SEC Info - Mendocino Brewing Co Inc - 10-K

Various portions of this Annual Report on Form 10-K, (the "Annual Report") including but not limited to the sections captioned "Description of Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operation," contain forward-looking information. Such information involves risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, Management's beliefs, and assumptions made by Management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," and variations of those and similar words are intended to identify such forward-looking information. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking information due to numerous factors, including but not limited to availability of financing for operations, availability of raw materials, successful performance of internal operations, the impact of competition, changes in distributor relationships or performance, and other risks discussed elsewhere in this Annual Report and from time to time in the Company's filings and reports with the Securities and Exchange Commission (the "Commission"). In addition, such statements could be affected by general industry and market conditions and growth rates, and by general economic and political conditions in the markets in which the Company competes. Readers are cautioned not to place undue reliance on these forward-looking statements.

Mendocino Brewing Company, Inc., (the “Company”) a California corporation, was founded in 1983. It was one of the first modern craft brewers, having opened the first new brewpub in California and the second in the United States following the repeal of Prohibition. The Company has been recognized for its innovations in the brewpub concept, its craft brew style and its distinctive labels. In 2008, the Company will celebrate its 25th anniversary. (In this Annual Report, the term "the Company" and its variants and the terms "we," "us," and "our" and their variants are generally used to refer to Mendocino Brewing Company, Inc. together with its subsidiaries, while the term "MBC" is used to refer to Mendocino Brewing Company, Inc. as an individual entity.)

The Company operates in two geographic markets, domestic (the United States) (referred to in this Annual Report as the "Domestic Territory") and Europe (including Austria, Belgium, Denmark, Ireland, Italy, the Netherlands, France, Finland, Germany, Greece, Iceland, Liechtenstein, Luxembourg, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom) as well as Canada (collectively, referred to in this Annual Report as the "European Territory").

The Company's domestic operations consist primarily of brewing and marketing proprietary craft beers, including Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, White Hawk Original IPA, and Red Tail Lager, and a licensed international specialty beer, Kingfisher Premium Lager. For domestic distribution, the Company brews its brands in its own facilities, which are located in Ukiah, California and Saratoga Springs, New York. Domestically, the Company distributes its products in 41 states and the District of Columbia.

The Company's European operations, which are conducted through its wholly-owned subsidiary United Breweries International (U.K.) Limited ("UBI") and UBI's wholly-owned subsidiary UBSN, Ltd. ("UBSN"), consist primarily of the marketing and distribution of Kingfisher Premium Lager in the European Territory through Indian restaurants, chain retail grocers, liquor stores, and other retail outlets (such as convenience stores). The Company holds an exclusive license to brew and distribute Kingfisher Premium Lager from United Breweries Limited ("UB Limited"), an Indian corporation. The Company's Chairman of the Board, Dr. Vijay Mallya, is also the Chairman of the Board of UB Limited.

All of the Company's beers sold in the European Territory are brewed in England under contract by Shepherd Neame, Ltd. ("Shepherd Neame"), a prominent English brewer. Although UBSN is the sole distributor of Kingfisher Premium Lager in the United Kingdom, Ireland, continental Europe, and Canada, it does not physically distribute its products to its ultimate trade customers, relying instead on specialty restaurant trade distributors in the United Kingdom and Shepherd Neame, acting as UBSN's agent, on a commission basis, for distribution to the supermarket and liquor and convenience store trade.

MBC first bottled its flagship brand, Red Tail Ale, in December 1983, and conducted its initial public offering in February 1995. The Company completed construction of its brewery in Ukiah, California in May 1997. This facility, which has a current annual packaging capacity of 100,000 brewers' barrels ("bbl.") in one shift, was designed to enable the Company's production capacity to be expanded to 200,000 bbl. per year with the inclusion of additional equipment.

The Company's New York subsidiary, Releta Brewing Company, LLC, d/b/a Ten Springs Brewery ("Releta"), which is located in Saratoga Springs, New York, commenced production in its leased facilities in February 1998. This facility, which has a current annual packaging capacity of 90,000 bbl. in one shift, was designed to enable the Company's production to be expanded to 200,000 bbl. per year with the inclusion of additional equipment.

In July 1998, the Company purchased certain assets from Carmel Brewing Company, Inc., a California corporation ("Carmel Brewing"), including trademarks, trade names, and other brand related assets as well as certain points of sale and brewing ingredients inventory.

On August 13, 2001, the Company acquired UBI together with UBI's wholly-owned subsidiary UBSN, from Inversiones Mirabel, S. A., a Panamanian corporation ("Inversiones"), in exchange for MBC stock then valued at approximately $5,500,000 (the "UBI Acquisition"). UBI and UBSN primarily market, sell, and distribute Kingfisher Premium Lager in the Company's European Territory. Kingfisher Premium Lager, which is the flagship brand of UB Limited, an India-based brewing and distribution company, is a recognized international brand, with widespread distribution outside the Company's geographic markets.

The Company also acquired the United States brewing and distribution rights for Kingfisher Premium Lager as a result of the UBI Acquisition. The Company brews Kingfisher Premium Lager in its Saratoga Springs, New York and Ukiah, California facilities. The Company has engaged Shepherd Neame to brew Kingfisher Premium Lager for distribution in the European Territory.

During the last quarter of fiscal year 2005, United Breweries of America, BVI, a British Virgin Islands corporation ("UBA-BVI"), an indirect beneficial owner of a majority of the Company's outstanding shares, merged into United Breweries Holdings, Ltd., an Indian Corporation ("UBHL"). As a result of the merger of UBA-BVI into UBHL, UBHL acquired indirect control over approximately 72% of the Company's outstanding shares. Dr. Mallya is the Chairman of the board of directors of UBHL.

The U.S. domestic beer market falls into a number of market categories, some of which include low-priced, premium, super premium, lite, import, and specialty/craft beers. In the Domestic Territory, the Company competes in the specialty/craft category, which is currently estimated by Brewers Association to be in the range of 8 million barrels per year. Craft beers are typically all malt, characterized by their full flavor, and are usually produced using methods similar to those of traditional European brews.

The vast majority of the Company's sales in the European Territory are made in the United Kingdom. During fiscal years 2007, 2006 and 2005 the Company's sales in the United Kingdom constituted approximately 91%, 92% and 94%, respectively, of its total sales in the European Territory.

Within the European Territory, the Company primarily distributes its products through Indian restaurants using specialist restaurant trade distributors. In addition, the Company distributes its products through other licensed premises and through other retail outlets such as supermarkets, liquor stores, and licensed shops and convenience stores.

The historic Hopland tavern ale house and merchandise store serves to market the Company's products in the Domestic Territory. Located on a tourist route in Hopland, California, 100 miles north of San Francisco, the Hopland Brewery opened in 1983 as the first new brewpub in California and the second in the United States following the repeal of Prohibition.

Beverages served at the Hopland tavern include Red Tail Ale, Blue Heron Pale Ale, Black Hawk Stout, Eye of the Hawk Select Ale, Peregrine Golden Ale, White Hawk IPA, and a seasonal brew on tap, along with local wines and soft drinks. The adjacent merchandise store sells the Company's brews and merchandise such as hand-screened label T-shirts, posters, engraved glasses and mugs, logo caps and other brewery-related gifts.

The Company brews five ales, one wheat beer, three lagers, one stout and a root beer on a year-round basis, and four seasonal ales, for distribution in the Domestic Territory. All of these products are brewed at the Company's production facilities in Ukiah, California, and Saratoga Springs, New York.

In the European Territory, the Company currently distributes Kingfisher Premium Lager. Prior to April 1, 2005, the Company also distributed Sun Lik Chinese Lager in the United Kingdom.

The Company's principal products are as follows.

RED TAIL ALE, a full flavored amber ale, is the Company's flagship brand. It is available year-round in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon kegs.

BLUE HERON PALE ALE is a golden ale with a full body and a distinctive hop character. It is available year-round in 12 oz. six-packs and twelve-packs, half-barrel kegs, and 5 gallon kegs.

BLACK HAWK STOUT is a rich bodied stout with big traditional flavors. It is available year-round in 12 oz. six-packs, half-barrel kegs, and 5 gallon kegs.

EYE OF THE HAWK SELECT ALE is a strong rich bodied amber ale. It is available year round in 12 oz. six-packs, half-barrel kegs, and 5 gallon kegs.

WHITE HAWK ORIGINAL IPA is a heavily hopped ale with distinctive hop character and bold malt flavor. It is available year round in 12 oz. six-packs and half-barrel kegs.

KINGFISHER PREMIUM LAGER is a conventionally fermented specialty lager with a smooth crisp taste. In the Domestic Territory, Kingfisher Premium Lager is currently available year-round in 12 oz. six-packs, 22 oz. bottles, and on-draft. In the European Territory, it is available year-round, in 330ml and 660ml bottles in multi-packs in the United Kingdom, Ireland, and continental Europe and in 330ml bottles in Canada, as well as in a variety of keg sizes. In the United Kingdom, it is also available on draft in Indian restaurants.

RED TAIL LAGER is a traditional lager, with a smooth light feel and a crisp sweet finish. It is currently available year-round only in northern California in 12-oz. six packs and half-barrel kegs.

In the Domestic Territory, the Company's bottled products are sold through wholesale distributors to consumers at supermarkets, warehouse stores, liquor stores, taverns and bars, restaurants, and convenience stores.

Most of the Company's brands are also available on draft. The Company's products are delivered to retail outlets by independent distributors whose principal business is the distribution of beer and in some cases other alcoholic beverages, and who typically also distribute one or more national beer brands. Together with its distributors, the Company markets its products to retail outlets and relies on its distributors to provide regular deliveries, to maintain retail shelf space, and to oversee timely rotation of inventory. The Company also offers a variety of ales and lagers directly to consumers at the tavern and merchandise store in Hopland, California and its’ tasting room attached to the Saratoga Springs brewery in New York.

In the European Territory, the Company's products are distributed primarily through Indian restaurants by specialist restaurant trade distributors. Such points of sale represent approximately 95% of the Company's total sales volume in the European Territory, with the remaining 5% of sales volume attributed to a combination of sales in other ethnic restaurants (primarily Chinese) and to sales by supermarkets, liquor stores, and licensed shops and convenience stores. The majority of the Company's restaurant sales are through its on-tap draft installations. UBI also exports Kingfisher Premium Lager to 16 European markets outside of the United Kingdom and to Canada, and its sales growth in those markets typically correlates with the establishment and proliferation of Indian restaurants in such locations.

In the Domestic Territory, the Company competes against a variety of brewers in the craft beer segment, including brewpubs, microbrewers, regional craft brewers, and craft beer products of major national breweries. Additionally, the entire craft beer segment competes to some extent with other segments of the United States beer market, including major national brands like Budweiser and Miller and imported beers such as Heineken and Becks.

The lager market in the United Kingdom is dominated by major international brands such as Carling, Budweiser, Becks, and Holsten Pils, both in the restaurant and pub sectors and in sales through supermarkets and other retail outlets. The Company's products are marketed through Indian and other restaurants, major supermarket chains, smaller chains, and individual stores. In all of these sectors, the Company faces competition from other ethnic and international brands produced by local and large international brewers. The Company promotes Kingfisher Premium Lager as the worldwide No. 1 selling premium Indian lager brand. The Company believes that the profile of this brand was raised significantly through the Company's promotion of Kingfisher World Curry Week in support of the charity "Action Against Hunger" that provides aid in the Indian sub-continent and southeast Asia.

The Company faces tough competition in the Domestic Territory as well as in the European Territory. The Company competes with other beer and beverage companies not only for consumer acceptance and loyalty but also for shelf and tap space in retail establishments. The Company must also vie for marketing focus by the Company's distributors and their customers, all of which also distribute and sell other beer and alcoholic beverage products. Many of these competitors have substantially greater financial and marketing resources and distribution networks than the Company. Moreover, the introduction of new products by competitors that compete directly with the Company's products, or that diminish the importance of the Company's products to retailers or distributors may have a material adverse effect on the Company's results of operations, cash flows and financial position.

Production of the Company's beverages requires quantities of various agricultural products, including barley, hops, malt, and malted wheat for beer. The Company fulfills its commodities requirements through purchases from various sources, some through contractual arrangements and others on the open market. In the European Territory, these purchases are made directly by or for Shepherd Neame, which brews the Company's products on a contract basis. The Company experienced substantial price increases in malt and hops during 2007 and the beginning of 2008 due to low availability and high demand. The commodity markets have experienced and the Company believes that the commodity markets will continue to experience price, availability and demand fluctuations. The price and supply of raw materials will be determined by, among other factors, the level of crop production, weather conditions, export demand, and government regulations and legislation affecting agriculture. The Company does not use any hedging transactions or unconditional purchase obligations to purchase its raw materials.

The Company's major suppliers in the United States are Great Western Malting Co., Yakima, Washington, and Canada Malting company, Montreal, Canada (malt); Hop Union LLC, Yakima, Washington and S S Steiner, Inc., New York, New York (hops); Gamer Packaging Inc., Minneapolis, Minnesota (bottles and crown corks); Alliance Packaging, Seattle, Washington, Inland Paper Board and Packaging, Inc., Antioch, California and Empire State Container, Inc., Syracuse, New York (cartons); Sierra Pacific Packaging, Oroville, California and Caraustar, Ashland, Ohio (carriers); and DWS Printing Associates, Bay Shore, NY (labels).

The Company's major supplier for the European Territory is Shepherd Neame, which brews on a contract basis all of the Company's products that are sold in the European Territory. The Company does not directly purchase any material amounts of agricultural commodities or other products for use in the European Territory.

Sales to the Company's top five customers in fiscal year 2007 totaled $9,420,000, or approximately 25%, of the Company's total net sales, as compared to $8,032,600 or 24% of total net sales for fiscal year 2006.

In the Company's Domestic Territory, sales to Mesa Distributing Company, Inc. totaled approximately 7.9% and 8.5% of the Company's domestic sales (or approximately 3.1% and 3.3% of its total sales) for fiscal years 2007 and 2006.

Sales to the Company's principal European customer, Shepherd Neame during fiscal year 2007 represented approximately 17.7% of the Company's European Territory sales (or approximately 10.7% of the Company's total sales), as compared to approximately 16.2% of European Territory sales (or approximately 9.9% of total net sales) in fiscal year 2006. No other individual customer accounted for more than 5% of the Company's total net sales during fiscal years 2007 or 2006.

The Company has U.S. federal trademark registrations on the principal register of the United States Patent and Trademark Office for the following marks: MENDOCINO BREWING COMPANY word mark (Reg. No. 2,441,141), RED TAIL ALE word mark (Reg. No. 2,032,382), RED TAIL design mark (Reg. No. 2,011,817), BLUE HERON PALE ALE design mark (Reg. No. 2,011,816), EYE OF THE HAWK SELECT ALE word mark (Reg. No. 1,673,594), YULETIDE PORTER word mark (Reg. No. 1,666,891), BREWSLETTER word mark (Reg. No. 1,768,639), PEREGRINE GOLDEN ALE word mark (Reg. No. 2,475,522), HOPLAND BREWERY word mark (Reg. No. 2,509,464), BLACK EYE ALE word mark (Reg. No. 2,667,078), SUN LAGER PREMIUM HANDCRAFTED BREW word and design mark (Reg. No. 2,583,446), WHITE HAWK ORIGINAL IPA word and design mark (Reg. No. 2,956,999), RAPTOR RED LAGER word and design mark (Reg. No. 3,113,619), and BLACK HAWK STOUT word mark (Reg. No. 3,205,652).

The Company uses the BLUE HERON word mark under a concurrent use agreement with Bridgeport Brewing Company which gives the Company the exclusive right to use the BLUE HERON word mark throughout the United States with the exception of Oregon, Idaho, Washington, and Montana. Bridgeport Brewing Company, the other concurrent use party, has the exclusive right to use the BLUE HERON word mark in those states.

The Company's use of the BLACK HAWK STOUT word mark is, by agreement with Hiram Walker & Sons, Inc., subject to the restriction that it be used solely to identify and distinguish malt beverage products namely, beer, ale and stout, and only in conjunction with the words "Mendocino Brewing Company."

The Company's United States federal trademark registration for the BLUE HERON word mark (Cancelled Reg. No. 1,820,076) was cancelled as a result of an alleged technical deficiency in registration compliance filings. The Company continues to use the BLUE HERON word mark and claims common law trademark rights in and to that mark. The Company presently has a pending application on file with the United States Patent and Trademark Office for the re-registration of the BLUE HERON word mark.

The Company claims common law trademark rights in and to the TALON BARLEY WINE ALE word mark and TALON BARLEY WINE ALE word and design mark and intends to register the marks with the United States Patent and Trademark Office.

The Company has acquired the trademark CARMEL BREWING COMPANY and any other variation of the same as used by Carmel Brewing Company and claims common law trademark rights in and to all such marks. The Company has also acquired the rights to use the RAZOR EDGE word mark through a License Agreement with Beverage Mates, Ltd. However, the Company is currently not using the RAZOR EDGE mark, and it is unclear whether it will use the mark in the future. The RAZOR EDGE License Agreement expires in 2008, but will be automatically renewed unless specifically terminated. License fees are calculated based on sales of the product. The Company has not had any sales of this brand since 2001.

In August 2001, the Company acquired UBI and its wholly-owned subsidiary UBSN, which hold the exclusive brewing and distribution rights for Kingfisher Premium Lager in the United Kingdom, Ireland, continental Europe, and Canada through a licensing agreement with UB Limited. Under its terms, this licensing agreement is currently scheduled to remain in effect until October 2013.

In July 2001, MBC entered into the Kingfisher Trademark and Trade Name License Agreement with Kingfisher America, Inc., pursuant to which MBC obtained a royalty-free, exclusive license to use the Kingfisher trademark and trade name in connection with the brewing and distribution of beer in the United States. Under its terms, this agreement is currently scheduled to remain in effect until October 2013.

Since 1998, UBI and UBSN have licensed to Shepherd Neame the exclusive right to brew, keg, bottle, can, label, and package all beers and related products sold under the Kingfisher trademark in the United Kingdom, Ireland, and continental Europe. The price UBSN pays to Shepherd Neame for brewing Kingfisher Premium Lager for distribution in the United Kingdom is set by a formula which varies according to the applicable duty on Kingfisher Premium Lager and other factors. (For additional information see "Item 13. — Certain Relationships and Related Transactions - Shepherd Neame - Brewing Agreement".) Under its terms this agreement is currently scheduled to remain in effect until October 2013.

In April 2004, the Company entered into a licensing agreement with Frank's Famous Foods ("FFF") and granted a non exclusive license to FFF for the trademark and trade name Red Tail Ale to be used in the manufacture and sale of barbecue sauces and marinades. FFF pays to the Company licensing fees ranging from $1.50 to $3.00 per case sold. Under its terms this licensing agreement is scheduled to terminate April 2, 2009.

The Company's Domestic Territory operations are subject to licensing by local, state and federal governments, as well as to regulation by a variety of state and local agencies. The Company is licensed to manufacture and sell beer by the Departments of Alcoholic Beverage Control in California and New York. A federal permit from the United States Treasury Department, Alcohol and Tobacco Tax and Trade Bureau (the "TTB") (formerly the Bureau of Alcohol, Tobacco, and Firearms) allows the Company to manufacture fermented malt beverages. To keep these licenses and permits in force the Company must pay annual fees and submit timely production reports and excise tax returns. Prompt notice of any changes in the operations, ownership, or company structure must also be made to these regulatory agencies. The TTB must also approve all product labels, which must include an alcohol use warning. These agencies require that individuals owning equity securities totaling in the aggregate 10% or more of the Company's outstanding securities be investigated as to their suitability of character. The Company's production operations must also comply with the Occupational Safety and Health Administration's workplace safety and worker health regulations and comparable state laws. Management believes that the Company is presently in compliance with the aforementioned laws and regulations. In addition, the Company has implemented its own voluntary safety program. The Hopland tavern is regulated by the Mendocino County Health Department, which requires an annual permit and conducts spot inspections to monitor compliance with applicable health codes.

In the United States, the federal excise tax rate is $7.00 per bbl. for up to 60,000 bbl. per year and $18.00 per bbl. for over 60,000 bbl. for brewers producing less than 2,000,000 barrels per year. The California excise tax rate is $6.20 per bbl. The State of New York presently imposes on brewers an excise tax of $3.88 per bbl. for production in excess of 100,000 bbl. per year.

The Company's operations in the European Territory are subject to regulation by United Kingdom and European laws, as well as by the laws of various individual countries in which UBI distributes its products. Due to the contract brewing arrangement in the European Territory, Shepherd Neame is subject to various laws of the European countries regarding production, bottling, packaging, and labeling in lieu of the Company. Trade with Canada is subject to, and in compliance with, regulation by the provincial Liquor Boards.

The Company is subject to various federal, state, and local environmental laws which regulate the use, storage, handling, and disposal of various substances.

The Company's waste products consist of water, spent grains, hops, glass and cardboard. The Company has instituted a recycling program for its office paper, newspapers, magazines, glass, and cardboard at minimal cost to the Company. The Company sells or gives away its spent grain to local cattle ranchers. The Company has not purchased any special equipment and does not incur any identifiable fees in connection with environmental compliance at its Hopland site.

Ukiah. The Company has built its own wastewater treatment plant for the Ukiah facility. As a result, the Company is not currently required to incur sewer hook-up fees at that location. If the Company's discharge exceeds 55,000 gallons per day, which Management does not expect to occur until annual capacity exceeds 100,000 bbl., the Company may be required to pay additional fees. The wastewater treatment facility construction costs totaled approximately $900,000, and the approximate operating costs of the plant are between $6,000 and $10,000 per month. The operating costs of the facility may increase with increased production. The Company has contracted to have the liquid sediment that remains from the treated wastewater trucked to a local composting facility for approximately the cost of transportation. The Company obtained a Mendocino County Air Quality Control Permit to operate the natural gas fired boiler in Ukiah; this permit is valid until August 30, 2008. Management expects this permit to be renewed.

Saratoga Springs. The Saratoga Springs facility is subject to various federal, state, and local environmental laws which regulate use, storage and disposal of various materials. The Company's solid waste materials consist of spent grain, cardboard, glass, and liquid waste. The Company has instituted a recycling program for cardboard, office paper and glass at a minimal cost to the Company. Spent grain is sold to local cattle dairy farms. The Company pays approximately $2,500 per month in sewer fees for liquid waste. The sewer discharge from the brewery is monitored and is within the standards set by the Saratoga County Sewer Department. The Company follows and operates under the rules and regulations of the New York Department of Environmental Conservation for Air Pollution Control.

Various states in which the Company sells its products in the Domestic Territory, including California and New York, have adopted certain restrictive packaging laws and regulations for beverages that require deposits on packages. Such laws have not had a significant effect on the Company's sales. The adoption of similar legislation by Congress or a substantial number of states or additional local jurisdictions might require the Company to incur significant capital expenditures for compliance.

In general, European packaging regulations are covered by specifications provided by the European Union; the Company believes it is in compliance with such specifications.

The Company has not received any notice from any governmental agency relating to the violation by the Company of any applicable environmental law.

As of December 31, 2007, MBC employed 52 full-time and 15 part-time individuals in the United States, including 11 in management and administration, 42 in brewing and production operations, 4 in retail and tavern operations and 10 in sales and marketing positions. In England, UBI and UBSN together employed 10 people in sales and marketing and 6 in managerial and administrative positions. Management believes that the Company's relations with its employees are generally good.

On February 28, 2003, approximately 21 employees engaged in brewing, bottling, warehousing, and shipping at the Ukiah brewery elected Teamsters Local No. 896, International Brotherhood of Teamsters, AFL-CIO (the "Union") to represent them as a collective bargaining agent. The Company and the Union executed a collective bargaining agreement effective November 17, 2003. Such collective bargaining agreement will expire on July 31, 2008. All of such 21 employees' positions henceforth must be held and filled by members of the union.

The Company has not spent a material amount during the last two fiscal years on research and development activities nor on customer-sponsored research activities relating to the development of new products, services or techniques or the improvement of existing products, services or techniques.

In addition to the other information in this Annual Report on Form 10-K, described below are risks and uncertainties that we believe are most likely to be material to our business and results of operations. Our business operations and results may also be adversely affected by additional risks and uncertainties not presently known, or which we currently deem immaterial, or which are applicable in general to the industries in which we compete or to the economy. If any of the following risks or uncertainties actually occurs, our business, financial condition, results of operations or cash flows would likely suffer.

LACK OF PROFITABLE OPERATIONS: We incurred a net loss for fiscal year 2007. Historically, the Domestic Territory has operated at a net loss. Since the year 2005, the European territory has also been operating at a loss. We believe such losses are attributable to low sales volumes and low production capacity utilization rates at our domestic brewing facilities and higher operating expenses in the European territory. Our business is also subject to certain fixed and semi-variable operating costs, and when combined with the impact of the correlation between current levels of production and maximum production capacity, our gross margins may be sensitive to small increases or decreases in sales volume in the Domestic Territory. In addition, higher cost of materials in 2006 resulted in increased materials costs. We may not be able to offset such increased expenses with comparable price increases in our products, which could also impact our gross margins. We may not be successful in our efforts to increase sales volume and utilization rates. Moreover, it is uncertain when, if at all, our operations will become profitable once again. Future operating losses may have a material adverse effect on our cash flows and financial position.

LIQUIDITY: Low utilization of the production capacity at our Ukiah and Saratoga Springs facilities and losses from our European operations continued to place demands on our working capital. We have loans, lines of credit, other credit facilities, and lease obligations with various creditors. Any breach of a loan by us which leads to our default, or to an attempt by one of our creditors to exercise its rights to certain of our tangible or intangible assets which have been used as collateral or which have been pledged as security for our obligations, could potentially make it difficult, at least in the short term, for us to continue our operations.

COMPETITION: We face intense competition in both our Domestic Territory as well as in our European Territory from both competitors in the beer market as well as from producers of wine and spirits. Certain of our competitors have substantially greater financial and marketing resources and more extensive distribution networks than we do. In addition, the introduction of new products by existing competitors or new entrants into the market may impact our market share. Moreover, consumer preference and consumer trends may result in a decrease in demand for our products which could also have an impact on our results of operations.

RAW MATERIALS: We are dependant on a limited number of suppliers, and in some instances on a sole supplier, for the majority of the raw materials and packaging materials used in our operations. As a result, an interruption in the supply chain may have an adverse effect on our operations if we were unable to find an alternative supplier at a comparable price. Our cost of materials, particularly that of malt and hops increased significantly during the year 2007 as well as in the first quarter of the year 2008 due to limited supply and higher demand. (See Part 1, Item 1, “Sources And Availability Of Raw Materials’). While we have increased our selling prices marginally, we may not be in a position to pass the entire cost increase to our customers which may have an adverse effect on our operations.

DEPENDENCY ON CONTRACT BREWING ARRANGEMENTS: We have entered into short term non-binding arrangements with several brewers to brew and package their brands at our brewing facilities, predominantly at our Releta facility. Approximately 28% of our sales volume in the Domestic Territory for fiscal year 2007 includes sales made under such contract brewing arrangements. There is no certainty that such existing arrangements will be extended in the future or that we will be able to enter into new arrangements. Any significant variation in these arrangements could have a material adverse effect on the Company's results of operations, cash flows and financial position.

ARRANGEMENT WITH SHEPHERD NEAME: UBI and UBSN entered into a brewing agreement that grants Shepherd Neame the exclusive right to brew and package all beers sold under the Kingfisher trademark in the United Kingdom, and to distribute such products elsewhere in the European Territory. Continued losses in the European Territory has increased the working capital gap and diminished our ability to timely settle our dues. Any interruption of the brewing, packaging or distribution of our products by Shepherd Neame for any reason is likely to have a material adverse effect on our results of operations, cash flows and financial position.

MATERIAL CONTRACT FOR THE SUPPLY OF KEGS: We have entered into an exclusive Keg Management Agreement with MicroStar Keg Management LLC ("MicroStar") which expires in September 2009. Under the terms of the agreement with MicroStar, we receive our entire supply of kegs exclusively from MicroStar. Moreover, pursuant to the terms of the agreement, if the agreement is terminated, we are required to purchase three times the average monthly keg usage for the preceding six-month period from MicroStar at purchase prices ranging from $54 to $84 per keg. If we are required in the future to purchase such kegs we may need to incur additional debt financing to fund such purchases. An interruption in the supply of kegs by MicroStar to us or in case of termination of the agreement, our failure to obtain the necessary funding to facilitate such purchases could have a material adverse effect on our business, results of operations, cash flow or financial position.

CHANGE IN PUBLIC ATTITUDE AND DRINKING PREFERENCES: There is an increasing public concern over alcohol-related social problems, including drunk driving, underage drinking and health consequences from the misuse of alcohol, including alcoholism. This may adversely affect consumption of alcoholic beverages. Consumers drinking preferences may also change due to availability of a variety of products in the craft brew segment. Hence any change in government regulation and shift in consumer preference may have an adverse impact on our operations.

Not applicable.

The Company owns nine acres of land in Ukiah, California on which its Ukiah brewery is located. Management believes that this facility is adequate for the Company's current capacity and also provides space for future expansion. Grand Pacific Financing Corporation currently holds a first deed of trust on this property in connection with a loan advanced to the Company. (See "Item 7. — Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Long-Term Debt"). The principal amount outstanding on the loan as of December 31, 2007 was $2,963,900.

The Company has estimated the life of the building at 40 years and depreciates the cost of the building on a straight-line method over its anticipated life. The Company does not depreciate the cost of the land. The Company's tax basis on the Ukiah facility is $10,850,000. Various other assets incorporated in this facility are being depreciated, on a straight-line basis, at rates of between 10 and 20 years. Property taxes are currently assessed on the Ukiah property at a rate of 1.125%, for an annual tax of $122,100.

The Company also leases 3.66 acres in Saratoga Springs, New York, on which the Ten Springs Brewery facilities are located. In November 2004, the Company leased additional warehouse space and extended the term of the lease until November 2019.

The Company's Ukiah and Releta facilities have both been operating at low production capacity utilization rates. The brewery in Ukiah, California has a current annual packaging capacity of approximately 100,000 bbl. on a single shift basis, whereas the annual sales volume from this facility was approximately 47,200 bbl. or 47% of maximum production capacity in 2007, as compared with 39,700 bbl. or 44% of maximum production capacity in 2006. The brewery at Saratoga Springs, New York currently has an annual packaging capacity of approximately 90,000 bbl. per year a on single shift basis, although its annual sales volume from this facility was approximately 30,200 bbl. or 34% of its maximum packaging capacity in 2007, as compared with 26,300 bbl. or 44% of its then maximum packaging capacity in 2006. Despite their low packaging capacity utilization rates, both of these brewing facilities incur costs for maintenance, property taxes, and other costs on a level consistent with their maximum production capacity rather than with their current utilization levels. The inability of the Company to align costs and utilization rates affects the Company's capital, liquidity, and resources of management. Failure to adequately align such costs and utilization rates may have a material adverse effect on the Company's business, financial condition, and results of operations.

The Company has leased a 2,275 square foot building in Hopland on which the Hopland tavern ale house and merchandise store are located. The lease on this property expires in August 2010.

The Company leases certain equipment and vehicles under capital and operating leases which expire at varying times through September 2012. Additionally, the Company leases equipment and vehicles under various other leases. As these leases expire, it is anticipated that, in accordance with the Company's current practices, the equipment will be acquired pursuant to the terms of the leases and the vehicles will be surrendered.

UBSN has leased a 1,365 square foot office located at Faversham, Kent, in England for a period of 10 years which lease expires in July 2015. The Company does not own or lease any other material properties in Europe.

The Company considers its land, buildings, improvements, and equipment to be well maintained, in good condition, and adequate to meet the operating demands placed upon them. In the opinion of Management, all of these properties are adequately covered by insurance.

None.

Not Applicable.

Since May 2002, the Company's Common Stock has been quoted on the NASDAQ OTC Bulletin Board, under the symbol "MENB". The table below sets forth, for the fiscal quarters indicated, the reported high and low bid prices for the Company's Common Stock, as reported on the OTC Bulletin Board. The information listed below reflects inter-dealer bids, without retail mark-up, mark-down, or commission, and may not represent actual transactions.

2007	High		Low
First Quarter	$	0.27	$	0.21
Second Quarter	$	0.35	$	0.20
Third Quarter	$	0.22	$	0.22
Fourth Quarter	$	0.32	$	0.22

The Company had approximately 2,288 holders of its common stock of record as of March 14, 2008. The Company has never paid a cash dividend on its Common Stock and Management does not expect the Company to pay cash dividends in the foreseeable future. The Company's credit agreements provide that the Company may not declare or pay any dividend or other distribution on its Common Stock (other than a stock dividend), or purchase or redeem any Common Stock, without the lender's prior written consent. Management anticipates that similar restrictions will remain in effect for as long as the Company has significant bank financing.

The holders of the Company's 227,600 outstanding shares of Series A Preferred Stock (which are not listed for trading on any market or to the Company's knowledge quoted on any bulletin board or other public quotation system) are entitled to aggregate cash dividends and liquidation proceeds of $1.00 per share before any dividend may be paid with respect to the Common Stock. The Series A Preferred Shares must be canceled after the holders of these shares have received their $1.00 per share aggregate dividend. For additional information see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Other Loans and Credit Facilities- Restricted Net Assets."

Historically, we have not paid any dividends. We anticipate that for the foreseeable future, all earnings, if any, will be retained for the operation and expansion of our business and that we will not pay cash dividends. The payment of dividends, if any, in the future will be at the discretion of the board of directors and will depend upon, among other things, future earnings, capital requirements, restrictions in future financing agreements, the general financial condition of the Company and general business conditions.

As of December 31, 2007, the Company did not have any securities authorized for issuance under any equity compensation plan approved by the shareholders.

The Company's policy with respect to the compensation of outside directors of MBC for their services as directors is as follows: each outside director receives $3,000 per Board meeting attended and $1,000 per committee meeting attended.

Prior to 2003, the Company had a policy of granting shares of Common Stock in lieu of cash to non-employee directors at their option, as compensation for their attendance at meetings of the Board of Directors and of Committees of the Board on which they served, based on a standard schedule of $3,000 per Board meeting attended and $1,000 per committee meeting attended. However, because the market value of the Company's Common Stock fell below $0.50 per share during the latter half of 2003, and has since remained consistently below $1.00 per share (at times falling below twenty cents per share) - which would have increased quite significantly the number of shares otherwise issuable to these directors — the Board of Directors adopted a Directors' Stock Grant Plan under which non-employee directors would receive, as compensation for Board and Committee meetings attended, shares of the Company's Common Stock valued at the higher of the book or market value calculated as of the last day of each year in respect of which such compensation was due. On May 14, 2007, the Board of Directors of the Company approved the issuance of an aggregate of 363,512 shares of the Company's unregistered common stock to certain of the Company's independent non-employee directors in recognition of services provided to the Board by such directors and as compensation, pursuant to the terms of the Company's Directors' Compensation Plan, for their attendance at Board and Committee meetings held during 2006.

The Company's policy for compensation of its non-employee directors has in the past included the annual issuance of options, pursuant to the Company's 1994 Stock Option Plan (the "Plan"), to purchase a number of shares of the Company's Common Stock having a fair market value of $25,000. The Plan expired in 2004, however, and to date no new option or similar plan has been adopted by the board. The Board may adopt new plans and guidelines for compensation in the future.

The Company issued thirteen (13) promissory notes pursuant to a Master Line of Credit Agreement between the Company and United Breweries of America, Inc. ("UBA") and one note on substantially similar terms to UBA between September 1999, and March 2005 (the "UBA Notes"). The outstanding principal amount of the UBA Notes, and the unpaid interest thereon may be converted, at UBA's discretion, into shares of the Company's unregistered Common Stock at a conversion rate of $1.50 per share. As of December 31, 2007, the outstanding principal and interest on the UBA Notes totaled approximately $2,916,297, and the UBA Notes were convertible into 1,944,198 shares of the Company's Common Stock. If the UBA Notes were deemed to be securities, the Company's Management believes that the issuance of all such notes is exempt from registration pursuant to Section 4(2) of the Securities Act of 1983, as amended (the "Act"), because UBA, the sole offeree and recipient thereof, has significant business experience, financial sophistication, and knowledge of and familiarity with the business of the Company. Management believes that if these notes were eventually to be converted into shares of the Company's Common Stock, the issuance of such shares would also be exempt from registration pursuant to Section 4(2) of the Act.

None.

Not required for smaller reporting companies.

The Company’s operations resulted in operating income of $611,000. After providing for interest, other income and taxes, the net loss was for fiscal year 2007 was $384,000.

In the Domestic Territory, brewing operations sales (based on volume) were 77,349 bbl. during fiscal year 2007, as compared to 65,969 bbl. and 59,046 bbl. in fiscal years 2006 and 2005, respectively. Sales from the Ukiah facility totaled 47,164 bbl., 39,693 bbl. and 41,620 bbl., for the fiscal years 2007, 2006 and 2005, respectively. Sales from the Saratoga Springs facility totaled 30,185 bbl., 26,276 bbl., and 17,426 bbl. for the fiscal years 2007, 2006 and 2005, respectively. We bottled 2,950 bbl., 3,577 bbl., and 2,919 bbl. in fiscal years 2007, 2006 and 2005, respectively, of cider products for California Cider Company.

We sold 67,488 bbl. of beer in our European Territory during fiscal year 2007 as compared to 67,797 bbl. and 67,633 bbl. during fiscal years 2006 and 2005, respectively. Sales in the United Kingdom accounted for 61,202 bbl., 60,187 bbl. and 61,077 bbl. during 2007, 2006 and 2005, respectively. Sales in continental Europe and Canada totaled 6,286 bbl., 7,610 bbl. and 6,556 bbl. during fiscal years 2007, 2006 and 2005, respectively. Although the sales of certain brands have fluctuated over the past few years, overall sales levels have remained consistent.

As used herein, the term "net sales" refers to gross sales less excise taxes. Overall net sales for fiscal year 2007 were $36,817,700, an increase of $4,542,300 or 14%, as compared to $32,275,400 in fiscal year 2006 mainly due to higher sales volume in the Domestic Territory.

DOMESTIC OPERATIONS: Net sales in the Domestic Territory totaled $13,943,700 in fiscal year 2007, compared to $12,149,400 for fiscal year 2006, representing an increase of $1,794,300 or 15%. Sales of beer for fiscal year 2007 increased by 11,380 barrels, to 77,349 barrels an increase of 17% as compared to 65,969 barrels in fiscal year 2006. The increase was due to increases in the sale of contract brands by approximately 10,100 bbl., and Company brands by 1,300 bbl. During fiscal year 2007, we bottled approximately 3,000 bbl. of cider products for California Cider Company on a contract basis compared to 3,600 bbl. in fiscal year 2006. We anticipate continuing to solicit opportunities to enter into non-binding contract brewing arrangements to address the low production capacity utilization rates in our Ukiah and Releta brewing facilities and anticipate that such contract brewing arrangements will continue to impact our net sales in the Domestic Territory.

EUROPEAN TERRITORY: Net sales in the Company's European Territory totaled $22,874,000 (£11,425,600) in fiscal year 2007, compared to $20,126,000 (£10,917,900) during fiscal year 2006. The increase was due to reduction in sales discount offered in the year 2007 and price increase during the beginning of the year 2007. Net sales presented in U.S. dollars resulted in an increase of 14%, as compared to fiscal year 2006,

CALIFORNIA		68-0318293
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

		Page
ITEM 1.	BUSINESS	1

ITEM 1A.	RISK FACTORS	7

ITEM 1B.	UNRESOLVED STAFF COMMENTS	9

ITEM 2.	PROPERTIES	9

ITEM 3.	LEGAL PROCEEDINGS	10

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	10

PART II		10

ITEM 5.	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS	10

ITEM 6.	SELECTED FINANCIAL DATA	12

ITEM 7.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	12

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	18

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	18

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	18

ITEM 9A.	CONTROLS AND PROCEDURES	18

ITEM 9B.	OTHER INFORMATION	21

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE COMPANY	21

ITEM 11.	EXECUTIVE COMPENSATION	23

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	27

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	28

ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	31

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	31

Mendocino Brewing Co Inc · 10-K · For 12/31/07

Filed On 3/31/08 4:08pm ET · SEC File 1-13636 · Accession Number 1144204-8-19096

Annual Report · Form 10-K
Filing Table of Contents

10-K · Annual Report

This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]

2006	High		Low
First Quarter	$	0.22	$	0.10
Second Quarter	$	0.30	$	0.13
Third Quarter	$	0.34	$	0.15
Fourth Quarter	$	0.25	$	0.17

Mendocino Brewing Co Inc · 10-K · For 12/31/07

Filed On 3/31/08 4:08pm ET · SEC File 1-13636 · Accession Number 1144204-8-19096

Annual Report · Form 10-KFiling Table of Contents

10-K · Annual Report

This is an EDGAR HTML document rendered as filed. [ Alternative Formats ]

Annual Report · Form 10-K
Filing Table of Contents