-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HCON3f+aOBGxzf7z1BbmKEq1aB1yzGCMAnbcusPpP+i9WEWnbcyPCs4M5MYG9Ly9 HWyPC3vMIl+vPLV2pDIb3w== 0001188112-04-000578.txt : 20040414 0001188112-04-000578.hdr.sgml : 20040414 20040414152308 ACCESSION NUMBER: 0001188112-04-000578 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MENDOCINO BREWING CO INC CENTRAL INDEX KEY: 0000919134 STANDARD INDUSTRIAL CLASSIFICATION: MALT BEVERAGES [2082] IRS NUMBER: 680318293 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 001-13636 FILM NUMBER: 04732919 BUSINESS ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 BUSINESS PHONE: 7077441015 MAIL ADDRESS: STREET 1: 13351 S HWY 101 CITY: HOPLAND STATE: CA ZIP: 95449 10KSB 1 t10ksb-2101.txt 10KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to ___________________ Commission file number: 1-13636 MENDOCINO BREWING COMPANY, INC. (Name of small business issuer in its charter) CALIFORNIA 68-0318293 (State or other jurisdiction of (I.R.S. Employee incorporation or organization) Identification No.) 1601 AIRPORT ROAD, UKIAH, CA 95482 (Address of principal executive offices) (Zip code) Issuer's telephone number: (707) 463-6610 Securities registered under Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, OTC BULLETIN BOARD WITHOUT PAR VALUE Securities registered under Section 12(g) of the Act: NONE Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year: $ 28,864,200 The aggregate market value of the voting stock held by non-affiliates computed by reference to the average bid price of $0.20 and ask price of $0.35 of such stock as of March 22, 2004 was: $481,900. -1- The number of shares the issuer's Common Stock outstanding as of MARCH 22, 2004 is: 11,266,874 DOCUMENTS INCORPORATED BY REFERENCE NONE Transitional Small Business Disclosure Format Yes [ ] No [X] -2- FORWARD-LOOKING INFORMATION Various portions of this Annual Report on Form 10-KSB, including but not limited to the sections captioned "Description of Business" and "Management's Discussion and Analysis or Plan of Operation," contain forward-looking information. Such information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs, and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of those and similar words are intended to identify such forward-looking information. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including, but not limited to, availability of financing for operations, successful performance of internal operations, the impact of competition, changes in distributor relationships or performance, and other risks discussed elsewhere in this Form 10-KSB and from time to time in the Company's Securities and Exchange Commission (the "Commission") filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and in general domestic and European economic and political conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. PART I ITEM 1. DESCRIPTION OF BUSINESS. OVERVIEW Mendocino Brewing Company, Inc., a California corporation, was founded in 1983. It was one of the first of the modern craft brewers, having opened the first new brewpub in California and the second in the United States since the repeal of Prohibition, and it has been recognized for its innovations in the brewpub concept, its craft brew style and its distinctive labels. (In this Annual Report, the term "the Company" and its variants is generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity.) The Company operates in two market and geographic areas, domestic (the United States) and European (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 "European Territory"), as well as Canada). The Company's domestic operations consist primarily of brewing and marketing a variety of proprietary craft beers, including among others Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, White -3- Hawk Original IPA, and Raptor Red Lager, and a licensed international specialty beer, Kingfisher Premium Lager. For domestic distribution, the Company brews its brands in its own facilities, which are located in Ukiah, California and Saratoga Springs, New York, and these beers are distributed in 36 states and the District of Columbia. The Company's European operations, which are conducted through its wholly-owned subsidiary United Breweries International (UK) Limited ("UBI") and UBI's own subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing and distribution of Kingfisher Lager throughout the European Territory, and to a lesser extent the marketing and distribution of Sun Lik Chinese Lager in the U.K., in both cases through ethnic restaurants (Indian for Kingfisher Lager and Chinese for Sun Lik), chain retail grocers, liquor stores, and other retail outlets (such as convenience stores). The Company holds the license to brew and distribute Kingfisher from United Breweries Limited ("UB Limited"), an Indian corporation. The Company's Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the Board of UB Limited. Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer, holds the license to brew and distribute Sun Lik (in the U.K. only) from an unrelated entity, the San Miguel Corporation; and in September 2001 Shepherd Neame granted UBSN a sublicense to distribute this beer (also in the U.K. only). One of the Company's Directors, R.H.B. (Bobby) Neame, is the Chairman and Chief Executive Officer of Shepherd Neame. All of the Company's beers sold in the European market and Canada are brewed in England under contract by Shepherd Neame, a related party. Although UBSN is the sole distributor of Kingfisher in the U.K., Ireland, continental Europe, and Canada, and of Sun Lik in the U.K., it does not physically distribute its products to its ultimate trade customers, relying instead on specialist restaurant trade distributors in the U.K. and Shepherd Neame, acting as UBSN's agent, on a commission basis, for the supermarket and liquor and convenience store trade. COMPANY BACKGROUND MBC was originally formed in March 1983. It first bottled its flagship brand, Red Tail Ale, in December 1983, and made its initial public offering in February 1995. The Company completed construction of its brewery in Ukiah, California in May 1997. This facility, which has a current annual capacity of 60,000 brewers' barrels ("bbl."), was designed to enable the Company's production to be expanded to 200,000 bbl. per year with the addition of necessary equipment. The Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs Brewery ("Releta"), which is located in Saratoga Springs, New York, commenced production in its leased facilities in February 1998, with an initial capacity of 60,000 bbl. per year expandable to 150,000 bbl. per year. -4- In July 1998, the Company purchased certain of the assets of Carmel Brewing Company, Inc., a California corporation ("Carmel Brewing"), such as trademarks, trade names, and other brand related assets as well as certain point of sales and brewing ingredient inventory. On August 13, 2001, the Company acquired United Breweries International (UK) Limited ("UBI") together with UBI's own subsidiary UBSN, Ltd. ("UBSN"), from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"), in exchange for MBC stock valued at approximately $4,468,750 (the "UBI Acquisition"). The UBI Acquisition was considered to be a related-party transaction because at the time Inversiones was owned by a trust in which the Company's Chairman, Dr. Mallya, may be deemed to be a beneficial owner. The Company operates UBI and UBSN primarily in the marketing, sale, and distribution of Kingfisher Lager in the Company's European Territory, and in the marketing and distribution of Sun Lik Chinese Lager in the U.K. Kingfisher Lager, which is the flagship brand of UB Limited, an India-based brewing and distribution company, is a recognized international brand, with wide distribution outside the Company's market areas. As a result of the UBI Acquisition, the Company now holds, in addition to UBI and UBSN, the United States brewing and distribution rights for Kingfisher Lager. The Company brews Kingfisher Lager for US distribution to the United States in both of its US brewing facilities -- Saratoga Springs and Ukiah. The Company has engaged Shepherd Neame to brew Kingfisher Lager for distribution in European Territory, and Sun Lik Chinese Lager for distribution in the U.K. only. (The Company does not brew or distribute Sun Lik Chinese Lager outside the United Kingdom.) INDUSTRY OVERVIEW DOMESTIC MARKET The domestic beer market falls into a number of market categories, including among others low-priced, premium, super premium, lite, import, and specialty/craft beers. Domestically, the Company competes in the specialty/craft category, which is estimated to be in the range of 6 million barrels per year and comprised approximately 3% of total U.S. beer sales in both 2003 and 2002. Craft beers are typically all malt, characterized by their full flavor, and are usually produced using methods similar to those of traditional European brews. EUROPEAN TERRITORY The Company's European Territory consists of Austria, Belgium, Denmark, Ireland, Italy, the Netherlands, France, Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, -5- Switzerland, and the United Kingdom as well as Canada, although during 2003 and 2002 Company sales were primarily in the U.K. Through its subsidiaries UBI and UBSN, the Company competes exclusively in the specialty category in the European Territory and Canada. The category in which the Company competes in Europe is primarily the Indian restaurant niche, although the Company does distribute its beers through other licensed premises and through other retail outlets such as supermarkets, liquor stores, and licensed shops and convenience stores. In the U.K., this market niche is estimated to be in the range of 150,000 to 175,000 bbl. per year. Management believes that, for Europe as a whole, this market niche is substantially larger. The Company offers two brands of beer in its European Territory: Kingfisher Lager (both within and outside the U.K.) and Sun Lik Chinese Lager (in the U.K. only). With approximately 7,000 premises in the U.K., the Indian restaurant niche is substantially larger than the equivalent Chinese restaurant market, which currently includes only about 3,500 premises in the U.K. The Company believes that Kingfisher Lager is the fastest growing ethnic brand in the U.K. Indian restaurant niche. In both the domestic and European markets, the rate at which the sales in the craft and specialty categories grow will have a material affect on the Company's business, financial condition, and results of operations. Actual industry performance will depend on many factors that are outside the control of the Company. BUSINESS OF THE COMPANY PRODUCTS Beverage sales (wholesale and retail combined) constituted over 98% (by revenue) of the Company's total sales in both 2003 and 2002, with food and merchandise retail sales (at the Hopland tavern) making up the balance in both years. In the US market, beverage sales constituted approximately 98% of total sales for 2003 and 97% in 2002, while in the European Territory beverage sales constituted virtually all of total sales for both years. Domestically, the Company brews seven ales, one wheat beer, three lagers, and one stout on a year-round basis, and a root beer, all of which are brewed at the Company's proprietary facilities in Ukiah, California, and Saratoga Springs, New York. The Company's principal products are as follows. o RED TAIL ALE, a full flavored amber ale, is the Company's flagship brand. It is available year-round in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon kegs. -6- o BLUE HERON PALE ALE is a golden ale with a full body and a distinctive hop character. It is available year-round in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon kegs. o BLACK HAWK STOUT is a rich bodied stout with big traditional flavors. It is available year-round in 12 oz. six-packs, half-barrel kegs, and 5 gallon kegs. o EYE OF THE HAWK SELECT ALE is a strong rich bodied amber ale. It is available year round in 12 oz. six-packs, half-barrel kegs, and 5 gallon kegs. o WHITE HAWK ORIGINAL IPA is a heavily hopped ale with distinctive hop character and bold malt flavor. It is available year round in 12 oz. six packs and half barrel kegs. o KINGFISHER PREMIUM LAGER is a conventionally fermented specialty lager with a smooth crisp taste. In the domestic market, Kingfisher is currently available year around in twelve ounce six-packs, 22 oz. bottles on-draft. In the European market, it is available year-round, in 330ml and 660ml bottles in multi packs in the U.K., Ireland, and continental Europe and in 330ml bottles in Canada, as well as in a variety of keg sizes. In the U.K., it is also available on draft through Indian restaurants. o RAPTOR RED LAGER is a traditional lager, with a smooth light feel and a crisp dry finish. It is currently available year round only on the West Coast in 12 oz. six packs and half barrel kegs. DISTRIBUTION METHODS In the United States, the Company's bottled products are sold through distributors to consumers at supermarkets, warehouse stores, liquor stores, taverns and bars, restaurants, and convenience stores. Most of the Company's brands are also available on draft. The Company's products are delivered to retail outlets by independent distributors whose principal business is the distribution of beer and in some cases other alcoholic beverages, and who typically also distribute one or more national beer brands. Together with its distributors, the Company markets its products to retail outlets and relies on its distributors to provide regular deliveries, to maintain retail shelf space, and to oversee timely rotation of inventory. The Company also offers a variety of ales and lagers directly to consumers at the tavern and merchandise store in Hopland, California. In the European Territory, the Company's products are distributed primarily through sales by Indian restaurants. Such sales represent approximately 95% of the Company's total European sales volume, with the remaining sales coming through other ethnic restaurants (primarily Chinese) and in sales by supermarkets, liquor stores, and licensed shops and convenience stores. In the U.K., Kingfisher has a market share of approximately 22% of the Indian restaurant market, through sales by some 7,000 Indian -7- restaurants and other licensed premises. The majority of the Company's sales in these restaurants is through its approximately 3,500 on-tap draft installations. UBI also exports Kingfisher to 16 European markets outside of the U.K. and to Canada, and its growth in those markets typically develops alongside the growth of Indian restaurants in those markets. The Company does not physically distribute its products to its ultimate trade customers in the European Territory, relying instead on specialist restaurant trade distributors and Shepherd Neame, acting as UBSN's agent on a commission basis, for the supermarket and liquor and convenience store trade. COMPETITION In its domestic markets, the Company competes against a variety of brewers in the craft beer segment, including brewpubs, microbrewers, regional craft brewers, and craft beer products of major national breweries. Additionally, the entire craft beer segment competes to some extent with other segments of the U.S. beer market, including major national brands like Budweiser and Miller and imported beers such as Heineken and Becks. The U.K. lager market is dominated by major international brands such as Carling, Budweiser, Becks, and Holsten Pils, both in the restaurant and pub segment and in sales through supermarkets and other retail outlets. The Company's products are marketed both through Indian and other restaurants and through major supermarket chains, smaller chains, and individual stores. In all these sectors, the Company faces competition from other ethnic and international brands, many of which are produced by local and large international brewers. The Company believes that Kingfisher, which during 2002 had a market share of approximately 22% of the U.K. Indian restaurant market, is also the fastest growing ethnic brand in the grocery multiple sector in terms of volume and distribution. The Company vigorously promotes Kingfisher as the No.1. selling premium Indian Lager brand in the U.K. and continental Europe. The profile of this brand has been raised significantly through the Company's sponsorship of Kingfisher World Curry Week and Kingfisher Curry Capital of Britain. Increased competition in either the domestic or European market could hinder distribution of the Company's products, and have a material adverse effect on the Company's business, financial condition, and results of operations. SOURCES AND AVAILABILITY OF RAW MATERIALS Production of the Company's beverages requires quantities of various agricultural products, including barley for malt, hops, malt, and malted wheat for beer. The Company fulfills its commodities requirements by purchases from -8- various sources, including both contractual arrangements and on the open market. In its European Territory, these purchases are made directly by or for Shepherd Neame, which brews the Company's products on a contract basis. Although the Company believes that adequate supplies of these agricultural products are available at the present time, it cannot predict future availability or prices of such products and materials. The commodity markets have experienced and will continue to experience price fluctuations. The price and supply of raw materials will be determined by, among other factors, the level of crop production, weather conditions, export demand, and government regulations and legislation affecting agriculture. The Company does not use any hedges or unconditional purchase obligations to purchase these products. The Company's major suppliers in the United States are Great Western Malting Co., Yakima, Washington, and Briess Malting, Milwaukee, Wisconsin (malt); Yakima Chief, Inc., Sunnyside, Washington and S S Steiner, Inc, New York, New York (hops); Gamer Packaging Inc. Minneapolis, Minnesota (bottles and crown corks); Inland Paper Board and Packaging, Inc., Antioch, California and Empire State Container, Inc. Syracuse, New York (cartons); Sierra Pacific Packaging, Oroville, California and Caraustar, Ashland, Ohio (carriers); and Inland Printing Company Inc., Lacrosse, Wisconsin (labels). The Company's major supplier in Europe is Shepherd Neame, which brews on a contract basis all of the Company's products that are sold in Europe. The Company does not directly purchase any material amounts of agricultural commodities or other products in Europe. DEPENDENCE ON MAJOR CUSTOMERS Sales to the Company's top five customers in 2003 totaled $7,088,800, or approximately 25%, of the Company's total sales, as compared to $6,718,100, or 26% of total sales, for 2002. In the Company's domestic market, sales to its principal customer, Alta Marketing, during 2003 constituted approximately 10.1% of the Company's domestic sales (or approximately 4.2% of its total sales). In 2002, by comparison, sales to the Company's largest US customer constituted approximately 12.7% of its domestic sales (or approximately 5.7% of total sales). Sales during 2003 to the Company's principal European customer, Shepherd Neame, represented approximately 15.5% of the Company's European Territory sales (or approximately 9% of the Company's total sales) for the year, as compared to approximately 14.6% of European Territory sales (or approximately 8.1% of total sales) in 2002. No other individual customer accounted for more than 5% of the Company's total sales during either 2003 or 2002. -9- TRADEMARKS The Company has U.S. federal trademark registrations on the principal register of the United States Patent and Trademark Office for the following marks: MENDOCINO BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg. No. 2,032,382), RED TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word mark (Reg. No. 1,673,594), EYE OF THE HAWK SELECT ALE design mark (Reg. No. 2,011,818), EYE OF THE HAWK SPECIAL EDITION ANNIVERSARY ALE design mark (Reg. No. 2,011,815), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word mark (Reg. No. 1,768,639), FROLIC SHIPWRECK ALE 1850 and design composite mark (Reg. No. 2,080,761), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,222), HOPLAND BREWING COMPANY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg. No. 2,667,078), SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark (Reg. No. 2,583,446), and PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,522). The Company uses the BLUE HERON word mark under a concurrent use agreement with Bridgeport Brewing Company which gives the Company the exclusive right to use the BLUE HERON word mark throughout the United States with the exception of Oregon, Idaho, Washington, and Montana. Bridgeport Brewing Company, the other concurrent use party, has the exclusive right to use the BLUE HERON word mark in those states. The Company's use of the BLACK HAWK STOUT word mark is, by agreement with Hiram Walker & Sons, Inc., subject to the restriction that it be used solely to identify and distinguish malt beverage products namely, beer, ale and stout, and only in conjunction with the words "Mendocino Brewing Company." The Company's United States federal trademark registrations for the BLUE HERON word mark (Cancelled Reg. No. 1,820,076) and BLACK HAWK STOUT word mark (Cancelled Reg. No. 1,791,807) were cancelled as a result of alleged technical deficiencies in registration compliance filings. The Company continues to use the BLUE HERON and BLACK HAWK STOUT word marks and claims common law trademark rights in and to such marks. The Company presently has pending applications on file with the United States Patent and Trademark Office for the re-registration of the BLACK HAWK STOUT and BLUE HERON word marks. The Company claims common law trademark rights in and to the WHITE HAWK ORIGINAL IPA word mark and WHITE HAWK ORIGINAL IPA word and design mark. The Company has applied to register the WHITE HAWK ORIGINAL IPA word and design mark with the United States Patent and Trademark Office (Ser. No. 78/304,844) and the application is currently pending. Similarly, the -10- Company claims common law trademark rights in and to the RAPTOR RED LAGER word mark and RAPTOR RED LAGER word and design mark. The Company has applied to register the RAPTOR RED LAGER word and design mark with the United States Patent and Trademark Office (Ser. No. 78/304,831) and the application is currently pending. Additionally, the Company claims common law trademark rights in and to the TALON BARLEY WINE ALE word mark and TALON BARLEY WINE ALE word and design mark and intends to register the marks with the United States Patent and Trademark Office. The Company has acquired the trademark CARMEL BREWING COMPANY and any other variation of the same as used by Carmel Brewing Company and claims common law trademark rights in and to all such marks. The Company has also acquired the rights to use the RAZOR EDGE word mark through a License Agreement with Beverage Mates, Ltd. However, the Company is currently not using the RAZOR EDGE mark, and it is unclear whether it will use the mark in the future. The RAZOR EDGE License Agreement expires in 2008, but will be automatically renewed unless specifically terminated. License fees are calculated based on sales of the product. The Company did not have any material sales of this brand during 2001. Releta has federal trademark registrations on the principal register of the United States Patent and Trademark Office for the FAT BEAR word mark (Reg. No.2,267,709), TEN SPRINGS word mark (Reg. No. 2,243,852), and WHITEFACE word mark (Reg. No. 2,322,226). Releta has a federal trademark registration on the supplemental register of the United States Patent and Trademark Office for the SARATOGA CLASSIC PILSNER word mark (Reg. No. 2,396,601). LICENSE AND FRANCHISE AGREEMENTS In August 2001, the Company acquired UBI and its wholly-owned subsidiary UBSN, which hold the exclusive brewing and distribution rights for Kingfisher Premium Lager in the U.K., Ireland, continental Europe, and Canada through a Licensing Agreement with United Breweries Limited ("UB Limited"); and to Sun Lik Chinese Lager in the U.K. as a sub-licensee of Shepherd Neame, which holds a license to this trademark through a Licensing Agreement with San Miguel Corporation. (See "Certain Relationships and Related Transactions," below.) In July 2001 MBC entered into a Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to which MBC obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing and distribution of beer in the United States. Under its terms, this agreement is currently scheduled to remain in effect until October of 2013. Since 1998, UBI and UBSN have licensed to Shepherd Neame, an affiliated entity, the exclusive right to brew, keg, bottle, can, label, and package all beers -11- and related products sold under the Kingfisher trademark in the U.K., Ireland, and continental Europe. (See "Certain Relationships and Related Transactions - Brewing Agreement Between UBI and Shepherd Neame," below.) GOVERNMENTAL REGULATION The Company's United States operations are subject to licensing by both state and Federal governments, as well as to regulation by a variety of state and local governments and agencies. The Company is licensed to manufacture and sell beer by the Departments of Alcoholic Beverage Control in California and New York. A federal permit from the United States Bureau of Alcohol, Tobacco, and Firearms ("BATF") allows the Company to manufacture fermented malt beverages. To keep these licenses and permits in force the Company must pay annual fees and submit timely production reports and excise tax returns. Prompt notice of any changes in the operations, ownership, or company structure must also be made to these regulatory agencies. BATF must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals owning equity securities in aggregate of 10% or more in the Company be investigated as to their suitability. The Company's production operations must also comply with the Occupational Safety and Health Administration's workplace safety and worker health regulations and comparable state laws. Management believes that the Company is presently in compliance with the aforementioned laws and regulations. In addition, the Company has implemented its own voluntary safety program. The Hopland tavern is regulated by the Mendocino County Health Department, which requires an annual permit and conducts spot inspections to monitor compliance with applicable health codes. In the United States, taxation of alcohol has increased significantly in recent years. Currently, the Federal 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 tax rate is $6.20 per bbl. The State of New York presently imposes an excise tax of $3.88 per bbl. on brewers for over 100,000 bbl. per year. The Company's European operations are subject to regulation by U.K. and European laws, as well as by the laws of various individual countries in which UBI distributes its products. Because Shepherd Neame is contracted to perform the brewing operations for the European market, Shepard Neame is subject to the various laws of the European countries regarding production, bottling, packaging, and labeling in lieu of the Company. The Company does not anticipate any significant increase in its applicable taxes in its European markets during 2004. -12- COMPLIANCE WITH ENVIRONMENTAL LAWS The Company is subject to various federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of various substances. The Company's waste products consist of water, spent grains, hops, and glass and cardboard. The Company has instituted a recycling program for its office paper, newspapers, magazines, glass, and cardboard at minimal cost to the Company. The Company sells or gives away its spent grain to local cattle ranchers. The Company has not purchased any special equipment and does not incur any identifiable fees in connection with its environmental compliance at its Hopland site. The Company has built its own wastewater treatment plant for the Ukiah facility. As a consequence, the Company is not currently required to incur sewer hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds 100,000 bbl., the Company may be required to pay additional fees. The estimated cost of the wastewater treatment facility was $900,000, and the estimated cost of operating the plant is between $6,000 and $10,000 per month. The cost may increase with increased production. The Company has contracted to have the liquid sediment that remains from the treated wastewater trucked to a local composting facility for essentially the cost of transportation. The Company obtained a Mendocino County Air Quality Control Permit to operate the natural gas fired boiler in Ukiah; this permit is valid until August 30, 2004. Management expects this permit to be renewed. The Saratoga Springs facility is subject to various federal, state, and local environmental laws which regulate use, storage and disposal of various materials. The Company's solid waste products consist of spent grain, cardboard, glass, and liquid waste. As for solid waste, the Company has instituted at this facility a recycling program for cardboard, office papers and glass at a minimal cost to the Company. The Company sells spent grain to local cattle dairy farms. The Company pays approximately $1,400 per month towards sewer fees for liquid waste. The sewer discharge from the brewery is monitored and is within the standards set by the Saratoga County Sewer Department. The Company follows and operates under the rules and regulations of the New York Department of Environmental Conservation for Air Pollution Control. Various states in which the Company sells its products in the U.S., including California and New York, have adopted certain restrictive packaging laws and regulations for beverages that require deposits on packages. The Company continues to do business in these states, and such laws have not had a significant effect on the Company's sales. The adoption of similar legislation -13- by Congress or a substantial number of states or additional local jurisdictions might require the Company to incur significant capital expenditures to comply. In Europe, various countries require information to be displayed on packaging in the national language. In general, European packaging regulations are covered by specifications provided by the European Union, with which the Company believes itself to be in compliance. Trade with Canada is subject to, and in compliance with, the regulation of the provincial Liquor Boards. The Company has not received any notice from any governmental agency that it is a potentially responsible person under any environmental law. EMPLOYEES As of December 31, 2003, MBC employed 57 full-time and 12 part-time individuals in the United States, including 11 in management and administration, 42 in brewing and production operations, 4 in retail and tavern operations and 12 in sales and marketing positions. By comparison, in England, UBI and UBSN together employed ten people in sales and marketing and six in managerial and administrative positions. Management believes that the Company's relations with its employees are generally good. On February 28, 2003, approximately 21 employees engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery elected Teamsters Local No. 896, International Brotherhood of Teamsters, AFL-CIO ("Union") to represent them as a collective bargaining agent. The Company and the Union executed a collective bargaining agreement effective November 17, 2003 through July 31, 2008. All of such 21 employees' positions henceforth must be held and filled by members of the union. THE HOPLAND TAVERN AND MERCHANDISE STORE An important marketing tool for the Company's domestic market has been the Hopland tavern and merchandise store. Located on a tourist route in Hopland, California, 100 miles north of San Francisco, the Hopland Brewery opened in 1983 as the first new brewpub in California and the second in the United States since the repeal of Prohibition. Beverages served at the Hopland tavern include Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, White Hawk IPA, and a seasonal brew on tap, along with local wines and soft drinks, as well as hand pumped cask conditioned ales. The adjacent merchandise store sells the Company's brews and merchandise such as hand-screened label T-shirts, posters, engraved glasses and mugs, logo caps and other brewery-related gifts. -14- In October 2003, the Company closed the restaurant located at the Hopland property. Management decided to close the restaurant because the space available for renewal at the end of the term of the current lease is limited, and the restaurant has traditionally done less business during the winter months. However, the Company continues to operate the bar and merchandise stores. There was no signifant cost incurred by the Company in shutting down the restaurant facility. ITEM 2. DESCRIPTION OF PROPERTY. In the United States, the Company owns nine acres of land in Ukiah, California on which its Ukiah brewery is operated. This facility is adequate for Company's current capacity and also has space for future expansion. Savings Bank of Mendocino County currently holds a first deed of trust on this property in connection with a loan advanced to the Company. (See PART II, Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") - Liquidity and Capital Resources - Long-Term Debt," below.) The principal amount outstanding on the loan as of December 31, 2003 was $2,421,300. CIT Group holds a second deed of trust on this property, securing a working capital facility granted to the Company. The amount owed to CIT Group by the Company under this capital facility was $1,674,000 as of December 31, 2003. (See MD&A -" Liquidity and Capital Resources -- Other Loans and Credit Facilities - CIT Group/Credit Finance Line of Credit," below). The Company owes approximately $618,000 to the County in overdue property taxes and accrued interest (See MD&A -" Liquidity and Capital Resources -- Other Loans and Credit Facilities - Overdue Property Taxes," below). Although it has now received a Certificate of Occupancy, the Company has yet to complete the build-out of its administrative space and the exterior landscaping of the Ukiah facility, and does not plan completion of the project until it has the available funds to do so. There is about $40,000 of work remaining to complete the construction and landscaping. The Company has estimated the life of the building at 40 years and depreciates the cost of the building on a straight-line method over its anticipated life. The Company does not depreciate the cost of the land. The Company's tax basis on the Ukiah facility is $7,584,000. Various other assets incorporated in this facility are being depreciated, on a straight-line basis, at between 10 and 20 years. Property taxes are currently assessed on the Ukiah property at a rate of 1.1%, for an annual tax of $106,800. The Company also currently leases a 15,500 square foot building in Hopland on which the Hopland tavern and merchandise store are located. The lease on this property expires in August 2004, and the Company is currently in negotiations with the property owner for renewal of the lease. The Company also leases 3.66 acres in Saratoga Springs, New York, on which Ten Springs Brewery operates under a lease. In June 2002, the Company -15- exercised its option to extend the lease for an additional five years and extended the lease until October 30, 2007. The Company has the option to renew the lease for two successive terms of five years if it is not in default at the time each option to extend the lease is exercised, and to purchase the land at the time the lease expires. The Company leases certain equipment and vehicles under capital and operating leases which expire at varying times from May 2004 to November 2006. Additionally, the Company leases equipment under various smaller leases. As these leases expire, it is anticipated that the equipment will be acquired pursuant to the terms of the leases and the vehicles will be surrendered. In the U.K., UBSN currently has one year remaining of a six year lease for offices located at Faversham, Kent, in England. The Company does not own or lease any other material properties in Europe. The Company considers its land, buildings, improvements, and equipment to be well maintained and 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. Effective March 28, 2003, the Company terminated a written distribution agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company ("GGDC"). On April 1, 2003, GGDC filed an action in Marin County Superior Court, naming the Company and Mr. Mark Anderson (who is employed by the Company as a sales manager) as defendants, and seeking actual and punitive damages in an amount not stated in the complaint. GGDC's action asserts claims for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, and negligent and intentional interference with economic relationships, all arising out of the allegedly wrongful termination of the GGDC distribution agreement. On January 21, 2004, GGDC filed an amended complaint, naming as additional defendants Dr. Vijay Mallya, the Company's Chairman; United Breweries of America, Inc., one of its principal shareholders; and the distribution companies now servicing the territory formerly handled by GGDC. The amended complaint seeks to impose a constructive trust on $655,000 that the Company received from its new distributors, and alleges new causes of action for conspiracy and conversion. The Company could be found to have an obligation to indemnify some or all of the other defendants for their legal costs and expenses and for all or a portion of any judgment against them in the action. The Company disputes GGDC's allegations, and intends to vigorously defend the action. The Company has filed a cross-complaint against GGDC, alleging breach of contract, tortious interference with prospective economic advantage, and unfair business practices. The Company is seeking the appropriate remedies, including compensatory and punitive damages. The Company is unable at this time to evaluate the likelihood of an unfavorable outcome in this litigation, or to provide an estimate of the amount or range of the potential loss in such an event. -16- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its Annual Meeting of Shareholders on October 27, 2003. At that meeting, the Company's shareholders voted to re-elect each of the Company's Directors for an additional term. The votes cast for each of the Directors were as follows. There were no broker non-votes; ballots for a total of 1,038,411 shares were not cast with respect to any candidate. Director Name For Withheld ------------- --- -------- Vijay Mallya 10,126,949 101,514 H. Michael Laybourn 10,126,674 101,789 Jerome G. Merchant 10,127,074 101,389 R.H.B. Neame 10,127,074 101,389 Sury Rao Palamand 10,126,949 101,514 Kent D. Price 10,127,074 101,389 Yashpal Singh 10,126,849 101,614 David Townshend 10,126,974 101,489 The Company's shareholders also voted to ratify the selection of Moss Adams, LLP as independent certified accountants to audit the Company's financial statements for the fiscal year ending December 31, 2003. The votes were cast as follows: for, 10,139,536; against, 23,195; abstain, 65,732. There were no broker non-votes; ballots for a total of 1,038,411 shares were not cast with respect to the selection of Moss Adams, LLC. -17- PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET INFORMATION Since May of 2002, the Company's Common Stock has been quoted on the Nasdaq OTC Bulletin Board, under the symbol "MENB". The Company's stock had previously been listed on the Pacific Exchange. However, because the stock did not maintain a minimum bid price of $1.00 per share as required by the rules of the Pacific Exchange, trading was suspended on the Pacific Exchange effective as of September 19, 2002, and the Common Stock was finally delisted on December 12, 2002. Management had previously determined that due to the low volume of trading in the Company's stock on the Pacific Exchange, the Company's Common Stock is better suited to the OTC Bulletin Board, and the Board of Directors did not contest or appeal the suspension of trading or the delisting of the Common Stock by the Pacific Exchange. The high and low prices or bids for the Company's Common Stock are set forth below for the quarters indicated. All prices for the first and second quarters of 2002 are the high and low sales prices as reported on the Pacific Exchange. The prices for the third and fourth quarters of 2002 and all prices for 2003 are the high and low bid information as reported from the OTC Bulletin Board. That information reflects inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.
2003 2002 ---------------------------------------- -------------------------------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High $0.35 $0.35 $0.40 $0.45 $0.69 $0.60 $0.35 $0.33 Low $0.21 $0.16 $0.19 $0.18 $0.45 $0.55 $0.26 $0.27
The Company had approximately 2,348 holders of its common stock of record as of December 31, 2003. The Company has never paid a cash dividend on its Common Stock and Management does not expect the Company to pay cash dividends in the foreseeable future. The Company's credit agreements provide that the Company may not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend), or purchase or redeem any Common Stock, without the lender's prior written consent. Management anticipates that similar restrictions will remain in effect for as long as the Company has significant bank financing. The holders of the Company's 227,600 outstanding shares of Series A Preferred Stock (which is not listed for trading on any market or to the -18- Company's knowledge quoted on any bulletin board or other public quotation system) are entitled to aggregate cash dividends and liquidation proceeds of $1.00 per share before any dividend may be paid with respect to the Common Stock. The Series A Preferred Shares must be canceled after the holders of these shares have received their $1.00 per share aggregate dividend. Management does not have any present intention to declare or pay a dividend on the Series A Preferred Stock. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS As of December 31, 2003, the Company has authorized and issued equity compensation in the following amounts:
- --------------------------------- ----------------------- -------------------------- -------------------------------- Number of securities to Weighted-average exercise Number of securities remaining be issued upon exercise price of outstanding available for future issuance of outstanding options, options, warrants and under equity compensation plans warrants and rights rights (excluding securities reflected in column (a)) - --------------------------------- ----------------------- -------------------------- -------------------------------- (a) (b) (c) - --------------------------------- ----------------------- -------------------------- -------------------------------- Equity compensation plans approved by security holders 429,273 $0.82 570,727 - --------------------------------- ----------------------- -------------------------- -------------------------------- Equity compensation plans not * * * approved by security holders - --------------------------------- ----------------------- -------------------------- -------------------------------- Total 429,273 $0.82 570,727 - --------------------------------- ----------------------- -------------------------- --------------------------------
- ------------ * See " Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities," below for a description of the status of the Company's Director's Stock Grant Plan in 2003 and currently. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES The Company's policy for compensation of its non-employee Directors has in the past included the annual issuance of options, pursuant to the Company's 1994 Stock Option Plan (the "Plan"), to purchase a number of shares of the Company's Common Stock having a fair market value of $25,000. In addition to such option grants, the Company had a policy of granting shares of Common Stock to non-employee Directors as compensation for their attendance at meetings of the Board of Directors and of Committees of the Board on which -19- they serve the "Directors' Stock Grant Plan"). However, because the market value of the Company's Common Stock was consistently below fifty cents per share during the latter half of 2002 and all of 2003 (at times falling below twenty cents per share), the Compensation Committee of the Company's Board of Directors has taken both of these policies under review. Pending completion of that review and a decision by the Committee and the Board as to appropriate compensation levels under these circumstances, no stock options or stock grants have been approved during 2003 or to date in 2004 in connection with any Director's service on the Board for that year. Pursuant to the Master Line of Credit Agreement (discussed in Item 6 below under the heading "Liquidity and Capital Resources - Master Line of Credit Agreement"), the Company issued thirteen (13) promissory notes to United Breweries of America, Inc. ("UBA") between September, 1999, and July, 2001. The outstanding principal amount of the notes and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of December 31, 2003, the outstanding principal and interest on the notes totaled approximately $1,921,500, and was convertible into 1,281,017 shares of the Company's Common Stock. In the event the convertible notes are deemed to be securities, the Company's Management believes that the issuance of the notes to UBA was exempt from registration pursuant to Section 4(2) of the Act because UBA, the sole offeree and recipient of the Notes, has significant business experience, financial sophistication, and knowledge of and familiarity with the business of the Company. Management believes that if the notes are converted into the Company's Common Stock, the issuance of such shares will also be exempt from registration pursuant to Section 4(2) of the Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Financial Statements and the Notes thereto and other financial information included elsewhere in this Report. The discussion of results and trends does not necessarily imply that these results and trends will continue. With respect to certain forward-looking statements contained in the following discussion, please refer to the paragraph captioned "Forward Looking Statements" set forth immediately prior to Part I of this Annual Report, above. CRITICAL ACCOUNTING POLICIES In the ordinary course of business, the Company has made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. -20- Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results. The Company constantly re-evaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the necessary estimates inherent in the preparation of financial statements. Estimates and assumptions include, but are not limited to, customer receivables, inventories, assets held for sale, fixed asset lives, contingencies and litigation. The Company has also chosen certain accounting policies when options were available, including: o The first-in, first-out (FIFO) method to value a majority of our inventories; o The intrinsic value method, or APB Opinion No. 25, to account for our common stock incentive awards; o A full valuation allowance of deferred tax assets for net operating loss carryforwards that are expected to expire prior to utilization; o The carrying value of certain plant and equipment in not impaired under FASB 144 based on expected future cash flows from operations; and o The decision by the Company not to accrue any amounts in connection with the litigation involving GGD, based on the Company's belief that it will prevail in the litigation. These accounting policies are applied consistently for all years presented. Our operating results would be affected if other alternatives were used. Information about the impact on our operating results is included in the footnotes to our consolidated financial statements. OVERVIEW The Company reported a net profit for the year 2003 - its first yearly net profit since 1995 -- primarily as a result of increased beverage sales in the United Kingdom; advantageous exchange-rate fluctuations; increased contract brewing sales at the Company's Releta facility in Saratoga Springs, New York; and a reduced provision for income taxes. The Company's sales gains were partially offset by significantly higher costs of goods sold, as well as by slightly lower sales in Canada and Continental Europe. The Company's brewing operation's sales in the United States during 2003 increased to 60,871 bbl., an increase of 2,255 bbl., or 3.85%, over the 58,616 bbl. sold in 2002. Sales out of the Ukiah facility during 2003 amounted to 47,315 barrels and the sales out of the Saratoga Springs facility amounted to 13,556 barrels. This compares to 47,440 barrels out of Ukiah and 11,176 barrels out of the Saratoga Springs facility in 2002. -21- The Company sold 61,040 bbl. in its European Territory during 2003, an increase of 3,968 bbl. or 6.9%, as compared to 57,072 bbl. sold during 2002. This increase was confined largely to the United Kingdom, however, where sales improved to 55,425 bbl. an increase of 7.8% as compared to sales of 51,426 bbl. during 2002. Sales to continental Europe and Canada actually decreased to 5,614 bbl. or 0.5% during 2003, as compared to sales of 5,645 during 2002. Total sales during 2003 were approximately $28,864,000, an increase of approximately $2,779,000, or 10.58%, over sales of approximately $26,085,000 in 2002. Net sales, after deducting excise taxes, were approximately $28,190,000 for 2003, an increase of approximately $ 2,756,000, or 10.85%, over net sales of 25,434,000 in 2002. The Company ended 2003 with a net income of approximately $47,000, an improvement of approximately $1,777,000 as compared with a net loss of approximately $1,730,000 for 2002. As discussed more fully under "Results of Operations," below, the amount of net income recorded for 2003 was also significantly affected by increases in the Company's cost of goods sold and operating expenses, as well as by decreases in its provision for income taxes and other expenses. During the second quarter of 2003, the Company launched Red Tail Ale in a commemorative 22 oz. bottle, and started brewing products of Monterey County Ales, Inc. at its breweries located in Ukiah and Saratoga Springs. `Raptor Red Lager', a new craft lager beer sold in the West Coast market, was introduced during the third quarter of the year. In October of 2003, the Company closed the restaurant located at the Hopland tavern property, because the space available for renewal at the end of the term of the current lease is limited, and the restaurant has traditionally done less business during the winter months. However, the Company continues to operate the bar and merchandise store at that location. Segment Information Prior to 2001, the Company's business operations were exclusively located in the United States, where it was divided into two segments, manufacturing and distribution of beer, which accounted for the majority of the Company's gross sales, and retail sales (primarily at the Company's Hopland, California, tavern and merchandise store) which generally accounted for less than 5% of gross sales (by revenue). With the Company's acquisition of UBI and UBSN in August 2001, however, the Company gained a new business segment, distribution of beer outside the United States, primarily in the U.K. and Ireland, continental Europe, and Canada (the "European Territory"). This segment accounted for 58% of the Company's gross sales during 2003 (as compared to 55% in 2002), with the Company's United States operations, including manufacturing and distribution of beer as well as retail sales (the "Domestic Territory") accounting for the remaining 42%. With expanded wholesale -22- distribution of beer and closure of restaurant at Hopland, Management expects that retail sales, as a percentage of total sales, will decrease proportionally to the expected increase in the Company's wholesale sales. RESULTS OF OPERATIONS The following tables set forth, as a percentage of net sales, certain items included in the Company's Statements of Operations. See the accompanying Financial Statements and Notes thereto.
--------------------------------- YEAR ENDED DECEMBER 31 --------------------------------- 2003 2002 STATEMENTS OF OPERATIONS DATA: % % --- --- Sales 102.39 102.56 Less Excise taxes 2.39 2.56 ------- ------- NET SALES 100.00 100.00 Cost of Goods Sold 67.92 66.42 ------- ------- GROSS PROFIT 32.08 33.58 ------- ------- Retail Operating Expenses 1.14 1.32 Marketing Expense 15.69 16.69 General and Administrative Expenses 11.78 10.74 ------- ------- Total Operating Expenses 28.61 28.75 ------- ------- INCOME FROM OPERATIONS 3.47 4.83 Other (Income) (0.58) (0.75) Interest Expense 2.94 3.64 ------- ------- Income before income taxes 1.11 1.94 Provision for income taxes 0.94 8.74 ------- ------- NET INCOME (LOSS) 0.17% (6.80%) ======= =======
-23-
------------------------------------ YEAR ENDED DECEMBER 31 ------------------------------------- 2003 2002 BALANCE SHEET DATA: $ $ - - Cash and Cash Equivalents 554,300 146,800 Working Capital (1,795,600) (4,509,700) Property and Equipment 13,874,800 14,159,400 Deposits and Other Assets 188,600 73,600 Total Assets 23,471,700 22,289,600 Long-term Debt 3,730,200 3,290,200 Obligation Under Capital Lease 204,100 193,900 Total Liabilities 16,965,100 15,943,200 Accumulated Deficit (8,447,600) (8,494,500) Shareholder's equity 6,506,600 6,346,400
NET SALES As used herein, the term "net sales" refers to gross sales less excise taxes. Other expenses, such as cost of goods sold, are not deducted from gross sales to determine net sales. Overall net sales for 2003 were $28,190,300, an increase of $2,756,800, or 10.8%, as compared to $25,433,500 in 2002. Sales volume and (in the European Territory) price increases contributed to the increase in sales. DOMESTIC OPERATIONS: Net U.S. sales were $11,341,500 in 2003, compared to $11,017,900 for 2002, representing an increase of 2.9%. Sales volume for the year increased by 2,255 barrels, to 60,871 barrels an increase of 3.84% as compared to 58,616 barrels in 2002 The growth reflects increases in the sale of the Company's brands (other than Kingfisher) by 1,307 bbl., contract brands by 857 bbl, and by 91 bbl. of Kingfisher Lager. The increase in overall net sales during 2003 was achieved mainly by higher wholesale shipments, which represented an increase of $409,700 over the wholesale shipments during 2002. Retail sales for the year decreased by $86,100, to $425,300, a decrease of 16.84% when compared to retail sales of $511,400 during 2002. EUROPEAN TERRITORY: Net sales in the Company's European Territory were $16,848,800 ((pound)10,310,700) in 2003, compared to $14,415,600 ((pound)9,594,400) during 2002. Because of exchange rate fluctuations, when the net sales results are compared in dollars they amount to an increase of 16.88%, as compared to 2002, while when measured in Pounds Sterling, the increase is only 7.47%. During 2003, the Company sold 61,040 barrels in its European Territory, an increase of 3,968 barrels, or 6.9%, as compared to 57,072 barrels during 2002. The Company increased its selling prices in all its European Territory markets by approximately 2.5% in March 2003, and about 1.7% of the increase in net sales is attributable to those price hikes. -24- COST OF GOODS SOLD: Overall cost of goods sold during 2003 was $19,145,500, as compared to $16,892,800 during 2002, an increase of $2,252,700, or 13.34%. As a percentage of net sales, costs of goods sold was 67.9% in 2003, as compared to 66.4% during 2002. (The foregoing amounts are calculated in US dollars, and do not take into account the effect of exchange rate fluctuations on the actual costs of goods sold in the Company's European Territory.) DOMESTIC OPERATIONS: Cost of goods sold as a percentage of net sales in the United States during 2003 was 70.3%, as compared to 67.1% during the year 2002, representing an increase of 3.2%. During 2003, there were increases in the price of packaging material (mainly bottles), rent, and insurance costs. The Company relies heavily on natural gas to operate its brewing operations, and electricity to operate its bottling and refrigeration units. Any significant increase in the use or charges of these utilities could significantly impact operations. EUROPEAN TERRITORY: Cost of goods sold in 2003 was $11,249,900 ((pound)6,884,500), as compared to similar costs of $9,470,700 ((pound)6,303,300) in 2002. As a percentage of net sales, cost of goods sold in the United Kingdom during 2003 was 66.8%, as compared to 65.9% during 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of exchange rate fluctuations). The increase was mainly due to exchange rate fluctuations and price increase by Shepherd Neame. GROSS PROFIT As a result of the higher sales volumes, price increases, and exchange rate fluctuations described above, gross profit for 2003 (expressed in dollars) grew to approximately $9,044,800, an increase of approximately $504,100, or 5.9%, as compared to gross profit of $8,540,700 achieved in 2002. As a percentage of net sales, however, the Company's overall gross profit during the year 2003 decreased to 32.1%, as compared to 33.6% for 2002, largely as a result of increases in costs of goods sold and excise taxes. OPERATING EXPENSES Operating expenses for the year 2003 were $8,067,300, an increase of $755,300, or 10.3%, as compared to $7,312,000 for 2002. Operating expenses consist of marketing and distribution expenses, general and administrative expenses, and retail operating expenses. MARKETING AND DISTRIBUTION EXPENSES: The Company's marketing and distribution expenses consist of salesmen's salaries and commissions, advertising costs, product and sales promotion costs, travel expenses, and related costs. For 2003, such expenses were $4,423,900, an increase of -25- $179,500, or 4.2%, as compared to $4,244,400 in 2002. As a percentage of net sales, the Company's marketing and distribution expenses decreased to 15.7% in 2003, as compared to 16.7% in 2002. DOMESTIC OPERATIONS: Domestic marketing and distribution expenses in 2003 were $1,339,700, a decrease of $42,600, or 3.09%, as compared to the $1,382,300 incurred during 2002. These expenses were equal to only 11.8% of U.S. net sales during the year 2003, as compared to 12.6% during 2002. This decrease is primarily due to a reduction in the Company's U.S. sales staff, which resulted in lower compensation, travel, entertainment and sampling expenses. Partially offsetting these reductions were increases in the Company's sales promotion expenses, including media advertising costs and point of sales materials. EUROPEAN TERRITORY: Marketing and distribution expenses in the European Territory during 2003 were $3,084,200, an increase of $222,100, or 7.76%, as compared to $2,862,100 during 2002. As a percentage of net sales in the United Kingdom, such expenses decreased to 18.31% during 2003, as compared to 19.85% during 2002 (in each case as calculated in U.S. dollars, after taking into account the effects of the exchange rate calculation). The increase was due primarily to increased promotional activities, including marketing and sales promotion expenses, which increased by $190,000, to $932,000 in 2003 as compared to $742,000 in 2002; higher personnel costs; personnel costs and sales commissions due to increased sales in supermarkets and convenient stores; increased distribution and promotional expenses relating to Sun Lik beer; and increases in the costs of repair and replacement of beer dispensing equipment installed in bars by the Company. These increases were partially offset by decreases in freight costs due to a reduction in export sales, and other miscellaneous distribution expenses. GENERAL AND ADMINISTRATIVE EXPENSES: The Company's general and administrative expenses were $3,320,000 for 2003, representing an increase of $587,700, or 21.5%, over $2,732,300 for 2002. These expenses were equal to 11.8% of net sales for 2003, as compared to 10.7% of net sales for 2002. DOMESTIC OPERATIONS. Domestic general and administrative expenses were $1,833,600 for 2003, representing an increase of $189,400, or 11.5%, over $1,644,200 for 2002. The increase was primarily due to $289,800 in increased legal and professional expenses caused by negotiation of a collective bargaining agreement at the Company's Ukiah, California, facility, and a legal dispute with a distributor. This increase was partly offset by decreases in bad debt, rent, certain lease fees and bank charges, investor related expenses, and travel expenses. EUROPEAN TERRITORY. General and administrative expenses related to the European Territory were $1,486,400 for 2003, representing an increase of $418,300, or 39.2%, as compared to $1,068,100 for 2002. These increases were -26- led by $181,200 in higher personnel costs and $110,000 in increased depreciation expenses. RETAIL OPERATING EXPENSES: Retail operating expenses for 2003 were $323,400, representing a decrease of $11,900, or 3.5%, from $335,300 in 2002. As a percentage of net sales, retail operating expenses decreased to 1.1% as compared to 1.3% for the year 2002. The decrease in retail operating expenses consisted mainly of decreases in labor expenses as a result of reduced hours of operation of the tavern and closure of the associated restaurant. OTHER EXPENSES Other expenses totaled $665,900 in 2003, representing a decrease of $69,500, or 9.5%, when compared to $735,400 in 2002. The decrease was primarily a result of lower interest expenses and miscellaneous income. INCOME TAXES The Company's provision for income taxes was $264,700 for 2003, a drop of $1,958,400, or 88.1%, as compared to $2,223,100 for 2002. The provision for taxes includes $263,400 related to the estimated amount of taxes that will be imposed by taxing authorities in the United Kingdom. As of December 31, 2003, the Company had approximately $9,888,400, $2,966,700, and $1,496,200 of Federal, California, and New York net operating losses, respectively, available to carry forward. Of the Federal and New York net operating losses, approximately $2,079,700 will expire in 2012, and the remainder will expire through 2023. The State of California has suspended the ability to use net operating loss carryforwards until 2005. The Company anticipates that any taxable income in California during this period will be offset by investment tax credits. The California net operating losses begin to expire in 2005 and will continue to expire through 2012. The Company also has $58,000 of California Manufacturers' Investment Tax Credits that can be carried forward to offset future taxes until they begin to expire in 2007. The Company has recorded a valuation allowance of $3,117,600 on deferred tax assets for net operating loss carryforwards that may expire prior to utilization. Management believes that the Company could still utilize the deferred tax assets in the ordinary course of business, but due to the significant time period that may elapse before utilization, Management has decided that a valuation allowance was necessary. The Company is implementing various strategies to achieve profits sufficient to utilize these assets. NET INCOME The Company's net income for 2003 was $46,900, an improvement of $1,775,700 as compared to a net loss of $1,729,800 for the year 2002. After -27- providing for a foreign currency translation adjustment of $113,300 for 2003 ($42,500 for 2002), the Company's comprehensive 2003 income was $160,200, as compared to a loss of $1,687,300 in 2002. SEASONALITY DOMESTIC OPERATIONS: Beer consumption nationwide has historically increased by approximately 20% during the summer months. It is not clear to what extent seasonality will affect the Company as it expands its capacity and its geographic markets. EUROPEAN OPERATIONS: Beer consumption in the United Kingdom, Ireland, and continental Europe has historically increased during the winter months. Although it is not clear to what extent seasonality and the expansion of its geographic markets will affect the Company, it is believed that the seasonality difference between the United States and United Kingdom-European markets will benefit the Company overall. CAPITAL DEMANDS The Saratoga Springs facility commenced brewing operations in February 1998. Both the Ukiah and Releta facilities have been operating at significantly less than full capacity during 2003. Both breweries have placed demands upon the Company's assets and liquidity. Failure to adequately meet those demands may have a material adverse affect on the Company's business, financial condition, and results of operations. The Company has yet to complete the build-out of its administrative space and the exterior landscaping of its Ukiah facility, and does not plan to revisit completion of the project until it has the available funds to do so. If, in the future, the Company decides to complete the construction and landscaping, the remaining work and the currently cost thereof are estimated to be as follows: covering the parking lot with asphalt, approximately $30,000; and building a concrete sidewalk to one of the entrances of the brewery building, approximately $10,000. PROCEEDS FROM OPERATIONS INSUFFICIENT TO SUSTAIN OPERATIONS Unused capacity at the Ukiah and Saratoga Springs facilities has placed severe demands on the Company's working capital. Beginning approximately in the second quarter of 1997, the time at which the Ukiah brewery commenced operations, proceeds from operations have not been able to provide sufficient working capital for day to day operations. To fund its operating deficits, the Company has relied upon lines of credit and other credit facilities, including loans from Company affiliates and loans and lines of credit from banks and other third party lenders (see "Liquidity and Capital Resources," below). -28- Even though the Company's overall operations have resulted in net profit during the year 2003, continuing losses in its United States operations and the maturing of certain of its debts in April and June of 2004 could have a serious adverse effect on the Company's operations. The Company does not currently have sufficient funds available to repay these currently maturing loans (which are secured by substantially all of MBC's assets) as they become due. The Company has successfully negotiated refinancing arrangements in the past, and is currently in discussion with potential new lenders to refinance the maturing debts. In the event that refinancing negotiations are not successful, one of the Company's principal shareholders has committed to provide financial assistance in order to avoid default under the currently maturing loans when they become due, although the terms of such financial assistance have not yet been agreed upon (see "Liquidity and Capital Resources," below). Despite this commitment, however, Management does not anticipate that renewing or replacing the existing loans would in itself correct its ongoing operating deficits. LIQUIDITY AND CAPITAL RESOURCES The Company has entered into a substantial number of loans, lines of credit, other credit facilities, and lease agreements over the last several years, with the result that a substantial majority of its assets are encumbered and it is carrying a relatively large debt burden. In order to continue its operations, the Company will have to make timely payments of its debt and lease commitments as they fall due. Any breach of a loan or lease which actually leads to default, or to an attempt by a creditor to exercise its rights in the Company's tangible or intangible assets, could potentially make it impossible, at least in the short term, for the Company to continue its operations. In particular, MBC's line of credit from CIT Group and its temporary loan from Savings Bank of Mendocino (both of which are more fully described below under "Other Loans and Credit Facilities") are scheduled to fall due on April 30 and June 23, 2004, respectively. A failure to replace, renegotiate, or extend either of these agreements would have a significant adverse impact on the Company's liquidity and operations. Although Management has been able to do so in the past, there can be no assurance that the Company will have access to the same or equivalent sources of funds in the future, either on a comparable basis or on any other terms acceptable to the Company. On April 4, 2004, MBC received a commitment from United Breweries of America, Inc. ("UBA"), one of its major shareholders, to the effect that UBA would provide MBC with such financial assistance as may be in UBA's power to prevent or avoid any default under either the CIT Group line of credit or the temporary loan from Savings Bank of Mendocino County when they become due. The terms of any such assistance have not yet been determined, however. MASTER LINE OF CREDIT. On August 31, 1999, MBC and United Breweries of America, Inc. ("UBA"), one of the Company's principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. The Company and UBA executed an Extension of Term of Notes under Master Line of Credit Agreement in February 2002, which was later amended in August 2002, and again in March and August 2003 (the "Extension Agreement"). The Extension Agreement confirms the Company's and UBA's extension of the terms of the UBA Notes for a period ending on August 14, 2004. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which confirms that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. As of the date of this filing, UBA has made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). The aggregate outstanding principal amount of the UBA Notes as of -29- February 27, 2003, was $1,515,371, and the accrued but unpaid interest thereon was equal to approximately $406,155. These amounts reflect an increase of approximately $85,200 in the interest currently due on the UBA Notes, as compared to December 31, 2002. The UBA Notes require the Company to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date, UBA has permitted the Company to capitalize all accrued interest; therefore, the Company has borrowed the maximum amount available under the facility. Upon maturity of any UBA Note, unless UBA has given the Company prior instructions to commence repayment of the outstanding principal balance, the outstanding principal and accrued but unpaid interest on such Note may be converted, at the option of UBA, into shares of the Company's common stock. If UBA does not elect to so convert any UBA Note upon maturity, it has the option to extend the term of such UBA Note for any period of time mutually agreed upon by UBA and the Company. During the extended term of any UBA Note, UBA has the right to require the Company to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA within sixty (60) days. The outstanding principal amount of the Notes and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of December 31, 2003, the outstanding principal and interest on the notes was convertible into 1,281,017 shares of the Company's Common Stock. On December 28, 2001, the Company and UBA entered into a Confirmation of Waiver which provides a written confirmation that as of August 13, 2001, UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes. (For further information about the Credit Agreement please refer to "PART III, Item 12 - Certain Relationships and Related Transactions -Master Line of Credit Agreement," below.) LONG TERM DEBT: MBC has obtained a $2.7 million loan from Savings Bank of Mendocino County ("SBMC"), secured by a first priority deed of trust on the Ukiah land, fixtures, and improvements. The loan is payable in partially amortizing monthly installments of $24,443 including interest at the rate of 7.24%, maturing December 2012 with a balloon payment in the amount of $932,600. The interest rate is adjusted on every five year anniversary of the agreement to the Treasury Constant Maturity Rate plus 4.17%. The amount of the balloon payment will vary depending on the change in interest rates over the years. In addition to the Ukiah land and facility, this loan is secured by some of the other assets of the Company (other than the Releta facility), including, without limitation, most of the Company's equipment. -30- EQUIPMENT LEASE: From 1996 until 2003, Finova Capital Corporation ("Finova") leased new brewing equipment with an original total cost of approximately $1.78 million to MBC, with monthly rental payments of approximately $27,100 each. During 2003, the Company exercised its option to purchase the equipment at a cost of approximately $576,200. OTHER LOANS AND CREDIT FACILITIES. CIT GROUP/CREDIT FINANCE LINE OF CREDIT: The CIT Group/Credit Finance, Inc. has provided MBC a $3,000,000 maximum line of credit with an advance rate of 80% of the qualified accounts receivable and 60% of the inventory at an interest rate of the prime rate of Chase Manhattan Bank of New York plus 2.25% payable monthly, originally scheduled to mature on September 23, 2002. The line of credit is secured by all accounts, general intangibles, inventory, and equipment of MBC except for the specific equipment and fixtures of the Company leased from Finova Capital Corporation, as well as by a second deed of trust on the Company's Ukiah land improvements. $1,484,000 of the line of credit was advanced to MBC as an initial term loan, which was repayable in sixty consecutive monthly installments of principal, each in the amount of $24,700. On January 17, 2003, the term of this facility was extended to November 30, 2003. At the same time, the maximum credit available was increased to $3,500,000, and MBC was provided a term loan of $750,000 consisting of the original balance of $346,300 and a new term loan of $403,700 repayable in 30 equal consecutive monthly installments of $24,700, commencing February 1, 2003, with a final payment of $8,000. CIT Group amended the facility on December 1, 2003, January 30, 2004 and February 27, 2004 and extended the term of the facility to expire on April 30, 2004 in order to allow MBC time to refinance. Based on MBC's current level of accounts receivable and inventory, MBC has drawn the maximum amount permitted under the line of credit. As of December 31, 2003, the total amount outstanding on the line of credit was approximately $1,674,000. Management believes that it will be successful in refinancing this agreement, but failure to do so would have a significant impact on the Company's liquidity and operations. SAVINGS BANK OF MENDOCINO TEMPORARY LOAN: On December 31, 2003, Savings Bank of Mendocino County ("SBMC") extended a temporary loan in the principal amount of $576,200 to MBC in order to finance a buy-out of equipment leased through Finova Capital Corporation. This loan, which is due for repayment on June 23, 2004, is secured by the existing assets of the Company and the assets released by Finova on lease termination. The rate of interest on the loan is 7%. Management believes that it will be successful in refinancing this agreement, but failure to do so would have a significant impact on the Company's liquidity and operations. -31- NEDBANK BANK LIMITED OPTION FACILITY: Nedbank Limited (formerly Necor Bank Limited), a South African registered company, has provided UBSN with a multi-currency option facility of 1,250,000 Pounds Sterling. This overdraft facility is secured by all of the assets of UBSN. The amount outstanding on this line of credit as of December 31, 2003 was approximately $765,600. SHEPHERD NEAME LOAN: Shepherd Neame has a contract with UBSN to brew Kingfisher Lager for the Company's European and Canadian markets. As consideration for extending the brewing contract, Shepherd Neame advanced a loan of (pound)600,000 (Pounds Sterling) to UBSN, repayable in annual installments of (pound)60,000 (Pounds Sterling) per year, commencing in June 2003. The loan carries a fixed interest rate of 5% per year. (For more information about this loan please see "PART III -- Certain Relationships and Related Transactions -- Loan Agreement Between UBSN and Shepherd Neame," below.) WEIGHTED AVERAGE INTEREST: The weighted average interest rates paid on the Company's U.S. debts (including the long term capital lease of equipment by Finova Capital Corporation Inc.) was 7.38% for the year 2003 and 8.19% for the year 2002. For loans primarily associated with Company's European territory, the weighted average rate paid was 6.42% in 2003 and 6.94% in 2002. Overall the weigted average rates were 7.26% for 2003 and 8.03% for 2002. KEG MANAGEMENT ARRANGEMENT: The Company entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides the Company with half-barrel kegs for which the Company pays a filling and use fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar then supplies the Company with additional kegs. The agreement has been extended on a monthly basis since September 2002. The Company is currently negotiating a new contract. If, on any given month, the agreement is not extended and terminates, the Company is required to purchase a certain number of kegs from MicroStar. The Company would probably finance the purchase through debt or lease financing, if available. However, there can be no assurance that the Company will be able to finance the purchase of kegs. Failure to extend the contract or failure to purchase the necessary kegs from MicroStar on termination of contract is likely to have a material adverse effect on the Company. CURRENT RATIO: The Company's ratio of current assets to current liabilities on December 31, 2003 was 0.84 to 1.0 and its ratio of total assets to total liabilities was 1.4 to 1.0. On December 31, 2002, the Company's ratio of current assets to current liabilities was 0.64 to 1.0 and its ratio of total assets to total liabilities was 1.4 to 1.0. OVERDUE PROPERTY TAXES: As of June 30, 2003, the delinquent property taxes due on the Company's Ukiah property, including penalties and interest, totaled $710,600, representing overdue taxes for the period from April 1999 to -32- June 2003. On July 31, 2003, the Company entered into a payment plan to settle these issues, pursuant to which it made an initial payment to the County of $143,000. The balance of the overdue taxes will be paid in four annual installments, due on or before April 10, 2005, 2006, 2007, and 2008, each representing 20% or more of the original overdue balance, along with accrued interest calculated at 18% per year. Because of the large amount of taxes owed, and the County's ability to sell the Ukiah property to satisfy a delinquency, failure to settle these tax issues (including payments due under the payment plan) could have, or have had, a serious adverse effect on the Company's business and financial condition. RESTRICTED NET ASSETS. The Company's wholly-owned subsidiary, UBI, has undistributed earnings of approximately $2,238,000. Under UBI's line of credit agreement, distributions and other payments to the Company from its subsidiary are limited to approximately $200,000 per year. RELATED PARTY TRANSACTIONS: In the last several years, MBC and its subsidiaries have entered into or amended several agreements with affiliated and related entities. Among these have been a Brewing Agreement and a Loan Agreement between UBSN and Shepherd Neame; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and UBSN; a Distribution Agreement between UBI and UBSN; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement between UBI and UB Limited. (For more information on all of these agreements please see "PART III - Item 12 - -- Certain Relationships and Related Transactions," below.) ITEM 7. FINANCIAL STATEMENTS. The information required by this item is set forth at Pages F-1 through F-16 to this Annual Report. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. The Company's Management including the Chief Executive Officer, President and Chief Financial Officer, have evaluated, within 90 days prior to the filing of this annual report, the effectiveness of the design, maintenance, and operation of the Company's disclosure controls and procedures. Management determined that the Company's disclosure controls and procedures were effective in ensuring that information required to be disclosed by the Company in the reports that it files under the Exchange Act is accurate and is recorded, -33- processed, summarized, and reported within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision making can be faulty and that breakdowns in internal controls can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process. There have been no significant changes in internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation thereof, including any corrective actions with regard to significant deficiencies and material weaknesses. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The following table sets forth the names, ages as of February 28, 2004 , and certain information regarding each of the Company's current Directors and executive officers:
Director Name Age Position Since - ---- --- -------- ----- H. Michael Laybourn 65 Director 1993 Vijay Mallya, Ph.D. 49 Director, Chairman of the Board, and Chief 1997 Executive Officer Jerome G. Merchant*+ 42 Director 1997 Mahadevan Narayanan 46 Chief Financial Officer and Secretary --- R.H.B. (Bobby) Neame 70 Director 1998 Sury Rao Palamand, Ph.D.*+ 73 Director 1998 Kent D. Price*+ 60 Director 1998 Yashpal Singh 58 Director and President 1997 David R. Townshend 57 Director 2001
- --------------- * Member of the Audit/Finance Committee. + Member of the Compensation Committee. -34- H. Michael Laybourn, co-founder of the Company, served as the Company's President from its inception in 1982 through December, 1999, and as its Chief Executive Officer from inception through October 1997. Mr. Laybourn was elected a Director in November 1993 when the Company began the process of converting from a limited partnership to a corporation and served as Chairman of the Board from June 1994 through October 1997. Mr. Laybourn is a former Vice President of the California Small Brewers Association and a former Chairman of the Board of Directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor of Fine Arts degree from Arizona State University. Vijay Mallya, Ph.D., became Chairman of the Board and Chief Executive Officer of the Company in October 1997. Dr. Mallya is Chairman of UBICS, Inc., United Breweries Limited, UB Engineering Limited, Mangalore Chemicals and Fertilizers Ltd., Herbertsons Limited, McDowell & Co. Ltd., and other affiliated companies (collectively the "UB Group"). (See "Security Ownership of Certain Beneficial Owners and Management," below.) United Breweries Limited and McDowell & Co., Ltd. are two of Asia's leading beer and spirits companies. The UB Group has annual sales in excess of (US) $1 Billion. He also sits on boards of several foreign companies and organizations including companies comprising the UB Group, The Institute of Economic Studies (India), and the Federation of the Indian Chamber of Commerce and Industries. Dr. Mallya was recently elected to serve as a member of the Upper House of the Indian Parliament. Dr. Mallya holds a Bachelor of Commerce degree from the University of Calcutta in India and an honorary Doctorate in Business Administration from the University of California, Irvine. Jerome G. Merchant became a Director in October 1997 and was Chief Financial Officer of the Company from November 1997 to October, 1998. Mr. Merchant currently serves as the Strategic Planning Consultant to the Chairman's Office of the Company and has served in such capacity since July 1996. Between April 1993 and December 2003, Mr. Merchant served in various capacities for Cal Fed Investments, a wholly owned subsidiary of Cal Fed Bank. His responsibilities included due diligence review and monitoring of investment products for Cal Fed Investments. As a result of the acquisition of Cal Fed Bank by Citigroup, since January 2003 Mr. Merchant has been serving as a Vice President and Regional Sales Director for Citigroup. Mr. Merchant received his Bachelor of Science degree in Managerial Economics-Finance from the University of California, Davis. Mahadevan Narayanan joined the company in early 2001 as Secretary, Corporate Controller and Chief Financial Officer. Before joining the Company, he served the United Breweries Group in India for the prior 17 years in various financial and accounting capacities. Mr. Mahadevan was most recently -35- employed as Senior Manager of Accounting Services of Herbertsons Ltd. for the past six years. He holds a Bachelor of Science degree in Mathematics from Madurai Kamaraj University in India and is an associate member of the Institute of Chartered Accountants of India. R.H.B. (Bobby) Neame became a Director in January 1998. Mr. Neame has served as the Chairman of Shepherd Neame Ltd. for more than thirty years. Shepherd Neame Ltd. has operated as a brewery in England for 300 years, making it England's oldest continuously operating brewery. Sury Rao Palamand, Ph.D., became a Director in January 1998. Dr. Palamand is the president of Summit Products, Inc., a beverage development firm serving the beverage industry; Chairman of the Southend Management, LLC which owns and operates a chain of restaurant breweries in the States of North Carolina, South Carolina, and Florida; and President of the Historic Lemp Brewery, LLC, which develops micro breweries and restaurants. From 1966 to 1989, Dr. Palamand served as Director, Beer and New Beverage Development for Anheuser-Busch Companies, Inc. Dr. Palamand holds a Master of Science in Chemistry from the University of Bombay, India and a Master of Science and Doctorate in Food and Flavor Technology from the Ohio State University, Columbus Ohio, USA. Kent D. Price became a Director in January 1998. He is currently the President and CEO of Robert Kent and Company, an investment and consulting company. Additionally, he is currently the Chairman of Fluid, Inc., President of Parker Price Venture Capital, and a Director of Capital Markets Company. From August 1994 until July 1998, he was employed by IBM Banking, Finance and Securities Industries as General Manager of Securities and Capital Markets. From 1993 through August 1994, he served as Chairman and Chief Executive Officer of the Bank of San Francisco. He currently serves as a Director of The San Francisco Company, which is the holding company for the Bank of San Francisco. He also sits on the board of the American Bridge Company. Mr. Price received a Bachelor of Arts in history and politics and a Master of Arts in Slavic studies from the University of Montana and attended Oxford University as a Rhodes Scholar. Yashpal Singh, President of the Company since January 2000, became a Director in October 1997 and has served as its Executive Vice President and Chief operating Officer since May 1998. From May 1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for UBA, an affiliate of the Company (see "Security Ownership of Certain Beneficial Owners and Management," below). In that capacity, he was responsible for UBA's United States brewing operations. Between 1992 and 1997, Mr. Singh also served as Senior Vice President-Operations for United Breweries Ltd., an Indian Corporation, where he was responsible for the operations of 12 breweries, instituting new projects, and technical and operational evaluation of potential -36- acquisition opportunities worldwide. Mr. Singh has over 38 years of experience in the brewing industry. Mr. Singh holds a Bachelors degree in Science from Punjab University in India, and has graduate training in the fields of Brewing, Malting, and Mineral Water Technology. Mr. Singh is an associate member of the Institute of Brewing, London; a member of the Master Brewers Association of America; and was a former executive member of the Managing Committee of the All India Brewer's Association. David Townshend became a Director in 2001. He is also a Director of UBSN, and has been the General Manager of UBSN since 1990. Mr. Townshend's responsibilities encompass all aspects of UBSN's operations. Prior to his promotion to General Manager of UBSN, Mr. Townshend served as Transport Manager for Shepherd Neame Limited, where his responsibilities included distribution and customer services. Mr. Townshend remains an employee of Shepherd Neame, which pays his compensation directly to him, although UBSN's agreements with Shepherd Neame provide for reimbursement of all or part of his salary and related expenses. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Based solely on its review of the Forms 4 and 5 furnished to the Company during and with respect to the year 2003, the Company is not aware of any person that was a Director, officer, or greater than 10% beneficial owner of the Company that failed to file on a timely basis reports required by Section 16(a) of the Exchange Act during the most recent fiscal year. AUDIT COMMITTEE FINANCIAL EXPERT The Company's Board of Directors believes that at least one member of the Company's Audit Committee - Mr. Kent D. Price - is both an independent Director and qualifies as an "audit committee financial expert" as that term is defined in the regulations of the Securities and Exchange Commission. CODE OF ETHICS The Company has adopted a Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer, and principal accounting officer. The Code of Ethics is posted on the Company's Internet website at www.mendobrew.com. Any person desiring a free copy of the Code of Ethics should send a written request to the Company's Secretary, N. Mahadevan at the Company's principal executive offices located at 1601 Airport Road, Ukiah, CA 95482. -37- ITEM 10. EXECUTIVE COMPENSATION. EXECUTIVE COMPENSATION The following table sets forth the annual compensation, including salary, bonuses, and certain other compensation, paid by the Company to its Chief Executive Officer and most highly-compensated executive officers and employees during each of the fiscal years ended December 31, 2003, 2002 and 2001. None of the Company's other executive officers received total compensation in excess of $100,000 in any of those years. SUMMARY COMPENSATION TABLE -38-
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------------------------------------------------------------------------- AWARDS PAYOUTS ------------------------------------------------------- RESTRICTED SECURITIES OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION AND PRINCIPAL YEAR ($) ($) ($) ($) SARS ($) ($) POSITION (#) - -------------------------------------------------------------------------------------------------------------------------------- Vijay Mallya, 2003 $158,129* $0.00 $0.00 Chief Executive Officer 2002 $120,000 $0.00 $0.00 2001 $120,000 $0.00 $0.00 Yashpal Singh, 2003 $118,875 $41,887 $13,538** President 2002 $115,500 $37,035 $11,539** 2001 $115,965 $33,212 $9,983** Mark Anderson, 2003 $79,200 $27,091 .$7,847 Sales Manager 2002 $79,200 $27,606 $6,421 2001 $79,200 $45,297*** $5,502
*Includes (pound)23,333 (Pounds Sterling) (approximately $38,129 in U.S. Dollars at current exchange rates) paid to Dr. Mallya by UBI during the period beginning September 1, 2003, as compensation for promoting the Company's products in the European Territory outside the U.K. This compensation is expected to equal approximately (pound)70,000 (Pounds Sterling) on an annual basis in the future (approximately $129,500 in U.S. Dollars at current exchange rates). **The value of the executive's medical benefits makes up approximately 80% of each of these amounts. ***Includes 25,000 common shares granted to Mr. Anderson as a stock bonus during 2001, valued at $0.688 per share. COMPENSATION OF DIRECTORS In the past, the Company has compensated each non-employee Director for his attendance at the meetings of the Board of Directors and for his -39- attendance at meetings of committees of the Board of Directors, annually granting each non-employee Director both (a) that number of shares of the Company's common stock which had a fair market value of $3,000 for each board meeting, and $1,000 for each committee meeting he attended during the prior year and (b) options to purchase that number of shares of the Company's common stock which had a fair market value of $25,000. In the last two years, however, noting the drop in the trading or quoted price for the Company's stock to less than $1.00 per share, the Board of Directors has suspended both the Company's stock option and stock grant programs. The Compensation Committee is currently considering a proposal to significantly modify the previous plans, and it is expected that one or more new plans and guidelines may be adopted later in the year. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. The following table sets forth certain information known to the Company regarding the beneficial ownership of the Company's Common Stock and Series A Preferred Stock as of February 27, 2004, for (a) each shareholder known by the Company to own beneficially 5% or more of the outstanding shares of its Common Stock or Series A Preferred Stock; (b) each Director; and (c) all Directors and executive officers of the Company as a group. Except as noted, the Company believes that the beneficial owners of the Common Stock and Series A Preferred Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
Shares Beneficially Approximate Name Owned(1) Percentage ---- -------- ---------- United Breweries of America, Inc.+ 3,087,818(2) 27.4% Inversiones Mirabel S.A. 5,500,000 48.8% Hong Kong Bank Building 6th Floor, Samuel Lewis Avenue P O Box 6-4298, El Dorado Panama City Vijay Mallya, Ph.D.+ 8,587,818(3) 76.2% H. Michael Laybourn++ 354,254(4) 3.1%
-40-
R.H.B. (Bobby) Neame 127,810(5) 1.1% c/o Shepherd Neame, Ltd. 17 Court Street. Faversham, Kent ME13 3AX United Kingdom Kent Price 180,097(5) 1.6% c/o Robert Kent and Company Wood Island #308 60 E. Sir Francis Drake Blvd. Larkspur, CA 94939 Sury Rao Palamand, Ph.D. 147,500(5) 1.2% 50 Crestwood Executive Center, Suite 207 St. Louis, MO 63126 Jerome G. Merchant+ 195,964(5) 1.7% Yashpal Singh++ -- -- David Townshend -- -- c/o UBSN Limited 17 Court Street Faversham, Kent ME13 3AX United Kingdom All Directors and executive officers as a group (8 persons) 9,593,443(6) 82% 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% --------------------- + 2400, Bridgeway, Suite 290, Sausalito, CA 94965 ++ 1601 Airport Road, Ukiah, CA 95402
(1) Applicable percentages of ownership are based on 11,266,874 shares of Common Stock outstanding. Shares of Common Stock subject to a contract of purchase or options currently exercisable or exercisable within 60 days after the date of this Statement are deemed outstanding -41- for computing the percentage ownership of the person obligated to purchase the shares or holding the options, but are not deemed outstanding for computing the percentage of any other person. (2) Does not include (i) 1,281,017 shares issuable upon conversion of certain convertible notes issued to UBA to terminate an existing Master Line of Credit Agreement and convert certain outstanding Notes into shares of Common Stock (see "PART III - Item 12, Certain Relationships and Related Transactions," below), or (ii) 882,057 outstanding shares which are held in the aggregate by Messrs. Laybourn, Scahill, Franks, and Barkley and which, pursuant to a Shareholders' Agreement, are subject to (A) a right of first refusal to purchase, held by the Company, which may become exercisable within 60 days, and (B) the requirement that the owners of record vote such shares for four Directors designated by UBA and two additional independent Directors who are acceptable to UBA. (3) Includes all shares held by the Company's two largest shareholders, United Breweries of America, Inc. ("UBA") and Inversiones Mirabel. S.A., a Panamanian corporation ("Inversiones"). Dr. Mallya may be deemed to be a beneficial owner of UBA and Inversiones because they are both controlled by Golden Eagle Trust, an Isle of Mann trust which in turn is controlled by persons who may exercise discretion in Dr. Mallya's favor among others. Dr. Mallya is also the Chairman and Chief Executive Officer of UBA. Does not include (i) 1,281,017 shares issuable upon conversion of certain convertible notes issued to UBA to terminate an existing Master Line of Credit Agreement and convert certain outstanding Notes into shares of Common Stock. (See "PART III - Item 12, Certain Relationships and Related Transactions," below). (4) Includes 68,077 shares subject to options exercisable or will be exercisable within 60 days. Does not include 3,683,698 currently outstanding shares held by UBA, Messrs. Scahill, Franks, and Barkley, all of which are subject to Shareholders' Agreement which requires the parties thereto to vote for one Director designated by Mr. Laybourn. (5) Includes 90,299 shares subject to options which are presently exercisable or will be exercisable within 60 days. (6) Does not include 595,880 outstanding shares held by Messrs. Scahill, Franks, and Barkley pursuant to a Shareholders' Agreement which requires the parties thereto to vote for four Directors designated by UBA, one Director designated by Mr. Laybourn, and two additional independent Directors who are acceptable to UBA, and which grants UBA a right of first refusal with respect to such shares. Includes -42- 429,273 shares subject to options which are presently exercisable or will be exercisable within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. MASTER LINE OF CREDIT AGREEMENT On August 31, 1999, the Company and UBA entered into a Master Line of Credit Agreement, which was subsequently amended in April of 2000, and February of 2001 (the "Credit Agreement"). The terms of the Credit Agreement provide the Company with a line of credit in the principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen (13) separate advances to the Company under the Credit Agreement, pursuant to a series of individual eighteen (18) month promissory notes issued by the Company to UBA (the "UBA Notes"). As of February 28, 2003, the aggregate outstanding principal amount of the UBA Notes was $1,515,371, and the accrued but unpaid interest thereon was equal to approximately $406,155. (For more information on the Master Line of Credit Agreement, please refer to Item 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL INFORMATION AND RESULTS OF OPERATIONS - Liquidity and Capital Resources," above.) LICENSE OF THE KINGFISHER TRADEMARK UBI licenses the trademark Kingfisher (the "Mark") from UB Limited, pursuant to a License Agreement dated October 9, 1998 and amended pursuant to a Supplemental Agreement dated October 22, 2001 (together, the "License Agreement"). Under the terms of the License Agreement, UB Limited has granted UBI and UBSN the exclusive right to use the Mark in a number of European countries, including among others Austria, Belgium, Italy, France, Germany, Ireland, the Netherlands, Spain, Sweden and the United Kingdom, as well as in Canada (collectively, the "Licensed Territory"). UB Limited, which owns the Mark, is responsible for maintaining the registration of the Mark in all relevant market areas. The License Agreement, which will expire on October 9, 2013, also provides that neither party may transfer its rights or obligations thereunder to any other person or entity unless the transferee enters into an agreement to be bound by the obligations of the transferor. In July 2001 MBC entered into a Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., a Delaware corporation affiliated with UB Limited, pursuant to which MBC obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing and distribution of beer in the United States. Under its terms, this agreement will remain in effect for so long as the Distribution Agreement (described below) between UBI and UBSN does. Currently, that agreement is scheduled to expire in October 2013. -43- Because the Company's Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the Board of UB Limited, the transactions represented by these license agreements may be deemed to be related party transactions. DISTRIBUTION AGREEMENT UBI entered into a Distribution Agreement with its wholly-owned subsidiary UBSN on October 9, 1998. Under this agreement, which was subsequently amended by a Supplemental Agreement dated as of October 24, 2001 (together, the "Distribution Agreement"), UBI granted UBSN an exclusive sublicense for the distribution of all lager and other beer products brewed or prepared for sale in the Company's European Territory, and a sublicense to use the Kingfisher trademark and trade name, to manufacture, package, market, distribute, and sell beer and other products using the Kingfisher trademark and logo, and to enter into the Brewing Agreement described below. The Distribution Agreement, which also requires UBSN to pay UBI a royalty fee of 50 British pence (approximately $0.82, at the average exchange rates during 2003) for every 100 liters (26 gallons) of beer brewed for sale in the European Territory, will expire (unless its term is extended) in October 2013. BREWING AGREEMENT BETWEEN UBI AND SHEPHERD NEAME On October 9, 1998, UBI and UBSN entered into a Brewing Agreement with Shepherd Neame, and on October 24, 2001, this agreement was amended by a Supplemental Agreement (as so amended, the "Brewing Agreement"). Since R.H.B. (Bobby) Neame, who is the Chairman and Chief Executive Officer of Shepherd Neame, has been a member of the Company's Board since January 1998, the transaction represented by the Brewing Agreement may be deemed to be a related party transaction. The Brewing Agreement, which was entered into (and amended) in conjunction with the Loan Agreement described below, grants Shepherd Neame the exclusive right to brew, keg, bottle, can, label, and package all beers and related products sold under the Kingfisher trademark in the United Kingdom, and with respect to the distribution of such products elsewhere in the European Territory, UBI and UBSN further agreed that they would require any other distributor of such products (subject to applicable laws and regulations) both to obtain such products directly from a company related to UBI or its subsidiaries and to refrain from seeking customers, or establishing a distribution network for such products, in the United Kingdom. In exchange, Shepherd Neame agreed to brew and/or supply Kingfisher Lager and related products to UBSN for destinations within (and, with the consent of Shepherd Neame, outside) the United Kingdom. The price UBSN pays to Shepherd Neame for brewing Kingfisher Lager for distribution in the United Kingdom is set by a formula which varies according to the applicable duty on Kingfisher Lager and other factors. -44- LOAN AGREEMENT BETWEEN UBSN AND SHEPHERD NEAME Concurrently with the Brewing Agreement described above, UBSN and Shepherd Neame entered into a Loan Agreement, under which on or about October 24, 2001, Shepherd Neame advanced to UBSN (pound)600,000 (Pounds Sterling) (the full amount available under the Loan Agreement), at a fixed interest rate of 5%, for general corporate purposes. This loan is payable in ten annual installments of (pound)60,000 (Pounds Sterling) each, commencing on June 30, 2003 and continuing on each anniversary thereof until the Loan is fully repaid. Any remaining balance of principal or interest will become due and payable (and the loan will terminate) on June 30, 2013. It would be an event of default under the Loan Agreement, and the lender would have the right, at will, not only to cancel the Loan Agreement and accelerate all sums due under it, but also to terminate the Brewing Agreement, if UBSN were to terminate or default under the Brewing Agreement, or if either of the License Agreements that UBI and UBSN have entered into with UB Limited (see "License of the Kingfisher Trademark, above) are terminated (except in accordance with their terms or in connection with the parties' entry into an equivalent Brewing Agreement). MARKET DEVELOPMENT AGREEMENT Effective October 26, 2001, MBC and UBSN entered into a Market Development, General and Administrative Services Agreement (the "Market Development Agreement"), under the terms of which UBSN 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 "Products"), provide certain legal and business management support services to UBSN, and provide assistance with the establishment and management of distribution channels for the Products in the United States. In consideration for performing these services, UBSN agreed to make periodic payments of service fees to MBC, amounting in the aggregate to $1,500,000 over a period of three years ($1,000,000 during calendar 2001, $300,000 during 2002, and $200,000 during 2003). The Market Development Agreement will continue in force during the term of the Distribution Agreement described above. BREWING LICENSE AGREEMENT Concurrently with the Market Development Agreement described above, MBC entered into a Brewing License Agreement with UBSN, under the terms of which UBSN granted to MBC an exclusive license to brew and distribute Kingfisher Premium Lager in the United States, in exchange for a royalty, payable to UBSN, of eighty cents ($0.80) for each case of Kingfisher Premium Lager brewed by MBC under this agreement. -45- ANNOUNCEMENT OF INTEREST BY UNITED BREWERIES HOLDINGS LTD. On September 30, 2002, the shareholders of United Breweries Holdings, Ltd. (formerly Kingfisher Properties & Holdings, Ltd.) ("UBHL"), a corporation based and incorporated in India and publicly-held in that country, approved resolutions authorizing UBHL's board of directors to consider a transaction by which UBHL would purchase some or all of the Company's outstanding shares. Dr. Mallya, the Company's Chairman of the Board and Chief Executive Officer, is also the Chairman of the Board of UBHL. To date, UBHL has not proposed any specific transaction to the Company, nor has it indicated when (if ever) it may make a specific proposal or commence negotiations with the Company for an actual acquisition of any of its shares. ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
Exhibit Number Description of Document ------ ----------------------- 3.1 (T) Articles of Incorporation of the Company, as amended. 3.2 (T) Bylaws of the Company, as amended. 10.1 (A) Mendocino Brewing Company Profit Sharing Plan. 10.2 (T) Amended 1994 Stock Option Plan 10.3 (A) Wholesale Distribution Agreement between the Company and Bay Area Distributing. 10.4 (A) Wholesale Distribution Agreement between the Company and Golden Gate Distributing. 10.5 (B) Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. 10.6 (A) Lease Agreement between the Company and Kohn Properties. 10.7 (C) Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed as Exhibit 19.2). 10.8 (D) Commercial Lease between Stewart's Ice Cream Company, Inc. and Releta Brewing Company LLC. 10.9 (E) Agreement between United Breweries of America Inc. and Releta Brewing Company LLC regarding payment of certain liens. 10.10 (F) Keg Management Agreement with MicroStar Keg Management LLC. 10.11 (G) Agreement to Implement Condition of Approval No. 37 of the Site Development Permit 95-19 with the City of Ukiah, California (previously filed as Exhibit 19.6).
-46-
Exhibit Number Description of Document ------ ----------------------- 10.12 (H) Manufacturing Business Expansion and Relocation Agreement with the City of Ukiah. 10.13 (H) Manufacturing Business Expansion and Relocation Agreement with the Ukiah Redevelopment Agency. 10.14 (I) $2,700,000 Note in favor of the Savings Bank of Mendocino County. 10.15 (I) Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino County. 10.16 (J) Equipment Lease with Finova Capital Corporation. 10.17 (J) Tri-Election Rider to Equipment Lease with Finova Capital Corporation. 10.18 (J) Master Lease Schedule with Finova Capital Corporation. 10.19 (K) Investment Agreement with United Breweries of America, Inc. 10.20 (K) Shareholders' Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.21 (K) Registration Rights Agreement Among the Company, United Breweries of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. 10.22 (L) Indemnification Agreement with Vijay Mallya. 10.23 (L) Indemnification Agreement with Michael Laybourn. 10.24 (L) Indemnification Agreement with Jerome Merchant. 10.25 (L) Indemnification Agreement with Yashpal Singh. 10.27 (L) Indemnification Agreement with Robert Neame. 10.28 (L) Indemnification Agreement with Sury Rao Palamand. 10.29 (L) Indemnification Agreement with Kent Price. 10.30 (M) Loan and Security Agreement between the Company, Releta Brewing Company LLC and The CIT Group/Credit Finance, Inc. regarding a $3,000,000 maximum line of credit. 10.31 (M) Patent, Trademark and License Mortgage by the Company in favor of The CIT Group/Credit Finance, Inc. 10.32 (M) Patent, Trademark and License Mortgage by Releta Brewing Company LLC in favor of The CIT Group/Credit Finance, Inc. 10.33 (N) Employment Agreement with Yashpal Singh.
-47-
Exhibit Number Description of Document ------ ----------------------- 10.35 (O) Master Loan Agreement between the Company and the United Breweries of America Inc. 10.36 (O) Convertible Note in favor of the United Breweries of America Inc. dated Sept. 7, 1999 10.37 (P) Convertible Note in favor of the United Breweries of America Inc. dated October 21, 1999 10.38 (P) Convertible Note in favor of the United Breweries of America Inc. dated November 12, 1999 10.39 (P) Convertible Note in favor of the United Breweries of America Inc. dated December 17, 1999 10.40 (P) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 1999 10.41 (P) Convertible Note in favor of the United Breweries of America Inc. dated February 16, 2000 10.42 (P) Convertible Note in favor of the United Breweries of America Inc. dated February 17, 2000 10.43 (P) Convertible Note in favor of the United Breweries of America Inc. dated April 28, 2000 10.44 (P) First Amendment to Master Loan Agreement between the Company and United Breweries of America, Inc., dated April 28, 2000 10.45 (Q) Convertible Note in favor of the United Breweries of America Inc. dated September 11, 2000 10.46 (Q) Convertible Note in favor of the United Breweries of America Inc. dated September 30, 2000 10.47 (Q) Convertible Note in favor of the United Breweries of America Inc. dated December 31, 2000 10.48 (Q) Convertible Note in favor of the United Breweries of America Inc. dated February 12, 2001 10.49 (R) Convertible Note in favor of the United Breweries of America Inc. dated July 1, 2001 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
-48-
Exhibit Number Description of Document ------ ----------------------- 10.52 (T) License Agreement between United Breweries Limited and United Breweries International (UK), Limited 10.53 (T) Supplemental Agreement to License Agreement between United Breweries Limited and United Breweries International (UK), Limited 10.54 (T) Distribution Agreement between United Breweries International (UK), Limited. and UBSN, Ltd. 10.55 (T) Supplemental Agreement to Distribution Agreement between United Breweries International (UK), Limited. and UBSN, Ltd. 10.56 (T) Market Development, General and Administrative Services Agreement between Mendocino Brewing Company, Inc. and UBSN, Ltd. 10.57 (T) Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (UK), Limited. and UBSN, Ltd. 10.58 (T) Supplemental Agreement to Contract to Brew and Supply Kingfisher Products among Shepherd Neame, Limited, United Breweries International (UK), Limited. and UBSN, Ltd. 10.59 (T) Loan Agreement between Shepherd Neame, Limited and UBSN, Ltd. 10.60 (T) Brewing License Agreement between UBSN, Ltd. and Mendocino Brewing Company, Inc. 10.61 (T) Kingfisher Trade Mark and Trade Name License Agreement between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc. 10.62 (U) First Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated November 13, 2002. 10.63 (U) Second Amendment to Extension of Term of Notes Under Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated March, 2003. 10.64 Amendment to Loan and Security Agreement between Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC and the CIT Group/Business Credit, Inc., dated January 17, 2003. 10.65 Commitment Letter from United Breweries of America, Inc. dated March 31, 2004. 14.1 Code of Ethics
-49-
Exhibit Number Description of Document ------ ----------------------- 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 NOTES: Each Exhibit listed above that is annotated with one or more of the following letters is incorporated by reference from the following sources: (A) The Company's Registration Statement dated June 15, 1994, as amended, previously filed with the Commission, Registration No. 33-78390-LA. (B) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1995. (C) The Company's Quarterly Report on Form 10-QSB for the period ended March 31, 1995. (D) The Company's Quarterly Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997. (E) The Company's Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 1997. (F) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1996 (G) The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1995 (H) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1996 (I) The Company's Annual Report on Form 10-KSB for the period ended December 31, 1997 (J) The Company's Registration Statement dated February 6, 1997, as amended, Registration No. 33-15673 (K) Schedule 13D filed November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya (L) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1998
-50-
Exhibit Number Description of Document ------ ----------------------- (M) The Company's Quarterly Report on Form 10-QSB for the period ended September 30, 1998 (N) The Company's Quarterly Report on Form 10-QSB for the period ended June 30, 1999 (O) Amendment No. 5 to Schedule 13D filed September 15, 1999, by United Breweries of America, Inc. and Vijay Mallya. (p) Amendment No. 6 to Schedule l3D filed May 12, 2000, by United Breweries of America, Inc. and Vijay Mallya. (Q) Amendment No. 7 to Schedule 13D filed February 22, 2001, by United Breweries of America, Inc. and Vijay Mallya. (R) Amendment No. 8 to Schedule 13D filed August 22, 2001, by United Breweries of America, Inc. and Vijay Mallya. (S) The Company's Current Report on Form 8-K filed as of February 19, 2002 (T) The Company's Annual Report on Form 10-KSB for the period ended December 31, 2001 (U) Amendment No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of America, Inc. and Vijay Mallya (b) CURRENT REPORTS ON FORM 8-K During the fourth quarter of 2002, the Registrant did not file any Current Reports on Form 8-K.
-51- SIGNATURES Pursuant to the requirements of Section 13 of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereto duly authorized. (Registrant) Mendocino Brewing Company, Inc. By: --------------------------------------- Dr. Vijay Mallya Its Chairman of the Board and Chief Executive Officer Date: April 14, 2004 Pursuant to the requirements of Section 13 of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: --------------------------------------- Dr. Vijay Mallya Its Chairman of the Board and Chief Executive Officer Date: April 14, 2004 By: --------------------------------------- Yashpal Singh Its President and Director Date: April 14, 2004 By: --------------------------------------- Jerome G. Merchant, Director Date: April 14, 2004 By: --------------------------------------- N. Mahadevan Its Secretary and Chief Financial Officer Date: April 14, 2004 By: --------------------------------------- H. Michael Laybourn, Director Date: April 14, 2004 -52- By: --------------------------------------- R.H.B. Neame, Director Date: April 14, 2004 By: --------------------------------------- Kent Price, Director Date: April 14, 2004 By: --------------------------------------- Sury Rao Palamand, Director Date: April 14, 2004 By: --------------------------------------- David Townshend, Director Date: April 14, 2004 -53- Exhibit List ------------ Page ---- No. - --- 10.64 Amendment to Loan and Security Agreement between Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC and the CIT Group/Business Credit, Inc., dated January 17, 2003. 10.65 Commitment Letter from United Breweries of America, Inc. dated March 31, 2004. 14.1 Code of Ethics 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) 32.1 Certification of Chief Executive Officer pursuant to Section 1350 32.2 Certification of Chief Financial Officer pursuant to Section 1350 -54- - -------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT AND CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2003 AND 2002 - -------------------------------------------------------------------------------- CONTENTS PAGE INDEPENDENT AUDITOR'S REPORT...............................................F - 1 CONSOLIDATED FINANCIAL STATEMENTS Balance sheets........................................................F - 2 Statements of operations and comprehensive income.....................F - 3 Statements of stockholders' equity....................................F - 4 Statements of cash flows..............................................F - 5 Notes to financial statements.........................................F - 6 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Mendocino Brewing Company, Inc. We have audited the accompanying consolidated balance sheets of Mendocino Brewing Company, Inc., as of December 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive income, 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 consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. 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 our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mendocino Brewing Company, Inc., as of December 31, 2003 and 2002, 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/ MOSS ADAMS LLP Santa Rosa, California February 20, 2004 PAGE F - 1
MENDOCINO BREWING COMPANY, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 - -------------------------------------------------------------------------------------------------------------- ASSETS 2003 2002 --------------- ---------------- CURRENT ASSETS Cash $ 554,300 $ 146,800 Accounts receivable, net of allowance for doubtful accounts of $37,800 and $157,300 7,017,700 5,924,900 Inventories 1,186,100 1,474,300 Prepaid expenses 555,500 403,400 --------------- ---------------- Total current assets 9,313,600 7,949,400 --------------- ---------------- PROPERTY AND EQUIPMENT 13,874,800 14,159,400 --------------- ---------------- OTHER ASSETS Deposits and other assets 188,600 73,600 Intangibles, net of amortization 94,700 107,200 --------------- ---------------- 283,300 180,800 --------------- ---------------- Total assets $ 23,471,700 $ 22,289,600 =============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Line of credit $ 1,974,800 $ 2,264,500 Note payable 576,200 - Accounts payable 5,340,100 5,598,700 Accrued liabilities 1,275,100 898,500 Deferred gain 655,200 - Income taxes payable 465,100 443,500 Current maturities of long-term debt 693,700 581,200 Current maturities of capital lease obligations 129,000 836,400 --------------- ---------------- Total current liabilities 11,109,200 10,622,800 NOTES TO RELATED PARTY 1,921,500 1,836,300 LONG-TERM DEBT, less current maturities 3,730,300 3,290,200 CAPITAL LEASE OBLIGATIONS, less current maturities 204,100 193,900 --------------- ---------------- Total liabilities 16,965,100 15,943,200 --------------- ---------------- STOCKHOLDERS' EQUITY Preferred stock, Series A, no par value, with aggregate liquidation preference of $227,600; 10,000,000 shares authorized, 227,600 shares issued and outstanding 227,600 227,600 Common stock, no par value; 30,000,000 shares authorized, 11,266,874 shares issued and outstanding 14,648,600 14,648,600 Accumulated comprehensive income (loss) 78,000 (35,300) Accumulated deficit (8,447,600) (8,494,500) --------------- ---------------- Total stockholders' equity 6,506,600 6,346,400 --------------- ---------------- Total liabilities and stockholders' equity $ 23,471,700 $ 22,289,600 =============== ================ SEE ACCOMPANYING NOTES. - -------------------------------------------------------------------------------------------------------------- PAGE F - 2
MENDOCINO BREWING COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2003 AND 2002 - -------------------------------------------------------------------------------------------------------------- 2003 2002 --------------- ---------------- SALES $ 28,864,200 $ 26,085,100 LESS EXCISE TAXES 673,900 651,600 --------------- ---------------- NET SALES 28,190,300 25,433,500 COST OF GOODS SOLD 19,145,500 16,892,800 --------------- ---------------- GROSS PROFIT 9,044,800 8,540,700 --------------- ---------------- OPERATING EXPENSES Retail operating 323,400 335,300 Marketing 4,423,900 4,244,400 General and administrative 3,320,000 2,732,300 --------------- ---------------- 8,067,300 7,312,000 --------------- ---------------- INCOME FROM OPERATIONS 977,500 1,228,700 --------------- ---------------- OTHER INCOME (EXPENSE) Miscellaneous income 162,900 200,200 Loss on sale of equipment (300) (9,200) Interest expense (828,500) (926,400) --------------- ---------------- (665,900) (735,400) --------------- ---------------- INCOME BEFORE INCOME TAXES 311,600 493,300 PROVISION FOR INCOME TAXES 264,700 2,223,100 --------------- ---------------- NET INCOME (LOSS) 46,900 (1,729,800) OTHER COMPREHENSIVE INCOME, net of tax foreign currency translation adjustment 113,300 42,500 --------------- ---------------- COMPREHENSIVE INCOME (LOSS) $ 160,200 $ (1,687,300) =============== ================ NET INCOME (LOSS) PER COMMON SHARE - Basic and diluted $ - $ (0.15) =============== ================ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted 11,266,874 11,173,686 =============== ================ SEE ACCOMPANYING NOTES. - -------------------------------------------------------------------------------------------------------------- PAGE F - 3
MENDOCINO BREWING COMPANY, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2003 AND 2002 - --------------------------------------------------------------------------------------------------------------------------------- SERIES A PREFERRED STOCK COMMON STOCK ACCUMULATED ----------------------- ------------------------ COMPREHENSIVE ACCUMULATED TOTAL SHARES AMOUNT SHARES AMOUNT INCOME (LOSS) DEFICIT EQUITY ----------- ----------- ----------- ------------ -------------- --------------- ----------------- Balance, December 31, 2001 227,600 $ 227,600 11,083,228 $ 14,476,500 $ (77,800) $ (6,764,700) $ 7,861,600 Stock issued for services - - 135,665 125,100 - - 125,100 Stock issued to Board of Directors - - 47,981 47,000 - - 47,000 Currency translation adjustment - - - - 42,500 - 42,500 Net loss - - - - - (1,729,800) (1,729,800) ----------- ----------- ----------- ------------ -------------- --------------- ----------------- Balance, December 31, 2002 227,600 227,600 11,266,874 14,648,600 (35,300) (8,494,500) 6,346,400 Currency translation adjustment - - - - 113,300 - 113,300 Net income - - - - - 46,900 46,900 ----------- ----------- ----------- ------------ -------------- --------------- ----------------- Balance, December 31, 2003 227,600 $ 227,600 11,266,874 $ 14,648,600 $ 78,000 $ (8,447,600) $ 6,506,600 =========== =========== =========== ============ ============== =============== ================= SEE ACCOMPANYING NOTES. - --------------------------------------------------------------------------------------------------------------------------------- PAGE F - 4
MENDOCINO BREWING COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003 AND 2002 - -------------------------------------------------------------------------------------------------------------- 2003 2002 --------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 46,900 $ (1,729,800) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation and amortization 1,127,400 1,049,000 Allowance for doubtful accounts (122,700) 18,700 Loss on sale of assets 300 9,200 Deferred income taxes - 1,922,600 Stock issued for services - 44,000 Changes in: Accounts receivable (519,800) 4,800 Inventories 288,200 (199,700) Prepaid expenses (124,200) (68,100) Deposits and other assets (5,800) 13,800 Accounts payable 155,800 (21,000) Accrued liabilities 334,200 12,500 Income taxes payable (24,400) 170,200 --------------- ---------------- Net cash from operating activities 1,155,900 1,226,200 --------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (728,600) (368,100) Proceeds from new distributors 655,200 - Proceeds from sale of fixed assets 15,200 23,700 --------------- ---------------- Net cash from investing activities (58,200) (344,400) --------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES Net repayments (borrowings) on line of credit and note payable 347,600 (350,900) Net repayments (borrowings) on long-term debt (331,000) (356,400) Payments on obligations under capital lease (680,900) (359,000) Disbursements in excess of deposits (134,300) 134,300 Proceeds from notes payable to related party 85,200 93,500 --------------- ---------------- Net cash from financing activities (713,400) (838,500) --------------- ---------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 23,200 13,700 --------------- ---------------- NET CHANGE IN CASH 407,500 57,000 CASH, beginning of year 146,800 89,800 --------------- ---------------- CASH, end of year $ 554,300 $ 146,800 =============== ================ SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 743,300 $ 950,600 Income taxes $ 305,600 $ 147,700 Non-cash investing and financing activities: Seller financed equipment $ 173,900 $ 117,400 Accounts payable converted to note payable $ 752,600 $ - SEE ACCOMPANYING NOTES. - -------------------------------------------------------------------------------------------------------------- PAGE F - 5
MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF OPERATIONS - Mendocino Brewing Company, Inc. (the Company), and its subsidiary, Releta Brewing Company, operate two breweries that produce beer and malt beverages for the specialty "craft" segment of the beer market. The breweries are located in Ukiah, California, and Saratoga Springs, New York. The Company also owns and operates a brewpub and gift store located in Hopland, California. The majority of sales for Mendocino Brewing Company are in California. The Company brews several brands, of which Red Tail Ale is the Flagship brand. In addition, the Company performs contract brewing for several other brands. The Company acquired United Breweries International, Limited (UK) (UBIUK), a holding company for UBSN Limited, in August 2001. UBSN is a distributor of alcoholic beverages, mainly Kingfisher Lager, in the United Kingdom and Europe. The distributorship is located in Faversham, Kent, in the United Kingdom. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements present the accounts of Mendocino Brewing Company, Inc., and its wholly owned subsidiaries, Releta Brewing Company, LLC, and UBIUK. All material inter-company balances, profits, and transactions have been eliminated. INVENTORIES - Inventories are stated at the lower-of-average cost or market. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and depreciated or amortized using straight-line and accelerated methods over the assets' estimated useful lives. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease. Costs of maintenance and repairs are charged to expense as incurred; significant renewals and betterments are capitalized. Estimated useful lives are as follows: Building 40 years Machinery and equipment 3 - 40 years Equipment under capital lease 3 - 20 years Leasehold improvements 7 - 20 years Vehicles 2 - 5 years Furniture and fixtures 5 - 10 years INTANGIBLES - Intangibles consist of receipts, trade names, trademarks, and other intangibles. Amounts are amortized using the straight-line method over 20 years, which is the estimated useful life of the intangibles. Assets determined to have indefinite lives are no longer amortized in accordance with SFAS No. 142, GOODWILL AND OTHER INTANGIBLES, but are tested for impairment on an annual basis. CONCENTRATION OF CREDIT RISKS - Financial instruments that potentially subject the Company to credit risk consist principally of trade receivables, cash deposits in excess of FDIC limits, and assets located in the United Kingdom. The Company's cash deposits are placed with major financial institutions. 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 $252,800 in cash and $5,560,600 of accounts receivable located in the United Kingdom. INCOME TAXES - The provision for income taxes is based on pre-tax earnings reported in the financial statements and adjusted for requirements of current tax law plus the change in deferred taxes. Deferred tax assets and liabilities are recognized using enacted tax rates and reflect the expected future tax consequences of temporary differences between the recorded amounts of assets and liabilities for financial reporting purposes and the tax basis of such assets and liabilities, and the future benefits from net operating loss carryforwards. SHIPPING COSTS - Shipping costs are included in marketing expense and totaled $576,500 and $600,200 for the years ended December 31, 2003 and 2002. REVENUE RECOGNITION - The Company recognizes revenue from the brewing and distribution operations when product is shipped. Revenues from the brewpub and gift store are recognized when services have been completed. - -------------------------------------------------------------------------------- PAGE F - 6 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- STOCK-BASED COMPENSATION - The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and complies with the disclosure provisions of Statement of Financial Accounting Standards (SFAS) No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Under APB No. 25, compensation expense is the excess, if any, of the fair value of the Company's stock at a measurement date over the amount that must be paid to acquire the stock. SFAS No. 123 requires a fair value method to be used when determining compensation expense for stock options and similar equity instruments. SFAS No. 123 permits a company to continue to use APB No. 25 to account for stock-based compensation to employees, but pro forma disclosures of net income and earnings per share must be made as if SFAS No. 123 had been adopted in its entirety. Stock options issued to non-employees are valued under the provisions of SFAS No. 123. Had compensation cost for the Company's options been determined based on the methodology prescribed under SFAS No. 123, the Company's net loss and loss per share would have been as follows: 2003 2002 ------------ ------------- Net income (loss) - as reported $ 46,900 $ (1,729,800) Compensation expense - 99,100 ------------ ------------- Net income (loss) - pro forma $ 46,900 $ (1,828,900) ============ ============= Income (loss) per share - pro forma $ 0.00 $ (0.16) The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2003 2002 ------------ ------------- Dividends N/A None Expected volatility N/A 107% Risk free interest rate N/A 4.50% Expected life N/A 5 years INCOME (LOSS) PER COMMON SHARE - Income (loss) per common share is computed using the weighted average number of common shares outstanding. A diluted earnings per share number is not presented because the inclusion of common stock equivalents in the computation would be antidilutive. Common stock equivalents associated with convertible notes and stock options, which are exercisable into 1,710,290 and 1,653,474 of common stock at December 31, 2003 and 2002, could potentially dilute earnings per share in future years. FOREIGN CURRENCY TRANSLATION - The assets and liabilities of UBIUK were translated at the United Kingdom pound sterling - U.S. dollar exchange rates in effect at December 31, 2003 and 2002, and the statements of operations were translated at the average exchange rates for the years then ended. Gains and losses resulting from the translations were deferred and recorded as a separate component of consolidated stockholders' equity. Cash at UBIUK was translated at exchange rates in effect at December 31, 2003 and 2002, 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 requires the Company to 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 the future utilization of deferred tax assets and possible impairment of certain plant and equipment. The Company has determined that deferred tax assets associated with net operating loss carryforwards may expire prior to utilization. The Company has placed a valuation allowance on these assets. The Company has estimated that its future cash flows from operations will be sufficient over the estimated useful lives to utilize all assets in the normal course of business. ACCOUNTS RECEIVABLE - Accounts receivable are reported at net realizable value. The Company has established an allowance for doubtful accounts based on factors pertaining to the credit risk of specific customers, historical trends, and other information. Delinquent accounts are written-off when it is determined that the amounts are uncollectible. - -------------------------------------------------------------------------------- PAGE F - 7 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- ADVERTISING - Advertising costs are expensed as incurred, and were $1,196,100 and $972,400 for the years ended December 31, 2003 and 2002. FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Long-term debt: Based on the borrowing rates currently available to the Company for loans with similar terms and average maturities, the fair value of long-term debt approximates cost. COMPREHENSIVE INCOME (LOSS) - Comprehensive income (loss) is composed of the Company's net income (loss) and changes in equity from non-stockholder sources. The accumulated balances of these non-stockholder sources are reflected as a separate item in the equity section of the balance sheet. NOTE 2 - LIQUIDITY AND MANAGEMENT PLANS Even though the Company's overall operations have resulted in net profit during the year 2003, continuing losses in its United States operations and the maturing of certain of its debts in April and June of 2004 could have a serious adverse effect on the Company's operations. The Company does not currently have sufficient funds available to repay the loans in question (which are secured by substantially all of the Company's assets) as they become due. The Company has successfully negotiated refinancing arrangements in the past and is currently in discussion with potential new lenders to refinance the maturing debts. In the event that refinancing negotiations are not successful, one of the Company's principal shareholders has committed to provide financial assistance in order to avoid default under the relevant loans when they become due. NOTE 3 - INVENTORIES
2003 2002 --------------- --------------- Raw materials $ 459,600 $ 398,300 Work-in-process 190,400 169,200 Finished goods 510,000 881,000 Merchandise 26,100 25,800 --------------- --------------- $ 1,186,100 $ 1,474,300 =============== ===============
NOTE 4 - PROPERTY AND EQUIPMENT
2003 2002 --------------- --------------- Machinery and equipment $ 10,323,800 $ 7,998,700 Buildings 7,202,300 7,202,300 Equipment under capital lease 573,300 2,370,200 Land 810,900 810,900 Leasehold improvements 1,432,400 1,383,000 Vehicles 100,300 319,100 Furniture and fixtures 167,800 37,300 Equipment in progress 256,800 - --------------- --------------- 20,867,600 20,121,500 Less accumulated depreciation and amortization 6,992,800 5,962,100 --------------- --------------- $ 13,874,800 $ 14,159,400 =============== ===============
The Company has property and equipment located in the United Kingdom with a net book value of approximately $1,196,100. NOTE 5 - LINE OF CREDIT AND NOTE PAYABLE The Company has available a $3,500,000 line of credit, with interest at the prime rate plus 2.25%. Approximately $1,484,000 was advanced to the Company in the form of a term loan (see Note 6). The bank's commitment under the line of credit matures April 2004. The agreement is secured by substantially all the assets of the Releta Brewing Company, LLC, accounts receivable, inventory, certain securities pledged by a stockholder, and a second position on the real property of Mendocino Brewing Company. The Company had $1,674,000 and $1,549,000 outstanding as of December 31, 2003 and 2002. - -------------------------------------------------------------------------------- PAGE F - 8 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company has available a temporary note loan of $576,200 from Savings Bank of Mendocino County to finance end of term buy-out of certain leased equipment. This note is secured against existing collateral with Savings Bank in addition to assets that were originally under capital lease. This loan matures in June 2004. The loan is expected to be refinanced but no agreement has been entered into subsequent to year end. UBSN Limited has available a (pound)1,250,000 (approximately $2,230,300 at December 31, 2003) line of credit with interest at the bank's base rate plus 1.5%. The bank's commitment under the line of credit is available on an on-going basis until further notice. The agreement is secured by substantially all of the assets of UBSN Limited. The subsidiary had (pound)429,100 and (pound)360,900 ($765,500 and $581,000) outstanding as of December 31, 2003 and 2002. The agreement restricts dividends to approximately (pound)122,500 ($218,500 at December 31, 2003) per year. NOTE 6 - LONG-TERM DEBT
2003 2002 ------------- -------------- Note to a bank; payable in monthly installments of $24,400, including interest at the Treasury Constant Maturity Index, plus 4.17%(currently 7.24%); maturing December 2012, with a balloon payment; secured by substantially all of the assets of Mendocino Brewing Company $ 2,421,300 $ 2,534,700 Note to a financial institution; payable in monthly installments of $24,700, plus interest at the prime rate plus 2.25%; maturing April 2004; secured by substantially all assets of the Releta Brewing Company, certain securities pledged by a stockholder, accounts receivable, inventory, and a second position on the remaining assets of Mendocino Brewing Company 464,700 371,000 Payable to Mendocino County in 4 annual installments of $143,600, plus interest at 18%, beginning April 2005; maturing April 2008 574,500 - Note payable to Sheperd Neame, Ltd., a related party; payable in annual installments of $107,000 plus interest at 5% beginning June 2003; maturing December 2012; unsecured 963,500 965,700 ------------- -------------- 4,424,000 3,871,400 Less current maturities 693,700 581,200 ------------- -------------- $ 3,730,300 $ 3,290,200 ============= ============== Maturities of long-term debt for succeeding years are as follows: Year Ending December 31, ------------------------ 2004 $ 693,700 2005 381,900 2006 391,500 2007 402,100 2008 413,600 Thereafter 2,141,200 ------------- $ 4,424,000 =============
- -------------------------------------------------------------------------------- PAGE F - 9 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 7 - CAPITAL LEASE OBLIGATIONS The Company leases brewing and office equipment under various capital lease agreements with various financial institutions. Future minimum lease payments under these capital lease agreements are as follows: Year Ending December 31, ------------------------ 2004 $ 176,000 2005 164,800 2006 53,300 2007 13,100 2008 3,400 ------------- 410,600 Less amounts representing interest 77,500 ------------- Present value of minimum lease payments 333,100 Less current maturities 129,000 ------------- $ 204,100 ============= NOTE 8 - NOTES TO RELATED PARTY Notes payable to a related party consist of convertible notes to United Breweries of America (UBA), with interest at the prime rate plus 1.5%, but not to exceed 10% per year. The notes are convertible into common stock at $1.50 per share or may be repaid in 60 monthly installments. The notes include $406,100 and $320,900 of accrued interest at December 31, 2003 and 2002. The notes are unsecured and subordinated to bank debt. NOTE 9 - PROFIT-SHARING PLAN The Company has a profit-sharing retirement plan under which it may make employer contributions at the discretion of the Board of Directors, although no such contributions are required. Employer contributions vest over a period of six years. The plan covers substantially all full-time employees meeting certain minimum age and service requirements. There were no contributions made for the years ended December 31, 2003 and 2002. - -------------------------------------------------------------------------------- PAGE F - 10 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 10 - COMMITMENTS AND CONTINGENCIES Effective March 28, 2003, the Company terminated a written distribution agreement with the House of Daniels, Inc., dba Golden Gate Distributing Company (GGD), in accordance with the provisions of the agreement, upon 30 days' written notice to GGD. On April 1, 2003, GGD filed an action in Marin County Superior Court, naming the Company and Mark Anderson (Mr. Anderson is employed by the Company as a sales manager) as defendants. Because Mr. Anderson is an employee of the Company, the Company may have some obligation to indemnify Mr. Anderson for his costs and expenses in connection with these claims. GGD claims that the termination of the agreement was wrongful and sued the Company for breach of contract, breach of the covenant of good faith and fair dealing, unfair business practices, negligent and intentional interference with economic relationships. The Company believes that cause was not required to terminate the agreement, but even if cause was required, the Company believes it had sufficient cause to terminate the agreement. The Company filed a cross-complaint against GGD alleging breach of contract, tortious interference with prospective economic advantage, and unfair business practices. The Company is seeking the appropriate remedies, including compensatory and punitive damages. During the second quarter of the year 2003, the Company received $655,200 from the two new distributors for the territories of Napa, Solano, Marin, and Sonoma Counties. The Company has treated this receipt as deferred gain pending disposal of the lawsuit. OPERATING LEASES - The Company and its subsidiaries have various lease agreements for the brewpub and gift store in Hopland, California; land at its Saratoga Springs facility; a building in the United Kingdom; and certain personal property. The land lease includes a renewal option for two additional five-year periods, which the Company intends to exercise, and some leases are adjusted annually for changes in the consumer price index. The land lease also contains an option to purchase. The leases begin expiring in 2004. Management expects to renew leases expiring in the near term at rates that are competitive in the marketplace. Rent expense charged to operations was $210,500 and $221,300 for the years ended December 31, 2003 and 2002. Future minimum lease payments under these agreements are as follows: Year Ending December 31, ------------------------ 2004 $ 194,400 2005 167,300 2006 147,400 2007 147,400 2008 37,200 ------------- 693,700 ============= KEG MANAGEMENT AGREEMENT - In January 1997, the Company entered into a keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides all kegs for which the Company pays a service fee between $5 and $15, depending on territory. The agreement is effective on a month-to-month basis. If terminated, the Company is required to purchase three times the average monthly keg usage for the preceding six-month period from MicroStar at purchase prices ranging from $54 to $84 per keg. The Company expects to continue this relationship and also negotiating a new contract. Rental expense associated with this agreement was $76,200 and $84,400 for the years ended December 31, 2003 and 2002. NOTE 11 - RELATED-PARTY TRANSACTIONS The Company conducts business with United Breweries of America (UBA), which owns approximately 76% of the Company's common stock through common ownership. Additionally, UBSN Limited has significant transactions with Sheperd Neame, Ltd., which is related to a Board member. The Company also has transactions with AUBI, a company affiliated with one of the Board members. The following table reflects balances outstanding and the value of the transactions with these related parties for the years ended December 31, 2003 and 2002. - -------------------------------------------------------------------------------- PAGE F - 11 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - --------------------------------------------------------------------------------
2003 2002 -------------- -------------- TRANSACTIONS - ------------ Sales to Sheperd Neame, Ltd. $ 2,536,000 $ 2,110,200 Purchases from Sheperd Neame, Ltd. 11,240,000 9,470,700 Expense reimbursements to Sheperd Neame, Ltd. 743,000 710,600 Interest expense associated to UBA convertible notes payable (see Note 8) 85,200 93,500 Interest paid to Sheperd Neame, Ltd. (see Note 6) 46,600 52,300 ACCOUNT BALANCES - ---------------- Accounts payable and accrued liabilities to Sheperd Neame, Ltd. 3,510,100 3,004,200 Accounts receivable and prepayments from Sheperd Neame, Ltd. 660,600 224,400 Amounts payable to AUBI 20,000 20,000
NOTE 12 - MAJOR CUSTOMERS Sales to the top five customers totaled $7,088,800 and $6,718,100 for the years ended December 31, 2003 and 2002, which represents 25% and 26% of sales for the years ended December 31, 2003 and 2002. Two customers, Alta Marketing and Sheperd Neame, Ltd., generated 13% of sales for the year ended December 31, 2003,and Golden Gate Distributing and Sheperd Neame, Ltd., generated 14% of sales for the year ended December 31, 2002. NOTE 13 - STOCKHOLDERS' EQUITY COMMON STOCK - In 2001, common stock authorized to be issued was increased from 20 million shares to 30 million shares. In August 2001, 5,500,000 shares were issued to Inversiones Mirabel S.A., for the outstanding stock of United Breweries International (UK) Limited. Since Mendocino Brewing and United Breweries International (UK) were under common control, the business combination was recorded as if it were a pooling of business interest, and the assets and liabilities were recorded at historical cost (see Note 17). As part of this transaction, the Company agreed to issue shares of common stock as payment for various acquisition costs totaling $69,200. These shares were issued in 2002. Dissenting stockholders were given the option to have the Company repurchase their stock at $.81 per share. 22,270 shares were acquired at a cost of $18,100. Independent outside members of the Board of Directors are compensated for attending Board of Directors and committee meetings. Compensation is with common stock. Expenses related to this compensation totaled $45,000 and $47,000 for the years ended December 31, 2003 and 2002. Stock has not yet been issued for the 2003 and 2002 expense as the Company is reviewing the policy. 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. - -------------------------------------------------------------------------------- PAGE F - 12 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 14 - STOCK OPTION PLAN Under the 1994 Stock Option Plan, the Company may issue options to purchase up to 1,000,000 shares of common stock. The Plan provides for both incentive stock options, as defined in Section 422 of the Internal Revenue Code, and options that do not qualify as incentive stock options. The Plan terminates upon the earlier of (a) the tenth anniversary of its adoption by the Board or (b) the date on which all shares available for issuance under the Plan have been issued. The exercise price of incentive options must be no less than the fair-market value of such stock at the date the option is granted, while the exercise price of non-statutory options will be no less than 85% of the fair-market value per share on the date of grant. With respect to options granted to a person possessing more than 10% of the combined voting power of all classes of the Company's stock, the exercise price will be no less than 110% of the fair-market value of such share at the grant date. During 2002, 240,385 non-statutory stock options with a five-year term were issued to the independent members of the Board of Directors at the market price on the date of grant. All options are exercisable at the date of grant. There were no options issued during 2003. Outstanding options expire through January 2007, with 88,888 options expiring in 2004; 100,000 options expiring in 2005; and 240,385 options expiring in 2007. The following table summarizes the number of options granted and exercisable and the weighted average exercise prices. SHARES UNDER WEIGHTED-AVERAGE OPTION EXERCISE PRICE ---------------- ---------------- Balance at December 31, 2001 188,888 $ 1.19 Options granted 240,385 $ 0.52 ---------------- Balance at December 31, 2002 429,273 $ 0.82 ---------------- Balance at December 31, 2003 429,273 $ 0.82 ================ NOTE 15 - INCOME TAXES The continuing losses in the U.S. operations has resulted in the Company determining that the deferred tax assets associated with net operating loss carryforwards and investment tax credits may expire prior to utilization. The Company recorded a valuation allowance of $3,117,000 for deferred tax assets that may expire prior to utilization. The Company also has $57,900 of California Manufacturers' Investment Tax Credits that can be carried forward to reduce future taxes. These credits begin expiring in 2008.
2003 2002 ---------------- ---------------- Provision for income taxes Federal $ - $ - United Kingdom 263,400 298,400 States 16,300 8,900 Benefit of state investment tax credit carryforwards (15,000) (6,800) ---------------- ---------------- 264,700 300,500 Change in deferred income taxes - 1,922,600 ---------------- ---------------- $ 264,700 $ 2,223,100 ================ ================
- -------------------------------------------------------------------------------- PAGE F - 13 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The difference between the actual income tax provision and the tax provision computed by applying the statutory federal income tax rate to earnings before taxes is attributable to the following:
2003 2002 ------------- ------------- Income tax expense at 34% $ 105,800 $ 167,700 State taxes 12,900 20,300 Undistributed earnings 209,500 359,400 United Kingdom tax (71,200) (61,000) Intercompany foreign dividends 76,200 - Recognition of future tax revenues or expenses 75,800 (39,000) Valuation allowance (144,300) 1,775,700 ------------- ------------- $ 264,700 $ 2,223,100 ============= ============= Temporary differences and carryforwards that give rise to deferred tax assets and liabilities are as follows: 2003 2002 ------------- ------------- Allowance for doubtful accounts $ 8,000 $ 19,100 Inventories 6,300 8,000 Accruals 73,000 56,500 Depreciation and amortization (317,500) (253,800) Benefit of net operating loss carryforward 3,758,900 3,614,400 Undistributed earnings of United Breweries Interanational (UK), Ltd. (800,300) (582,100) Investment in United Breweries International (UK) Ltd. 328,400 328,300 Other 60,400 71,200 ------------- ------------- 3,117,200 3,261,600 Less valuation allowance (3,117,200) (3,261,600) ------------- ------------- $ - $ - ============= ============= Valuation allowance - beginning of year $ 3,261,600 $ 1,486,000 Valuation allowance - end of year 3,117,300 3,261,600 ------------- ------------- Change in valuation allowance $ (144,300) $ 1,775,600 ============= ============= Net operating losses available for carryforward will expire as follows: DATE OF EXPIRATION FEDERAL CALIFORNIA NEW YORK ------------------ ------------- --------------- -------------- 2005 $ - $ 2,417,200 $ - 2010 - 250,900 - 2011 - 153,700 - 2012 1,802,300 144,900 277,400 2018 2,758,800 - 424,700 2019 2,153,100 - 320,300 2020 965,600 - 134,200 2021 1,041,100 - 160,200 2022 615,800 - 94,400 2023 551,700 - 85,000 ------------- --------------- -------------- $ 9,888,400 $ 2,966,700 $ 1,496,200 ============= =============== ==============
- -------------------------------------------------------------------------------- PAGE F - 14 MENDOCINO BREWING COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 16 - SEGMENT INFORMATION The Company's business presently consists of three segments. The first is brewing for wholesale to distributors and other retailers. This segment accounted for 43% and 46% of the Company's gross sales during 2003 and 2002. The second consists of distributing alcoholic beverages to retail establishments and restaurants in the United Kingdom and Europe. This segment accounted for approximately 55% and 52% of the Company's gross sales during 2003 and 2002. The third segment consists of brewing beer for sale along with food and merchandise at the Company's brewpub and retail merchandise store located at the Hopland Brewery. This segment accounted for 2% of the Company's gross sales during 2003 and 2002. A summary of each segment is as follows:
YEAR ENDED DECEMBER 31, 2003 --------------------------------------------------------------------------------- BREWING TAVERN & DISTRIBUTOR CORPORATE Operations TASTING ROOM OPERATIONS AND OTHER TOTAL -------------- --------------- ---------------- -------------- -------------- Sales $ 11,590,100 $ 425,300 $ 16,848,800 $ - $ 28,864,200 Operating income (19,400) (31,400) 1,028,300 - 977,500 Identifiable assets 13,695,200 102,400 6,676,900 1,336,700 21,811,200 Depreciation and amortization 736,500 6,000 358,800 26,100 1,127,400 Capital expenditures 268,600 - 459,200 - 727,800 YEAR ENDED DECEMBER 31, 2002 --------------------------------------------------------------------------------- BREWING TAVERN & DISTRIBUTOR CORPORATE Operations TASTING ROOM OPERATIONS AND OTHER TOTAL -------------- --------------- ---------------- -------------- -------------- Sales $ 11,158,100 $ 511,400 $ 14,415,600 $ - $ 26,085,100 Operating income 221,400 22,800 984,500 - 1,228,700 Identifiable assets 14,500,800 99,600 5,973,100 1,716,100 22,289,600 Depreciation and amortization 758,900 5,700 246,500 37,900 1,049,000 Capital expenditures 133,900 - 350,900 2,700 487,500
- -------------------------------------------------------------------------------- PAGE F - 15 EX-10.64 3 tex10_64-2101.txt EX-10.64 Exhibit 10.64 CIT Business Credit T: 312 424-9700 Ten South LaSaIle Street F: 312 424-9740 Chicago, IL 60603 January 17, 2003 VIA TELECQPIER - -------------- Mendocino Brewing Company, Inc. 1610 Airport Road Ukiah, California 95482 RE: Loan and Security Agreement dated as of September 24, 1998, as amended (the "Loan Agreement") between Mendocino Brewing Company, Inc. and Releta Brewing Company LLC (collectively, "Borrower") and The CIT Group/Business Credit, Inc., as successor to The CIT Group/Credit Finance, Inc. ("CJT") Ladies and Gentlemen: Reference is made to the Loan Agreement. Capitalized terms used in this letter and not specifically defined herein shall have the meanings given to such terms in the Loan Agreement. 1. New Term Loan. Borrower has requested that CIT make a new term loan to Borrower in the principal amount of $403,740.86 (the "New Term Loan"). CIT has agreed to make the New Term Loan to Borrower by consolidating the New Term Loan with the existing Term Loan made to Borrower under Section 10.2(a) of the Loan Agreement on or about September 24, 1998, which has an outstanding principal balance of $346,259.14 as of the date hereof. In order to evidence this consolidation, CIT and Borrower agree to amend and restate Section 10.2(a) in its entirety to read as follows: "(a) A Term Loan shall be made to Borrower on or about January 17, 2003 in the amount of $750,000, which consists of an original Term Loan having an outstanding principal balance of $346,259.14 as of such date and a new term loan of $403,741.86 to be made on or about such date. The principal amount of this Term Loan shall be repaid in immediately available funds in thirty (30) equal consecutive monthly installments of $24,732.80 each, with a final payment of $8,016.00, due and payable commencing February 1, 2003 and on the first day of each month thereafter, provided that notwithstanding the foregoing, the unpaid principal balance thereof shall be due and payable in full on the expiration of any Term or the termination of this Agreement, if earlier." The outstanding principal balance of the existing Term Loan made under Section 10.2(a) of the Loan Agreement shall remain outstanding and shall not be deemed to have been repaid by the making of the New Term Loan. Mendocino Brewing Company, Inc. January 17, 2003 Page 2 2. Other Amendments. This letter shall confirm the agreement of CIT and Borrower to amend the Loan Agreement in the following manner: (a) Section 9.1 is amended and restated in its entirety to read as follows: "Term. This Agreement shall only become effective upon execution and delivery by Borrower and Lender and shall continue in full force and effect for the term set forth in paragraph 10.7 from the date hereof (the "Term")." (b) Section 10.1(a) is amended and restated in its entirety to read as follows: "(a) Maximum Credit: $3,500,000". (c) Section 10.1(c) is amended and restated in its entirety to read as follows: "(c) Inventory Sublimit (~ 2.1(b)): $1,500,000". (d) Section 10.4(d) is amended and restated in its entirety to read as follows: "(d) Facility Fee: 0.50% of the Maximum Credit, fully earned on January 17, 2003, but due and payable in ten equal installments of $1,750 each commencing on February 1, 2003 and on the first month of each month thereafter through November 1, 2003". (e) Section 10.7 is amended and restated in its entirety to read as follows: "Term: The Term expires on November 30, 2003". 3. Conditions and Other Matters. (a) Borrower agrees to pay to CIT a fee of $10,000 as consideration for CIT's agreement to make the New Term Loan to Borrower and amend the Loan Agreement in the manner set forth above, and CIT shall charge such fee to Borrower's revolving loan account on the date that CIT makes the New Term Loan to Borrower. (b) On or before May 31, 2003, Borrower shall have delivered to CIT copies of the agreement (the "Tax Payment Agreement") between Borrower and Mendocino County for the Mendocino Brewing Company, Inc. January 17, 2003 Page 3 payment of past due real estate taxes owed by Borrower to Mendocino County, and such agreement shall be satisfactory to CIT in its reasonable discretion. (c) On the date that CIT makes the New Term Loan to Borrower, (i) Borrower agrees to repay in full all existing "Overadvances" ($25,000 as of the date hereof) provided by CIT to Borrower under the letter agreement dated as of September 5, 2001, and (ii) CIT will deduct Reserves of $130,000 pursuant to Section 2.1(f) of the Loan Agreement. Concurrently with or immediately after Borrower pays in full the first installment of real estate property taxes due on or about May 2003 to Mendocino County pursuant to the Tax Payment Agreement, CIT agrees to release said Reserves; provided that no Default or Event of Default exists which has not been waived by CIT. (d) Within 30 days of the date of this letter, Borrower and CIT agree to establish one or more lockboxes and collateral proceeds accounts for the collection of the proceeds of the Collateral pursuant to Section 5.1 of the Loan Agreement; and Borrower, CIT and the applicable financial institution(s) shall execute lockbox and collateral account agreements in form and substance satisfactory to CIT. (e) In order to induce CIT to make the New Term Loan to Borrower, Borrower hereby represents and warrants to CIT that: (i) the execution, delivery and performance by Borrower of this letter is within Borrower's corporate power and has been duly authorized by all necessary corporate action; (ii) this letter and the Loan Agreement, as amended by this letter, are the legal, valid and binding obligations of Borrower, enforceable against Borrower in accordance with their terms; and (iii) no Event of Default exists as of the date hereof, and all of the representations and warranties contained in the Loan Agreement are true and correct as of the date hereof, except to the extent that such representations and warranties relate solely to an earlier date, in which case such representations and warranties were true and correct as of such earlier date. (f) THIS LETTER IS A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. Wherever possible, each provision of this letter will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this letter is prohibited by or invalid under such law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this letter. This letter may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart is deemed to be an original, but all such counterparts together constitute but one and the same letter. This letter is binding upon Borrower, CIT and their respective successors and assigns, and inures to the benefit of Borrower, CIT and their respective successors and assigns. Mendocino Brewing Company, Inc. January 17, 2003 Page 4 (f) Borrower's non-compliance with any of the provisions of this letter agreement, including without limitation paragraphs 3(a), 3(b), 3(c), and 3(d), shall constitute an Event of Default under the Loan Agreement. Except as expressly modified by this letter, all terms and provisions of the Loan Agreement shall remain unmodified and in full force and effect, and shall apply with such force and effect to this letter. Please indicate Borrower's agreement to the foregoing by executing this letter where indicated below. In addition, United Breweries Information Consultancy Services, Ltd and United Breweries of America, Inc. each must also execute this letter where indicated below to consent to the making of the New Term Loan and the other amendments set forth above and to confirm that the foregoing New Term Loan and other amendments shall not affect, modify or diminish their respective obligations under (as applicable) the pledge agreement executed by United Breweries Information Consultancy Services, Ltd. and the subordination agreement between United Breweries of America, Inc. and CIT, relating to the Loan Agreement. The amendments to the Loan Agreement set forth in this letter shall become effective, and CIT agrees to make the New Term Loan to Borrower, upon CIT's receipt of this letter signed by Borrower and the parties set forth below. Very truly yours, THE CIT GROUP/BUSINESS CREDIT, INC. By: -sd- BRIAN KUNDICH Title: VP Agreed to this 17th day of January, 2003: MENDOCINO BREWING COMPANY, INC. RELETA BREWING COMPANY LLC By: -sd- N MAHADEVAN By: -sd- YASHPAL SINGH Title: CFO Title: PRESIDENT Mendocino Brewing Company, Inc. January 17, 2003 Page 5 The undersigned (each, a "Party") hereby consents to the New Term Loan and the other amendments set forth above and agrees and confirms that the foregoing amendments to the Loan Agreement shall not affect, modify or diminish such Party's obligations under (as applicable) the pledge agreement executed for the benefit of CIT, or the subordination agreement between United Breweries of America, Inc. and CIT, relating to the Loan Agreement, notwithstanding the agreement of CIT to make the New Term Loan and the other amendments contemplated above to Borrower. UNITED BREWERIES INFORMATION CONSULTANCY SERVICES, LTD. By: -sd- Name: JAY VALLABH Title:DIRECTOR UNITED BREWERIES OF AMERICA, INC. By: -sd- Name: ANIL PISHARODY Title:SECRETARY EX-10.65 4 tex10_65-2101.txt EX-10.65 March 31, 2004 Board of Directors Mendocino Brewing Company 1601 Airport Road Ukiah, CA 95482 RE: Future Financing ---------------- Gentlemen: It has come to our attention that Mendocino Brewing Company, Inc. ("MBC") is a party to the following debt agreements, among others : (a) a credit agreement with CIT Group/Credit Finance, Inc. ("CIT"), pursuant to which CIT has provided MBC with a $3,000,000 maximum line of credit, and which is currently due to expire on April 30, 2004 (the "CIT Line"), and (b) a temporary loan from Savings Bank of Mendocino ("SBM") in the original principal amount of $576,200 , which is currently due on June 23, 2004 (the SBM Loan"). We understand that MBC is currently in the process of actively seeking takeout financing for both the SBM Loan and the CIT Line. As a means of assisting MBC to obtain such new financings, this letter is to confirm that United Breweries of America, Inc. ("UBA") will provide MBC with such financial assistance as may be in UBA's power to prevent or avoid any default under either the CIT Line or the SBM Loan when either of them may become due. Sincerely, United Breweries of America, Inc. By: --------------------------------- EX-14.1 5 tex14_1-2101.txt EX-14.1 MENDOCINO BREWING COMPANY, INC. CODE OF BUSINESS CONDUCT AND STATEMENT OF ETHICAL STANDARDS ADOPTED AS OF APRIL, 2004 CODE OF BUSINESS CONDUCT AND STATEMENT OF ETHICAL STANDARDS This Code of Business Conduct and Statement of Ethical Standards (this "CODE") has been adopted by the Board of Directors of Mendocino Brewing Company, Inc. (the "COMPANY") in order to provide to the Company's officers, directors, employees, and consultants ("COMPANY PERSONNEL") a generally applicable statement of the basic standards and expectations that the Company holds applicable to all Company Personnel in the conduct of the Company's business and affairs. This Code is intended to qualify as a "code of ethics" within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. All Company Personnel are expected to read and become familiar with this Code and the standards it sets forth, and may be required, from time to time, to affirm their adherence to these standards by signing a Compliance Certificate. I. COMPLIANCE WITH LAWS, RULES AND REGULATIONS It is the policy of the Company to comply with all laws and regulations that are applicable to the Company's business and other activities. All Company Personnel must obey the law when acting within the scope of their duties or otherwise on the Company's behalf. Specifically, the Company is committed to compliance with all applicable laws, whether in the United States or abroad, that are related to the conduct of the Company's business, including but not limited to laws and regulations relating to: 1. Brewing practices and all related health and safety laws and regulations; 2. Maintaining a safe and healthy work environment; 3. Maintaining a workplace that is free from all improper forms of discrimination or harassment; 4. Competition, marketing, and disclosure practices, including laws relating to labeling of contents, unfair restraints of trade, and other unfair trade practices; 5. Environmental laws and standards; 6. Illegal payments to any government officials or political party representatives of any country; and 7. State and federal corporate and securities laws. All Company Personnel are prohibited from trading in the securities of the Company or any other company while in possession of material nonpublic information about the Company or such other company. In addition, Company Personnel are strictly prohibited from recommending, "tipping," or suggesting that anyone else trade in the securities of the Company or any other company on the basis of material nonpublic information. Violation of insider trading 1 laws can result in fines and criminal penalties, in addition to disciplinary action by the Company. II. CONFLICTS OF INTEREST; CORPORATE OPPORTUNITIES No Company Personnel should be involved in any activity which creates or gives the appearance of a conflict of interest between their own personal interests and the interests of the Company or its shareholders. In particular, no Company Personnel may, without disclosure to and the explicit prior consent of the Company's Board of Directors, as provided in Section VI, below: 1. Be a consultant to, or an officer, director, or employee of, or otherwise operate or have a material financial interest in, any outside business that manufactures or markets products or services in competition with the current or anticipated products and services of the Company (a "Competitor"), supplier, customer, or business partner of the Company; 2. Seek or accept any personal loan or services from any Competitor, supplier, customer, or business partner of the Company; 3. Be a consultant to, or an officer, director, or employee of, or otherwise operate, an outside business if doing so would materially interfere with his or her responsibilities to the Company; 4. Use the Company's property, information, or position for personal gain; or 5. Pursue a business opportunity that is in the Company's line of business without first presenting the opportunity to the Company. All Company Personnel shall notify the Company's Chief Executive Officer or Chief Financial Officer of the existence of any actual or potential conflict of interest. III. CONFIDENTIALITY; PROTECTION AND PROPER USE OF THE COMPANY'S ASSETS All Company Personnel shall maintain the confidentiality of information entrusted to them by the Company (including by other Company Personnel) or by its suppliers, customers, or business partners, unless such disclosure has been duly authorized by the Company or is legally required and an appropriate officer of the Company has been previously notified that such disclosure has been requested by an authorized person or governmental agency. Information coming within the limitations expressed above includes all of the following, whether such information relates solely to the Company or whether it relates to any Company customer, supplier, or business partner: 1. Information marked "Confidential," "Private," "For Internal Use Only," or with similar legends; 2 2. Technical or scientific information, and the results of any inspections, tests, or surveys, relating to past, current, or anticipated products, techniques, services, or research; 3. Business or marketing plans, results, or projections; 4. Earnings and other internal financial and production data; 5. Confidential personnel information of every kind; 6. Information about or relating to suppliers and customers, including but not limited to price lists and lists of products and services obtained, bid on, or requested; and 7. Other non-public information that, if disclosed, might be (a) of use to competitors, (b) harmful to the Company or to its suppliers, customers, or other business partners, or (c) of use to investors in making a decision to buy, hold, or sell the Company's securities. All Company Personnel are personally responsible for protecting those Company assets that are entrusted to them and for helping to protect the Company's assets in general. To ensure the protection of the Company's assets, all Company Personnel should: 1. Exercise reasonable care to prevent theft, damage, or misuse of Company property; 2. Promptly report the actual or suspected theft, damage, or misuse of Company property to a supervisor; and 3. Safeguard all electronic programs, data, communications, and written materials from inadvertent access by others. IV. GOOD FAITH AND FAIR DEALING The Company is committed to conducting its business with integrity and in an honest and fair manner, and to sustaining a work environment that fosters mutual respect, openness, and individual integrity. Company Personnel are expected to deal honestly and fairly with the Company's customers, suppliers, Competitors, business partners, and other third parties. To this end, no Company Personnel shall: 1. Make false or misleading statements about the Company or its Competitors to customers, suppliers, business partners, or other third parties; 2. Solicit or accept from any person that does business with the Company, or offer or extend to any such person, cash in any amount or gifts, meals, or entertainment that could influence or reasonably give the appearance of influencing the Company's 3 business relationship with that person or go beyond common courtesies usually associated with accepted business practice; 3. Solicit or accept any fee, commission, or other compensation for referring customers to third-party vendors; or 4. Otherwise take unfair advantage of the Company's customers or suppliers, or other third parties, through manipulation, concealment, abuse of privileged information, or any other unfair-dealing practice. V. ACCURATE AND TIMELY PERIODIC REPORTS AND OTHER PUBLIC COMMUNICATIONS Securities laws and Company policy require the prompt disclosure of accurate and complete information regarding the Company's business, financial condition, and results of operations. To this end, all Company Personnel should promptly report evidence of improper financial reporting, which may include: 1. Financial results that seem inconsistent with the performance of underlying business transactions; 2. Inaccurate Company records, such as overstated expense reports, or erroneous time sheets or invoices; and 3. Requests to circumvent ordinary review and approval procedures. The Company's senior officers and accounting employees have a special responsibility to ensure that all of the Company's financial disclosures are full, fair, accurate, timely, and understandable. Such Company Personnel must: 1. Maintain a system of internal accounting controls that will ensure that all transactions are properly recorded and that material information about the Company is made known to management; 2. Maintain books and records that accurately and fairly reflect the Company's transactions; 3. Prohibit the establishment of any undisclosed or unrecorded funds or assets; and 4. Comply with generally accepted accounting principles and all standards, laws, and regulations for accounting and financial reporting of transactions, estimates, and forecasts. VI. REPORTING AND EFFECT OF VIOLATIONS All Company Personnel must report, in person or in writing, any known or suspected violations of this Code or of any applicable laws to the Company's Chief Executive Officer or Chief Financial Officer. The Company strictly 4 prohibits any retaliation against any Company Personnel who act in good faith in reporting any such violation. The Company's Chief Financial Officer, or if so directed a Special Committee of the Board of Directors, will investigate any reported violations of this Code or of any applicable laws, and will oversee an appropriate response, including proposing and implementing corrective action and preventative measures. Company Personnel who violate any laws, governmental regulations, or this Code will face appropriate, case specific, disciplinary action, which may include demotion or discharge. The provisions of this Code may be waived only in extraordinary circumstances and on a case-by-case basis: 1. For directors or executive officers, only by a resolution of the Company's Board of Directors or a committee of the Board authorized to make such determinations; and 2. For all other Company Personnel, only by the Chief Financial Officer or a committee of the Board authorized to make such determinations. Any waiver of this Code granted to a director or executive officer will be publicly disclosed as required by the securities exchange or association on which the Company's securities are listed for trading, as and to the extent required by the rules of such exchange or association. Any change in or waiver of this Code for senior financial officers will be publicly disclosed as required by the Securities Exchange Commission (the "SEC"), as and to the extent required by the rules of the SEC. VII. ADMINISTRATION The Board of Directors has the primary responsibility for setting the Company's standards of business and ethical conduct, for drafting and implementing the Code, and for reviewing them from time to time as the Board deems appropriate in light of ongoing changes in the Company's legal and regulatory environment, evolving business practices in the industry, and applicable business and ethical standards in the United States and abroad. While the Board of Directors has primary responsibility for administering the Code, all Company Personnel are personally responsible for their individual compliance with the Code. 5 COMPLIANCE CERTIFICATE I have read, and I understand, the Company's Code of Business Conduct and Statement of Ethical Standards (the "CODE"), and I agree to adhere to the standards of conduct set forth in the Code with respect to all of my activities in connection with and on behalf of the Company. Further, I understand and agree that (a) I am personally responsible to make sure that I am aware of and in compliance with the Code and (b) any violation of the Code will subject me to appropriate disciplinary action, up to and including demotion or discharge. By signing this Certificate, I intend to certify to the Company that, except to the extent noted in the signed Statement of Exceptions attached to this Compliance Certificate, I am not in violation of the Code. Dated: _________, 20__ _______________________________ Please Sign Above _______________________________ Please Print Your Name Above _______________________________ Please Indicate Your Title or Position Above Please check one of the following boxes: / / A Statement of Exceptions is attached. / / No Statement of Exceptions is attached. EX-31.1 6 tex31_1-2101.txt EX-31.1 Exhibit 31.1 CERTIFICATIONS Statement of Principal Executive Officer I, Dr. Vijay Mallya, certify that: 1. I have reviewed this annual report on Form 10-KSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small -55- business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. ------------------------------------ Dr. Vijay Mallya, Chairman of the Board and Chief Executive Officer Date: April 14, 2004 -56- EX-31.2 7 tex31_2-2101.txt EX-31.2 Exhibit 31.2 STATEMENT OF PRINCIPAL FINANCIAL OFFICER I, N. Mahadevan, certify that: 1. I have reviewed this annual report on Form 10-KSB of Mendocino Brewing Company, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the small business issuer and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is -57- reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial data; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. --------------------------------- N. Mahadevan, Chief Financial Officer Date: April 14, 2004 EX-32.1 8 tex32_1-2101.txt EX-32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO TITLE 18, U.S.C. SECTION 1350 In connection with the Annual Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, Vijay Mallya, Chief Executive Officer of the Company, certify, pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. ---------------------------------- Dr. Vijay Mallya Chairman of the Board and Chief Executive Officer Date: April 14, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 9 tex32_2-2101.txt EX-32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO TITLE 18, U.S.C. SECTION 1350 In connection with the Annual Report of Mendocino Brewing Company, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2003 as filed with the Securities and Exchange Commission (the "Report"), I, N. Mahadevan, Chief Financial Officer of the Company, certify, pursuant to Title 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. --------------------------------- N. Mahadevan Chief Financial Officer Date: April 14, 2004 A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----