UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
| [X] | | ANNUAL
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934 |
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2012
or
| [ ] | | TRANSITION
REPORT
PURSUANT
TO
SECTION
13
OR
15(d)
OF
THE
SECURITIES
EXCHANGE
ACT
OF
1934 |
For
the transition period from __________ to __________
COMMISSION
FILE NUMBER 1-13636
MENDOCINO
BREWING COMPANY, INC.
(Exact
name of Registrant as Specified in our Charter)
| CALIFORNIA |
|
68-0318293 |
| (State
or Other Jurisdiction of |
|
(IRS
Employer |
| Incorporation
or Organization) |
|
Identification
No.) |
1601
AIRPORT ROAD, UKIAH, CA 95482
(Address
of principal executive offices)
(707)
463-2627
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: none
Securities
registered pursuant to Section 12(g) of the Act:
Common
stock, no par value
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ]
No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ]
No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company.
Large
accelerated Filer [ ] Accelerated Filer [ ]
Non-accelerated Filer [ ] Smaller reporting company [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based on the average
of the closing bid and asked prices for such stock as reported by the OTC Markets Bulletin Board on June 30, 2012 was approximately
$355,600.
The
number of shares of the registrant’s Common Stock outstanding as of March 15, 2013 was 12,611,133.
DOCUMENTS
INCORPORATED BY REFERENCE
None
Table
of ContentS
FORWARD-LOOKING
INFORMATION
This
Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to in this Annual Report as the
Exchange Act. Forward-looking statements are not statements of historical fact but rather reflect our current expectations, estimates
and predictions about future results and events. These statements may use words such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “predict,” “project” and similar expressions
as they relate to us or our Management. Unless the context otherwise requires, references in this Annual Report to “we,”
“us,” “our,” or the “Company” refer to Mendocino Brewing Company, Inc. together with its subsidiaries.
When we make forward-looking statements, we are basing them on our Management’s beliefs and assumptions, using information
currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including but
not limited to, risks, uncertainties and assumptions discussed in this Annual Report. Factors that can cause or contribute to
these differences include those described under the headings “Risk Factors” and “Management Discussion and Analysis
and Plan of Operation.” If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions
prove to be incorrect, actual results may vary materially from what we projected. All subsequent written and oral forward-looking
statements attributable to us or individuals acting on our behalf are expressly qualified in their entirety by this paragraph.
You should specifically consider the factors identified in this Annual Report, which would cause actual results to differ before
making an investment decision. We are under no duty to update any of the forward-looking statements after the date of this Annual
Report or to conform these statements to actual results.
In
addition, such statements could be affected by general industry and market conditions and growth rates, and by general economic
and political conditions in the markets in which we compete. Readers are cautioned not to place undue reliance on these forward-looking
statements.
PART
I
OVERVIEW
Mendocino
Brewing Company, Inc., a California corporation, was founded in 1983 as a limited partnership and converted to a corporation in
1993. We were one of the first modern craft brewers, having opened the first new brewpub in California and the second in the United
States following the repeal of Prohibition. We have been recognized for our innovations in the brewpub concept, our craft brew
style and our distinctive labels. In this Annual Report, the term “the Company” and its variants and the terms “we,”
“us,” and “our” and their variants are generally used to refer to Mendocino Brewing Company, Inc. together
with its subsidiaries, while the term “MBC” is used to refer to Mendocino Brewing Company, Inc. as an individual entity.
We
operate in two geographic markets, (i) the United States and Canada (referred to in this Annual Report as the “North American
Territory”) and (ii) Europe (including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands, France, Finland, Germany,
Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom) (referred to
in this Annual Report as the “Foreign Territory”). Our European operations are primarily in the United Kingdom.
Our
operations in the North American Territory consist primarily of brewing and marketing proprietary craft beers, including Red Tail
Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, White Hawk Original IPA, and Red Tail Lager, and a licensed
international specialty beer, Kingfisher Premium Lager. For distribution in the North American Territory, we brew our brands in
our own facilities, which are located in Ukiah, California and Saratoga Springs, New York. In the North American Territory, we
distribute our products in most of the states, the District of Columbia and Canada.
Our
operations in the Foreign Territory, which are conducted through our wholly-owned subsidiary, United Breweries International (U.K.)
Limited (“UBIUK”) and UBIUK’s wholly-owned subsidiary, Kingfisher Beer Europe Limited (“KBEL”),
which was formerly known as UBSN Limited, consist primarily of the marketing and distribution of Kingfisher Premium Lager through
Indian restaurants, chain retail grocers, liquor stores, and other retail outlets (such as convenience stores). We hold an exclusive
license, expiring in October 2018, from United Breweries Limited, an Indian public limited company (“UB Limited”)
to brew and distribute Kingfisher Premium Lager in certain areas of the Foreign Territory. The Chairman of our Board of Directors,
Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited.
All
of our beers sold in the Foreign Territory are brewed in England under a contract with Shepherd Neame, Ltd. (“Shepherd Neame”),
an English brewer. This contract expires in October 2013. We are in discussion with another brewer to brew and package products
for sale in the Foreign Territory. KBEL is the sole distributor of Kingfisher Premium Lager in the United Kingdom, Ireland, and
continental Europe, but does not physically distribute our products to our ultimate trade customers. KBEL relies on specialty
restaurant trade distributors in the United Kingdom and on Shepherd Neame, acting as KBEL’s agent, on a commission basis,
for distribution to the supermarket, liquor and convenience store trade.
COMPANY
BACKGROUND
We
first bottled our flagship brand, Red Tail Ale, in December 1983, and conducted our initial public offering in February 1995.
We completed construction of our brewery in Ukiah, California in May 1997. This facility, which has a current annual packaging
capacity of 100,000 brewers’ barrels (“bbl.”) assuming one eight hour shift per day, was designed to enable
our production capacity at such facility to be expanded to 200,000 bbl. per year with additional equipment.
Our
New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs Brewery (“Releta”), which is located in Saratoga
Springs, New York, commenced production in our leased facilities in February 1998. This facility, which has a current annual packaging
capacity of 90,000 bbl. assuming one eight hour shift per day, was also designed to enable our production at such facility to
be expanded to 200,000 bbl. per year with additional equipment.
In
1998, we purchased certain assets from Carmel Brewing Company, Inc., a California corporation (“Carmel Brewing”).
We continue to bottle and sell beer under the Carmel Brewing name.
In
2001, we acquired UBIUK together with UBIUK’s wholly-owned subsidiary, KBEL, from Inversiones Mirabel, S.A., a Panamanian
corporation, (“Inversiones”) in exchange for MBC stock then valued at approximately $5,500,000 (the “UBIUK Acquisition”).
UBIUK and KBEL primarily market, sell, and distribute Kingfisher Premium Lager in the Foreign Territory. Kingfisher Premium Lager,
which is the flagship brand of UB Limited, is a recognized international brand, with widespread distribution outside our geographic
markets.
We
also acquired the United States brewing and distribution rights for Kingfisher Premium Lager as a result of the UBIUK Acquisition.
We brew Kingfisher Premium Lager in our Saratoga Springs, New York and Ukiah, California facilities. We have a contract with Shepherd
Neame to brew Kingfisher Premium Lager for distribution in the Foreign Territory which expires in October 2013.
In
2005, United Breweries of America, BVI, a British Virgin Islands corporation (“UBA-BVI”), an indirect beneficial owner
of a majority of our outstanding shares, merged into United Breweries Holdings, Ltd., an Indian public limited company (“UBHL”).
As a result of the merger of UBA-BVI into UBHL, UBHL acquired indirect control over approximately 78% of our then outstanding
shares. Dr. Vijay Mallya, our Chairman of the Board, is also the Chairman of the board of directors of UBHL.
In
2010, we purchased certain brand-related assets from Golden West Brewing Company, a California corporation and Beautiful Brews
Inc., a Florida corporation, including trademarks, trade names, and other brand-related assets related to the Butte Creek brands
of organic ales and Honey Amber Rose ale, respectively. MBC pays royalties based on sales of such assets.
INDUSTRY
OVERVIEW
NORTH
AMERICAN MARKET
We
are a brewer in the craft brewing segment of the United States beer industry. The United States domestic beer market consists
of a number of market categories, some of which include low-priced, premium, super premium, lite, import, and specialty/craft
beers. In the North American Territory, we compete in the specialty/craft category which the Brewers Association estimated produced
approximately 11.5 million barrels in the year 2011. Craft beers are typically all malt, characterized by their full flavor, and
are usually produced using methods similar to those of traditional European brews. The domestic beer market is dominated by large
domestic and international brewers. The craft brewing segment is growing, but is relatively small. Recently, the United States
beer market has seen two trends, the number of craft brewers has increased in number and the large domestic brewers have merged
or been acquired by other large domestic and international brewers (e.g. InBev S.A.’s acquisition of Anheuser-Busch Companies,
Inc.). Since our formation in the 1980s, the rate at which the craft beer segment has grown has fluctuated over the years. The
large domestic brewers produce their own fuller-flavored products to compete against craft beers. The introduction of flavored
malt beverages starting in 2001 has also increased competition in the beer market. Additionally, the wine and spirits market has
seen an increase in recent years, attributable to competitive pricing, television advertising, increased merchandising and resurgent
consumer interest in wine and spirits.
EUROPEAN
MARKET
The
vast majority of our sales in the European Union are made in the United Kingdom. During fiscal years 2012 and 2011 our sales in
the United Kingdom constituted approximately 89% of our total sales in the Foreign Territory. Sales in the Foreign Territory primarily
consist of sales of Kingfisher Premium Lager. We have production and distribution rights for Kingfisher Premium Lager in the United
Kingdom and the other European Union countries.
Within
the European Union, we primarily distribute our products through Indian restaurants using restaurant trade distributors. In addition,
we distribute our products through other retail outlets such as supermarkets, liquor stores, and licensed shops and convenience
stores.
OUR
BUSINESS
We
are a pioneering brewer in the specialty craft brewing segment in the United States. We produce high quality ales and lagers in
our own breweries in the United States. Through our subsidiary in the United Kingdom, we have production and distribution rights
to Kingfisher Premium Lager in the European Union, Canada and, until October 2013, the United States. Generally sales are made
through distributors. We are negotiating arrangements to maintain production and distribution rights in the United States after
October 2013.
PRODUCTS
We
produce a variety of flavorful craft beers by using high quality ingredients in our brewing process. For distribution in the North
American Territory, we brew ten ales, one wheat beer, three lagers, two pilsners, two stouts and a root beer, all on a year-round
basis, and three seasonal brews. All of these products are brewed at our production facilities in Ukiah, California, and Saratoga
Springs, New York. The locations of the breweries are well positioned to serve the large markets on the East and West coasts.
In
the Foreign Territory, we currently distribute Kingfisher Premium Lager. Kingfisher Premium Lager is the leading Indian beer by
sales volume in India and abroad.
Our
principal products are as follows:
RED
TAIL ALE, a full flavored amber ale, is our flagship brand. It is available in 12 oz. six-packs and twelve-packs, half-barrel
kegs, and 5 gallon kegs.
BLUE
HERON PALE ALE is a golden ale with a full body and a distinctive hoppy character. It is available in 12 oz. six-packs and
twelve-packs, half-barrel kegs, and 5 gallon kegs.
BLACK
HAWK STOUT is a rich bodied stout with big traditional flavors. It is available in 12 oz. six-packs, half-barrel kegs, and
5 gallon kegs.
EYE
OF THE HAWK SELECT ALE is a rich-bodied amber ale. It is available year-round in 12 oz. six-packs, half-barrel kegs, and 5
gallon kegs.
WHITE
HAWK ORIGINAL IPA is a heavily hopped ale with a distinctive hoppy character and bold malt flavor. It is available in 12 oz.
six-packs and half-barrel kegs.
KINGFISHER
PREMIUM LAGER is a conventionally fermented specialty lager with a smooth crisp taste. In the United States, Kingfisher Premium
Lager is available in 12 oz. six-packs, 22 oz. bottles, half-barrel kegs, and 5 gallon as well as on tap in a few pubs and Indian
restaurants. In Canada, Kingfisher Premium Lager is available in 12 oz. six-packs and 22 oz. bottles. Kingfisher Premium Lager
is available year-round in 330ml and 660ml bottles in multi-packs as well as in a variety of keg sizes in the United Kingdom,
Ireland, and continental Europe. In the United Kingdom, it is also available on tap in Indian restaurants.
DISTRIBUTION
METHODS
In
the North American Territory, our products are sold through wholesale distributors to consumers at supermarkets, warehouse stores,
liquor stores, taverns and bars, restaurants, and convenience stores.
Our
products are delivered to retail outlets by independent distributors whose principal business is the distribution of beer, and
in some cases other alcoholic beverages, and who typically also distribute one or more national beer brands. Together with our
distributors, we market our products to retail outlets and rely on our distributors to provide regular deliveries, to maintain
retail shelf space, and to oversee timely rotation of inventory. We also offer a variety of ales and lagers directly to consumers
at a tasting room attached to the Saratoga Springs brewery in New York and at our ale house in Ukiah, California (formerly located
in Hopland, California).
In
the Foreign Territory, our products are distributed primarily through Indian restaurants by restaurant trade distributors. Such
points of sale represent approximately 90% of our total sales volume in the Foreign Territory, with the remaining 10% of sales
volume attributed to sales in supermarkets, liquor stores, and licensed shops and convenience stores. The majority of our restaurant
sales are through our on-tap draft installations. KBEL exports Kingfisher Premium Lager to many European markets outside of the
United Kingdom, and our sales growth in those markets typically correlates with the establishment and proliferation of Indian
restaurants in such locations.
Distribution
and retailing of products in Canada involves a wide range and varied degree of government control through provincial liquor boards.
We distribute our products through provincial liquor control boards or independent distributors, as required in each province.
COMPETITION
In
the North American Territory, we compete against a variety of brewers in the craft beer segment, including brewpubs, microbrewers,
regional craft brewers, and craft beer products of major national breweries. Additionally, the entire craft beer segment competes
to some extent with other segments of the United States beer market, including major national brands like Budweiser and Miller
and imported beers such as Heineken and Becks.
The
lager market in the United Kingdom is dominated by major international brands such as Stella Artois, Carling, Heineken, Budweiser,
and Becks, in the restaurant and pub sectors and in sales through supermarkets and other retail outlets. Our products are marketed
through Indian and other restaurants, major supermarket chains, smaller chains, and individual stores. In all of these sectors,
we face competition from other ethnic and international brands produced by local and large international brewers. We promote Kingfisher
Premium Lager as the worldwide No. 1 selling premium Indian lager. We promote the brand through our significant participation
in events directed at the Indian restaurant trade and volume-driven promotions in supermarkets and Cash & Carry stores, a
retail chain in the United Kingdom.
In
recent years, the larger domestic and international brewers have introduced fuller-flavored beers meant to compete with our craft
beer offerings. The participation by larger domestic and international brewers increases competition and price sensitivity within
the craft beer segment. Craft brewers compete primarily on product quality, taste profile, and consistency.
We
face tough competition in the North American Territory as well as in the Foreign Territory. We compete with other beer and beverage
companies not only for consumer acceptance and loyalty but also for shelf and tap space in retail establishments. We must also
vie for marketing focus by our distributors and their customers, all of which also distribute and sell other beer and alcoholic
beverage products. Many of our competitors’ financial and marketing resources and distribution networks are substantially
greater than ours. Moreover, the introduction of new products by competitors that compete directly with our products, or that
diminish the importance of our products to retailers or distributors, may have a material adverse effect on our results of operations,
cash flows and financial position.
SOURCES
AND AVAILABILITY OF RAW MATERIALS
Production
of our beverages requires various processed agricultural products, including malt and hops. We fulfill our commodities requirements
through purchases from various sources, some through contractual arrangements and others on the open market. In the Foreign Territory,
these purchases have historically been made directly by Shepherd Neame, which brews our products on a contract basis pursuant
to a contract due to expire in October 2013. We are in the process of negotiating a new brewing contract with a different brewer.
If we are unable to enter into a new brewing contract on reasonable terms pursuant to which the new contract brewer acquires the
raw materials necessary to brew our products in the Foreign Territory, our results of operations, cash flows and financial position
are likely to be materially adversely affected. In 2008, MBC and Releta each entered into long term contracts to purchase hops.
These contracts expire in 2015. If we are unable to enter into new contracts to purchase hops on commercially reasonable terms,
our results of operations, cash flows and financial position may be materially adversely affected. The price of malt has increased
substantially since the beginning of 2012. We believe that the commodity markets will continue to experience price, availability
and demand fluctuations. The price and supply of raw materials will be determined by, among other factors, the level of crop production,
weather conditions, export demand, and government regulations and legislation affecting agriculture.
Our
major suppliers in North America are Great Western Malting Co., Yakima, WA, and Canada Malting Company, Montreal, Canada (malt);
Hop Union LLC, Yakima, WA and S.S. Steiner Inc., New York, NY (hops); Gamer Packaging Inc., Minneapolis, MN (bottles and crowns);
Alliance Packaging, Seattle, WA, and International Paper Co. Pittsburg, PA (cartons); Rose City Printing and Packaging, Vancouver,
WA and Keystone Paper and Box Company, Inc., South Windsor, CT (carriers); and DWS Printing Associates, Bay Shore, NY (labels).
Our
major supplier for the Foreign Territory is Shepherd Neame, which brews on a contract basis all of our products that are sold
in the Foreign Territory. We do not directly purchase any agricultural commodities or other products for use in the Foreign Territory.
We are currently in the process of negotiating an arrangement with a new brewer. If we do not come to an agreement with such new
brewer on commercially reasonable terms for the period after expiration of our agreement with Shepherd Neame in October 2013,
our results of operations, cash flows and financial position may be materially adversely affected.
DEPENDENCE
ON MAJOR CUSTOMERS
Sales
to our top five customers in 2012 totaled $9,245,700 (approximately 23% of our sales), as compared to sales to our top five customers
in 2011 which totaled $10,576,900 (approximately 26% of our sales).
Sales
to our principal European customer, Shepherd Neame, during 2012 represented approximately 15% of our Foreign Territory sales (or
approximately 9% of our total sales), as compared to approximately 21% of Foreign Territory sales (or approximately 12% of total
sales) in 2011. In 2012, we increased our distribution network and had decreased sales to Shepherd Neame compared to 2011. No
other individual customer accounted for more than 5% of our total sales during 2012 or 2011. Our European sales may be affected
by the terms of any new brewing and distribution contract entered into for the period beginning October 2013.
Seasonality
Our
product sales are seasonal, with the first and fourth quarters historically being the slowest and the rest of the year typically
having stronger sales. Sales volume may be affected by weather. Accordingly, our results for any individual quarter may not be
indicative of the results that may be achieved for the full fiscal year.
Sales
and Marketing
We
market our products through various promotional programs with our distributors and wholesalers. The sales and marketing staff
offer support to the wholesalers and retailers by educating them about our products. Our products are promoted at local art, music
and food festivals, and restaurants and pubs. We operate a tasting room at our Saratoga Springs brewery and our ale house in Ukiah,
California. We utilize signs, tap handles, coasters, logo glassware and posters to promote our products in bars, pubs and restaurants.
We
participate in various consumer promotion programs, primarily price discounts. We occasionally advertise our products in print
media.
TRADEMARKS
We
have United States federal trademark registrations on the principal register of the United States Patent and Trademark Office
for the following marks: MENDOCINO BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg. No. 2,032,382),
RED TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word
mark (Reg. No. 1,673,594), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word mark (Reg. No. 1,768,639), PEREGRINE
GOLDEN ALE word mark (Reg. No. 2,475,522), HOPLAND BREWERY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg. No. 2,667,078),
BLACK HAWK STOUT word mark (Reg. No. 3,205,652), BLUE HERON word mark (Reg. No. 3,818,385), HONEY AMBER ROSE design mark (Reg.
No. 3,276,229), TWIN SISTERS (Reg. No. 3,589,090), REVOLUTION X (Reg. No. 3,237,471); ROCK HARD TEN (Reg. No. 3,585,772), ORGANIC
PIONEERS (Reg. No. 3,339,179), THE OFFICIAL BEER OF PLANET EARTH (Reg. No. 3,339,151), YOSEMITE (Reg. No. 4,064,887), and CATCH
22 (Reg. No. 3,814,885).
We
have United States federal trademark registrations on the supplemental register of the United States Patent and Trademark Office
for the following marks: BEER DIVA word mark (Reg. No. 3,350,568).
We
use the BLUE HERON word mark (Reg. No. 3,818,385) under a concurrent use agreement with Bridgeport Brewing Company which gives
us the exclusive right to use the BLUE HERON word mark throughout the United States with the exception of Oregon, Idaho, Washington,
and Montana. Bridgeport Brewing Company, the other concurrent use party, has the exclusive right to use the BLUE HERON word mark
in those states.
We
claim common law trademark rights in and to the following marks: TALON BARLEY WINE ALE word mark, TALON BARLEY WINE ALE design
mark, TRAINWRECK word mark, HELLTOWN word mark, and BUTTE CREEK BREWING word mark.
We
have acquired the trademark CARMEL BREWING COMPANY and any other variation of the same as used by Carmel Brewing Company and claim
common law trademark rights in and to all such marks. We have also acquired the rights to use the RAZOR EDGE word mark through
a License Agreement with Beverage Mates, Ltd. However, we are currently not using the RAZOR EDGE mark, and it is unclear whether
we will use the mark in the future. The original term of the RAZOR EDGE License Agreement ended in 2008, but has been automatically
renewed. License fees are calculated based on sales of the product. We have not had any sales of this brand since 2001.
LICENSE
AGREEMENTS
UBIUK
and KBEL hold the exclusive brewing and distribution rights for Kingfisher Premium Lager in the United Kingdom, Ireland, continental
Europe, and Canada through a licensing agreement with UB Limited which is currently scheduled to expire in October 2018.
In
July 2001, we entered into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., (“KFA”)
pursuant to which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with
the brewing and distribution of beer in the United States. The Company plans to negotiate arrangements to continue to brew and
distribute beer using the Kingfisher trademark.
Since
1998, UBIUK and KBEL have licensed to Shepherd Neame the exclusive right to brew, keg, bottle, can, label, and package all beers
and related products sold under the Kingfisher trademark in the United Kingdom, Ireland, and continental Europe. The price KBEL
pays to Shepherd Neame for brewing Kingfisher Premium Lager for distribution in the United Kingdom is set by a formula which varies
according to the applicable duty on Kingfisher Premium Lager and other factors. (For additional information see “Item 13.
— Certain Relationships and Related Transactions - Brewing Agreement”.) Under its terms, this agreement will expire
in October 2013. We are in discussion with another brewer to brew and package products for sale in the Foreign Territory. If we
are unable to enter into a new agreement for brewing for distribution in the Foreign Territory, our results of operations, cash
flows and financial position may be materially adversely affected.
GOVERNMENTAL
REGULATION
Our
North American Territory operations are subject to licensing by local, state and federal governments, as well as to regulation
by a variety of state and local agencies. We are licensed to manufacture and sell beer by the Departments of Alcoholic Beverage
Control in California and New York. A federal permit from the United States Treasury Department, Alcohol and Tobacco Tax and Trade
Bureau (the “TTB”) (formerly the Bureau of Alcohol, Tobacco, and Firearms) allows us to manufacture fermented malt
beverages. To keep these licenses and permits in force we must pay annual fees and submit timely production reports and excise
tax returns. We must give these regulatory agencies prompt notice of any changes in the operations, ownership, or company structure.
The TTB must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals
owning equity securities totaling in the aggregate 10% or more of our outstanding securities be investigated as to their suitability
of character. Our production operations must also comply with the Occupational Safety and Health Administration’s workplace
safety and worker health regulations and comparable state laws. Management believes that we are presently in compliance with the
aforementioned laws and regulations. In addition, we have implemented our own voluntary safety program. Our Ukiah ale house is
regulated by the Mendocino County Health Department, which requires an annual permit and conducts spot inspections to monitor
compliance with applicable health codes. In Canada, provincial governments regulate the beer industry, particularly the pricing,
mark-up, container management, sale, distribution and advertising of beer. Distribution and retailing of products in Canada involves
a wide range and varied degree of government control through provincial liquor boards. We distribute our products through provincial
liquor control boards or independent distributors, as per the applicable regulation for each province.
In
the United States, for brewers producing less than 2,000,000 barrels per year, the federal excise tax rate is $7.00 per bbl. for
up to 60,000 bbl. per year and $18.00 per bbl. for over 60,000 bbl. The California excise tax rate is $6.20 per bbl. The State
of New York presently imposes on brewers an excise tax of $3.88 per bbl. for production in excess of 100,000 bbl. per year.
Our
operations in the Foreign Territory are subject to regulation by United Kingdom and European laws, as well as by the laws of various
individual countries in which UBIUK distributes our products. Due to the current contract brewing arrangement in the Foreign Territory,
Shepherd Neame, rather than the Company, is subject to various laws of the European countries regarding production, bottling,
packaging, and labeling.
COMPLIANCE
WITH ENVIRONMENTAL LAWS
We
are subject to various federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of
various substances. We have not received any notice from any governmental agency relating to our violation of any applicable environmental
law.
Our
waste products consist of process water, spent grains, hops, glass and cardboard. We have instituted a recycling program for our
office paper, newspapers, magazines, glass, and cardboard at minimal cost to us. We sell or give away our spent grain to local
cattle ranchers.
Ukiah.
We built our own wastewater treatment plant for the Ukiah facility. As a result, we have reduced our sewer hook-up fees at that
location. If our discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds
100,000 bbl., we may be required to pay additional fees. The approximate operating costs of the plant are between $6,000 and $10,000
per month, which may increase with increased production. We have contracted to have the liquid sediment that remains from the
treated wastewater trucked to a local composting facility at a cost of between $4,500 and $5,500 per month. We obtained a Mendocino
County Air Quality Control Permit to operate a natural gas fired boiler in Ukiah; this permit is valid until August 30, 2013.
Management expects this permit to be renewed each year.
Saratoga
Springs. Our solid waste materials consist of spent grain, cardboard, glass, and liquid waste. We have instituted a recycling
program for cardboard, office paper and glass at minimal cost to us. Spent grain is given away to local cattle dairy farms free
of charge. We pay approximately $2,500 per month in sewer fees for liquid waste. We follow and operate under the rules and regulations
of the New York Department of Environmental Conservation for Air Pollution Control.
Various
states in which we sell our products, including California and New York, have adopted certain restrictive packaging laws and regulations
for beverages. These laws require deposit on packages. Such laws have not had a significant effect on our sales. The adoption
of similar legislation by Congress, a substantial number of states or additional local jurisdictions might require us to incur
significant capital expenditures for compliance. We believe we are in compliance with all applicable Canadian laws and regulations.
In
general, European packaging regulations are covered by specifications provided by the European Union; we believe we are in compliance
with such specifications.
Dram
Shop Laws
The
serving of alcoholic beverages to a person known to be intoxicated may, under certain circumstances, result in the server being
held liable to third parties for injuries caused by the intoxicated customer. Our brewpub and tasting room have limited hours
and our employees have knowledge of this issue. Large awards in excess of our insurance coverage could adversely affect our financial
condition.
EMPLOYEES
As
of December 31, 2012, MBC employed 63 full-time and 14 part-time individuals in the United States, including 13 in management
and administration, 45 in brewing and production operations, 4 in retail and tavern operations and 15 in sales and marketing positions.
In England, UBIUK and KBEL together employed 19 full-time and 2 part-time individuals including 14 in sales and marketing and
7 in managerial and administrative positions. Management believes that our relationship with our employees is generally good.
Approximately
14 employees currently engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery are represented by Teamsters
Local No. 896, International Brotherhood of Teamsters, AFL-CIO (the “Union”). Under our collective bargaining agreement
with the Union, all of such 14 employees’ positions must be held and filled by members of the Union. The collective bargaining
agreement will expire on July 31, 2013. A failure to renew such agreement may have a material adverse effect on our results of
operations, cash flows and financial position.
RESEARCH
AND DEVELOPMENT
We
have not spent a material amount during the last two fiscal years on research and development activities or on customer-sponsored
research activities relating to the development of new products, services or techniques, or the improvement of existing products,
services or techniques.
In
addition to the other information about risks in this Annual Report on Form 10-K, described below are risks and uncertainties
that we believe are most likely to be material to our business and results of operations. Our business operations and results
may also be adversely affected by additional risks and uncertainties not presently known, or which we currently deem immaterial,
or which are applicable in general to the industries in which we compete or to the economies in which we sell our products. Any
of the following risks or uncertainties might cause our business, financial condition, results of operations or cash flows to
suffer.
LACK
OF PROFITABLE OPERATIONS: We incurred a net loss in the North American Territory for 2012. From 2005 to 2011, operations in the
Foreign Territory have resulted in a net loss. We did not incur a net loss in the Foreign Territory for 2012. We believe our losses
are attributable to low sales volume and higher operating expenses. Our business is also subject to certain fixed and semi-variable
operating costs, which, when combined with the difference between current levels of production and maximum production capacity,
may cause our gross margins to be sensitive to small increases or decreases in sales volume in the North American Territory. We
may not be able to offset such increased expenses with comparable price increases in our products, which could also impact our
gross margins. We may not be successful in our efforts to increase sales volume and utilization rates. Moreover, it is uncertain
when, if at all, our operations will become profitable once again. Future operating losses may have a material adverse effect
on our cash flows and financial position.
LIQUIDITY:
Low utilization of the production capacity at our Ukiah and Saratoga Springs facilities and losses from our European operations
continued to place demands on our working capital. We have loans, lines of credit, other credit facilities, and lease obligations
with various creditors. We may find it difficult to continue our operations, at least in the short term, if any of the following
occur: a breach of any loan provision by us that leads to our default, an inability of any lender to continue to offer credit
facilities, our inability to refinance credit facilities when and as they become due, or an attempt by one of our creditors to
exercise its rights to certain of our tangible or intangible assets which have been used as collateral or which have been pledged
as security for our obligations.
We
rely on short and long-term debt to meet our working capital needs. As described in the “Description of Our Indebtedness”
section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms of the Company’s
loan agreement with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”), require that we meet certain
financial covenants. We may not be able to generate financial results sufficient to meet one or more financial covenants, which
would cause us to be in violation of the loan agreement. Failure to meet the covenants is an event of default under the loan agreement.
Following an event of default, Cole Taylor could deny a request for a waiver, and the entire outstanding loan balance would be
immediately due and payable. In such a case, we would seek to refinance the loan with one or more lenders, potentially at less
desirable terms. Given the current economic environment and the tightening of lending standards by many financial institutions,
there can be no guarantee that additional financing would be available at commercially reasonable terms, if at all.
On
March 22, 2013, United Breweries (Holdings) Limited (“UBHL”) issued a letter of financial support on behalf of KBEL
( “Letter of Support”), to KBEL’s accountants, to confirm that UBHL had agreed to provide funding on an as needed
basis to KBEL to ensure that KBEL is able to meet its financial obligations as and when they fall due. The Letter of Support confirms
that such support will be available, at a minimum, until one year from March 22, 2013. If it becomes necessary to seek UBHL’s
financial assistance under the Letter of Support and UBHL is either unable or unwilling to fulfill its commitment to KBEL, or
to extend the time period of such commitment, it may result in a material adverse effect on KBEL’s, UBIUK’s and our
financial position and on our ability to continue operations.
If
we are in default under our secured credit facilities, our lenders may seek to satisfy any outstanding obligations through recourse
against the applicable pledged collateral which may include our real property, fixed assets and current assets. The loss of any
material pledged asset would likely have a material adverse effect on our financial position and results of operations.
Rates
of interest on our credit facilities are variable based on the prime lending rates in the United States and the United Kingdom.
Any increase in the prime lending rates would increase our interest expense and could have a material adverse effect on our financial
position and results of operations.
Our
credit agreement has covenants that limit our near-term capital expenditures. Maintaining our facilities or introducing
new products or packaging may require incremental capital expenditures; however, per the terms of our loan agreement, our capital
expenditures will be limited to specified amounts (based on a formula). If the capital expenditures necessary to maintain our
facilities or bring new products or packaging to market are greater than the amounts to which we are limited by this arrangement,
our ability to maintain or increase sales growth could be impaired, which could materially adversely affect our business.
COMPETITION:
We face intense competition in both our North American Territory and in our Foreign Territory from both competitors in the beer
market and producers of wine and spirits. Certain of our competitors have substantially greater financial and marketing resources
and more extensive distribution networks than we do. In addition, the introduction of new products by existing competitors or
new entrants into the market may impact our market share. Moreover, consumer preference and consumer trends may result in a decrease
in demand for our products which could also have an impact on our results of operations.
RAW
MATERIALS: We are dependent on a limited number of suppliers, and in some instances on a sole supplier, for the majority of the
raw materials and packaging materials used in our operations. As a result, an interruption in the supply chain might have an adverse
effect on our operations if we were unable to find an alternative supplier at a comparable price. Unfavorable weather conditions
might impact the output of crops necessary to brew our products which might, in turn, affect our supply chain. The price of malt
increased significantly in the first quarter of 2012 due to limited supply and higher demand (See Part 1, Item 1, “Sources
And Availability of Raw Materials”). We may not be in a position to pass the entire amount of any cost increase to our customers
which may have an adverse effect on our operations.
DEPENDENCY
ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding arrangements with several brewers to brew and package
their brands at our brewing facilities, predominantly at our Saratoga Springs, New York facility. Approximately 33% of our sales
volume in the North American Territory for fiscal year 2012 was comprised of sales made under such contract brewing arrangements.
There is no certainty that such existing arrangements will be extended in the future or that we will be able to enter into new
arrangements. Any significant variation in these arrangements could have a material adverse effect on our results of operations,
cash flows and financial position.
DEPENDENCY
ON DISTRIBUTORS: We sell beer to independent beer distributors for distribution to retailers. Although the Company currently has
arrangements with its wholesale distributors to distribute the products, sustained growth will require it to maintain such relationships
and possibly enter into agreements with additional distributors. Changes in control or ownership of the current distribution network
could lead to less support of our products. No assurance can be given that we will be able to maintain or secure additional distributors
on terms favorable to us. Our ability to maintain existing distribution arrangements may be adversely affected by the fact that
many of our distributors are reliant on one of the major beer producers for a large percentage of their revenue and, therefore,
they may be influenced by such producers. If our existing distribution agreements are terminated, we may not be able to enter
into new distribution agreements on substantially similar terms, which may result in an increase in the costs of distribution.
ARRANGEMENT
WITH SHEPHERD NEAME: UBIUK and KBEL entered into a brewing agreement that grants Shepherd Neame the exclusive right to brew and
package all beers sold under the Kingfisher trademark in the United Kingdom, and to distribute such products elsewhere in the
Foreign Territory. Continued losses in the European Territory have diminished our ability to timely settle our liabilities. Any
interruption of the brewing, packaging or distribution of our products by Shepherd Neame for any reason is likely to have a material
adverse effect on our results of operations, cash flows and financial position. The agreement with Shepherd Neame expires in October
2013. We are in discussion with another brewer to brew and package our products for sale in the Foreign Territory. If we are unable
to enter into a new agreement for brewing for distribution in the Foreign Territory, our results of operations, cash flows and
financial position may be materially adversely affected.
GROSS
MARGINS: Our gross margins may fluctuate while our expenses remain constant. We anticipate that our future gross margins
will fluctuate and may even decline as a result of many factors, including disproportionate depreciation and other fixed and semi-variable
operating costs, and the level of production at our breweries in relation to current production capacity. Our sales volume is
much lower than our brewing and packaging capacities, leading to under utilization (See “Item 2 – Properties”
below). Both of our brewing facilities incur maintenance and other costs on a level consistent with their maximum capacity rather
than with their current utilization levels. Our high level of fixed and semi-variable operating costs causes gross margin to be
especially sensitive to relatively small increases or decreases in sales volume. Other factors that could affect cost of sales
include changes in freight charges, the availability and prices of raw materials and packaging materials, the mix between draft
and bottled product sales, and federal or state excise taxes and levies. Our inability to align costs and utilization rates affects
our capital, liquidity, and management resources. Failure to adequately align such costs and utilization rates may have a material
adverse effect on our business, financial condition, and results of operations.
MATERIAL
CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an exclusive Keg Management Agreement with MicroStar Keg Management LLC
(“MicroStar”) which expires in September 2014. Under the terms of the agreement with MicroStar, we receive our entire
supply of kegs exclusively from MicroStar. If the agreement is terminated, we are required to purchase from MicroStar four times
the average monthly keg usage for the preceding six-month period. We may need additional funds to purchase those kegs. An interruption
in the supply of kegs or, in the case of termination of the agreement, our failure to obtain the necessary funding to facilitate
such purchases could have a material adverse effect on our business, results of operations, cash flows or financial position.
SEASONALITY:
Sales of craft beer products in the United States and beer sales in the United Kingdom are somewhat seasonal, with the winter
months historically being the slowest and the summer months generating stronger sales. Our sales volume may also be affected by
weather conditions. Therefore, the results for any quarter may not be indicative of the results that may be achieved for the full
fiscal year. If an adverse event such as a regional economic downturn or poor weather conditions should occur during the second
and third quarters, the adverse impact to our revenues would likely be greater as a result of the seasonal business.
ECONOMIC
DOWNTURN: There is a concern over current economic conditions and its impact on consumer spending. Such economic conditions may
adversely affect the sale of our products. In the past few years, the United States, the United Kingdom and other countries have
experienced periods of deteriorated economic conditions. Such economic challenges may continue or reoccur. These conditions make
it difficult for us to accurately forecast and plan future business activities. Furthermore, during challenging economic times,
we may face issues gaining timely access to financings or capital infusion, which could result in an impairment of our ability
to continue our business activities. We cannot predict the timing, strength or duration of any economic slowdown or subsequent
economic recovery, worldwide, in the United States, or in our industry. These and other economic factors could have a material
adverse effect on our financial condition and operating results.
REGULATION
AND TAXATION: The manufacture and sale of alcoholic beverages is a business that is highly regulated and taxed at the federal,
state and local levels. Our operations may be subject to more restrictive regulations and increased taxation than those of non-alcohol
related businesses. For instance, brewery and wholesale operations require various federal, state and local licenses, permits
and approvals. In addition, some states prohibit wholesalers and retailers from holding an interest in any supplier such as the
Company. Violation of such regulations can result in the loss or revocation of existing licenses by the wholesaler, retailer and/or
supplier. The loss or revocation of any existing licenses, permits or approvals, failure to obtain any necessary additional or
new licenses, permits or approvals, or the failure to obtain approval for the transfer of any existing permits or licenses, could
have a material adverse effect on our ability to conduct our business. Because of the many and various licensing and permitting
requirements, there is a risk that one or more regulatory authorities could determine that we have not complied with applicable
licensing or permitting regulations, paid the appropriate excise taxes, or maintained the approvals necessary to conduct business
within their respective jurisdictions. There can be no assurance that any such regulatory action would not have a material adverse
effect upon us or our operating results.
Various
jurisdictions frequently propose increasing the federal and/or state excise tax on alcoholic beverages, or certain types of alcoholic
beverages such as flavored malt beverages, either to increase revenues, or discourage purchase by underage drinkers. If adopted,
these measures could affect some or all of our products. If federal or state excise taxes are increased, we may have to raise
prices to maintain present profit margins which may have an impact on our sales volume. Higher taxes on beer may reduce the overall
demand, thus negatively impacting sales of our products. Recently, states have been reviewing the state tax treatment for flavored
malt beverages, which could result in increased costs for the Company and decreased sales.
Further
federal or state regulation may be forthcoming that could limit distribution and sales of alcohol products. Such regulation might
reduce our ability to sell our products at retail and at wholesale and could severely impact our business.
CHANGE
IN PUBLIC ATTITUDE AND DRINKING PREFERENCES: There is public concern over alcohol-related social problems, including drunk driving,
underage drinking and health consequences from the misuse of alcohol, including alcoholism. This may adversely affect consumption
of alcoholic beverages. Consumer drinking preferences may also change due to availability of a variety of products in the craft
brew segment. Any change in government regulation or shift in consumer preference may have an adverse impact on our operations.
Consumer demand for luxury items, including craft beer, is sensitive to downturns in the economy and the corresponding impact
on discretionary spending. Changes in discretionary consumer spending or consumer preferences brought about by factors such as
perceived or actual general economic conditions, job losses and the resultant rising unemployment rate, perceived or actual disposable
consumer income and wealth and changes in consumer confidence in the economy, could significantly reduce customer demand for craft
beer in general, and the products we offer specifically. Furthermore, any of these factors may cause consumers to substitute our
products with the fuller-flavored national brands or other more affordable alternatives. In either event, this would likely have
a significant negative impact on our operating results.
ADVERTISING
AND MARKETING EFFORTS: The sales and marketing programs used to generate demand for our products may be unsuccessful. In
the future this could lead us to lower the prices that we charge for our products, depending on competitive factors in our various
markets. To increase demand for our products, we have participated in price promotions with our wholesalers and retail customers
in most of our markets. The number of markets in which we participate in price promotions and the frequency of such promotions
may change depending upon market conditions. There can be no assurance that our price promotions will be successful in increasing
demand for our products. If consumers were unwilling to accept our products or if general consumer trends caused a decrease in
the demand for beer, including craft beer, it would adversely impact our sales and results of operations. If the flavored alcohol
beverage market, the wine market, or the spirits market continues to grow, this could draw consumers away from our products and
have an adverse effect on sales and results of operations. Furthermore, if beer consumption in general were to fall out of favor
among consumers, or if the beer industry were subjected to significant additional governmental regulation, our operations could
be adversely affected.
INFORMATION
TECHNOLOGY SYSTEMS: We rely upon the capacity, reliability and security of our information technology, or IT, systems across all
of our major business functions, including manufacturing, retail, financial and administrative functions. We also rely on systems
owned and operated by third party business vendors to process payroll for our employees. Our business requires us to use and store
customer, employee and business partner personally identifiable information, which we refer to as PII. This may include names,
addresses, phone numbers, email addresses and contact preferences.
Information
technology helps us operate efficiently and produce our financial statements. If we do not allocate and effectively manage the
resources necessary to sustain technology infrastructure, we could be subject to transaction errors, processing inefficiencies,
business disruptions or the loss of or damage to intellectual property through security breach. Any inefficiency in our data management
systems could materially impair our ability to effectively plan, forecast and execute our business plan and comply with applicable
laws and regulations. We also face the challenge of supporting our older systems and implementing upgrades when necessary. Any
such impairment could materially and adversely affect our financial condition, results of operations, cash flows and the timeliness
with which we report our internal and external operating results.
We
require user names and passwords in order to access our information technology systems. We also use encryption and authentication
technologies to secure the transmission and storage of data. We rely on security measures implemented by third party vendors to
protect our PII. These security measures may be compromised as a result of third-party security breaches, employee error, malfeasance,
faulty password management or other irregularities, and result in persons obtaining unauthorized access to our data or accounts.
We
are not aware of any material cyber attack on our information technology systems. The costs to timely detect and eliminate or
alleviate network security problems, bugs, viruses, worms, malicious software programs and security vulnerabilities could be significant,
and our efforts to address these problems may not be successful and could result in unexpected interruptions, delays, or cessation
of service, and may harm our business operations. Moreover, if a computer security breach affects our systems or results in the
unauthorized release of PII, our reputation and brand could be materially damaged and use of our products and services could decrease.
We would also be exposed to risks of loss, litigation and potential liability, which could result in a material adverse effect
on our business, results of operations and financial condition. We do not have specific insurance coverage against risks related
to cyber incidents.
INSURANCE:
We may experience material losses in excess of insurance coverage. We believe that we have a reasonable amount of insurance coverage
for a business of our size and type. There are, however, certain types of catastrophic losses that are not generally insured because
it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits
occur, such loss could have an adverse effect on our results of operations and financial condition.
LITIGATION:
In the future we may be subject to litigation that could have a material adverse effect on our financial condition and
operations. At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of
these proceedings cannot be predicted. If a plaintiff were successful in a claim against our Company, we could be faced with the
payment of a material sum of money. If this were to occur, it could have an adverse effect on our financial condition.
COMMON
STOCK PRICE: The market for our Common Stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade
on any national securities exchange, the only market currently available, to the extent any trading occurs, is the “bulletin
boards/pink sheets”. It is possible that no active public market with significant liquidity will ever develop. Thus,
investors run the risk of never being able to sell their shares or selling at a depressed price. Our Common Stock price could
be subject to significant fluctuations and/or may decline. Factors that could affect our stock price include, but are not limited
to:
| - | the
entry
into,
or
termination
of,
key
agreements;
|
| - | the
introduction
of
new
products
by
us
or
our
competitors;
|
| - | future
sales
of
our
Common
Stock;
|
| - | variations
in
our
operating
results;
|
| - | changes
in
the
market
values
of
public
companies
that
operate
in
our
business
segment;
|
| - | general
market
conditions; and
|
| - | domestic
and
international
economic
factors
unrelated
to
our
specific
performance. |
DIVIDENDS:
We have never paid cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future.
Instead, we will likely retain future earnings for reinvestment in our business.
| ITEM 1B. |
UNRESOLVED
STAFF COMMENTS. |
Not
required for smaller reporting companies.
BREWING
FACILITIES
We
own nine acres of land in Ukiah, California on which our Ukiah brewery is located. Management believes that this facility is adequate
for our current capacity and also provides space for future expansion. Cole Taylor Bank currently holds a deed of trust on this
property in connection with a loan advanced to us. (See “Item 7. – Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Description of our Indebtedness – Cole Taylor Facility”). The principal
amount outstanding on the loan as of December 31, 2012 was $2,885,600.
We
have estimated the life of the Ukiah brewery at 40 years and depreciate the cost of the building on a straight-line method over
its anticipated life. We do not depreciate the cost of the land. Our assessed value on the Ukiah facility is approximately $10,165,200.
Various other assets incorporated in this facility are being depreciated, on a straight-line basis, at rates of between 10 and
20 years. Property taxes are currently assessed on the Ukiah property (including machinery and equipment) at a rate of 1.144%,
for an annual tax of $116,300.
We
also lease 3.66 acres in Saratoga Springs, New York, on which the Ten Springs brewery facilities are located. In 2009, we leased
additional warehouse space and entered into a new lease. The current term of this lease expires on July 2014, with an option to
extend the lease for three successive terms of five years each, provided that the lease is not in default.
Based
on current product mix, the brewery in Ukiah, California has a current annual cellar capacity of approximately 55,000 bbl, and
the brewery at Saratoga Springs, New York currently has an annual cellar capacity of approximately 45,000 bbl. per year. Cellar
capacity can be expanded by addition of tanks of desired size and quantity. We installed additional tanks at both breweries during
early 2012 to increase the cellar capacity by approximately 5,000 barrels at each brewery. The Ukiah and Saratoga Springs breweries
have annual packaging capacity of 100,000 bbl. and 90,000 bbl. respectively on a single shift basis, and each brewery has annual
brewing capacity of 200,000 bbl. (See “Item 1A – Risk Factors – Gross Margins” above.)
ALE
HOUSE
We
have leased a 2,500 square foot building in Ukiah, California where our ale house and merchandise store is located.
MACHINERY
AND EQUIPMENT
We
lease certain equipment and vehicles under capital and operating leases which expire at varying times. Additionally, we lease
equipment and vehicles under various other leases. As these leases expire, it is anticipated that, in accordance with our current
practices, the equipment will be acquired, the vehicles will be surrendered, and we will enter into new vehicle leases.
KBEL
has leased approximately 2,000 square feet of office space in Maidstone, Kent, in England. We do not own or lease any other material
properties in Europe.
We
consider our land, buildings, improvements, and equipment to be well maintained, in good condition, and adequate to meet the operating
demands placed upon them. In the opinion of Management, all of these properties are adequately covered by insurance.
| ITEM 3. |
LEGAL
PROCEEDINGS. |
The
Company is involved from time to time in claims, proceedings and litigation arising in the normal course of business. The Company
believes that, to the extent that any pending or threatened litigation involving the Company or its properties exists, such litigation
will not likely have any material adverse effect on the Company’s financial condition or results of operations.
| ITEM 4. |
MINE
SAFETY DISCLOSURES. |
Not
applicable.
PART
II
ITEM
5.
|
MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
MARKET
INFORMATION
Our
Common Stock is quoted for trading on the OTCQB tier of the OTC Markets under the symbol “MENB”. The market
for our Common Stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade on any national
securities exchange, the only market currently available, to the extent any trading occurs, will continue to be the “bulletin
boards”. It is possible that no active public market with significant liquidity will ever develop. Thus, investors
run the risk of never being able to sell their shares.
The
table below sets forth, for the fiscal quarters indicated, the quoted high and low bid prices for our Common Stock, as reported
on the OTCQB tier of the OTC Markets. The information listed below reflects inter-dealer bids, without retail mark-up,
mark-down, or commission, and may not necessarily represent actual transactions.
| 2012 | |
High | | |
Low | |
| First Quarter | |
$ | 0.23 | | |
$ | 0.13 | |
| Second Quarter | |
$ | 0.17 | | |
$ | 0.15 | |
| Third Quarter | |
$ | 0.25 | | |
$ | 0.16 | |
| Fourth Quarter | |
$ | 0.24 | | |
$ | 0.20 | |
| 2011 | |
High | | |
Low | |
| First Quarter | |
$ | 0.20 | | |
$ | 0.11 | |
| Second Quarter | |
$ | 0.20 | | |
$ | 0.02 | |
| Third Quarter | |
$ | 0.28 | | |
$ | 0.20 | |
| Fourth Quarter | |
$ | 0.29 | | |
$ | 0.02 | |
We
had approximately 2,234 holders of our Common Stock of record as of March 5, 2013.
Dividends
Historically,
we have not paid any dividends. We anticipate that for the foreseeable future, all earnings, if any, will be retained for the
operation and expansion of our business and that we will not pay cash dividends. The payment of dividends, if any, in the future
will be at the discretion of MBC’s Board of Directors, which we refer to in this Annual Report as the Board, and will depend
upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial
condition of the Company and general business conditions. Our credit agreements provide that we may not declare or pay any dividend
or other distribution on our 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 we have significant
bank financing.
The
holders of our 227,600 outstanding shares of Series A Preferred Stock (which are not listed for trading on any market, or to our
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.
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Effective
as of January 1, 2012, the Board adopted an amendment to the directors compensation plan (as amended, the “Amended and Restated
Directors’ Compensation Plan”) with respect to the compensation of Non-Employee (as defined therein) members
of the Board for their services as directors. The Amended and Restated Directors’ Compensation Plan was subsequently approved
by the shareholders. Under the terms of the Amended and Restated Directors’ Compensation Plan, each Non-Employee director
receives a fixed annual retainer of $15,000 as well as additional fees of $1,250 per meeting of the Board and $1,250 per committee
meeting attended. The chairs of the Compensation Committee and the Audit/Finance Committee each receive $4,500 in fees for acting
as chairpersons of such committees. In addition, each Non-Employee Director on January 1 of each calendar year during the five
year period commencing January 1, 2012 and ending December 31, 2016 shall receive an addition $2,000 per year.
Prior
to January 1, 2012, under the terms of the earlier plan (“Directors’ Compensation Plan”), Non-Employee directors
received a fixed annual retainer of $12,000 as well as additional fees of $1,000 per meeting of the Board and $1,000 per committee
meeting attended. The chairs of the Compensation Committee and the Audit/Finance Committee each received $4,000 in fees for acting
as chairpersons of such committees. In addition to the above fixed compensation, each Non-Employee director of MBC serving in
office on January 1st of any applicable year was eligible to receive a discretionary amount of Common Stock, up to an additional
25,000 shares. Determinations as to when such shares were to be issued were based upon MBC’s performance, each director’s
performance for the immediately preceding year, and such factors as determined in the sole discretion of the Board. We last issued
shares under a predecessor of the Directors’ Compensation Plan on September 14, 2011 as compensation for Board service in
2009.
Dr.
Vijay Mallya, Chairman of the Board, receives fixed remuneration as described in “Item 11-Executive Compensation –
Directors’ Compensation for the Year 2012”.
Currently
there are no equity compensation plans, therefore, no equity compensation plan information has been provided in chart form.
RECENT
SALES OF UNREGISTERED SECURITIES
None.
ISSUER
PURCHASE OF EQUITY SECURITIES
None.
| ITEM 6. |
SELECTED
FINANCIAL DATA. |
Not required for smaller
reporting companies.
| ITEM 7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
The
following discussion of our financial condition and results of operations should be read in conjunction with our financial statements
and related notes, and the other financial information included in this Form 10-K. With respect to this discussion, the terms
“Company,” “we,” “us,” and “our” refer to the consolidated operations of Mendocino
Brewing Company, Inc. This discussion and analysis may contain forward-looking statements.
OVERVIEW
Since
our formation in 1983, we have been brewing and selling our craft beers in the United States. Effective upon our acquisition of
UBIUK in 2001, we have produced and distributed Kingfisher Premium Lager in the United States, Europe (primarily the United Kingdom)
and Canada.
Our
operations for fiscal years 2012 and 2011 resulted in income from operations of $935,200 and $492,400, respectively. After providing
for interest, other income and taxes, the net income in 2012 and 2011 was $558,400 and $49,400 respectively. Even though sales
decreased, net income increased in the year 2012, mainly due to a reduction in operating expenses.
RESULTS
OF OPERATIONS
YEAR
ENDED DECEMBER 31, 2012 COMPARED TO YEAR ENDED DECEMBER 31, 2011
The
following table sets forth, for the periods indicated, a comparison of certain items from our Consolidated Statements of Operations:
| | |
2012 | | |
2011 | | |
Increase/
(Decrease) | | |
% Change | |
| Gross sales | |
$ | 40,335,900 | | |
$ | 41,211,100 | | |
$ | (875,200 | ) | |
| (2.1 | )% |
| Excise taxes | |
| 1,091,300 | | |
| 1,057,300 | | |
| 34,000 | | |
| 3.2 | % |
| Net sales | |
| 39,244,600 | | |
| 40,153,800 | | |
| (909,200 | ) | |
| (2.3 | )% |
| Cost of goods sold | |
| 28,442,100 | | |
| 29,276,800 | | |
| (834,700 | ) | |
| (2.9 | )% |
| Gross profit | |
| 10,802,500 | | |
| 10,877,000 | | |
| (74,500 | ) | |
| (0.7 | )% |
| Operating expenses | |
| 9,867,300 | | |
| 10,384,600 | | |
| (517,300 | ) | |
| (5.0 | )% |
| Income from operations | |
| 935,200 | | |
| 492,400 | | |
| 442,800 | | |
| 89.9 | % |
| Interest expense | |
| (450,000 | ) | |
| (470,100 | ) | |
| (20,100 | ) | |
| 4.3 | % |
| Other income | |
| 75,900 | | |
| 34,200 | | |
| 41,700 | | |
| 121.9 | % |
| Income before income taxes | |
| 561,100 | | |
| 56,500 | | |
| 504,600 | | |
| 893.1 | % |
| Provision for income taxes | |
| 2,700 | | |
| 7,100 | | |
| (4,400 | ) | |
| (62.0 | )% |
| Net Income | |
$ | 558,400 | | |
$ | 49,400 | | |
$ | 509,000 | | |
| 1030.4 | % |
NET
SALES
As
used herein, the term “net sales” refers to gross sales less excise taxes. Overall net sales for fiscal year 2012
were $39,244,600, a decrease of $909,200 or 2.3% as compared to $40,153,800 in fiscal year 2011 which we consider to be a minor
year-to-year fluctuation.
NORTH
AMERICAN TERRITORY OPERATIONS: Net sales in the North American Territory totaled $16,228,300 in fiscal year 2012, compared to
$16,138,400 for fiscal year 2011, representing an increase in 2012 of $89,900 or 1%. Sales of beer for fiscal year 2012 increased
by 1,000 barrels to 83,600 barrels, an increase of 1%, as compared to 82,600 barrels in fiscal year 2011. This increase was due
to an increase in sales of contract brands. We continue to solicit opportunities to enter into non-binding contract brewing arrangements
to address the low production capacity utilization rates in our Ukiah and Releta brewing facilities and anticipate that fluctuations
in the availability of such contract brewing arrangements will continue to impact our net sales in the North American Territory.
FOREIGN
TERRITORY OPERATIONS: Net sales in the Foreign Territory totaled $23,016,300 in fiscal year 2012, compared to $24,015,400 during
fiscal year 2011, a decrease of $999,100 or 4%. The decrease was due to lower sales volume partially offset by a higher selling
price. The lower sales volume was caused by a continued decline in the beer market and general economic conditions. We have experienced
reduced sales volume on certain channels which generated low or negative margin mostly due to management action to reduce low
margin sales in channels managed by Shepherd Neame.
Inflation
did not have a significant impact on net sales.
COST
OF GOODS SOLD
Overall
cost of goods sold during fiscal year 2012 was $28,442,100, as compared to $29,276,800 during fiscal year 2011, a decrease of
$834,700, or 2.9%. As a percentage of net sales, costs of goods sold remained between 72% and 73% in fiscal years 2012 and 2011.
Utilization
of our production capacity has a direct impact on cost. Generally, when facilities are operating at higher percentage of production
capacity, cost is favorably affected because fixed and semi-variable operating costs, such as depreciation and production costs,
are spread over a larger volume base. Our production capacity is currently under-utilized. In addition to capacity utilization,
other factors that could affect cost of sales include unanticipated increases in material and shipping costs, the availability
and prices of raw materials and packaging materials, and the availability of contract brewing contracts.
NORTH
AMERICAN TERRITORY OPERATIONS: Cost of goods sold as a percentage of net sales in the North American Territory increased to 76%
during the fiscal years 2012 compared to 75% in 2011 due to a slight increase in price of raw materials.
FOREIGN
TERRITORY OPERATIONS: As a percentage of net sales, cost of goods sold in the United Kingdom during fiscal year 2012 decreased
to 70%, as compared to 72% during fiscal year 2011, mainly due to an increase in sales prices with no corresponding increase in
the purchase cost to us of several products.
GROSS
PROFIT
As
a result of decreased sales offset by decreased cost of goods, gross profit for fiscal year 2012 (expressed in United States dollars)
was $10,802,500, a decrease of $74,500, or 1%, as compared to gross profit of $10,877,000 in fiscal year 2011. As a percentage
of net sales, our overall gross profit during fiscal year 2012 and 2011 remained between 27% and 28%.
OPERATING
EXPENSES
Operating
expenses consist of marketing and distribution expenses, and general and administrative expenses. Operating expenses for fiscal
year 2012 totaled $9,867,300, a decrease of $517,300, or 5%, as compared to $10,384,600 for fiscal year 2011. The decrease is
generally attributable to the restructuring and reduced depreciation expenses in the Foreign Territory, as described below. As
a percentage of net sales, operating expenses decreased to 25% during fiscal year 2012 compared to 26% in fiscal year 2011.
MARKETING
AND DISTRIBUTION EXPENSES: Our marketing and distribution expenses consist of salaries and commissions, advertising costs, product
and sales promotion costs, travel expenses, and retail operating expenses. For fiscal year 2012, such expenses equaled $5,631,000,
a decrease of $272,600 or 5%, as compared to $5,903,600 in fiscal year 2011. As a percentage of net sales, our marketing and distribution
expenses decreased to 14% in fiscal year 2012, as compared to 15% in fiscal year 2011.
NORTH
AMERICAN TERRITORY OPERATIONS: Marketing and distribution expenses for the North American Territory in fiscal year 2012 equaled
$1,754,500, an increase of $56,100, or 3%, as compared to $1,698,400 in marketing and distribution expenses incurred during fiscal
year 2011. Such increase in expenses is mainly due to an increase in the operational expenses of the Company’s Ukiah alehouse
which opened in June 2011. Marketing and distribution expenses remained at 11% of North American Territory net sales during fiscal
years 2012 and 2011.
FOREIGN
TERRITORY OPERATIONS: Marketing and distribution expenses in the Foreign Territory during fiscal year 2012 equaled $3,876,500,
a decrease of $328,700, or 8%, as compared to $4,205,200 during fiscal year 2011. Such decrease is mainly due to (i) a restructuring
of manpower, delays in replacing sales personnel and associated costs, (ii) reductions in sales commissions due to lower commissionable
sales volume and (iii) a decreased marketing agency fee. As a percentage of net sales in the United Kingdom, such expenses decreased
to 17% during 2012 compared to 18% in the year 2011.
GENERAL
AND ADMINISTRATIVE EXPENSES: General and administrative expenses include all expenses not characterized as sales and marketing
expenses. Our general and administrative expenses totaled $4,236,300 for fiscal year 2012, representing a decrease of $244,700,
or 5%, as compared to $4,481,000 for fiscal year 2011. General and administrative expenses equaled 11% of net sales for fiscal
years 2012 and 2011.
NORTH
AMERICAN TERRITORY OPERATIONS: General and administrative expenses for our North American Territory equaled $1,984,600 for fiscal
year 2012, representing an increase of $72,500, or 4%, as compared to $1,912,100 for fiscal year 2011. The increase in general
and administrative expenses was primarily due to an increase in salary and benefits to administrative staff.
FOREIGN
TERRITORY OPERATIONS: General and administrative expenses for our Foreign Territory equaled $2,251,700 in fiscal year 2012, representing
a decrease of $317,200, or 12%, as compared to $2,568,900 for fiscal year 2011 mainly due to reduced depreciation expenses caused
by a reduction in the value of depreciable assets.
OTHER
EXPENSES
Other
expenses, including interest expenses, totaled $374,100 in fiscal year 2012, representing a decrease of $61,800, or 14%, as compared
to $435,900 in fiscal year 2011. Such decrease was partly due to a reduction in interest and increased profit from sale of assets.
INCOME
TAXES
We
incurred an income tax expense of $2,700, related to United States operations, for fiscal year 2012, as compared to expense of
$7,100 for fiscal year 2011.
NET
INCOME
Due
to factors described above, our net income for fiscal year 2012 prior to accounting for foreign currency translation adjustments
was $558,400, an increase of $509,000 as compared to $49,400 for fiscal year 2011. After taking into account a negative foreign
currency translation adjustment of $117,200 for fiscal year 2012, compared to a negative adjustment of $8,100 for fiscal year
2011, our comprehensive income in fiscal year 2012 was $441,200, as compared to $41,300 in fiscal year 2011.
RETAIL
OPERATIONS
We
operate a tasting room and merchandise store where we serve our brews on tap. We also sell various items of apparel and memorabilia
bearing the Company’s trademarks, which creates further awareness of our beers and reinforces our branding. Although sales
revenues from retail operations are not significant ($256,600 in 2012 and $207,700 in 2011), we view them as a marketing opportunity
for our products.
LIQUIDITY
AND CAPITAL RESOURCES
Unused
capacity at our Ukiah and Saratoga Springs facilities has continued to place demands on our working capital. Since we commenced
operations at our Ukiah brewery, proceeds from our operations have not been able to provide us with sufficient working capital.
On
December 31, 2012, we had cash and cash equivalents of $198,500, an accumulated deficit of $13,830,700, and a working capital
deficit of $2,913,000 as the result of prior losses from the operations of UBIUK and KBEL, primarily in the United Kingdom. During
2012, we operated profitably, generating $468,100 in cash flow from operations. In response to the losses incurred in connection
with our international operations, UBHL, our indirect majority shareholder, issued a letter of financial support on KBEL’s
behalf on February 15, 2011, on March 2, 2012 and on March 22, 2013 (each, a “Letter of Support”). Under the
terms of the Letters of Support, UBHL agreed to provide funding to KBEL on an as needed basis to enable KBEL to meet its financial
obligations as they fall due. There is no maximum limit on the amount of funding to be provided by UBHL to KBEL under the terms
of the Letters of Support, however, such funding is subject to compliance with applicable exchange control regulations and other
applicable laws and regulations regarding the transfer of funds from India to the United Kingdom. The Letter of Support dated
March 22, 2013 was issued for a twelve month minimum period. The type of financial support to be provided by UBHL and the
terms of such financial support is not specified in the Letters of Support. Our Management intends to seek UBHL’s consent
to keep the current Letter of Support in force beyond the minimum period, if necessary, or request that UBHL issue a new letter
of support for the period after such minimum period. If UBHL does not agree to keep the Letter of Support in force following the
minimum specified period or is unwilling to meet its obligations under the Letter of Support, it could result in a material adverse
effect on KBEL and UBIUK’s financial condition and thus on our consolidated results of operations and could affect KBEL,
UBIUK’s and potentially our ability to continue operations. Our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman
of the board of directors of UBHL.
Our
Management has taken several actions to enable us to meet our working capital needs through March 31, 2014, including reductions
in discretionary expenditures, optimization of pricing and discounts to increase margins, and the expansion of our business in
new territories. In addition, we continue to seek additional brewing contracts in an effort to utilize a portion of our excess
production capacity. We may also seek additional capital infusions to support our operations.
We
have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (collectively,
“Indebtedness”). Certain of the agreements governing our Indebtedness contain cross-default provisions which may cause
an event of default under one agreement to result in an event of default under a separate agreement. In addition, under certain
of the agreements governing our Indebtedness, a material adverse change in our financial condition may result in an event of default.
In case of an event of default, the agreements provide the lenders with several rights and remedies, including, but not limited
to, acceleration and termination of the facility, implementation of default interest rates, and secured party rights with respect
to the collateral (including the power to sell such collateral). Substantially all of our assets, including the real property
in Ukiah, are pledged as collateral pursuant to the terms of the agreements governing our Indebtedness. If we are in default under
our secured credit facilities, our lenders may seek to satisfy any outstanding obligations through recourse against the applicable
pledged collateral which may include our real property, and fixed and current assets. The loss of any material pledged asset would
likely have a material adverse effect on our financial position and results of operations.
We
are currently making timely payments of principal and interest relating to our Indebtedness as such Indebtedness becomes due,
and anticipate that we will continue to make such timely payments in the immediate future. However, if we fail to maintain any
of the financial covenants under the various agreements governing our Indebtedness, fail to make timely payments of amounts due
under our Indebtedness, or commit any other breach resulting in an event of default, such events of default (including cross-defaults)
could have a material adverse effect on our financial condition. In case of the acceleration and termination of our existing Indebtedness,
we would likely need to obtain replacement financing. If we are unable to obtain such replacement financing, it may result in
a material adverse effect on our financial condition and our ability to continue operations. In addition, remedies available to
secured parties relating to our assets that have been pledged as collateral could have a material adverse effect on our financial
conditions and operations.
We
have significantly revamped our operations in the Foreign Territory including, but not limited to, improvements in organizational
structure, changes in customer pricing policy to increase sales realization, and stricter control on costs and receivables to
improve operational results. We continue to explore new contract brewing opportunities to increase revenue. However, there can
be no assurance that we will be able to increase sales to provide cash for operating activities. Our future working capital requirements
will depend on many factors, including the rates of our revenue growth, our introduction of new products and our expansion of
sales and marketing activities. To the extent our available cash is insufficient to fund our future activities, we may need to
raise additional funds through bank credit arrangements, or public or private equity or debt financings. We may also need to raise
additional funds in the event we determine in the future to acquire businesses or significant assets. We may not be able to obtain
bank credit arrangements or to effect an equity or debt financing on terms acceptable to us or at all.
Cash
Flow Results:
Historically,
we have funded our operations primarily with proceeds from issuances of preferred stock, Common Stock, debt financing, lease financing,
and cash flows from operations.
Net
cash provided by operations was $468,100 and $1,412,600 for 2012 and 2011 respectively. During the year ended December 31, 2012,
the primary factors contributing to our calculation of net cash provided by operating activities were non cash expenses consisting
primarily of depreciation expense of $1,090,000, net decrease in accounts payable and accrued liabilities of $1,223,300 and net
income of $558,400.
During
the year 2012, the value of our inventory increased by $110,900 compared to increase of $42,900 during the year 2011. Fluctuations
in inventory are normal for our operations and industry and are typically not indicators of any material contributing cause. The
decrease in accounts payable for the year 2012 compared to 2011 was attributable to payments made to Shepherd Neame to bring down
amounts owed.
Increases
and decreases in inventories, prepaid accounts, deposits and accrued liabilities over the course of the year are due to normal
operational fluctuations during the year.
Net
cash used in investing activities was $1,490,900 and $1,009,100, respectively, for 2012 and 2011. Such funds were used primarily
for purchases of brewing, production and packaging equipment in the United States and beer dispensing equipment in the Foreign
Territory.
Net
cash provided by financing activities was $928,600 for 2012 compared to net cash used in financing activities of $173,900 in 2011.
During 2012, we utilized the line of credit to purchase equipment in the United States and for working capital in the United Kingdom.
Financing activities also include borrowing on long term debt, debt payments and lease installments.
DESCRIPTION
OF OUR INDEBTEDNESS:
Cole
Taylor Facility
On
June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”) with Cole Taylor. The
Agreement provides a credit facility, with a maturity date of June 23, 2016, of up to $10,000,000 consisting of a $4,119,000 revolving
facility, a $1,934,000 machinery & equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure
line of credit. At the time that a loan or advance is made, the Company may choose, subject to certain contingencies, an interest
rate based on either LIBOR or the Wall Street Journal prime rate as follows: (a) with respect to the revolving facility, either
LIBOR plus a margin of 3.50% or the Wall Street Journal prime rate plus a margin of 1.00%, (b) with respect to the machinery and
equipment term loan or the capital expenditure term loan, either LIBOR plus a margin of 4.25% or the Wall Street Journal prime
rate plus a margin of 1.50%, and (c) with respect to the real estate term loan, either LIBOR plus a margin of 4.75% or the Wall
Street Journal prime rate plus a margin of 2.00%. The Agreement binds us to certain financial covenants including maintaining
prescribed minimum tangible net worth and prescribed minimum fixed charges coverage. There is a prepayment penalty if we prepay
all of our obligations prior to the maturity date. The credit facility is secured by a first priority security interest in all
of MBC’s and Releta’s personal property and a first mortgage on our Ukiah, California property, among other assets
of MBC and Releta. Our obligations under the Agreement are subject to acceleration upon the occurrence of an event of default
under the Agreement.
On March 29, 2013, MBC
and Releta entered into a First Amendment (the “Amendment”) to the Agreement.
The Amendment clarifies
the method by which the fixed charge coverage ratio shall be calculated. To the extent MBC and Releta may have been in breach
of the covenants related to the fixed charge coverage ratio for certain periods, Cole Taylor Bank has agreed in the Amendment
that such breach is waived and that no event of default has occurred by reason of such breach. The Amendment is attached to this
Annual Report as Exhibit 10.112.
Master
Line of Credit. On August 31, 1999, MBC and UBA, one of our principal shareholders, entered into a Master Line of Credit Agreement,
which was subsequently amended in April 2000 and February 2001 (the “Credit Agreement”). The terms of the Credit Agreement
provide us with a line of credit with a principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen
(13) separate advances to us under the Credit Agreement and one additional advance on March 2, 2005 on substantially the same
terms as those under the Credit Agreement, pursuant to a series of individual eighteen-month promissory notes issued by us to
UBA (the “UBA Notes”). UBA has executed an Extension of Term of Notes under Master Line of Credit Agreement (the “Extension
Agreement”). The Extension Agreement confirms UBA’s extension of the terms of the UBA Notes for a period ending on
June 30, 2012 with automatic renewals after such maturity date for successive one year terms, provided that either MBC or UBA
may elect not to extend a term upon written notice given to the other party no more than 60 days and no fewer than 30 days prior
to the expiration of such term. MBC did not receive or deliver a notice of election not to extend the term prior to the expiration
of the period ending June 30, 2012, so the current term has been extended until June 30, 2013.
The
outstanding principal amount of the notes and the unpaid interest thereon may be converted, at UBA’s discretion, into shares
of our unregistered Common Stock at a conversion rate of approximately $1.50 per share for the notes issued pursuant to the Credit
Agreement. On December 28, 2001, we entered into a Confirmation of Waiver with UBA which confirmed that as of August 13, 2001,
UBA waived its rights with regard to all conversion rate protection as set forth in the UBA Notes issued by us up to that date.
In 2011, the principal and interest owed pursuant to the convertible promissory note dated March 2, 2005, which was not covered
by the Confirmation of Waiver, was adjusted to $1.44 per share.
As
of December 31, 2012, the outstanding principal and interest on the UBA Notes was convertible into approximately 2,288,102 shares
of our Common Stock. However, the current market price of our Common Stock is substantially less than the conversion rate, and
it is likely that any conversion would occur at market prices at the time of conversion.
The
UBA Notes require us to make quarterly interest payments to UBA on the first day of April, July, October, and January. To date,
UBA has permitted us to capitalize all accrued interest; therefore, we have borrowed the maximum amount available under the facility.
Upon maturity of any of the UBA Notes, unless UBA has given us prior instructions to commence repayment of the outstanding principal
balance, the outstanding principal and accrued but unpaid interest on such Notes may be converted, at the option of UBA, into
shares of our Common Stock. If UBA does not elect to so convert any UBA Notes upon maturity, it has the option to extend the terms
of the UBA Notes for any period of time mutually agreed upon by UBA and us. During the extended term of the UBA Notes, UBA has
the right to require us to repay the outstanding principal balance, along with the accrued and unpaid interest thereon, to UBA
within sixty (60) days.
The
UBA Notes are subordinated to credit facilities extended to us by Cole Taylor pursuant to subordination agreements executed by
UBA. Per the terms of the subordination agreements, UBA is precluded from demanding repayment of the UBA Notes unless the Cole
Taylor facilities are repaid in full.
During
the fiscal years 2012 and 2011, the greatest aggregate amount of principal outstanding on the UBA Notes was $1,915,400. No principal
or interest was paid during fiscal years 2012 or 2011. As of February 28, 2013, the aggregate
outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately
$1,506,500, for a total amount outstanding of $3,421,900, convertible in to 2,298,159 shares
of our Common Stock. As of February 28, 2013, UBA beneficially owned approximately 24.5% of our outstanding Common Stock
(excluding any shares issuable upon conversion of the UBA Notes). Our Chairman, Dr. Vijay Mallya, is also the Chairman of the
board of directors of UBA.
OTHER
LOANS AND CREDIT FACILITIES
ROYAL
BANK OF SCOTLAND FACILITY: On April 26, 2005, Royal Bank of Scotland Commercial Services Limited (“RBS”) provided
KBEL with an approximately $2.8 million (£1,750,000) maximum revolving line of credit with an advance rate based on 80%
of KBEL’s qualified accounts receivable. This facility has a minimum maturity of twelve months, but will be automatically
extended unless terminated by either party upon six months’ written notice.
SHEPHERD
NEAME LOAN: Shepherd Neame has a contract with KBEL to brew Kingfisher Premium Lager for our European Territory. Shepherd Neame
had advanced a loan of £600,000, or approximately $960,000, to KBEL, which was repaid in annual installments of £60,000,
or approximately $96,000 per year, ending in June 2012. The loan, which is now fully repaid, carried a fixed interest rate of
5% per year. (For more information about this loan see “Item 13. - Certain Relationships and Related Transactions, and Director
Independence — Loan Agreement”.)
WEIGHTED
AVERAGE INTEREST: The weighted average interest rates paid on our debts incurred in connection with the North American Territory
were 4.9% for fiscal year 2012 compared to 5.3% for fiscal year 2011. For loans primarily associated with our Foreign Territory,
the weighted average interest rate paid was 3% for fiscal years 2012 and 2011.
KEG
MANAGEMENT ARRANGEMENT: We entered into a keg management agreement (the “Keg Agreement”) with MicroStar Keg Management
LLC (“MicroStar”) for a five year term effective September 1, 2009. Under this arrangement, MicroStar provides us
with half-barrel kegs for which we pay a filling and use fee. Distributors return empty kegs to MicroStar instead of to us. MicroStar
then supplies us with additional kegs. In case of a change of control of MBC during the term of the Keg Agreement, MicroStar shall
have an option to terminate the Keg Agreement by providing the Company with written notice within 45 days following the effective
date of the change of control. If the Keg Agreement is terminated, MicroStar shall have an option to require the Company to purchase
four (4) times the average monthly quantity of MicroStar kegs delivered to the Company during the six month period preceding the
effective date of the termination of the Keg Agreement. We anticipate financing the purchase of such kegs through debt or lease
financing, if available. However, there can be no assurance that we will be able to finance the purchase of such kegs. Failure
to purchase the necessary kegs from MicroStar upon the termination of the Keg Agreement is likely to have a material adverse effect
on both our business (if we are unable to find a comparable supplier) as well as on our working capital (if we are required to
purchase the kegs upon early termination and are unable to obtain adequate financing).
CURRENT
RATIO: Our ratio of current assets to current liabilities on each of December 31, 2012 and December 31, 2011 was 0.7 to 1.0 and
our ratio of total assets to total liabilities as of those dates was 1.1 to 1.0.
RESTRICTED
NET ASSETS. Our wholly-owned subsidiary, UBIUK, had cumulative losses of approximately $2,339,000 as of December 31, 2012. Under
KBEL’s line of credit agreement with Royal Bank of Scotland, distributions and other payments from our subsidiaries to us
are not permitted if the retained earnings drop below approximately $1,600,000.
RELATED
PARTY TRANSACTIONS: Over the last several years, MBC and our subsidiaries have entered into or amended several agreements with
affiliated and related entities. Among such agreements have been a Brewing Agreement and a Loan Agreement between KBEL and Shepherd
Neame; a Market Development Agreement, a Distribution Agreement, and a Brewing License Agreement between MBC and KBEL; a Distribution
Agreement between UBIUK and KBEL; a Trademark Licensing Agreement between MBC and Kingfisher of America, Inc.; and a License Agreement
between UBIUK and UB Limited. (For more information on these agreements please see “Item 13. — Certain Relationships
and Related Transactions, and Director Independence”.)
OFF-BALANCE
SHEET ARRANGEMENTS
We
are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future
impact on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
CONTRACTUAL
OBLIGATIONS
The
following chart sets forth our contractual obligations as of December 31, 2012.
| |
Payments
due by period | |
| Contractual
Obligations | |
Total | | |
Less
than
1 year | | |
1 - 3
years | | |
3 - 5
years | | |
More than
5 years | |
| Secured line of credit | |
$ | 3,159,700 | | |
$ | 3,159,700 | | |
| - | | |
| - | | |
| - | |
| Long Term Debt Obligations | |
| 4,432,400 | | |
| 450,000 | | |
| 900,000 | | |
| 3,082,400 | | |
| - | |
| Capital Lease Obligations | |
| 3,200 | | |
| 3,200 | | |
| - | | |
| - | | |
| - | |
| Operating Lease Obligations | |
| 668,300 | | |
| 320,400 | | |
| 313,100 | | |
| 34,800 | | |
| - | |
| Purchase Obligations | |
| 2,472,800 | | |
| 2,155,800 | | |
| 252,400 | | |
| 64,600 | | |
| - | |
| Notes to Related Parties | |
| 3,407,000 | | |
| - | | |
| - | | |
| 3,407,000 | | |
| - | |
| Total | |
$ | 14,143,400 | | |
$ | 6,089,100 | | |
$ | 1,465,500 | | |
$ | 6,588,800 | | |
$ | - | |
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations are based on our financial statements, which have
been prepared in accordance with United States generally accepted accounting principles (“GAAP”). The preparation
of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base
our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may
differ from these estimates under different assumptions or conditions. While our significant accounting policies are described
in more detail in Note 1 to our financial statements, we believe the following accounting policies to be critical to the judgments
and estimates used in the preparation of our consolidated financial statements:
Revenue
Recognition. The Company recognizes revenue from the brewing and distribution operations in accordance with Accounting Standards
Codification (“ASC”) 605 of the Financial Accounting Standards Board (“FASB”). The Company recognizes
revenue from product sales, net of discounts.
The
Company recognizes revenue only when all of the following criteria have been met:
| ● | Persuasive
evidence
of
an
arrangement
exists; |
| ● | Delivery
has
occurred
or
services
have
been
rendered; |
| ● | The
fee
for
the
arrangement
is
fixed
or
determinable;
and |
| ● | Collectability
is
reasonably
assured. |
“Persuasive
Evidence of an Arrangement” – The Company documents all terms of an arrangement in a written contract or purchase
order signed by the customer prior to recognizing revenue.
“Delivery
Has Occurred or Services Have Been Performed” – The Company delivers the products prior to recognizing revenue or
performs services as per contractual terms. Product is considered delivered upon delivery to a customer’s designated location
and services are considered performed upon completion of Company’s contractual obligations.
“The
Fee for the Arrangement is Fixed or Determinable” – Prior to recognizing revenue, an amount is either fixed or determinable
under the terms of the written contract. The price is negotiated at the outset of the arrangement and is not subject to refund
or adjustment during the initial term of the arrangement.
“Collectability
is Reasonably Assured” – The Company determines that collectability is reasonably assured prior to recognizing revenue.
Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. The Company does not enter
into arrangements unless collectability is reasonably assured at the outset. Existing customers are subject to ongoing credit
evaluations based on payment history and other factors. If it is determined during the arrangement that collectability is not
reasonably assured, revenue is recognized on a cash basis.
The
Company records certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as
an expense. The Company reports these items on the income statement as a reduction in revenue and as a corresponding reduction
in marketing and selling expenses.
Revenues
from the brewpub and gift store are recognized when sales have been completed.
The
Company has agreements with Shepherd Neame to produce, market and distribute Kingfisher Premium Lager in the United Kingdom. See
Note 10 of the Financial Statements regarding transactions with Shepherd Neame. The Company invoices Shepherd Neame based on an
agreed transfer price per unit, which is subject to revision upon reconciliations based on contractual formulas.
Allowance
for Doubtful Accounts. We use the allowance method to account for uncollectible accounts receivable. Our estimate is based
on historical collection experience and a review of the current status of accounts receivable. We review our accounts receivable
balances by customer for accounts greater than 90 days old and make a determination regarding the collectability of the accounts
based on specific circumstances and the payment history that exists with such customers. We also take into account our prior experience,
the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value
of our receivables. We also review our allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly,
we believe that our allowances for doubtful accounts fairly represent the underlying collectability risks associated with our
accounts receivable.
Inventories.
Inventory consists of raw materials, work in progress, and finished goods. Inventory is stated at the lower of cost or market
using the average-cost method. Cost includes the acquisition cost of raw materials and components, direct labor, and manufacturing
overhead. We periodically review our inventory for excess or quality issues. Should we conclude that we have inventory for which
we cannot recover our costs as a result of such review, we would record a charge to cost of goods sold. We record write downs
for excess and obsolete inventory equal to the difference between the cost of inventory and the estimated fair value based on
assumptions about future product life-cycles, product demand and market conditions. If actual product life cycles, product demand
and market conditions are less favorable than those projected by Management, additional inventory write-downs may be required.
Impairment
of Long-Lived Assets. The Company assesses the impairment of its long-lived assets periodically in accordance with the provisions
of ASC 360-10-50, (Accounting for the Impairment and Disposal of Long-Lived Assets). The Company reviews the carrying value of
property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the
carrying value exceeds the fair value of assets. The factors considered by Management in performing this assessment include current
operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other economic factors.
Long-lived assets that Management commits to sell or abandon are reported at the lower of carrying amount or fair value less cost
to sell.
Foreign
Currency Translation. Financial statements of foreign subsidiaries located in the United Kingdom where the local currency,
the UK Pound Sterling, is the functional currency, are translated into United States dollars using period-end exchange rates for
assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation adjustments
associated with net assets or liabilities are reported as non-owner changes in equity. Any exchange rate gains or losses related
to foreign currency transactions are recognized in the income statement as incurred in the same financial statement caption as
the underlying transaction and are not material for any year shown.
Cash
at UBIUK was translated at exchange rates in effect on December 31, 2012 and 2011, 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.
Income
Taxes. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement bases and the respective
tax bases of the assets and liabilities and operating loss and tax credit carry forwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
as income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized, and have been provided for all periods presented.
The
Company periodically assesses uncertain tax positions that the Company has taken or expects to take on a tax return (including
a decision whether to file or not to file a return in a particular jurisdiction). The Company evaluated its tax positions and
determined that there were no uncertain tax benefits for the years ending December 31, 2012 and 2011.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income requiring new disclosures regarding
reclassification adjustments from accumulated other comprehensive income (“AOCI”). ASU No. 2013-02 requires disclosure
of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement of operations or in the notes.
The standard is effective for fiscal years beginning after December 15, 2012. The Company does not believe that the adoption of
this guidance will have a material impact on the Company’s consolidated financial statements. The Company plans to adopt
this guidance beginning in the first quarter of 2013.
In
July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350) which simplifies the impairment test for
indefinite-lived intangible assets other than goodwill. ASU No. 2012-02 gives the option to first assess qualitative factors to
determine if it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying
amounts as a basis for determining whether it is necessary to perform a quantitative valuation test. ASU No. 2012-02 is effective
for fiscal years and interim periods beginning on or after September 15, 2012. The Company conducted its annual impairment assessment
as of October 1, which included adoption of this guidance. The adoption of this guidance on October 1, 2012 did not have a significant
impact on the Company’s consolidated financial position, results of operations or cash flows.
Other
recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force (“EITF”)), the American
Institute of Certified Public Accountants (“AICPA”), and the Securities and Exchange Commission (“SEC”)
did not or are not believed by Management to have a material impact on the Company’s present or future financial statements.
| ITEM7A. | | QUANTITATIVE
AND
QUALITATIVE
DISCLOSURES
ABOUT
MARKET
RISK. |
Not
required for smaller reporting companies.
| ITEM
8. | | FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA. |
The
information required by this item is set forth on Pages F-1 through F-25 of this Annual Report.
| ITEM
9. | | CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| ITEM
9A. | | CONTROLS
AND PROCEDURES. |
EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES
Our
Management team, under the supervision and with the participation of our Chief Executive Officer (principal executive officer)
and our Chief Financial Officer (principal financial officer), evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined under Rule 13a-15(e) promulgated under the Exchange Act) as of the last day of
the fiscal period covered by this Annual Report, December 31, 2012. The term “disclosure controls and procedures”
means our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to Management, including our principal executive and principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive
Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) concluded that our disclosure
controls and procedures were effective as of December 31, 2012.
Report
of Management on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act as a process designed by, or under the supervision
of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected
by the issuer’s board of directors, Management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes
those policies and procedures that:
| |
● | | pertain
to
the
maintenance
of
records
that,
in
reasonable
detail,
accurately
and
fairly
reflect
the
transactions
and
dispositions
of
the
assets
of
the
issuer; |
| |
| | |
| |
● | | provide
reasonable
assurance
that
transactions
are
recorded
as
necessary
to
permit
the
preparation
of
financial
statements
in
accordance
with
GAAP,
and
that
receipts
and
expenditures
of
the
issuer
are
being
made
only
in
accordance
with
authorizations
of
Management
and
directors
of
the
issuer;
and |
| |
| | |
| |
● | | provide
reasonable
assurance
regarding
the prevention
or timely
detection
of unauthorized
acquisition,
use or
disposition
of the
issuer’s
assets
that could
have a
material
effect
on the
financial
statements. |
Because
of our inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions or that the degree of compliance with existing policies or procedures may deteriorate.
In
accordance with the internal control reporting requirements of the SEC, Management completed an assessment of the adequacy of
our internal control over financial reporting as of December 31, 2012. In making this assessment, Management used the criteria
set forth in Internal Control — Integrated Framework by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) and the SEC’s guide entitled “Sarbanes-Oxley Section 404: A Guide for Small Business”. As
a result of this assessment and based on the criteria in the COSO framework and SEC guidance, Management has concluded that, as
of December 31, 2012, our internal control over financial reporting was effective.
This Annual Report does
not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
We are not required to
provide an attestation report on our internal control over financial reporting because we are not an accelerated filer or a large
accelerated filer.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
were no changes in our internal control over financial reporting that occurred in the year ended December 31, 2012 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| ITEM
9B. | | OTHER
INFORMATION. |
None.
PART
III
| ITEM
10. | | DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
The
following table sets forth the names, ages as of February 28, 2013, and certain information regarding each of our current directors
and executive officers:
| Name |
|
Age |
|
Position(s) |
|
Director
Since** |
| Scott
R. Heldfond *+ |
|
68 |
|
Director |
|
2005 |
| Michael
Laybourn+ |
|
74 |
|
Director |
|
1993 |
| Vijay
Mallya, Ph.D. |
|
57 |
|
Director
and Chairman of the Board |
|
1997 |
| Jerome
G. Merchant* |
|
51 |
|
Director |
|
1997 |
| Mahadevan
Narayanan |
|
55 |
|
Chief
Financial Officer and Secretary |
|
N/A |
| Sury
Rao Palamand, Ph.D. |
|
82 |
|
Director |
|
1998 |
| Kent
D. Price*+ |
|
69 |
|
Director |
|
1998 |
| Yashpal
Singh |
|
67 |
|
Director,
President and Chief Executive Officer |
|
1997 |
| ** |
All
directors are elected by our shareholders at the Annual Meeting to serve until the following Annual Meeting. Currently, there
are no arrangements or understandings between (i) any of the directors and any other person pursuant to which any director
was or is to be selected as a director or (ii) any of the executive officers and any other person pursuant to which any executive
officer was or is to be selected as an executive officer. We have entered into an employment agreement with our Chief Executive
Officer pursuant to which his term of employment has been extended until September 30, 2015. Our Chief Financial Officer does
not have any set date for the expiration of his term of office. |
| |
|
| * |
Member
of the Audit/Finance Committee. |
| |
|
| + |
Member
of the Compensation Committee. |
Mr.
Scott Heldfond joined the Board in January 2005. He was a Director of NASDAQ Insurance Group, LLC, a national insurance brokerage
and consulting firm owned by the NASDAQ Stock Market prior to the firm’s sale to Aon Risk Services in 2009. Mr. Heldfond
currently services as a Director at Aon Risk Services. Mr. Heldfond has also served as the Managing Partner of eSEED Capital,
LLC, a technology-focused merchant banking firm since 1999. He also served as President and Chief Executive Officer of Frank Crystal
& Co. of California, a New York-based insurance brokerage firm from 1995 to 1999, as Chairman of Hales Capital LLC, an investment
banking firm from 1994 to February 1997 and as President of AON Real Estate & Investments. Mr. Heldfond also served as a Director
of HomeGain, Inc. (later sold to Classified Ventures), a private venture backed company and currently serves as a Director of
UBICS Inc., a NASDAQ traded firm that provides information technology staffing and solutions for domestic and international businesses.
Mr. Heldfond also served as a Director of Galoob Toys, which was the third largest toy manufacturer before its sale to Hasbro.
Mr. Heldfond holds an undergraduate degree from the University of California, Berkeley and a J.D. from the University of San Francisco
Law School. He is a Mayoral appointed Commissioner of the Health Services Commission of the City and County of San Francisco.
In addition, he serves as an advisor to or on the board of directors of a number of local, statewide, and national charitable
and community service organizations. Mr. Heldfond is the retired Honorary Consul General to the United States for the Republic
of Rwanda. Mr. Heldfond’s expertise in risk management and insurance matters, in particular, led to his selection as a member
of the Board.
H.
Michael Laybourn, co-founder of the Company, served as the Company’s President from its inception in 1983 through December
1999, and as its Chief Executive Officer from inception through October 1997. Mr. Laybourn was elected as a Director in November
1993 when the Company began the process of converting from a limited partnership to a corporation and served as Chairman of the
Board from June 1994 through October 1997. Mr. Laybourn is a former Vice President of the California Small Brewers Association
and a former Chairman of the board of directors of the Brewers Association of America. Mr. Laybourn holds a Bachelor of Fine Arts
degree from Arizona State University. Mr. Laybourn’s expertise in craft brewing, in particular, led to his selection as
a member of the Board.
Dr.
Vijay Mallya, Ph.D., became Chairman of the Board in October 1997 and was MBC’s Chief Executive Officer until January 2005.
Dr. Mallya is a well known industrialist and the Chairman of UBICS, Inc., United Breweries Limited, United Spirits Limited, Whyte
& Makay Limited, United Breweries (Holdings) Limited (which is the indirect beneficial owner of two of MBC’s largest
shareholders (United Breweries of America, Inc. and Inversiones Mirabel S.A.)), Kingfisher Airlines Limited, UB Engineering Limited,
Mangalore Chemicals and Fertilizers Ltd., and other affiliated companies (collectively the “UB Group”). The UB Group
is comprised of businesses in the following sectors: alcoholic beverages, life sciences, engineering, agrochemicals, information
technology, fertilizers, print media, civil aviation and infrastructure development. United Breweries Limited and United Spirits
Limited are two of Asia’s leading beer and spirits companies. Dr. Mallya is also a keen sportsman and an ardent aviator
and yachtsman. He participates and supports several sporting activities worldwide, including the Force India F1 Formula One Motor
Racing Team, the United East Bengal Football Team and the United Mohun Bagan Football Team. He also sits on the boards and committees
of several foreign companies and organizations including companies comprising the UB Group, The Institute of Economic Studies
(India), the Federation of the Indian Chamber of Commerce and Industries and Motorsports Association of India. Dr. Mallya has
been the recipient of many prestigious awards and accolades, including being nominated to the Global Leaders of Tomorrow by the
World Economic Forum, receiving the Légion d’ Honneur from the Government of France in 2008 and the Outstanding Business
Leader Award from the Associated Chambers of Commerce and Industry of India in 2009. Dr. Mallya was recently elected to serve
as a member of the Upper House of the Indian Parliament for the second time. Dr. Mallya holds a Bachelor of Commerce degree from
the University of Calcutta in India and an honorary Doctorate in Business Administration from California Southern University,
Santa Ana. Dr. Mallya’s knowledge and expertise in the global alcoholic beverage industry were significant in his selection
as a member of the Board as well as his appointment as Chairman.
Jerome
G. Merchant became a director in October 1997 and was Chief Financial Officer of the Company from November 1997 to October 1998.
Mr. Merchant served as the Strategic Planning Consultant to the Chairman’s Office of the Company from July 1996 until January
2007. Mr. Merchant is a Managing Director with Kinetic Advisors, LLC, a boutique mid-market investment advisory company. He has
over 20 years of experience in investment banking and capital raising transactions. Previously, he held executive positions at
McGladrey Capital Markets, Citigroup and MetLife Investors. Mr. Merchant has advised the investment division and clients of Citibank
and Smith Barney, amongst others. In executive and strategic planning capacities, he has advised public and private companies
and institutional and high-net worth investors. Between April 1993 and December 2003, Mr. Merchant served in various senior capacities
for Cal Fed Investments, a wholly owned subsidiary of Cal Fed Bank. Previously, Mr. Merchant directed the west coast capital raising
for a private equity group focused on equity oriented management buyouts and strategic acquisitions. He received his B.S. degree
in Managerial Economics-Finance from the University of California, Davis. Mr. Merchant’s expertise in capital raising and
financial markets contributed to his selection as a member of the Board.
Mahadevan
Narayanan joined the company in 2001 as Secretary and Chief Financial Officer. Before joining the Company, he served the UB Group
(including affiliates of the Company) in India for 17 years as part of the management team in various financial and accounting
capacities. Prior to joining the Company, Mahadevan Narayanan was employed as Senior Manager of Accounting Services of Herbertsons
Ltd. for six years. He holds a Bachelor of Science degree in Mathematics from Madurai Kamaraj University in India and is an Associate
member of the Institute of Chartered Accountants of India.
Sury
Rao Palamand became a director of MBC in January 1998. Dr. Palamand is a director and partner of Summit Products, Inc., a beverage
development and consulting company serving the food and beverage industry. He is also a director and partner in the Historic Lemp
Brewery and is involved in the development of microbreweries and brewpubs, and in the restoration of historic buildings. Dr. Palamand
has over 40 years of experience in the brewing industry and has published numerous scientific and technical papers on beer and
other fermented beverages in various technical journals in the United States and abroad. He is an associate member of the Institute
of Brewing, London and is a member of several brewing organizations in the United States. In addition, Dr. Palamand possesses
technical and technological expertise in wine making as well as in the development of soft drinks. Prior to joining the Company
as a director, Dr. Palamand served as Director of Beer and New Beverage Development at Anheuser-Busch Companies, Inc. Dr. Palamand
holds a Bachelor of Science degree from the University of Mysore, India, a Master of Science degree in Applied Chemistry from
the University of Bombay, India and a Masters degree in Food Microbiology and a Ph.D. degree in Food and Flavor technology from
Ohio State University, Columbus, Ohio. Dr. Palamand is listed in the MARQUIS WHO’S WHO in America and in the WHO’S
WHO in the Midwest. In particular, Mr. Palamand’s technical expertise in fermented beverages was an important criteria in
his selection as a member of the Board.
Kent
D. Price became a director in January 1998. Kent Price is a founder and President of Parker Price Venture Capital. Mr. Price was
a Rhodes Scholar at Oxford University, attended the University of Montana, the University of California, Los Angeles and Harvard
Business School. Mr. Price is a member of the board of directors of the University of Montana and a member of its Investment Committee.
Mr. Price is the chairman of Fluid Inc., a technology enhanced service company that is a leader in the development of eCommerce
sites. Mr. Price has extensive operational experience, including as Chief Executive Officer of The Chloride Group, a global battery
company, Chief Executive Officer of the Bank of San Francisco, General Manager of Banking, Finance and Securities Group at IBM,
Chief Financial Officer at the Bank of New England, Executive Vice President of the Bank of America and a senior officer at Citibank.
He has lived and worked in England, Germany, Ireland, Nigeria, Ivory Coast, Taiwan, Hong Kong, Japan and Singapore as well as
the United States. He has served on various boards of directors of companies based in the UK, India, South Africa, Hong Kong,
Taiwan, China and the United States. Mr. Price currently serves on the board of directors of UBICS (a NASDAQ listed company).
Mr. Price served as a Captain in the United States Air Force. Mr. Price’s banking and financial expertise was important
in his selection as a member of the Board.
Yashpal
Singh became a director of MBC in October 1997 and served as the Company’s Executive Vice President and Chief Operating
Officer beginning in April 1998. Mr. Singh became the Company’s President in January 2000 and its Chief Executive Officer
in January 2005. From May 1997 to March 1998, Mr. Singh served as Executive Vice-President- Operations for UBA, one of MBC’s
major shareholders. Between 1964 and 1990, Mr. Singh served in various capacities including as Head Brewer and Chief Executive
Officer of a large alcoholic beverage corporation in India. Between 1990 and 1997, Mr. Singh also served as Senior Vice President-Operations
for United Breweries Ltd., an Indian Corporation, where he was responsible for the operations of 12 breweries, the establishment
of new green-field projects, and technical and operational evaluations of potential acquisition opportunities worldwide. Mr. Singh
holds a Bachelor’s degree in Science from Punjab University in India, a Diploma in Brewing from the Institute of Brewing
and Distilling in London and has extensive training in the fields of Brewing, Malting, and Mineral Water Technology. Mr. Singh
is an Associate member of the Institute of Brewing, London, a member of the Master Brewers Association of America, and was a former
executive member of the Managing Committee of the All India Brewer’s Association. Mr. Singh has over 47 years of varied
experience in the brewing industry. Mr. Singh’s long standing technical and management expertise in brewing led to his selection
as a member of the Board.
FAMILY
RELATIONSHIPS
There
are no family relationships among any of the directors and executive officers.
INVOLVEMENT
IN CERTAIN LEGAL PROCEEDINGS
None.
SECTION
16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based
solely on our review of the Forms 3, 4 and 5 furnished to us during and with respect to fiscal year 2012, we are not aware of
any untimely filing by a director, officer, or greater than 10% beneficial owner of the reports required by Section 16(a) of the
Exchange Act during our most recent fiscal year.
AUDIT COMMITTEE
We have a separately-designated
standing Audit/Finance Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. Jerome G. Merchant, Scott
R. Heldfond and Kent D. Price serve as the committee members of the Audit/Finance Committee.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined
that Mr. Kent D. Price, a member of our Audit/Finance Committee, is both an independent Director and qualifies as an “audit
committee financial expert” as that term is defined in the Exchange Act, and pursuant to the rules and regulations promulgated
by the SEC.
CODE OF ETHICS
We have adopted a Code
of Ethics that applies to our Chief Executive Officer (principal executive officer), Chief Financial Officer (chief financial
officer), and principal accounting officer. The Code of Ethics is posted on our website at www.mendobrew.com. We intend to disclose
future amendments to certain provisions of our Code of Ethics, or waivers of such provisions granted to executive officers and
directors on our website within four (4) business days following the date of such amendment or waiver. Any person desiring a free
copy of the Code of Ethics should send a written request to our Secretary, Mahadevan Narayanan, at our principal executive office
located at 1601 Airport Road, Ukiah, CA 95482.
DIRECTORS’ NOMINATIONS
There have been no material
changes to the procedures by which shareholders may recommend nominees to the Board.
Corporate Governance
Director Independence
The Board has determined
that the following directors qualify as “independent” in accordance with the published listing requirements of NASDAQ:
Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh is not “independent” because he is
an employee of MBC. Dr. Mallya is not independent since he has received payments in excess of the applicable threshold from the
Company during the last three (3) years. Prior to 2007, Mr. Merchant provided certain consulting services to the Company, however,
given the timing and nature of such services as well as the amount of compensation provided in relation thereto, the Board has
determined that Mr. Merchant meets the criteria for being an “independent director”.
The NASDAQ rules contain
both objective tests and a subjective test for determining who is an “independent director.” The objective tests provide
that a director is not considered independent if he (i) is an employee of the Company (or a parent or subsidiary) (or has been
in the past three (3) years); (ii) has accepted (or a family member has accepted) compensation from the Company in excess of $120,000
during any period of twelve (12) consecutive months within the preceding three (3) year period (subject to certain exceptions);
(iii) has a family member that was employed as an executive officer of the Company (or a parent or subsidiary) during the past
three (3) years; (iv) is (or a family member is) a controlling shareholder or an executive officer of an organization to which
the Company made or received payments in the current year or at any time during the past three (3) years that exceed the greater
of (a) five percent (5%) of the recipient’s consolidated gross revenues or (b) $200,000 for that year; (v) is (or has a
family member who is) employed as an executive officer of another entity where at anytime during the past three (3) years any
of the executive officers of the Company serve on the compensation committee of such other entity; or (vi) is (or has a family
member who is) a current partner of the Company’s outside auditor who worked on the Company’s audit at anytime during
any of the past three (3) years. The subjective test is based on the standard that an independent director must be a person who
lacks a relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
Leadership Structure
Since January 2005, the
Company has separated the roles of Chairman of the Board and Chief Executive Officer. From 1997 until January 2005, Dr. Vijay
Mallya served as both the Chief Executive Officer as well as Chairman of the Board of Directors of MBC. The Board of Directors
believes that the separation of the roles of Chief Executive Officer and Chairman of the Board provides the Company with additional
processes, controls and oversights that facilitate the functioning of the Board of Directors and its decision-making in the best
interests of MBC and its shareholders. In addition, the separation of the roles of Chairman and Chief Executive Officer permit
the holders of such offices to focus on the fundamental duties and specialized nature of the respective office. MBC’s Chairman,
Dr. Vijay Mallya, and the Board of Directors works together with the Chief Executive Officer to develop MBC’s strategic
goals. Dr. Mallya also acts as an international brand ambassador and presides over the Board of Directors meetings at which he
is present. MBC’s Chief Executive Officer, Yashpal Singh, is responsible for the day-to-day oversight of the MBC’s
performance and the brewing operations. Mr. Singh is also responsible for the implementation of MBC’s strategic goals. The
Board of Directors may review its leadership structure from time to time and implement any changes that it deems appropriate to
respond to the needs of the Company.
Risk Oversight
The Audit/Finance Committee
and Compensation Committee play key roles in the Board of Director’s risk oversight function as such committee members are
all Non-Employee Directors. The Committee system provides an independent level of protection with regards to MBC’s decision-making
processes and an additional mechanism for the oversight of MBC’s risk management controls and procedures. The Board of Directors
as a whole will continue to monitor MBC’s general and specific risks and take action to manage such risk as it deems appropriate
or necessary.
Board of Directors’ and Committee
Meetings
During the fiscal year
ended December 31, 2012, the Board of Directors held one meeting, the Audit/Finance Committee held four meetings and the Compensation
Committee held one meeting. No director attended fewer than 75% of the aggregate of the total number of meetings of the Board
of Directors and any committees of which such Director was a member.
Listed below are the committees
of the Board of Directors, along with the names of the Directors who served as members of each committee during 2012.
Audit/Finance Committee.
The Board of Directors has a standing Audit/Finance Committee.
Messrs. Merchant, Price,
and Heldfond serve as the members of the Audit/Finance Committee (established in accordance with Section 3(a)(58)(A) of the Exchange
Act). This committee met four times during fiscal year 2012. The Audit/Finance Committee reviews, acts on, and reports to the
Board of Directors with respect to various auditing, accounting and finance matters, including the selection of the Company’s
auditors, the scope of the annual audits, the fees to be paid to the auditors, the performance of the Company’s auditors,
and the accounting practices of the Company. In the judgment of MBC’s Board of Directors, the members of the Committee are
“independent,” as that term is defined in Rule 5605(a)(2) of the NASDAQ Listing Rules and also meet the additional
criteria for independence of Audit Committee members set forth in Rule 10A-3(b)(1) under the Exchange Act.
Nominating Committee.
Due to its limited size, the Board of Directors does not have a nominating committee or a committee performing similar functions.
Instead, all of the Directors participate in the director nomination process. A few of MBC’s Directors may not meet the
criteria to qualify as “independent” under the rules of NASDAQ or under the applicable rules of the other national
securities exchanges.
Compensation Committee.
Messrs. Heldfond (Chair), Price, and Laybourn served on MBC’s Compensation Committee for the fiscal year ended December
31, 2012. The Compensation Committee considers all matters of compensation with respect to the chief executive officer, president,
any vice president, and any other senior executive, and makes recommendations to the Board of Directors regarding the compensation
of such persons. The Compensation Committee also makes determinations with respect to the granting of stock awards to directors
who are also employees of MBC. The Compensation Committee Chair held two meetings during the year 2012.
| ITEM
11. | | EXECUTIVE
COMPENSATION. |
SUMMARY COMPENSATION TABLE
The following table sets
forth the annual compensation of our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal
financial officer), who are the only MBC employees whose total compensation exceeded $100,000 during the fiscal year ended December
31, 2012.
Neither of these executive officers has been
issued equity shares or stock options as compensation to date.
Name and Principal
Position |
|
|
Year |
|
|
|
Salary ($) |
|
|
|
Bonus ($) |
|
|
|
Stock
Awards
($) |
|
|
|
Option Awards ($) |
|
|
|
Non-Equity Incentive Plan Compensation ($) |
|
|
|
Nonqualified Deferred Compensation Earnings ($) |
|
|
|
All Other Compensation ($)* |
|
|
|
Total ($) |
|
| (a) |
|
|
(b) |
|
|
|
(c) |
|
|
|
(d) |
|
|
|
(e) |
|
|
|
(f) |
|
|
|
(g) |
|
|
|
(h) |
|
|
|
(i) |
|
|
|
(j) |
|
Yashpal Singh
President and Chief Executive Officer |
|
|
2012 |
|
|
|
304,000 |
|
|
|
27,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
17,000 |
|
|
|
348,500 |
|
|
|
|
2011 |
|
|
|
264,400 |
|
|
|
26,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
19,500 |
|
|
|
310,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mahadevan Narayanan
Chief Financial Officer and Corporate Secretary |
|
|
2012 |
|
|
|
181,100 |
|
|
|
16,500 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,400 |
|
|
|
220,000 |
|
| |
|
|
2011 |
|
|
|
157,500 |
|
|
|
15,900 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
22,200 |
|
|
|
195,500 |
|
| * | | Other
compensation
includes
use
of
company
vehicle,
health
care
reimbursement
for
the
executive
and
his
immediate
family
and
vacation
reimbursement. |
Compensation Narrative
The Compensation Committee
of the Board determines and administers the compensation for our executive officers. The Compensation Committee reviews and determines
all components of the executive officers’ compensation, including making individual compensation decisions and reviewing
and revising compensation guidelines as appropriate. The Compensation Committee also consults with the Chief Executive Officer
regarding revisions to the compensation of the Chief Financial Officer and other non-executive employees, as appropriate.
We have entered into an
Employment Agreement with our Chief Executive Officer that sets forth the terms of his employment and provides for certain benefits.
The term of the agreement was extended to September 30, 2015. We do not currently have an employment agreement in place with our
Chief Financial Officer. We do not have any severance payment arrangements other than with the Chief Executive Officer. We have
agreed to reimburse travel expenses for the Chief Executive Officer and his family to return to their home country upon the termination
of the Chief Executive Officer’s employment with us. In addition, if the Chief Executive Officer is terminated either with
or without cause without 12 months’ notice, he is entitled to be paid an amount equal to twelve months of his base salary.
We do not have any payment arrangements that would be triggered by a “change in control” of MBC.
Total compensation for
the Chief Executive Officer and Chief Financial Officer consists of base salary, annual cash bonus payments, health benefits for
the executive officer and his immediate dependent family members, use of company vehicle, vacation reimbursement and, with respect
to the Chief Executive Officer only, life insurance.
Elements of Compensation
MBC
selected elements of compensation to provide incentives for its executive officers to relocate to the United States from India.
In so doing, MBC reviewed the compensation packages of its executive officers at their prior positions in India, so that comparable
packages could be provided.
Base Salary
The Compensation Committee
establishes executive officers’ base salaries on an annual basis. Given our stock performance and financial situation, there
is currently no salary component directly tied to our stock price or to our financial performance. Effective as of January 1,
2012, the Compensation Committee increased the annual base salary of the Chief Executive Officer and the Chief Financial Officer
to $304,000 and $181,100 respectively.
Annual Cash Bonus
The compensation packages
for the Chief Executive Officer and the Chief Financial Officer also contain a component providing for payment of annual cash
bonuses. Given MBC’s past working capital constraints, the Compensation Committee historically determined that a percentage
of the cash compensation of the executive officers would be in the form of annual cash bonuses that could be disbursed following
the completion of the applicable fiscal year. In the past few years. approximately 10% of the cash compensation paid to each of
the Chief Executive Officer and the Chief Financial Officer was paid in the form of a bonus rather than as salary.
Perquisites and Personal
Benefit
In addition to salary
and annual bonus, the total compensation of our Chief Executive Officer and Chief Financial Officer includes perquisites and personal
benefits. The types of perquisites and personal benefits awarded to such officers were determined when each such officer commenced
employment with us and are substantially of the same nature as the perquisites provided to such executive officer by previous
employers. The perquisites available to the executive officers consist of: use of company vehicles, health care reimbursement
for the executive officer and his immediate family, reimbursement of certain specified vacation expenses and life insurance.
Equity Plans
We do not currently maintain
any equity compensation plans for or provide any form of equity compensation to our executive officers.
Retirement Plans
On August 27, 2009, we
entered into a certain Separation and Severance Agreement (the “Agreement”) with Mr. Yashpal Singh, our President
and Chief Executive Officer.
Pursuant to the terms
of the Agreement, upon Mr. Singh’s (i) termination of employment for Good Reason (as defined in the Agreement), (ii) termination
of employment at the end of the employment term, (iii) death, (iv) disability or (v) termination by us without Cause (as defined
in the Agreement), he shall be entitled to certain severance benefits and payments. The severance payment shall equal the product
of (x) 2.5 times his average monthly base salary (calculated over the twelve (12) month period preceding the termination event),
multiplied by (y) the number of years (on a pro rated basis) he had been employed by the us at the Termination Date (as defined
in the Agreement); provided, however, that the severance payment may not exceed thirty (30) months of Mr. Singh’s average
monthly base salary (calculated over the twelve (12) months preceding his termination date). In addition, we agreed to pay COBRA
premiums for Mr. Singh and his spouse until the earlier of (i) the effective date on which he obtains comparable health insurance
from a subsequent employer or (ii) eighteen (18) months following his Termination Date. Mr. Singh shall also be entitled to accrued
salary, vacation time and benefits as set forth in Mr. Singh’s employment agreement.
If Mr. Singh’s employment
is terminated without Cause, in addition to the severance payment described above, he shall also receive either (i) 365 days prior
written notice or (ii) a lump sum payment equal to twelve (12) months of his base salary at the rate in place at the Termination
Date (the “Notice Payment”).
In case of Mr. Singh’s
resignation without Good Reason, he shall be entitled to accrued salary, vacation time and benefits set forth in his employment
agreement but shall not be entitled to the severance payment or the Notice Payment.
If Mr. Singh is terminated
by us for Cause, he shall be entitled to (i) accrued salary, vacation time and benefits as set forth in his employment agreement
and (ii) if we do not provide Mr. Singh at least twelve (12) months prior notice, the Notice Payment. Mr. Singh shall not be entitled
to the severance payment in case of termination by MBC for Cause.
Payments due to Mr. Singh
under the Severance Agreement shall be paid in equal installments by the Company over a 20 month period. The receipt of payments
is contingent on Mr. Singh executing a release of claims for the benefit of the Company.
For purposes of illustrating
the potential amounts payable to Mr. Singh under the Severance Agreement, assuming a termination date of December 31, 2012, Mr.
Singh would have received the following approximate amounts of compensation for the applicable triggering event: termination by
the Company for Cause - $304,000; completion of term of Employment Agreement - $760,100 plus COBRA payments; termination due to
disability or death - $760,100 plus COBRA payments; termination by Mr. Singh for Good Reason - $760,100 plus COBRA payments; or
termination by the Company without Cause - $1,064,100 plus COBRA payments.
Except for the Employment
Agreement and Severance Agreement with Mr. Singh, MBC does not currently maintain any other retirement plans nor provide any post-retirement
benefits to any employee or executive officer.
The Company does not currently
have an employment agreement in place with its Chief Financial Officer, but may enter into an employment agreement with such executive
officer in the future.
DIRECTORS’ COMPENSATION FOR THE YEAR
2012
Dr. Vijay Mallya, Chairman
of the Board, is paid $120,000 per year by MBC for services rendered as Chairman, and £89,600 per year (approximately $143,700
in United States dollars at the average exchange rate for the year 2012) by UBIUK for promoting our products in the Foreign Territory
outside the United Kingdom.
Effective as of January
1, 2012, the Board adopted an amendment to the directors compensation plan (as amended, the “Amended and Restated Directors’
Compensation Plan”) with respect to the compensation of Non-Employee (as defined therein) members of the Board for their
services as directors. The Amended and Restated Directors’ Compensation Plan was subsequently approved by the shareholders
in January 2013. Under the terms of the Amended and Restated Directors’ Compensation Plan, each Non-Employee director receives
a fixed annual retainer of $15,000 as well as additional fees of $1,250 per meeting of the Board and $1,250 per committee meeting
attended. The chairs of the Compensation Committee and the Audit/Finance Committee each receive $4,500 in fees for acting as chairpersons
of such committees. In addition, each Non-Employee Director on January 1 of each calendar year during the five year period commencing
January 1, 2012 and ending December 31, 2016 shall receive an addition $2,000 per year.
| Name |
|
Fees
Earned
or Paid
in Cash
($) |
|
|
Stock
Awards
($) |
|
|
Option
Awards
($) |
|
|
Non Equity Incentive Plan Compensation ($) |
|
|
Nonqualified Deferred Compensation Earnings ($) |
|
|
All Other Compensation ($) |
|
|
Total
($) |
|
| (a) |
|
(b) |
|
|
(c) |
|
|
(d) |
|
|
(e) |
|
|
(f) |
|
|
(g) |
|
|
(h) |
|
| Dr. Vijay Mallya |
|
263,700 |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
263,700 |
|
| Kent Price |
|
27,750 |
* |
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
27,750 |
|
| Sury Rao Palamand |
|
17,000 |
+ |
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
17,000 |
|
| Jerome Merchant |
|
23,250 |
# |
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
23,250 |
|
| Scott Heldfond |
|
29,000 |
## |
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
29,000 |
|
| Michael Laybourn |
|
17,000 |
^ |
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
17,000 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| * |
Fee for attending one Board meeting and four committee meetings calculated
at $1,250 per meeting, $15,000 fixed annual retainer, $2,000 additional fixed retainer and $4,500 for acting as Chairman of
Audit Committee. $6,750 of such fee was paid in the first quarter of 2013. |
| + |
Fixed annual retainer of $15,000 and $2,000 additional fixed retainer. $5,000
of such fee was paid in the first quarter of 2013. |
| |
|
| # |
Fee for attending one Board meeting
and four committee meetings calculated at $1,250 per meeting, $15,000 fixed annual retainer and $2,000 additional fixed
retainer. $6,250 of such fee was paid in the first quarter of 2013.
|
| |
|
| ## |
Fee for attending one Board meeting and five committee meetings calculated
at $1,250 per meeting, $15,000 fixed annual retainer, $2,000 additional fixed retainer and $4,500 for acting as Chairman of
Compensation Committee. $7,000 of such fee was paid in the first quarter of 2013. |
| |
|
| ^ |
Fixed annual retainer of $15,000 and $2,000 additional fixed retainer. $5,000
of such fee was paid in the first quarter of 2013. |
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
Messrs. Heldfond (Chair), Price and Laybourn
served on MBC’s Compensation Committee for the fiscal year ended December 31, 2012. Mr. Laybourn served as MBC’s President
from inception in 1983 through December 1999 and its Chief Executive Officer from inception until October 1997. No member of the
Compensation Committee or executive officer of the Company has a relationship that would constitute an interlocking relationship
with executive officers or directors of another entity.
Compensation
Committee REPORT
The Compensation
Committee has reviewed and discussed with Management the Compensation Discussion and Analysis contained in this Annual Report
on Form 10-K. Based on the Compensation Committee’s review of and discussions with Management with respect to the Compensation
Discussion and Analysis, our Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be
included in MBC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
The Compensation Committee
Scott R. Heldfond (Chair)
Kent D. Price
Michael Laybourn
| ITEM
12. | | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS. |
Information regarding Securities
Authorized for Issuance under Equity Compensation Plans is provided in Item 5 above.
The following table sets forth certain information
known to the Company regarding the beneficial ownership of MBC’s Common Stock and Series A Preferred Stock as of February
28, 2013, for each shareholder known by us to own beneficially 5% or more of the outstanding shares of our Common Stock or Series
A Preferred Stock:
| Security Ownership of Certain Beneficial Owners |
| Name
and Address | |
Amount
and
Nature of
Beneficial
Ownership (1) | | |
Percent
of
Class | |
| COMMON STOCK | |
| | | |
| | |
United Breweries of America, Inc.
1050 Bridgeway,
Sausalito, CA 94965 | |
| 3,087,818 | (2) | |
| 24.5 | % |
Inversiones Mirabel S.A.
Hong Kong Bank Building
6th Floor,
Samuel Lewis Avenue
P O Box 6-4298, El Dorado
Panama City, Panama | |
| 5,500,000 | | |
| 43.6 | % |
United Breweries (Holdings) Limited.
100/1, Richmond Road,
Bangalore
- 560 025, India | |
| 8,587,818
| (2),(3) | |
| 68.1 | % |
Vijay Mallya
United Breweries of America, Inc.
1050 Bridgeway,
Sausalito, CA 94965 | |
| 8,587,818
| (4
) | |
| 68.1 | % |
(1) Applicable percentages
of ownership are based on 12,611,133 shares of Common Stock outstanding as of February 28, 2013.
(2) Does not include 2,298,159
shares issuable to UBA upon conversion of certain convertible notes issued by MBC to UBA under a Master Line of Credit Agreement
(For additional information, see “Item 13. Certain Relationships and Related Transactions”). UBHL is the ultimate
beneficiary of substantially all of the shares owned by both UBA and Inversiones.
(3) Includes all shares
held by our two largest shareholders, UBA and Inversiones. UBHL is the beneficial owner of UBA and Inversiones because they are
both controlled by Rigby International Corp., a company registered in the British Virgin Island, with primary offices at Vanterpool
Plaza, 2nd Floor, Wickhams Cay I, Road Town, Tortola, British Virgin Island 2 and a mailing address c/o CAS SA, 12-14 Avenue,
Riverdil, CH-1260, Lyon, Switzerland, (“Rigby”). Rigby is a wholly-owned subsidiary of UBHL.
(4) Includes all shares
indirectly held by UBHL. Does not include 2,298,159 shares issuable to UBA upon conversion of certain convertible notes issued
by MBC to UBA described in footnote (2) above. Dr. Mallya disclaims beneficial ownership of the reported securities except to
the extent of his pecuniary interest therein.
The following table sets
forth certain information known to the Company regarding the beneficial ownership of MBC’s Common Stock and Series A Preferred
Stock as of February 28, 2013, for each director, each executive officer, and all directors and executive officers of MBC as a
group. Except as otherwise noted, we believe that the beneficial owners of the Common Stock and Series A Preferred Stock listed
below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject
to community property laws where applicable.
| Security Ownership
of Management |
| COMMON STOCK |
|
|
Amount and
Nature
of Beneficial
Ownership |
|
|
|
Percent
of
Class (1) |
|
| Vijay Mallya |
|
|
8,587,818 |
(2) |
|
|
68.1 |
% |
| H. Michael Laybourn |
|
|
492,221 |
|
|
|
3.9 |
% |
| Kent D. Price |
|
|
428,401 |
|
|
|
3.4 |
% |
| Sury Rao Palamand (3) |
|
|
332,110 |
|
|
|
2.6 |
% |
| Jerome G. Merchant |
|
|
290,530 |
|
|
|
2.3 |
% |
| Yashpal Singh |
|
|
— |
|
|
|
— |
|
| Scott R. Heldfond |
|
|
257,275 |
|
|
|
2.0 |
% |
| Mahadevan Narayanan |
|
|
— |
|
|
|
— |
|
| All Directors and executive officers as a group (8 persons) |
|
|
10,388,355 |
|
|
|
82.4 |
% |
| |
|
|
|
|
|
|
|
|
| SERIES A PREFERRED STOCK |
|
|
|
|
|
|
|
|
| H. Michael Laybourn |
|
|
6,100 |
|
|
|
2.7 |
% |
| All Directors and executive officers as a group (8 persons) |
|
|
6,100 |
|
|
|
2.7 |
% |
*Amount represents less than 1% of the outstanding securities of
the class.
(1) Applicable percentages
of ownership are based on (i) 12,611,133 shares of Common Stock outstanding as of December 31, 2012 and (ii) 227,600 shares of
Series A Preferred Stock outstanding as of February 28, 2013.
(2) Includes all shares
indirectly held by UBHL. Does not include 2,298,159 shares issuable to UBA upon conversion of certain convertible notes issued
by MBC to UBA described in footnote (2) of Table 1 above. Dr. Mallya disclaims beneficial ownership of the reported securities
except to the extent of his pecuniary interest therein.
(3) Shares are held by
a revocable trust for the benefit of Mr. Palamand’s immediate family and lineal descendants. Mr. Palamand serves as the
trustee of the trust.
CHANGES IN CONTROL
There are no arrangements
currently known to us which may result in a change in control of our Company at a future date.
| ITEM
13. | | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE. |
During fiscal year 2012,
we were a participant in the following transactions in which (i) the amount involved exceeded the lesser of (A) $120,000, or (B)
one percent of the average of our total assets at year end for the last two completed fiscal years and (ii) a related person had
or will have a direct or indirect material interest:
UBA Line of Credit
On August 31, 1999, MBC
and UBA, one of our principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in
April 2000 and February 2001 (the “Credit Agreement”). The terms of the Credit Agreement provide us with a line of
credit in a principal amount of up to $1,600,000. We have executed an Extension of Term of Notes under the Master Line of Credit
Agreement (the “Extension Agreement”) with UBA. The UBA Notes have been extended until June 2012 with automatic renewals
after such maturity date for successive one year terms, provided that either the Company or UBA may elect not to extend the term
upon written notice given to the other party no more than 60 days and no fewer than 30 days prior to the expiration of such term.
No notice of election not to extend the term was received prior to the expiration of the period ending June 30, 2012, so the current
term has been extended until June 30, 2013.
We have issued thirteen
(13) promissory notes to UBA pursuant to the Credit Agreement between the Company and UBA and one note on substantially similar
terms to UBA, but unrelated to the Credit Agreement, between September 1999 and March 2005. On December 28, 2001, we entered into
a Confirmation of Waiver with UBA which confirmed that as of August 13, 2001, UBA waived its rights with regard to the conversion
rate protection set forth in the UBA Notes then outstanding. Such waiver does not apply to the single note issued to UBA that
was not related to the Credit Agreement on March 2, 2005. The aggregate outstanding principal amount of the UBA Notes as of December
31, 2012 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,491,600, for a total amount
due of $3,407,000.
The outstanding principal
amount of the notes and the unpaid interest thereon may be converted, at UBA’s discretion, into shares of our unregistered
Common Stock at a conversion rate of $1.50 per share for the notes issued pursuant to the Credit Agreement and $1.44 for the note
issued on March 2, 2005. As of December 31, 2012, the outstanding principal and interest on the UBA Notes was convertible into
2,288,102 shares of our Common Stock.
As of February 28, 2013,
the aggregate outstanding principal amount of the UBA Notes was $1,915,400, and the accrued but unpaid interest thereon was equal
to approximately $1,506,500. As of February 28, 2013, the entire amount of the outstanding principal and accrued but unpaid interest
owed with respect to the UBA Notes was convertible into 2,298,159 shares of our Common Stock. As of February 28, 2013, UBA beneficially
owns approximately 24.5% of our outstanding Common Stock (excluding any shares issuable upon the conversion of the notes issued
to UBA). Our Chairman, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBA. During each of fiscal years 2012
and 2011, the largest aggregate amount of principal outstanding was $1,915,400. No principal or interest was paid during fiscal
year 2012 or 2011.
License Agreement
In July 2001, we entered
into a Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., a Delaware corporation affiliated
with UB Limited, pursuant to which we obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name
in connection with the brewing and distribution of beer in the United States. This agreement will remain in effect for as long
as the Distribution Agreement (described below) between UBIUK and KBEL remains in effect. The Distribution Agreement is scheduled
to expire in October 2018 but, pursuant to its amended terms, will no longer provide brewing and distribution rights in the United
States. The Company plans to negotiate arrangements to continue to brew and distribute beer using the Kingfisher trademark. If
the Company cannot obtain the right to brew and distribute beer using the Kingfisher trademark on commercially reasonable terms,
our results of operations, cash flows and financial position may be materially adversely affected.
Because our Chairman of
the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UB Limited, the transactions represented by this
license agreement may be deemed to be related party transactions.
The dollar value of the
license agreement cannot be accurately estimated.
Shepherd Neame, Ltd.
As described more fully
below, our principal European subsidiary, KBEL, is a party to a Brewing Agreement and a Loan Agreement with Shepherd Neame. Shepherd
Neame and the Company may be deemed to be related parties with respect to the Brewing Agreement and the Loan Agreement because
Mr. R.H.B. Neame (the Chairman of the board of directors of Shepherd Neame) was also our director at the time when the Brewing
Agreement and the Loan Agreement were entered into and when the Brewing Agreement was subsequently amended. Further, Mr. David
Townshend (a senior Shepherd Neame employee) was serving as the President of KBEL (pursuant to an agreement between KBEL and Shepherd
Neame) and was also our director at the time when the Brewing Agreement and the Loan Agreement were entered into and when the
Brewing Agreement was subsequently amended.
Brewing Agreement
On October 9, 1998, UBIUK
and KBEL originally entered into a Brewing Agreement with Shepherd Neame, and on October 24, 2001, this agreement was amended
by a Supplemental Agreement (together, the “Brewing Agreement”).
The Brewing Agreement,
which was entered into (and amended) in conjunction with the Loan Agreement described below, grants to Shepherd Neame the exclusive
right to brew, keg, bottle, can, label, and package all beers and related products sold under the Kingfisher trademark in the
United Kingdom, and distribute such products elsewhere in the Foreign Territory. UBIUK and KBEL further agreed that they would
require any other distributor of such products (subject to applicable laws and regulations) to obtain such products directly from
a company related to UBIUK or our subsidiaries and to refrain from seeking customers, or establishing a distribution network for
such products, in the United Kingdom. In exchange, Shepherd Neame agreed to brew and/or supply Kingfisher Premium Lager and related
products to KBEL for destinations within (and, with the consent of Shepherd Neame, outside) the United Kingdom. The price KBEL
pays to Shepherd Neame for brewing Kingfisher Premium Lager for distribution in the United Kingdom is set by a formula which varies
according to the applicable duty on Kingfisher Premium Lager and other factors. Purchases from Shepherd Neame by KBEL equaled
approximately $16,192,200 and $17,310,000 during the years 2012 and 2011 at the average exchange rate in effect during 2012 and
2011 respectively. Our Brewing Agreement with Shepherd Neame expires in October 2013.
The dollar value of the
Brewing Agreement cannot be accurately estimated.
Loan Agreement
Concurrently with the
Brewing Agreement described above, KBEL and Shepherd Neame entered into a Loan Agreement, under which on or about October 24,
2001, Shepherd Neame advanced to KBEL £600,000 (the full amount available under the Loan Agreement), at a fixed interest
rate of 5%, for general corporate purposes. This loan was paid in ten annual installments of £60,000 each, commencing on
June 30, 2003 and ending on June 2012, and is now fully paid. The aggregate amount of principal paid during each of 2012 and 2011
was £60,000 in each year, or $95,100 and $96,300 at the annual average exchange rate during 2012 and 2011, respectively.
The largest amount of principal outstanding was £60,000, or $95,100 at the average annual exchange rate, in fiscal year
2012, and £120,000, or $192,500 at the average annual exchange rate, in fiscal year 2011. The interest paid on such loan
was $2,400 in 2012 and $7,200 in 2011.
Distribution Agreement
UBIUK entered into a Distribution
Agreement with its wholly-owned subsidiary KBEL on October 9, 1998. Under this agreement, which was subsequently amended by a
Supplemental Agreement dated as of October 24, 2001 and a deed of variation dated March 11, 2013 and effective October 9, 2013
(together, the “Distribution Agreement”), UBIUK granted KBEL an exclusive sublicense for the distribution of all lager
and other beer products brewed or prepared for sale in the United States and the Foreign Territory, and a sublicense to use the
Kingfisher trademark and trade name, to manufacture, package, market, distribute, and sell beer and other products using the Kingfisher
trademark and logo, and to enter into a Brewing License Agreement described below. The Distribution Agreement, which also requires
KBEL to pay UBIUK a royalty fee of 50 British pence (approximately $0.80 at the average exchange rates in effect during fiscal
year 2012) for every 100 liters (26 gallons) of beer brewed for sale in the Foreign Territory, will expire, with respect to the
Foreign Territory sublicense, in October 2018. The sublicense with respect to the United States expires in October 2013. The royalty
due to UBIUK for the year 2012 was approximately $61,700 and for the year 2011 was approximately $67,500.
Brewing License Agreement
Effective October 26,
2001, MBC entered into a Brewing License Agreement with KBEL, under the terms of which KBEL granted us an exclusive license to
brew and distribute Kingfisher Premium Lager, in exchange for a royalty, payable to KBEL, of eighty cents ($0.80) for each case
of Kingfisher Premium Lager sold by us under this agreement. The Brewing License Agreement expires pursuant to its terms in October
2018. Prior to October 9, 2013, the Brewing License Agreement covers the United States. Pursuant to a deed of variation, after
October 9, 2013, the territories covered by the Brewing License Agreement are Canada and the Caribbean Islands. MBC plans to make
arrangements to continue to brew and distribute Kingfisher Premium Lager in the United States after October 9, 2013. If MBC cannot
make such arrangements on commercially reasonable terms, our results of operations, cash flows and financial position may be materially
adversely affected. The royalty due to KBEL pursuant to the Brewing License Agreement for the year 2012 was approximately $134,000
and for the year 2011 was approximately $124,700.
Market Development Agreement
Concurrently with the
Brewing Licenses Agreement described above, MBC and KBEL entered into a Market Development, General and Administrative Services
Agreement (the “Market Development Agreement”), under the terms of which KBEL engaged MBC to perform a variety of
advertising, promotional, and other market development activities in the United States in connection with Kingfisher beer and
related consumer products (the “Products”), provide certain legal and business management support services to KBEL,
and provide assistance with the establishment and management of distribution channels for the Products in the United States. In
consideration for the services received under this agreement, KBEL agreed to pay service fees to MBC amounting in the aggregate
to $1,500,000 over the period from 2001 through 2003. Such payments have been made in full and no additional payments are anticipated
to be made in the future. The Market Development Agreement expires pursuant to its terms in 2013.
MBC’s two largest shareholders are UBA,
which owns 24.5% of MBC’s Common Stock, and Inversiones, which owns 43.6% of MBC’s Common Stock. UBHL is the ultimate
beneficial owner of UBA and Inversiones because both UBA and Inversiones are controlled by Rigby International Corp, a wholly-owned
subsidiary of UBHL.
DIRECTOR INDEPENDENCE
The Board has determined
that the following directors qualify as “independent” in accordance with the published listing requirements of NASDAQ:
Mr. Heldfond, Mr. Laybourn, Mr. Palamand, Mr. Merchant and Mr. Price. Mr. Singh is not “independent” because he is
our employee. Dr. Mallya is not independent since he has received payments in excess of $100,000 from us during a consecutive
twelve (12) months within the preceding three (3) year period.
The NASDAQ rules have
both objective tests and a subjective test for determining who is an “independent director”. The objective tests provide
that a director is not considered independent if he (i) is an employee of the Company (or has been in the past three (3) years);
(ii) has accepted (or a family member has accepted) compensation from the Company in excess of $100,000 during any twelve (12)
consecutive months within the preceding three (3) year period (subject to certain exceptions); (iii) has a family member that
was employed as an executive officer of the Company during the past three (3) years; (iv) is (or a family member is) a controlling
shareholder or an executive officer of an organization to which we made or received payments that exceed the greater of (a) five
percent (5%) of the recipient’s consolidated gross revenues for that year or (b) $200,000 for the current year or the preceding
three (3) years. The subjective test is based on the standard that an independent director must be a person who lacks a relationship
that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities
of a director.
The Board of Directors
does not have a nominating committee or a committee performing similar functions. Instead, all of the Directors participate in
the director nomination process. As discussed above, Mr. Singh and Dr. Mallya are not “independent” directors under
the NASDAQ standards for independence.
COMPANY RELATIONSHIPS
UBA and Inversiones own
24.5% and 43.6% of the outstanding shares of our Common Stock, respectively, as of February 28, 2013. UBA has also advanced us
the principal amount of $1,915,400 under separate convertible notes. As of February 28, 2013 the principal amount outstanding
on the notes together with the accrued interest was convertible into approximately 2,298,200 shares of our Common Stock. Because
UBHL is the ultimate parent of both UBA and Inversiones, UBHL is the ultimate beneficiary of 68.1% the shares of our Common Stock.
Refer to “Item 12 - Security ownership of certain beneficial owners and management and related stockholder matters”
above.
| ITEM
14. | | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
The Company has appointed
RBSM, LLP (“RBSM”), as our independent auditors to perform the audit of our financial statements for the year 2012.
PMB Helin Donovan, L.L.P.
(“PMB”), our previously appointed independent auditors, performed the audit of our financial statements for the year
2011.
AUDIT FEES. The aggregate
fees billed by PMB during the year 2012 for the audit of our annual consolidated financial statements was $97,000; fees of an
additional $45,000 were billed to us during 2012 in connection with PMB’s review of interim financial statements in connection
with our Quarterly Reports on Form 10-Q for that year. The fees described in this paragraph represented approximately 89% of the
total fees for services billed to us by PMB during 2012.
The aggregate fees billed
by PMB during the year 2011 for the audit of our annual consolidated financial statements was $93,000; fees of an additional $45,000
were billed to us during 2011 in connection with PMB’s review of interim financial statements in connection with our Quarterly
Reports on Form 10-Q for that year. The fees described in this paragraph represented approximately 89% of the total fees for services
billed to us by PMB during 2011.
AUDIT RELATED FEES. PMB
did not bill us any amount in fees for assurance or related services in 2012 or 2011.
TAX FEES. The aggregate
fees billed by PMB during 2012 for tax products and services related to the preparation of our tax returns other than those described
in the foregoing paragraphs, was $17,500. Such fees represented approximately 11% of the total fees for services rendered to us
by PMB during 2012.
The aggregate fees billed
by PMB during 2011 for tax products and services related to the preparation of our tax returns, other than those described in
the foregoing paragraphs, was $17,500. Such fees represented approximately 11% of the total fees for services rendered to us by
PMB during 2011.
ALL OTHER FEES. PMB did
not bill us for any amount towards fees for services other than those mentioned above during the years 2012 and 2011.
All audit and other services
performed by RBSM and PMB on our behalf are approved in advance by our Audit Committee.
We are not aware that
any significant amount of the work done during the course of the audit of our 2012 and 2011 Financial Statements was performed
by persons other than full-time, permanent, employees of RBSM and PMB as applicable.
| ITEM
15. | | EXHIBIT AND FINANCIAL STATEMENT SCHEDULES. |
| (a) |
DOCUMENTS FILED AS PART OF THIS REPORT. The following documents are filed as part of this Report: |
| |
|
| |
(1) |
Audited financial statements and financial statement schedules |
Report of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations and Comprehensive Income
for the Years Ended December 31, 2012 and 2011
Consolidated Statements of Stockholders’ Equity for the Years
Ended December 31, 2012 and 2011
Consolidated Statements of Cash Flow for the Years Ended December
31, 2012 and 2011
Notes to Financial Statements
| |
(2) |
FINANCIAL STATEMENT SCHEDULES. The financial statement schedules required to be filed by Item
8 of this Annual Report on Form 10-K are listed above. All other financial statement schedules are omitted because they were
not required or the required information is included in the Financial Statements or Notes thereto. |
| Exhibit Number |
|
|
|
Description of Document |
| 3.1 |
|
(T) |
|
Articles of Incorporation of Mendocino Brewing Company, Inc. as amended. |
| 3.2 |
|
(T) |
|
Bylaws of Mendocino Brewing Company, Inc., as amended. |
| 10.1 |
|
|
|
[Intentionally omitted] |
| 10.2 |
|
|
|
[Intentionally omitted] |
| 10.3 |
|
(A) |
|
Wholesale Distribution Agreement between Mendocino Brewing Company, Inc. and Bay
Area Distributing. |
| 10.4 |
|
|
|
[Intentionally omitted] |
| 10.5 |
|
(B) |
|
Liquid Sediment Removal Services Agreement with Cold Creek Compost, Inc. |
| 10.6 |
|
|
|
[Intentionally omitted] |
| 10.7 |
|
(C) |
|
Commercial Real Estate Purchase Contract and Receipt for Deposit (previously filed
as Exhibit 19.2). |
| 10.8 |
|
(D) |
|
Commercial Lease between Stewart’s Ice Cream Company, Inc. and Releta Brewing
Company LLC. |
| 10.9 |
|
|
|
[Intentionally omitted] |
| 10.10 |
|
(F) |
|
Keg Management Agreement with MicroStar Keg Management LLC. |
| 10.11 |
|
(G) |
|
Agreement to Implement Condition of Approval No. 37 of the Site Development Permit
95-19 with the City of Ukiah, California (previously filed as Exhibit19.6). |
| 10.12 |
|
|
|
[Intentionally omitted] |
| 10.13 |
|
|
|
[Intentionally omitted] |
| 10.14 |
|
|
|
[Intentionally omitted] |
| 10.15 |
|
(I) |
|
Hazardous Substances Certificate and Indemnity with the Savings Bank of Mendocino
County. |
| 10.16 |
|
|
|
[Intentionally omitted] |
| 10.17 |
|
|
|
[Intentionally omitted] |
| 10.18 |
|
|
|
[Intentionally omitted] |
| 10.19 |
|
(K) |
|
Investment Agreement with United Breweries of America, Inc. |
| 10.20 |
|
|
|
[Intentionally omitted] |
| 10.21 |
|
(K) |
|
Registration Rights Agreement Among Mendocino Brewing Company, Inc., United Breweries
of America, Inc., H. Michael Laybourn, Norman Franks, Michael Lovett, John Scahill, and Don Barkley. |
| 10.22 |
|
(L) |
|
Indemnification Agreement with Vijay Mallya. |
| 10.23 |
|
(L) |
|
Indemnification Agreement with Michael Laybourn. |
| 10.24 |
|
(L) |
|
Indemnification Agreement with Jerome Merchant. |
| 10.25 |
|
(L) |
|
Indemnification Agreement with Yashpal Singh. |
| 10.27 |
|
(L) |
|
Indemnification Agreement with Robert Neame. |
| 10.28 |
|
(L) |
|
Indemnification Agreement with Sury Rao Palamand. |
| 10.29 |
|
(L) |
|
Indemnification Agreement with Kent Price. |
| 10.30 |
|
|
|
[Intentionally omitted] |
| 10.31 |
|
|
|
[Intentionally omitted] |
| 10.32 |
|
|
|
[Intentionally omitted] |
| 10.33 |
|
|
|
[Intentionally omitted] |
| 10.35 |
|
(O) |
|
Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United
Breweries of America Inc. dated August 31, 1999. |
| 10.36 |
|
(O) |
|
Convertible Note in favor of United Breweries of America Inc. dated Sept. 7, 1999. |
| 10.37 |
|
(P) |
|
Convertible Note in favor of United Breweries of America Inc. dated October 21,
1999. |
| 10.38 |
|
(P) |
|
Convertible Note in favor of United Breweries of America Inc. dated November 12,
1999. |
| 10.39 |
|
(P) |
|
Convertible Note in favor of United Breweries of America Inc. dated December 17,
1999. |
| 10.40 |
|
(P) |
|
Convertible Note in favor of United Breweries
of America Inc. dated December 31, 1999. |
| 10.41 |
|
(P) |
|
Convertible Note in favor of United Breweries of America
Inc. dated February 16, 2000. |
| 10.42 |
|
(P) |
|
Convertible Note in favor of United Breweries of America
Inc. dated February 17, 2000. |
| 10.43 |
|
(P) |
|
Convertible Note in favor of United Breweries of America
Inc. dated April 28, 2000. |
| 10.44 |
|
(P) |
|
First Amendment to Master Line of Credit Agreement
between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated April 28, 2000. |
| 10.45 |
|
(Q) |
|
Convertible Note in favor of United Breweries of America
Inc. dated September 11, 2000. |
| 10.46 |
|
(Q) |
|
Convertible Note in favor of United Breweries of America
Inc. dated September 30, 2000. |
| 10.47 |
|
(Q) |
|
Convertible Note in favor of United Breweries of America
Inc. dated December 31, 2000. |
| 10.48 |
|
(Q) |
|
Convertible Note in favor of United Breweries of America
Inc. dated February 12, 2001. |
| 10.49 |
|
(R) |
|
Convertible Note in favor of United Breweries of America
Inc. dated July 1, 2001. |
| 10.50 |
|
(S) |
|
Confirmation of Waiver Between Mendocino Brewing Company,
Inc. and United Breweries of America, Inc., dated as of December 28, 2001. |
| 10.51 |
|
(S) |
|
Extension of Term of Notes Under Master Line of Credit
Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated February 14, 2002. |
| 10.52 |
|
(T) |
|
License Agreement between United Breweries Limited
and United Breweries International (U.K.), Limited. |
| 10.53 |
|
(T) |
|
Supplemental Agreement to License Agreement between
United Breweries Limited and United Breweries International (U.K.), Limited. |
| 10.54 |
|
(T) |
|
Distribution Agreement between United Breweries International
(U.K.), Limited. and KBEL, Ltd. |
| 10.55 |
|
(T) |
|
Supplemental Agreement to Distribution Agreement between
United Breweries International (U.K.), Limited and KBEL, Ltd. |
| 10.56 |
|
(T) |
|
Market Development, General and Administrative Services
Agreement between Mendocino Brewing Company, Inc. and KBEL, Ltd. |
| 10.57 |
|
(T) |
|
Contract to Brew and Supply Kingfisher Products among
Shepherd Neame, Limited, United Breweries International (U.K.), Limited. and KBEL, Ltd. |
| 10.58 |
|
(T) |
|
Supplemental Agreement to Contract to Brew and Supply
Kingfisher Products among Shepherd Neame, Limited, United Breweries International (U.K.), Limited and KBEL, Ltd. |
| 10.59 |
|
(T) |
|
Loan Agreement between Shepherd Neame, Limited and
KBEL, Ltd. |
| 10.60 |
|
(T) |
|
Brewing License Agreement between KBEL, Ltd. and Mendocino
Brewing Company, Inc. |
| 10.61 |
|
(T) |
|
Kingfisher Trade Mark and Trade Name License Agreement
between Kingfisher of America, Inc. and Mendocino Brewing Company, Inc. |
| 10.62 |
|
(U) |
|
First Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated November
13, 2002. |
| 10.63 |
|
(U) |
|
Second Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement between Mendocino Brewing Company, Inc. and United Breweries of America, Inc., dated March
31, 2003. |
| 10.64 |
|
|
|
[Intentionally omitted] |
| 10.65 |
|
|
|
[Intentionally omitted] |
| 10.66 |
|
(W) |
|
Third Amendment to Extension of Term of Notes under
Master Line of Credit Agreement, dated August 14, 2003. |
| 10.67 |
|
|
|
[Intentionally omitted] |
| 10.69 |
|
|
|
[Intentionally omitted] |
| 10.70 |
|
(Z) |
|
Second Agreement dated October 9, 1998 between KBEL,
Ltd. and Shepherd Neame, Ltd. |
| 10.71 |
|
|
|
[Intentionally omitted] |
| 10.72 |
|
|
|
[Intentionally omitted] |
| 10.73 |
|
|
|
[Intentionally omitted] |
| 10.74 |
|
(BB) |
|
Convertible Promissory Note of Mendocino Brewing Company,
Inc. in favor of United Breweries of America, Inc., dated March 2, 2005. |
| 10.75 |
|
|
|
[Intentionally omitted] |
| 10.76 |
|
(DD) |
|
Invoice Discounting Agreement between The Royal Bank
of Scotland Commercial Services Limited and KBEL Limited, dated April 26, 2005. |
| 10.77 |
|
|
|
[Intentionally omitted] |
| 10.78 |
|
|
|
[Intentionally omitted] |
| 10.79 |
|
(EE) |
|
Loan Agreement by and between Mendocino Brewing Company,
Inc. and Grand Pacific Financing Corporation dated June 28, 2006. |
| 10.80 |
|
(EE) |
|
Promissory Note of Mendocino Brewing Company, Inc.
in favor of Grand Pacific Financing Corporation, dated June 28, 2006. |
| 10.81 |
|
|
|
[Intentionally omitted] |
| 10.82 |
|
(FF) |
|
Loan and Security Agreement by and among Marquette
Business Credit Inc. and Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC, dated November 16, 2006. |
| 10.83 |
|
(FF) |
|
Revolving Note of Mendocino Brewing Company, Inc. and
Releta Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006. |
| 10.84 |
|
(FF) |
|
Term Note of Mendocino Brewing Company, Inc. and Releta
Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006. |
| 10.85 |
|
(FF) |
|
CAPEX Note of Mendocino Brewing Company, Inc. and Releta
Brewing Company, LLC in favor of Marquette Business Credit Inc., dated November 16, 2006. |
| 10.86 |
|
(FF) |
|
Fifth Amendment to Extension of Term of Notes Under
Master Line of Credit Agreement, effective August 31, 2005. |
| 10.87 |
|
(FF) |
|
Sixth Amendment to Extension of Term of Notes under
Master Line of Credit Agreement, effective December 31, 2006. |
| 10.88 |
|
(FF) |
|
Second Amendment to Convertible Promissory Note, effective
December 31, 2006. |
| 10.89 |
|
(GG) |
|
Seventh Amendment to Extension of Term of Notes under
Master Line of Credit Agreement effective June 30, 2007. |
| 10.90 |
|
(GG) |
|
Third Amendment to Convertible Promissory Note, effective
June 30, 2007. |
| 10.91 |
|
(HH) |
|
Employment Agreement of Yashpal Singh (Management Contract). |
| 10.92 |
|
(II) |
|
Eighth Amendment to Extension of Term of Notes under
Master Line of Credit Agreement, effective June 30, 2008. |
| 10.93 |
|
(II) |
|
Fourth Amendment to Convertible Promissory Note, effective
June 30, 2008. |
| 10.94 |
|
(JJ) |
|
Directors’ Compensation Plan, as amended (Management
Contract). |
| 10.95 |
|
(KK) |
|
Ninth Amendment to Extension of Term Notes under Master
Line of Credit effective June 30, 2009. |
| 10.96 |
|
(KK) |
|
Fifth Amendment to Convertible Promissory Notes, effective
June 30, 2009 |
| 10.97 |
|
(LL) |
|
Separation and Severance Agreement by and between the
Company and Yashpal Singh, effective August 27, 2009 (Management Contract). |
| 10.98 |
|
(MM) |
|
Keg
Management Agreement by and between MicroStar Keg Management, LLC and the Company effective September 1, 2009†. |
| 10.99 |
|
(NN) |
|
Commercial Lease dated August 1, 2009 between Stewart’s
Shop Corp. and Releta Brewing Company LLC. |
| 10.100 |
|
(OO) |
|
Tenth Amendment to Extension of Term Notes
under Master Line of Credit Agreement, effective June 30, 2010. |
| 10.101 |
|
(OO) |
|
Sixth Amendment to Convertible Promissory Notes, effective
June 30, 2010. |
| 10.102 |
|
(OO) |
|
Employment Agreement with Damon Swarbrick (Management
Contract). |
| 10.103 |
|
(PP) |
|
Letter of Support issued on behalf of KBEL by United
Breweries (Holdings) Limited, dated March 25, 2010. |
| 10.104 |
|
(QQ) |
|
Letter of Support issued on behalf of KBEL by United
Breweries (Holdings) Limited, dated February 15, 2011. |
| 10.105 |
|
(RR) |
|
Waiver and First Amendment to Loan and Security Agreement
dated as of April 29, 2011 by Marquette Business Credit, Inc., Mendocino Brewing Company, Inc. and Releta Brewing Company,
LLC. |
| 10.106 |
|
(SS) |
|
Credit and Security Agreement dated as of June 23,
2011 between Cole Taylor Bank, Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC. |
| 10.107 |
|
(SS) |
|
Seventh Amendment to Convertible Promissory Note effective
June 30, 2011. |
| 10.108 |
|
(SS) |
|
Eleventh Amendment to Extension of Term of Notes under
Master Line of Credit Agreement effective June 30, 2011. |
| 10.109 |
|
(TT) |
|
Amended and Restated Directors’ Compensation
Plan (Management Contract). |
| 10.110 |
|
(UU) |
|
Letter of Support issued on behalf of Kingfisher Beer
Europe Limited by United Breweries (Holdings) Limited, dated March 2, 2012. |
| 10.111 |
|
(VV) |
|
Amended and Restated Directors’ Compensation
Plan (Management Contract). |
| 10.112 |
|
|
|
First Amendment to Credit and Security Agreement effective
March 29, 2013 by and among Cole Taylor Bank, Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC. |
| 14.1 |
|
(V) |
|
Code of Ethics |
| 21.1 |
|
|
|
Subsidiaries of the Registrant |
| 31.1 |
|
|
|
Certification of Chief Executive Officer pursuant to
Rule 13a-14(a)/15d-14(a). |
| 31.2 |
|
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a). |
| 32.1 |
|
|
|
Certification of Chief Executive Officer Pursuant to
U.S.C. 1350. |
| 32.2 |
|
|
|
Certification of Chief Financial Officer Pursuant to
U.S.C. 1350. |
| 99.1 |
|
|
|
Letter of Support issued on behalf of Kingfisher Beer
Europe Limited by United Breweries (Holdings) Limited, dated March 22, 2013. |
| 101.INS |
|
|
|
XBRL Instance Document |
| 101.SCH |
|
|
|
XBRL Taxonomy Extension Schema Document |
| 101.CAL |
|
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF |
|
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
|
|
|
XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE |
|
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
† Certain portions have been omitted and have
been filed separately with the SEC pursuant to a request for confidential treatment under Rule 24b-2 as promulgated under the
Securities Exchange Act of 1934.
NOTES: Each Exhibit listed above that is annotated with
one or more of the following letters is incorporated by reference from the following sources:
| |
(A) |
MBC’s Registration Statement dated June 15, 1994, as amended, previously filed with the
Commission, Registration No. 33-78390-LA. |
| |
(B) |
MBC’s Annual Report on Form 10-KSB for the period ended December 31, 1995. |
| |
(C) |
MBC’s Quarterly Report on Form 10-QSB for the period ended March 31, 1995. |
| |
(D) |
MBC’s Quarterly Report on Form 10-QSB/A No. 1 for the period ended September 30, 1997. |
| |
(F) |
MBC’s Annual Report on Form 10-KSB for the period ended December 31, 1996. |
| |
(G) |
MBC’s Quarterly Report on Form 10-QSB for the period ended September 30, 1995. |
| |
(I) |
MBC’s Annual Report on Form 10-KSB for the period ended December 31, 1997. |
| |
(K) |
Schedule 13D filed November 3, 1997, by United Breweries of America, Inc. and Vijay Mallya. |
| |
(L) |
MBC’s Quarterly Report on Form 10-QSB for the period ended June 30, 1998. |
| |
(O) |
Amendment No. 5 to Schedule 13D filed September 15, 1999, by United Breweries of America, Inc.
and Vijay Mallya. |
| |
(P) |
Amendment No. 6 to Schedule 13D filed May 12, 2000, by United Breweries of America, Inc. and Vijay
Mallya. |
| |
(Q) |
Amendment No. 7 to Schedule 13D filed February 22, 2001, by United Breweries of America, Inc.
and Vijay Mallya. |
| |
(R) |
Amendment No. 8 to Schedule 13D filed August 22, 2001, by United Breweries of America, Inc. and
Vijay Mallya. |
| |
(S) |
MBC’s Current Report on Form 8-K filed as of February 19, 2002. |
| |
(T) |
MBC’s Annual Report on Form 10-KSB for the period ended December 31, 2001. |
| |
(U) |
Amendment No. 9 to Schedule 13D filed March 31, 2003, by United Breweries of America, Inc. and
Vijay Mallya. |
| |
(V) |
MBC’s Annual Report on Form 10-KSB for the year ended December 31, 2003. |
| |
(W) |
Amendment No. 10 to Schedule 13D filed August 18, 2003 by United Breweries of America, Inc. and
Dr. Vijay Mallya. |
| |
(Z) |
MBC’s Quarterly Report on Form 10-Q for the period ended September 30, 2004. |
| |
(BB) |
MBC’s Current Report on Form 8-K filed as of March 8, 2005. |
| |
(DD) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2005. |
| |
(EE) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2006. |
| |
(FF) |
MBC’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006. |
| |
(GG) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2007. |
| |
(HH) |
MBC’s Annual Report on Form 10-K for the period ended December 31, 2007. |
| |
(II) |
MBC’s Quarterly Report on Form 10-Q for the period ended September 30, 2008. |
| |
(JJ) |
MBC’s Annual Report on Form 10-K for the period ended December 31, 2008. |
| |
(KK) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2009. |
| |
(LL) |
MBC’s Current Report on Form 8-K filed as of August 31, 2009. |
| |
(MM) |
MBC’s Quarterly Report on Form 10-Q for the period ended September 30, 2009. |
| |
(NN) |
MBC’s Quarterly Report on Form 10-Q for the period ended March 31, 2010. |
| |
(OO) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2010. |
| |
(PP) |
MBC’s Quarterly Report on Form 10-Q/A No. 1 for the period ended September 30, 2010. |
| |
(QQ) |
MBC’s Annual Report on Form 10-K for the year ended December 31, 2010. |
| |
(RR) |
MBC’s Quarterly Report on Form 10-Q for the period ended March 31. 2011. |
| |
(SS) |
MBC’s Quarterly Report on Form 10-Q for the period ended June 30, 2011. |
| |
(TT) |
MBC’s Schedule 14A filed September 1, 2010. |
| |
(UU) |
MBC’s Annual Report on Form 10-K for the year ended December 31, 2011. |
| |
(VV) |
MBC’s Schedule 14A filed December 19, 2012. |
| |
|
|
| (b) |
Exhibit Attached The following Exhibits are attached to this Annual Report on Form 10-K: |
| |
|
| |
10.112 |
First Amendment to Credit and Security Agreement effective March 29, 2013 by and among Cole Taylor
Bank, Mendocino Brewing Company, Inc. and Releta Brewing Company, LLC. |
| |
21.1 |
Subsidiaries of the Registrant. |
| |
31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
| |
31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a).* |
| |
32.1 |
Certification of Chief Executive Officer Pursuant to U.S.C. 1350.** |
| |
32.2 |
Certification of Chief Financial Officer Pursuant to U.S.C. 1350.** |
| |
99.1 |
Letter of Support issued on behalf of Kingfisher Beer Europe Limited by United Breweries (Holdings)
Limited, dated March 22, 2013.* |
| |
101.INS |
XBRL Instance Document† |
| |
101.SCH |
XBRL Taxonomy Extension Schema Document† |
| |
101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document† |
| |
101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document† |
| |
101.LAB |
XBRL Taxonomy Extension Label Linkbase Document† |
| |
101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document† |
| |
|
|
| (c) |
Excluded Financial Statements. None. |
____________________
| * | | Filed
herewith |
| ** | | Furnished
herewith |
| † | | Pursuant
to Rule
406T
of Regulation
S-T,
the interactive
data
files
on Exhibit
101 hereto
are deemed
not filed
or part
of a
registration
statement
or prospectus
for purposes
of Sections
11 or
12 of
the Securities
Act of
1933,
as amended,
are deemed
not filed
for purposes
of Section
18 of
the Securities
Exchange
Act of
1934,
as amended,
and otherwise
are not
subject
to liability
under
these
sections. |
Signature
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on our behalf
by the undersigned, thereunto duly authorized.
| |
(Registrant) MENDOCINO BREWING COMPANY, INC. |
| |
|
|
| |
By:
|
/s/ Yashpal Singh |
| |
|
Yashpal Singh |
| |
|
President
and Chief Executive Officer
(Principal Executive Officer) |
| |
|
|
| |
|
Date: April 1, 2013 |
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity
and on the dates indicated.
| |
(Registrant) MENDOCINO BREWING COMPANY, INC. |
| |
|
|
| |
By: |
/s/ Vijay Mallya |
| |
|
Dr. Vijay Mallya |
| |
|
Director and Chairman of the Board |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Yashpal Singh |
| |
|
Yashpal Singh |
| |
|
President, Director and Chief Executive
Officer
(Principal Executive Officer)
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Scott R. Heldfond |
| |
|
Scott R. Heldfond, Director |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Jerome G. Merchant |
| |
|
Jerome G. Merchant, Director |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Mahadevan Narayanan |
| |
|
Mahadevan Narayanan |
| |
|
Secretary and Chief Financial Officer
(Principal Financial Officer) |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ H. Michael Laybourn |
| |
|
H. Michael Laybourn, Director |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Kent Price |
| |
|
Kent Price, Director |
| |
|
Date: April 1, 2013 |
| |
|
|
| |
By: |
/s/ Sury Rao Palamand |
| |
|
Sury Rao Palamand, Director |
| |
|
Date: April 1, 2013 |
Mendocino
Brewing Company, Inc.
Consolidated
Financial Statements
For
the Years Ended
December
31, 2012 and 2011
Mendocino
Brewing Company, Inc.
Consolidated
Financial Statements
For
the Years Ended
December
31, 2012 and 2011
CONTENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Mendocino Brewing Company, Inc. and Subsidiaries
Ukiah, California
We have audited the accompanying consolidated
balance sheet of Mendocino Brewing Company, Inc. and subsidiaries (“MBC”) as of December 31, 2012, and the related
consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility of the MBC’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. MBC is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits include
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for expressing an opinion on the effectiveness of the MBC’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of MBC as of December
31, 2012 and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
| /s/ RBSM LLP |
|
| Larkspur, California |
|
| April 1, 2013 |
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders of
Mendocino Brewing Company, Inc. and Subsidiaries
Ukiah, California
We have audited the accompanying consolidated
balance sheet of Mendocino Brewing Company, Inc. and subsidiaries (“MBC”) as of December 31, 2011, and the related
consolidated statements of operations and comprehensive income, changes in stockholders’ equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility of the MBC’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. MBC is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for expressing an opinion on the effectiveness of the MBC’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of MBC as of December
31, 2011 and the results of its operations and cash flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
| /s/ PMB HELIN DONOVAN, LLP |
|
| San Francisco, California |
|
| April 1, 2013 |
|
Mendocino
Brewing Company, Inc.
Consolidated
Balance Sheets
As
of December 31, 2012 and 2011
| |
|
2012 |
|
|
2011 |
|
| ASSETS |
|
|
|
|
|
|
|
|
| Current Assets |
|
|
|
|
|
|
|
|
| Cash |
|
$ |
198,500 |
|
|
$ |
312,200 |
|
| Accounts receivable, net |
|
|
5,421,600 |
|
|
|
5,338,700 |
|
| Inventories |
|
|
1,910,500 |
|
|
|
1,799,600 |
|
| Prepaid expenses |
|
|
514,900 |
|
|
|
412,800 |
|
| |
|
|
|
|
|
|
|
|
| Total Current Assets |
|
|
8,045,500 |
|
|
|
7,863,300 |
|
| |
|
|
|
|
|
|
|
|
| Property and Equipment, net |
|
|
11,937,200 |
|
|
|
11,391,900 |
|
| |
|
|
|
|
|
|
|
|
| Other Assets |
|
|
|
|
|
|
|
|
| Deposits and other assets |
|
|
238,800 |
|
|
|
432,500 |
|
| Intangibles |
|
|
30,000 |
|
|
|
30,000 |
|
| |
|
|
|
|
|
|
|
|
| Total Other Assets |
|
|
268,800 |
|
|
|
462,500 |
|
| |
|
|
|
|
|
|
|
|
| Total Assets |
|
$ |
20,251,500 |
|
|
$ |
19,717,700 |
|
| |
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Current Liabilities |
|
|
|
|
|
|
|
|
| Secured lines of credit |
|
$ |
3,159,700 |
|
|
$ |
1,749,800 |
|
| Accounts payable |
|
|
5,693,600 |
|
|
|
6,705,900 |
|
| Accrued liabilities |
|
|
1,652,100 |
|
|
|
1,618,700 |
|
| Current maturities of notes to related parties |
|
|
- |
|
|
|
93,200 |
|
| Current maturities of long-term debt |
|
|
450,000 |
|
|
|
423,600 |
|
| Current maturities of capital leases |
|
|
3,100 |
|
|
|
67,500 |
|
| |
|
|
|
|
|
|
|
|
| Total Current Liabilities |
|
|
10,958,500 |
|
|
|
10,658,700 |
|
| |
|
|
|
|
|
|
|
|
| Long-Term Liabilities |
|
|
|
|
|
|
|
|
| Notes to related parties less current maturities |
|
|
3,407,000 |
|
|
|
3,315,700 |
|
| Long term debt, less current maturities |
|
|
3,982,400 |
|
|
|
4,280,900 |
|
| |
|
|
|
|
|
|
|
|
| Total Long-Term Liabilities |
|
|
7,389,400 |
|
|
|
7,596,600 |
|
| |
|
|
|
|
|
|
|
|
| Total Liabilities |
|
|
18,347,900 |
|
|
|
18,255,300 |
|
| |
|
|
|
|
|
|
|
|
| Stockholders’ Equity |
|
|
|
|
|
|
|
|
| Preferred stock, Series A, no par value, with liquidation
preference of $1 per share; 10,000,000 shares authorized, 227,600 shares issued and outstanding |
|
|
227,600 |
|
|
|
227,600 |
|
| Common stock, no par value 30,000,000 shares authorized, 12,611,133
shares issued and outstanding |
|
|
15,100,300 |
|
|
|
15,100,300 |
|
| Accumulated other comprehensive income |
|
|
406,400 |
|
|
|
523,600 |
|
| Accumulated deficit |
|
|
(13,830,700 |
) |
|
|
(14,389,100 |
) |
| |
|
|
|
|
|
|
|
|
| Total Stockholders’ Equity |
|
|
1,903,600 |
|
|
|
1,462,400 |
|
| |
|
|
|
|
|
|
|
|
| Total Liabilities and Stockholders’ Equity |
|
$ |
20,251,500 |
|
|
$ |
19,717,700 |
|
The accompanying notes are an integral part
of these consolidated financial statements.
Mendocino
Brewing Company, Inc.
Consolidated
Statements of Operations and Comprehensive Income
For
the Years Ending December 31, 2012 and 2011
| |
|
2012 |
|
|
2011 |
|
| Sales |
|
$ |
40,335,900 |
|
|
$ |
41,211,100 |
|
| Less excise tax |
|
|
1,091,300 |
|
|
|
1,057,300 |
|
| |
|
|
|
|
|
|
|
|
| Net Sales |
|
|
39,244,600 |
|
|
|
40,153,800 |
|
| |
|
|
|
|
|
|
|
|
| Cost of Goods Sold |
|
|
28,442,100 |
|
|
|
29,276,800 |
|
| |
|
|
|
|
|
|
|
|
| Gross Profit |
|
|
10,802,500 |
|
|
|
10,877,000 |
|
| |
|
|
|
|
|
|
|
|
| Operating Expenses |
|
|
|
|
|
|
|
|
| Marketing |
|
|
5,631,000 |
|
|
|
5,903,600 |
|
| General and administrative |
|
|
4,236,300 |
|
|
|
4,481,000 |
|
| |
|
|
|
|
|
|
|
|
| Total Operating Expenses |
|
|
9,867,300 |
|
|
|
10,384,600 |
|
| |
|
|
|
|
|
|
|
|
| Income from Operations |
|
|
935,200 |
|
|
|
492,400 |
|
| |
|
|
|
|
|
|
|
|
| Other Income (Expense) |
|
|
|
|
|
|
|
|
| Miscellaneous income |
|
|
66,500 |
|
|
|
33,700 |
|
| Gain on sale of assets |
|
|
9,400 |
|
|
|
500 |
|
| Interest expense |
|
|
(450,000 |
) |
|
|
(470,100 |
) |
| |
|
|
|
|
|
|
|
|
| Total Other Expense, net |
|
|
(374,100 |
) |
|
|
(435,900 |
) |
| |
|
|
|
|
|
|
|
|
| Income before Income Taxes |
|
|
561,100 |
|
|
|
56,500 |
|
| |
|
|
|
|
|
|
|
|
| Provision for Income Taxes |
|
|
2,700 |
|
|
|
7,100 |
|
| |
|
|
|
|
|
|
|
|
| Net Income |
|
|
558,400 |
|
|
|
49,400 |
|
| |
|
|
|
|
|
|
|
|
| Other Comprehensive Income (Loss) - |
|
|
|
|
|
|
|
|
| Foreign currency translation adjustment |
|
|
(117,200 |
) |
|
|
(8,100 |
) |
| |
|
|
|
|
|
|
|
|
| Comprehensive Income |
|
$ |
441,200 |
|
|
$ |
41,300 |
|
| |
|
|
|
|
|
|
|
|
| Net income per common share – |
|
|
|
|
|
|
|
|
| Basic |
|
|
0.04 |
|
|
|
0.00 |
|
| Diluted |
|
|
0.04 |
|
|
|
0.00 |
|
| |
|
|
|
|
|
|
|
|
| Weighted average common shares outstanding – |
|
|
|
|
|
|
|
|
| Basic |
|
|
12,611,133 |
|
|
|
12,481,913 |
|
| Diluted |
|
|
14,899,235 |
|
|
|
12,481,913 |
|
The accompanying notes are an integral part
of these consolidated financial statements.
Mendocino
Brewing Company, Inc.
Consolidated
Statements of Stockholders’ Equity
For
the Years Ending December 31, 2012 and 2011
| |
|
Series A |
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other |
|
|
|
|
|
|
|
| |
|
Preferred |
|
|
|
|
|
Common |
|
|
|
|
|
Comprehensive |
|
|
Accumulated |
|
|
Total |
|
| |
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Income |
|
|
Deficit |
|
|
Equity |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance December 31, 2010 |
|
|
227,600 |
|
|
$ |
227,600 |
|
|
|
12,427,262 |
|
|
$ |
15,043,300 |
|
|
$ |
531,700 |
|
|
$ |
(14,438,500 |
) |
|
$ |
1,364,100 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock issued for compensation |
|
|
|
|
|
|
|
|
|
|
183,871 |
|
|
|
57,000 |
|
|
|
|
|
|
|
|
|
|
|
57,000 |
|
| Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
49,400 |
|
|
|
49,400 |
|
| Currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,100 |
) |
|
|
- |
|
|
|
(8,100 |
) |
| Balance December 31, 2011 |
|
|
227,600 |
|
|
$ |
227,600 |
|
|
|
12,611,133 |
|
|
$ |
15,100,300 |
|
|
$ |
523,600 |
|
|
$ |
(14,389,100 |
) |
|
$ |
1,462,400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
558,400 |
|
|
|
558,400 |
|
| Currency translation adjustment |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(117,200 |
) |
|
|
- |
|
|
|
(117,200 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance December 31, 2012 |
|
|
227,600 |
|
|
$ |
227,600 |
|
|
|
12,611,133 |
|
|
$ |
15,100,300 |
|
|
$ |
406,400 |
|
|
$ |
(13,830,700 |
) |
|
$ |
1,903,600 |
|
The accompanying notes
are an integral part of these consolidated financial statements.
Mendocino Brewing
Company, Inc.
Consolidated
Statements of Cash Flows
For the Years Ending
December 31, 2012 and 2011
| |
|
2012 |
|
|
2011 |
|
| CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
| Net Income |
|
$ |
558,400 |
|
|
$ |
49,400 |
|
| Adjustments to reconcile net loss to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
1,048,100 |
|
|
|
1,488,000 |
|
| Provision for doubtful accounts |
|
|
(40,000 |
) |
|
|
(80,300 |
) |
| Gain on the sale of assets |
|
|
(9,400 |
) |
|
|
(500 |
) |
| Interest accrued on related party notes |
|
|
91,300 |
|
|
|
90,900 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| (Increase) decrease in accounts receivable |
|
|
164,000 |
|
|
|
(926,100 |
) |
| (Increase) decrease in inventories |
|
|
(110,900 |
) |
|
|
(42,900 |
) |
| (Increase) decrease in prepaid expenses |
|
|
(86,100 |
) |
|
|
38,100 |
|
| (Increase) decrease in deposits and other assets |
|
|
76,000 |
|
|
|
(370,400 |
) |
| Increase (decrease) in accounts payable |
|
|
(1,221,300 |
) |
|
|
1,039,900 |
|
| Increase (decrease) in accrued liabilities |
|
|
(2,000 |
) |
|
|
126,500 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
468,100 |
|
|
|
1,412,600 |
|
| |
|
|
|
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| Purchases of property, equipment and leasehold improvements |
|
|
(1,503,100 |
) |
|
|
(1,025,900 |
) |
| Proceeds from sale of fixed assets |
|
|
12,200 |
|
|
|
16,800 |
|
| |
|
|
|
|
|
|
|
|
| Net cash used in investing activities: |
|
|
(1,490,900 |
) |
|
|
(1,009,100 |
) |
| |
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| Net borrowing (repayment) on lines of credit |
|
|
1,360,500 |
|
|
|
(1,175,100 |
) |
| Borrowing on long term debts |
|
|
184,700 |
|
|
|
4,881,000 |
|
| Repayment on long-term notes |
|
|
(456,800 |
) |
|
|
(3,694,200 |
) |
| Repayment on related party notes |
|
|
(95,100 |
) |
|
|
(96,300 |
) |
| Payments on obligations under capital leases |
|
|
(64,700 |
) |
|
|
(89,300 |
) |
| |
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities: |
|
|
928,600 |
|
|
|
(173,900 |
) |
| |
|
|
|
|
|
|
|
|
| EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
(19,500 |
) |
|
|
13,400 |
|
| |
|
|
|
|
|
|
|
|
| Net Change in Cash |
|
|
(113,700 |
) |
|
|
243,000 |
|
| |
|
|
|
|
|
|
|
|
| Cash at beginning of period |
|
|
312,200 |
|
|
|
69,200 |
|
| |
|
|
|
|
|
|
|
|
| Cash at end of period |
|
$ |
198,500 |
|
|
$ |
312,200 |
|
| |
|
|
|
|
|
|
|
|
| NON CASH FINANCING INFORMATION |
|
|
|
|
|
|
|
|
| Common stock issued to satisfy liabilities |
|
$ |
- |
|
|
$ |
57,000 |
|
| |
|
|
|
|
|
|
|
|
| SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
| Cash paid during the period for: |
|
|
|
|
|
|
|
|
| Interest |
|
$ |
358,700 |
|
|
$ |
379,200 |
|
| Income taxes |
|
$ |
2,700 |
|
|
$ |
7,100 |
|
The accompanying notes
are an integral part of these consolidated financial statements.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
1. Description of Operations and
Summary of Significant Accounting Policies
Description of Operations
Mendocino Brewing Company, Inc., (“the
Company” or “MBC”), was formed in 1983 in California, and has two operating subsidiaries: Releta Brewing Company,
LLC, (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). In the United States (“US”),
MBC and its subsidiary, Releta, operate two breweries that produce beer 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 majority of sales
for Mendocino Brewing Company in the US are in California. The Company brews several brands, of which Red Tail Ale is the flagship
brand. In addition, the Company performs contract brewing for several other brands, and MBC holds the license to distribute Kingfisher
Lager Beer in the US and Canada. Generally, product shipments are made directly from the breweries to the wholesalers or distributors
in accordance with state and local laws.
The Company’s United Kingdom (“UK”)
subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”) which, prior to March 30, 2011,
was known as UBSN Limited (“UBSN”). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in
the United Kingdom and Europe. The distributorship is located in Maidstone, Kent in the UK.
Subsequent Events
The Company evaluates events that occur subsequent
to the balance sheet date of periodic reports, but before financial statements are issued for periods ending on such balance sheet
dates, for possible adjustment to such financial statements or other disclosure. This evaluation generally occurs through the
date at which the Company’s financial statements are electronically prepared for filing with the Securities and Exchange
Commission (“SEC”).
Principles of Consolidation
The consolidated financial statements present
the accounts of Mendocino Brewing Company, Inc., and its wholly-owned subsidiaries, Releta and UBIUK. All material intracompany
and inter-company balances, profits and transactions have been eliminated.
Basis of Presentation and Organization
The financial statements for the years ended
December 31, 2012 and 2011 have been prepared in accordance with accounting principles generally accepted in the United States.
The financial statements and notes are representations of the management and the Board of Directors, who are responsible for their
integrity and objectivity.
Reclassifications
Certain items in the financial statements
for the prior year have been reclassified to conform to the current year presentation. These reclassifications had no effect on
net income or equity.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Cash and Cash Equivalents, Short- and Long-Term
Investments
For purposes of cash flows, the Company considers
all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Foreign Operations
Approximately 22% of the Company’s assets
are located in the UK. Although this country is considered economically stable and the Company has experienced no notable burden
from foreign exchange transactions, export duties, or government regulations, it is always possible that unanticipated events
in foreign countries could disrupt the Company’s operations.
Trade Accounts Receivable and Allowance
for Doubtful Accounts
Trade accounts receivable are stated at the
invoiced amount and are the amount the Company expects to collect. Sales are made to approved customers on an open account basis,
subject to established credit limits, and generally no collateral is required. The allowance for doubtful accounts is the Company’s
best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in
circumstances relating to accounts receivable may result in a requirement for additional allowances in the future.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the
following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction
history with the customer, current economic and industry trends and changes in customer payment terms. Past due balances over
90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company’s
customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based
on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a
credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit to accounts receivable. As of December 31, 2012 and 2011,
the Company maintained a reserve of $207,800 and $240,200 of potentially doubtful accounts receivable, respectively.
Inventories
Inventories are stated at the lower of average
cost, which approximates the first-in, first-out method, or market (net realizable value). The Company regularly reviews its inventories
for the presence of obsolete product attributed to age, seasonality and quality. Inventories that are considered obsolete are
written off or adjusted to carrying value.
Prepaid Expenses and Other Assets
Prepaid expenses and other assets generally
consist of deposits, other receivables, and prepayments for future services. Prepayments are expensed when the services are received.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Property and Equipment
Property and equipment are stated at cost
and depreciated or amortized using the straight-line method over the assets’ estimated useful lives. Leasehold improvements
are amortized over the shorter of the life of the improvement or the life of the related lease. The Company uses other depreciation
methods (generally, accelerated depreciation methods) for tax purposes where appropriate. Costs of maintenance and repairs are
charged to expense as incurred; significant renewals and betterments are capitalized. When property and equipment are retired,
sold, or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts
and any gain or loss is included in the statement of operations.
Estimated useful lives of property and equipment
are as follows:
| Building |
40 years |
| Machinery and equipment |
3 - 40 years |
| Equipment under capital lease |
3 - 10 years |
| Leasehold improvements |
5 - 10 years |
| Vehicles |
3 - 5 years |
| Furniture and fixtures |
5 - 10 years |
Assets
Held under Capital Leases
Assets held under capital leases are recorded
at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of
the lease. Amortization expense is computed using the straight-line method over the shorter of the estimated useful lives of the
assets or the period of the related lease.
Impairment of Long-Lived Assets
The Company assesses the impairment of its
long-lived assets periodically in accordance with the provisions of Accounting Standards Codification (ASC) 360, (Accounting for
the Impairment and Disposal of Long-Lived Assets). The Company reviews the carrying value of property and equipment and any other
long-lived assets for impairment annually or whenever events and circumstances indicate that the carrying value of an asset may
not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where
undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount
by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment
include current operating results, trends, and prospects, as well as the effects of obsolescence, demand, competition, and other
economic factors. Long-lived assets that management commits to sell or abandon are reported at the lower of carrying amount or
fair value less cost to sell. During the year ended December 31, 2012, the Company recorded no impairment losses and during the
year ended December 31, 2011 the Company recorded impairment losses of $17,600 related to long-lived assets.
Deferred Financing Costs
Costs relating to obtaining financing are
capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are
removed from the related accounts and charged to operations. Deferred financing costs of $311,300 related to loans repaid in June
2011 were fully amortized as of June 30, 2011. Deferred financing costs related to new borrowing made in June 2011 were $225,000.
Amortization of deferred financing costs charged to operations was $45,000 and $55,200 for the years ended December 31, 2012 and
2011, respectively.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Income Taxes
The Company accounts for income taxes in accordance
with ASC 750 which requires an asset and liability approach for financial accounting and reporting for income taxes and allows
recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under
the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are recognized for deductible temporary differences and
operating loss, and tax credit carryforwards. A valuation allowance is established to reduce the deferred tax asset if it is more
likely than not that the related tax benefits will not be realized.
The Company periodically assesses uncertain
tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to file
a return in a particular jurisdiction). The Company evaluated its tax positions and determined that there were no uncertain tax
benefits for the years ending December 31, 2012 and 2011.
Revenue Recognition
The Company recognizes revenue from the brewing
and distribution operations in accordance with ASC 605. The Company recognizes revenue from product sales, net of discounts.
The Company recognizes revenue only when all
of the following criteria have been met:
| |
● |
Persuasive evidence of an arrangement exists; |
| |
● |
Delivery has occurred or services have been rendered; |
| |
● |
The fee for the arrangement is fixed or determinable; and |
| |
● |
Collectibility is reasonably assured. |
“Persuasive Evidence of an Arrangement”
– The Company documents all terms of an arrangement in a written contract or purchase order signed by the customer prior
to recognizing revenue.
“Delivery Has Occurred or Services
Have Been Performed” – The Company delivers the products prior to recognizing revenue or performs services as
per contractual terms. Product is considered delivered upon delivery to a customer’s designated location and services considered
performed upon completion of Company’s contractual obligations.
“The Fee for the Arrangement is Fixed
or Determinable” – Prior to recognizing revenue, an amount is either fixed or determinable under the terms of
the written contract. The price is negotiated at the outset of the arrangement and is not subject to refund or adjustment during
the initial term of the arrangement.
“Collectibility is Reasonably Assured”
– The Company determines that collectibility is reasonably assured prior to recognizing revenue. Collectibility is assessed
on a customer-by-customer basis based on criteria outlined by management. The Company does not enter into arrangements unless
collectibility is reasonably assured at the outset. Existing customers are subject to ongoing credit evaluations based on payment
history and other factors. If it is determined during the arrangement that collectibility is not reasonably assured, revenue is
recognized on a cash basis.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
The Company records certain consideration
paid to customers for services or placement fees as a reduction in revenue rather than as an expense. The Company reports these
items on the statement of operations as a reduction in revenue and as a corresponding reduction in marketing and selling expenses.
Revenues from the brewpub and gift store are
recognized when sales have been completed.
Excise Taxes
The federal government levies excise taxes
on the sale of alcoholic beverages, including beer. For brewers producing less than 2.0 million barrels of beer per calendar year,
the federal excise tax is $7 per barrel on the first 60,000 barrels of beer removed for consumption or sale during a calendar
year, and $18 per barrel for each barrel in excess of 60,000. Individual states also impose excise taxes on alcoholic beverages
in varying amounts, which have also been subject to change. Sales as presented in the Company’s statements of operations,
reflect the amount invoiced to the Company’s wholesalers and other customers. Excise taxes due to federal and state agencies
are not collected from the Company’s customers, but rather are the responsibility of the Company. Net sales, as presented
in the Company’s statements of operations, are reduced by applicable federal and state excise taxes. In the UK, excise taxes
are paid by the manufacturer and not by the Company.
Discounts
To further promote retail sales of its products
and in response to local competitive conditions, the Company regularly offers price discounts to distributors and retailers in
most of its markets. Sales for the years 2012 and 2011, as presented in the Company’s statements of operations, are reduced
by $1,330,800 and $1,523,000 respectively, related to such discounts.
Chargebacks and Sales Reserves
The Company has estimated
reserves for chargebacks for promotional expenses by distributors. The Company estimates its reserves by utilizing historical
information and current contracts. In estimating chargeback reserves, the Company analyzes actual chargeback amounts and applies
historical chargeback rates to estimates potential chargeback. The Company routinely assesses its experience with distributors
and adjusts the reserves accordingly. If actual chargebacks and other rebates are greater than the Company’s estimates,
additional reserves may be required. Revisions to estimates are charged to income in the period in which the facts that give rise
to the revision become known.
Seasonality
Sales of the Company’s products are
somewhat seasonal, with the first and fourth quarters historically being the slowest and the rest of the year generating stronger
sales. The volume of sales may also be affected by weather conditions. Because of the seasonality of the Company’s business,
results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Taxes Collected From Customers
Taxes collected from customers and remitted
to tax authorities are sales tax collected from our retail customers. State and federal excise taxes on beer shipments are the
responsibility of the company and included in our selling price. Excise taxes on shipments are shown in a separate line item in
the consolidated statement of operations as reduction of gross sales. Sales taxes collected from customers are recognized as a
liability, with the liability subsequently reduced when the taxes are remitted to the tax authority. Total sales taxes collected
from customers and remitted to tax authorities were not material in 2012 and 2011.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Delivery Costs
In accordance with ASC 605, (Shipping and
Handling Fees and Costs) the company reports pass-through freight costs on beer shipped to independent beer wholesalers in cost
of sales. Reimbursements of these costs by wholesalers are reported in sales.
Non-pass-through costs incurred by the Company
to deliver beer to wholesalers are included in marketing, distribution and administrative expenses. These costs are considered
marketing related because in addition to product delivery, wholesalers provide marketing and other customer service functions
to customers including product display, shelf space management, distribution of promotional materials, and product rotation. Shipping
costs included in marketing expense totaled $914,200 and $854,800, for the years ended December 31, 2012 and 2011, respectively.
Basic and Diluted Income per Share
The basic earnings per share is computed by
dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding during the
period. In 2011, the effect of any potentially dilutive securities would have been anti-dilutive. Therefore, the conversion of
the related party notes has been excluded from the calculation of net earnings per share for the year ended December 31, 2011.
Basic net earnings per share exclude the dilutive effect of stock options or warrants and convertible notes. The computations
of basic and dilutive net earnings per share are as follows:
| |
|
Year Ended December 31 |
|
| |
|
2012 |
|
|
2011 |
|
| Net income |
|
$ |
558,400 |
|
|
|
49,400 |
|
| Weighted average common shares outstanding |
|
|
12,611,133 |
|
|
|
12,481,913 |
|
| Basic net income per share |
|
$ |
0.04 |
|
|
|
0.00 |
|
| Interest expense on convertible notes |
|
$ |
91,300 |
|
|
|
- |
|
| Income for purpose of computing diluted net income per share |
|
$ |
649,700 |
|
|
|
- |
|
| Incremental shares from assumed exercise of dilutive securities |
|
|
2,288,102 |
|
|
|
- |
|
| Dilutive potential common shares |
|
|
14,899,235 |
|
|
|
12,481,913 |
|
| Diluted net earnings per share |
|
$ |
0.04 |
|
|
|
0.00 |
|
Foreign Currency Translation
The Company has subsidiaries located in the
UK, where the local currency, UK Pound Sterling, is the functional currency. Financial statements of these subsidiaries are translated
into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for
revenues and expenses. Cumulative translation adjustments associated with net assets or liabilities are reported in non-owner
changes in equity. Any exchange rate gains or losses related to foreign currency transactions are recognized in the income statement
as incurred, in the same financial statement caption as the underlying transaction, and are not material for any year shown.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Cash at UBIUK was translated at exchange rates
in effect at December 31, 2012 and 2011, and its cash flows were translated at the average exchange rates for the years then ended.
Changes in cash resulting from the translations are presented as a separate item in the statements of cash flows.
Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America includes having the Company make estimates
and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets
and liabilities. The amounts estimated could differ from actual results. Significant estimates include, allowance for doubtful
accounts, depreciation and amortization periods, and the future utilization of deferred tax assets.
Advertising
Advertising costs are expensed as incurred
and were $900,700 and $1,116,300 for the years ended December 31, 2012 and 2011, respectively.
Fair Value of Financial Instruments
Fair Value
The fair value of the Company’s financial
instruments reflects the amounts that the Company estimates to receive in connection with the sale of an asset or paid in connection
with the transfer of a liability in an orderly transaction between market participants at the measurement date (exit price). For
financial assets and liabilities that are periodically re-measured to fair value, the Company discloses a fair value hierarchy
that prioritizes the use of inputs used in valuation techniques into the following three levels:
Level 1 – quoted prices in active markets
for identical assets and liabilities.
Level 2 – observable inputs other than
quoted prices in active markets for identical assets and liabilities.
Level 3 – unobservable inputs.
At December 31, 2012 and 2011, the Company
had no financial assets or liabilities that required periodic re-measurement at fair value.
The recorded value of certain financial assets
and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, other current assets, accounts payable
and accrued expenses, approximate the fair value of the respective assets and liabilities at December 31, 2012 and December 31,
2011 based upon the short-term nature of the assets and liabilities. Based on borrowing rates currently available to the Company
for loans with similar terms, the carrying value of short and long term notes payable approximate fair value.
Comprehensive Income
Comprehensive income is composed of the Company’s
net income and changes in equity from all other non-stockholder sources. The changes from these non-stockholder sources are reflected
as a separate item in the statements of operations and comprehensive income.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
Reportable Segments
The Company manages its operations through
two business segments: (i) brewing operations, tavern and tasting room operations in the US and Canada (the “North American
Territory”) and (ii) distributor operations in Europe (including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands,
France, Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United
Kingdom) (the “Foreign Territory”). The Company evaluates performance based on net operating profit. Where applicable,
portions of the administrative function expenses are allocated between the operating segments. The operating segments do not share
manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by
the other, the transaction is valued according to the Company’s transfer policy, which approximates market price. The costs
of operating the manufacturing plants are captured discretely within each segment. The Company’s property, plant and equipment,
inventory, and accounts receivable are captured and reported discretely within each operating segment.
Recent Accounting Pronouncements
In December 2011, the FASB amended its guidance
related to the disclosure of offsetting assets and liabilities. The amended guidance will require disclosures for entities with
financial instruments and derivatives that are either offset on the balance sheet or subject to a master netting arrangement.
The provisions of the amended guidance will be effective for the Company beginning in the first quarter of 2013. The Company does
not expect its adoption will have a material impact on the Company’s results of operations, financial position or cash flows.
In July 2012, the FASB issued ASU No. 2012-02,
Intangibles-Goodwill and Other (Topic 350) which simplifies the impairment test for indefinite-lived intangible assets other than
goodwill. ASU No. 2012-02 gives the option to first assess qualitative factors to determine if it is more likely than not that
the fair value of an indefinite-lived intangible asset is less than its carrying amounts as a basis for determining whether it
is necessary to perform a quantitative valuation test. ASU No. 2012-02 is effective for fiscal years and interim periods beginning
on or after September 15, 2012. The Company conducted its annual impairment assessment as of October 1, which included adoption
of this guidance. The adoption of this guidance on October 1, 2012 did not have a significant impact on the Company’s consolidated
financial position, results of operations or cash flows.
In February 2013, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income requiring new disclosures regarding reclassification adjustments from
accumulated other comprehensive income (“AOCI”). ASU No. 2013-02 requires disclosure of amounts reclassified out of
AOCI in its entirety, by component, on the face of the statement of operations or in the notes. The standard is effective for
fiscal years beginning after December 15, 2012. The Company does not believe that the adoption of this guidance will have a material
impact on the Company’s consolidated financial statements. The Company plans to adopt this guidance beginning in the first
quarter of 2013.
Other recent accounting pronouncements issued
by the FASB (including its Emerging Issues Task Force (“EITF”), the American Institute of Certified Public Accountants
(“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s
present or future financial statements.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
2. Liquidity
and Management Plans
On June 23, 2011, MBC and Releta entered into
a Credit and Security Agreement (the “Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole
Taylor”). The Agreement provides a credit facility of up to $10,000,000 with a maturity date of June 23, 2016 consisting
of a $4,119,000 revolving facility, a $1,934,000 machinery & equipment term loan, a $2,947,000 real estate term loan and a
$1,000,000 capital expenditure line of credit. The proceeds were used to repay credit facilities provided by Marquette Business
Credit, Inc. and Grand Pacific Financing Corporation. Convertible promissory notes issued to UBA are subordinated to Cole Taylor.
At December 31, 2012, MBC had cash and cash
equivalents of $198,500, an accumulated deficit of $13,830,700 and a working capital deficit of $2,913,000 due to past losses
incurred in connection with KBEL’s operations in the UK.
We have had a history of past losses in our
domestic operations in the US as substantial infrastructure costs were incurred in advance of obtaining customers and generating
revenue.
On March 22, 2013, United Breweries (Holdings)
Limited (“UBHL”) issued a letter of financial support on behalf of KBEL (the “Letter of Support”), to
KBEL’s accountants, to confirm that UBHL had agreed to provide funding on an as needed basis to KBEL to ensure that KBEL
is able to meet its financial obligations as and when they fall due. There is no maximum dollar limit on the amount of funds which
UBHL will provide to KBEL specified in the Letter of Support. The type of financial support provided by UBHL and the terms of
such financial support are not specified in the Letter of Support. UBHL’s financial support to KBEL is contingent upon compliance
with any applicable exchange control requirements and other applicable laws and regulations relating to the transfer of funds
from India to the UK. The Letter of Support was issued for at least a one year minimum period which runs through March 22, 2014.
MBC’s management intends to request that UBHL continue to keep the Letter of Support in force beyond the minimum specified
period, if necessary. UBHL controls our two largest shareholders, UBA and Inversiones Mirabel S.A., respectively, and as such
UBHL is the Company’s indirect majority shareholder. UBHL represented in the Letter of Support that it has the requisite
financial resources to meet its commitment to KBEL under the Letter of Support. The Chairman of MBC’s Board of Directors,
Dr. Vijay Mallya, is also the Chairman of the Board of Directors of UBHL.
Our Management has taken several actions to
enable us to meet our working capital needs through March 31, 2014, including reductions in discretionary expenditures, expansion
of our business in new territories and securing additional brewing contracts in an effort to utilize a portion of our excess production
capacity. We may also seek additional capital infusions to support our operations.
If it becomes necessary to seek UBHL’s
financial assistance under the Letter of Support and UBHL is either unable or unwilling to fulfill its commitment to KBEL under
the Letter of Support or to extend the time period of such commitment if necessary, it may result in a material adverse effect
on the Company’s financial position and on its ability to continue operations. In addition, if the Company is in default
under its secured credit facilities, its lenders may seek to satisfy any outstanding obligations through recourse against the
applicable pledged collateral which may include its real property and fixed and current assets. The loss of any material pledged
asset would likely have a material adverse effect on the Company’s financial position and results of operations.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
3. Inventories
Inventories, consisting of materials, materials
overhead, labor, and manufacturing overhead, are stated at the lower of average cost or market (net realizable value) and consist
of the following at December 31:
| |
|
2012 |
|
|
2011 |
|
| Raw materials |
|
$ |
807,000 |
|
|
$ |
851,000 |
|
| Work-in-progress |
|
|
323,600 |
|
|
|
325,100 |
|
| Finished goods |
|
|
732,300 |
|
|
|
582,200 |
|
| Merchandise |
|
|
47,600 |
|
|
|
41,300 |
|
| |
|
$ |
1,910,500 |
|
|
$ |
1,799,600 |
|
4. Property and Equipment
The following is a summary
of property and equipment, at cost less accumulated depreciation, at December 31:
| |
|
2012 |
|
|
2011 |
|
| Machinery and equipment |
|
$ |
11,772,000 |
|
|
$ |
12,357,500 |
|
| Buildings |
|
|
7,222,100 |
|
|
|
7,222,100 |
|
| Equipment under capital lease |
|
|
183,700 |
|
|
|
183,700 |
|
| Land |
|
|
810,900 |
|
|
|
810,900 |
|
| Leasehold improvements |
|
|
1,459,600 |
|
|
|
1,443,900 |
|
| Vehicles |
|
|
190,000 |
|
|
|
235,100 |
|
| Furniture and fixtures |
|
|
359,600 |
|
|
|
358,500 |
|
| Equipment in progress |
|
|
663,500 |
|
|
|
377,400 |
|
| |
|
|
22,661,400 |
|
|
|
22,989,100 |
|
| Accumulated depreciation and amortization |
|
|
(10,724,200 |
) |
|
|
(11,597,200 |
) |
| |
|
$ |
11,937,200 |
|
|
$ |
11,391,900 |
|
The total depreciation and amortization expense
for the years ended December 31, 2012 and 2011 was $1,048,100 and $1,488,000, respectively.
5. Secured
Lines of Credit
In June 2011, Cole Taylor provided a line
of credit drawable up to 85% of eligible receivables and 60% of eligible inventory for a period up to June 2016. The borrowings
are collateralized, with recourse, by MBC’s and Releta’s trade receivables and inventory located in the US. This facility
carries interest at a rate of either LIBOR plus 3.5% or prime plus 1% and is secured by substantially all of the assets, excluding
real property, of Releta and MBC. The amount outstanding on this line of credit as of December 31, 2012 was approximately $1,887,700.
Included in the Company’s balance sheet as accounts receivable at December 31, 2012, are account balances totaling $2,531,700
of accounts receivables and $1,910,500 of inventory collateralized to Cole Taylor under this facility.
On April 26, 2005, Royal Bank of Scotland
Commercial Services Limited (“RBS”) provided an invoice discounting facility to KBEL for a maximum amount of £1,750,000
based on 80% prepayment against qualified accounts receivable related to KBEL’s UK customers. The initial term of the facility
was for a one year period after which time the facility could be terminated by either party by providing the other party with
six months notice. The facility carries an interest rate of 1.38% above the RBS base rate and a service charge of 0.10% of each
invoice discounted. The amount outstanding on this line of credit as of December 31, 2012 was approximately $1,272,000.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
6. Long-Term Debt
Maturities of long-term debt for succeeding years
are as follows:
| |
|
Year ended December 31, |
|
| |
|
2012 |
|
|
2011 |
|
| Loan from Cole Taylor, payable in monthly installments of $12,300,
plus interest at prime plus 2% with a balloon payment of approximately $2,210,300 in June 2016; secured by real property at
Ukiah. |
|
$ |
2,718,300 |
|
|
$ |
2,885,600 |
|
| |
|
|
|
|
|
|
|
|
| Loan from Cole Taylor, payable in monthly installments of $25,200 including interest
at prime plus 1.5% with a balloon payment of approximately $552,600 in June 2016; secured by all assets of Releta and MBC,
excluding real property at Ukiah. |
|
|
1,714,100 |
|
|
|
1,818,900 |
|
| |
|
|
4,432,400 |
|
|
|
4,704,500 |
|
| Less current maturities |
|
|
450,000 |
|
|
|
423,600 |
|
| |
|
$ |
3,982,400 |
|
|
$ |
4,280,900 |
|
| Principal payments due during Year Ending December 31, |
| 2013 |
|
$ |
450,000 |
|
| 2014 |
|
|
450,000 |
|
| 2015 |
|
|
450,000 |
|
| 2016 |
|
|
3,082,400 |
|
| |
|
$ |
4,432,400 |
|
MBC and Releta have a series
of loans with Cole Taylor Bank. On March 29, 2013, MBC, Releta and Cole Taylor Bank entered into an amendment to the loan documents
which clarified the method by which the fixed charge coverage ratio shall be calculated. To the extent MBC and Releta may have
been in breach of the covenants related to the fixed charge coverage ratio for certain periods, Cole Taylor Bank has agreed in
the amendment that such breach is waived and that no event of default has occurred by reason of such breach
7. Capital
Lease Obligations
The Company leases certain brewing equipment,
vehicles and office equipment under agreements that are classified as capital leases. The future minimum lease payments required
under the capital leases and the present value of the net minimum lease payments as of December 31, 2012, are as follows:
| Year Ending December 31, 2013 |
|
$ |
3,200 |
|
| |
|
|
3,200 |
|
| Less amounts representing interest |
|
|
(100 |
) |
| Present value of minimum lease payments |
|
|
3,100 |
|
| Less current maturities |
|
|
3,100 |
|
| Non-current leases payable |
|
$ |
- |
|
Depreciation expense related to capital leases
was $18,400 and $43,100 for the years ended December 31, 2012 and 2011, respectively.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
8. Notes to Related Party
Subordinated
Convertible Notes Payable
Notes payable to related parties includes
unsecured convertible notes to UBA for a total value including interest (at the prime rate plus 1.5%, but not to exceed 10% per
year) of $3,407,000 and $3,315,700 as of December 31, 2012 and 2011. Thirteen of the UBA notes are convertible into common stock
at $1.50 per share and one UBA note is convertible at a rate of $1.44 per share. The UBA notes have been extended until June 2013
but have automatic renewals after such maturity date for successive one year terms, provided that either the Company or UBA may
elect not to extend the term upon written notice given to the other party no more than 60 days and no fewer than 30 days prior
to the expiration of such term. UBA may demand payment within 60 days of the end of the extension period but is precluded from
doing so because the notes are subordinated to long-term debt agreements with Cole Taylor maturing in June 2016. Therefore, the
Company will not require the use of working capital to repay any of the UBA notes until the Cole Taylor facilities are repaid.
The UBA notes included $1,491,600 and $1,400,300 of accrued interest at December 31, 2012 and December 31, 2011, respectively.
9. Commitments and Contingencies
Purchase of raw materials
Production of the Company’s beverages
requires quantities of various processed agricultural products, including malt and hops for beer. The Company fulfills its commodities
requirements through purchases from various sources, some through contractual arrangements and others on the open market. Future
payments under existing contractual arrangements are as follows:
| Year Ending December 31, |
|
|
|
|
| 2013 |
|
$ |
2,155,800 |
|
| 2014 |
|
|
126,200 |
|
| 2015 |
|
|
126,200 |
|
| 2016 |
|
|
64,600 |
|
| |
|
$ |
2,472,800 |
|
Legal
The Company is periodically involved in legal
actions and claims that arise as a result of events that occur in the normal course of operations. The Company’s management
and its legal counsel assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In
assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result
in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims
as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates
that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated
liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material
loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed. Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the nature of the guarantee would
be disclosed.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
The Company is not currently aware of any
legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on
the Company’s financial position or results of operations
Operating Leases
The Company leases some of its operating and
office facilities for various terms under long-term, non-cancelable operating lease agreements. The leases expire at various dates
through 2015 and provide for renewal options ranging from month-to-month to five years. In the normal course of business, it is
expected that these leases will be renewed or replaced by leases on similar properties. The leases provide for increases in future
minimum annual rental payments based on defined increases which are generally meant to correlate with the Consumer Price Index,
subject to certain minimum increases. Also, the agreements generally require the Company to pay certain costs (real estate taxes,
insurance and repairs).
The Company and its subsidiaries have various
lease agreements for the brewpub and gift store in Ukiah, California; land at its Saratoga Springs, New York, facility; a building
in the UK; and certain equipment. The New York lease includes renewal options for three additional five-year periods beginning
in 2014, which the Company intends to exercise, and some leases are adjusted annually for changes in the consumer price index.
Rent expense charged to operations was $324,400 and $304,600 for the years ended December 31, 2012 and 2011.
Future minimum lease payments under these agreements are as follows:
| Year Ending December 31, |
|
|
|
|
| 2013 |
|
$ |
320,400 |
|
| 2014 |
|
|
226,900 |
|
| 2015 |
|
|
86,200 |
|
| 2016 |
|
|
24,900 |
|
| 2017 |
|
|
9,900 |
|
| Thereafter |
|
|
- |
|
| |
|
$ |
668,300 |
|
Keg Management Agreement
In September 2009, the Company renewed the
keg management agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar provides all kegs for which the
Company pays a service fee depending on the applicable territory. The agreement is effective for five years ending in September
2014. If the agreement is terminated, the Company is required to purchase four times the average monthly keg usage for the preceding
six-month period from MicroStar. The Company expects to continue this relationship. Rental expense associated with this agreement
was $82,100 and $59,100 for the years ended December 31, 2012 and 2011, respectively. This annual fee is not included in the above
future minimum lease payments.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
10. Related-Party Transactions
The Company conducts business with United
Breweries of America (UBA), which owns approximately 25% of the Company’s common stock. Additionally, KBEL has significant
transactions with Shepherd Neame, Ltd., which is a related party to a former Board member. The following table reflects balances
outstanding as of December 31, 2012 and 2011 and the value of the transactions with these related parties for the years ended
December 31, 2012 and 2011:
| |
|
2012 |
|
|
2011 |
|
| TRANSACTIONS |
|
|
|
|
|
|
|
|
| Gross sales to Shepherd Neame Ltd. |
|
$ |
3,527,000 |
|
|
$ |
5,063,000 |
|
| Purchases from Shepherd Neame Ltd. |
|
|
16,192,200 |
|
|
|
17,310,000 |
|
| Expenses reimbursement to Shepherd Neame Ltd. |
|
|
1,030,900 |
|
|
|
1,167,200 |
|
| Interest expenses associated with UBA notes |
|
|
91,300 |
|
|
|
90,900 |
|
| Interest paid to Shepherd Neame Ltd. |
|
|
2,400 |
|
|
|
7,200 |
|
| ACCOUNT BALANCES |
|
|
|
|
|
|
|
|
| Accounts payable and accrued liabilities to Shepherd Neame Ltd. |
|
|
3,894,900 |
|
|
|
4,856,900 |
|
| Accounts receivable and prepayments to Shepherd Neame Ltd. |
|
|
356,300 |
|
|
|
344,700 |
|
Independent outside members of the Board of Directors are compensated
for their services. Expenses related to this compensation totaled $114,000 and $91,000 for the years ended December 31, 2012 and
2011 and are included in general and administrative expenses on the statements of operations and comprehensive income.
11. Concentrations and Credit Risk
Financial instruments that potentially subject
the Company to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable.
Substantially all of the Company’s cash and cash equivalents are deposited with commercial banks that have minimal credit
risk, in the US and the UK. Accounts receivable are generally unsecured and customers are subject to an initial credit review
and ongoing monitoring. Wholesale distributors account for substantially all accounts receivable; therefore, this risk concentration
is limited due to the number of distributors and the laws regulating the financial affairs of distributors of alcoholic beverages.
The Company has approximately $75,300 in cash deposits and $2,889,900 of accounts receivable due from customers located in the
UK as of December 31, 2012.
The Company could experience labor disputes,
work stoppages or other disruptions in production that could adversely affect it. As of December 31, 2012, union represented approximately
18% of the Company’s US-based workforce. On that date, the Company had approximately fourteen employees at its California
(“CA”) facility who were working under a collective bargaining agreement. The agreement covering the CA facility expires
on July 31, 2013.
Gross sales to the top five customers totaled
$9,245,700 and $10,576,900 for the years ended December 31, 2012 and 2011, which represents 23% and 26% of sales for the years
ended December 31, 2012 and 2011, respectively. Gross sales to Shepherd Neame for the years ended December 31, 2012 and 2011 was
$3,527,000 and $5,063,000, which represented 9% and 12% of sales for those years respectively. No other customer individually
represented greater than 5% of revenue.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
12. Stockholders’
Equity
Preferred Stock
Ten million shares of preferred stock have
been authorized, of which 227,600 are designated as Series A. Series A shareholders are entitled to receive cash dividends and/or
liquidation proceeds equal, in the aggregate, to $1.00 per share before any cash dividends are paid on the common stock or any
other series of preferred stock. When the entire Series A dividend/liquidation proceeds have been paid, the Series A shares are
automatically canceled and will cease to be outstanding. Only a complete corporate dissolution will cause a liquidation preference
to be paid.
13. Income
Taxes
The large accumulated losses from past operations
have resulted in the Company determining that the deferred tax assets associated with net operating loss carryforwards may expire
prior to utilization. Although the Company had net income in 2012 and 2011, it had net losses in previous years. Because of the
uncertainty of realization of any tax assets, the Company provided a full valuation allowance against its net deferred tax assets
at December 31, 2012 and 2011. Consequently, no benefit for deferred tax assets appears on the Company’s financial statements.
The Company’s income tax expense is
summarized as follows:
| |
|
2012 |
|
|
2011 |
|
| Provision for income taxes |
|
|
|
|
|
|
|
|
| US Federal |
|
$ |
- |
|
|
$ |
- |
|
| US States |
|
|
2,700 |
|
|
|
7,100 |
|
| Current provision |
|
|
2,700 |
|
|
|
7,100 |
|
| Change in deferred income taxes |
|
|
- |
|
|
|
- |
|
| Total provision for income taxes |
|
$ |
2,700 |
|
|
$ |
7,100 |
|
The difference between
the actual income tax provision and the tax provision computed by applying the statutory US federal and United Kingdom income
tax rates to earnings before taxes is attributable to the following:
| |
|
2012 |
|
|
2011 |
|
| US Federal income tax expense (benefit) at 34% |
|
$ |
(26,600 |
) |
|
$ |
88,400 |
|
| US State income tax expense (benefit) |
|
|
21,800 |
|
|
|
1,900 |
|
| United Kingdom income tax expense (benefit) at 20% |
|
|
127,900 |
|
|
|
(42,100 |
) |
| Non deductible expenses |
|
|
17,400 |
|
|
|
22,600 |
|
| Change in tax assumptions and other tax items |
|
|
1,800 |
|
|
|
1,334,300 |
|
| Change in valuation allowance |
|
|
(139,600 |
) |
|
|
(1,398,000 |
) |
| Total |
|
$ |
2,700 |
|
|
$ |
7,100 |
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
In order to clearly reflect its tax and economic
position, the Company changed its assumptions in 2011 regarding the tax effects of utilizing net operating losses, its investment
in its subsidiary in the United Kingdom, and the timing of repatriation of any future profits from that subsidiary. These changes
in assumptions reduced the Company’s gross tax assets in 2011.
Temporary differences and carryforwards that
give rise to deferred tax assets and liabilities are as follows:
| |
|
2012 |
|
|
2011 |
|
| Benefit of net operating loss carryforwards |
|
$ |
5,282,300 |
|
|
$ |
5,299,100 |
|
| Depreciation and amortization |
|
|
(1,827,900 |
) |
|
|
(1,677,000 |
) |
| Other |
|
|
103,600 |
|
|
|
75,500 |
|
| Subtotal |
|
|
3,558,000 |
|
|
|
3,697,600 |
|
| Less valuation allowance |
|
|
(3,558,000 |
) |
|
|
(3,697,600 |
) |
| Total |
|
$ |
- |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
| Change in valuation allowance |
|
$ |
(139,600 |
) |
|
$ |
(1,398,000 |
) |
The Company has net operating losses available
for carry forward. The US Federal net operating losses total approximately $13,487,000 and expire beginning 2017 and ending in
2032. The US state operating losses total approximately $926,000 and expire beginning in 2014 and ending 2029. The Company’s
UK operating losses total approximately $3,073,000 and they do not expire.
Tax years that remain open for examination
by the Internal Revenue Service and the US states include 2009, 2010, and 2011; the Company expects to file its 2012 returns in
the summer of 2013. California may still examine 2008 because of its longer statute of limitations. Additional years may be examined
in the event of criminal tax fraud, and any year may be subject to examination to the extent that the Company utilizes the net
operating losses from those years in its current or future tax returns.
14. Segment
Information
The Company’s business presently consists
of two segments – the North American Territory and the Foreign Territory.
The Company’s operations in the North
American Territory consist primarily of brewing and marketing proprietary craft beers. For distribution in the North American
Territory, the Company brews its brands in its own facilities, which are located in Ukiah, California and Saratoga Springs, New
York. This segment accounted for approximately 43% and 42% of the Company’s gross sales during the years 2012 and 2011,
respectively.
The Company’s operations in the Foreign
Territory, which are conducted through its wholly-owned subsidiary UBIUK and UBIUK’s wholly-owned subsidiary KBEL, consist
primarily of the marketing and distribution of Kingfisher Premium Lager in the Foreign Territory through Indian restaurants, chain
retail grocers, liquor stores, and other retail outlets (such as convenience stores). This segment accounted for approximately
57% and 58% of the Company’s gross sales during 2012 and 2011 respectively.
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
A summary of each segment is as follows:
| |
|
Year Ended December 31, 2012 |
|
| |
|
Brewing
Operations |
|
|
Distributor
Operations |
|
|
Corporate
and Other |
|
|
Total |
|
| Sales |
|
$ |
17,319,600 |
|
|
$ |
23,016,300 |
|
|
|
|
|
|
$ |
40,335,900 |
|
| Operating income |
|
|
239,300 |
|
|
|
695,900 |
|
|
|
|
|
|
|
935,200 |
|
| Identifiable assets |
|
|
12,775,100 |
|
|
|
4,440,800 |
|
|
|
3,035,600 |
|
|
|
20,251,500 |
|
| Depreciation and amortization |
|
|
616,000 |
|
|
|
432,100 |
|
|
|
|
|
|
|
1,048,100 |
|
| Capital expenditures |
|
|
1,086,600 |
|
|
|
416,500 |
|
|
|
|
|
|
|
1,503,100 |
|
| |
|
Year Ended December 31,2011 |
|
| |
|
Brewing
Operations |
|
|
Distributor
Operations |
|
|
Corporate
and Other |
|
|
Total |
|
| Sales |
|
$ |
17,195,700 |
|
|
$ |
24,015,400 |
|
|
|
|
|
|
$ |
41,211,100 |
|
| Operating income (loss) |
|
|
615,300 |
|
|
|
(122,900 |
) |
|
|
|
|
|
|
492,400 |
|
| Identifiable assets |
|
|
12,148,600 |
|
|
|
4,484,200 |
|
|
|
3,084,900 |
|
|
|
19,717,700 |
|
| Depreciation and amortization |
|
|
632,300 |
|
|
|
855,700 |
|
|
|
|
|
|
|
1,488,000 |
|
| Capital expenditures |
|
|
506,800 |
|
|
|
519,100 |
|
|
|
|
|
|
|
1,025,900 |
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
15. Unrestricted
Net Assets
The Company’s wholly-owned
subsidiary, UBIUK, has cumulative losses of approximately £1,428,000 ($2,322,200) as of December 31, 2012. Under KBEL’s
line of credit agreement with RBS, distributions and other payments to the Company from its subsidiary are not permitted if the
subsidiary’s retained earnings drop below £1,000,000 ($1,626,200). Condensed financial information of the United States
operations is as follows:
| Balance Sheets |
|
2012 |
|
|
2011 |
|
| |
|
|
|
|
|
|
| Assets |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
123,200 |
|
|
$ |
187,200 |
|
| Accounts receivable, net |
|
|
2,531,700 |
|
|
|
2,308,400 |
|
| Inventories |
|
|
1,910,500 |
|
|
|
1,799,600 |
|
| Other current assets |
|
|
111,900 |
|
|
|
126,800 |
|
| Total current assets |
|
|
4,677,300 |
|
|
|
4,422,000 |
|
| |
|
|
|
|
|
|
|
|
| Investment in subsidiary |
|
|
1,225,000 |
|
|
|
1,225,000 |
|
| Property and equipment |
|
|
10,864,600 |
|
|
|
10,349,000 |
|
| Intercompany receivable |
|
|
471,400 |
|
|
|
231,400 |
|
| Other assets |
|
|
268,800 |
|
|
|
462,500 |
|
| Total assets |
|
$ |
17,507,100 |
|
|
$ |
16,689,900 |
|
| |
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
| Line of credit |
|
$ |
1,887,700 |
|
|
$ |
895,300 |
|
| Accounts payable |
|
|
1,584,300 |
|
|
|
1,511,400 |
|
| Accrued liabilities |
|
|
884,300 |
|
|
|
824,300 |
|
| Current maturities of debt and capital leases |
|
|
453,100 |
|
|
|
473,100 |
|
| Total current liabilities |
|
|
4,809,400 |
|
|
|
3,704,100 |
|
| |
|
|
|
|
|
|
|
|
| Long-term debt and capital leases |
|
|
3,982,400 |
|
|
|
4,280,900 |
|
| Notes to related parties |
|
|
3,407,000 |
|
|
|
3,315,700 |
|
| Total liabilities |
|
|
12,198,800 |
|
|
|
11,300,700 |
|
| |
|
|
|
|
|
|
|
|
| Stockholders’ equity |
|
|
|
|
|
|
|
|
| Common stock |
|
|
15,100,300 |
|
|
|
15,100,300 |
|
| Preferred stock |
|
|
227,600 |
|
|
|
227,600 |
|
| Accumulated deficit |
|
|
(10,019,600 |
) |
|
|
(9,938,700 |
) |
| Total stockholders’ equity |
|
|
5,308,300 |
|
|
|
5,389,200 |
|
| Total liabilities and stockholders’ equity |
|
$ |
17,507,100 |
|
|
$ |
16,689,900 |
|
Mendocino
Brewing Company, Inc.
Notes
to Consolidated Financial Statements
December
31, 2012 and 2011
15. Unrestricted
Net Assets (continued)
| Statement of Operations |
|
2012 |
|
|
2011 |
|
| |
|
|
|
|
|
|
| Net sales |
|
$ |
16,228,300 |
|
|
$ |
16,138,400 |
|
| Cost of goods sold |
|
|
12,383,900 |
|
|
|
12,037,300 |
|
| Selling, marketing, and retail expenses |
|
|
1,754,500 |
|
|
|
1,698,400 |
|
| General and administrative expenses |
|
|
1,984,600 |
|
|
|
1,912,100 |
|
| Income from operations |
|
|
105,300 |
|
|
|
490,600 |
|
| |
|
|
|
|
|
|
|
|
| Other income and (expense) |
|
|
|
|
|
|
|
|
| Interest expenses |
|
|
(380,000 |
) |
|
|
(382,200 |
) |
| Other income |
|
|
196,500 |
|
|
|
158,700 |
|
| Provision for taxes |
|
|
(2,700 |
) |
|
|
(7,100 |
) |
| |
|
|
(186,200 |
) |
|
|
(230,600 |
) |
| Net income (loss) |
|
$ |
(80,900 |
) |
|
$ |
260,000 |
|
| Statements of Cash Flows |
|
2012 |
|
|
2011 |
|
| |
|
|
|
|
|
|
| Cash flows from operating activities |
|
$ |
583,700 |
|
|
$ |
464,800 |
|
| Cash used in investing activities |
|
|
|
|
|
|
|
|
| Purchase of property and equipment |
|
|
(1,086,600 |
) |
|
|
(506,800 |
) |
| Proceeds from sale of equipment |
|
|
5,000 |
|
|
|
- |
|
| Net cash flows used in investing |
|
|
(1,081,600 |
) |
|
|
(506,800 |
) |
| Cash flow from financing activities |
|
|
|
|
|
|
|
|
| Net borrowings (repayments) on line of credit |
|
|
992,400 |
|
|
|
(725,900 |
) |
| Borrowings on long term debt |
|
|
184,700 |
|
|
|
4,881,000 |
|
| Repayment of long-term debt |
|
|
(456,800 |
) |
|
|
(3,694,200 |
) |
| Payment on obligations under capital leases |
|
|
(46,400 |
) |
|
|
(47,300 |
) |
| Net change in intercompany payable |
|
|
(240,000 |
) |
|
|
(249,300 |
) |
| Net cash flows from financing activities |
|
|
433,900 |
|
|
|
164,300 |
|
| Cash, beginning of year |
|
|
187,200 |
|
|
|
64,900 |
|
| Cash, end of year |
|
$ |
123,200 |
|
|
$ |
187,200 |
|
