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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended October 31, 1996
Commission File Number 1-12119
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED
(Exact Name of Registration business as Specified in Its Charter)
Bermuda 72-1323940
(Jurisdiction of incorporation) (I.R.S. Employer Identification Number)
ONE GALLERIA BOULEVARD, SUITE 1714, METAIRIE, LOUISIANA 70001
(Address, including zip code, of Principal Executive Offices)
(504) 849-2739
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK: REDEEMABLE COMMON STOCK
Boston Stock Exchange PURCHASE WARRANTS:
Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by a check mark whether the registrant: (1) has filed all
reports required to be filed by Section 12 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this 10-K or any amendment
to this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant on December 31, 1996, based on the closing price on that date
of $2.375 on the Nasdaq SmallCap Market was $4,262,830.50.*
The number of shares outstanding of the registrant's common stock as
of January 21, 1996 was 3,696,876.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the
Registrant's 1997 Annual Meeting of Stockholders are incorporated by reference
into Part III of this Report.
* The aggregate market value of the voting stock held by non-affiliates was
estimated by excluding only those shares held by directors, officers and
principal shareholders filing Schedules 13D and/or 13G.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL. American Craft Brewing International Ltd. ("AmBrew International", or
"the Company") owns and operates the South China Brewery (the "South China
Brewery"), Hong Kong, the first of a series of American-style micro-breweries
the Company intends to establish in selected locations in the Pacific Rim,
Europe and Mexico. The South China Brewery produces fresh, high-quality,
preservative-free, hand-crafted beers using state-of-the-art
American-manufactured brewing equipment. Hand-crafted beers are distinguishable
by their full flavor, which results from traditional brewing styles. The Company
believes that American-style micro-brewing has growth potential in other key
world markets and that the South China Brewery is a model that can be adapted to
other markets.
The American-style micro-brewery concept has developed over the past
ten years into the fastest growing segment of the American beer industry.
American-style micro-breweries produce less than 15,000 barrels per year of
hand-crafted beers in a variety of styles. The Company believes that the growing
demand for micro-brewed beers in the United States is part of a broader shift in
preferences on the part of a certain segment of consumers away from
mass-produced products and toward high-quality, distinctive foods and beverages.
While craft beers account for less than 2% of total United States beer
consumption, sales volume of these beers grew by 50% during 1995. AmBrew
International believes that the demand for craft beers is not limited to the
United States and is committed to the production of a variety of craft beers
designed to appeal to a growing number of consumers in global markets.
The Company's senior management has extensive experience in the
international beverage alcohol industry. The Company expects to utilize its
management's experience to identify new markets receptive to the American-style
micro-brewery concept and to seek out strategic local partners to co-invest in
new micro-breweries in such markets. The Company plans to establish and operate,
either through wholly-owned subsidiaries or through majority-owned or otherwise
Company-controlled joint venture arrangements with strategic local partners, a
series of micro-breweries similar in concept to the South China Brewery. The
Company expects that these partners will use their knowledge of local
regulations and markets to facilitate the establishment and acceptance of the
Company's micro-breweries and their products. In pursuing its expansion
strategy, the Company will move into both markets dominated by mass-market
breweries and markets in which high-quality beer producers will be the Company's
primary competition. In markets where mass produced beers are sold to a broad
consumer profile, AmBrew International intends to develop craft beers as locally
produced premium product alternatives. In markets in which there are already a
number of traditional high-quality beer producers, the Company intends to
produce distinctive micro-brewed products for niche market segments.
In December, 1996, the Company entered into a joint venture, Celtic
Brew LLC, a New York limited liability company, with its Irish joint venture
partner, Aidan McGuinness, to establish and operate the Dublin, Ireland
expansion brewery. In January, 1997, the Company entered into a lease with
Corporation Calfik, a company wholly-owned by Federico G. Cabo Alvarez, one of
AmBrew International's directors and principal shareholders, to lease a 21,443
square foot facility near the Mexico-United States border at which the Company
intends to operate the Tecate expansion brewery through a wholly owned
subsidiary. In addition, the Company has signed a letter of intent with a
Chinese restaurant group, United Restaurants of Gallery, to form a joint venture
to establish and operate an expansion brewery in Shanghai. The Company has also
identified the following additional locations in which it is considering
establishing expansion breweries during 1997, subject to more extensive
feasibility studies: Budapest, Prague, Singapore, the United Kingdom, Warsaw,
Zurich and additional sites in Ireland.
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The Company has placed an order with Micro Brew Systems Co., Ltd.
("Micro Brew Systems") to purchase twenty micro-brewing systems manufactured by
JV Northwest, Ltd. of Portland, Oregon ("JVNW") and has made a $200,000
non-refundable deposit to secure manufacturing space for the twenty systems,
which deposit can be applied to the purchase price of any of the first ten
systems after ten systems are in production. The Company has made additional
down payments of $164,017 and $176,064, respectively, for the systems in
production for the Dublin and Tecate expansion breweries. The Company has also
entered into an agreement with Micro Brew Systems to identify and conduct
feasibility studies on potential future sights, and to act as project
consultants.
AMERICAN-STYLE MICRO-BREWERIES AND THE BREWING INDUSTRY
American-style micro-breweries produce small quantities of fresh,
high-quality, preservative-free, hand-crafted beers. In 1995, craft brewers,
both regional and micro, comprised the only growing segment of the United States
beer market. According to the Association of Brewers of Boulder, Colorado, 830
new breweries have been established in the United States since 1980: 17
"regional craft breweries" (breweries producing between 15,000 and 500,000
barrels per year); 280 micro-breweries (breweries producing less than 15,000
barrels for off-premise sale); and 533 brew pubs (brewery restaurants that sell
mostly on premise).
AmBrew International believes that it can take advantage of this
micro-brewery market niche opportunity by selling high-quality, hand-crafted
beer in certain international markets just as United States micro-brewers have
done in domestic markets. While craft beers account for less than 2% of total
United States beer consumption, sales volume of these beers grew by 50% in 1995
and had a compounded annual growth rate of approximately 47% during the period
from 1985 through 1995.
SOUTH CHINA BREWERY
The Company exported the American-style micro-brewery concept by
establishing the South China Brewery in Hong Kong in June 1995. The South China
Brewery produces its specialty products with a state-of-the-art, company-owned
brewing system using traditional brewing methods. For the year ended October 31,
1996, the South China Brewery operated at approximately 35% of brewing capacity.
A head brewer and two assistants brew all of the South China Brewery's beer.
With only four other employees, the South China Brewery produces, distributes
and markets three full-flavored, craft beers marketed under the South China
Brewery's own brand names, Crooked Island Ale, Dragon's Back India Pale Ale, and
Stonecutter's Lager. The South China Brewery also custom brews ales for local
Hong Kong establishments, in accordance with their individual specifications, to
market under their own labels. The South China Brewery is designed to permit
small and economical production runs of differentiated products to meet special
tastes or other custom requirements, and for sale in niche markets.
PROPOSED EXPANSION MARKETS
Two expansion breweries for the Dublin and Tecate sites are currently
under development and manufacturing has begun at JVNW, supplier of the South
China Brewery equipment, on the brewing equipment to be installed at the Dublin
and the Tecate sites. The Company plans to establish and operate, either through
wholly-owned subsidiaries or through majority-owned or otherwise
Company-controlled joint venture arrangements with strategic local partners, a
series of state-of-the-art, American-style micro-breweries. The Company is
currently considering the following locations: Budapest, Prague, Shanghai,
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Singapore, the United Kingdom, Warsaw, Zurich and additional sites in Ireland.
AmBrew International is actively reviewing sites for additional expansion
breweries the Company plans to open in 1997.
Dublin. In December, 1996, the Company entered into a joint venture,
Celtic Brew LLC, a New York limited liability company, with its Irish joint
venture partner, Aidan McGuinness, to establish and operate the Dublin, Ireland
expansion brewery. Mr. McGuinness is the owner of Premier Worldwide Beers
(Ireland) Ltd. and Premier Worldwide Beers PLC of Croydon, England, importers
and distributors of beers and other beverages in Ireland and the United Kingdom.
Under the terms of the Operating Agreement, AmBrew International and Mr.
McGuinness have agreed to make initial capital contributions of $600,000 and
$400,000, respectively, to the joint venture. Celtic Brew will lease a recently
built 3,800 square feet facility specifically designed for the micro-brewery in
Enfield, county Meath, approximately 40 miles west of Dublin on the main
east-west roadway from Dublin to Galway. Celtic Brew is a prototype AmBrew
20-barrel brewery designed to have an annual capacity of 70,000 cases, to be
expanded as the need arises. Additional fermentation and bright beer tanks are
incorporated into the Celtic Brew facility to allow for a larger percentage of
lager production. Initial packaging will be in 30 and 50 liters kegs for the
draft markets both in Ireland and the United Kingdom. A bottling and labeling
line will also be operating for both the domestic and export markets.
Fabrication has begun on the micro-brewery system, forecast to be shipped in
February, 1997. The projected start-up date for Celtic Brew LLC is March, 1997.
The General Manager has been appointed and is currently working at the brewery
location. Micro Brew Systems and the Company's local partner are continuing to
interview candidates for the positions of Head Brew Master and all necessary
ancillary staff.
Tecate. In January, 1997, the Company entered into a five-year lease
with Corporation Calfik, a company, owned by AmBrew International director
Federico G. Cabo Alvarez, to lease 21,443 square feet of space in Tecate,
Mexico. Tecate is located in Baja California Norte, approximately one mile from
the California-Mexican border. The Tecate brewery will be wholly-owned by the
Company. The leased site is large enough to allow for further expansion as the
need arises. The Tecate expansion brewery will be known as Cerveceria Rio Bravo.
Cerveceria Rio Bravo will have an annual brewing capacity of 200,000 cases per
year, approximately three times the size of the South China Brewery prototype.
Additional fermentation and bright beer tanks and brewing vessels
are incorporated into the Cerveceria Rio Bravo plan to allow for the larger
capacity. A kegging, bottling and labeling line will be operating for both the
domestic and export market. The Company expects that the strategic location of
Cerveceria Rio Bravo will provide an ideal location from which AmBrew
International can distribute its products into northern Mexico and the United
States. The projected start-up date for Cerveceria Rio Bravo is May, 1997.
Shanghai. The Company has visited a prospective site for the Shanghai
expansion brewery, has signed a letter of intent with a Chinese restaurant
group, United Restaurants of Gallery, to form a joint venture to establish and
operate this expansion brewery and has commenced work on a preliminary site
layout.
With the exception of the Tecate expansion brewery, the Company
currently expects strategic local partners to invest in minority equity
interests in the proposed expansion breweries. The Company expects to utilize
its management's extensive experience in the international beverage alcohol
industry to seek out additional strategic local partners for such co-investment
purposes. Additionally, the Company intends to obtain, if possible, debt
financing so that the expected aggregate equity investment in each brewery,
other than Cerveceria Rio Bravo, is approximately 50% of the total
capitalization. The Company believes that third party financing in conjunction
with the net proceeds of the Company's initial public offering (the "Offering")
will be necessary to enable the Company to establish all six of the breweries it
is considering establishing in 1997.
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The Company expects to achieve economies of scale with its proposed
breweries through volume discounts on equipment and ingredient purchases and
reduction of brewery start-up expenses. The Company has entered into a contract
with Micro Brew Systems to purchase brewing equipment manufactured by JVNW at
favorable prices and terms for volume purchases. For each of the proposed
breweries, the Company will conduct a feasibility study covering brewery
licensing, taxation and local operating costs and will conduct a head brewer
search. In addition, the Company expects to utilize its experience with the
South China Brewery to speed the process from start-up to profitable operations
at the proposed breweries.
Successful expansion will require management of various factors
associated with the construction of new facilities in geographically and
politically diverse locations. Factors include site selection, local land use
requirements, obtaining governmental permits and approvals, adequacy of
municipal infrastructure, environmental uncertainties, possible cost estimation
errors or overruns, additional financing, construction delays, weather problems
and other factors, many of which are beyond the Company's control. There can be
no assurance that the Company will be successful in establishing and operating
additional breweries.
AMBREW USA
In December, 1996, the Company purchased 95% of the outstanding
capital stock of Atlantis Import Company Incorporated, now AmBrew USA, for
approximately $100,000 plus an agreement to pay certain royalties in the future.
AmBrew USA currently imports into the United States several brands of beer
brewed by other producers. The Company expects to use AmBrew USA to import into
the United States and distribute beer produced at its expansion breweries.
AmBrew USA is scheduled to begin importing beer from the South China Brewery
during the first half of 1997 and will import other expansion brewery products
as they become available.
BREWING OPERATIONS
The Company's beer is prepared from barley, grain, hops, yeast and
water. Distinctive styles of beer depend upon how the barley is malted, the use
of hops and the proportions of the ingredients, among other factors. The
following describes the production process used at the South China Brewery. The
Company intends to utilize the same type and scale of equipment at the other
breweries and to generally pattern future brewery operations on the South China
Brewery.
Brewing Process. The South China Brewery's products are crafted from
pale and specialty malted barley produced in Great Britain by high-quality
malters. The South China Brewery acquires its hops from micro-brewery quality
sources in the United States. The first step in the South China Brewery's
brewing process is to crack malted barley in a roller mill (milled barley is
called grist) and store it in a grist case. Hot water (called "liquor") and
grist are mixed in a mash/lauter tun producing the mash. A sweet, clear liquid
(called "wort") is filtered out of the mash and transferred to the kettle. The
wort is brought to a rolling boil in the kettle. Some hops are added early to
provide bitterness; other hops (finishing hops) are put in later to give a fine
aroma. The hot wort is cooled to termination temperature (about 40(degree)F)
through a heat exchanger. The cold liquor tank provides the water to cool the
wort in the heat exchanger and the resulting heated water is transferred to the
hot liquor tank for use in the next brew. The cooled wort is then transferred to
the fermentation tanks ("unitanks"), yeast is added and fermentation begins.
Fermentation is the process by which yeast transforms the sweet wort into a
flavor solution containing alcohol and carbon dioxide. After fermentation, the
beer is aged to develop its final smooth taste. The fermentation and aging
process can last 14 days for ales and 21 days and longer for lagers.
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The conditioned product is filtered and stored in a bright beer tank
where it is carbonated and then packaged. Packaged beer is stored in a
refrigerated walk-in cooler and delivered in refrigerated vehicles and
containers.
Quality Control. The South China Brewery employs an experienced head
brewer who hand crafts all of the brewery's beer. The Company will seek to
employ a similarly qualified head brewer at each of the Company's proposed
breweries by conducting a head brewer personnel search for each proposed
brewery. The Company plans to monitor production and exercise quality control at
each of its breweries. Each brewery will have equipment for on-site yeast
propagation, to monitor product quality, to test products and to measure color
and bitterness. The breweries will also utilize independent laboratories for
further product analysis. The Company's policy is to meet the highest quality
standards, with the goal of assuring the purity and safety of each of its beers.
The quality of the South China Brewery product is of such a high standard that
one of its specialty brew products was recognized globally. A specialty product
made for Delaney's was awarded the Gold Medal Award in the English Style Special
Bitter category at the World Beer Cup International Competition held in Vail,
Colorado in June 1996.
Management believes that its ability to engage in constant product
innovation and its control over product quality are critical competitive
advantages. Accordingly, the Company does not hire third parties to perform
contract brewing of any of its products, and plans to operate its own breweries
in each of the proposed initial expansion locations and at any subsequent sites.
In addition, AmBrew International believes that its ownership of a number of
micro-breweries will enable it to shift production among breweries giving it
greater operating flexibility while reducing the risk of producing all of its
products at a single location. This strategy would also permit the Company to
produce its brands that achieve widespread market-acceptance at any of its
proposed breweries for local consumption.
PRODUCTS
The South China Brewery produces three styles of full-flavored craft
beers using traditional brewing methods, high quality ingredients and
state-of-the-art American-manufactured brewing equipment that the Company
intends to replicate at each of its proposed breweries. The Company's beers are
marketed on the basis of freshness and distinctive flavor profiles. The South
China Brewery distributes its products in kegs and glass bottles. The bottles
are freshness-dated for the benefit of consumers. For the fiscal year ended
October 31, 1996, approximately 87.5% of the South China Brewery's sales were
generated by sales of kegged products. For the fourth quarter, approximately 90%
of the South China Brewery's sales were generated by sales of kegged products.
Proprietary Brands. The South China Brewery produces three branded
products, each with its own distinctive combination of flavor, color and
clarity.
Crooked Island Ale. The flagship brand, Crooked Island Ale, accounted
for approximately 20.1% of sales during the fiscal year ended October
31, 1996 and accounted for approximately 19.6% of the Company's sales
during the fourth quarter. This ale is produced from pale malted
barley from Great Britain and hops from the United States. Crooked
Island Ale is a light, golden ale with a fresh clean nose and crisp
finish. It is brewed light, with all the flavor and uniqueness of a
full-bodied ale. The Company believes that this ale's distinctive
malt flavor comes from a careful balance of bittering and aroma hops.
Crooked Island Ale is available in both kegs and bottles.
Dragon's Back India Pale Ale. Brewed to reflect the essence of a
traditional oak barrel British India pale ale, Dragon's Back gets its
amber hue from a blend of premium British malted barley. This ale is
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heavily hopped maintaining all of the qualities of the quintessential
cask ale. Currently, Dragon's Back is brewed for distribution only in
kegs. Dragon's Back accounted for approximately 10.1% of sales for
the fiscal year ended October 31, 1996 and accounted for
approximately 30.2% of sales during the fourth quarter.
Stonecutter's Lager. The third and newest proprietary product
produced by the South China Brewery is the Company's number one
growth product. Stonecutter's Lager is produced using only premium
British malt and the highest quality European and American hops. It
has a clean, refreshing flavor with just a hint of the Saaz hop used
in traditional Czech pilseners. The beer's body is light with a
pleasant golden hue. Stonecutter's Lager was introduced in August,
1996 and it is sold in both bottles and kegs. Stonecutter's Lager
accounted for approximately 1.9% of sales for the fiscal year ended
October 31, 1996 and for approximately 13.4% of sales for the fourth
quarter. Sales of Stonecutter's Lager almost equaled sales of
Dragon's Back India Pale Ale during November and December of 1996.
Specialty Brewing. In addition to its branded products, the South
China Brewery custom brews ales for local Hong Kong establishments, in
accordance with their individual product specifications, to market under their
own labels. The South China Brewery currently produces specialty brews for two
customers, Iconic America, formerly known as Dabeers Distributors Limited, and
Delaney's (Wanchai) Limited, owners of Delaney's Irish Pub ("Delaney's"). The
Company's contracts with these customers will expire in August and September,
1997, respectively. While the Company has no reason to believe that such
contracts will not be renewed, there is no assurance that either contract will
be renewed or renewed on favorable terms. AmBrew International retains the
proprietary rights to the recipes of its specialty brewed beers.
For the fiscal year ended October 31, 1996, specialty brewing sales
accounted for approximately 67.5% of sales. For the fourth quarter, specialty
brewing sales accounted for approximately 34% of sales. Sales to Iconic America
accounted for 42.9% of sales during fiscal year 1996 and 20.5% for the fourth
quarter then ended. Sales to Delaney's accounted for 24.6% of sales for fiscal
1996 and 13.5% of sales for the fourth quarter then ended.
The Company believes that continual development of new products is
the hallmark of micro-breweries. In an effort to be responsive to varying
consumer style and flavor preferences, the South China Brewery is continually
engaged in the development and testing of new products. The South China Brewery
currently has the capability of producing all the distinct styles of beer and
has a single production batch size of 260 cases. The Company intends to
construct the proposed breweries with similar versatility. The Company intends
to expand sales by entering into additional specialty brewing arrangements with
local bar, club, hotel, restaurant and airline partners in Hong Kong and in each
of the locales of the proposed breweries.
BREWING FACILITIES
The South China Brewery. The South China Brewery's brewing facility
is located in Aberdeen, Hong Kong, on the south side of the island. The Company
believes, based on its experience in the industry, that the South China Brewery
is the first and only independent micro-brewery established outside the United
States using state-of-the-art, American-made brewing equipment. The selection of
this site enabled the South China Brewery to be located near its primary markets
in the Hong Kong Central district and Kowloon, while not incurring the high
lease costs of downtown Hong Kong. The primary operations are in a 3,600 square
foot space on the second floor of a twenty-three story building. An additional
2,000 square foot storage facility for dry package goods (bottles, caps, labels)
is also located in the same building. Both the brewing facility and the storage
facility are leased.
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The Hong Kong 20-barrel brewery is an adaptable facility that is able
to produce nine different products simultaneously. The capacity of this brewery
can be increased by 50% with the addition of fermentation tanks at an installed
cost of approximately $150,000. The configuration and space of the brewery
allows the Company to achieve this 50% expansion with no modification to either
the facility or equipment currently installed. For these reasons, the South
China Brewery will serve as a prototype for the proposed breweries allowing the
Company to modify the basic configuration at each location to achieve optimum
brewery capacity and capability.
EQUIPMENT
The equipment for the Company's breweries was designed and fabricated
by JVNW. JVNW was established in 1981 and is considered one of the premiere
fabricators of micro-brewery systems. The Company's state-of-the-art equipment
allows the head brewer to control the brewing process to achieve a consistent
hand-crafted, high-quality product. The Company entered into a contract with
Micro Brew Systems (a distributor of JVNW brewing equipment) to purchase twenty
micro-brewing systems for use in its proposed expansion breweries. The first two
systems will be delivered to their respective sites in the first half of 1997.
The prototype plant is a 20-barrel system which means that it is
capable of brewing 20 barrels of product with each brewing cycle. Twenty barrels
(each barrel is 31 gallons) equates to approximately 260 cases of 24 355-ml
bottles or 75 30-liter kegs. Annual capacity is approximately 70,000 cases. The
10 fermentation vessels allow the plant to make different products at the same
time.
The breweries also utilize several pieces of ancillary equipment such
as a boiler to make steam for heating the hot liquor and boiling in the brew
kettle, a glycol refrigeration unit to provide cooling for the cold liquor tank,
fermentation tanks and a bright beer tank, fixed and movable pumps to transfer
the liquid, filters, soft piping, for transferring liquid to and from the
fermentation tanks, and labeler, bottling equipment and kegging equipment.
SALES AND MARKETING
The South China Brewery markets its products by educating consumers
as to the distinctive qualities of its products and by emphasizing localized
promotions designed to enhance the South China Brewery's word-of-mouth
reputation. The Company intends to adopt sales and marketing strategies targeted
for each individual local market it serves, but generally will seek to identify
its products with local markets. Management believes that by locating the
proposed breweries in proximity to the local markets they serve, AmBrew
International will be able to enjoy distinct competitive advantages, including
consumer identification with the Company's brands and enhanced familiarity with
local consumer tastes. By pursuing this strategy, the Company believes that it
will be able to develop its reputation and prestige as a local craft brewer,
while selectively introducing new and existing products into new regional
markets.
The South China Brewery devotes considerable effort to the promotion
of on-premise consumption at participating pubs and restaurants, and currently
engages in limited media advertising. Among other things, the South China
Brewery participates in and sponsors cultural and community events, local music
and other entertainment venues, local festivals and cuisine events, and local
professional sporting events in Hong Kong. The Company believes that educating
retailers about the freshness and quality of its products will in turn allow
retailers to assist in educating consumers. The Company considers on-premise
product sampling and education to be among its most effective tools for building
brand identity with consumers and establishing word-of-mouth reputation. The
South China Brewery achieves additional on-premise marketing through a variety
of other point-of-sale tools, such as tap handles, coasters, table tents, neon
signs, banners, posters and menu guidance. The South China Brewery also markets
its products through sales and giveaways of T-shirts, polo shirts, baseball
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hats and glasses. Sales of merchandise could develop as an independent source of
revenue for the Company. In addition, the South China Brewery offers guided
tours of its facility to further increase consumer awareness of its products and
is considering offering tasting sessions. Plans are currently underway to expand
the rolls of the guided facility tours and to make merchandising an important
added marketing tool.
The South China Brewery distributes its own products and does not use
independent distributors. To expand distribution of proprietary brands, the
South China Brewery has recently hired two local sales representatives. The
Company is continuously reevaluating its distribution strategy for each market
as its business develops.
The Company also expects that AmBrew USA will begin to import into
the United States beer produced in the expansion breweries. AmBrew USA is
scheduled to begin importing beer from the South China Brewery during the first
half of 1997 and will import other expansion brewery products as they become
available.
COMPETITION
Hong Kong. The beer industry is intensely competitive. While there
are no other craft brewers in Hong Kong, the South China Brewery competes
directly with premium import beers as well as with mass-produced beers marketed
by a number of much larger producers. Some larger United States beer producers
are marketing their beers in the United States as craft beers. There can be no
assurance that, in the future, the Company will not face competition from
mass-produced beer marketed internationally as craft beer. Similarly, the
Company may face competition from brewers or other investors who wish to
establish American-style micro-breweries in Hong Kong or in other areas in which
the Company plans to locate breweries.
Ireland. The Company has identified one established micro-brewery in
the city of Kildare. The Company has also identified one micro-brewery under
construction in Dublin. The Company believes that the established distribution
network provided by the Company's local partner, Mr. Aidan McGuinness, will
enable it to compete effectively in the Irish market for micro-brewed beers.
Tecate. The Company is not aware of any other micro-breweries in the
area of the Tecate expansion brewery site. The Company does not believe that the
products produced by the Cerveceria Rio Bravo will be in direct competition with
mass-produced Mexican beers.
SUPPLIERS
The South China Brewery purchases all of its pale and specialty
malted barley from a single British supplier and its premium-quality select hops
from a single United States supplier. The South China Brewery maintains its own
yeast supply. The South China Brewery purchases its case boxes, bottles and
crowns each from a single supplier and maintains multiple competitive sources
for its supply of labels. While the South China Brewery believes that multiple
sources of supply are available for all of its ingredients and raw materials,
there can be no assurance that political, economic or other factors will not
limit or restrict the availability of supplies. The Company expects that future
breweries will adopt similar practices for obtaining supplies.
As with most agricultural products, the supply and price of raw
materials used to produce the Company's beers can be affected by a number of
factors beyond the control of the Company, such as frosts, droughts, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. If any of the foregoing were to occur, no assurance can be
given that such condition would not have an adverse effect on the Company's
business, financial condition and results of operation.
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GOVERNMENT REGULATION
Hong Kong Regulations. The South China Brewery was granted a brewery
license pursuant to the Dutiable Commodities Ordinance and the Dutiable
Commodities Regulations (Chapter 109 of the Laws of Hong Kong) which will expire
on June 6, 1997. The renewal application is a simple formality and does not have
to be submitted until 30 days before the current license expires. The renewal
application will be submitted in a timely manner. The license is annually
renewable, and there is no reason to expect that the license will not be
renewed.
The South China Brewery is required to comply with the terms and
conditions of a license for the environmental discharge originating from the
South China Brewery in the Western Buffer Water Control Zone of Hong Kong which
has been obtained pursuant to Section 20 of the Water Pollution Control
Ordinance (Chapter 358 of the Laws of Hong Kong) which will expire on February
28, 1997. The renewal application is a simple formality and does not have to be
submitted until 30 days before the current license expires. The renewal
application will be submitted in a timely manner. The license is annually
renewable and there is no reason to expect that the license will not be renewed.
The South China Brewery's premises are connected, directly or
indirectly, to a communal drain or a communal sewer which is vested in and
maintained by the Hong Kong government, and produces trade effluent that is
discharged into a communal drain or communal sewer. Accordingly the South China
Brewery, in addition to a sewer charge, pays to the Hong Kong government a trade
effluent surcharge under the Sewage Services Ordinance (Chapter 463 of the laws
of Hong Kong).
Other Regulations. The Company will conduct a preliminary feasibility
study for each of the proposed expansion brewery locations including analyses of
brewery licensing requirements and other local operating costs. In addition, the
Company will seek the assistance and expertise of local joint venture partners
in complying with local regulatory requirements. The Company intends to apply
for any licenses required at the Tecate and Dublin sites, but no such licenses
have yet been issued.
INSURANCE
The South China Brewery maintains a public liability insurance policy
(coverage limit approximately $1.3 million) to protect against damage to third
party property. In addition, the South China Brewery maintains a total of
$800,000 in commercial all risks coverage and approximately $390,000 of business
interruption coverage. The South China Brewery also maintains employee
compensation insurance as required by local law. The Company plans to purchase
comparable insurance, and any additional insurance necessitated by local
conditions or regulations, for each of the proposed breweries.
INTELLECTUAL PROPERTY
The Company regards the trademarks it adopts and uses in connection
with the sale of its products as having substantial value and as being an
important factor in the marketing of its products. The Company's policy is to
pursue registration of the trademarks it adopts and uses in connection with the
sale of its products whenever possible, and to oppose vigorously any
infringement of its marks. The Company has applied to register the marks CROOKED
ISLAND ALE and DRAGON'S BACK INDIA PALE ALE in Hong Kong, China and Taiwan. The
mark STONECUTTER'S LAGER has not been registered, but plans are underway to
submit the registration application during the first quarter of 1997 for Hong
Kong, China and Taiwan. The CROOKED ISLAND ALE application was accepted for
registration in Taiwan, and is pending in Hong Kong. The application was
rejected in China because of its similarity to a prior registered mark; the
Company has appealed this rejection which is still pending. The Company has not
yet received a
-10-
<PAGE>
<PAGE>
status report on the DRAGON'S BACK INDIA PALE ALE applications. The Company is
not aware of any infringing uses of its trademarks by third parties that could
materially affect its current business.
AmBrew International has applied to register the trademark for
CROOKED ISLAND ALE and plans to file an application to register the trademark
for STONECUTTER'S LAGER with the United States Patent and Trademark Office.
While it has not obtained patents on its recipes, AmBrew
International believes that it is not standard practice in the industry to
obtain such patents.
EMPLOYEES
As of January 28, 1996, the Company and its subsidiaries have twelve
full-time employees. The Company's future success will depend, in part, on its
ability to continue to attract, retain and motivate highly qualified marketing
and managerial personnel. Each of James L. Ake, Executive Vice President and
Chief Operating Officer of the Company, Steve Armstrong, Executive Vice
President and General Manager of AmBrew USA and Ted Miller, Head Brewer at the
South China Brewery have employment agreements. Dean McGuinness, General Manager
of Celtic Brew does not currently have an employment contract. None of the
Company's employees are represented by a collective bargaining agreement, nor
has the South China Brewery experienced work stoppages. The South China Brewery
believes that relations with its employees are satisfactory.
LEASES
The South China Brewery leases brewing and storage space in the Vita
Tower at 29 Wong Chuk Hang, Aberdeen, Hong Kong at a current monthly rent of
$8,200. The leases expire in September, 1997, and April, 1998, respectively. The
South China Brewery has the option to extend each of the leases six years beyond
their original term at a rent to be agreed upon by the parties.
The Dublin area expansion brewery lease is undergoing final
negotiations.
The Tecate expansion brewery leases brewing and storage space of
21,443 square feet from Corporacion Calfik at a current monthly rent of $6,625.
The lease term is five years with yearly incremental rent increases ending on
September 12, 2001.
ITEM 2. PROPERTIES
The Company has a 20-barrel brewing system with additional ancillary
systems needed to package the product located at the brewery in Hong Kong. The
Company has also made a non-refundable $200,000 down payment on twenty
additional brewing systems, and has made $340,081 additional down payments on
two systems in production for the Dublin and Tecate expansion breweries. There
are no known encumbrances on any of the Company's property.
ITEM 3. LEGAL PROCEEDINGS
The South China Brewery is not involved in any material pending legal
proceedings and is not aware of any material legal proceedings threatened
against it.
-11-
<PAGE>
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
(a) At the first annual general meeting of the Company on
June 5, 1996, the following resolutions were adopted by the affirmative vote of
1,200,000 shares, par value $0.01 per share, of the Company, such shares
constituting all of the issued and outstanding shares of capital stock of the
Company on such date:
(i) that the Bye-Laws, in the form incorporated herein by
reference as Exhibit 3.2, was approved;
(ii) that the number of directors of the Company be not
less than two nor more than ten;
(iii) that the following directors be elected until the
second annual general meeting of the Company or until
their respective successors are elected or appointed:
Pierre William Harriston Bordeaux
Federico G. Cabo Alvarez
David K. Haines
Norman H. Brown, Jr.
John F. Beaudette
Wyndam H. Carver
Joseph Heid
John D. Campbell
Tonesan Amissah-Furbert;
(iv) that the Board of Directors be authorized to fill any
vacancy on the Board as and when it deems fit;
(v) that Arthur Andersen & Co. be appointed auditors of the
Company to hold office until the close of the second annual
general meeting;
(vi) that the 1,200,000 shares, par value $0.01 per share,
originally issued at the provisional directors' meeting
held on June 5, 1996 be classified as shares of common
stock; and
(vii) that the authorized share capital of the Company be
increased from $12,000 to $105,000 by the creation
of 8,800,000 shares of Common Stock, and 500,000 shares
of preferred stock, par value $0.01 per share.
(b) On July 18, 1996, the sole stockholder of the Company,
Mr. Bordeaux, executed a written consent approving the Company's 1996 Stock
Option Plan in the form incorporated herein by reference as Exhibit 10.1.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company effected the Offering of Common Stock (the "Common
Stock") and Redeemable Common Stock Purchase Warrants (the "Warrants") on
September 11, 1996, at prices to the public of $5.50 and $0.10, respectively.
Since that date, the Company's Common Stock and Warrants have traded on the
Boston Stock Exchange (the "BSE") and the Nasdaq SmallCap Market ("SmallCap").
The Common Stock and Warrants trade under the symbols "BRW" and "BRWW",
respectively, on the BSE and under the symbols "ABREF" and "ABRWF", respectively
on SmallCap. The table below sets forth
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<PAGE>
<PAGE>
the high and low sales prices for the of the Company's Common Stock as reported
on SmallCap for that portion of the fourth quarter in which the Company's stock
was publicly traded:
Fiscal Year Ended October 31, 1996 High Low
---- ---
$5.50 $3.375
As of January 23,1997, there were 46 record holders of the Common
Stock.
Holders of common stock are entitled to receive such dividends as the
Board of Directors may, from time to time, declare out of funds legally
available for payment of dividends. To date, the Company has neither declared
nor paid any dividends on the Company's common stock. The Company currently
intends to retain its earnings to support operations and expansion of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the fiscal years ended October 31,
1996 and 1995, have been derived from the consolidated financial statements
included elsewhere in this filing which have been audited by Arthur Andersen
LLP, independent public accountants, whose report thereon is also included
elsewhere in this filing. The selected financial data set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this filing.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1996 1995
---- ----
<S> <C> <C>
Net sales $ 427,750 $ 63,707
Cost of sales (104,473) (38,960)
---------- ----------
Gross profit 323,277 24,747
Selling, general and administrative
expenses (685,541) (292,888)
Interest expense, net (303,408) (17,838)
Other expenses, net (283) (2,265)
---------- ----------
Loss before income taxes (665,955) (288,244)
Income tax benefit 36,405 47,560
---------- ----------
Net loss $ (629,550) $ (240,684)
========== ==========
Net loss per common share $ (0.28) $ (0.12)
Weighted average number of shares
outstanding(1) 2,232,448 2,071,422
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
----------------
BALANCE SHEET DATA:
<S> <C>
Total current assets $6,016,226
Total assets $7,001,306
Total current liabilities $ 254,872
Total long-term liabilities $ 17,364
Total liabilities $ 272,236
Total shareholders' equity $6,729,070
</TABLE>
- --------
(1) The weighted average common shares outstanding during the periods were
computed on the basis that the Share Exchange, the Share Split and the
Merger (defined below in Item 8) had been consummated prior to the years
presented. Average common equivalent shares for common stock warrants have
not been included, as the computation would not be dilutive. For the year
ended October 31, 1995, the effect, using the treasury stock method, of
shares issued to the holders of the Bridge Notes were included in the
computation assuming such issuance had been made prior to the period
presented.
-13-
<PAGE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Unless otherwise indicated, the following discussion addresses the
Company's consolidated financial condition and results of operations, including
the Hong Kong brewing and distribution subsidiaries, South China Brewing Company
Limited ("South China") and SCBC Distribution Company Limited ("SCBC"),
respectively. On May 31, 1996, the stockholders of South China and SCBC
exchanged substantially all of the issued and outstanding shares of South China
and SCBC for 23,750 shares of capital stock of Craft Brewing Holdings Limited, a
British Virgin Islands Company ("Craft"), in a transaction accounted for as a
reorganization of companies under common control in a manner similar to a
pooling of interests. On July 30, 1996, Craft amalgamated into AmBrew
International in a transaction accounted for as a pooling of interests. The
officers and directors of AmBrew International remained in office after the
amalgamation. South China and SCBC are collectively referred to as the South
China Brewery. This discussion should be read in conjunction with the
Consolidated Financial Statements. In addition, the period-to-period
presentation set forth under "--Results of Operations" will not necessarily be
indicative of future results and future net losses can be expected as increased
expenses are incurred in connection with the establishment of expansion
breweries that the Company proposes to establish and operate, either through
wholly-owned subsidiaries or through majority-owned or otherwise
Company-controlled joint venture arrangements with strategic local partners.
With the exception of historical information, the matters discussed
herein are "forward looking statements" within the meaning of the Private
Litigation Reform Act of 1995. Such forward looking statements are subject to
risks, uncertainties and other factors which could differ materially from future
results implied by such forward looking statements. Potential risks and
uncertainties include, but are not limited to, the Company's ability to
establish and operate additional breweries on a timely basis, increased
acceptance by consumers of the Company's brands and development by the Company
of new brands of beer and the Company's ability to finance any additional
capital expenditures once the proceeds of the Offering have been committed.
RESULTS OF OPERATIONS
The Company completed its first full year of operations on October
31, 1996. The Company commenced operations in June of 1995. The following table
sets forth certain line items from the Company's consolidated statements of
operations expressed as a percentage of net sales for the fiscal years ended
October 31, 1996 and 1995. Because of the limited duration and scope of
activities during fiscal 1995, the information reveals substantial change.
<TABLE>
<CAPTION>
Twelve Months Ended
October 31, 1996 October 31, 1995
---------------- ----------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 24.4% 61.2%
Gross profit 75.6% 38.8%
Selling, general & administrative expenses 160.3% 459.7%
Operating loss 84.7% 420.9%
Interest expense, net 70.9% 28%
Net loss 147.2% 377.8%
</TABLE>
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<PAGE>
<PAGE>
Net Sales. For the years ended October 31, 1996 and 1995 net sales
were $427,750 and $63,707, respectively. The growth in net sales was due in part
to increased awareness of and acceptance by consumers of the South China
Brewery's products, but largely reflects the limited duration and scope of the
Company's operations in fiscal 1995. The South China Brewery introduced a new
proprietary brand, Stonecutter's Lager, in the third quarter of 1996, and
continued to market its existing proprietary brands and custom brewed products.
Sales of the South China Brewery's proprietary brands accounted for 32.5% of the
Company's net sales and 67.5% of net sales were attributable to sales of custom
brewed products. In September, 1995, the South China Brewery entered into
contracts for the brewing and supply of custom brewed ales for consumption in
two Hong Kong pubs. Both of the custom brewing agreements have been renewed and
extend into 1997. The South China Brewery had net sales of $72,043 for the three
months ended October 31, 1996. Despite the overall increase in net sales for the
fiscal year, net sales decreased in the fourth quarter because Iconic America
decreased its monthly purchases in the fourth quarter. Iconic America has not
resumed its prior level of purchases. Sales to Iconic America account for 42.9%
of annual net sales. For the first quarter of 1997, the Company expects that the
South China Brewery will continue to experience an operating loss. The Company
is actively seeking additional customers and other opportunities to increase
revenues from the South China Brewery.
Cost of Sales. The South China Brewery's cost of sales for the years
ended October 31, 1996 and 1995 was $104,473, or 24.4% of sales, and $38,960, or
61.2% of sales, respectively. The decline in the cost of sales percentage is
largely due to the efficiencies resulting from sales of kegged products and more
efficient use of brewing equipment. Sales of kegged products represented 87.5%
of sales for the year ended October 31, 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the years ended October 31, 1996 and 1995 were
$685,541 and $292,888, respectively. Of the selling, general and administrative
expenses for the year ended October 31, 1996, $498,815 is attributed to the
South China Brewery. The balance of $186,726 is attributable to AmBrew
International's corporate office expenses. Because the South China Brewery
functioned at only 35% of capacity and since personnel at the brewery handle all
of the brewery's general and administrative functions, the level of expense is
high relative to sales. The Company's selling, general and administrative
expenses, including salary, marketing, and other operational expenses, will
increase as the proposed expansion breweries are established.
Net Interest Expense. Net interest expense for the years ended
October 31, 1996 and 1995 was $303,408 and $17,838, respectively. Interest
expense for fiscal 1996 included a non-cash charge of $265,000 representing the
original issue discount related to the repayment of the Bridge Notes. The
remainder of the increase in interest expense resulted from bank loans payable
and a note payable to BPW Holding LLC, a shareholder of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Effective September 11, 1996, the Company completed an initial public
offering of 1,580,000 shares of common stock at $5.50 per share and 1,580,000
warrants at $0.10 per warrant generating net proceeds of $6,506,880.
Additionally, the exercise of the Underwriter's over-allotment option to
purchase 236,000 warrants generated net proceeds of $20,532. Prior to the
Offering, the Company funded its operations and capital requirements through a
combination of private sales of equity, borrowings from a shareholder and from
an institutional lender supported by a guarantee and letters of credit from
shareholders and cash flow from operations. Net cash used in operating
activities for the years ended October 31, 1996 and 1995 was $511,708 and
$297,869, respectively.
-15-
<PAGE>
<PAGE>
The Company's material commitments for future capital expenditures
relate primarily to the financing of the proposed expansion breweries. The
Company has placed an order for twenty micro-brewery systems with Micro Brew
Systems and made a $200,000 non-refundable deposit on the equipment. The Company
has paid an additional down payment of $340,081 on two systems in production for
the Dublin and Tecate expansion breweries. The Company used proceeds from the
Offering to pay the deposit and the additional down payments. The Company is
required to pay the remaining balance for each micro-brewery system to Micro
Brew Systems under the terms of the contract as the equipment is completed and
ready for shipment.
At October 31, 1996, the South China Brewery had capital lease
obligations of $17,179, $17,179, and $6,025, respectively, for each of the three
years ending October 31, 1999 relating to its delivery vehicles. At October 31,
1996, the South China Brewery had $88,903 in operating lease commitments over
the two year period ending October 31, 1998 relating to its warehouse and
brewery facility. In addition, the Company has an additional operating lease
commitment over the five-year period ending September 11, 2001 of $417,323
relating to its warehouse and brewery facility in Tecate. On November 20, 1996
the Company signed a lease for its Corporate office with a term of three years.
Monthly lease payments are $1,957, with rent dates commencing on November 15,
1996. The Company has committed to make an initial capital contribution of
$600,000 to Celtic Brew LLC, the Company's joint venture for the Dublin
expansion brewery. In addition to the capital requirements to establish the
expansion breweries, the Company has an annual fixed salary expense of $172,000
related to various employment agreements with its employees.
Approximately $4,000,000 of the net proceeds from the Offering were
invested by the Company in tax exempt interest-bearing accounts and
approximately $1,758,447 were invested in taxable interest-bearing accounts,
pending investment in the Company's operations. At January 28, 1997,
approximately $4,000,000 remains invested in such accounts and the balance has
been invested in operations. The Company expects to be able to finance, using
its own funds, funds provided by joint venture partners and third party
financing, if available, up to six expansion breweries in 1997, including the
Tecate and Dublin breweries. The Company expects that it will require additional
external financing in 1998 to establish additional expansion breweries and to
meet working capital requirements. The Company may seek such additional
financing in the form of additional equity financing or borrowed funds. The
Company has not yet begun to investigate the potential availability of such
additional financing whether in the form of debt or equity.
In May 1996, Craft issued $370,000 principal amount of Bridge Notes
bearing an interest rate of 12% to certain investors in Singapore and Hong Kong.
Pursuant to the terms of the Bridge Notes, these investors received 116,876
shares of common stock and bridge warrants entitling such investors to purchase,
in the aggregate, up to 116,876 shares of common stock commencing six months
from the date thereof at 150% of the initial public offering price per Share. In
connection with the Offering, and pursuant to the terms of Bridge Notes held by
Long-Term Partners, Long-Term Partners was paid the sum of $125,193 representing
principal and interest.
On March 31, 1995, the South China Brewery borrowed $565,000 from
Hibernia National Bank. The Hibernia Loan was evidenced by a promissory note
with principal payments due on September 30, 1996 and March 31, 1997 bearing a
Citibank prime plus 0.5% interest rate. Prior to the Offering, the amount due on
the Hibernia Loan had been reduced to $452,000 through principal repayments by
the Company. The South China Brewery borrowed $65,000 from a shareholder
evidenced by a limited recourse promissory note dated March 5, 1996 due ten days
after the date of the Offering bearing an interest rate of 5.5%. The Company
used $452,000 and $8,569 of the net proceeds from the Offering to repay the
principal and interest due, respectively, on the
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<PAGE>
<PAGE>
Hibernia Loan. The Company also used $65,000 and $4,091, respectively, from the
net proceeds of the Offering to repay the principal and accrued interest on the
shareholder loan.
The Company believes that its working capital will provide it with
sufficient capital resources and liquidity to meet its foreseeable needs.
ITEM 8. FINANCIAL STATEMENTS
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................................................................. 18
Consolidated Balance Sheets, as of October 31, 1996 and 1995.............................................................. 19
Consolidated Statements of Operations for the Years Ended October 31, 1996, 1995 and 1994................................. 20
Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 1996,
1995 and 1994............................................................................................................. 21
Consolidated Statements of Cash Flows for the Years Ended October 31, 1996, 1995 and 1994................................. 22
Notes to Consolidated Financial Statements................................................................................ 23
</TABLE>
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<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of American Craft Brewing
International Limited:
We have audited the accompanying consolidated balance sheets of
American Craft Brewing International Limited (a Bermuda corporation) and
subsidiaries as of October 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended October 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
American Craft Brewing International Limited and subsidiaries as of October 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
January 24, 1997
Houston, Texas
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<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF OCTOBER 31, 1996 AND 1995
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,780,672 $ 102,248
Accounts receivable, net of allowance for doubtful accounts of
$1,500 and $556 73,581 21,680
Inventories 35,508 22,922
Prepaids and other current assets 126,465 391
----------- -----------
Total current assets 6,016,226 147,241
Equipment and capital leases, net 663,830 634,767
Rental, utility and other deposits 235,749 35,174
Deferred tax assets 85,501 49,096
----------- -----------
Total assets $ 7,001,306 $ 866,278
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Long-term bank loan, current portion $ -- $ 113,000
Capital lease obligations, current portion 12,858 13,284
Accounts payable and accrued liabilities 242,014 39,294
Shareholders' loans -- 85,638
----------- -----------
Total current liabilities 254,872 251,216
Long-term bank loan, net of current portion -- 395,500
Capital lease obligations, net of current portion 17,364 30,221
----------- -----------
Total liabilities 272,236 676,937
Commitments and Contingencies
Shareholders' equity:
Preferred stock, $0.01 par, 500,000 shares authorized,
none issued -- --
Common stock, $0.01 and $0.13 par, 10,000,000 and 11,000
shares authorized, 3,696,876 and 5,000 shares issued and
outstanding, respectively 36,969 645
Common stock warrants, 2,090,876 outstanding 181,906 --
Additional paid-in capital 7,388,205 --
Subscription monies received in advance -- 437,156
Accumulated deficit (878,010) (248,460)
----------- -----------
Total shareholders' equity 6,729,070 189,341
----------- -----------
Total liabilities and shareholders' equity $ 7,001,306 $ 866,278
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 427,750 $ 63,707 $ ----
Cost of sales (104,473) (38,960) ----
--------- ------- ----------
Gross profit 323,277 24,747 ----
Selling, general and administrative expenses (685,541) (292,888) (9,312)
Interest expense, net (303,408) (17,838) ----
Other expenses, net (283) (2,265) ----
---------- ---------- ----------
Loss before income taxes (665,955) (288,244) (9,312)
Income tax benefit 36,405 47,560 1,536
---------- ---------- ----------
Net loss $ (629,550) $ (240,684) $ (7,776)
========== ========== ===========
Net loss per common share $ (0.28) $ (0.12) $ ----
========== ========== ===========
Weighted average number of shares outstanding 2,232,448 2,071,422 2,071,422
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
Common
Common stock Additional Subscription monies Accumulated
stock warrants paid-in capital received in advance deficit
------------ ------------ --------------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance as of August 31, 1993 $ -- $ -- $ -- $ -- $ --
Issuance of common stock 1 -- -- -- --
Subscription monies received in advance -- -- -- 224,119 --
Net loss -- -- -- -- (7,776)
----------- ----------- ----------- ----------- -----------
Balance as of October 31, 1994 1 -- -- 224,119 (7,776)
Issuance of common stock 644 -- -- -- --
Subscription monies received in advance -- -- -- 213,037 --
Net loss -- -- -- -- (240,684)
----------- ----------- ----------- ----------- -----------
Balance as of October 31, 1995 645 -- -- 437,156 (248,460)
Subscription monies received in advance -- -- -- 117,659 --
Issuance of common stock and capitalization of
subscription monies received 13 -- 554,802 (554,815) --
Effect of the Share Exchange and the Share
Split (See Note 1) 19,342 -- (19,342) -- --
Issuance of common stock, net of initial public
offering expenses 15,800 -- 6,339,874 -- --
Issuance of common stock warrants -- 171,738 -- -- --
Issuance of common stock and common stock
warrants to holders of Bridge Notes
(See Note 8) 1,169 10,168 512,871 -- --
Net loss -- -- -- -- (629,550)
----------- ----------- ----------- ----------- -----------
Balance as of October 31, 1996 $ 36,969 $ 181,906 $ 7,388,205 $ -- $ (878,010)
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 1996, 1995 AND 1994
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (629,550) $ (240,684) $ (7,776)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 68,455 21,997 --
Deferred income tax benefit (36,405) (47,560) (1,536)
Non-cash interest expense 274,208 -- --
Increase in operating assets:
Accounts receivable, net (51,901) (21,680) --
Inventories (12,586) (22,922) --
Prepaids and other current assets (126,074) (391) --
Rental, utility and other deposits (200,575) (25,741) (9,433)
Increase in operating liabilities:
Accounts payable and accrued liabilities 202,720 39,112 182
----------- ----------- -----------
Net cash used in operating activities (511,708) (297,869) (18,563)
Cash flows from investing activities:
Purchases of equipment (97,518) (595,037) (10,295)
Cash flows from financing activities:
Proceeds from bank loan -- 565,000 --
Repayment of bank loan (508,500) (56,500) --
Repayment of capital lease obligations (13,283) (7,927) --
Proceeds from bridge notes 370,000 -- --
Repayment of bridge notes (120,000) -- --
Proceeds from shareholders' loans 18,000 83,148 2,490
Repayment of shareholders' loans (103,638) -- --
Subscription monies received in advance 117,659 213,037 224,119
Proceeds from issuance of common stock and common stock
warrants 7,610,817 644 1
Stock issuance costs paid (1,083,405) -- --
----------- ----------- -----------
Net cash provided by financing activities 6,287,650 797,402 226,610
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 5,678,424 (95,504) 197,752
Cash and cash equivalents at beginning of period 102,248 197,752 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 5,780,672 $ 102,248 $ 197,752
=========== =========== ===========
Supplemental disclosures to statements of cash flows:
Cash interest paid $ 50,335 $ 29,166 $ --
Conversion of bridge notes to common stock and bridge
warrants $ 250,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
-22-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
ORGANIZATION
American Craft Brewing International Limited, a Bermuda company
("AmBrew International" or the "Company"), was incorporated on June 5, 1996. On
July 30, 1996, American Craft Brewing International Limited, a British Virgin
Islands company formerly known as Craft Brewing Holdings Limited ("Craft"),
amalgamated into AmBrew International (the "Merger"). AmBrew International is
the surviving company and its officers and directors remained in office after
the amalgamation. On May 31, 1996, Craft acquired its entire interests in South
China Brewing Company Limited ("South China"), a company incorporated in Hong
Kong and formerly known as Forever Smooth Investments Limited, and SCBC
Distribution Company Limited, a company incorporated in Hong Kong and formerly
known as Arizona Limited ("SCBC," and collectively with South China, the "South
China Brewery"), through the exchange (the "Share Exchange") of substantially
all of the issued and outstanding shares of capital stock of South China and
SCBC by the stockholders thereof for 23,750 shares of capital stock of Craft.
This Share Exchange had the effect of consolidating ownership of the South China
Brewery's operating companies into Craft. The Merger had the effect of
transferring all of the assets (including the capital stock of South China and
SCBC) and liabilities of Craft to AmBrew International, a company without
material assets or liabilities prior to the Merger. Concurrent with the Share
Exchange, Craft issued 1,250 shares of capital stock to certain investors in
Hong Kong. Effective as of June 19, 1996, Craft consummated an eighty-for-one
share split (the "Share Split") (as a result 2,000,000 shares were outstanding),
which has been reflected retroactively in the accompanying consolidated
statements of operations. Effective September 11, 1996, the Company completed an
initial public offering of 1,580,000 shares of its common stock and 1,580,000
redeemable common stock purchase warrants at initial public offering prices of
$5.50 and $0.10, respectively.
Unless otherwise required by the context, the terms "AmBrew
International" and the "Company" include American Craft Brewing International
Limited and its subsidiaries. Details of these companies are:
<TABLE>
<CAPTION>
Country and Date
Name of Incorporation Principal Activities
---- ---------------- ---------------------
<S> <C> <C>
American Craft Brewing International Bermuda
Limited June 5, 1996 Holding company
South China Brewing Company Limited Hong Kong
May 26, 1994 Production of beer
SCBC Distribution Company Limited Hong Kong
August 31, 1993 Distribution of beer
</TABLE>
-23-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
PRINCIPAL ACTIVITIES
AmBrew International is a holding company, which owns all the capital
stock of the South China Brewery's operating companies: South China and SCBC.
The South China Brewery operates a micro-brewery in Hong Kong for the production
of beer and ale and distributes these products to customers in Hong Kong. The
South China Brewery started to build its production facilities in October 1994
and commenced commercial operations in June 1995. The Company intends to
establish a series of American-style micro-breweries in selected locations in
the Pacific Rim, Europe and Mexico. The first two of these expansion breweries
are in process and will be located in the Dublin, Ireland area and Tecate,
Mexico.
2. BASIS OF PRESENTATION
The Merger was accounted for as a reorganization of companies under
common control on a historical cost basis in a manner similar to a pooling of
interests because AmBrew International had the same shareholdings immediately
after the Merger that Craft had immediately before the Merger. The Share
Exchange was also accounted for as reorganizations of companies under common
control in a manner similar to a pooling of interests because Craft had the same
shareholdings immediately after the Share Exchange that South China and SCBC had
immediately before the Share Exchange.
The consolidated balance sheet as of October 31, 1995, and the
consolidated statements of operations for the years ended October 31, 1995 and
1994 incorporate the financial statements of the South China Brewery. The
consolidated financial statements as of and for the year ended October 31, 1996
incorporate the financial statements of American Craft Brewing International
Limited and the South China Brewery. All material intercompany balances and
transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. INVENTORIES
Inventories are stated at the lower of cost, on a first-in first-out
basis, or market. Costs of work-in-process and finished goods include direct
materials, direct labor and production overhead.
B. EQUIPMENT AND CAPITAL LEASES
Equipment and capital leases are recorded at cost. Depreciation for
financial reporting purposes is provided utilizing the straight-line method over
the estimated useful lives of the assets as follows: brewing equipment-20 years;
furniture and equipment-4 years; and motor vehicles (capital leases)-4 years.
Leasehold improvements are amortized utilizing the straight-line method over the
terms of the leases or the estimated useful lives of the improvements, whichever
is shorter. All ordinary repair and maintenance costs are expensed as incurred.
-24-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
C. SALES
Sales represent the invoiced value of goods supplied to customers.
Sales are recognized upon delivery of goods and passage of title to customers.
D. INCOME TAXES
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 109, which requires
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Deferred income taxes are provided using the liability method.
Under the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial statement bases
of assets and liabilities.
E. OPERATING LEASES
Operating leases represent those leases under which substantially all
the risks and rewards of ownership of the leased assets remain with the lessors.
Rental payments under operating leases are charged to expense on the
straight-line basis over the period of the relevant leases.
F. FOREIGN CURRENCY TRANSLATION
The translation of financial statements of foreign subsidiaries into
United States dollars is performed for balance sheet accounts using the closing
exchange rate in effect at the balance sheet date and for revenue and expense
accounts using an average exchange rate during each reporting period. Gains and
losses resulting from translation, if any, will be included in shareholders'
equity separately as cumulative translation adjustments. For the years ended
October 31, 1996, 1995 and 1994, aggregate losses from foreign currency
transactions included in the results of operations were not material.
G. NET LOSS PER COMMON SHARE
Net loss per common share is computed by dividing the net loss by the
weighted average common shares outstanding during the periods, on the basis that
the Share Exchange, the Share Split and the Merger (See Note 1) had been
consummated prior to the years presented. Average common equivalent shares for
common stock warrants have not been included, as the computation would not be
dilutive. For the years ended October 31, 1995 and 1994, the effect, using the
treasury stock method, of the issuance of shares to the holders of the Bridge
Notes (See Note 8) were included in the computation assuming such issuance had
been made prior to the periods presented.
H. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
-25-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
I. CASH AND CASH EQUIVALENTS
For purposes of the consolidated balance sheets and the consolidated
statements of cash flows, the Company considers all investments with original
maturities of three months or less to be cash equivalents.
J. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, cash
equivalents, trade receivables and trade payables. The book values of these
instruments are considered to be representative of their respective fair values.
K. RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of", was issued in March 1995. The Company
will adopt SFAS No. 121 in the first quarter of fiscal 1997 and based on current
circumstances, does not believe that such adoption will have a material effect
on its financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation", was issued
in October 1995. As permitted by SFAS No. 123, the Company will elect to
continue accounting for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, and accordingly, will recognize no compensation
expense for stock options granted, as the stock option plan requires that the
exercise price be equal to or greater than fair value at the date of grant. The
pro forma disclosures required by SFAS No. 123 will be made in the footnotes to
the fiscal 1997 consolidated financial statements.
4. INVENTORIES
Inventories are composed of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 31,451 $16,682
Work-in-process and finished goods 4,057 6,240
--------- ---------
$ 35,508 $22,922
======== =======
</TABLE>
-26-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
5. EQUIPMENT AND CAPITAL LEASES
Equipment and capital leases are composed of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Equipment:
Leasehold improvements $ 54,316 $ 52,123
Brewing equipment 563,577 522,869
Furniture and equipment 79,834 25,216
Capital leases:
Motor vehicles 56,556 56,556
--------- ---------
754,283 656,764
Less: Accumulated depreciation
Equipment (71,602) (17,284)
Capital leases (18,851) (4,713)
--------- ---------
$ 663,830 $ 634,767
========= =========
</TABLE>
6. LONG-TERM BANK LOAN
The long-term bank loan was evidenced by a promissory note, bearing a
variable interest rate equal to the U.S. Citibank prime rate plus 0.5%, which
was 9.25% per annum as of October 31, 1995. The bank loan was secured by a
letter of credit of $315,000 provided by two directors of the Company who are
also shareholders of the Company and a guarantee of $250,000 given by a
shareholder of the Company. The debt was extinguished with the proceeds from the
initial public offering.
7. SHAREHOLDERS' LOANS
During the year ended October 31, 1995, South China borrowed $65,000
from BPW Holding Limited, a shareholder of the Company. The loan was evidenced
by a limited recourse promissory note dated March 5, 1996, bearing interest at a
rate of 5.5% per annum and was due ten days after the consummation of the
initial public offering of the Company's common stock. For the years ended
October 31, 1996, 1995 and 1994, interest expense paid to the shareholder was
$4,091, $813, and $0, respectively. The loan was repaid with proceeds from the
initial public offering.
The remaining balance of the shareholders' loans as of October 31,
1995 was unsecured, non-interest bearing and without repayment terms. These
shareholders' loans were paid in full during fiscal 1996.
8. BRIDGE NOTES
In May 1996, the Company issued $370,000 principal amount of bridge
notes bearing interest at a rate of 12% per annum which increased to 14% per
annum at September 1, 1996. Holders of $250,000 principal amount of these notes
converted such notes and interest payable thereon, upon consummation of the
initial public offering, into 94,255 shares of the Company's common stock. The
holder of the remaining $120,000 principal amount of such notes was repaid in
cash and received at no additional cost 22,621 shares of the Company's common
stock, upon consummation of the initial public offering. The note holders also
each received a warrant entitling such holder to purchase for a period of
eighteen months, that number of shares of common stock of the
-27-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
Company as such holder received upon consummation of the initial public
offering, at a price of $8.25 per share (the "Bridge Warrants"). Included in the
consolidated statement of operations for the year ended October 31, 1996, is a
non-cash interest charge of $265,000 representing the original issue discount
related to the repayment of these notes.
9. SHAREHOLDERS' EQUITY
As of October 31, 1995, the amount of common stock recorded in the
consolidated balance sheet represents the aggregate amount of the common stock
of the subsidiaries of the Company at that date. As of October 31, 1996, the
amount of common stock recorded in the consolidated balance sheet represents the
common stock of the Company after the Share Exchange, the Share Split and the
initial public offering.
The Board of Directors is authorized, without further shareholder
approval, to issue up to 500,000 shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restrictions granted or
imposed upon unissued shares of preferred stock and to fix the number of shares
constituting any series and designations of such series.
The Company has issued warrants under several separate agreements
which expire between 1998 and 2001. As of October 31, 1996, a total of 2,090,876
shares of common stock has been reserved for issuance upon the exercise of
common stock warrants. Other than the Representative's Warrants and the Bridge
Warrants (See Note 8), each warrant allows the holder to purchase one share of
common stock, subject to adjustment upon the occurrence of certain events. The
Representative's Warrants also allow for the purchase of common stock warrants.
Each Bridge Warrant entitles the holder to purchase that number of shares of
common stock as such holder received upon consummation of the initial public
offering. The warrants are recorded at their estimated fair values at the date
of issuance and were issued in connection with the Company's initial public
offering. Beginning in 1998, certain warrants are redeemable under specified
conditions and at the Company's discretion.
The number of warrants outstanding, warrant holders, exercise prices
and redemption prices are as follows:
<TABLE>
<CAPTION>
Number of Shares Issuable
Under Warrants Company
Outstanding at Exercise Price Redemption
October 31, 1996 Warrant Holders Per Share Price Per Warrant
---------------- --------------- --------- -----------------
<S> <C> <C> <C>
1,580,000 Publicly held $6.875 $0.10
236,000 Publicly held $6.875 $0.10
158,000 Underwriter's Representative $7.700 Not Redeemable
116,876 Bridge Note holders $8.250 Not Redeemable
---------
2,090,876
</TABLE>
-28-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
The exercise price for common stock warrants under the
Representative's Warrants is $0.14 and such warrants entitle the holder to
purchase one share of common stock at an exercise price of $11.34 per share.
10. INCOME TAXES
The Company and its subsidiaries are subject to income taxes on an
entity basis on income arising in or derived from the tax jurisdiction in which
they are domiciled and operate. AmBrew International is exempted from income tax
in Bermuda until 2016. The Hong Kong subsidiaries are subject to Hong Kong
profits tax at a rate of 16.5%.
The significant components of the income tax benefit are:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred - Operating loss carryforwards 36,405 47,560 1,536
------- ------- -------
$36,405 $47,560 $ 1,536
======= ======= =======
</TABLE>
The reconciliation of the United States federal income tax rate to
the effective income tax rate based on the loss before income tax benefit stated
in the consolidated statements of operations is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States federal income tax rate (35.0%) (35.0%) (35.0%)
Aggregate effect of different tax rates in
foreign jurisdictions 6.1% 18.5% 18.5%
Losses for which no benefit is recognized 23.4% -- --
---- ---- ----
Effective income tax rate (5.5%) (16.5%) (16.5%)
===== ===== =====
</TABLE>
The major component of deferred tax assets relates to the tax loss
carryforwards. As of October 31, 1996 and 1995, tax losses of approximately
$220,636 and $298,000, respectively, can be carried forward indefinitely.
11. COMMITMENTS AND CONTINGENCIES
A. CAPITAL COMMITMENTS
As of October 31, 1996 and 1995 the Company had purchase commitments,
net of deposits, for the purchase of equipment and furniture of approximately
$729,881 and $19,000, respectively.
B. LEASE COMMITMENTS
The Company leases various facilities under noncancelable operating
leases which expire at various dates through 2001. Rental expenses for the years
ended October 31, 1996, 1995 and 1994 were approximately $84,695, $67,000 and
$0, respectively. Future minimum rental payments as of October 31, 1996, under
agreements classified as operating leases with noncancelable terms in excess of
one year are as follows:
-29-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
Payable during the following periods:
<TABLE>
<S> <C>
Fiscal 1997 $172,832
Fiscal 1998 116,948
Fiscal 1999 110,315
Fiscal 2000 89,500
Fiscal 2001 87,083
---------
$576,678
</TABLE>
12. LEGAL PROCEEDINGS
The Company is not involved in any material pending legal proceedings
and is not aware of any material legal proceedings threatened against it.
13. OPERATING RISK
A. BUSINESS RISK
The South China Brewery commenced operations in June 1995. Its
operations are subject to all the risks inherent in an emerging business
enterprise. These include, but are not limited to, high expense levels relative
to production, complications and delays frequently encountered in connection
with the development and introduction of new products, the ability to recruit
and retain accomplished management personnel, competition from established
breweries, the need to expand production and distribution and the ability to
establish and sustain product quality.
B. CONCENTRATION OF CREDIT RISK
A substantial portion of the South China Brewery's sales are made to
a small number of customers on an open account basis and generally no collateral
is required. The five largest accounts receivable comprised 73% and 41% of total
accounts receivable as of October 31, 1996 and 1995, respectively. Details of
individual customers accounting for more than 10% of the Company's sales for the
years ended October 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
1996 1995
---- ----
<S> <C> <C>
Iconic America Limited, formerly DaBeers
Distributors Limited 42.9% 27.1%
===== =====
Delaney's (Wanchai) Limited 24.6% 10.5%
===== =====
</TABLE>
-30-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
The Company performs ongoing credit evaluation of each customer's
financial condition. It maintains reserves for potential credit losses and such
losses in the aggregate have not exceeded management's projections.
C. CONCENTRATION OF SUPPLIERS
The South China Brewery relies upon a single supplier (other than for
labels) for each of the raw materials used to make and package its beers.
Although to date the South China Brewery has been able to obtain adequate
supplies of these ingredients and other raw materials in a timely manner from
these sources, if the South China Brewery were unable to obtain adequate
supplies of ingredients or other raw materials, delays or reductions in product
shipments could occur which would have an adverse effect on the South China
Brewery's business, financial condition and results of operations. As with most
agricultural products, the supply and price of raw materials used to produce the
South China Brewery's beers can be affected by factors beyond the control of the
South China Brewery, such as drought, frost, other weather conditions, economic
factors affecting growing decisions, various plant diseases and pests. If any of
the foregoing were to occur, the Company's business, financial condition and
results of operations would be adversely affected.
D. POLITICAL RISK
A substantial portion of the Company's assets are located in Hong
Kong. As a result, the Company's business, financial condition and results of
operations may be influenced by the political situation in Hong Kong and by the
general state of the Hong Kong economy. On July 1, 1997, sovereignty over Hong
Kong will be transferred from the United Kingdom to the People's Republic of
China, and Hong Kong will become a Special Administrative Region of China.
14. STOCK OPTION PLAN
On July 18, 1996 the Company's shareholders adopted the 1996 Stock
Option Plan (the "Plan"). Under the Plan, a committee of the Board of Directors
may grant options to eligible employees (including officers and directors) of
the Company. Under the terms of the Plan, the per share exercise price of
options granted under the Stock Option Plan may not be less than 100% of the
fair market of a share of the Company's common stock on the date of grant.
Options will be exercisable during the period specified by the Stock Option
Committee, except that options will be immediately exercisable in the event of a
change in control of the Company and in the event of certain mergers and
reorganizations of the Company. A total of 300,000 shares of the Company's
common stock have been authorized and reserved for issuance under the Plan. The
Company has granted no stock options under the Plan.
15. SUBSEQUENT EVENTS
Subsequent to October 31, 1996, the following events took place:
a. In November 1996 the Company moved into its new corporate offices
located at One Galleria Blvd., Suite 1714, Metairie, LA 70001.
-31-
<PAGE>
<PAGE>
AMERICAN CRAFT BREWING INTERNATIONAL LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(AMOUNTS EXPRESSED IN UNITED STATES DOLLARS)
b. In December, 1996, the Company purchased 95% of the outstanding
capital stock of Atlantis Import Company Incorporated, now AmBrew USA, for
approximately $100,000. AmBrew USA currently imports several brands of beer into
the United States and the Company expects to use AmBrew USA as a possible
vehicle through which to import and distribute into the United States products
from its expansion breweries. AmBrew USA is scheduled to begin importing beer
from the South China Brewery during the first half of 1997 and will import other
expansion brewery products as they become available.
c. The Company has entered into an agreement with a local partner,
Mr. Aidan McGuinness, and has selected the site for the first Dublin area
expansion brewery which will be located in Enfield, County Meath, approximately
40 miles west of Dublin. The building that will house the Dublin expansion
brewery is owned by the McGuinness family and the lease is undergoing final
negotiations. Work has also been completed on the site layout. A deposit in the
amount of $164,017 was paid to JV Northwest for the micro-brewery system that
will be placed at this sight. The equipment is scheduled to ship in February
1997. The name of this expansion brewery is Celtic Brew LLC.
d. The Company has selected the site for the Tecate expansion
brewery, signed on January 6, 1997 a five year lease that is effective on
September 11, 1996 with multiple options to extend and has commenced work on
a preliminary site layout. The building is being leased from Corporacion
Calfik, a company owned by a director and principal shareholder of the Company.
The Tecate expansion brewery will be known as Cerveceria Rio Bravo. The
micro-brewery, located approximately one mile from the Mexican/United States
border, will be wholly-owned and operated by the Company. A deposit in the
amount of $176,064 has been paid to JV Northwest for the micro-brewery
system that will be placed at this sight. The equipment is scheduled to
ship in March 1997.
e. The Company is continuously investigating opportunities to
establish expansion breweries and plans to complete six such expansion
breweries during fiscal 1997 and has signed a letter of intent with
a Chinese restaurant group, United Restaurants of Gallery, to form a joint
venture to establish and operate an expansion brewery in Shanghai.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by
reference from the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders (the "1997 Proxy Statement") under the caption "Election of
Directors."
-32-
<PAGE>
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by
reference from the 1997 Proxy Statement under the caption "Executive
Compensation."
-33-
<PAGE>
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by
reference from the 1997 Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by
reference from the 1997 Proxy Statement under the caption "Certain
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) The Following documents are filed as part of this report:
1. Financial Statements at Item 8 of this report. All schedules are
omitted because they were not required or the required information is
included in the Financial Statements and Notes thereto.
2. The following exhibits are filed as part of this report or hereby
incorporated by reference to exhibits previously filed with the
Commission:
2.1 - Plan and Agreement of Amalgamation between Craft and the
Company*
3.1 - Memorandum of Amalgamation of the Company **
3.2 - Bye-Laws of the Company**
4.1 - Specimen common stock certificate**
4.2 - Warrant Agreement between the Company, National Securities
Corporation ("National Securities") and the Bank of New York
(including form of Redeemable Common Stock Purchase
Warrant)*
4.3 - Representative's Warrant Agreement between the Company and
National Securities (including form of Representative's
Warrant) (incorporated by reference to Exhibit 4.3 of the
Registration Statement)*
10.1 - 1996 Stock Option Plan of the Company **
10.2 - Agreement of Lease between Ping Ping Investment Company
Limited ("Ping Ping") and South China dated as of December
12, 1994 **
10.3 - Agreement of Lease between Ping Ping and South China dated
as of May 1, 1995**
10.4 - Agreement of Lease between the Company and Corporation
Calfik dated as of January 6, 1997***
10.5 - Management Agreement and Performance Guaranty between South
China and Lunar Holdings Limited dated as of April 1, 1995**
10.5 - Distributors Limited Brewing Contract between South China
and DaBeers Distributors Limited ("DaBeers") dated as of
September 23, 1995**
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10.6 - Brewing Agreement between South China and Delaney's
(Wanchai) Limited dated as of September 20, 1995**
10.7 - Employment Agreement, dated as of June 14, 1996, between the
Company and James L. Ake*
10.8 - Employment Agreement, dated as of April 27, 1995, between
Edward Cruise Miller and South China**
10.9 - Ratification and Exchange Agreement, dated May 31, 1996, by
and among South China, SCBC, Craft and each of the persons
listed on the signature page hereto*
10.10 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Mark Youds*
10.11 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and John Arvanitis*
10.12 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Mark Gallagher*
10.13 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Harry Allen Friedberg*
10.14 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Micro Brew Systems Co., Ltd*
10.15 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Noah Schaffer*
10.16 - Bridge Financing Purchase Agreement, dated as of May 31,
1996, between the Company and Long-Term Partners Ltd*
10.17 - Forms of Bridge Financing Convertible Notes (including forms
of Bridge Financing Warrants attached thereto)**
10.18 - Novation Agreement, dated as of October 3, 1996, among SCBC,
DaBeers and Iconic America Limited ("Iconic")*
10.19 - Brewing Agreement, dated as of October 3, 1996, between SCBC
and Iconic*
10.20 - Operating Agreement of Celtic Brew LLC***
27.0 - Financial Data Schedule***
(b) Reports on Form 8-K:
None
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarterly period ended July 31, 1996 (file no. 1-12119)
** Incorporated by reference to the Company's registration statement on Form
S-1 (file no. 333-6033)
*** Filed herewith.
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SIGNATURE
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.
AMERICAN CRAFT BREWING
INTERNATIONAL LIMITED
/s/ JAMES L. AKE
Date: January 28, 1997 ___________________________________
James L. Ake
Executive Vice President,
Chief Operating Officer
and Secretary
/s/ PETER W. H. BORDEAUX
__________________________________
Peter W. H. Bordeaux, Director
/s/ FEDERICO G. CABO ALVAREZ
__________________________________
Federico G. Cabo Alvarez, Director
__________________________________
Norman H. Brown, Director
/s/ JOHN F. BEAUDETTE
__________________________________
John F. Beaudette, Director
/s/ WYNDHAM H. CARVER
__________________________________
Wyndham H. Carver, Director
/s/ DAVID K. HAINES
__________________________________
David K. Haines, Director
/s/ JOSEPH E. HEID
__________________________________
Joseph E. Heid, Director
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Exhibit 10.4
INDUSTRIAL LEASE
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("Lease"), dated September 11, 1996, is made by
and between CORPORACION CALFIK S.A. DE C.V. ("LESSOR") and CERVECERIA RIO BRAVO
S.A. DE C.V., ("LESSEE"), (collectively the "PARTIES,")
1.2 PREMISES: That certain real property, including all improvements
therein, and commonly known by the street address of Boulevard Morelos #750
Colonia Industrial, located in the city of Tecate, State of Baja California
Norte, Mexico, zip code 21430, as outlined on Exhibit "A" attached hereto.
("Premises"). The "Building" includes the East Wing consisting of approximately
One Third of the overall Building and generally described in Exhibit "B"
attached hereto, containing approximately 21,443 square feet. In addition to
Lessee's rights to use and occupy the Premises as hereinafter specified. Lessee
shall have non-exclusive right to the Common Areas (as defined in Paragraph 2.5
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the Building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon are herein collectively referred to as the "Industrial Center."
1.3 TERM: Five (5) years ("ORIGINAL TERM") commencing September 11, 1996
("COMMENCEMENT DATE") and ending September 10, 2001.
1.4 BASE RENT: $75,000.00 per year ("BASE RENT"), payable $18,750.00
quarterly in advance on the first day of each and every calendar quarter
commencing on September 11, 1996 and continuing each quarter during the first
year of this Lease.
1.5 ADJUSTMENT OF RENT: The Base Rent shall be increased on each
anniversary of this Lease as follows:
Commencing September 11, 1997 the Base Rent shall be $79,500.00 per
year payable quarterly.
Commencing September 11, 1998 the Base Rent shall be $84,500.00 per
year payable quarterly.
Commencing September 11, 1999 the Base Rent shall be $89,000.00 per
year payable quarterly.
Commencing September 11, 2000 the Base Rent shall be $95,000.00 per
year payable quarterly.
1.6 LESSEE' SHARE OF COMMON AREA OPERATING EXPENSES: ("Lessee's Share")
of the Common Area Operating Expenses shall be determined by its prorata square
footage of the Premises as compared to the total square footage of the Building.
1.7 PERMITTED USE: Lessor represents that there are no zoning or other
restrictions which would prevent Lessee from using or occupying the leased
premises for the operation of a Brewery. Lessee shall use and occupy the
Premises for a Brewery, Warehouse or any other legal use which is reasonably
comparable thereto. Lessor hereby agrees to not unreasonably withhold or delay
its consent to any written request by Lessee for a modification of said
Permitted Use so long as the same will not impair the structural integrity of
the improvements on the Premises or in the Building. In the event there are any
zoning or other restrictions which would prevent the operation of a Brewery from
being conducted at the Premises, this Lease shall become null and void upon such
determination. Lessor agrees not to unreasonable withhold or delay consent to a
modification of a permitted use, and that Lessor cannot financially condition or
delay such approval.
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1.8 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein.
1.9 REAL ESTATE BROKERS: There are no Real Estate Brokers or brokerage
relationships which exist in this transaction and none have been consented to by
the Parties.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2. CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date and throughout the
term of this Lease and any extensions thereof. If a non-compliance with said
warranty exists as of the Commencement Date, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify same at Lessor's expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility Installations made or to be made by Lessee. If the
Premises do not comply with said warranty, Lessor shall, except as otherwise
provided in this Lease, promptly after receipt of written notice from Lessee
setting forth with specificity the nature and extent of such non-compliance,
rectify the same at Lessor's expense. If Lessee does not give Lessor written
notice of a non-compliance with this warranty within six (6) months following
the Commencement Date, correction of that non-compliance shall be the obligation
of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Lessor to satisfy itself with respect to the condition of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law as
defined in Paragraph 4) and the present and future suitability of the Premises
for Lessee's intended use, (b) that Lessee has made such investigation as it
deems necessary with reference to such matters and assumes all responsibility
therefor as the same relate to Lessee's occupancy of the Premises and/or the
term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has
made any oral or written representations or warranties with respect to the said
matters other than as set forth in this Lease.
2.5 COMMON AREAS - DEFINITION. The term "Common Areas" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general
non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center
and their respective employees, suppliers, shipper, customer, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.6 COMMON AREAS - LESSEE'S RIGHTS. Lessor hereby grants to Lessee, for
the benefit of Lessee and its employees, suppliers, shipper, contractors,
customers and invitees, during the time of this Lease, the non-
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exclusive right to use, in common with other entitled to such use, the Common
Areas as they exist from time to time, subject to any rights, powers, and
privileges reserved by Lessor under the terms thereof.
3. RENT.
3.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar quarter shall be prorated based upon the actual
number of days of the calendar quarter involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or at such other addresses as Lessor may from time to time designate in
writing to Lessee.
3.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during
the term hereof, in addition to the Base Rent, Lessee's share (as specified in
Paragraph 1.6) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "Common Area Operating Expenses" are defined, for purposes of this
Lease, as all cost incurred by Lessor relating to the ownership and operation of
the industrial Center, including but not limited to the following:
(i) The operation, repair and maintenance, in neat, clean, good
order and condition of the parking area, loading and unloading areas, trash
areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas,
irrigation system, Common Area lighting facilities, fences, gates and roof.
Lessor shall be responsible for the roof, exterior walls and foundations and
that maintenance of these areas are not included in the common area operating
expenses.
(ii) The cost of water, electricity to the Common Area.
(iii) Trash disposal, security services.
(iv) Real Property Taxes to be paid by Lessor for the Building
and Common Areas.
(v) The cost of the premiums for the insurance policies
maintained by Lessor.
(vi) Any other services to be provided by Lessor that are stated
elsewhere in this Lease to be Common Area Operating
Expenses.
(b) Lessee's share of the Common Area Operating Expense shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessee's Share of annual
Common Area Operating Expenses and the same shall be payable quarterly as Lessor
shall designate.
4. HAZARDOUS SUBSTANCES:
All references to Hazardous Substances which are referred to or
described below shall apply only in connection with the ("Applicable Law") of
Mexico, the State of Baja California Norte and the City of Tecate, if any. They
are not intended to include any reference to any Laws or Regulations enacted by
the United States or any of its States.
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(a) Lessee shall not use or permit the use of the Premises which will
create any Hazardous Substance to be on the Premises which will either: (i)
potentially injurious to the public health, safety or welfare, the environment
or the Premises, (ii) regulated or monitored by any governmental authority, or
(iii) a basis for liability of Lessor to any governmental agency or third party
under any applicable statute or law theory. Hazardous Substance shall include,
but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any
products, by-products or fractions thereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, that a Hazardous Substance,
or a condition involving or resulting from same, has come to be located in, on,
under or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor. Lessee
shall also immediately give Lessor a copy of any statement, report, notice,
registration, application, permit, business plan, license, claim, action or
proceeding given to, or received from, any governmental authority or private
party, or persons entering or occupying the Premises, concerning the presence,
spill, release, discharge of, or exposure to, any Hazardous Substance or
contamination in, on, or about the Premises, including but not limited to all
such documents as may be involved in any Reportable Uses involving the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 4 shall include, but
not be Limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement. Lessor is responsible
and holds the Lessee harmless if the Lessor has allowed hazardous substances to
be placed on the Premises and the Lessee is damaged by the Lessor's actions.
(d) Except as otherwise provided in this Lease, Lessee, shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner, comply
with all "APPLICABLE LAW," which term is used in this Lease to include all laws,
rules, regulations, ordinances directives covenants, easements and restrictions
of record, permits, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of Lessor's engineers
and/or consultants, relating in any manner to the Premises (including but not
limited to matters pertaining to (i) industrial hygiene, (ii) environmental
conditions on, in, under or about the Premises, including soil and groundwater
conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance or storage tank), now in effect or which may hereafter
come into effect, and whether or not reflecting a change in policy from any
previously existing policy. Lessor is responsible and holds the Lessee harmless
if the Lessor has allowed hazardous substances to be placed on the Premises and
the Lessee is damaged by the Lessor's actions.
(e) Lessor shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by Lessee
with this Lease and all Applicable Laws, and to employ experts and/or
consultants in connection therewith and/or to advise Lessor with respect to
Lessee's activities, including but not limited to the installation, operation,
use, monitoring, maintenance, or removal of any Hazardous Substance or storage
tank on or from the Premises. The costs and expenses of any such inspections
shall be paid by the party requesting same, unless a Default or Breach of this
Lease, violation of Applicable Law, or a contamination, caused or materially
contributed to by Lessee is found to exist or be imminent, or unless the
inspection is requested or
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ordered by a governmental authority as the result of any such existing or
imminent violation or contamination. In any such case, Lessee shall upon request
reimburse Lessor for the costs and expenses of such inspections. Lessee's
responsibility under this paragraph shall be limited to a judicial
determination that the Lessee is at fault and in no case shall there be a breach
of this Lease by Lessee under this paragraph until such determination is made.
5. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
5.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty as to
condition), 2.3 (Lessor's warranty as to compliance with covenants, etc), 5.2
(Lessor's obligations to repair), 7 (damage and destruction), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair. Lessee is not responsible for
repairing anything other than what is caused by its actions and is not required
to make repairs to the premises caused by the element of age or that which is
not caused by Lessee's neglect. Lessee, in keeping the Premises in good order,
condition and repair, shall exercise and perform good maintenance practices.
Lessee's obligations shall include restoration, replacements or renewals when
necessary to keep the Premises and all improvements thereon or a part thereof in
good order, condition and state of repair. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control.
5.2 LESSOR'S OBLIGATIONS. Lessor shall keep in good order, condition and
repair the foundations, exterior walls, structural condition of interior bearing
walls, exterior roof, parking lots, walkways, parkways, driveways, landscaping,
fences and utility systems serving the Common Areas and all parts thereof, as
well as providing the services for which there is a Common Area Operating
Expense pursuant to Paragraph 3.2. Lessor shall not be obligated to paint the
exterior or interior surfaces of exterior walls nor shall Lessor be obligated to
maintain, repair or replace windows, doors or plate glass of the Premises.
5.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "Utility Installations" is
used in this Lease to refer to all carpeting, window coverings, air lines, power
panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations and/or Utility Installations" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 5.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000. Lessor herein agrees that such prior
written consent shall not be unreasonable withheld or delayed or financially
conditioned.
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(b) CONSENT. Any Alterations or Utility Installations that Lessee shall
desire to make and which require the consent of the Lessor shall be presented to
Lessor in written form with proposed detailed plans. All consents given by
Lessor shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or
materials furnished or alleged to have been furnished to or for Lessee at or for
use on the Premises, which claims are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in, on or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense defend and protect itself, Lessor
and the Premises against the same and shall pay and satisfy any such adverse
judgment that may be rendered thereon before the enforcement thereof against the
Lessor or the Premises.
5.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 5.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 5.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) REMOVAL. Unless otherwise agreed in writing, Lessor may require that
any or all Lessee Owned Alterations or Utility Installations be removed by the
expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall Surrender the Premises by the
end of the last day of the Lease term or any earlier termination date with all
of the improvements, parts and surfaces thereof clean and free of debris and in
good operating order, condition and state of repair, ordinary wear; and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
6. INSURANCE; INDEMNITY.
6.1 PAYMENT OR PREMIUMS. The cost of the premiums for the insurance
policies maintained by
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lessor under this Paragraph 6 shall be a Common Area Operating Expense pursuant
to Paragraph 3.2 hereof. Premiums for Policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date. Lessor herein agrees that it
shall obtain insurance at reasonable rates and consistent with similar
properties in the area. Lessor shall name Lessee as an additional insured.
6.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance protecting
Lessee and Lessor (as an additional insured) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain
the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "insured contract" for the
performance of Lessee's indemnity obligations under this Lease. The limits of
said insurance required by this Lease or as carried by Lessee shall not,
however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor
may also maintain liability insurance described above, in addition to, and not
in lieu of, the insurance required to be maintained by Lessee. Lessee shall not
be named as an additional insured therein.
6.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of the Lessor,
with loss payable to Lessor and to any Lender(s) insuring against loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. If Lessor is the Insuring Party, however Lessee Owned
Alterations and Utility Installations shall be insured by Lessee under Paragraph
6.4 rather than by Lessor. If the coverage is available and commercially
appropriate, such policy or policies shall insure against all risks of direct
physical loss or damage (except the perils of flood and/or earthquake unless
required by a Lender), including coverage for any additional costs resulting
from debris removal and reasonable amounts of coverage for the enforcement of
any ordinance or law regulating the reconstruction or replacement of any
undamaged sections of the Premises required to be demolished or removed by
reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss.
(b) ADJACENT PREMISES. If the Premises are part of a larger building, or
if the Premises are part of a group of buildings owned by Lessor which are
adjacent to the Premises, the Lessee shall pay for any increase in the premiums
for the property insurance of such building or buildings if said increase is
caused by Lessee's acts, omissions, use or occupancy of the Premises.
(c) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
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6.4 LESSEE'S PROPERTY INSURANCE. Lessee at its cost shall either by
separate policy or, at Lessor's option by endorsement to a policy already
carried, maintain insurance coverage on all of Lessee's personal property,
Lessee Owned Alterations and Utility Installations in, on, or about the Premises
similar in coverage to that carried by the Lessor under Paragraph 6.3. Such
insurance shall be full replacement cost coverage with a deductible of not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property or the restoration of Lessee
Owned Alterations and Utility Installations. Lessee shall be the Insuring Party
with respect to the insurance required by this Paragraph 6.4 and shall provide
Lessor with written evidence that such insurance is in force.
6.5 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve
the other, and waive their entire right to recover damages (whether in contract
or in tort) against the other, for loss of or damage to the Waiving Party's
property arising out of or incident to the perils required to be insured against
under Paragraph 6. The effect of such releases and waivers of the right to
recover damages shall not be limited by the amount of insurance carried or
required, or by any deductibles applicable thereto.
6.6 INDEMNITY. Except for Lessor's and Lessor's employees, agents, and
invitees negligence and/or breach of express warranties, Lessee shall indemnify,
protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's
master or ground lessor, partners and Lenders, from and against any and all
claims, loss of rents and/or damages, costs, liens, judgments, penalties,
permits, attorney's and consultant's fees, expenses and/or Liabilities arising
out of, involving, or in dealing with, the occupancy of the Premises by Lessee,
the conduct of Lessee's business, any act, omission or neglect of Lessee, its
agents, contractors, employees or invitee, and out of any Default or Breach by
Lessee in the performance in a timely manner of any obligation on Lessee's part
to be performed under this Lease. The foregoing shall include, but not be
limited to, the defense or pursuit of any claim or any action or proceeding
involved therein, and whether or not (in the case of claims made against Lessor)
litigated and/or reduced to judgement, and whether well founded or not. In case
any action or proceeding be brought against Lessor by reason of any of the
foregoing matters, Lessee upon notice from Lessor shall defend the same at
Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any such
claim in order to be so indemnified. All expenses listed in the indemnity
provision in which the Lessee may be responsible shall be basis on reasonable
expenses.
6.7 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
except for its own intentional or negligent acts or those of its agents or
employees, for injury or damage to the person or goods, wares, merchandise or
other property of Lessee, Lessee's employees, contractors, invitee, customers,
or any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether the said injury or damage results from conditions arising
upon the Premises or upon other portions of the building of which the Premises
are a part, or from other sources or places, and regardless of whether the cause
of such damage or injury or the mean of repairing the same is accessible or not.
Lessor shall not be Liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence, Lessor shall
under no circumstances be liable for injury to Lessee's business or for any loss
of income or profit therefrom.
7. DAMAGE OR DESTRUCTION.
7.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, the repair cost of which damage or destruction
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is less than 50% of the then Replacement Cost of the Premises immediately prior
to such damage or destruction, excluding from such calculation the value of the
land and Lessee Owned Alterations and Utility Installations. If any other part
of the building on the Premises is partially damaged, it should be repaired and
if not repaired, Lessee has the right to terminate this Lease if in fact the
failure to repair the remaining portions of the building affect the Lessee's
operation of his business at the Premises.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the
Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations,
(c) "INSURED LOSS" shall mean damage or destruction to improvements on
the Premises, other than Lessee Owned Alterations and Utility Installations,
which was caused by an event required to be covered by the insurance described
in Paragraph 6.3(a), irrespective of any deductible amounts or coverage limits
involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
7.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall at Lessor's expense, repair such
damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility
Installations) as soon as reasonably possible and this Lease shall continue in
full force and effect; provided, however, that Lessee shall, at Lessor's
election, make the repair of any damage or destruction the total cost to repair
of which is $10,000 or less, and, in such event, Lessor shall make the insurance
proceeds available to Lessee on a reasonable basis for that purpose.
Notwithstanding the foregoing, if the required insurance was not in force or the
insurance proceeds are not sufficient to effect such repair, the Insuring Party
shall promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said repairs.
In the event, however, the shortage in proceeds was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost insurance
coverage was not commercially reasonable and available, Lessor shall have no
obligation to pay for the shortage in insurance proceeds or to fully restore the
unique aspects of the Premises unless Lessee provides Lessor with the funds to
cover same, or adequate assurance thereof, within ten (10) days following
receipt of written notice of such shortage and request therefor. If Lessor
receives said funds or adequate assurance thereof within said ten (10) day
period, the party responsible for making the repairs shall complete them as soon
as reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period, Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If in such case Lessor does not so elect, then this Lease
shall terminate sixty (60) days following the occurrence of the damage or
destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any such
damage or destruction. Premises Partial Damage due to flood or earthquake shall
be subject to Paragraph 7.3 rather than Paragraph 7.2, notwithstanding that
there may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party. If any other
part of the building on the Premises is partially damaged, it should be repaired
and if not repaired, Lessee has the right to terminate this Lease if in fact the
failure to repair the remaining portions of the building affect the Lessee's
operation of his business at the Premises. In the event the cost of repairs is
less than $10,000 and whether or not there is insurance proceeds, Lessor shall
be responsible for the cost of such repairs.
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7.3 PARTIAL DAMAGE--UNINSURED LOSS. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either: (i) repair such damage as soon as reasonably possible at
Lessor's expense, in which event this Lease, shall continue in full force and
effect, or (ii) give written notice to Lessee within thirty (30) days after
receipt by Lessor of knowledge of the occurrence of such damage of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the
giving of such notice. In the event Lessor elects to give such notice of
Lessor's intention to terminate this Lease, Lessee shall have the right within
ten (10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the repair of such damage totally at Lessee's
expense and without reimbursement from Lessor. Lessee shall provide Lessor with
the required funds or satisfactory assurance thereof within thirty (30) days
following Lessee's said commitment. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible and the required funds are available. If Lessee does not
give such notice and provide the funds or assurance thereof within the times
specified above, this Lease shall terminate as of the date specified in Lessor's
notice of termination.
7.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. in the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 6.5.
7.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6)
months of the term of this Lease there is damage for which the cost to repair
exceeds one (1 ) month's Base Rent, whether or not an Insured Loss, Lessor may,
at Lessor's option, terminate this Lease effective sixty (60) days following
the date of occurrence of such damage by giving written notice to Lessee of
Lessor's election to do so within the (30) days after the date of occurrence of
such damage. Provided, however, if Lessee at that time has an exercisable option
to extend this Lease, then Lessee may preserve this Lease by, within twenty (20)
days following the occurrence of the damage, or before the expiration of the
time provided in such option for its exercise, whichever is earlier ("Exercise
Period"), (i) exercising such option and (ii) providing Lessor with any shortage
in insurance proceeds (or adequate assurance thereof) limited to those repairs
required to be paid by Lessee pursuant to the terms of this Lease. If Lessee
duly exercises such option during said Exercise Period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
said Exercise Period, then Lessor may at Lessor's option terminate this Lease
as of the expiration of said sixty (60) day period following the occurrence of
such damage by giving written notice to Lessee of Lessor's election to do so
within ten (10) days after the expiration of the Exercise Period,
notwithstanding any term or provision in the grant of option to the contrary.
7.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 7.2 (Partial
Damage--Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues, shall be abated in proportion
to the degree to which Lessee's use of the Premises is impaired. Except for
abatement of Base Rent, Real Property Taxes insurance premiums, and other
charges, if any, as aforesaid, all other obligations of Lessee hereunder shall
be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such repair or restoration.
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(b) If Lessor shall be obligated to repair or restore the Premises under
the provisions of this Paragraph 7 and shall not commence, in a substantial and
meaningful way, the repair or restoration of the Premises within fifteen (15)
days after such obligation shall accrue, Lessee may, at any time prior to the
commencement of such repair or restoration, give written notice to Lessor and to
any Lenders of which Lessee has actual notice of Lessee's election to terminate
this Lease on a date not less than sixty (60) days following the giving of such
notice. If Lessee gives such notice to Lessor and such Lenders and such repair
or restoration is not commenced within thirty (30) days after receipt of such
notice, this Lease shall terminate as of the date specified in said notice. If
Lessor or a Lender commences the repair or restoration of the Premises within
thirty (30) days after receipt of such notice, this Lease shall continue in fail
force and effect. "Commence" as used in this Paragraph shall mean either the
unconditional authorization of the preparation of the required plans, or the
beginning of the actual work on the Premises, whichever First occurs.
8. PAYMENT OF TAXES.
8.1 Lessor shall pay the Real Property Taxes, as defined in Paragraph
8.2, applicable to the Industrial Center any such amounts shall be include in
the calculation of Common Area Operating Expenses in accordance with the
provisions of Paragraph 3.2.
8.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "Real
Property Taxes" shall include any form of real estate tax or assessment, general
or special, ordinary or extraordinary, and any license fee, commercial rental
tax, improvement bond or bonds, levy or tax (other than inheritance, personal
income or estate taxes) imposed upon the Industrial Center by any authority
having the direct or indirect power to tax, including any city, state or federal
government, or any school, agricultural, sanitary, fire, street, drainage or
other improvement district thereof, levied against any legal or equitable
interest of Lessor in the Premises or in the real property of which the Premises
are a part, Lessor's right to rent or other income therefrom, and/or Lessor's
business of leasing the Premises. The term "Real Property Taxes" shall also
include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring or changes in applicable law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Premises or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties. The present tax and assessment for the
Industrial Center is in the sum of $6,000.00 per year.
8.3 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property.
9. UTILITIES.
Lessee shall pay directly for all utilities and services supplied to the
Premises, including but not limited to electricity, telephone, security, water,
gas, heat, light, power, trash disposal and other utilities and services
supplied to the Premises, together with any taxes thereon. If any such services
are not separately metered to Lessee, Lessee shall pay a reasonable proportion,
to be determined by Lessor, of all charges jointly metered with other premises
in the Building, in the manner and within the time periods set forth in
Paragraph 3.2.
10. DEFAULT; BREACH; REMEDIES.
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10.1 DEFAULT; BREACH. A "Default" is defined as a failure by the Lessee
to observe, comply with or perform any of the terms, covenants, conditions or
rules applicable to Lessee under this Lease. A "Breach" is defined as the
occurrence of any one or more of the following Defaults, and, where a grace
period for cure after notice is specified herein, the failure by Lessee to cure
such Default prior to the expiration of the applicable grace period, shall
entitle Lessor to pursue the remedies set forth in Paragraphs 10.1 and/or 10.2:
(a) The vacating of the Premises without the intention to reoccupy same,
or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure by
Lessee to make any payment of Base Rent or any other monetary payment required
to be made by Lessee hereunder, whether to Lessor or to a third party, as and
when due, or the failure by Lessee to provide Lessor with reasonable evidence of
insurance required under this Lease.
(c) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, where such Default continues for a period of thirty
(30) days after written notice thereof by or on behalf of Lessor to Lessee;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach of this Lease by Lessee if Lessee commences such cure
within said thirty (30) day period and thereafter diligently prosecutes such
cure to completion.
(d) The occurrence of any of the following invents: (i) The making by
lessee of any general arrangement or assignment for the benefit of creditors
(ii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within thirty
(30) days, or (iii) the attachment, execution or other judicial seizure, of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within thirty (30)
days; provided, however, in the event that any provision of this subparagraph
(d) is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
10.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its option,
may require all future payments to be made under this Lease by Lessee to be made
only by cashier's check. In the event of a Breach of this Lease by Lessee, as
defined in Paragraph 10.1, with or without further notice or demand, and without
limiting Lessor in the exercise of any right or remedy which Lessor may have by
reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any lawful
means, in which case this Lease and the term hereof shall terminate and Lessee
shall immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee: (i) the worth at the time of
the award of the unpaid rent which had been earned at the time of termination;
(ii) the worth at the time of award of the amount by which the unpaid rent
which would have been earned after termination until the time of award exceeds
the amount of such rental loss that the Lessee proves could have been reasonably
avoided; (iii) the worth at the time of award of the amount by which the unpaid
rent for the balance of the term after the time of award exceeds the amount of
such rental loss that the Lessee proves could be reasonably avoided; and (iv)
any other amount necessary to compensate Lessor for all the detriment
proximately caused by the Lessee's
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failure to perform its obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom, including but not limited
to the cost of recovering possession of the Premises, expenses of reletting,
including necessary renovation and alteration of the Premises, reasonable
attorneys' fees. If termination of this Lease is obtained through the
provisional remedy of unlawful detainer, Lessor shall have the right to recover
in such proceeding the unpaid rent and damages as are recoverable therein, or
Lessor may reserve therein the right to recover all or any part thereof in a
separate suit for such rent and/or damages.
(b) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises are located.
(c) The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
10.3 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 10.3, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee in
writing for such purpose, of written notice specifying wherein such obligation
of Lessor has not been performed; provided, however, that if the nature of
Lessor's obligation is such that more than thirty (30) days after such notice
are reasonably required for its performance, then Lessor shall not be in breach
of this Lease if performance is commenced within such thirty (30) day period and
thereafter diligently pursued to completion.
10.4 BREACH BY LESSEE. Lessee shall not be deemed in breach of this
Lease (with the exception of Lessee's obligation to pay "Rent" as provided in
paragraphs 1.4, 1.5, 1.6 and Section 3 entitled "Rent") unless Lessee fails
within a reasonable time to perform an obligation required to be performed by
Lessee. For purposes of this Paragraph 10.4, a reasonable time shall in no event
be less than thirty (30) days after receipt by Lessor of written notice
specifying wherein such obligation of Lessee has not been performed; provided,
however, that if the nature of Lessee's obligation is such that more than thirty
(30) days after such notice are reasonably required for its performance, then
Lessee shall not be in breach of this Lease if performance is commenced within
such thirty (30) day period and thereafter diligently pursued to completion.
11. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
12. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
13. RENT DEFINED. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
14. NO PRIOR OR OTHER AGREEMENTS; DISCLAIMER. This Lease contains all agreements
between the Parties with respect to any matter mentioned herein, and no other
prior or contemporaneous agreement or understanding shall be effective. Lessor
and Lessee each represents and warrants to the Brokers that it has made, and is
relying solely upon, its own investigation as to the nature, quality, character
and financial responsibility of the other Party to this Lease and as to the
nature, quality and character of the Premises.
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15. NOTICES.
15.1 All notices required or permitted by this Lease shall be in writing
and may be delivered in person (by hand or by messenger or courier service) or
may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 16.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or permitted to be given to Lessor
hereunder shall be concurrently transmitted to such party or parties at such
addresses as Lessor may from time to time hereafter designate by written notice
to Lessee.
15.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. If sent by regular
mail the notice shall be deemed given forty-eight (48) hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted by
facsimile transmission or similar means the same shall be deemed served or
delivered upon telephone confirmation of receipt of the transmission thereof,
provided a copy is also delivered via delivery or mail. If notice is received on
a Sunday or legal holiday, it shall be deemed received on the next business day.
16. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or of any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any preceding Default or Breach by
Lessee of any provision hereof, other than the failure of Lessee to pay the
particular rent so accepted. Any payment given Lessor by Lessee, may be accepted
by Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
17. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
18. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
19. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
20. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State of Baja California Norte. Any litigation between the Parties
hereto concerning this Lease shall be initiated in the state in which the
Premises are located.
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21. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce the
terms hereof or declare rights hereunder, the Prevailing Party (as hereafter
defined) in any such proceeding, action, or appeal thereon, shall be entitled to
reasonable attorneys fees. Such fees may be awarded in the same suit or
recovered in a separate suit, whether or not such action or proceeding is
pursued to decision or judgment.
22. CONSENTS.
(a) Wherever in the Lease the consent of a Party is required to an act
by or for the other Party, such consent shall not be unreasonably withheld or
delayed.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
23. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
24. OPTION.
24.1 DEFINITION. As used in this Paragraph 24 the word "OPTION" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor.
24.2 OPTION.
Lessor hereby grants to Lessee the option to extend the term of this
Lease for five (5) additional years commencing when the prior term expires upon
each of the following terms and conditions:
(a) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option would commence by at least ninety (90) days
a written notice of the exercise of the option to extend this Lease for said
additional term, time being of the essence. If said notification of the exercise
of said option is not so given and received, the option shall automatically
expire;
(b) The provisions of paragraph 24, including the provisions relating
to default of Lease set forth in paragraph 10 of this Lease are conditions of
this Option;
(c) All of the terms and conditions of this Lease shall apply to this
Option.
(d) The First Years Rent of the option period shall be calculated as
follows:
(i) On September 11, 2001 ("First Year of Option"), the rent
payable under paragraph 1.5 ("Base Rent") of this Lease shall be adjusted to
increase the Base Rent six (6%) percent of the previous Base Rent year.
Initial [LMCB]
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24.3 ADJUSTMENT OF OPTION RENT: The annual Base Rent payable under
paragraph 1.5 ("Base Rent") as established for the First Year of Option as set
forth in Paragraph 24.2 shall be increased on each anniversary of the option
period of this Lease by six (6%) percent thereafter.
24.4 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof,
and cannot be voluntarily or involuntarily assigned or exercised by any person
or entity other than said original Lessee while the original Lessee is in full
and actual possession of the Premises and without the intention of thereafter
assigning or subletting. The Options, if any, herein granted to Lessee are not
assignable, either as a part of an assignment of this Lease or separately or
apart therefrom, and no Option may be separated from this Lease in any manner,
by reservation or otherwise.
24.5 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
24.6 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 10.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of Default under Paragraph 10.1, whether or not the Defaults
are cured, during the twelve (12) month period immediately preceding the
exercise of the Option.
(b) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 10 during any twelve
(12) month period, whether or not the Defaults are cured, or (iii) if Lessee
commits a Breach of this Lease.
25. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
26. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
27. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the
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obtaining of normal financing or refinancing of the property of which the
Premises are a part.
28. COUNTERPARTS. This Lease may be executed simultaneously in two counterparts,
each one of which shall be deemed an original but all of which shall constitute
one and the same Lease.
The Parties have executed this Lease on the dates specified above their
respective signatures as set forth in the Signature Page of this Lease.
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SIGNATURE PAGE
By LESSOR: CORPORACION CALFIK S.A. de C.V.
By: /s/ Luz Maria C. Bandala Executed at: Guadalajara, Jalisco,
________________________ on September 11, 1996
Luz Maria C. Bandala
President
Address:
Dolonia Providencia Telephone: 011-523-641-5940
Suite 912 Fax: 011-523-641-3241
Guadalajara, Jalisco
Mexico 44630
By LESSEE: CERVECERIA RIO BRAVO S.A, de C.V.
By: /s/ James L. Ake
__________________ Executed at: Metairie, Louisiana, on January 6, 1997
James L. Ake
Executive Vice President
Address:
One Galleria Boulevard Telephone: (504) 849 2739
Suite 1714 Fax: (504) 849 2740
Metairie, LA 70001
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EXHIBIT "A"
[FLOOR PLAN]
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EXHIBIT "B"
BUILDING DESCRIPTION
SECTION SOUARE FOOTAGE
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WAREHOUSE 13,433
FRONT OFFICE 1,335
FRONT MEZZANINE 1,335
REAR MEZZANINE 2,239
REFRIGERATION ROOM 560
REAR WAREHOUSE 1,120
LOADING DOCK 861
TOTAL 21,443
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OPERATING AGREEMENT
OF
CELTIC BREW LLC
a New York limited liability company
This Operating Agreement (the "Agreement") is entered into as of
December 2, 1996, by and among American Craft Brewing International Limited, a
Bermuda company ("AmBrew International"), and Aidan McGuiness (collectively, the
"Members").
The parties have agreed to organize and operate a limited
liability company in accordance with the terms and subject to the conditions set
forth in this Agreement.
The parties agree as follows:
1. Organization. The parties hereby organize a limited liability
company pursuant to the New York Limited Liability Company Law (the "Act") and
the provisions of this Agreement and, for that purpose, authorize and direct
AmBrew International to execute and file the Articles of Organization of this
limited liability company with the New York Department of State ("Department of
State").
2. Name. The name of the limited liability company shall be
Celtic Brew LLC (the "Company").
3. Purpose. The purpose of the Company is to engage in any lawful
act or activity for which limited liability companies may be formed under the
Act and to engage in any and all activities necessary or incidental thereto.
4. Principal Office. The Company's principal place of business
shall be located at One Galleria Boulevard, Suite 912, Metairie, Louisiana
70001. The Company may have such other business offices within or without the
State of New York as determined from time to time.
5. Term. The term of the Company shall begin upon the filing of
the Articles of Organization with the Department of State and shall continue
until dissolved in accordance with this Agreement.
6. Members; Percentage Interests. (a) The name, present mailing
address and percentage interest (the "Percentage Interest") of each Member is
set forth on Exhibit A.
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(b) Whenever a new Member is admitted, Exhibit A shall be amended
to reflect the changes in Percentage Interests of Members for succeeding
periods determined on the basis of the terms upon which the new Member is
admitted.
(c) Whenever a Member withdraws or is expelled, Exhibit A shall
be amended to give effect to the changes in Percentage Interests of Members
for succeeding periods resulting from the withdrawal or expulsion.
7. Capital Contributions; Capital Accounts. (a) Upon the
execution of this Agreement, the Members shall respectively contribute to the
Company cash or other property in the amounts or having the net agreed value
respectively set forth on Exhibit A (the "Initial Capital Contributions").
(b) Except as otherwise provided in this Agreement or by
applicable law, no Member shall be required to make additional capital
contributions without his consent. Except with the consent of the Managing
Member (defined below), no Member shall be entitled to make any additional
capital contribution.
(c) There shall be established and maintained for each Member a
separate capital account ("Capital Account"). There shall be added to the
Capital Account of each Member (i) the amount of any money, and the net
agreed value (the "Carrying Value") of any other property, contributed by the
Member to the Company as capital and (ii) income and gain allocated to the
Member by the Company in accordance with Section 8 of this Agreement, and
there shall be subtracted from such Capital Account (x) the amount of any
money, and the fair market value of any other property, distributed to the
Member and (y) losses and expenses allocated to the Member by the Company in
accordance with Section 8 of this Agreement. If property other than cash is
distributed to the Members (whether in liquidation of the Company or
otherwise), for purposes of computing Capital Accounts the property will be
deemed to have been sold by the Company for its fair market value and the
income, gain, loss or expense from the deemed sale will be allocated in
accordance with Section 8.
(d) All capital, whenever contributed, shall be subject in all
respects to the risks of the business and subordinate in right of payment to
the claims of present or future creditors of the Company and of any successor
firm in accordance with this Agreement.
(e) No interest shall be allowed to any Member by reason of the
amount of his capital contribution or Capital Account except as provided in
Section 20.
8. Allocations. (a) Subject to Section 8(c) and Section 8(d)
below, each item of income, gain, loss or expense of the Company for any period
shall be allocated to the Members' Capital Accounts in proportion to their
respective Percentage Interests for such periods except that: (i) if at the time
of any allocation the amount of any loss or expense to be allocated to a
Member's Capital Account would cause the Member's Capital Account to be less
than zero, then the Member's Capital Account shall be allocated that portion of
loss or expense that will cause the Member's Capital Account to equal
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zero,and the balance shall be reallocated among the Capital Accounts of all
other Members (to the extent that doing so would not cause such Capital Accounts
to be less than zero), pro rata in accordance with the balances of the other
Members' Capital Accounts immediately prior to the reallocation (any such
reallocated loss or expense being sometimes called an "Additional Loss
Allocation") and (ii) at the time of any allocation of income or gain, any
Member has an "Unreimbursed Additional Loss Allocation" (as defined below), then
the income or gain of the Company being allocated at the time shall be allocated
(A) first to the Capital Accounts of Members who have Unreimbursed Loss
Allocations, pro rata in accordance with the respective aggregate amounts of
such Member's Unreimbursed Additional Loss Allocations at the time, until there
shall be no remaining Unreimbursed Additional Loss Allocations and (B)
thereafter, except as otherwise required by Section 8(c) and Section 8(d), in
accordance with Members' Percentage Interests. "Unreimbursed Additional Loss
Allocation" of a Member at any time shall mean the excess, at the time, of the
aggregate amount of all Additional Loss Allocations allocated to the Member's
Capital Account up to that time over the aggregate amount of income or gain
allocated to the Member's Capital Account pursuant to the clause (ii)(A) of the
preceding sentence up to that time.
(b) Income, gain, loss, and expenses shall be determined for this
purpose in the same manner used in determining the Company's taxable income
or loss for federal income tax purposes, except that (i) there shall be added
any income exempt from federal income tax; (ii) there shall be subtracted any
expenditures that are neither deductible nor chargeable to capital account;
(iii) in the case of any property contributed as capital, Carrying Value
rather than adjusted tax basis shall be used to compute gain or loss
resulting from any disposition of the property and depreciation, amortization
and other cost recovery deductions and similar items of income or deduction
in respect of such property shall be calculated as if the adjusted tax basis
of the asset were its Carrying Value; (iv) unrealized gain or loss
attributable to any property distributed to Members shall be deemed realized
immediately prior to the distribution and (v) appropriate adjustments shall
be made to reflect any deemed sale or purchase of assets and deemed
realization of items of income, gain, loss or expense as a result of a
revaluation of assets upon the admission, withdrawal or expulsion of a Member
as provided for herein. Such allocations shall be made for each period (an
"Allocation Period") commencing with the date of the filing of the Articles
of Organization with the Department of State or the day after an Allocation
Event and ending on the date of the next succeeding Allocation Event. An
"Allocation Event" shall mean any one of the following: (i) the end of a
calendar year, (ii) the admission, withdrawal or expulsion of a Member, (iii)
the termination of the Company for federal income tax purposes, (iv) the
dissolution of the Company and (v) any other event which the Members, in
their discretion, designate as an "Allocation Event". In case any person
shall be admitted as a new Member to the Company, or any Member shall
withdraw or be expelled from the Company or shall die, the Company shall be
deemed to have sold its assets for their respective fair market values, as
determined in good faith by the Managing Member, and concurrently repurchased
such assets, on the date of such event for the same consideration.
(c) In accordance with Section 704(c) of the Internal Revenue
Code of 1986, as amended (such Code, as amended from time to time or any
successor federal income tax legislation, being herein called the "Code"),
income, gain, loss and expense with respect to any property contributed to
the capital of the Company shall, solely for income tax purposes, be
allocated among
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the Members so as to take account of any variation between the adjusted
basis of such property of the Company for federal income tax purposes and
the Carrying Value of such contributed property.
(d) (i) Notwithstanding subsection 8(a), if a Member unexpectedly
receives any adjustments, allocations or distributions described in clause
(ii) of this Section 8(d), items of income and gain shall be specially
allocated to the Member's Capital Account so as to eliminate the Adjusted
Capital Account Deficit (as hereinafter defined) as quickly as possible.
(ii) An "Adjusted Capital Account Deficit" shall be the
deficit balance in a Member's Capital Account as of the end of a fiscal year,
decreased by:
(A) allocations of deduction and loss to the Member that
are reasonably expected to be made in subsequent years by reason
of a gift of an equity interest in the Company, varying equity
interests in the Company during a fiscal year, or a distribution
of unrealized receivables or inventory items (as described in
Section 1.704-1(a)(2)(ii)(d)(5) of the Treasury Regulations under
the Code); and
(B) distributions to the Member that are reasonably
expected to be made in subsequent years in excess of offsetting
increases to the Member's Capital Account that are reasonably
expected to occur.
(iii) Any allocation of items of income or gain pursuant
to clause (i) of this Subsection 8(d) shall be taken into account in
computing subsequent allocations under this Section, so that the net effect
of the allocations under this Subsection shall be the same as if no
allocation had been made under this Subsection.
(iv) This Subsection (d) is intended to comply with the
provisions of Treasury regulation Section 1.704-1(b)(2)(ii)(d) and shall be
applied in a manner consistent with that intent.
9. Distributions. (a) Except as otherwise provided in Section
9(b) and Section 20 below or as otherwise required by the Act, distributions to
Members shall be made at such time and in such form and amounts as the Managing
Member shall from time to time determine; provided, however, that all such other
distributions shall be made pro rata in accordance with the respective Members'
Percentage Interests at the time of the distribution.
(b) To the extent the Company is required by law to make tax
payments on behalf of a Member, such payments shall be treated as
distributions to the Member on whose behalf the payment is made.
10. Management. (a) There shall at all times be one Member who is
designated the Managing Member of the Company to serve until a successor is
elected or appointed as provided herein. AmBrew International is hereby
appointed as the initial Managing Member. The property, business and affairs of
the Company shall be managed by its Managing Member. Except where the Members'
approval is expressly required by this Agreement or by the Act, the Managing
Member shall
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have full authority, power and discretion to make all decisions with respect to
the Company's business and to perform such other services and activities as set
forth in this Agreement. The Managing Member shall be agent of the Company for
the purpose of its business and the act of the Managing Member, including the
execution in the name of the Company of an instrument, for apparently carrying
on in the usual way the business of the Company shall bind the Company, unless
(i) the Managing Member has in fact no authority to act for the Company in the
particular matter and (ii) the person with whom the Managing Member is dealing
has knowledge that the action has not been so approved. Unless otherwise
expressly authorized by this Agreement or the Members as set forth herein, the
act of the Managing Member that is not apparently for carrying on the Company's
business in the ordinary course shall not bind the Company.
(b) Except as otherwise expressly provided in this Agreement or
the Act, no Member, solely by reason of being a Member, shall have the right
to control or manage, or shall take any part in the control or management of,
the property, business or affairs of the Company.
(c) Members, by a vote of the majority in interest of all of the
Members, may elect additional Managing Members at any meeting of Members.
Members may at any time, at a meeting at which a quorum is present remove a
Managing Member with or without cause.
(d) The Managing Member need not be an individual or a resident
of the State of New York. A Managing Member shall automatically cease to be a
Managing Member if such Managing Member ceases to be a Member. The Managing
Member may from time to time create or designate additional classes of
managers or officers having such relative rights, powers, duties, preferences
and limitations as the Managing Member shall determine, subject to the
limitations set forth in this Agreement.
(e) Except as otherwise provided in this Agreement, any vacancy
occurring for any reason in the office of the Managing Member, whether
resulting from the death, resignation or removal of the Managing Member or
otherwise, may be filled only by a vote of the majority in interest of all of
the Members; provided, however, that no Managing Member may be elected
pursuant to this Section unless, in the opinion of counsel to AmBrew
International, the election would not adversely affect the Company's status
as a partnership for United States federal income tax purposes.
(f) No Member shall be elected or shall continue as the Managing
Member if such Member's Percentage Interest is not at least 1%.
11. Meetings of and Voting by Members. (a) A meeting of the
Members may be called at any time by those Members holding an aggregate of at
least 25% of the Percentage Interests then held by Members. Meetings of Members
shall be held at the Company's principal place of business or at any other place
agreed to by the Managing Member. Not less than 10 nor more than 60 days before
each meeting, the person calling the meeting shall give written notice of the
meeting to each Member entitled to vote at the meeting. The notice shall state
the place, date, hour and purpose of the meeting. Notwithstanding the foregoing
provisions, each Member who is entitled to notice waives
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notice if before or after the meeting the Member signs a waiver of the notice
which is filed with the records of Members' meetings, or is present at the
meeting in person or by proxy without objecting to the lack of notice. Unless
this Agreement provides otherwise, at a meeting of Members, the presence in
person or by proxy of Members holding not less than a majority of the Percentage
Interests then held by Members constitutes a quorum. A Member may vote either in
person or by written proxy signed by the Member or by the Member's duly
authorized attorney in fact.
(b) Each Member shall be entitled to vote on all matters
presented to the Members.
(c) Except as otherwise provided in this Agreement, the
affirmative vote of Members holding at least a majority of the Percentage
Interests then held by all the Members, at a meeting at which a quorum is
present, shall be required to approve any matter coming before the Members,
including, without limitation, each of the following:
(i) approval of the sale, exchange, lease, mortgage,
pledge or other transfer of all, or substantially all, of the assets or
business of the Company;
(ii) approval of a merger or consolidation of the Company
with or into another limited liability company, foreign limited
liability company or other entity;
(iii) assignment for the benefit of creditors of the
Company, filing of a voluntary bankruptcy petition, or consent to an
involuntary petition, under Title 11 of the United States Bankruptcy
Code or under the laws of the Republic of Ireland; and
(iv) amendment of the Articles of Organization.
(d) In lieu of holding a meeting, the Members may vote or
otherwise take action by a written instrument indicating the consent of the
Members holding such Percentage Interests as would be required for Members to
take action under this Agreement. If such consent is not unanimous, prompt
notice shall be given to those Members who have not consented in writing but
who would have been entitled to vote thereon had such action been taken at a
meeting.
(e) Members may participate in a meeting by conference telephone
or similar communications equipment, by means of which all persons
participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
(f) The affirmative vote of disinterested Members holding a
majority of the Percentage Interests held by all disinterested Members shall
be required for loaning funds to, or guaranteeing any obligation or liability
of, or entering into any other agreement, transaction or arrangement with any
Member, Managing Member or any affiliate of any thereof by the Company.
12. Creation of Different Classes of Membership Interests. With
the consent of Members holding not less than a majority of the aggregate
Percentage Interests of all Members, the Company may issue membership interests
(including warrants, options, rights or convertible
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instruments), from time to time in one or more classes, or one or more series of
such classes, which classes or series shall have, subject to the provisions of
applicable law, such designations, preferences and relative, participating,
optional or other special rights as shall be fixed by such Members, including,
without limitation, with respect to (a) the allocation of income, gain, loss or
expense to each such class or series; (b) the right of each such class or series
to share in distributions; (c) the rights of each such class or series upon
dissolution and liquidation of the Company; and (d) the right of each such class
or series to vote on, or take action with respect to, Company matters, including
matters relating to the relative rights, preferences and privileges of such
class or series, to the extent permitted by applicable law, if any such class or
series is granted such voting rights.
13. Assignments. (a) A Member may not sell, assign or otherwise
transfer in whole or in part such Member's membership interest in the Company
without the written consent of the Managing Member, which consent may be
withheld in its sole discretion. Any sale, assignment or other transfer that is
not in compliance with this Section shall be null and void. All buyers,
assignees and other transferees are subject to the requirements of admission as
an additional Member pursuant to Section 15.
(b) The restrictions set forth in this Section shall not apply to
the transfer of a membership interest from a deceased Member to his personal
representative or estate.
14. Withdrawal and Expulsion. (a) Any Member may withdraw from
the Company by giving written notice to the Members of his election to do so,
and such withdrawal shall be effective at the expiration of 3 months after the
giving of such notice or at such earlier date as shall be fixed by the Managing
Member. Promptly upon receipt of such notice, the Managing Member shall give the
other Members written notice of such election to withdraw. Until such withdrawal
becomes effective, such Member shall in all respects continue to be a Member
hereunder.
(b) With the consent of Members holding a majority of the
Percentage Interests, the Managing Member shall have the right to expel and
cause the withdrawal of any Member from the Company for Cause (as defined
herein) at any time by delivering to such Member a written notice setting
forth the effective date of his expulsion and stating that such expulsion is
for Cause pursuant to this Section 14(b), and on the date so fixed, such
Member shall automatically withdraw and cease to be a Member. For purposes of
this Section 14(b), Cause shall mean:
(i) any conduct by a Member in the course of the Company's
business other than in good faith; or
(ii) any breach by a Member of any material obligation
under this Agreement not cured within 10 days after notice in writing
from the Managing Member.
15. Admission of Additional Members by the Company. One or more
additional Members of the Company may be admitted to the Company at any time or
from time to time with the affirmative vote of Members holding a majority in
Percentage Interests of all Members and upon such
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terms and conditions as such Members may approve. Each new Member will be
required to execute an agreement pursuant to which such Member becomes bound by
the terms of this Agreement.
16. Events of Dissolution. The Company shall be dissolved upon
the happening of any of the foll wing events:
(a) the affirmative vote of Members holding a majority
of the Percentage Interests held by all Members;
(b) the death, incapacity, bankruptcy, dissolution, expulsion or
withdrawal of a Member unless the remaining Members, by the affirmative vote
of Members holding a majority of the Percentage Interests held by the
remaining Members, within 90 days thereafter, elect to continue the business
of the Company pursuant to the terms of this Agreement; or
(c) the entry of a decree of judicial dissolution under Section
702 of the Act.
17. Liability of Members. The Members shall not have any
liability (personal or otherwise) for the obligations or liabilities of the
Company except to the extent provided in the Act.
18. Exculpation of Managing Member. The Managing Member shall not
have liability (personal or otherwise) to the Company or its Members for damages
for any breach of duty in such capacity, provided that nothing in this Section
shall eliminate or limit the liability of the Managing Member if a judgment or
other final adjudication adverse to him establishes that his acts or omissions
were in bad faith or involved intentional misconduct or a knowing violation of
law or that he personally gained in fact a financial profit or other advantage
to which the Managing Member was not legally entitled or that with respect to a
distribution to Members the acts of the Managing Member were not performed in
accordance with the Act.
19. Indemnification. To the fullest extent permitted by law, the
Company shall indemnify and hold harmless the Managing Member and Members of the
Company and their respective directors, trustees, shareholders, officers,
employees and agents (collectively, the "Indemnitees"), from and against any and
all costs, liabilities, claims, expenses, including reasonable attorneys' fees,
and damages (collectively, "Losses") paid or incurred by any such Indemnitee in
connection with the conduct of the Company's business in accordance with this
Agreement and the Act, except that no Indemnitee shall be entitled to
indemnification in respect of any Loss incurred by such Indemnitee by reason of
such Indemnitee's willful misconduct. Any indemnity under this Section shall be
provided out of and to the extent of Company assets only and no Member shall
have any personal liability on account thereof. All rights of an Indemnitee
under this Section shall survive the dissolution of the Company and the
withdrawal of the Indemnitee from membership in the Company and shall inure to
the benefit of its heirs, personal representatives, successors and assigns.
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20. Liquidation; Payments to Deceased, Incapacitated, Dissolved,
Withdrawing and Expelled Members if Business is Continued. (a) Upon dissolution
of the Company, unless the remaining Members elect to continue the business of
the Company as provided above, the Managing Member (or if the Managing Member
refuses, such other person selected by the Members) shall be the liquidator of
the Company (collectively, the "Liquidator"). The Liquidator shall liquidate the
assets of the Company and apply and distribute the proceeds of such liquidation
in the following order of priority, unless otherwise required by mandatory
provisions of applicable law:
(i) to creditors of the Company (including Members);
(ii) to the Members, to the extent of and in proportion to
the balances in their respective Capital Accounts, after adjustment to
reflect any income, gain, loss or expense for the fiscal year (as
defined in Section 24 herein) in which such liquidation occurs; and
(iii) the balance, if any, to the Members in proportion
to their then Percentage Interests.
provided, however, that the Liquidator may place in escrow a reserve of cash
or other assets of the Company for contingent liabilities in an amount
determined by the Liquidator to be appropriate for such purposes.
(b) In case a Member (the "Affected Member") withdraws or
is expelled, the following shall be applicable:
(i) The Percentage Interest of any such Affected Member
shall cease on the date immediately following the effective date of such
withdrawal or expulsion (such date is the "termination date").
(ii) The Company shall deliver to the Affected Member or
his personal representative any property owned by the Member that is in
the possession of the Company and shall pay to the Member or his
personal representative the balance of any amount owed by the Company to
the Member (other than any amount owed with respect to the Member's
Capital Account) less any amounts due the Company by such Member,
including amounts payable pursuant to Section 20(b)(iv).
(iii) The Company shall pay to the Affected Member or his
personal representative an amount equal to the positive balance in such
Member's Capital Account as of the date of the termination date
determined after making all appropriate adjustments to reflect any
events occurring at or prior to the date of the termination date. In
determining items of income, gain, loss, and expense for the Allocation
Period ending on the date of the termination date, it shall be assumed
that all property owned by the Company was sold on the termination date
for its fair market value as determined by the Managing Member.
-9-
<PAGE>
<PAGE>
(iv) Payments to an Affected Member or his personal
representative of amounts due under this Section shall be made in cash
or, in case payment in cash is not reasonably practicable (in the
judgment of the Managing Member), in other property having, in the
reasonable opinion of the Managing Member, a fair market value equal to
the amount due, (aa) in the case of a Member who withdraws voluntarily
in three equal annual installments, the first of which shall be payable
on the first annual anniversary of the first January 1, April 1, July 1
or October 1 next following the date of withdrawal; (bb) in the case of
any Member expelled for Cause, in five equal annual installments, the
first of which shall be payable on the first annual anniversary of the
first January 1, April 1, July 1 or October 1 next following the date of
expulsion; and (cc) in any other case on the last day of the twelve
month period commencing on the first calendar quarter next following the
date of dissolution; provided, however, that the Managing Member may
elect to pay any unpaid amount due the Member at any earlier time in its
discretion.
(v) Any net amount due to the Company from an Affected
Member or due from the Company to an Affected Member or his personal
representative shall bear interest from the date of dissolution until
paid at a rate per annum equal to the rate announced by The Chase
Manhattan Bank (and its successors) in New York City from time to time
as its prime rate, changing as and when said prime rate shall change.
21. Right to Compel Cash Sale. (a) If any Member or group of
Members holding at least 51% of the Percentage Interests (which Member or group
is referred to herein as the "51% Group") proposes to sell, assign or otherwise
transfer ("Transfer") for cash all Percentage Interests owned by the 51% Group
to a purchaser (the "Purchaser") in an arms-length transaction, it may, at its
option, require the remaining Members to Transfer all, but not less than all, of
the Percentage Interests owned by them to the Purchaser on the same terms and
conditions upon which the 51% Group is selling its Percentage Interests. If
AmBrew International holds more than 50% of the Company's Percentage Interests
and the Purchaser offers to purchase for cash consideration other assets of
AmBrew International in addition to the Percentage Interests of the 51% Group,
then the Company shall retain an independent investment bank to value the
Designated Interests (defined below) and the 51% Group, if it has exercised its
option under this Section 21, shall be obligated to pay such value to the
Members other than those that are part of the 51% Group.
(b)(i) The Percentage Interests to be Transferred by
each of the Members other than those that are part of the 51% Group are referred
to in this Section 21 as the "Designated Interests". The 51% Group shall give
notice of the exercise of their rights pursuant to this Section 21 to each of
the remaining Members setting forth the cash consideration to be paid by the
Purchaser and the other terms and conditions of such Transfer. Within 15 days of
such notice by the 51% Group, each of the remaining Members shall deliver to a
representative of the 51% group designated in the notice such instruments as may
be required to Transfer the Designated Interests held by such Member.
(ii) If, within 120 days after the 51% Group gives such
notice, the Transfer of all the Percentage Interests of the members in
accordance herewith is not completed, the 51%
-10-
<PAGE>
<PAGE>
Group shall return to each remaining Member all instruments previously
delivered to such representative, and all the restrictions on sale or
other disposition contained in this Agreement with respect to membership
interests owned by Members shall again be in effect.
(iii) Simultaneously with the consummation of the Transfer
of membership interests of the 51% Group and of the remaining Members
pursuant to this Section 21, the 51% Group shall cause the Purchaser to
remit directly to each remaining Member the total sales price of the
Designated Interests of such Member Transferred pursuant hereto, and
shall furnish such other evidence of the completion and time of
completion of such sale or other disposition and the terms thereof as
may be reasonably requested by such Members. The 51% Group may deduct
from the sales price payable to each other Member pursuant to this
Section 21 such Member's pro rata portion of the out-of-pocket fees and
expenses payable in respect of the completion of such Transfer,
including, without limitation, reasonable brokers', legal and accounting
fees and expenses.
22. Buy-Sell Between Partners. (a) Either AmBrew International on
the one hand or the other Members acting collectively on the other hand (in
either case, the "Buy-Sell Offeror") may, by written notice (the "Buy-Sell
Selling Notice") to the other(s) (the "Buy-Sell Receiver"), offer to either:
(i) buy from the Buy-Sell Receiver all, but not less than
all, of the Buy-Sell Receiver's Percentage Interests in the Company
(whether of the Buy-Sell Offeror or the Buy-Sell Receiver, such
interests referred to as the "Buy-Sell Interests"); or
(ii) sell to the Buy-Sell Receiver all, but not less than
all, of the Buy-Sell Offeror's Buy-Sell Interests.
As used in this Section 22, the term "Selling Member" shall mean
the Member(s) that sells its Buy-Sell Interests and the term "Purchasing
Member" shall mean the Member(s) that purchases the Buy-Sell Interests of the
Selling Member. The Buy-Sell Selling Notice shall state the Buy-Sell
Offeror's desire to purchase the Buy-Sell Receiver's Buy-Sell Interests or
sell the Buy-Sell Offeror's Buy-Sell Interests in accordance with the terms
set out therein (collectively, the "Buy-Sell Transfer Terms"), which terms
shall (x) include, without limitation, the purchase or sales price for the
Buy-Sell Interests of the Buy-Sell Receiver or the Buy-Sell Offeror, as the
case may be, and (y) be subject to the provisions of this Section 22. The
Buy-Sell Selling Notice shall be a firm, legally binding and irrevocable
offer for 90 days from the date of its delivery to the Buy-Sell Receiver.
(b) The Buy-Sell Receiver shall, within 90 days after the date
upon which the Buy-Sell Selling Notice shall have been given by the Buy-Sell
Offeror, give a notice ("Buy-Sell Notice of Election") to the Buy-Sell
Offeror as to whether it desires (i) to sell its Buy-Sell Interests in
accordance with the Buy-Sell Transfer Terms or (ii) to purchase the Buy-Sell
Interests of the Buy-Sell Offeror in accordance with the Buy-Sell Transfer
Terms. In the event that the Buy-Sell Receiver elects to purchase the
Buy-Sell Interests of the Buy-Sell Offeror on the Buy-Sell Transfer Terms,
then the Buy-Sell Receiver shall deliver to counsel for the Buy-Sell Offeror
in escrow, by wire transfer of immediately available funds in accordance with
such escrow agent's instructions or by
-11-
<PAGE>
<PAGE>
certified check or bank cashier's check, an amount equal to 5% of the portion
of the Buy-Sell purchase price, which amount will be released from escrow and
paid at closing to the Selling Member (the "Buy-Sell Deposit").
(c) In the event that, within the 90-day period referred to in
the last sentence to Section 22(a), either: (i) the Buy-Sell Receiver elects
to sell its Buy-Sell Interests in accordance with the Buy-Sell Transfer
Terms, or (ii) the Buy-Sell Receiver shall not have delivered a Buy-Sell
Notice of Election within such 90-day period to the Buy-Sell Offeror, or
(iii) the Buy-Sell Receiver shall have delivered a Buy-Sell Notice of
Election declining to purchase the Buy-Sell Interests of the Buy-Sell Offeror
in accordance with the Buy-Sell Transfer Terms, then, (x) the Buy-Sell
Receiver shall be deemed to have irrevocably elected to sell its Buy-Sell
Interests in accordance with the Buy-Sell Transfer Terms and (y) the Buy-Sell
Offeror shall be obligated to purchase, and the Buy-Sell Receiver shall be
obligated to sell, the Buy-Sell Receiver's Buy-Sell Interests in accordance
with the Buy-Sell Transfer Terms (provided that if the Buy-Sell Selling
Notice states the desire of the Buy-Sell Offeror to sell its Buy-Sell
Interests, the purchase price of the Buy-Sell Interests of the Buy-Sell
Receiver shall be the same price per Percentage Interest as the sales price
of the Buy-Sell Interests of the Buy-Sell Offeror contained in the Buy-Sell
Transfer Terms); in either case, the Buy-Sell Offeror shall then be the
Purchasing Member and the Buy-Sell Receiver shall be the Selling Member. Once
the Buy-Sell Receiver has by its action obligated the Buy-Sell Offeror to
purchase the Buy-Sell Interests of the Buy-Sell Receiver, the Buy-Sell
Offeror shall deliver to counsel for the Selling Member, in escrow, by wire
transfer of immediately available funds in accordance with such escrow
agent's instructions or by certified check or bank cashier's check, an amount
equal to the Buy-Sell Deposit.
(d) The closing date for purchasing the Selling Member's Buy-Sell
Interests (the "Buy-Sell Closing Date") shall be set by the Purchasing Member
in a notice to the Selling Member; provided, however, that the date so chosen
as the Buy-Sell Closing Date must not be later than 9 months after the
delivery of the Buy-Selling Notice (the "Buy-Sell Closing Period"); provided,
further, that the Buy-Sell Closing Period may be extended for an additional
45 day period if, prior to the end of the Buy-Sell Closing Period, the
Purchasing Member delivers to the Selling Member a binding commitment (which
is unconditional except for commercially reasonable and customary closing
conditions) from an institutional lender that is reasonably acceptable to the
Selling Member pursuant to which such institutional lender agrees to finance
all or a portion of the Buy-Sell Purchase Price on or prior to the end of
such 45 day extended period.
(e) On the Buy-Sell Closing Date the Purchasing Member shall
deliver by wire transfer or by a certified check or bank cashiers check drawn
upon a New York bank which is a member of the New York Clearing House
Association in a sum equal to the balance of that portion of the Buy-Sell
Purchase Price which is to be paid for the Buy-Sell Interests of the Selling
Member and shall otherwise comply with Buy-Sell Transfer Terms, and all
amounts paid into escrow by the Purchasing Member shall be released from
escrow and paid to the Selling Member.
-12-
<PAGE>
<PAGE>
(f) The Buy-Sell Transfer Terms shall (i) require payment in cash
for the Buy-Sell Interests and (ii) require that the Buy-Sell Interests be
sold by the Selling Member free and clear of any liens and encumbrances
against same.
(g) On the Buy-Sell Closing Date, each Member shall execute,
acknowledge and deliver to each other Member such instruments, and take such
other actions, as such other Member shall reasonably request in order to
effectuate the purchase and sale of the Selling Member's Buy-Sell Interests
in accordance with the Buy-Sell Transfer Terms and otherwise in accordance
with the provisions of this Section 22; provided, however, that no Selling
Member shall be required to make any representations to any Purchasing Member
other than the representation that the Selling Member is transferring its
Buy-Sell Interests free and clear of any liens, claims and encumbrances of
any kind.
(h) If a Member(s) fails for any reason to purchase or sell upon
the Buy-Sell Transfer Terms and otherwise in accordance with this Section 22,
then such Member(s) shall be deemed a defaulting Member(s) hereunder and the
non-defaulting Member(s) shall have the following options, in each case to be
exercised or commenced within 90 days of the date of such default:
(i) to retain the Buy-Sell Deposit (if the defaulting
Member(s) was to be the Purchasing Member) as liquidated damages and
continue the Company, it being agreed that the damages arising from a
breach by a Member of its obligations under this Section 22 are impossible
to ascertain with certainty and the Buy-Sell Deposit represents a good
faith estimate of the damages likely to be incurred by the non-defaulting
Member(s); or
(ii) to retain the Buy-Sell Deposit (if the defaulting
Member(s) was to be the Purchasing Member) and then elect, by notice to the
defaulting Member(s), on the date set forth in such notice by the
non-defaulting Member(s), within 3 months after the Buy-Sell Closing Date,
to purchase the Buy-Sell Interests of the defaulting Member(s) for a
purchase price equal to (x) the Buy-Sell purchase price for the Buy-Sell
Interests of the defaulting Member(s) multiplied by 90% minus (y) the
Buy-Sell Deposit retained by the non-defaulting Member(s), such election to
be made in the sole and absolute discretion of the non-defaulting
Member(s); or
(iii) to elect (if the defaulting Member(s) was to be the
Selling Member), by notice to the defaulting Member(s), on the date set
forth in such notice, within 3 months after the Buy-Sell Closing Date, to
purchase the Buy-Sell Interests of the defaulting Member(s) at the Buy-Sell
Purchase Price for the Buy-Sell Interests of the defaulting Member(s)
multiplied by 90%, in which case upon payment of such purchase price the
defaulting Member shall cease to have any rights to its Buy-Sell Interests,
except for the right to surrender such Buy-Sell Interests in exchange for
payment of such purchase price.
23. Time of the Essence. Time is of the essence with respect to
each of the dates and time periods set forth in Sections 21 and 22.
24. Tax Matters. The Company's fiscal and taxable year will end
each October 31. The Managing Member shall be the only Member authorized to
prepare, execute and file tax returns and
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<PAGE>
<PAGE>
tax reports on behalf of the Company and to represent the Company before any
taxing authority. The Members shall, on each such Member's tax return, treat
each item of income, gain, loss or expense derived from the Company in a manner
consistent with the treatment of such item on the Company's tax returns and
reports.
25. Other Investments. Nothing in this Agreement shall be deemed
to limit or proscribe the ability of the Members or their respective affiliates
to invest in other entities or operate other businesses, including breweries, in
Ireland or elsewhere.
26. Applicable Law. This Agreement shall be governed by, and
construed in accordance with, the law of the State of New York (other than the
conflicts of law rules), all rights and remedies being governed by said laws.
27. CONSENT TO JURISDICTION. EACH OF THE MEMBERS HEREBY SUBMITS
TO THE NON-EXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW
YORK CITY FOR THE PURPOSE OF ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO
THE COMPANY OR THIS AGREEMENT. EACH OF THE MEMBERS IRREVOCABLY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE LAYING OF VENUE OF ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT AND
ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS BEEN BROUGHT IN
AN INCONVENIENT FORUM. EACH MEMBER CONSENTS TO THE SERVICE OF PROCESS IN ANY
SUCH PROCEEDING BY THE DELIVERY (BY OVERNIGHT COURIER) TO IT AT ITS ADDRESS SET
FORTH IN EXHIBIT A HERETO, OR SUCH OTHER ADDRESS AS THE MEMBER SHALL HAVE
NOTIFIED THE COMPANY IN WRITING. EACH MEMBER FURTHER AGREES THAT A FINAL
JUDGMENT IN ANY SUCH PROCEEDING SHALL BE CONCLUSIVE AND BINDING AND MAY BE
ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER
PROVIDED BY LAW.
28. Amendments. (a) Except as otherwise provided by this
Agreement or the Act, this Agreement may be amended by the affirmative vote of
Members holding 66 2/3% of the Percentage Interests.
(b) Notwithstanding anything to the contrary contained in this
Section 28, the Managing Member may modify the provisions of this Agreement
without the consent of the Members if, upon advice of counsel to the Company,
the modification is necessary to cause the Company to be or to continue to be
classified as a partnership for United States federal income tax purposes.
-14-
<PAGE>
<PAGE>
(c) Notwithstanding anything to the contrary contained in this
Section 28, any amendment to this Agreement that would adversely affect the
liabilities of a Member solely by virtue of being a member of the Company
shall require the consent of each Member affected.
29. Counterparts. This Agreement may be executed in several
counterparts and all counterparts so executed shall together be deemed to
constitute one complete agreement, and each such counterpart shall be deemed to
be an original, binding the party or parties subscribed thereto.
30. Power of Attorney. Each Member hereby constitutes and
appoints the Managing Member or if a Liquidator shall have been selected
pursuant to Section 20, the Liquidator of the Company as such Member's true and
lawful agent and attorney-in-fact ("Agent"), with full power of substitution,
with full power and authority in such Member's name, place and stead to execute,
acknowledge, deliver and file all such documents which the Agent deems necessary
or appropriate (i) to continue the existence or qualification of the Company as
a limited liability company under the laws of any state or jurisdiction, (ii) to
reflect amendments to this Agreement or the Articles of Organization made
pursuant hereto or (iii) to reflect the dissolution or liquidation of the
Company pursuant to the terms hereof. The foregoing power of attorney is hereby
declared irrevocable and a power coupled with an interest and shall survive the
death or incapacity of any Member and shall extend to such Member's successors
and assigns, heirs or representatives.
31. Headings. The headings of the paragraphs of this Agreement
are inserted for convenience only and shall not constitute a part hereof.
-15-
<PAGE>
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the date set forth above.
AMERICAN CRAFT BREWING
INTERNATIONAL LIMITED
By_______________________________________
Name: James L. Ake
Title: Executive Vice President, Chief
Operating Officer and Secretary
_______________________________________
AIDAN McGUINESS
-16-
<PAGE>
<PAGE>
Exhibit A
to
Operating Agreement
of
CELTIC BREW LLC
<TABLE>
<CAPTION>
Initial Capital
Name of Member Address Percentage Interest Contribution
-------------- ------- ------------------- ------------
<S> <C> <C> <C>
1. American Craft One Galleria Boulevard 60% US$600,000
Brewing International Metairie, Louisiana 70001
Limited
2. Aidan McGuinness Shannon and Western Brewery 40% US$400,000
Limited
Enfield Industrial Estate
Enfield, County Meath
IRELAND
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary finacial information extracted from the
consolidated balance sheet of American Craft Brewing International Limited
and its Subsidiaries as of October 31, 1996, and the consolidated statements of
operations for the years ended October 31, 1996, and 1994, and is
qualified in its entirety by reference to such financial statements (the
"Financial Statements").
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1996 OCT-31-1995
<PERIOD-START> NOV-01-1995 NOV-01-1994
<PERIOD-END> OCT-31-1996 OCT-31-1995
<CASH> 5,780,672 102,248
<SECURITIES> 0 0
<RECEIVABLES> 75,081 22,236
<ALLOWANCES> 1,500 556
<INVENTORY> 35,508 22,922
<CURRENT-ASSETS> 6,016,226 147,241
<PP&E> 754,283 656,764
<DEPRECIATION> 90,453 21,997
<TOTAL-ASSETS> 7,001,306 866,278
<CURRENT-LIABILITIES> 254,872 251,216
<BONDS> 0 0
<COMMON> 36,969 645
0 0
0 0
<OTHER-SE> 6,692,101 188,696
<TOTAL-LIABILITY-AND-EQUITY> 7,001,306 866,278
<SALES> 427,750 63,707
<TOTAL-REVENUES> 427,750 63,707
<CGS> 104,473 38,960
<TOTAL-COSTS> 790,014 331,848
<OTHER-EXPENSES> 283 2,265
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 303,408 17,838
<INCOME-PRETAX> (665,955) (288,244)
<INCOME-TAX> (36,405) (47,560)
<INCOME-CONTINUING> (629,550) (240,684)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (629,550) (240,684)
<EPS-PRIMARY> (0.28)<F1> (0.12)<F1>
<EPS-DILUTED> 0 0
<FN>
<F1>Refer to Note 3 of the Notes to the Financial Statements for discussion of
total common shares used in EPS.
</TABLE>
