United states
securities and exchange commission
Washington, D.C. 20549
Form 10-q
(Mark One) | |
[X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2013
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 its Charter)
California | 68-0318293 | |
(State or Other Jurisdiction of | (IRS Employer | |
Incorporation or Organization) | Identification No.) | |
1601 Airport Road, Ukiah, CA | 95482 | |
(Address of principal executive offices) | (Zip Code) |
(707) 463-2087
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(check one)
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 Exchange Act). Yes [ ] No [X]
The number of shares of the issuer’s common stock outstanding as of August 10, 2013 is 12,611,133.
Table of Contents
PART I FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | F-1 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 3 | |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 12 | |
Item 4. | Controls and Procedures | 12 | |
PART II OTHER INFORMATION | |||
Item 3. | Defaults Upon Senior Securities | 12 | |
Item 6. | Exhibits | 13 | |
SIGNATURES | 14 |
2 |
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2013 | December 31, 2012 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 96,900 | $ | 198,500 | ||||
Accounts receivable, net | 4,635,900 | 5,421,600 | ||||||
Inventories | 1,942,600 | 1,910,500 | ||||||
Prepaid expenses | 721,900 | 514,900 | ||||||
Total Current Assets | 7,397,300 | 8,045,500 | ||||||
Property and Equipment, net | 11,818,900 | 11,937,200 | ||||||
Deposits and other assets | 310,700 | 268,800 | ||||||
Total Assets | $ | 19,526,900 | $ | 20,251,500 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Secured lines of credit | $ | 3,155,400 | $ | 3,159,700 | ||||
Accounts payable | 5,088,600 | 5,693,600 | ||||||
Accrued liabilities | 1,486,800 | 1,652,100 | ||||||
Current maturities of long-term debt | 4,715,300 | 450,000 | ||||||
Current maturities of obligations under capital leases | - | 3,100 | ||||||
Total Current Liabilities | 14,446,100 | 10,958,500 | ||||||
Long-Term Liabilities | ||||||||
Notes to related parties | 3,452,100 | 3,407,000 | ||||||
Long term debts, less current maturities | - | 3,982,400 | ||||||
Total Long-Term Liabilities | 3,452,100 | 7,389,400 | ||||||
Total Liabilities | 17,898,200 | 18,347,900 | ||||||
Stockholders’ Equity | ||||||||
Preferred stock, Series A, no par value, with liquidation preference of $1 per share; 10,000,000 shares authorized, 227,600 shares issued and outstanding | 227,600 | 227,600 | ||||||
Common stock, no par value 30,000,000 shares authorized, 12,611,133 shares issued and outstanding | 15,100,300 | 15,100,300 | ||||||
Accumulated comprehensive income | 554,800 | 406,400 | ||||||
Accumulated deficit | (14,254,000 | ) | (13,830,700 | ) | ||||
Total Stockholders’ Equity | 1,628,700 | 1,903,600 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 19,526,900 | $ | 20,251,500 |
See accompanying notes to these condensed financial statements.
F-1 |
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
THREE
MONTHS ENDED June 30 | SIX
MONTHS ENDED June 30 | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Sales | $ | 9,715,800 | $ | 10,577,500 | $ | 18,113,200 | $ | 20,217,800 | ||||||||
Excise taxes | 204,200 | 307,300 | 366,800 | 517,700 | ||||||||||||
Net sales | 9,511,600 | 10,270,200 | 17,746,400 | 19,700,100 | ||||||||||||
Cost of goods sold | 6,954,200 | 7,339,500 | 12,922,100 | 14,144,600 | ||||||||||||
Gross profit | 2,557,400 | 2,930,700 | 4,824,300 | 5,555,500 | ||||||||||||
Operating expenses | ||||||||||||||||
Marketing | 1,410,300 | 1,361,300 | 2,651,300 | 2,842,400 | ||||||||||||
General and administrative | 1,104,700 | 986,900 | 2,371,900 | 2,068,100 | ||||||||||||
Total operating expenses | 2,515,000 | 2,348,200 | 5,023,200 | 4,910,500 | ||||||||||||
Income (loss) from operations | 42,400 | 582,500 | (198,900 | ) | 645,000 | |||||||||||
Other income (expense) | ||||||||||||||||
Other income | 8,600 | 6,600 | 11,900 | 10,100 | ||||||||||||
Profit on sale of asset | - | 5,100 | - | 9,400 | ||||||||||||
Interest expense | (120,100 | ) | (108,800 | ) | (231,300 | ) | (225,100 | ) | ||||||||
Total other expenses | (111,500 | ) | (97,100 | ) | (219,400 | ) | (205,600 | ) | ||||||||
Income (loss) before income taxes | (69,100 | ) | 485,400 | (418,300 | ) | 439,400 | ||||||||||
Provision for income taxes | - | - | 5,000 | 800 | ||||||||||||
Net income (loss) | $ | (69,100 | ) | $ | 485,400 | $ | (423,300 | ) | $ | 438,600 | ||||||
Foreign currency translation income (loss) | (4,200 | ) | 61,000 | 148,400 | (33,600 | ) | ||||||||||
Comprehensive income (loss) | $ | (73,300 | ) | $ | 546,400 | $ | (274,900 | ) | $ | 405,000 | ||||||
Net income (loss) per common share – | ||||||||||||||||
Basic
| $ | (0.01 | ) | $ | 0.04 | $ | (0.03 | ) | $ | 0.03 | ||||||
Diluted | $ | (0.01 | ) | $ | 0.03 | $ | (0.03 | ) | $ | 0.03 | ||||||
Weighted average common shares outstanding – | ||||||||||||||||
Basic | 12,611,133 | 12,611,133 | 12,611,133 | 12,611,133 | ||||||||||||
Diluted | 12,611,133 | 14,868,393 | 12,611,133 | 14,868,393 |
See accompanying notes to these condensed financial statements.
F-2 |
MENDOCINO BREWING COMPANY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2013 | 2012 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income (loss) | $ | (423,300 | ) | $ | 438,600 | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: | ||||||||
Depreciation and amortization | 523,400 | 512,300 | ||||||
Provision for doubtful accounts | (40,200 | ) | (9,700 | ) | ||||
Interest accrued on related party debt | 45,100 | 45,400 | ||||||
(Profit) on sale of assets | - | (9,400 | ) | |||||
Changes in: | ||||||||
Accounts receivable | 660,400 | 152,800 | ||||||
Inventories | (32,900 | ) | (33,300 | ) | ||||
Prepaid expenses | (233,900 | ) | (184,400 | ) | ||||
Deposits and other assets | (77,600 | ) | (62,900 | ) | ||||
Accounts payable | (346,700 | ) | (1,242,500 | ) | ||||
Accrued liabilities | (119,100 | ) | 250,600 | |||||
Net cash used in operating activities | (44,800 | ) | (142,500 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchases of property and equipment | (451,500 | ) | (303,100 | ) | ||||
Proceeds from sale of fixed assets | - | 12,200 | ||||||
Net cash used in investing activities | (451,500 | ) | (290,900 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net borrowing on line of credit | 78,000 | 419,300 | ||||||
Borrowing on long-term debt | 539,700 | 184,700 | ||||||
Repayment on long-term debt | (256,800 | ) | (306,400 | ) | ||||
Payments on obligations under long term leases | (3,100 | ) | (36,100 | ) | ||||
Net cash provided by financing activities | 357,800 | 261,500 | ||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 36,900 | (6,300 | ) | |||||
NET CHANGE IN CASH | (101,600 | ) | (178,200 | ) | ||||
CASH, beginning of period | 198,500 | 312,200 | ||||||
CASH, end of period | $ | 96,900 | $ | 134,000 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION | ||||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 5,000 | $ | 800 | ||||
Interest | $ | 186,200 | $ | 179,700 |
See accompanying notes to these condensed financial statements.
F-3 |
MENDOCINO BREWING COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Operations and Summary of Significant Accounting Policies
Description of Operations
Mendocino Brewing Company, Inc. was formed in 1983 in California, and has two operating subsidiaries: Releta Brewing Company, LLC (“Releta”), and United Breweries International (UK) Limited (“UBIUK”). The terms “we”, “us”, “our”, and the “Company” and its 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. standing alone. In the United States (the “US”), MBC and 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 MBC in the US are in California. We brew several brands, of which Red Tail Ale is the flagship brand. In addition, we perform contract brewing for several other brands. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with state and local laws.
MBC’s United Kingdom (the “UK”) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (“KBEL”). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in the UK and Europe. The distributorship is located in Maidstone, Kent in the UK. In addition, through UBIUK, the Company has production and distribution rights to Kingfisher Premium Lager in the Canada and, until October 2013, the United States. Generally sales are made through distributors. We are arranging to maintain production and distribution rights for Kingfisher in the United States after October 2013.
Subsequent Events
We evaluate 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 on which our 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 MBC 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 accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the US. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in our most recent Annual Report on Form 10-K, as filed with the SEC, which contains additional financial and operating information and information concerning significant accounting policies followed by the Company. The financial statements and notes are representations of our management (“Management”) and board of directors (the “Board of Directors”), who are responsible for their integrity and objectivity.
Operating results from the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or any future period.
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.
F-4 |
SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in our significant accounting policies during the six months ended June 30, 2013 compared to what was previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
Cash and Cash Equivalents, Short and Long-Term Investments
For purposes of cash flows, we consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Revenue Recognition
We recognize revenue from the brewing and distribution operations in accordance with Accounting Standards Codification 605 of the Financial Accounting Standards Board. We recognize revenue from product sales, net of discounts.
We recognize 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” – We document 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” – We deliver the products prior to recognizing revenue and we perform 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 our 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” – We determine that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. We do 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.
We record certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as an expense. We report these items on the income statement as a reduction in revenue and as a corresponding reduction in marketing and selling expenses.
Revenues from our brewpub and gift store are recognized when sales have been completed.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Balances over 90 days past due and other higher risk amounts are reviewed individually for collectability. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on Management’s assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
F-5 |
Inventories
Inventories are stated at the lower of average cost, which approximates the first-in, first-out method, or market (net realizable value). We regularly review our 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.
Deferred Financing Costs
Costs relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related to a borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $22,500 and $11,300 for the six and three months ended June 30, 2013 and 2012 respectively.
Concentrations
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Substantially all of our cash and cash equivalents are deposited with commercial banks in the US and the UK that have minimal credit risk. 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. As of June 30, 2013, we have approximately $2,127,100 of accounts receivable due from UK customers.
Labor disputes, work stoppages or other disruptions in production could adversely affect us. As of June 30, 2013, union members represented approximately 18% of our US-based workforce. MBC has approximately fourteen employees at its Ukiah, California facility who were working under a collective bargaining agreement that expired on July 31, 2013. The union and management are currently negotiating a new agreement.
Income Taxes
We account 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. We periodically assess uncertain tax positions that we have taken or expect to take on tax returns, including decisions whether to file returns in any particular jurisdiction. We have evaluated our tax positions and have determined that there were no uncertain tax benefits as of June 30, 2013 and December 31, 2012.
F-6 |
Basic and Diluted Earnings (Loss) per Share
The basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes. If the Company’s operations result in net loss for any period, diluted net loss per share would be the same as basic net loss per share, since the effect of any potentially dilutive securities would be anti-dilutive. Therefore, the conversion of the related party notes has been excluded from the Company’s calculation of net loss per share. The computations of basic and dilutive net loss per share are as follows:
Three months ended | Six months ended | |||||||||||||||
6/30/2013 | 6/30/2012 | 6/30/2013 | 6/30/2012 | |||||||||||||
Net income (loss) | $ | (69,100 | ) | 485,400 | $ | (423,300 | ) | 438,600 | ||||||||
Weighted average common shares outstanding | 12,611,133 | 12,611,133 | 12,611,133 | 12,611,133 | ||||||||||||
Basic net income (loss) per share | $ | (0.01 | ) | 0.04 | $ | (0.03 | ) | 0.03 | ||||||||
Interest expense on convertible notes | $ | - | 22,700 | $ | - | 45,400 | ||||||||||
Income (loss) for computing diluted net income per share | $ | (69,100 | ) | 508,100 | $ | (423,300 | ) | 484,000 | ||||||||
Incremental shares from assumed exercise of dilutive securities | - | 2,257,260 | - | 2,257,260 | ||||||||||||
Dilutive potential common shares | 12,611,133 | 14,868,393 | 12,611,133 | 14,868,393 | ||||||||||||
Diluted net earnings (loss) per share | $ | (0.01 | ) | 0.03 | $ | (0.03 | ) | 0.03 |
Foreign Currency Translation
The local currency in the UK, the UK Pound Sterling, is the functional currency for our UK subsidiaries. Financial statements of these subsidiaries are translated into US dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation adjustments associated with net assets or liabilities are reported in non-owner changes in equity. Any exchange rate gains or losses related to foreign currency transactions are recognized in the income statement as incurred, in the same financial statement caption as the underlying transaction, and are not material for any year shown. Cash flows were translated at the average exchange rates for the three months 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 US includes having us make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The amounts estimated could differ from actual results. Significant estimates include the allowance for bad debts, depreciation and amortization periods, and the future utilization of deferred tax assets.
Comprehensive Income (Loss)
Comprehensive income (loss) is composed of our net loss and changes in equity from non-stockholder sources. The accumulated balances of these non-stockholder sources are reflected as a separate item in the equity section of the balance sheet.
F-7 |
Reportable Segments
Our operations are managed through two business segments: (i) brewing operations and tasting room operations in the US, and distributor operations in Canada (the “North American Territory”); and (ii) distributor operations in Europe, including the UK (the “Foreign Territory”). We evaluate performance based on net operating profit. Where applicable, portions of our administrative expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. If any materials and/or services are provided to one operating segment by the other, the transaction is valued according to our 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.
2. Liquidity and Management Plans
Cole Taylor Facility. On June 23, 2011, MBC and Releta entered into a Credit and Security Agreement (the “Agreement”) with Cole Taylor Bank, an Illinois banking corporation (“Cole Taylor”). The Agreement provides a credit facility with a maturity date of June 23, 2016 of up to $10,000,000 consisting of a $4,119,000 revolving facility, a $1,934,000 machinery and equipment term loan, a $2,947,000 real estate term loan and a $1,000,000 capital expenditure line of credit. A significant portion of the proceeds received under the Agreement were used to repay credit facilities provided by Marquette Business Credit, Inc. and Grand Pacific Financing Corporation. Convertible promissory notes issued to United Breweries of America, Inc. (“UBA”), one of the Company’s principal shareholders, are subordinated to the Cole Taylor facility.
On March 29, 2013, MBC, Releta, and Cole Taylor entered into a First Amendment (the “Amendment”) to the Agreement to clarify the method by which the fixed charge coverage ratio is calculated. The Amendment also provided that to the extent MBC and Releta may have been in breach of the covenants related to the fixed charge coverage ratio for certain periods before December 31, 2012, such breach is waived and no event of default has occurred by reason of such breach.
The Agreement requires MBC and Releta to maintain certain financial covenants, including a minimum fixed charge coverage ratio of 1.05 to 1.00 as of the end of each month for the trailing twelve month period. As previously reported, on April 29, 2013, we determined that the fixed charge coverage ratio for the trailing twelve month period ended March 31, 2013 fell short and was 0.90 to 1.00. The Agreement provides that the failure to observe any financial covenant will constitute an event of default, causing all of our obligations under the Agreement to immediately and automatically become due and payable, without notice. The event of default is deemed continuing until waived in writing by Cole Taylor. In a letter received from Cole Taylor on May 8, 2013 (the “Letter”), Cole Taylor acknowledged the Company’s shortfall as of March 31, 2013, but stated that Cole Taylor has not exercised any default rights or remedies under the Agreement as a result of such default. The Letter further provides that Cole Taylor will continue to monitor the situation and the Company’s performance, and reserves all rights and remedies available to it in connection with such default. The fixed charge coverage ratio for the trailing twelve month period had continued to fall, and as of June 30, 2013, was 0.28 to 1.00. Cole Taylor is aware that we are not in compliance with the required ratio.
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 is automatically extended unless terminated by either party upon six months’ written notice.
Heineken Facility. As previously reported, on April 18, 2013, KBEL entered into a Loan Agreement pursuant to which Heineken UK Limited (“Heineken”) agreed to provide KBEL with a secured term loan facility of £1,000,000 to be made available, subject to the fulfillment of certain conditions precedent, on October 9, 2013 and to be repaid in full by October 9, 2016. The Loan Agreement with Heineken is described under the section captioned “Description Of Our Indebtedness” below.
F-8 |
Additional Debt. We have several loans, lines of credit, other credit facilities and lease agreements which are currently outstanding (collectively, “Indebtedness”). We currently make timely payments of principal and interest relating to the Indebtedness as they fall due and anticipate that we will continue to make such timely payments in the immediate future. However, if we fail to maintain any of the financial covenants under the various agreements governing Indebtedness (such as the default under the Agreement described above), fail to make timely payments of amounts due under the Indebtedness, or commit any other breach resulting in an event of default under the agreements governing Indebtedness, such events of default (including cross-defaults) could have a material adverse effect on our financial condition. If our existing debt were accelerated and terminated, we would need to obtain replacement financing, the lack of which would have a material adverse effect on our financial condition and ability to continue operations. In addition, actions taken by secured parties against the Company’s assets which have been pledged as collateral could have a material adverse effect on our financial condition and operations.
At June 30, 2013, we had cash and cash equivalents of $96,900, an accumulated deficit of $14,254,000, and a working capital deficit of $7,048,800 due to losses incurred and reclassification of debts owing to Cole Taylor as a result of the event of default under the Agreement described above.
UBHL Support. On March 22, 2013, United Breweries (Holdings) Limited (“UBHL”), MBC’s indirect majority shareholder, 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. The Letter of Support does not specify either the terms of UBHL’s support, or a maximum dollar limit. 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 a twelve month minimum period, but, if necessary, Management intends to seek UBHL’s consent to extend the stated support. UBHL controls the Company’s two largest shareholders, UBA and Inversiones Mirabel S.A., and as such, UBHL is the Company’s indirect majority shareholder. The Chairman of the Company’s Board of Directors, Dr. Vijay Mallya, is also the chairman of the board of directors of UBHL.
Summary. Management has taken several actions to enable us to meet our working capital needs through June 30, 2014, including reducing discretionary expenditures, expanding business in new territories, and securing additional brewing contracts in an effort to utilize a portion of excess production capacity. We may also seek additional capital infusions to support our operations.
If it becomes necessary to seek UBHL’s financial assistance under the Letter of Support and UBHL does not fulfill its commitment to KBEL, it may result in a material adverse effect on our financial position and on our ability to continue operations. In addition, our lenders may seek to satisfy any outstanding obligations through recourse against the applicable pledged collateral which may include our real property and fixed and current assets. The loss of any material pledged asset would likely have a material adverse effect on our financial position and results of operations.
3. Inventories
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.
Inventories consist of the following:
June 30, 2013 | December 31, 2012 | |||||||
Raw Materials | $ | 852,900 | $ | 807,000 | ||||
Beer-in-process | 299,600 | 323,600 | ||||||
Finished Goods | 689,600 | 732,300 | ||||||
Merchandise | 100,500 | 47,600 | ||||||
TOTAL | $ | 1,942,600 | $ | 1,910,500 |
F-9 |
4. Secured Lines of Credit
In June 2011, Cole Taylor provided a line of credit, from which may be drawn up to 85% of eligible receivables and 60% of eligible inventory during the period ending 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 prime plus 1% and is secured by substantially all of the assets of Releta and MBC. The amount outstanding on this line of credit as of June 30, 2013 was $1,963,400. We have included as accounts receivable on our June 30, 2013 balance sheet, $2,508,800 of accounts receivables and $1,887,400 of inventory collateralized to Cole Taylor under this facility.
On April 26, 2005, 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 one year, after which time the facility could be terminated by either party upon 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 June 30, 2013 was $1,192,000. Account balances totaling $2,127,100 of accounts receivables collateralized to RBS under this facility are included in our balance sheet as accounts receivable at June 30, 2013.
5. Long-Term Debt
Maturities of long-term debt for succeeding years are as follows:
June 30, 2013 | December 31, 2012 | |||||||
Loan from Cole Taylor, payable in monthly installments of $12,300, plus interest at prime plus 2% with a balloon payment of approximately $2,202,500 in June 2016; secured by substantially all assets of Releta and MBC. | $ | 2,644,600 | $ | 2,718,300 | ||||
Loans from Cole Taylor, payable in monthly installments of $32,300 plus interest at prime plus 1.5% with a balloon payment of approximately $908,700 in June 2016; secured by substantially all assets of Releta and MBC. | 2,070,700 | 1,714,100 | ||||||
4,715,300 | 4,432,400 | |||||||
Less current maturities | 4,715,300 | 450,000 | ||||||
$ | - | $ | 3,982,400 |
6. Notes to Related Parties
Subordinated Convertible Notes Payable
Notes payable to related parties includes unsecured convertible notes to UBA (the “UBA Notes”) for a total value of $3,452,100 as of June 30, 2013, including annual interest at the prime rate plus 1.5%, but not to exceed 10%. Thirteen of the UBA Notes are convertible into common stock at a rate of $1.50 per share and one UBA Note is convertible at a rate of $1.44 per share. The UBA Notes have been extended until June 2014 and have automatic renewals after such maturity date for successive one year terms, provided that either we 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 the applicable term. Under the terms of the UBA Notes, UBA may demand payment within 60 days following the end of the extension period, but UBA has agreed to subordinate the UBA Notes to our long-term debt agreements with Cole Taylor, which mature in June 2016. Therefore, we 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 include $1,536,700 and $1,491,600 of accrued interest at June 30, 2013 and December 31, 2012, respectively.
F-10 |
7. Commitments and Contingencies
Purchase of raw materials
Production of our beverages requires quantities of various processed agricultural products, including malt and hops for beer. We fulfill our commodities requirements through purchases from various sources, some through contractual arrangements and others on the open market.
Legal
We are periodically involved in legal actions and claims that arise as a result of events that occur in the normal course of operations. Management, together with our legal counsel, assesses the resulting contingent liabilities, and such assessment inherently involves the exercise of judgment.
We are not currently aware of any legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our financial position or results of operations.
Operating Leases
We lease some 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, we expect 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 us to pay certain costs, including real estate taxes, insurance and repairs.
We have various lease agreements for the brewpub and gift store in Ukiah, California, the brewery at Releta’s Saratoga Springs, New York facility, a building in the UK, and certain equipment. The New York lease includes a renewal option for three additional five-year periods, which Releta intends to exercise, and some leases are adjusted annually for changes in the Consumer Price Index. The leases begin expiring in 2014.
Keg Management Agreement
MicroStar Keg Management LLC (“MicroStar”), provides all of our kegs, for which we pay a service fee depending on the applicable territory. We are required to purchase four times the average monthly keg usage for the preceding six-months upon the termination of our agreement with MicroStar. Although our agreement currently terminates in September, 2014, we expect to continue this relationship.
8. Related-Party Transactions
We have entered into several agreements with affiliated and related entities, including, but not limited to, 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 UBHL. KBEL is a party to a brewing agreement and a loan agreement with Shepherd Neame Limited (“Shepherd Neame”).
As previously reported, on March 11, 2013, UBIUK entered into an amendment (the “UBIUK License Amendment”) of that certain License Agreement between UBIUK and United Breweries Limited, an Indian corporation (“UB”), dated as of October 8, 1998, as amended (the “UBIUK License”). The UBIUK License grants UBIUK the exclusive license to use certain trademarks and do all things necessary to manufacture, package, market, distribute and sell Kingfisher beer in a defined territory. Also as previously reported, on March 11, 2013, UBIUK entered into an amendment (the “KBEL Amendment”) of that certain Distribution Agreement between UBIUK and KBEL dated October 9, 1998, as amended (the “KBEL License”). The KBEL License grants KBEL exclusive distribution rights with respect to Kingfisher beer, and sub-licenses to KBEL rights granted to UBIUK pursuant to the UBIUK License, in each case, within a defined territory. The KBEL Amendment, together with the UBIUK License Amendment, are referred to in this report as the “Subsidiary Amendments”.
F-11 |
Both Subsidiary Amendments shall be effective October 9, 2013. When effective, the Subsidiary Amendments will: (i) acknowledge that the brewing agreement among UBIUK, KBEL and Shepherd Neame will be replaced with a new contract brewing agreement between KBEL and Heineken; (ii) authorize KBEL to enter into loan and sub-license agreements with Heineken; (iii) expand the territory covered by the UBIUK License and the KBEL License to cover Canada, additional countries in eastern Europe, and the Caribbean Islands; (iv) delete the United States from the list of territories covered by the UBIUK License and the KBEL License; and (v) extend the term of the UBIUK License and the KBEL License until October 9, 2018.
Also as previously reported, on March 11, 2013, KBEL entered into an amendment (the “Company Amendment”) of that certain Brewing License Agreement between KBEL and the Company dated October 26, 2001 as amended (the “Company License”). The Company License currently grants us rights to distribute Kingfisher beer in the United States. When effective, the Company Amendment will change the territory covered by the Company License from the United States to Canada and the Caribbean Islands.
Although, when effective, the Subsidiary Amendments and the Company Amendment will not provide license and distribution rights in the United States, we plan to negotiate the continued right to use Kingfisher trademarks and distribute Kingfisher beer in the United States pursuant to a separate arrangement. Also, as previously disclosed, the Chairman of the Company’s board of directors, Dr. Vijay Mallya, is also the Chairman of UB.
The following tables reflect the value of the transactions during the six months ended June 30, 2013 and 2012 and the balances outstanding as of June 30, 2013 and December 31, 2012.
TRANSACTIONS | June 30, 2013 | June 30, 2012 | ||||||
Sales to Shepherd Neame | $ | 1,667,100 | $ | 1,842,800 | ||||
Purchases from Shepherd Neame | $ | 7,044,200 | $ | 7,856,800 | ||||
Expense reimbursement to Shepherd Neame | $ | 515,300 | $ | 512,900 | ||||
Interest expense related to UBA convertible notes | $ | 45,100 | $ | 45,400 |
ACCOUNT BALANCES | June 30, 2013 | Dec 31, 2012 | ||||||
Accounts payable to Shepherd Neame | $ | 2,841,800 | $ | 3,894,900 | ||||
Accounts receivable from Shepherd Neame | $ | 282,900 | $ | 356,300 |
9. Segment Information
Our 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, we brew our brands in our own facilities, which are located in Ukiah, California and Saratoga Springs, New York. Our operations in the Foreign Territory, which are conducted through UBIUK and KBEL, consist primarily of the marketing and distribution of Kingfisher Premium Lager in the Foreign Territory.
F-12 |
A summary of each segment is as follows:
Six months ended June 30, 2013 | ||||||||||||||||
North
American Territory | Foreign
Territory | Corporate
& Others | Total | |||||||||||||
Net Sales | $ | 7,374,700 | $ | 10,371,700 | $ | - | $ | 17,746,400 | ||||||||
Operating Income (loss) | $ | (249,400 | ) | $ | 50,500 | $ | - | $ | (198,900 | ) | ||||||
Identifiable Assets | $ | 12,734,300 | $ | 3,587,200 | $ | 3,205,400 | $ | 19,526,900 | ||||||||
Depreciation & Amortization | $ | 323,200 | $ | 200,200 | $ | - | $ | 523,400 | ||||||||
Capital Expenditures | $ | 283,000 | $ | 168,500 | $ | - | $ | 451,500 |
Six months ended June 30, 2012 | ||||||||||||||||
North
American Territory | Foreign
Territory | Corporate
& Others | Total | |||||||||||||
Net Sales | $ | 8,569,100 | $ | 11,131,000 | $ | - | $ | 19,700,100 | ||||||||
Operating Income | $ | 440,600 | $ | 204.400 | $ | - | $ | 645,000 | ||||||||
Identifiable Assets | $ | 11,979,700 | $ | 3,697,800 | $ | 3,833,200 | $ | 19,510,700 | ||||||||
Depreciation & Amortization | $ | 309,200 | $ | 203,100 | $ | - | $ | 512,300 | ||||||||
Capital Expenditures | $ | 84,500 | $ | 218,600 | $ | - | $ | 303,100 |
F-13 |
10. Unrestricted Net Assets
Our wholly-owned subsidiary, UBIUK, has undistributed losses of $2,155,900 as of June 30, 2013. Under KBEL’s line of credit agreement with RBS, distributions and other payments to MBC from KBEL are not permitted if retained earnings drop below $1,521,000. Condensed financial information of MBC together with its other subsidiary, Releta is as follows:
June 30, 2013 | December 31, 2012 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Cash | $ | 94,900 | $ | 123,200 | ||||
Accounts receivable, net | 2,508,800 | 2,531,700 | ||||||
Inventories | 1,887,400 | 1,910,500 | ||||||
Prepaid expenses | 291,000 | 111,900 | ||||||
Total current assets | 4,782,100 | 4,677,300 | ||||||
Investment in UBIUK | 1,225,000 | 1,225,000 | ||||||
Property and equipment | 10,846,900 | 10,864,600 | ||||||
Intercompany receivable | 599,400 | 471,400 | ||||||
Other assets | 310,700 | 268,800 | ||||||
Total assets | $ | 17,764,100 | $ | 17,507,100 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Line of credit | $ | 1,963,400 | $ | 1,887,700 | ||||
Accounts payable | 1,759,400 | 1,584,300 | ||||||
Accrued liabilities | 1,005,000 | 884,300 | ||||||
Current maturities of debts and lease | 4,715,300 | 453,100 | ||||||
Total current liabilities | 9,443,100 | 4,809,400 | ||||||
Long-term debts and capital lease | - | 3,982,400 | ||||||
Notes to related parties | 3,452,100 | 3,407,000 | ||||||
Total liabilities | $ | 12,895,200 | $ | 12,198,800 | ||||
Stockholders’ equity | ||||||||
Preferred stock | 227,600 | 227,600 | ||||||
Common stock | 15,100,300 | 15,100,300 | ||||||
Accumulated deficit | (10,459,000 | ) | (10,019,600 | ) | ||||
Total stockholders’ equity | 4,868,900 | 5,308,300 | ||||||
Total liabilities and stockholders’ equity | $ | 17,764,100 | $ | 17,507,100 |
Statements of Operations | Three months ended June 30 | Six months ended June 30 | ||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
(unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
Net sales | $ | 3,790,300 | $ | 4,627,500 | $ | 7,374,700 | $ | 8,569,100 | ||||||||
Cost of goods sold | (3,061,800 | ) | (3,419,100 | ) | (5,844,400 | ) | (6,357,700 | ) | ||||||||
Sales, marketing, and retail expenses | (430,200 | ) | (443,500 | ) | (814,600 | ) | (872,100 | ) | ||||||||
General and administrative expenses | (485,400 | ) | (462,300 | ) | (1,024,100 | ) | (968,600 | ) | ||||||||
Income (loss) from operations | (187,100 | ) | 302,600 | (308,400 | ) | 370,700 | ||||||||||
Other income | 39,800 | 42,900 | 74,400 | 77,600 | ||||||||||||
Interest expense | (102,200 | ) | (92,300 | ) | (200,400 | ) | (189,100 | ) | ||||||||
Provision for taxes | -- | -- | (5,000 | ) | (800 | ) | ||||||||||
Net income (loss) | $ | (249,500 | ) | $ | 253,200 | $ | (439,400 | ) | $ | 258,400 |
F-14 |
Statements of Cash Flows | Six months ended June 30 | |||||||
2013 | 2012 | |||||||
(unaudited) | (unaudited) | |||||||
Cash flows from operating activities | $ | 27,200 | $ | 227,300 | ||||
Purchase of property and equipment | (283,000 | ) | (84,500 | ) | ||||
Proceed from sale of assets | - | 5,000 | ||||||
Net borrowing (repayment) on line of credit | 75,700 | (46,300 | ) | |||||
Borrowing on long term debt | 539,700 | 184,700 | ||||||
Repayment on long term debt | (256,800 | ) | (211,800 | ) | ||||
Payment on obligation under capital lease | (3,100 | ) | (25,000 | ) | ||||
Net change in payable to UBI | (128,000 | ) | (117,100 | ) | ||||
Decrease in cash | (28,300 | ) | (67,700 | ) | ||||
Cash, beginning of period | 123,200 | 187,200 | ||||||
Cash, end of period | $ | 94,900 | $ | 119,500 |
11. Income Taxes
In the six months ended June 30, 2013 and 2012, we recorded tax expenses related to state franchise taxes only, and did not record income tax expenses due to the availability of deferred tax assets to offset any taxable income in the US (at the federal and state level to the extent applicable) and the UK. We have established a full valuation allowance against our deferred tax assets based on an assessment that the criteria that deferred tax assets will more likely than not be realized has not yet been met. During the three months ended March 31, 2013 and 2012, our effective tax rates were de minimis. The difference between our effective tax rates, the 35% US federal statutory tax rate, and the UK’s statutory tax rate resulted primarily from a tax benefit related to a reduction in the federal and state deferred tax asset valuation allowance.
Our major tax jurisdictions are (i) US (federal), (ii) California (state), (iii) New York (state) and (iv) UK. Tax returns remain open to examination by the applicable governmental authorities for tax years 2009 through 2012. The federal and state taxing authorities may choose to audit tax returns for prior years due to significant tax attribute carryforwards for those prior years. However, such audits will be limited to adjustments to such carryforward tax attributes. The Company is not currently being audited in any tax jurisdiction.
F-15 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion summarizes the significant factors affecting our consolidated operating results, financial condition and cash flows for the three and six months ended June 30, 2013, compared to the three and six months ended June 30, 2012. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
In this Report, the terms “we”, “us”, “our”, and “the Company” and its variants are generally used to refer to Mendocino Brewing Company, Inc. and its subsidiaries, while the term “MBC” is used to refer to Mendocino Brewing Company, Inc. as an individual entity standing alone.
Forward Looking Statements
Various portions of this Quarterly Report on Form 10-Q, including but not limited to the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking information. Such information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company’s business, Management’s beliefs, and assumptions made by Management. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those and similar words are intended to identify such forward-looking information. Our forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All forward-looking statements are based on assumptions about an uncertain future and are based on information available as of the date such statements are issued. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including but not limited to, changes in the pricing environment for our products, changes in demand for malt beverage products in different markets, changes in distributor relationships or performance, changes in customer preference for our products, regulatory or legislative changes, the impact of competition, changes in the prices of raw materials, availability of financing for operations, changes in interest rates, changes in our foreign business, and other risks discussed elsewhere in this Quarterly Report on Form 10-Q and from time to time in the Company’s Securities and Exchange Commission (“SEC”) filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic, Canadian and European economic and political conditions. We undertake no obligation to update these forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date the forward-looking statements are made or to publicly release the results of any revisions to these forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements.
Segment Information
Prior to 2001, our business operations were exclusively located in the US, and consisted of the manufacture and distribution of beer. With our acquisition of United Breweries International (UK), Ltd. (“UBIUK”) in August 2001, however, we gained a new business segment - distribution of beer outside the US, primarily in the UK and continental Europe, (collectively, the “Foreign Territory”). This segment accounted for 57% and 55% of our gross sales during the first six months of the years 2013 and 2012 respectively, with the US and Canada (the “North American Territory”) accounting for the remaining 43% and 45% during the first six months of the years 2013 and 2012 respectively.
Seasonality
Sales of our products are somewhat seasonal. Historically, our sales volumes in all geographic areas have been comparatively low during the first quarter of the calendar year in both the North American and Foreign Territories. In the North American Territory, our sales volumes have generally been higher during the second and third quarters and slower during the fourth quarter. In the Foreign Territory the fourth quarter has generally generated a higher sales volume for us compared to the other three quarters. The volume of our sales in any given area may also be affected by local weather conditions. Because of the seasonality of our business, results for any one quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Labor Relations
As of June 30, 2013, union members represented approximately 18% of our US-based workforce. MBC has approximately fourteen employees at its Ukiah, California facility who were working under a collective bargaining agreement that expired on July 31, 2013. The union and the Company’s management are currently negotiating a new collective bargaining agreement. Any labor dispute, work stoppage or other disruption in production as a result of the expiration of the collective bargaining agreement could adversely affect us.
Summary of Financial Results
We ended the first six months of the year 2013 with a net loss of $423,300, as compared to a net income of $438,600 for the same period in 2012. As set forth more fully under “Results of Operations,” below, the net loss during the first six months of the year 2013 was attributable to a reduction in US sales revenues, mainly because our largest contract brand decreased its requirements and we experienced production problems in New York.
3 |
Results of Operations
Three Months Ended June 30, 2013 Compared To Three Months Ended June 30, 2012
Net Sales
Our overall net sales for the second quarter of 2013 were $9,511,600, a decrease of $758,600, or 7.4%, compared to $10,270,200 for the second quarter of 2012. The decrease was due to decreases in sales of our brands and contract brands in the North American Territory.
North American Territory: Our net sales for the second quarter of 2013 were $3,790,300 compared to $4,627,500 for the same period in 2012, a decrease of $837,200, or 18.1%, mainly due to decreased sales volume. The sales volume decreased to 19,100 barrels in the second quarter of 2012 from 23,900 barrels in the second quarter of 2012; a net decrease of 4,800 barrels, or 19.9%. Sales of contract brands decreased by 3,600 barrels because our largest contract brand has constructed its own brewing facility. Although they continue to use us for contract brewing, their requirements are now much lower than their previous needs. Sales of MBC’s brands decreased by 500 barrels, and Kingfisher sales decreased by 700 barrels. We had maintenance issues in our facility in New York that prevented us from brewing at full capacity. Those issues have since been resolved.
Foreign Territory: Net sales for the second quarter of 2013 were $5,721,300 compared to $5,642,700 during the corresponding period of 2012, an increase of $78,600, or 1.4% when measured in US Dollars.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales during the second quarter of 2013 was 73.1%, as compared to 71.5% during the corresponding period of 2012.
North American Territory: Cost of goods sold as a percentage of net sales in the US during the second quarter of 2013 was 80.8%, compared to 73.9% during the corresponding period of 2012. 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, and the lower sales volume in 2013 caused further decreases in productivity.
Foreign Territory: Cost of goods sold as a percentage of net sales in the UK during the second quarter of 2013 was 68.6%, as compared to 70.2% during the corresponding period in 2012. In the UK, the purchase price of our products includes an excise duty. The amount of this excise duty decreased, therefore the purchase price of the products decreased accordingly.
Gross Profit
Due to reduction in sales revenue and higher cost of goods in North American Territory, gross profit for the second quarter of 2013 was $2,557,400 compared to $2,930,700 during the corresponding period of 2012 (a decrease of $373,300 or 12.7%). As a percentage of net sales, gross profit during the second quarter of 2013 decreased to 26.9% from 28.5% for the second quarter of 2012.
4 |
Operating Expenses
Operating expenses for the second quarter of 2013 were $2,515,000, an increase of $166,800, or 7.1%, as compared to $2,348,200 for the corresponding period of 2012. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.
Marketing and Distribution Expenses: Our marketing and distribution expenses for the second quarter of 2013 were $1,410,300, as compared to $1,361,300 for the second quarter of 2012, representing an increase of $49,000 or 3.6%.
North American Territory: Marketing and distribution related expenses for the second quarter of 2013 were $430,200 compared to $443,500 during the corresponding period of 2012, representing a decrease of $13,300 or 3.1%. As a percentage of net sales in the US, such expenses increased to 11.4% during the second quarter of 2013, compared to 9.6% during the corresponding period of 2012.
Foreign Territory: Marketing and distribution related expenses for the second quarter of 2013 were $980,100 compared to $917,800 during the corresponding period of 2012, representing an increase of $62,300, or 6.8%. This increase is mainly due to repairs of beer dispensing equipment and increases in advertising and sales commissions. As a percentage of net sales in the UK, marketing and distribution related expenses increased to 17.1% during the second quarter of 2013 compared to 16.3% during the corresponding period of 2012.
General and Administrative Expenses: Our general and administrative expenses were $1,104,700 for the second quarter of 2013, representing an increase of $117,800 or 11.9%, from $986,900 for the corresponding period in 2012.
North American Territory: Domestic general and administrative expenses were $485,400 for the second quarter of 2013, representing an increase of $23,100, or 5%, compared to $462,300 for the second quarter of 2012 due to increase in various miscellaneous expenses.
Foreign Territory: General and administrative expenses related to the Foreign Territory were $619,300 for the second quarter of the year 2013, representing an increase of $94,700 or 18.1%, when compared to $524,600 for the second quarter of 2012. The increase was mainly due legal expenses in connection with the negotiation of the Heineken contracts, a new employee, and miscellaneous administrative expenses.
Other Expenses
Net other expenses for the second quarter of 2013 totaled $111,500, representing an increase of $14,400, or 14.8%, when compared to $97,100 for the second quarter of 2012. Our interest expenses increased in accordance with our greater amounts of debt.
Income Taxes
We made no income tax provisions for the second quarters of 2013 and 2012.
Net Profit / Loss
Our net loss for the second quarter of 2013 was $69,100, compared to net income of $485,400 for the second quarter of 2012. After providing for a negative foreign currency translation adjustment of $4,200 during the second quarter of 2013 (as compared to positive adjustment of $61,000 for the same period in 2012), our comprehensive loss for the second quarter of 2013 was $73,300, compared to comprehensive income of $546,400 for the same period in 2012. As discussed above, the primary reason for the loss was the drop in our sales revenue.
Six Months Ended June 30, 2013 Compared To Six Months Ended June 30, 2012
Net Sales
Our overall net sales for the first six months of 2013 were $17,746,400, a decrease of $1,953,700, or 9.9%, compared to net sales of $19,700,100 for the same period in 2012.
5 |
North American Territory: North American net sales for the first six months of 2013 were $7,374,700 compared to $8,569,100 for the same period in 2012, a decrease of $1,194,400 or 13.9%. Our domestic sales volumes decreased to 36,500 barrels during the first six months of 2013 from 44,300 barrels in the first six months of 2012, representing a decrease of 7,800 barrels or 17.5%. Sales of MBC’s brands decreased by 2,200 barrels, sales of Kingfisher brands decreased by 900 barrels and sales of contract brands decreased by 4,700 barrels during the first six months of 2013 compared to the same period in 2012. As previously discussed, we experienced productivity issues in New York and our biggest contract brand reduced its production at our facility.
Foreign Territory: Net sales for the first six months of 2013 were $10,371,700 compared to $11,131,000 during the corresponding period of 2012, a decrease of $759,300 or 6.8%. due to reduction in sales volume.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales during the first six months of 2013 was 72.8%, as compared to 71.8% during the corresponding period of 2012.
North American Territory: Cost of goods sold as a percentage of net sales in the US during the first six months of 2013 was 79.3%, as compared to 74.2%, during the corresponding period of 2012. Our production capacity is currently under-utilized. 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. However, our production has decreased because of the lower demand for our products, causing the fixed and semi-variable costs to have a greater effect.
Foreign Territory: Cost of goods sold as a percentage of net sales in the UK during the first six months of 2013 was 68.8%, as compared to 70.1% during the corresponding period in 2012. In the UK, the purchase price that we pay for our products includes an excise duty. That duty has decreased, resulting in a corresponding decrease in our cost of goods.
Gross Profit
As a result of a decrease in sales revenue and increase in cost of goods, gross profit for the first six months of 2013 decreased to $4,824,300, from $5,555,500 during the corresponding period of 2012. As a percentage of net sales, the gross profit during the first six months of 2013 decreased to 27.2% from 28.2% during the corresponding period in 2012, mainly due to the decreases in sales revenues described above.
Operating Expenses
Operating expenses for the first six months of 2013 were $5,023,200, an increase of $112,700, or 2.3%, as compared to $4,910,500 for the corresponding period of the year 2012. Operating expenses consist of marketing and distribution expenses and general and administrative expenses.
Marketing and Distribution Expenses: Our marketing and distribution expenses for the first six months of the year 2013 were $2,651,300, as compared to $2,842,400 for the same period in 2012, representing a decrease of $191,100 or 6.7%.
North American Territory: Marketing and distribution related expenses for the first six months of 2013 were $814,600 compared to $872,100 during the corresponding period of 2012, representing a decrease of $57,500 or 6.6%. The decrease was mainly due to decreases in freight and miscellaneous operational expenses due to reduced sales volume. However, because net sales decreased at an even greater rate, these expenses equaled 11% of net sales in the US during the first six months of the year 2013, compared to 10.2% during the corresponding period of 2012.
Foreign Territory: Marketing and distribution related expenses for the first six months of 2013 were $1,836,700 compared to $1,970,300 during the corresponding period of 2012, representing a decrease of $133,600 or 6.8%. As a percentage of net sales in the UK, marketing and distribution expenses remained at 17.7% during the first six months of 2013 and 2012. The decrease in expenses was mainly due to a decrease in advertising and promotional expenses.
General and Administrative Expenses: Our general and administrative expenses were $2,371,900 for the first six months of the year 2013, representing an increase of $303,800 or 14.7%, from $2,068,100 for the corresponding period in 2012.
North American Territory: Domestic general and administrative expenses were $1,024,100 for the first six months of 2013, representing an increase of $55,500, or 5.7%, from $968,600 for the same period in 2012 due to small increases in various miscellaneous administrative expenses.
Foreign Territory: General and administrative expenses related to the Foreign Territory were $1,347,800 for the first six months of 2013, representing an increase of $248,300 or 22.6%, as compared to $1,099,500 for the same period in 2012. The increases were mainly due to a new employee and legal expenses associated with changes being made in the brewing arrangement with Heineken.
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Other Expenses
Net other expenses for the first six months of 2013 totaled $219,400 representing an increase of $13,800 or 6.7% when compared to $205,600 for the same period in 2012. The additional expense is caused by greater interest expenses associated with our increased debt.
Income Taxes
We have a provision for income taxes of $5,000 for the first six months of 2013 compared to a provision of $800 for the corresponding period in 2012. The provision for taxes is related to the estimated amount of taxes that will be imposed on us by tax authorities in the US, and is based upon the previous year’s results.
Net Income / Loss
Our net loss for the first six months of 2013 was $423,300, as compared to net income of $438,600 for the first six months of 2012. After providing for a positive foreign currency translation adjustment of $148,400 during the first six months of 2013 (as compared to a negative foreign currency translation adjustment of $33,600 for the same period in 2012), comprehensive loss for the first six months of 2013 was $274,900, compared to comprehensive income of $405,000 for the same period in 2012. As stated above, the primary reason for the loss was the drop in sales revenues during the period.
LIQUIDITY AND CAPITAL RESOURCES
Unused capacity at our Ukiah, California and Saratoga Springs, New York facilities has continued to place demands on our working capital. Historically, our operations have not generated sufficient cash flows to provide us with sufficient working capital. However, we believe that the liquidity we derived from the debt financing and cash flows attributable to our operations is sufficient to fund our capital expenditures, debt maturities and other business needs for the next twelve months. We generated our liquidity and capital resources primarily through operations and available debt financing.
UBHL Support. 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 March 22, 2013 (the “Letter of Support”). Under the terms of the Letter of Support, UBHL agreed to provide funding to KBEL on an as needed basis to enable KBEL to meet its financial obligations as they become due. There is no maximum limit on the amount of funding to be provided by UBHL to KBEL under the terms of the Letter 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 UK. The Letter of Support 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 Letter of Support. 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 periods after such minimum period. If UBHL were unable or unwilling to meet its current obligations under the Letter of Support or, if requested, UBHL does not agree to keep the Letter of Support in force following the minimum specified period, it could result in a material adverse effect on our financial condition and could affect our ability to continue operations. Our Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the board of directors of UBHL.
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Cole Taylor Facility. On March 29, 2013, MBC and Releta entered into a First Amendment (the “Amendment”) to the Credit and Security Agreement, dated as of June 23, 2011, by and among the Company, Releta, and Cole Taylor (as amended, 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, all of which ended on or before December 31, 2012, Cole Taylor has agreed in the Amendment that such breach is waived and that no event of default has occurred by reason of such breach.
On April 29, 2013, we determined that we were not in compliance with fixed charge coverage ratio under the Agreement. The Agreement requires us to maintain certain financial covenants, including a minimum fixed charge coverage ratio of 1.05 to 1.00 for trailing twelve month periods. We determined that the fixed charge coverage ratio for the trailing twelve month period ended March 31, 2013 fell short of the requirement, resulting in an event of default under the Agreement. Under the Agreement, upon the occurrence of an event of default, all of our obligations under the Agreement will immediately and automatically become due and payable, without notice of any kind. The event of default shall be deemed continuing until waived in writing by Cole Taylor. In a letter received from Cole Taylor on May 8, 2013 (the “Letter”), Cole Taylor acknowledged the violation of the fixed charge coverage ratio as of March 31, 2013, but stated that Cole Taylor has not exercised any default rights or remedies under the Agreement as a result of such default. The Letter further provides that Cole Taylor will continue to monitor the situation and our performance, and reserves all rights and remedies available to it in connection with such default. Cole Taylor is aware that as of June 30, 2013, we continued to be out of compliance with the minimum fixed charge coverage ratio. Cole Taylor’s exercise of its rights or remedies arising from any default under the Agreement could have a material adverse effect on the Company’s financial condition. The Agreement with Cole Taylor is described under the section captioned “Description Of Our Indebtedness” below.
Heineken Facility. On April 18, 2013, KBEL entered into a Loan Agreement with Heineken pursuant to which Heineken agreed to provide KBEL with a secured term loan facility of £1,000,000 to be made available, subject to the fulfillment of certain conditions precedent, on October 9, 2013, and to be repaid in full by October 9, 2016. The Loan Agreement with Heineken is described under the section captioned “Description Of Our Indebtedness” below.
Summary. As of June 30, 2013, we had cash and cash equivalents of $96,900, an accumulated deficit of $14,254,000 and a working capital deficit of $7,048,800 due to losses incurred and reclassification of debts owing to Cole Taylor as a result of the event of default under the Agreement described above.
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, certain of the agreements governing our Indebtedness contain provisions pursuant to which a material adverse change in our financial condition may result in an event of default under such agreements. 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, California, 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.
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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 under the agreements governing our Indebtedness, such events of default (including cross-defaults) could have a material adverse effect on our financial condition. If our existing Indebtedness is accelerated or terminated, we will need to obtain replacement financing. If we are unable to obtain such replacement financing, it will likely 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.
Management has taken several actions to enable us to meet our working capital needs through June 30, 2014, including reductions in discretionary expenditures, optimization of pricing and discounts to increase margins, expansion of our business in new territories and exporting our brands outside United States. In addition, we continue to seek additional brewing contracts in an effort to increase revenue and utilize a portion of our excess production capacity. 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. The proposed brewing arrangement with Heineken is expected to improve our margins significantly in the Foreign Territory.
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. There can be no assurance that we will be able to increase sales to provide cash for operating 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 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:
Net cash used in operating activities for the six months ended June 30, 2013 was $44,800, compared to $142,500 for the six months ended June 30, 2012. We generally do not require significant cash on hand to meet our operating needs.
During the first six months of 2013, increases in collections from debtors resulted in increases in cash flow of $660,400 which was used to pay down accounts payable and accrued liabilities. Our inventory increased by $32,900 between December 31, 2012 and June 30, 2013. Fluctuations in inventory are normal for our operations and industry and are typically not indicators of any material contributing cause. Prepaid expenses increased by $233,900, mainly due to renewal of our insurance policies in June 2013.
Net cash used in investing activities totaled $451,500 for the first six months of 2013 compared to $290,900 for the first six months of 2012. Net cash used for investing activities consists of purchases of machinery and equipment. Some of the new equipment and machinery replaced older items, and in the North American Territory, some was installed to upgrade the facility for increased production.
Net cash provided by financing activities totaled $357,800 during the first six months of 2013, compared to $261,500 during the first six months of 2012. Net cash provided by financing activities principally consisted of a temporary increase in the Company’s use of a revolving line of credit and borrowing on long term debt, offset by payments on loan and lease payments.
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DESCRIPTION OF OUR INDEBTEDNESS:
Cole Taylor Facility
On June 23, 2011, MBC and Releta entered into the Agreement with Cole Taylor (as described in “Liquidity and Capital Resources”). 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 and 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 the applicable loan or advance is made, we 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 line of credit, 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 interest in all of MBC’s and Releta’s personal property and a first mortgage on our Ukiah, California property, among other items of MBC and Releta assets.
On March 29, 2013, MBC and Releta entered into the Amendment to the Agreement (as described in “Liquidity and Capital Resources”). The Amendment clarifies the method by which the fixed charge coverage ratio shall be calculated. To the extent we may have been in breach of the covenants related to the fixed charge coverage ratio before December 31, 2012, Cole Taylor has agreed in the Amendment that such breach is waived and that no event of default had occurred by reason of such breach on or before December 31, 2012.
The Agreement requires us to maintain certain financial covenants, including a minimum fixed charge coverage ratio of 1.05 to 1.00 for the trailing twelve month period. As discussed in “Liquidity and Capital Resources”, we determined that the fixed charge coverage ratio for the trailing twelve month period ended March 31, 2013 fell short of the requirement resulting in an event of default under the Agreement, and Cole Taylor acknowledged the Company’s default of the fixed charge coverage ratio as of March 31, 2013, but stated that Cole Taylor has not exercised any default rights or remedies under the Agreement as a result of such default. The fixed charge coverage ratio for the trailing twelve month period has continued to fall, and as of June 30, 2013, was 0.28 to 1.00. Cole Taylor is aware that we are not in compliance with the fixed charge coverage ratio requirement. Cole Taylor’s exercise of its rights or remedies under the Agreement could have a material adverse effect on the Company’s financial condition.
Master Line of Credit and UBA Notes
On August 31, 1999, MBC and UBA, one of our principal shareholders, entered into a Master Line of Credit Agreement, which was subsequently amended in April 2000 and February 2001 (the “Credit Agreement”). The terms of the Credit Agreement provide us with a line of credit in the principal amount of up to $1,600,000. As of the date of this filing, UBA has made thirteen 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”). Thirteen of the UBA Notes are convertible into common stock at a rate of $1.50 per share and one UBA Note is convertible at a rate of $1.44 per share. UBA has executed an Extension of Term of Notes under Master Line of Credit Agreement and an amendment to the March 2, 2005 note (together, the “Extension Agreements”). The Extension Agreements, as amended, confirm UBA’s extension of the terms of the UBA Notes for a period ending on June 30, 2013 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 the applicable term. Since no such notice was given by either party, UBA Notes have been automatically extended up to June 30, 2014.
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 UBA Notes may be converted, at the option of UBA, into shares of our common stock. 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 60 days.
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The UBA Notes are subordinated to credit facilities extended to us by Cole Taylor pursuant to a subordination agreement executed by UBA. Per the terms of the subordination agreement, UBA is precluded from demanding repayment of the UBA Notes unless and until the Cole Taylor facilities are repaid in full.
The aggregate outstanding principal amount of the UBA Notes as of June 30, 2013 was $1,915,400, and the accrued but unpaid interest thereon was equal to approximately $1,536,700, for a total amount outstanding of $3,452,100. As of June 30, 2013, the outstanding principal and interest on the UBA Notes was convertible into approximately 2,318,400 shares of our common stock. However, as the current market price of our common stock is substantially less than the conversion rate, any conversion may occur at a lower price.
Other Loans, Credit Facilities and Commitments
Heineken Loan
On April 18, 2013, KBEL entered into a Loan Agreement with Heineken UK Limited (“Heineken”) pursuant to which Heineken agreed to provide KBEL with a secured term loan facility of £1,000,000 to be made available, subject to the fulfillment of certain conditions precedent, on October 9, 2013, and to be repaid in full by October 9, 2016. Interest on the loan is payable quarterly in arrears on the outstanding balance of the loan at the rate of 5% above the Bank of England base rate. Prepayment is permitted. Upon an event of default, if Heineken and KBEL fail to agree on a payment plan acceptable to Heineken, Heineken may, among other remedies, declare the loan immediately due and repayable or exercise its right to an exclusive license pursuant to the Sub-Licence Agreement entered between Heineken, UBIUK, KBEL and United Breweries Limited.
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 is automatically extended unless terminated by either party upon six months’ written notice.
Keg Management Arrangement
In September 2009, we entered into a keg management agreement with MicroStar Keg Management, LLC (“MicroStar”). Under this arrangement, MicroStar provides us with half-barrel kegs for which we pay filling and usage fees. Distributors return the kegs directly to MicroStar. MicroStar then supplies us with additional kegs. The agreement is effective for five years ending in September 2014. Upon termination of this agreement, we are required to purchase four times the average monthly keg usage for the preceding six-month period from MicroStar. We anticipate that we would either extend this agreement prior to termination, or finance the required purchase through debt or lease financing, if available. However, there can be no assurance that we will be able to extend the agreement or finance the purchase of the required kegs. Our failure to purchase the required kegs from MicroStar upon termination of the agreement would likely have a material adverse effect on our operations.
Weighted Average Interest
The weighted average annual interest rates paid on our US debts was 5% for the first six months of 2013 and 2012. For loans primarily associated with our Foreign Territory, the weighted average annual rate paid was 3% for the first six months of 2013 and 2012.
Current Ratio
Our ratio of current assets to current liabilities on June 30, 2012 was 0.51 to 1.0 and our ratio of total assets to total liabilities was 1.1 to 1.0. Our ratio of current assets to current liabilities on June 30, 2012 was 0.78 to 1.0 and our ratio of total assets to total liabilities was 1.1 to 1.0.
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Restricted Net Assets
UBIUK has undistributed losses of $2,155,900 as of June 30, 2013. Under KBEL’s line of credit agreement with RBS, distributions and other payments to MBC from KBEL are not permitted if retained earnings drop below $1,521,000.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Evaluation Of Disclosure Controls And Procedures
Our Management team, under the supervision and with the participation of our chief executive officer (our principal executive officer) and our chief financial officer (our principal financial officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the last day of the quarter ended June 30, 2013. 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 chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on this evaluation, our chief executive officer and our chief financial officer concluded that, our disclosure controls and procedures were effective as of June 30, 2013.
Changes In Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter (the three months ending June 30, 2013) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The discussions under the subheadings “Cole Taylor Facility”, one of which is under “Description of Our Indebtedness”, and the other of which is under “Liquidity and Capital Resources”, both set forth in Item 2 of PART I of this report, are hereby incorporated by reference in their entirety.
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Exhibit Number | Description | |
10.1 | Contract Brewing and Distribution Agreement between Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013. (1) | |
10.2 | Heineken Sub-License Agreement by and among Heineken UK Limited, United Breweries International (UK) Limited, Kingfisher Beer Europe Limited, and United Breweries Limited, dated April 18, 2013. (1) | |
10.3 | Loan Agreement between Heineken UK Limited and Kingfisher Beer Europe Limited, dated April 18, 2013. (1) | |
31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.* | |
31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.* | |
32.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.** | |
32.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.** | |
101.INS | XBRL Instance Document** | |
101.SCH | XBRL Taxonomy Extension Schema Document** | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document** | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document** | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document** | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document** |
(1) | Portions of this exhibit have been omitted pursuant to a request for confidential treatment under Rule 24b-2 of the Exchange Act. The omitted material has been separately filed with the Securities and Exchange Commission. |
* | Filed herewith. |
** | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MENDOCINO BREWING COMPANY, INC. | ||
Dated: August 14, 2013 | By: | /s/ Yashpal Singh |
Yashpal Singh | ||
President and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Dated: August 14, 2013 | By: | /s/ Mahadevan Narayanan |
Mahadevan Narayanan | ||
Chief Financial Officer and Secretary | ||
(Principal Financial Officer) |
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CONFIDENTIAL PORTIONS HAVE BEEN OMITTED BASED UPON A REQUEST
FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934 AND HAVE BEEN SEPARATELY FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
CONTRACT BREWING AND DISTRIBUTION AGREEMENT between Heineken UK Limited and Kingfisher Beer Europe Limited |
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This Contract Brewing and Distribution Agreement is dated April 18, 2013 between:-
PARTIES:-
A. | HEINEKEN UK LIMITED, a company incorporated in Scotland (Registered Number SC065527) having its registered office at 2-4 Broadway Park, South Gyle Broadway, Edinburgh, EH12 9JZ (“Heineken UK”); and |
B. | KINGFISHER BEER EUROPE LIMITED, a company incorporated in England and Wales (Registered Number 02367133) having its registered office at Springfield House, Sandling Road, Maidstone, Kent, ME14 2LP (“KBE”). |
(each a “party” and together the “parties”) |
WHEREAS:-
(1) | Heineken UK is a brewer and supplier of beers in the UK. |
(2) | KBE is a supplier and distributor of beer to its customers in the United Kingdom and European on-trade, off-trade and wholesale markets. |
(3) | Heineken UK shall manufacture, package and supply beer for KBE and KBE shall purchase its requirements for the Products on the terms set out in this Agreement. |
IT IS AGREED:-
1. | Definitions and Interpretation |
1.1 | Unless the context otherwise requires, in this Agreement the following words and expressions shall have the meaning set out opposite them: |
“Agent” | means any subsidiary or holding company of Heineken UK and any third party appointed by Heineken UK in connection with this Agreement; | |
“Agreement” | means this Contract Brewing Agreement together with its Schedules; | |
“Agreement Date” | means the date of this Agreement as noted above; | |
“Business Day” | means a day (other than a Saturday or a Sunday) when banks are generally open for business in England and Wales; | |
“Commencement Date” | means 9 October 2013; |
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“Contract Year” | means any period of twelve months beginning on the Commencement Date or any anniversary thereof; | |
“Depot” | means KBE Customers’ primary distribution depots in the United Kingdom (excluding Northern Ireland); | |
“Distribution Charge” | has the meaning given to it in Clause 5.4; | |
“Event of Default” | has the meaning given to it in the Loan Agreement; | |
“Facility” | has the meaning given to it in the Loan Agreement; | |
“Group” | means in relation to any person, such persons, every holding company of such person and every subsidiary of such person and of every such holding company and a member of the Heineken UK Group or KBE Group shall be construed accordingly; | |
“Heineken Sub-licence Agreement” | means the sub-licence agreement entered into between Heineken UK, KBE, United Breweries International (UK) Limited, a company registered in England with company number 1688201 and having its registered office at Tingewick Road, Buckingham MK1 8GD and United Breweries Limited, a company incorporated in India and having its registered office at Level 3-5, UB Tower, UB City 24, Vittal Mallya Road, Bangalore, 560001, India on or around the date of this Agreement. | |
“HUK Customers” | means Modern Retail Customers and Star Pubs & Bars Estate; | |
“Keg Charge” | has the meaning given to it in Clause 16.2; | |
“KBE Customers” | means KBE’s wholesale and on trade customers in the United Kingdom and KBE’s customers in Europe (not including Germany); | |
“Loan Agreement” | means the loan agreement entered into between Heineken UK and KBE on or around the date of this Agreement; | |
“Modern Retail Customers” | means the customers listed in Schedule 2, and such other customers as may be agreed between the parties from time to time; | |
“Payment Processing Date” | means each of the fifth (5th), fifteenth (15th) and twenty-fifth (25th) date in each calendar month (or, where such day is not a Business Day, the next Business Day thereafter), on which Heineken UK carries out payment processing runs. |
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“Potential Event of Default” | has the meaning given to it in the Loan Agreement; | |
“Price(s)” | means the prices for the Products as set out in Schedule 1 to this Agreement as may be amended from time to time in accordance with Clause 8; | |
“Product” | means Kingfisher beer, as more particularly set out in Schedule 1 to this Agreement and as may be amended from time to time; | |
“Recipe(s)” | means the list of ingredients and agreed manufacturing process for the Product as provided by KBE to Heineken UK on or around the Commencement Date; | |
“Review Date” | has the meaning given to it in Clause 8.4; | |
“Royalty” | has the meaning given to it in Clause 4.4; | |
[ * ] | [ * ] | |
“Specifications” | means the product specifications and details as to the method of production and also the packaging of the Product and the quality procedures and performance standards relating to the Product as agreed between the parties from time to time; | |
“Star Pubs and Bars Estate” | means the tenanted pub estate in the United Kingdom that is owned, operated or managed by Heineken UK, its subsidiaries or holding company (as the case may be); | |
“Term” | means the term of this Agreement as set out in Clause 2.1; | |
“Trade Marks” | means the trade marks which subsist in the Products, Recipes and Specifications, as more particularly set out in Schedule 4; | |
“Ullage Policy” | Means the Heineken UK standard ullage policy as more particularly set out in Schedule 3; | |
“United Kingdom” | means England, Wales, Scotland and Northern Ireland; | |
“VAT” | means value added tax as provided for in the Value Added Tax Act 1994 and legislation (whether delegated or otherwise) supplemental thereto; and | |
“Volume Forecasts” | shall have the meaning given to it in Clause 6.1; |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
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1.2 | In this Agreement:- |
1.2.1 | the singular includes the plural and vice versa; |
1.2.2 | references to gender include references to all genders; |
1.2.3 | unless otherwise stated, references to sub-Clauses, Clauses and to the Schedules are to sub-Clauses, Clauses and the Schedules to this Agreement; |
1.2.4 | the Clause headings are for reference only and shall not affect the construction or interpretation of this Agreement; |
1.2.5 | the Schedules annexed hereto are incorporated into and form part of this Agreement; |
1.2.6 | “subsidiary” and “holding company” shall have the meanings given to them in section 1159 of the Companies Act 2006; and |
1.2.7 | references to statutes, any statutory instrument, regulation or order shall be construed as a reference to such statute, statutory instrument, regulation or order as amended or re-enacted from time to time. |
1.3 | In this Agreement, except where the context otherwise requires, any reference to:- |
1.3.1 | another agreement or any deed or other instrument or document shall be construed as a reference to that other agreement, deed or other instrument or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated; |
1.3.2 | a “day” means a period of 24 hours (or such other number of hours as may be relevant in the case of changes for daylight saving) ending at 12.00 midnight; |
1.3.3 | the words “include” or “including” are to be construed as meaning without limitation; |
1.3.4 | a “month” means a calendar month; and |
1.3.5 | a “person” includes any individual, partnership, firm, company, corporation, joint venture, trust, association, organisation or other entity, in each case whether or not having a separate legal personality. |
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2. | Term |
2.1 | This Agreement is effective from the Commencement Date, with the exception of Clause 3.4 which shall apply from the Agreement Date, and shall continue for a period of five (5) years whereupon it shall automatically terminate, unless terminated earlier in accordance with Clause 18. |
3. | Appointment |
3.1 | Heineken UK is exclusively appointed to manufacture, package and distribute the Product for sale in the United Kingdom and to manufacture and package the Product for export by KBE to Europe (not including Germany) on the terms set out in this Agreement. |
3.2 | Heineken UK has the right to manufacture and package the Product at any brewery site in the United Kingdom as nominated by Heineken UK. |
3.3 | Heineken UK, or its nominated distributor, shall: |
3.3.1 | manufacture the liquid for the Product to the Recipes, materially in accordance with the Specifications; and |
3.3.2 | package the Product materially in accordance with the Specifications. |
3.4 | The parties acknowledge and agree that a number of trial brews will be required to be undertaken by Heineken UK or its Agent prior to the Commencement Date in order to finalise and agree the Recipe. The parties have agreed that each trial brew will incur a cost of £[ * ] for which KBE shall be liable and that there will be an additional cost per batch to KBE to tanker and destroy product off site in the event that a trial brew is unsuccessful. In addition, sample bottles used for consumer research as part of the trial brews shall be charged to KBE at a cost of £[ * ] (not including courier costs) per ten cases of Product. KBE shall be liable for any and all costs associated with the trial brews and KBE shall, on receipt of an invoice from Heineken UK, make payment to Heineken UK within [ * ] days of the date of the relevant invoice. |
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4. | Sale of the Product by Heineken UK |
4.1 | KBE acknowledges that Heineken UK shall be the sole and exclusive reseller of the Product to the Modern Retail Customers. Heineken UK shall also have the right to sell the Product to its Star Pubs and Bars Estate. |
4.2 | KBE undertakes (on behalf of itself and each member of the KBE Group) (i) that it shall refer any requests for Product from Modern Retail Customers directly to Heineken UK; and (ii) except where KBE demonstrates to the reasonable satisfaction of Heineken UK that it would conflict with any legally binding obligation on KBE existing as at the Commencement Date, or any statutory obligation applicable to KBE and coming into force after the Commencement Date, then KBE will include in any agreement which it enters into for the supply of the Product to a KBE Customer, a restriction on the KBE Customer not to actively sell the Product to the Modern Retail Customers (in this case, and without limitation, “actively selling” means approaching customers and does not include responding to unsolicited requests or sales from general advertising and promotions). |
4.3 | Neither Heineken UK nor KBE or the KBE Customers shall be prohibited from making passive sales of the Product to any person (that is to say, sale of Products to customers made on an unsolicited basis). |
4.4 | In consideration of the exclusivity granted to Heineken UK pursuant to Clause 4.1, Heineken UK shall pay KBE a royalty of £[ * ] per hectolitre (the “Royalty”) on all Product sold by Heineken UK to HUK Customers only during the Term. |
4.5 | At the end of each calendar month, Heineken UK shall send KBE a report of sales volumes by SKU in the preceding month for Product sold by Heineken UK to HUK Customers only. Within 30 days after the end of each Contract Year, KBE shall submit to Heineken UK an invoice for the total Royalty due in respect of that Contract Year, by aggregating the sales volumes data supplied by Heineken UK during that Contract Year. Heineken UK shall pay such invoice on the Payment Processing Date immediately following the date falling [ * ] after the date of receipt of the relevant invoice. Payments shall be made by BACS with cleared funds to such account in the United Kingdom as KBE may nominate from time to time. |
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4.6 | The Royalty shall be adjusted annually on the anniversary of the Commencement Date by a percentage equal to the annual movement (expressed in percentage terms) in [ * ] during the twelve (12) month period ending on 31st July in the same year as the relevant anniversary of the Commencement Date. |
4.7 | In addition to the sales volume data supplied by Heineken UK pursuant to Clause 4.5, Heineken UK shall also send KBE a quarterly report comprising such information and in such format as agreed between the parties. |
4.8 | In the event that Heineken UK sells less than [ * ] hectolitres of the Product in any Contract Year, KBE shall, on giving Heineken UK six (6) months’ notice, be entitled to withdraw the exclusivity granted to Heineken UK to sell to the Modern Retail Customers pursuant to Clause 4.1, such exclusivity to be withdrawn on the expiry of the six month notice period. |
5. | Sale of Product by KBE |
5.1 | Heineken UK shall sell, and KBE shall purchase Product at the Prices set out in Schedule 1 and in accordance with Clause 8 for re-sale to KBE Customers. |
5.2 | Subject to Clause 7.1, Product purchased by KBE pursuant to Clause 5.1, shall be delivered by Heineken UK, or its nominated distributor, to such Depot(s) as agreed in advance between the parties. |
5.3 | Heineken UK has agreed to provide tamper evident caps on kegged Product at the rate of £[ * ] per hectolitre on each 50 litre keg and £[ * ] per hectolitre on each 30 litre keg. These charges shall be added to the Prices for kegged Product and KBE shall be liable to make payment there for in accordance with Clause 9.1. |
5.4 | In consideration of Heineken UK delivering Product to the Depot(s) on behalf of KBE, KBE shall be liable to pay Heineken UK a distribution charge of £[ * ] per hectolitre of Product delivered to the Depot(s) (the “Distribution Charge”), which shall be increased annually in accordance with Clause 5.4. KBE shall pay the Distribution Charge in accordance with Clause 9.1. |
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5.5 | The Distribution Charge shall be increased annually by Heineken UK on the anniversary of the Commencement Date by a percentage equal to the annual movement (expressed in percentage terms) in [ * ] during the twelve (12) month ending on 31st July in the same year as the relevant anniversary of the Commencement Date. |
6. | Manufacturing and Forecast Volumes |
6.1 | Heineken UK shall produce, and submit to KBE, a forecast of the Product it anticipates it will require in order to satisfy the forecast demand and orders from HUK Customers and KBE Customers, as follows (or as otherwise agreed between the parties from time to time): |
6.1.1 | [ * ] setting out the total forecasted volume demand for the forthcoming [ * ]; and | |
6.1.2 | [
*
]
setting
out
the
total
forecasted
volume
demand
for
the
forthcoming
[
*
],
| |
(together the “Volume Forecasts”). |
6.2 | Within five (5) Business Days of receipt of the Volume Forecasts, KBE shall review and discuss any changes that it wishes to make to the Volume Forecasts with Heineken UK, and the Volume Forecasts may be adjusted accordingly by mutual agreement. Once the Volume Forecasts have been finalised and agreed, KBE shall sign off on the Volume Forecasts thereby demonstrating its agreement with the Volume Forecasts. |
6.3 | By signing off on the Volume Forecasts in accordance with Clause 6.2, KBE acknowledges that the Volume Forecasts will form the basis on which Heineken UK (acting in its complete discretion) shall plan its production to manufacture the Product, and the parties agree that the first [ * ] of the Volume Forecasts shall be fixed. |
6.4 | In the event of unforecasted demand in excess of the Volume Forecasts, Heineken UK shall be entitled at its sole discretion to reject purchase orders submitted by KBE. In the event that the volume of Product actually sold is less than the volume anticipated in the Volume Forecasts, the parties shall seek to agree a plan to sell the Product before the Product breaches its minimum shelf life. If the parties are unable to agree a plan to sell the Product, [ * ]. |
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KBE acknowledges that Heineken UK will only manufacture the Product in minimum weekly production runs of [ * ] hectoliters in respect of finished Product. Accordingly, the parties shall use their respective best endeavours to ensure that the orders are submitted and managed in such way so as to meet customer demand and in production runs not less than the minimum amounts set out in this clause 6.5. Nothing shall oblige Heineken UK to manufacture liquid for the Product in volumes less than the minimum production run unless otherwise agreed.
6.5 | Subject to clause 6.4, KBE further acknowledges that the maximum increase in manufacturing of the Product week on week is a doubling of the minimum production runs set out above (for example, if one brew is carried out in week one, two brews can be carried out in week two, and four brews can be carried out in week four, and so on (if required due to customer demand)). |
6.6 | Heineken UK shall procure (at its own cost) all the raw materials, consumables and other materials used in the manufacture of the Product. Heineken UK shall have the discretion as to which suppliers and in what quantities it procures such raw materials, consumables or other materials. |
6.7 | Should KBE wish to amend or alter the Recipe or the Specification or change the SKU of the Product in any way, it will notify Heineken UK in writing of its proposed changes. The parties shall meet in good faith to review and discuss the proposed impact of the changes on Heineken UK’s or its Agent’s (as the case may be) manufacture and packaging of the Product and, if appropriate, to review and agree a change to the Price. If Heineken UK agrees to the relevant amendment or alteration, then unless otherwise agreed between the parties, KBE shall be liable for any and all costs incurred by Heineken UK or its Agent (as the case may be) as a result thereof, which includes (but is not limited to) (i) any wasted expenditure on raw materials, consumables and other materials which can no longer be used by Heineken UK or its Agent (as the case may be) for the purposes of manufacturing and/or packaging to the amended or altered Recipe, Specification or SKU, and (ii) any capital investment costs to enable Heineken UK or its Agent (as the case may be) to manufacture and package the Product in accordance with the relevant amendment or alteration. For the avoidance of doubt, nothing herein shall oblige Heineken UK to manufacture or package the Product to an amended Recipe or Specification. |
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7. | Ordering & Logistics |
7.1 | KBE shall submit orders for the Product electronically to Heineken UK via EDI. KBE shall submit orders on a day [ * ] for day [ * ] lead-time. |
7.2 | Heineken UK (or its nominated distributor’s) vehicles shall deliver Product purchased by KBE pursuant to this Agreement to the relevant Depot(s) on a day [ * ] for day [ * ] lead-time, provided that a purchase order must be placed no later than 5pm at the latest on day [ * ] in order for delivery to be tendered on day [ * ]. |
7.3 | KBE shall notify Heineken UK within 24 hours of delivery if it detects any discrepancy in the quantity of the Product ordered. Any quantity discrepancies not notified within 24 hours of delivery will be payable in full by KBE as per Clause 5.1. In the event of an agreed discrepancy in any delivery, Heineken UK shall: |
7.3.1 | in respect of a short quantity of Product delivered, credit back the volume of Product short delivered and Heineken UK (or its nominated distributor) shall arrange with KBE for the shortfall of Product to be re-delivered and re-invoiced; and |
7.3.2 | in respect of an excess quantity of Product delivered, expect KBE to accept and pay for the excess Product. |
7.4 | In the event that the parties are in dispute over any invoice, discrepancy or quantity or quality issue in relation to the Product the matter shall be escalated to the Heineken UK Head of Brewing Operations and the KBE Operating Director to discuss and agree a resolution to the matter. |
8. | Pricing |
8.1 | Heineken UK will supply the Product to KBE at the Prices (as amended pursuant to this Clause 8) during the Term, in consideration for payment of such Prices by KBE in accordance with Clause 9. |
8.2 | On the Commencement Date, the Prices shall be increased by the same percentage increase as the percentage increase (if any) in [ * ] during the period commencing on 1st August 2012 and ending on 31st July 2013, and those revised Prices shall apply from the Commencement Date until 31st December 2013. Thereafter, the Prices shall be adjusted annually in accordance with Clauses 8.4 and 8.5 below. |
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8.3 | The parties agree that: |
8.3.1 | the Price of packaged Product comprises a [ * ]% fixed cost element and a [ * ]% variable cost element (which reflects the cost of raw materials and packaging materials); and |
8.3.2 | the Price of kegged Product comprises a [ * ]% fixed cost element and a [ * ]% variable cost element (which reflects the cost of raw materials and packaging materials). |
8.4 | In respect of each of the packaged Product SKUs, the Price will be adjusted annually by Heineken UK on 1st January in each Contract Year (the “Review Date”) as follows: |
8.4.1 | [ * ]% of the relevant Price shall be adjusted by a percentage equal to the annual movement (expressed in percentage terms) in the [ * ] published by [ * ] in the October immediately prior to the Review Date, showing [ * ] over the previous 12 month period; and |
8.4.2 | [ * ]% of the relevant Price shall be adjusted by a percentage equal to the percentage movement in the cost of raw materials and packaging materials over the 12 month period immediately prior to the Review Date. |
8.5 | In respect of each of the kegged Product SKUs, the Prices will be adjusted annually by Heineken UK on the Review Date as follows: |
8.5.1 | [ * ]% of the relevant Price shall be adjusted by a percentage equal to the annual movement (expressed in percentage terms) in the [ * ] published by [ * ] in the November immediately prior to the Review Date, showing [ * ] over the previous 12 month period; and |
8.5.2 | [ * ]% of the relevant Price shall be adjusted by a percentage equal to the percentage movement in cost of raw materials and packaging materials over the 12 month period immediately prior to the Review Date. |
8.6 | All amounts payable pursuant to this Agreement are stated exclusive of VAT and all other similar taxes and duties payable in respect of such payments. In the event that VAT or duty shall be chargeable on any amounts payable by KBE, then KBE shall in addition thereto, pay to Heineken UK such VAT and duty as may be applicable thereon, provided that Heineken UK has provided KBE with a valid VAT invoice. In the event that VAT or duty shall be chargeable on the Royalty, then Heineken UK shall pay to KBE such VAT and duty as may be applicable thereon, provided that KBE has provided Heineken UK with a valid VAT invoice. Any increase in VAT or duty shall be passed on in full at the time of implementation. |
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9. | Payment |
9.1 | Heineken UK shall invoice KBE for the Product delivered to the Depots, which shall include the Distribution Charge payable and any additional charge for tamper evident caps pursuant to Clause 5.3, at the end of the month for all Product delivered to the Depots during that month. For example, all deliveries of Product made by Heineken UK to the Depots in January shall be invoiced on or around 31st January. KBE shall pay all such invoices within [ * ] days of the date of the relevant invoice. Payments shall be made by BACS with cleared funds to such account in the United Kingdom as Heineken UK may nominate from time to time. |
9.2 | In the event that either party fails to make payment of any invoice or part thereof by the due date for payment thereof, the other party shall be entitled to charge interest on any invoices outstanding after the due date for payment until payment is made at the rate of 5% above the Bank of England base rate from time to time. |
9.3 | If KBE breaches this Agreement, or Heineken UK considers (acting reasonably) that KBE’s financial or trading position is such that there is a reasonable risk that KBE will not be able to make payment for any Product in accordance with the terms of this Agreement or Heineken UK has reasonable concerns about KBE’s solvency then Heineken UK reserves the right at any time and at its sole discretion to amend or withdraw any or all of the payment terms and method of payment. |
10. | Risk & Title |
10.1 | Risk in the Product shall transfer to KBE at the point at which the Product has been unloaded from Heineken UK (or its nominated distributor’s) vehicles at the Depot. |
10.2 | Title to the Product shall remain with Heineken UK until such time as the Product has been paid for in full in cleared funds by KBE. |
10.3 | Heineken shall retain title to all returnable containers (kegs or casks) in which the Product is supplied from time to time. |
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11. | Trade Marks |
11.1 | KBE authorises and licenses Heineken UK on an exclusive basis to use the Trade Marks for the purposes of manufacturing, packaging and selling the Product in accordance with this Agreement. For the avoidance of doubt, this includes the granting of an exclusive license to Heineken UK to brew the Product. |
11.2 | KBE warrants that it has and will continue to have the full right and title to license the Trade Marks to Heineken UK pursuant to Clause 11.1 during the Term. |
11.3 | Heineken UK acknowledges that United Breweries Limited, a company incorporated in India and having its registered office at Level 3-5, UB Tower, UB City 24, Vittal Mallya Road, Bangalore, 560001, India, are the owners of the Trade Marks and that Heineken UK will not obtain or assert any right to any part of them, except for the limited rights referred to above. |
11.4 | Heineken UK shall not, without the written consent of KBE, use any of the names, devices or logos applied by KBE to the Product, except for the purpose of identifying the Product. |
11.5 | KBE shall indemnify Heineken UK and/or its Agents (as the case may be) in relation to any reasonable costs and expenses incurred as a result of any third party actions brought against Heineken UK and/or its Agents (as the case may be) in relation to their use of the Trade Marks and Heineken UK or its Agents shall give KBE reasonable assistance and control of any such action. |
11.6 | Heineken UK shall not, without the written consent of KBE, sell, dispose of or describe the Product under or by reference to any name or description other than the name or description applied to the Product by KBE. |
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12. | Product Recall |
12.1 | In the event that either party becomes aware of the existence of any quality or technical problem or other issue relating to the Product which either creates or is likely to give rise to a risk to the health or safety of Heineken UK and/or KBE customers, consumers or users, the possibility of action by enforcement authorities or a risk of adverse publicity or public dispute for either party, the following provisions will apply: |
12.1.1 | the party becoming aware of the problem will promptly notify the other by email and/or telephone, and shall, as soon as practicable supply the other party with such information as is in its possession relating to: |
(a) | the identity, location and quantity of the Product involved; |
(b) | relevant Product or packaging coding; and |
(c) | any other matters which may be of assistance in tracing the Product or identifying the cause of the problem. |
12.1.2 | Heineken UK, where so notified by KBE, and KBE, where so notified by Heineken UK, shall take all such steps as are reasonable to mitigate the losses which Heineken UK, or, as the case may be, KBE are reasonably likely to incur; |
12.1.3 | representatives of Heineken UK and KBE (each acting reasonably) will meet as soon as is practicable after notification for the purposes of agreeing measures to be taken to remedy or mitigate the problem and measures to inform customers (and enforcement authorities where necessary) about any emerging risks; |
12.1.4 | where appropriate, such measures may include the cessation of production of the Product and/or the recall of Product and such cessation of production and/or recall shall be carried out if: |
(a) | it appears necessary in order to comply with statutory requirements; or |
(b) | to mitigate the effect or potential effect on either party as is reasonably required by either party and/or a party’s personal injury/product liability insurers; |
12.1.5 | provided that Heineken UK shall always be entitled in its absolute discretion to recall any Product pursuant to this Clause 12.1; |
12.1.6 | any recall under Clause 12 shall be organised by Heineken UK. KBE shall provide Heineken UK with all information in its possession which may reasonably be required in order to organise and carry out the recall. |
13. | Technical Services |
13.1 | KBE acknowledges that Heineken UK has no obligation to provide technical dispense services in respect of the Product or to customers purchasing the Product from time to time. |
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14. | Marketing Investment |
14.1 | KBE shall be liable for all marketing investment to the Modern Retail Customers, which investment shall be made entirely at KBE’s discretion, subject to the amount of the marketing investment in any Contract Year not exceeding [ * ] in the relevant Contract Year. Heineken UK will be invoiced directly by the Modern Retail Customers for any marketing investment during the Term and within thirty (30) days after the end of each Contract Year, Heineken UK shall submit to KBE an invoice for the amount of marketing investment that Heineken UK has paid to the Modern Retail Customers during the relevant Contract Year. KBE shall pay such invoice within [ * ] days of the date of the relevant invoice. |
14.2 | Heineken UK shall pay for any marketing investment in the Star Pubs and Bars Estate and for Heineken UK On Trade Customers. |
15. | Ullage |
15.1 | Subject to Clause 15.2, the Ullage Policy shall apply to all Product sold by Heineken UK and by KBE pursuant to this Agreement. |
15.2 | KBE shall be responsible for collating and reporting all ullage claims received from KBE Customers to Heineken UK. Heineken UK will then collect the ullage from the relevant Depots in accordance with the Ullage Policy (for the avoidance of doubt, Heineken UK will not collect ullage out with the United Kingdom), and KBE shall be responsible for applying the credit decision in accordance with the Ullage Policy. |
16. | Keg Balancing |
16.1 | In relation to those KBE Customers who do not separately have a trading account with Heineken UK, KBE shall be responsible for returning kegs to Heineken UK which have been supplied on its behalf by Heineken UK, or its nominated distributor, to those KBE Customers’ Depots. Heineken UK will automatically count the number of kegs delivered to and collected by Heineken UK’s nominated distributor from those KBE Customers, on KBE’s behalf, on a quarterly basis. |
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16.2 | The difference between the number of kegs supplied to each KBE Customer, and those returned will be that KBE Customer’s keg balance. Any negative keg balance (arising because not all kegs delivered to the relevant KBE Customer have been returned to Heineken UK through its nominated distributor) will give rise to a charge of £[ * ] per keg (the “Keg Charge”). Heineken UK reserves the right to levy the Keg Charge on KBE on a quarterly basis for each KBE Customer that has returned fewer than [ * ]% of the kegs supplied by Heineken UK to that KBE Customer. The Keg Charge will be applied to KBE’s trading account and shall be paid by KBE within [ * ] days of the date of the relevant invoice. |
16.3 | Any subsequent reduction in a KBE Customer’s keg balance (at each quarterly review) shall result in a credit to KBE’s trading account of £[ * ] per keg. Note that a positive keg balance can only be applied against an historical or a future negative keg balance, otherwise no credit will be given for a positive balance. Unless otherwise agreed, only keg movements after the date of signing of this Agreement will be recorded. |
16.4 | For the avoidance of any doubt, the provisions of this Clause 16 shall only apply to kegged Product supplied to KBE Customers who do not have a direct trading relationship with Heineken UK. |
17. | Assignment & Sub-Contracting |
17.1 | Save as set out in Clause 17.2, none of the rights, duties, or obligations under this Agreement may be assigned, delegated, transferred or sub-contracted by either party without the other party’s prior written consent, such consent not to be unreasonably withheld. |
17.2 | KBE acknowledges and accepts that Heineken UK will sub-contract distribution of the Product manufactured under this Agreement to its nominated distributor from time to time and that Heineken UK may appoint an Agent to manufacture and package the Product under Heineken UK’s supervision. |
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18. | Termination |
18.1 | Either party shall be entitled to terminate this Agreement immediately in the event of: |
18.1.1 | a material breach of this Agreement by the other party which, having been notified to that party, goes unremedied for a period of 30 days or more; or |
18.1.2 | the other party (i) voluntarily or involuntarily enters a bankruptcy, insolvency or similar proceeding; (ii) passes a resolution for winding up its business or a court of competent jurisdiction makes an order to that effect (other than for the purpose of amalgamation or restructuring) or (iii) a receiver is appointed in respect of substantially all of its assets. |
18.2 | Heineken UK shall be entitled to terminate this Agreement: |
18.2.1 | on thirty (30) days’ notice on the occurrence of a change of control or ownership of KBE after the date of this Agreement, where Heineken UK considers such change of control shall have a material adverse effect on Heineken UK PROVIDED THAT such notice of termination is served within six (6) calendar months of the date that Heineken UK became aware of the change of control or ownership; or |
18.2.2 | immediately on notice to KBE in the event that an Event of Default or a Potential Event of Default occurs under the Loan Agreement and such has not been rectified within 30 days of the occurrence of the Event of Default or Potential Event of Default. |
19. | Consequences of Termination |
19.1 | On expiry or termination of this Agreement for any reason and subject to any express provisions set out elsewhere in this Agreement: |
19.1.1 | all outstanding sums payable by either party shall immediately become due and payable to the other party; |
19.1.2 | all rights and licences granted under this Agreement shall cease; |
19.1.3 | subject to Clause 19.1.4 below, Heineken UK and its Agents shall cease all use of the Trade Marks; |
19.1.4 | Heineken UK shall, for a period of 180 days after the date of termination, have the right to dispose of all stocks of Product in its or its Agents’ possession and all Product in the course of manufacture at the date of termination, provided that the Royalty payable by Heineken UK is paid to KBE in accordance with Clause 4.4 on receipt by Heineken UK of a valid invoice in respect of the Product disposed of pursuant to this Clause 19.1.4. |
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19.2 | Subject to Clause 19.3, in the event that this Agreement is terminated early by Heineken UK pursuant to Clause 18 above, Heineken UK may by written notice to KBE exercise its right to the exclusive licence pursuant to the Heineken Sub-licence Agreement. |
19.3 | Subject to the Facility under the Loan Agreement having been fully repaid by KBE to Heineken UK as at the date of termination of this Agreement, the parties shall meet to discuss and consider alternative security arrangements to the Heineken Sub-licence Agreement. For the avoidance of doubt, nothing shall oblige Heineken UK to accept an alternative security arrangement pursuant to this Clause 19.3 and Heineken UK reserves the right at all times to exercise its right to the exclusive licence under the Heineken Sub-licence Agreement in accordance with Clause 19.2. |
19.4 | The expiry or termination of this Agreement, for any reason, shall not affect any provision of this Agreement that is expressed to survive or operate in the event of expiry or termination and shall be without prejudice to the provisions of this Clause 19and to any rights of either party which may have accrued by, at or up to the date of such expiry or termination. |
20. | Standard Terms and Conditions |
The Heineken UK Limited Standard Terms and Conditions of Sale (as set out in Schedule 5) will apply to the supply of Product under this Agreement. Where there is a conflict between the Standard Terms and Conditions of Sale and this Agreement, this Agreement will prevail.
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21. | Force Majeure |
21.1 | Any delay in or failure by either party hereto in performance hereunder shall be excused if and to the extent that such delay or failure is caused by occurrences beyond such party’s control including but not limited to, acts of God, decrees or restraints of government, strikes, labour disputes, war, fire, riot, sabotage, terrorism and any other cause or causes whether similar or dissimilar to those already specified which cannot be controlled by such party. Such performance shall be so excused for the period during which such inability of the party to perform is so caused but for no longer period and shall be remedied as far as possible with all reasonable despatch. Any time period for performance shall be extended by a period equal to duration to any period during which such performance is excused by this Clause. |
22. | Confidentiality |
22.1 | Each of the parties agrees to keep the terms of this Agreement and of any information exchanged between the parties in the course of this Agreement (in whatever form and including materials, notes, or papers in whatever form derived from such information) (“Confidential Information”) strictly confidential and shall not divulge any Confidential Information to any other person, except to its employees, licensees and/or Agents engaged in the production, marketing (including advertising) and distribution of the Product to whom it shall be essential to disclose the same. |
22.2 | Nothing in Clause 22.1 shall restrict the disclosure of any Confidential Information: |
22.2.1 | which has entered into the public domain (other than by breach of a party to this Agreement); |
22.2.2 | which comes into the possession of a party independently provided that such information has come into the possession of that party in circumstances of good faith; or |
22.2.3 | which is required to be disclosed by law, regulation, any competent court, governmental or regulatory authority pursuant to the rules of any stock exchange. |
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23. | Entire Agreement |
23.1 | This Agreement and the Schedules annexed hereto constitute the entire understanding between the parties with respect to the subject matter hereof and supersedes any previous understandings, arrangements, representations, negotiations or agreements previously entered into between the parties. Provided that nothing in this Clause 23shall have effect to exclude the liability of either party for fraud or fraudulent misrepresentation. |
24. | Waiver |
24.1 | Subject to Clause 24.2, failure, delay or neglect by either party to enforce at any time any provision of this Agreement shall not be construed nor shall be deemed to be a waiver of that party’s rights hereunder nor in any way affect the validity of the whole or any part of this Agreement nor prejudice the party’s rights to take subsequent action. |
24.2 | Either party shall be entitled by notice in writing to the other party to waive its rights under this Agreement. |
25. | Severability |
25.1 | If any provision of this Agreement is declared to be void or unenforceable by any judicial or administrative authority in any jurisdiction in which this Agreement is effective, such provision will be deemed to be severable and the parties shall each use their reasonable endeavours in good faith to modify this Agreement so that the intent of this Agreement can be legally carried out. |
26. | Notices |
26.1 | Any notice, consent, confirmation or other information required or authorised by this Agreement to be given by either party to the other may be given by hand or sent by first class recorded delivery post to the other party at the address specified in this Agreement or such other address as may from time to time be notified in writing to the party giving such notice or other communication by the party to whom such notice or other communication is given. |
26.2 | Notices shall be deemed given, in the case of notice given by hand, when given, and in the case of notice given by recorded delivery post, two Business Days after the date of posting. |
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27. | Contracts (Rights of Third parties) |
27.1 | A person who is not party to this Agreement shall have no rights under the Contracts (Rights of Third parties) Act 1999 to enforce any terms of this Agreement. This Clause does not affect any right or remedy of any person which exists or is available otherwise than pursuant to that Act. |
28. | Disclaimer of Agency and Partnership |
28.1 | This Agreement shall not, unless expressly agreed otherwise, constitute either party as an agent of the other. The parties hereto are independent contractors and shall have no power, nor will either of the parties represent that either has any power, to bind the other party or to assume or to create any obligation or responsibility, express or implied, on behalf of the other party or in the other party’s name. |
28.2 | Nothing in this Agreement shall be construed as creating any relationship of partnership between the parties hereto. |
29. | Variation |
29.1 | This Agreement shall not be amended and no variation to its terms shall be effective unless such amendment or variation is in writing and is signed by or on behalf of each of the parties. |
30. | Counterparts |
30.1 | This Agreement may be executed in any number of counterparts, each of which so executed shall be an original, but together shall constitute one and the same instrument. |
31. | Governing Law |
31.1 | This Agreement shall be governed by and construed in accordance with the law of England & Wales and the parties hereby submit to the exclusive jurisdiction of the courts in England & Wales. |
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Schedule 1
Product and Prices per unit
SKUs and exclusive of VAT and Duty unless otherwise stated
SKU | Price per unit | Duty | Duty and Price | |||||||||
Kingfisher 50litre keg | £ | [ * ] | £ | 45.89 | £ | [ * ] | ||||||
Kingfisher 30litre keg | £ | [ * ] | £ | 27.53 | £ | [ * ] | ||||||
Kingfisher 24 x 330ml | £ | [ * ] | £ | 7.27 | £ | [ * ] | ||||||
Kingfisher 12 x 500ml | £ | [ * ] | £ | 5.51 | £ | [ * ] | ||||||
Kingfisher 12 x 660ml | £ | [ * ] | £ | 7.27 | £ | [ * ] | ||||||
Kingfisher (4 x 6) x 330ml | £ | [ * ] | £ | 7.27 | £ | [ * ] |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
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Schedule 2
Modern Retail Customers
● | [ * ] |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
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Schedule 3
Ullage Policy
Product / Container Fault Reporting
Upon contacting your product quality contact point the following Information will be required;
● | Outlet account name and number. | |
● | The best before date of the product (as detailed on the container label) | |
● | The nature of the problem (please see fault descriptions below) | |
● | The brand. | |
● | The container size. | |
● | The container Racking Code (as detailed on the container label) |
Recognised product and dispense fault descriptions ~
Cloudy
Flat
Head Retention
Palate
Fobbing
Product Recall
Leaking Container / Extractor Fault
Leaking Cask
Short Fill
No Label
Overage – No Credit
Technician Visits ~
In the interests of customer service and product quality at the point a fault is reported Heineken UK reserve the right to arrange a Technical Services visit to your premises.
If a technician visits the outlet and is unable to restore the product to satisfactory condition he will either destroy the contents in the outlet in accordance with Customs or Excise regulations or arrange for the uplift of the product where destroy on site facilities are not available. Samples may be taken and the container will be weighed to determine if it meets our minimum volume criteria. Details of the container will be recorded and transferred through to Heineken UK Trade Quality dept to determine creditworthiness of the product.
Product Quality Samples may be taken prior to destruction in accordance with Customs and Excise regulations.
If a technician does not visit the outlet arrangements will be made to uplift the container from the premises. Our “Heineken UK Trade Quality” department will arrange for an uplift tag/label to be delivered direct to the outlet either by post or with the driver when collection of the keg is due for uplift and ask that you attach this to the container/s in question as soon as it is received.
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PLEASE NOTE IT IS THE CUSTOMERS RESPONSIBILITY TO SEAL ANY CASK RETURNS WITH BUNGS AND PEGS TO AVOID PRODUCT LOSS IN TRANSIT, WHICH COULD AFFECT THE CREDIT DECISION
Ullage Container Uplift ~
Heineken UK delivery crews will check the uplift documentation details against the actual container/s requested for collection and obtain the customers signature. Once the container is returned to the Heineken UK depot, the container will be checked and weighed to;
1. | Verify the accuracy of data previously reported with any discrepancies being reported back through the recognised channel, and | |
2. | Determine the contents of the container. |
Credit Criteria ~
Subject to the following conditions being met, credit for the full nominal contents of the container will be given.
1. | Product should not be on sale beyond its best before date. | |
2. | Product should be reported as faulty prior to the expiry of its best before date. | |
3. | Product should not be mismanaged, diluted or adulterated. | |
4. | The keg or cask racking label must be present. | |
5. | There should be no sign of tampering with the container or spear. | |
6. | The volume of product in the container meets our Minimum Contents Criteria. |
In addition credit for the full nominal contents of the container will be given, without consideration of the minimum contents criteria, in the following circumstances;
1. | The container is reported faulty at the time of delivery (e.g. a missing seal / label etc.) | |
2. | There is acknowledged production fault associated with the product. | |
3. | The container is leaking. | |
4. | The container has an extractor fault and cannot be broached. |
Credit is not considered under the Returned Beer Policy where ~
1. | The product is below the minimum contents allowed. | |
2. | The container label is not intact or illegible. | |
3. | The best before date has expired | |
4. | The product integrity has been compromised (this is determined by a container sample having been taken and failing to meet the specific product criteria.) |
Minimum Contents Criteria ~
Credit will normally be given on the full nominal contents of the container if the product has been stored and dispensed in a manner so as not to affect the quality and standard of the product and the reported date is prior to the best before date. Credit will only be given providing that the following minimum quantities are returned:
20 Ltr | = | [ * ] Ltr Minimum. | |
30 Ltr | = | [ * ] Ltr Minimum. | |
41 Ltr (9 Gal) | = | [ * ] Ltr Minimum. | |
45 Ltr (10 Gal) | = | [ * ] Ltr Minimum. | |
50 Ltr (11 Gal) | = | [ * ] Ltr Minimum. | |
82 Ltr (18 Gal) | = | [ * ] Ltr Minimum. | |
100Ltr (22 Gal) | = | [ * ] Ltr Minimum. |
Credit will only be given if less than [ * ] gallons / [ * ] litres have been removed from the container, regardless of size.
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
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The minimum contents policy is designed specifically to identify product quality issues as quickly as possible and so limit potential losses.
Product Adulteration ~
Following the completion of analysis at our laboratory if a sample is subsequently found not to be creditworthy Heineken UK will notify the customer and process a reversal of the credit against the individual account.
Product Management ~
Filtering back damages product quality and contravenes legislation. Evidence of such a practice will result in a nil credit decision.
There are a number of Customer key actions required to ensure that beers are served and maintained in a quality condition;
● | Maintain air temperature at 12c +/- 2c | |
● | Allow stock 48hrs acclimatisation in the cellar before use. | |
● | Rotate stock by age and sell within best before date. | |
● | Store in a clean and hygienic environment. Ensure the cellar has hot and cold water supply as well as adequate drainage facilities. Do not keep animals or chemicals in the cellar. | |
● | Dispense beer as per Heineken UK quality standards, using correct tap at the recommended temperature and speed. | |
● | Ensure the appropriate gas is used to dispense the beer. | |
● | Clean equipment and lines at least every 7 days, using the recommended detergents, strength and soak time. | |
● | Rinse nozzles and sparklers daily and leave to soak in clean water or soda water between trading sessions. | |
● | Do not tamper with, or remove spears from kegs. | |
● | Do not filter back (autovacs are not approved on the grounds of hygiene). |
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Schedule 4
Trade Marks
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Schedule 5
HEINEKEN UK LIMITED
Terms and Conditions of Sale
1 | Basis of Sale |
1.1 | These are the terms of our contract with you. Any terms and conditions proposed by you or which you may purport to apply under any purchase order or confirmation of order are expressly excluded. The signing or acceptance of any of your documentation by any of our employees or agents shall not modify these terms or form part of any contract between you and us. |
1.2 | All descriptions and illustrations contained in our advertisements and other sales literature are intended merely to present a general impression of the goods described in them and nothing contained in them shall form part of this contract (save that no liability for fraudulent misrepresentation is excluded by this provision). |
1.3 | These terms of sale should be read in conjunction with our Trading Policy documents (including, but not limited to our Ullage Policy and Quality Policy), which we issue from time to time and which also form part of this contract. |
1.4 | These terms of sale cover the supply of goods by us across all routes to market including the on trade, off trade and wholesale. Accordingly, some of these terms of sale may not apply to your route to market of the products purchased. |
2. | Orders, Delivery and Returns |
2.1 | All orders shall be deemed to be an offer by you to purchase goods pursuant to these terms and conditions of sale. No order shall be binding on us, until it is accepted over the telephone or by electronic communication by one of our authorised representatives or confirmed in writing by us. |
2.2 | We shall not be liable for any loss or damage whatsoever arising as a result of failure to deliver goods by any particular date provided that we use all reasonable endeavours to deliver the goods within a reasonable timescale. We may deliver the goods by installments. |
2.3 | We do not sell goods on a “sale or return” basis. |
2.4 | Our Quality Policy (issued from time to time) applies to any valid claims relating to the quality of the goods supplied. |
2.5 | A deposit may be charged by us on returnable Containers which will be credited to your account on their prompt return in good condition. Any credit given may differ from the quantities shown on the customer copy of the delivery note. We also reserve the right to charge at replacement cost where a Container is not returned to us, or to levy a charge (equal to the replacement cost less the scrap value of the Container) where a Container is returned to us damaged (such damage occurring whilst the container is at your risk). |
2.6 | We reserve the right to make an additional charge if you request any unscheduled delivery or emergency delivery. |
2.7 | In relation to the supply of wine, Vintages will follow on, unless we advise you otherwise. Where vintages are stroked (e.g. 2002/3) it is anticipated that stocks of the older vintage will run out during the life of our price list. The younger vintage will follow on at the same price. |
2.8 | References in our price list to container sizes expressed in terms of “halves” or “quarters” are standard industry expressions and are not necessarily arithmetically relative to the contents of the corresponding sizes of “bottles”. |
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3. | Storage, Handling and Resale of Goods |
3.1 | You shall take all reasonable steps, and shall use your reasonable endeavours to procure that your own customers take all reasonable steps, to preserve the quality of the goods and any bottles, cases, canisters, kegs, casks, crates, pallets or other returnable containers and packaging (“Containers”) from the time of delivery until dispensed to the ultimate consumer. This includes, but is not limited to: |
3.1.1 | storing the goods and Containers in clean, sound and dry premises, out of direct sunlight and within appropriate temperatures and other ambient conditions; |
3.1.2 | transporting the goods and Containers carefully and in suitably adapted vehicles; |
3.1.3 | implementing proper stock rotation procedures to ensure that the goods with the earlier “Best Before” date are delivered and used first (but not selling goods which are past their “Best Before” date); |
3.1.4 | avoiding the stock-piling of perishable goods; |
3.1.5 | minimising, so far as is possible, the time elapsing between delivery and onward sale of perishable goods; and |
3.1.6 | observing any guidelines issued by us concerning the storage, temperature and method of dispensing to the ultimate consumer. |
3.2 | Title to the Containers shall remain vested in us or our nominated subcontractor from time to time. |
3.3 | You shall allow us reasonable access to your premises and facilities where the goods or Containers are stored and handled (and shall, upon reasonable request, provide us with reasonable details of your own customers and ensure that they allow us reasonable access to their premises and facilities), so we can check compliance with these terms. |
3.4 | You shall co-operate fully with us in the event of a recall of the goods or Containers and you shall provide such co-operation and assistance as we may reasonably request in order to comply with applicable legal requirements relating to the goods or Containers or any part of them. |
3.5 | You shall ensure, and shall use reasonable endeavours to procure that your customers ensure, that the goods remain in the original Containers in which they are supplied, until sold or dispensed to the ultimate consumer (this does not apply to tank beers) and that any markings (including any trade marks), numbers or references indicated on the Containers are not covered, defaced, altered or erased. |
3.6 | We may notify you that goods will be delivered to you on returnable pallets. If we do, you accept that property in such pallets shall remain with us and you agree to return the pallets to us on a “like for like” basis at your own cost. We reserve the right to charge you for any pallets not returned, or for pallets which are returned damaged. |
3.7 | Subject to mandatory laws, you shall not, and shall procure that your customers shall not, without our prior written consent: |
3.7.1 | use any of the names, devices or logos applied by us to any of the goods, except for the purpose of identifying and promoting the goods in a manner which is acceptable to us; or |
3.7.2 | sell, dispose of or describe the goods under or by reference to any name or description other than the name or description applied by us. |
3.8 | The residual contents of any Containers which are collected for return to us (or our contractor) for refilling and/ or cleaning will become our property from the time they are collected, without any further payment by us. You will have no further rights in those residual contents. This does not affect our Ullage Policy. |
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3.9 | We may (at our discretion) print bar codes on the goods, in accordance with the rules of the Article Numbering Association. We shall not be liable to you in the event of any omission or error in such bar codes. |
4. | Prices |
4.1 | The prices charged for goods will be those applied by us on the date of acceptance of your order. |
4.2 | Any increases in rates of duty or other taxes or increases in price which are out with our control will be passed on immediately in full. In the event of any such change, orders received but not delivered at the date of such change will be fulfilled at the revised prices. |
4.3 | All prices quoted are exclusive of Value Added Tax, unless otherwise stated. In the event that we supply goods to you under bond you shall ensure that you fulfill your excise obligations under the relevant regulations published by HM Revenue & Customs from time to time. |
4.4 | The prices quoted for goods are inclusive of carriage, (unless expressly agreed to and stated as otherwise) to U.K. mainland premises, excluding Northern Ireland, Scottish Islands, Isle of Man, Channel Islands and Isles of Scilly. We reserve the right to charge for any deliveries which we believe (acting reasonably) cost significantly more than our average cost to deliver. For the avoidance of doubt, if goods are supplied to premises out with the UK, additional costs may be passed on to you, including (where appropriate) any rise in cost due to currency fluctuations. |
4.5 | We operate a keg surcharge scheme whereby we will levy a charge on draught products supplied in small volume Containers. We reserve the right to amend the level of keg surcharges and/or introduce new Container sizes into the scheme from time to time at our absolute discretion. We will communicate all keg surcharges and any changes in keg surcharges to you from time to time. All prices quoted are exclusive of keg surcharges unless otherwise stated. |
5. | Payment |
5.1 | You shall make payment to us in cleared funds within such period or on such date as we shall specify to you from time to time (the “due date”). If we do not give you a specific date then payment is due within 28 days of the date of invoice. |
5.2 | Failure to pay any amount due to us, or any other Heineken UK Group Companies (as defined below) by the due date or any circumstances which give us reasonable concerns about your solvency, shall entitle us to suspend delivery of any undelivered orders. The time for payment for the goods shall be of the essence of the contract. |
5.3 | Heineken UK Group Companies means Heineken UK Limited, any direct or indirect holding or subsidiary undertakings of Heineken UK Limited or any direct or indirect subsidiary of such holding company, and other undertakings in which Heineken UK Limited has a direct or indirect interest, as defined by the Companies Act. |
5.4 | We reserve the right at any time, at our sole discretion, to amend or withdraw any or all of the (i) payment terms, (ii) credit limit and (iii) method of payment. |
5.5 | In the event of your breach of our contract with you, or any concerns we may reasonably have about any of the events listed in clause 10 applying to you, we reserve the right to amend or withdraw any or all of the payment terms, credit limit or method of payment. |
5.6 | We may endeavour to procure credit insurance in order to cover any credit risk associated the extension of credit to you. In the event that we have such cover which is subsequently revoked, withdrawn or reduced by our insurer, we reserve the right to amend or withdraw any or all of the payment terms, credit limit or method of payment. |
5.7 | If payment is not made by the due date, we reserve the right to claim interest at the rate prescribed from time to time under the Late Payment of Commercial Debts (Interest) Act 1998 until payment is received by us in cleared funds. |
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5.8 | In the event of any cheques or direct debits being dishonoured, a charge of £25.00 excluding VAT (or such other reasonable sum as we may from time to time advise you) will be made on your account to cover bank and administrative costs. We also reserve the right to make a reasonable administration charge for any copy invoice/ statements requested by you. |
5.9 | If you refuse to accept a delivery, for whatever reason, we reserve the right, in addition to a reasonable administration charge and any other claim we may have, to charge you the cost of carriage both to and from your premises. |
6. | Dispense Equipment |
6.1 | All raising, dispense and other equipment (“equipment”) supplied by us (or our subcontractor) shall remain our property (or the property of other companies with whom we have contracted), but the equipment shall be at your risk while on your premises or under your custody or control. You are to insure the equipment whilst it is at your risk, such insurance to be sufficient to cover all costs required to effect the replacement or repair (including but not limited to labour costs). For the avoidance of doubt, we shall not be responsible for the provision and maintenance of any cellar cooling equipment. |
6.2 | The equipment must be used only with goods and Containers supplied to you by us (or our subcontractor) and must be used in accordance with our instructions (or those of our subcontractor) and remain strictly as installed by our representative (or our subcontractor). The equipment must not be moved to a different location or tampered with. |
6.3 | You will allow us (or our subcontractor) or our representative access for maintenance or removal of the equipment and for auditing purposes at all reasonable times. You shall ensure that the equipment supplied to you is properly maintained and is returned to us (or our subcontractor) on demand at any time and, in any event, when no longer used by you with our goods. |
6.4 | In the event that you use such equipment to dispense products other than our owned or licensed brands, we reserve the right to either: |
6.4.1 | remove the equipment from your premises; or |
6.4.2 | charge you for use of equipment for as long as you dispense other brands through it; or |
6.4.3 | to sell the equipment to you at a price at which we (or our nominated contractor) may agree with you. |
6.5 | Where clauses 6.4.1 or 6.4.2 apply, you must arrange for all references to any of our trade marks to be removed from such equipment prior to use in connection with products other than our own. |
6.6 | In the event that the equipment requires maintenance, repair or replacement otherwise than in the ordinary course and excluding normal wear and tear, we retain our right and that of our subcontractors’ to charge you for such maintenance, repair and/or replacement costs. Notwithstanding the terms of this clause 6, we shall be entitled (at our discretion unless agreed otherwise with you) to levy a reasonable charge to cover our costs in maintaining the equipment. |
6.7 | If you are wholesaling our products then you must ensure that the terms of this clause 6 are replicated in your terms and conditions with your customer. |
If you are wholesaling our products, you shall provide us with reasonable data for the outlets and products supplied to support the placement and maintenance of equipment and facilitate quality checking of our products in trade.
7. | Risk and Retention of Title |
7.1 | Risk of damage to or loss of the goods and Containers shall pass to you at the time of delivery or, if you wrongfully fail to take delivery of the goods, at the time when we tendered delivery of the goods. |
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7.2 | The property in the goods (but not in any Containers) shall pass to you only when we have received from you payment of: |
7.2.1 | all amounts owing in respect of these goods; and |
7.2.2 | all other amounts then due and owing from you to us or any other Heineken UK Group Companies whether or not under this contract. |
7.3 | Until the property in the goods passes to you, you shall hold the goods as our fiduciary agent and bailee, you shall keep the goods separate from your own goods and third party goods and the goods shall be properly stored, protected and insured (in an amount which is not less than the price payable to us) and identified as our property. |
7.4 | Until the property in the goods passes to you, (subject to the provisions of condition 7.5) you shall be entitled to resell or use the goods in the ordinary course of your business, but shall account to us for the proceeds. You shall, to the fullest practicable extent, keep all such proceeds separate from any of your or third party monies or property and, in the case of tangible proceeds, properly stored, protected and insured. Your power of sale referred to in this clause shall automatically cease upon the occurrence of any of the events referred to in condition 10. |
7.5 | Until the property in the goods passes to you (and provided the goods are still in existence and have not been resold), we may require you to deliver the goods to us. If you fail to do so, we (or our representatives) may enter your premises (with or without vehicles) or any third party premises where the goods are stored and repossess the goods and we (or our subcontractors) may do this at any time in order to repossess the Containers. |
7.6 | You shall not be entitled to pledge or charge by way of security any of the goods, Containers and equipment which remain our property, but if you do so or purport to do so, all money owing by you to us shall become immediately due and payable, and we shall have the right to recover our Containers and equipment. |
7.7 | The rights and remedies conferred to us by this clause 7 are in addition to and shall not in any way limit our other rights and in particular (but without limitation) our right to sue for the price of the goods (even if property in the goods has not passed) and to recover our Containers. |
7.8 | In the case of goods delivered to Scotland, references in clause 7.3 to “bailee” shall be deemed to be “trustee”. |
8. | Claims |
Upon delivery, all goods should be examined and signed for with a clear signature and any loss or damages entered upon the delivery note and the carriers notified in writing on the same day. We shall be entitled to treat any signature obtained in good faith as binding you. Claims cannot be entertained once goods have been signed for (unless the defect was not apparent until sampling). In respect of the non-delivery of goods for which an invoice has been raised, any claim must be made in writing to us within five days of the date of the invoice. Any claim in respect of incorrect pricing must be made in writing to us within fourteen days of the date of the invoice.
9. | Liability |
9.1 | Our liability in the event of a valid claim relating to the goods or Containers or our breach of this contract or our negligence or breach of any duty will be limited to (a) the replacement of the goods or a refund of the price of the relevant goods plus (b) if physical damage to your property has been caused by us supplying defective goods or Containers (“Property Damaging Goods”), we will pay you such compensation as we may reasonably consider appropriate, up to a maximum of £200 for each order fulfilled by us which contained Property Damaging Goods. We shall have no further or other liability to you. |
9.2 | We shall not be liable to you or be deemed to be in breach of this contract by reason of any delay in performing, or any failure to perform, any of our obligations, if the delay or failure was due to any cause beyond our reasonable control or due to your fault. This includes, but is not limited to, strikes, lock-outs or other industrial actions or trade disputes (whether involving our employees or those of a third party). |
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9.3 | We do not exclude any liability to you in respect of death or personal injury caused by our negligence or fraud. |
9.4 | You shall indemnify us against any third party claims, losses, damages, expenses and costs we incur as a result of your negligence or any breach of this contract by you. |
10. | Insolvency |
10.1 | We may terminate this contract or suspend further deliveries under this contract (without any liability to you) if: |
10.1.1 | you become unable to pay your debts as they fall due; or you commence negotiations with your creditors with a view to rescheduling any of your debts; or you cease trading or announce your decision to do so; or the value of your assets is less than your liabilities; or |
10.1.2 | any steps are taken with a view to; |
10.1.2.1 | appointing an administrator, receiver, administrative receiver, liquidator, trustee or other similar officer in respect of you or your assets; |
10.1.2.2 | enforcing payment of any of your debts or of any security you have granted; or |
10.1.2.3 | obtaining a moratorium in respect of your debts; or |
10.1.3 | we believe that any of the events referred to in clauses 10.1.1 and 10.1.2 are reasonably likely to occur and we notify you accordingly. |
10.2 | If we terminate this contract in accordance with this condition 10, the price payable for any goods that have been delivered but not paid for shall become immediately due and payable, regardless of any previous agreement or arrangement to the contrary. Any exercise by us of our rights under this condition 10 will not affect any of our other rights or remedies under this contract. |
11. | Consumer orders |
This term applies only if you are not a business but are a “consumer” within the meaning of The Consumer Protection (Distance Selling) Regulations 2000. If, after we have accepted an order from you, you wish to withdraw from this contract then you may do so by informing us no later than 7 working days after the date of delivery of the goods. If you notify us that you wish to cancel the order, and we have already delivered the goods to you, then you must return the goods to us at your own cost and risk. Provided that the goods are returned in the same condition as when we supplied them to you, we shall reimburse all sums paid by you for those goods less any reasonable costs of delivery.
12. | Disclosure of Information and Data Protection |
12.1 | We may give information and/or an opinion relating to you or your business or the status of any account held with us (“Information”) to any credit reference agency, bank, supplier or sub-contractor as we reasonably consider appropriate. You authorise us to disclose Information to such persons and you acknowledge that such Information may be used by other customers of such persons, for purposes including, but not limited to, assessing applications for credit by you and members of your household (if applicable) and for occasional debt tracing and fraud prevention purposes. |
12.2 | Additionally we may, subject to the provisions of the Consumer Credit Act 1974, seek Information from any credit reference agency, bank or other person. You authorise us to obtain such Information. |
12.3 | We comply with the Data Protection Act 1998 and any Information you provide to us will be stored and processed by us in accordance with that Act. Please note that any Information you provide to us represents your express consent to disclose your Information to other Heineken UK Group Companies. |
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12.4 | We may use the Information to send you our promotional material. Please advise us if you wish to stop receiving promotional material from us. |
12.5 | By entering into this contract you agree and consent to the use of the Information as set out above and for the purposes of our fulfilling our obligations to you under this contract. |
12.6 | You may access the Information by writing to our Data Protection Administrator at our Registered Office Address. To protect your privacy and security we may take reasonable steps to verify your identity before granting access to Information or making any requested alterations. |
12.7 | We are required to comply with money laundering legislation and regulations designed to combat the laundering of the proceeds of crime. Deliveries will not be made unless we have been provided with satisfactory evidence of your identity, and in certain circumstances we may be required to notify the appropriate authorities of issues relating to your affairs. We accept no liability to you for any losses you incur as a result of any actions we require to take as a result of such legislation and regulations. |
13. | Set-off |
If you owe us, or any other Heineken UK Group Companies, any payment or other liability, then we may set-off or withhold that amount from any sum which we, or such other Heineken UK Group Companies, owe you. In other words, only the net amount will be paid to you.
14. | Waiver |
No delay by either of us in exercising our rights or remedies under this contract shall prevent or restrict the exercise of such rights or remedies at any time. No waiver (whether express or implied) by either of us of any breach of any of the terms of this contract by the other shall be construed as a waiver of any subsequent breach of the same or any other provision.
15. | Termination |
Without prejudice to our rights under Clause 10, we shall be entitled to terminate this contract immediately if you commit a material breach of any of these terms and conditions, or on 30 days prior written notice for any other reason.
16. | Proper Law and Jurisdiction |
This contract shall be governed and construed in accordance with English law and the English Courts shall have exclusive jurisdiction over any disputes arising.
17. | General |
17.1 | We reserve the right to transfer to any person the right to receive payment of any money payable to us, and/or any of our other rights. |
17.2 | All copyright, patent, trade mark, trade secret, design rights, domain names and other proprietary and Trade Marks whether registered or unregistered in the goods (“Trade Marks”) and Containers and information and know how which we may provide in relation to the goods and Containers shall (as between you and us) remain vested in us. You shall not acquire any title in the Trade Marks relating to the goods or Containers. You may not copy or imitate the Trade Marks, goods or Containers or do or omit to do, or permit any third party to do or omit to do, anything which may damage such Trade Marks. Any goodwill arising from the use of such Trade Marks shall accrue to us. |
17.3 | If we agree to supply you with goods upon which excise duty (or other duties or taxes) has not been paid, it will be on the strict condition that you comply with all legislation and procedures (whether legally binding or not) relating to excise duty suspension or such other regime as may be applicable. You will keep us fully indemnified at all times on demand against any assessments, claims, demands, losses, liabilities or expenses which we incur as a result of any failure by you to fulfill your obligations under such legislation or procedures. We shall not be obliged to provide you with any certificate or similar relating to payment of excise duty on any delivery. This information shall be shown on the delivery note in question, a copy of which should be retained for your records. |
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17.4 | Please note that goods such as merchandising/ point of sale and branded items may be supplied by us for use in your business. If you dispose of goods which form part of the assets of your business (e.g. you sell them, give them away, or take them into private use) this is normally a supply for VAT purposes and, where it is a taxable supply, you will have to account for VAT on the disposal. |
17.5 | You shall not be entitled to assign, re-sell, transfer, encumber or otherwise any of your rights or obligations under this contract, in whole or in part, without our prior consent and any attempt to do so will enable us to terminate this contract without prejudice to our other rights and remedies. |
18. | Amendments |
We reserve the right to alter these terms of sale generally or for any particular class of goods or customer. We will use our reasonable endeavours to give at least one week’s notice of alteration.
19. | Severance |
If any provision of these terms is held by any competent authority to be unenforceable (in whole or in part) it shall be deemed severable and the remaining provisions of these terms (and/ or the remainder of such provision) shall continue in full force and effect.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their duly authorised representatives and delivered on the date first above written.
SIGNED for HEINEKEN UK LIMITED by: | Before THIS WITNESS: | |||
Signature | /s/ Joss van der Burg | Signature | /s/ Mark Hannam | |
Name: | Joss van der Burg | Name: | Mark Hannam | |
Title: | Finance Director | Address: | 30 Kingston Road, Oxford, OX2 6RQ | |
Date: | 04/16/2013 | Date: | 04/16/2013 |
SIGNED for KINGFISHER BEER EUROPE LIMITED by | Before THIS WITNESS: | |||
Signature | /s/ Damon Swarbrick | Signature | /s/ Mark Davis | |
Name: | Damon Swarbrick | Name | Mark Davis | |
Title: | Director | Address: | Springfield House, Sandling Road, Maidstone, Kent | |
Date: | 04/17/2013 | Date: | 04/17/2013 |
36 |
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED BASED UPON A REQUEST
FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934 AND HAVE BEEN SEPARATELY FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
HEINEKEN SUB-LICENCE AGREEMENT between Heineken UK Limited and United Breweries International (UK) Limited and Kingfisher Beer Europe Limited and United Breweries Limited |
1 |
This Sub-Licence Agreement is dated April 18, 2013 between:-
PARTIES:-
A. | HEINEKEN UK LIMITED, a company incorporated in Scotland (Registered Number SC065527) and having its registered office at 2-4 Broadway Park, South Gyle Broadway, Edinburgh, EH12 9JZ (“Heineken UK”); and |
B. | UNITED BREWERIES INTERNATIONAL (UK) LIMITED, a company incorporated in England and Wales (Registered Number 1688201) and having its registered office at 75 Westow Hill, Crystal Palace, London, SE19 1TX (“UBI”); and |
C. | KINGFISHER BEER EUROPE LIMITED, a company incorporated in England and Wales (Registered Number 02367133) and having its registered office at Springfield House, Sandling Road, Maidstone, Kent, ME14 2LP (“KBE”); and |
D. | UNITED BREWERIES LIMITED, a company incorporated in India and having its registered office at Level 3-5, UB Tower, UB City 24, Vittal Mallya Road, Bangalore, 560001, India (“UB”). |
(each a “party” and together the “parties”) |
BACKGROUND:-
(1) | KBE and Heineken UK have entered into a Contract Brewing and Distribution Agreement and a Loan Agreement (both as defined below). |
(2) | The parties have agreed that in the event that KBE defaults under the Contract Brewing and Distribution Agreement and/or the Loan Agreement, Heineken UK shall, at its option, acquire an exclusive licence from UBI to produce, market and sell the Product (as defined below) in the United Kingdom. |
(3) | This Agreement sets out the terms and conditions on which Heineken UK shall acquire the exclusive licence. |
IT IS AGREED:-
1. | Definitions and Interpretation |
1.1 | Unless the context otherwise requires, in this Agreement the following words and expressions shall have the meaning set out opposite them: |
“Agent” | means any subsidiary or holding company of Heineken UK and any third party appointed by Heineken UK in connection with this Agreement; |
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“Agreement” | means this Sub-Licence Agreement together with its Schedules; | |
“Contract Brewing and Distribution Agreement” | means the contract brewing and distribution agreement entered into between KBE and Heineken UK on or around the date of this Agreement; | |
“Contract Year” | means any period of twelve months beginning on the Effective Date or any anniversary thereof; | |
“Debt” | has the meaning given to it in Clause 4.1; | |
“Distribution Agreement” | means the distribution agreement between UBI and KBE dated 9th October 1998, as the same was amended pursuant to a supplemental agreement dated 24th October 2001 and a deed of variation dated 11th March 2013; | |
“Effective Date” | has the meaning given in Clause 3.1; | |
“Event of Default” | has the meaning given to it in the Loan Agreement; | |
“Finance Document” | has the meaning given to it in the Loan Agreement; | |
“Gross Revenue” | means the proceeds from Product supplied to third parties, to personnel and group companies, associates, joint ventures and investments; | |
“Loan Agreement” | means the loan agreement entered into between KBE and Heineken UK on or around the date of this Agreement; | |
“Product” | means Kingfisher beer; | |
“Recipe” | means the list of ingredients and agreed manufacturing process for the Product; | |
“Revenue” | has the meaning given to it in the Heineken SCAN database (i.e. Gross Revenue (excluding excise) less discounts to customers less variable selling expenses plus proceeds from services); | |
“Specifications” | means the product specifications and details as to the method of production and also the packaging of the Product and the quality procedures and performance standards relating to the Product as agreed between the parties from time to time; |
3 |
“Term” | means the term of this Agreement as set out in Clause 3.1; | |
“Term Date” | means the earlier of (i) the date on which KBE has repaid the Debt to Heineken UK; or (ii) the date on which the Agreement terminates pursuant to Clause 4.3; or (iii) 9 October 2018; | |
“Territory” | means the United Kingdom (England, Wales, Scotland and Northern Ireland); | |
“Trade Marks” | means the trade marks which subsist in the Products, Recipes and Specifications, as more particularly set out in Schedule 2; and | |
“TMLA” | means the trade mark licence agreement between UBI and United Breweries Limited, a company incorporated in India and having its registered office at Level 3-5, UB Tower, UB City 24, Vittal Mallya Road, Bangalore, 560001, India, dated 9th October 1998, as the same was amended pursuant to a supplemental agreement dated 22nd October 2001 and a deed of variation dated 11th March 2013. |
1.2 | In this Agreement:- |
1.2.1 | the singular includes the plural and vice versa; | ||
1.2.2 | references to gender include references to all genders; | ||
1.2.3 | unless otherwise stated, references to sub-Clauses, Clauses and to the Schedules are to sub-Clauses, Clauses and the Schedules to this Agreement; | ||
1.2.4 | the Clause headings are for reference only and shall not affect the construction or interpretation of this Agreement; | ||
1.2.5 | the Schedules annexed hereto are incorporated into and form part of this Agreement; | ||
1.2.6 | “subsidiary” and “holding company” shall have the meanings given to them in section 1159 of the Companies Act 2006; and | ||
1.2.7 | references to statutes, any statutory instrument, regulation or order shall be construed as a reference to such statute, statutory instrument, regulation or order as amended or re-enacted from time to time. |
4 |
1.3 | In this Agreement, except where the context otherwise requires, any reference to:- |
1.3.1 | another agreement or any deed or other instrument or document shall be construed as a reference to that other agreement, deed or other instrument or document as the same may have been, or may from time to time be, amended, varied, supplemented or novated; | ||
1.3.2 | a “day” means a period of 24 hours (or such other number of hours as may be relevant in the case of changes for daylight saving) ending at 12.00 midnight; | ||
1.3.3 | the words “include” or “including” are to be construed as meaning without limitation; | ||
1.3.4 | a “month” means a calendar month; and | ||
1.3.5 | a “person” includes any individual, partnership, firm, company, corporation, joint venture, trust, association, organisation or other entity, in each case whether or not having a separate legal personality. |
2. | Licence |
2.1 | UBI grants to Heineken UK an exclusive, royalty-free and irrevocable licence to use the Trade Marks for the purpose of producing, marketing, selling and distributing the Product in the Territory on the terms set out in this Agreement, and in particular the terms of the licence as set out in Schedule 1 (Licence Terms and Conditions). |
2.2 | As the owner of the Trade Marks, UB irrevocably consents to the grant of the licence pursuant to Clause 2.1 on the terms and conditions set out in this Agreement. |
3. | Term |
3.1 | Notwithstanding the date of this Agreement, this Agreement and the licence granted pursuant to clause 2.1 shall come into force with effect from the time: |
(i) | the notice issued pursuant to Clause 11.2(e) of the Loan Agreement is deemed to have been received in accordance with the notice provisions in Clause 15 of the Loan Agreement; or | |
(ii) | the notice issued pursuant to Clause 19.2 of the Contract Brewing and Distribution Agreement is deemed to have been received in accordance with the notice provisions in Clause 26 of the Contract Brewing and Distribution Agreement, (the “Effective Date”), and shall continue until the Term Date, unless terminated earlier in accordance with Clause 7 (the “Term”). For the avoidance of doubt, Heineken UK’s exercise of its right to the licence pursuant to Clause 11.2(e) of the Loan Agreement or Clause 19.2 of the Contract Brewing and Distribution Agreement shall lead to the immediate and automatic coming into force of the licence on the terms set out in this Agreement and no further action shall be required by the parties in order to give effect to the licence. |
5 |
3.2 | KBE and UBI acknowledge and agree that in the event of the coming into force of Heineken UK’s licence pursuant to clause 3.1 above, the terms of the Distribution Agreement shall be automatically varied such that KBE’s licence to the Trade Marks in the Territory are suspended with immediate effect from the Effective Date until the expiry of the Term. |
4. | Debt Write Off |
4.1 | In consideration of acquiring the exclusive licence pursuant to Clause 2.1, Heineken UK shall reduce the total amount outstanding and due by KBE to Heineken UK under this Agreement and any and all Finance Documents (the “Debt”) as at the Effective Date, at a notional royalty rate of [ * ]% of Revenue, which shall be written off at quarterly intervals throughout the Term. |
4.2 | Interest shall accrue on the Debt, from and including the Effective Date until the Debt has been repaid in full at the rate of 5% above the Bank of England base rate. The interest payable by KBE to Heineken UK pursuant to this Clause 4.2 shall be added to the Debt and written off in accordance with Clause 4.1 during the Term. |
4.3 | At the end of the first Contract Year, Heineken UK shall review the amount of the Debt and Heineken UK, UBI and KBE shall meet to discuss and consider whether the Debt can be settled at that point in a mutually acceptable way. If Heineken UK, UBI and KBE are able to reach a settlement solution, this Agreement shall terminate when Heineken UK has received the amount agreed to be payable to Heineken UK, in accordance with the settlement solution pursuant to this Clause 4.3, by BACS with cleared funds to such account in the United Kingdom as Heineken UK may nominate from time to time. |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
6 |
4.4 | In the event that Heineken UK, UBI and KBE cannot reach a settlement solution pursuant to Clause 4.3 above, the Debt shall continue to be written off in accordance with Clause 4.1 until the expiry of the Term. |
5. | Marketing Support |
5.1 | Subject to Clause 5.2, Heineken UK shall accrue a notional marketing fund of £[ * ] per hectolitre of Product sold by Heineken UK in the Territory during the Term, to be spent on marketing activities to promote the Product in the Territory, including any trade support to customers. Any unused marketing fund on the expiry or termination of this Agreement shall lapse. For the avoidance of doubt, no cash equivalent shall be payable. |
5.2 | Heineken UK, UBI and KBE may agree during the Term to use the notional marketing fund which has accrued pursuant to Clause 5.1 in order to accelerate KBE’s repayment of the Debt in such amounts as Heineken UK, UBI and KBE may agree from time to time. For the avoidance of any doubt, the amount to be spent by Heineken UK on marketing activities pursuant to Clause 5.1 shall be reduced by an amount equal to that portion of the marketing fund that has been used to accelerate KBE’s repayment of the Debt. |
6. | Trade Marks |
6.1 | UBI warrants that it has and will continue to have the full right and title to license the Trade Marks to Heineken UK during the Term. |
6.2 | Heineken UK acknowledges that UB are the owners of the Trade Marks and that Heineken UK will not obtain or assert any right to any part of them, except to the extent that the Licence permits. |
6.3 | UBI shall indemnify Heineken UK and/or its Agents in relation to any reasonable costs and expenses incurred as a result of any third party actions brought against Heineken UK and/or its Agents (as the case may be) in relation to their use of the Trade Marks and Heineken UK and/or its Agents shall give UBI reasonable assistance and control of any such action. |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
7 |
6.4 | Heineken UK shall not, without the written consent of UBI sell, dispose of or describe the Product under or by reference to any name or description other than the name or description applied to the Product by UBI. |
7. | Termination |
7.1 | Heineken UK shall be entitled to terminate this Agreement immediately in the event that: |
7.1.1 | a material breach of this Agreement by UBI which, having been notified to UBI, goes unremedied for a period of 30 days or more; or | |
7.1.2 | UBI’s licence pursuant to the TMLA is terminated for any reason. |
7.2 | UBI shall be entitled to terminate this Agreement immediately in the event that: |
7.2.1 | a material breach of this Agreement by Heineken UK which, having been notified to Heineken UK, goes unremedied for a period of 30 days or more; or | |
7.2.2 | Heineken UK (i) voluntarily or involuntarily enters a bankruptcy, insolvency or similar proceeding; (ii) passes a resolution for winding up its business or a court of competent jurisdiction makes an order to that effect (other than for the purpose of amalgamation or restructuring) or (iii) a receiver is appointed in respect of substantially all of its assets. |
8. | Consequences of Termination |
8.1 | On expiry or termination of this Agreement for any reason and subject to any express provisions set out elsewhere in this Agreement: |
8.1.1 | subject to clause 8.2 below, the Debt (which for the avoidance of doubt, shall include any interest payable on the Debt) shall immediately become due and payable by KBE to Heineken UK; | |
8.1.2 | all rights and licences granted under this Agreement shall cease; | |
8.1.3 | subject to Clause 8.1.4 below, Heineken UK shall cease all use of the Trade Marks; | |
8.1.4 | Heineken UK shall, for a period of 180 days after the date of termination, have the right to dispose of all stocks of Product in its or its Agents’ possession and all Product in the course of manufacture at the date of termination. |
8 |
8.2 | Where KBE is unable to make payment of the Debt on termination of this Agreement for any reason, UBI shall be liable to make payment of the Debt to Heineken UK immediately on termination. |
8.3 | The expiry or termination of this Agreement, for any reason, shall not affect any provision of this Agreement that is expressed to survive or operate in the event of expiry or termination and shall be without prejudice to the provisions of this Clause 8.3 and to any rights of a party which may have accrued by, at or up to the date of such expiry or termination. |
9. | Limitation of Liability |
9.1 | Neither party excludes or restricts their liability for death, personal injury or fraudulent misrepresentation. |
9.2 | Subject always to Clause 9.1, the aggregate liability of Heineken UK for any single breach or series of similar breaches of this Agreement shall be limited to £[ * ] in any Contract Year. |
9.3 | Subject always to Clause 9.1, neither party shall be liable to the other party in contract, delict, tort (including negligence) or otherwise arising out of or in connection with this Agreement including by way of indemnity for any special, indirect or consequential losses or damage (including loss of profits and loss of business), provided that where such losses were within the contemplation of the parties at the date of this Agreement this Clause 9.3 shall not apply. |
10. | Force Majeure |
10.1 | Any delay in or failure by a party hereto in performance hereunder shall be excused if and to the extent that such delay or failure is caused by occurrences beyond such party’s control including but not limited to, acts of God, decrees or restraints of government, strikes, labour disputes, war, fire, riot, sabotage, terrorism and any other cause or causes whether similar or dissimilar to those already specified which cannot be controlled by such party. Such performance shall be so excused for the period during which such inability of the party to perform is so caused but for no longer period and shall be remedied as far as possible with all reasonable despatch. Any time period for performance shall be extended by a period equal to duration to any period during which such performance is excused by this Clause. |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
9 |
11. | Confidentiality |
11.1 | Each of the parties agrees to keep the terms of this Agreement and of any information exchanged between the parties in the course of this Agreement (in whatever form and including materials, notes, or papers in whatever form derived from such information) (“Confidential Information”) strictly confidential and shall not divulge any Confidential Information to any other person, except to its employees, licensees and/or Agents engaged in the production, marketing (including advertising) and distribution of the Product to whom it shall be essential to disclose the same. |
11.2 | Nothing in Clause 11.1 shall restrict the disclosure of any Confidential Information: |
11.2.1 | which has entered into the public domain (other than by breach of a party to this Agreement); | |
11.2.2 | which comes into the possession of a party independently provided that such information has come into the possession of that party in circumstances of good faith; or | |
11.2.3 | which is required to be disclosed by law, regulation, any competent court, governmental or regulatory authority pursuant to the rules of any stock exchange. |
12. | Assignment & Sub-Contracting |
12.1 | Save as set out in Clause 12.2, none of the rights, duties, or obligations under this Agreement may be assigned, delegated, transferred or sub-contracted by either party without the other party’s prior written consent, such consent not to be unreasonably withheld. |
12.2 | UBI, UB and KBE acknowledge and accept that Heineken UK may sub-contract distribution of the Product to its nominated distributor from time to time and that Heineken UK may appoint an Agent to manufacture and package the Product under Heineken UK’s supervision. |
13. | Waiver |
13.1 | Subject to Clause13.2, failure, delay or neglect by a party to enforce at any time any provision of this Agreement shall not be construed nor shall be deemed to be a waiver of that party’s rights hereunder nor in any way affect the validity of the whole or any part of this Agreement nor prejudice the party’s rights to take subsequent action. |
10 |
13.2 | Each of the parties shall be entitled by notice in writing to the other parties to waive its rights under this Agreement. |
14. | Severability |
14.1 | If any provision of this Agreement is declared to be void or unenforceable by any judicial or administrative authority in any jurisdiction in which this Agreement is effective, such provision will be deemed to be severable and the parties shall each use their reasonable endeavours in good faith to modify this Agreement so that the intent of this Agreement can be legally carried out. |
15. | Notices |
15.1 | Any notice, consent, confirmation or other information required or authorised by this Agreement to be given by a party to another party to this agreement may be given by hand or sent by first class recorded delivery post to such other party at the address specified in this Agreement or such other address as may from time to time be notified in writing to the party giving such notice or other communication by the party to whom such notice or other communication is given. |
15.2 | Notices shall be deemed given, in the case of notice given by hand, when given, and in the case of notice given by recorded delivery post, two business days after the date of posting. |
16. | Contracts (Rights of Third parties) |
16.1 | A person who is not party to this Agreement shall have no rights under the Contracts (Rights of Third parties) Act 1999 to enforce any terms of this Agreement. This Clause does not affect any right or remedy of any person which exists or is available otherwise than pursuant to that Act. |
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17. | Disclaimer of Agency and Partnership |
17.1 | This Agreement shall not, unless expressly agreed otherwise, constitute a party as an agent of another party. The parties hereto are independent contractors and shall have no power, nor will each of the parties represent that it has any power, to bind the other party (or parties) or to assume or to create any obligation or responsibility, express or implied, on behalf of the other party (or parties) or in the other party’s (or parties’) name. |
17.2 | Nothing in this Agreement shall be construed as creating any relationship of partnership between the parties hereto. |
18. | Variation |
18.1 | This Agreement shall not be amended and no variation to its terms shall be effective unless such amendment or variation is in writing and is signed by or on behalf of each of the parties. |
19. | Entire Agreement |
19.1 | This Agreement and the Schedules annexed hereto constitute the entire understanding between the parties with respect to the subject matter hereof and supersedes any previous understandings, arrangements, representations, negotiations or agreements previously entered into between the parties. Provided that nothing in this Clause 19 shall have effect to exclude the liability of either party for fraud or fraudulent misrepresentation. |
20. | Counterparts |
20.1 | This Agreement may be executed in any number of counterparts, each of which so executed shall be an original, but together shall constitute one and the same instrument. |
21. | Governing Law |
21.1 | This Agreement shall be governed by and construed in accordance with the law of England & Wales and the parties hereby submit to the exclusive jurisdiction of the courts in England & Wales. |
12 |
Schedule 1
Licence Terms and Conditions
1. | APPOINTMENT, TECHNICAL DIRECTIONS, ADVICE AND SUPERVISION |
1.1 | Throughout the continuance of this Agreement, UBI (or its appointed agent) shall, in order to enable Heineken UK (or its appointed Agent) to produce and to package the Product materially in accordance with the Specifications, supply the Recipe and the Specifications to Heineken UK. |
2. | PRODUCTION |
Throughout the continuance of this Agreement Heineken UK shall, or shall procure that its Agent, in respect of the Product shall:
2.1 | install and maintain at its breweries such equipment (including laboratory equipment) and installations for the production and packaging of the Product in accordance with the Specifications; |
2.2 | manufacture the liquid for the Product to the Recipes, materially in accordance with the Specifications; |
2.3 | produce, package and store the Product at the breweries materially in conformity with: |
2.3.1 | the Specifications; and | |
2.3.2 | all applicable laws, bye-laws and regulations in the Territory and it will be Heineken UK’s responsibility to notify UBI of any incompatibility between Clauses 2.3.1 and 2.3.2; |
2.4 | at all reasonable times, and subject to agreeing a date and time in advance with Heineken UK, permit UBI to inspect all ingredients and such parts of the breweries, manufacturing facilities and stores in which the Product is produced, packaged or stored; |
2.5 | provide to UBI at its request, or permit UBI to take samples of raw and other materials and of the Product (irrespective of the stage of its production) at UBI’s expense; |
2.6 | provide to UBI, at UBI’s expense, and subject to receiving reasonable notice from UBI: |
2.6.1 | samples of the Product in advance of their use in such quantities and at such times as UBI may from time to time specify; | |
2.6.2 | technical reports in such form and at such times as may from time to time be indicated by UBI; |
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2.6.3 | progress-reports of new works and information about the condition of plant, equipment, installations used for the production and packaging of the Product when requested to do so by UBI; | |
2.6.4 | particulars of difficulties encountered in the production and packaging of the Product and in plant, equipment, installations or their components used therefore when requested to do so by UBI; |
All such requests under this clause 2.6 shall not be made unreasonably. | |
2.7 | in all its activities so act as to avoid bringing UBI or the name of the Product into disrepute in any part of the Territory. |
3. | MARKETING |
Heineken UK shall throughout the continuance of this Agreement:
3.1 | market the Product and ensure that all marketing is carried out in accordance with Clause 4 hereof; |
3.2 | not sell and distribute any off standard Product (as hereinafter defined); |
3.3 | use for the presentation of the Product only: |
i) | such sizes, designs and colours of bottles and cans, | |
ii) | such bottle closures and outer containers, | |
iii) | such labels, get-up and markings on bottles and outer containers, and | |
iv) | such advertising materials and literature, |
as shall conform to laws and regulations applicable to the relevant part of the Territory in which that particular Product is to be sold (including but not limited to Excise Regulations); | |
3.4 | use the Trade Marks only in relation to the Product, sell the Product only under the Trade Marks and keep UBI informed of all manners in which the Trade Marks are proposed to be used and are used by Heineken UK; |
3.5 | neither while this Agreement is in force nor at any time after its termination register, attempt to register or secure any rights therein or assert any proprietary rights or use anywhere any Trade Marks which in any way includes, resembles or is associated with the Trade Marks or any part thereof; |
14 |
3.6 | not without UBI’s prior consent in writing, sell or export the Product in or to any part, region or country outside the Territory nor knowingly sell or supply it to any customer who requires it for any such export or sale, such consent not to be unreasonably withheld. |
4. | MARKETING AND ADVERTISING |
4.1 | UBI shall during the continuance of this Agreement render to Heineken UK all marketing assistance as UBI consider necessary or as Heineken UK may request to enable Heineken UK to carry out the provisions hereof. |
4.2 | If Heineken UK requires additional marketing services specific to the Territory, such as market surveys, assistance in local promotions or management of local sponsorships (hereinafter referred to as “Additional Marketing Services”), UBI and Heineken UK shall agree on the terms and conditions of such Additional Marketing Services in accordance with Clause 4.3 hereof. |
4.3 | Subject to Clause 4.4, Heineken UK undertakes that all marketing of the Product (including but not limited to media-advertisements, publicity and sales promotion) shall be carried out at Heineken UK’s sole discretion (a) for Heineken UK’s account but subject to UBI’s approval in order to ensure that it will be in line with UBI’s worldwide advertising policy; and (b) shall always be in strict compliance with the laws of the Territory. |
4.4 | Heineken UK shall be under no obligation to spend any amount in excess of what Heineken UK has agreed to provide pursuant to Clause 5.1 of this Agreement on marketing activities during the Term. |
4.5 | Copyright in any advertising materials and literature including in the artistic work appearing in the Trade Marks acquired by or coming into the possession of Heineken UK or any of its advertising or other agents or employees designed or written for the purpose of the promotion of sales of the Product (“Advertising Materials and Literature”) shall in all circumstances be UB’s property without payment and Heineken UK shall accordingly reserve such ownership in any authority or order which it may give or which may be given by its direction for the preparation of Advertising Materials and Literature. UB may require Heineken UK to execute such documents as may be required to affirm the ownership of UB in the Trade Marks as well as the Advertising Materials and Literature. |
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4.6 | In the event of any infringement or suspected infringement of UB’s copyright in Advertising Materials and Literature or any act or thing which might be detrimental thereto coming to Heineken UK’s notice, Heineken UK shall promptly notify UBI or KBE thereof and take such steps or join with UB if required in taking such steps against the alleged infringer as UB may require. |
4.7 | Clause 4.5 shall survive the termination of this Agreement. |
5. | PRODUCT CONTROL |
If UBI, being of the opinion that any beer produced or marketed by Heineken UK as the Product is in any aspect different from its specifications or standard (“off standard Product”), has given a notice in writing to Heineken UK to that effect, Heineken UK shall:
5.1 | keep and procure to be retained in its or its Agent’s depot all such off standard Product; |
5.2 | use its reasonable endeavours to recover any such off standard Product already delivered; |
5.3 | dispose of such off standard Product; and |
5.4 | cease the delivery of the Product until the required appearance nature and quality thereof has been re-attained. |
6. | LICENCES, CLAIMS |
6.1 | Heineken UK warrants to UBI that it has all appropriate licences, permits and authority to enable it to produce, bottle, package, store, distribute, market and sell the Product in the Territory and that it will maintain such licences, permits and authorities in full force and effect throughout the continuation of this Agreement. |
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Schedule 2
Trade Marks
17 |
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed by their duly authorised representatives and delivered on the date first above written.
SIGNED for HEINEKEN UK LIMITED by: | Before THIS WITNESS: | |||
Signature | /s/ Joss van der Burg | Signature | /s/ Mark Hannam | |
Name: | Joss van der Burg | Name: | Mark Hannam | |
Title: | Finance Director | Address: | 30 Kingston Road, Oxford, OX2 6RQ | |
Date: | 04/16/2013 | Date: | 04/16/2013 |
SIGNED for UNITED BREWERIES INTERNATIONAL(UK) LIMITED by | Before THIS WITNESS: | |||
Signature | /s/ Jerome G. Merchant | Signature | /s/ Alain Littee | |
Name: | Jerome G. Merchant | Name | Alain Littee | |
Title: | Director | Address: | 107 Egloff Drive | |
Date: | 04/15/2013 | Date: | 04/15/2013 |
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SIGNED for KINGFISHER BEER EUROPE LIMITED by: | Before THIS WITNESS: | |||
Signature | /s/ Damon Swarbrick | Signature | /s/ Mark Davis | |
Name: | Damon Swarbrick | Name: | Mark Davis | |
Title: | Director | Address: | Springfield House, Sandling Road, Maidstone, Kent | |
Date: | 04/17/2013 | Date: | 04/17/2013 |
SIGNED for UNITED BREWERIES LIMITED by: | Before THIS WITNESS: | |||
Signature | /s/ Shekhar Ramamurthy | Signature | /s/ Govind Iyengar | |
Name: | Shekhar Ramamurthy | Name: | Govind Iyengar | |
Title: | Joint President | Address: | UB City, UB Tower, Level 4 | |
#24, Vital Mallaya Road | ||||
Bangalore, 560001 | ||||
India | ||||
Date: | 04/17/2013 | Date: | 04/17/2013 |
19 |
CONFIDENTIAL PORTIONS HAVE BEEN OMITTED BASED UPON A REQUEST
FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934 AND HAVE BEEN SEPARATELY FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION.
LOAN AGREEMENT between Heineken UK Limited and Kingfisher Beer Europe Limited |
Contents
Clause | |||
1. | Definitions and Interpretation | 1 | |
2. | The Commitment | 5 | |
3. | Drawdown | 6 | |
4. | Conditions precedent | 6 | |
5. | Interest | 6 | |
6. | Default interest | 6 | |
7. | Repayment, prepayment and cancellation | 7 | |
8. | Payments | 7 | |
9. | Representations and warranties | 8 | |
10. | Undertakings | 11 | |
11. | Events of default | 14 | |
12. | Indemnities | 16 | |
13. | VAT | 17 | |
14. | Set Off | 17 | |
15. | Notices | 17 | |
16. | Assignment | 19 | |
17. | Severance | 19 | |
18. | Waiver | 19 | |
19. | Third Party Rights | 19 | |
20. | Counterparts | 20 | |
21. | Governing law and jurisdiction | 20 | |
Schedule | |||
Schedule 1 - Conditions Precedent | 21 | ||
1. | Constitutional documents, resolutions and certificates | 21 | |
2. | Finance Documents | 22 | |
3. | Financial | 22 | |
4. | Other documents and evidence | 22 | |
Schedule 2 – Facility Repayment | 23 | ||
Schedule 3 – Draft Letter of Direction | 24 |
This Loan Agreement is dated April 18, 2013 between:-
PARTIES:-
A. | HEINEKEN UK LIMITED, a company incorporated in Scotland (Registered Number SC065527) having its registered office at 2-4 Broadway Park, South Gyle Broadway, Edinburgh, EH12 9JZ (the “Lender”); and |
B. | KINGFISHER BEER EUROPE LIMITED, a company incorporated in England and Wales (Registered Number 02367133) having its registered office at Springfield House, Sandling Road, Maidstone, Kent, ME14 2LP (the “Borrower”). |
(each a “party” and together the “parties”) |
BACKGROUND
The Lender has agreed to provide the Borrower with a secured term loan facility of £1,000,000.
IT IS AGREED:-
1. | Definitions and Interpretation |
1.1 | Unless the context otherwise requires, in this Agreement the following words and expressions shall have the meaning set out opposite them: |
Affiliate: in relation to any person, a subsidiary of that person or a holding company of that person or any other subsidiary of that holding company.
Agreement: means this loan agreement together with its Schedules.
Borrower’s Parent Company: means United Breweries International (UK) Limited, a company registered in England with company number 1688201 and having its registered office at 75 Westow Hill, Crystal Palace, London, SE19 1TX.
Business Day: a day (other than a Saturday or a Sunday) on which the Lender is open for business.
Change of Control: a situation where:
(a) | any person, or group of connected persons not having control (as defined in sections 450 and 451 of the Corporation Tax Act 2010) of the Borrower on the Effective Date acquires control of the Borrower; or |
(b) | any shareholder of the Borrower who owns more than 50% of the issued ordinary share capital of the Borrower on the Effective Date transfers (whether by a single transfer or a series of transfers at different times) shares constituting, in aggregate, 50% or more in nominal value of the Borrower’s issued ordinary share capital without the Lender’s prior written consent. |
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Contract Brewing and Distribution Agreement: means the contract brewing and distribution agreement entered into between the parties on or around the Effective Date.
Drawdown Date: means 9 October 2013.
Effective Date: means the date of this Agreement.
Event of Default: any event or circumstance listed in clause 11.
Facility: means the sterling term loan facility of £1,000,000 to be made available to the Borrower pursuant to this Agreement.
Final Repayment Date: means 9 October 2016.
Finance Documents: means
(a) | this Agreement; |
(b) | the Contract Brewing and Distribution Agreement; |
(c) | all agreements and other documents entered into from time to time pursuant to any of the foregoing; and |
(d) | any other documents designated by the Lender and the Borrower as a Finance Document. |
Financial Indebtedness: means all payment or repayment obligations, whether present or future, actual or contingent incurred by the Borrower at that time in respect of all or any of the following (but without double counting):
(a) | money borrowed or raised from any source; |
(b) | any bonds, notes, loan stock, debenture or similar instruments; |
(c) | any acceptance credit, note purchase facility, invoice discounting facility, bills of exchange or documentary credits; |
(d) | gross obligations under or in respect of finance leases; |
(e) | the supply of any goods or services which is more than 60 days past the expiry of the period customarily allowed by the relevant supplier after the due date; |
(f) | guarantees, indemnities or other assurances against financial loss whether in connection with the performance of contracts or otherwise; and |
(g) | amounts raised or obligations incurred in respect of any other transaction which have the commercial effect of Financial Indebtedness (including, without limitation, forward sale or purchase agreements, leases, hire purchase and conditional sale agreements), |
but excluding the invoice discounting facility created pursuant to the invoice discounting agreement between the Borrower and The Royal Bank of Scotland Commercial Services Limited (company number 03220331) dated 26th April 2005.
Financial Year: means 1st January to 31st December in the same year.
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First Interest Payment Date: means 9th January 2014.
Interest Payment Date: means
(a) | the First Interest Payment Date and each date falling every 3 months thereafter; and |
(c) | the Final Repayment Date. |
Heineken Sub-licence Agreement: means the sub-licence agreement entered into between the Lender, the Borrower, the Borrower’s Parent Company and UB on or around the Effective Date.
Material Adverse Effect: means any event or circumstance which, in the opinion of the Lender:
(a) | is likely to materially and adversely affect the Borrower’s ability to perform or otherwise comply with all or any of its obligations under this Agreement; or |
(b) | is likely to materially and adversely affect the business, operations, property, condition (financial or otherwise) or prospects of the Borrower; or |
(c) | is likely to result in this Agreement or the Security not being legal, valid and binding on, and enforceable in accordance with its terms against, the Borrower and, in the case of the Security, not providing to the Lender the security interest under the Security. |
Permitted Debt: means the amount of £[ * ] owed by the Borrower to Shepherd Neame Limited (company number 00138256) as at the Effective Date.
Permitted Security: means any Security Interest arising under:
(a) | the Fixed and Floating Charge dated 16th May 2005 and created by the Borrower for the purpose of securing all monies due or to become due from the Borrower to The Royal Bank of Scotland Commercial Services Limited (company number 03220331); |
(b) | the Heineken Sub-licence Agreement; |
(c) | any liens arising by operation of law and in the ordinary course of the Borrower’s business and not as a result of any default or omission by the Borrower; |
(d) | any normal title retention arrangements included in a supplier’s standard conditions of supply of goods acquired by the Borrower in the ordinary course of trade; |
(e) | any netting or set-off arrangement entered into by the Borrower in the ordinary course of its banking arrangements for the purpose of netting debit and credit balances; and |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
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(f) | any Security Interest created or outstanding with the Lender’s prior written consent. |
Potential Event of Default: means the occurrence of any event which, with the giving of notice and/or the lapse of time and/or the making of any determination, or the fulfillment of any condition under clause 11 would, in the reasonable opinion of the Lender, be expected to constitute an Event of Default.
Security: means the Heineken Sub-licence Agreement, pursuant to which the Borrower’s Parent Company agrees to grant the Lender an exclusive licence to produce, market, sell and distribute the Kingfisher brand in the United Kingdom in the event that an Event of Default or a Potential Event of Default occurs.
Security Interest: any mortgage, charge (whether fixed or floating, legal or equitable), pledge, lien, assignment by way of security or other security interest securing any obligation of any person or any other agreement or arrangement having or purporting to have the effect of granting or constituting priority over unsecured creditors’ rights.
Tax: any tax, levy, impost, duty or other charge, fee, deduction or withholding of a similar nature (including any penalty or interest payable in connection with the failure to pay, or delay in paying, any of these).
TMLA: means the trade mark licence agreement between the Borrower’s Parent Company and UB dated 9th October 1998, as the same was amended pursuant to a supplemental agreement dated 22nd October 2001 and a deed of variation entered into on or around the Effective Date.
UB: means United Breweries Limited, a company incorporated in India and having its registered office at Level 3-5, UB Tower, UB City 24, Vittal Mallya Road, Bangalore, 560001, India.
Unpaid Sum: means any sum due and payable but unpaid by the Borrower under this Agreement.
VAT: value added tax as provided for in the Value Added Tax Act 1994 and any other tax of a similar nature.
1.2 | A reference to a statute, statutory provision or subordinate legislation is a reference to it as it is in force for the time being, taking account of any amendment, re-enactment or extension and includes any former statute, statutory provision or subordinate legislation which it amends or re-enacts. |
1.3 | Unless the context otherwise requires, a reference to one gender shall include a reference to the other genders. |
1.4 | Unless the context otherwise requires, words in the singular include the plural and in the plural the singular. |
1.5 | A reference to a clause or Schedule is to a clause of, or Schedule to, this Agreement unless the context requires otherwise. |
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1.6 | A reference to a holding company or subsidiary means a holding company or subsidiary as defined in section 1159 of the Companies Act 2006. |
1.7 | A reference to this Agreement (or any provision of it) or any other document shall be construed as a reference to this Agreement, that provision or that document as it is in force for the time being and as amended, varied or supplemented in accordance with its terms or with the agreement of the relevant parties. |
1.8 | A reference to a person shall include a reference to an individual, firm, company, corporation, unincorporated body of persons, or any state or any agency of any person. |
1.9 | A reference to a document in the agreed form is to that document in the form agreed by the parties and initialled by or on behalf of them for identification (including any alteration which may be so agreed). |
1.10 | A reference to a certified copy of a document means a copy certified to be a true, complete and up-to-date copy of the original document, in writing and signed by a director or the secretary of the party delivering the document. |
1.11 | A reference to an amendment includes a novation, re-enactment, supplement or variation (and amended shall be construed accordingly). |
1.12 | A reference to assets includes present and future properties, undertakings, revenues, rights and benefits of every description. |
1.13 | A reference to an authorisation includes an approval, authorisation, consent, exemption, filing, licence, notarisation, registration or resolution. |
1.14 | A reference to a regulation includes any regulation, rule, official directive, request or guideline (whether or not having the force of law) of any governmental, inter-governmental or supranational body, agency, department or regulatory, self-regulatory or other authority or organisation. |
1.15 | A reference to the Lender shall include the Lender’s respective successors, permitted transferees and permitted assigns. |
1.16 | Clause, Schedule and paragraph headings shall not affect the interpretation of this agreement. |
2. | The Commitment |
2.1 | Amount |
(a) | Subject to the terms of this Agreement, the Lender shall make available to the Borrower the Facility on the terms and subject to the conditions of this Agreement. |
2.2 | Purpose |
(a) | The Borrower shall, subject to the terms of this Agreement, use or procure the use of the Facility for the purpose of: |
(i) | refinancing its Permitted Debt; and |
(ii) | providing additional working capital in the Borrower’s business. |
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(b) | The Lender shall not be bound to monitor or verify the application of any amount borrowed pursuant to this Agreement. |
3. | Drawdown |
3.1 | Subject to clause 4, the Lender shall make the Facility available to the Borrower in full on the Drawdown Date. |
4. | Conditions precedent |
4.1 | The Facility will only be made available, and the obligations of the Lender under this Agreement will only arise, once the Lender has received all the documents and evidence specified in Schedule 1 in the form, and containing the information, that it requires. |
4.2 | The Lender’s obligation to make the Facility available pursuant to clause 3, is subject to the further conditions precedent that, on the Effective Date and the Drawdown Date: |
(a) | the representation and warranties in clause 9 are true and correct and will be true and correct immediately after the Lender has made the Facility available; and |
(b) | no Event of Default or Potential Event of Default is continuing or would result from the Facility being made available to the Borrower. |
4.3 | The conditions specified in this clause 4 are inserted solely for the Lender’s benefit. The Lender may waive them, in whole or in part and with or without conditions, without prejudicing the Lender’s right to require subsequent fulfillment of such conditions. |
5. | Interest |
5.1 | Interest shall accrue on the Facility, from and including the Drawdown Date to the date the Facility is repaid in full. |
5.2 | Interest shall be payable by the Borrower to the Lender quarterly in arrears (at such account as the Lender may specify from time to time) on the outstanding balance of the Facility on each Interest Payment Date at the rate of 5% above the Bank of England base rate. |
5.3 | Interest shall accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 365 days. |
6. | Default interest |
6.1 | If the Borrower fails to pay any amount payable by it under this Agreement on its due date, interest shall accrue on the Unpaid Sum from the due date up to the date of actual payment (both before and after judgment) at a rate which is two per cent (2%) per annum higher than the applicable rate under clause 5.2. Any interest accruing under this clause 6.1 shall be immediately payable by the Borrower on demand by the Lender. |
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6.2 | Default interest (if unpaid) arising on an Unpaid Sum will be compounded with the Unpaid Sum at the end of each month applicable to that Unpaid Sum but will remain immediately due and payable. |
7. | Repayment, prepayment and cancellation |
7.1 | Repayment |
Subject to clauses 7.2 and 7.3 below, the Borrower shall repay the Facility quarterly in arrears on each Interest Payment Date in equal installments of £83,333.33, with the first payment falling due on the First Interest Payment Date. In any event, the Borrower shall repay the outstanding balance of the Facility in full (together with all other sums outstanding to the Lender under this Agreement) on or before the Final Repayment Date.
7.2 | Voluntary Prepayment |
The Borrower may, by irrevocable written notice to be received by the Lender not later than 11.00 am five Business Days before an Interest Payment Date (or such shorter period as the Lender may agree), prepay the outstanding balance of the Facility or part thereof together with all accrued but unpaid interest and all other costs payable pursuant to clause 12.
7.3 | No re-borrowing of the Facility |
No amount of the Facility repaid or prepaid may be redrawn or drawn once repaid or prepaid (as the case may be).
7.4 | Application of Prepayments |
Any prepayment of the Facility in part pursuant to this Agreement shall reduce the repayment installments outstanding under clause 7.1. Such prepayments shall be applied to the amount due on the last of the repayment dates set out in Schedule 2.
8. | Payments |
8.1 | Facility Payments |
Subject to satisfaction of all the applicable conditions in clause 4, the Lender shall pay the Facility to the Borrower on the Drawdown Date in accordance with the Borrower’s draft letter of direction as set out in Schedule 3 which shall be issued on or before the Drawdown Date.
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8.2 | Place and time |
All payments to be made by the Borrower to the Lender under this Agreement shall be made on the due date specified in this Agreement to the account specified by the Lender.
8.3 | Non-Business Day |
If any payment should become due on a day which is not a Business Day the due date for such payment shall be the following Business Day unless such following Business Day shall fall in the next calendar month in which case it shall be the preceding Business Day.
8.4 | No Set-Off/Counterclaim |
All payments to be made by the Borrower under this Agreement shall be made in pounds sterling:
(a) | without set-off, deduction or counterclaim; and |
(b) | free and clear of and without deduction for or on account of all taxes unless the Borrower is compelled by law to make payment subject to such taxes. |
8.5 | Payment of taxes/grossing-up |
All taxes in respect of this Agreement and any amounts paid or payable hereunder shall be paid by the Borrower when due and in any event prior to the date on which penalties attach thereto. If any such taxes or amounts in respect thereof must by law be deducted from any monies payable or paid by the Borrower hereunder, the Borrower shall pay such additional amounts as may be necessary to ensure that the Lender receives after payment of such taxes an amount equal to the full amount which it would have received had payment not been made subject to such taxes or amounts.
8.6 | Tax receipts |
As soon as practicable after each payment by the Borrower of tax or in respect of taxes, the Borrower shall deliver to the Lender evidence satisfactory to the Lender (including all relevant tax receipts) that such tax has been duly remitted to the appropriate authority.
9. | Representations and warranties |
9.1 | Representations and Warranties |
The Borrower represents and warrants to the Lender that:
(a) | Status |
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(i) | it is a limited liability company duly incorporated and validly existing under the laws of England and Wales; |
(ii) | it has full power and authority to own its assets and carry on its business, as it is being conducted; |
(b) | Powers and authority |
It has the power to execute, deliver and perform its obligations under this Agreement, and to carry out the transactions contemplated by this Agreement and all necessary steps have been or will be taken to authorise the execution, delivery and performance of the same. No limit on its powers will be exceeded as a result of the borrowing or granting of the Security contemplated by this Agreement;
(c) | Non-Contravention |
The execution, delivery and performance by it of this Agreement will not contravene or conflict with:
(i) | its constitutional documents; |
(ii) | any agreement or instrument binding on it or its assets or constitute a default or termination event (however described) under any such agreement or instrument; or |
(iii) | any law or regulation or judicial or official order, applicable to it; |
(e) | No default |
(i) | no Potential Event of Default has occurred or is continuing; and |
(ii) | no Event of Default has occurred or is continuing; |
(iii) | no other event or circumstance is outstanding which constitutes a default or termination event (howsoever described) under any other agreement or instrument which is binding on it or to which any of its assets is subject which has or is likely to have a Material Adverse Effect; |
(g) | Litigation |
No action, litigation, arbitration or administrative proceeding has been commenced, or is pending or threatened against the Borrower, nor is there subsisting any unsatisfied judgement or award given against the Borrower by any court, arbitrator or other body which has or is reasonably likely to have a Material Adverse Effect.
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(h) | Financial Statements |
Each set of financial statements delivered by it to the Lender were prepared in accordance with consistently applied accounting principles, standards and practices generally accepted in its jurisdiction of incorporation and presents a true and fair view of the Borrower’s financial condition and operations during the relevant accounting period and were approved by the Borrower’s directors in compliance with section 393 of the Companies Act 2006;
(i) | No material adverse change |
There has been no material adverse change in the business, assets or financial condition, trading position or prospects of the Borrower since the date of the publication of its most recent audited financial statements;
(j) | Security Interests and Financial Indebtedness |
(i) | no Security Interest other than a Permitted Security Interest exists over all or any part of the assets of the Borrower; and |
(ii) | it does not have any Financial Indebtedness outstanding other than under the Permitted Debt and as permitted by this Agreement; |
(k) | Taxes |
(i) | it has complied with all taxation laws in all jurisdictions in which it is subject to taxation and has paid all taxes due and payable by it on or before penalties are incurred and no claims are being asserted against it in respect of taxes; and |
(ii) | it is not required to make any deduction for or on account of Tax from any payment it may make under this Agreement; |
(l) | Information |
All information, in written or electronic format, supplied by, or on behalf of the Borrower to the Lender in connection with the Facility was, at the time it was supplied or at the date it was stated to be given (as the case may be);
(i) | if it was factual information, complete, true and accurate in all material respects; |
(ii) | if it was a financial projection or forecast, prepared on the basis of recent historical information and on the basis of reasonable assumptions and was arrived at after careful consideration; |
(iii) | if it was an opinion or intention, made after careful consideration and was fair and made on reasonable grounds; and |
(iv) | not misleading in any material respect, nor rendered misleading by a failure to disclose other information, except to the extent that it was amended, superseded or updated by more recent information supplied by, or on behalf of, the Borrower to the Lender; |
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(m) | Pari Passu |
Its payment obligations under this Agreement rank at least pari passu in right and priority of payments with all existing and future unsecured and unsubordinated obligations (including contingent obligations), except for those mandatorily preferred by law applying to companies generally.
9.2 | Repetition |
Each of the representations and warranties given pursuant to clause 9.1 shall be deemed to be repeated by reference to the facts and circumstances then existing on the Effective Date, the Drawdown Date and on each Interest Payment Date.
10. | Undertakings |
10.1 | Information Undertakings |
The Borrower undertakes that from the date of this Agreement unless the Lender otherwise agrees:
(a) | Audited Accounts |
As soon as the same become available, but in any event within 90 days after the end of each Financial Year, deliver to the Lender a copy of the Accounts of the Borrower for the relevant Financial Year.
(b) | Management Accounts. |
As soon as the same become available, but in any event within 10 days after the end of the period to which they relate, deliver monthly management accounts of the Borrower for such period;
(c) | Notices |
It shall deliver copies of all notices or other documents sent by the Borrower to its shareholders and/or creditors;
(d) | Default, litigation, etc |
Promptly, upon becoming aware of the same, notify the Lender of:
(i) | any Event of Default or Potential Event of Default; |
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(ii) | any litigation, arbitration or administrative proceeding commenced or threatened against the Borrower which, if adversely determined could reasonably be expected to have a Material Adverse Effect; or |
(iii) | any Security Interest (other than a Permitted Security Interest) attaching to any assets of the Borrower. |
10.2 | Positive undertakings |
The Borrower undertakes from the Effective Date that it shall:
(a) | Ranking of obligations |
Ensure that the Borrower’s payment obligations under the Finance Documents shall at all times rank rank at least pari passu with all other present and future unsecured and unsubordinated Financial Indebtedness of the Borrower except for such Financial Indebtedness which is mandatorily preferred by law and not by contract;
(b) | Further assurance |
Notify the Lender promptly if it becomes aware of any lack of efficacy, validity or enforceability of any provision of any of the Finance Documents and in any event promptly do all such things as the Lender (or any receiver or similar insolvency official in any relevant jurisdiction) may reasonably request from time to time to perfect, remedy any defaults or lack of validity in, and protect the payment obligations and/or security constituted or evidenced or purported to be constituted or evidenced by any of the Finance Documents, and it shall forthwith pay to the Lender on demand all reasonable costs incurred in connection with the same, save in the case of negligence or error on the part of the Lender or its advisors;
(c) | Pay taxes |
Save for where the Lender is satisfied that the relevant Tax or governmental charge is being contested in good faith and the Borrower has maintained adequate reserves to pay such Taxes and governmental charges and the costs required to contest them, pay and discharge all Tax and governmental charges payable by or assessed upon it prior to the date on which the same become overdue or before any penalty is incurred;
(d) | Insurance |
The Borrower shall:
(i) | effect such insurances as a prudent company in the same business would effect, each insurance to be in an amount and in a form a prudent company in the same business would effect; |
(ii) | pay (or procure the payment of) all premiums promptly and do all other things necessary to keep each insurance policy in force. |
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(e) | Authorisations |
The Borrower shall promptly:
(i) | obtain, maintain and comply with; and |
(ii) | supply a certified copy to the Lender of, any authorisation required under any law or regulation for the validity or enforceability of or to enable it to perform its obligations under any Finance Document. |
10.3 | Negative undertakings |
The Borrower undertakes from the Effective Date that it shall not:
(a) | Negative Pledge |
Create or permit to subsist any Security Interest over any of its assets other than a Permitted Security Interest;
(b) | Fees |
Pay any fees or commissions to any person other than:
(i) | to any third party on open market terms and for the purpose of and in the ordinary course of business; or |
(ii) | fees incurred under any Finance Document; |
(c) | Loans |
Make any loans to or for the benefit of any person;
(d) | Credit |
Grant any credit to or for the benefit of any person other than in the ordinary course of business;
(e) | Financial Indebtedness |
Save for the Permitted Debt incur or permit to subsist any Financial Indebtedness other than in the ordinary course of carrying on its business or as expressly contemplated in any Finance Document;
(f) | Arm’s Length |
Transact or contract with a third party, other than on an arm’s length basis.
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11. | Events of default |
11.1 | Each of the following shall be an Event of Default: |
(a) | Non-payment |
The Borrower does not pay on the due date (which shall be the date of demand if so payable) any amount payable by it under this Agreement at the place and in the currency and funds in which it is expressed to be payable;
(b) | Certain defaults or claims |
The Borrower does not comply with any of its obligations under clause 10.3;
(c) | Other defaults |
The Borrower does not comply with any of its obligations under any Finance Document;
(c) | Termination of TMLA |
The TMLA is terminated for any reason;
(d) | Breach of representation or warranty |
Any representation, warranty or statement made or deemed to be repeated by the Borrower under any Finance Document or in any document delivered by or on behalf of the Borrower under or in connection with any Finance Document is in any material respect incorrect when made or deemed to have been repeated;
(e) | Attachment or distress |
A creditor or encumbrancer attaches or takes possession of, or a distress, execution, sequestration or other process is levied or enforced upon or sued out against, any of the assets of the Borrower and such civil remedy is not, in the opinion of the Lender, frivolous, vexatious and/or is not released within 30 Business Days;
(f) | Enforcement of Security Interest |
Any Security Interest over any of the assets of the Borrower becomes enforceable;
(g) | Inability to pay debts |
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The Borrower:
(i) | suspends payment of its debts or is unable or admits its inability to pay its debts as they fall due; or |
(ii) | begins negotiations with any creditor with a view to the general readjustment or rescheduling of all or any class of creditors; or |
(iii) | proposes or enters into any composition or other arrangement for the benefit of its creditors generally or any class of creditors; |
(h) | Insolvency proceedings |
Any person takes any action or any legal proceedings are started or other steps taken (including, without limitation, the presentation of a petition) for the sequestration, winding up, administration, reorganisation or dissolution of the Borrower or the appointment of a liquidator, trustee, receiver, administrator, administrative receiver or similar officer in respect of the Borrower or any of their assets or any analogous procedure or step is taken in any jurisdiction;
(i) | Adjudication or appointment |
Any adjudication, order or appointment is made under or in relation to any of the proceedings referred to in clause 11.1(h);
(j) | Cessation of business |
The Borrower suspends, ceases or threatens to suspend or cease to carry on its business or ceases to hold any licence, authorisation or consent necessary or desirable for the conduct of its business;
(k) | Ownership |
Without the prior written consent of the Lender, there is a Change of Control; and
(l) | Material Adverse Effect |
Any event or series of events occurs which in the reasonable opinion of the Lender is likely to have a Material Adverse Effect.
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11.2 | Acceleration |
Within thirty (30) days of the occurrence of an Event of Default, the parties shall use their reasonable endeavours to agree a plan which would accelerate payments by the Borrower of any outstanding balance due to the Lender under the Finance Documents to a level that is acceptable to the Lender. If the parties are unable to reach agreement on a suitable plan within 30 days of the relevant Event of Default occurring, then on the expiry of the 30 day period the Lender may by written notice to the Borrower:
(a) | terminate the Facility; and/or |
(b) | terminate the obligations of the Lender under this Agreement; and/or |
(c) | declare the Facility immediately due and repayable; and/or |
(d) | charge interest on the Facility at the rate specified in clause 5.2; and/or |
(e) | exercise its right to the exclusive licence pursuant to the Heineken Sub- licence Agreement. |
12. | Indemnities |
12.1 | Indemnity |
The Borrower shall indemnify the Lender on demand against any Loss (including any Loss on account of funds borrowed, contracted for or utilised to fund any amount payable under this Agreement, any amount repaid or prepaid under this Agreement and any loss of profits) which the Lender has sustained or incurred as a consequence of:
(a) | the failure of the Borrower to make a payment on the due date of any sum due under this Agreement; |
(b) | the occurrence of any Event of Default, Potential Event of Default or the operation of clause 11.2; and/or |
(c) | the enforcement or preservation of the Lender’s rights under the Finance Documents. |
12.2 | Indemnity payments |
Where in any Finance Document the Borrower has an obligation to indemnify or reimburse the Lender in respect of any loss or payment, the calculation of the amount payable by way of indemnity or reimbursement shall take account of the likely tax treatment in the hands of the Lender (as conclusively determined by the Lender) of the amount payable by way of indemnity or reimbursement and of the Loss or payment in respect of which that amount is payable.
12.3 | General |
Each indemnity in this clause 12 shall constitute a separate and independent obligation from the other obligations contained in the Finance Documents, shall give rise to a separate and independent cause of action, shall apply irrespective of any indulgence granted from time to time and shall continue in full force and effect notwithstanding any judgment, decree or order or a liquidated sum or sums in respect of amounts due under the Finance Documents or under any such judgment or order.
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13. | VAT |
All payments made by the Borrower under this Agreement are calculated without regard to VAT. If any such payment constitutes the whole or any part of the consideration for a taxable or deemed taxable supply (whether that supply is taxable pursuant to the exercise of an option or otherwise) by the Lender, the amount of that payment shall be increased by an amount equal to the amount of VAT which is chargeable in respect of the taxable supply in question.
No payment or other consideration to be made or furnished to the Borrower by the Lender pursuant to or in connection with this Agreement may be increased or added to by reference to (or as a result of any increase in the rate of) any VAT which shall be or may become chargeable in respect of any taxable supply.
14. | Set Off |
The Borrower authorises that the Lender may, without notice to the Borrower, set off any obligation due from the Borrower under the Finance Documents against any obligation owed by the Lender to the Borrower.
15. | Notices |
15.1 | Notices and deemed receipt |
Any notice or other communication to be given under, or in connection with the matters contemplated by, this Agreement shall be in writing and signed by or on behalf of the party giving it and shall be served by delivering it personally or sending it by pre-paid recorded delivery or registered post to the address and for the attention of the relevant party set out in clause 15.2 (or as otherwise notified by that party hereunder). Any such notice shall be deemed to have been received:
(a) | if delivered personally, at the time of delivery; |
(b) | in the case of pre-paid recorded delivery or registered post, 48 hours from the date of posting; and |
(c) | in the case of registered airmail, five days from the date of posting. |
Provided that if deemed receipt occurs before 9.00 am on a business day the notice shall be deemed to have been received at 9.00 am on that day and if deemed receipt occurs after 5.00 pm on a business day, or on a day which is not a business day, the notice shall be deemed to have been received at 9.00 am on the next business day. For the purpose of this clause, “business day” means any day which is not a Saturday, a Sunday or a public holiday in the place at or to which the notice is left or sent.
17 |
15.2 | Addresses for notices |
The addresses of the Parties for the purposes of clause 14.1 are:
Lender | |
Address: Heineken | UK Limited |
2-4 Broadway Park | |
South Gyle Broadway | |
Edinburgh | |
EH12 9JZ | |
For the attention of: | The Legal Department |
Borrower | |
Address: | Kingfisher Beer Europe Limited |
Springfield House | |
Sandling Road | |
Maidstone | |
Kent, ME14 2LP | |
For the attention of: | The Chief Executive |
or such other address in the United Kingdom as may be notified in writing from time to time by the relevant party to the other party.
15.3 | No electronic service |
Notice given under this Agreement shall not be validly served if sent by e-mail.
18 |
16. | Assignment |
16.1 | The Lender may assign all or any part of its rights or benefits under this Agreement to an Affiliate of the Lender and to any third party provided that the Lender gives the Borrower at least 30 days notice of such assignment and subject to the Borrower consenting to the proposed assignment to a third party (such consent not to be unreasonably withheld or delayed). For the avoidance of any doubt, an assignment by the Lender to an Affiliate of the Lender shall not be subject to the Borrower’s consent. |
16.2 | The Lender may disclose to a prospective assignee or to any other person who may propose entering into contractual relations with the Lender, or to any investor or potential investor in a securitisation (or similar transaction of broadly equivalent economic effect), in relation to this Agreement such information about the Borrower or the Lender’s rights or obligations under this Agreement, and any associated documentation (including any security), as the Lender shall consider appropriate provided that any such assignee or other person undertakes to the Lender and the Borrower to keep such information confidential. |
16.3 | The Borrower may not assign any of its rights or transfer any of its rights or obligations under this Agreement. |
17. | Severance |
If any provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that shall not affect:
(a) | the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or |
(b) | the legality, validity or enforceability in any other jurisdiction of that or any other provision of this Agreement. |
18. | Waiver |
Failure, delay or neglect by either party to enforce at any time any provision of this Agreement shall not be construed nor shall be deemed to be a waiver of that party’s rights hereunder nor in any way affect the validity of the whole or any part of this Agreement nor prejudice the party’s rights to take subsequent action.
19. | Third Party Rights |
A person who is not party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this Agreement.
19 |
20. | Counterparts |
This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement. Any party may enter into this Agreement by signing any such counterpart.
21. | Governing law and jurisdiction |
21.1 | This agreement and any dispute or claim arising out of, or in connection with, it or its subject matter or formation (including non-contractual disputes or claims) shall be governed by, and construed in accordance with, the law of England and Wales. |
21.2 | The parties to this agreement irrevocably agree that, subject as provided below, the courts of England and Wales shall have exclusive jurisdiction to settle any dispute or claim that arises out of, or in connection with, this agreement or its subject matter or formation (including non-contractual disputes or claims). Nothing in this clause shall limit the right of the Lender to take proceedings against the Borrower in any other court of competent jurisdiction, nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdictions, whether concurrently or not, to the extent permitted by the law of such other jurisdiction. |
This agreement has been entered into on the date stated at the beginning of it.
20 |
Schedule 1 - Conditions Precedent
1. | Constitutional documents, resolutions and certificates |
1.1 | A copy of the constitutional documents of the Borrower. |
1.2 | A copy of the resolutions duly passed by the Borrower’s and the Borrower’s Parent Company’s board of directors: |
(a) | approving the entry into, terms of and transactions contemplated by the Finance Documents; |
(b) | authorising specified persons to execute the Finance Documents on its behalf, to give all notices (and take all other action in connection with the Finance Documents; |
(c) | confirming no limit on the powers of the Borrower or the Borrower’s Parent Company or their directors to borrow money or create security would be exceeded by its entry into or performance of its obligations under the Finance Documents; and |
(d) | confirming that entry into the relevant Finance Document is in the commercial interests of the Borrower (stating the reasons for such conclusion). |
1.3 | A certificate, signed by a director of the Borrower, confirming that borrowing or granting security in respect of the Facility would not mean any borrowing, security or similar limit binding on the Borrower would be exceeded. |
1.4 | A certificate, signed by a director of the Borrower’s Parent Company, confirming that borrowing or granting security in respect of the Facility would not mean any borrowing, security or similar limit binding on the Borrower would be exceeded. |
1.5 | A certificate, signed by a director of the Borrower, confirming that each copy of a document relating to it that it has provided under Schedule 1 is correct, complete and in full force and effect at a date no earlier than the Effective Date. |
1.6 | A certificate, signed by a director of the Borrower’s Parent Company, confirming that each copy of a document relating to it that it has provided under Schedule 1 is correct, complete and in full force and effect at a date no earlier than the Effective Date. |
21 |
2. | Finance Documents |
2.1 | Each of the Finance Documents, duly executed by the Borrower. |
3. | Financial |
3.1 | A copy of the Borrower’s latest available audited financial statements. |
3.2 | The Borrower’s unaudited financial statements for the six (6) month trading period ending on 30th June 2013. |
4. | Other documents and evidence |
4.1 | A copy of any power of attorney under which the Borrower may execute the Finance Documents. |
4.2 | A copy of any other authorisation, document, opinion or assurance which the Lender considers necessary in connection with the entry into, and performance of, the transactions contemplated by the Finance Documents, or for the Finance Documents to be valid and enforceable. |
22 |
Schedule 2 – Facility Repayment
Repayment Date | Repayment Amount |
9th January 2014 | £83,333.33 |
9th April 2014 | £83,333.33 |
9th July 2014 | £83,333.33 |
9th October 2014 | £83,333.33 |
9th January 2015 | £83,333.33 |
9th April 2015 | £83,333.33 |
9th July 2015 | £83,333.33 |
9th October 2015 | £83,333.33 |
9th January 2016 | £83,333.33 |
9th April 2016 | £83,333.33 |
9th July 2016 | £83,333.33 |
9th October 2016 | £83,333.33 |
Total capital repayment: | £1,000,000 |
23 |
Schedule 3 – Draft Letter of Direction
[ON KBE HEADED PAPER]
HEINEKEN UK LIMITED
2-4 Broadway Park
South Gyle Broadway
Edinburgh
EH12 9JZ
[DATE]
Dear Sirs
Letter of Direction
Heineken UK Limited (“Heineken”) and Kingfisher Beer Europe Limited (“Kingfisher”) entered into a loan agreement on [DATE] (the “Loan Agreement”), under the terms of which Heineken agrees to make available to Kingfisher a loan of £1,000,000 (the “Loan”) on the terms and conditions set out in the Loan Agreement.
Pursuant to clause 8.1 of the Loan Agreement, Kingfisher requests for Heineken to make payment of the Loan in accordance with the terms set out in this letter of direction. Specifically, Kingfisher requests for payment of the Loan to be made in two installments on the due date for payment of the Loan as follows:
1. | £[ * ] or the amount of Kingfisher’s debt to Shepherd Neame Limited (company number 00138256) (“Shepherd Neame”) on the Drawdown Date, whichever is the lesser, shall be paid directly to Shepherd Neame to the undernoted account details. The parties have acknowledged in the Loan Agreement that the main purpose of the Loan is to enable Kingfisher to repay an amount of £[ * ] that it owes to Shepherd Neame, and accordingly, Kingfisher’s direction for payment to be made by Heineken directly to Shepherd Neame is to enable Kingfisher to settle its debt to Shepherd Neame at the earliest opportunity. For the avoidance of doubt, Kingfisher must satisfy itself that payment by Heineken to Shepherd Neame pursuant to this letter of direction will constitute settlement of Kingfisher’s debt to Shepherd Neame. |
2. | The amount owing by Kingfisher to Heineken pursuant to clause 3.4 of the contract brewing and distribution agreement entered into between the parties on [DATE], in relation to the costs of trial brews and package design changes, shall be set off against the remainder of the Loan due under the Loan Agreement, and the balance of £[ ] shall be paid directly to Kingfisher to the undernoted account details. |
* CONFIDENTIAL PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION
24 |
The parties agree that payment of the Loan by Heineken in accordance with this letter of direction shall crystallise the Loan and that Heineken’s obligation under the Loan Agreement to pay the Loan pursuant to clause 8.1 of the Loan Agreement shall be satisfied. For the avoidance of any doubt, no further amount shall be payable by Heineken under the Loan Agreement.
With effect from the date of payment by Heineken of the Loan in accordance with the terms of this letter of direction, Kingfisher’s right and obligations under the Loan Agreement shall commence in respect of the full Loan amount on the terms and conditions set out in the Loan Agreement.
A person who is not party to this letter has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this letter.
Please confirm your agreement to the terms set out or referred to in this letter by signing and returning the enclosed duplicate copy of this letter.
Yours faithfully
Damon Swarbrick, Chief Executive Officer
Kingfisher Beer Europe Limited
Undernote:
Shepherd Neame Bank Details
[ ]
Kingfisher Bank Details
[ ]
Accepted and agreed for and on
behalf of Heineken UK Limited, by:- |
Date |
_____________________________________ Print Name |
25 |
EXECUTION PAGE
THE BORROWER
Signed for and on behalf of KINGFISHER BEER EUROPE LIMITED by: |
) ) |
||||
Signature | /s/ Damon Swarbrick | ||||
Name (block capitals) | DAMON SWARBRICK | ||||
Before this witness:
|
Director | ||||
Witness signature | /s/ Mark Davis | ||||
Witness name | MARK DAVIS | ||||
(block capitals) | |||||
Witness address | Springfield House | ||||
Sandling Road | |||||
Maidstone, Kent | |||||
THE LENDER
Signed for and on behalf of HEINEKEN UK LIMITED by: |
) ) |
||||
Signature | /s/ Joss van der Burg | ||||
Name (block capitals) | JOSS VAN DER BURG | ||||
Before this witness: | Director | ||||
Witness signature | /s/ Mark Hannam | ||||
Witness name | MARK HANNAM | ||||
(block capitals) | |||||
Witness address | 30 Kingston Road | ||||
Oxford | |||||
OX2 6RQ | |||||
26 |
CERTIFICATIONS
I, Yashpal Singh, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 14, 2013
/s/ Yashpal Singh | |
Yashpal Singh, | |
Chief Executive Officer | |
(Principal Executive Officer) |
CERTIFICATIONS
I, Mahadevan Narayanan, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Mendocino Brewing Company, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 14, 2013
/s/ Mahadevan Narayanan | |
Mahadevan Narayanan, | |
Chief Financial Officer | |
(Principal Financial Officer) |
CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,
SECTION 1350
In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Yashpal Singh, Chief Executive Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: August 14, 2013
/s/ Yashpal Singh | |
Yashpal Singh Title: Chief Executive Officer | |
(Principal Executive Officer) |
CERTIFICATION PURSUANT TO TITLE 18, UNITED STATES CODE,
SECTION 1350
In connection with the Quarterly Report of Mendocino Brewing Company, Inc. (the “Company”) on Form 10-Q for the quarterly period ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mahadevan Narayanan, Chief Financial Officer of the Company, certify, pursuant to Title 18, United States Code, Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Date: August 14, 2013
/s/ Mahadevan Narayanan | |
Mahadevan Narayanan Title: Chief Financial Officer | |
(Principal Financial Officer) |
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Description of Operations and Summary of Significant Accounting Policies (Policies)
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Jun. 30, 2013
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Operations |
Description of Operations
Mendocino Brewing Company, Inc. was formed in 1983 in California, and has two operating subsidiaries: Releta Brewing Company, LLC (Releta), and United Breweries International (UK) Limited (UBIUK). The terms we, us, our, and the Company and its 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. standing alone. In the United States (the US), MBC and 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 MBC in the US are in California. We brew several brands, of which Red Tail Ale is the flagship brand. In addition, we perform contract brewing for several other brands. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with state and local laws.
MBCs United Kingdom (the UK) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (KBEL). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in the UK and Europe. The distributorship is located in Maidstone, Kent in the UK. In addition, through UBIUK, the Company has production and distribution rights to Kingfisher Premium Lager in the Canada and, until October 2013, the United States. Generally sales are made through distributors. We are arranging to maintain production and distribution rights for Kingfisher in the United States after October 2013. |
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Subsequent Events |
Subsequent Events
We evaluate 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 on which our financial statements are electronically prepared for filing with the Securities and Exchange Commission (SEC). |
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Principles of Consolidation |
Principles of Consolidation
The consolidated financial statements present the accounts of MBC and its wholly-owned subsidiaries, Releta and UBIUK. All material intracompany and inter-company balances, profits and transactions have been eliminated. |
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Basis of Presentation and Organization |
Basis of Presentation and Organization
The accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the US. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in our most recent Annual Report on Form 10-K, as filed with the SEC, which contains additional financial and operating information and information concerning significant accounting policies followed by the Company. The financial statements and notes are representations of our management (Management) and board of directors (the Board of Directors), who are responsible for their integrity and objectivity.
Operating results from the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or any future period. |
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Reclassifications |
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. |
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Cash and Cash Equivalents, Short and Long-Term Investments |
Cash and Cash Equivalents, Short and Long-Term Investments
For purposes of cash flows, we consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. |
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Revenue Recognition |
Revenue Recognition
We recognize revenue from the brewing and distribution operations in accordance with Accounting Standards Codification 605 of the Financial Accounting Standards Board. We recognize revenue from product sales, net of discounts.
We recognize revenue only when all of the following criteria have been met:
Persuasive Evidence of an Arrangement We document 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 We deliver the products prior to recognizing revenue and we perform services as per contractual terms. Product is considered delivered upon delivery to a customers designated location, and services are considered performed upon completion of our 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 We determine that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. We do 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.
We record certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as an expense. We report these items on the income statement as a reduction in revenue and as a corresponding reduction in marketing and selling expenses.
Revenues from our brewpub and gift store are recognized when sales have been completed. |
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Allowance for Doubtful Accounts |
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Balances over 90 days past due and other higher risk amounts are reviewed individually for collectability. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on Managements assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. |
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Inventories |
Inventories
Inventories are stated at the lower of average cost, which approximates the first-in, first-out method, or market (net realizable value). We regularly review our 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. |
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Deferred Financing Costs |
Deferred Financing Costs
Costs relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related to a borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $22,500 and $11,300 for the six and three months ended June 30, 2013 and 2012 respectively. |
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Concentration |
Concentrations
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Substantially all of our cash and cash equivalents are deposited with commercial banks in the US and the UK that have minimal credit risk. 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. As of June 30, 2013, we have approximately $2,127,100 of accounts receivable due from UK customers.
Labor disputes, work stoppages or other disruptions in production could adversely affect us. As of June 30, 2013, union members represented approximately 18% of our US-based workforce. MBC has approximately fourteen employees at its Ukiah, California facility who were working under a collective bargaining agreement that expired on July 31, 2013. The union and management are currently negotiating a new agreement. |
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Income Taxes |
Income Taxes
We account 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. We periodically assess uncertain tax positions that we have taken or expect to take on tax returns, including decisions whether to file returns in any particular jurisdiction. We have evaluated our tax positions and have determined that there were no uncertain tax benefits as of June 30, 2013 and December 31, 2012. |
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Basic and Diluted Earnings (Loss) per Share |
Basic and Diluted Earnings (Loss) per Share
The basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes. If the Companys operations result in net loss for any period, diluted net loss per share would be the same as basic net loss per share, since the effect of any potentially dilutive securities would be anti-dilutive. Therefore, the conversion of the related party notes has been excluded from the Companys calculation of net loss per share. The computations of basic and dilutive net loss per share are as follows:
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Foreign Currency Translation |
Foreign Currency Translation
The local currency in the UK, the UK Pound Sterling, is the functional currency for our UK subsidiaries. Financial statements of these subsidiaries are translated into US dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation adjustments associated with net assets or liabilities are reported in non-owner changes in equity. Any exchange rate gains or losses related to foreign currency transactions are recognized in the income statement as incurred, in the same financial statement caption as the underlying transaction, and are not material for any year shown. Cash flows were translated at the average exchange rates for the three months then ended. Changes in cash resulting from the translations are presented as a separate item in the statements of cash flows. |
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Use of Estimates |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the US includes having us make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The amounts estimated could differ from actual results. Significant estimates include the allowance for bad debts, depreciation and amortization periods, and the future utilization of deferred tax assets. |
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Comprehensive Income (Loss) |
Comprehensive Income (Loss)
Comprehensive income (loss) is composed of our net loss and changes in equity from non-stockholder sources. The accumulated balances of these non-stockholder sources are reflected as a separate item in the equity section of the balance sheet. |
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Reportable Segments |
Reportable Segments
Our operations are managed through two business segments: (i) brewing operations and tasting room operations in the US, and distributor operations in Canada (the North American Territory); and (ii) distributor operations in Europe, including the UK (the Foreign Territory). We evaluate performance based on net operating profit. Where applicable, portions of our administrative expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. If any materials and/or services are provided to one operating segment by the other, the transaction is valued according to our transfer policy, which approximates market price. The costs of operating the manufacturing plants are captured discretely within each segment. The Companys property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment. |
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) (USD $)
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3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Income Statement [Abstract] | ||||
Sales | $ 9,715,800 | $ 10,577,500 | $ 18,113,200 | $ 20,217,800 |
Excise taxes | 204,200 | 307,300 | 366,800 | 517,700 |
Net sales | 9,511,600 | 10,270,200 | 17,746,400 | 19,700,100 |
Cost of goods sold | 6,954,200 | 7,339,500 | 12,922,100 | 14,144,600 |
Gross profit | 2,557,400 | 2,930,700 | 4,824,300 | 5,555,500 |
Operating expenses | ||||
Marketing | 1,410,300 | 1,361,300 | 2,651,300 | 2,842,400 |
General and administrative | 1,104,700 | 986,900 | 2,371,900 | 2,068,100 |
Total operating expenses | 2,515,000 | 2,348,200 | 5,023,200 | 4,910,500 |
Income (loss) from operations | 42,400 | 582,500 | (198,900) | 645,000 |
Other income (expense): | ||||
Other income | 8,600 | 6,600 | 11,900 | 10,100 |
Profit on sale of asset | 5,100 | 9,400 | ||
Interest expense | (120,100) | (108,800) | (231,300) | (225,100) |
Total other expenses | (111,500) | (97,100) | (219,400) | (205,600) |
Income (loss) before income taxes | (69,100) | 485,400 | (418,300) | 439,400 |
Provision for income taxes | 5,000 | 800 | ||
Net income (loss) | (69,100) | 485,400 | (423,300) | 438,600 |
Foreign currency translation income (loss) | (4,200) | 61,000 | 148,400 | (33,600) |
Comprehensive income (loss) | $ (73,300) | $ 546,400 | $ (274,900) | $ 405,000 |
Net income (loss) per common share - | ||||
Basic | $ (0.01) | $ 0.04 | $ (0.03) | $ 0.03 |
Diluted | $ (0.01) | $ 0.03 | $ (0.03) | $ 0.03 |
Weighted average common shares outstanding - | ||||
Basic | 12,611,133 | 12,611,133 | 12,611,133 | 12,611,133 |
Diluted | 12,611,133 | 14,868,393 | 12,611,133 | 14,868,393 |
Long-Term Debt
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Long-term Debt, Unclassified [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-Term Debt |
5. Long-Term Debt
Maturities of long-term debt for succeeding years are as follows:
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Description of Operations and Summary of Significant Accounting Policies (Details Narrative) (USD $)
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3 Months Ended | 6 Months Ended | ||||
---|---|---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Dec. 31, 2012
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Jun. 30, 2011
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Deferred financing cost | $ 225,000 | |||||
Amortization of deferred financing costs charged to operations | 11,300 | 11,300 | 22,500 | 22,500 | ||
Accounts receivable | 4,635,900 | 4,635,900 | 5,421,600 | |||
Collective bargaining agreement expires date | Jul. 31, 2013 | |||||
Uncertain tax benefits | 0 | 0 | 0 | |||
Ukiah [Member]
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Union members as a percentage of US-based workforce | 18.00% | 18.00% | ||||
Number of employees in California working under collective bargaining agreement | 14 | 14 | ||||
UK [Member]
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Accounts receivable | $ 2,127,100 | $ 2,127,100 |
Description of Operations and Summary of Significant Accounting Policies (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Basic and Dilutive Net Loss Per Share |
The computations of basic and dilutive net loss per share are as follows:
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Unrestricted Net Assets - Condensed Statement of Cash Flows (Details) (Mendocino, MBC And Releta Company [Member], USD $)
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6 Months Ended | |
---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
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Mendocino, MBC And Releta Company [Member]
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Cash flows from operating activities | $ 27,200 | $ 227,300 |
Purchase of property and equipment | (283,000) | (84,500) |
Proceed from sale of assets | 5,000 | |
Net borrowings (repayments) on line of credit | 75,700 | (46,300) |
Borrowings on long term debt | 539,700 | 184,700 |
Repayment of long-term debt | (256,800) | (211,800) |
Payment on obligations under capital lease | (3,100) | (25,000) |
Net change in payable to UBI | (128,000) | (117,100) |
Decrease in cash | (28,300) | (67,700) |
Cash, beginning of period | 123,200 | 187,200 |
Cash, end of period | $ 94,900 | $ 119,500 |
Inventories - Schedule of Inventories (Details) (USD $)
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Jun. 30, 2013
|
Dec. 31, 2012
|
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Inventory Disclosure [Abstract] | ||
Raw Materials | $ 852,900 | $ 807,000 |
Beer-in-process | 299,600 | 323,600 |
Finished Goods | 689,600 | 732,300 |
Merchandise | 100,500 | 47,600 |
Inventories, Total | $ 1,942,600 | $ 1,910,500 |
Liquidity and Management Plans (Details Narrative)
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0 Months Ended | ||||||||||||||||
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Jun. 23, 2011
USD ($)
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Apr. 25, 2005
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Jun. 30, 2013
USD ($)
|
Dec. 31, 2012
USD ($)
|
Jun. 30, 2012
USD ($)
|
Dec. 31, 2011
USD ($)
|
Apr. 26, 2005
USD ($)
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Apr. 18, 2013
UK [Member]
GBP (£)
|
Apr. 26, 2005
UK [Member]
GBP (£)
|
Jun. 30, 2013
Fixed Charges Coverage Required Trailing 12 Months [Member]
Number
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Mar. 31, 2013
Fixed Charges Coverage Required Trailing 12 Months [Member]
Number
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Jun. 30, 2013
Fixed Charges Coverage Actual Trailing 12 Months [Member]
Number
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Mar. 31, 2013
Fixed Charges Coverage Actual Trailing 12 Months [Member]
Number
|
Jun. 23, 2011
Revolving Credit Facility [Member]
USD ($)
|
Jun. 23, 2011
Machinery And Equipment Term Loan [Member]
USD ($)
|
Jun. 23, 2011
Real Estate Term Loan [Member]
USD ($)
|
Jun. 23, 2011
Capital Expenditure Line Of Credit [Member]
USD ($)
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Credit facility, maturity date | Jun. 23, 2016 | ||||||||||||||||
Credit facility, agreement amount | $ 10,000,000 | $ 2,800,000 | £ 1,750,000 | $ 4,119,000 | $ 1,934,000 | $ 2,947,000 | $ 1,000,000 | ||||||||||
Fixed charge coverage ratio | 1.05 | 1.05 | 0.28 | 0.90 | |||||||||||||
Percentage of qualified accounts receivable | 80.00% | ||||||||||||||||
Secured term loan | 1,000,000 | ||||||||||||||||
Secured loan repayment term | Oct. 09, 2016 | ||||||||||||||||
Cash and cash equivalents | 96,900 | 198,500 | 134,000 | 312,200 | |||||||||||||
Accumulated deficit | 14,254,000 | 13,830,700 | |||||||||||||||
Working capital deficit | $ 7,048,800 |
Segment Information - Schedule of Segment Information (Details) (USD $)
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6 Months Ended | |
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Jun. 30, 2013
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Jun. 30, 2012
|
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Net Sales | $ 17,746,400 | $ 19,700,100 |
Operating Income (loss) | (198,900) | 645,000 |
Identifiable Assets | 19,526,900 | 19,510,700 |
Depreciation & Amortization | 523,400 | 512,300 |
Capital Expenditures | 451,500 | 303,100 |
North American Territory [Member]
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Net Sales | 7,374,700 | 8,569,100 |
Operating Income (loss) | (249,400) | 440,600 |
Identifiable Assets | 12,734,300 | 11,979,700 |
Depreciation & Amortization | 323,200 | 309,200 |
Capital Expenditures | 283,000 | 84,500 |
Foreign Territory [Member]
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Net Sales | 10,371,700 | 11,131,000 |
Operating Income (loss) | 50,500 | 240,400 |
Identifiable Assets | 3,587,200 | 3,697,800 |
Depreciation & Amortization | 200,200 | 203,100 |
Capital Expenditures | 168,500 | 218,600 |
Corporate And Others [Member]
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Net Sales | ||
Operating Income (loss) | ||
Identifiable Assets | 3,205,400 | 3,833,200 |
Depreciation & Amortization | ||
Capital Expenditures |
Notes to Related Parties (Details Narrative) (USD $)
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6 Months Ended | ||||
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Jun. 30, 2013
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Dec. 31, 2012
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Jun. 30, 2013
Thirteen UBA Notes [Member]
|
Jun. 30, 2013
One UBA Note [Member]
|
Jun. 30, 2013
Subordinated Convertible Notes Payable [Member]
|
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Unsecured convertible notes | $ 3,452,100 | ||||
Percentage of convertible notes interest, prime rate plus | 1.50% | ||||
Percentage of convertible notes interest rate, maximum | 10.00% | ||||
Debt instruments conversion price per share | $ 1.50 | $ 1.44 | |||
Convertible notes payable maturity date, description | The UBA Notes have been extended until June 2014 and have automatic renewals after such maturity date for successive one year terms, provided that either we 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 the applicable term. Under the terms of the UBA Notes, UBA may demand payment within 60 days following the end of the extension period, but UBA has agreed to subordinate the UBA Notes to our long-term debt agreements with Cole Taylor, which mature in June 2016. |
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Accrued interest | $ 1,536,700 | $ 1,491,600 |
Description of Operations and Summary of Significant Accounting Policies - Schedule of Basic and Dilutive Net Loss Per Share (Details) (USD $)
|
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
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Accounting Policies [Abstract] | ||||
Net income (loss) | $ (69,100) | $ 485,400 | $ (423,300) | $ 438,600 |
Weighted average common shares outstanding | 12,611,133 | 12,611,133 | 12,611,133 | 12,611,133 |
Basic net income (loss) per share | $ (0.01) | $ 0.04 | $ (0.03) | $ 0.03 |
Interest expense on convertible notes | 22,700 | 45,400 | ||
Income (loss) for computing diluted net income per share | $ (69,100) | $ 508,100 | $ (423,300) | $ 484,000 |
Incremental shares from assumed exercise of dilutive securities | 2,257,260 | 2,257,260 | ||
Dilutive potential common shares | 12,611,133 | 14,868,393 | 12,611,133 | 14,868,393 |
Diluted net earnings (loss) per share | $ (0.01) | $ 0.03 | $ (0.03) | $ 0.03 |
Description of Operations and Summary of Significant Accounting Policies
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6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Description of Operations and Summary of Significant Accounting Policies |
1. Description of Operations and Summary of Significant Accounting Policies
Description of Operations
Mendocino Brewing Company, Inc. was formed in 1983 in California, and has two operating subsidiaries: Releta Brewing Company, LLC (Releta), and United Breweries International (UK) Limited (UBIUK). The terms we, us, our, and the Company and its 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. standing alone. In the United States (the US), MBC and 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 MBC in the US are in California. We brew several brands, of which Red Tail Ale is the flagship brand. In addition, we perform contract brewing for several other brands. Generally, product shipments are made directly from the breweries to the wholesalers or distributors in accordance with state and local laws.
MBCs United Kingdom (the UK) subsidiary, UBIUK, is a holding company for Kingfisher Beer Europe Limited (KBEL). KBEL is a distributor of alcoholic beverages, mainly Kingfisher Lager Beer, in the UK and Europe. The distributorship is located in Maidstone, Kent in the UK. In addition, through UBIUK, the Company has production and distribution rights to Kingfisher Premium Lager in the Canada and, until October 2013, the United States. Generally sales are made through distributors. We are arranging to maintain production and distribution rights for Kingfisher in the United States after October 2013.
Subsequent Events
We evaluate 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 on which our 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 MBC 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 accompanying unaudited condensed consolidated financial statements for the six months ended June 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the US. These condensed financial statements should be read in conjunction with the audited consolidated financial statements included in our most recent Annual Report on Form 10-K, as filed with the SEC, which contains additional financial and operating information and information concerning significant accounting policies followed by the Company. The financial statements and notes are representations of our management (Management) and board of directors (the Board of Directors), who are responsible for their integrity and objectivity.
Operating results from the six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013 or any future period.
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.
SIGNIFICANT ACCOUNTING POLICIES
There have been no significant changes in our significant accounting policies during the six months ended June 30, 2013 compared to what was previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
Cash and Cash Equivalents, Short and Long-Term Investments
For purposes of cash flows, we consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Revenue Recognition
We recognize revenue from the brewing and distribution operations in accordance with Accounting Standards Codification 605 of the Financial Accounting Standards Board. We recognize revenue from product sales, net of discounts.
We recognize revenue only when all of the following criteria have been met:
Persuasive Evidence of an Arrangement We document 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 We deliver the products prior to recognizing revenue and we perform services as per contractual terms. Product is considered delivered upon delivery to a customers designated location, and services are considered performed upon completion of our 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 We determine that collectability is reasonably assured prior to recognizing revenue. Collectability is assessed on a customer-by-customer basis based on criteria outlined by Management. We do 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.
We record certain consideration paid to customers for services or placement fees as a reduction in revenue rather than as an expense. We report these items on the income statement as a reduction in revenue and as a corresponding reduction in marketing and selling expenses.
Revenues from our brewpub and gift store are recognized when sales have been completed.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Management considers the following factors when determining the collectability of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic and industry trends and changes in customer payment terms. Balances over 90 days past due and other higher risk amounts are reviewed individually for collectability. If the financial condition of our customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on Managements assessment, we provide for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after we have used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable.
Inventories
Inventories are stated at the lower of average cost, which approximates the first-in, first-out method, or market (net realizable value). We regularly review our 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.
Deferred Financing Costs
Costs relating to obtaining financing are capitalized and amortized over the term of the related debt. When a loan is paid in full, any unamortized financing costs are removed from the related accounts and charged to operations. Deferred financing costs related to a borrowing made in June 2011 were $225,000. Amortization of deferred financing costs charged to operations was $22,500 and $11,300 for the six and three months ended June 30, 2013 and 2012 respectively.
Concentrations
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents, and accounts receivable. Substantially all of our cash and cash equivalents are deposited with commercial banks in the US and the UK that have minimal credit risk. 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. As of June 30, 2013, we have approximately $2,127,100 of accounts receivable due from UK customers.
Labor disputes, work stoppages or other disruptions in production could adversely affect us. As of June 30, 2013, union members represented approximately 18% of our US-based workforce. MBC has approximately fourteen employees at its Ukiah, California facility who were working under a collective bargaining agreement that expired on July 31, 2013. The union and management are currently negotiating a new agreement.
Income Taxes
We account 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. We periodically assess uncertain tax positions that we have taken or expect to take on tax returns, including decisions whether to file returns in any particular jurisdiction. We have evaluated our tax positions and have determined that there were no uncertain tax benefits as of June 30, 2013 and December 31, 2012.
Basic and Diluted Earnings (Loss) per Share
The basic earnings (loss) per share is computed by dividing the earnings (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Basic net earnings (loss) per share exclude the dilutive effect of stock options or warrants and convertible notes. If the Companys operations result in net loss for any period, diluted net loss per share would be the same as basic net loss per share, since the effect of any potentially dilutive securities would be anti-dilutive. Therefore, the conversion of the related party notes has been excluded from the Companys calculation of net loss per share. The computations of basic and dilutive net loss per share are as follows:
Foreign Currency Translation
The local currency in the UK, the UK Pound Sterling, is the functional currency for our UK subsidiaries. Financial statements of these subsidiaries are translated into US dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for revenues and expenses. Cumulative translation adjustments associated with net assets or liabilities are reported in non-owner changes in equity. Any exchange rate gains or losses related to foreign currency transactions are recognized in the income statement as incurred, in the same financial statement caption as the underlying transaction, and are not material for any year shown. Cash flows were translated at the average exchange rates for the three months 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 US includes having us make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. The amounts estimated could differ from actual results. Significant estimates include the allowance for bad debts, depreciation and amortization periods, and the future utilization of deferred tax assets.
Comprehensive Income (Loss)
Comprehensive income (loss) is composed of our net loss and changes in equity from non-stockholder sources. The accumulated balances of these non-stockholder sources are reflected as a separate item in the equity section of the balance sheet.
Reportable Segments
Our operations are managed through two business segments: (i) brewing operations and tasting room operations in the US, and distributor operations in Canada (the North American Territory); and (ii) distributor operations in Europe, including the UK (the Foreign Territory). We evaluate performance based on net operating profit. Where applicable, portions of our administrative expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. If any materials and/or services are provided to one operating segment by the other, the transaction is valued according to our transfer policy, which approximates market price. The costs of operating the manufacturing plants are captured discretely within each segment. The Companys property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment. |
Inventories
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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Inventory Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories |
3. Inventories
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.
Inventories consist of the following:
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