UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 0-25836
PORTLAND BREWING COMPANY
(Exact name of small business issuer as specified in its charter)
Oregon 93-0865997
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2730 NW 31st Avenue
Portland, Oregon 97210
(Address of principal executive offices and zip code)
(503) 226-7623
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 outstanding of the Registrant's Common Stock as of November
5, 1999 was 3,365,267 shares.
Transitional Small Business Disclosure Format (check one): Yes [X] No [ ]
<PAGE>
PORTLAND BREWING COMPANY
FORM 10-QSB
INDEX
PART I FINANCIAL INFORMATION
Page
Item 1. Financial Statements
Balance Sheets - September 30, 1999 and
December 31, 1998 2
Statements of Operations -Three and Nine Months Ended
September 30, 1999 and 1998 3
Statements of Cash Flows - Nine Months Ended September 30,
1999 and 1998 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 8
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holder 11
Item 6. Exhibits and Reports on Form 8-K 12
1
<PAGE>
PORTLAND BREWING COMPANY
BALANCE SHEETS
<TABLE>
September 30, December 31,
1999 1998
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT
ASSETS:
Cash $ 35,279 $ 52,532
Accounts receivable 825,097 765,997
Inventories 696,181 554,864
Prepaid assets 194,185 266,452
------------ -------------
Total current assets 1,750,742 1,639,845
Property and equipment, less accumulated depreciation and
amortization of $4,067,898 (1999) and $3,476,429 (1998) 6,828,789 7,249,791
Other assets, net 149,098 113,933
------------ -------------
Total assets $ 8,728,629 $ 9,003,569
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 461,402 $ 323,626
Current portion of long-term debt 26,178 26,178
Stockholder term loan (Note 8) 2,100,000 -
Accounts payable 938,503 879,265
Accrued payroll 147,340 134,247
Other accrued liabilities 80,290 70,052
Customer deposits held 140,259 133,464
------------ -------------
Total current liabilities 3,893,972 1,566,832
Long-term debt, less current portion 89,395 113,334
Stockholder term loan (Note 8) - 2,100,000
Series A Redeemable Convertible Preferred Stock, $52 par value,
10,000 shares authorized, shares issued and outstanding: 5,770,
liquidation preference of $300,040 300,040 -
STOCKHOLDERS' EQUITY:
Common stock, no par value, 25,000,000 shares authorized, shares
issued and outstanding: 3,365,267 7,115,798 7,115,798
Stock notes receivable (375) (375)
Accumulated deficit (2,670,201) (1,892,020)
------------ -------------
Total stockholders' equity 4,445,222 5,223,403
------------ -------------
Total liabilities and stockholders' equity $ 8,728,629 $ 9,003,569
============ =============
</TABLE>
The accompanying notes are an integral part of these statements
2
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PORTLAND BREWING COMPANY
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 2,905,008 $ 2,723,774 $ 7,900,274 $ 7,688,593
Less-excise tax 139,581 123,080 383,424 344,544
------------- ------------ ------------- -------------
Net sales 2,765,427 2,600,694 7,516,850 7,344,049
Cost of sales 1,868,518 1,829,945 5,279,325 5,390,920
------------- ------------ ------------- -------------
Gross profit 896,909 770,749 2,237,525 1,953,129
General and administrative expenses 338,087 309,900 952,818 945,772
Sales and marketing expenses 743,205 557,628 1,822,080 1,539,990
Loss on disposition of assets - 384,268 - 384,268
------------- ------------ ------------- -------------
Loss from operations (184,383) (481,047) (537,373) (916,901)
Interest expense (64,194) (62,829) (176,440) (232,818)
Other (expense) income, net (43,680) 75,250 (64,369) (182,418)
------------- ------------ ------------- -------------
Total other (expense) income, net (107,874) 12,421 (240,809) (415,236)
------------- ------------ ------------- -------------
Net loss before extraordinary item (292,257) (468,626) (778,182) (1,332,137)
Extraordinary item - gain on debt
restructuring - 1,198,808 - 1,198,808
------------- ------------ ------------- -------------
Net (loss) income $ (292,257) $ 730,182 $ (778,182) $ (133,329)
============= ============ ============= =============
Basic net (loss) income per share $ (0.09) $ 0.29 $ (0.23) $ (0.06)
============= ============ ============= =============
Diluted net (loss) income per share $ (0.09) $ 0.29 $ (0.23) $ (0.06)
============= ============ ============= =============
Shares used in per share calculations:
Basic 3,365,267 2,505,051 3,365,267 2,218,312
============= ============ ============= =============
Diluted 3,365,267 2,505,051 3,365,267 2,218,312
============= ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
PORTLAND BREWING COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
Nine Months Ended September 30,
----------------------------------------
1999 1998
------------------ ---------------
<S> <C> <C>
Cash flows relating to operating activities:
Net loss $ (778,182) $ (133,329)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 684,279 745,269
Amortization 91,630 146,979
Loss on disposition of assets - 384,268
(Gain) loss on sale of assets (6,727) 10,788
Extraordinary item - (1,198,808)
(Increase) decrease in:
Accounts receivable (59,100) (221,121)
Inventories (167,423) (639)
Prepaid assets 72,267 (52,187)
(Decrease) increase in:
Accounts payable 59,238 26,733
Accrued payroll and other accrued liabilities 23,331 102,354
Customer deposits held 6,795 (3,131)
------------ ------------
Net cash used in operating activities (73,892) (192,824)
------------ ------------
Cash flows relating to investing activities:
Purchase of property and equipment (491,780) (153,935)
Proceeds from sale of property and equipment 235,231 18,533
Changes in other assets (100,689) (22,122)
------------ ------------
Net cash used in investing activities (357,238) (157,524)
------------ ------------
Cash flows relating to financing activities:
Net borrowings under line of credit 137,776 225,000
Issuance of notes payable to distributors - 97,698
Issuance of preferred stock 300,040 -
Repayments of long term debt (23,939) -
------------ ------------
Net cash provided by financing activities 413,877 322,698
------------ ------------
Net decrease in cash (17,253) (27,650)
Cash, beginning of period 52,532 52,719
------------ ------------
Cash, end of period $ 35,279 $ 25,069
============ ============
Non cash transactions:
Conversion of stockholder loans to common stock $ - $ 400,000
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 176,440 $ 160,546
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
PORTLAND BREWING COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods presented. The financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading.
The organization and business of the Company, accounting policies followed by
the Company and other information are contained in the notes to the Company's
financial statements filed as part of the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1998. This quarterly report should be
read in conjunction with such Annual Report.
Operating results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the entire fiscal
year ending December 31, 1999, or any portion thereof.
2. Comprehensive Income (Loss)
The Company has adopted Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS 130"), which establishes requirements for disclosure of comprehensive
income (loss). Comprehensive income (loss) did not differ from reported net
income (loss) in the periods presented.
3. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net loss by the
weighted average number of shares of common stock outstanding for the period.
Diluted net loss per common share is the same as basic net loss per share since
all potential dilutive securities are excluded because they are antidilutive.
Diluted net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding for the period and dilutive
common equivalent shares outstanding during the period.
The dilutive effect of stock options outstanding for the purchase of 375,300 and
144,900 shares at September 30, 1999 and 1998, respectively, warrants
outstanding for the purchase of 87,697.5 shares at September 30, 1999 and 1998,
and 577,000 shares of common stock into which the outstanding Series A
Redeemable Convertible Preferred Stock are convertible at September 30, 1999
were not included in net loss per share calculations, because to do so would
have been antidilutive.
4. Loss on Disposition of Assets
Results of operations for the third quarter of 1998 included a charge of
$384,268 associated with a plan designed to reduce costs and improve operational
efficiencies, under which the Company sold its Flanders Street facility in
November 1998. The estimated loss was primarily composed of the write-down of
machinery and equipment used in the Flanders Street facility to fair market
value.
5
<PAGE>
5. Extraordinary Item
In the third quarter of 1998, the Company recorded an extraordinary gain related
to a debt restructuring. The Company was relieved of debt and accrued interest
originated by a bank, and certain debt to trade creditors. The gain was offset
by professional fees related to the restructuring.
In connection with the debt restructuring, a stockholder of the Company
purchased approximately $3.1 million of secured debt held by a bank. The Company
and the stockholder entered into a new agreement, which replaced the bank loan
agreement and reduced the outstanding amount of the loan to $2,100,000. See Note
8 and "Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."
6. Inventories
Inventories are stated at the lower of average cost, which approximates the
first-in, first-out (FIFO) method, or market and include materials, labor and
manufacturing overhead. Inventories consist of the following:
Sept. 30, Dec. 31,
1999 1998
------------- -------------
Raw materials $ 259,600 $ 176,288
Work-in-process 208,739 164,428
Finished goods 167,459 138,357
Merchandise 60,383 49,685
Kegs, inventory value - 26,106
------------- -------------
$ 696,181 $ 554,864
============= =============
7. Line of Credit
The Company had a $600,000 revolving line of credit with a bank, which matured
on August 20, 1999. On August 16, 1999 the Company negotiated a new $750,000
revolving line of credit ("Revolving Line") with Washington Mutual Bank (d.b.a.
Western Bank), under which $461,402 was outstanding at September 30, 1999.
Payment of the Revolving Line is secured by certain of the Company's assets and
is guaranteed by certain of the Company's shareholders. Interest is payable
monthly at a per annum rate equal to prime rate plus 1% (9.25% at September 30,
1999). The line of credit expires on August 1, 2000.
8. Stockholder Term Loan
The Company has $2.1 million outstanding under a term loan from the MacTarnahan
Limited Partnership (a stockholder of the Company). The $2.1 million term loan
("Term Loan"), secured by receivables, inventory and equipment of the Company,
bears interest at a per annum rate equal to the prime lending rate of the Bank
of the Northwest plus 1% (9.25% at September 30, 1999). The Term Loan is due on
January 31, 2000, and accordingly has been classified as current in the
accompanying balance sheet as of September 30, 1999. The Company expects to
place the debt permanently with a financial institution by April 1, 2000 or pay
off the debt through the raising of additional capital. There can be no
assurance that the Company will be able to obtain permanent financing from a
financial institution or that the Company will be able to raise additional
capital on commercially reasonable terms or at all. If permanent financing is
unavailable, the MacTarnahan Limited Partnership has committed to extend the due
date of the Term Loan until satisfactory permanent financing can be obtained for
the period through April 1, 2000. See "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources."
6
<PAGE>
9. Series A Redeemable Convertible Preferred Stock
On March 1, 1999, the Company sold 5,770 shares of Series A Redeemable
Convertible Preferred Stock ("Series A") for $52 per share, resulting in
aggregate proceeds of $300,040. Because the redemption of the Series A is
outside the control of the Company, the Series A is not classified as
stockholders' equity at September 30, 1999. See "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources."
10. Segment Information
The Company is organized into two product-based segments, brewery operations and
restaurant operations. The Company's brewery segment brews specialty beer in its
Portland, Oregon brewery, which is sold to distributors and retail customers.
The Company's restaurant segment consisted of two restaurants until November
1998, when one of the restaurants was sold. Management evaluates segment
performance based on segment gross profit.
All revenues are attributable to, and all long-lived assets are located in, the
United States; the Company's country of domicile. The basis of accounting for
transactions between segments is based on the fair market value of the
respective goods or services. In the nine months ended September 30, 1999, two
distributors represented approximately 39% and 18%, respectively, of net sales.
In the nine months ended September 30, 1998, two distributors represented
approximately 40% and 14%, respectively of net sales.
<TABLE>
Three months ended September 30, Nine months ended September 30,
------------------------------------- ---------------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Net sales:
Brewery $ 2,378,352 $ 2,038,117 $ 6,491,427 $ 5,727,722
Restaurant(s) 462,025 668,808 1,233,841 1,913,403
------------- ------------- ------------- ---------------
Subtotal 2,840,377 2,706,925 7,525,268 7,641,125
Less: intersegment sales (74,950) (106,231) (208,418) (297,076)
------------- ------------- ------------- ---------------
Total net sales $ 2,765,427 $ 2,600,694 $ 7,516,850 $ 7,344,049
============= ============= ============= ===============
Gross profit:
Brewery $ 822,252 $ 694,523 $ 2,067,815 $ 1,767,717
Restaurant(s) 114,184 131,176 280,026 340,718
------------- ------------- ------------- ---------------
Subtotal 936,436 825,699 2,347,841 2,108,435
Intersegment loss (39,527) (54,950) (110,316) (155,306)
------------- ------------- ------------- ---------------
Total gross profit $ 896,909 $ 770,749 $ 2,237,525 $ 1,953,129
============= ============= ============= ===============
</TABLE>
11. Subsequent Event
On October 31, 1999, the Company acquired all of the outstanding common stock of
Harco Products, Inc., ("Harco"), a related party. Harco produces hand trucks for
various industrial uses. The purchase price of approximately $570,000, paid by
the issuance of shares of the Company's common stock valued at $0.75 per share,
will be allocated to the underlying assets and liabilities of Harco. The
purchase price is subject to post-closing adjustments expected to be finalized
in December 1999. This acquisition will be accounted for using the purchase
method of accounting, which requires that the purchase price be allocated to the
net assets acquired based upon the relative fair value of assets acquired. The
excess of the acquisition cost over the fair value of the net assets acquired,
if any, will be amortized using the straight-line method. The Company's
financial statements will include the results of operations from the date of
acquisition.
7
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation
Certain statements in Management's Discussion and Analysis or Plan of Operation
are forward-looking statements. These forward-looking statements are based on
current expectations and entail various risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward-looking
statements. Such risks and uncertainties include general business and economic
conditions, competitive products and pricing, ability to reduce operating
expenses, fluctuations in demand and availability of financing. See
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources" for additional risks and uncertainties.
Results of Operations
Third Quarter and Nine Months ended September 30, 1999 and 1998
Net sales in the third quarter of 1999 increased 6% to $2,765,427 from
$2,600,694 in the third quarter of 1998. Shipments in the third quarter of 1999
increased 15% to 15,524 barrels from 13,461 barrels in the third quarter of
1998. Net sales in the first nine months of 1999 increased 2% to $7,516,850 from
$7,344,049 in the first nine months of 1998. Shipments in the first nine months
of 1999 increased 11% to 41,875 barrels from 37,656 barrels in the first nine
months of 1998. The third quarter and first nine months of 1998 included sales
at the Company's Flanders Street facility, which was closed in October 1998 and
sold in November 1998.
Gross profit increased 16% to $896,909 (32% of net sales) in the third quarter
of 1999 from $770,749 (30% of net sales) in the third quarter of 1998. Gross
profit increased 15% to $2,237,525 (30% of net sales) in the first nine months
of 1999 from $1,953,129 (27% of net sales) in the first nine months of 1998. The
increases in gross profit were a result of higher production volumes in the
third quarter and first nine months of 1999, decreases in costs of certain
components which are being purchased in larger quantities at better pricing and
a decrease in costs associated with the Company's Flanders Street facility,
which was closed in October 1998 and sold in November 1998.
General and administrative expenses increased 9% to $338,087 (12% of net sales)
in the third quarter of 1999 from $309,900 (12% of net sales) in the third
quarter of 1998. General and administrative expenses increased 1% to $952,818
(13% of net sales) in the first nine months of 1999 from $945,772 (13% of net
sales) in the first nine months of 1998.
Sales and marketing expenses increased 33% to $743,205 (27% of net sales) in the
third quarter of 1999 compared to $557,628 (21% of net sales) in the third
quarter of 1998. Sales and marketing expenses increased 18% to $1,822,080 (24%
of net sales) in the first nine months of 1999 compared to $1,539,990 (21% of
net sales) in the first nine months of 1998. The increases were primarily a
result of increased sales, increased expenses incurred to maintain sales levels
in a highly competitive market and focus on promotion of the Company's
MacTarnahan brand and costs associated with festivals and events, which mostly
occurred during the third quarter of 1999. The Company is evaluating its sales
and marketing expenses and anticipates that such expenses will return to normal
levels (approximately 21% of net sales) in the fourth quarter of 1999. There can
be no assurances that the Company will be able to reduce its sales and marketing
expenses in the fourth quarter of 1999.
Interest expense increased to $64,194 in the third quarter of 1999 from $62,829
in the third quarter of 1998. Interest expense decreased to $176,440 in the
first nine months of 1999 from $232,818 in the first nine months of 1998. The
increase in the third quarter of 1999 is primarily attributable to an increase
in the amount outstanding under the Company's line of credit. The decrease in
the nine-month periods was primarily a result of the debt restructuring which
occurred in late 1998. See "Management's Discussion and Analysis or Plan of
Operation -Liquidity and Capital Resources."
8
<PAGE>
Liquidity and Capital Resources
The Company requires capital principally to fund its working capital needs. The
Company has met its capital requirements through cash flow from operations, bank
borrowings, loans from shareholders and the private and public sale of its
Common Stock.
Accounts receivable increased in the first nine months of 1999 as a result of an
increase in sales and the timing of shipments. Inventories increased in the
first nine months of 1999 as the Company began purchasing certain components
such as bottles, 6-pack containers and cartons in larger quantities during 1999
in order to secure better pricing. Prepaid assets decreased as a result of the
timing of the purchase of goods and services and their use. Accounts payable
increased in the first nine months of 1999 as a result of the timing of
purchases and payments.
In 1998, the Company recorded an extraordinary gain related to a debt
restructuring. The Company was relieved of $1,079,257 of debt and accrued
interest originated by Bank of America, NT & SA and $272,915 of trade accounts
payable. The gain was offset by professional fees related to the restructuring.
In connection with the debt restructuring, the MacTarnahan Limited Partnership
(a related party) purchased approximately $3.1 million of secured Company debt
held by Bank of America, NT & SA. The $3.1 million bank debt plus accrued
interest and other related charges was settled by the MacTarnahan Limited
Partnership, which in turn resulted in a net loan payable from the Company to
the MacTarnahan Limited Partnership of $2.1 million. The $2.1 million term loan
("Term Loan"), secured by receivables, inventory and equipment of the Company,
bears interest at a per annum rate equal to the prime lending rate of the Bank
of the Northwest plus 1% (9.25% at September 30, 1999). The Term Loan is due on
January 31, 2000, and accordingly has been classified as current in the
accompanying balance sheet as of September 30, 1999. The Company expects to
place the debt permanently with a financial institution by April 1, 2000 or pay
off the debt through the raising of additional capital. There can be no
assurance that the Company will be able to obtain permanent financing from a
financial institution or that the Company will be able to raise additional
capital on commercially reasonable terms or at all. If permanent financing is
unavailable, the MacTarnahan Limited Partnership has committed to extend the due
date of the Term Loan until satisfactory permanent financing can be obtained for
the period through April 1, 2000.
As a result of the 1998 debt restructuring referred to above, the Company issued
notes in the aggregate principal amount of $148,065 to trade creditors, that
mature on September 1, 2003 and bear interest at 6% per annum. At September 30,
1999, $115,573 remains outstanding under these notes.
The Company had a $600,000 revolving line of credit with a bank, which matured
on August 20, 1999. On August 16, 1999 the Company negotiated a new $750,000
revolving line of credit ("Revolving Line") with Washington Mutual Bank (d.b.a.
Western Bank), under which $461,402 was outstanding at September 30, 1999.
Payment of the Revolving Line is secured by certain of the Company's assets and
is guaranteed by certain of the Company's shareholders. Interest is payable
monthly at a per annum rate equal to prime rate plus 1% (9.25% at September 30,
1999). The line of credit expires on August 1, 2000.
On March 1, 1999, Harmer Mill & Logging Supply Company and the Charles A. Adams
Family Trust each purchased 2,885 shares of the Company's Series A Preferred
Stock ("Series A") for $52 per share, resulting in aggregate proceeds to the
Company of $300,040. Each share of Series A is convertible on February 25, 2004,
into fully paid and non-assessable shares of Common Stock at a rate of 100
shares of Common Stock for each share of Series A. The conversion ratio, which
is currently 100 to 1, is subject to adjustment in the event of stock splits or
stock dividends. Unless converted, the Company must redeem the Series A shares
on February 25, 2004, at $52 per share, plus any declared but unpaid dividends,
in cash or in 24 equal monthly payments bearing interest at 12% per annum.
Because the redemption of the Series A is outside the control of the Company,
the Series A was not classified as stockholders' equity at June 30, 1999. Each
shareholder of Series A is entitled to the number of votes equal to the number
of shares of Common Stock into which the Series A shares can be converted and
the Series A shares are entitled to vote as a separate class. Each shareholder
of Series A is entitled to receive cumulative dividends at the rate of 8% per
annum, when and if
9
<PAGE>
declared by the Board of Directors, prior to payment of dividends on Common
Stock. No dividends have been declared to date. In the event of any liquidation
or dissolution of the Company, either voluntary or involuntary, each shareholder
of Series A shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds to the holders of Common Stock, an
amount equal to $52 per share for each share of Series A and an amount equal to
all declared but unpaid dividends on Series A.
The Company operates in the specialty beer industry. Intense competition and the
proliferation of new brands has had and may continue to have an adverse effect
on the Company's business, financial condition and results of operations. There
can be no assurance that the Company will be able to increase its sales volume
or be able to maintain its selling prices in existing markets or new markets.
The Company experienced significant operating losses during the years ended
December 31, 1998 and 1997, and continues to incur losses in 1999. Operating
results have fluctuated and may continue to fluctuate as a result of many
factors, including sales volumes and selling prices, increased fixed operating
costs as a percent of sales during periods when the Company's brewery is at less
than full capacity, changes in product mix, increased selling and marketing
costs incurred as the Company protects its business in existing markets and
increased transportation costs as it develops business in new geographic
markets.
The Company's working capital requirements over the next year are expected to be
met from cash flow through operations, funds available under the Company's
revolving line and, if appropriate and available, additional equity offerings
and/or borrowings from other lenders. There can be no assurance the Company will
be able to raise additional funds through equity offerings or additional
borrowings.
Year 2000 Issue
The Company's approach to the Year 2000 issue is discussed below. In discussing
the Year 2000 issue, the Company necessarily makes certain forward looking
statements. There can be no assurance that actual results will not differ
materially from the projections contained in the forward looking statements.
Factors that may cause actual results to differ materially include, but are not
limited to, the failure of Company personnel and outside consultants to properly
assess and address the Company's Year 2000 issues, inaccurate or incomplete
disclosure by third parties regarding the Year 2000 issue, failure to address
Year 2000 issue with all vendors, (including utility vendors), and customers,
infrastructure failures, such as disruptions in the supply of electricity, gas,
water or communications services, or major institutions, such as the government
and banking systems, and failure of the Company to accurately predict the costs
to address the Year 2000 issue or the lost revenues related to interruption in
the Company's or its customers' businesses.
State of Readiness. The Company, in conjunction with outside consultants, has
made an assessment of the effect of the Year 2000 issue on its computer
equipment and software (sometimes referred to as "information technology" or
"IT") and devices with embedded technology (sometimes referred to as "non-IT").
The Company identified certain modifications to its IT systems and non-IT
systems that were necessary to address the Year 2000 issue and has completed
implemented of those modifications. Based on this assessment and implementation
of the modifications discussed above, the Company believes its IT systems and
non-IT systems will properly recognize calendar dates beginning in the year
2000. There can be no assurance, however, that the Company's assessment was
sufficient to discover all Year 2000 issues, and Year 2000 issues not discovered
by the Company could have a material adverse effect on the Company's business,
results of operations and financial condition.
The Company has evaluated the IT systems and non-IT systems of its outside
vendors and customers. The Company contacted its significant vendors and
customers regarding the Year 2000 issue and no major deficiencies were
discovered with respect to those contacted. The Company is relying on
information provided to it by its outside vendors and customers to assess their
Year 2000 readiness, and therefore cannot provide assurance that the Company
will not be adversely affected by their Year 2000 issues.
Costs to Address Year 2000 Issue. To date, costs directly related to Year 2000
remediation efforts have been immaterial. Accordingly, the Company expects the
costs to address the Year 2000 issue will not have a material
10
<PAGE>
adverse financial impact on the Company's financial condition or results of
operations. However, there can be no assurance that additional remediation costs
will not occur as additional information is obtained in connection with Year
2000 issues.
Risks of the Company's Year 2000 Issue. The Company believes its most reasonably
likely worst-case Year 2000 scenario would relate to problems with the systems
of third parties rather than with the Company's internal systems, because the
Company has less control over assessing and remediating the Year 2000 problems
of third parties. The Company believes its risks are greatest with regard to
infrastructure (e.g., electricity supply, water and sewer service),
telecommunications and transportation supply channels. If certain critical third
party suppliers, such as those supplying infrastructure (e.g., electricity
supply, water and sewer service), telecommunications and transportation supply
channels experience difficulties resulting in disruption of service to the
Company, a shutdown of the Company's operations could occur for the duration of
the disruption. The first part of the calendar year is not a critical production
period or period of high customer demand and therefore the Company believes it
would be able to recover from a temporary interruption without a material
adverse effect on the Company's operations. The inability of the Company to
operate its facilities for any significant period, or any other failure, if not
quickly remedied, could have a material adverse effect on the Company's
business, results of operations and financial condition.
Company's Contingency Plan. Based on the Company's assessment of the Year 2000
issue, the Company has not developed and does not intend to develop a
contingency plan to address the most reasonably likely worst-case scenario. With
respect to major infrastructure (e.g., electricity supply, water and sewer
service), telecommunications and transportation supply channels, the Company has
no contingency plans that would mitigate the lack of such services. The Company
continues to be in contact with the suppliers of these services to learn more
about the vulnerabilities, if any, of critical third parties and to obtain
assurances from these parties that there will be no material disruption in the
services they provide to the Company as a result of Year 2000 issues. The
Company is relying on information provided to it by its infrastructure,
telecommunications and transportation suppliers to assess their Year 2000
readiness, and therefore cannot provide assurance that the Company will not be
adversely affected by their Year 2000 issues. There can be no assurance that the
Company will be able to identify, avoid or develop contingency plans to address
all possible worst-case scenarios.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on September 18, 1999. The
following matters were submitted to shareholders for their consideration:
1. With respect to the five nominees for director identified in the
Company's Proxy Statement: Charles A. (Tony) Adams received 2,884,724
votes and 31,280 votes were withheld, Frederick L. Bowman received
2,897,224 votes and 18,780 votes were withheld, Robert M. MacTarnahan
received 2,896,824 votes and 19,180 votes were withheld, R. Scott
MacTarnahan received 2,897,324 votes and 18,680 votes were withheld and
Howard M. Wall, Jr. received 2,896,874 votes and 19,130 votes were
withheld.
2. The appointment of Arthur Andersen LLP as the Company's independent
auditors for the year ending December 31, 1999 was ratified as follows:
2,891,820 shares were voted in favor, 14,425 shares were voted in
opposition and 9,759 votes abstained.
11
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits included herein:
Exhibit Exhibit
Number Number
(1-A) (S-B 601) Description
--------------- -------------- ------------------------------------------
6.21 10.21 Business Loan Agreement, dated August 16,
1999
12 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 10th day of November, 1999.
PORTLAND BREWING COMPANY
Signature Title
--------- -----
/s/ Glenmore James
- -------------------------------- Executive Vice President and Chief Financial
Glenmore James Officer (Principal Financial and Accounting
Officer)
13
EXHIBIT 10.21
BUSINESS LOAN AGREEMENT
<TABLE>
- ----------------- -------------- -------------- -------------- ------------- ------------- ------------- ------------- -------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$750,000.00 08-16-1999 08-01-2000 0101 4A0 6100 1049968 610
- ----------------- -------------- -------------- -------------- ------------- ------------- ------------- ------------- -------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan
or item
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: Portland Brewing Company Lender: Washington Mutual Bank, doing
2730 NW 31st Avenue business as Western Bank
Portland, OR 97210 Beaverton Business Banking Center
12655 SW Center Street, Suite 500
Beaverton, OR 97005
THIS BUSINESS LOAN AGREEMENT between Portland Brewing Company ("Borrower") and
Washington Mutual Bank doing business as Western Bank ("Lender") is made and
executed on the following terms and conditions. Borrower has received prior
commercial loans from Lender or has applied to Lender for a commercial loan or
loans and other financial accommodations, including those which may be described
on any exhibit or schedule attached to this Agreement. All such loans and
financial accommodations, together with all future loans and financial
accommodations from Lender to Borrower, are referred to in this Agreement
individually as the "Loan" and collectively as the "Loans." Borrower understands
and agrees that: (a)In granting, renewing, or extending any Loan, Lender is
relying upon Borrower's representations, warranties, and agreements, as set
forth in this Agreement; (b)the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and discretion;
and (c)all such Loans shall be and shall remain subject to the following terms
and conditions of this Agreement.
TERM. This Agreement shall be effective as of August 16, 1999, and shall
continue thereafter until all indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as this
Business Loan Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Business Loan
Agreement from time to time.
Borrower. The word "Borrower" means Portland Brewing Company.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
<PAGE>
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such Indebtedness may be or hereafter may become otherwise
unenforceable.
Lender. The word "Lender" means Washington Mutual Bank doing business as
Western Bank, its successors and assigns.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefore.
Permitted Liens. The words "Permitted Liens" mean: (a)liens and security
interests securing Indebtedness owed by Borrower to Lender; (b)liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c)liens of materialmen, mechanics, warehousemen,
or carriers, or other like liens arising in the ordinary course of business
and securing obligations which are not yet delinquent; (d)purchase money
liens or purchase money security interests upon or in any property acquired
or held by Borrower in the ordinary course of business to secure
indebtedness outstanding on the date of this Agreement or permitted to be
incurred under the paragraph of this Agreement titled "Indebtedness and
Liens"; (e)liens and security interests which, as of the date of this
Agreement, have been disclosed to and approved by the Lender in writing;
and (f)those liens and security interests which in the aggregate constitute
an immaterial and insignificant monetary amount with respect to the net
value of Borrower's assets. See Exhibit "A."
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
<PAGE>
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under this Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a)the Note; (b)Security
Agreements granting to Lender security interests in the Collateral;
(c)Financing Statements perfecting Lender's Security Interests; (d)evidence
of insurance as required below; and (e)any other documents required under
this Agreement or by Lender or its counsel, including without limitation
any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and the
Related Documents, and such other authorizations and other documents and
instruments as Lender or its counsel, in their sole discretion, may
require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all fees,
charges, and other expenses which are then due and payable as specified in
this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document or
certificate delivered to Lender under this Agreement are true and correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized and validly
existing under the laws of the State of Oregon and is validly existing and
in good standing in all states in which Borrower is doing business.
Borrower has the full power and authority to own its properties and to
transact the businesses in which it is presently engaged or presently
proposes to engage. Borrower also is duly qualified as a foreign
corporation and is in good standing in all states in which the failure to
so qualify would have a material adverse effect on its businesses or
financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under
(a)any provision of its articles of incorporation or organization, or
bylaws, or any agreement or other instrument binding upon Borrower or
(b)any law, governmental regulation, court decree, or order applicable to
Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has not
executed any security documents or
<PAGE>
financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used,
or filed a financing statement under, any other name for at least the last
five (5) years. See Exhibit "A."
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section6901, et seq., or
other applicable state or Federal laws, rules, or regulations adopted
pursuant to any of the foregoing or intended to protect human health or the
environment ("Environmental Laws"). Except as disclosed to and acknowledged
by Lender in writing, Borrower represents and warrants that: (a)During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or
threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b)Borrower has no knowledge
of, or reason to believe that there has been (i)any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii)any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c)Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation Environmental Laws. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender may
deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall be
at Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating the
properties for hazardous waste and hazardous substances. Borrower hereby
(a)releases and waives any future claims against Lender for indemnity or
contribution in the event Borrower becomes liable for cleanup or other
costs under any such laws, and (b)agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release of a hazardous waste or substance on the properties,
or as a result of a violation of any Environmental Laws. The provisions of
this section of the Agreement, including the obligation to indemnify, shall
survive the payment of the Indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral. See Exhibit "A."
<PAGE>
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns.
Commercial Purposes. Borrower intends to use the Loan Proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i)no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii)Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii)no steps have been taken to terminate any
such plan, and (iv)there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's chief executive office, if Borrower has more than one place
of business, is located at 2730 NW 31st Avenue, Portland, Oregon 97210.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a)all material adverse
changes in Borrower's financial condition, and (b)all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in
<PAGE>
which Lender holds or is offered a security interest for the Loans,
Borrower will provide Lender with such loss payable or other endorsements
as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a)the name
of the insurer; (b)the risks insured; (c)the amount of the policy; (d)the
properties insured; (e)the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f)the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish executed
guaranties of the Loans in favor of Lender, executed by the guarantors
named below, on Lender's forms, and in the amounts and under the conditions
spelled out in those guaranties.
Guarantors Amounts
Robert M. MacTarnahan $750,000.00
Charles A. Adams $750,000.00
Charles A. Adams Family Trust $750,000.00
Harmer Mill & Logging Supply Co. dba Harmer Co. $750,000.00
MacTarnahan Limited Partnership $750,000.00
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a)the legality of the same shall be contested in good faith by
appropriate proceedings, and (b)Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
<PAGE>
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurance. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a)Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b)except as allowed as a Permitted Lien, sell,
transfer, mortgage, assign, pledge, lease, grant a security interest in, or
encumber any of Borrower's assets, or (c)sell with recourse any of
Borrower's accounts, except to Lender. See Exhibit "A."
Continuity of Operations. (a)Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b)cease operations, liquidate, transfer, merge or consolidate with any
other entity (unless Borrower is the surviving entity), change ownership,
change its name, dissolve or transfer or sell Collateral out of the
ordinary course of business, (c)pay any dividends on Borrower's stock
(other than dividends payable in its stock), or (d)purchase or retire any
of Borrower's outstanding shares or alter or amend Borrower's capital
structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets or (b)incur any obligation as surety or guarantor other than in the
ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a)Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower has with
Lender; (b)Borrower becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt.
<PAGE>
YEAR 2000. Unless Lender has provided Borrower with a written waiver of the
following "Year 2000" provisions, the following provisions shall apply:
Borrower represents, warrants and covenants that it has, or will have by a date
that is acceptable to Lender: (i)undertaken a detailed inventory, review, and
assessment of all areas within its business and operations that could be
adversely affected by the failure of Borrower to be Year 2000 compliant on a
timely basis, (ii)developed a detailed plan and timeline and committed adequate
resources for becoming Year 2000 compliant on a timely basis, and
(iii)implemented that plan in accordance with that time table in all material
respects. Borrower covenants and agrees that Borrower shall from time to time
upon Lender's request furnish periodic updates to Lender regarding Borrower's
progress on its Year 2000 compliance efforts, and provide copies to Lender of
any internal and third-party assessments of Borrower's Year 2000 compliance
efforts. Borrower covenants to be and reasonably anticipates that it will be
Year 2000 compliant on a timely basis.
Borrower has made (or will make, by a date acceptable to Lender) written inquiry
(or, if acceptable to Lender, oral inquiry) of each of its key suppliers,
vendors, and customers as to whether such persons will be Year 2000 compliant in
all material respects on a timely basis. Based on that inquiry, and to the best
of Borrower's knowledge only, Borrower believes that all such persons will be
Year 2000 compliant in all material respects on a timely basis. For purposes of
this provision, "Key suppliers, vendors, and customers" refers to those
suppliers, vendors, and customers of Borrower whose business failure would, with
reasonable probability, result in a material adverse change in the business,
properties, condition (financial or otherwise), or prospects of Borrower, or
Borrower's ability to repay the indebtedness evidenced by this Agreement.
"Year 2000 compliant" means, with regard to any entity, that all software,
embedded microchips, and other processing capabilities utilized by, and material
to the business operations or financial condition of, such entity are able to
interpret and manipulate data on and involving all calendar dates correctly and
without causing any abnormal ending scenario, including in relation to dates in
and after the Year 2000.
It shall be an event of default under this Note if (x)any of Borrower's
representations and warranties regarding Year 2000 shall cease to be true
(whether or not true when made) and, as a result, Lender reasonably believes
that Borrower's financial condition or its ability to pay its debts as they
become due will thereby be materially impaired, (y)Borrower fails to comply with
any of its Year 2000 covenants, or (z)Borrower fails to be Year 2000 compliant
in any material respect on a timely basis.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no event
later than one hundred and twenty (120) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by a
certified public accountant satisfactory to Lender, and, as soon as available,
but in no event later than sixty (60) days of year-end, Borrower prepared
statements, and, as soon available, but in no event later than thirty (30) days
after the end of each fiscal quarter, Borrower's balance sheet and profit and
loss statement for the period ended, prepared and certified as correct to the
best knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be provided
under this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by Borrower
as being true and correct.
GUARANTOR'S SUBMISSION OF FINANCIAL STATEMENTS AND TAX RETURNS. Borrower agrees
that, while this Agreement is in effect, Guarantor will furnish to Lender the
following: (1)As soon as available, but in no event later than 120 days after
the end of each year, Guarantor's individual financial statement and complied
balance sheet and profit and loss statement for such yearly period, prepared and
certified as correct to the best knowledge and belief by Guarantor or
Guarantor's chief financial officer or other officer or person acceptable to
Lender. (2)Promptly after the filing thereof and in any event within 30 days
after the filing thereof, a copy of Guarantor's filed federal and state tax
returns together with all supplemental schedules.
<PAGE>
AGING AND LISTING OF ACCOUNTS RECEIVABLE AND PAYABLE. Borrower covenants and
agrees with Lender that, while this Agreement is in effect, Borrower shall
deliver to Lender within thirty (30) days after the end of each month, a
detailed aging of Borrower's accounts and contracts receivable and accounts
payable as of the last day of the month, together with an explanation of any
adjustments made at the end of that month, all in a form acceptable to Lender.
RIGHT OF SETOFF. See Exhibit "A".
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election
<PAGE>
by Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an obligation
of Borrower or of any Grantor shall not affect Lender's right to declare a
default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Oregon. If there is a lawsuit, Borrower agrees upon
Lender's request to submit to the jurisdiction of the courts of Washington
County, the State of Oregon. This Agreement shall be governed by and
construed in accordance with the laws of the State of Oregon.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
<PAGE>
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. Under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US (LENDER)
AFTER OCTOBER3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENT MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
AUGUST 16, 1999.
BORROWER:
Portland Brewing Company
By:/s/ Charles A. Adams
----------------------------------------------------
Charles A. Adams, President/Chief Executive Officer
LENDER:
Washington Mutual Bank doing business as Western Bank
By: /s/ Jerry Boehm
---------------------------------------------------
Authorized Officer
<PAGE>
EXHIBIT "A"
This Exhibit is attached to and by this reference is made a part of each
Business Loan Agreement dated August 16, 1999, and executed in connection with a
loan or other financial accommodations between Washington Mutual Bank doing
business as Western Bank and Portland Brewing Company.
RIGHT OF SETOFF. Lender shall not have a security interest in, nor shall Lender
set off against amounts due hereunder, the sums in any account of Borrower
maintained with Lender.
DEFAULT. Notwithstanding the foregoing, Borrower will not be in default as
provided above unless and until (a) Lender gives to Borrower written notice of
the alleged default specifying that the default be cured within the time allowed
by this Business Loan Agreement, and (b) Borrower fails to cure the alleged
default within such time period. With respect to a failure to make a payment
hereunder, the amount of time allowed for cure shall be ten days following such
written notice from Lender. With respect to any other default, the amount of
time allowed for cure shall be 30 days following written notice of default;
provided, however, in the event a default reasonably requires more than 30 days
for cure, Borrower shall not be deemed in default so long as Borrower commences
cure within such 30-day period and thereafter diligently pursues cure to
completion.
ADDITIONAL SECURED PARTY. As previously disclosed to Lender, MacTarnahan Limited
Partnership holds a security interest in certain assets of Borrower, including,
but not limited to, a junior security interest in accounts receivable and
inventory. The security interest of MacTarnahan Limited Partnership, and any
assignment of that security interest, is a "Permitted Lien" and shall not be a
default under this Business Loan Agreement.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements found in the Company's Report on Form 10-QSB for
the nine months ended September 30, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 35,279
<SECURITIES> 0
<RECEIVABLES> 825,097
<ALLOWANCES> 0
<INVENTORY> 696,181
<CURRENT-ASSETS> 1,750,742
<PP&E> 10,896,687
<DEPRECIATION> 4,067,898
<TOTAL-ASSETS> 8,728,629
<CURRENT-LIABILITIES> 3,893,972
<BONDS> 0
0
300,040
<COMMON> 7,115,798
<OTHER-SE> (2,670,576)
<TOTAL-LIABILITY-AND-EQUITY> 8,728,629
<SALES> 7,900,274
<TOTAL-REVENUES> 7,516,850
<CGS> 5,279,325
<TOTAL-COSTS> 5,279,325
<OTHER-EXPENSES> 2,774,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176,440
<INCOME-PRETAX> (778,182)
<INCOME-TAX> 0
<INCOME-CONTINUING> (778,182)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (778,182)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
</TABLE>
