managerial Economics-Finance from
the University of California, Davis. Mr. Merchant’s expertise in capital raising and financial markets contributed to his
selection as a member of the Board.
Mahadevan
Narayanan joined the company in 2001 as Secretary and Chief Financial Officer. Before joining the Company, he served the UB Group
(including affiliates of the Company) in India for 17 years as part of the management team in various financial and accounting
capacities. Immediately prior to joining the Company, Mahadevan Narayanan was employed as Senior Manager of Accounting Services
of Herbertsons Ltd. for 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 MBC 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 and is involved in the development of microbreweries and brewpubs, and 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 United States 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
Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS WHO’S WHO in America and in the WHO’S
WHO in the Midwest. In particular, Mr. Palamand’s technical expertise in fermented beverages was an important criteria in
his selection as a member of the Board.
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, the University of California, Los
Angeles and Harvard Business School. Mr. Price is a member of the board of directors of the University of Montana and a
served on its Foundation and Investment Committee. Mr. Price is the chairman of Fluid Inc., a technology enhanced service
company that is a leader in the development of eCommerce sites. Mr. Price has extensive operational experience, including as
Chief Executive Officer of The Chloride Group, a global battery company, Chief Executive Officer of the Bank of San
Francisco, General Manager of Banking, Finance and Securities Group at IBM, Chief Financial Officer 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 and Singapore as well as the United States. He has
served on various boards of directors of companies based in the UK, India, South Africa, Hong Kong, Taiwan, China and the
United States. Mr. Price served on the board of directors of UBICS (a NASDAQ listed company). Mr. Price served as a
Captain in the United States Air Force. Mr. Price’s banking and financial expertise was important in his selection as a
member of the Board.
Yashpal
Singh became a director of MBC in October 1997 and served as the Company’s Executive Vice President and Chief Operating
Officer beginning in April 1998. Mr. Singh became the Company’s President in January 2000 and its Chief Executive Officer
in January 2005. From May 1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for UBA, one of MBC’s
major shareholders. Between 1964 and 1990, Mr. Singh served in various capacities including as Head Brewer and Chief Executive
Officer of a large alcoholic beverage corporation in India. Between 1990 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, the establishment
of new green-field projects, and technical and operational evaluations of potential acquisition opportunities worldwide. Mr. Singh
holds a Bachelor’s degree in Science from Punjab University in India, a Diploma in Brewing from the Institute of Brewing
and Distilling in London and has extensive 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. Mr. Singh has over 48 years of varied
experience in the brewing industry. Mr. Singh’s long standing technical and management expertise in brewing led to his selection
as a member of the Board.
FAMILY
RELATIONSHIPS
There
are no family relationships among any of the directors and executive officers.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based
solely on our review of the Forms 3, 4 and 5 furnished to us during and with respect to fiscal year 2013, we are not aware of
any 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 our most recent fiscal year.
AUDIT
COMMITTEE
We
have a separately-designated standing Audit/Finance Committee established in accordance with Section 3(a)(58)(A) of the Exchange
Act. Jerome G. Merchant, Scott R. Heldfond and Kent D. Price serve as the committee members of the Audit/Finance Committee.
AUDIT
COMMITTEE FINANCIAL EXPERT
The
Board has determined that Mr. Kent D. Price, a member of our Audit/Finance Committee, is both an independent Director and qualifies
as an “audit committee financial expert” as that term is defined in the Exchange Act, and pursuant to the rules and
regulations promulgated by the SEC.
CODE
OF ETHICS
We
have adopted a Code of Ethics that applies to our Chief Executive Officer (principal executive officer), Chief Financial Officer
(chief financial officer), and principal accounting officer. The Code of Ethics is posted on our website at www.mendobrew.com.
We intend to disclose future amendments to certain provisions of our Code of Ethics, or waivers of such provisions granted to
executive officers and directors on our 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 our Secretary, Mahadevan Narayanan, at
our principal executive office 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 Board. Once the date of the
next annual meeting has been set, the Company will file a current report on Form 8-K disclosing the date by which a nominating
shareholder or nominating shareholder group must submit a notice on Schedule 14N, which date shall be a reasonable time before
we mail our proxy materials for the meeting.
Corporate
Governance
Director
Independence
The
Board has determined that the following directors qualify as “independent” in accordance with the published listing
requirements of NASDAQ: Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh is not “independent”
because he is an employee of MBC. Dr. Mallya is not independent since he has received payments in excess of the applicable threshold
from the Company during the last three (3) years. Prior to 2007, Mr. Merchant provided certain consulting services to the Company,
however, given the timing and nature of such services as well as the amount of compensation provided in relation thereto, the
Board has determined that Mr. Merchant meets the criteria for being an “independent director”.
The
NASDAQ rules contain 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 a parent
or subsidiary) (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 $120,000 during any period of 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 (or a parent
or subsidiary) 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 in the current year or at any time during the past three (3)
years that exceed the greater of (a) five percent (5%) of the recipient’s consolidated gross revenues or (b) $200,000 for
that year; (v) is (or has a family member who is) employed as an executive officer of another entity where at anytime during the
past three (3) years any of the executive officers of the Company serve on the compensation committee of such other entity; or
(vi) is (or has a family member who is) a current partner of the Company’s outside auditor who worked on the Company’s
audit at anytime during any of the past 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.
Leadership
Structure
Since
January 2005, the Company has separated the roles of Chairman of the Board and Chief Executive Officer. From 1997 until January
2005, Dr. Vijay Mallya served as both the Chief Executive Officer as well as Chairman of the board of directors of MBC (the “Board
of Directors” or the “Board”). The Board of Directors believes that the separation of the roles of Chief Executive
Officer and Chairman of the Board provides the Company with additional processes, controls and oversights that facilitate the
functioning of the Board of Directors and its decision-making in the best interests of MBC and its shareholders. In addition,
the separation of the roles of Chairman and Chief Executive Officer permit the holders of such offices to focus on the fundamental
duties and specialized nature of the respective office. MBC’s Chairman, Dr. Vijay Mallya, and the Board of Directors works
together with the Chief Executive Officer to develop MBC’s strategic goals. Dr. Mallya also acts as an international brand
ambassador and presides over the Board of Directors meetings at which he is present. MBC’s Chief Executive Officer, Yashpal
Singh, is responsible for the day-to-day oversight of the MBC’s performance and the brewing operations. Mr. Singh is also
responsible for the implementation of MBC’s strategic goals. The Board of Directors may review its leadership structure
from time to time and implement any changes that it deems appropriate to respond to the needs of the Company.
Risk
Oversight
The
Audit/Finance Committee and Compensation Committee play key roles in the Board of Director’s risk oversight function as
such committee members are all Non-Employee Directors. The Committee system provides an independent level of protection with regards
to MBC’s decision-making processes and an additional mechanism for the oversight of MBC’s risk management controls
and procedures. The Board of Directors as a whole will continue to monitor MBC’s general and specific risks and take action
to manage such risk as it deems appropriate or necessary.
Board
of Directors’ and Committee Meetings
During
the fiscal year ended December 31, 2013, the Board of Directors held two meetings and the Audit/Finance Committee held five meetings.
Two directors did not attend one meeting of the Board of Directors and no director attended fewer than 75% of the meetings any
committees of which such Director was a member.
Listed
below are the committees of the Board of Directors, along with the names of the Directors who served as members of each committee
during 2013.
Audit/Finance
Committee
. The Board of Directors has a standing Audit/Finance Committee.
Messrs.
Merchant, Price, and Heldfond serve as the members of the Audit/Finance Committee (established in accordance with Section 3(a)(58)(A)
of the Exchange Act). This committee met five times during fiscal year 2013. The Audit/Finance Committee reviews, acts on, and
reports to the Board of Directors with respect to various auditing, accounting and finance matters, including the selection of
the Company’s auditors, the scope of the annual audits, the fees to be paid to the auditors, the performance of the Company’s
auditors, and the accounting practices of the Company. In the judgment of MBC’s Board of Directors, the members of the Committee
are “independent,” as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules and also meet the additional
criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
Nominating
Committee
. Due to its limited size, the Board of Directors does not have a nominating committee or a committee performing
similar functions. Instead, all of the Directors participate in the director nomination process. A few of MBC’s Directors
may not meet the criteria to qualify as “independent” under the rules of NASDAQ or under the applicable rules of the
other national securities exchanges.
Compensation
Committee
. Messrs. Heldfond (Chair), Price, and Laybourn served on MBC’s Compensation Committee for the fiscal year
ended December 31, 2013. The Compensation Committee considers all matters of compensation with respect to the chief executive
officer, president, any vice president, and any other senior executive, and makes recommendations to the Board of Directors regarding
the compensation of such persons. The Compensation Committee also makes determinations with respect to the granting of stock awards
to directors who are also employees of MBC. In the judgment of MBC’s Board of Directors, the members of the Compensation
Committee are “independent” as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules.
ITEM
11.
EXECUTIVE COMPENSATION.
SUMMARY
COMPENSATION TABLE
The
following table sets forth the annual compensation of our Chief Executive Officer (principal executive officer) and Chief Financial
Officer (principal financial officer), who are the only MBC employees whose total compensation exceeded $100,000 during the fiscal
year ended December 31, 2013.
Neither
of these executive officers has been issued equity shares or stock options as compensation to date.
Name and Principal
Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
All Other
Compensation
($)*
|
|
|
Total
($)
|
|
|
(a)
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
(i)
|
|
|
(j)
|
|
|
Yashpal Singh President and Chief Executive Officer
|
|
|
2013
|
|
|
|
304,000
|
|
|
|
30,500
|
|
|
|
18,600
|
|
|
|
353,100
|
|
|
|
|
|
2012
|
|
|
|
304,000
|
|
|
|
27,500
|
|
|
|
17,000
|
|
|
|
348,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mahadevan Narayanan Chief Financial Officer and Corporate Secretary
|
|
|
2013
|
|
|
|
181,100
|
|
|
|
18,200
|
|
|
|
22,100
|
|
|
|
221,400
|
|
|
|
|
|
2012
|
|
|
|
181,100
|
|
|
|
16,500
|
|
|
|
22,400
|
|
|
|
220,000
|
|
* Other
compensation 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 determines and administers the compensation for our executive officers. The Compensation 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 Compensation 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.
We
have entered into an Employment Agreement with our Chief Executive Officer that sets forth the terms of his employment and provides
for certain benefits. The term of the agreement was extended to September 30, 2015. We do not currently have an employment agreement
in place with our Chief Financial Officer. We do not have any severance payment arrangements other than with the Chief Executive
Officer. We have 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 us. In addition, if the Chief Executive Officer is
terminated either with or without cause without 12 months’ notice, he is entitled to be paid an amount equal to twelve months
of his base salary. We do not have any payment arrangements that would be triggered by a “change in control” of MBC.
Total
compensation for the Chief Executive Officer and Chief Financial Officer consists of base salary, annual cash bonus payments,
health benefits for each such officer and his immediate dependent family members, use of company vehicle, vacation reimbursement
and, with respect to the Chief Executive Officer only, life insurance.
Elements
of Compensation
MBC
selected elements of compensation to provide incentives for its executive officers to relocate to the United States from India.
In so doing, MBC reviewed the compensation packages of its executive officers at their prior positions in India, so that comparable
packages could be provided.
Base
Salary
The
Compensation Committee establishes executive officers’ base salaries on an annual basis. Given our stock performance and
financial situation, there is currently no salary component directly tied to our stock price or to our financial performance.
Effective as of January 1, 2012, the Compensation Committee increased the annual base salary of the Chief Executive Officer and
the Chief Financial Officer to $304,000 and $181,100 respectively. No adjustments have been made to such salaries during fiscal
2013.
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 MBC’s past working capital constraints, the Compensation 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. In the past few years. approximately 10% of the cash compensation
paid to each of the Chief Executive Officer and the Chief Financial Officer was paid in the form of a bonus rather than as salary.
Perquisites
and Personal Benefit
In
addition to salary and annual bonus, the total compensation of our Chief Executive Officer and Chief Financial Officer includes
perquisites and personal benefits. The types of perquisites and personal benefits awarded to such officers were determined when
each such officer commenced employment with us 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
We
do not currently maintain any equity compensation plans for or provide any form of equity compensation to our executive officers.
Retirement
Plans
On
August 27, 2009, we entered into a certain Separation and Severance Agreement (the “Separation Agreement”) with Mr.
Yashpal Singh, our President and Chief Executive Officer.
Pursuant
to the terms of the Separation Agreement, upon Mr. Singh’s (i) termination of employment for Good Reason (as defined in
the Separation Agreement), (ii) termination of employment at the end of the employment term, (iii) death, (iv) disability or (v)
termination by us without Cause (as defined in the Separation Agreement), he shall be entitled to certain severance benefits and
payments. The severance payment shall equal the product of (x) 2.5 times his average monthly base salary (calculated over the
twelve (12) month period preceding the termination event), multiplied by (y) the number of years (on a pro rated basis) he had
been employed by the us at the Termination Date (as defined in the Separation Agreement); provided, however, that the severance
payment may not exceed thirty (30) months of Mr. Singh’s average monthly base salary (calculated over the twelve (12) months
preceding his termination date). In addition, we agreed to pay COBRA premiums for Mr. Singh and his spouse until the earlier of
(i) the effective date on which he obtains comparable health insurance from a subsequent employer or (ii) eighteen (18) months
following his Termination Date. Mr. Singh shall also be entitled to accrued salary, vacation time and benefits as set forth in
Mr. Singh’s employment agreement.
If
Mr. Singh’s employment is terminated without Cause, in addition to the severance payment described above, he shall also
receive either (i) 365 days prior written notice or (ii) a lump sum payment equal to twelve (12) months of his base salary at
the rate in place at the Termination Date (the “Notice Payment”).
In
case of Mr. Singh’s resignation without Good Reason, he shall be entitled to accrued salary, vacation time and benefits
set forth in his employment agreement but shall not be entitled to the severance payment or the Notice Payment.
If
Mr. Singh is terminated by us for Cause, he shall be entitled to (i) accrued salary, vacation time and benefits as set forth in
his employment agreement and (ii) if we do not provide Mr. Singh at least twelve (12) months prior notice, the Notice Payment.
Mr. Singh shall not be entitled to the severance payment in case of termination by MBC for Cause.
Payments
due to Mr. Singh under the Separation Agreement shall be paid in equal installments by the Company over a 20 month period. The
receipt of payments is contingent on Mr. Singh executing a release of claims for the benefit of the Company.
For
purposes of illustrating the potential amounts payable to Mr. Singh under the Separation Agreement, assuming a termination date
of December 31, 2013, Mr. Singh would have received the following approximate amounts of compensation for the applicable triggering
event: termination by the Company for Cause - $304,000; completion of term of Employment Agreement - $760,100 plus COBRA payments;
termination due to disability or death - $760,100 plus COBRA payments; termination by Mr. Singh for Good Reason - $760,100 plus
COBRA payments; or termination by the Company without Cause - $1,064,100 plus COBRA payments.
Except
for the Employment Agreement and Separation Agreement with Mr. Singh, MBC does not currently maintain any other retirement plans
nor provide any post-retirement benefits to any employee or executive officer.
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.
DIRECTORS’
COMPENSATION FOR THE YEAR 2013
Dr.
Vijay Mallya, Chairman of the Board, is paid $120,000 per year by MBC for services rendered as Chairman, and £89,600 per
year (approximately $140,100 in United States dollars at the average exchange rate for the year 2013) by UBIUK for promoting our
products in the Foreign Territory outside the United Kingdom.
Effective
as of January 1, 2012, the Board adopted a directors compensation plan ( the “Directors’ Compensation Plan”)
with respect to the compensation of Non-Employee (as defined therein) members of the Board for their services as directors. The
Directors’ Compensation Plan was subsequently approved by the shareholders in January 2013. Under the terms of the Directors’
Compensation Plan, each Non-Employee director receives a fixed annual retainer of $15,000 as well as additional fees of $1,250
per meeting of the Board and $1,250 per committee meeting attended. The chairs of the Compensation Committee and the Audit/Finance
Committee each receive $4,500 in fees for acting as chairpersons of such committees. In addition, each Non-Employee Director on
January 1 of each calendar year during the five year period commencing January 1, 2012 and ending December 31, 2016 shall receive
an addition $2,000 per year.
|
|
|
Fees
Earned
or Paid in Cash
|
|
|
Total
|
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
(a)
|
|
(b)
|
|
|
(h)
|
|
|
Dr.
Vijay Mallya
|
|
|
260,100
|
|
|
|
260,100
|
|
|
Kent Price
|
|
|
30,250
|
*
|
|
|
30,250
|
|
|
Sury Rao Palamand
|
|
|
18,250
|
+
|
|
|
18,250
|
|
|
Jerome Merchant
|
|
|
25,750
|
#
|
|
|
25,750
|
|
|
Scott Heldfond
|
|
|
30,250
|
##
|
|
|
30,250
|
|
|
Michael Laybourn
|
|
|
18,250
|
^
|
|
|
18,250
|
|
|
*
|
Fee
for attending two Board meetings and five committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer,
$2,000 additional fixed retainer and $4,500 for acting as Chairman of Audit Committee. $22,875 of such fee was not paid in
2013.
|
|
|
|
|
+
|
Fixed
annual retainer of $15,000 and $2,000 additional fixed retainer and fee for attending one Board meeting calculated at $1,250
per meeting. $13,250 of such fee was not paid in 2013.
|
|
|
|
|
#
|
Fee
for attending two Board meeting and five committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer
and $2,000 additional fixed retainer. $19,500 of such fee was not paid in 2013..
|
|
|
|
|
##
|
Fee
for attending two Board meeting and five committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer,
$2,000 additional fixed retainer and $4,500 for acting as Chairman of Compensation Committee. $22,875 of such fee was not
paid in 2013.
|
|
|
|
|
^
|
Fixed
annual retainer of $15,000 and $2,000 additional fixed retainer and fee for attending one Board meeting calculated at $1,250
per meeting. $15,500 of such fee was not paid in 2013.
|
COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs.
Heldfond (Chair), Price and Laybourn served on MBC’s Compensation Committee for the fiscal year ended December 31, 2012.
Mr. Laybourn served as MBC’s President from inception in 1983 through December 1999 and its Chief Executive Officer from
inception until October 1997. No member of the Compensation Committee or executive officer of the Company has a relationship that
would constitute an interlocking relationship with executive officers or directors of another entity.
Compensation
Committee REPORT
The
Compensation Committee has reviewed and discussed with Management the Compensation Discussion and Analysis contained in this Annual
Report on Form 10-K. Based on the Compensation Committee’s review of and discussions with Management with respect to the
Compensation Discussion and Analysis, our Committee recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in MBC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
The
Compensation Committee
Scott
R. Heldfond (
Chair
)
Kent
D. Price
Michael
Laybourn
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Information regarding Securities Authorized for Issuance under Equity Compensation Plans is provided in Item 5 above.
The
following table sets forth certain information known to the Company regarding the beneficial ownership of MBC’s Common Stock
and Series A Preferred Stock as of February 28, 2014, for each shareholder known by us to own beneficially 5% or more of the outstanding
shares of our Common Stock or Series A Preferred Stock:
|
Security
Ownership of Certain Beneficial Owners
|
|
|
Name
and Address
|
|
Amount
and Nature
of Beneficial
Ownership (1)
|
|
|
Percent
of Class
|
|
|
COMMON
STOCK
|
|
|
|
|
|
|
United Breweries of America, Inc.
1050 Bridgeway,
Sausalito, CA 94965
|
|
|
3,087,818 (2 )
|
|
|
|
24.5
|
%
|
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
|
|
|
|
43.6
|
%
|
United Breweries (Holdings) Limited.
100/1, Richmond Road,
Bangalore - 560 025, India
|
|
|
8,587,818
(2),(3 )
|
|
|
|
68.1
|
%
|
Vijay Mallya
United Breweries of America, Inc.
1050 Bridgeway,
Sausalito, CA 94965
|
|
|
8,587,818 (4 )
|
|
|
|
68.1
|
%
|
(1)
Applicable percentages of ownership are based on 12,611,133 shares of Common Stock outstanding as of February 28, 2014.
(2)
Does not include 2,359,172 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 our 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 primary
offices at Vanterpool Plaza, 2nd Floor, Wickhams Cay 1, Road Town, Tortola, British Virgin Island 2 and a mailing address c/o
CAS SA, 12-14 Avenue, Riverdil, CH-1260, Lyon, Switzerland, (“Rigby”). Rigby is a wholly-owned subsidiary of UBHL.
(4)
Includes all shares indirectly held by UBHL. Does not include 2,359,172 shares issuable to UBA upon conversion of certain convertible
notes issued by MBC to UBA described in footnote (2) above. Dr. Mallya disclaims beneficial ownership of the reported securities
except to the extent of his pecuniary interest therein.
The
following table sets forth certain information known to the Company regarding the beneficial ownership of MBC’s Common Stock
and Series A Preferred Stock as of February 28, 2014, for each director, each executive officer, and all directors and executive
officers of MBC as a group. Except as otherwise noted, we believe 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.
|
Security
Ownership of Management
|
|
|
COMMON
STOCK
|
|
Amount
and Nature
of Beneficial
Ownership
|
|
|
Percent
of
Class (1)
|
|
|
Vijay Mallya
|
|
|
8,587,818 (2)
|
|
|
|
68.1
|
%
|
|
H. Michael Laybourn
|
|
|
492,221
|
|
|
|
3.9
|
%
|
|
Kent D. Price
|
|
|
428,401
|
|
|
|
3.4
|
%
|
|
Sury Rao Palamand (3)
|
|
|
332,110
|
|
|
|
2.6
|
%
|
|
Jerome G. Merchant
|
|
|
290,530
|
|
|
|
2.3
|
%
|
|
Yashpal Singh
|
|
|
--
|
|
|
|
--
|
|
|
Scott R. Heldfond
|
|
|
257,275
|
|
|
|
2.0
|
%
|
|
Mahadevan Narayanan
|
|
|
--
|
|
|
|
--
|
|
|
All Directors and executive officers as a group (8 persons)
|
|
|
10,388,355
|
|
|
|
82.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
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.
(1)
Applicable percentages of ownership are based on (i) 12,611,133 shares of Common Stock outstanding as of February 28, 2014 and
(ii) 227,600 shares of Series A Preferred Stock outstanding as of February 28, 2014.
(2)
Includes all shares indirectly held by UBHL. Does not include 2,359,172 shares issuable to UBA upon conversion of certain convertible
notes issued by MBC to UBA described in footnote (2) of Table 1 above. Dr. Mallya disclaims beneficial ownership of the reported
securities except to the extent of his pecuniary interest therein.
(3)
Shares are held by a revocable trust for the benefit of Mr. Palamand’s immediate family and lineal descendants. Mr. Palamand
serves as the trustee of the trust.
CHANGES
IN CONTROL
There
are no arrangements currently known to us which may result in a change in control of our Company at a future date.
ITEM
13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Since
the beginning of fiscal year 2012, we were 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 average of our 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:
UBA
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 a principal amount of up to $1,600,000. We have executed an Extension of Term of Notes under the Master Line
of Credit Agreement (the “Extension Agreement”) with UBA. The UBA Notes have been extended until June 2012 with automatic
renewals after such maturity date for successive one year terms, provided that either the Company or UBA may elect not to extend
the term upon written notice given to the other party no more than 60 days and no fewer than 30 days prior to the expiration of
such term. No notice of election not to extend the term was received prior to the expiration of the period ending June 30, 2013,
so the current term has been extended until June 30, 2014.
We
have issued thirteen (13) promissory notes to UBA pursuant to the Credit Agreement between the Company and UBA and one note on
substantially similar terms to UBA, but unrelated to the Credit Agreement, between September 1999 and March 2005. On December
28, 2001, we entered into a Confirmation of Waiver with UBA which confirmed that as of August 13, 2001, UBA waived its rights
with regard to the conversion rate protection set forth in the UBA Notes then outstanding. Such waiver does not apply to the single
note issued to UBA on March 2, 2005 that was not related to the Credit Agreement. The aggregate outstanding principal amount of
the UBA Notes as of December 31, 2013 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,582,500,
for a total amount due of $3,497,900.
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 for the notes issued pursuant to the Credit Agreement
and $1.44 for the note issued on March 2, 2005. As of December 31, 2013, the outstanding principal and interest on the UBA Notes
was convertible into 2,349,283 shares of our Common Stock.
As
of February 28, 2014, the aggregate outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest
thereon was equal to approximately $1,597,300. As of February 28, 2014, the entire amount of the outstanding principal and accrued
but unpaid interest owed with respect to the UBA Notes was convertible into 2,359,172 shares of our Common Stock. As of February
28, 2014, UBA beneficially owns approximately 24.5% of our outstanding Common Stock (excluding any shares issuable upon the conversion
of the notes issued to UBA). Our Chairman, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBA. During each
of fiscal years 2013 and 2012, the largest aggregate amount of principal outstanding was $1,915,400. No principal or interest
was paid during fiscal year 2013 or 2012.
License
Agreement
In
July 2001, we entered into a Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., a Delaware corporation
affiliated with UB Limited, pursuant to which we 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. This agreement will remain in effect
for as long as the Distribution Agreement (described below) between UBIUK and KBEL remains in effect. The Distribution Agreement
is scheduled to expire in October 2018 but, pursuant to its amended terms, will no longer provide brewing and distribution rights
in the United States. The Company plans to negotiate arrangements to continue to brew and distribute beer using the Kingfisher
trademark. If the Company cannot obtain the right to brew and distribute beer using the Kingfisher trademark on commercially reasonable
terms, our results of operations, cash flows and financial position may be materially adversely affected.
Because
our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited, the transactions represented
by this license agreement may be deemed to be related party transactions.
The
dollar value of the license agreement cannot be accurately estimated.
Shepherd
Neame, Ltd.
As
described more fully below, our principal European subsidiary, KBEL, was a party to a Brewing Agreement and a Loan Agreement with
Shepherd Neame, both of which expired in October 2013. Shepherd Neame and the Company may be deemed to be related parties with
respect to the Brewing Agreement and the Loan Agreement because Mr. R.H.B. Neame (the Chairman of the board of directors of Shepherd
Neame) was also our director at the time when the Brewing Agreement and the Loan Agreement were entered into and when the Brewing
Agreement was subsequently amended. Further, Mr. David Townshend (a senior Shepherd Neame employee) was serving as the President
of KBEL (pursuant to an agreement between KBEL and Shepherd Neame) and was also our director at the time when the Brewing Agreement
and the Loan Agreement were entered into and when the Brewing Agreement was subsequently amended.
Brewing
Agreement
On
October 9, 1998, UBIUK and KBEL originally entered into a Brewing Agreement with Shepherd Neame, and on October 24, 2001, this
agreement was amended by a Supplemental Agreement (together, the “SN Brewing Agreement”).
The
SN Brewing Agreement, which was entered into (and amended) in conjunction with the Loan Agreement described below, granted 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 distribute such products elsewhere in the Foreign Territory. UBIUK and KBEL 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 UBIUK or our 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 KBEL for destinations within (and, with the consent of Shepherd Neame, outside) the United
Kingdom. The price KBEL paid to Shepherd Neame for brewing Kingfisher Premium Lager for distribution in the United Kingdom was
set by a formula which varied according to the applicable duty on Kingfisher Premium Lager and other factors. Purchases from Shepherd
Neame by KBEL equaled approximately $11,367,700 and $16,192,200 during the years 2013 and 2012 at the average exchange rate in
effect during 2013 and 2012 respectively. Our SN Brewing Agreement with Shepherd Neame expired in October 2013.
The
dollar value of the SN Brewing Agreement could not be accurately estimated.
Loan
Agreement
Concurrently
with the Brewing Agreement described above, KBEL and Shepherd Neame entered into a Loan Agreement, under which on or about October
24, 2001, Shepherd Neame advanced to KBEL £600,000 (the full amount available under the Loan Agreement), at a fixed interest
rate of 5%, for general corporate purposes. This loan was paid in ten annual installments of £60,000 each, commencing on
June 30, 2003 and ending on June 2012, and was fully paid.
Distribution
Agreement
UBIUK
entered into a Distribution Agreement with its wholly-owned subsidiary KBEL on October 9, 1998. Under this agreement, which was
subsequently amended by a Supplemental Agreement dated as of October 24, 2001 and a deed of variation dated March 11, 2013 and
effective October 9, 2013 (together, the “Distribution Agreement”), UBIUK granted KBEL an exclusive sublicense for
the distribution of all lager and other beer products brewed or prepared for sale in the Foreign 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 KBEL to pay UBIUK a royalty fee of 50 British pence (approximately $0.80 at the average exchange rates in
effect during fiscal year 2013) for every 100 liters (26 gallons) of beer brewed for sale in the Foreign Territory, will expire,
with respect to the Foreign Territory sublicense, in October 2018. The royalty due to UBIUK for the year 2013 was approximately
$57,900 and for the year 2012 was approximately $61,700.
Brewing
License Agreement
Effective
October 26, 2001, MBC entered into a Brewing License Agreement with KBEL, under the terms of which KBEL granted us an exclusive
license to brew and distribute Kingfisher Premium Lager, in exchange for a royalty, payable to KBEL, of eighty cents ($0.80) for
each case of Kingfisher Premium Lager sold by us under this agreement. The Brewing License Agreement expires pursuant to its terms
in October 2018. Pursuant to a deed of variation, after October 9, 2013, royalty payable to KBEL was reduced to $0.56 per US barrel.
The royalty due to KBEL pursuant to the Brewing License Agreement for the year 2013 was approximately $97,400 and for the year
2012 was approximately $134,000.
Market
Development Agreement
Concurrently
with the Brewing Licenses Agreement described above, MBC and KBEL entered into a Market Development, General and Administrative
Services Agreement (the “Market Development Agreement”), under the terms of which KBEL engaged MBC 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 “MDA Products”), provide certain legal and business management support services to
KBEL, and provide assistance with the establishment and management of distribution channels for the MDA Products in the United
States. In consideration for the services received under this agreement, KBEL agreed to pay service fees to MBC 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 Market Development Agreement expired pursuant to its terms in 2013.
Brewing
Agreement
On
April 18, 2013, KBEL and UBIUK entered into a Contract Brewing and Distribution Agreement (the “Brewing Agreement”)
with HUK. Affiliates of HUK are significant shareholders of UB Limited. In addition, UB Limited has arrangements with affiliates
of HUK pursuant to which UB Limited brews Heineken beer for the Indian market. The Chairman of the board of directors of the Company,
Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited.
Commencing
October 9, 2013, the Brewing Agreement granted HUK the exclusive right to manufacture, package and supply Kingfisher beer for
sale in the United Kingdom and to manufacture and package Kingfisher beer for export by KBEL to Europe (excluding Germany) for
a period of five years whereupon the Brewing Agreement will automatically terminate. In addition, under the Brewing Agreement,
in exchange for royalty payments to KBEL, HUK received the right to be the sole and exclusive reseller of the Product (as defined
in the Brewing Agreement) to certain customers. If HUK fails to sell a specified amount to such customers, KBEL will be entitled
to withdraw such exclusivity upon the terms provided in the Brewing Agreement. KBEL will continue to sell the Product purchased
from HUK to certain wholesale and on trade customers in the United Kingdom. HUK is entitled to terminate the Brewing Agreement
on thirty days’ notice upon a change of control of KBEL, or immediately upon the occurrence, and failure to rectify within
30 days, of an Event of Default or Potential Event of Default (as such terms are defined in the HUK Loan Agreement, described
below). KBEL purchased beer from HUK for an amount of $3,006,100 in 2013. Royalty fees receivable from HUK in 2013 were $9,600.
HUK
Loan Agreement
On
April 18, 2013, KBEL entered into a loan agreement with HUK pursuant to which HUK provided KBEL with a secured term loan facility
of £1,000,000 on October 9, 2013. The loan has to be repaid in twelve equal quarterly installments commencing from January
9, 2014. Interest on the loan will accrue from day to day and is calculated on the basis of the actual number of days elapsed
and a year of 365 days. Such interest is payable quarterly in arrears on the outstanding balance of the loan at the rate of 5%
above the Bank of England base rate. Prepayment is permitted. Upon an Event of Default, as defined in the loan agreement, if HUK
and KBEL fail to agree on a payment plan acceptable to HUK, HUK may, among other remedies, declare the loan immediately due and
repayable or exercise its right to an exclusive license pursuant to the Sub-Licence Agreement described and defined below. The
largest amount of principal outstanding under the loan agreement in 2013 was £1,000,000. The amount of principal outstanding
as of March 27, 2014 was £9,016,700. No principal or interest was paid in 2013.
Sub-Licence
Agreement
On
April 18, 2013, HUK, UBIUK, KBEL and UB Limited entered into that certain Heineken Sub-Licence Agreement (the “Sub-Licence
Agreement”) pursuant to which HUK has the option, exercisable upon a default or breach by KBEL under the Brewing Agreement
or the loan agreement with HUK described above or a change of control or bankruptcy of KBEL, to acquire an exclusive license from
UBIUK to produce, market and sell Kingfisher beer in the United Kingdom. Such license would expire on the earlier of the date
certain debts (the “Debt”) between HUK and KBEL are settled, and October 9, 2018. As consideration for such license,
HUK would reduce the Debt pursuant to the terms of the Sub-Licence Agreement. HUK may terminate the Sub-Licence Agreement upon
a material breach by UBIUK, after notice and a thirty day cure period, or, immediately upon the termination of UBIUK’s license
pursuant to its agreement with UB Limited. Upon termination of the Sub-Licence Agreement, the Debt shall become immediately due
and payable. HUK’s aggregate liability for breaches of the Sub-Licence Agreement is capped.
The
dollar value of the Sub-Licence Agreement cannot be accurately estimated.
MBC’s
two largest shareholders are UBA, which owns 24.5% of MBC’s Common Stock, and Inversiones, which owns 43.6% of MBC’s
Common Stock. UBHL is the ultimate beneficial owner of UBA and Inversiones because both UBA and Inversiones are controlled by
Rigby International Corp, a wholly-owned subsidiary of UBHL.
MBC
received a letter dated November 11, 2013 from UBHL, MBC’s indirect majority shareholder, dated November 11, 2013. The chairman
of MBC’s Board, Dr. Vijay Mallya, is also the chairman of the board of directors of UBHL. In the letter, UBHL sets forth
its understanding that its investment in MBC will allow MBC to reach certain goals. In light of such understanding, UBHL is willing
to commit to invest $2,000,000 in MBC in four installments to be paid every six months over a two year period. The letter does
not state definitive terms for the proposed investment, but states that UBHL would prefer to receive “ordinary voting stock”
as compensation for such investment. UBHL will consider additional investment based on a business plan to be provided by MBC.
On
January 22, 2014, MBC issued a promissory note (the “Catamaran Note”) to Catamaran Services, Inc., a Delaware corporation
(“Catamaran”) in the principal amount of $500,000. Catamaran Holdings, Ltd., the sole shareholder of Catamaran, has
directors in common with Inversiones, one of the major shareholders of MBC. The indirect beneficial owner of Inversiones is UBHL.
Dr. Vijay Mallya, the Chairman of the board of directors of the Company is also the Chairman of the board of directors of UBHL.
Pursuant
to the terms of the Catamaran Note, MBC promises to pay the principal sum of $500,000 with accrued interest, as described below,
to Catamaran within six months following the date of the Catamaran Note, subject to the receipt by MBC of an equity investment
by its majority shareholder (the “Shareholder Investment”) in an amount sufficient either (a) to pay the Catamaran
Note through Permitted Payments, as defined below, or (b) to pay both the Catamaran Note and certain existing obligations of MBC
to Cole Taylor pursuant to the Credit and Security Agreement dated as of June 23, 2011 (as amended, modified or supplemented from
time to time) among MBC, Releta, and Cole Taylor (the “Agreement”) in full. “Permitted Payments” on the
Catamaran Note are payments made from the portion of a Shareholder Investment that is in excess of $500,000.
If
MBC is not able to satisfy its obligations on the Catamaran Note within six month following the date of the Catamaran Note, the
Catamaran Note shall be automatically extended for additional six month terms. Interest shall accrue from the date of the Catamaran
Note on the unpaid principal at a 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 Corporation in San Francisco, California, or (ii) ten percent (10%) per annum,
until the principal is fully paid.
The
Catamaran Note may be prepaid without penalty at the option of MBC; however, no payments on the Catamaran Note may be made unless
such payment is a Permitted Payment or certain existing obligations of MBC to Cole Taylor pursuant to the Agreement have been
satisfied in full. The Catamaran Note may not be amended without the prior written consent of Cole Taylor.
No
interest has yet been paid on the Catamaran Note; the largest aggregate amount of principal outstanding under the Catamaran Note
as of March 27, 2014 was $500,000.
DIRECTOR
INDEPENDENCE
The
Board has determined that the following directors qualify as “independent” in accordance with the published listing
requirements of NASDAQ: Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh is not “independent”
because he is an employee of MBC. Dr. Mallya is not independent since he has received payments in excess of the applicable threshold
from the Company during the last three (3) years. Prior to 2007, Mr. Merchant provided certain consulting services to the Company,
however, given the timing and nature of such services as well as the amount of compensation provided in relation thereto, the
Board has determined that Mr. Merchant meets the criteria for being an “independent director”.
The
NASDAQ rules contain 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 a parent
or subsidiary) (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 $120,000 during any period of 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 (or a parent
or subsidiary) 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 in the current year or at any time during the past three (3)
years that exceed the greater of (a) five percent (5%) of the recipient’s consolidated gross revenues or (b) $200,000 for
that year; (v) is (or has a family member who is) employed as an executive officer of another entity where at anytime during the
past three (3) years any of the executive officers of the Company serve on the compensation committee of such other entity; or
(vi) is (or has a family member who is) a current partner of the Company’s outside auditor who worked on the Company’s
audit at anytime during any of the past 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.
Please
see additional disclosure set forth under the heading “Board of Directors’ and Committee Meetings” above.
The
Board of Directors does not have a nominating committee or a committee performing similar functions. Instead, all of the Directors
participate in the director nomination process. As discussed above, Mr. Singh and Dr. Mallya are not “independent”
directors under the NASDAQ standards for independence.
COMPANY
RELATIONSHIPS
UBA
and Inversiones own 24.5% and 43.6% of the outstanding shares of our Common Stock, respectively, as of February 28, 2014. UBA
has also advanced us the principal amount of $1,915,400 under separate convertible notes. As of February 28, 2014 the principal
amount outstanding on the notes together with the accrued interest was convertible into 2,359,172 shares of our Common Stock.
Because UBHL is the ultimate parent of both UBA and Inversiones, UBHL is the ultimate beneficiary of 68.1% the shares of our Common
Stock. 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 RBSM, LLP (“RBSM”), as our independent auditors to perform the audit of our financial statements
for the year 2013 and the year 2012.
PMB
Helin Donovan, L.L.P. (“PMB”), our previously appointed independent auditors, performed the audit of our financial
statements for the year 2011.
AUDIT
FEES. The aggregate fees billed by RBSM during the year 2013 for the audit of our annual consolidated financial statements was
$75,000 and of an additional $36,000 were billed to us during 2013 in connection with RBSM’s review of interim financial
statements in connection with our Quarterly Reports on Form 10-Q for that year. The fees described in this paragraph represented
approximately 88% of the total fees for services billed to us by RBSM during 2012.
The
aggregate fees billed by PMB during the year 2012 for the audit of our annual consolidated financial statements was $97,000; fees
of an additional $45,000 were billed to us during 2012 in connection with PMB’s review of interim financial statements in
connection with our Quarterly Reports on Form 10-Q for 2011. The fees described in this paragraph represented approximately 89%
of the total fees for services billed to us by PMB during 2012.
AUDIT
RELATED FEES. Neither RBSM nor PMB billed us any amount in fees for assurance or related services in 2013 or 2012.
TAX
FEES. The aggregate fees billed by RBSM during 2013 for tax products and services related to the preparation of our tax returns
other than those described in the foregoing paragraphs, was $14,500. Such fees represented approximately 12% of the total fees
for services rendered to us by RBSM during 2013.
The
aggregate fees billed by PMB during 2012 for tax products and services related to the preparation of our tax returns other than
those described in the foregoing paragraphs, was $17,500. Such fees represented approximately 11% of the total fees for services
rendered to us by PMB during 2012.
ALL
OTHER FEES. RBSM did not bill us for any amount towards fees for services other than those mentioned above during the years 2013
and 2012.
PMB
billed us $13,100 related to review of audit for the year 2012 and issuance of opinion for the audit of financial statements for
the year 2011.
All
audit and other services performed by RBSM and PMB on our behalf are approved in advance by our Audit Committee.
All
of the work done during the course of the audit of our 2013 Financial Statements was performed by full-time, permanent employees
of RBSM.
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.
|
|
|
|
|
|
|
(3)
|
LIST
OF EXHIBITS.
|
|
Exhibit Number
|
|
|
|
Description
of Document
|
|
|
|
|
|
|
|
3.1
|
|
(T)
|
|
Articles
of Incorporation of Mendocino Brewing Company, Inc. as amended.
|
|
3.2
|
|
(T)
|
|
Bylaws
of Mendocino Brewing Company, Inc., as amended.
|
|
10.1
|
|
|
|
[Intentionally
omitted]
|
|
10.2
|
|
|
|
[Intentionally
omitted]
|
|
10.3
|
|
(A)
|
|
Wholesale
Distribution Agreement between Mendocino Brewing Company, Inc. 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 Exhibit19.6).
|
|
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.
|
|
10.20
|
|
|
|
[Intentionally
omitted]
|
|
10.21
|
|
(K)
|
|
Registration
Rights Agreement Among Mendocino Brewing Company, Inc., 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 Mendocino Brewing Company, Inc. 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 Mendocino Brewing Company, Inc. 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.
|
|
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 KBEL, Ltd.
|
|
10.55
|
|
(T)
|
|
Supplemental
Agreement to Distribution Agreement between United Breweries International (U.K.), Limited and KBEL, Ltd.
|
|
10.56
|
|
(T)
|
|
Market
Development, General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and KBEL, Ltd.
|
|
10.57
|
|
(T)
|
|
Contract
to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and
KBEL, 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 KBEL, Ltd.
|
|
10.59
|
|
(T)
|
|
Loan
Agreement between Shepherd Neame, Limited and KBEL, Ltd.
|
|
10.60
|
|
(T)
|
|
Brewing
License Agreement between KBEL, 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]
|
|
10.69
|
|
|
|
[Intentionally
omitted]
|
|
10.70
|
|
(Z)
|
|
Second
Agreement dated October 9, 1998 between KBEL, 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 KBEL Limited, dated April 26, 2005.
|
|
10.77
|
|
|
|
[Intentionally
omitted]
|
|
10.78
|
|
|
|
[Intentionally
omitted]
|
|
10.79
|
|
(EE)
|
|
[Intentionally
omitted]
|
|
10.80
|
|
(EE)
|
|
[Intentionally
omitted]
|
|
10.81
|
|
|
|
[Intentionally
omitted]
|
|
10.82
|
|
(FF)
|
|
[Intentionally
omitted]
|
|
10.83
|
|
(FF)
|
|
[Intentionally
omitted]
|
|
10.84
|
|
(FF)
|
|
[Intentionally
omitted].
|
|
10.85
|
|
(FF)
|
|
[Intentionally
omitted]
|
|
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
|
|
(HH)
|
|
Employment
Agreement of Yashpal Singh (Management Contract).
|
|
10.92
|
|
(II)
|
|
Eighth
Amendment to Extension of Term of Notes under Master Line of Credit Agreement, effective June 30, 2008.
|
|
10.93
|
|
(II)
|
|
Fourth
Amendment to Convertible Promissory Note, effective June 30, 2008.
|
|
10.94
|
|
(JJ)
|
|
Directors’
Compensation Plan, as amended (Management Contract).
|
|
10.95
|
|
(KK)
|
|
Ninth
Amendment to Extension of Term Notes under Master Line of Credit effective June 30, 2009.
|
|
10.96
|
|
(KK)
|
|
Fifth
Amendment to Convertible Promissory Notes, effective June 30, 2009
|
|
10.97
|
|
(LL)
|
|
Separation
and Severance Agreement by and between the Company and Yashpal Singh, effective August 27, 2009 (Management Contract).
|
|
10.98
|
|
(MM)
|
|
Keg
Management Agreement by and between MicroStar Keg Management, LLC and the Company effective September 1, 2009
†
.
|
|
10.99
|
|
(NN)
|
|
Commercial
Lease dated August 1, 2009 between Stewart’s Shop Corp. and Releta Brewing Company LLC.
|
|
10.100
|
|
(OO)
|
|
Tenth
Amendment to Extension of Term Notes under Master Line of Credit Agreement, effective June 30, 2010.
|
|
10.101
|
|
(OO)
|
|
Sixth
Amendment to Convertible Promissory Notes, effective June 30, 2010.
|
|
10.102
|
|
(OO)
|
|
Employment
Agreement with Damon Swarbrick (Management Contract).
|
|
10.103
|
|
(PP)
|
|
[Intentionally
omitted]
|
|
10.104
|
|
(QQ)
|
|
[Intentionally
omitted]
|
|
10.105
|
|
(RR)
|
|
[Intentionally
omitted]
|
|
10.106
|
|
(SS)
|
|
Credit
and Security Agreement dated as of June 23, 2011 between Cole Taylor Bank, Mendocino Brewing Company, Inc. and Releta Brewing
Company, LLC.
|
|
10.107
|
|
(SS)
|
|
Seventh
Amendment to Convertible Promissory Note effective June 30, 2011.
|
|
10.108
|
|
(SS)
|
|
Eleventh
Amendment to Extension of Term of Notes under Master Line of Credit Agreement effective June 30, 2011.
|
|
10.109
|
|
(TT)
|
|
Amended
and Restated Directors’ Compensation Plan (Management Contract).
|
|
10.110
|
|
(UU)
|
|
Letter
of Support issued on behalf of Kingfisher Beer Europe Limited by United Breweries (Holdings) Limited, dated March 2, 2012.
|
|
10.111
|
|
(VV)
|
|
Amended
and Restated Directors’ Compensation Plan (Management Contract).
|
|
10.112
|
|
(WW)
|
|
Letter
of Support issued on behalf of Kingfisher Beer Europe Limited by United Breweries (Holdings) Limited, dated March 22, 2013.
|
|
14.1
|
|
(V)
|
|
Code
of Ethics
|
|
21.1
|
|
|
|
Subsidiaries
of the Registrant
|
|
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.
|
|
101.INS
|
|
|
|
XBRL
Instance Document
|
|
101.SCH
|
|
|
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL
|
|
|
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
|
|
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
|
|
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
|
|
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
10.113
|
|
(XX)
|
|
Amendment
dated as of March 11, 2013 to that certain License Agreement dated as of October 8, 1998 between United Breweries International
(UK) Limited and United Breweries Limited (previously filed as Exhibit 10.1).
|
|
10.114
|
|
(XX)
|
|
Amendment
dated as of March 11, 2013 to that certain Distribution Agreement dated as of October 9, 1998 between United Breweries International
(UK) Limited and Kingfisher Beer Europe Limited (previously filed as Exhibit 10.2).
|
|
10.115
|
|
(XX)
|
|
Amendment
dated as of March 11, 2013 to that certain Brewing License Agreement dated as of October 26, 2001 between Mendocino Brewing
Company, Inc. and Kingfisher Beer Europe Limited (previously filed as Exhibit 10.3).
|
|
10.116
|
|
(YY)
|
|
Contract
Brewing and Distribution Agreement between Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013.†
|
|
10.117
|
|
(YY)
|
|
Heineken
Sub-License Agreement by and among Heineken UK Limited, United Breweries International (UK) Limited, Kingfisher Beer Europe
Limited, and United Breweries Limited, dated April 18, 2013.†
|
|
10.118
|
|
(YY)
|
|
Loan
Agreement between Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013.†
|
†
Certain portions have been omitted and have been filed separately with the SEC pursuant to a request for confidential treatment
under Rule 24b-2 as promulgated under the Securities Exchange Act of 1934.
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)
|
MBC’s
Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA.
|
|
|
(B)
|
MBC’s
Annual Report on Form 10-KSB for the period ended December 31, 1995.
|
|
|
(C)
|
MBC’s
Quarterly Report on Form 10-QSB for the period ended March 31, 1995.
|
|
|
(D)
|
MBC’s
Quarterly Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997.
|
|
|
(F)
|
MBC’s
Annual Report on Form 10-KSB for the period ended December 31, 1996.
|
|
|
(G)
|
MBC’s
Quarterly Report on Form 10-QSB for the period ended September 30, 1995.
|
|
|
(I)
|
MBC’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)
|
MBC’s
Quarterly Report on Form 10-QSB for the period ended June 30, 1998.
|
|
|
(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)
|
MBC’s
Current Report on Form 8-K filed as of February 19, 2002.
|
|
|
(T)
|
MBC’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)
|
MBC’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.
|
|
|
(Z)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended September 30, 2004.
|
|
|
(BB)
|
MBC’s
Current Report on Form 8-K filed as of March 8, 2005.
|
|
|
(DD)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2005.
|
|
|
(EE)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2006.
|
|
|
(FF)
|
MBC’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
|
|
|
(GG)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2007.
|
|
|
(HH)
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2007.
|
|
|
(II)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended September 30, 2008.
|
|
|
(JJ)
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2008.
|
|
|
(KK)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2009.
|
|
|
(LL)
|
MBC’s
Current Report on Form 8-K filed as of August 31, 2009.
|
|
|
(MM)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended September 30, 2009.
|
|
|
(NN)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended March 31, 2010.
|
|
|
(OO)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2010.
|
|
|
(PP)
|
MBC’s
Quarterly Report on Form 10-Q/A No. 1 for the period ended September 30, 2010.
|
|
|
(QQ)
|
MBC’s
Annual Report on Form 10-K for the year ended December 31, 2010.
|
|
|
(RR)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended March 31. 2011.
|
|
|
(SS)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2011.
|
|
|
(TT)
|
MBC’s
Schedule 14A filed September 1, 2010.
|
|
|
(UU)
|
MBC’s
Annual Report on Form 10-K for the year ended December 31, 2011.
|
|
|
(VV)
|
MBC’s
Schedule 14A filed December 19, 2012.
|
|
|
(WW)
|
MBC’s
Annual Report on Form 10-K for the period ended December 31, 2012.
|
|
|
(XX)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended on March 31, 2013.
|
|
|
(YY)
|
MBC’s
Quarterly Report on Form 10-Q for the period ended June 30, 2013.
|
|
(b)
|
Exhibit Attached
The following Exhibits are attached to this Annual Report on Form 10-K:
|
|
|
21.1
|
Subsidiaries
of the Registrant.
|
|
|
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.**
|
|
|
101.INS
|
XBRL
Instance Document
|
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document
|
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
|
101.LAB
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
|
(c)
|
Excluded
Financial Statements
. None.
|
*
Filed herewith
** Furnished
herewith
SIGNATURES
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 our behalf by the undersigned, thereunto duly authorized.
|
|
(Registrant)
MENDOCINO BREWING COMPANY, INC.
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By:
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/
s
/
Yashpal Singh
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|
Yashpal
Singh
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President
and Chief Executive Officer
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|
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(Principal
Executive Officer)
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Date:
March 31, 2014
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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.
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|
(Registrant)
MENDOCINO BREWING COMPANY, INC.
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By:
|
/s/
Vijay Mallya
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Dr.
Vijay Mallya
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|
Director
and Chairman of the Board
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Date:
March 31, 2014
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By:
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/s/
Yashpal Singh
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|
Yashpal
Singh
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|
President,
Director and Chief Executive Officer
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(Principal
Executive Officer)
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Date:
March 31, 2014
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By:
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/s/
Scott R. Heldfond
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Scott
R. Heldfond, Director
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Date:
March 31, 2014
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By:
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/s/ Jerome
G. Merchant
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Jerome G. Merchant,
Director
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Date: March 31,
2014
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By:
|
/s/
Mahadevan Narayanan
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|
Mahadevan Narayanan
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Secretary and
Chief Financial Officer
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(Principal Financial
Officer)
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Date: March 31,
2014
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By:
|
/s/
H. Michael Laybourn
|
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H. Michael Laybourn,
Director
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Date: March 31,
2014
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By:
|
/s/
Kent Price
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Kent Price, Director
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Date: March 31,
2014
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By:
|
/s/
Sury Rao Palamand
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Sury Rao Palamand,
Director
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|
Date: March 31,
2014
|
Mendocino
Brewing Company, Inc.
Consolidated
Financial Statements
For
the Years Ended
December
31, 2013 and 2012
Mendocino
Brewing Company, Inc.
Consolidated
Financial Statements
For
the Years Ended
December
31, 2013 and 2012
C
O N T E N T S
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Mendocino
Brewing Company, Inc. and Subsidiaries
Ukiah, California
We
have audited the accompanying consolidated balance sheets of Mendocino Brewing Company, Inc. and subsidiaries (the “Company”)
as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive income (loss), changes
in stockholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are
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 audits include 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 consolidated financial statements. 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 audit provides 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 Mendocino Brewing Company, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of its
operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States
of America.
|
/s/
RBSM LLP
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|
Larkspur, California
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|
March 31, 2014
|
|
Mendocino
Brewing Company, Inc.
Consolidated
Balance Sheets
As
of December 31, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
324,800
|
|
|
$
|
198,500
|
|
|
Accounts receivable, net
|
|
|
4,119,300
|
|
|
|
5,421,600
|
|
|
Inventories
|
|
|
2,242,000
|
|
|
|
1,910,500
|
|
|
Prepaid expenses
|
|
|
591,600
|
|
|
|
514,900
|
|
|
Total Current Assets
|
|
|
7,277,700
|
|
|
|
8,045,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
11,664,800
|
|
|
|
11,937,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Deposits and other assets
|
|
|
324,500
|
|
|
|
268,800
|
|
|
Total Other Assets
|
|
|
324,500
|
|
|
|
268,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
19,267,000
|
|
|
$
|
20,251,500
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Secured lines of credit
|
|
$
|
2,245,000
|
|
|
$
|
3,159,700
|
|
|
Accounts payable
|
|
|
4,893,800
|
|
|
|
5,693,600
|
|
|
Accrued liabilities
|
|
|
1,467,900
|
|
|
|
1,652,100
|
|
|
Current maturities of long-term debt to related party
|
|
|
552,500
|
|
|
|
—
|
|
|
Current maturities of long-term debt, others
|
|
|
4,448,000
|
|
|
|
450,000
|
|
|
Current maturities of capital leases
|
|
|
5,300
|
|
|
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
13,612,500
|
|
|
|
10,958,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Liabilities
|
|
|
|
|
|
|
|
|
|
Subordinated convertible notes to related party
|
|
|
3,497,900
|
|
|
|
3,407,000
|
|
|
Long term debt to related party, less current maturities
|
|
|
1,104,900
|
|
|
|
—
|
|
|
Long term debt – others
|
|
|
—
|
|
|
|
3,982,400
|
|
|
Long term lease, less current maturities
|
|
|
17,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Long-Term Liabilities
|
|
|
4,620,500
|
|
|
|
7,389,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
18,233,000
|
|
|
|
18,347,900
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 12,611,133
shares issued and outstanding
|
|
|
15,100,300
|
|
|
|
15,100,300
|
|
|
Accumulated comprehensive income
|
|
|
413,700
|
|
|
|
406,400
|
|
|
Accumulated deficit
|
|
|
(14,707,600
|
)
|
|
|
(13,830,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders’ Equity
|
|
|
1,034,000
|
|
|
|
1,903,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
|
|
$
|
19,267,000
|
|
|
$
|
20,251,500
|
|
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, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
Sales
|
|
$
|
36,418,200
|
|
|
$
|
40,335,900
|
|
|
Less excise tax
|
|
|
782,300
|
|
|
|
1,091,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
35,635,900
|
|
|
|
39,244,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
25,770,300
|
|
|
|
28,442,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
9,865,600
|
|
|
|
10,802,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
5,432,000
|
|
|
|
5,631,000
|
|
|
General and administrative
|
|
|
4,699,200
|
|
|
|
4,236,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
10,131,200
|
|
|
|
9,867,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from Operations
|
|
|
(265,600
|
)
|
|
|
935,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
Miscellaneous income
|
|
|
44,500
|
|
|
|
66,500
|
|
|
Gain (loss) on disposal of assets
|
|
|
(74,600
|
)
|
|
|
9,400
|
|
|
Interest expense
|
|
|
(577,100
|
)
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Expense, net
|
|
|
(607,200
|
)
|
|
|
(374,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before Income Taxes
|
|
|
(872,800
|
)
|
|
|
561,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
4,100
|
|
|
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
(876,900
|
)
|
|
|
558,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss) - Foreign currency translation
adjustment
|
|
|
7,300
|
|
|
|
(117,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (loss)
|
|
$
|
(869,600
|
)
|
|
$
|
441,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share Basic and diluted
|
|
|
(0.07
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding –
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,611,133
|
|
|
|
12,611,133
|
|
|
Diluted
|
|
|
12,611,133
|
|
|
|
14,899,235
|
|
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, 2013 and 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Series A
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
|
|
|
Common
|
|
|
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2011
|
|
|
227,600
|
|
|
$
|
227,600
|
|
|
|
12,611,133
|
|
|
$
|
15,100,300
|
|
|
$
|
523,600
|
|
|
$
|
(14,389,100
|
)
|
|
$
|
1,462,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
558,400
|
|
|
|
558,400
|
|
|
Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(117,200
|
)
|
|
|
-
|
|
|
|
(117,200
|
)
|
|
Balance December 31, 2012
|
|
|
227,600
|
|
|
$
|
227,600
|
|
|
|
12,611,133
|
|
|
$
|
15,100,300
|
|
|
$
|
406,400
|
|
|
$
|
(13,830,700
|
)
|
|
$
|
1,903,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(876,900
|
)
|
|
|
(876,900
|
)
|
|
Currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,300
|
|
|
|
-
|
|
|
|
7,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2013
|
|
|
227,600
|
|
|
$
|
227,600
|
|
|
|
12,611,133
|
|
|
$
|
15,100,300
|
|
|
$
|
413,700
|
|
|
$
|
(14,707,600
|
)
|
|
$
|
1,034,000
|
|
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, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
(876,900
|
)
|
|
$
|
558,400
|
|
|
Adjustments to reconcile net loss to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,105,400
|
|
|
|
1,048,100
|
|
|
Provision for doubtful accounts
|
|
|
(49,400
|
)
|
|
|
(40,000
|
)
|
|
(Gain) loss on the disposal of assets
|
|
|
74,600
|
|
|
|
(9,400
|
)
|
|
Interest accrued on related party notes
|
|
|
90,900
|
|
|
|
91,300
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in accounts receivable
|
|
|
1,395,400
|
|
|
|
164,000
|
|
|
(Increase) decrease in inventories
|
|
|
(330,100
|
)
|
|
|
(110,900
|
)
|
|
(Increase) decrease in prepaid expenses
|
|
|
(68,100
|
)
|
|
|
(86,100
|
)
|
|
(Increase) decrease in deposits and other assets
|
|
|
(107,900
|
)
|
|
|
76,000
|
|
|
Increase (decrease) in accounts payable
|
|
|
(776,500
|
)
|
|
|
(1,221,300
|
)
|
|
Increase (decrease) in accrued liabilities
|
|
|
(181,300
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
276,100
|
|
|
|
468,100
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases of property, equipment and leasehold improvements
|
|
|
(819,000
|
)
|
|
|
(1,503,100
|
)
|
|
Proceeds from sale of fixed assets
|
|
|
3,000
|
|
|
|
12,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities:
|
|
|
(816,000
|
)
|
|
|
(1,490,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net borrowing (repayment) on lines of credit
|
|
|
(907,200
|
)
|
|
|
1,360,500
|
|
|
Borrowing on long term debts, related party
|
|
|
1,564,200
|
|
|
|
—
|
|
|
Borrowing on long term debts, others
|
|
|
539,700
|
|
|
|
184,700
|
|
|
Repayment on long-term notes
|
|
|
(524,100
|
)
|
|
|
(456,800
|
)
|
|
Repayment on related party notes
|
|
|
-
|
|
|
|
(95,100
|
)
|
|
Payments on obligations under capital leases
|
|
|
(3,100
|
)
|
|
|
(64,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities:
|
|
|
669,500
|
|
|
|
928,600
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
(3,300
|
)
|
|
|
(19,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash
|
|
|
126,300
|
|
|
|
(113,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
198,500
|
|
|
|
312,200
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
324,800
|
|
|
$
|
198,500
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
486,200
|
|
|
$
|
358,700
|
|
|
Income taxes
|
|
$
|
4,100
|
|
|
$
|
2,700
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Seller financed equipment
|
|
$
|
23,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these financial statements.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
1.
Description
of Operations and Summary of Significant Accounting Policies
Description
of Operations
Mendocino
Brewing Company, Inc., was formed in 1983 in California, and has two operating subsidiaries: Releta Brewing Company, LLC, (“Releta”),
and United Breweries International (UK) Limited (“UBIUK”). In the United States (“US”), MBC
and its subsidiary, Releta, operate two breweries that produce beer for the specialty “craft” segment of the beer
market. The breweries are located in Ukiah, California and Saratoga Springs, New York. The majority of sales for Mendocino Brewing
Company in the US 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 Premium Lager
Beer in the US and Canada. Generally, product shipments are made directly from the breweries to the wholesalers or distributors
in accordance with state and local laws. In these notes, 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’s United Kingdom (“UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”).
KBEL is a distributor of Kingfisher Premium Lager Beer, in the United Kingdom and Europe. The distributorship is located in Maidstone,
Kent in the UK.
Subsequent
Events
The
Company evaluates events that occur subsequent to the balance sheet date of periodic reports, but before financial statements
are issued for periods ending on such balance sheet dates, for possible adjustment to such financial statements or other disclosure.
This evaluation generally occurs through the date at which the Company’s financial statements are electronically prepared
for filing with the Securities and Exchange Commission (“SEC”).
Principles
of Consolidation
The
consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiaries,
Releta and UBIUK. All material intracompany and inter-company balances, profits and transactions have been eliminated.
Basis
of Presentation and Organization
The
financial statements for the years ended December 31, 2013 and 2012 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.
Reclassifications
Certain
items in the financial statements for the prior year have been reclassified to conform to the current year presentation. These
reclassifications had no effect on net income or equity.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
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.
Foreign
Operations
Approximately
23% of the Company’s assets are located in the UK. Although this country is considered economically stable and the Company
has experienced no notable burden from foreign exchange transactions, export duties, or government regulations, it is always possible
that unanticipated events in foreign countries could disrupt the Company’s operations.
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. Sales are made to approved
customers on an open account basis, subject to established credit limits, and generally no collateral is required. 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.
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. Management considers the following factors when determining the collectibility of specific customer accounts:
customer credit-worthiness, past transaction history with the customer, current economic and 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.
The Company had allowances of $68,200 and $207,800 for doubtful accounts receivable as of December 31, 2013 and 2012, respectively.
Inventories
Inventories
are stated at the lower of average cost, which approximates the first-in, first-out method, or market (net realizable value).
The Company regularly reviews its inventories for the presence of obsolete product attributed to age, seasonality and quality.
Inventories that are considered obsolete are written off or adjusted to carrying value.
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets generally consist of deposits, other receivables, and prepayments for future services. Prepayments are
expensed when the services are received.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Property
and Equipment
Property
and equipment are stated at cost and depreciated or amortized using the straight-line method over the assets’ estimated
useful lives. Leasehold improvements are amortized over the shorter of the life of the improvement or the life of the related
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 the statement of operations.
Estimated
useful lives of property and equipment are as follows:
|
Building
|
40
years
|
|
Machinery and
equipment
|
3
- 40 years
|
|
Vehicles
|
3
- 5 years
|
|
Furniture and
fixtures
|
5
- 10 years
|
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.
Impairment
of Long-Lived Assets
The
Company assesses the impairment of its long-lived assets periodically in accordance with the provisions of Accounting Standards
Codification (ASC) 360, (Accounting for the Impairment and Disposal of Long-Lived Assets). The Company reviews the carrying value
of property and equipment and any other long-lived assets for impairment annually or 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. During the year ended December 31, 2013 and 2012 the Company recorded
no impairment losses related to long-lived assets.
Deferred
Financing Costs
Costs
relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full,
any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related
to borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $45,000 for the
years ended December 31, 2013 and 2012.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 750 which requires an asset and liability approach for financial accounting
and reporting for income taxes and allows recognition and measurement of deferred tax assets based upon the likelihood of realization
of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. 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.
The
Company periodically assesses uncertain tax positions that the Company has taken or expects to take on a tax return (including
a decision whether to file or not to file a return in a particular jurisdiction). The Company evaluated its tax positions and
determined that there were no uncertain tax benefits for the years ending December 31, 2013 and 2012.
Revenue
Recognition
The
Company recognizes revenue from brewing and distribution operations in accordance with ASC 605. 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 are considered performed upon completion of Company’s contractual obligations.
“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 records certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as
an expense. The Company reports these items on the statement of operations 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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
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. In the UK, excise taxes are paid by the manufacturer and not by the Company.
Discounts
To
further promote retail sales of its products and in response to local competitive conditions, the Company regularly offers price
discounts to distributors and retailers in most of its markets. Sales for the years 2013 and 2012, as presented in the Company’s
statements of operations, are reduced by $1,165,100 and $1,330,800 respectively, related to such discounts.
Chargebacks
and Sales Reserves
The
Company has estimated reserves for chargebacks for promotional expenses by distributors. The Company estimates its reserves by
utilizing historical information and current contracts. In estimating chargeback reserves, the Company analyzes actual chargeback
amounts and applies historical chargeback rates to estimate potential chargeback. The Company routinely assesses its experience
with distributors and adjusts the reserves accordingly. If actual chargebacks and other rebates are greater than the Company’s
estimates, additional reserves may be required. Revisions to estimates are charged to income in the period in which the facts
that give rise to the revision become known.
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.
Taxes
Collected From Customers
Taxes
collected from customers and remitted to tax authorities are sales tax collected from our retail customers. State and federal
excise taxes on beer shipments are the responsibility of the company and included in our selling price. Excise taxes on shipments
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 2013 and 2012.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Delivery
Costs
In
accordance with ASC 605, (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 wholesalers are included in marketing, distribution and administrative expenses.
These costs are considered marketing related because in addition to product delivery, wholesalers 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 $911,200 and $914,200, for the years ended December
31, 2013 and 2012, respectively.
Basic
and Diluted Income per Share
The
basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number
of common shares outstanding during the period. In 2013, the effect of any potentially dilutive securities would have been anti-dilutive.
Therefore, the conversion of the related party notes has been excluded from the calculation of net earnings per share for the
year ended December 31, 2013. Basic net earnings per share exclude the dilutive effect of stock options or warrants and convertible
notes. The computations of basic and dilutive net earnings per share are as follows:
|
|
|
Year Ended December 31
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net income (loss)
|
|
$
|
(876,900
|
)
|
|
$
|
558,400
|
|
|
Weighted average common shares outstanding
|
|
|
12,611,133
|
|
|
|
12,611,133
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
|
Interest expense on convertible notes
|
|
$
|
—
|
|
|
$
|
91,300
|
|
|
Income (loss) for purpose of computing diluted net income per share
|
|
$
|
(876,900
|
)
|
|
$
|
649,700
|
|
|
Incremental shares from assumed exercise of dilutive securities
|
|
|
—
|
|
|
|
2,288,102
|
|
|
Dilutive potential common shares
|
|
|
12,611,133
|
|
|
|
14,899,235
|
|
|
Diluted net earnings (loss) per share
|
|
$
|
(0.07
|
)
|
|
$
|
0.04
|
|
Foreign
Currency Translation
The
Company has subsidiaries located in the UK, where the local currency, UK Pound Sterling, is the functional currency. Financial
statements of these subsidiaries 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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Cash
at UBIUK was translated at exchange rates in effect at December 31, 2013 and 2012, 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 doubtful accounts, depreciation and amortization periods, and the future utilization of deferred
tax assets.
Advertising
Advertising
costs are expensed as incurred and were $755,600 and $900,700 for the years ended December 31, 2013 and 2012, respectively.
Fair
Value of Financial Instruments
Fair
Value
The
fair value of the Company’s financial instruments reflects the amounts that the Company estimates to receive in connection
with the sale of an asset or paid in connection with the transfer of a liability in an orderly transaction between market participants
at the measurement date (exit price). For financial assets and liabilities that are periodically re-measured to fair value, the
Company discloses a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three
levels:
Level
1 – quoted prices in active markets for identical assets and liabilities.
Level
2 – observable inputs other than quoted prices in active markets for identical assets and liabilities.
Level
3 – unobservable inputs.
At
December 31, 2013 and 2012, the Company had no financial assets or liabilities that required periodic re-measurement at fair value.
The
recorded value of certain financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable,
other current assets, accounts payable and accrued expenses, approximate the fair value of the respective assets and liabilities
at December 31, 2013 and December 31, 2012 based upon the short-term nature of the assets and liabilities. 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
Comprehensive
income is composed of the Company’s net income and changes in equity from all other non-stockholder sources. The changes
from these non-stockholder sources are reflected as a separate item in the statements of operations and comprehensive income.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Reportable
Segments
The
Company manages its operations through two business segments: (i) brewing operations, tavern and tasting room operations in the
US and Canada (the “North American Territory”) and (ii) distributor operations in 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) (the “Foreign Territory”). 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.
Recent
Accounting Pronouncements
In
February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income requiring new disclosures regarding
reclassification adjustments from accumulated other comprehensive income (“AOCI”). ASU No. 2013-02 requires disclosure
of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes.
The standard is effective for fiscal years beginning after December 15, 2012. The Company adopted this guidance beginning in the
first quarter of 2013. Adoption of this guidance does not have a material impact on the Company’s consolidated financial
statements.
In
July 2013, the FASB issued guidance on the financial statement presentation of an unrecognized tax benefit when a net operating
loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal
years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company
does not believe the adoption of this standard will have a material impact on its 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.
2.
Liquidity
and Management Plans
On
June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”) with Cole Taylor Bank,
an Illinois banking corporation (“Cole Taylor”). The Agreement provides a credit facility with a maturity date of
June 23, 2016 of up to $10,000,000 consisting of a $4,119,000 revolving facility, a $1,934,000 machinery and equipment term loan,
a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit. A significant portion of the proceeds
received under the Agreement were used to repay credit facilities provided by Marquette Business Credit, Inc. and Grand Pacific
Financing Corporation. Convertible promissory notes issued to United Breweries of America, Inc. (“UBA”), one of the
Company’s principal shareholders, are subordinated to the Cole Taylor facility.
The
Agreement requires MBC and Releta to maintain certain minimum fixed charge coverage ratios for trailing twelve month periods and
minimum tangible net worth. The minimum tangible net worth MBC and Releta are required to maintain is subject to increase based
on the net income of MBC and Releta. On March 29, 2013, MBC, Releta, and Cole Taylor entered into a First Amendment (the “Amendment”)
to the Agreement to clarify the method by which the fixed charge coverage ratio is calculated, with retrospective application.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
The
required fixed charge coverage ratio for the trailing twelve month periods ended March 31, 2013 onwards fell short of the required
ratio. The tangible net worth fell short of the required amount for the period beginning June 1, 2013 onwards.
On
September 18, 2013, MBC and Releta received a notice (the “Default Notice”) from Cole Taylor regarding its intention
to exercise certain rights with respect to events of default of the Company pursuant to the Agreement.
The
Agreement provides that the failure of MBC and Releta to observe any covenant will constitute an event of default under the Agreement.
Under the Agreement, upon the occurrence of an event of default, all of MBC’s and Releta’s obligations under the Agreement
may, at the option of Cole Taylor, be declared, and immediately shall become, due and payable, without notice of any kind. The
event of default shall be deemed continuing until waived in writing by Cole Taylor. The Default Notice states that Cole Taylor
has elected to charge a default interest rate equal to two percent (2%) per annum in excess of the interest rate otherwise payable
under the Agreement effective September 1, 2013. The Company estimates that the increased rate currently results in approximately
$120,000 additional annual interest expense. Cole Taylor has not waived the events of default described in the Default Notice
and has reserved all other available rights and remedies under the Agreement, certain other related documents and applicable law.
Cole Taylor could declare the full amount owed under the Agreement due and payable at any time for any reason or no reason. The
Company has not received any notice or other communication from Cole Taylor that it intends to exercise any of the remedies available
to it under the Agreement in connection with the events of default. The exercise of additional remedies by Cole Taylor may have
a material adverse effect on the Company’s financial condition and the Company’s ability to continue to operate. If
it becomes necessary for MBC and Releta to seek additional financing, there is no guarantee that MBC and Releta will be able to
obtain such financing on terms favorable to the Company or on any terms.
As
of December 31, 2013, the fixed charge coverage ratio was required to be 1.10 to 1. The Company calculated that the fixed charge
coverage ratio as of December 31, 2013 was -0.58 to 1. The Company calculated that the required tangible net worth of MBC and
Releta was $6,181,400 as of December 31, 2013 and the actual tangible net worth on such date was $4,848,200. The Company does
not anticipate that it will regain compliance with the required fixed charge coverage ratio or the minimum tangible net worth
in the immediate future.
We
have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (collectively,
“Indebtedness”). We currently make timely payments of principal and interest relating to the Indebtedness as they
fall due and anticipate that we will continue to make such timely payments in the immediate future. However, if we fail to maintain
any of the financial covenants under the various agreements governing Indebtedness (such as the default under the Agreement described
above), fail to make timely payments of amounts due under the Indebtedness, or commit any other breach resulting in an event of
default under the agreements governing Indebtedness, such events of default (including cross-defaults) could have a material adverse
effect on our financial condition. If our existing debt were accelerated and terminated, we would need to obtain replacement financing,
the lack of which would have a material adverse effect on our financial condition and ability to continue operations. In addition,
actions taken by secured parties against the Company’s assets which have been pledged as collateral could have a material
adverse effect on our financial condition and operations.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
At
December 31, 2013, we had cash and cash equivalents of $324,800, an accumulated deficit of $14,707,600, and a working capital
deficit of $6,334,800 due to losses incurred and reclassification of debts owing to Cole Taylor as a result of the default under
the Agreement described above.
On
November 8, 2013, United Breweries Holding Limited (“UBHL”), Company’s indirect majority shareholder issued
a letter of financial support on behalf of MBC (the “Letter of Support”) to MBC’s accountants to confirm that
UBHL had agreed to provide funding on an as needed basis to ensure that MBC is able to meet its financial obligations when they
fall due. The Letter of Support do not specify either the terms of UBHL’s support, or a maximum dollar limit. UBHL’s
financial support is contingent upon compliance with any applicable exchange control requirements and other applicable laws and
regulations relating to the transfer of funds from India. The MBC Letter of Support was issued for a period through December 31,
2014, but, if necessary, management intends to seek UBHL’s consent to extend the stated support. UBHL controls the Company’s
two largest shareholders, UBA and Inversiones Mirabel S.A., and as such, UBHL is the Company’s indirect majority shareholder.
The Chairman of the Company’s Board of Directors, Dr. Vijay Mallya, is also the chairman of the board of directors of UBHL.
The
Company received a letter dated November 11, 2013 from UBHL expressing its willingness to commit to invest $2,000,000 in the Company
in four installments to be paid every six months over a two year period. The letter did not state definitive terms for the proposed
investment. UBHL would consider additional investment based on a business plan to be provided by the Company.
Management
has taken several actions to enable us to meet our working capital needs through December 31, 2014, including reducing discretionary
expenditures, expanding business in new territories, reducing manpower and securing additional brewing contracts in an effort
to utilize a portion of excess production capacity. We may also seek additional capital infusions to support our operations.
If
it becomes necessary to seek UBHL’s financial assistance under the Letter of Support and UBHL does not fulfill its commitment
to MBC, it may result in a material adverse effect on our financial position and on our ability to continue operations. In addition,
our lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which may
include our real property and fixed and current assets. The loss of any material pledged asset would likely have a material adverse
effect on our financial position and results of operations.
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:
|
|
|
2013
|
|
|
2012
|
|
|
Raw materials
|
|
$
|
813,000
|
|
|
$
|
807,000
|
|
|
Work-in-progress
|
|
|
357,700
|
|
|
|
323,600
|
|
|
Finished goods
|
|
|
967,600
|
|
|
|
732,300
|
|
|
Merchandise
|
|
|
103,700
|
|
|
|
47,600
|
|
|
|
|
$
|
2,242,000
|
|
|
$
|
1,910,500
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
4.
Property
and Equipment
The
following is a summary of property and equipment, at cost less accumulated depreciation, at December 31:
|
|
|
2013
|
|
|
2012
|
|
|
Machinery and equipment
|
|
$
|
12,468,400
|
|
|
$
|
11,772,000
|
|
|
Buildings
|
|
|
7,218,900
|
|
|
|
7,222,100
|
|
|
Equipment under capital lease
|
|
|
23,000
|
|
|
|
183,700
|
|
|
Land
|
|
|
810,900
|
|
|
|
810,900
|
|
|
Leasehold improvements
|
|
|
1,397,200
|
|
|
|
1,459,600
|
|
|
Vehicles
|
|
|
111,200
|
|
|
|
190,000
|
|
|
Furniture and fixtures
|
|
|
352,500
|
|
|
|
359,600
|
|
|
Equipment in progress
|
|
|
217,800
|
|
|
|
663,500
|
|
|
|
|
|
22,599,900
|
|
|
|
22,661,400
|
|
|
Accumulated depreciation and amortization
|
|
|
(10,935,100
|
)
|
|
|
(10,724,200
|
)
|
|
|
|
$
|
11,664,800
|
|
|
$
|
11,937,200
|
|
The
total depreciation and amortization expense for the years ended December 31, 2013 and 2012 was $1,105,400 and $1,048,100, respectively.
5.
Secured
Lines of Credit
In
June 2011, Cole Taylor provided a line of credit drawable up to 85% of eligible receivables and 60% of eligible inventory for
a period up to June 2016. The borrowings are collateralized, with recourse, by MBC’s and Releta’s trade receivables
and inventory located in the US. This facility carries interest at a rate of either LIBOR plus 3.5% or prime plus 1% and is secured
by substantially all of the assets, excluding real property, of Releta and MBC. The amount outstanding on this line of credit
as of December 31, 2013 was approximately $1,517,200. Included in the Company’s balance sheet as accounts receivable at
December 31, 2013, are account balances totaling $1,512,300 of accounts receivables and $2,217,300 of inventory collateralized
to Cole Taylor under this facility.
On
April 26, 2005, Royal Bank of Scotland Commercial Services Limited (“RBS”) provided an invoice discounting facility
to KBEL for a maximum amount of £1,750,000 based on 80% prepayment against qualified accounts receivable related to KBEL’s
UK customers. The initial term of the facility was for a one year period after which time the facility could be terminated by
either party by providing the other party with six months’ notice. The facility carries an interest rate of 1.38% above
the 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, 2013 was approximately $727,800.
6.
Long-Term
Debt
|
|
|
Year ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Loan from Cole Taylor, payable in monthly installments of $12,300, plus interest at prime plus 4% with a balloon payment of approximately $2,210,300 in June 2016; secured by real property at Ukiah.
|
|
$
|
2,570,900
|
|
|
$
|
2,718,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan from Cole Taylor, payable in monthly installments of $23,000 including interest at prime plus 3.5% with a balloon payment of approximately $552,600 in June 2016; secured by all assets of Releta and MBC, excluding real property at Ukiah.
|
|
|
1,877,100
|
|
|
|
1,714,100
|
|
|
|
|
|
4,448,000
|
|
|
|
4,432,400
|
|
|
Less current maturities
|
|
|
4,448,000
|
|
|
|
450,000
|
|
|
|
|
$
|
-
|
|
|
$
|
3,982,400
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
7.
Long-Term
Debt – Related Party
|
|
|
Year ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Loan from Heineken UK Limited, payable in quarterly installments of $138,100, plus interest at UK prime plus 5% maturing on October 9, 2016, secured by licensing rights pursuant to the Sub-License Agreement.
|
|
|
1,657,400
|
|
|
|
-
|
|
|
|
|
|
1,657,400
|
|
|
|
-
|
|
|
Less current maturities
|
|
|
552,500
|
|
|
|
-
|
|
|
|
|
$
|
1,104,900
|
|
|
$
|
-
|
|
Maturities
of debt for succeeding years are as follows:
|
Year ended December 31, 2014
|
|
|
$
|
552,500
|
|
|
Year ended December 31, 2015
|
|
|
$
|
552,500
|
|
|
Year ended December 31, 2016
|
|
|
$
|
552,400
|
|
On
April 18, 2013, KBEL entered into a Loan Agreement (the “Loan Agreement”) with Heineken UK Limited (“HUK”)
pursuant to which HUK provided KBEL with a secured term loan of £1,000,000 on October 9, 2013 to be repaid in twelve quarterly
installment of £83,333.33 each, commencing from January 9, 2014 along with interest at the rate of 5% above the Bank of
England base rate. Prepayment is permitted. Upon an Event of Default, as defined in the Loan Agreement, if HUK and KBEL fail to
agree on a payment plan acceptable to HUK, HUK may, among other remedies, declare the loan immediately due and repayable or exercise
its right to an exclusive license pursuant to the Sub-License Agreement as described and defined in the Loan Agreement.
8.
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 lease and the present value of the net minimum lease payments as
of December 31, 2013, are as follows:
|
Year Ending December 31, 2014
|
|
$
|
6,400
|
|
|
Year Ending December 31, 2015
|
|
|
6,400
|
|
|
Year Ending December 31, 2016
|
|
|
6,400
|
|
|
Year Ending December 31, 2017
|
|
|
6,400
|
|
|
|
|
|
25,600
|
|
|
Less amounts representing interest
|
|
|
(2,600
|
)
|
|
Present value of minimum lease payments
|
|
|
23,000
|
|
|
Less current maturities
|
|
|
5,300
|
|
|
Non-current leases payable
|
|
$
|
17,700
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
9.
Notes to Related Party
Subordinated
Convertible Notes Payable
Notes
payable to related parties includes unsecured convertible notes to UBA for a total value including interest (at the prime rate
plus 1.5%, but not to exceed 10% per year) of $3,497,900 and $3,407,000 as of December 31, 2013 and 2012. Thirteen of the UBA
notes are convertible into common stock at $1.50 per share and one UBA note is convertible at a rate of $1.44 per share. The UBA
notes have been extended until June 2014 but have automatic renewals after such maturity date for successive one year terms, provided
that either the Company or UBA may elect not to extend the term upon written notice given to the other party no more than 60 days
and no fewer than 30 days prior to the expiration of such term. 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 Cole Taylor maturing
in June 2016. Therefore, the Company will not require the use of working capital to repay any of the UBA notes until the Cole
Taylor facilities are repaid. The UBA notes included $1,582,500 and $1,491,600 of accrued interest at December 31, 2013 and December
31, 2012, respectively.
10.
Commitments
and Contingencies
Purchase
of raw materials
Production
of the Company’s beverages requires quantities of various processed agricultural products, including malt and hops for beer.
The Company fulfills its commodities requirements through purchases from various sources, some through contractual arrangements
and others on the open market. Future payments under existing contractual arrangements are as follows:
|
Year Ending December 31,
|
|
|
|
|
|
2014
|
|
|
$
|
1,938,800
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
1,938,800
|
|
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.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
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 some of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements.
The leases expire at various dates through 2019 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 Ukiah, California; land at its Saratoga
Springs, New York, facility; a building in the UK; and certain equipment. The New York lease includes renewal options for three
additional five-year periods beginning in 2014, which the Company intends to exercise, and some leases are adjusted annually for
changes in the consumer price index. Rent expense charged to operations was $359,300 and $324,400 for the years ended December
31, 2013 and 2012.
Future minimum
lease payments under these agreements are as follows:
|
Year Ending December 31,
|
|
|
|
|
|
2014
|
|
|
$
|
400,500
|
|
|
2015
|
|
|
|
310,200
|
|
|
2016
|
|
|
|
215,000
|
|
|
2017
|
|
|
|
195,000
|
|
|
2018
|
|
|
|
191,600
|
|
|
Thereafter
|
|
|
|
103,800
|
|
|
|
|
|
$
|
1,416,100
|
|
Keg
Management Agreement
In
September 2009, 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 depending on the applicable territory. The agreement is effective for
five years ending in September 2014. If the agreement is terminated, the Company is required to purchase four times the average
monthly keg usage for the preceding six-month period from MicroStar. The Company expects to continue this relationship. Rental
expense associated with this agreement was $102,000 and $82,100 for the years ended December 31, 2013 and 2012, respectively.
This annual fee is not included in the above future minimum lease payments.
11.
Related-Party
Transactions
The
Company conducts business with United Breweries of America (UBA), which owns approximately 25% of the Company’s common stock.
KBEL had significant transactions with Shepherd Neame, Ltd., which is a related party to a former Board member. KBEL also had
significant transactions with HUK, a related party with respect to one of MBC’s Board members. The following table reflects
balances outstanding as of December 31, 2013 and 2012 and the value of the transactions with these related parties for the years
ended December 31, 2013 and 2012:
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
|
|
|
2013
|
|
|
2012
|
|
|
TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
Gross sales to Shepherd Neame Ltd.
|
|
$
|
2,400,400
|
|
|
$
|
3,527,000
|
|
|
Purchases from Shepherd Neame Ltd.
|
|
|
11,367,700
|
|
|
|
16,192,200
|
|
|
Expenses reimbursement to Shepherd Neame Ltd.
|
|
|
865,100
|
|
|
|
1,030,900
|
|
|
Purchases from HUK
|
|
|
3,006,100
|
|
|
|
—
|
|
|
Expenses reimbursement to HUK
|
|
|
375,500
|
|
|
|
—
|
|
|
Interest expenses associated with UBA notes
|
|
|
90,900
|
|
|
|
91,300
|
|
|
Interest paid to Shepherd Neame Ltd.
|
|
|
2,400
|
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNT BALANCES
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities to Shepherd Neame Ltd.
|
|
|
70,400
|
|
|
|
3,894,900
|
|
|
Accounts receivable and prepayments to Shepherd Neame Ltd.
|
|
|
5,000
|
|
|
|
356,300
|
|
|
Accounts payable and accrued liabilities to HUK
|
|
|
1,746,800
|
|
|
|
—
|
|
Independent
outside members of the Board of Directors are compensated for their services. Expenses related to this compensation totaled $152,800
and $114,000 for the years ended December 31, 2013 and 2012 and are included in general and administrative expenses on the statements
of operations and comprehensive income.
12.
Concentrations and Credit Risk
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 commercial
banks that have minimal credit risk, in the US and the UK. Accounts receivable are generally unsecured and customers are subject
to an initial credit review and ongoing monitoring. 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 $211,100 in cash deposits and $2,607,000 of accounts receivable
due from customers located in the UK as of December 31, 2013.
The
Company could experience labor disputes, work stoppages or other disruptions in production that could adversely affect it. As
of December 31, 2013, a union represented approximately 18% of the Company’s US-based workforce. On that date, the Company
had approximately fourteen employees at its California (“CA”) facility who were working under a collective bargaining
agreement. The agreement covering the CA facility expired on July 31, 2013 and the Company and the union are negotiating a new
agreement.
Gross
sales to the top five customers totaled $7,575,900 and $9,245,700 for the years ended December 31, 2013 and 2012, which represents
21% and 23% of sales for the years ended December 31, 2013 and 2012, respectively. Gross sales to Shepherd Neame for the years
ended December 31, 2013 and 2012 was $2,373,400 and $3,527,000, which represented 7% and 9% of sales for those years respectively.
No other customer individually represented greater than 5% of revenue.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
13.
Stockholders’
Equity
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.
Income
Taxes
The
large accumulated losses from past operations have resulted in the Company determining that the deferred tax assets associated
with net operating loss carryforwards may expire prior to utilization. Because of the uncertainty of realization of any tax assets,
the Company provided a full valuation allowance against its net deferred tax assets at December 31, 2013 and 2012. Consequently,
no benefit for deferred tax assets appears on the Company’s financial statements.
The
Company’s income tax expense is summarized as follows:
|
|
|
2013
|
|
|
2012
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
US Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
US States
|
|
|
4,100
|
|
|
|
2,700
|
|
|
Current provision
|
|
|
4,100
|
|
|
|
2,700
|
|
|
Change in deferred income taxes
|
|
|
-
|
|
|
|
-
|
|
|
Total provision for income taxes
|
|
$
|
4,100
|
|
|
$
|
2,700
|
|
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:
|
|
|
2013
|
|
|
2012
|
|
|
US Federal income tax expense (benefit) at 34%
|
|
$
|
(517,600
|
)
|
|
$
|
(26,600
|
)
|
|
US State income tax expense (benefit)
|
|
|
(77,200
|
)
|
|
|
21,800
|
|
|
United Kingdom income tax expense (benefit) at 20%
|
|
|
129,900
|
|
|
|
127,900
|
|
|
Non deductible expenses
|
|
|
23,400
|
|
|
|
17,400
|
|
|
Other
|
|
|
4,800
|
|
|
|
1,800
|
|
|
Change in valuation allowance
|
|
|
440,800
|
|
|
|
(139,600
|
)
|
|
Total
|
|
$
|
4,100
|
|
|
$
|
2,700
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Temporary
differences and carryforwards that give rise to deferred tax assets and liabilities are as follows:
|
|
|
2013
|
|
|
2012
|
|
|
Benefit of net operating loss carryforwards
|
|
$
|
5,572,100
|
|
|
$
|
5,282,300
|
|
|
Depreciation and amortization
|
|
|
(1,653,800
|
)
|
|
|
(1,827,900
|
)
|
|
Other
|
|
|
80,500
|
|
|
|
103,600
|
|
|
Subtotal
|
|
|
3,998,800
|
|
|
|
3,558,000
|
|
|
Less valuation allowance
|
|
|
(3,998,800
|
)
|
|
|
(3,558,000
|
)
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
440,800
|
|
|
$
|
(139,600
|
)
|
The
Company has net operating losses available for carry forward. The US Federal net operating losses total approximately $14,537,400
and expire beginning 2017 and ending in 2033. The US state operating losses total approximately $1,405,500 and expire beginning
in 2014 and ending in 2033. The Company’s UK operating losses total approximately $2,525,400 and they do not expire.
Tax
years that remain open for examination by the Internal Revenue Service and the US states include 2010, 2011, and 2012; the Company
expects to file its 2013 returns in the summer of 2014. California may still examine 2009 because of its longer statute of limitations.
Additional years may be examined in the event of criminal tax fraud, and any year may be subject to examination to the extent
that the Company utilizes the net operating losses from those years in its current or future tax returns.
15.
Segment
Information
The
Company’s business presently consists of two segments – the North American Territory and the Foreign Territory.
The
Company’s operations in the North American Territory consist primarily of brewing and marketing proprietary craft beers.
For distribution in the North American Territory, the Company brews its brands in its own facilities, which are located in Ukiah,
California and Saratoga Springs, New York. This segment accounted for approximately 41% and 43% of the Company’s gross sales
during the years 2013 and 2012, respectively.
The
Company’s operations in the Foreign Territory, which are conducted through its wholly-owned subsidiary UBIUK and UBIUK’s
wholly-owned subsidiary KBEL, consist primarily of the marketing and distribution of Kingfisher Premium Lager in the Foreign Territory
through Indian restaurants, chain retail grocers, liquor stores, and other retail outlets (such as convenience stores). This segment
accounted for approximately 59% and 57% of the Company’s gross sales during 2013 and 2012 respectively.
A
summary of each segment is as follows:
|
|
|
Year Ended December 31, 2013
|
|
|
|
|
North American Territory
|
|
|
Foreign Territory
|
|
|
Corporate
and Other
|
|
|
Total
|
|
|
Sales
|
|
$
|
14,806,700
|
|
|
$
|
21,611,500
|
|
|
|
|
|
|
$
|
36,418,200
|
|
|
Operating income (loss)
|
|
|
(1,037,400
|
)
|
|
|
771,800
|
|
|
|
|
|
|
|
(265,600
|
)
|
|
Identifiable assets
|
|
|
12,736,500
|
|
|
|
4,414,500
|
|
|
|
2,116,000
|
|
|
|
19,267,000
|
|
|
Depreciation and amortization
|
|
|
677,800
|
|
|
|
427,600
|
|
|
|
|
|
|
|
1,105,400
|
|
|
Capital expenditures
|
|
|
342,000
|
|
|
|
477,000
|
|
|
|
|
|
|
|
819,000
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
North American Territory
|
|
|
Foreign Territory
|
|
|
Corporate
and Other
|
|
|
Total
|
|
|
Sales
|
|
$
|
17,319,600
|
|
|
$
|
23,016,300
|
|
|
|
|
|
|
$
|
40,335,900
|
|
|
Operating income
|
|
|
239,300
|
|
|
|
695,900
|
|
|
|
|
|
|
|
935,200
|
|
|
Identifiable assets
|
|
|
12,775,100
|
|
|
|
4,440,800
|
|
|
|
3,035,600
|
|
|
|
20,251,500
|
|
|
Depreciation and amortization
|
|
|
616,000
|
|
|
|
432,100
|
|
|
|
|
|
|
|
1,048,100
|
|
|
Capital expenditures
|
|
|
1,086,600
|
|
|
|
416,500
|
|
|
|
|
|
|
|
1,503,100
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
16.
Unrestricted
Net Assets
The
Company’s wholly-owned subsidiary, UBIUK, has cumulative losses of approximately $1,717,400 as of December 31, 2013. Under
KBEL’s line of credit agreement with RBS, distributions and other payments to the Company from its subsidiary are not permitted
if the subsidiary’s retained earnings drop below $1,657,400. Condensed financial information of the United States operations
is as follows:
|
Balance Sheets
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
113,700
|
|
|
$
|
123,200
|
|
|
Accounts receivable, net
|
|
|
1,512,300
|
|
|
|
2,531,700
|
|
|
Inventories
|
|
|
2,217,300
|
|
|
|
1,910,500
|
|
|
Other current assets
|
|
|
165,500
|
|
|
|
111,900
|
|
|
Total current assets
|
|
|
4,008,800
|
|
|
|
4,677,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiary
|
|
|
1,225,000
|
|
|
|
1,225,000
|
|
|
Property and equipment
|
|
|
10,519,200
|
|
|
|
10,864,600
|
|
|
Intercompany receivable
|
|
|
716,700
|
|
|
|
471,400
|
|
|
Other assets
|
|
|
324,500
|
|
|
|
268,800
|
|
|
Total assets
|
|
$
|
16,794,200
|
|
|
$
|
17,507,100
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,517,200
|
|
|
$
|
1,887,700
|
|
|
Accounts payable
|
|
|
2,524,500
|
|
|
|
1,584,300
|
|
|
Accrued liabilities
|
|
|
1,001,700
|
|
|
|
884,300
|
|
|
Current maturities of debt and capital leases
|
|
|
4,453,300
|
|
|
|
453,100
|
|
|
Total current liabilities
|
|
|
9,496,700
|
|
|
|
4,809,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases
|
|
|
17,700
|
|
|
|
3,982,400
|
|
|
Notes to related parties
|
|
|
3,497,900
|
|
|
|
3,407,000
|
|
|
Total liabilities
|
|
|
13,012,300
|
|
|
|
12,198,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
15,100,300
|
|
|
|
15,100,300
|
|
|
Preferred stock
|
|
|
227,600
|
|
|
|
227,600
|
|
|
Accumulated deficit
|
|
|
(11,546,000
|
)
|
|
|
(10,019,600
|
)
|
|
Total stockholders’ equity
|
|
|
3,781,900
|
|
|
|
5,308,300
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
16,794,200
|
|
|
$
|
17,507,100
|
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
17.
Unrestricted
Net Assets (continued)
|
Statement of Operations
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
14,024,400
|
|
|
$
|
16,228,300
|
|
|
Cost of goods sold
|
|
|
11,354,400
|
|
|
|
12,383,900
|
|
|
Selling, marketing, and retail expenses
|
|
|
1,710,600
|
|
|
|
1,754,500
|
|
|
General and administrative expenses
|
|
|
2,094,200
|
|
|
|
1,984,600
|
|
|
Income (loss) from operations
|
|
|
(1,134,800
|
)
|
|
|
105,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income and (expense)
|
|
|
|
|
|
|
|
|
|
Interest expenses
|
|
|
(448,200
|
)
|
|
|
(380,000
|
)
|
|
Loss on disposal of assets
|
|
|
(77,600
|
)
|
|
|
|
|
|
Other income
|
|
|
138,300
|
|
|
|
196,500
|
|
|
Provision for taxes
|
|
|
(4,100
|
)
|
|
|
(2,700
|
)
|
|
|
|
|
(391,600
|
)
|
|
|
(186,200
|
)
|
|
Net loss
|
|
$
|
(1,526,400
|
)
|
|
$
|
(80,900
|
)
|
|
Statements of Cash Flows
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
$
|
935,800
|
|
|
$
|
583,700
|
|
|
Cash flow from investing activities
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(342,000
|
)
|
|
|
(1,086,600
|
)
|
|
Proceeds from sale of equipment
|
|
|
-
|
|
|
|
5,000
|
|
|
Net cash flows from investing
|
|
|
(342,000
|
)
|
|
|
(1,081,600
|
)
|
|
Cash flow from financing activities
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) on line of credit
|
|
|
(370,500
|
)
|
|
|
992,400
|
|
|
Borrowings on long term debt
|
|
|
539,700
|
|
|
|
184,700
|
|
|
Repayment of long-term debt
|
|
|
(524,100
|
)
|
|
|
(456,800
|
)
|
|
Payment on obligations under capital leases
|
|
|
(3,100
|
)
|
|
|
(46,400
|
)
|
|
Net change in intercompany payable
|
|
|
(245,300
|
)
|
|
|
(240,000
|
)
|
|
Net cash flows from financing activities
|
|
|
(603,300
|
)
|
|
|
433,900
|
|
|
Cash, beginning of year
|
|
|
123,200
|
|
|
|
187,200
|
|
|
Cash, end of year
|
|
$
|
113,700
|
|
|
$
|
123,200
|
|
18.
Subsequent
Events
On
January 22, 2014, MBC issued a promissory note (the “Catamaran Note”) to Catamaran Services, Inc., a Delaware corporation
(“Catamaran”) in the principal amount of $500,000. Catamaran Holdings, Ltd., the sole shareholder of Catamaran, has
directors in common with Inversiones, one of the major shareholders of MBC. The indirect beneficial owner of Inversiones is UBHL.
Dr. Vijay Mallya, the Chairman of the board of directors of the Company is also the Chairman of the board of directors of UBHL.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2013 and 2012
Pursuant
to the terms of the Catamaran Note, MBC promises to pay the principal sum of $500,000 with accrued interest, as described below,
to Catamaran within six months following the date of the Catamaran Note, subject to the receipt by MBC of an equity investment
by its majority shareholder (the “Shareholder Investment”) in an amount sufficient either (a) to pay the Catamaran
Note through Permitted Payments, as defined below, or (b) to pay both the Catamaran Note and certain existing obligations of MBC
to Cole Taylor pursuant to the Credit and Security Agreement dated as of June 23, 2011 (as amended, modified or supplemented from
time to time) among MBC, Releta, and Cole Taylor (the “Agreement”) in full. “Permitted Payments” on the
Catamaran Note are payments made from the portion of a Shareholder Investment that is in excess of $500,000.
If
MBC is not able to satisfy its obligations on the Catamaran Note within six month following the date of the Catamaran Note, the
Catamaran Note shall be automatically extended for additional six month terms. Interest shall accrue from the date of the Catamaran
Note on the unpaid principal at a 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 Corporation in San Francisco, California, or (ii) ten percent (10%) per annum,
until the principal is fully paid.
The
Catamaran Note may be prepaid without penalty at the option of MBC; however, no payments on the Catamaran Note may be made unless
such payment is a Permitted Payment or certain existing obligations of MBC to Cole Taylor pursuant to the Agreement have been
satisfied in full. The Catamaran Note may not be amended without the prior written consent of Cole Taylor.
Mendocino Brewing (CE) (USOTC:MENB)
Gráfica de Acción Histórica
De Feb 2025 a Mar 2025
Mendocino Brewing (CE) (USOTC:MENB)
Gráfica de Acción Histórica
De Mar 2024 a Mar 2025
