SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A No. 1
(Mark One)
[x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission file number: 1-13636
Mendocino Brewing Company, Inc.
(Name of small business issuer in its charter)
California 68-0318293
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
13351 South Highway 101, Hopland, CA 95449
(Address of principal executive offices) (Zip code)
Issuer's telephone number: (707) 744-1015
Securities registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value The Pacific Stock Exchange
Securities registered under Section 12(g) of the Act:
Not applicable
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- ------
The number of shares of the issuer's common stock outstanding as of
September 30, 1997 is 2,341,548. (Does not include 300,000 shares issued subject
to substantial restrictions as security for a forbearance. See Item 2 -
Management's Discussion and Analysis -- Financing the New Brewery - Vendor
Financing.)
<PAGE>
PART I
Item 1. Financial Statements.
<TABLE>
MENDOCINO BREWING COMPANY, INC.
BALANCE SHEET
September 30,1997
(Unaudited)
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash and cash equivalents $ 152,432
Accounts receivable 505,834
Inventories 429,320
Prepaid expenses and taxes 67,050
Refundable income taxes 116,500
Deferred income taxes 23,100
----------
Total Current Assets: 1,294,236
----------
Property and Equipment 11,128,642
----------
Other Assets
Deferred private placement costs 496,806
Deposits and other assets 100
Deferred income taxes 139,700
----------
Total Other Assets: 636,606
----------
Total Assets: $ 13,059,484
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Line of credit $ 600,000
Accounts payable 773,972
Accrued wages and related expense 148,690
Accrued construction costs 820,454
Accrued liabilities 436,075
Refundable deposit 964,000
Notes payable 3,563,057
Current maturities of obligation under capital lease 164,460
----------
Total Current Liabilities: 7,470,708
Obligation under capital lease, less current maturities 1,622,592
Deferred income taxes 18,100
----------
Total Liabilities: 9,111,400
Stockholders' Equity
Common stock, no par value; 20,000,000 shares authorized;
2,341,548 shares issued and outstanding 3,869,569
Preferred stock, 2,000,000 shares authorized, 227,600 of
which are designated Series A, no par value, with aggregate liquidation
preference of $227,600; 227,600 Series A shares
issued and outstanding 227,600
Accumulated deficit (149,085)
----------
Total Stockholders' Equity: 3,948,084
----------
Total Liabilities and Stockholders' Equity: $ 13,059,484
==========
<FN>
The accompanying notes are an integral
part of these financial statements
</FN>
</TABLE>
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<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales $ 1,467,724 $ 1,111,044 $ 3,792,203 $ 3,022,417
Less excise taxes 79,269 47,050 198,683 118,033
----------- ----------- ----------- -----------
Net sales 1,388,455 1,063,994 3,593,520 2,904,384
----------- ----------- ----------- -----------
Cost of goods sold 899,746 543,545 2,240,583 1,413,995
----------- ----------- ----------- -----------
Gross profit 488,709 520,449 1,352,937 1,490,389
----------- ----------- ----------- -----------
Operating expenses
Retail operations 196,616 191,255 531,204 563,540
Marketing and distribution 184,171 200,846 615,035 493,666
General and administrative 216,848 151,175 605,995 490,791
----------- ----------- ----------- -----------
597,635 543,276 1,752,234 1,547,997
----------- ----------- ----------- -----------
Income (loss) from operations (108,926) (22,827) (399,297) (57,608)
----------- ----------- ----------- -----------
Other income (expense)
Interest income 1,298 210 4,404 11,029
Interest expense (44,018) -- (73,639) --
Write off of deferred offering costs -- -- (141,006) --
Other income (expense) 7,141 (907) 12,782 (48,269)
----------- ----------- ----------- -----------
(35,579) (697) (197,459) (37,240)
----------- ----------- ----------- -----------
Loss before income taxes (144,505) (23,524) (596,756) (94,848)
----------- ----------- ----------- -----------
Benefit from income taxes (131,000) (3,086) (244,600) (23,786)
----------- ----------- ----------- -----------
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
=========== =========== =========== ===========
Loss per share $ (0.01) $ (0.01) $ (0.15) $ (0.03)
=========== =========== =========== ===========
Weighted average common shares
outstanding 2,341,548 2,322,222 2,335,106 2,322,222
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
MENDOCINO BREWING COMPANY, INC.
STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (13,505) $ (20,438) $ (352,156) $ (71,062)
Adjustments to reconcile net loss to
net cash provided (used) by operating
activities:
Depreciation and amortization 126,913 12,182 237,569 35,190
Loss on sale of assets -- 346 -- 346
Gain on sale of assets -- (3,915) -- (3,915)
Deferred income taxes (111,600) 4,000 (135,200) (17,500)
Changes in:
Accounts receivable (23,155) 237,477 (123,622) 145,973
Inventories (126,268) 20,059 (48,819) (187,219)
Prepaid expenses and taxes 618 (15,918) (8,510) (41,910)
Refundable income tax (19,400) -- (109,400) --
Accounts payable (97,815) (4,846) 206,415 257,456
Accrued wages and related expense 11,191 1,746 30,422 (22,620)
Accrued profit sharing -- (30,000) -- (30,000)
Accrued liabilities 384,178 (11,673) 419,972 (3)
Income taxes payable -- -- -- (34,200)
----------- ----------- ----------- -----------
Net cash provided by operating
activities: 131,157 189,020 116,671 30,536
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (264,667) (1,212,905) (1,925,872) (4,226,070)
Deposits and other assets 40 (12,203) 13,965 2,362
Proceeds from sale of fixed assets -- 3,569 -- 3,569
----------- ----------- ----------- -----------
Net cash used by investing activities: (264,627) (1,221,539) (1,911,907) (4,220,139)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from short-term borrowing (1,300) (56,900) 797,693 298,416
Principal payments on long-term debt -- (31,328) -- (31,327)
Proceeds from obligation under capital
lease -- 750,000 -- 750,000
Payments on obligation under capital
lease (38,700) -- (89,890) --
Refundable deposit 464,000 -- 964,000 --
Accrued construction costs 25,896 641,339 75,985 1,822,157
Proceeds from sale of common stock -- -- 164,271 --
Deferred stock offering costs -- (49,615) 37,687 (103,549)
Deferred private placement costs (415,020) -- (496,806) --
----------- ----------- ----------- -----------
Net cash provided by financing
activities: 34,876 1,253,496 1,452,940 2,735,697
----------- ----------- ----------- -----------
INCREASE (DECREASE) IN CASH (98,594) 220,977 (342,296) (1,453,906)
----------- ----------- ----------- -----------
CASH, BEGINNING OF PERIOD 251,026 21,226 494,728 1,696,109
----------- ----------- ----------- -----------
CASH, END OF PERIOD $ 152,432 $ 242,203 $ 152,432 $ 242,203
=========== =========== =========== ===========
Supplemental Cash Flow Information Includes the Following:
Cash Paid During the Period for:
Interest $ 154,441 $ 28,284 $ 402,284 $ 77,202
Income taxes $ -- $ -- $ -- $ 52,500
=========== =========== =========== ===========
Non-cash investing and financing activities for the nine month period ending September 30,1997, consisted of acquiring fixed assets
of $19,573 through a capital lease.
<FN>
The accompanying notes are an integral
part of these financial statements.
</FN>
</TABLE>
-3-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
The financial statements included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to such rules and
regulations. It is believed, however, that the disclosures are adequate to make
the information presented not misleading.
The financial statements, in the opinion of management, reflect all adjustments
necessary to fairly state the financial position and the results of operations.
These results are not necessarily to be considered indicative of the results for
the entire year.
Note 2 Subsequent Event
On October 24, 1997, the Company entered into an investment agreement with
United Breweries of America, Inc., a Delaware corporation ("UBA"), whereby (a)
the Company issued 1,600,000 shares of common stock to UBA at a purchase price
of $4.25 per share in exchange for $1,800,000 cash and $5,000,000 in assets in
the form of 100% of the outstanding interests of Releta Brewing Company LLC, a
limited liability company formed by UBA for the purpose of acquiring a brewery
in Saratoga Springs, New York; and (b) UBA unconditionally agreed to purchase an
additional 517,647 shares for cash at $4.25 per share ($2,200,000 in the
aggregate) on or before November 30, 1997. The brewery is approximately one year
old and was built for a total investment of $8.7 million. Commencement of
brewing operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
UBA also agreed to provide funding for the working capital requirements of
Releta in an amount not to exceed $1 million until October 24, 1999 or until
Releta's operations are profitable, whichever comes first. Professional expenses
and investment banker fees associated with the transaction (private placement
costs) were approximately $500,000, resulting in net proceeds of approximately
$3.5 million.
Note 3 Short-Term Borrowing
The Company has a $600,000 term line of credit from a bank with variable
interest at the bank's index rate plus 1.5%, maturing November 30, 1997. The
note is secured by receivables and inventory. The bank has issued a commitment
letter to convert the loan to a revolving line of credit upon full funding of
the investment agreement with UBA.
Note 4 Notes Payable
Note payable (construction loan) to bank of $2,404,313, with interest at the
bank's index rate plus 2%; secured by substantially all of the Company's assets;
note matures January 1, 1998. The bank has issued a commitment letter
-4-
<PAGE>
MENDOCINO BREWING COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
to convert the loan to long-term debt upon full funding of the investment
agreement with UBA.
Note payable to contractor of $900,000, with interest at 12%; due the later of
January 31, 1997 or 30 days after completion of the brewery; secured by common
stock and a second deed of trust on the brewery and subordinated to bank debt.
Note payable to certain individuals of $260,044, due in monthly payments of
$2,380, including interest at 9%; matured June 1997 with a verbal extension
until October 1997, and a balloon payment; secured by real property and
subordinated to bank debt.
Note 5 Renegotiation of Obligation under Capital Lease
In June 1997 the Company renegotiated its capital lease to retroactively reduce
the amount of the lease commitment from approximately $2.1 million to $1.8
million. The excess of lease payments previously paid over the recalculated
lease payments has been credited against future payments.
Note 6 Direct Public Offering
On November 6, 1996, the Company filed a registration statement with the
Securities and Exchange Commission to sell 600,000 shares of its no par value
common stock at a proposed offering price of $8.50 per share. In August 1997,
the offering was terminated after having sold 19,326 shares for $164,271. All
stock transactions occurred prior to June 30, 1997. As of June 30, 1997, the
Company had incurred $305,277 of offering costs related to this offering. Of
that amount, $164,271 was offset against the stock sale proceeds in
Stockholders' Equity and the balance of $141,006 was expensed in the quarter
ended June 30, 1997.
-5-
<PAGE>
Item 2. Management's Discussion and Analysis.
The following discussion and analysis should be read in conjunction with the
Financial Statements and the Notes thereto included as Item 1 in this Report.
The discussion of results and trends does not necessarily imply that these
results and trends will continue.
Forward-Looking Information
The Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-QSB contain forward-looking
information within the meaning of the Private Securities Litigation Reform Act
of 1995. The forward-looking information involves risks and uncertainties that
are based on current expectations, estimates, and projections about the
Company's business, management's beliefs, and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," and variations of such words and similar expressions are intended
to identify such forward-looking information. Therefore, actual outcomes and
results may differ materially from what is expressed or forecasted in such
forward-looking information due to numerous factors, including, but not limited
to, availability of financing for operations, successful performance of internal
operations, impact of competition, changes in distributor relationships or
performance, full funding of the investment agreement with United Breweries of
America, Inc., and other risks detailed below as well as those discussed
elsewhere in this Form 10-QSB and from time to time in the Company's Securities
and Exchange Commission filings and reports. In addition, such statements could
be affected by general industry and market conditions and growth rates, and
general domestic economic conditions.
Overview
The third quarter of 1997 was highlighted by the commencement of bottling
operations at the new brewery in Ukiah. Brewing commenced in mid-second quarter.
The Ukiah brewery has given the Company the ability to offer its brews in draft
form to distributors and retail accounts for the first time. The third quarter
also saw the introduction of Black Hawk Stout(R) in 12 oz. six packs with a new,
award-winning label, for the first time. The Company now offers three brands in
12 oz. six packs.
In October 1997 the Company concluded a definitive investment agreement with
United Breweries of America, Inc. which provided for a $4 million cash
investment in the Company and the contribution to the Company of a new brewery
in Saratoga Springs, New York. See "Liquidity and Capital Resources --
Investment by United Breweries of America, Inc." Commencement of brewing
operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
Increased net sales for the nine-month period (up 23.7% over the same period in
1996) were achieved in significant part through increased marketing efforts
which were begun mid-second quarter in 1996. The limit on the Company's brewing
capacity (which was relieved by commencement of operations in Ukiah), increased
marketing expenses associated with increased productive capacity, increased
fixed costs associated with the new facility, and a one-time $141,000 write off
of public offering expenses contributed to a $352,200 loss for the nine month
period.
-6-
<PAGE>
The bottling line from the Hopland facility was moved in mid July 1997. The
Company relocated seven of its eleven smaller fermenting tanks from its Hopland
facility to Ukiah for production of the Company's seasonal ales, which are
brewed in smaller quantities than Red Tail Ale(R) and Blue Heron(R) Pale Ale.
This will permit the Company to expand production to a possible 60,000 bbl. per
year rate, as required by demand, while still producing its seasonal ales.
Results of Operations
Nine Months Ending September 30, 1997 Compared to Nine Months Ending September
30, 1996. The following discussion sets forth information for the nine-month
periods ending September 30, 1996 and 1997. This information has been derived
from unaudited interim financial statements of the Company contained elsewhere
herein and reflects, in Management's opinion, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
results of operations for these periods. Results of operations for any interim
period are not necessarily indicative of results to be expected for the full
fiscal year.
<TABLE>
The following table sets forth, as a percentage of net sales, certain items
included in the Company's Statements of Operations. See Financial Statements
elsewhere in this Report, for the periods indicated:
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Statements of Income Data:
Sales........................................... 105.53% 104.06%
Excise taxes.................................... 5.53 4.06
------ ------
Net sales....................................... 100.00 100.00
Costs of sales.................................. 62.35 48.68
------ ------
Gross profit.................................... 37.65 51.32
------ ------
Retail operating expense........................ 14.78 19.40
Marketing and distribution expense.............. 17.12 17.00
General and administrative expense.............. 16.86 16.90
------ ------
Total operating expenses........................ 48.76 53.30
------ ------
Loss from operations............................ (11.11) (1.98)
Other expense................................... (5.49) (1.28)
------ ------
Loss before income taxes........................ (16.61) (3.27)
Benefit from income taxes....................... (6.81) (0.82)
------ ------
Net loss........................................ (9.80)% (2.45)%
====== ======
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
At September 30,
--------------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....................... $ 152,400 $ 242,200
Working capital (deficit)....................... (6,176,500) (3,240,300)
Property and equipment.......................... 11,128,600 8,151,000
Deposits and other assets....................... 100 158,000
Total assets.................................... 13,059,500 9,452,800
Long-term debt.................................. 1,622,600 718,700
Total liabilities............................... 9,111,400 5,099,700
Shareholder's equity............................ 3,948,100 4,353,100
</TABLE>
Net Sales. Net sales for the first nine months of 1997 were $3,593,520 compared
to $2,904,384 for the first nine months of 1996, and increase of 23.7%.
Management attributes the growth in sales to the implementation of new marketing
strategies, including new point of sale materials and additional field sales
representatives, and the commencement of operations at the new Ukiah facility,
beginning in the second quarter of 1996. Wholesale beer shipments increased by
65.9% in the first nine months of 1997 compared to the same period in 1996.
Increases attributable to additional unit sales were offset by a wholesale price
reduction implemented in September 1996. Management attributes approximately 60%
of the sales increase to increased sales to existing distributors and geographic
expansion begun in the second half of 1996 and the remaining 40% to sales of
draft beer from the new brewery, which began for the first time in May 1997.
Retail sales at the Hopland Brewery brewpub and merchandise store were up 5.1%
for the first nine months of 1997 compared to 1996. Management attributes the
increase to merchandise sales resulting from tourist traffic generated by the
Company's marketing efforts.
Cost of goods sold. Cost of goods sold as a percentage of net sales increased
13.7 percentage points from the first nine months of 1996 to 62.4% in the same
period in 1997. Management attributes the increase to higher fixed costs
associated with the new Ukiah brewing facility.
Gross profit. Gross profit decreased 9.2% from the first nine months of 1996 to
$1,353,000 in the same period in 1997. As a percentage of net sales, gross
profit decreased 13.7 percentage points from the first nine months of 1996 to
37.7% in the same period in 1997. The decrease in gross profit as percentage of
net sales is attributable to the increase in cost of goods sold and a wholesale
price reduction implemented in September 1996.
Operating expenses. Operating expenses were $1,752,200, representing an increase
of 13.2% from the first nine months of 1996. Operating expenses consist of
retail operating expense, marketing and distribution, and general and
administrative expense. Retail operating expenses were $531,200, representing a
decrease of $32,300, or 5.7%, from the first nine months of 1996. The decrease
reflects a decrease in supply and repairs costs of $15,000, a decrease in labor
costs of $11,300, and a decrease in net other expenses of $6,000.
Marketing and distribution expenses were $615,000, representing an increase of
$121,400, or 24.6%, from the first nine months of 1996. As a percentage of net
sales, marketing and distribution expenses were essentially unchanged.
Promotional/advertising costs (including point of sales and packaging/label
development costs) increased by $90,400, marketing and sales labor increased by
$58,200, travel and lodging expenses (incurred in supporting new geographic
-8-
<PAGE>
markets) increased by $26,900, the reserve for bad debts decreased by $31,100,
the Company established a $30,000 reserve in connection with a dispute with a
distributor, net other distribution expenses decreased by $66,000, and net
miscellaneous expenses increased by $13,000.
General and administrative expense was $606,000, representing an increase of
$115,200, or 23.5%, from the first nine months of 1996. As a percentage of net
sales, general and administrative expense was essentially unchanged. Taxes and
insurance costs associated with the new Ukiah brewery increased by $68,400,
professional fees increased by $24,700, costs associated with being a public
company increased by $11,700, and net miscellaneous expenses increased by
$10,400.
Other income (expense). Other expense was $197,500, representing an increase of
$160,200 in expense in the first nine months 1997 compared to the same period
for 1996. This was primarily as a result of writing off $141,000 in costs of the
direct public offering (net of proceeds raised) and additional net interest
expense of $73,600, offset by the non-recurrence of a $38,300 write off of costs
associated with a proposed alliance in 1996 and $16,100 in net additional
miscellaneous income.
Net loss. Increased fixed costs as the Company began production at the new
brewery in mid-quarter, increased marketing and distribution expense as the
Company continued to implement the marketing program began mid-quarter a year
ago, and the net effect of certain one time occurrences, offset by a tax benefit
of $244,600, produced a net loss in the nine months ended September 30, 1997
which was $281,100 higher than in the comparable 1996 nine month period.
Segment Information
Mendocino Brewing's business presently consists of two segments. The first is
brewing for wholesale to distributors and other retailers. This segment
accounted for 78.9% of the Company's first nine months 1997 sales. The second
segment consists of brewing beer for sale along with food and merchandise at the
Company's brewpub and retail merchandise store, the Hopland Brewery. This
segment accounted for 21.1% of the Company's sales for the first nine months of
1997.
Mendocino Brewing began producing draft beer at its new brewery in Ukiah in May
1997. The initial annual capacity of the new brewery is 60,000 bbl. The bottling
line from the Hopland facility was moved to Ukiah in mid July 1997 and seven of
the eleven 70 - 120 bbl. fermenting tanks were moved to Ukiah in mid August. As
the Company does not intend to expand its brewpub operations, Management expects
that retail sales, as a percentage of total sales, will decrease proportionally
to the expected increase in the Company's wholesale sales.
Seasonality
Beer consumption nationwide has historically increased by approximately 20%
during the summer months. It is not clear to what extent seasonality will affect
the Company as it expands its capacity and its geographic markets.
-9-
<PAGE>
Financing the New Brewery.
New Brewery Cost. Although the Company has commenced brewing operations at the
Ukiah facility, construction is not yet completed. The Company has yet to
complete the build-out of its administrative space and the exterior landscaping.
The presently estimated cost of the new brewery at its initial annual capacity
of 60,000 bbl. is $12.2 million. This includes $0.8 million for the land, $7.3
million for improvements to the real estate, $3.4 million for equipment, and
$0.7 million for financing costs. Of this amount, approximately $10.9 million
has been paid or provided for from cash raised in the Company's initial direct
public offering, the proceeds of debt described below, cash provided by the
investment agreement with United Breweries of America, Inc., and cash from
operations. Of the remaining balance of approximately $1.3 million,
approximately $0.3 million is expected to be funded through the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. The $1 million balance will be funded from
operations or other sources or will be deferred. The Ukiah brewery is presently
operating under a temporary certificate of occupancy from the City of Ukiah.
Completion of construction is a condition to the issuance of a final certificate
of occupancy. Failure to complete construction and obtain a final certificate of
occupancy could have a material adverse effect on the Company's business,
financial condition, and results of operations.
Construction Financing. Mendocino Brewing has obtained a $2.7 million
construction loan secured by a first priority deed of trust on the Ukiah land
and improvements. The loan is fully funded. The construction loan bears interest
at the lender's prime plus 2% (initially 10.25%), payable monthly, and matures
on January 1, 1998.
In October 1997 the bank issued a new written commitment to convert the
construction loan to a 15 year term loan upon full funding of the investment
agreement with UBA. The commitment provides that upon conversion, the loan will
bear interest at 1.5% over prime. The minimum annual interest rate is to be
7.5%. The loan is to be amortized over 25 years with a balloon payment upon
maturity in 15 years. The lender's commitment letter states that the lender will
convert the unpaid principal at maturity to a fully amortized 10-year loan
subject to terms and conditions to be agreed upon at that time. The commitment
letter does not legally obligate the bank to convert the construction loan to
permanent financing. Failure to find a lender to refinance the construction loan
could have a material adverse impact on the Company's business, financial
condition, and results of operations.
Equipment Lease. FINOVA Capital Corporation has leased new brewing equipment
with a total cost of approximately $1.78 million to Mendocino Brewing for a term
of 7 years with monthly rental payments of approximately $27,100 each. At
expiration of the initial term of the lease, the Company may purchase the
equipment at its then current fair market value but not less than 25% nor more
than 30% of the original cost of the equipment, or at the Company's option, may
extend the term of the lease for an additional year at approximately $39,000 per
month with an option to purchase the equipment at the end of the year at then
current fair market value. The lease is not pre-payable.
Seller Financing of Ukiah Real Estate. The seller of the Ukiah land has a note,
secured by a third priority deed of trust on the land, with a remaining
principal balance as of September 30, 1997 of approximately $258,700 at 9%
annual interest payable in monthly installments of principal and interest of
$2,380 with the balance due at maturity in October 1997 per a verbal agreement
-10-
<PAGE>
with the spokesman for the lending group. The Company expects to repay the loan
with the proceeds of the investment agreement with UBA.
WestAmerica Loan. WestAmerica Bank of Santa Rosa, California has loaned
Mendocino Brewing $600,000 secured by Mendocino Brewing's accounts receivable
and inventory. The loan is fully funded and bears interest at the bank's index
rate plus 1.5% payable monthly and matures on November 30, 1997. In October
1997, WestAmerica Bank provided the Company with commitment letter to convert
the $600,000 term loan to a revolving line of credit with an advance rate of 80%
of qualified accounts receivable and 25% of inventory upon full funding of the
investment agreement with United Breweries of America, Inc. The commitment
letter does not legally obligate the bank to convert the loan. To the extent
that the loan is not extended or refinanced, the Company will be required to
repay the loan. Failure to find a lender to refinance the loan could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Vendor Financing. The general contractor for the new brewery, BDM Construction
Co., Inc. ("BDM"), agreed to defer up to $900,000 in fees otherwise owed or to
become payable on December 31, 1996, subject to performance by BDM of its
obligations under the construction contract, until January 31, 1997 with
interest at 12% per annum. As of November 12, 1997, approximately $0.9 million
was due to BDM. No written modifications have been made to the deferral
arrangement to address the current circumstances. The deferral arrangement is
secured by a second priority deed of trust on the Ukiah land and improvements,
and by 300,000 shares of Mendocino Brewing's Common Stock. In the event of
default, BDM is required to proceed against the Common Stock before initiating
any proceeding against the real estate. The Common Stock collateral was issued
to BDM by the Company pursuant to Section 4(2) of the Securities Act of 1933
subject to the restrictions (a) that the shares shall be canceled if the amounts
owed BDM are paid in full, (b) that if the full amount owed BDM is not paid, the
shares must be sold in a commercially reasonable manner as specified in the
California Commercial Code, and (c) that any shares not needed to be sold to
satisfy the obligation to BDM shall be canceled. Under California law, BDM may
not retain the shares in satisfaction of the obligation without the written
consent of the Company given after an event of default. BDM has the right to
require the Company to register the shares issued for its account for sale to
the public. As of November 11, 1997, BDM has not taken any action to enforce the
Company's obligations to it. The Company presently anticipates that payment of
its obligation to BDM will be funded with the proceeds of the investment
agreement with United Breweries of America, Inc. See "Investment by United
Breweries of America, Inc." below. Failure to repay BDM could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Keg Management Arrangement. The Company has entered into a keg management
agreement with MicroStar Keg Management LLC. Under this arrangement, MicroStar
provides the Company with half-barrel kegs for which the Company pays a filling
fee. Distributors return the kegs to MicroStar instead of the Company. MicroStar
then supplies the Company with additional kegs. If the agreement terminates, the
Company is required to purchase a certain number of kegs from MicroStar. The
Company would probably finance the purchase through debt or lease financing, if
available.
-11-
<PAGE>
Liquidity and Capital Resources
Generally. The expansion now underway has had and will continue to have a
material impact on Mendocino Brewing's assets, liabilities, commitments for
capital expenditures, and liquidity.
Saratoga Springs Brewery. The acquisition of the additional brewery in Saratoga
Springs, New York will place additional demands on the Company's assets,
liabilities, commitments for capital expenditures, and liquidity. UBA has agreed
to provide funding for the working capital requirements of the Saratoga Springs
brewery in an amount not to exceed $1 million until October 24, 1999 or until
the brewery's operations are profitable, whichever comes first. Commencement of
brewing operations at the Saratoga Springs brewery is contingent upon obtaining
appropriate alcoholic beverage licenses, applications for which are in process.
The Company's ratio of current assets to current liabilities on September 30,
1997 was 0.17 to 1.0 and its ratio of assets to liabilities was 1.43 to 1.0.
New Brewery. See "Financing the New Brewery" above.
Impact of Expansion on Cash Flow. Mendocino Brewing must make timely payments of
its debt and lease commitment to continue in operation. Increased capacity will
also place additional demands on the Company's working capital to pay the cost
of additional sales and marketing activities and staff, production personnel,
and administrative staff and to fund increased purchases of supplies. There will
be a lag between the time the Company must incur some or all of these costs and
the time the Company realizes revenue from increased sales. Working capital for
day to day business operations had historically been provided primarily through
operations. Beginning approximately with the second quarter of 1997, proceeds
from operations have not been able to provide sufficient working capital for day
to day operations as the Company expands. The investment agreement with UBA is
expected to provide approximately $700,000 in working capital. In addition, UBA
has agreed to provide funding for the working capital requirements of the
Saratoga Springs brewery in an amount not to exceed $1 million until October 24,
1999 or until the brewery's operations are profitable, whichever comes first.
Investment by United Breweries of America, Inc. On October 24, 1997, the Company
entered into an investment agreement with United Breweries of America, Inc., a
Delaware corporation ("UBA"), whereby (a) the Company issued 1,600,000 shares of
common stock to UBA at a purchase price of $4.25 per share in exchange for
$1,800,000 cash and $5,000,000 in assets in the form of 100% of the outstanding
interests of Releta Brewing Company LLC, a limited liability company formed by
UBA for the purpose of acquiring the brewery in Saratoga Springs, New York; and
(b) UBA unconditionally agreed to purchase an additional 517,647 shares for cash
at $4.25 per share ($2,200,000 in the aggregate) on or before November 30, 1997.
The brewery is approximately one year old and was built with a total investment
of $8.7 million. Professional expenses and investment banker fees associated
with the transaction were approximately $500,000, resulting in net proceeds of
approximately $3.5 million. UBA also agreed to provide funding for the working
capital requirements of Releta in an amount not to exceed $1 million until
October 24, 1999 or until Releta's operations are profitable, whichever comes
first.
-12-
<PAGE>
PART II
Item 6. Exhibits and Reports on Form 8-K.
Exhibit
Number Description of Document
- ------- -------------------------------
3.1 (A) Articles of Incorporation, as amended, of the Company
3.2 (B) Bylaws of the Company
4.1 Articles 5 and 6 of the Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.1.)
4.2 Article 10 of the Restated Articles of Incorporation, as
amended, of the Company (Reference is made to Exhibit 3.2.)
4.3 (A) Form of Common Stock Certificate (Incorporated by reference
from the Company's Registration Statement dated June 15,
1994, as amended, previously filed with the Commission,
Registration No. 33-78390-LA.)
10.1 (A) Mendocino Brewing Company Profit Sharing Plan.
10.2 (A) 1994 Stock Option Plan (previously filed as Exhibit 99.6).
10.3 * Employment Agreement with H. Michael Laybourn.
10.4 * Employment Agreement with Norman Franks
10.5 (A) Wholesale Distribution Agreement between the Company and
Bay Area Distributing.
10.6 (A) Wholesale Distribution Agreement between the Company and
Golden Gate Distributing.
10.7 (A) Sales Contract between the Company and John I. Hass, Inc.
10.8 (F) Liquid Sediment Removal Services Agreement with Cold Creek
Compost, Inc.
10.9 (A) Lease Agreement between the Company and Kohn Properties.
10.10 (C) Commercial Real Estate Purchase Contract and Receipt for
Deposit (previously filed as Exhibit 19.2).
10.11 (D) Installment Note between Ukiah Redevelopment Agency and
Langley et al. (previously filed as Exhibit 19.5).
10.12 (F) Promissory Note for $76,230 in favor of Langley et al.
10.13 (G) Agreement to modify note and deed of trust dated June 6,
1995 with Langley, et al.
10.14 (G) Agreement to modify note dated June 6, 1995 with Langley,
et al.
10.15 (G) Amendment to installment note payable to Langley, et al.
10.16 Commercial Lease Between Stewart's Ice Cream Company, Inc.
and Releta Brewing Company LLC.
10.17 * Agreement between United Breweries of America, Inc. and
Releta Brewing Company LLC regarding payment of certain
liens.
10.18 (F) Standard Form of Agreement Between Owner and Architect for
Designated Services between the Company and Victor Lopes.
10.19 (G) Construction agreement with BDM Construction Company, Inc.
10.20 (J) Letter Agreement Concerning Use of Proceeds with BDM
Construction Co., Inc.
10.21 (J) $900,000 Note in favor of BDM Construction Co., Inc.
-13-
<PAGE>
Exhibit
Number Description of Document
- ------- -------------------------------
10.22 (G) Consulting Agreement with Daniel R. Moldenhauer.
10.23 (C) Brewery Fixtures Construction Agreement with Enerfab, Inc.
(previously filed as Exhibit 19.3).
10.24 (K)+ Keg Management Agreement with MicroStar Keg Management LLC.
10.25 (E) Agreement to Implement Condition of Approval No. 37 of the
Site Development Permit 95-19 with the City of Ukiah,
California (previously filed as Exhibit 19.6).
10.26 (G) Manufacturing Business Expansion and Relocation Agreement
with the City of Ukiah.
10.27 (G) Manufacturing Business Expansion and Relocation Agreement
with the Ukiah Redevelopment Agency.
10.28 (H) Business Loan Agreement with WestAmerica Bank.
10.29 (J) Letter Agreement Concerning Use of Proceeds with
WestAmerica Bank.
10.30 * Commitment letter/extension agreement from WestAmerica Bank
dated October 21, 1997.
10.31 (J) Construction Loan Agreement with the Savings Bank of
Mendocino County.
10.32 (J) Business Loan Agreement with the Savings Bank of Mendocino
County.
10.33 (J) $2,700,000 Note in favor of the Savings Bank of Mendocino
County.
10.34 (J) Assignment of Deposit Account in favor of the Savings Bank
of Mendocino County.
10.35 * Change in Terms Agreement with the Savings Bank of
Mendocino County dated November 5, 1997.
10.36 (J) Commitment Letter from the Savings Bank of Mendocino County
dated September 13, 1996.
10.37 * Commitment Letter from the Savings Bank of Mendocino County
dated October 15, 1997.
10.38 * Letter Agreement with the Savings Bank of Mendocino County
dated October 23, 1997.
10.39 (J) Equipment Lease with FINOVA Capital Corporation.
10.40 (J) Tri-Election Rider to Equipment Lease with FINOVA Capital
Corporation.
10.41 (J) Master Lease Schedule with FINOVA Capital Corporation.
10.42 (J) Advance and Subordination Agreement among the Company,
FINOVA Capital Corporation, and Enerfab, Inc.
10.43 (L) Investment Agreement with United Breweries of America, Inc.
10.44 (L) Shareholders' Agreement Among the Company, United Breweries
of America, Inc., Michael Laybourn, Norman Franks, Michael
Lovett, John Scahill, and Don Barkley
10.45 (L) Registration Rights Agreement Among the Company, United
Breweries of America, Inc., Michael Laybourn, Norman
Franks, Michael Lovett, John Scahill, and Don Barkley
27 * Financial Data Schedule
-14-
<PAGE>
Exhibit
Number Description of Document
- ------- -------------------------------
- --------------------------------
* Previously filed.
(A) Incorporated by reference from the Company's Registration
Statement dated June 15, 1994, as amended, previously filed
with the Commission, Registration No. 33-78390-LA.
(B) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1994
previously filed with the Commission.
(C) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended March 31, 1995
previously filed with the Commission.
(D) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1995
previously filed with the Commission.
(E) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended September 30, 1995
previously filed with the Commission.
(F) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1995
previously filed with the Commission.
(G) Incorporated by referenced from the Company's Report on
Form 10-QSB for the quarter period ended June 30, 1996
previously filed with the Commission.
(H) Incorporated by referenced from the Company's Report on
Form 10-QSB/A No. 1 for the quarter period ended June 30,
1996 previously filed with the Commission.
(J) Incorporated by reference from the Company's Registration
Statement dated February 6, 1997, as amended, previously
filed with the Commission, Registration No. 333-15673.
(K) Incorporated by referenced from the Company's Report on
Form 10-KSB for the annual period ended December 31, 1996
previously filed with the Commission.
(L) Incorporated by reference from the Schedule 13D filed with
the Commission on November 3, 1997 by United Breweries of
America, Inc. and Vijay Mallya.
+ Portions of this Exhibit were omitted pursuant to an
application for an order declaring confidential treatment
filed with the Securities and Exchange Commission.
No reports on Form 8-K were filed during the quarter for which this report is
filed.
<PAGE>
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
Mendocino Brewing Company, Inc.
(Registrant)
Date November 14, 1997 /s/ H. Michael Laybourn
---------------------------- -------------------------------------------
H. Michael Laybourn, President
Date November 14, 1997 /s/ Norman H. Franks
---------------------------- -------------------------------------------
Norman H. Franks, Chief Financial Officer
COMMERCIAL LEASE
Dated this _______ day of October, 1997.
Between: STEWART'S ICE CREAM COMPANY, INC. as "Landlord"
PO Box 435
Saratoga Springs, NY 12866
Attn: William Drake, President
And: RELETA BREWING COMPANY LLC as "Tenant"
a Delaware Corporation,
Three Harbor Drive, Suite 115
Sausalito, CA 94965
Attn: Vijay Mallya, President
Landlord leases to Tenant and Tenant leases from Landlord the following
described property (the "Premises") on the terms and conditions stated below:
A property of approximately 3.66 acres, which includes a building space
of approximately 21,750 square feet, and all appurtenances and
improvements thereto, which building is more particularly described as
follows:
Building 3, Saratoga Dairy, Excelsior Ave., Saratoga Springs, New York,
the exact legal description of which is attached as Exhibit "A".
The Premises shall also include the sharing of rights to use springwater
from the natural spring located on the premises. Tenant to bear all
expense to plumb the spring to allow its use.
Landlord hereby acknowledges that there are no other tenants in
possession or with a right to possession of any part or portion of the Premises.
SECTION 1. OCCUPANCY
1.1 ORIGINAL TERM. The term of this lease shall commence October 31,
1997 and shall expire on October 30, 2002. This is deemed the original term. The
"Term Commencement date" is October 31, 1997.
1.2 RENEWAL OPTION. If the lease is not in default at the time each
option is exercised or at the time the renewal term is to commence, Tenant shall
have the option to renew this lease for three (3) successive terms of five (5)
years each, as follows:
(1) Each of the renewal terms shall commence on the day following
expiration of the preceding term.
(2) The option may be exercised by written notice to Landlord given not
less than 180 days prior to the last day of the expiring term. The giving of
such notice shall be sufficient to make the lease binding for the renewal term
without further act of the parties. Landlord and Tenant shall then be bound to
take the steps required in connection with the determination of rent as
specified below. If Tenant shall fail to give any such notice within such one
hundred eighty (180) day time limit, Tenant's right to exercise its option shall
nevertheless continue until thirty (30) days after Landlord shall have given
Tenant notice of Landlord's election to terminate such option, and Tenant may
exercise such option at any time until the expiration of said thirty (30) day
period. It is the intention of the parties to avoid forfeiture of Tenant's
PAGE 1 - COMMERCIAL LEASE
<PAGE>
rights to extend the term of this Lease under any of the options set forth in
this Section 1.2 through inadvertent failure to give notice thereof within the
time limits prescribed. During any extension of the term all Sections of this
Lease will be effective, and references to term will incorporate the extensions.
(3) The terms and conditions of the lease for each renewal term shall be
identical with the original term except for rent and except that Tenant will no
longer have any option to renew this lease that has been exercised. Rent for a
renewal term shall be the rental during the last year of the preceding original
or renewal term adjusted as provided herein.
SECTION 2. RENT
2.1 BASE RENT. During the original term, Tenant shall pay to Landlord as
base rent the sum of $8,333.33 per month. Rent shall commence on the Term
Commencement Date. Rent shall be payable on the last day of each month in
advance at such place as may be designated by Landlord.
2.2 ADDITIONAL RENT. All taxes, insurance costs, utility charges and
repair costs that Tenant is required to pay by this lease are deemed "Additional
Rent."
2.3 ESCALATION. During the initial lease period and the option periods,
the base rent provided in Section 2.1 shall be increased on the anniversary date
of the lease by a percentage equal to 75% of the percentage change in the
Consumer Price Index published by the United States Bureau of Labor Statistics
of the United States Department of Labor. Comparisons shall be made using the
index entitled "U.S. City Average - All Items and Major Group Figures for All
Urban Consumers (1982-84=100)," or on the nearest comparable data on changes in
the cost of living if such index is no longer published. The increase will begin
on the fifteenth day of the month of February 1997, and will be based on the CPI
increase during the initial year of the lease. The first change shall be
determined by comparison of the figure for December 1, 1995, with that of each
succeeding year. In no event, however, shall base rent be reduced below that
payable during the first year of this lease. The preceding formula shall be used
for each additional renewal term as appropriate.
2.4 LEASE CONSIDERATION. In consideration of Landlord executing this
Lease, Tenant shall assume the right and obligation to release from the
Premises, the liens listed in Exhibit B. Tenant shall have the right to assert
any defenses to enforcement of the liens and shall have the discretion with
respect to negotiating any settlement or satisfaction thereof, without consent
of the Landlord. Tenant shall have 12 months from the Term Commencement Date
within which to release or have released or satisfied the liens referenced in
Exhibit "B".
SECTION 3. USE OF THE PREMISES
3.1 PERMITTED USE. The Premises shall be used as a facility for brewery,
winery, warehouse, office, sales and storage purposes and for no other purpose
without the consent of Landlord, which consent shall not be unreasonably
withheld.
3.2 RESTRICTIONS ON USE. In connection with the use of the Premises,
Tenant shall:
(1) Conform to all applicable laws and regulations of any public
authority affecting the premises and the use, and correct at Tenant's own
expense any failure of compliance created through Tenant's fault or by reason of
Tenant's use, but Tenant shall not be required to make any structural changes to
effect such compliance, unless created by Tenant's structural changes to the
building.
PAGE 2 - COMMERCIAL LEASE
<PAGE>
(2) Refrain from any use that would be reasonably offensive to other
tenants or owners or users of neighboring premises or that would tend to create
a nuisance or damage the reputation of the premises. Notwithstanding this
provision, Landlord acknowledges that Tenant's use will occasion certain odors
related to brewery and winery uses, and such odors shall not violate this
provision.
(3) Refrain from loading the electrical system or floors beyond the
point considered safe according to a competent engineer or architect.
(4) Tenant shall not cause or permit any Hazardous Substance to be
spilled, leaked, disposed of, or otherwise released on or under the Premises in
violation of any applicable law. Tenant may use or otherwise handle on the
Premises only those Hazardous Substances typically used or sold in the prudent
and safe operation of the business specified in Section 3.1. Tenant may store
such Hazardous Substances on the Premises only in quantities necessary to
satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all
Environmental Laws and exercise the highest degree of care in the use, handling,
and storage of Hazardous Substances and shall take all practicable measures to
minimize the quantity and toxicity of Hazardous Substances used, handled, or
stored on the Premises. Upon the expiration or termination of this Lease, Tenant
shall remove all of the Hazardous Substances from the Premises except those
placed there by Landlord, or which are otherwise the primary responsibility of
Landlord. The term Environmental Laws shall mean any applicable federal, state
or local statute, regulations, or ordinance or any applicable judicial or other
governmental order pertaining to the protection of health, safety or the
environment. The term Hazardous Substance shall mean any hazardous, toxic,
infectious or radioactive substance, waste, and material as defined or listed by
any Environmental Law and shall include, without limitation, petroleum oil and
its fractions.
(5) Landlord warrants that it has no knowledge of the presence of any
regulated or environmentally Hazardous Substances in, on or within reasonable
proximity to the Premises, nor of any existing violations of any laws, rules,
regulations or ordinances, including without limitation, any Environmental Laws
against or upon the Premises.
(6) Tenant shall indemnify, defend and hold Landlord harmless from all
claims, demands, liabilities, costs, expenses, damages, and fines of any nature
arising directly or indirectly form or as a result of the presence or existence
of contamination upon the Premises as a result of the activities of Tenant or
its sublessees or assignees, or by the failure of Tenant or its sublessees or
assignees to comply with any and all Environmental Laws. The foregoing
indemnification shall survive the termination or expiration of this Lease.
(7) Landlord shall indemnify, defend and hold Tenant harmless from all
claims, demands, liabilities, costs, expenses, damages, and fines of any nature
arising directly or indirectly from or as a result of the presence or existence
of contamination upon the Premises as a result of the activities of Landlord,
prior tenants, owner or operators of the Premises, or by failure of Landlord to
comply with any and all Environmental Laws, except those caused or created by
Tenant. The foregoing indemnification shall survive the termination or
expiration of this Lease.
SECTION 4. REPAIRS AND MAINTENANCE
4.1 LANDLORD'S OBLIGATIONS. The following shall be the responsibility of
Landlord:
(1) Except as provided herein, Landlord shall keep the following in good
order, condition and repair: the foundations, exterior walls and roof of the
PAGE 3 - COMMERCIAL LEASE
<PAGE>
Premises. Landlord shall not be obligated to maintain or repair windows, doors,
plate glass or the interior surfaces of exterior walls. Landlord shall commence
to make repairs within ten (10) days after receipt of written notice from Tenant
of the need for such repairs, and thereafter pursue such repairs to completion.
Landlord shall diligently pursue to completion the performance of all repairs or
maintenance that are the responsibility of Landlord under this Lease.
(2) Landlord is providing the building in its current condition "As Is"
except for latent defects which require repair as provided above. Landlord shall
not be required to correct structural defects caused by Tenant's remodel of the
structure for Tenant's uses.
4.2 TENANT'S OBLIGATIONS. The following shall be the responsibility of
Tenant:
(1) all other repairs to the premises which Landlord is not required to
make under Section 4.1.
(2) Tenant shall have no obligation to maintain any portion of the
premises it does not occupy or for which the occupant does not pay Tenant rent.
Tenant shall have no maintenance obligations until the rent commencement date.
4.3 LANDLORD'S INTERFERENCE WITH TENANT. In performing any repairs,
replacements, alterations, or other work performed on or around the Premises,
Landlord shall not cause unreasonable interference with use of the Premises by
Tenant. In determining whether Landlord has unreasonably interfered, the court
shall consider, among other factors, the nature of the repair, other
alternatives for completing the repair, the cost of the other repair
alternatives, and what caused the need for repairs. If Landlord unreasonably
interferes with Tenant's use of the Premises while performing repairs,
replacements, alterations, or other work around the Premises, the Tenant may
abate rent for that period, after delivering to Landlord five (5) days written
notice citing the condition which Tenant claims unreasonably interferes with its
use of the premises. Tenant may not abate rent if Landlord remedies the
condition within the five (5) day period. Nothing shall prevent Landlord from
declaring Tenant in default if Landlord does not, in fact, unreasonably
interfere with the Tenant's use and occupancy of the Premises.
4.4 REIMBURSEMENT FOR REPAIRS ASSUMED. If either party fails or refuses
to make repairs that are required by this Section 4, the other party may make
the repairs and charge the actual costs of repairs to the first party. Such
expenditures by Landlord shall be reimbursed by Tenant on demand together with
interest at the rate of 8% per annum from the date of expenditure by Landlord.
Such expenditures by Tenant may be deducted from rent and other payments
subsequently becoming due or, at Tenant's election, collected directly from
Landlord with interest at a rate of 8% per annum until paid. Except in an
emergency creating an immediate risk of personal injury or property damage,
neither party may perform repairs which are the obligation of the other party
and charge the other party for the resulting expense unless at least ten (10)
days before work is commenced, the defaulting party is given notice in writing
outlining with reasonable particularity the repairs required, and such party
fails within that time to initiate such repairs in good faith.
4.5 INSPECTION OF PREMISES. Landlord shall have the right to inspect the
Premises at any reasonable time or times to determine the necessity of repair.
Whether or not such inspection is made, the duty of Landlord to make repairs
shall not mature until a reasonable time after Landlord has received from Tenant
written notice of the repairs that are required. Landlord may not inspect such
portion of the Premises as are subject to "bond room" requirements without a
representative of Tenant present.
PAGE 4 - COMMERCIAL LEASE
<PAGE>
SECTION 5. ALTERATIONS
5.1 ALTERATIONS PROHIBITED. Tenant shall make no improvements or
alterations on the Premises of any kind without first obtaining Landlord's
written consent, which consent shall not be unreasonably withheld. All
alterations shall be made in a good and workmanlike manner, and in compliance
with applicable laws and building codes. As used herein, "alterations" includes
the installation of computer and telecommunications wiring, cables, and conduit
that require structural changes to the building.
5.2 OWNERSHIP AND REMOVAL OF ALTERATIONS. Except as provided in Section
15.2 or otherwise all improvements and alterations performed on the Premises by
either Landlord or Tenant shall be the property of Landlord when installed.
Improvements and alterations installed by Tenant shall, at Landlord's option, be
removed by Tenant and the premises restored, provided, however, that Tenant need
not remove the structural alterations related agreed to by Landlord specifically
conditions its approval of the alteration upon its removal at the end of the
lease term. Landlord agrees that the roof height needs not be restored at
surrender of the Premises.
SECTION 6. INSURANCE
6.1 LIABILITY INSURANCE. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of property) and personal injury
arising out of the operation, use or occupancy of the Premises. Tenant shall
name Landlord as an additional insured under such policy. The initial amount of
such insurance shall be One Million Dollars ($1,000,000) per occurrence and
shall be subject to periodic increase by Landlord based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 6.1 shall (i) be primary and non-contributing; (ii) contain
cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance of its indemnity obligations herein, if the matters giving rise to
the indemnity result from the negligence of the Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord shall also obtain comprehensive
public liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Premises but in no event less than $1,000,000.00 per
occurrence. The policy obtained by Landlord shall not be contributory and shall
not provide primary insurance.
6.2 PROPERTY INSURANCE. During the Lease Term, Landlord shall maintain
policies of insurance covering loss of or damage to the Premises in the full
amount of its replacement value. Such policy shall contain an Inflation Guard
Endorsement and shall provide protection against all perils included within the
classification of fire, extended coverage, vandalism, malicious mischief,
special extended perils (all risk), sprinkler leakage and any other perils which
Landlord deems reasonably necessary. Landlord shall have the right to obtain
flood and earthquake insurance, if reasonably necessary in his judgment.
Landlord shall not obtain insurance for Tenant's fixtures or equipment or
building improvements installed by Tenant on the Premises. During the Lease
Term, Landlord shall also maintain a rental income insurance policy, with loss
payable to Landlord, in an amount equal to one year's Base Rent, plus estimated
real property taxes and insurance premiums. Landlord shall provide Tenant with a
copy of any insurance policy obtained pursuant to paragraph 6.1 or 6.2. Tenant
shall not do or permit anything to be done which invalidates any insurance
policies.
PAGE 5 - COMMERCIAL LEASE
<PAGE>
6.3 PAYMENT OF PREMIUMS. Tenant shall pay all premiums for the insurance
policies described in Paragraphs 6.1 and 6.2 (whether obtained by Landlord or
Tenant) within fifteen (15) days after Tenant's receipt of a copy of the premium
statement or other evidence of the amount due, except Landlord shall pay all
premiums for non-primary comprehensive public liability insurance which Landlord
elects to obtain as provided in Paragraph 6.1. If insurance policies maintained
by Landlord cover improvements on real property other than the Premises,
Landlord shall deliver to Tenant a statement of the premium applicable to the
Premises showing in reasonable detail how Tenant's prorated share of the premium
was computed. If the Lease Term expires before the expiration of an insurance
policy maintained by Landlord, Tenant shall be liable for Tenant's prorated
share of the insurance premiums. Before the Commencement Date, Tenant shall
deliver to Landlord a copy of any policy of insurance which Tenant is required
to maintain under this Section 6. At least thirty (30) days prior to the
expiration of any such policy, Tenant shall deliver to Landlord a renewal of
such policy. As an alternative to providing a policy of insurance, Tenant shall
have the right to provide Landlord a certificate of insurance, executed by an
authorized officer of the insurance company, showing that the insurance which
Tenant is required to maintain under this Section 6 is in full force and effect
and containing such other information which Landlord reasonably requires.
6.4 GENERAL INSURANCE PROVISIONS.
(1) Any insurance which Tenant is required to maintain under this Lease
shall include a provision which requires the insurance carrier to give Landlord
not less than thirty (30) days written notice prior to any cancellation or
modification of such coverage.
(2) If Tenant fails to deliver any policy, certificate or renewal to
Landlord required under this Lease within the prescribed time period or if any
such policy is canceled or modified during the Lease Term without Landlord's
consent, Landlord following fifteen (15) days written notice to Tenant of such
event and Tenant's failure to cure within that fifteen-day period, may obtain
such insurance, in which case Tenant shall reimburse Landlord for the cost of
such insurance within fifteen (15) days after receipt of a statement that
indicates the cost of such insurance.
(3) Tenant shall maintain all insurance required under this Lease with
companies holding a "General Policy Rating" of A-12 or better, as set forth in
the most current issue of "Best Key Rating Guide." Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.04 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 6 is
for the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease, Tenant
shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
as that coverage may change from time to time. Landlord makes not representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property or
liability insurance which Tenant deems necessary to protect Landlord and Tenant.
(4) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive and release any and all rights
of recovery against the other, or against the officers, employees, agents or
representative of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by any
insurance policy in force (whether or not described in this Lease) at the time
of such loss or damage. The release and waiver contained in this section is
intended to release and waive the liability of each party for the consequences
of its negligent acts or omissions. Upon obtaining the required policies of
insurance, Landlord and
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Tenant shall give notice to the insurance carriers of this mutual waiver of
subrogation.
(5) Landlord shall abide by conditions 1-4 with regard to any insurance
policy he is required to maintain under the terms of this Lease.
SECTION 7. TAXES; UTILITIES
7.1 PROPERTY TAXES. Tenant shall pay as due all real property taxes and
special assessments levied against the Premises. As used herein, real property
taxes includes any fee or charge relating to the ownership, use, or rental of
the Premises, other than taxes on the net income of Landlord or Tenant and
excluding estate, gift inheritance and franchise taxes of Landlord.
7.2 CONTEST OF TAXES. Tenant shall be permitted to contest the amount of
any tax or assessment as long as such contest is conducted in a manner that does
not cause any risk that Landlord's interest in the Premises will be foreclosed
for nonpayment. Landlord shall cooperate in any reasonable manner with such
contest by Tenant.
7.3 PRORATION OF TAXES. Tenant's share of real property taxes and
assessments for the years in which this lease commences or terminates shall be
prorated based on the portion of the tax year that this lease is in effect.
7.4 NEW CHARGES OR FEES. If a new charge or fee relating to the
ownership or use of the premises or the receipt of rental therefrom or in lieu
of property taxes is assessed or imposed, then, to the extent permitted by law,
Tenant shall pay such charge or fee. Tenant, however, shall have no obligation
to pay any income, profits, or franchise tax levied on the net income derived by
Landlord from this lease.
7.5 PAYMENT OF UTILITIES CHARGES. Tenant shall pay when due all charges
for services and utilities incurred in connection with the use, occupancy,
operation, and maintenance of the Premises, including (but not limited to)
charges for fuel, water, gas, electricity, sewage disposal, power,
refrigeration, air conditioning, telephone, and janitorial services. If any
utility services are provided by or through Landlord, charges to Tenant shall be
comparable with prevailing rates for comparable services.
7.6 INTERRUPTION OF ESSENTIAL SERVICES. In the event of an interruption
of any essential service ("essential services" shall be defined as gas,
electricity, water, or sewer), Landlord shall use reasonable diligence to
restore such service. If there is an interruption in any essential service to
the Premises and such interruption is not the result of the negligence or
willful misconduct of Tenant, its agents, employees, invitees, visitors,
sublessees, or assigns, and such interruption continues for more than five (5)
days after receipt by landlord of written notice from Tenant, Tenant shall be
entitled to an abatement of all rent and other sums due hereunder with respect
to that portion of the Premises rendered unusable by Tenant until such time as
such essential service is restored to an extent that such portion is again
rendered usable by Tenant. In addition to the foregoing, Tenant shall have the
right to terminate this Lease by giving written notice to Landlord in the event
there is an interruption in any essential service that has not been cured within
thirty (30) days following the date of the first occurrence of such
interruption, ten (10) days notice of termination is given to Landlord, and the
essential service has not been restored prior to the date for termination given
in the notice.
SECTION 8. DAMAGE AND DESTRUCTION
8.1 PARTIAL DAMAGE. If the Premises are partly damaged and Section 8.2
does not apply, the Premises shall be repaired by Landlord at Landlord's
expense.
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Repairs shall be accomplished with all reasonable dispatch subject to
interruptions and delays from labor disputes and matters beyond the control of
Landlord and shall be performed in accordance with the provisions of Section
4.3.
8.2 DESTRUCTION. If the Premises are destroyed or damaged such that the
cost of repair exceeds 50% of the value of the structure before the damage or
such that the damages renders a substantial section of the structure
untenantable, either party may elect to terminate the lease as of the date of
the damage or destruction by notice given to the other in writing not more than
45 days following the date of damage. In such event all rights and obligations
of the parties shall cease as of the date of termination, and Tenant shall be
entitled to the reimbursement of any prepaid amount paid by Tenant and
attributable to the anticipated term. If neither party elects to terminate,
Landlord shall proceed to restore the Premises to substantially the same form as
prior to the damage or destruction. Work shall be commenced as soon as
reasonably possible and thereafter shall proceed without interruption except for
work stoppages on account of labor disputes and matters beyond Landlord's
reasonable control, and be completed within ninety (90) days thereafter. If the
Landlord fails to complete repairs within the time provided, Tenant may elect to
terminate this Lease after thirty (30) days after Tenant's notice to terminate
is delivered to landlord. Nevertheless, this Lease shall not terminate if
Landlord substantially completes the repairs and delivers occupancy to Tenant
within the thirty (30) day notice period.
8.3 RENT ABATEMENT. Rent shall be abated during the repair of any damage
to the extent the premises are untenantable.
8.4 DAMAGE LATE IN TERM. If damage or destruction to which Section 8.2
would apply occurs within one year before the end of the then-current lease
term, Tenant may elect to terminate the lease by written notice to Landlord
given within 30 days after the date of the damage. Such termination shall have
the same effect as termination by Landlord under Section 9.1(1).
SECTION 9. EMINENT DOMAIN
9.1 PARTIAL TAKING. If a portion of the Premises is condemned and
Section 9.2 does not apply, the lease shall continue on the following terms:
(1) Except as otherwise provided, Landlord shall be entitled to all of
the proceeds of condemnation, and Tenant shall have no claim against Landlord as
a result of the condemnation.
(2) Landlord shall proceed as soon as reasonably possible to make such
repairs and alterations to the Premises as are necessary to restore the
remaining Premises to a condition as comparable as reasonably practicable to
that existing at the time of the condemnation. If condemnation occurs and this
Lease is not terminated, restoration work shall be commenced as soon as
reasonably possible and thereafter shall proceed without interruption except for
work stoppages on account of labor disputes and matters beyond Landlord's
reasonable control, and be completed within ninety (90) days thereafter. If the
Landlord fails to complete restoration within the time provided, Tenant may
elect to terminate this Lease after thirty (30) days after Tenant's notice to
terminate is delivered to Landlord. Nevertheless, this Lease shall not terminate
if Landlord substantially completes the restoration and delivers occupancy to
Tenant within the thirty (30) day notice period.
(3) After the date on which title vests in the condemning authority or
an earlier date on which alterations or repairs are commenced by Landlord to
restore the balance of the Premises in anticipation of taking, the rent shall be
reduced in proportion to the reduction in value of the Premises as an economic
unit on account of the partial taking. If the parties are unable to agree on the
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amount of the reduction of rent, each shall appoint one appraiser, and each
appraiser shall appoint a third appraiser, and the appraisers shall determine
the rental value.
(4) If a portion of Landlord's property not included in the Premises is
taken, and severance damages are awarded on account of the Premises, or an award
is made for detriment to the Premises as a result of activity by a public body
not involving a physical taking of any portion of the Premises, this shall be
regarded as a partial condemnation to which Sections 9.1(1) and 9.1(3) apply,
and the rent shall be reduced to the extent of reduction in rental value, if
any, of the Premises as though a portion had been physically taken.
9.2 TOTAL TAKING. If a condemning authority takes all of the Premises or
a portion sufficient to render the remaining premises reasonably unsuitable for
the use that Tenant was then making of the premises (including access and
parking), the lease shall terminate as of the date the title vests in the
condemning authorities. Such termination shall have the same effect as a
termination under Section 9.1(1).
9.3 COMPENSATION. Any compensation awarded due to any condemnation
whether for the whole or a part of the Premises, shall be apportioned between
the parties according to applicable law. Nothing contained herein shall preclude
Tenant from prosecuting any claim against the condemning authority in any such
condemnation proceedings for the cost of its moving expenses, loss of business,
or depreciation to, damage to, cost of removal of, or the value of its trade
fixtures, equipment, furniture and other personal property included in such
taking. If this Lease is terminated in such taking, Tenant shall have no claim
against Landlord on account of the termination.
9.4 SALE IN LIEU OF CONDEMNATION. Sale of all or part of the premises to
a purchaser with the power of eminent domain in the face of a threat or
probability of the exercise of the power shall be treated for the purposes of
this Section 9 as a taking by condemnation.
SECTION 10. LIABILITY AND INDEMNITY
10.1 LIENS. The provisions of subparagraph (1) through subparagraph (2)
which immediately follow, shall only apply to such claims as arise from work,
services or materials furnished at the request of Tenant. All claims arising in
connection with a prior tenancy are addressed by paragraph 2.4.
(1) Except with respect to activities for which Landlord is responsible,
Tenant shall pay as due all claims for work done on and for services rendered or
material furnished to the Premises, and shall keep the Premises free from any
liens. If Tenant fails to pay any such claims or to discharge any liens,
Landlord may do so and collect the cost as additional rent. Any amount so added
shall bear interest at the rate of 8% per annum from the date expended by
Landlord and shall be payable on demand. Such action by Landlord shall not
constitute a waiver of any right or remedy which Landlord may have on account of
Tenant's default.
(2) Tenant may withhold payment of any claim in connection with a
good-faith dispute over the obligation to pay, as long as Landlord's property
interests are not jeopardized. If a lien is filed as a result of nonpayment,
Tenant shall, within 10 days after knowledge of the filing, secure the discharge
of the lien or deposit with Landlord cash or sufficient corporate surety bond or
other surety satisfaction to Landlord in an amount sufficient to discharge the
lien plus any costs, attorney fees, and other charges that could accrue as a
result of a foreclosure of sale under the lien.
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10.2 TENANT'S INDEMNITY. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Premises; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant, its agents, employees or invitees to
be done in or about the Premises, including any contamination of the Premises or
any other property resulting from the presence or use of Hazardous Material
caused or permitted by Tenant; (c) any breach or default in the performance of
Tenant's obligations under the Lease; (d) any misrepresentation of breach of
warranty by Tenant under this Lease; or (3) other acts or omissions of Tenant,
its agents, employees or invitees. Tenant shall defend Landlord against any such
cost, claim or liability at Tenant's expense with counsel reasonably acceptable
to Landlord. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Premises
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's negligence or
willful misconduct. As used in this section, the term "tenant" shall include
Tenant's employees, agents, contractors, invitees, subleases, and assigns if
applicable.
10.3 LANDLORD'S INDEMNITY. Landlord shall defend Tenant against any
uninsured cost, claim or liability at Landlord's expense with counsel reasonably
acceptable to Tenant, or at Tenant's election and if allowed by Landlord's
insurer. Landlord shall reimburse Tenant for any legal fees or costs incurred by
Tenant arising out of Landlord's gross negligence or willful misconduct related
to the Premises of this Lease. As used in this section, the term "Landlord"
shall include Landlord's employees, agents, contractors, invitees, sublessees
and assigns if applicable.
SECTION 11. QUIET ENJOYMENT; MORTGAGE PRIORITY
11.1 LANDLORD'S WARRANTY. Landlord warrants that it is the owner of the
Premises and has the right to lease them free of all encumbrances except those
set forth on the attached schedule entitled "Exceptions to Title". Subject to
these exceptions Landlord will defend Tenant's right to quiet enjoyment of the
Premises from the lawful claims of all persons during the lease term.
11.2 SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT. This Lease shall be
subject and subordinate to the lien and security interest of any mortgage or
deed of trust now or hereafter placed so as to encumber the Leased Premises;
provided, however, that as an express condition to any such subordination by
Tenant, the mortgagee or beneficiary under such mortgage or deed of trust must
agree in writing with Tenant that, in the event of a foreclosure sale or a deed
in lieu of foreclosure (i) Tenant's rights under the Lease will be recognized
and (ii) Tenant's possession of the Leased premises will not be disturbed
provided Tenant is not then in default under this Lease. Subject to the
foregoing, Tenant shall upon request attorn to any person or entity succeeding
to the interest of Landlord by foreclosure or otherwise. With respect to any
mortgage or deed of trust currently encumbering the Leased Premises as of the
commencement of this Lease, Landlord must secure from the mortgagee or
beneficiary thereunder an agreement in favor of Tenant in a form and substance
acceptable to Tenant and containing those terms set out in (i) and (ii) of this
section above.
11.3 ESTOPPEL CERTIFICATE. Either party will, within 20 days after
notice from the other, execute and deliver to the other party a certificate
stating whether or not this lease has been modified and is in full force and
effect and specifying any modifications or alleged breaches by the other party.
The certificate shall also state the amount of monthly base rent, the dates to
which rent has been paid in advance, and the amount of any security deposit or
prepaid rent. Failure to deliver the certificate within the specified time shall
be conclusive upon the party from whom the certificate was requested that the
lease is in full force and effect and has not been modified except as
represented in the notice requesting the certificate.
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11.4 WAIVER OF LANDLORD'S LIEN. From time to time, some or all of
Tenant's Premises may be financed by or owned by someone other than Tenant. To
the extent that any of Tenant's property is financed or owned by someone other
than Tenant or Tenant's Affiliate, Landlord agrees that such property is not
Landlord's property no matter how the same is affixed to the Premises or used by
Tenant and agrees to recognize the rights of the lender, owner, secured creditor
or lessor ("Secured Party") of Tenant's property. Landlord hereby waives any
claim arising by way of any Landlord's lien (whether created by statute or by
contract or otherwise) with respect to the interest of any Secured Party in
Tenant's property ("Landlord's Lien Waiver"). If such confirmation is required
by Tenant or Secured Party, Landlord agrees to execute and deliver Landlord's
Lien Waiver within fifteen days from Tenant's or secured Partys' request
therefor or Landlord will have conclusively been deemed to have granted
confirmation of Landlord's Lien Waiver thereafter and Landlord agrees that
Tenant and Secured Party may thereafter rely thereon and Landlord shall be
estopped from raising any claim on lien on Tenant's property for which the
Landlord's Lien Waiver was requested.
11.5 FINANCIAL INFORMATION. Tenant shall provide financial information
reasonably required by Landlord to allow Landlord to finance or refinance the
Premises. Tenant shall meet this requirement if it provides to Landlord its most
recently prepared annual financial report to shareholders, provided it is not
more than one year old, together with any quarterly reports which update the
annual financial report.
SECTION 12. ASSIGNMENT AND SUBLETTING
Tenant may assign this Lease or sublet the Leased Premises or any
portion thereof without Landlord's consent to any person or entity which
controls, is controlled by, or its under common control with Tenant, or to any
person or entity, joint business or joint operation resulting from a merger,
consolidation or agreement with Tenant, or to any person or entity that acquires
substantially all the assets of Tenant as a going concern (collectively, an
"Affiliate"); provided, however, that the Affiliate assumes in writing all of
Tenant's obligations under the Lease and provided further that Tenant shall
remain primarily liable under this Lease.
It is further understood that Tenant may be periodically offering for
sale shares of ownership or similar interests in its corporation or a
corporation with which it may merge or consolidate on a public or private basis
for the purposes of expanding, capitalizing and or financing Tenant's business
and no prohibitions or conditions on assignment or submitting shall apply to
such activities.
Tenant shall also be permitted to grant subleases as to minor portions
of the Premises to consultants or others providing services to support necessary
to the development and operation of Tenant's continuing business at the
Premises. For the purposes of this section, a minor portion of the premises
shall not exceed twenty-five percent (25%) of the premises in total sublet
space.
Except as provided above, Tenant may not assign or sublet to another
user (the "Assignee") the Premises or this Lease except with the written consent
of Landlord, which consent shall not be unreasonably withheld. The Landlord may
consider, among other factors, the following in deciding whether the intended
use of the proposed Assignee is consistent with this Lease and other surrounding
uses and available services; the experience and capability of the proposed
Assignee for the intended business use of the property; and whether the
Landlord's lender will allow the assignment.
Tenant may also sublet to current occupants of the building after the
first year anniversary of the rent commencement date, on terms mutually agreed
between Tenant and the proposed subtenant.
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Landlord shall have the right to transfer, assign and convey, in whole
or in part, any or all of the right, title and interest to the Premise provided
such transferee or assignee shall be bound by the terms, covenants and
agreements herein contained, and expressly assumes and agrees in writing to
perform the covenants and agreement of landlord herein contained.
SECTION 13. DEFAULT
The following shall be events of default:
13.1 DEFAULT IN RENT. Failure of Tenant to pay any rent or other charge
within 10 days after written notice from Landlord, provided, however, that
Landlord shall not be obligated to give notice that rent is due more than twice
in any calendar year. After the second written notice in any calendar year,
Tenant shall be in default without further written notice.
13.2 DEFAULT IN OTHER COVENANTS. Failure of Tenant to comply with any
term or condition or fulfill any obligation of the lease (other than the payment
of rent or other charges) within 30 days after written notice by Landlord
specifying the nature of the default with reasonable particularity. If the
default is of such a nature that it cannot be completely remedied within the
30-day period, this provision shall be complied with if Tenant begins correction
of the default within the 30-day period and thereafter proceeds with reasonable
diligence and in good faith to effect the remedy as soon as practicable.
13.2 INSOLVENCY. An assignment by Tenant for the benefit of creditors;
the filing by Tenant of a voluntary petition in bankruptcy; an adjudication that
Tenant is bankrupt or the appointment of a receiver of the properties of Tenant;
the filing of any involuntary petition of bankruptcy and failure of Tenant to
secure a dismissal of the petition within 30 days after filing; attachment for
the levying of execution on the leasehold interest and failure of Tenant to
secure discharge of the attachment or release of the levy of execution within 30
days shall constitute a default. If Tenant consists of two or more individuals
or business entities, the events of default specified in this Section 13.3 shall
apply to each individual unless within 10 days after an event of default occurs,
the remaining individuals produce evidence satisfactory to Landlord that they
have unconditionally acquired the interest of the one causing the default. If
the lease has been assigned, the events of default so specified shall apply only
with respect to the one then exercising the rights of Tenant under the lease.
SECTION 14. REMEDIES OF DEFAULT
14.1 TERMINATION. In the event of a default the lease may be terminated
at the option of Landlord by written notice to Tenant. Whether or not the lease
is terminated by the election of Landlord or otherwise, Landlord shall be
entitled to recover damages from Tenant for the default, and Landlord may
reenter, take possession of the premises, and remove any persons or property by
legal action or by self-help with the use of reasonable force and without
liability for damages and without having accepted a surrender.
14.2 RELETTING. Following reentry or abandonment, Landlord may relet the
Premises and in that connection may make any suitable alterations or refurbish
the Premises, or both, or change the character or use of the Premises, but
Landlord shall not be required to relet for any use or purpose other than that
specified in the lease or which landlord may reasonably consider injurious to
the Premises, or to any tenant that Landlord may reasonably consider
objectionable. Landlord may relet or part of the Premises, alone or in
conjunction with other properties, for a term longer or shorter than the term of
this lease, upon any reasonable terms and conditions, including the granting of
some rent-free occupancy or other rent concession.
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14.3 DAMAGES. In the event of termination or retaking of possession
following default, Landlord shall be entitled to recover immediately, without
waiting until the due date of any future rent or until the date fixed for
expiration of the lease term, the following amounts as damages:
(1) The loss of rental from the date of default until a new tenant is,
or with the exercise of reasonable efforts could have been, secured an paying
out.
(2) The reasonable costs of reentry and reletting including without
limitation the cost of any cleanup, refurbishing, removal of Tenant's property
and fixtures, costs incurred under Section 14.5, or any other expense occasioned
by Tenant's default including but not limited to, any remodeling or repair
costs, attorney fees, court costs, broker commissions, and advertising costs.
(3) Any excess of the value of the rent and all of Tenant's other
obligations under this lease over the reasonable expected return from the
premises for the period commencing on the earlier of the date of trial or the
date the premises are relet, and continuing through the end of the term. The
present value of future amounts will be computed using a discount rate equal to
the prime loan rate of major Oregon banks in effect on the date of trial.
14.4 RIGHT TO SUE MORE THAN ONCE. Landlord may sue periodically to
recover damages during the period corresponding to the remainder of the lease
term, and no action for damages shall bar a later action for damages
subsequently accruing.
14.5 LANDLORD'S RIGHT TO CURE DEFAULTS. If Tenant fails to perform any
obligation under this Lease, Landlord shall have the option to do so after 30
days' written notice to Tenant. All of Landlord's expenditures to correct the
default shall be reimbursed by Tenant on demand with interest at the rate of 8%
annum from the date of expenditure by Landlord. Such action by Landlord shall
not waive any other remedies available to Landlord because of the default.
14.6 REMEDIES CUMULATIVE. The foregoing remedies shall be in addition to
and shall not exclude any other remedy available to Landlord under applicable
law.
SECTION 15. SURRENDER AT EXPIRATION
15.1 CONDITION OF PREMISES. Upon expiration of the lease term or earlier
termination on account of default, Tenant shall deliver all keys to Landlord and
surrender the Premises in first-class condition and broom clean ordinary wear
and tear excepted. Alterations constructed by Tenant with permission from
Landlord shall not be removed or restored to the original condition unless the
terms of permission for the alteration so require. Tenant's obligations under
this section shall be subordinate to the provisions of Section 8 relating to
destruction and Section 9 relating to eminent domain.
15.2 FIXTURES.
(1) All fixtures placed upon the Premises during the Term, other than
Tenant's trade fixtures, shall, at Landlord's option, become the property of
Landlord. If Landlord so elects, Tenant shall remove any or all fixtures that
would otherwise remain the property of Landlord, and shall repair any physical
damage resulting from the removal. If Tenant fails to remove such fixtures,
Landlord may do so and charge the cost to Tenant with interest at the legal rate
from the date of expenditure.
(2) Prior to expiration or other termination of the lease term Tenant
shall remove all furnishings, furniture, and trade fixtures that remain its
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property. If Tenant fails to do so, this shall be an abandonment of the
property, and Landlord may retain the property and all rights of Tenant with
respect to it shall cease or, by notice in writing given to Tenant within 20
days after removal. If Landlord elects to require Tenant to remove, Landlord may
effect a removal and place the property in public storage for Tenant's account.
Tenant shall be liable to Landlord for the cost of removal, transportation to
storage, and storage, with interest at the legal rate on all such expenses from
the date of expenditure by Landlord.
(3) Notwithstanding any other provision of this lease, Tenant shall have
the right to place its trade fixtures and other equipment at the Premises and
such shall be and remain the property of Tenant at all times. Tenant shall have
the right to remove such trade fixtures and equipment upon the termination or
expiration of this Lease provided that Tenant is not in default and that Tenant
shall repair any damage to the Premises caused by such removal.
15.3 HOLDOVER.
(1) If Tenant does not vacate the Premises at the time required,
Landlord shall have the option to treat Tenant as a tenant from month to month,
subject to all of the provisions of this lease except the provisions for term
and renewal and at a rental reate equal to rent last paid by Tenant during the
original term, adjusted by any escalation provision contained in this lease, or
to eject Tenant from the Premises and recover damages caused by wrongful
holdover. Failure of Tenant to remove fixtures, furniture, furnishings, or trade
fixtures that Tenant is required to remove under this Lease shall constitute a
failure to vacate to which this section shall apply if the property not removed
will substantially interfere with occupancy of the Premises by another tenant or
with occupancy by Landlord for any purpose including preparation for a new
tenant.
(2) If a month-to-month tenancy results from a holdover by Tenant under
this Section 15.3, the tenancy shall be terminable at the end of any monthly
rental period on written notice from Landlord given not less than 10 days prior
to the termination date which shall be specified in the notice. Tenant waives
any notice that would otherwise be provided by law with respect to a
month-to-month tenancy.
SECTION 16. LANDLORD'S DEFAULT
Except where the provisions of this Lease grant Tenant an express
exclusive remedy, if Landlord shall fail to perform or observe any covenant,
term, provision or condition of this Lease and such default should continue
beyond a period of ten (10) days as to a monetary default or thirty (30) days
(or such longer period as is reasonably necessary to remedy a default provided
Landlord shall continuously and diligently pursue such remedy at all times until
such default is cured, or in the event of an emergency, such shorter reasonable
times period as is warranted by the nature of the emergency, but in no event
shall such shorter time period be less than forty-eight hours) as to a
non-monetary default, after in each instance receipt of a written notice (the
"Notice") thereof is given by Tenant to Landlord, then, in any such event
Tenant, upon expiration of the applicable grace period, shall have the right (a)
to cure such default, and Landlord shall reimburse Tenant on demand for all sums
expended in so curing the default plus interest thereon at the rate of eight
percent (8%) per annum until paid (and if not paid by Landlord on demand, Tenant
may offset such amount due from the rent and all other sums due hereunder until
paid) and (b) to commence such actions at law or in equity to which Tenant may
be entitled.
SECTION 17. MISCELLANEOUS
17.1 NONWAIVER. Waiver by either party of strict performance of any
provision of this lease shall not be a waiver of or prejudice the party's right
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to require strict performance of the same provision in the future or of any
other provision.
17.2 ATTORNEY FEES. If suit or action is instituted in connection with
any controversy arising out of this lease, the prevailing party shall be
entitled to recover in addition to costs such sum as the court may adjudge
reasonable as attorney fees at trial, on petition for review, and on appeal.
17.3 NOTICES. Any notice required or permitted under this lease shall be
given when actually delivered by overnight courier or telecopy or 48 hours after
deposited in United States mail as certified mail addressed to the address first
given in this lease or to such other address as may be specified from time to
time by either of the parties in writing.
17.4 SUCCESSION. Subject to the above-stated limitations on transfer of
Tenant's interest, this lease shall be binding on and inure to the benefit of
the parties and their respective successors and assigns.
17.5 RECORDATION. This lease may be recorded at the option of Tenant,
provided that Tenant pays the cost of recording a memorandum of the lease.
17.6 ENTRY FOR INSPECTION. Landlord shall have the right to enter upon
the Premises at any time upon reasonable advance notice to determine Tenant's
compliance with this lease, to make necessary repairs to the building or to the
Premises, or in the last 6 months of the term show the Premises to any
prospective tenant or purchaser, and in addition shall have the right, at any
time during the last two months of the term of this lease, to place and maintain
upon the Premises notices for leasing or selling of the Premises. Landlord shall
comply with all "bond room" restrictions in exercising its right of entry.
17.7 INTEREST ON RENT AND OTHER CHARGES. Any rent or other payment
required of Tenant by this lease shall, if not paid within 10 days after it is
required of Tenant by this lease shall, if not paid within 10 days after it is
due, bear interest at the rate of 8% per annum (but not in any event at a rate
greater than the maximum rate of interest permitted by law) from the due date
until paid.
17.8 PRORATION OF RENT. In the event of commencement or termination of
this lease at a time other than the beginning or end of one of the specified
rental periods, then the rent shall be prorated as of the date of commencement
or termination and in the event of termination for reasons other than default,
all prepaid rent shall be refunded to Tenant or paid on its account.
17.9 TIME OF ESSENCE. Time is of the essence of the performance of each
of Tenant's obligations under this lease.
17.10 PARKING. Tenant may improve and stripe the parking areas around
the building at its cost and expense. For the first year after the rent
commencement date of this lease, Tenant shall be entitled to use eighty-two
percent (82%) of the spaces created and may designate certain spaces for its
exclusive use.
17.11 SIGNAGE. Tenant may erect such signs as seems to it appropriate,
provided, however, that all such signs shall comply with all laws, regulations
and ordinances.
17.12 APPROVALS. It is specifically understood and agreed that as
regards any approvals or matters to be performed to the satisfaction of a party
or only with a party's consent, that party shall not unreasonably withhold or
delay its approval or indication of satisfaction or consent unless specifically
otherwise provided herein.
PAGE 15 - COMMERCIAL LEASE
<PAGE>
17.13 DUTY OF GOOD FAITH. Landlord and Tenant shall have at all times a
right and duty to act reasonably and in good faith and mitigate any damages or
claims arising out of this Lease or in connection with the use, condition or
occupancy of the Premises or an occupance of a default in any terms of this
Lease. The party claiming a lack of good faith or failure to mitigate shall have
the burden to prove such a claim.
SECTION 18. RIGHT OF FIRST REFUSAL
Landlord agrees not to sell, transfer, exchange, grant an option to
purchase, lease, or otherwise dispose of the Premises or any part of, or
interest in, the Premises without first offering the Premises to Tenant on the
terms and conditions set forth in this Agreement. As used in this Agreement, the
term SELL includes a ground lease of the Premises with primary and renewal terms
of more than 15 years in the aggregate.
When Tenant receives the Notice and a copy of the Offer. Tenant shall
have the prior and preferential right to purchase the Premises (or the part of
or interest in the Premises covered by the offer, as the case may be) at the
same price and on the same terms and conditions as are contained in the Offer,
except that if Tenant exercises the right of first refusal by electing to
purchase the Premises then (1) the closing of the transaction contemplated by
the Offer shall take place no earlier than 90 days after the date that Tenant
elects to exercise the right of first refusal, and (2) Tenant shall receive a
credit against the sale price of the Premises in an amount equal to any
brokerage commission that Landlord may save by selling the Premises to Tenant
rather than the Third-Party Offeror.
Tenant shall have 45 days from the date Tenant receives the Motion and a
copy of the Offer to notify Landlord whether Tenant elects to purchase the
Premises pursuant to the terms of the Offer. If Tenant elects to exercise its
right to purchase the Premises, then, in addition to giving Landlord written
notice of its election within the 45-day period, Tenant also shall tender an
amount equal to the earnest money deposit, if any, specified in the offer, which
will be held and used in accordance with the terms of the Offer.
If Tenant fails to timely exercise its right to purchase the Premises
pursuant to the terms of this Agreement, and for any reason Landlord shall not
sell or convey the Premises to the Third-Party Offeror on the terms contained in
the Offer within six months of Tenant's election not to purchase, then Landlord
must resubmit the Offer as well as any other offer to Tenant before selling the
Premises, and such offers shall be subject to Tenant's right of first refusal
under this Agreement.
SECTION 19. OPTION TO PURCHASE
Notwithstanding the foregoing, Landlord hereby grants Tenant an
exclusive option to purchase the Premises at a price of $995,000. This option
shall be exercised by Tenant giving Landlord written notice of its intent to
exercise the option to purchase the Premises, with closing to take place no
later than December 31, 19??, or this option shall be void.
LANDLORD
Stewart's Ice Cream Co., Inc.
By: /s/ William Drake
-------------------------------------
Authorized Agent
PAGE 16 - COMMERCIAL LEASE
<PAGE>
TENANT
Releta Brewing Company, LLC
By: /s/ Vijay Mallya
------------------------------------
Authorized Agent (to be agreed upon)
PAGE 17 - COMMERCIAL LEASE
<PAGE>
Schedule "A"
All that tract or parcel of land situate in the City of Saratoga
Springs, Saratoga County. N.Y.S., bounded and described as follows:
Beginning at a point on the northerly boundary of Excelsior Avenue at
the southwesterly corner of lands now or formerly of Elnor and Evelyn
VanDerwerker as recorded in the Saratoga County Clerk's Office in Liber 584 of
Deeds. Page 208, being the southeast corner of the lot herein described, thence
along the northerly line of Excelsior Avenue, S 87 degrees 59 minutes 35 seconds
W, 385.07 feet to a point and N 89 degrees 42 minutes 24 seconds W, 128.88 feet
to a point. Thence through the lands of the grantor, N 25 degrees 17 minutes 00
seconds E. 261.25 feet to a point and N 01 degrees 85 minutes 59 seconds W,
138.82 feet to a point, thence along the southerly line of New York State Route
50, the following three courses: S71 degrees 33 minutes 00 seconds E, 33.00 feet
to a point; N 88 degrees 04 minutes 00 seconds E, 206.52 feet to a point; N 82
degrees 45 minutes 00 seconds E, 159.00 feet to a point. Thence along the
westerly line of lands of said Van Derwerker, S 01 degrees 35 minutes 59 seconds
E 378.90 feet to the point of beginning. Containing 3.663 acres of land.
<PAGE>
EXHIBIT "B"
Date Lienor Amount
- ---- ------ --------------
2/7/97 Bratney Equipment Company $ 66,233.44
3/7/97 Northridge Group, Inc. 255,384.52
3/20/97 Brookside Farms, Inc. 11,672.14
7/8/97 Tioga Building Co., Inc.
(mechanic lien $46,126.88)
(judgment amount) 68,142.48
9/9/97 Northern Mechanical Services, Inc. 117,058.20
9/12/97 Advanced Technology Systems 41,994.16
9/17/97 Brookside Farms, Inc. 3,469.00
9/23/97 Krones, Inc. 13,020.86
10/ /97 Moreau Associates 4,488.18
---------------
Total $ 581,412.98
